Home Mortgage Financing Guide

The REAL story in 2012

There are big issues affecting home ownership right now:

Shopping for the best rates


Recently reported in the New York Times,

 “Interest rates are the lowest in decades, enticing many borrowers to shop for a loan.” 

 Yes, but keep in mind that lenders use varied approaches to set mortgage loan rates.  Consumers who want to try for the lowest rates available need to consider basic factors, such as credit score, points, property type, down payment, and length of the loan.

 

Mortgage Lenders

Providing mortgage financing for real property, these lenders take on several forms. A mortgage banker (Chase for example) provides loans generally with its own funds or a mortgage lender or broker uses several lenders and investor capital to fund many loans. Since each individual borrower has specific needs, many lenders work with portfolio loans (held by the bank), government insured loans ("Fannie Mae", "Freddie Mac", FHA, VA) or with other mortgage financing institutions as well as their own.

With years of local experience and working with numerous locally based lenders on a regular basis, This Real Estate Agent would be happy to recommend the best mortgage financing lenders to you.

Whether you are buying or selling, the key to the sale is financing. Helping you determine monthly payments, down payment options and closing costs, I can direct you in the right direction-NOT ALL LENDERS WORK ALIKE! 

Qualifying

First,  obtain a copy of your credit report and score. This service is provided free of charge by the credit reporting agencies.

Next, do not pre-judge your ability to borrow.  Most importantly, if you are considering a home purchase, do not change your financial condition before consulting with a lending professional. That means do not move money from one account to another, avoid big ticket purchases such as automobiles, try not to change jobs & make your home purchase the priority in your life.

Working with a mortgage financing lender of choice, I will help you obtain the best possible terms that fit your needs. 

The lender typically weighs three criteria to determine your ability to borrow: CASH, CREDIT & INCOME.

CASH on hand can even be in the form of a gift or in a savings account or an investment account. However, no down loans are gone because of the abuses over the last several years.

CREDIT as reported and scored by authorized agencies reports how much you owe and to whom, whether you pay late or on time or not at all.  Major credit "dings" are charge offs, unpaid collection accounts, bankruptcies, repositions or foreclosures. Even major problems, if far enough in the past or "repaired" may NOT prevent you from obtaining a loan.

Credit repair simply means reviewing your credit report, correcting mistakes, settlement of problem accounts and good financial management.  Get your reports online and for free. Look for errors that could be depressing your score, like accounts that don’t belong to you, balances that are actually lower than reported, old debts that are paid off that should have been removed entirely (7 years for credit cards, 10 for bankruptcies). Pay off any unpaid judgments or collection balances, no matter how small.
Consider reopening accounts you thought were open but have been closed because you haven’t used them in so long - it will help boost your utilization ratio.

Pay down some debt if possible, but don’t close any accounts.  Instead, spread your debt out. If you owe a large amount on one credit card and nothing on another, transfer some of the balance. Try to keep balances below 35%. Use your credit regularly – and pay it on time, every time.

Finally, check in with your mortgage financing broker!  Do not pay down debt until you determine your cash needs in the purchase of a new home.

If you are not able to obtain a home loan today, many borrowers often repair their credit sufficiently to obtain financing in as little as 6 months. Anyone may obtain their credit report for free once a year.

AnnualCreditReport.com is the only legitimate online source for your free annual credit report

 

Here is an example based upon my own experience!

     A potential buyer approached me to help him purchase a home. A relative had given him $20,000 to help. He used most of the money to pay down credit cards and when he tried to obtain a loan,

     he did not have enough cash to pay closing costs and down payment

Credit Scoring is widely used by most lenders to quickly determine your credit worthiness. The FICO score is most widely used. although some credit reporting agencies may us other models. FICO has just established a "lending" score which claims to establish a risk score specifically for mortgage lending. Many factors effect the score such as delinquencies, charge offs, payment history and numerous others factors including how often you apply for credit & how much you use.  If you order a credit report, make sure that it does not appear as a credit inquiry from a credit grantor. The inquiry itself may lower your credit score or trigger other inquiries. Be careful when granting authorization for a credit report.

