FHA is about to get a little more expensive

If you are shopping for a home and plan on utilizing the FHA’s 3.5% mortgage program, you might not want to wait too long to solidify your purchase.  FHA has announced its plan to increase its mortgage insurance premium by .1% in 2013.  Currently, FHA borrowers pay an Up Front Mortgage Insurance Premium (UFMIP) of between 1.20 and 1.50%.  The other change that has yet to be confirmed, is the talk of making mortgage insurance (MIP) permanent on all FHA loans.  Currently, if your mortgage balance were to get to 78% of the purchase price and/or you’ve made 60 timely payments on your mortgage, you could see your MIP fall off your loan.  If the proposed change were to take place, new borrowers would see the MIP stay on their loan for the life of that loan.

FHA mortgages are a vital part of the housing market.  Since mortgage insurers of conventional loans require a 680 credit score and can be expensive, even at that score, the lower credit score requirement and lower down payment option make FHA a very important mortgage program, especially for first time home buyers.  So in short, if you are in the market to purchase a new home, or maybe even considering a refinance, don’t hesitate too long and take the lower mortgage payment that you can get today.

FEMA Map for RI

Today, FEMA declared three counties of RI as disaster areas.  What that means for anyone who is in the process of a mortgage, whether for purchase or refinance, and had your property appraised prior to Hurricane Sandy, your mortgage lender will probably be looking for a reinspection of the property, to ensure that the property is still in good condition.  This is not only to protect the lender, but the potential homeowner.  If you're purchasing a home, it's in your best interest for this to happen so that if the storm did result in damage to your future new home, the seller's insurance has to cover the repair.

Fear of Lender Buy Backs

If you're in the process of a purchase or refinance mortgage, here's a great explanation of what you might be attempting to overcome.

CNBC Video on Fear of Mortgage Buy Backs

When refinancing, consider lowering the term as well

Many borrowers are taking advantage of today’s record low rates to refinance and reduce their mortgage payments, but have you ever considered reducing your term as well?  Applying for a new, lower rate AND dropping the number of years on your mortgage can and will reduce the overall amount you pay for the life of the mortgage.

Consider this.  A homeowner who bought their house 2 years ago and financed $200,000 over 30 years at a rate of 5% has a principal and interest payment of $1073.64.  If they were to refinance to a new 30 year mortgage at 3.5%, their new payment would be about $898.09, depending on pay-off and new closing costs rolled in.  That’s a savings of $175.55 per month.  Not bad.  But now consider the same refinance, but for 25 years.  The same rate would result in a payment of $1001.25 for a savings of $72.39 per month.  Doesn’t sound like much until you look at the fact that the new 25 year mortgage also got rid of 3 years of the mortgage payment.

If that borrower kept the original mortgage they had, they would pay over $360,000 over the course of the remaining 28 years.  By refinancing to a new 25 year mortgage, they not only save the $72 per month, the overall payment over the life of the new loan is $300,375.  That’s a savings of over $60,000.

So, when considering a refinance, consider the lower term as well.  Many are utilizing this option and will be greatly rewarded for it in the years to come.

Want a lower rate? Better act fast!!

Even with the last week’s weaker than expected job report, which would generally lead to rates staying as is, if not moving slightly lower, you can expect rates to tick up a bit starting this week.  The reason is a bit complicated and technical, but here’s the long and short of it.  While factors such as credit score, down payment (for purchases), equity position (for refinances), and term (30 year, 15 year, etc.) will affect your rate, there are other factors from the investor’s standpoint, that will affect it as well.  One such factor is called the guarantee fee, otherwise known as the “g-fee.”

A guarantee fee is a fee charged by entities such as Fannie Mae and Freddie Mac.  They help pay for things that happen behind the scenes of a mortgage transaction.  Mortgage lenders “pool” loans together and sell them in blocks.  They will also sell the servicing of a loan to another entity.  This simply means that just because Bank A collects your payments, Lender B still owns your mortgage.  Things like this are a cost to lenders and they pass this off in the form of an adjustment to interest rates.  Hence, the g-fee.

The FHFA (Federal Housing Finance Agency) is increasing this fee, partly in hopes of making Fannie Mae and Freddie Mac a less attractive option for those in the market for a home loan.  The FHFA’s adjustment to the g-fee goes into effect on November 1, 2012, but lenders are preparing for that by adjusting rates starting this week.  The reason for this is that if you start a new mortgage application today, by the time you loan closes and funds, the lender will be trying to securitize your loan with Fannie or Freddie at the time the new fee is in place.  Rates could look as much as .25% higher this week, although the jobs report of last Friday is keeping things tame at the week’s open.

