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Posts Tagged ‘Mortgages’

Well, it looks like the rough economy is hitting T-Boz from 90’s R&B group TLC.   Mediatakeout.com is reporting that her house is being foreclosed…

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One of the situations I see often is when a person has great credit but their spouse does not.   With FICO scores taking and even more important role in qualifying for a mortgage today than even just six months ago, this can be a very big issue for potential home buyers and folks looking to refinance.

Most people assume that lenders go off the breadwinner’s FICO score which IS NOT the case.  Lenders take the lowest middle FICO score between both borrowers.    So if Joe has FICO scores of 775, 780, 740 and his wife has FICO scores of 720, 710, and 680; theFICO score used for qualification purposes is Joe’s wife’s middle score of 710.

In this example, Joe is likely to pay a higher interest rate because his wife does not have a 740 FICO score which is needed to qualify for the most competitive rate these days.    In most cases, I would just drop Joe’s wife from the loan application and only use Joe for qualifying purposes.    Joe’s wife would still be on the title to the property, but would not be responsible for the mortgage.

However, what do you do if you need both incomes to qualify for the mortgage?  In short, you are your spouses credit!  If you need both incomes to qualify for the mortgage and your spouse has bad credit, it means YOU have bad credit to.

So the next time you are picking up potential mates at a bar, instead of asking for a phone number you may want to ask for a FICO score instead.

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There has been a lot of buzz going around about a plan to reduce mortgage rates to 4.5%. While none of us knows what is going to be implemented, I can say that I don’t believe 4.5% interest rates are going to save the housing market because low rates do not address the root cause of the current housing market stagnation.

The housing market isn’t suffering from high interest rates. Rates have been at near historical lows for the past six years. The bottom line is that if you can’t afford to buy with 30 year rates at 6%, you can’t at 4.5% either.

The housing market is suffering the consequences of loose lending and an oversupply of homes. Over the past seven years or so, mortgage products allowed people to afford bigger mortgages due to a combination of low interest rates and less strict guidelines such as lower down payments and even lower credit scores. When money is falling off the trees, borrowers are not as price constrained as they would be in a normal market. This leads to ever increasing home prices.

In addition, developers turned every cornfield they could find into the hottest new development to meet the demand from consumers. Condo developments popped up on every street corner in urban areas. Not only were Joe Plumber consumers buying homes, but also Donald Trump wannabes which further inflated prices.

Eventually, supply begins to exceed demand. As any 10th grader taking economics will tell you, when that happens prices must come down. In the case of the housing market, supply begin to exceed demand and to make matters worse, the liquidity that fueled the demand also begin to dry up. In short, the housing market had the rug ripped out from under it. Banks drove home prices sky high with loose lending and then shut off the spigot abruptly with ever increasingly strict underwriting guidelines.

A 4.5% interest rate won’t help anyone if you still need a 40% down payment and a 800 FICO score to qualify or if there are still way too many houses on the market relative to the number of buyers.

If we want to get the housing market stabilized, we need a moratorium on building new homes so that the existing inventory can be worked through. In addition, the government needs to provide reasonable incentives to make buying an attractive alternative to renting for credit worthy borrowers. For instance, the government should consider providing down payment grants. We also need some incentives to encourage the purchase of foreclosed homes.

I don’t pretend to have all the answers, but I do know artificially lowering interest rates will not stop this train wreck.

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Many people have a phobia about the documentation needed to get approved for a mortgage. There really shouldn’t be any fear and the paperwork required really isn’t all that bad. When you apply for a mortgage, you should have the following documentation readily available as it will make the underwriting process smoother and faster. You will need to provide your lender with copies of the following documents:

Driver’s Licenses: This is to verify that you are who you say you are…

Proof of Citizenship: Yes, you have to be in the country legally to get a mortgage. If you are a permanent resident, we need your green card. If you are a non-permanent resident, we need the visa to show that you can legally work and live in the US.

Past two years w-2 statements: This corroborates income and work experience.

Most recent 30 day’s paystubs: Your paystubs should so year-to-date earnings and match your income claimed on the loan application. If you are self-employed or commissioned, in lieu of paystubs we will need your most recent two years of tax returns.

Most recent three months statements for savings and investment accounts: Funds available for down payment, closing costs, and reserves need to be verified. The banks will want to see all of your available liquid assets. Any large deposits on the accounts may also need to be explained. If you don’t get paper statements mailed to you, the online printouts are fine as long as your name and bank are clearly legible on the printout.

There may be other documents needed in certain circumstances, but the above is a good start.

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Like most of the good loan officers who are still in the business, I have been bombarded with phone calls from consumers looking to refinance over the past week. Always a day late and a dollar short, the media is reporting that mortgage rates are back at historic lows. I locked a number of borrowers at 5.375% over the past week with no points and no closing costs on thirty year fixed rate loans. However, given the number of calls I have taken, the number actually locked is relatively small.

