Are you Commingling? Mortgage Definitions

Commingling can take several different forms and meanings so we are going to focus on the root of the word. According to Wikipedia, Commingling literally mean “mixing together.” This is a common concern in the Real Estate world when it comes to collecting Earnest Money deposits and such. Taking a clients money and mixing it with your own personal funds is illegal. Financial advisors and attorneys also run the risk of serious legal action if they were to commingle funds.

It is when a fiduciary mixes funds that he holds in care of the client with their own funds. This makes it difficult to determine who’s funds are who’s and in the case of financial investment how to distribute gains.

For the purposes of this blog I wanted to touch on Commingling from the gift perspective.  As FHA continues gain steam as one of the premier financing tools for a home purchase so does gift for down payment. The Paper trail of the gift is extremely important and must be consistent throughout. For Example: Your aunt has agreed to give you $5000 for the use toward your purchase. Your aunt must show she has the ability to give the money via a bank statement, evidence the withdrawal from that account, show the cashiers check and the borrower must provide a statement receiving the funds. The cashiers check and the deposit into the borrowers account must match. Many times clients take the Cashiers check from the aunt and Commingle the funds with another small deposit. Now the paper-trail of the gift does not match across the board. If the additional funds were case they are hard to track.

Commingling could cost you time and anxiety in your purchase transaction if you do not pay attention.

Mortgage Definitions: PITI but not the Pity you think.

As we continue the series of Mortgage Definitions brought to by California Home Strategies we take a look today at PITI. This is definitely “PITI” but not the pity you think.

PITI: This stands for Principal, Interest, Taxes and Insurance. If you have a loan with “impounds” which is your taxes insurance are included in your monthly payment then the payment you make every month is PITI. If you have a loan with Mortgage Insurance this would also be included in the monthly payment but is not part of the PITI definition.  PITI is also used in the calculation of your Debt to Income ratios.

It is important to understand what PITI is. Dave Ramsey recommends that you total mortgage (PITI) not exceed 25% of your gross monthly income. Consult your mortgage broker to see what is right for your family. The standard FHA guidelines require a 31/43 Debt to Income.

Thank you again for reading. Until Next Time.

Mortgage Definitions: Servicing

Many times there is confusion when buying a home of whom you will pay in the end. The use of a broker is very common and when we use a broker to help us obtain a mortgage our loan is sold. The broker may obtain the loan for you through Acme wholesale and Acme will promptly sell that debt to an investor. That investor may or may not service the loan. They may have someone else service the loan. So what is Servicing?

Servicing – The collection of mortgage payments from borrowers and related responsibilities of a loan servicer.

If you are like me that leaves me asking the question then what is a servicer?

Servicer – An organization that collects principal and interest payments from borrowers and manages borrowers’ escrow accounts. The servicer often services mortgages that have been purchased by an investor in the secondary mortgage market.

So in the most layman’s term possible servicing and a servicer is the debt collector. This is where you will send your payment and all correspondence about that payment will be made directly through this company.

Risk Assessment Tools: DU and LP Automated Underwriting Definitions

In today’s market, the need for an automated underwriting approval prior to submitting an offer has become common practice. To be competitive the Listing agent or the bank that owns the property would like to know that you have been ran through our automated underwriting engines. Yes, they are computer programs that assess the risk of the file and determine the viability of the loan. It is only as good as the inputter and that is why in most cases brokers and loan officers are asking that you provide a backpack of information. In continuing our trend of Mortgage Definition Monday I have defined these terms below:

Hud has defined Automated Underwriting in their terms and glossary section as follows.

Automated Underwriting - loan processing completed through a computer-based system that evaluates past credit history to determine if a loan should be approved. This system removes the possibility of personal bias against the buyer.

Additionally, I will add that the computer is assessing the total credit risk of the buyer. The loan can still be declined even if it receives an automated approval for multiple reasons. Some of which may include but are not limited to: unacceptable collateral, unacceptable income documentation, drop in the borrowers credit, unacceptable asset documentation and wholesaler overlays that would override the automated approval for the specific wholesaler.

