Mortgage Finance Blog

Thirty-year fixed loans have hit record lows in four of the past five weeks. Homeowners have found it increasingly attractive to consider the opportunity to save money on their mortgage payments. It’s important to find out exactly what is entailed in the process, and the cost to find out if it will work for you and your family. It may prove to save you some money to know a few possible roadblocks before you get started.

First and foremost, the value of one’s property will be among the most important aspects of the refinance process. Additionally, it is the most costly aspect of determining whether or not a refinance can be successful. Based on the size of the property, a typical homeowner will spend slightly less than $500 to obtain an appraisal report. This might be one of the toughest components to side-step. But, it may behoove you to call a Realtor and ask for a comparative analysis. Using a 10% tolerance, you might be able to determine whether or not your home will appraise appropriately to satisfy the highest acceptable loan to value ratio.

Income and time-on-job are critical aspects of obtaining approval as well. If you have recently taken on a new job you will find greater success if you wait six months before applying for the new mortgage. Ideally, the homeowner should be at less than a 28% front-end ratio. This means that the monthly mortgage payment divided by the gross monthly income should be less than .28. Moreover, the back-end ratio should be less than 36%. The back-end ratio includes all other consumer debt and the mortgage payment. As an example, if you make $10,000 per month, your expenses should not exceed $3,600, altogether, or 36% of your income.

Credit scores and history are equally as important as appraisal value and income. Accessing your free annual credit report  may be the best way to monitor reported content. If you borrow less than 35% of the credit limit offered on your credit cards, you will find that your scores will be more agreeable. There is no substitute for consistent, on-time payments, it is invaluable. Low credit scores will cost you in all aspects of borrowing. From car loans to credit cards, your score will determine your interest rate and can affect your mortgage rates and viability, as well.

There are lots of aspects of the refinance that may become a challenge. Ensuring that all of the aforementioned elements are within the risk tolerance of bank guidelines, you will find that the refinance process will go much smoother. On average refinance customers are saving over $125 per month, some saving hundreds of dollars. Although market conditions are down, you might consider renting your current residence and moving-on to buy a new property. Consult your CPA and your trusted mortgage broker to determine how rental income is calculated and whether or not a new home purchase is the right move. If you have an FHA loan on your home now, there may be a way to refinance without needing an appraisal at all. With so many variables, it is always helpful to ask your mortgage professional. Don’t delay too long, this once in a lifetime opportunity to borrow cheap money won’t last forever!

Your Trusted Mortgage Broker,

Diego L. Quintero

A couple of months ago, I wrote about the increased charges of FHA loans. We discussed the increase of the mortgage insurance premium funding fee from 1.75% of the loan amount to 2.25%.

This major change was to allow the FHA to increase its cash reserves and to create some stability within the government entity. The change still makes the FHA loan rather attractive for borrowers who do not have a substantial down payment.

However, if a borrower’s credit score is above average (700 FICO), it may prove advantageous for borrowers to save for an additional few months and go with conventional financing. Borrowers making this paradigm shift will realize a better equity position and save more at the closing table.

Let’s do that math. If we are obtaining a $100,000 loan, the closing fees using FHA financing would be roughly the same as a conventional loan except for the 2.25% funding fee.

Considering such, the FHA requires a minimum down payment of 3.5% of the purchase price.  Simple math demonstrates that after the down payment is deposited, the borrower’s equity position is merely 1.25% (3.5%-2.25%=1.25%) of the purchase price. That’s hardly any equity!

Conversely, utilizing conventional financing, the borrower is required to deposit at least 5% as a down payment. Considering that a funding fee is not incurred, the 5% equity position remains intact.

Most banks and brokers offer a slightly better rate on conventional financing than FHA. This is due to less paperwork, time, effort, processing, etc. In our example, if the borrower waits an additional month or two to save approximately $1,500 for the down payment, he/she will find themselves in a better equity position, saving more money at the closing table and making nearly the same monthly payments.
 
Is it better to obtain conventional financing and realize a greater equity position? For most, it makes more sense. It will depend on a variety of factors. Make sure that you get all of the facts of your particular scenario.

Look to your trusted lender to personalize your options and make a side by side comparison of a couple of loan programs. Such a comparison can help you feel confident that you are making the best financial decisions for you and your family.

Over the past year I have seen many investors attempting to revisit the old business model of the “fix-n-flip.” This type of investing proved to be simple and lucrative to most people from 2001 to late 2005, even for the novice investor. As investors flock back to the marketplace, they are finding themselves in between a rock and a hard place - trying to find a common ground between themselves, buyers and banks.