The three primary credit reporting agencies are Experian, Trans Union and Equifax, all accessible through the internet.

Lastly, INCOME, reported either by W-2's, 1099's, tax returns or bank statements shows your ability to service a loan.  

Here is another real life example!

from The Wall Street Journal   

Hidden Medical Debt Trips Up Homeowners

more in Personal Finance »

By Jessica Silver-Greenberg

Two erroneous $11 doctor bills stopped Ms. White from refinancing her home.

The 49-year-old resident of Texas, pays 7% on the mortgage for her three-bedroom house. In October, she says, she was shocked to learn that the two medical bills, which had been turned over to a collection agency, had caused her credit score to fall from 757 to 680—making refinancing far too expensive.

"I was told I'd have to pay $14,000 in closing costs to get a 5.5% interest rate," Ms. White says, substantially more than she would have paid with a higher credit score. When Ms. White contacted the doctor's office, she found out the bills had been issued in error.

Ms. White's case is hardly an isolated one. Otherwise well-qualified borrowers with good loan-to-value ratios and steady employment are increasingly finding it difficult to refinance because of medical billing mistakes marring their credit, say mortgage bankers and real-estate agents.

 

Some 14 million Americans have errors on their credit report because of medical collections, according to the Commonwealth Fund, a Washington-based nonprofit focused on health-care research. These routinely small-balance blemishes, which can go unnoticed for years, can be a death knell for refinancing because they can cause outright refusals—or make closing costs so high that borrowers opt not to refinance at all.

Until she tried to refinance, Ms. White says, she had no idea about the overdue medical bills, which were from a visit earlier this year to an orthopedist. She has since disputed the charges, which will be removed from her credit reports within 30 days, but is worried about rising interest rates. "I'll have missed the window," she says.

 

LOANS

A Thirty-year, fixed-rate conventional loan consists of a mortgage with monthly payments of principal & interest that remain constant throughout the life of the loan.

Federal lending guidelines for primary residence conforming loans have returned to more traditional standards but with many conditions designed to deal with the current recession. With these changes, instituted by both the Bush Administration and the Obama Administration, mortgage financing practices are pushing toward a more stable future in the housing market. Once the housing and credit markets stabilize future lending practices will likely be modified further to respond to future market conditions.
 

Fifteen-year, fixed rate financing has a larger monthly payment than a 30-year loan, but a lower interest rate and smaller potential interest cost. As appealing as this loan may appear, it locks the borrower into higher payments which may become unaffordable at some future time.  Home buyers should always be careful when choosing a loan.  If the borrower has extra money, he/she may make additional principal payments and reduce the term of a 30 year loan without being locked into higher payments.

 An adjustable rate mortgage (ARM) is a form of mortgage financing which typically has an initial interest rate and then changes on a regular schedule. The initial "start" rate is now available for a number of years, but historic low fixed rates becoming available are now replacing the once popular ARM, although the ARM still has desirable qualities.

Because the interest rate changes, monthly payments can also rise or fall. The interest rate is based on an index; say the 10-year U.S. Treasury note and the lenders margin. The margin is essentially the lenders profit. Combined they equal the monthly interest rate to the borrower.  Most ARMs have annual and lifetime interest caps and monthly payment caps. These caps moderate the “ups and downs” of the variable rate, but do not eliminate it.  

Some ARM mortgages allow lenders to collect "negative amortization," an expression which means the interest cost is greater than the minimum monthly payment, so the borrower may make smaller payments, but the size of the loan balance increases. If the borrower pays more than the minimum interest payment in order to reduce the balance of the loan, the effect is to reduce the minimum monthly payment rather than reduce the term as in pre-paying a fixed rate loan. Self employed or commission sales people whose income varies from year to year may often prefer this type of loan.

 

A jumbo loan is, essentially, a 30-year mortgage but with a loan amount above the conventional conforming loan limit, currently $729,750 in Ventura County, but vary around the country.  Because a larger loan amount is outstanding, lenders have more risk and so interest rates are higher than for traditional conforming financing and conditions are tougher. Non-conforming Jumbo Loans are also ineligible for government backing, and thus excluded from nearly all mortgage modification and refinance programs.
 

