Simply The Best Loans

Since June 29, 2006, the Federal Reserve has left the federal fund rate of 5.25 unchanged. Wednesday’s meeting is expected to result in a continuation of it’s stay-the-course policy, after 17 consecutive rate hikes. First quarter economic growth slowed and unemployment went up slightly in April. There is much speculation as to whether the Fed will maintain this holding pattern throughout 2007 or will begin cutting rates in order to keep the economy growing. Most predict that if a recession appears close, rates will be cut.

For those that have been waiting to see evidence of the real estate bubble bust, you won’t be surprised to hear some of the stories being told by Northern Virginia homeowners. They are coming up short at closing because they are being forced to sell their homes for less than what they owe on them.

A recent Washington Post article referenced numerous scenarios where sellers in and around the DC area have gone to the closing table still owing the bank as much as $100,000. These “short sales” are the result of would-be homeowners purchasing homes at the very maximum of their payment threshold with little-to-no money down. Compounded by the plethora of interest-only loan programs in recent years and you now have sellers that have no equity in a market where sale prices are stagnant or going down, not up.

Even for those that can sell their homes for what they paid for them, if they haven’t built any equity, they will still be out-of-pocket the costs of sale, which include real estate commissions and closing costs.

With numerous subprime lenders closing their doors and thousands of adjustable rate mortgages approaching their first interest-rate adjustment, lenders and regulators are anxious. The cost of foreclosure to the average lender can be as much as $50k or higher. Refinancing homeowners into more reasonable fixed-rate programs seems a sound solution to the problem, but regulations often prevent lenders and/or mortgage servicing companies from contacting homeowners until they are over 30 days late on their payments. The resulting credit backlash of late mortgage payments on a homeowner’s credit report can create additional issues, especially if s/he is trying to qualify for a conventional loan.

Faced with the prospect of foreclosure, a homeowner may consider selling the best course of action but this only works well if there is at least enough equity in the property to cover the costs of sale. Any homeowner finding him/herself faced with the possibility of being unable to make their monthly mortgage payments due to interest-rate adjustments, illness, divorce or unemployment, should carefully review their mortgage note and terms. S/he should seek the recommendations and advice of a trusted, professional financial advisor. Then homeowners can contact their lender or mortgage servicing company to find out what assistance they can provide to help them keep their home by refinancing their current loan into one with terms that are more workable for them and their budget.

Private mortgage Insurance (PMI) is an insurance premium paid by the borrower each month as part of his/her mortgage payment if their mortgage balance is more than 80% of the property’s appraised value or sales price, whichever is lower, at the time of settlement. For example, an individual is buying a home and the sales price is $200,000. He has $10,000 for a down payment. Since $10,000 is only 5% of the sales price, he will have a loan of 95% of the sales price or $190,000, the lender requires you to have PMI which is added to the monthly payment. The premium amount you pay is based on the type of loan, individual credit scores and other factors.

After hearing references from some of my lenders about a new PMI tax deduction, I contacted my CPA who provided the following guidelines for those interested in whether or not they qualify for this deduction:

1. The deduction is in effect for the tax year 2007 only.

2. The deduction applies to purchase loans primarily rather than loans that are refinanced with PMI. If it is a cash-out refinance and 100% of the proceeds go toward home improvement, then the deduction may apply but this is subject to interpretation and you should review this with a tax professional.

3. The deduction only applies to taxpayers with adjusted gross income of $100,000 or less. It is pro-rated to some degree for taxpayers with adjusted gross income between $100,000 and $110,000. A taxpayer whose adjusted gross income is over $110,000 does not qualify for the deduction.

4. The insurance coverage must be provided by the VA, FHA, RHA, or private lenders defined in Sec 2 of the HPA of 1998.

While this very general overview can help some homeowners better understand how they may qualify for this deduction, it is not definitive. As with any deduction, a taxpayer must review the guidelines carefully and preferably confer with a tax professional to be certain they are eligible.

