Archive for the ‘Mortgage Tips’ Category
FHA Loan Changes
Sunday, August 22nd, 2010
No doubt about it – in the last 18 months, the mortgage and housing industries have experienced more policy and program changes than ever before. Here we highlight the new FHA changes – still, a great program for first time home buyers, distressed home buyers, and credit challenged home buyers. Also, some new changes for property investors to take notice of.
Courtesy of The Washington Post, Dina ElBoghdady: WASHINGTON — The low down-payment mortgages backed by the Federal Housing Administration are back in vogue. But recent policy changes make it harder to qualify for an FHA loan, and more restrictions are on the way. The agency does not make loans. It insures qualified lenders against losses if borrowers default. Since its creation in 1934, it has collected fees from its borrowers to pay lenders for loans gone bad. In the past year and a half, FHA-insured loans made up roughly 30 percent of all new single-family home-purchase mortgages — up from 3 percent in 2006 — and about 20 percent of new refinancing deals. But as the agency’s loan volume expanded, its default rate shot up. The cash reserves set aside to pay for unexpected losses have eroded to dangerously low levels. If FHA funds are depleted, taxpayers would have to come to the rescue for the first time in the agency’s history. The agency is now trying to protect itself against risk without undermining its key role in propping up the housing market. To that end, it has tightened some standards while loosening others.
Seller concessions
What are they? Contributions that sellers kick in to help defray a buyer’s costs. They can include closing costs, inspections, appraisals and free upgrades.
What’s changing? The FHA proposes slashing allowable seller concessions in half, capping them at 3 percent of the home price instead of the current 6 percent.
Why? FHA analyses show a strong correlation between high seller concessions and high default rates, possibly because the concessions can lead to inflated home prices. The theory is some sellers might make concessions only to add the cost to the price.
What does this mean to me? This buyer’s perk will soon be less generous. The proposal does not ban concessions above 3 percent. But concessions exceeding 3 percent would result in a dollar-for-dollar reduction in the home’s sales price and reduce the amount of the allowable loan.
Credit scores
What are they? Three-digit numbers that help lenders determine how likely a person is to pay back a loan in a timely manner. The FHA uses the most common scoring formula, FICO, with scores ranging from 300 to 850. The higher the number, the better the rating.
What’s changing? This year, the FHA plans to impose a minimum credit-score requirement: 500. Borrowers with credit scores below 580 would have to make a down payment of at least 10 percent instead of the usual 3.5 percent minimum.
Why? Low-scoring borrowers default at a higher rate than more creditworthy ones. As of January, the percentage of FHA borrowers who were seriously delinquent was three times as high for borrowers with scores below 580 than for those with scores above 580.
What does this mean to me? Lenders are already imposing tougher credit-score requirements on FHA borrowers than the agency is proposing, which could explain why only 1 percent of borrowers with FHA-insured single-family home loans have scores below 580.
Underwriting
What is it? Lenders must document information about the property (such as its value) and the borrower (such as income, debt, credit score) to assess whether the person is likely to repay the loan. Most lenders feed that information into an automated underwriting system for approval.
What’s changing? High-risk borrowers whose loans were flagged by the automated system could soon be subjected to a more in-depth manual review by the lender’s underwriting staff.
Why? The agency is trying to reduce its exposure to risk by limiting the discretion lenders have in approving loans.
What does it mean to me? Borrowers whose loans are manually underwritten would be required to have cash reserves equal to at least one monthly mortgage payment. Borrowers with credit scores below 620 would be more closely scrutinized. For instance, their overall debt would not be allowed to exceed 43 percent of their income.
Short refinancing
What is it? A new program that allows borrowers current on their mortgage payments to refinance into an FHA loan if they are underwater, meaning they owe more on their mortgage than their home is worth.
What’s changing? Borrowers who have no equity in their homes would be allowed to refinance into an FHA loan. The FHA would allow refinancing of the first mortgage only. If there is a second mortgage, the two loans combined cannot exceed the current value of the home by more than 15 percent once the first loan is refinanced.
Why? Many people are vulnerable to foreclosure because their home values have plummeted, making them unable to refinance or sell their properties if they lose their jobs or face a financial setback. This programs aims to help them.
What does it mean for me? Refinancing in this manner will probably hurt your credit, and qualifying won’t be easy. The lender or investor who owns your existing mortgage must voluntarily reduce the amount owed on that loan by at least 10 percent. Also, you generally must have about 31 percent or more of your pretax income available for the new monthly payment for all mortgages on the property.