Automated Underwriting Systems has been defined well on Mortgage Professor’s website.

This definition is as follows:

Automated Underwriting Systems -A particular computerized system for doing automated underwriting.  Mortgage insurers and some large lenders have developed such systems, but the most widely used are Fannie Mae’s “Desktop Underwriter” and Freddie Mac’s “Loan Prospector”.

I will add that the systems are very accurate however again each of the approvals will be reevaluated manually by an underwriter to determine the completeness of the documentation. The underwriting systems are constantly being tweaked to include the newest guidelines however it would be appropriate to double check prior to issuing an approval letter. DU Refi Plus is one of the new programs that took a minute before it was available in the system. When this is the case you make get feedback that is not consistent.

I will continue to bring Mortgage Definitions to you each and every Monday. Until then have a great week.

God Bless,

Matt Freeman

Definitions taken from the HUD glossary and Mortgage Professor glossary. I have added to these definitons and included links to their sites for further verifications.

Don’t Go Assuming Nothing. Or Maybe you Should? Mortgage Definitions: Assumption

As the series on Mortgage Definitions continues we are going to take a look at Assumption. In most cases the root word assume can bring a negative connotation. For Example: “Honey, I assumed you were going to pick up our son from practice.” Another could be “I was under the assumption Michael was going to block the defensive end.” Either case the word is most commonly used in a way that we do not perceive to be a benefit. 

Assumption - The act of taking to or upon oneself – One of many of the definitions in Merriam-Webster pertains to the assumption of a new obligation. 

In the world of Mortgage Government loans are in many cases assumable. Hud defines an Assumable Mortgage in their Mortgage Glossary well. In short a mortgage that may be assumed simply means that the buyer can take over the mortgage of the seller under the same terms and the same balances. The buyer will have to credit qualify for the mortgage and there may be a small fee but this can be very attractive. 

Example: The seller of a property has an FHA loan which can be assumed at the rate of 4.875%. Rates at the time of the sale of the property are around 7.5%. The seller may advertise that they have an assumable first note at 4.875% making the home more affordable for any potential buyers. The buyer will still have to get a second mortgage for the remainder of what he does not have as a down payment. 

Example: Seller is selling the property for 200K and has a first mortgage for 140K at 4.875%. The buyer will either have to put 60K down or get a second mortgage . Since 100% financing is no longer a viable source and seconds are hard to come by the best case is the buyer has the money down. 

The Assumption Clause  is the provision written in the note that allows the assumption to take place. 

If you are wondering whether or not your loan is assumable check for the assumption clause in the note or contact your Mortgage Professional and they can help you. 

Assumption is another reason amongst many that I think that FHA in most cases is better than a conventional loan. It provides a unique selling proposition that the Conventional Mortgage cannot provide.

 

Mortgage Definitions: Lock In and Lock In Period

It is common to hear the terms Lock In or Lock In Period associated with your new home purchase. The terms are very important to your financing and it is important to have an understanding of them.

Lock In – An agreement in which the lender guarantees a specified interest rate for a certain amount of time at a certain cost.

Lock In Period – The time period during which the lender has guaranteed an interest rate to a borrower.

Previously, we examined different costs associated in Free Mortgage Step Right Up! These costs are either in rate and offered by the wholesaler via yield spread premium or they are paid upfront as pre-paid interest also known as discount. Each morning the investor sets the rates they are willing to sell on the open market based on their risk tolerance. They will set what they determine to be the par rate of the day and build the pricing off that rate. Par rate is generally represented with a 30 day lock defined as the lock in period.

Lock in Periods  are important because they are the time that you are given to execute the funding of your loan at the rate and the cost that you “Locked In” at. The shorter the period of the lock the cheaper the costs for the rate that you are locking in.

For Example: If you were locking the rate 4.75% today on a 15 day  lock the cost would have been .125% discount. The same rate locked for a 30 day period would have cost .250% discount. To give yourself an additional 15 days to get your laon closed it would have cost an additonal .125% of the loan amount. (this example is for illustrative purposes only and may not represent your borrowing position. Rates were on a 30 year conforming fixed rate mortgage with 740 fico, full doc on a single family residence purchase. Please consult your professional regarding your loan specifically.)

