Fannie Mae Guidelines Changes Coming Up

It’s funny because I was just thinking to myself the other day that if they loosened the guidelines for those who have had foreclosures and short sales a little more it could help correct the housing marketing.  I am sure many do not what to hear this but the fact of the matter is people are human and make mistakes.  Many have learned from this housing downturn and will making much smarter financinal decisions, smarter than they ever have before, going forward.  Also, because lots of time the consumer has a lack of self control the banks need to put rules in place so someone isn’t able to overextend theirself. 

Well, Fannie Mae just released that they are extending the waiting period that must elapse after a borrower experiences a foreclosure to 7 years from 4 years.  Fannie goes onto say that if there are extenuating circumstances you can follow their new rules but it will be a manual underwrite which in general means stricter rules. 

On a positive note, Fannie Mae is decreasing their maximum debt to income ratio down to 45% from 50%.  This is a good thing because you shouldn’t be any higher than that and really shouldn’t even be that high but there are different circumstances that can allow for higher ratios especially with compensating factors such as high credit scores, assets, etc.

The Fed & Interest Rates

Many are wondering where interest rates are at now that the mid-term elections are over and the Fed announced their Quantative Easing II (QE2) which entails additional purchases of bonds.  Well, rates are still at historic lows and it has certainly created a lot of volatility.

The day the Fed met mortgage bonds which move interest rates got worse because the amount of bond purchases per month was at $75 million per month versus the expectations of $100 million per month.  The following day the bond markets rallied and then we had the Friday unemployment report which was better than expecations and bonds got worse. 

In English, interest rates are still the same prior to the announcement of the Fed’s bond purchase program.  When mortgage bonds get about 25 basis points (.25) worse banks will look to reprice interest rates for the worse.  Just because they do a reprice for the worse doesn’t necessarily result in a higher interest rate.  It may just be less pay for the mortgage professional. 

The same can be said for when bonds get 25 basis points better, it may not result in a better interest rate.  Lots of times it will take a 50 basis point movement but there is no exact science to figuring this out.  The bigger problem is when bonds improve and you think rates will improve and they don’t.  The reason is banks may not pass the savings on because they get overloaded with volume.  How do you reduce your volume to you can still provide a service, make rates higher so you don’t get new loans for a day or so. 

The bottom line is that you should lock your  interest rate in when you are happy with your payment and never looks back.  It’s better to be locked wishing you were floating then to be floating wishing you were locked.

What It Takes To Get A Loan

I love all of the great articles of late that explain what is involved in getting a loan.  None of this should scare anyone because it is not difficult stuff.  At the very least it should teach people to be more organized and to hold onto their tax returns for a number of years. 

If you can afford a home you can get a loan.  I don’t know about you but providing tax returns, W-2s, paystubs, and bank statements shouldn’t be a problem.  Oh, and you have to explain large deposits such as cash deposits into your bank account.

I had a client call me the other day to say that he isn’t looking to shop to find an eighth of a point lower in interest rate or to save a few hundred dollars in closing costs.  He wants someone who is going to close his loan.  He ended up having to buy 2 properties cash because the previous mortgage person wasn’t going to close the loan in time.  He learned the hard way the value in dealing with an expert.  As I have always said a couple hundred dollars or an eighth of a point in interest rate won’t change your life but a transaction gone bad could.   You get what you pay for in life and if you are looking for the cheapest person out there that might just be the type of advice and service you end up with. 

Below is an article from Kiplingers that goes over what is involved in getting a loan.  I recommend taking a quick peak at it.      

http://www.kiplinger.com/magazine/archives/what-it-takes-to-get-a-loan.html 

No Closing Cost Mortgages

The saying goes “if it’s too good to be true it probably is.”  A no closing cost mortgage is no different, you pay one way or the other. 

The way a no closing cost loan works is you end up getting a higher rate so that the closing costs can be paid through the premium with a higher interest rate.  An example is if market rates are at 4.25% paying no points a no closing cost mortgage might be at 4.75%.  You have to determine what is best for you depending on what your plans are for the future. 

If you need the no closing cost option because you are short on the monies needing to close than you might want to rethink purchasing a home.  There are more costs that come with owning a home than renting. 