For anyone with an adjustable rate mortgage, now is the time to consider refinancing into a fixed rate. For the last several weeks interest rates have been creeping downward. 30-year fixed rates are around 6%. If you have an ARM that is going to adjust anytime in next 12 to 24 months, you should consider refinancing now. Take the Refinance Quiz and evaluate your current mortgage needs.

For some time now, my credit report provider has offered a service to correct and re-score a credit report within 5 to 10 business days. Considering if you attempt to get your report corrected of some error or derogatory credit by trying to work with the credit bureaus themselves, you might get your credit score improvement within 3 to 6 months. That’s a big difference!

For someone in the process of purchasing a home and a 20 point improvement in their score results in a better interest rate, this is a valuable tool. But it isn’t cheap. My report provider charges $30 per credit bureau per tradeline. For instance, if you had a credit card company reporting late payments, but you have the documentation to show that the bill was paid on time and you wanted to have your report corrected, the cost would be $90 to have it corrected and for your report to be re-scored.

A recent client, who was able to provide documentation that two accounts were paid in full and closed, got a 20 point improvement in her credit score which cost her $180. The improvement of her score resulted in a reduction of her interest rate which saved her over $200 per month on her mortgage payment. For my client, those savings were well worth the fee to have the report re-scored quickly.

The downside is the reporting company makes no guarantee that your score will be improved even after going through their re-scoring process. So it is possible that you could spend the $90 per item and it not impact your score enough to make a difference in the terms of your loan.

That’s when you need the assistance of a mortgage professional to help you evaluate ‘the cost versus the benefit’ and whether or not re-scoring is right for you.

Any application for credit can result in your credit report being pulled by the potential creditor. Whether it’s for a mortgage, a VISA card or a furniture store, it can impact your credit score. One potentially hazardous practice is applying for credit over the internet. If you apply for a mortgage loan or equity line on an internet site that offers “multiple” quotes from different lenders, your information is being distributed via that site to all of those potential lenders. In order for a lender to provide you with a quote for loan terms, they need your credit scores. If your qualifying information is sent to 12 lenders for rate quotes, each one of them can pull a credit report. That’s 12 credit inquiries, which can drop your score. Then, if you seek a loan with several local institutions, they will also pull a credit report. It is very easy for inexperienced borrowers to have their credit pulled excessively because they are “shopping” for the better mortgage rate.

A client was recently referred to me after her loan was denied by an online lender two days before closing. In order to determine whether or not I could help her get a loan, I had to pull her credit report. I discovered that, since she had applied for a mortgage with an online company that offered “competitive” quotes from multiple lenders, her credit had been pulled over 7 times. By the time she found a house, contracted to buy it and scheduled to close, her lender of choice pulled credit again, just prior to closing. The numerous credit pulls earlier had reduced her score to the point that she no longer qualified for their loan program. While I was ultimately able to get her a loan to purchase the house she wanted to buy, her rate was considerably higher than what it would have been with her initial credit scores.

Shopping online for anything can have potential pitfalls but shopping over the internet for mortgages is risky for anyone that isn’t extremely well-versed on credit and the mortgage process. If you are unsure of your credit status or lack a good understanding of the mortgage process, you would do well choosing local bank or mortgage broker to assist you when seeking financing for a home.

Much of the country is currently experiencing a slump in new home sales as a result of increasing interest rates. The same increase that is slowing new sales will also cause many new homeowners a significant increase in their current payments when their ARMs begin to adjust to higher rates.

In a recent article, CNNMoney.com reported that,

The Mortgage Bankers Association estimates that some $330 billion worth of ARMs will adjust in 2006 and $1 trillion worth will reset by the end of 2007. With a $200,000 loan adjusting upward from 4 percent to 6 percent, the monthly bill would increase to about $1,200, from $955.

A 20% monthly increase in payment would seriously impact the budget of the average homeowner. With recent low rates and flexible loan options that allow for interest-only or minimum payments, many new homeowners stretched their budgets to the max and purchased a more expensive home than they might have otherwise. Few families, even those with two incomes, would be financially comfortable with a sudden decrease in discretionary income of several hundred dollars a month. Many will be strained beyond what they can reasonably manage.

