New FHA Streamline Rules Help Make Refinancing Easier

Effective June 11th 2012, new rules regarding FHA Streamlines will help some borrower refinance into lower rates.

While everyone is well aware of mortgage rates being at all time lows, access to those low mortgage rates remains tight, with credit score minimums,  increasing mortgage insurance premiums and falling home property values.

In the Midwest, St. Louis, Kansas City, and Indianapolis, home values have not been hit as hard, but still, many customers who make their mortgage payments on time have missed out on the benefits of these low rates because of inability to qualify.

Specifically, for those who have a HUD backed mortgage, increasing mortgage insurance premiums have become the largest obstacle to helping borrowers take advantage of lower rates, having gone through numerous premium increases as rates have fallen in recent years.

However, effective June 11th, 2012 some who have paid their FHA mortgage on time will have the opportunity to cheaply save money by lowering their rate, and mortgage insurance premiums(both upfront and monthly)

In order for a borrower to qualify, the following will be needed:

  1. Must have an existing FHA mortgage endorsed prior to May 31st, ,2009.(Endorsed, not closed)
  2.  Mortgage must be paid on time.
  3. May be done without an appraisal.

Upfront Mortgage Insurance Premiums (UFMIP) will be reduced from 1.75% currently being charges to .01%(yes. 01%)

Monthly premiums will be reduced from 1.25% on 30 year mortgages over 95% LTV to .55% on most loans.

So What does that translate to?

About $100 on a $175,000 30 year fixed rate refinance compared to today’s FHA mortgage insurance tables.

How your ability to repay impacts your ability qualify for a mortgage loan.

Quick Facts video 3: How capacity (your ability to repay) impacts your ability qualify for a mortgage loan.

How likely are you to be able to pay back your mortgage?  Steady employment is the best determinant of your ability to repay.  W2 wage earners are viewed as most stable from an underwriting standpoint because their income is easily documented.  Overtime, commission, and self employment income are considered less stable and are more difficult to document.

YES!               W2’s and tax returns prove steady employment

Maybe             Overtime, commission, self employment

NO way!         stated income loans (no documentation)

In our current market, full income documentation in the form of W2s and/or tax returns are required whether you’re self-employed or a wage earner. Stated income programs, which don’t require proof of income, are a thing of the past.

What is DTI?  Debt-To-Income ratio or DTI expressed as a percentage is the most important ratio to know when qualifying for a mortgage. You compute your DTI by dividing your total monthly obligations by your monthly before-tax income.

Debt-To-Income Ratio or DTI  =  Monthly obligations / Monthly pre-tax income

For example, if a borrower has a $250 auto payment, $150 in credit card payments, and a mortgage payment of $850 per month, then monthly obligations total $1,250. If your gross income is $4,000 a month then your debt to income ratio is 32%. A good rule of thumb is that you want a DTI no higher than 40%.

$250 + $150 + $850 = $1250 (monthly obligations)  /  $4,000 Monthly Income (pre-tax)  = 32%

Recommended DTI is 40% or less.

Another factor that impacts your ability to repay is the amount of liquid assets you have. Lenders want to see that you have enough cash reserves to cover your mortgage in “case of a rainy day”. Acceptable assets for reserves include checking, savings, and retirement accounts, as well as any other liquid cash accounts.

Saving for a rainy day pays off!

Checking, Savings, and Retirement Accounts as well as any other liquid assets make you more likely to be able to repay your mortgage.

Thanks for viewing our quick facts Capacity video, I hope you found it helpful.  If you have any questions please feel free to call us, our loan officers are friendly and ready to help!

Our loan officers are happy to answer any questions!  So give us a call at 800-Homestead-8! (A text file of this video can be found on our website)

How do I get approved for a mortgage & improve my credit?

Quick facts video 2 – How do I get approved for a mortgage loan and improve my credit score?

How does my credit score impact my ability to qualify for a mortgage?