Upfront insurance premium
What is it? A fee the Federal Housing Administration collects from borrowers that can be paid in cash at the closing table or rolled into the loan.
What’s changed? The FHA raised the premium earlier this year from 1.75 percent of the loan’s value to 2.25 percent.
Why? The money will replenish the funds the FHA uses to compensate lenders for default-related losses.
How does this affect me? If you take out a $300,000 loan, you will now pay $6,750 in premium instead of $5,250. If you roll the premium into the financing, you will also pay interest on it during the life of the loan.
Cash-out refinancing
What is it? Refinancing a mortgage for a higher amount than is owed on the loan and taking the difference in cash — in effect, pulling equity out of the house.
What’s changed? Borrowers can tap up to 85 percent of the home’s current value. Previously, they were allowed to take up to 95 percent of value.
Why? The agency is trying to prevent people from draining equity, which would make it tough for them to sell their homes or refinance if they faced financial problems.
How does this affect me? Cash-out deals have become tougher to find. Even with conventional loans, many lenders offer this type of financing only to people with top-notch credit and significant equity.
Flipping
What is it? The practice of buying a home and quickly reselling it for a profit.
What changed? On Feb. 1, the FHA suspended a policy for one year that banned FHA borrowers from buying a home if the seller had owned it for less than 90 days.
Why? The goal is to encourage investors to buy poorly maintained foreclosures, fix them up and sell them to FHA buyers as soon as they hit the market. This should help clear the glut of homes for sale.
How does this affect me? This opens up a wider range of properties to FHA borrowers. But inspections must be done to determine whether the home is in working order. If the price of the home is 20 percent higher than what the investor paid, a second appraisal is required to determine whether the increase is justified.
Condominium spot approval
What is it? To purchase a condo in a building that is not FHA-approved, FHA borrowers had to receive “spot approval” for the unit. The process required the condo’s management to fill out a questionnaire addressing the agency’s must-meet conditions.
What’s changed? The agency eliminated spot approval earlier this year. Now, any condo buyer with an FHA loan must stick to an FHA-approved building. A lender, developer/builder, homeowners association or management company can submit a package to the FHA seeking approval. The change was part of a broader initiative to tighten FHA condo policy. Some elements have been temporarily loosened through Dec. 31 to try to stabilize the condo market.
Why? Condos are widely considered the market’s shakiest segment because they are popular with speculators and financially vulnerable entry-level buyers. A lot of foreclosure-related losses have come from condos, which is why industry policies have forced lenders to look more closely at the makeup of entire complexes before extending loans.
How does it affect me? As part of the temporarily loosened guidelines, the FHA will insure the loans on up to 50 percent of the units in a condo building, though it will back 100 percent if a project meets certain criteria. At least 50 percent of the units in a project must be owner-occupied or sold to owners who plan to occupy the units. As for new construction, 30 percent of the units must be presold before an FHA loan can be financed there.
Want to know more about your credit, and the mortgage process? Just ask. We have some great tools to help you – and it’s all free. If you would like a copy of our Client Information Pack (CIP) filled with lots of helpful advice about your credit, lending, and mortgage guidelines, simply navigate to the contact page, send an email, or complete the online application for more helpful information. To claim your copy, simply click here:
or visit the Empower Home Loans website by clicking here:
how to finance house flips – ultimate leverage
Thursday, June 3rd, 2010
We all know someone who has ‘flipped’ a property at some point. Over the last decade, TV shows such as TLC’s “Flip that House” (link) have shown us success after success. Over the last decade its popularity has risen. Truth be told, in it’s prime (2005-2006), flipping homes was easy, and not a huge risk. With some basic knowhow, and contacts in the right places, you could do just about anything. For example, some people were buying homes purchased at near their current value, swept them clean and tidied them up, then listed and sold for a profit. Obviously, that’s a rookie move in any market, but still, homes were selling – fast. Inexperienced people turned into ‘investors’ overnight and were making money. But it’s not that easy anymore. Today it’s different.
plenty of deals at the right price
Is it a bad time to invest in real estate, or to even consider property flips? Absolutely not. Today it is a great time to invest. Mortgage rates are extremely low, and purchase prices are very low. Plus, inventory is in your favor. Banked owned properties are all over the place, and the mortgage market is tailored to first time homebuyers. All of this together is a great alignment.
where’s the money then?