The constant change in the market require the investors to at times make midday chnages to the pricing. The imrovements can be for the better or for the worse. There are cases when more than one change can occur in a given day. If you have locked prior to the change you are safe from the change. If the rates have gotten better you are not allowed to get the better rate or pricing that it changes to. On the other hand if the pricing deteriorates you are locked in at the pricing prior to the deterioration. Pricing is time stamped so it is imperative when making a decision you are decisive. See Don’t bend over picking up pennies while dollar bills fly over you head  ! Indecision can prove to be a costly mistake.

For More Reading on Rate Locks, Lock In or Lock in Period you can also read:

Mortgage Locks: Certainly Uncertain! 3 tips to locking your mortgage.

Mortgage Rates Locking or Floating part 2 of 2 by Jeffrey Belonger

As always thank you for reading,

Matt Freeman

Free Mortgage Step Right Up!Definitions Continued:Origination, YSP, and Discount

Extra, Extra, read all about it! We got your free mortgages over here! No cost, no fees all we need is for you to apply and voila. I am sure that you have heard of the infamous no cost mortgage. You know the one that costs you absolutely nothing. Yeah that one. Oh you got one of these before. I am so sorry to hear that.

The truth is there is no such thing as “no cost.” I know surprise surprise. It is quite often that we come across consumers that have been told about the “no cost” mortgage. It could not be any further from the truth. You see the illusion in the trick is that there are third party vendors that are not part of the Mortgage per se that want to be paid. Examples of those professionals would be the appraiser, the title company, the termite guy and the credit vendor to name a few. Ask you mortgage consultant about the “no cost” mortgage and see what they say.

This blog is not about the “no cost mortgage though. It is a continuance on the series of definitions. Today we will take a look at the different types of ways that your mortgage professional is paid. There are three terms that you will commonly hear:

Origination -  Loan origination is the fee that is charged by the Broker or Banker that you are working with. Commonly, this makes up a portion of the broker or bankers commission. When applying for an FHA mortgage it is common to see 1% origination.

YSP or Yield Spread Premium - yield spread premium is an incentive that the wholesaler pays the broker for delivering a quality loan package and for locking specific rates. In general the higher the rate the higher theYSP. However, today’s market has changed YSP and many times the previous statement no longer holds true. There are several reasons for this but one of the reasons is that investors are afraid of an early pay off. See if they are to offer large incentive to sell higher rates and the rates remain low, there is a likelihood that the consumer would refinance to a lower rate. When the consumer does this early on in the loan it is called an early pay-off. An investor who has paid a large incentive for the higher rate will not have held the investment long enough to recoup the pay out resulting in a loss on the investment. It is common to see incentive be offered at the rates that are selling in the secondary market.

Discount – This is the opposite of YSP. Discount is paid to the investor to obtain a lower rate. It is essentially pre-paid interest. If you are willing to pay more money up front to the investor then they are willing to discount the note rate. This process lowers your monthly payment but increases the upfront costs of the loan. Discount will be made payable to the wholesaler that you are obtaining the loan through.

You cannot have discount and YSPon the same loan. However, origination can be seen with both discount and ysp. The broker has a percentage that they make on the loan. Many times that is with a combination of loan origination and ysp. In some cases the math would point to paying all origination for the broker/bankers fee so that the rate is lower and there is no YSP.

How do you know what is right for your loan? Consult your professional but also ask yourself the following question? How long do I see myself in this home and this loan? The answer to that question will help your professional show you the appropriate combination. After all, it is simply mathematical. The numbers never lie and they will tell you what is right and what may not work.

As Always thank you for tuning in.

All the best,

Mortgage Insurance: Definitions in Mortgage

Mortgage Insurancecan be like gum on your shoe on a hot day. In the years 2002-2007 everyone would avoid Mortgage insurance like is was a plague. The way that we would avoid Mortgage Insurance was by getting an first mortgage and combining with a second mortgage. This type of structuring was commonly referred to as 80/20, 80/10/10 or 75/25. This numbers referred to the LTV/CLTV (http://mattfreeman.wordpress.com/2009/03/19/loan-to-value-definitions-in-mortgage-continued/) .

