Huge FHA Change
August 6th, 2010 (12:39 pm)Effective September 7th, 2010 FHA will radically change the structure of its mortgage insurance premium. When a borrower takes out a loan through FHA, they are required to pay both an Upfront Mortgage Insurance Premium (UFMIP) and an annual Mortgage Insurance premium paid monthly. Until now, the UFMIP was 2.25% of the loan amount, and the annual premium was generally .55% of the loan amount.
For example, if a borrower purchased a home for $200,000, they could borrow 97.5% of the purchase price for their “base” loan amount of $195,000. The UFMIP was $4387, and the monthly premium was $89.
Under the new guidelines, the UFMIP will go down to 1% (from 2.25%) but the annual premium (paid monthly) will go up to .90% (from .55%). So for the example the UFMIP will be $1950, and the monthly will be $146 ($57 more). This will make the annual (monthly) premium pretty much the same as a “conventional” loan with 5% down and average credit scores.
The main differences with FHA are that the borrower only needs 2.5% down payment instead of 5%, and the credit score doesn’t affect the interest rate like it does with conventional loans, but conventional loans have NO UFMIP. With this change, FHA will attract borrowers with below-average credit scores and less than 5% down payment more than conventional loans will. While the change is aimed at increasing the revenue FHA gets from loans, I’m afraid we’ll have to wait and see what actually happens.
The UFMIP does not have to be paid in cash but rather gets “financed”, or added, on top of the loan amount–$195,000 in the example. This results in borrowing an additional $4387 thereby increasing the monthly payment about $23/month over the base loan amount payment. With the new 1% UFMIP financed, the $1950 only increases the loan payment $10/month. On the other hand, the annual (monthly) premium just went up from $89 to $146/month. So the net change will result in a $34 ($57-$23) higher monthly payment for the same home. It is less upfront money, but more monthly premium.
So, like paying higher upfront fees (“Points”) for a lower interest rate, we compare for a breakeven point when we divide the upfront fee by the monthly payment savings. In this example, the lower upfront fee saves $4387-1950=$2437. The monthly payment increases $34, so the breakeven point is $2437/34=71 months. Bottom line, the new structure is better for the borrower up until month 72 (about the 6 year mark). After the 6th year, the higher monthly payment just plain costs more.
There are of course tax implications and cash-flow and down payment considerations when deciding which loan type to choose, but I like this new FHA structure. The odds of keeping an FHA loan longer than 72 months ( about the 6 year mark) are not that good, so this should save most borrowers money. This may present more problems for FHA in the near future because of this lowered revenue, but maybe FHA is counting on its borrowers staying in their loan longer than the average.
This change makes it more important than ever to compare options with an experience Mortgage Planner when buying or refinancing to see what’s best versus working with someone who is just trying to get the loan done and earn a quick commission.
Your Loan Is Approved–Or Is It?
July 9th, 2010 (01:27 pm)There is another pothole in the road to be aware of. When a borrower applies for a mortgage and receives a call from their lender telling them his loan is approved, he breathes a big sigh of relief. But wait, the loan is approved, the closing is set, the borrower goes to the bank to get their cash for closing, and now. . .there is one more hurdle in this ever-changing finance world that has to be cleared.
Due to the frequency of loans defaulting as a result of differences between the application data and the final loan information, a new measure has been introduced called the Loan Quality Initiative (LQI). LQI has 4 major area of focus for borrowers to be aware of. These apply only to conventional loans like Fannie Mae but not to FHA or VA loans–yet.
(1) A direct verification with the Social Security Administration of an applicant’s Social Security number will now be required with all applicants. A simple photcopy of their card and tax returns will not be enough.
(2) Lenders will now require the credit report be updated just prior to closing. Issues will arise when there are new “inquiries”, new credit accounts, and/or higher monthly payments than what was found on the initial credit report. New inquiries will need to be fully explained to ensure that there are no new credit accounts that weren’t initially disclosed. Further, the monthly payments on existing accounts may have changed causing the debt payment total to be higher. And finally, if any new accounts were opened during the application process, the new monthly payments will need to be included in qualifying calculations. This credit report has the biggest potential to turn a loan that was approved into a loan that is later declined. It is also the area over which the borrower has the most control. An important thing to be preapred for is that if there is new information to be considered, the loan will need to be re-underwritten and may cause a delay in closing. For purchase transactions, this could potentially cause an inconvenience for the sellers as well.
(3) There are also several measures to confirm occupancy when an applicant applies for a loan for their “primary residence”. This has always been a concern in lending when someone applies for a mortgage. If any signs show the possibility the applicant will NOT occupy the home as his primary residence (such as buying two homes close to each other in a short time frame), the loan could also be declined or at least require more time and documentation to confirm occupancy.
(4) Finally, all parties to a transaction from the Realtors, to the borrowers, to the lender will be checked against two databases of “excluded parties” which contain names of people that have either committed fraud at some point or done something else wrong to raise suspicion in a transaction. This has always been required for government loans, so this requirement just seems obvious of other residential conventional loans.
The bottom line is this: lenders should be warning clients of these changes and potential delays they can cause while informing them what to-do and not-to-do during their application process.
