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FHA Back to Work Extenuating Program

Buy Again, 12 Months From Short Sale or Foreclosure

The Back to Work Program provides financing for borrowers that recovered from financial hardship that resulted in a short-sale or foreclosure.

If you has experienced any of the following financial difficulties, you may be eligible for the program:

• Pre-Foreclosure Sales
• Short Sales
• Deed-in-Lieu
• Foreclosure
• Chapter 7 Bankruptcy
• Chapter 13 Bankruptcy
• Loan Modification
• Forbearance Agreements

Program summary:

• Show credit impairments resulting from loss of employment or loss of household income
• Loss of employment and/or income 20% or more for 6 months or longer
• The recovery periods begins the month of loss of employment/income
• Demonstrate full recovery and complete housing counseling
• Re-establish of credits for 12+ months for short-sale or foreclosure

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How to Decode Your Credit Score

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A common complaint about credit scores is that they are a “black box” containing a set of mysterious secret formulas that can confuse even the most savvy of consumers.

While there are many ways in which trying to understand credit scores can be frustrating to consumers, for high scorers eyeing that elusive perfect score, part of the confusion often comes in the form of those seemingly “meaningless” reason codes that accompany almost all credit scores, good or bad.

By meaningless reason codes, I’m talking about the comments that accompany high (over 760 FICO) credit scores, with such descriptions as “no recent bankcard balance information,” “too many bankcard charge accounts,” “lack of recent installment loan information,” and other messages that tend to make someone who is effectively managing their credit feel like they should be doing more.

As a high-scoring Credit.com reader recently asked us,  ”I feel like I am penalized for owning my home and not being in debt. Where’s the logic in that?”

This is a good question, to which a logical response would be that these reason codes represent the scoring factors with the greatest difference between the number of points possible and the number of points achieved. In other words, these are the areas of the score where you “lost” the most points.

Reason codes can be valuable to consumers with scores in the lower-to-middle scoring ranges, as they point out the areas needing the most improvement, mostly within the payment history and amounts owed categories that together make up almost two-thirds of a FICO score.

For high-scoring consumers, who by definition have already been paying on time and keeping balances low — practices everyone should follow — reason codes tend to focus on the less important scoring factors that can help distinguish one high-scoring consumer from another to a lender, but that doesn’t make much sense to someone simply trying to do what it takes to raise an already good score.

To illustrate, let’s take a look at some of these low-impact reason codes that tend to appear with high scores, and what might happen if you attempt to act on them:

• No recent bankcard balance information. This usually means there are no credit card accounts with balances on the credit report. To remedy this situation, you may be tempted to stop paying your balances in full each month, and instead make only minimum payments.  However, doing so is more likely to have the opposite effect of dropping your score and replacing that reason code with one such as “amount owed on revolving balances is too high.”
• Too many bankcard charge accounts. This one sounds pretty straightforward, but there’s a catch. Notice how this reason code doesn’t say there are too many “open” cards — just that there are too many cards on the report? People often interpret this reason code as “too many open bankcard charge accounts” and close one or more cards, not realizing that by doing so they raise the risk of higher credit utilization (balance/limit ratio) and a lower score, accompanied by the reason code, “proportion of balances to credit limits on revolving/charge accounts is too high.”
• Lack of recent installment loan information. This code is similar to the first one above, with loans replacing credit cards.  Taking out a new loan to satisfy this reason code is more likely to be counterproductive by lowering your score and telling you via the reason codes that your “ratio of loan balances to loan amounts is too high” and you have “too many accounts recently opened.”

So if these meaningless reason codes are starting to make some of you high scorers feel like you can’t win for losing, remind yourself that a 760 FICO score is likely to qualify you for the same credit terms that a perfect score will, and go back to managing your credit as you’ve been doing all along.  And if you’d like to get a better understanding of which credit score components you should be working on, get your free Credit Report Card from Credit.com or pull a free credit report once a year from each of the credit bureaus at AnnualCreditReport.com.

via yahoo finance

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How Much Income Do You Need to Buy a House?

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If you’re in the market for a new home, chances are you’ll have to compromise at some point along the way. Maybe you’ll have to commute a little farther than you’d like in order to get the best value for your money. Or perhaps you’ll forgo a huge backyard to be closer to the city.

And when it comes to finances, you might find a disparity between how much house you want and how much house you can purchase given your gross monthly income and other factors.

Home loans are made against your ability to repay. While the mortgage loan is secured against the house, it is really made against your income. That’s what mortgage lenders look for — income to offset liabilities.

Simply put, the amount of income you need to purchase a house will vary by your payment comfort level, including any other monthly debt obligations you might have.

Important terms
Mortgage payment:  Principal, interest, property taxes insurance and mortgage insurance, if needed

Consumer debts: Minimum payment obligations on things such as auto loans, credit cards, student loans, personal loans and installment loans

Other debt obligations:  Alimony and/or child support or any other court-ordered repayment obligations

Running the math
Here’s a simple formula to calculate the amount of income you’ll need to purchase a home:

Target mortgage payment + consumer debts ÷ .36 = Gross monthly income needed to qualify

Most lenders limit your debt-to-income ratio (how much of your monthly income pays debt) to between 36 percent and 45 percent. While the exact ratio varies by lender and loan type, it’s best to base your calculations on the lower end to ensure that you won’t overextend yourself financially.

So, if your target mortgage payment is $2,000 per month and you have consumer debts of $300 per month, you will need $6,388 gross monthly income to offset your housing expenses and consumer obligations.

Down payment
Your down payment is another important factor in determining how much income you’ll need to buy a home.

Consider the following loan scenario using a purchase price of $300,000 (assuming no other debts) and the current rates on Zillow Mortgage Marketplace.

Conventional loan

• Down payment: 5 percent ($15,000)
• Interest rate: 3.26 percent
• Approximate mortgage payment: $1,770
• Gross monthly income needed: $4,916

So at the end of the day how much income you need to purchase a home is predicated on your monthly income, consumer debt obligations and down payment.

Impact of debt
For every dollar of debt, you will need double that in income. So if you have a $300 car payment, you’ll need at least $600 per month or more in income to offset that debt.

Debt erodes income, and less income translates to less purchasing power.

So, does buying a home make sense?

Yes, so long as the amount you can borrow for your desired purchase price is in sync with your debt obligations and, of course, your down payment.

via yahoo homes

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Six Tips On Scouting The Best Mortgage Loans

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Think you're ready to shop for mortgage loans? If you haven't done your homework, you might want to read these six tips before you begin.

The Boy Scouts of America have a motto that could be used by prospective homeowners who want to purchase a mortgage: "Be Prepared!"

But finding a good mortgage loan can be much more complicated than learning to tie knots, and if you're not ready, you could work yourself into a real financial bind.

"If you don't do your homework, you could pay a higher interest rate or be put in an inappropriate loan program that could cost you tens of thousands of dollars, literally," says Bill Burnett, president of the Virginia Association of Mortgage Brokers (VAMB).

Want to avoid these financial binds? These six expert tips can help you scout for the best mortgage.

Tip #1: Learn the Lingo
Do you know the difference between interest and an annual percentage rate (APR)? If you're shifting uncomfortably in your seat right now, think about how dazed and confused you will be when comparing mortgage loans.

Because the real estate business has a language of its own, Burnett says that familiarizing yourself with some basic terminology could be to your advantage.

"You don't have to become a mortgage expert, but you should be familiar with mortgage terms so that when you are speaking to realtors, lenders, brokers, or some other mortgage professionals you can keep up," says Dustin Hobbs, communications director for the California Mortgage Bankers Association (CMBA). "Not only will it protect your own interests, it will make you a better consumer."

So let's have a quick vocabulary lesson on the two aforementioned terms that Hobbs considers essential to know: interest and APR.

The website for the Virginia Association of Mortgage Brokers defines interest as the price that lenders charge borrowers for using their money. On the other hand, an APR is defined as the "total cost of the loan, expressed as a yearly rate." This total cost might include fees and closing costs.

As you can see, when comparing mortgage loans, it's helpful to speak the language. The VAMB website contains an entire glossary of real estate terms for you to study up on.

Tip #2: Get to Know Your Mortgage Professionals
Shopping for a mortgage loan should begin when you start shopping for mortgage professionals, the people who will advise you during the process and/or set up the actual loan. Hobbs says there are a number of ways to locate them:

• Seek referrals from people who successfully have obtained mortgage loans.
• Check with a group such as the National Association of Mortgage Brokers (NAMB), a professional organization for the mortgage broker industry.
• Consult your local chamber of commerce.
• Obtain background information on professionals from state or national mortgage regulators, such as the Nationwide Mortgage Licensing System and Registry (NMLS).

Burnett says you can choose a mortgage broker, a lender, or a combination of the pair in order to get the loan shopping process in motion. A mortgage broker may counsel you on available loans and process your application and loan, according to the Virginia Association of Mortgage Brokers. A lender, on the other hand, will underwrite the loan after assessing your risk.

Whether you enlist the help of mortgage brokers or work directly with lenders, both Hobbs and Burnett say you should be willing to investigate their business history through services such as the Better Business Bureau (BBB), the national nonprofit organization that tracks and reviews businesses, their practices, and their reputations.

Bottom line: "Know who you are dealing with," Hobbs says. "Take an active role in the process and get a second opinion."

Burnett also suggests consulting other professionals like your financial planner or accountant about a proposed mortgage. Make sure you're making the right decision from all of those viewpoints.

Tip #3: Keep Score of Your Credit
You've probably heard about it ad nauseum, but our experts are confirming: "Credit rating is everything on a mortgage," says Burnett.

Credit scores, which are maintained by credit reporting bureaus, are used by lenders to help gauge whether or not you'll be able to pay back the money you borrow, according to Burnett.

Known more specifically as FICO (Fair, Isaac and Company) scores, credit scores range from 300-850. The basic axiom, Burnett says, is that the lower your credit score, the more difficult it could be for you to obtain a mortgage loan.

"The lending requirements are so tight now, they take people out of the market who used to qualify," Burnett says. "Income and assets are important, too, but if you have a million bucks in the bank with a 660 credit score, you are going to get hammered with fees, points, or [interest] rates."

Hobbs suggests correcting any errors that might appear on your credit report. How, you ask? The website myfico.com provides a list of tips to help people repair their credit. Here are some highlights:

• Make your credit payments on time.
• Reduce the amount of debt you owe.
• Pay your bills on time.
• Pay off debt rather than move it around.
• Have credit cards, but manage them responsibly.

"You gotta make sure you can do everything to maintain good credit," Hobbs says. "Certainly a family looking into a home should be monitoring their credit closely." To keep tabs on your credit score, you can check with the three major credit bureaus - Equifax, Experian, and Trans Union.

Tip #4: Tabulate Cost Information
When comparing mortgage loans, there are oodles of numbers you have to consider before finalizing your choice. If you're not a math major, and you're unsure of how to deal with the matrix of numbers involved in the mortgage loan process, Hobbs suggests you get some backup from a knowledgeable source.

"Don't be afraid to get a second opinion," he says. "It will help you understand if costs are reasonable. You won't know if you're getting a great deal by doing Google search."

You also might want to get familiar with the difference between a fixed and adjustable-rate mortgage (ARM) - as well as daily interest rates - in order to properly use a mortgage calculator.

A fixed-rate mortgage has an interest rate and monthly payment that remains constant over the loan's duration, the Federal Reserve Board says. Conversely, rates and payments are adjusted periodically with an ARM because they are based on the movement of a financial index, according to the Virginia Association of Mortgage Brokers.

When it comes to interest rates, understand that they can change each and every day. You might want to check in with an online source such as mortgagenewsdaily.com, a news and social media site that monitors the mortgage and real estate industries and provides daily updates of interest rates.

Tip #5: Aim for Pre-Approval
If you would like to consider yourself a savvy shopper in the mortgage loan market, Hobbs says you should take aim at getting pre-approved for a loan amount.

Pre-approval, the Virginia Association of Mortgage Brokers says, is "a commitment by a lender to extend credit, provided that specific conditions are met."

The biggest advantage of getting pre-approved, Hobbs says, is that it gives borrowers some negotiating leverage when they start looking at homes to buy. Because they already know the amount and type of mortgage within their price range, borrowers are less likely to overspend for a home that's out of their price range or budget.

Tip #6: Wheel and Deal
Shopping for a mortgage loan is not just a figure of speech. So like any shrewd consumer, you shouldn't bite on the first offer made by a broker or lender, but be willing to ask questions and negotiate to get the best deal possible.

"You can always ask," Burnett says. "Ask whether there is an origination fee, which is a fee paid to the person originating the loan or the cost to do business with a banker or broker."

Knowing what to ask might get a bit confusing, too, if you feel rushed. The key to dealing with lenders and brokers, Hobbs says, is not feeling hurried to make a deal and sign paperwork.
"Are you fully aware of what you are signing up for?" Hobbs asks. "It's something you don't want to rush through because, for most people, it's the most significant and largest financial commitment they will ever make."

To get the best mortgage loan possible, the Federal Reserve Board recommends asking these questions:

• Will a lender or broker waive or reduce one of its fees or agree to fewer points or a lower rate?
• Is the lender or broker agreeing to lower one fee while increasing another one?
• Can lenders or brokers give better terms than the ones they quoted originally or ones you have found elsewhere?

If you come into the process prepared to ask these sorts of questions, Burnett says you might be ready to make some astute comparisons of mortgage loans.

"You want to make sure you are obtaining the program, rate, and strategy that best fits your financial needs," Burnett says. "You need to take your time, make a good decision, and look at all your options."

via yahoo homes

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Seven Steps To Take Before You Refinance

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If you're considering refinancing your home, here are a few essential steps to take before signing on the dotted line.

Are you taking note of the low interest rates and wondering if refinancing might be a good option for you?

If done right, it could save you a significant amount of money.

But before you jump into this process, there are some important steps you should take to make sure refinancing is in your best financial interest, says Chris L. Boulter, president of Val-Chris Investments, Inc., a company specializing in residential and commercial loans. This includes checking your credit score and knowing the value of your home, among other things.
Want more details? Read on for specific steps you'll want to take before you refinance.

#1 - Understand What Refinancing Can Do for You
Refinancing your home is a big move, so you should know exactly what it is and how it could benefit you.

Essentially, refinancing is the process of getting a new mortgage to replace your existing one. The new loan, says Boulter, pays off the first and could give you a new interest rate, new monthly payment, and a new term length.

Usually, says Boulter, people refinance to reduce their interest rate (also known as the price of borrowing money) on their loan. This means that when you reduce your interest rate, you'll also lower the cost of borrowing money and therefore save money.

But that's not all. Refinancing could also help you go from a 30-year loan term to a 15-year loan (or vice-versa), switch from an adjustable-rate mortgage to a fixed-rate mortgage, consolidate your first and second mortgages, and much more.

So, do your research, contact a mortgage lender, and find out how you could benefit from refinancing.

#2 - Check Your Credit Score
Do you know what your credit score is? If not, you should probably get on top of it because having a good credit score is important when it comes to refinancing, says Boulter.

Particularly, your credit score determines whether you qualify for refinancing, as well as what kind of interest rate you'll get. Generally, the higher the score, the lower your rate, says Boulter. And to get the historically low rates now available, you'll need a very good score: 720 or above, he adds.

In case you're wondering, that's on a scale of 300 to 850, according to the Fair Isaac (FICO) scale, which Boulter says is the one that most banks use.

So, what happens if you're not thrilled with your score? You can still make strides to help improve it. In fact, 65 percent of your credit score is determined by two factors: your payment history and the amounts you still owe, according to the FICO website.

So, it may take time to build up your score into the positive, but if you make sure to pay all bills on time and pay down as much debt as possible, you'll definitely be going in the right direction.

You can get one free copy of your credit score every year. The only authorized website to fill orders for the free annual credit report is annualcreditreport.com, says the Federal Trade Commission, a federal agency that prevents business practices that are unfair to consumers.

#3 - Check Your Equity
Equity is something else you'll want to become familiar with, too. Why? Because equity - the difference between the current market value of your home and the amount you still owe on your mortgage - plays a part in determining whether or not you can refinance.

Lenders normally want you to have at least 20 percent equity in order to refinance, according to Boulter. He says this is because of the real estate market downturn, and the fact that lenders are cautious when lending money with real estate as collateral, which is exactly what they do when you refinance your home.

The good news is that there are still options out there for those with little or no equity, according to Making Home Affordable (MHA), an official program of the Department of Treasury & Housing and Urban Development.

#4 - Shop Around
You probably shop around for the best price on bread, so when it comes to a mortgage - which could be hundreds of thousands of dollars - it makes sense to shop for the best interest rate.

However, according to Boulter, don't expect to find a lot of difference in rates. Because of recent laws and a banking industry with fewer companies, he says there is less variety in rates.

"That said, it certainly makes sense to get a second opinion on the terms that have been negotiated," he says.

And even if it's just the slightest different in interest rates, when it comes to borrowing hundreds of thousands of dollars for 15 or 30 years, a small difference in the rate could mean a big difference in cost over time.

#5 - Learn How Much You Will Lower Your Interest Rate
For you, the whole point of refinancing is probably to save money by lowering your interest rate, which, remember, is essentially the price you are paying to borrow the money.

And because there are costs and fees associated with refinancing (more on that in #6), you need to make sure you lower your rate enough to make refinancing worthwhile. Generally speaking, if you can lower your rate by three-quarters of a percent, refinancing is worth considering, says Boulter.

To get an idea of what your new interest rate might be, Boulter says that most lenders will give good faith estimates that spell out costs, fees, and interest rates - with no commitment on your part.

One important point to note, says Boulter, is that the more fees and costs you pay up front or out of pocket, the lower your rate may be. Similarly, you could also have the option to take a lower rate and then add the amount you would pay for fees and costs into the amount you borrow.

#6 - Understand Your Closing Costs
Did you think that paying interest on the loan was the only price you had to pay?

Well, your bank thinks otherwise. There are other costs and fees associated with your loan, known as closing costs, and it's important to make sure that the refinancing savings outweigh them.

To help you better understand what closing costs involve, here's a brief breakdown of some of the more common major costs and fees, although they could change from lender to lender:*

Loan Origination Fee: Your lender charges this to cover such things as attorney fees, document preparation fees, notary fees, and more. It might be called an underwriting fee, administrative fee, or processing fee. The average cost is $2,537 with a 10 percent down payment.

Application Fee: Your lender charges this fee to cover processing your loan request and checking your credit. The median cost is $365.

Points: These represent a one-time fee from the lender. One point equals one percent of the amount of the loan. For example, one point on a $100,000 loan is $1,000. These fees are usually between .5 and 1 percent, according to Boulter.

Appraisal Fee: This is a determination by a professional appraiser of the worth of your property. The lender wants to make sure it is worth at least the loan amount. The Federal Reserve notes that the median cost is $292, but Boulter says it could be up to $700.

Lender-Required Home Inspection Fees: Depending where your home is located, the lender may want inspections of the house's systems and structure. This cost is estimated to be anywhere from $300 to $500.

Private Mortgage Insurance (PMI): If you are borrowing more than 80 percent of the market value of the home, or in other words, if your down payment is less than 20 percent, the lender will usually require mortgage insurance. This insurance covers the lender's loss if you don't make the mortgage payments. The estimated cost is $50 to $100 per month.

#7 - Determine How Long You Plan to Stay in Your Home
Is this your dream home? The one in which you want to stay until you're old and gray? You should know, because the answer can help you determine whether refinancing is the right move for you.

Basically, says Boulter, if you're planning to stay in your home for at least a year to two years after refinancing your mortgage, it's probably worth it to refinance.

Why? Because of those closing costs we discussed earlier. Essentially, since getting a new loan costs money, it takes time for the savings to outweigh the costs. For example, let's say you borrow $300,000 and it costs 1.5 percent in closing costs. That's $4,500. If your monthly payment goes down by $300 per month, it will take 15 months to pay for those closing costs in savings.

*Unless otherwise stated, all costs and fees information according to "A Consumer's Guide to Mortgage Settlement Costs" published by the Federal Reserve Board, the main governing body of the Federal Reserve System which oversees national monetary policy and the banks.

via yahoo homes

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The Top 6 Mortgage Mistakes

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During the 2007-2009 financial crisis, the United States economy crumbled because of a problem with mortgage foreclosures. Borrowers all over the nation had trouble paying their mortgages. At the time, eight out of 10 borrowers were trying to refinance their mortgages. Even high-end homeowners were having trouble with foreclosures. Why were so many citizens having trouble with their mortgages? Let's take a look at the biggest mortgage mistakes that homeowners make.

1. Adjustable Rate Mortgages
Adjustable rate mortgages seem like a homeowners dream. An adjustable rate mortgage starts you off with a low interest rate for the first two to five years. They allow you to buy a larger house than you can normally qualify for and have lower payments that you can afford. After two to five years the interest rate resets to a higher market rate. That's no problem because borrowers can just take the equity out of their homes and refinance to a lower rate once it resets.

Well, it doesn't always work out that way. When housing prices drop, borrowers tend to find that they are unable to refinance their existing loans. This leaves many borrowers facing high mortgage payments that are two to three times their original payments. The dream of home ownership quickly becomes a nightmare.

2. No Down Payment
During the subprime crisis, many companies were offering borrowers no-down-payment loans to borrowers. The purpose of a down payment is twofold. First, it increases the amount of equity that you have in your home and reduces the amount of money that you owe on a home. Second, a down payment makes sure that you have some skin in the game. Borrowers who place down a large down payment are much more likely to try everything possible to make their mortgage payments since they do not want to lose their investment. Many borrowers who put little to nothing down on their homes find themselves upside down on their mortgage and end up just walking away. They owe more money than the home is worth. The more a borrower owes, the more likely they are to walk away.

3. Liar Loans
The phrase "liar loans" leaves a bad taste in your mouth. Liar loans were incredibly popular during the real estate boom prior to the subprime meltdown that began in 2007. Mortgage lenders were quick to hand them out and borrowers were quick to accept them. A liar loan is a loan that requires little to no documentation. Liar loans do not require verification. The loan is based on the borrower's stated income, stated assets and stated expenses.

They are called liar loans because borrowers have a tendency to lie and inflate their income so that they can buy a larger house. Some individuals that received a liar loan did not even have a job! The trouble starts once the buyer gets in the home. Since the mortgage payments have to be paid with actual income and not stated income, the borrower is unable to consistently make their mortgage payments. They fall behind on the payments and find themselves facing bankruptcy and foreclosure.

4. Reverse Mortgages
If you watch television, you have probably seen a reverse mortgage advertised as the solution to all of your income problems. Are reverse mortgages the godsend that people claim that they are? A reverse mortgage is a loan available to senior citizens age 62 and up that uses the equity out of your home to provide you with an income stream. The available equity is paid out to you in a steady stream of payments or in a lump sum like an annuity.

There are many drawbacks to getting a reverse mortgage. There are high upfront costs. Origination fees, mortgage insurance, title insurance, appraisal fees, attorney fees and miscellaneous fees can quickly eat up your equity. The borrower loses full ownership of their home. Since all of the equity will be gone from your home, the bank now owns the home. The family is only entitled to any equity that is left after all of the cash from the deceased's estate has been used to pay off the mortgage, fees, and interest. The family will have to try to work out an agreement with the bank and make mortgage payments to keep the family home.

5. Longer Amortization
You may have thought that 30 years was the longest time frame that you could get on a mortgage. Are you aware that some mortgage companies are offering loans that run 40 years now? Thirty five and forty year mortgages are slowly rising in popularity. They allow individuals to buy a larger house for much lower payments. A 40-year mortgage may make sense for a young 20-year-old who plans to stay in their home for the next 20 years but it doesn't make sense for a lot of people. The interest rate on a 40-year mortgage will be slightly higher than a 30 year. This amounts to a whole lot more interest over a 40-year time period, because banks aren't going to give borrowers 10 extra years to pay off their mortgage without making it up on the back end.

Borrowers will also have less equity in their homes. The bulk of payments for the first 10 to 20 years will primarily pay down interest making it nearly impossible for the borrower to move. Besides, do you really want to be making mortgage payments in your 70s?

6. Exotic Mortgage Products
Some homeowners simply did not understand what they were getting themselves into. Lenders came up with all sorts of exotic products that made the dream of home ownership a reality. Products like interest only loans which can lower payments 20-30%. These loans let borrowers live in a home for a few years and only make interest payments. Name your payment loans let borrowers decide exactly how much they want to pay on their mortgage each month.

The catch is that a big balloon principal payment would come due after a certain time period. All of these products are known as negative amortization products. Instead of building up equity, borrowers are building negative equity. They are increasing the amount that they owe every month until their debt comes crashing down on them like a pile of bricks. Exotic mortgage products have led to many borrowers being underwater on their loans.

The Bottom Line
As you can see, the road to homeownership is riddled with traps. If you can avoid the traps that many borrowers fell into, then you can keep yourself from financial ruin.


via yahoo homes

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Better Mortgage Rates Start With Better FICO Scores

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If you plan to use a mortgage for your next home purchase, you’ll want to keep your credit scores as high as possible. Credit scores play an out-sized role in determining for which mortgage product you’ll qualify, and to which rate you’ll be assigned by your lender.

The higher your credit score, the lower your mortgage rate will be.

What Is A Credit Score?
History has shown that the best way to predict a person’s behavior over the near-term future is to look at that person’s behavior in the recent past. It’s a concept similar to the First Rule of Physics — an object in motion tends to stay in motion.

We can apply this theory to consumer credit, too. A person who has recently paid his bills on-time should continue to pay his bills on-time in the near-future.

This is the basis of credit scoring; using your past to predict your future.

To mortgage lenders, your credit score represents your likelihood of making on-time mortgage payments for the next 90 days. “90 days” matters because, after 90 days without payments, a homeowner falls into default.

Higher credit scores correlate with lower default risk which explains why people with high credit scores tend to receive lower mortgage rates than people with low credit scores. This is true across all loan types, including conventional, jumbo, and FHA mortgages.

Like most else in finance, those with the lowest risks get to pay the lowest rates.

Lenders Use The FICO Scoring Model, Exclusively
There are three main credit bureaus in the United States. They are Equifax, Experian and TransUnion. Each offers a bevy of credit-scoring products, available for purchase on their respective websites. Prices range from “free” to several hundred dollars.

None, however, are particularly relevant in the home-buying process. This is because the nation’s mortgage lenders rely on a different credit model — the FICO model.

FICO is named for the Fair Isaac Corporation. It was “invented” in the 1950s and has become the mortgage industry standard for credit ratings. Today, FICO scores are omnipresent to the point that people generically refer to all credit scores as “FICO scores”.

This is akin to calling all adhesive bandages “Band-Aids”. FICO is the brand name — not the product.

FICO scores range from 300-850.

Credit Scores Change Mortgage Rates
Your FICO score has always influenced the mortgage rate for which you’re eligible. In 2008, though, it began to change your loan fees.

In response to major mortgage market losses, in April 2008, both Fannie Mae and Freddie Mac introduced something called Loan-Level Pricing Adjustments (LLPA). Loan-level pricing adjustments are “discount points” added to a mortgage rate, based on a specific borrower’s risk to the lender.

A discount point is a loan fee, paid at the time of closing. 1 discount point is equal to 1 percent of your loan size.

Example : A $300,000 mortgage that’s assessed 1 discount point will have $3,000 in extra fees due at closing.

Fannie Mae and Freddie Mac know that low credit scores correlate to high default rates so, like an insurance policy, they assigned the highest costs to the highest-risk borrowers.

Assuming a 20% downpayment, look at how discount points change based on credit score. Fees get massive for FICOs under 700.

• 740+ FICO  : There are no discount points required. This loan is “low risk”.
• 720-739 FICO :  0.250 discount points are charged to the borrower, or $250 per $100,000 borrowed
• 700-719 FICO :  0.750 discount points are charged to the borrower, or $750 per $100,000 borrowed
• 680-699 FICO :  1.500 discount points are charged to the borrower, or $1,500 per $100,000 borrowed
• 660-679 FICO :  2.500 discount points are charged to the borrower, or $2,500 per $100,000 borrowed

Now, not many new home buyers just have that kind of extra cash just laying around. Therefore, as an alternative to paying discount points with cash, many choose to “roll up” the fees into their respective mortgage rates. In general, 1.000 discount point can be “traded in” for a 0.250 increase to your mortgage rate.

Example : A consumer with a 680 FICO score is required to pay 1.500 discount points at closing, or can alternatively accept a mortgage rate increase of 0.375%.

This is why it’s important to keep your credit score high. There are real dollar costs for having scores under 740.

Improving On Your Credit Score
If your credit score is not as high as you’d like, the good news is that you can take steps to raise it — sometimes without even changing your spending habits.

via trulia

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10 Major Mortgage Mistakes to Avoid

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Getting a mortgage is no simple task: It's a complex and time-consuming process, and perhaps one of the most significant events of our lives, at least in financial terms. Here are ten potential pitfalls to avoid:

1. Not checking your credit: Long before you begin searching for a mortgage, you should know where you stand in the credit score department. After all, a bad credit score can bump up your mortgage interest rate several percentage points or leave you with no approval at all. Be sure you check your credit early on (several months in advance) in case any changes need to be made to get it back up to snuff.

2. Applying for new credit alongside the mortgage: In this same vein, be sure to avoid applying for any other type of credit before and during the mortgage application process. Whenever you apply for new credit, you're seen as a greater credit risk, at least initially. If you happen to apply for a credit card or auto loan around the same time you apply for a mortgage, your credit score might get dinged enough to kill your eligibility or bump up your interest rate.

3. Failing to look at the total housing payment: A mortgage payment consists of principal, interest, taxes, and insurance (PITI). A common mistake made by prospective home buyers is not factoring in their property taxes and insurance premium into their overall mortgage budget. The debt-to-income ratio (DTI ratio), used to determine if a borrower will qualify for a certain mortgage payment, is calculated by dividing the proposed cost of PITI by gross monthly income. A $1,200 homeowner's insurance policy would add $100 per month to an escrowed mortgage payment.

4. Not seasoning your assets: The bank or lender will want to see that you can actually pay your mortgage each month. But without seasoned assets, those that have been in your own account for at least a couple months, you could be out of luck entirely. Some borrowers seem to think they can transfer funds from a relative's account days before applying, but this simply won't fly once the underwriter uncovers the paper trail.

5. Job hopping: Another key to mortgage approval is steady employment and income. An underwriter will want to know that the income you bring in every month is consistent and expected to continue into the foreseeable future. So don't jump from job to job too much before applying for a mortgage. If it's in the same field, it shouldn't be a deal killer, but a career change will lead to problems. If you're thinking about jumping ship, wait until you've closed your mortgage first.

6. Not getting pre-approved: Good preparation is the key to a good mortgage. Before shopping for a home, make sure you can actually qualify for financing by getting a pre-approval. A mortgage pre-approval is more robust than a simple pre-qualification because the bank pulls your credit and looks at your income, assets, and employment. Your DTI ratio will also come into play to ensure you know exactly how much you can afford. With this pre-approval, you will also get a written commitment from the lender that will show home sellers you're serious about the purchase.

7. Not shopping around: But just because you're pre-approved with one bank doesn't mean you need to obtain financing from them. Be sure to shop around with multiple banks and lenders and even consider a mortgage broker. A broker can shop your rate with a number of banks concurrently and find you the lowest rate with the best terms. Don't be one of the many consumers who obtains a single mortgage rate prior to applying. Comparison shop as you would for anything else you buy. And don't forget to factor in closing costs!

8. Chasing exotic loan programs: Shop around for the lowest rate and closing costs, but not at the expense of your mortgage. Anything that sounds too good to be true most likely is. If the payment seems too low, you might be paying interest-only or even negatively amortizing, meaning your mortgage balance is growing each month. It's best to keep it simple and go with a loan program you can get your head around, like a fixed-rate mortgage.

9. Forgetting to lock your rate: Keep in mind that a mortgage rate means very little if it's not locked-in. If you're happy with your rate, lock it. Mortgage rates change daily and sometimes several times daily. All those mortgage quotes you obtain are just quotes until you actually tell the bank, lender, or broker to "lock it in." Once locked, your rate is guaranteed for a certain period of time, be it 7 days, 15 days, or a month. But never assume your rate is locked until you get it in writing!

10. Not reading your loan documents: Finally, it's your responsibility to read and accept the terms of your new mortgage. Sure, it might be a pain to go through all the loan documents at signing, but it's a bigger pain to sign up for something you don't want or agree with. Take the time at closing to ensure you understand everything you're signing, and thereby agreeing to. And don't be afraid to ask questions! Otherwise, you could wind up with a mortgage with predatory terms and no place to turn.

by Colin Robertson | U.S.News & World Report LP 

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6 Must-Do's Before Buying a Home

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You might be ready to buy a home, but are you armed with the knowledge you need? Do you know about credit score requirements? Are you familiar with flexible standards on Federal Housing Administration loans?

Whether you are a first-time homebuyer or an experienced owner, buying a house requires a "preflight check," in the words of Barry Zigas, director of housing policy for the Consumer Federation of America.

Here is a six-item checklist, including tips on two types of savings you need, plus advice about what's more important than buying a house for its resale value.

Strengthen your credit score
"It's a brave, new world with respect to credit requirements for mortgages," says John Ulzheimer, president of consumer education at smartcredit.com and formerly of FICO, which pioneered credit scoring.

One old rule still applies: The higher your credit score, the lower your down payment and monthly payments.

"Below 660 or 680, you're either going to have to pay sizable fees or a higher down payment," Zigas says. And that's pretty much the cutoff score for getting a mortgage, he says.

Vicki Bott, deputy assistant secretary for single-family housing at the Department of Housing and Urban Development, says that her office has noticed much the same thing. "While there are many qualified borrowers in the 580 range, the market today is probably (looking for) 640 to 660, at a minimum," Bott says.

On the other end, a score of 700 to 720 will get you a good deal and 750 and above will garner the best rates on the market, Ulzheimer says.

Improve your chances by: pulling your credit reports and ensuring you're not being unfairly penalized for old, paid or settled debts, Zigas says.

Stop applying for new credit a year before you apply for financing. And keep the moratorium in place until after you close on your home, Ulzheimer says.

Figure out how much house you can afford
The buyer's mantra: Get a home that's financially comfortable.

There are various rules of thumb that will help you get an idea of how much home you can afford. If you're using FHA financing, as almost one-fifth of buyers get FHA-insured loans, your home payment can't exceed 31 percent of your monthly income. But, with some mitigating factors, FHA will let you go higher.

For conventional loans, a safe formula is that home expenses should not exceed 28 percent of your gross monthly income, says Susan Tiffany, director of consumer periodicals for the Credit Union National Association.

Improve your chances by: trying on that financial obligation long before you sign the mortgage papers, says Tiffany. Before you home shop, calculate the mortgage payment for the home in your intended price range, along with the increased expenses (such as taxes, insurance and utilities). Then bank the difference between that and what you're paying now.

Not only does it allow you to build a nice nest egg, but "you can back away from it," or scale back, if the payments start to pinch, she says.

Save for down payment and closing costs
Depending on your credit and financing, you'll typically need to save enough money to put anywhere from 3.5 percent to 20 percent down.

If you're using FHA financing, then you need a score of 500 or higher. And in the 500 to 579 range, if you can find a lender, you'll have to put 10 percent down instead of 3.5 percent.

One exception: Veterans Affairs loans, which require no down payment.

Another cash expense: closing costs. Whatever your loan source, you'll also need money to pay closing costs, which run (depending on where you live), from $2,300 to $4,000. Get the average closing costs in your state at Bankrate's closing costs map.

Improve your chances by: Along with banking your own money, search out down payment assistance, Tiffany says. Often it's location-based or tagged to a certain type of buyer, like first-timers, she says. So do an Internet search with the city name, then the county name, along with word combinations such as "down payment assistance," "first-time homebuyers" and "homebuyer's assistance."

In a buyer's market, you can also negotiate to have the seller pay a portion of the closing costs.

Build a healthy savings account
This is over and above your money for the down payment and closing. Your lender wants to see that you're not living paycheck to paycheck. If you have three to five months' worth of mortgage payments set aside, that makes you a much better loan candidate. And some lenders and backers, like the FHA, will give you a little more latitude on other factors if they see that you save a cash cushion.

That money will also help you with maintenance and repair issues that come up when you own a home. While repairs are sporadic, items such as a new roof, water heater or other big-ticket items can hit suddenly and hard.

Improve your chances by: setting aside money every month. A good rule of thumb: on average you'll spend 2.5 percent to 3 percent of your home's value annually on upkeep, repairs and maintenance, says Joseph Gyourko, chairman of the real estate department at the Wharton School of the University of Pennsylvania. If you're buying a $250,000 home, aim to bank $520 to $625 per month.

Get preapproved for a mortgage
For serious home shoppers, "the No. 1 thing is they better have everything in order," says Dick Gaylord, past president of the National Association of Realtors. That means that, before the real home shopping begins, you want to get financing in place, he says.

And the preapproval process is "much more extensive" than it was a few years ago, he says.

Bott agrees. "That documentation around income and assets is very essential, more so than in the last five years," she says.

Improve your chances by: getting financing in place "before you walk through the first house," Gaylord says. Otherwise, he says, "How do you know how much you can afford?"

Buy a house you like
If you're buying today for yourself and your family, you want a home that will make you happy for the next few years.

Gone are the days when you could count on a quick sale, Tiffany says. And depending on how much you put down, and how much you have to shell out to sell and relocate, short-term ownership can be a pretty expensive proposition.

Improve your chances by: stepping back, Gyourko says, and making certain "you like the house."

via bankrate

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Mortgage Rates a Hair Above Record Lows

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Fed announces no changes to existing monetary policies

Mortgage rates eased slightly this week, staying near record lows amid uncertainty about the strength of the economic recovery.

The Federal Reserve's Open Market Committee said Wednesday that it expects to maintain "a highly accommodative stance for monetary policy" to support a stronger economic recovery, but announced no changes to existing policies.

Labor market conditions have improved in recent months, the committee noted, but the unemployment remains elevated.  Despite some signs of improvement, the housing sector "remains depressed," the committee noted.

Freddie Mac's weekly Primary Mortgage Market Survey showed 30-year fixed-rate mortgages averaging 3.88 percent with an average 0.7 point for the week ending April 26, down from 3.9 percent last week and 4.78 percent a year ago. Rates on 30-year fixed-rate mortgages hit an all-time low in records dating to 1971 of 3.87 percent during the first three weeks of February.

For 15-year fixed-rate mortgages, rates averaged 3.12 percent with an average 0.6 point, down from 3.13 percent last week and 3.97 percent a year ago. Rates on 15-year fixed-rate mortgages hit an all-time low in records dating to 1991 of 3.11 percent during the week ending April 12.

Rates on five-year Treasury-indexed hybrid adjustable-rate mortgage (ARM) loans averaged 2.85 percent with an average 0.6 point, up from 2.78 percent last week but down from 3.51 percent a year ago. Last week's rates for five-year ARMs were at an all-time low in records dating to 2005.

For one-year Treasury-indexed ARMs, rates averaged 2.74 percent with an average 0.6 point, down from 2.81 percent last week and 3.15 percent a year ago. Rates on one-year ARMs hit an all-time low in records dating to 1984 of 2.72 percent during the week ending March 1.

Looking back a week, a separate survey by the Mortgage Bankers Association showed demand for purchase mortgages during the week ending April 20 was up a seasonally adjusted 2.7 percent from the week before, to a level essentially unchanged from a year ago.

by Inman News

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6 Don’ts After You Apply For A Mortgage

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I learned a long time ago that “common sense is NOT common practice“. This is especially the case during the emotional time that surrounds buying a home, when people tend to do some non-commonsensical things. Here are a few that I’ve seen over the years that have delayed (and even killed) deals:

1. Don’t deposit cash into your bank accounts. Lenders need to source your money and cash is not really traceable. Small, explainable deposits are fine, but getting $10,000 from your parents as a gift in cash is not. Discuss the proper way to track your assets with your loan officer.
2. Don’t make any large purchases like a new car or a bunch of new furniture. New debt comes with it, including new monthly obligations. New obligations create new qualifications. People with new debt have higher ratios…higher ratios make for riskier loans…and sometimes qualified borrowers are no longer qualifying.
3. Don’t co-sign other loans for anyone. When you co-sign, you are obligated. With that obligation comes higher ratios, as well. Even if you swear you won’t be making the payments, the lender will be counting the payment against you.
4. Don’t change bank accounts. Remember, lenders need to source and track assets. That task is significantly easier when there is a consistency of accounts. Frankly, before you even transfer money between accounts, talk to your loan officer.
5. Don’t apply for new credit. It doesn’t matter whether it’s a new credit card or a new car, when you have your credit report run by organizations in multiple financial channels (mortgage, credit card, auto, etc.), your FICO score will be affected. Lower credit scores can determine your interest rate and maybe even your eligibility for approval.
6. Don’t close any credit accounts. Many clients have erroneously believed that having less available credit makes them less risky and more approvable. Wrong. A major component of your score is your length and depth credit history (as opposed to just your payment history) and your total usage of credit as a percentage of available credit. Closing accounts has a negative impact on both those determinants of your score.

The best advice is to fully disclose and discuss your plans with your loan officer/real estate agent before you do anything financial in nature. Any blip in income, assets, or credit should be reviewed and executed in a way to keep your application in the most positive light.

via kcmblog

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Fed Lays Egg & Mortgage Rates Bunny-Hop Up

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Mortgage rates inched up this week after the Fed signaled to investors that it won't buy more bonds to provide further stimulus to the U.S. economy.

The benchmark 30-year fixed-rate mortgage rose to 4.25 percent, compared to 4.23 percent the previous week, according to the Bankrate.com national survey of large lenders. The mortgages in this week's survey had an average total of 0.39 discount and origination points. One year ago, the mortgage index was 5.08 percent; four weeks ago, it was 4.11 percent.

The benchmark 15-year fixed-rate mortgage fell to 3.42 percent from 3.44 percent the previous week, and the benchmark 5/1 adjustable-rate mortgage rose to 3.15 percent from 3.14 percent.

Fed can't keep rates low forever
The Fed has helped to keep mortgage rates artificially low through its continuous purchase of government and mortgage bonds, which is a policy known as quantitative easing.

Many investors hoped the Fed would add another round of stimulus, but most Fed members lean away from that idea and seem ready to let the U.S. economy stand on its own. At least, that is the message investors got Tuesday, after the minutes from the last Federal Open Committee Meeting were released.

"The U.S. government can't buy its own debt forever," says Brett Sinnott of CMG Mortgage in San Ramon, Calif.

What does that mean for borrowers? It means rates won't stay low forever. Rates started to climb as soon as the FOMC minutes came out Tuesday afternoon, but they adjusted down a little after Spain's troubled bond market made the headlines Wednesday morning.

The consensus in the mortgage industry is that rates will climb from their lows by the end of the year.

There's still time
For now, borrowers still have a chance to grab a low rate.

"I'm not expecting to see rates under 4 percent on a 30-year like we did before, but 4.25 is not insanely bad," says John Stearns, a mortgage banker at American Fidelity Mortgage Services in Mequon, Wis.

Volatility in rates: Should you lock or wait?
Mortgage rates are expected to seesaw in coming weeks as the market enters a volatile period, says Bob Moulton, president of Americana Mortgage in Manhasset, N.Y.

"You might see them spike and trickle down," Moulton says.

When rates are too unstable, some borrowers may have doubts about whether they should wait for rates to drop after a spike or lock, so they don't risk missing the boat.

It depends on the borrower's situation, but in general, it is wise to lock, Moulton says. "If you lock and they do come down, you can possibly renegotiate with the lender," he says. "If you don't lock, there is nothing we can do if rates go up."

He recommends that borrowers ask their lenders in advance about their policy on floating rates and their flexibility on renegotiating rates in case they fall.

Are unstable rates good for the market?
This cycle of volatility might spur refinances and the housing market, Moulton says. "The spikes around the cycle will push people who were on the fence to buy houses and refinance."

Moulton says he helped many borrowers last week who wanted to lock as rates recovered from the previous week's climb.

The volume of mortgage applications nationwide increased 4.8 percent last week, compared to a week earlier, according to the Mortgage Bankers Association, or MBA.

Buyers get off the sidelines
While most of the mortgage applications come from refinancers, activity from buyers has increased, the MBA says.

"Applications to buy a home picked up last week, and they are running more than 2 percent above the level reported at this time last year," says Michael Fratantoni, the MBA's vice president of research and economics. "Home purchase applications for conventional loans are now about 10 percent above last year's level."

Homebuyers certainly are getting off the fence, Stearns says.

"Renters are realizing, when they talk to people, you've got the perfect market," he says. "Rates are low; prices are low; and they'll go up sooner than later. Trying to guess the bottom is not a wise thing to do."

via bankrate.com

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5 First-Time Homebuyer Mistakes

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Mistakes people make when buying a first home

First-time homebuyers have never gone through the stressful experience of buying a home, and they often learn the hard way that making a wrong turn during this process is costly and stressful. Sometimes it leads to a failed deal.

Getting approved for a mortgage, finding the right agent, searching for the perfect home and staying within a budget are some of the challenges buyers must face before they become homeowners.

Here are five common mistakes first-time homebuyers should avoid.

There's more to it than mortgage payments
Many first-time homebuyers decide to buy when they feel ready for a mortgage. But just because they can afford the mortgage payments doesn't mean they can afford to own a home, says New York attorney Rafael Castellanos, a managing director at Expert Title Insurance.

"They have an idea of what their mortgage payment is going to be, but they don't realize there's much more to it," he says.

Property insurance, taxes, homeowners association dues, maintenance, and higher electric and water bills are some of the costs first-time homebuyers tend to overlook when shopping for a place.

"Keep in mind property taxes and insurance have a tendency of going up every year," Castellanos says. "Even if you can afford it now, ask yourself if you'll be able to afford the increased costs later."

Even though it's your first home, you must think of it as a long-term commitment, says Ed Conarchy, a mortgage planner and investment adviser at Cherry Creek Mortgage in Gurnee, Ill.

"If you have to switch jobs in a year or two and may have to move for the job, you should think twice," says Conarchy. "Ideally, you should picture yourself living in that house for five to seven years."

Looking for a home first and a loan later
Homebuying doesn't begin with home searching. It begins with a mortgage prequalification -- unless you're lucky to have enough money to pay cash for your first house.

Often, first homebuyers "are afraid to get prequalified," says Steve Anderson, a broker and owner at Re/Max Benchmark Realty in Las Vegas. They fear the lender may tell them they don't qualify for a mortgage or they qualify for a loan smaller than expected. "So they pick a price range out of sky and say, 'Let's go look for a house,'" Anderson says.

And that's not how it should be done. Yes, it's more fun to go look at houses than to sit in a lender's office where you have to expose your financial situation. But that's a backward approach, Conarchy says.

"You get preapproved, and then you find a home," he says. "That way you'll make a financial decision versus an emotional decision."

Not getting professional help
New to the homebuying game? You'll need a reputable real estate agent, a good loan officer or broker, and perhaps a lawyer.

Venturing into this process alone, without professional help, is not a good idea, says Anderson. While every rule has its exception, generally, first-time buyers should not try to deal directly with the listing agent, he says.

"If you are getting divorced, are you going to go to your husband's attorney for help? Of course not," he says. "Same here. If you go to a listing agent, they are only going to show you their listings. You must find a buyers' agent to help you."

If you hire an agent without a referral from friends or family, ask the agent to provide references from previous buyers. The same goes for loan officers or mortgage brokers.

"It's very hard for first-time homebuyers because they don't know who they are dealing with," Anderson says.

It's crucial to find a professional who will give you "truly independent advice," Conarchy says.

Sometimes that means hiring a lawyer, says Castellanos.

"You are about to make what is possibly the largest single investment of your lifetime," Castellanos says. "You want to make sure it's done right."

Exhausting entire savings on the down payment
Spending all or most of their savings on down payment and closing costs is one of the biggest mistakes first-time homebuyers make, Conarchy says.

"Some people scrape all their money together to make the 20 percent down payment so they don't have to pay for mortgage insurance, but they are picking the wrong poison because they are left with no savings at all," he says.

Homebuyers who put 20 percent or more down don't have to pay for mortgage insurance when getting a conventional mortgage. That's usually translated into substantial savings on the monthly mortgage payment. But it's not worth the risk of living on the edge, says Conarchy.

"I'd take paying for mortgage insurance any day over not having money for rainy days," he says. "Everyone -- especially homeowners -- needs to have a rainy-day fund."

No furniture shopping until the deal is closed
You have prequalified for a loan. You found the house you wanted. The contract is signed and the closing is in 30 days. Don't celebrate by buying furniture or a car, if you plan to finance those purchases.

In this tight lending environment, lenders pull credit reports before the closing to make sure the borrower's financial situation has not changed since the loan was approved. Any new loans on your credit report can jeopardize the closing.

Buyers, especially first-timers, often learn this lesson the hard way.

"They sign the contract and they want to go buy new furniture for the house or a new car," Anderson says. "I remember one case where just before closing, the buyer drove to the office and said, 'Look at my brand-new car.' I told them, 'You better go back to that dealership.'"

Luckily, the dealership agreed to wait a couple of days to report the loan to the credit bureaus, he says. Otherwise, it could have killed the deal.

By Polyana da Costa • Bankrate.com

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The Right Mortgage

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If you're considering buying a home, securing a mortgage loan is a key part of the process.  However, you’re probably wondering: how do I find the best mortgage loan for my financial needs? Generally speaking, there are two types of mortgage loans:

• A fixed-rate mortgage offers a rate that stays the same over the life of the loan. This type of loan generally has a longer term and may be good if you plan to own your home for a long time.
• An adjustable-rate mortgage offers an interest rate that adjusts based on market conditions (it goes higher or lower) after a specified time period. This type of loan may be good for people who need an initial lower monthly payment.

Consider the following factors to help you gain insight into the kind of home you can afford, and the type of mortgage that will best fit your financial situation:

How long do you plan to own the home?

• Some loans have longer terms (from 15 to 40 years) that typically work well when you plan to stay in the home for a long time. Other loans have lower interest rates for a shorter term, and may be attractive if you plan to move in five to seven years.
• CONSIDER: How many years do you plan to stay in the home? Will you move within seven years, or is this the place to "settle down?"

How much can you afford as a down payment?

• 20% of the cost of the home is standard for the down payment on a conventional loan, but there are loans that allow you to put down as little as 5 or 10%.
• The higher your down payment, the lower your monthly mortgage payment will be.
• CONSIDER: How much can you realistically afford as the down payment?

What is the general price range for other homes in your neighborhood?

• How many homes are for sale in the area? How are they priced? Do you have a list of comparable properties?
• Are there other neighborhoods that catch your eye? How are the homes in these other areas priced?
• CONSIDER: Which area/home features the best combination of location, quality, and cost for you.

Which of the following is more important to you?

• To have low monthly payments?
• To pay less over the life of the loan, even if monthly payments are high?
• Some loans offer lower monthly mortgage payments over a long period of time. Other loans are designed to be paid in a shorter time frame, but have higher monthly payments.
• CONSIDER: Which situation would work best for you? It helps to be clear about your financial goals and resources.

Your credit history

• Mortgage lenders will look at your credit history and credit score to determine your track record for paying off debt.
• CONSIDER: Do you have a good credit score? Review your credit report to find out.

via bhgrealestate.com

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Mortgage deduction limits: per residence, not per person

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Last week brought bad news for wealthy unmarried couples who own homes together. The U.S. Tax Court held that the $1.1 million limit on the mortgage interest deduction must be applied per residence, not per taxpayer, even where the co-owners are unmarried and file separate tax returns.

Home mortgage interest for a loan or loans totaling $1 million is deductible as an itemized deduction. Interest on a home equity loan -- for a primary or second home -- of up to $100,000 is also deductible. Thus, you can deduct the interest on a total of $1.1 million in home loans each year. If you borrow more than that, the additional interest is not deductible.

If a married couple own a home or homes and file a joint return, the $1.1 million limit applies to them both together. If they file separately, the limit is cut in half for each. So, either way, married couples are limited to deducting the interest on only $1.1 million.

But what about when unmarried couples purchase homes together and file separate returns -- does the limit apply to them both together or to each separately?

Charles and Bruce, an unmarried couple, purchased a principal residence in Beverly Hills, Calif., and a second home in Rancho Mirage, Calif., as joint tenants. They each filed separate tax returns. Their total mortgage debt was more than $2.7 million.

Charles and Bruce each deducted on their separate returns the interest on $1.1 million of their loans. Thus, together they deducted the interest on $2.2 million.

The Internal Revenue Service said that Charles and Bruce together could deduct only the interest on $1.1 million. The couple argued that because they were not married, the limitations on married taxpayers don't apply to them.

Instead, they claimed that when unmarried people co-own a house the $1.1 million limit applies to each individual taxpayer.

The Tax Court sided with the IRS. It held that the $1.1 million limit applies per residence, not per taxpayer, even where a home is co-owned by unmarried taxpayers.

Thus, even though they were unmarried and filed separate returns, Charles and Bruce could together deduct the interest on only $1.1 million of their mortgage debt.

Instead of deducting more than $76,000 in mortgage interest on their individual returns, they could each deduct only $38,000.

Unmarried people who purchase expensive homes should keep this limitation in mind.

By Stephen Fishman
Inman News

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10 Things To Keep In Mind When Buying A House

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Buying a home is a trying and complicated process. It often strains relationships and puts an enormous amount of stress on buyers physically, mentally and financially. That's why the folks at the Boston Globe have put together this list of 10 things to keep in mind as you weather the home-buying storm.

1. Get your financing in order

"The seller wants to know that if they do accept the offer, that barring catastrophic title issues or inspection issues, the deal is going to go through," said Gary Dwyer, broker-owner of Buyer Agents of Boston. Another expert recommends having a full pre-approval within the past 30 days: "Six months is no good anymore, because the rules keep changing."

2. Understand your time horizon

"As a shorter-term buyer, you might consider whether the place is a good investment, and if it's the kind of property that's going to be attractive for the next buyer...A house near train tracks, for instance, is probably not what most people are looking for. But for someone who's planning to stay longer, a good school system or larger lot size might make up for the trains thundering past."

3. Know the overall market conditions

Investigate what comparable properties have sold for over the past three to six months, Dwyer advises. If you're not working with an agent, sites with pricing information such Zillow.com or Trulia.com could help.

4. Search and buy within your means

"If the housing crisis has taught us anything, it's that buying with the expectation that prices will continuously go up — and that if you can eke out the payments each month, you'll be in a good spot in the long run — isn't such a good idea."

5. If you're waiting for prices to go lower, think again

Real estate is a bit like the stock market, Hillman says, in that it's unpredictable. Though some people might be waiting on the sidelines for housing prices to dip lower, she says, "looking at the numbers, I can't see them continuing to go down."

6. Don't get too sucked in by appearances

Buyers should keep in mind that many sellers will try to present their homes in the best possible light. "If the house has been staged, what [potential buyers] forget is that all that stuff is going out when [the sellers] leave," says Needham realtor Harriet Lieb. "Sometimes you're better off buying something that needs a little decorating, because it's going to take on your own look anyway."

7. Have questions prepared

"Sellers and their agents should be prepared to answer questions including how old the roof, heating system, hot water heater, and windows are; if the basement has taken water in the time the seller has been there, and if there's a sump pump; and what utilities and homeowner insurance generally cost... If there's been recent renovation work, buyers should find out of all building permits have been signed off and if all of the contractors and sub-contractors have been paid in full. If there's a pool, buyers should ask if the seller has a permit from the city or town."

8. If you're thinking of buying a brand new house...

Consider that a home that's been lived in has been tested, says Lieb. The seller will be able to tell you if the basement takes on water in a rainstorm, for instance.

"People will pay a lot of money for a brand new house. I tell people, it's only new once. It's like a car — you drive it out of the lot, it's not new," she says.

9. If you're buying a condo, know the rules

"Condo lending rules have become more stringent, making it difficult for some would-be buyers to get financing. Lenders generally want buildings to be at least 50 percent owner-occupied, Dwyer says."

