FHA, VA, CONVENTIONAL, USDA, JUMBO MORTGAGES

Credit Repair

Today's mortgage market requires borrowers to have good, some might even say great credit. Never before are home buyers and home owners scrutinized so heavily by their credit scores. As recently as June of 2008, we as mortgage lenders could offer the same loan terms and rates to someone with a 650 as those with a 740 credit score. No longer is that the case. Each borrower is judged severly on their credit scores, segmented into 20 point increments. That is 720 versus 700 or 640 versus 660. The lower your score the more "points" you pay for the loan. 1 point equals 1 percent of the loan amount. Please see my prior article on the new Fannie Mae fees being charged to borrowers. To help borrowers avoid additional fees, my team offers credit repair services. Consumers can now improve their scores and obtain more favorable rates.

A little about credit repair...

Credit repair is an ongoing series of properly timed and constructed challenges to the three major credit bureaus regarding negative items on your credit. It is these negative items that cause your credit score, otherwise known as your FICO score to be lower than could be optimal. A low FICO score is what a creditor uses to determine your eligibility for credit. The range is between 350 and 850-900. Every lender has their own guidelines to determine what score threshold they require to grant credit to potential lenders. All other things being equal, scores above the 720 range meet many lenders guidelines to qualify for an A rated mortgage loan, auto loan, or credit card.

The federal government has imposed certain guidelines that govern how credit can be repaired and define consumer rights. These congressional acts are known as the (FCRA) Fair Credit Reporting Act, and the (CROA) Credit Repair Organizations Act. You can view the FCRA here:  http://www.ftc.gov/os/statutes/fcrajump.htm the FCRA establishes rules on how and when credit bureaus must respond to challenges regarding consumer credit reports. The key feature of the FCRA is the requirement that properly challenged negative information on credit reports must be deleted if not verified within 30 days. To accomplish increased FICO scores, as much negative information must be deleted as possible. Only regular, properly constructed and specifically-timed challenges can accomplish this objective.

For more information contact my office at 847-873-7295 to find out how I personally insure your credit repair results, or contact our credit repair specialists directly at: Revolution Credit Solutions Inc. 1-888-852-0005

First Payments Are Paid At Close... Why?

It can be summarized by stating that the first payment of a home mortgage, whether it's a real estate refinance or a home purchase loan, is always paid forward. All other payments for a mortgage are paid "back".

Let's explore this with an example.

Mary closes her new loan on the 15th of January. That means the loan has funded and recorded. If it's a home purchase loan, she has been given her keys. If it's a refinance, the new rate kicks in.

At Mary's closing, she was given a settlement statement otherwise known as a HUD-1. ON this HUD-1 Mary sees all the expenses of her loan. Expenses such as: loan costs, appraisal fees, title costs, tax expenses, closer fees AND her first payment among other costs.

The line item that we are discussing is called "prepaid interest". It's labeled prepaid interest because the first payment to the bank, the one that is always paid at the closing table, is always interest only- no principle. Banks are authorized, only on the first payment, to collect interest ahead of time to the end of the month.

Banks cannot collect any interest unless they have earned it. Which means that all payments after the first "interest only" payment, are paid backwards. The reason for this paying back is because borrowers will start using the money hence banks start earning the interest as the month ticks off. Once the month ticks off, the lender sends a coupon for the month that was just used.

Why is the bank allowed to collect the first payment in advance? This grace period is given to banks so that they can their administrative and loan servicing roles. Loan servicing, is the process of managing and collecting payments.

If Mary closes her loan on the 15th, she will pay all the interest forward (unearned yet by the bank) from the 15th to the end of the month. Stay with me... she has paid the interest forward to the end of the month, now the loan converts to the normal process of paying backwards. Does she have to pay for February on the 1st of February? No, because now the bank has to earn the interest and send a coupon for the month earned. Mary's first payment will be due March 1 paid back for all of February.

Remember, the first payment is always paid forward, and all the other payments are paid back. Whether the loan closes on the 1st, 2nd, 10th, 15th, 28th or 29th it is paid to the end of the month. If it closes on the 29th, then Mary owes two days interest. If it closes on the 1st, Mary owes 30 days interest.

