The Lending Coach

Coaching and teaching - many through the mortgage process and others on the field

Category: Refinance (page 2 of 4)

Is A Jumbo Mortgage Better Than A Conforming Home Loan?

What Is A “Jumbo” Mortgage?

A “jumbo” mortgage is a loan that larger than the current conforming  guidelines established by Fannie Mae or Freddie Mac. Today, a mortgage that exceeds $424,100 is considered “non-conforming.”

So, when you finance expensive property, you need a jumbo mortgage. Interestingly, the borrower has to play by different rules, because mortgages for high-priced homes are not necessarily standardized.

Jumbo Mortgages: They Are Back

During the mortgage crisis a number of years ago, jumbo loans all but vanished. The ones that remained came with guidelines that were nearly impossible for homeowners to meet.

Jumbo loans generally meant high down payments, higher interest rates, and high credit standards – which made these loans essentially obsolete.

But as the real estate market steadily recovered, jumbo loans have been re-entering the lending landscape.

In fact, homebuyers in the market for a larger loan may be pleasantly surprised to know that jumbo mortgage rates are nearly as low as conforming rates.

Source: The Mortgage Reports

Conforming Rates vs. Jumbo Mortgage Rates

Years ago, the difference between conforming mortgage rates and jumbo rates ranged between half a point to two full points.

These days, however, the spread between jumbo rates and conforming rates is minimal – sometimes as little as 1/10th of a percent, according to a number of surveys out in the marketplace.

Look At Jumbo ARMs

Adjustable rate mortgages can be over one percent lower than fixed-rate jumbo loans. For borrowers with larger loans, ARMs are popular alternatives.

That’s because with bigger balances, the effect of a lower interest rate on what you pay each month is more pronounced.

In addition, jumbo ARM rates can sometimes be lower than their conforming counterparts.

Many jumbo ARMS are not sold to investors, but are instead held by lenders on their own books. These “portfolio” mortgages can be made according to whatever guidelines and pricing the lenders establish.

The market is much less homogeneous, and the smart shopper can often find a bargain with a lender trying to expand its market share or build up its pipeline.

Jumbo ARMs come with introductory periods in which their rates are fixed. You can find loans fixed for three, five, seven, or ten years.

If you don’t keep your mortgage for more than the introductory period, you’ll never even have to deal with rate adjustments. And interestingly, most borrowers don’t hold on to those mortgages for more than 7 years.

Compare and Shop Jumbo Mortgage Rates

Unlike conforming mortgage rates, which typically differ by .25 to .5 percent between competitors, jumbo mortgage rates can vary largely from one lender to the next.

Jumbo lenders can serve different markets — alternative documentation, non-prime, unorthodox properties, or borrowers with big down payments and perfect credit — and that affects the rates charged.

This means that when conforming mortgage rates are higher, jumbo rates don’t necessarily follow that the same path.

It definitely pays to shop and compare.

Unlike smaller mortgage loans, a half percent difference in the interest rate on a $700,000 loan amount can add up over time.

  • $700,000 at 4.375% = $3,495
  • $700,000 at 4.875% = $3,704

The difference between these two scenarios adds up fast. Over five years, $209 per month saves over $12,500.

Let’s Talk

If you are interested, please do reach out to talk in further detail about jumbo mortgage products.  It would be my pleasure to help!

The views expressed are my own and do not necessarily reflect those of American Financial Network, Inc.

 

5 Ways to Raise Your Credit Score Today

fico

I receive questions all the time regarding the credit scoring system, the FICO score, and how to improve those scores.

Not only can improving your FICO credit score improve your chances of obtaining a mortgage, but it could improve your auto insurance premiums and, possibly, make you a more attractive employment candidate.

FICO scores range from 300 to 850 – and mortgage applicants get the best mortgage rates and terms when their FICO scores are 720 or higher.

For borrowers of all FICO scores, the best way to improve your credit rating is to understand the factors that make up your FICO score, and to take the right actions that can make a positive impact on your score.

