Simply The Best Loans

One issue that continues to arise as a result of the high level of appreciation in many housing markets, is buyers’ understanding the difference between the appraised value of a property versus the sales price. In a hot market, a seller may ask and receive a higher price for his/her property but, if the buyer is getting a conventional residential home mortgage, the lender will require an independent appraisal of the property which measures value based on many aspects of the property and recent comparable sales in the area. Usually to be considered a fair comp for value, the sale must have taken place within the last 6 months.

The lender will often order a “review appraisal” which involves the submitted appraisal being double-checked by the lender’s own appraisal department. The lender can even order an additional inspection by their own appraiser if they question or have issue with some aspect of the submitted appraisal. If the lender determines the value to be less than the sales price and/or the submitted appraised value, the loan will reflect the reduced value which can impact the monies needed by the buyer to close.

For instance, a buyer contracts to purchase a home priced at $250k even though comparable sales in the neighborhood top out at $240k. The property is appraised for $250k and the loan and appraisal are submitted to the lender. The lender’s underwriter questions the value and orders an internal review. The review appraiser reviews the submitted appraisal, area comps and other appropriate market information and determines the property is over-valued by $10k. The buyer is at that point forced to either: walk away, negotiate a lower sales price or pay the $10k out-of-pocket since the loan amount will now be calculated on a lower value. If the buyer was getting 100% financing, the $10k difference would be paid by the buyer at closing in addition to closing costs.

Since most borrowers that seek 100% financing are doing so because they don’t have funds to put toward a down payment, the above scenario could create numerous problems for the buyer. One of the best ways for a buyer to protect him/herself is to work with a professional Realtor that has done a market analysis of the property and comparable sales for the neighborhood. If there is any question about value, the Realtor can ensure the contract for sale includes language which will protect the buyer and give him/her options for re-negotiating or canceling the contract should the appraisal or lender review not support the sales price.

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.

Routinely couples, whether married or just in a commited relationship, will come to my office to apply for a mortgage and only one of the parties present is aware of the “family” finances. Or, one member of the couple will come in to get the process started because of work or scheduling conflicts of the other individual, only to discover they don’t know enough about their joint finances to go through the application process.

Do you know where the money is? Do you know how it’s invested? Do you know what interest rate you are paying on your credit accounts and/or current mortgage? Where are your important documents kept? Who is your insurance carrier? These are all fairly basic pieces of financial information but, more often than not, only one member of the couple knows the answer. Show me the money! Let’s talk Turkey! However you want to say it, it boils down to one thing, both individuals should know what their financial picture looks like.

For anyone to be able to maintain a good financial and credit history, they first need to understand what they have, what they owe, how much interest they’re paying for it, how it is insured and where the supporting documentation for everything is kept. It is fine for one member of the couple to handle the details of paying the bills, making the deposits, etc. as long as both are aware of the overall situation. Remember, sharing finances with someone means that you get the good with the bad. If one party is great at making sure the the bills are paid on time each month, then both will benefit. However, if the party responsible for paying the bills isn’t timely, both will suffer the credit consequences.

I hear comments from clients such as “well, he does a better job with that than me” or “she’s just more organized than me” and allowing the person with more organization skills or financial savvy handle the day-to-day responsibilities is fine. But that does not mean that you can abdicate your responsibility in maintaining a good grasp of your financial picture.

As a couple, it is imperative in sharing finances that you have shared goals for your financial future. Most people argue over money because they are not in agreement on what should be done with it, how it should be invested or what it is spent on. If you take the time to sit down together, review your finances regularly and agree on what your finanical goals are and the process you plan to use to achieve them, then the likelihood of arguments over money is greatly reduced. It may mean you have to agree to compromise. One individual believes in the need to save funds in safe, insured accounts, while one individual believes in the need to invest in potentially riskier ventures, you may have to agree to do a little of both. Or you may agree to be more conservative now in order to have the flexibility for more adventurous investing later. It doesn’t matter how you decide to compromise as long as you both understand the ups and downs of the decisions you make.

This is where the help of a good financial advisor and/or CPA can be beneficial. Also, there are numerous good books readily available, at the local bookstore or library, to assist you in understanding and developing your plan. Whatever you want your financial picture to be, it can be realized if you are willing to invest the time, focus and research necessary to make it happen.