10. Think about a home's intrinsic value

"[Buying a home] has always been a consumption decision and an investment decision," says Nicolas Retsinas, director of the Joint Center for Housing Studies at Harvard. In recent years, "we moved that dot along the continuum, and it became an investment decision... Questions such as 'Is this where I want to raise a family' and 'Is this close to the things that are important to me' will factor more into the decision."

via The Consumerist

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FHA to Raise Insurance Premiums in April

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In a move to increase their financial standing (and to get the FHA back into required capital requirements), on Monday, HUD announced their anticipated increases in the premiums they charge borrowers. Simply stated, the cost of borrowing is going up.

FHA loans, by design, are more liberal in their underwriting guidelines than most conventional loan products (in terms of credit, income ratios, required investment from the borrower, and maximum loan amount). HUD is not a lender. Rather, it is a federally-insured insurance company. They insure lenders against default on loans underwritten in compliance with their published guidelines. It is because of this insurance that lenders approve and close loans with more liberal guidelines.

As an insurance company, HUD charges two types of premiums on the FHA mortgages:

• The UFMIP (Up Front Mortgage Insurance Premium) will be raised effective April 1, 2012 from its current 1% to 1.75%. One advantage to the UFMIP is the fact that it is typically built into the loan amount and does not require additional cash outlay at closing. However, the increase in loan amount does impact monthly payment and cash flow.
• The MMIP (Monthly Mortgage Insurance Premium) will be raised 10 basis points on April 1, 2012 to cover the requirements of the payroll tax extension approved last year. This is a direct increase of 10 basis points in the borrower’s mortgage payment, and has the effect of a 10 basis point increase in interest rates. As a kicker, loans over $625,000 will be bumped 35 basis points from today’s levels effective June 1, 2012. This bump is substantial, as you can see in the chart below.

Click to enlarge

via kcmblog

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HARP: Are you upside down?

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Do you owe more on the home then what its worth?
Are you or anyone you know UPSIDE down?
HARP 2.0 can help.
NO APPRAISAL needed.
Not everyone can qualify for this program.
Call me for details. 480-721-6253.

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Unemployed With Mortgage Trouble? Freddie, Fannie to Expand Help

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Job growth may be picking up, but the ranks of unemployed remain large, and plenty of Americans are trying to figure out how to pay the mortgage while they’re out of work.

Offering those borrowers a break on their mortgages has long been idea considered by policy makers, but two of the industry’s biggest players — mortgage giants Fannie Mae and Freddie Mac — have only offered limited relief.

Months after a similar move by HUD Secretary Shaun Donovan, unemployed homeowners with loans guaranteed by Fannie and Freddie could now be eligible for reduced or suspended mortgage payments for up to a year. The government-controlled mortgage finance companies emphasized that they were doing so at the direction of their regulator, the Federal Housing Finance Agency.

Starting Feb. 1, Freddie Mac said it will allow companies that collect mortgage payments to give borrowers up to a 12-month break on their mortgages, up from a current level of six months. However, the break, known in the mortgage industry as forbearance, will only be temporary. Borrowers will still owe the payments they have missed.

“These expanded forbearance periods will provide families facing prolonged periods of unemployment with a greater measure of security by giving them more time to find new employment and resolve their delinquencies,” said Tracy Mooney, a Freddie Mac senior vice president. “We believe this will put more families back on track to successful long-term home ownership.”

Freddie Mac didn’t have an estimate available for how many borrowers would qualify.

In the past, mortgage companies could suspend borrowers’ payments for up to three months without Freddie Mac’s written approval, or for six months with prior approval. The company said it did grant longer forbearance terms, but only for events such as natural disasters.

Under the new policy, those mortgage companies will be able to automatically extend the borrower’s forbearance for six months and expand it to a year with Freddie Mac’s approval.

A spokesman for Fannie Mae said the company has “received the same directive from FHFA as Freddie Mac and will be implementing similar changes to our unemployment forbearance guidelines.”

via wsj

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Your Credit Report Will Be Re-Pulled Just Prior To Closing (And It Could Change Your Loan Terms)

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When does "cleared to close" not mean "cleared to close"? When Fannie Mae's involved, that's when.

Fannie Mae's "Loan Quality Initiative"

Fannie Mae doesn't make loans. Rather, it buys loans from banks and securitizes them into mortgage-backed securities. As such, Fannie Mae wants to make sure that every loan it buys to meet its basic underwriting standards. That way, it can stand behind the quality of its securities.

And, when we talk about loan approvals, this is actually what's happening; your loan is being underwritten based on Fannie Mae's guidelines. Loans approved for closing are -- presumably --  in line with Fannie Mae's minimum standards.

We say "presumably" because when foreclosures began to increase last decade, Fannie Mae started an audit of its loans and found large numbers of mortgage that had failed to meet its standards. Some loans, it found, were grossly underwritten, comprising its securities and its bottom-line.

To limit "bad loans", Fannie Mae created its Loan Quality Initiative.

The Loan Quality Initiative is broad in scope, comprising 9 pages. For banks, it creates "extra steps" in underwriting. It's validation of things like social security numbers and borrower occupancy. They're small tasks, but time-consuming, and there's a lot of them.

As a mortgage applicant, you don't have to worry about what the bank is doing. You have one task only -- don't mess up your credit.

Just Before Funding, Your Credit Will Be Repulled

The Loan Quality Initiative requires lenders to re-verify credit credit profiles just prior to closing and to look for changes. In other words, although your credit was pulled at the start of underwriting, Fannie Mae wants your bank to pull it again -- just in case something changed.

This ensures that loans are priced properly, and are funded on the borrower's risk at closing as opposed to at application; because a lot can change while a loan is in-process. Especially when the loan is for a purchase closing in 60 days or more.

Banks will repull your credit prior to closing. Some of the things they're looking for include :

• Did you apply for new credit cards while your loan was in-process?
• Did you run up existing cards while your loan was in-process?
• Did you finance an automobile while your loan was in-process?
• Did you make some other major purchase while your loan was in-process?
• Did you add non-disclosed debts while your loan was in-process?

Each of the above is a red flag to underwriting. If your "final" credit report doesn't match your original credit report, your mortgage may be subject to a complete re-underwrite and, in a worst case scenario, a loan application denial.

The 3 Credit Hotspots For Loans In-Process

The Loan Quality Initiative is pretty straight-forward and common sense-like. As a mortgage applicant, it's easy to avoid its claws. There are 3 things for which an underwriter is looking in your credit file.

Here are those 3 items how the bank will react.

What the bank will do: Recalculate debt-to-income ratios using your "new" minimum payment due figures. If the DTI exceeds Fannie Mae's maximum threshold, the loan will be denied.

What you should do about it: Don't run up credit cards prior to closing -- even for layaway items. Consider paying more than the minimum due, just in case.

What the bank will do: Use your new credit score to assess loan-level pricing adjustments or outright denials for when scores fall below Fannie Mae's minimum credit score requirement.

What you should do about it: Follow the basic rules of keeping your credit score high -- pay your bills, don't let things go into collection, and don't look for new credit unless necessary. myFICO.com has a terrific series on credit scoring you can review.

What the bank will do: Look at the Credit Inquiry section of your credit report to look for "non-disclosed liabilities". If items are found, the bank will ask for supporting documentation on the inquiry, and will use the information to re-underwrite your mortgage.

What you should do about it: Don't go looking for new credit until after your loan is funded.  Period.  Now re-read that first sentence, please, to help it sink it.

And remember -- this is all happening after your loan has reached "final approval" status. You should protect your credit all the way through funding. Don't buy new furniture on credit the day before you move in; or buy a car for that new garage.

Loan Approvals Tough, But Not Impossible

Fannie Mae began its Loan Quality Initiative to improve its loan pool's overall performance.  Better loan quality helps to keep conforming mortgage rates down and reduces the taxpayer burden of bad loans.  That's two big wins.

Unfortunately, the Loan Quality Initiative can also result in additional mortgage turndowns and broken closings.

Therefore, be extra careful with your credit between your application date and closing.  If you must buy something big, consider paying cash or waiting it out.  major purchases on your credit card can be grounds to revoke an approval.

Even if your loan is cleared-to-close.

Apply For A Mortgage With Great, Low Rates

Fannie Mae's Loan Quality Initiative applies to Fannie Mae loans only. It does not apply to FHA mortgages, USDA loans, VA loans or jumbo loans. However, it's still good smarts to keep your credit clean while your loan is in-process.

via themortgagereport.com

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