Find out more here from The Mortgage Reports and Britt Scearce

What’s Included In Your FICO Score

The FICO credit score takes into account a combination of all of the information found in your credit report.washingtonpostwordle

Your FICO score is made up of the following:

  • Payment History: 35% of your overall FICO
  • Total Amounts Owed: 30% of your overall FICO
  • Length of Credit History: 15% of your overall FICO
  • New Credit: 10% of your overall FICO
  • Type of Credit in Use: 10% of your overall FICO

To find out what is impacting your FICO score you will want to review your credit reports.  You can obtain a free copy of your credit report from each of the three main credit reporting agencies — Equifax, TransUnion, and Experian — at www.annualcreditreport.com.

Your scores are generated based on a snapshot of the information on your credit report as of the particular moment that the report is pulled. Correcting errors is crucial, therefore, to ensure the highest possible FICO score.

Here are things you can do in the short term to improve your score:

1. Verify your accounts are current

“Payment History” makes the largest impact on your FICO score at 35% of your overall score. It is vital, therefore, that you keep current on all of the accounts reporting to your credit report.

When reviewing your credit report, should you find any accounts that are past due, catch them up as soon as possible and pay at least the minimum payment required by the due date.

2. Dispute your inaccuracies

Should you detect any errors on your credit report, you will want to request a correction as quickly as possible.  In order to make a correction, use the information on your report to contact the credit bureaus, and also the creditors which provided the erroneous data to the bureaus.  Getting even one late payment removed from your credit report can improve your FICO score dramatically.

piggybank-house3. Ask for a little grace

Sometimes, a creditor may be willing to “help you out”.  In cases where you make a relatively small slip-up, with a creditor you’ve never been late with, you can sometimes get a late-payment waived.  It’s always a good idea to make a phone call and to ask for a little grace.  This works best if you catch the delinquency early and bring the account current right away.

There are many examples of creditors removing a late payment from your credit report if there’s a legitimate story behind what happened, and if you can explain what steps you’ve taken to avoid a repeat occurrence.

4. Settle up collections, charge-offs, judgments and liens

Old collection items, credit card charge-offs, and judgments and liens can hurt your FICO score, too. If you’ve got any of these on your credit report, it’s time to contact your creditors and collection agencies and to settle up one-at-a-time.

In many cases, you can negotiate with your creditors to remove a trade line completely in exchange for settling an account for its full balance. You need to call your credits first, however, to find out.

5. Improve your debt utilization ratio

Another way to improve your FICO is to improve your “amounts owed”, or debt utilization ratio.  Debt utilization makes up 30% of your FICO credit score.  This is a measure of how much you money you owe to creditors as compared to how much credit is available to you.  The FICO scoring model takes into account the utilization of each individual credit account; and the utilization of all of your credit accounts combined.Cool bulbs

For example, if you have five credit cards, each with a $2,000 limit, you have a total $10,000 available credit over all five accounts. If you carry a $1,000 balance on one of the five accounts, you would have a 50% utilization on one card and a 10% utilization over all of your credit.

In general, debt utilization of 30% of less is good for FICO scores. Utilization over 30% is often bad.

Now that you are armed with this – get to work and see what you can accomplish to improve that score.  Give me a call, as I’d be more than happy to coach you through this process, as well!

Mortgage Approval After One Year of Self-Employment?

one-year

Self-employed mortgage applicants must prove stability of employment and income, usually going back two years.  This is a bit tougher than it is for regular salaried employees.

Traditionally, mortgage lenders have required two years federal income tax returns in securing a mortgage for purchasing or refinancing real estate.  There’s been changes to the way mortgage lenders underwrite mortgage loans.

Fortunately, there is a way to use just one year of tax returns to qualify for a mortgage.  This can help newer business owners, as well as those who experienced a down year in the past.

Key ExchangeWhether you are looking to buy a home or refinance one, you may be able to qualify by showing only your most recent year of income.  Check out this article by The Mortgage Report’s Adam Lesner for more.

Getting Approved As A Self-Employed Applicant

Generally, a self-employed borrower is any individual who has 25% or greater ownership interest in a business.

According to conventional mortgage guidelines published by Fannie Mae, underwriters consider the following factors to approve a self-employed borrower.

  • The stability of the borrower’s income
  • The location and nature of the borrower’s business
  • The demand for the product or service
  • The financial strength of the business
  • The future outlook of the business

Two points stand out here when getting approved as a business owner: stability and consistency.

