Fixed Rates vs Adjustable Rate Mortgages

This morning Robert Shiller (co-creator of the Case/Shiller Housing Index) said that the 30 year fixed mortgage is “outdated.”  I am not a Yale professor but in this current environment I feel that anything but a fixed rate is too risky for most.  We have no idea where home prices will be and rates are at historic lows. 

Yes, adjustable rate mortgages are very attractive but what if you can’t sell your home once it starts adjusting?  Yes, there are caps on how much it can adjust on each adjustment period and a lifetime cap but I personally don’t think it is worth the risk right now.  The future is too unpredictable and interest rates are too low. 

I saw this conversation on CNBC this morning and they showed a breakdown of how the US has the largest percentage of fixed rate mortgages in the world but not the highest percentage of homeownership.  I understand that going with an ARM can lower the costs of owning a home but each borrower’s circumstances are different. 

http://www.cnbc.com//id/37982582   

The Fannie Mae HomePath Loan

A Fannie Mae HomePath loan is only eligible for properties that are owned by Fannie Mae and are listed on http://www.homepath.com/.  The biggest difference in a HomePath loan versus a Conventional loan is that it doesn’t require an appraisal and if you put less than 20% down you will not have mortgage insurance (you will have a much higher than normal rate though). 

A lot of people in the industry push this loan because it is easy since an appraisal isn’t required so there won’t be problems with the value coming in too low and the lender won’t know about any repairs that are needed.  What is good for us in the industry doesn’t mean it is good for the borrower. 

As a buyer you still want to get an inspection to make sure there are not any issues.  I would even recommend getting an appraisal because you don’t want to over pay for the property.  I had a buyer who was buying a HomePath eligible property but since we had a non-occupant co-borrower I had to give them a Freddie Mac loan and we had to get an appraisal.  The property was under contract for $125,000 and the appraisal came in at $95,000.  That is a big difference.  If this buyer went with a HomePath mortgage they would have never known this. 

I do understand that appraisals have tougher rules to follow and for this particular transaction the most recent sales were from November 2009 but you can see my point.  This is just another reason you need to deal with a Mortgage Professional who is going to explain these things to you.  Getting a mortgage product you don’t understand is what got us into this mess in the first place.

What You Need To Know When Buying A Condo

Anytime I get a call and someone tells me that they are buying a condo I begin to cringe.  The reason I cringe is because there are a lot of items that can prevent a deal from not closing and I don’t’ ever want that to happen to one of my clients.  I know I say time and time again but I cannot stress this enough when it comes to condos, you MUST USE A CONDO EXPERT, PERIOD!

How do you if the person you are speaking to is a condo expert?  You tell them the name of a condo you are trying to purchase and see what they say.  The correct response your Mortgage Professional is that they are going to look the condo up using their resources, would like the name and number to the association to ask questions pertaining to the condo approval, and talk to you about advantages of putting 25% down on a primary residence or 30% down if it is a 2^nd home in order to get a “Limited Review Approval.” 

Although these measures are to help protect the bank they in turn can help protect you as a buyer.  The lender wants to make sure that their collateral is going to be there in X number of years and so should you. 

If you are getting an FHA loan your mortgage professional should check FHA’s Approved Condo list found at https://entp.hud.gov/idapp/html/condlook.cfm.  If it is not on the list you will have to get the full condo project approved which can take up to 4-6 weeks as of right now.  The condo will have to be in great financial shape and meet a lot of guidelines. 

If you are you are getting a Conventional loan and do not receive the Limited Review Approval then you will have to get a full approval.  It is a little easier with a Conventional loan than an FHA loan but not much. 

Each bank can have their own “overlays” that need to be followed.  The main items to look out for how many units are 30 days or more behind on their dues, is there any litigation, how much Fidelity Bond coverage do they have, how much do they have in reserve, amount that are owner occupied/2^nd homes, and if they have a right of first refusal that can affect the mortgagee.  There are many more but this should give you a good idea.

How Do You Know Which Mortgage Bank or Broker To Use?

This is an easy question, an experienced and honest one.  The hard part is how do you determine who that is when everyone is a sales person.  You probably won’t know until it closes or down the road but hopefully with the new National Mortgage Licensing System (NMLS) that is going into effect will help. 

The NMLS requires all Mortgage Loan Originators (MLOs) to pass a state and national exam, do a criminal background check, and have a credit report pulled.  As long as everything checks out each MLO will get their own unique identifier number that you will be able to look up. 

Too many borrowers get caught up in the interest rate.  Although you don’t want to get a rate that is .5% above everyone else you do want to make sure that they are advising you and putting you in the right mortgage product, an 1/8^th to a ¼ of a point in interest rate won’t change your life but a transaction gone bad will.  

What do I mean by that?  I mean that someone should be asking you about how long you plan on staying in the home, look at your credit card debt, see if you want to max out your retirement, etc.  If the answers are yes to looking to pay down credit card debt and maxing out your retirement you shouldn’t be going into a 15 year fixed most likely.  If you want to make bi-weekly payments you probably want to be told that it may not be a good idea to set it up with your lender and instead just add an extra amount of principle each month so that after 12 months you will have made 13 payments.  You don’t want to have a higher set payment and one month need extra money because of an unexpected expense.

I could go on for days on this topic but the most important thing to remember is that there is a lot more to a mortgage than just an interest rate.  There are a lot of great banks and lenders out there but they are only as good as they people they employ and who is handling your loan.

Foreign National Mortgage Financing

I guess the best place to start is by defining what a foreign national is.  A foreign national is a non-US citizen that is a non-resident.  A permanent or non-permanent resident could be eligible for financing that any US citizen would be able to receive under Fannie Mae, Freddie Mac, and government guidelines contingent upon meeting their lending requirements. 