The reality is that most people aren’t going to benefit from the ultra-low rates that are available and here is why:

Too Slow and Indecisive: The mortgage market is extremely volatile right now. Rates are changing multiple times in the day (usually for the worst). Last Tuesday, I could do 5.375% the first thing in the morning and by about noon, the market moved to 5.5 and then 5.625%. The bulk of the people who missed the opportunity did so because they had to “think about it…” C’Mon people. I am saving you $200 plus per month, not charging you a dime to do it and getting you a historically low thirty year fixed rate and you need to think about it??!! Discuss it with the wife?!

Second Mortgages: One of the insidious things that lenders are doing right now is refusing subordinations. When you have a second mortgage or home equity line of credit, that lender has to give you permission to refinance the first mortgage. In the past, this used to be no big deal. However, now that values are falling and second mortgage lenders bear most of the default risk, they are refusing to subordinate to a new first mortgage even if a refinance of the first mortgage is less risky than the original mortgage!! Very few lenders will subordinate a second mortgage if the combined loan-to-value is above 85%. I wrote about this practice earlier this year.

FICO Scores: Mortgage lenders love FICO scores. In fact, they love them so much these days that now you need a 740 or higher to qualify for the lowest rates available. In fact, if you have a 739, you are going to see your rate jump by at least .125%. Up to 1/2 percent higher or more if you have a 700 FICO or lower. That one late payment on the library book will cost you big time.

Expensive PMI: Private mortgage insurers bear the brunt of the loss when a home goes into foreclosure. Given the foreclosure records that have been broken, PMI companies have been losing their shirts. Now they are jacking up the cost of mortgage insurance. If you have a loan to value more than 80%, increased mortgage insurance costs may erode any savings from a lower interest rate.

Big Ass Loan: Otherwise known as Jumbo or non-conforming mortgages. In many cases, if you have a loan that is too big to sell to Fannie Mae or Freddie Mac (larger than $417k in Chicago), it is going to be much harder to find a good rate these days. Particularly, if you don’t have at least 25% equity in the property.

These gotcha’s can be overcome, however, it you need to make sure you are working with a knowledgeable professional. It is important that you talk in detail with your lender (hopefully me!) and really figure out how you can better position yourself to take advantage of the current low rates that are available. As I keep trying to tell people who keep putting off refinancing or buying a home, the risk isn’t if rates are going to be lower, the risk is will you actually qualify!

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If there is one great thing that may come out of this housing crisis is that banks may develop more innovative mortgage products.  In the past, innovation at banks meant figuring out how to fleece consumers.  Now that banks are failing left and right, maybe they will develop mortgage products that are more focused on keeping borrowers in their homes.

For the most part, foreclosures are caused by job loss, divorce, and medical issues that result in the borrower losing the ability to pay the mortgage.  Over the past several months, mortgage lenders have been working to modify mortgages to more affordable terms for in trouble borrowers. 

I wonder if a bank will come out with a mortgage that doesn’t need “modification”.   Lenders should have built in modification processes and terms for borrowers who are truly in a tough spot temporarily.  For instance, a borrower loses a job and they are able to postpone payments up to six months without penalty once during the life of the loan.  The postponed payments would be added back into the principal.  Maybe the borrower would also need to get permission and show hardship before being able to exercise the option. 

There will always be people who would not be able to make their payments under any circumstances, but having this type of flexibility built into a mortgage would be a much more cost effective way for banks to work with borrowers who are truly in a temporary hardship.

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The mortgage market has created a sort of no-man’s land in Chicago with non-conforming financing.  A no-man’s land is an area that you don’t want to be.  In Chicago, it is selling a luxury condominium priced between $475k and about $650k.  Recent changes in mortgage guidelines are going to cause condo units in this price range to fall into a death spiral value wise.

Over the past year, mortgage lenders and private mortgage insurance companies have been slowly but surely tightening up underwriting requirements to minimize risk.  In particular, the changes overtly affect loans that are larger than the maximum loan amount that Fannie and Freddie Mac will purchase from banks of $417,000.  

For loans larger than $417,000, private mortgage insurance companies (PMI) will not provide insurance coverage.  The second mortgage market is all but dried up, so it is nearly impossible to get a second mortgage with combined loan-to-values greater than 85% and even those are hard to come by.  In fact, some lenders are just saying no to condominiums altogether.  The bottomline is that if you need a loan larger than $417,000 to buy a condo in Chicago, it is going to be damn near impossible to without a 20% down payment. 

Herein lies the problem.  The buyers…

The typical purchaser of units in no-man’s land tend to be high income young professionals (usually couples).  These are buyers who have very high incomes, but generally have not been working a very long time – attorneys, bankers, doctor’s finishing up residencies, etc.  They may earn household incomes of $200k plus per year and can easily afford the mortgage debt from a cash flow standpoint, but they do not have a lot of liquid savings available to sink into an illiquid asset such as a home when a 20% down payment is required. 

The issue with the Chicago market is obvious.  The borrowers who would normally buy all of these high end condo’s downtown cannot readily get financing because of lack of large down payments.  They are being forced to save up for a long time if they want to stay in that price range or are setting their sights on cheaper units.  The owners of these units in no-man’s land are going to have to drop their prices to make them more attractive to the most borrowers or hope they are one of the lucky ones that appeal to well heeled empty-nester with 20% or greater down payments.

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