Friday, October 31, 2008

What Is the Difference Between HUD and FHA? Do You Need FHA Financing to Buy a HUD Home?

Q: What is the difference between HUD and FHA? Do you need FHA financing to buy a HUD home?

A: HUD is the U.S. Department of Housing and Urban Development, and oversees a wide range of federal housing, economic development, and anti-discrimination programs. FHA is the Federal Housing Administration, and provides mortgage insurance on loans made by FHA-approved lenders. FHA is part of HUD.

When a house that has an FHA-insured mortgage goes into foreclosure, it is known as a "HUD home" because HUD, rather than a bank, takes title to the property. It is not necessary for a buyer to get FHA financing to buy a HUD home. HUD doesn't care where the money to buy the house comes from - they just want to sell it.

Thursday, October 30, 2008

Down Payment Requirements and Availability of Funds

Two things to address today: down payment requirements and funds available for mortgages.

There was a story on the news last night saying that borrowers will soon need 20% down to buy a house. That is NOT true. Down payment requirements are determined by the secondary market (Fannie Mae, Freddie Mac, Ginnie Mae) -- companies that buy loans from the lenders, securitize the loans (package them up in large "pools"), and then sell them to large investors (mutual funds, foreign governments, etc.). They decide what the down payment requirements should be based on the rate of return the investors are demanding in order to buy the mortgage backed securities (MBS). There is very little demand for sub-prime MBS because many of the loans go into default. However, there is an almost insatiable demand for US prime mortgages within the investment community. FHA loans have always been guaranteed by the US government, and now Fannie Mae and Freddie Mac loans are guaranteed by the US government. If someone has 3% down for a primary residence and a credit score above 580, they will have very little trouble getting a loan. The investors want to buy them because they're backed by our government, so there's no reason to raise the down payment requirements.

No one in the mortgage industry can make any money if no loans are made, so it is in no one's interest to make it hard to get a loan.

Which brings us to the availability of funds. Many people have called us in the past week asking if there is money available for loans. Please don't listen to anyone who tells you that funds for loans are not available or are shrinking. Anyone who tells you that is seriously misinformed. There may not be money available from a particular lender because they had shady lending practices, or because they maintain their own loans rather than sell them on the secondary market (lenders who keep their own loans are known as portfolio lenders - they keep the loans they make in their own investment portfolio). However, as long as big investors want to buy securities that are backed by the US government, there is absolutely nothing to worry about.

The flow of money within the mortgage finance industry is extremely complicated and very few people who have not studied it can understand it. It's easy to get on TV and in the papers by announcing that no one can get a loan without 20% down, or by saying the money for loans has dried up, so people make stuff up or repeat what they heard from someone who didn't know what they were talking about. Please don't ruin your business by telling your buyers it's hard to get a loan or that there's no available money. It's simply not true.

Mortgage Rates and the Federal Funds Rate

Q: Why don't mortgage rates go down when the Federal Reserve lowers the fed funds rate?

A: The federal funds rate is the rate that banks in the Federal Reserve system charge when they lend money to each other, usually on a very short-term basis (as short as one day). The Prime rate is 3% higher than the fed funds rate, and is what banks use to determine the interest rate for Home Equity Lines of Credit (HELOCs). However, long-term mortgage rates are determined by what large, long-term investors (mutual fund managers, foreign governments, other fabulously wealthy types) are willing to accept as a return on their investment money. The best indication of whether mortgage rates are going to go up or down is the yield on the 10-year Treasury note, which changes all day long, depending on the trading in the bond market (just as stock prices change constantly, so do bond prices). Mortgage rates are always a bit higher than the 10-year yield.

Wednesday, October 29, 2008

Seller Concession Limits

On most loans these days, the seller pays part of the buyer's closing costs, so it's important to know what the limits are. Here are the Fannie Mae limits for seller concessions (the amount the seller can pay towards the buyer's closing costs):

-- 2% of the sales price for an investment property.