The break-even of an investor that is lending money is considered to be 80% so if you borrow less than 80% than the investor does not need any protection. If you borrow more than 80% on one loan then the investor wants to have protection in the event you default. When you default and they have to take back the property and they have giving 90% of it’s value their loss can be 10% or greater after all the expenses to foreclose. Please be aware that there are a few exceptions to the rule namely VA and USDA loan programs.

This is where Mortgage Insurance comes into play. The mortgage insurance protect the investor when a consumer defaults and repays them for any losses that they may take. Mortgage Insurance can take on many forms and I suggest that you talk to your Mortgage Professional for the one that may best suit your situation. A few of the types of Mortgage Insurance are as follows:

BPMI – Borrower Paid Mortgage Insurance - commonly used with an FHA loan borrower paid mortgage insurance is paid by the borrower on a monthly basis. For FHA there is an Upfront Mortgage Insurance Premium and then the monthly expense. This monthly expense is in addition to your principle and interest payment, your taxes and you homeowners insurance.

LPMI – Lender Paid Mortgage Insurance – As the name states the lender pays the mortgage insurance premium for you in theory. What they do is raise the rate that you would have gotten by a said amount to cover their risk. The increased rate that you pay covers the losses because the rate is above market. (Why would you want this?)

I am glad you asked that question. In 2007, Mortgage Insurance, became tax deductible. (please note that I am not a CPA and any information here is strictly to illustrate my point. Please consult your CPA for your situation prior to making a decision). However, there were some provisions to what and who could deduct this premium. If you make greater than 100K gross you cannot deduct BPMI. Those that are in that category would have better tax benefits going with LPMI because the MI is built into the rate and Mortgage Interest is always deductible(primary residence).

The reason that 80/20 or 75/25 or 80/10/10 were popular was because the first mortgage was under the 80% break-even and the second mortgage would generally attach a higher rate by 2-3% to absorb the risk they were taken. Second Mortgage were also smaller loans.

You may here the terms PMI(private mortgage insurance), BPMI, LPMI, MIP(mortgage insurance premium) and it can get very confusing. I always recommend that you consult your professional to help explain anything you may be unsure of.

To end this summary of Mortgage Insurance I like to always give a few examples of what I might recommend and when we need or do not need mortgage insurance.

Ex. 1 -  Purchase Price 100K and you need a loan for 85K. Do we need Mortgage Insurance? The answer is yes. Since we are borrowing over 80% of the value of the home BPMI or LPMI would be needed. Another way to finance this to avoid Mortgage insurance would be to do an 80% first mortgage and a 5% second mortgage and putting 15% down. However, second mortgages are the 2009 dinosaur equivalent. They are almost extinct.

Ex. 2 – Purchase Price 200K and you need a loan for 160K.  Do we need Mortgage Insurance? The answer is no. In this case the LTV is exactly 80% and at this LTV and below there is no need for Mortgage Insurance.

In summary, Mortgage insurance is a fee that is paid by you and it is to protect the investor that is taking the chance on lending you more that 80% of the value of the home. It can be dropped when your home reaches that 80% LTV range but can be difficult to do. If you have an FHA mortgage they require 60 payments and a LTV of 78% before you an get rid of it.

If you have any questions regarding what is in this post please leave a comment or call me in the office. Thank you for your time.

As Always, Thank you for reading.

Matt Freeman

Loan to Value: Definitions in Mortgage Continued

Buying a new home or refinancing your existing mortgage is something that hopefully everyone will experience at one point in their life. Mortgages are tailored for the individual or couple that is buying the home. They are assessed by the overall risk the investor will have on the loan based on the qualifications of the consumer. Yesterday we discussed DTI or Debt to Income which is the borrowers ability to repay the debt. Today I would like to take a look at the collateral side of lending commonly referred to as LTV or Loan to Value.