People like to close their loans at the end of the month, so that their closing costs, reflected through less days of prepaid interest, are lower.

Closing costs saved by paying the prepaid interest at the end of the month are important if someone is low on savings- closing at the end of the month is cheaper. However, closing at the end of the month is also riskier because "everyone" is trying to close at the end of the month, and delays do happen.

Usually most closing entities are going nuts in the last five days of the month. If you can avoid closing at the end of the month do so. Try closing between the 15th and the 25th for less anxiety.

U.S States with the Most Subprime Loans

2006 data on States with the most subprime mortgage loans as a ratio of total mortgage loans.

Property Tax Escrowing or Impounding - Who Pays What?

Prorations are a common concern among real estate buyers and refinancers. When a new real estate buyer comes onto record during a new home purchase loan, or when a new refinance loan is established through a mortgage refinance, what happens to the taxes that have been paid? Who pays the taxes that are due?

These and other important costs should all be accurately itemized by the closing agent, on the Settlement Statement/HUD-1. The Settlement Statement also known as the HUD-1 is a detailed accounting of how the money in the transaction was spent. Borrowers should carefully read their HUD-1's.

If the transaction pertains to a purchase mortgage loan, the taxes can be prorated in two ways. The first method which is common in many of the western states, is the equal division of taxes to the day of closing. The seller is paid by the buyer for what the seller paid ahead of time to the tax collector. For example: Taxes were paid for the first half of the year (6 months) on February 1st for the months from January 1 to June 31. The property transfers ownership on February 28th. The Seller will be credited at close for all the days the seller paid in advance from March 1 to June 31. The buyer will pay the sellers for these days at closing, which will bring the closing costs UP for the buyers and give the sellers a little extra money at close as a pay back for prepaid taxes.

Another way taxes are prorated occurs in states like Illinois where a buyer is given full credit at closing for the taxes and is expected to pay the entire sellers portion when it comes due in the next cycle ( are your eyes glazing over?) Example: The buyer purchases a home for $265,000 and the Settlement Statement shows a value of $258,000 owed by the buyer. Setting aside other costs, what this tells the buyer is that when the tax bill comes due, the buyer will owe the tax man $7000 plus the balance of what the buyer owes for the period of the buyers ownership. Its fun to see the lower purchase price on the HUD-1 but the tax bill can be shocking when it comes due.

Most lenders will require a borrower to pay an upfront amount in advance to establish a reserve account for taxes. This reserve account is also known as "impounds" or "escrowing" depending on which state the property is located. If a borrower takes a new loan from a lender, the lender will charge the required amount to insure that a proper amount of cash reserves is available when taxes are due.

In cases of refinances, the borrower's original lender may not disclose how much money the borrowers are getting back from the original "escrow" account. In this case Lender 1 needs to send a check to the borrowers after close. The borrowers may have to go back to their records and do some calculations as to how much they are owed.

Almost everyone feels dumb when asking about proration's even professionals that have been in the business for years. Don't let your loan officer, Realtor or closer make you feel like you are asking a dumb question. If they do, then they are being careless or don't know the answer and are trying to cover up with the rush rush. Most closers need to be able to explain exactly how money is dispersed.

Don't forget, you can have the seller pay a portion of your closing costs. It's perfectly fine and very common these days.

Senator Dodd Stops TARP Accountability Amendment Introduced by Rep. Tim Walz

On January 13th Congressman Tim Walz from Minnesota introduced an amendment to establish additional public accountability methods for TARP funds. As most of us have come to realize, the first half of TARP (350 billion dollars worth) have gone pretty much unaccounted for since being released. Yes, there is no "public" record of how the funds were used and no clear disclosure has been forthcoming from the Fed or the banks that have received the money.

These are YOUR hard earned taxpayer dollars being blindly given to some of the worlds worst run financial enterprises. 

It seems, because of Senate Banking Chair Christopher Dodd's efforts to NOT allow the amendment to be introduced to the Senate, the 2nd installment of the 350 billion dollars is also going to be released again with little to no public accountability. Thanks to Dodd's efforts, we still won't know how or where the money is being spent. 

Senator Dodd has routinely been a central figure in the banking crisis. 