-- 3% for a primary residence or a second home, if the buyer has less than 10% as a down payment.

-- 6% for a primary residence or a second home if the buyer has between 10% and 24.99% as a down payment.

-- 9% for a primary residence or a second home if the buyer has 25% or more as a down payment.

For FHA loans, the limit for seller concessions is 6% of the purchase price, regardless of the down payment.

For VA loans, there is no limit on the amount that the seller can pay towards the buyer's closing costs. However, some of the fees that are typically thought of as being "closing costs", such as the money used to set up the buyer's property tax and homeowners insurance escrow account, have a limit of 4%. In almost all cases, the seller is allowed to pay all of the buyer's fees.

Tuesday, October 28, 2008

Paying Off Debt to Qualify for a Loan

If you don't qualify for a loan because your debt-to-income ratio is too high, you are allowed to pay off debt in order to qualify for the loan. This applies to both installment debt (car loans, furniture loans, etc.) and revolving debt (credit cards).

For a conventional (non-government) loan, Fannie Mae underwriting guidelines permit it, but individual lenders are allowed to add their own restrictions on top of Fannie Mae's, so not every lender will be able to offer you the option of paying off debt to qualify. Always check with the lender to make sure it's allowed under their guidelines.

For FHA loans, every lender follows FHA guidelines, so they will all allow debt to be paid off to qualify. One additional benefit of getting an FHA loan in a case like this is that FHA allows the money that's used to pay off the debt to come from a gift from a relative.

Monday, October 27, 2008

VA Funding Fee

VA loans have a borrower fee known as the VA Funding Fee, which ranges from 1.25% to 3.3% of the loan amount on purchase transactions. The exact amount depends on whether the borrower is/was in the regular military or the Reserves/National Guard; the amount of the downpayment, if any (VA loans can be for 100% financing); and whether the borrower has previously used their VA entitlement.

The VA Funding Fee can be financed into the loan, and typically is. However, there are certain circumstances which exempt the borrower from the funding fee. The following people do not have to pay the funding fee (taken from the VA Handbook):

-- Veterans receiving VA compensation for service-connected disabilities.
-- Veterans who would be entitled to receive compensation for service-connected disabilities if they did not receive retirement pay.
-- Veterans who are rated by VA as eligible to receive compensation as a result of pre-discharge disability examination and rating.
-- Unmarried surviving spouses of veterans who died in service or from service-connected disabilities.

Among other advantages, VA loans have the lowest interest rates (same as FHA), allow 100% financing, and require no mortgage insurance. They are almost always the best financing option for veterans, or members of the active military or Reserves/National Guard.

Mortgage Broker Licensing

Q: Do mortgage brokers need to be licensed in Colorado?

A: Yes. At the moment, mortgage brokers need to have a criminal background check, a $25,000 bond, errors and omissions insurance, and they must register with the state. Beginning January 1, 2009, Colorado Mortgage brokers need to take 40 hours of training and pass a test on federal law, state law, and mortgage basics to maintain their licenses.

Friday, October 24, 2008

Credit Score Tips

Good credit scores are important for people interested in buying a house. Here are two things that buyers should NOT do if they want to have the highest possible credit score:

-- People should NOT pay off old collection accounts or charge-off accounts. Fannie Mae no longer requires either of these types of accounts to be paid, and the same holds true for FHA and VA loans. The problem with paying off old collection or charge-off accounts is that the "date of last activity" for those accounts will be moved up to the current date if they are paid. That in effect turns them into new derogatory accounts, which will lower the score dramatically. The only time a collection account should be paid is if the collection company is currently demanding payment. If you would like to pay off old collection accounts, wait until after the closing on your loan.

-- People should NOT close old accounts. The longer an account is open, the higher the credit score, even if the account is not being used. Many people close accounts to "get them off my credit report". That is a huge mistake because it raises the ratio of debt to credit limit.