Like DTI, Loan to Value is also expressed as a ratio. It is the amount you will finance for the purchase or refinance divided by the value of the home. The home is what is used as collateral and the greater the equity the lower the risk. Another way to put that would simply be low LTV lowers the risk and high LTV increases the risk.

Let’s look at an example for a refinance transaction. You currently owe approximately 150K on your home. An independent appraisal has determined that the value of your home is approximately 300K. The loan to value on your home would be:

loan amount / appraised value = LTV   150K / 300K = 1/2 = 50%.

We never would use the 1/2 in the example as the number is always expressed as a percentage however, for the example I wanted to illustrate the correct math. 50% LTV would be considered as a low risk loan to value. That means that you have 50% equity in the home and in the event the lender had to take back the property via Foreclosure they would be able to sell for a profit.

80% LTV is considered the break even point for an investor that has to foreclose on a property. They spend approximately 20% of the equity in fees, marketing and reduction of price as well as the holding costs if they are to retake the property. This is exactly why they need insurance know as Mortgage Insurance when our LTV exceeds 80%.

Let’s take a loook at another example. You are buying a home and you have 3.5% to put down as a down payment. The home that you would like to buy is selling for 100K. This means that you would need to finance 96, 500K of the purchase:

LTV = Loan Amount/Appraised Value = 96,500k / 100,000k = 96.5% LTV(please note that purchase price and appraised value can be different. In the event they differ on a purchase the investor will base LTV off the lower of the two.)

We have looked at a few basic examples of LTV here today. The last thing that I would like to dicuss briefly is CLTV. CLTV stands for combined loan to value. This is when you have two or three loans on a property. If you have a loan for 100K and a second mortgage for 50K and the value of the property is 300K how would you determine the combined loan to value? Let’s look at an example:

Loan 1 + Loan 2 / Appraised Value = CLTV; 100k + 50k / 300k = 150k / 300k = 50% CLTV.

These are very basic examples and I must tell you that there is always an LTV and sometimes a CLTV. You will have both in many cases:

Example above the LTV = 100k / 300k = 33% and the CLTV = 100k + 50k / 300k = 50%.

CLTV may also be referred to TLTV or HCLTV which are total loan to value and heloc combined loan to value.

I hope that you enjoyed this information on LTV. Stay tuned for definitions of credit and mortgage insurance coming soon.  As always thank you for listening.

 

 

Definitons: DTI also known as debt to income

DTI also known as debt to income is becoming one of the most important factors when obtaining a loan. The debt to income is a ratio of your debt versus the gross monthly income. This ratio is largely evaluated when determining the risk of the loan. Here is how we calculate your debt to income.

Front end debt to income is the total housing expense divided by your gross monthly income. Total housing expense includes your principle and interest, mortgage insurance, taxes and homeowners insurance monthly. This is commonly referred to as PITI, principle, interest, taxes and insurance. The mortgage insurance is not always charged.

Ex. (excludes mortgage insurance) 100K loan amount @ 6% interest = $599.55 principle and interest + $104.17 taxes and $30 for homeowners insurance = $733.72. If you make $3,000 per month gross then your front end DTI will be $733.72/$3000 = 24% housing debt. This means that your housing debt monthly is 24% of your gross monthly.

The back end ratio which is very closely looked at will take into account the minimum monthly debts that you are expected to pay that report to your credit. Examples include credit card minimums, car payments, student loans, or any other note loan. So the back end ratio will be the housing expense + all the minimum amounts due divided by your gross monthly.

Ex. car payment = $300, credit cards = $300 and student loan = $200 then you have $800 debt load per month. If the house payment is $733.72 + $800 = $1533.72 divided by the gross monthly income of $3000 will give you the back end ratio of 51%.

51% back end ratio would be considered very high and you would have to have compensating factors.

When evaluating your own debt to income simply remember the new total housing payment + other debts that are required to be paid on the credit divided by your gross monthly income should give you an idea. The recommendations for an FHA loan are 31/43 which would include the additional payment of mortgage insurance. Dave Ramsey in his book The Total Money Makeover recommends that your housing payment or front end ratio should never exceed 25%.