FHA Update and More! Video Blog!

90 Day Anti-Flipping policy is waived for one year by HUD!

Have you gotten an accepted offer on a house only to find out that this is a flipped property and FHA will not insure your loan until the 91st day?

If this has happened to you worry no longer. For one year HUD is waiving this requirement with a few restrictions.  Here is the update from National Association of Mortgage Brokers:

On January 15, 2010, the U.S. Department of Housing and Urban Development (HUD) issued a Waiver of Requirements of 24 CFR Sec.203.37a(b)(2).  This regulation provides that a mortgage for a property will not be eligible for FHA insurance if the contract of sale for the purchase of the property is executed within 90 days of the prior acquisition by the seller, and the seller does not come under any of the specific exemptions that apply to the 90-day rule.

The waiver takes effect on February 1, 2010 for a one-year period, and is limited to those sales meeting the following conditions:

1.    All transactions must be arms-length, with no identity of interest between the buyer and seller or other parties participating in the sales transaction;
2.    In cases in which the sales price of the property is 20% or more over and above the seller’s acquisition cost, the lender must:
a.    provide supporting documentation and/or a second appraisal;
b.    order an inspection of the property and provide it to the buyer
3.    Limited to forward mortgages, and does not apply to the Home Equity Conversion Mortgage (HECM) for Purchase program.

You can also go directly to HUD site for information on the Flipping Waiverin Greater detail.

Please consult your mortgage professional on how and if this will affect any transaction that you are seeking or currently in. The waiver starts on the 1st of February.

Onions are not the only thing with Layers!

I was sitting on my couch the other day watching one of the most infamous movies of all time with my children. The movie I am certain that many of you remember. During the movie there is a point when they talk about how “Onions have layers” and it got me thinking. Yes, that movie was Shrek and no this is not a pitch for the upcoming Shrek 4.

Like onions, all mortgage loans have layers. The layers are risk layers. Every file that we touch or work on is evaluated by the amount of risk to the investor. Risk is evaluated on several different ways. An underwriter has to be comfortable with the level of risk in order to approve the file. These layers can be described the following way: 1) Credit 2) Collateral 3) Capacity and 4) Compensating Factors.

Credit – Credit is more than a score. The score does make up the first level of assessment. If you do not have a score that meets the minimum requirement for the program you are done before you begin. However, what if you do have a score that is high enough to qualify for the loan program. Does that mean it is a done deal at that point? Credit has several components that we must go over to make sure that a consumer not only meets the requirement for score but credit as well. Some of these factors are:

• # of trade lines open and rating current – A trade line is an open account such as a credit card, and auto loan, a mortgage note, and installment debt or even a lease. These trade lines must remain open and most be rated to the current date. Some people have old credit cards that they never actively closed that have not reported in months. This shows the lender that you have the ability to open and maintain credit and when you have done so for several different types of credit it will help establish a solid score. They do go hand and hand. However if you have a 700 score and only one open trade line that is a small credit card open for 5 months this will not qualify. Although the score is high there has been little time for you to make a mistake and the low limit is a low risk for the credit card company. This would be insufficient credit.
• Several Open Collections – FHA specifically looks at the last twelve months of credit to see how you are doing now. There are cases that the scores are qualifying scores but a client has many open collections for semi large amounts. If this is not in the last twelve months the underwriter might require them to be paid especially anything over $1000 or so. If they are in the last twelve months and there is more than one you most likely will not qualify for the loan. If it is only one then you will have to write a suitable explanation and it will be left to the underwriters judgment. The only exception to this rule is Medical collections.
• Open Tax Liens or Judgments – Any of these items will have to be paid no matter what. They will also be further evaluated to see when they occurred what it is and why. Remember they are trying to see if there is any recurring behavior patterns of unpaid debts without explanations that make sense or situations you could not have predicted.