Let’s start with some basic information about credit.

There are three major credit bureaus:  Equifax, Experian, and TransUnion.

These credit bureaus document payment histories for mortgages, auto loans, personal loans, credit cards, and other consumer debt.  They also track and report derogatory information such as collections, foreclosures, judgments, charge offs, liens and bankruptcies.  From this compilation of debt and payment history a credit score is computed.

My credit history (list below) rent, utilities, mastercard, visa, student loans,

OH NO!!! (list below)  collections, foreclosures, judgments, bankruptcies…

Understanding credit scores

Credit scores range from 300 to 850 and have proven to be highly predictive of future repayment performance.  Lenders therefore depend on an individual’s credit score to determine the risk of a borrower defaulting on their mortgage loan.

In the past a credit score of 580 was commonly used as the lowest score acceptable for obtaining a mortgage, however after the 2008 mortgage crisis this score is now considered too risky and a score of at least 640 is now typically required.  Scores above 720 are considered “good” credit since they represent a low risk of default and therefore the best pricing is obtained by borrowers with the highest credit scores.

300 NO WAY!

580 Sorry – won’t work today

640 Acceptable – but by improving your score – you could save!

720 WAY TO GO! That’s going to save you some bucks!

850 Are you kidding? You go you little credit master!

How do I improve my credit score?

  1. Well – make payments on time! This may seem obvious to some, but making your payments consistently on-time over the years is the most critical component of your credit score.
  2. Check your credit on a regular basis and if there are any errors have them corrected immediately.  Federal law entitles you to one free credit report annually which can be ordered at freecreditscore.com
  3. Keep your credit card balances to no more than 1/3 of the outstanding limit. Maxing out your available credit negatively impacts your credit score, even if you pay your bills on time.
  4. Don’t close that account!  Keeping revolving accounts open especially over time improves your score.
In brief 

1. Make Payments ON TIME!!

2. Check your credit at freecreditscore.com.

3. If your Visa limit is $15,000 don’t let your balance go above $5,000.  Maxing out your cards damages your credit score!

4. Don’t close that account, even infrequently used accounts can improve your score.

Thanks for viewing our quick facts Credit video, I hope you found it helpful.  If you have any questions please feel free to call us, our loan officers are friendly and ready to help!

Our loan officers are happy to answer any questions!  So give us a call at 800-Homestead-8! (A text file of this video can be found on our website)

 

What is an ARM? Should I consider getting an ARM?

Adjustable Rate Mortgages (arm)

An ARM loan or Adjustable Rate Mortgage,  is a mortgage with a rate that can adjust. While the term has been vilified as one of the causes of the dreaded, “mortgage meltdown”, not all ARM’s carry mortgage rates that are unreasonable. Just like most anything, all it takes is a little effort to understand the different ARM programs and to see if they would be beneficial to you./wp-admin/post.php?post=669&action=edit#

To understand an ARM correctly, we need a few definitions along with our example:

John, in Chesterfield Missouri, has a mortgage application that has a start rate of 2.50%, 5/1 ARM with 5/2/5 “Caps”, and 2.75% “Margin” with the 1 Year US Treasury as the “Index”.

Index

An Index is a guide used to measure interest rates. Examples of interest rate changes are, 1 year LIBOR(London Interbank Offered Rate, 1 year treasury, and Prime).  This is available on any financial website. Your interest rate is computed based on the index, the month before your adjustment period ends.

Margin

An easy way of thinking of Margin is as the lender’s markup on funds.  It’s added to the index. If you don’t know your index, its normally available on your note, or ask you loan officer if you are yet to close. This is where you need to pay close attention. Abusive lending practices were introduced into margins. A normal margin is about 2.75%, however during the time where the causes of the mortgage meltdown happened, some margins were as high as 8%.

