Articles about Mortgages

Now more than ever, having good credit is important if you want to qualify for a mortgage. Borrowers with all types of credit profiles can and do obtain mortgages, but those with the best credit profiles get the best rates and terms.

Many borrowers, especially those with dings on their credit reports -such as late payments and medical collections – might benefit from a credit restoration service.

Many credit restoration services work under the guidelines of FACTA – the Fair and Accurate Credit Transactions Act. FACTA states that creditors are obligated to follow certain procedures before reporting information, specifically derogatory information, to the credit bureaus.

Credit restoration services, in cases where proper disclosure was absent, confront the creditors, sometimes with threats of legal action on behalf of a borrower, and can often have information such as late payments, collections and judgments removed from the credit report, under FACTA laws. With most items that carry some type of balance, such as collections, borrowers are still obligated to repay them but can do so without having it appear on their credit reports. A credit restoration can take anywhere from 30 to 60 or more days.

Borrowers need to research credit restoration services. Many are legitimate, but as with many other industries that have appeared after  the housing crisis, there are some that will try to charge high fees or skimp on the service they provide.

Given the current real estate market, with an abundance of undervalued and distressed properties, looking into the purchase of an investment property might be a good idea.

Keeping in mind how these properties work from a finance perspective will help in the decision to purchase one.

What is The Strategy?

The three questions that a potential property investor should ask are:

1. How much of a down payment is needed?
2. How much of an investment will be required to get the property either rentable or resalable after purchase?
3. What will the market bear in terms of either a rental rate or a sales price?

Getting Financed

Investors should expect to have a down payment of at least 25% when purchasing a property. Rates are from 0.5% to 1% higher than those charged to purchase a home used as a primary residence, and you should expect to have at least six months of mortgage payments in the bank as asset reserves for each investment property that you own.

However, if you purchase a two- to four-unit property and intend to live in one of the units, the property will be considered a primary residence and financed accordingly.  There are still premiums that apply for multiunit properties, but they are normally lower than those for investment properties.

On a mortgage application, rental income is typically calculated at 75% of the amount on the lease, to account for vacancies throughout the year.  This difference in income will be made up by your personal income. If you have less than two years of landlord experience, you will not be eligible to use the rental income on the mortgage application and will need to cover that amount with your personal income.

Whether purchasing or refinancing a mortgage, following a few simple steps will ensure that borrowers get the best mortgage for their situation.

The first questions that borrowers should ask themselves are how long they plan to own the property and what type of stability in payments are they looking for. If you plan on being in the property for only a few years, an adjustable-rate mortgage (ARM) or a balloon loan might be best for you, as the rates on these can be lower than that of a fixed-rate mortgage.

Finding the Best Mortgage

Getting in touch with one or more mortgage professionals is the next step in the process. You should explain your situation, then listen to what the professional has to say.  Mortgage brokers and banks are required by law to provide, in writing, to a potential borrower a good faith estimate, or GFE. The GFE will show a rate, costs and the amount of escrows that a borrower should expect to pay.

Good faith estimates can and should be compared to one another. If you want another opinion, you should speak to someone you trust and who is independent of the transaction, such as a real estate attorney.

You should also be asking how long you can expect the process to take. Longer turn times in periods of very low rates are to be expected. A good idea, especially in the case of a refinance, is to get prequalified in anticipation of low rates. The less processing that a lender needs to do with a file after the rate is locked, the lower the rate it is usually able to offer.

With low home prices and an abundance of foreclosed properties for sale, first-time home buyers might do well to find out what is available in their areas.

First-timers are in a unique position to purchase foreclosures, for two reasons.

The first is that few if any lenders will accept a contract on a foreclosure from a borrower who has another home to sell.

The second reason is that first-timers can most likely stay where they are while going through the drawn-out process of purchasing a foreclosed property.  Some borrowers might wait weeks to even hear if an offer they have placed on a property has been accepted.

First Steps for First-Timers

To start the process, as a borrower, you should get yourself prequalified, so you know what you can afford.  You should then find yourself a good real estate agent who knows the ins and outs of foreclosures, preferably one who does a lot of these transactions.