Thursday, October 23, 2008

Updates to Fannie Mae Risk Factors

Fannie Mae has recently made some changes to the way they consider risk factors when underwriting a loan. A risk factor is something that makes a loan more risky or less risky. Here are the changes:

-- The presence of a co-borrower no longer makes a loan "significantly" less risky. However, if the co-borrower has a strong credit history (credit score of 700 or above), then the risk is reduced somewhat.

-- If a borrower has less than 2 months of reserves (principal, interest, taxes, insurance, mortgage insurance, HOA fees), then the risk of a loan is increased. If they have more than 6 months reserves, then the risk decreases. Between 2 and 6 months is considered to be "risk neutral". This does NOT mean a borrower is required to have reserves. Reserves requirements are determined by the individual loan underwriting guidelines or by the underwriting software.

-- Self-employed borrowers are no longer considered to be more risky than salaried or hourly employees.

Borrower's Right to See the Final Settlement Statement

Q: How long before a closing must a mortgage broker give a borrower the final settlement statement (HUD-1)?

A: Under federal law, the borrower has a right to request the settlement statement 24 hours before the closing. Under Colorado law, the mortgage broker must provide the borrower with the HUD-1 one day before the closing, unless the borrower waives their right to receive it.

Wednesday, October 22, 2008

Fixing Bankruptcy Errors on Credit Reports

Many people have bankruptcies on their credit report. Very often, the accounts that were included in the bankruptcy are not reported correctly on their credit report and appear as if they are still open (and very delinquent) accounts. This lowers the credit score tremendously. If you have bad credit scores following a bankruptcy, there may just be mistakes on the report.

This is a very easy error to get fixed. You need to send a letter to the credit reporting agencies (TransUnion, Equifax, and Experian) explaining that the account in question was included in the bankruptcy and should be reported that way. Include a copy of the bankruptcy filing papers (which list the accounts included in the bankruptcy) and the discharge papers (which state that the bankruptcy is finished). If you are in a hurry to get it fixed, your mortgage broker can do a Rapid Re-score, which shortens the time to fix the errors from 30-60 days to 2-4 days.

Tuesday, October 21, 2008

FHA and Fannie Mae / Freddie Mac Loan Limits

The maximum loan amount that is allowed for FHA loans depends on the county where the property is located. Here is the link to the FHA web site that shows all the limits.

Once you're on the site, choose the correct state from the "State" drop-down menu. Then hit "Send". There is no need to select any other menu items.

In the "Limit Type" drop-down menu, the default entry is "FHA Forward". That is the name for regular FHA loans, as opposed to "HECM", which stands for Home Equity Conversion Mortgage, commonly known as a reverse mortgage.

You can also get the Fannie Mae and Freddie Mac loan limits by selecting "Fannie/Freddie" from the "Limit Type" drop-down menu.

Monday, October 20, 2008

Approved Appraisers

When a mortgage broker chooses an appraiser, one of the things that must be checked is the "approved appraisers" list for the lender that is financing the loan. Many lenders have a list of appraisers whom they have already approved, and they will not consider appraisals that have been completed by anyone who is not on that approval list.

The approval process is usually fairly easy - in most cases the appraiser must submit a license, a resume, and proof of E&O insurance. However, the approval process sometimes takes a long time (weeks, not days) and some lenders are not allowing anyone new to be on their approval list. If a lender has already been chosen and the appraisal has been completed by an appraiser who is not approved by the lender, another appraisal will have to be ordered and paid for.

Portfolio Loans

Q: What is a portfolio loan?

A: A portfolio loan is a loan that is maintained by the lender and is not sold to another lender, Fannie Mae, Freddie Mac, et al. It is a loan that the lender keeps in its own portfolio, or group of investments. In the old days before the sub-prime mess (6 - 12 months ago), portfolio loans very often had relaxed underwriting guidelines. If the loan was not being sold to Fannie Mae, for example, then the lender did not have to comply with Fannie Mae's underwriting guidelines. Many portfolio lenders have gone out of business because so many of these loans went into foreclosure. Indymac Bank is a good example of a portfolio lender that is no longer in business. Some portfolio lenders still exist, but generally speaking, the underwriting guidelines for loans they will retain in their own portfolio are just as strict as the guidelines for loans that will be sold to another lender.