Collateral – is based on how much you are putting down on the property you are buying or the amount of equity you have in your current home. The larger the down payment the lower the risk. Anything less than 20% down requires Mortgage Insurance. Mortgage Insurance is designed to cover the investor on their losses in the even that the consumer forecloses. FHA is a Government insured loan and is designed to have a limited down payment so generally the collateral portion for FHA borrowers is usually not considered a strength of the file as a whole.

Capacity – This is the consumers ability to repay the debt. This is largely based on your debt to income ratio. However, capacity can be broken down further and commonly is:

• Time on the Job – If you are in a new industry where you get tips, overtime, bonus, commission or any other special compensation that you did not receive at your previous job they may not include this income. This could have a dramatic impact on the qualifications.
• Work History – I have had situations where the borrower had many jobs and this spooked the investor. I had to make up for spotty job history but accenting the positive factors of the loan.
• Self Employed Income Decreasing Year over Year – many loan officers take a two year average and that is the way that we are taught if and only if the income is steady and or increasing. In the event the income is decreasing year over year we use the current year only and we must make sure that the decline is not severe.

There are other items on capacity that we may look at in the layering of the risk but for time and length purposes that is all that we will discuss here.

Compensating Factors -Any factors that decrease the layers or levels of risk in the file. Some compensating factors may include but are not limited to:

• Assets
• 401K
  
• Long time on same job
• Reserves after down payment (not an FHA Requirement but considered a compensating factor)
• Low Debt to Income
• own funds to close not gift

The following Illustration is one that I have always used to give myself a visual of all the information above. Then I would rate each section 1-10 and determine how to present the strengths and minimize the exposure of the weaknesses.

Although overly simplified the graph shows that Credit, Collateral and Capacity are the focal points or base of the triangle. If any one of them are not very strong it is up to the supporting arms or Compensating factors to make up the difference. In order to do so the compensating factors have to make sense and be supportive to the overall structure of the file.

Ultimately the layers of risk will make or break your file. The goal of a loan officer should be to package the file in the best manner possible to make sure the underwriter sees why this is a good file. If someone has a high debt to income (Capacity) then it is essential that they are strong in credit and collateral and it is a bonus if they have compensating factors such as reserves. When borrowers want to do down payment assistance programs they are adding layers to the file. When you increase the layers or levels of risk you create a greater chance for error or decline. It is imperative that as you increase the risk you have supporting compensating factors that help to justify the risk an investor may take on you. As a consumer you can work toward this. Set yourself up for success. Decrease the layers that your file has and maximize your three C’s. This will help you to get a loan in today’s economy.

In conclusion, it is all about risk or layers. You want to give as many reasons to the investor to buy your loan as you can. I understand that it is hard to fire on all cylinders all the time and that is why Compensating factors play a huge roll. If you know that you have lower credit, don’t make a ton of money, and have limited down payment then you have to understand that you may be asked for several items. If you want to ask for down payment assistance you have to take a step back and be the investor. The question is why do I want to give my money to this person? Our job is to assist you in answering that question for the investor.

As always thank you for reading.

HUD making Changes to FHA lending?

I am certain that by now you have heard that there are some changes that are beginning to take place with FHA financing. I am certain that you have heard that they are Bankrupt or that their reserves are diminishing at a rapid pace. I am also certain that you have heard that FHA will be adopting the HVCC as of January 1st.

How much of it is True? What affect will it have on the housing market? Does any of it affect the loan that I have with them?

I am sure that there are a dozen other questions that are going to arise from the headlines and the many blogs that are posted pre-maturely from professionals wanting to be the first to give you the information. Please be aware that all changes that will go into effect will come in the form of a Mortgagee letter. If you do not read it from a m0rtgagee letter do not give it a ton of thought. Even if you read it here it should contain a link to the mortgagee letter directly on HUD’s site. Click here to go to the HUD Site. They have published several mortgagee letters.

