More Hurdles for Home Buyers

http://www.kiplinger.com/magazine/archives/more-hurdles-for-home-buyers.html?si=1

By Anne Kates Smith
From Kiplinger's Personal Finance magazine, May 2011

Uncle Sam is backing away from a big part of the home-loan business in a slow retreat that will ultimately make mortgages more expensive. The trade-off is that taxpayers won't bear the cost -- or not as much of it -- if the housing market implodes again. It will take years to wind down Fannie Mae and Freddie Mac, the infamous failed mortgage giants now in conservatorship. But we're already getting a taste of what life will be like without them. 

For decades, Fannie and Freddie formed a vast, secondary market for mortgage loans by standardizing terms, then packaging loans into securities that carried a payment guarantee. Investors who bought the securities provided cash for new mortgages. It worked well until home prices collapsed and Fannie and Freddie were undone by loans that turned out to have been too risky. So far, the government has provided more than $130 billion to honor their debt and loan guarantees.

In a rare instance of like-mindedness across the political spectrum, most everyone agrees that Fannie and Freddie have to go. For now, the aim is to shrink the market in government-backed loans by making them less attractive relative to still-scarce private-label loans. To that end, the limits on loans that Fannie and Freddie will guarantee are slated to fall to a maximum of $625,500 as of October 1, from $729,750 now, making loans more costly in expensive housing markets. Down-payment minimums are headed toward 10% (minimums are officially 3% now, although in practice today's borrowers pay more). Recently, Fannie and Freddie raised fees for most loans with terms longer than 15 years, even for borrowers with perfect credit scores and 25% equity.

The debate on how to restructure the mortgage market for the long term has just begun, and a number of proposals are on the table, including a trio from the Obama administration.

The first would privatize the mortgage market completely, except for Federal Housing Administration and other insurance programs aimed at low- and moderate-income borrowers. The second would add a government guarantee for mortgage securities that would be activated only in times of crisis. The third option -- the one gaining traction -- proposes that a group of private companies provide investors with guarantees on mortgage securities. Uncle Sam would provide re-insurance, with a guarantee that would kick in only after the first line of private guarantors was wiped out.

Depending on what replaces Fannie and Freddie, they may be sorely missed. Without them, rates would likely be at least a quarter of a percentage point higher, with investors demanding higher yields for loans with no implicit government guarantee. Similarly, lenders would likely demand larger down payments or better credit. The traditional 30-year fixed-rate loan might become a rarity (as it is outside the U.S.), and prepayment fees could come back, with banks or investors unwilling to bear the risk of rate fluctuations. Without the standardization of mortgages that Fannie and Freddie provide, borrowers could face an array of shifting terms and conditions. In that world, clear, readable mortgage disclosures would be more important than ever.

NOW HIRING: Experience Residential Mortgage Loan Officer

We are actively looking for experienced residential mortgage loan officers.  There are a lot of changes right now in the mortgage industry affecting loan officer pay.  Our compensation model is very good because we are a lender, independent and stable.

Dominion is poised to grow.  We actually have excess funding capacity.  Full in-house underwriting will be available soon – right here in Nazareth.

$100.00 (one hundred) will be paid to the person that refers us any loan officer that we hire. 

USDA Implementation of Annual Fee and Decreased Upfront Fee

Single Family Housing Guaranteed Loan Program Implementation of Annual Fee and Decreased Upfront Fee Effective October 1, 2011

Implementation of an annual fee of 0.30 percent of the outstanding principal balance will allow the Agency to reduce the up-front guarantee fee. Therefore, effective October 1, 2011, the up-front guarantee fee for purchase transactions will decrease from 3.5% to 2% for purchase loans. The up-front guaranteed fee for refinance loans transactions will remain at 1%.

Credit Score Hurdle Comes Under Fire

by Brian Collins (Origination News)

The National Community Reinvestment Coalition alleges that lenders are blocking blue-collar workers and minorities from getting Federal Housing Administration loans by erecting high credit score thresholds. But the industry has a message for the nonprofit: “We’re just trying to protect ourselves.”

The coalition of community groups recently filed fair lending complaints against 22 lenders with HUD, which promptly launched an investigation.