Adjustment Period

The adjustment period is the disclosure of periods the rate is fixed before it adjusts. In our example, John from Chesterfield Missouri mortgage has a 5/1 ARM means the interest rate is 2.5% for the first 5 years, adjusting on the 61st month, then every 1 year thereafter.

Interest rate Caps

Cap on a mortgage discloses the maximum percentage an ARM can adjust per period and over the life of the loan, or “Capped”.  For example, the 5/2/5 caps means John in Chesterfield’s ARM can’t adjust to more than 7.5% on the first adjustment, no more that 2% per year thereafter, and no more than 7.5% over the life of the loan. Again, this is also a place to pay close attention. ARM caps are there to protect the consumer against unreasonable interest rate jumps. A normal ARM cap for the 1st adjustment is 2-5%. During the pre-mortgage meltdown days, we saw no cap and a life cap of up to 18%!

So How is my ARM rate computed?

Index + Margin = Interest rate, limited by the interest rate cap.

So, using our example above.  John from St. Louis (Chesterfield) has had his ARM mortgage for 5 years now and the US Treasury is at 1%.  So Index of 1 + margin of 2.75=3.75% will be John’s new interest rate for the next 12 months.

When Should I choose an ARM?

Provided this isn’t your first rodeo owning and financing a home, you could consider and ARM if:

  1. You plan on being in your home for the a time period less that the fixed period of the ARM. Say, if you are planning on moving in 4 years, a 5/1 ARM may work well for you.
  2. You have additional income coming in soon. Say, you are first in line for the next promotion and Junior’s college fund has not yet been fully funded.

So, to conclude, ARM’s aren’t for everybody, and they can have some tricky parts. However, provided you’ve done your research, they can be of benefit in the right circumstances.

 

What is Private Mortgage Insurance and why am I paying it?

Clinically put, Private Mortgage Insurance, or PMI or MI, is insurance that will help to protect a lender from loss in the case of a default by the borrower. MI is almost always required on loans with less than twenty percent equity. That means, if you are purchasing a home with less than twenty percent down or refinancing to more than eighty percent of your home’s value, you will be required to pay mortgage insurance. While it is a payment that the borrower pays to insure another party, it does have its benefits.

How is mortgage insurance charged?

There are a couple of ways MI is charged. There is Monthly MI, which is computed based on various factors such as credit score, LTV(Loan to Value), and term, then there is MIP(Mortgage Insurance Premium) which is charged up front, and most of the time added to the loan amount. Some programs charge one or the other, while some, (Gulp) charge both. In some cases, there is an add on to the interest rate which pays the premium, called Lender Paid MI. (LPMI)

Why should I pay MI?

Simply put, if you don’t have 20% to put down on a mortgage when you purchase or refinance, then be happy you get to pay MI. For example, in Kansas City and St. Louis, the average home sales price is right at $145,000. I don’t know about you, but I didn’t have 20% down ($29,000) sitting around in my checking when I purchased my first home.

Having MI to purchase a home allows most buyers to get into a home with as little as 2.5% down in some cases. So without the benefit of MI, purchasing a new home would be very difficult.

However, here are some tips to be as efficient as you can with the premiums you pay.

How to pay as little MI as possible

  1. Save as much money as you can. The larger the down payment, the lower the MI, and/or MIP.
  2. Keep your credit score as high as possible. Remember, the minimum score to get a home loan these days is 640. The higher the score, the lower the MI.

How to get out of paying MI if you are already paying

  1. Most MI contracts cancel when you pay the loan amount down to 78% of the original value of the home at purchase or value on the last refi. However, that takes almost 10 years if you put down 5%.
  2. The 2nd way to get out of paying MI, is by refinancing your home assuming you have built up 20% equity through a combination of principle payments and appreciation. However if you are content with your existing loan, you should call your lender to see on what conditions they will cancel your MI.

To summarize, while MI is a premium you pay to insure someone else’s interest, it helps people buy homes and refinance homes with less that 20% equity and with some good planning and discipline, there are ways to keep the premiums to a minimum.