Having a real estate attorney review the documents is also a very good idea.

Conventional Financing

To obtain traditional financing (conventional or FHA) the property must be habitable – which means it has functioning water, electricity, heat, etc. – but may be missing things such as a stove and a dishwasher.  These items are considered separate from the property itself.

FHA 203(k) Financing

For properties that need a bit more work or are sold as-is, look into the FHA 203(k) program.

This two-in-one loan covers the cost of the property and some of the repairs that it might need.  The loan amount is based on the anticipated appraised value once the repairs are made.|

This program covers one- to four-unit buildings and is for borrowers who intend to live at the property, meaning that investors would be excluded from the program.

June 2009

With all the talk about foreclosures these days, a basic overview of some of the terminology might be helpful.

When a property is in foreclosure, it means that the lender has started legal proceedings to take back the property from the borrower.

A borrower is considered to be in default when he or she misses even one payment, but lenders typically start proceedings after three missed payments.  Depending on the state where the property is located, the court system may be involved.

The period of time from when the borrower misses the first payment to when the lender starts the foreclosure proceedings is called the pre-foreclosure period. A number of things can happen at this point. The borrower and the lender can sit down and come up with some type of loan modification agreement, by which the terms of the loan can be altered, at least for a certain period of time, to allow the borrower to get into a better financial position.

If the borrower can find someone who wants to, and is able to, buy the property, he or she can sell.  If the amount the person wants to pay is less than the borrower owes and the lender will take that amount, it is called a short sale. Once the foreclosure proceedings have started, however, the lender will be the only one that is able to sell the property.

If the borrower and lender agree that the borrower will turn the property back over to the lender, then walk away – without going through the foreclosure process, a deed in lieu of foreclosure takes place.

June 2009

As home prices continue to decline across the nation, unprecedented opportunities have appeared for the first-time home buyer and for those who are currently looking to buy without first having to sell another home.

Income, credit and the amount of down payment will of course determine the best program to use for an individual borrower.

For this article, let’s take a look at a first-time home buyer who has two years of stable employment and 3.5% or less to put down on a property.

Federal Housing Administration

The FHA, which has changed slightly its guidelines since last year, is looking for a down payment of at least 3.5% from the borrower’s own funds or via a gift from a close relative.

While there is an upfront mortgage insurance premium (financeable) of 1.75% of the loan amount and a monthly mortgage insurance premium, the FHA allows lower credit scores than do conventional loans.
It also discounts the issue of markets with declining property values, unlike conventional loans, which take markets with falling property values into account.

Conventional Loans

With a conventional loan, depending on where the property is located, a borrower may put down as little as 3%. Credit requirements are much tighter than with the FHA at this level of down payment, and income requirements are about the same, but borrowers will bypass the upfront premium. They must still pay a monthly premium, however.

For the buyer interested in purchasing one of the many foreclosures available these days, specifically ones that need extensive repairs, the FHA has a program called a 203(k).

This is a rehabilitation and repair program that allows the buyer to borrow, in one loan, funds to buy the home that they, themselves, intend to live in, plus enough to do at least $5,000 of rehab and repair work.

In the current employment market, it is no surprise that many people are wondering what they can do to prevent getting into difficulties with their mortgages if they lose their jobs.

The first thing to do is make sure you are living within your means. This sounds basic, but many homeowners – especially those with very low mortgage rates – have acquired other debt, with payments that, in some cases, are greater than those of the mortgage itself.

Making wise consumer choices will help leave extra funds each month that can be put away for a rainy day
The second action is to set up access to reserve funds, such as a home equity line of credit, to be used only in the case of an employment gap. Applying for a home equity line – let alone any type of mortgage – after employment has ended is an uphill challenge, unless there is another borrower in the household who can qualify on his or her own.

A home equity loan is ideal because the application process is normally much simpler than it is for a standard mortgage and often comes at no cost to the borrower.

With the recent tightening of lending standards, it might be a good idea to find out what your options are before you need them.

