Archive for September, 2008
FHA Update: Down Payment And Mortgage Insurance
Posted by Kevin Kueneke | Currently 1 Comment »
We finally have some clarification regarding the effective dates of the new Federal Housing Administration (FHA) down payment requirement as well as the new FHA Upfront and Monthly Mortgage Insurance Premiums.
As many of you will remember, FHA is increasing their minimum investment from the buyer from 3.0% to 3.5%. There were rumors that this was going to be effective October 1st, 2008. We now know that January 1, 2009, is the effective date for the down payment increase. 
FHA mortgage insurance, on the other hand, is changing effective October 1, 2008.
For purchase transactions, FHA has both a onetime upfront mortgage insurance premium (UFMIP) as well as monthly mortgage insurance (MIP), except for loan terms less than 15 years combined with a down payment of 10% or more.
The following is a breakdown of the new mortgage insurance for purchase money transactions with FHA case numbers assigned on or after October 1, 2008:
Loan Term > 15 Years
Loan to Value Upfront Premium Monthly Rate
<=95.00% 1.75 0.500
> 95.00% 1.75 0.550
Loan Term < 15 Years
Loan to Value Upfront Premium Monthly Rate
<=90.00% 1.75 None
> 90.00% 1.75 0.250
So how do these changes affect the typical home buyer? Most FHA loans fall into the category of less than 5% down payment and a loan term greater than 15 years. This makes sense since most first-time home buyers are looking for the least amount of down payment and the lowest monthly payment.
The old upfront premium was 1.5% of the base loan amount (base loan calculated using sales price minus down payment for this example, the actual calculation is slightly more complicated), and the old monthly insurance amount was 0.50% of the base loan amount divided by twelve months. Let’s look at a property with a sales price of $350,000:
Base Loan Amount: $339,500
Old Monthly Mortgage Insurance: $141.46
New Monthly Mortgage Insurance: $155.62
Difference of roughly $14.16 per month.
Old Upfront Mortgage Insurance Premium: $5,092.50 (of which $5,050 can be financed)
New Upfront Mortgage Insurance Premium: $5,941.25 (of which $5,900 can be financed)
If these amounts are financed, the difference in the payment at today’s 30 year fixed rate of 5.875% would be $5.03 per month. Add that to the slightly higher monthly mortgage insurance, and you are looking at just over $19 more per month with the new numbers.
An additional $19 per month is still relatively small considering FHA’s more lenient credit guidelines and down payment requirements. FHA is more strict though regarding the condition of the property versus typical conventional financing, helping to assure that the property is in a reasonable and safe condition.
With the new, higher FHA loan limits, FHA is taking more risk. As with any insurance whether it be auto, home, or mortgage, higher risk goes hand in hand with higher premiums. I think an extra $19 per month is worth paying to keep this program around.
Do you have a specific example you would like to discuss? Please feel free to call me at (760)500-1919 or email me: Kevin@MyCWMtg.com
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BEWARE! The Location of Property You Choose May Affect Your Loan Approval!
Posted by Paul Gonzales | Currently 1 Comment »
In a recent post I discussed how the type or character of property you select to purchase may affect your loan approval. You also need to be aware that in certain cases, the location of the property may limit, or even disqualify, the financing you were approved for. Here are some examples:
Are we there yet.....
Rural Properties
The issue here is that the more “rural” a property is with regard to location to employment and business opportunity, the smaller the resale market may be in the event the lender has to foreclose and sell the property down the road. Exactly what constitutes a property that is too rural for conventional financing is difficult to pin down and will vary from lender to lender. Just be aware that that cozy little home nestled in a private valley, adjacent to National Forest land and only an hour away from the nearest State highway may be a bit too rural for the lender you are approved with.
Second Home or Vacation Homes
A common lender guideline for defining a second home is a property that is at least 50 miles from your primary residence. Why? Simply because most people interested in buying investment property don’t want to drive 50 miles to fix a tenant’s plumbing problem on a Sunday afternoon. On the other hand, most people don’t feel like they have really gotten away from it all by driving from Escondido to Poway. The bottom line is that if the lender thinks you really intend to use the property as an investment you will need to qualify for investment financing.
Mello-Roos or Special Assessment Areas
These are neighborhoods that have special property taxes assessed against them, in addition to “standard” property taxes. Such special taxes are usually the result of bonds that have been issued by the city or local district to pay for civic improvements such as new schools, libraries, fire or police stations and other major improvements that serve the immediate area. The amount of additional tax is often not significant, perhaps $30 to $40 per year. However, some housing developments built in recent years can have hefty additional taxes or bond debt to pay. In a few cases, the total property taxes can be almost double the “standard” property taxes and can affect the amount of financing you can get, not to mention your monthly budget. Be sure to ask your real estate agent about this when focusing on a particular property.
Leased Land
Certain areas in Southern California are lands that have been leased by the original owners to builders and developers. An example are lands in the vicinity of Palm Springs, Palm Desert and Indio that belong to Native American tribes. In some cases these locations have been leased under ninety-nine year leases. The developers have built condominiums and other developments on these lands. Eventually, the land and any improvements (your condo, for example) could revert back to the original owners at the end of the lease term. Hence, lenders may be hesitant to lend on such a property. Generally speaking, you will be OK as long as the remaining term of the lease is longer than the term of the loan you are seeking. For example, if there are 65 years remaining on the underlying land-lease and you are seeking a 30-year loan, most lenders will consider such a deal.
There can be other location issues that may affect your financing options as well. Be sure to consult with your real estate or mortgage professional if you suspect that the location of a particular property might raise a lender concern.
call me for questions at (800) 775-7334 or email at paulforloans@aol.com
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WaMu Goes Down: Should You Be Surprised?
