Articles about Mortgages

Mortgage rates are relatively low at the moment, but there’s little doubt they’ll begin creeping up. It’s important, then, to have some knowledge of how mortgage rates are determined and what the picture might look like in the future.

Fixed Interest Rates

Fixed interest mortgage rates are tied to the 10-year U.S. Treasury note and are indirectly tied to the prime rate. In today’s economic times, the 10-year note tends to be a more stable investment than the stock market. The demand for this type of security increases the price, which decreases the yield, which is tied to fixed mortgage rates, resulting in lower fixed rates. Once the demand for stocks increases and bonds decreases, the yield will rise, and so will fixed mortgage rates.

Adjustable Interest Rates

Adjustable mortgage rates, as well as credit card rates and car loan rates, are often tied to variable indices, such as the U.S. prime rate. The prime rate is the rate at which banks lend money to one another. It is presently at a historical low in light of the economy.

But when the economy starts to turn around, prime and other indices will be likely to rise, and this is to be expected, as they have been low for some time now.

Other countries, including Australia, have started to increase the prime rate, as they are seeing slight improvements in their economies. The U.S. prime rate should remain where it is now for the foreseeable future, but it will eventually increase.

There are many differences between conventional and Federal Housing Administration (FHA) mortgage loan programs.

When considering the purchase of a home, it’s important that you compare the two.

If you’re looking to purchase a home using FHA, you must put down a minimum of 3.5% and you need a credit score of 620 or higher.

Regardless of the loan-to-value ratio, you’ll also pay an up-front mortgage insurance (MI) premium of 1.75% of the financed loan amount and normally there is a monthly mortgage insurance premium after that.
Homebuyers using conventional financing must put down at least 5% and have a minimum credit score of 720.

There is no up-front MI on conventional loans.

However, there is monthly MI on all loans where the loan-to-value ratio is greater than 80%.

Conventional financing will accommodate borrowers with credit scores as low as 620.

However, the premiums that are charged in such things as up-front fees or rate increases will usually make FHA loans a better choice for borrowers with credit scores in this lower range.

Income guidelines are more conservative with FHA than with conventional programs.

FHA is more liberal with credit, so it may be a better choice if you’ve had recent credit issues but make more than enough income to cover all your monthly expenses.

Conventional financing requires two months of liquid asset reserves.

This means you must be able to cover two months of the mortgage, including taxes and property insurance, from sources such as checking or savings accounts or a retirement account. FHA has no reserve requirements.

With all of opportunities in the current market to purchase undervalued properties, people looking to get into the world of property investing might want to explore their options. But there are a few things to keep in mind.

Investors looking to finance an investment property must put down 25% to 30% of the purchase price and have a credit score of 720 or higher, with no history of foreclosure or bankruptcy in the last seven years.

Mortgage rates on investment properties are also higher than they are on properties in which owners intend to live. Conventional loan programs are the programs of choice for investors, as the Federal Housing Administration typically lends only on primary residences. Additionally, rental income must be documented in the form of a signed lease. Any prior rental income from other properties must go back at least two years and be supported by signed tax returns. Rental income is typically calculated at 75% of the amount on the rental lease, as lenders allow for what is called an occupancy rate, meaning there will be times when the property will be without tenants.

Asset reserves on investment properties are six months of principal, interest, taxes and insurance for each rental property owned.

If you purchased a multifamily property, though, and live in one of the units, you would be buying it as a primary residence versus an investment property. Anything with more than four units would require a commercial loan.

If you’re looking to buy a foreclosure property, the following information will help you navigate the waters.

A foreclosure is any property that is in the process of being taken back by the lender. A short sale is when a borrower is selling a property for less than is owed on it.

A real estate-owned (REO) property means that the foreclosure process has been completed and the bank owns the property outright.

These days, the market is full of the aforementioned properties. If you’re looking to buy one, find yourself a good real estate agent who has worked with these before.