Extension of Tax Credit
June 14th, 2010 (09:49 am)For those homebuyers scheduled to close the end of June to get their First-Time or Move-Up Tax Credit, it might be a bit intimidating to hear how many other loans are scheduled to close around that same time. This means the likelihood of any last minute changes or problems getting fixed is pretty low. You can’t expect other buyers to forgoe their $8000 or $6500 tax credit because your closing gets delayed.
But there may be some hope after all. Senator Harry Reid has proposed extending the tax credit deadline from June 30th to September 30th. Buyers are still required to have their accepted offer by April 30th, but would not need to close until September 30th.
This is a pretty big deal. There would, FOR SURE, be home buyers that miss out on the tax credit because of this deadline combined with a last minute problem that delays closing.
Not coincidentally, Harry Reid is a Senator from Nevada which has the largest foreclosure rate in the U.S. Many people are buying up these foreclosures at discounted prices and intend to receive the tax credit to boot. The common theme with buying a foreclosed home from a bank is that everything about the process from the initial offer right through closing is different than buying from a person.
It is common on the day of closing to hear from an attorney representing the bank who states the entire transaction cannot close that day because of something that is not in the bank’s best interest. This causes delays in closings often when purchasing foreclosures (and short sales), so it is likely an extension will have the greatest impact on that market–and Nevada in particular. Go Harry!
The other huge segment that will be helped is those waiting to buy a new home until their current home sells. If this gives them another 3 months to sell their current house, they could still buy the new home and receive the tax credit. This would be a win-win for everyone involved.
Understanding Appraisals
May 4th, 2010 (08:36 am)Consumers are often baffled by the home appraisal process. They may feel their home is worth a certain dollar amount, and therefore, the appraised value doesn’t make sense to them. It is important to know that appraisal guidelines are dictated by the lenders. In many states, the lenders must disclose the purpose of the appraisal, as each situation carries its own set of rules.
In essence, lender guidelines force appraisers to put a fair market value on a home based upon comparable sales in the area where the home is located, as the home must be “bracketed” according to size and value. For example, when valuing home A and comparing with homes B and C, homes and B and C should have square footage and sales prices higher and lower than home A in order to achieve a range, or “bracket” around home A to support the conclusion of value. At least 3 other sales, and up to 7, may be used to support the value conclusion of home A while making adjustments for differences among the properties such as size, view, location, condition, amenities, upgrades, etc.
Upgrades can usually be expressed at full value in newer homes since they required investing additional money into the cost of building the home. On the other hand, the amount invested in upgrading or remodeling an older home is rarely reflected in full in the final appraisal. The reason is the home had value in its original condition, and again, the value of the upgrades must be supported by comparable examples within the same marketplace.
These comparisons will be preferably drawn from current market activity within the last six months and one mile. Some lenders may want to look at both closed and pending sales to see if there is any room for negotiation. This is a safeguard to prevent appraisers from over-valuing the home in question. It is further stated in the guidelines that appraisers can only place a value on homes that have closed escrow. However, when property values rapidly increase within a marketplace, appraisers are generally permitted to make concessions and put more weight on the evidence provided by comparisons to pending sales and listings. This allows for a “real time” appraisal.
In order to preserve the objectivity of the appraisal process, lenders are prohibited from communicating with appraisers regarding value. While residential homes may have aesthetic appeal that can be observed by sellers, buyers, and Realtors, this is not always quantifiable for the appraiser in their appraisal. Further, the lack of similar homes that have closed recently and nearby presents another problem for appraisers in evaluating the sale. Appraisers often find themselves unable to satisfy all parties while the lender, and more specifically—the lender’s underwriter, is the one with the final say as to the acceptability of the appraisal and the property.
As a Mortgage Planner, I make it a point to follow lending laws and lender guidelines at all times, and work within the systems they provide. This promotes a smooth closure for my clients. As always, you are welcome to contact me if you have any questions.
Mortgage Do’s and Don’ts
April 15th, 2010 (03:11 pm)Here is a list of helpful tips to ensure an effortless loan process. If you encounter a special situation, it is best to mention it to us right away so we can help you determine the best way to achieve your goals.
These DO’s and DON’Ts will help avoid any delays with your loan approval.
♦ DO continue making your mortgage or rent payments
♦ DO stay current on all existing accounts
♦ DO keep working at your current employer
♦ DO keep your same insurance company (refinance)
♦ DO choose your new insurance company soon (purchase)
♦ DO continue living at your current residence
♦ DO continue to use your credit as normal
♦ DO call us if you have any questions
♦ DON’T make a major purchase (car, boat, fur, jewelry, etc.)
♦ DON’T apply for new credit (even if you seem pre-approved)
♦ DON’T open a new credit card account
♦ DON’T close any credit card accounts
♦ DON’T transfer or consolidate any credit card balances
♦ DON’T pay off charge-offs without a discussion with us first
♦ DON’T pay off collections without a discussion with us first
♦ DON’T pay off any loan or credit card without discussing it with us
♦ DON’T change bank accounts
♦ DON’T max-out or over-charge on your credit card accounts
♦ DON’T take out a new loan
♦ DON’T start any home improvement projects
♦ DON’T finance any elective medical procedure
♦ DON’T open a new cellular phone account
♦ DON’T join a new fitness club
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