The major dilemma lies in the appraisal. When the new buyer needs a mortgage to purchase a home, an appraisal is performed. This will allow the bank to measure risk, based on the home’s value and additional information contained therein.

The new laws that affect appraising (Home Valuation Code of Conduct or HVCC) have further depressed the market. As appraisers are seemingly drafting reports that lack in-depth research and careful analysis, we are finding that home values are reported very conservatively. While this allows banks to mitigate risk on declining markets, it is not boding well for the investor who wanted to make a quick buck. The result is usually a low appraisal, which leads to either renegotiating the sales price to a lesser value, or the transaction falling apart.

Another issue lies in time lines regarding the earliest that a property can be sold after purchase.

For example, the Federal Housing Administration (FHA) has written separate guidelines for these kinds of homes. Two appraisals are generally required and the bank will use the value of the lesser report.

Additionally, a line-item cost breakdown may be required. This means that the investor will need to provide proof of items that were purchased, including labor.

Usually investors who are savvy, will do some of the work themselves or barter with workmen to decrease their costs to improve the home. Both guidelines are challenging to overcome, but if you acquire a home at a low value, it may still result in a winning situation.

The FHA has those separate guidelines that reach the 90-day period of ownership. After 90 days, the new buyer can use the FHA loan program, and may forgo the added rules leaving the investor in a better position.

Some conventional lenders, as opposed to FHA, have a 6-month time period before a resale can take place. Those lenders are usually the conservative, yet better-priced lenders. However, they can also request the line-item cost breakdown sheet in the event that the appraisal comes in low and a rebuttal to the report is issued.

For the most part, rebuttals do not work to increase the value of an appraisal. The bank usually selects the conservative value before lending on a property. There have, however, been remote cases where a rebuttal works.

There are several other factors realtors and investors should know before entering the marketplace.

In order to be a valuable resource for investors, Realtors should know the details of a typical fix’n flip scenario. Your mortgage broker can be the most essential resource to ensure investors a successful outcome. A knowledgeable mortgage broker can partner with the real estate agent to create a more detailed and accurate comparative analysis and help the investor gain confidence.

Begin building teams that work to protect the investor and create more business for the future.

Your Mortgage Broker,

Diego L. Quintero

As foreclosure rates surged to their highest levels in five years, I found it interesting to have received an email from one of the most conservative lenders in the country stating that they are getting more aggressive on the lending front. It’s great news for new home buyers as they are now able to place a 5% down payment versus the 10% that we have been accustomed to, in Arizona, over the past three years.

Arizona, Nevada, California and the Florida markets have all been struggling to elude the “deteriorating market” label. Upon this new announcement, the “sand states” now find themselves borrowing at the same levels as all other states like Connecticut or North Carolina. Appraisers are beginning to write “stable market conditions” on reports and banks are gaining confidence.

However, we continue to have naysayers who call doom for the real estate market. Despite those naysayers, banks are reporting strong figures as JP Morgan Chase reports a 57% jump in quarterly profits. The velocity of money is about to be ‘turned-up’ with this latest aggressive mortgage lending announcement. Our national economy may actually feel the money flowing, once again.

Up until this latest announcement, the only method of obtaining a loan value greater than 90% in the ‘sand-states’ was to buy a home utilizing the FHA programs. The major drawback of FHA is the FHA Funding Fee. In my post from last week, I described the increase in fees that the government is considering, from a 1.75% to 2.25% of the loan amount. Its a great time for conventional lenders to step-up and gain a larger market share as markets stabilize.

Prior to the risky lending practices, the 95% loan to value was a customary lending practice. This is not the beginning of a return to sub-prime lending and stated income loans. This is merely a return to normal lending conditions that kept us stable for many years before the risky players entered the lending arena.

Chief Executive of JP Morgan Chase, Jamie Dimon said recently, “The last thing we need is to enact new policies that over-regulate and work at cross-purposes without reducing system-wide risk. None of us can afford the costs of unnecessary or bad regulation.”

Dimon gets to the point in describing the fact the money must continue to flow and that the latest regulations, although prudent, may slow down the pace of money flow and further deteriorate the economy.

Keep a look-out for some upcoming reports by other large banks and determine whether or not you are ready to make a 'step-up' or buy your first home. The timing is now and better than ideal.