The Libor, one of the most used indices for mortgages, was 1.279 in July of 2003. Now, 3 years later, it is at 5.591, a rate increase of over 4%. Even if a homeowner has a minimum amount of equity in their home and would have to pay closing costs out-of-pocket, s/he may need to seriously consider refinancing now.

It is important for any homeowner, but especially a first-time homeowner to review his/her mortgage note and terms of any adjustable rate mortgage. S/he needs to know:

1. The index on which their rate is based? (i.e. Libor, Treasury, COFI, etc.)
2. What’s the index now?
3. What is the margin on their note?
4. When is the first adjustment date?

With that information, s/he should be able to roughly calculate what the new rate will be and then, by using a free mortgage calculator, determine what his/her new payment will be. If the payment increase causes concern and/or budget issues, the homeowner should immediately contact his/her financial advisor and/or mortgage professional to review financing options and solutions.

With triple-digit temperatures in recent weeks here in Central Virginia, all activity seems to be winding down to an almost dead stop. The local the housing market is no exception and has slowed significantly from this time last year. Several open-houses in my area over the last two weekends failed to bring a parade of potential buyers driving through the neighborhoods. Other areas of the country are experiencing the same slow-down.

Where is the market still warm?? According to CNNMoney.com, markets that swelled from the influx of Katrina refugees are continuing to experience positive growth. Several others, such as Viriginia Beach and Gainsville, FL, remain strong.

While a slow-down has been long-anticipated, real estate is still a strong market and although prices are falling in some areas, there is no indication of wide-spread depreciation. For complete details on the second quarter figures on over 150 markets nationwide, click here.

Loan programs require certain criteria for qualification. In addition to meeting this criteria, the borrower’s particular financial picture such as credit score, the loan amount, the loan-to-value (the percentage of the loan amount as it relates to the sale price or appraised value), the choice of loan program, and/or the type of property can all contribute to changing the cost of the loan.

As previously outlined, lenders quote interest rates with corresponding yield spread premiums. Then the lender has pricing adjustments for all the different variables possible for one loan. Pricing adjustments can be as little as .125 percent of the loan amount up to 5% percent or more of the loan amount. Calculating these pricing adjustments correctly for a specific loan can be one of a loan officers biggest challenges.

Rate sheets vary from lender to lender, program adjustments vary from program to program and everyone’s financial picture is different. With so many variables going into the determination of loan terms, it is virtually impossible for a consumer to compare apples to apples in shopping for a mortgage. It can also be counter-productive for a borrower to attempt to do so.

If a borrower is “shopping” a mortgage with multiple companies s/he risks having too many credit checks, getting confusing or misleading information and possibly having duplication of upfront service fees for appraisals, credit reports, etc. The advantage to working with a professional mortgage broker is to have an experienced professional do the shopping and evaluating for you and then give you an overview of your best options. The broker’s focus is to get the borrower the best possible terms for his/her financial circumstances and needs.

While yield spread premiums (YSP) are rebates offered each day by lenders for any interest rate over the daily par rate, the YSP is also the tool loan officers use to offset lender adjustment fees to the consumer. Every loan program with every lender can have “adjustments” to the interest rate or hits as they are called by loan officers. Whenever a loan officer issues a good faith estimate to a client, s/he must be sure to either charge for these adjustments or cover the cost by quoting a rate with YSP that will offset it.

The amount of loan program rate hits can be based on numerous factors such as credit score, loan size, loan-to-value (LTV), property location, loan type (cash-out refinance versus rate/term refinance), etc. These adjustments can total as little as .125% of the loan amount and go up to several percentage points of the loan amount. If paid by the borrower, this could mean thousands in extra fees for closing.

Industry practice is to cover the adjustments by the YSP rather than charge them directly to the borrower. Since YSP’s are usually odd numbers, if the hits or adjustments on a loan are .75% and closest YSP to offset this charge is .875%, the loan officer would be paid the .125% net rebate at settlement. This net rebate is paid outside of closing or POC and does not come out of the borrower’s funds at settlement. It is paid to the loan officer by the lender.

Next, loan program adjustments and their affect on interest rates.