However, the question is how are people getting the financing to buy these flips when conventional lending tends to favor perfect borrowers right now? Great question. If you have been in the property investing realm for a while, you have probably heard of hard money. To put it simply, hard money is all about the deal, and not you or your credit score. A private lender will lend you money to purchase a deal, and improve it, (for a short term) when conventional financing may take too long, or just will not qualify. “Great!” you say, “Where can I get some of this hard money!?” Well, that’s easy, (Empower) but what’s more important is knowing how it works, and how expensive it can be.
Common rates for conventional mortgages these days are less than 5% – which is awesome. This rate stretched over 360 months can make your payment affordable and realistic for your household needs. Plus, your loan to value (LTV) can be anywhere from 60-97% (FHA). Meaning, you don’t have to bring a ton of money to the table to buy a house. Furthermore, your fees (origination) range from 1-3 pts (%). With hard money, rates usually start at 10-12% (interest only) stretched out from 6-24 months, with fees around 4-10 pts and a total LTV of 60-75%. You may be thinking, “Wow! That is way to expensive! Why would anyone spend that kind of money?” Well, think about it for a minute…
If you are unable to obtain conventional financing for your property investment, what are your alternatives? Using all of your cash to tie up the deal and fix it up is expensive in that it uses zero leverage whatsoever. This ‘high cost’ is marginal when you look at a typical investment flips profitability. In fact, the profitability of your money increases by using hard money. If you aren’t evaluating the profitability of your money, you need to slap your own self in the face and check this out…
let’s see it in action:
Let’s say we have a deal with a 100,000 purchase price, it needs 15,000 in repairs, and should have a sales price of around 200,000. Let’s say it takes 6 months to sell. Obviously, we are leaving other costs such as Realtor, title/escrow fees, and assuming that this will take up to 6 months to sell (you better not take that long in real life!) If you use your money, the profitability of your money looks like this:
1. cash from savings, heloc, or other source.
personal out of pocket costs: 100,000 + 15,000 = 115,000
- upon sale: 200,000 – 115,000 = 85,000 gross profit, profitability: 74%
2. hard money leveraged: (LTV of 65%, rate of 12%, 4 pts. in fees)
- hard money loan: 100,000 + 15,000 (65%) = 75,000
- total interest cost: 75,000 (12% at 6 mos.) = 4,500
- fees: 75,000 (4%) = 3,000
personal out of pocket costs: 40,000 + 4,500 + 3,000 = 47,500
- upon sale: 200,000 – 75,000 – 47,500 = 77,500 gross profit, profitability: 163%
All that matters in a deal is the profitability potential. Remember, try not to get emotional – the paint, the yard, how well you and your team did on the countertops - at the end of the day, it simply does not matter if you lose money! Profitability is number one. Make your decisions on an investment based on the profitability, make sure you are factoring the cost of your best work and ideas – then you will know you have a deal that everyone will be proud to be a part of – before, during, and after the sale!
Your best days are ahead. We would love to help you get there.
Want to know more about your credit, and the mortgage process? Just ask. We have some great tools to help you – and it’s all free. If you would like a copy of our Client Information Pack (CIP) filled with lots of helpful advice about your credit, lending, and mortgage guidelines, simply navigate to the contact page, send an email, or complete the online application for more helpful information. To claim your copy, simply click here:
or visit the Empower Home Loans website by clicking here:
housing market in recovery.
Wednesday, June 2nd, 2010
Spring is the best season to shop for houses – and sell houses. The weather is beautiful, the yard and new flowers look great, and most families like to complete their home purchase by the end of the summer ensuring no interruption during the school year. But for the last couple years, we have seen some hesitant buyers and sellers.
However, it looks different this year. Thanks to extremely low rates, tax credits, an improving economy, all are helping the housing market stage a revival. In April alone, sales of existing homes jumped 23% from a year ago, according to the trade organization National Association of Realtors. Sales of new homes rose even faster, up 48% from a year ago. What’s more, a growing number of economists believe the three-year plunge in housing prices is at an end.
“Units, volume and sales price are up on all fronts,” says real estate broker Todd Hetherington, who is based in Alexandria, Va. “Houses that are priced well are getting multiple offers in the first week.”