Posted by Kevin Kueneke | Leave A Comment »
It was announced Thursday evening that Washington Mutual was closed by the U.S government in what is the largest U.S. bank failure in history. The Federal Deposit Insurance Corp was named receiver and stated that “customers should expect business as usual on Friday, and all depositors are fully protected.”
I am not writing this post to discuss the details of the post-failure workings (please see this Yahoo! News article), and I do understand that WaMu’s failure is complicated. I just want to express my lack of surprise that WaMu failed from a loan officer’s standpoint.
WaMu was a leader in subprime originations and they were fortunate enough to weather the subprime storm of February, 2007, as long as they did. They had a separate subprime division with a separate name (Long Beach Mortgage) which probably helped protect them a little.
But WaMu’s real niche over the last several years was the negative amortization loan, aka, the Option Arm, which allows a borrower to make a minimum payment that might not cover the mortgage interest that is actually accruing thereby causing the mortgage balance to increase.
WaMu was obviously not the only lender offering these loans, but they were known for underwriting guidelines that were further outside of the box than most other lenders. They also loved very large option arm loans and were one of the last option arm lenders to offer stated income. Even though they seemed to have a fairly stringent appraisal review process, many bad underwriting decisions were made.
WaMu was not alone in the big option arm mess. Here are some other lenders that offered, and even pushed, the option arm loan:
· Bear Stearns had an appetite for very large, stated income option arms loans as well. They also offered No-Documentation option arms up to 90% loan to value. Bear merged with EMC, a subprime lender, in 2007. We all know what happened to Bear Stearns.
· World Savings built their business on the “Pick-a-Pay” loan, which was their name for the option arm. If the loan to value was 70% or less, then no income or assets were verified, not even the source. They referred to this as their Quick Qualifier. World Savings also allowed significantly lower credit scores than other lenders and more marginal credit. World Savings was purchased by Wachovia in 2007 and the poor performance of the Pick-A-Pay has since caused the closure of that division.
· IndyMac was recently taken over by the FDIC. They too had a large subprime division, but they also originated many stated income option arms.
· Countrywide was perhaps the largest originator of the option arm, especially stated income. At the time they were “saved” by BofA, 89% of the loans Countrywide originated in the previous year were no longer within their guidelines. Although many of these loans were considered subprime, many were stated income option arms. Little tidbit that is frequently overlooked…BofA actually offered an option arm for a brief time, but wisely chose to discontinue the program.
· Downey Savings has been rumored to be in trouble. They recently discontinued their Lite-Doc program and yesterday discontinued the last of their option arm products. They were always loose on income, but tough on property values.
What do these lenders have in common? Stated income option arms. Is anyone else left that offered these? Homecomings is gone. Greenpoint is gone. Bank United stopped lending in California. SouthStar allowed 100% financing, stated income, with an option arm 1st mortgage, no surprise they are gone. American Home Mortgage, the tenth largest lender in the nation at the time it folded in August of 2008, specialized in easy to qualify option arms, with minimum pay rates of 1% and note rates of 10%…how does that work?
Looks like the option arm really was too good to be true. And WaMu found out the hard way.
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A Change In A Buyer’s Expectations
Posted by Kevin Kueneke | Leave A Comment »
The home buying landscape is significantly different than this time last year. For those of us in the industry, this is obvious.
The media has mentioned this in countless articles and news broadcasts, but there are still many homeowners looking to buy a new home that expect to get the same loan they got when they purchased their last home. They expect, and in some cases demand, a No-Documentation loan or a No Income Verification loan with little money down. 
These loans were so easily attainable that many people forgot what “real” qualifying is like. Questions like, “What do you mean you want to see a paystub?” or, “My tax returns… you need every page?” are becoming quite common.
However, I had a very refreshing meeting the other day with a new client. Refreshing in the sense that the client understood that lending guidelines have actually changed over the last 12-18 months…but it took a little time for it to sink in.
We first spoke on the phone two weeks ago and at that time he was determined to buy a home that was outside of his full-documentation price range, but well within his “stated income” or “no doc” price range of years past. He is a 100% commission employee with significantly lower income than two years ago, and has about 15% down payment (he is selling his current home and is fortunate enough to have equity). However, his loan amount will still be over $417,000 (but under $697,500 - the current Agency Jumbo limit in San Diego County) and his once high credit scores are now considered average.
Two weeks ago, he sounded obviously frustrated by the fact that his No-Doc loan was no longer available. I explained that lending guidelines have changed since the last time he purchased a home and options are far more limited, especially with a down payment of less than 20%. He was still in the year 2006, the year where anyone with a pulse could qualify for a home loan.
He then left for a week-long family vacation. It took another few days for us to finally meet, during which time I encouraged him to call several other lenders, including his servicing lender. They all told him the same thing…lending has changed and banks are stricter than before and that his ocean view dream home is outside of his budget. But they forgot to tell him how much home he can afford. 
We ran the numbers and found that if he was willing to live a little further away from the ocean, that he could still afford a nice home. Nicer than what he has now but for less money. He even said that his current payments are a little steep and that he always thought it was strange that he was able to purchase his last home even though he did not have a job at the time.
If the mortage market had not crashed and his No-Doc loan was still available, this client admittedly would have purchased a more expensive, more unaffordable home like so many others have. Fortunately, he was forced to re-evaluate. He was forced to change his expectations. And he was willing to do so.
Any questions or comments? Please feel free to call me at (760)500-1919 or email me: Kevin@MyCWMtg.com
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