The way underwriters measure stability is by looking at length of history in that business specifically, and in that field.

They typically want to see a two-year history in the respective industry. This is where you may be granted an exception if you haven’t been self-employed the whole two years in that line of work.

Ask The Lender To Use Different Approval Software

In some cases, the underwriter won’t ask you to provide a full two years’ worth of tax returns.

Most applicants’ files are run through computerized underwriting systems, then verified by real person. The underwriting software, in some cases, will ask for the most recent year of tax returns only.

Freelancer-Finances-810x552The one-year requirement typically comes from “Loan Prospector,” which is Freddie Mac’s loan approval software. Fannie Mae’s version of the software is less likely to give you a one-year requirement. Most lenders can approve loans via Freddie Mac or Fannie Mae.

If you have been self-employed less than two years, ask your lender to try running your scenario through Loan Prospector. There’s a chance this system will require you to document less self-employment than would another system.

If you receive the reduced, one-year requirement, it’s important to understand that your tax return must reflect a full year of self-employment income.

For example, if you became self-employed in April 2017, that year’s tax returns are not going to reflect a full year.  If you started your business in November 2016, then your 2017 tax returns will demonstrate a full year of experience running your business.

Give your me a call to find out more – as there are multiple alternatives that we can examine!

Use Assets as Income in Loan Qualification

best-banks-for-mortgages-min

A little-known change in Freddie Mac’s rules could be a big help to qualifying retiring Baby Boomers and other savvy homebuyers who have limited incomes, but substantial financial assets, for a low-rate conforming, conventional mortgage.

Without a steady income, how do they qualify for a loan?  By utilizing assets as income, that’s how!

Loans backed by Fannie Mae and Freddie Mac — which means most loans issued these days — can use assets such as IRAs and 401(k)s to help applicants meet income requirements. The provision “lets you takeblue-roof-and-calc advantage of your holdings to a greater degree,” says Keith Gumbinger, vice-president of HSH Associates, which publishes mortgage information and rates.

How Does It Work?

Assets that can be counted under these rules include retirement accounts such as IRAs and 401(k)s, lump-sum retirement account distributions and annuities.

“The borrower must be fully vested, and the retirement assets must be in a retirement account that is immediately accessible,” says Brad German, a spokesman for Freddie Mac.  That means the money cannot be subject to an early-withdrawal penalty and cannot currently be used for income.

The formula takes 70% of qualifying assets, subtracts what will be needed for down payment and closing costs and divides the remainder by 360, the number of months in a standard loan, to arrive at a monthly income used to determine the applicants’ maximum payment and loan amount.

stick figure on cashHSH.com says, for example, that a borrower with $1 million in assets could count $700,000.  After taking out $10,000 for closing costs and dividing by 360, the borrower could show $1,917 in monthly income.

That, of course, is not enough for a gigantic loan.  But it could be very helpful if the borrower needed a relatively modest loan for the gap between the cost of a new home and the proceeds from selling an older one.  And Social Security, pension and other income sources could help the borrower get a bigger loan.

There are some catches, however.  To be counted, the assets, including interest earnings and dividends, cannot be used for current income, HSH says.

If you would like to find out more about utilizing your assets as income for your next home purchase or refinance, reach out to your mortgage lender for more details.

 

The views expressed are my own and do not necessarily reflect those of American Financial Network, Inc.

Cancel Your Mortgage Insurance – Right Now!

Home Mortgage Refinance

If you bought a house with a down payment of less than 20%, your lender required you to buy mortgage insurance. The same goes if you refinanced with less than 20% equity.

Private mortgage insurance is expensive, and you can remove it after you have met some conditions.

How to get rid of PMI

To remove PMI, or private mortgage insurance, you must have at least 20% equity in the home. You may ask the lender to cancel PMI when you have paid down the mortgage balance to 80% of the home’s original appraised value.

The process to do so is straightforward.  Get an estimate of value from a local real estate agent or loan officer.  Online home valuation websites can be inaccurate, so be careful with those.palmgraph

See if you have around 20% equity based on your home’s estimated value.  Be sure to add closing costs onto your existing loan balance if you do not wish to pay them out of pocket.