While prices for these types of properties are often lower than comparable non-foreclosure properties, keep in mind that the process of purchasing one can be more drawn out than it is when buying a property via conventional channels.

Lenders must approve the sales, and with the volume that many are carrying, it may take weeks to hear if an offer is even accepted. Because there are so many undervalued properties, there may be many bids on each, driving up the price in a bidding war.

Financing a foreclosure is pretty much the same process as financing a traditionally purchased property. The purchase process may be slow at the beginning, but after an offer is accepted many lenders want to close quickly, often within weeks, to get the properties off their books.

New laws have been introduced in an attempt to avoid surprises for borrowers at the closing table in both purchase and refinance transactions

The laws require initial disclosure of fees, and re-disclosure in the event of fee or rate changes.

Traditionally, when a borrower has made application to a lender, the lender, by law, was and is required to disclose certain information.

This information includes two documents.

The first document is called the good faith estimate (GFE).

This shows the rate, the fees and the charges the lender expects to collect in the course of the transaction.

The second document is called the truth in lending (TIL) disclosure. This shows what is called the annual percentage rate (APR).

The APR is a calculation that rolls fees and costs of the loan into the loan itself.

The APR is normally higher than the rate.

So now, if you go to two lenders with the same rate and same loan amount, the APR given by each one will
be determined by the cost associated with the loan.

You can now compare apples to apples.

Now, before lenders can charge you any fees, other than for obtaining your credit report, they must receive from you, in writing, a statement that you acknowledge what they are proposing to you in the way of fees and APR.

If there ends up being a change in the loan amount, or a rate or fee change that results in an APR change of greater than one-eighth of a percent (.125), the lender must re-disclose this.

Under the new laws, borrowers also now have a minimum of three business days to review and approve the changes before the file can go to closing.

With the unprecedented drop in home prices, more people can now afford to get into the market. However, there are some things that first-time homebuyers should keep in mind.

Contact your mortgage professional to find out what you can afford before you start to look. Being realistic from the beginning of the process will enable you to set expectations appropriately.

Plan on putting down between 3.5 and 5% of the purchase price. This can come from either your own funds or be in the form of a gift from a close relative. Other up-front expenses will include closing costs and escrows.

If you’re looking at either foreclosures or short sales, allow extra time to complete the process, as these sales need to be approved by the holders of the mortgages on the properties. These lenders are undoubtedly overwhelmed at this point in time, so they might take several weeks or more just to respond to an offer submitted on a property.

Keep in mind that the $8,000 first-time home buyer tax credit will take effect when you file your taxes next year. The program is set to end December 1, 2009. Many people think you can use some of this money at closing, but you cannot.

There are very rare instances where an at-closing credit would apply, but these cases involve the use of a third party, such as a charitable organization.

Always have an experienced real estate attorney involved in the process, and have him or her review everything that you sign.

If it seems like short sales have suddenly exploded in the real estate arena, it’s not your imagination.

Once considered relatively rare, short sales have become a common phenomenon in the past 18 months, thanks in large part to the banking and mortgage crisis.

To find out if you can benefit from a short sale, here’s some helpful information about the practice.

What Is a Short Sale?

Short sales occur when the bank and seller agree to a purchase price for real estate that is less than the original mortgage amount and does not cover the entire cost of the existing debt obligation.

Who Benefits?

Depending upon how the deal is structured, everyone can benefit from a short sale.

The seller benefits from the ability to save his or her credit rating and avoid bankruptcy or face a mountain of debt, the buyer benefits from acquiring a property at below market price, and the lender benefits from a sure sale that reduces the risk of a property going to auction or of having to foot the bill for foreclosure and additional expenses.

Considerations and Consequences

Short sales are not without consequences, so take time to carefully weigh all options before making a decision.

Sellers need to carefully review the terms prior to signing a final contract.

Some lenders expect the seller to make up the difference between the selling price and the full amount of the original mortgage.

Buyers should also proceed with caution, as many properties have additional liens, deferred maintenance, back taxes or other expensive fees that become the obligation of the buyer.