It can be a tough call in this current market to decide because part of me says that rates are at historic lows so you want to lock in the lowest possible rate since you need to go into it knowing you need to hold onto the property for 10 years.  The other side of it is just when we think interest rates can’t go lower they do and if you did a no closing cost loan to begin with you would be able to refinance to a lower rate either paying closing cost only once or doing another no closing cost loan hoping they fall again. 

There are talks that the Fed will announce on November 3^rd their plan to buy more mortgage-backed securities which in turn would make rates move lower temporarily.  I don’t think betting on anything the government is going to do is a smart decision.  I am not critizing our government or any specific party here it’s just I don’t recommend making your investment decisions based entirely on what they may or may not do. 

The safe bet is probably to pay the closing costs but each and every loan is different depending on their future and goals.  Always consult a Mortgage Professional first before deciding.

A Foreclosure & How It Affects You Buying Another Home

Most people do not know that the release date that banks have to go off of is not the date that you are foreclosed upon and they take title from you.  The release date is the date that the bank disposes of the property. 

It can take a bank months or years to finally sell your property and that is when your waiting period begins.  Typically the bank won’t allow you to buy again for another 4 years but there were new rules that Fannie Mae came out:

• Deed-in-Lieu of Forecloure is 2 years with a minimum of 20% down.
• Preforeclosure sale is 4 years with a minimum of 10% down
• A short sale is 7 years and the down payment will depend. 

If you can show an extenuating circumstance than all of the above goes to 2 years and a minimum of 10% down.  Fannie Mae defines a unique hard ship as:

• is unlikely to re-occur and is not a natural or manmade disaster;
• is temporary in nature or of limited scope, but impacts many borrowers;
• may involve property damage, hazard in the dwelling, or other adverse property conditions;
• creates financial hardship that impacts the ability of the borrower to continue making payments on the mortgage loan;
• may involve uncertainty regarding whether insurance will cover the losses incurred; and
• has been designated as a “unique hardship” by Fannie Mae.

https://www.efanniemae.com/sf/guides/ssg/annltrs/pdf/2010/svc1011.pdf 

FHA requires 3 years and VA is 2 years.  The years and guidelines mentioned above are subject to change without notice and can vary from bank to bank. 

An example of it taking years would be if your bankruptcy was discharged in January of 2008 and the property wasn’t sold until January 2010 you have to wait 2 years from January of 2010.  Just because the property was included in the bankruptcy doesn’t matter.

Getting The Right Loan

I have written many times about how a loan is much more than just an interest rate.  It’s about getting the right loan and advice to put you and your family in the best financial situation now and in the future. 

Every borrowers situation is different but for the most part I like a 30 year fixed rate mortgage over a 15 year because with a 30 year you can always make a 15 year payment if you want but with a 15 year loan you can’t make a 30 year fixed payment when money is tight. 

I am sure there are many experiencing this now and that is evident from an article in The Wall Street Journal yesterday called “I can afford my home with the right loan.”  I have included the link at the bottom of the page.

I am one of those “troubled borrowers.” My problem is not that I can’t afford my home, but that I can’t afford my existing 15-year mortgage. I need a 30-year mortgage, but I’m unable to refinance because of my home’s decline in value. I could easily afford to buy my home at today’s value with a 30-year mortgage at today’s interest rates. And the miserable irony is that the next owner of my house, after the foreclosure sale, will receive exactly that deal.

When you are looking for the lowest rate that’s the type of service and advice you are going to receive.  You get what you pay for and if you want to put the purchase of your largest asset and liability in the hands of some random person you found on the internet then go right ahead.  I heard a saying by a veteran in the mortgage industry say “you shop for shoes, you shop for clothes, but when you shop for a mortgage you get stuck with the biggest liar.” 

Another thing to keep in mind with a 30 year versus a 15 year fixed is that with a 30 year you might have an easier time qualifying for a mortgage or other types of credit down the road because the debt to income ratio for a person with a 30 year is going to be lower than a 15 year.  

http://online.wsj.com/article/SB20001424052748703369704575461920484221104.html 

The Pre-Qualification Process

It is more important than ever to make sure that the pre-qualification/pre-approval process is done correctly.  In order to do that it can’t be done in 10 minutes anymore and it should never be rushed.  I get calls every single day about deals that did not close and it is because there was an error calculating income and it all could have been prevented at the point of pre-qualification. 