Then, reach out to your lender and begin the refinance process!

Refinancing to get out of PMI

When mortgage rates are near record lows, as they are now, refinancing can allow you not only to get rid of PMI, but you can reduce your monthly interest payments. It’s a double-whammy of savings.

RefinanceThe refinancing tactic works if your home has gained substantial value since the last time you got a mortgage. Let’s say you bought your house 3 years ago for $100,000, and you borrowed $90,000. That means you have a loan-to-value ratio of 90%, and you pay for PMI.

Three years later, you’ve made all your payments and you have chipped away at the loan balance. Now you owe $85,000. And your home’s value has gone up — now it can be appraised at $112,000. Its value has grown 4% a year.

At this point, you owe $85,000 on a $112,000 house. This means you owe 76% of the home’s value — well under the 80% loan to value that triggers the need for mortgage insurance. Under these circumstances, you can refinance intfha-mipo a new loan without having to pay for PMI.

Here’s a great piece from Craig Berry at the Mortgage Reports for those who have FHA loans and are paying mortgage insurance (MIP). He outlines the benefits of the FHA loan – and examines why right now is a great time to move to a conventional loan.

Now is the time

With rates near historic lows and home values rising consistently, now is a fantastic time to look at refinancing away that PMI.  I’d be happy to sit down with you and talk about alternatives and programs that could fit you needs!

 

The views expressed are my own and do not necessarily reflect those of American Financial Network, Inc.

Closing Timeframes Continue to Lengthen

spiral-clock

Since the implementation of the Consumer Financial Protection Bureau’s TILA-RESPA Integrated Disclosures rule last October, continuing evidence shows the impact of TRID in lengthening the time to close real estate transactions.  Both purchase and refinances have been severely impacted by these new regulations.

Now, a report from Ellie Mae shows more statistical evidence on how deeply the impact of TRID is being felt, with the time to close a mortgage loan climbing yet again.  Additionally, 2016’s average time to close a loan is 10 days longer than just one year ago in 2015, when the average time to close a loan was 40 days.

If you find 50 day closes unacceptable (as I do), please reach out to me so we can get your customer in their new home sooner rather than later!  Take advantage of Equity Prime’s 30-day On-Time Closing Guarantee.

The gist of TRID is that mortgage lenders must send particular paperwork to mortgage borrowers 72 houRealtor Guarantee 3-1-2016 (2)rs prior to closing, and that changes to any of the documents require a re-disclosure of said terms and another 72-hour waiting period.

Since October 2015, then, closings have had an additional 3 days tacked on; a government-mandated delay affecting all closed loans.  But Equity Prime is still holding to it’s 30 day on-time closing guarantee!

The faster you can close on a mortgage, the lower the mortgage interest rate can be and the faster your client gets into their new home! Know the steps in a mortgage approval, and where you cut time and corners to get to closing quicker.

Source: The Mortgage Reports

The Bank Statement Mortgage – A Great Option

Borrowers that have incomes that are less documented have a much more difficult time qualifying for a traditional home loan.  In general, self-employed borrowers or those who write off 2106 un-reimbursed expenses will be the most likely to benefit from the bank statement program.  These programs can be used for a primary residence, a second home or an investment property.

“Bank Statement loans are designed specifically for the self-employed and others whose tax returns and employment history may not adequately express their financial viability”

As its name would suggest, the concept is predicated on providing evidence of future payment ability, in the form of bank statements from the past 12 to 24 months. These can serve as the means for a down payment, in addition to taking the place of a traditional employment history for the years of W -2 forms typically required of buyers during the application process. Freelancer-Finances-810x552

The bank statement program is designed to alleviate this shortfall of standard documentation.  We will determine an applicant’s ability to repay based on a more pragmatic, case-by-case approach.

Bank Statement Program Verification

Lenders may allow the use of personal or business bank statements to support a self-employed borrower’s income for qualification purposes. The documentation provided needs to document that the income is stable, likely to continue and sufficient to enable the borrower to repay the debt.

The income presented must be reasonable for the profession or type of business.  In addition, when using business bank statements to support the borrower’s income, the nature and structure of business must be evaluated to determine if the applied expense assumptions are reasonable.

The borrower’s business may be a sole proprietorship, a partnership (general or limited), or a corporation. They may also receive income documented by Form 1099, or filed on a Schedule C.

Borrower must have been in the same line of work or own the same business for two years. Self-employed borrowers must be able to document by a neutral third-party that the business has been in operation for the last two years and that they have had ownership for that period of time. Third-party verification generally includes:

  • A letter from a certified public accountant (CPA)
  • A letter from a regulatory agency or professional organization
  • Copy of business license

stick figure on cashBorrowers that are employed by the seller, property seller, realtor, or receive foreign income are ineligible.

Income Documentation Requirements

The Borrower’s application must include all sources and amounts of income. The bank statements must support income listed on the application.  Deposits from income sources that are not reflected on the 1003 or those not needed to qualify will not be included in the qualifying income calculation.

Income sources separate from self-employment must be verified. Examples of verification include social security letter, employment verification, or divorce decree. If tax returns are provided for the borrower using bank statements to support their income, the loan must be fully documented.

Income may be documented by either personal or business bank statements. However, the co-mingling of personal and business or multiple business accounts is prohibited. If multiple accounts are used to show income and reserves, documentation must be provided to show evidence that the funds are separate and distinct.

Here are a few of the key features of this type of loan:

  • Up to 45 percent debt-to-income ratio
  • 5/1 & 7/1 adjustable-rate mortgage options
  • Loan-to-value ratios of up to 75 percent
  • Cash-out options of up to $350,000 for a primary residence
  • Loan amounts of up to $2 million

While the bank statement program is truly unique, there are signs the rest of the mortgage market is catching up to the evolution. These types of transactions are becoming more and more common – and for good reason!

 

What is APR….and is it all that important?

Mortgage-APR-Is-Most-Often-Inaccurate

There is a lot of regulation around APR and home mortgages – and anything with this much regulation must be important, right?  Lenders and loan officers spend a lot of time calculating, managing, and disclosing APR.  It is a big part of everyday life in the lending industry.

Candidly, APR is confusing and hard to understand.  I have heard it called many things – average percentage rate, about percentage rate, approximate percentage rates…for the record it is Annual Percentage Rate, so let’s clear up some of the confusion.

Source: The Mortgage Reports

What is APR and is it all that important?

APR (annual percentage rate) is the interest rate plus the costs associated with the loan.  This mysterious number is intended to give an apples to apples comparison between two different loans.  

Theoretically, if the consumer compares the APR of two loans, the loan with the lowest annual percentage rate is naturally the best loan for the consumer.  APR is designed to protect consumes from hidden costs, bait & switch, and deceptive marketing schemes which have been used in this industry.

Equity Prime - Michael NelsonHang On A Minute – Does APR Tell the Whole Story All Of The Time?

APR is certainly helpful and an important part of the lending process.  However, loans are complex and ultimately one number alone does not automatically find the best loan for a particular borrower.  Please do check out the article I have attached with this post that details  APR – the good and the bad.  APR is a complex calculation with many variables. If these variables are not exactly the same between loans, the loans are not apples to apples comparisons.

Remember, the borrower must look at a refinance or purchase of a new home relative to their particular needs.  The borrower’s debt, savings, down payment, anticipated time in a home, family, etc all play an important part in selecting the right mortgage.  While APR is important, one number can’t take into account all the variations and nuances in the life of a borrower.

APR Michael NelsonEquity PrimeWe Need to Help Our Customers Understand Hard Concepts!

I have said this before and it is worth repeating – lenders (such as myself) and real estate agents must  educate clients on  appropriate real estate and lending options.  If you are a borrower – make sure you have the right professionals supporting your real estate needs.  The right professionals care about your needs and take the time to do the research required to recommend the correct products.

A big thanks to my friend and colleague, Mike Nelson, for really bringing together the key pieces of APR!

Discount Points & Mortgages: Good idea or wasted money?