NCRC president and chief executive John Taylor said housing counselors were finding that they couldn’t help struggling borrowers get into affordable FHA loans because some lenders had drawn the line at a 620 or 640 credit score. (HUD only requires borrowers to have a 580 score to qualify for a low-downpayment FHA loan.)

So, NCRC initiated its own probe. These policies are preventing blue-collar people from applying for a FHA loan, Taylor said. “We are not going to tolerate that. That happens to be against the law,” he said.

But FHA lenders are under no obligation to rubberstamp loans if the borrower has a 580 credit score, according to Glen Corso, managing director of the Community Mortgage Banking Project. “FHA expects them to exercise their judgment and discretion,” he said.

Corso noted the FHA’s own figures show that loans with downpayments of less than 10% down and credit scores from 620 to 679 have an 8.6% default rate.

But FHA loans with credit scores between 580 and 619 have a 19.6% default rate. Some lenders consider that to be “too risky,” Corso said. Several CMBP members have been named in the NCRC complaints. And NCRC maintains it is investigating other lenders and may file more complaints.

Meanwhile, HUD was ready to launch its investigation the same day that NCRC filed its 22 complaints. “We thank NCRC for bringing these complaints to HUD,” said John Trasvina, HUD assistant secretary for fair lending and equal opportunity. “For lenders to deny responsible home seekers this source of credit, without regard for their capacity to repay the loans, would raise serious fair housing concerns and, if proven, undermine our nation’s recovery efforts,” Trasvina said.

Many lenders have raised their minimum score requirements to protect themselves from defaults and buyback risks.

They began raising their credit standards following the subprime meltdown in 2007 when the FHA still allowed borrowers with a 500 credit score to qualify for its government guaranteed loans.

If lenders continued to make those risky loans, the FHA “would be toast today,” said mortgage banking consultant Brian Chappelle. Currently, the FHA is in the black with a razor-thin 0.5% capital reserve.

Credit scores below 620 are considered to be in subprime territory by many in the industry. Even the FHA has tightened its credit underwriting standards over the past year. In October of this year it raised its downpayment requirement to 10% for borrowers with credit scores from 500 to 577. Borrowers with credit scores below 500 can no longer qualify for FHA-insured mortgages. (Qualified borrowers with a credit score of 580 and higher can still get a FHA loan with a 3.5% downpayment.)

But the NCRC chief dismisses claims that lenders have to worry about buybacks and indemnifications in making loans today. He noted that the FHA’s high default rates and credit losses are due to legacy loans originated in 2006, 2007 and 2008. “There are no buybacks” on FHA loans originated today that follow the agency guidelines, said Taylor.

Lenders need to “open the window wide enough to include anyone who is eligible,” he said. “We are going to make sure this is done fairly.”

USDA’s Rural Development Guaranteed Housing Program Fact Sheet

• 100% loan to value
• Unlimited seller assist
• Finance closing costs up to the appraised value of the home
• 30-year fixed rate, no balloons, no prepayment penalties, no recapture fess, etc.
• FHA style home condition, insulation standards no longer apply!
• No limit on loan size up to $417,000
• No monthly mortgage insurance premium
• Flexible credit underwriting, income must be verified and qualify

 Property Restrictions 

For single family, owner occupied homes, not restricted to first time buyers but cannot
own other real estate unless inadequate or for sale, half of a double/twin/duplex okay,
manufactured is not.

 Geographic Restrictions 

For towns with populations under 10,000, no flood plains. Eligibility website: http://eligibility.sc.egov.usda.gov

 Income Restrictions 

Based on family size, family care expenses and county.

Mortgage Loan Qualification Guide for Self Employed Applicants

Self employed applicants for a home mortgage loan are income qualified based on the business net profit from the income tax returns.  Laws now require lenders to document a borrower’s ability to repay the loan by this method.    Sometimes self employed mortgage loan applicants are penalized under mortgage loan underwriting rules.  Preparation is important because it may take a year or two to fix some problems.  Any self employed person who thinks there may be a mortgage loan in their future should read this guide.  Please consult your tax adviser or CPA before making changes to your business. 

Who is considered self employed?

If you own 25% of more of a business, the underwriter will consider you self employed.  If you are an independent contractor, file a schedule C for your work income or your employer does not withhold income taxes, than you are considered self employed by a mortgage underwriter.  Employees of Corporations who own 25% or more of that corporation are considered self employed.  The underwriter will use your W-2 income plus or minus the net business income for the previous one to two years.

How does the underwriter calculate qualifying income?

The underwriter will look at your net profit to determine your qualifying income.  Net Profit is line 31 on the 2008 IRS Schedule C.  Depreciation (line 13) and sometimes expenses for business use of your home (line 30) can be added to qualifying income.  If you own a partnership or corporation, a few other business expenses can be added to the qualifying income such as amortization/casualty loss and depletion.  Farms can add back Co-ops and depletion.  Usually income is averaged from the previous two years’ tax returns, but not always.  We have been able to use the most recent year’s income only in some cases.

What should you do to help qualify for a mortgage loan?

Open a separate business bank account.
You business should have a separate bank account and all business bills should be paid from that account.  Debts on your personal credit report can be removed from the qualifying debt ratio if you can demonstrate the business pays that debt by showing the last 12 months of cancelled checks from the business account.  If the account is not old enough, you paid one month from a personal account or in cash, or debt payments are co-mingled with personal accounts – then that debt cannot be removed from your qualifying debt ratio.  

No new debts

If a debt is too new to provide 12 months of cancelled business checks, then that account will probably be included in your debt ratio.  Also, new debt is a usually a derogatory credit score factor.  If you plan to apply for a mortgage loan in the next year, hold off on all other new credit.

Obtain business credit

True commercial accounts usually do not show up on your personal credit report and therefore will not be counted in your debt ratio.  Just in case, be sure to pay the debt from your business bank account.

Co-borrowers and co-signers

A co-borrower is typically a person who will reside in the home and be on the title with the borrower.  Income and debts of borrowers and co-borrowers are combined to determine the debt ratio.   Often, a co-borrower is a spouse but not always.  Co-borrowers equally share individual responsibility for the debt with the borrower.  

A co-signer is usually someone who does not live in the home and often is not on title.  A co-signer is personally guaranteeing your mortgage loan.  They are responsible for the debt.  If your business income is not sufficient to qualify, a qualified co-signer can make the difference.  Not all loan programs allow co-signers.  

Establish a history

Two years is the typical requirement to use self employed income.  Sometimes, a shorter time period is acceptable.

Get listed

Often, the existence of the business for two years must be verified.  Typical ways to do this are by business licenses, a CPA letter or a yellow pages listing.  I have encountered some self employed borrowers who can provide none of these.  This can present a challenge.  We find a way to verify the business exists, but it is faster and easier to do so if you follow the conventional means.

Balance deductions with qualifying

No one enjoys paying income taxes.  There is sometimes a choice to be made between paying income taxes and the ability to qualify for a mortgage loan.  

Get pre-approved for your home loan

The first step to buying a home is a pre-approval for your home loan.  Bring your income tax returns to your mortgage loan officer.  Different loan programs have their own rules – Fannie Mae, Freddie Mac, FHA, VA, USDA and so on.  Meeting with a mortgage loan expert is especially important for the self employed applicant.

Contact me when you are ready for your mortgage loan pre-approval.  Small business owners and self employed customers are a specialty of mine.  I serve the business community on the executive board of the Nazareth Area Chamber of Commerce and other organizations. In addition, my eleven years experience in the mortgage loan industry and personal experience as a third generation small business owner helps me relate to and assist my self employed customers.

Daniel D. Thierry, CRMS

Home Financing Advisor

License ID 132253

Debt Consolidation Refinance

At extremely low mortgage interest rates many homeowners would benefit from a refinance.  If you have equity in your home, this may be a great time to consider consolidating debt.  The following illustration is based on an actual case:

Current debts:	Monthly payment:	Years left to pay off:
$68,000 mortgage	$924	23
$13,000 credit card	$274	15 at least
$33,000 student loans	$309	20+ (once deferment ends)
$12,000 tuition	$100 est.	20+ (if loan was taken)
$126,000 in debt	$1607 per month	Over 20 years left on avg.

Refinance to 3.875% 15-year fixed:  $1,260 monthly payment (includes taxes and insurance)

o   Pay off debt in 15 years, about $112,000 in savings over those 5 years compared to current debt terms

o   Save $347 month for 15 years for about $62,460 in savings

o   Over $184,000 in debt savings on a $130,000 loan!