Friday, October 17, 2008

Loan Conditions

We get asked many questions about loan conditions. Here's a brief overview of the different types of conditions and a few examples of each:

-- Prior to docs conditions. These are things that must be reviewed by the underwriter before a final approval (clear-to-close) is issued. Examples: pay stubs, bank statements, loan application, credit report, appraisal.

-- At closing conditions. These conditions must be satisfied at the closing. The list of "at closing" conditions is usually included in the lender's closing instructions to title, however, underwriters occasionally forget to include some. It is the mortgage broker's job to know what the "at closing" conditions are so there won't be any problems after the closing. Examples: correct seller concessions, maximum allowable monthly payment, loan application must be signed again, flood cert.

-- Prior to purchase conditions. For loans that are not directly funded by the investor, these are the conditions that must be satisfied before the investor will buy the loan from the mortgage banker. Examples: telephone verification of employment, closing protection letter, state-specific disclosures.

-- Prior to funding conditions. These are things that have to be verified before the loan can fund. Some lenders will not allow a loan to be funded, even though it has closed, unless they see various documents. Examples: copy of the signed HUD, signed Deed of Trust, signed loan application, proof of the wire from a down payment assistance program.

Thursday, October 16, 2008

Colorado Housing and Finance Authority (CHFA) Rates

Q: Are the rates for Colorado Housing and Finance Authority (CHFA) loans negotiable?

A: No, CHFA loan rates are set by CHFA, and it doesn't matter which mortgage broker a borrower uses - everyone who is approved to sell CHFA loans gets the same rate. The rate that a borrower gets is the rate in effect on the day that the mortgage broker reserves the funds from CHFA. That rate is then tied to the borrower, so even if the buyer changes their mind and gets another property, the same rate will apply.

Rapid Re-Score Saves the Deal

We've had a few deals recently where the buyer did not qualify at first. We ran the buyers' credit through credit analyzing software that we have, and in each case, if the buyer paid down the balance a bit on just one credit account, their scores would rise enough to get approved. Credit scores go up when balances go below 70%, 50%, or 30% of the available limits for an account.

Once the buyer paid the balances down the appropriate amount (all we needed as proof was a print-out of the new balance), we ordered a rapid re-score from the credit company and got the approvals. The longest we've ever had to wait for a rapid re-score was three days.

Wednesday, October 15, 2008

Pre-foreclosure Sales and Short Sales

Fannie Mae has issued guidance regarding the amount of time that must elapse before someone can get a new loan when they have had a pre-foreclosure or a short sale. There is a difference between the two, even though most of us use the terms interchangeably.

A pre-foreclosure sale occurs when a borrower is delinquent on their mortgage and the lender accepts a lesser amount than is owed to speed up the foreclosure process and save expenses. There is a 2-year time period from the completion date of the transaction before that borrower (the seller) will be able to get another Fannie Mae loan.

A short sale occurs when a borrower who is NOT delinquent sells a property and the lender agrees to accept a lesser amount than is owed. The borrower will be able to get a Fannie Mae loan immediately after the short sale, provided the short sale agreement states that they are not obligated to pay the deficiency (the amount between what is owed and what the lender actually gets).

Pre-foreclosure sales and short sales both lower credit scores, but there is no standard way of reporting these actions to the credit bureaus, so it is impossible to say how much the credit score will be affected. A pre-foreclosure sale typically lowers the score much more than a short sale, only because the borrower has had recent mortgage payment delinquencies. Those late payments will show up on the credit report regardless of how the pre-foreclosure is reported.