Changes include but may not be limited to:

• Appraiser Independence
• Appraiser Portability
• Appraisal Validity Periods
• Strengthening Counterparty Risk Management
• Revised Streamline Refinance Transactions
• Annual Base City High Cost Percentage Revisions

Man’s Best Friend

They say that a dog is a man’s best friend and for many years I don’t think that I believed it. In fact, I wanted a dog so bad as a kid and we could never afford one so I think that I was scarred from those days. Naturally when my wife and kids asked for a dog I was absolutely against it. I was able to resist until the day………………

It was a Sunday and I received a phone call from my father. He asked are you guys going to be around for a while I want to come up. If you know my dad this would be extremely out of the ordinary. My dad is in Modesto so about 1 hour and a half later there was a knock at the door. My kids all three of them ran to the door in excitement. The funniest part is they had no clue nor did I or my wife what would be behind the door. We opened the door and my Dad was standing there with a three pound 8 week old pure breed Boston Terrier. That Sunday against all my better judgment and wishes KODA was born into the family.

So what has happened since then is that little tiny dog is now a one year and a half year puppy that my kids adore. My wife is his master (don’t even think about saying mine too). He sleeps in our bed every night. I had just gotten all the kids out of the bed but what the hay him or a fourth kid I will take him. I like him a lot when no one is looking and then I throw up the machismo when people are looking. Then it all happened……Last week on Friday we noticed that there was something wrong with his eye. We took him to the vet to discover that he had an eye ulcer. He was to have an ointment in his eye every two hours and I was selected to administer. My wife and kids left Sunday on a trip without me and it was just he and I. I have to say that we bonded and through all the ointment administering and talking to him because there was no one else I decided to publicly admit that I love the little guy. Monday I took him for the recheck and the Vet sent me to emergency eye care. She stated that his eye was REAL BAD! I went to the doctor and she stated that he needed to have surgery first thing this Morning. He was going to receive an eye graft and if that did not work he would lose his eye. Hundreds of emotions ran through me but the one that generally would have floored me: THE COST was of no concern.

Over the night I waqs worried sick but confident that the DOC would do her magic. The surgery was a success for KODA and for the doctor cha-ching! The most important thing is that I learned that a dog is truly A MANS BEST FRIEND. He would do anything for me and I will do the same for him.

WHAT DOES THIS HAVE TO DO WITH HOMES AND HOME MORTGAGES?

The answer is very simple. I think that are many times that we convince ourselves that we do not like something based on a past experience or trauma that we may have experienced. If we never want to look at a one story because we don’t feel that there will be enough privacy we limit our scope. Many times the very thing that we are adamant about can become the thing that we adore the most. I was so against a dog that for the first year that we have had the dog I have completely missed out on the joy that he brings to the table. Don’t let Stereotypes about FHA, Mortgage, certain neighborhoods or schools determine how you feel about something. Give yourself the shot of making your own decision as to whether or not something is for you. Also, give the person that is making the suggestion the chance to explain why before you knock it.

I have many clients that walk through the door saying NO FHA or NO Points and there are a lot of cases that they end up realizing that FHA with one point was mathematically the best choice for them. Go into everything with the same enthusiasm as a child. Approach it as though you know nothing and seek wisdom and wise counsel. Let the product or the numbers paint the picture for you. Seek the facts and the truth without limiting the windows that you are looking through and in the end you will be all the more wise and all the more satisfied.

JUST REMEMBER THAT I MISSED A YEAR OF MY DOGS LIFE BECAUSE I HAD A PRE-DETERMINED VIEW THAT WAS ABSOLUTELY INCORRECT! KODA you truly are a man’s best friend and thank you so much for the life lesson that you have taught me.

With or Without Harp here are 5 ways you might Refinance your Home!