If you are considering a new home or an upgrade, you must take advantage of the current market conditions. In the upcoming months, the Federal Housing Administration (FHA) is seeking to make some pricey changes to home buying, so the timing could not be better to contact your local real estate agents.

In order for the FHA to improve their financial position, they are increasing the mortgage insurance premium from 1.75% to 2.25%. What is mortgage insurance? Simply stated, it is an insurance policy that will protect the lender in the event that the borrower cannot make payments.

FHA assistant secretary of housing David H. Stevens explained the need for mortgage insurance to Congress on March 11: "This assistance allows lenders to make capital available to many borrowers who would otherwise have no access to the safe, affordable financing needed to purchase a home."

In addition to insurance increases, some home buyers might see the minimum down payment increase from 3.5% to 5% or even 10%!

Also keep in mind the tax rebate we’ve blogged about for first time home buyers and ‘step-up’ buyers. There is still time to benefit from this offer. For additional tax facts, you can review your IRS info. As always, consult your CPA or attorney to make sure that you are filing your taxes correctly.

Interest rates are still at all time lows, as are home prices at rock-bottom. Plus, the rebate is still in effect, so it simply makes sense to buy your own place or step-up your lifestyle as the buyer’s position is near perfect.

• A legal record clear of felonies (i.e. driving under the influence, fraud, money laundering, etc.)
• Exceptional credit history
• FBI background search & fingerprinting

If you are planning to refinance or buy a home soon, you may want to think about how to finance your gift giving this year. In a recession, it's easy to fall into the pattern of using credit cards to make purchases when you are in the heat of holiday shopping. But I want all of you to think twice.

In the past few months industry leaders have decided that the default rates on mortgage loans are still unacceptable. Add-in some season spending and you may find yourself in tough position to refinance or purchase in the near future. Banks will deny loans that surpass the forty-five percent threshold on debt to income ratios. A ratio that has been used in the past, but could have been overturned if the borrower had excellent credit scores and/or plentiful assets.

Debt to income ratios are a calculation of monthly income in relation to a borrower’s household debt; like credit cards, car payments, student loans, or mortgages. For example, if a borrower makes $1000 gross income (before taxes) per month and has $300 in monthly payments, then that borrower has a 30% debt to income ratio.

It is simply going to be more difficult to get approved for home loans and if your seasonal spending is done on credit, be careful! The latest trend of credit card interest-rate hikes may take you over the debt to income threshold where the payments reported at the credit bureaus are higher than customary.

Another word of caution when planning your holiday budget is the instability of the job market. These lending changes are taking place, more so, for the banks & mortgage insurance companies to feel more confident investing in residential real estate. Additionally, Shaun Donovan, Secretary of Housing and Urban Development states, “Obviously, foreclosures have proven very difficult to tackle – where they were first driven by subprime mortgages, now job losses are the primary cause.”

When loans are written, jobs and incomes are verified, but with the tumultuous marketplace- no job is safe. Either way, take caution in the holiday spending, it will only hurt your position if you need to make any large financial moves in the future.

On a less personal level, it may make sense to continue tightening lending guidelines, but are we risking the restriction of the velocity of money and further deteriorating the economy? A question to be answered by historians in many years to come.

Hello All,

The latest changes in the mortgage industry have allowed us to keep moving forward, albeit slowly – but moving. While the industry has seen a steep decline in loan applications in the past few weeks, the federal government is hoping that the recent approval to extend the tax credit will help bolster the industry and the overall economy. As many of you already know, the $8,000 tax credit for first time homebuyers has been extended through the month of June, 2010. You must be in contract by April 30, 2010. So, make sure to get a head-start on home shopping. If you want to get a good deal on a home, you do not want to be up against a deadline as it will hamper your ability to negotiate.

In some markets, the tax credit will also be available for ‘move-up’ buyers. The $6,500 tax credit is available for those who want to buy a replacement primary residence. Technically, it applies to all markets, but you must have lived in your home for at least the last 5 years.  Many homeowners in the Arizona, California, Nevada, and Florida markets may not be able to take advantage of the program since they may not have equity in their current primary residences to sell and make a profit. Perhaps if you live in the New England market, you may find that you are able to “move-up” and take advantage of the latest legislation a bit easier than your western or southern counterparts.