How do you combat this?  Apply now if you’re in the market for a refinance.  If you’re purchasing, shop around with a few lenders.  Know you credit score when you call to avoid too many credit inquiries.  This will keep you in a position of being an educated and qualified borrower.

Don't go buy that new furniture just yet!

When soon to be new home owners find out that their mortgage application is not only approved, but clear to close, they think they’re in the clear for having inquiries on their credit report and/or obtaining new accounts.  Often, a new account will be something like a large furniture or appliance store, or worse, that new car you wanted to buy prior to applying for a mortgage.  What you may not be aware of is, the lender will be pulling your credit report again, just before closing.  It’s part of a process called the “Loan Quality Initiative”  so the report is commonly referred to as an “LQ” in the industry.

The initiative was designed to ensure that loans that go to closing are of the highest quality.  Higher quality loans means less bad loans down the road and less burden on the tax payers.  It also helps to keep interest rates lower, since there is a lesser need to recoup lost revenue on the part of Fannie Mae or Freddie Mac, who are securitizing these loans.

So what do you, as a consumer, need to be aware of and practice as a mortgage applicant? Easy, don’t run up any new debt or even inquire into it until you’ve closed your loan.  A credit inquiry on your LQ will result in your lender asking for a letter stating why your credit was pulled and that you haven’t actually been granted new credit.  You also want to make sure that you don’t actively use your existing credit and increase the balances, or more importantly, the minimum monthly payment.  Significant changes to your credit profile or amount of your monthly liabilities can turn an approval into a denial.  The LQ will provide information on any changes in your budget and when the numbers are recalculated by an underwriter, if there is new or increased liability on the part of the borrower, the debt ratios will increase and if they go over the maximum allowed by the guidelines of the loan you’ve applied for, your approval will be switched to a denial.

The best thing to do is simply be extra careful with your credit during the loan process.  Waiting just a few days to make that big purchase will only ensure that your loan stays approved, and this goes for a refinance as well.

Why can’t we close our mortgage in 30 days?!!

With rates under 4% for quite some time now, the amount of activity in the mortgage world has been vigorous, to say the least.  Home prices coupled with these rates have dramatically increased the number of purchase mortgage applications.  Add in the economic programs of HARP 2.0 and FHA Streamline Refinances and the number elevates to tremendous numbers.

This influx of activity not only has lenders at capacity, but title companies, appraisers and closing attorneys as well.  Closing a mortgage in 30 days isn’t impossible, but it’s rare.  You almost need a “perfect storm.”  You need to be, what I like to call, a “submission friendly” borrower.  The amount of documentation needed to get a mortgage processed is cumbersome, to say the least, both on the part of the borrower AND the lender.  In recent years, the amount of disclosures required for a mortgage application has practically doubled.

A couple of the new disclosures create delays in the process due to their time sensitivity.  A lender is not allowed to order an appraisal until the borrower has provided an intent to move forward with the loan.  This is a disclosure within the application package.  Once this item is signed, then and only then, can the lender order the appraisal though an appraisal management company.   The processing of the payment for this appraisal cannot take place for three days after the intent is signed and the appraiser isn’t going to perform the appraisal until he or she knows they’re getting paid.  Once the appraisal is done, if there are no issues, you’re looking at a 7-10 day window to get the report.  So we’re already into the process by about two weeks.

The “submission friendly” borrower will provide all of the items asked for, such as W-2’s, pay stubs, bank statements, etc.  Anything missing will delay the file from even being looked at by an underwriter.  If there are complete files in line for the underwriter, those will be looked at first.  With the current influx of files coming in, an incomplete file will never be “next.”

Once the file does reach the status of “Clear to Close”, about 15 to 20 days later, the closing department still needs to do their checks and balances.  They need to verify that the APR from the initial application has not changed and that the loan complies with all federal laws to protect the borrower as well as the company.  If any changes are necessary, the file needs to be redisclosed and there is a mandatory three day waiting period.  Preparing the loan for closing generally takes 48 hours.

While it is still possible to close a loan in 30 days, it’s better not to get your hopes up and consider the fact that 30-45 days is the expectation.  It’s a small price to pay for a smoother transaction to secure something that will last 30 years.