Are you considering refinancing your home? You cannot listen to all the the talk of low Mortgage rates and not consider looking into it. Maybe you have some equity and would not mind taking out a little cash right now. The problem is the devil that is on your shoulders. Yes, there are naysayers out there that say that it cannot be done or that you would be crazy to cash out of your home right now. I know I get it. Jealousy is a disease of the worst kind. The bottom line is that if you are considering refinancing there are a few different options that you have.The following is a list of opportunities that may be available to you:

1. Streamline FHA – This is a simple and effective way to lower your rate on your FHA mortgage. If you currently have a rate that exceeds 5.875% then you may want to talk to your professional. There are limited costs such as title insurance, processing and few miscellaneous. You will receive a refund from the upfront MIP that you paid or financed initially and that can be applied to your costs. In most cases that I have done or seen the borrower brings their monthly payment to the close of escrow or less.
2. VA IRRL or VA Cash-out Refinance - The VA IRRL is similar to and FHA streamline. The goal is to minimize the cost of the refinance so the Veteran can lower the rate on their note. A Cash Out VA loan is the same as a traditional cash out mortgage but for Veteran’s only and with certain restrictions.
3. DU Refi Plus - This program is part of the HARP (Home Affordability and Stability Plan) that was recently released. If your loan is owned by Fannie Mae you can refinance your first Mortgage to 105% of the homes value. If you have a second in place then that second can be subordinated to an unlimited CLTV. This will vary case by case and lender by lender and many of the wholesalers have their own overlays. Overlays are added guidelines to protect their investors. Essentially stricter underwriting.
4. Freddie Mac’s Relief Refinance Mortgage – This Program is the same as the DU Refi Plus but Freddie Mac requires that you return to the current servicer of the loan. What this means is that if you have a Freddie Mac owned loan and that loan is serviced by Countrywide you will have to refinance with Countrywide. In my post Breaking News Fannie Mae and Freddie Mac to the rescue? I have listed the sites where you can find out who owns your mortgage.
5. Traditional Refinance – If you are one of the few that have equity in your home you have the ability to capitalize on today’s low rates. The one concern is the appraisal on many of these loans because often times the lender will do an AVM or Desk Review of our appraisal. This is especially common when you are looking to take cash out of the property. Here are a few ways to refinance traditionally:

• Rate and Term Refinance – A rate and term refinance is simply as it states. It is when you refinance to lower the rate or the term of you mortgage. Many cases you can do both at the same time. I have several clients that are taking advantage of this opportunity right now. They are cutting the term of their mortgage from 25-30yrs to 15-20 yrs.
• Cash-Out Refinance – A cash out refinance occurs when you borrow equity from your home. The cash may be used to pay off debt, home improvements, vacation, investing or whatever else you choose to do with it. WARNING – The appraisal on a cash-out refinance will be scrutinized the higher the LTV. Also, there are costs that are associated with a cash-out refinance that you will not incur on a rate and term refinance. It is part of the risk based pricing that Fannie Mae and Freddie Mac have gone to.
• Government Cash Out or Rate and Term Refinance - This is the same as the traditional except that it is bound by Government Guidelines. For Example FHA has limited refinance transactions to 85% LTV.

As always this information is to help you gain a better understanding on what may be available to you. I strongly encourage you to consult you mortgage professional and find out your options today!

Thank you,

Matt Freeman

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.

 

Wow that was Easy! FHA Streamline Refinance designed specifically for the consumer.

 

 

 

 

 

 

 

 

 

 

Confused Homeowner

 

Dear Confused Homeowner,

 First of all you are not alone. The FHA Streamline is a terrific loan and it is rather simple. Contrary to the media reports on lending. The FHA Streamline is designed to be simple and low cost. Many times the cost to close is simply the amount of the mortgage payment you would have made. Instead of paying your mortgage to your servicer you make that payment to the Escrow Company at close. Wholesalers have reduced their fees on these transactions and the many escrow companies have compatible rate programs. As is the case with every loan program each wholesaler has their own overlays or qualifications if you will. It is common to see a 620 credit score minimum, some require employment and others do not, no income and no assets are many times the case. Consult your professional to speak directly about your situation.