If you are going to take-on the benefits of the program, make sure that your income does not exceed the maximum allowable, per program guidelines. The credit does not have to be paid back unless the home ceases to be the taxpayer's main residence within a three-year period following the purchase. Watch out for the small print, too. Don’t try to buy a home from a close relative, specifically from your spouse, parent, grandparent, child or grandchild. It simply won’t work that way!

No matter which market you are from, feel free to call me and I can help you understand the details and lead you in the right direction. If there is anyone that you may know that needs more information, please pass on my info. I look forward to making new business relationships. Thank you, in advance!

Your trusted mortgage professional,

Diego L. Quintero

Attention Condo Owners & Realtors:

It has been a rough time for bankers to realize profits in the real estate market and worse results have come from the condo market. Although, we have seen a lot of luxury condos hit the market over the last decade, they are simply not turning out to be a good investment. What has taken place? Well, the Federal Housing Administration (FHA) has issued a mortgagee letter (2009-19) which states that they will place some stringent approval guidelines to accept condo complexes. In order for a bank to fund on a condo unit for a customer, it must be approved by FHA and pass the standards required for funding.
According to the the letter, all condominium project approvals will be invalid within the next month. It does, however, allow projects that were approved on or after October 1st, 2008. This pretty much wipes out the majority of approved condominium projects across the country. Even if your particular condo is approved, I would not be too comfortable since all of the approvals will need to be renewed every two years. This, effectively, stops FHA lending on condos over the next few years. There is very little chance that the Department of Housing and Urban Development (HUD) will have the work force to re-approve all condos within two years. Is the writing on the wall? No one wants to fund on condos anymore!
As for conventional financing, we have seen the loan-to-value ratios decrease on loan guidelines over the last few years. This means that the potential buyer has to have more of a down payment in order to secure financing. Additionally, mortgage insurance companies are refusing to insure loans placed on condos, which leaves all buyers in a position to put at least 20% down. Its simply getting tougher to buy or refinance a condo.
What does this mean to the typical buyer, owner, or Realtor? In general, investors always have to think about the exit strategy before entering into an investment. This new rule which takes effect on November 2, 2009 will effectively decrease your chances of resale and close-off your exit. If conventional guidelines follow suit, then your chances of resell will be only as a "seller carry-back" or "full cash buyer." As a Realtor, it is essential that we advise potential buyers of the possibility of owning the investment until, let’s just say, “forever.” Its tough to get rid of an asset that can’t be bought by all possible financial means.
So, if you would love a condo – go get one and be happy to sit on the investment for a very long time. If you want to assure yourself of some type of exit strategy, then pick a single family residential home and rest assured that your exit strategy will be better than that of condo.

Your trusted mortgage professional,

Diego L. Quintero

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Hello All!

In the past few months I have been on the phone with many  real estate agents asking for loan commitment letters or Loan Status Reports (LSR’s). The LSR is a form that represents a bank approval by the potential buyer. It shows the dates that the mortgage consultant reviewed personal data, like bank statements, pay stubs, tax returns as well as the completion of a loan application.  These are all important facts required to submit a purchase offer and helps the seller(s) understand that the buyer is ready to move forward if the offer is accepted.

At most of the larger banks, the process may be more complex than at a brokerage. They usually take several hours to get out a loan commitment, they are unwilling to help the applicant formulate a strategic plan to purchase in the future, and their rates are usually higher.  However, they market their products really well, which may sway the average consumer. I am competing with the large banks on a daily basis and the way that I compete with them is by using wholesale lenders who can offer the rates at lesser costs. Sort of like shopping at Costco versus Target. If you don’t buy in bulk, you won’t get the best deal. Using that line of thinking is exactly how wholesalers and brokers work together to consistently beat the big banks. If a brokerage is closing a lot of wholesale business, they get the perks of offering better, lower cost products.

Unfortunately, the service across the industry is poor, at best. It is especially poor at the larger institutions where they have too many people involved with your personal data and things get lost, misplaced, or they lose contact altogether. The next time that you apply for a mortgage, test it out – get an application at a large institution and get a copy of the Good Faith Estimate and the Truth-in Lending statement. Send me the estimates so that I can help you understand the data. If you want to compare rates and costs, use the annual percentage rate (APR) to determine who is giving you the better deal. Don’t forget to factor-in the service! Nine times out of ten, a broker will beat the big bank rates and while I cannot vouch for the service of other brokerages, I can promise you that your experience with FSREI will be surprisingly pleasant.

Thank you for reading! I look forward to reading your comments in my email and online!

Respectfully,

Diego L. Quintero