Monday, October 13, 2008

Prepayment Penalties

If a loan has a prepayment penalty, that means the borrowers will have to pay a penalty if they pay off more than a certain percentage of the loan principal before the prepayment penalty period expires. Generally, even with a prepayment penalty, borrowers can pay off 20% of the loan amount each year and not be penalized. The penalty period can be up to three years, and is typically either 6 months interest, or 1% of the loan amount for every year remaining in the penalty period (3% the first year, 2% the second year, 1% the third year). Prepayment penalties do not have to be three years long, however. They could be for one year or two years, also.

There are two different types of prepayment penalties. One is called a "hard" prepay and the other is a "soft" prepay. A hard prepayment penalty penalizes the borrower if the borrower sells the house or refinances the house. A soft prepayment penalty penalizes the borrower if the house is refinanced, but not if the house is sold. Some prepayment penalties are hard for the first year and soft for the remaining years. In that case, the borrower could sell the house after owning it for one year and avoid the penalty, but they would incur the penalty if they refinanced it before the penalty period was over.

Why do some loans have prepayment penalties and others do not? It's simple -- the mortgage broker gets paid a rebate from the lender if there's a penalty, and the rebate gets larger as the penalty period gets longer. Lenders encourage mortgage brokers to sell loans with prepayment penalties because the lender is able to trap the borrower in the loan.

There is no reason to ever have a prepayment penalty on a loan. It only benefits the mortgage broker and the lender. A borrower is certainly not helped by a prepayment penalty, and a real estate agent will get fewer referrals from buyers who have been directed towards mortgage brokers who sell loans with prepayment penalties.

Extra Payments on Interest-Only Loans

Q: If a borrower has an interest-only loan and makes a payment towards the principal, does the payment go down or does the loan get paid off sooner?

A: The monthly payment for an interest-only loan is calculated by multiplying the principal by the interest rate, and then dividing by 12. So every time a borrower makes a principal payment, their monthly mortgage payment goes down.

On a fully amortized loan (both principal and interest payments are made each month), if the borrower makes an extra payment towards the principal, the payment stays the same, but the loan will be paid off sooner.

Which Credit Score Is Used?

Q: Is the borrower's or the co-borrower's credit score used to approve a loan?

A: If the loan is a Fannie Mae, Freddie Mac, FHA, or VA loan (this is the majority of loans at the moment), the lower of the two credit scores is used for qualification. This is why it is sometimes a good idea to take someone off the loan application. For example, if a couple is applying for a loan and one of them has a much lower score than the other, it may be better to only have the spouse with the higher score apply for the loan. Of course, if we do this, then the income from the spouse who is not applying for the loan cannot be used.

If the loan is a VA or FHA loan, it doesn't matter quite as much what the scores are because scores are not considered with government loans, although the applicant's credit history certainly is.

For loans that are not being sold to Fannie Mae, Freddie Mac, VA, or FHA, it is up to the lender which score to use. This is one of the reasons there are so many foreclosures. Lenders ignored poor credit scores, but still counted the income of the borrowers with those poor scores to qualify them for the loan. If someone has a history of not paying their bills, putting their name on a mortgage does not make them suddenly start paying their bills.

FHA Down Payment

FHA has issued new guidance regarding the implementation of its higher down payment requirement (3.5%, up from the current 3%). The 3.5% down payment goes into effect on January 1, 2009. Any FHA loan that has had a case number assigned to it prior to January 1 will only require a 3% down payment. The mortgage broker can obtain the case number as soon as a contract is available.

Power(s) of Attorney for Bank-Owned Homes

If you ever have transactions that involve bank-owned homes, this is important to know. If the owner of record (the person or company whose name is on the title report) is different than the name of the seller on the sales contract or the name of the seller that is on an amend/extend to the contract, most lenders are now requiring Power(s) of Attorney allowing the various banks and loan servicers to sign the documents for the owner of record. Sometimes when a loan goes into foreclosure, it is sold repeatedly between different banks, and the buyer's lender and the title company need to know that the seller actually has the right to sell the property.

This is not a particularly difficult problem to resolve, but it often takes weeks to establish a paper trail between all the different people, banks, and loan servicing companies that have signed the various documents. Make sure everyone involved in the transaction is aware of this issue so contract dates are not missed.