Approved-Mortgage

My good friend and colleague, Mike Nelson, has put together a fantastic piece on understanding the pros and cons of paying discount “points” or fees to obtain a lower interest rate.  I’ll warn you, this is some real “inside baseball” type of stuff (and as Mike states, “I recommend this blog and a smart phone as you try to go to sleep…if you have insomnia”), but he does a fantastic job of highlighting the key reasons to either buy down your rate, or not.

Source – Mike Nelson’s Efficient Selling Blog

Let’s start at the beginning – with a definition.  This definition comes to us from Investopedia along with an article they penned on the topic.

Discount points are a type of fee mortgage borrowers can purchase that lowers the amount of interest they will have to pay on subsequent payments. Each point generally costs 1% of the total loan amount and depending on the borrower, each point lowers your interest rate by one-eighth to one one-quarter of your interest rate. Discount points are tax deductible in the year in which they are paid.

How long the customer stays in the house or re-finances ultimately determines if a discount is worth the cost!

Most borrowers and lenders will immediately conduct a break-even analysis to determine the benefit of the discount.  In Mike’s example, the $10 difference in monthly payment is recouped in 100 months, or 8.4 years.  The borrower then considers how long they will live in the house – if it’s more than 8 years, the discount seems like a good deal.  Do click on Mike’s link to find out more.

The average 30 year mortgage in the US is refinanced every 7 years.

So what is the conclusion?

Generally, if the borrower believes they will be in the house more than 10 years they should give strong consideration to paying the discount on the rate with cash and not financing into the mortgage.  After 10 to 15 years the discounted interest rate is generally better for the borrower.  Interestingly, however, the average loan is refinanced every 7 years, so take that into consideration, as well!

One other thing to factor in, are the tax ramifications to the mortgage.  It’s important to consult with a financial advisor or CPA for the complete tax implications.

Work with a lender who can do the math!

If you are working with a lender that does not understand these concepts, you are working with the wrong lender!  It’s the responsibility of the lender to calculate the implications of discounts and pass that on to you.

Finally, remember this: lenders are not giving discounts because they save you money at their expense.  The lenders (or at least the one’s who are doing it right) are doing sophisticated calculations determining the risk of discounting rates over the lifespan of an entire portfolio of loans.  Lenders will price accordingly – just make sure you as a borrower have don the analysis to know which scenario is best for your situation!

 

No, You Don’t Need 20% Down….Or Even Close To It

down_payment

Years ago, conventional wisdom said potential home buyers should make a down-payment of 20 percent.

Doing so, the logic went, would help them secure a great interest rate and make monthly mortgage payments less costly.  These lower payments would help home buyers afford the expenses of home ownership — from closing costs to homeowner’s insurance to emergency funds.

But 20 percent down proved too large a hurdle for many potential homeowners as housing prices rose in the 1990s and beyond.

Today, large down-payments are nothing more than suggestions.

Source: The Mortgage Reports – Barbara Ballinger

Today, down-payment options from zero to 15% are completely reshaping the way people buy homes, especially first-timminimum-down-paymente home buyers.  Regardless of financial status, age, background, or nationality, home buyers are learning how to make a down-payment that suits their needs. They are no longer worried about adhering to outdated ideas about a “normal” down-payment.

There are equally good reasons for you to make a much smaller down-payment. By doing so, you retain available cash in the bank for emergencies, expenses, and other financial goals.

Conserve cash:  Many say that “cash is king”.  Experienced investors want to protect what they have and use the extra income to invest in other projects or the market.

Pay off debt: Many lenders advise using available cash first to pay off credit card debt. That debt is calculated at a higher interest rate than a mortgage and doesn’t offer the same tax deduction.

With debt paid off or lowered, you’re also likely to see your credit score climb. You need a minimum of between 640 and 680 to secure the most reasonable loan rates. Improve your score and hit 740, and you’ll secure an even better rate.

Tackle repairs: Having cash on hand will allow you to make essential repairs and upgrades. Few homes are so perfect that you move in without wanting to do some work.

piggy-bank-cashSet aside for an emergency:  Emergency funds are important to cover unforeseen repairs or other non-home related issues. If your car breaks down or furnace goes out, it’s better to have cash on hand rather than finance repairs with a credit card. That can lead to higher expenses later.

You can find the complete article here…..

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