It is so important for the loan officer to get copies of the borrowers past 2 years worth of tax returns (both personal and business, if applicable), 2 years of W-2s, most recent paystubs, and 2 months of bank/brokerage statements in order to correctly pre-qualify/pre-approve the borrower.  To speed the process up it might not be a bad idea to mention to your clients to start compiling this documentation. 

Just to comment on assets real quick, every institution needs all pages of the borrowers assets (even if blank) along with documenting and explain any and all deposits if it can’t be determined just by looking at the statement (i.e. a direct deposit or a transfer from one account).  I always advise the borrowers of this during the pre-qualification process but like a lot of things it goes in one ear and out the other.  To hear it from a couple different people never hurts. 

In case you want to know what is involved in calculating income click on this link https://www.efanniemae.com/sf/formsdocs/forms/pdf/sellingtrans/1084.pdf.  Although the worksheet seems self explanatory to come up with the final calculations it is no different than getting an automated approval in Fannie Mae’s DO/DU or Freddie Mac’s LP, it is only as accurate as the person inputting the information.  As you can see there are a lot of things to consider.  Most of the time for a W-2ed employee we are only subtracting out the 2106 Unreimbursed Expenses but I am blown away by the dollar amount claimed here and how some occupations shouldn’t have any but they do.  I am not sure if it is an accountant not advising the client correctly or what but it can affect someone being able to get financing.  I see a lot of police officers having a large dollar amount claimed here for uniforms. 

I hope this helps and should you have any questions please do not hesitate to call or email me.

Should You Get a Fixed Rate or Adjustable Rate Mortgage?

Just as with most questions regarding mortgages the answer would be it depends.  There are no set rules with this or anything else pertaining to financing.  Every borrower’s situation is different and that is why it is important to deal with someone who is going to guide in you the right direction, a Mortgage Consultant if you will. 

My personal opinion right now for most would be to get a 30 year fixed rate mortgage.  I say this because interest rates are so low.  Yes, they are lower on adjustable rate mortgages but I feel this economy is too unpredictable that who knows if you will truly pay it off before the rate adjusts.  Another point to add to that is why would you want to pay off a mortgage that you are financing in the 4 percents?  Make sure to max out your retirement first, payoff high interest rate credit cards, have a rainy day fund, etc.

I have a client right now who is trying to decide between a 15 year fixed and a 30 year fixed.  Interest rates are about .5% lower on 15 year fixed rates but if you take out a 30 year fixed rate you can amortize it over 15 years and make a 30 year payment should you need to.  If you take out a 15 year fixed you have to make that payment whether you want to or not.  I had a client who refinanced into a 15 year fixed rate 2 years ago, called me a year ago to refinance into a 30 year because he was worried about his job, and just as we started the refinance process he lost his job.  Now he is stuck with a 15 year fixed payment without a job.  It is sad and scary. 

This is just another reason as to why everything isn’t all about interest rates.  I don’t mean to beat a deadhorse but you can’t what you pay for in life and if you are getting financing from the cheapest person that is probably the type of advice you are going to get.

Should You Get A Conventional or FHA Loan?

In the State of Florida Conventional loans require at least 5% down, it has to be a primary single family detached home, you have to have credit scores above 720 (preferably above 740), 2 months of reserves, and a maximum debt to income ratio of 41%, but if you do it might just be your best option. 

The reason I say that is because FHA has a one time upfront mortgage insurance premium charge of 2.25% of your loan amount.  It gets rolled into the loan amount but it is a charge nonetheless.  The factor for the monthly mortgage insurance is a little less with FHA on a loan with 5% down. 

You can find a very good example of what I am talking about at http://mgic.com/education/mi_better_option.html.  MGIC, who is one of the mortgage insurance companies that will insure loans above 80% loan to value, also has an “MI Options Calculator” that can be found here https://calculators.emagic.com/Calculators/servlet.  Hopefully your Mortgage Professional does this for you but just in case I wanted you to have the resources needed to do it.

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.