Don’t take your eye off the ball just yet, housing prices, like everything else, still remain rocky. According to the S&P/Case-Shiller nationwide index, home prices fell 3.2% in the first quarter of 2010, down from the already low levels where they stood at the end of 2009. And home prices may stay down for a little longer. The continued recent slide in the stock market is hurting consumer confidence and likely to make some people pause before buying a house. Foreclosures aren’t helping the housing market either – unless you count the improvement of inventory provided by property investors and house flippers. But as more repossessed homes are now starting to land on the market, this drives up the number of houses for sale and keeps resale prices down. The Mortgage Bankers Association said last week that mortgage applications for new home purchases fell to the lowest level since 1997 – and that plus the fact that mortgage credit remains tight, is making it hard for some prospective home buyers to qualify for a loan. Some argue that the stabilization of tight credit is what is needed for the economy – and does not affect housing, but creates opportunities for many responsible borrowers.
timing your move
Alternatively, a growing number of economists believe this spring could end up being the start of a sustained rebound in the housing market. The biggest driver of that rebound will likely be interest rates. Though rates were expected to rise this summer, the continuing problems in Europe are driving down rates in the U.S., which is still seen as a safe haven for investors. The result is that mortgage rates have fallen to their lowest point in a year and are expected to continue to drop through the summer. Think on this: in general, for every percentage-point decline in mortgage rates, houses effectively become 10% cheaper.
A recent study of 92 economists by financial-products firm MacroMarkets found that on average housing prices are expected to drop slightly in 2010 and begin rising again next year. That means that for the first time in years someone who buys a house this spring will most likely see their home appreciate in the next year. And rising housing prices, just like falling ones, tend to feed on themselves. ”Low interest rates will be a powerful incentive,” says William Hummer, chief economist for Wayne Hummer Investments. “People who want to be home owners will get back into the market.”
All in all, there are a lot of opportunities out there – don’t regret waiting to make your move…
Your best days are ahead.
Want to know more about your credit, and the mortgage process? Just ask. We have some great tools to help you – and it’s all free. If you would like a copy of our Client Information Pack (CIP) filled with lots of helpful advice about your credit, lending, and mortgage guidelines, simply navigate to the contact page, send an email, or complete the online application for more helpful information. To claim your copy, simply click here:
or visit the Empower Home Loans website by clicking here:
rate vs product. which is better?
Tuesday, May 4th, 2010
Today many large lenders are advertising nothing but the interest rate. They would have you believe that the rate of a Mortgage is the most important component of your loan. We feel that rate is only a small piece of the loan puzzle.
With the increased frequency of people changing jobs in the United States, individuals rarely stay with the same companies for the duration of their careers. This translates to people moving around more frequently than in the past. People who stay in the same house for longer than five years are quickly becoming the minority in the real estate market. The need now for competitive products to facilitate these changes in housing is more important than ever. Borrowers need options that allow them more flexibility to move around.
So which is it?
To answer this question let’s take a look at a 30yr fixed loan. Consumers choose a 30yr fixed based on two things-a low fixed rate and a low fixed payment. Contrary to public opinion, the interest rate on a 30yr fixed rate mortgage is not fixed. Let’s use the example of a 30 year fixed rate mortgage of $150,000. In the first ten years of your loan you would pay the bank $84,000 in interest. Only $25,000 in the first ten years would go to principal. After 21 years, half of the initial balance is still owed. At this point, the consumer will have paid $226,000 with only $75,000 of it going to principal. All of a sudden, that low fixed rate you received does not seem as low. With people only staying in a home for 5-7 years, paying the bank interest is not as appealing to today’s consumer.
Is there a solution? The answer is “yes”. Loan products such as Adjustable Rate Mortgages (ARM’s) or first position lines of credit allow consumers to pay less in overall interest during the course of their loans. We believe that matching up a consumer with a product that better fits their needs is far more powerful than trying to find the lowest rate. “But who needs these types of Mortgages?” A regional manager for a large retail chain would be good example. These positions come with a higher rate of relocation. In this case someone who knows they are only going to be in a house for a couple of years would be better served by a product that offers them payment options and possibly a low introductory start rate. This would allow the consumer to pay more towards the principal balance of their loan rather than paying most of the money to interest. Also, it helps the consumer generate more equity in their home by putting greater distance between what is owed on the home and what the current value is.
In the lending world there are a vast number of loan products and loan programs. Keep an open mind about the loan process and be open to the advice that a seasoned mortgage professionals offers. Rates may look great on paper but in the larger financial picture, they are not as important as the products they are associated with. We strive to find our clients a perfect balance between rate and products, and believe it to be the path to greater financial prosperity and less unnecessary debt.
Your best days are ahead,
Want to know more about your credit, and the mortgage process? Just ask. We have some great tools to help you – and it’s all free. If you would like a copy of our Client Information Pack (CIP) filled with lots of helpful advice about your credit, lending, and mortgage guidelines, simply navigate to the contact page, send an email, or complete the online application for more helpful information. To claim your copy, simply click here:
or visit the Empower Home Loans website by clicking here:
