Simply The Best Loans

The Fed responded yesterday to the question concerning potential real estate bubbles breaking across the country. The past few years of record low interest rates coupled with very high appreciation, in many markets, have some analysts predicting an extreme downturn in residential housing prices as interest rates go up.

Additionally, some analysts have been predicting interest rates soaring into double digits by the end of the year. The proposed result: homeowners would find their properties are no longer valued at the price they paid and, since many purchased their homes with adjustable rate mortgages, interest-increased payments would become unaffordable.

Over the last few years, with rates dropping to record lows, interest-only loans became extremely popular. Many of my clients opted for an interest-only payment based on the assumption that rapid appreciation would create equity in the property. I have seen incredible appreciation in the area I live, with some properties doubling in value in less than ten years.

With an interest-only payment, borrowers are able to buy a much more expensive house and still manage the payments. While I don’t agree with many of the “doom and gloom” folks expecting interests rates to reach such levels borrowers are no longer able to purchase homes, I also don’t think the extreme appreciation many areas have experienced in recent years will continue.

Do I think real estate in these areas is going to depreciate? Probably not. Greenspan said yesterday that, historically, periods of depreciation in real estate values are actually very rare. So are interest-only loans a risk?

As with any other investment, the amount of risk depends on the individual. What may be very practical for one borrower could be very risky for another.

Example #1: An established commission sales person with a fluctuating income gets an interest-only loan in order to ensure in low-commission times they have least payment possible. Then, when commissions are collected the sales person pays a a lump sum directly to the principal. The sales person has figured out the amount of principal payment he/she would be making each month with a full payment loan. He/she pays that amount or more to the principal of the loan periodically. The sales person is still creating equity in the property by reducing the principal balance on the loan, but has lower payments each month. An interest-only loan in this scenario is low risk.

Example #2: The borrower chooses an interest-only loan so that he/she can buy a more expensive house. He/She has other revolving debt and little-to-no savings. The borrower is assuming equity will build in the property through appreciation, not by reducing the principal balance of his/her loan. The borrower gets transferred or loses a job after a year or so. In trying to sell the house, the borrower discovers that he/she can not sell the property for enough to cover the sales expense and payoff the loan. The borrower basically owes more than or, at best, equal to the property’s value. This is a high risk scenario.

Since no one can guarantee what future market conditions are going to be, the borrower must in all instances plan for “worse-case”. Examples of “worse-case” could be: lower than expected appreciation, interest rates adjust upward too quickly creating negative amortization, or the property has to be sold for unexpected reasons and there is no equity.

Anyone considering an interest-only loan program should discuss it with their broker and/or other financial advisors. The borrower needs to be confident that his/her reasons for chosing the interest-only program will outweigh the potential worse-case scenario. His/her financial planning should include making periodic payments to the principal balance of the loan to ensure he/she is building of equity in the property.

In the course of qualifying for a loan, residential or commercial, you complete a 1003 (called a ten oh three) Uniform Residential Loan Application. On the application, you give employment history, income and assets, a schedule of real estate that you own and answer some basic disclosure questions.

For the average borrower, this is a straight forward process. For the self-employed, commissioned sales or 1099 consultant, this is a challenging prospect. These borrowers don’t receive a bi-weekly paycheck. Their income can come in bits and pieces, sometimes large lump sums. Underwriters have difficulty fitting these borrowers into their “box” of underwriting perimeters. This used to result in borrower’s being denied loans.

Now we have a variety of options, the most common being Stated Income and/or Stated Asset loans. The other description of these programs is No Income Verification and/or No Asset Verification. These terms mean that when filling out the application, with the help of your loan officer, you will state whatever income or assets you need to meet the debt-to-income ratios the underwriter requires. You don’t have to prove it with check stubs, tax returns or account statements.

When doing a stated loan, you and your loan officer must keep in mind that whatever you state must be realistic for the type employment shown. For instance, it is perfectly reasonable that a seasoned realtor would make $100,000 annually. It is not realistic for a cashier working at Wal-Mart.

Now you’re saying to yourself–what’s the catch? All lenders have different requirements a borrower must meet to qualify for one these programs. As a rule, the strictest criteria is for credit scores. Most lenders require scores of 720 or higher. However, if your scores are not that high, you may still qualify but at a slightly higher interest rate. Since there are hundreds of lenders, that results in even more underwriting options.

Suffice to say that if you are working with a knowledgeable broker and you need one of these type programs, the broker should be able to find a lender whose program fits your needs.