Public Records Web Site

Here's a web site that will save you lots of time.

It provides access to the public records sites for every county in the nation. If the county does not have a public records web site, it still provides the phone numbers for the county offices you need: assessor, treasurer, recorder, etc.

Underwriters use this site when they get a loan. We use it for every file we get so we'll know exactly what the underwriter is going to be looking at.

Online Underwriting Systems

Ever think you had a mortgage approval and then find out you didn't?

Fannie Mae and Freddie Mac (the two biggest mortgage purchasers), FHA, and VA are very interested in making sure that doesn't happen. Each of these entities has online underwriting software that will approve a mortgage in minutes.

The names of the software programs are Desktop Underwriter (Fannie Mae's version, referred to as DU), and Loan Prospector (Freddie Mac's version, referred to as LP). DU and LP provide access to the FHA and VA systems as well.

When using the software, the borrower's loan information is entered into the online system, a credit report is pulled, and the approval results are available in seconds. As long as the information entered in the software is accurate, the loan is good.

In addition to getting a fast, accurate pre-approval, here are some other advantages of using DU and LP:

-- Reduced income and asset documentation. When a loan is submitted to DU or LP, the report issued by the system (known as the "findings") will list the required documentation. Depending on the credit score and overall strength of the file, we often see a "verbal verification of employment" as the only thing required -- no W-2's, no pay stubs, no taxes, no bank statements.

-- Higher debt-to-income allowances. If a loan is submitted to an underwriter without first submitting it to DU or LP, the lender is obligated to limit the borrower to the debt-to-income ratio listed in the underwriting guidelines. However, if the underwriting software determines that those limits may be exceeded (and it almost always does), Fannie Mae, Freddie Mac, FHA, and VA will still purchase the loan. This increases the number of approvals tremendously.

-- If the loan is not approved by the software, we are given the reason for the denial. Very often, loans are denied because the borrower has inadequate cash reserves. If that's the case, we can add more reserves, resubmit the loan, and get the approval. Sometimes, just one more month's reserves will mean the difference between getting a loan and not getting a loan. Of course, the borrower must actually have the reserves, but some loan programs allow gifts from relatives to be used for reserves!

We always run every loan through the online systems. That way, there's no guess work. It saves us an enormous amount of time because we aren't sending loans to undwrwriting that have no chance of getting approved, and it is really good for business when all our loans close.

Friday, October 10, 2008

Address, Zip Code, and County Lookup

We see many sales contracts that have an incorrect street name or zip code. When an underwriter gets a loan to underwrite, one of the first things they do is check the official United States Postal Service (USPS) web site to verify the address. If the address on the USPS site is different than the address on the contract, the contract will need to be amended to show the USPS address. Here's the USPS web site to look up the correct address:

We use it on every loan we originate before we submit the loan to underwriting, and we recommend that every agent check the site before drawing up the sales contract. If you click on the "Mailing Industry Information" link once you get the correct address, it will tell you the county, which is often entered incorrectly on listings.

This will save lots of time.

Thursday, October 9, 2008

The Credit Freeze - What Does It Mean?

We are getting many calls from real estate agents and borrowers asking about the "credit freeze" and how it affects someone's ability to qualify for a mortgage. A credit freeze exists when banks are unwilling to lend to each other because they don't trust each other. Their attitude is this: if I, as the owner of a bank, lend to you, the owner of a different bank, will you be able to pay me back? The answer for most banks is a resounding NO. They don't trust each other, so they won't lend money to each other.

However, that has no affect on their willingness to lend to individuals looking for mortgages. There are hundreds of different loan programs available, but the bottom line is this: if a buyer has a 580 credit score, has paid all their bills on time for the past year, and has 3% for a down payment, they will have very little problem getting a 30-year fixed-rate mortgage with no prepayment penalty for a primary residence. With a credit score below 580, it gets more difficult, but it's not impossible.

The loans available today are full doc loans - employment, income, and assets must be documented.