So why would you not want to be classified as a foreign national?  The reason is because these loans are not eligible for delivery under Conventional and government guidelines which will give a typical borrower lower down payment requirements and better interest rates.  A lender that offers financing to foreign nationals holds the loan in their portfolio (on their balance sheet) and services the loan because these types of loans are not eligible to be sold on the secondary market.

Every bank is different when it comes to foreign nationals but most require at least 30% down and a little more if you are buying a condominium.  There are banks that are doing fixed rate mortgages but typically most offer adjustable rate mortgages (ARMs).  For instance, one of my investors only allow ARM’s up to a maximum of 5 years and another that allows up to a 7 year ARM along with a 15 and 30 year fixed rates. 

The documentation that is required on these types of loans also varies from lender to lender but for the most part a copy of a valid Visa or Passport is required along with credit reference letters from a banking institution that they have had a relationship with for at least 2 years, a CPA letter showing income and employment history, 2 to 3 months worth of bank statements with a lot of reserves, a bank account opened in the US to hold the reserves, and making sure everything is translated into English and US dollars and originals of all.

A Short Sale Study

This was sent to me by Rob Chrisman.  “A study put out by Deutsche Bank ranked GMAC ranked as the top servicer among all prime mortgage servicers based on short sale timelines – six months! The investment bank’s survey showed that a short sale generated a higher recovery than an REO sale. For “prime” short sales, GMAC was the fastest, followed by CitiMortgage (7.5 months) and Wells (8 months). DB’s study showed that BofA was the slowest with a 13 month short sale timeline. For “subprime” Wells came in first (15 months), followed by HomEq and then Saxon. Option ARM short sale speedsters were EMC, Aurora, and GMAC. ShortSales”

Alan Greenspan & Interest Rates

There has been a lot of talk about Alan Greenspan’s op-ed and for good reason.  As I have said time and time again, we cannot predict where interest rates will be but they are at historic lows now.  Although many, including Greenspan, think that rates will stay low for the next few months you just never know and I think Greenspan’s example below is exactly why now is a good time to buy or refinance if you are in the market even with the home buyer tax credit coming to an end.

I grant that low long-term interest rates could continue for months, or even well into next year. But just as easily, long-term rate increases can emerge with unexpected suddenness. Between early October 1979 and late February 1980, for example, the yield on the 10-year note rose almost four percentage points.

http://online.wsj.com/article/SB10001424052748704198004575310962247772540.html?mg=com-wsj

What Documentation Is Required For A Mortgage?

Explaining this could take awhile so I will try to keep it brief.  It is tough to determine where to begin so I guess I will start by saying you need to be prepared to be cooperative with your mortgage professional.  If they ask for something just get it.  It will make everything go much smoother. 

If you are refinancing and one person is telling you how you don’t have to provide much and another is telling you do, start running from the person who is making it sound like there is nothing that is needed. 

Now don’t be scared, it isn’t anything that is difficult.  It will just be a lot of paperwork.  For example, if you bank statements show a deposit that we cannot determine where it came from we will need an explanation and proof of it. 

Some of the documents that you will most likely need to get a mortgage are your 2 most recent paystubs, past 2 years tax returns with all schedules and pages, past 2 year W-2s, 2 most recent statements for any and all assets, and a copy of your driver’s licenses and social security card.  If any document says pages 1 of whatever we need all pages even if it is blank.

Interest Rate Update

Interest rates are still at historic lows so if you are looking to buy or refinance now is the time to do it.  No one can tell you where they will be tomorrow, in a week, month, or year but we do know that they are at all time lows.

Let’s talk about the weekly interest rate survey that comes out on Thursdays.  This survey is for the average interest rate for the week ending, with points being paid, and a summary of the survey.  Too many people just read the headline that interest rates are at 4.72% just as it was this past Thursday, June 10^th, 2010. 

If you go to FreddieMac.com and click on the “Current Weekly Survey” link towards the bottom left it will take you to this:

Freddie Mac (NYSE:FRE) today released the results of its Primary Mortgage Market Survey® (PMMS®) in which the 30-year fixed-rate mortgage (FRM) averaged 4.72 percent with an average 0.7 point for the week ending June 10, 2010, down from last week when it averaged 4.79 percent. Last year at this time, the 30-year FRM averaged 5.59 percent.

So what does that mean in English?  It means that rate may no longer exist.  It is an average and it doesn’t take into account for any fluctuation in interest rates on that day, Thursday.

Jumbo Mortgage Market Is Returning

There have been a lot of headlines about this of late and I have included some of the articles on this in my Blog.  A Jumbo Mortgage is any loan amount above the Conforming loan limit for Fannie Mae and Freddie Mac which is typically $417,000.  The reason many want to avoid getting a Jumbo Mortgage is because the interest rates are higher. 

There are temporary loan limits for certain counties that can go higher than that.  If you would like to see what the loan limit for your county is you can go to https://entp.hud.gov/idapp/html/hicostlook.cfm.  If you get confused feel free to email me and I can look it up for you.  In Broward, Miami-Dade, and Palm Beach Counties the maximum loan limit for a Conventional mortgage is $423,750. 

The biggest change for the United States Jumbo market is that rates have improved because there is now an appetite for these types of mortgages.  Most of these loans require at least 20% down.  In the harder hit areas such as South Florida most banks will require 35% down because it is considered a declining market.  Luckily I have a few banks that we deal with that will allow less money down in South Florida and for some loan amounts up to $2 million with only 20% down depending on the strength of the loan. 

A big reason interest rates are higher on Jumbo Mortgages is because there isn’t really a secondary market for them right now and banks have to portfolio, keep them in house, them.  There was a test bond for Jumbo Mortgages that attracted a lot of attention and did well so this could really help to jump start the luxury market even more.  Only time will tell.