Private Mortgage Insurance, also known as PMI, is a supplemental insurance policy you may be required to obtain in order to get a mortgage loan. PMI is provided by private (non-government) companies and is usually required when your loan-to-value ratio — the amount of your mortgage loan divided by the value of your home — is greater than 80 percent. It is important to note that PMI is an insurance policy for the lender to ensure that they will be paid back the amount of the mortgage in the event you default on your loan. The premium for this insurance is broken into monthly payments and added to your monthly mortgage payment.

PMI isn’t always a bad thing — it can allow you to make a lower down payment and still qualify for a mortgage loan. In past years, without PMI, many of us would not have been able to purchase our first home. Now with a number of lenders, if you have good credit, you can get a loan with a higher than 80% LTV and still not have to pay PMI insurance.

One thing about PMI insurance that has always bothered me is that you, the borrower, are paying for an insurance for the lender guaranteeing that the lender will be paid in full if you default, yet, the lender still gets to foreclose on the property as well. They get paid by the insurance and get the property too! Seems like a double dip to me.

Your PMI premium is fixed based on plan type (loan-to-value ratio, loan type, loan term, etc.) and is also related to your particular credit history or other individual characteristics. PMI typically amounts to about one-half of one percent of your mortgage amount annually, according to the Mortgage Bankers Association. On a $200,000 mortgage, you may be paying $1,000 per year for PMI. Nonetheless, I have seen PMI insurance premiums that were considerably more than .5% of the loan amount.

Your best bet to avoid this expense is to either put down the required 20%, ask your loan officer if you qualify for a program that does not have PMI even with higher LTVs, or do a combination loan.

A combination loan means that your loan is broken up into two parts. You have a first mortgage up to 80% LTV and at the same time a second mortgage for the balance up to 100% LTV. This type loan can allow you to make a lower down payment and still avoid PMI.

In some cases a subprime loan is a good way to avoid PMI. If the combine interest rates and payments on a combo are going to be uncomfortably high and you have good credit, you could ask your mortgage broker to look at subprime lenders. Subprime lenders do not charge PMI insurance no matter what the LTV is. Also, to borrowers with high credit scores, subprime lenders offer rates that are competitive to conventional lenders.

Subprime lending is often a two to three year proposition as the loans are usually 2 or 3 year ARMS and after the initial 2 to 3 years the rate adjustments could be too high for comfort. However, some subprime lenders offer excellent fixed rates to borrowers with superior credit and the savings of PMI insurance and/or combined costs of a combo loan can make this a more attractive loan option for those borrowers.

As a full-service mortgage broker, I deal with a broader range of consumers than other loan officers. It is because I am able to offer such a wide variety of programs from multiple lenders versus loan officers that work for just one lender and offer only that lender’s programs.

I also offer my clients as much information and/or assistance I can when helping them choose a specific type of mortgage since I believe this will significantly impact their overall financial picture. I do not attempt to act as a financial advisor. I do try to make sure that whatever type loan they are interested in will support whatever financial goals they tell me they have.

An informed, educated borrower is empowered to make better financial decisions for themselves and their family. Therefore, I work hard to make sure my clients are well-informed of the loan choices and/or options.

I’ve had two recent experiences that have led me to write this article. Both times my clients came to me with very specific ideas about what type of mortgage they wanted. After reviewing their credit and financial picture, I had to recommend against the loan programs they believed they wanted.

Why would I do this………………..especially since both times resulted in my losing the opportunity to make money on the loan?

The answer is simple. It was a bad financial decision for my client. In each case the loan was obtainable for them, the downside in both instances would have resulted in such a financial strain that my clients would have been risking their overall fiscal health.

While it’s not my job to manage my client’s finances, I do believe that I have a responsibility to point out potential pitfalls. If they are considering mortgage options that would leave them extremely vulnerable financially should they have an unexpected loss of income or health, I feel honor-bound to tell them the risks and recommend another course of action.

There are also a lot a loan programs that look good from some particular aspect but overall, if you read the fine print, are very risky to the borrower. I don’t recommend these products to my clients. When they come in to meet with me and ask for them, I recommend against them.

I base my recommendations to my clients on my heartfelt belief that if I wouldn’t buy it, I shouldn’t sell it to you.

Remember, when shopping for anything, the person representing the product is usually very knowledgeable, not only of their product, but of the competition’s products as well. If you’re dealing with an honest professional and you ask the question “would you do this” and their answer is “no”, you probably don’t want to do it either.

According to The Chicago Tribune , mortgage rates have reached a new low, which is great news for buyers on the market now. The Associated Press wrote that “[r]ates on 30-year and 15-year mortgages this week dropped to their lowest levels since late February.”

Here’s what this development means for home buyers and real-estate investors:
“

As long as inflation is held in check there is little or no pressure to push mortgage rates higher,” said Frank Nothaft, Freddie Mac’s chief economist. Despite high fuel prices, “core” inflation–which excludes food and energy costs–seems to be fairly tame, he said.

Mortgage giant Freddie Mac reported Thursday in its weekly survey that rates on 30-year, fixed-rate mortgages averaged 5.71 percent, down from 5.77 percent last week.

Analysts attributed the decline in mortgage rates to reduced fears on the part of investors that the economy might face an outbreak of inflation.

Already this week, rates dropped to 5.27 percent from 5.33 percent last week for a 15-year, fixed-rate mortgage. If you are getting ready to refinance, this could be the time for you!

Asked recently by my 14 yr old son why I became a mortgage broker, caused me to reflect on the answer. I thought you might appreciate the short version of the story.

We’re riding home from his track meet and he says something like “why do you do the mortgage business, Mom, I mean it’s not like it takes any special skills or education……except for like, people skills, of course.” I figure if my own son, who has lived with me through all the trials and tribulations of creating a business and making it successful doesn’t get it, then most other people might not either.

How I became a mortgage broker may in some ways seem accidental, however, I always intended to be in business for myself even in my youth. No, I don’t think that there are people out there planning to become mortgage brokers because it’s a “glamorous” career choice.

Most people are probably like me. I knew I wanted the independence that comes with owning your own business and the means to do that, by chance, just happened to be the mortgage business. That being said, do not doubt for a minute that I love my job. I do!

It is a very gratifying thing to help someone buy a new home. Your home is your sanctuary even if everyone’s idea of sanctuary is different. Nonetheless, we all want the place we can go and know that we belong there and are safe. That’s a pretty good feeling…………….helping people find their sanctuary!

On the commercial side, I’m able to help business owners achieve their goals. Whether it’s a new property for expansion or financing for new equipment, inventory, etc., commercial loans allow me to play a part in their success. Seeing a business grow and succeed is like watching your child grow, every new accomplishment is exciting.

So far as skills, well, the mortgage business has it’s challenges like any other. Although it’s not like engineering or nursing, no one goes to college and majors in mortgages, it does require certain educational background and some very specific skill sets.

I believe the opportunities and experiences I’ve had in other jobs and industries has given me a stronger focus, as a business owner, on meeting the needs of my clients and the community at-large. I take the skills and knowledge I’ve gleened over the years and apply the best of what I’ve learned to what I do today.

If you want the advantage of bi-weekly payments and are setting it up yourself, you may want to refer to the following checklist:

1. Figure out your draft amount for each pay period.
Take your total monthly payment, multiply by 12, then divide by the number of times you’re paid each year.

2. Go to your bank in person or online and find out what they need for you to set up your automatic draft payment schedule.

3. Make sure you are ahead on your payments when starting your automatic drafts to cover any unexpected payment delays and ensure there are no late payments.

4. Send your lender a letter telling them you are going pay by automatic draft, when drafts will begin, and how often they will be made. Please note that it is possible that there may still be some companies out there that don’t accept automatic drafts from a bank. If so, you can still pay on a bi-weekly schedule, you will just have to do it manually with a check. Make sure you send a copy of the payment coupon or statement with each check and put the last 4 digits of your loan number on your check for reference.

5. For the first few months, check your payment history and balance information every month with your lender. This ensures payments have been made and applied timely.

6. If you receive notice that your loan servicing has changed to another company, take steps immediately to have your drafts sent to the new company. Then follow step 5 again for the first few months.

Additional notes: Lenders sell their loans off to other lenders or servicing companies on a routine basis. A lot of my clients worry this will negatively impact their loan. This does not affect your loan in any way, it merely changes the location the payments are made to. It is helpful to know that for the first 90 days after a loan is transferred from one company to another, neither company can report any derogatory payment history to your credit report. So just make sure you have your payments sent on time to the correct place within those first 90 days.

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In order to save money and maximize the services offered by almost all major banks, you can set up bi-weekly payment plans yourself. If you bank online, this process is even easier. If not, you can visit your local branch and get assistance there to create this payment schedule.

First, look at your monthly mortgage payment (including escrow if you are impounding for taxes and insurance) and multiply it by 12. Once you have that number, divide it by the number of paychecks you receive in a year whether it’s 24 or 26 or 52. Set up an automatic draft for that amount to be drafted from your account and paid to you mortgage each payday.

Second, and this is very important, you must make sure you are ahead in your payments by at least 2 weeks, preferably a whole month, before you set these drafts up. Do not start these drafts at the beginning of a month assuming that you will stay current because you may not.

The way some banks process their automatic drafts, especially when they are first being established, may result in a 2 to 3 week delay for your mortgage lender to actually receive a payment from the bank. If your timing is off at all, it could result in the lender either charging you late fees or worse reporting a late payment on your credit record. Late mortgage payments are one of the most derogatory credit issues you can have on your credit report.

This is easily avoided. The best way to do it may make budgeting for a few weeks a little difficult if you’re already having money issues but the reward is well worth the extra tightening you might experience in the short term. (And it is still less expensive than paying the mortgage company a set up fee.) You need to pay your entire monthly mortgage on the first of the month as you usually do and, at the same time, start your first draft payment.

So, in essence, you are making a payment and a half or so that first time, so you are a half or so payment ahead in the beginning. By the next paycheck around two weeks later, you are making another half payment to the mortgage and now you are a month ahead in your payments. Now, as time goes forward, your mortgage is having the principal reduced every 14 to 16 days and you are always paying a month ahead.

With this strategy, you will reduce your mortgage quickly, have an easier time budgeting your mortgage payments and you will never have to worry about a late payment.

A later post will provide a checklist for easy reference when you start your bi-weekly payment schedule.

Many mortgage companies offer bi-weekly payment plans which are designed to help you budget for your mortgage payment more conveniently and payoff your mortgage early. Any bi-weekly payment plan will help you pay your mortgage off sooner, however, very few bi-weekly payment plans are actually making bi-weekly payments.

What the lender actually does is collect a bi-weekly draft from you but the payment is still applied in a lump sum once a month to your mortgage. This does pay down your principal quicker because it essentially results in one extra payment being made directly to your principal balance each year. You are not, however, getting the benefit of having a payment applied to your mortgage on a bi-weekly basis, even though you have had it deducted from your bank account that way.

This sounds confusing and, in fact, it is. If you are not very savvy about payment schedules, you could read all the information provided by most lenders offering these programs and not realize many of these important facts. Most lenders who offer these programs charge an enrollment fee of $250 or more. In addition, they also charge a processing fee of sometimes as much as $9.50 to $11.50 per draft of your checking/savings account. This can add up to over $500 per year in fees alone. I don’t know about you but, given the choice, I’d rather write checks myself and use that extra $500 to pay down my principal balance.

Don’t get me wrong, these programs will enable you to pay off your mortgage more quickly, but for far less than $500 a year, you can create the same effect and pay the extra money you’re not spending on fees to your mortgage principal.

Unless the your mortgage lender is offering the bi-weekly payment plan for a one time set up fee (which is usually a result of banks charging them a fee to set up automatic draft payment), there is a better option which you can set up yourself.

Tomorrow’s post will tell how to set up bi-weekly payments yourself.

Let’s say that you have (1) contracted to purchase a home; (2) completed the loan application; and (3) provided all required documents to your loan officer.

What happens now, you ask?

Your loan will be submitted for underwriting. In short, underwriting is the lender’s review of all the information submitted compared to FannieMae and/or FreddieMac lending guidelines to determine if it within their risk ratios. (More on underwriting will be featured later.) Once the underwriting process has been completed, your loan officer should tell you the results. Here’s what you should look for in your loan officer’s remarks:

1. Make sure that your loan officer reviews your underwriting results with you in terms that you understand. If something confuses you, ask for further explanation.

2. The loan officer should tell you if the results of the underwriting will affect the terms that you outlined in the Good Faith Estimate (GFE), such as your interest rate.

3. Expect updates: if you are working with a conscientious loan officer, you will be kept abreast of your loan’s progress. The underwriting process can take 24-48 hours or several days to weeks, depending on the volume of loans the lender is processing at any given time.

4. Your loan officer should tell you immediately if the underwriter has asked for additional documentation even if it is something that seems out-of-the-ordinary or trivial. If necessary, your loan officer should guide you through providing the underwriter with whatever information s/he requests as quickly as possible.

No matter what type of loan you need or how much you need to borrow, your loan officer’s job is to make the process clear and easy for you. Your questions and concerns should be addressed and any issues that arise addressed immediately. By working with you, your realtor and closing agent, your loan officer should make the entire loan process seamless and stress-free.

For further information or definitions of terms, see our website: www.PremierMortgageSource.com