Homeowners often reap benefits renters miss out on, such as being able to write off mortgage interest and property taxes. Managing debt – to protect your home by being able to weather a financial debacle should it occur – therefore makes good sense. Check with your tax professional for more details.

The Homeowner Affordability and Stability Plan unveiled in February is a great start to getting millions of responsible borrowers into mortgages that they can afford.  The plan addresses borrowers who either have less than 20% equity in their homes due to declining property values, or are employed but have had a recent decline in income.

The Basics

The plan is actually two plans. The first part helps employed homeowners who have made their house payments on time and want to refinance to a lower interest rate, but are unable to do so under current lending guidelines.

Lenders will modify the terms of the loan, for five years, and forego some of the equity requirements that keep many borrowers from obtaining the lowest available rates.

This rate reduction will be funded by a combination of TARP funds, and  by Fannie Mae and Freddie Mac, and would bring down mortgage payments to 31% of the gross income of the borrowers. The plan applies only to primary residences, excluding second homes and investment properties.

The second part of the plan addresses homeowners considered at-risk – perhaps from a decrease in income – and seeks to identify these borrowers before they default on their payments.

The Challenges

Issues that have been facing lenders since the implementation of the program include being able to handle the number of borrowers inquiring about the modification programs.

Issues facing borrowers include being severely upside down in their mortgages.

Borrowers who bought or refinanced a home at 100% equity several years ago and now have seen their property values fall 20% would either need to fund the difference to get them back to at least 105% or wait until the property appreciated in value.

With mortgage rates at near historic lows, you might be asking yourself if now is the right time to refinance. This is a very good question. Several factors will determine what might make this worthwhile. They are:

• How much will my payment and/or rate decrease?
• How much will the refinance cost, and who will be paying for it?
• How long do I plan on staying in the property?

Larger loan amounts will yield greater savings per month over smaller loan amounts with a given rate change, but even then care should be taken to make sure the transaction is in the borrower’s best interest.  For example, a homeowner with a $200,000, 30-year fixed rate mortgage at 6% interest is currently paying $1,199.10 per month in principal and interest. Should that borrower find a lender offering a refinance rate of 5.5%, that payment would drop to $1,135.58, creating a difference of $63.52 per month.

With the typical refinance transaction costing about $1,800, the recapture period of the expense of doing this works out to $1,800/$63.52, or about 28 months.  If the homeowner were to sell the property or refinance it within that time period, the expense incurred would amount to more than the benefit.

The positive side to this example is that if the homeowner were to stay in the property for 10 years after the refinance, the payment difference, $63.52 for 120 months, would equal $7,622.40 which, less the $1,800, gives the borrower a net benefit of $5,822.

With 2009 still it its early months, let’s take a look at what we might see in the coming year.

Purchases

If you’re unsure as to what you can afford – or you think that your credit profile might limit you – now is a good time to explore your options. This applies to both first-time buyers and long-time homeowners.

The Federal Housing Authority (FHA), which caters to borrowers with either less money to put down or who are credit-challenged (or both), has tightened its guidelines just a bit for 2009. However, it is still a very good place to start.

The FHA requires a 3.5% down payment, but all or part of this can come in the form of a gift from a relative.
Many of the closing costs can be financed by the seller by what is known as a seller concession.

There will be an upfront mortgage insurance premium of 1.75% of the loan amount, but this can be financed as well.  There also will be a monthly insurance premium assessed.

Refinances

A challenge facing homeowners looking to refinance is their equity position – in other words, the value of their home.

Tentative borrowers might want to give their real estate agent a call and have him or her run what is called a Comparative Market Analysis, or CMA.  This is a list of comparable homes, excluding foreclosures and non-comparable properties that have sold in the area recently.

Mortgage lenders tend to give more credence to CMAs than to market analyses that include non-comparables and foreclosures.

Once borrowers have an idea of what their home is worth, they can, with the help of a lender, determine their options.

With rates being relatively low, it might be time to get out of that ARM or other higher fixed-rate loan you might be in right now.