Senator Dodd's contact information:

FHA 5 Year Fixed Program

If you are a first time home buyer and think that you may want to sell and upgrade in 5 or 6 years, then this program is worth taking a serious look at.

FHA undoubtedly offers some of the best and safest programs on the market, and they offer much more than the standard 30 year fixed.  

What is an FHA 5 year fixed? This loan is a 30 year amortization loan payment that remains fixed at around 4.25% (today's rate) for the first 5 years. The loan is about 1% lower than a regular 30 year fixed and can save a home buyer or home owner about $180 a month on a $250,000 loan.

After the 5th year the rate can go up 1% per year: 4.25% (1st -5th year), 5.25% (6th year), 6.25% (7th year), 7.25% (8th year), etc.. capping at 9.25%.

The max increase is capped at 5% above the start rate. Example: 4.25% (start rate) + 5% (cap) = 9.25% (max capped rate). Sounds like a high rate right? Totally irrelevant if the buyer is going to sell in 5 or 6 years OR can't qualify for the 30 year fixed payment due to current tight debt to income ratio requirements for borrowers. Every dollar may count when qualifying.

VERY IMPORTANT NOTE: FHA allows FHA borrowers to "streamline" refinance without an appraisal or credit report if they are changing from one FHA loan program to another if the switch materially benefits the borrower. Why not start at a 5 year fixed to qualify for the loan and streamline refinance into a 30 year fixed after the transaction closes? Streamlines don't require the borrower to "requalify" for the loan.

Is $180 savings a lot? For some first time home buyers or current home owners it may be the difference between an approval or a decline.

Mortgage Rates Now a-la-carte

Mortgage rates have gotten sliced and diced in very narrow catagories and credit score ranges. Last year we were able to pool 700 ficos with 650.. this doesn't hold true any longer. I've included the MAIN FANNIE MAE AND FREDDIE MAC matrix below for what we as mortgage lenders have to look at before we price a loan. There is also matrices for cash-out refinances, condo's, investment properties and 2nd homes.

Don't expect any of the mortgage rates you see in the paper or online to hold true. The mortgage rates you see online are "base" rates and are only offered to a very small percentage of the population with the highest credits scores and largest down payments.

With declining property values, high loan defaults and lower credit scores so common now you will be better served working with a mortgage person you can first trust and one that has access to many lenders. Access to many lenders will help you find the right rate and approval for your particular needs.

As you can see on the below matrix 720 credit scores with lots of equity home owners are getting the best rates. This matrix applies to conventional loans only not FHA or VA loans. FHA and VA loans offer there own risk based adjustments. Guideline changes have been almost non stop since the end of 2007 due to the disrupted nature of mortgage lending.

Below adjustments are strictly for addtional points added for risk based add-ons. 1 point equals 1% of the loan amount. EX: 1 point for a $100,000 loan is $1,000, 2 points for a $100,000 loan is $2,000, and so on.

A borrower that doesn't want to pay risk based 'points' can typically increase their rate to absorb points. It usually costs a .25% increase in rate to eliminate 1 point.

Example: .25% increase in rate may eliminate a 1 point charge, .50% in rate may eliminate a 2 point charge. A 5.0% rate may have a 2 point charge or the client may pay 5.5% rate with 0 points.

The below risk based point adds are national guidelines that apply to all conventional mortgage lenders. Some lenders can add on their own additional "regional" risk premiums.

Clients can choose to incur the below addtional points or a higher rate to offset any additional points that must be charged due to additional risk.  

FHA 203k and 203ks : Rehabing a Home

FHA offers two programs for borrowers that would like to buy a home, or refinance a home, and simultaneously acquire the money needed to complete a home improvement project, major or minor project. The two programs are known as the 203k and the 203ks. 

Need a new roof, kitchen, furnace, air conditioning, septic, well, flooring, paint, appliances, mold remediation, fix up a shabby foreclosure, upgrade a bank owned purchase, maybe you want to add a bedroom room or two? Yes you can with the two best purchase/rehab programs on the market: the FHA 203k and ks programs.