How the loan is set up and how the loan amount is determined is based on how long you have had your current mortgage. Based on the time that you have had the loan you receive a refund on the last upfront mortgage insurance premium you financed or paid for. For example: If you have had the loan 6 months you will receive 70% of the amount you paid. If you financed $3500 in upfront mortgage insurance premium you will be refunded $2450 applied to the payoff or closing costs. You will then have a new upfront mortgage insurance premium of 1.5% of the new base loan amount. There are a few ways to calculate your new base loan amount based on how long you have been in the current mortgage as well.

Here is a grid of the Upfront Mortgage Insurance Refund:

 

Upfront Mortgage Insurance Premium Refund Percentages
	Month of Year
Year	1	2	3	4	5	6	7	8	9	10	11	12
1	80	78	76	74	72	70	68	66	64	62	60	58
2	56	54	52	50	48	46	44	42	40	38	36	34
3	32	30	28	26	24	22	20	18	16	14	12	10

 

 

The bottom line is if you have an FHA Insured Mortgage currently and your rate is 6% or higher than it would be to your benefit to give your Mortgage Professional a call.

Matt Freeman

 

 

 

　

　

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

The Top 3 Mistakes Buyers Make when getting Pre-approved.

The very first thing that a buyer should do when considering  a new home purchase is contact their Mortgage Broker or Banker and get pre-approved. However, many times this is not the case. Many times buyers see a home that they like either by driving buy it or searching on-line. This home sparks the interest and they use on-line calculators to see if the home is affordable. The payment appears affordable and within their budget. The question is with tightening credit and underwriting criteria will the documentation support that theory…….

Mistake #1 – Test Driving Homes before Pre-approval – Looking at homes on your own or with a Realtor prior to have a clear understanding of your qualification, the cost and the payment is a recipe for let down. Two things commonly happen to the consumer when this approach occurs. They fall in love with the home and either buy it even though it was above their comfort level or get disappointed when they find out they do not qualify. Both are dangerous as one could lead to financial disaster and the other could lead to inaction that will cost you later.

Solution – Consult your Mortgage Broker or Banker on your qualification levels when you get the desire to buy. The consultation is free and can save you time, money and heartache. If you do not have a Mortgage Broker or Banker get a referral from someone you trust and respect or do thorough research and interview two or three. Generally your Realtor will know someone that you can trust.

Mistake #2 – Getting Pre-approved without providing your documentation – If the Mortgage Broker or Banker is willing to issue you a pre-approval in today’s credit market without reviewing all of your income and asset documentation and looking at the credit  RUN! Every dollar counts and without reviewing the tax returns and the income documentation we may qualify you using an income that will not stand when the loan is underwritten. Your Mortgage Consultant should take the conservative approach to your income to leave room for the unknown.

Solution – Find a Mortgage Professional that you feel comfortable with and invest in yourself by meeting with them face to face to get your pre-approval. This will allow you and the Mortgage Professional to talk in detail about the situation and make sure that you explore all options. If you are unable to meet in person the next best thing is to provide all the documentation necessary and have a phone appointment on speaker phone. (You could always do Webcam or Webinar meetings as well).

Mistake #3 – Assuming the Pre-Approval is good indefinitely – Pre-approvals are credit approvals. Credit is a snapshot in time and can change daily if you are an active user of credit. If you were borderline on your credit approval from the beginning say 623 Fico and you are going FHA and you go buy some 0% interest at Home Depot you may be at risk. A credit report is generally good for about 60 days. Since a Pre-approval is a credit and income approval any change in either make make it invalid. Another thing buyers are not aware of is programs and guidelines are frequently changing and if they are not being updated by their Mortgage Professional they may again be at risk.

Solution – Stay in constant contact with your Mortgage Professional (They should be in contact with you but it is a two way street). Make sure that there have not been any program changes that would affect your approval status. You also have to keep your Mortgage Professional aware of anything that you have done that may help or hurt your approval. An example would be a pay raise or a new credit purchase. Communication is the key to protecting your Pre-Approval.

The next time you are considering buying a home and you are in California, Oregon or Idaho go to http://capitolmortgage.com/officers-detail.aspx?LONum=161 for your pre-approval.