The FHA 203(k) Rehabilitation Loan is a little-known mortgage financing program for fixer-uppers.
 Home buyers thinking of purchasing a distressed property in need of repair, but who are concerned that the cost of the repairs could drain their savings account may qualify for the Federal Housing Administration’s (FHA) 203(k) rehabilitation program. This program provides loans for covering renovation costs as well as the purchase price of the primary residence.  Investors are not eligible for this program.  Additionally, similar to traditional FHA loan programs, the rehab program allows for a down payment of as little as 3.5 percent. Basically, the property “just has to appraise below market value and then at market value with the repairs.” This loan requires a lender familiar with the program.

A variety of other loans, convertible or interest only fixed, due in 3, 5, or 7 years offer a combination of rates and terms. As an example, if a borrower only plans to keep a home for five years, knowing that his job will change, he may prefer a loan with a lower rate for the first five years, although the loan is amortized for a full 30 years. Typically these loans then convert to a new rate calculation which may require refinancing.

Loan Modification Programs, designed to help a homeowner avoid  "preventable" foreclosure and create a "sustainable" long term payment plan are available. These loans typically require qualifying under more traditional terms and conditions although certain special terms addressing the current foreclosure crisis are being implemented. Many believe the key to ending the current financial crisis and stabilizing the economy in general is housing, so new laws are designed to expedite the housing recovery by reducing foreclosures and removing unqualified borrowers from the system. Refinance vehicles, short pays or other tools are all designed to turn a non-performing loan (liability) into a valuable financial asset.

 

As further explanation, a short pay is a pre-foreclosure process in which the lender takes a payoff less than the balance of the loan in the sale of the house, thereby replacing the unqualified borrower with a qualified buyer. Other tools are deeds in lieu of foreclosure (deeding the house back to the lender), forbearance agreements (a temporary agreement delaying foreclosure) and informal delays in the foreclosure process (designed to give the borrower more time to possibly work out a solution). reducing the loan balance, extending the term from 30 years to 40 and reducing the monthly payment. Contact your lender directly to determine the terms and conditions of the programs available and your eligibility.

 

Summary

When obtaining mortgage financing, even though a lender may be willing to loan you more, consider what payment you and your family are comfortable making each month.

Loans have a nominal interest rate and an annual percentage rate (APR). The APR is important because it includes not only the interest rate, but also such costs as points (loan discount fees), per diem interest, mortgage insurance and other expenses.

In summary, mortgage financing guidelines are now more comparable with those used for the last several decades and are now coalescing into a new set of common standards, actually tougher than in the past. Many considerations are used now to address the foreclosure crisis, but will likely be modified as the housing market returns to normal. Lenders are very demanding in making loans, so patience is required, but as a potential home buyer, this is a great time to buy. Prices have adjusted realistically and offer much more affordable housing again. Bank owned property is often available at "fire sale" prices, but patience is required because of the convoluted process in purchasing a property in foreclosure and obtaining financing. In today's environment, even highly qualified buyers will find difficulties in obtaining credit. Hopefully as we move forward, the credit markets will return to normalcy. So weather you are considering a detached house for sale, an apartment style condo or something in between, the Real Estate Agent can help.

A word of caution: private companies, real estate brokers, non-profit or for-profit organizations and attorneys are offering to help the borrower or financially distressed seller, but beware when looking for help. Consumers can verify that a company’s contract has been approved by the California Department of Real Estate or currently licensed by visiting their site,  or by calling (916) 227-0770.

 

*This Real Estate Agent recommends that any prospective home owner consult with a home mortgage lender about current programs as a first step in buying a home.



For a personal evaluation with an area specialist, contact:  

Dawn Peck 805-389-1558 or 805-312-0450 at Guild Mortgage Company

    711 E. Daily Dr, Camarillo, CA 93010
 

  Ane-Marie Barbettini 805-240-1490 Wells Fargo Home Mortgage

   2831 Saviers Rd., Oxnard, CA 93033

 

Bank of America Home Loans  1.866.670.5271 - Offices through out Ventura County

  

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