The 203k will allow borrowers to complete major renovations up to the maximum FHA lending limits for the particular county. Example: I purchase a home that needs to be demolished and rebuilt. I purchase the home for $50,000 in McHenry Illinois and the project needs $300,000 to complete. I can receive via the FHA program the full $350,000 less downpayment and closing costs at todays rate of 6.00% to complete the entire project.

The 203ks allows borrowers to make less complicated projects a reality. The FHA 203ks offers the home owner or purchaser up to $35,000 to fix up the home the way they like it and not have to come up with additional money after transaction close to complete the task. Example: I purchase a home for $250,000 in Chicago Illinois and need $35,000 for hardwood floors and a roof. I can receive $285,000 less downpayment and closing costs to complete my project. 

The genesis of these programs was the 80's when there were so many foreclosures on the market and HUD needed a way to "bring up" properties in the hardest hit area's. At that time these loans were offered to investors, but no longer. They worked so well HUD kept offering them. These programs allow home owners to beautify their homes while renewing neighborhoods. Its a win win for everyone.

Both programs are simply fantastic and you can view my 203ks PowerPoint presentation to learn more at: www.realestateloans.com/203ks.ppt

More info at HUD

In my opinion these two programs are in the top five all time greatest loans. Call me an I can walk you through the steps to qualifying, writing up and obtaining this loan.

Changes in Appraisals Starting May 1, 2009

Freddie Mac and Fannie Mae, starting May 1, 2009, will start implementing a change in the way appraisals must be ordered if the loan is to be funded by one of the above entities. FHA and VA appraisals are not subject to the new rule. There will be a short "feedback" cycle I believe ending Feb 1 but don't expect too much deviation from the tentative terms. 

No longer can a third party originator or real estate agent order an appraisal directly from the appraiser. This move was initiated by the two agencies ( Freddie Mac first, Fannie soon to follow ) to reduce the influence that an ordering party may have on coercing valuations.

Will appraisal turn times and service be negatively impacted? Will the cost of the appraisal increase due to increase in oversight? Will customers needlessly pay for appraisals because of untrained loan officers not having access to Pre-Comps? Will loan declines increase due to overly conservative BANK valuations or possibly due to appraisers not making an genuine effort?

PROBABLY, but we won't know until year end what the effects of this rulling will be. Anything that cleans up the system and the process, I'm 110% for. It does seem however that occasionally certain rules created to regulate can go against what's ultimately good for the consumer. Jury is out at this time. Stay tuned.

NOTE: FHA underwriting starting January 1, 2009 requires two appraisals for cash out refinances above the 85% loan to value. A first for FHA.

FHA : Buying 2, 3 or 4 Unit Properties

Units are a great way to start for home buyers, especially first time buyers that don't mind rolling up their sleeves to manage a few tenants. In my opinion, FHA offers the best 2, 3 and 4 unit mortgage program on the market.

Buyers too often tell me, when I offer the opportunity, that they don't want to have rentals. Most of the time it's their first home and they are nervous about getting in over their heads with "stuff" to manage. I sometimes do however get a call after my buyers have bought their first home asking if they can buy an invesment property now.

The reason I recommend buying a 2, 3 or 4 unit property as your FIRST property is due to financing availabilty. FHA will allow a first time buyer to buy their first home as UNITS. FHA won't allow this same buyer to buy a multi unit after they have purchased a single family home. There are exceptions to the rule but its a difficult rule to overcome.

FHA is not a loan program that you can use to build an investment portfolio. You shouldn't and I won't tell the underwriter that you want to move from the comfort of a single family home and occupy a 4 unit building with tenants. Does that really make practical sense? Yes, in some cases it might but most often its a ploy to buy an investment property under the guise of owner occupied parameters ( lower down and lower rates ).

Too many "investotrs" try to pull this one over on me and the underwriters. Some underwriters in the past turned a blind eye because they would be bullied by the loan officer but thankfully this is less so the case now that the market got its reality check.

If you are looking to buy a home soon, consider using FHA first to purchase 2-4 units. Live in the units for as long as you can stand it, then buy a single family property using another owner occupied loan program. You can buy the units with a low down payment and then when it makes practical sense buy a single family home as an owner occupied. This is the proper way to paramid up the ownership ladder.

Your Illinois FHA broker 

FHA loan limits for McHenry County Illinois