Additionally, short sales may require substantial time before obtaining final approval, which can make it difficult to lock in favorable rates or result in the loss of other prospective properties.

With all the information coming out about the $8,000 tax credit for first-time home buyers, it might help to recap some of it and clear up some of the more common misconceptions.

A first-timer is deemed to be someone who has had no home ownership in the last three years.

How Much You Get

The tax credit is good toward the purchase of a home that the borrower intends to live in as his or her primary residence.

This means that investment properties are excluded.

The amount of the tax credit can be up to $8,000 or 10% of the purchase price, whichever is less. The buyer of an $80,000 home will get the same benefit as someone buying a $200,000 home.

Buyers must own the property for a minimum of 36 months or will forfeit some or all of the tax credit.

Tax Credit at Closing

Buyers may be under the impression that they will get all or part of this credit at the closing table, thereby helping to pay for closing costs, or even toward a down payment.  There is a very small number of instances where this is happening, but this typically occurs when a borrower is working with a non-profit or charitable organization.

Lenders, most of which have been reluctant to adopt these credit-at-closing programs, would in effect be floating the money to buyers, and most if not all are reluctant to do this.

In the current lending environment, buyers can expect to put down at least 3.5% (with FHA) of their own money or gift funds and take the credit when they file their taxes next year.

Where to Get Help

Buyers should check with their tax professional to get specifics on the home buyer tax credit.

They can also visit the IRS website at www.irs.gov.

Credit is a very important part of the mortgage qualification process because borrowers with the best credit profiles will be able to borrow against their homes at the lowest rates.

With sweeping credit card reforms coming next year, credit users will enjoy many benefits and protections never before seen, but at the same time, they may find themselves paying more for that credit and find it more challenging to come by. Understanding credit, from the perspective of obtaining a mortgage or the anticipation of obtaining one in the future is important.  Here are a few of the many things that lenders look at with regard to credit, and how it may impact your ability to get a mortgage.

Balance to Limit Ratios: Lenders like to see that borrowers are able to keep balances on credit cards low, ideally under 40% of the limit. Higher balances will impact credit scores, and balances that are over the limit, versus near the limit, will have even more of an impact.

Payment History: A demonstrated ability to make payments is important, especially in the period immediately prior to applying for the mortgage.  Borrowers with recent late payments will have challenges in convincing a lender that they are worthy of a mortgage if they are unable to make smaller payments on time.

Debt Ratios: The total amount of debt you are carrying in relation to your income will give the lender a picture of how well you are living within your means. Lower ratios are better.

With so many different terms that relate to mortgage rates and how they are set, it might be helpful to compare and contrast some of them in order to get a clearer understanding of the differences.

HELOCs and Other Short-Term Lending

The prime rate is the rate that banks use to lend money to each other.

Many credit instruments, such as home equity loans and lines of credit, automobile loans, and credit card rates, are based on this.

From the perspective of the creditors, this is considered short-term lending, and the rate can change regularly.

Adjustable Rate Mortgages

Rates for adjustable rate mortgages, or ARMs, are based on indices that often reflect the prime rate but are, at the same time, different.

These economic indices include rates of shorter-term Treasury bills, such as the one-year Treasury bill, the LIBOR, which is the London InterBank Offered Rate, and COFI, which is the Cost of Funds Index.

To arrive at a rate that they will offer potential borrowers on a mortgage, lenders take these indices and add what is called a margin to them.

For example, if the rate on an index were to be 3.00% and the lender were to add a margin of 2.5%, the rate the borrower would pay, at least initially, would be 5.5%.

The rate may change over time as the index changes, and as the loan is eligible for rate adjustments, per the terms of the loan.

Fixed-Rate Mortgages

Fixed-rate mortgages, more specifically those that are for 15 or more years in length, are considered long-tem lending.

For the most part, except for very recently, long-term mortgage rates have followed the yield on the ten-year Treasury bill, which tends to change with economic conditions.