3 Questions to Ask Your Lender

Uncategorized / 2 Jul 2022

3 Questions to Ask Your Lender

3 Questions to Ask Your Lender

Every major sales transaction requires a consultation and a home purchase is no exception. Stay in control of your mortgage by asking your lender the following questions:

1. How long will this take?

It looks harsh at first glance, doesn’t it? But in reality it’s a question that will give you a reality check. Many borrowers are bombarded with ads from lenders who guarantee closing in a certain number of days, but each loan application is different and requires varying lengths of time to process. Ask your lender for an estimate of time before you find yourself growing antsy!

2. Will I be penalized if I pay off my loan early?

Early repayment penalties are in place because paying off a loan before its due date results in less interest paid to your lender. It sounds greedy, but interest keeps our operation running. While we try to secure the lowest mortgage rates possible for our customers, it’s quite a blow to hear they’ve repaid an entire loan so quickly that our slow accruing profits have officially been cut off. The early repayment penalty covers those losses.

3. What are my closing costs?

Always ask us for a GFE or Good Faith Estimate. GFEs detail all of the extra fees that are required at loan closing. You will not only want to understand each cost for your own peace of mind, but also your wallet. Do not be one of those borrowers who thinks money for a down payment is enough to cover an entire home purchase – there are always extra fees for those people who work hard to get your loan closed in a timely fashion.

Ultimately, a good mortgage lender will answer all these questions, and more. Click here to schedule a call with our advisor. We will be happy to provide expert advice and support you throughout the mortgage process.

Getting rid of Private Mortgage Insurance (PMI)

Uncategorized / 2 Jul 2022

Getting rid of Private Mortgage Insurance (PMI)

Private mortgage insurance, or PMI, helps to protect the lender in case you default on your mortgage – and the obligation is on you to pay for that protection. Normally, lenders will require you to purchase private mortgage insurance if you have less than 20% to put down or if you refinance and have less than 20% in equity in your home.

Lenders require PMI to hedge the risk of you defaulting on your mortgage loan and the foreclosure not generating enough to cover the balance of your loan plus the lender’s fees. This protection is not cheap, and you’re left footing the bill. As an example, on a $250,000 loan, you could be paying as much as $210 a month.

In a perfect world, you can avoid PMI by waiting to buy until you have saved at least 20% to put down. The realities of life don’t always allow for that through. Taking on the expense of PMI allows you to purchase a home, and start building equity, while you might otherwise be waiting months or years. The purchase and the burden of PMI makes sense when house values are rising, or if the interest rates are low and you want to make sure you are able to lock in today’s rates.

Regardless of how you got there, you’ll want to get rid of PMI as quickly as possible. Below you’ll find the rules and guides on dropping PMI and riding your budget of this expense.

 

When can I stop paying PMI?

As long as you are current on your mortgage payments, you can stop paying PMI as soon as your loan balance falls to 80% of your homes value. If your home is worth $250,000, you would need to owe $200,000 or less to stop the payment of PMI.

Although your loan will eventually fall to 80% of your home’s value if you continue making your payments, this process can take years as most of your payments are going towards interest in the first years of your mortgage. If you bought a $250,000 home with 10% down payment, your loan balance would be $225,000. You would need to pay that balance down to $200,000 to get rid of the PMI payment. Assuming you have a 30 year fixed mortgage at 4.5%, your loan balance would drop below that threshold only after 6 years.

Making extra payments and rising real estate values could both help get that balance down to 80% faster. If your $250,000 house is now worth $300,000, you’d no longer have to pay PMI because your remaining balance would be roughly 73% of what your house is currently worth.

 

How can I stop paying PMI?

If you believe your balance has dropped to 80% you can send a written request to your lender asking for them to remove the PMI. This request must include your loan information, property address and information on the equity you believe you’ve built in your home.

In most cases the lender will require a professional appraiser of their choosing to give a current value of the home before proceeding, and will most likely ask you to pay for it. The lender won’t just take your word for it though, an appraisal is necessary if your request to drop PMI is based on an increase in the homes value. Many lenders will even require an appraisal when your request is based on a decrease in the loan balance. The necessity for an appraisal in that case is to ensure that your home hasn’t declined in value since you obtained the mortgage.

If you want to save yourself the cost of the appraisal, lenders are required to automatically drop PMI once your loan balance falls to 78% of the original value of the home when you took out your loan. Regardless of the current value of the home, the lenders still can’t require PMI so long as your are current on your mortgage. While you are saving money on the appraisal, you could be paying for PMI a lot longer then you have to by waiting to reach the 78% mark. With a $250,000 home, your loan balance would be below 78% of its value ($195,000) only after 84 months. That amounts to $2,275 if your PMI costs you $175 and you are making the additional 13 payments.

In most cases, the cost of the appraisal is well worth it. As you get close to the 80% mark, or if you feel your home’s value has increased, you can check the comparable home sales in your area to get a rough estimate of what your home would appraise for. If the comparable sales support your beliefs, you should definitely write your lender to request the removal of PMI.

For more information click here to schedule a call with our advisor. We will be happy to provide expert advice and support you throughout the mortgage process.

No Doc Mortgages Are Back

Uncategorized / 2 Jul 2022

No Doc Mortgages

No Doc Mortgages Are Back

Less than a decade ago no doc mortgages were the craze that everyone was jumping on top of. While they proved to be a viable alternative for self-employed borrowers, the default rates on these types of mortgages nearly crashed the entire US real estate market.

To recover from the collapse, most lenders have gone from “no doc” to “all doc, all the time.”

As the real estate market has once again found it’s footing, lenders are bringing back alternatives for non-traditional financing that has kept many home buyers on the sidelines.

What Defines a No Doc Loan?

Before the real estate crash of 2008, lenders offered no doc loans to buyers who realistically had no way of repaying the mortgages.

These once popular programs got their name from their lack of documentation requirements as the loans required very few docs to get approved.

The most egregious of these loans was the NINJA loan, with no requirements at all to prove income, job or assets. All the borrowers had to do was state their income, but no one was verifying this information.

Contrary to traditional guidelines, these loans were approved purely on credit history and sometimes assets, but not on employment and income.

How Alternative Income became a “thing”

The no doc loan was originally created to make it easier for business owners to purchase homes. While business owners often have plenty of cash flow, their taxable income, which is used by lenders to qualify for a mortgage, usually came up short.

Standard “no doc” or “stated income” or “no income verification” guidelines required borrowers to have at least six months of their income in reserves. Since this is a form of savings, savings were often used as a substitute for income.

These loans often had fairly high credit score requirements as well. The logic behind this was that if you have the ability to spend money and repay your debts on time, you probably had the income to support it. In this scenario, FICO became another alternative for income.

The problem is that people can borrow money to show sufficient reserves and pay their bills by borrowing even more. This could create the picture of perfect credit and assets without the true means of being able to afford the new mortgage.

The start of the default on No Doc

As the availability of no doc loan options increased, as did their popularity with home buyers. Lenders began pushing the envelope with no doc loans and many removed the safety nets like larger down payments, higher required credit scores and increased asset requirements.

Subprime loans with higher rates, higher fees, no down payment requirements and no income verification quickly took over the market.

As with everything, all good things must come to an end. These “liar loans” were frequently being abused causing far greater default rates than on traditional loans and the lenders started to roll back these options.

This roll back left many without any viable options for new loans in no doc scenarios.

Ability to Repay and QM became a “thing”

To correct the market, the Consumer Finance Protection Bureau (CFPB) introduced new rules for mortgage lenders.

The Bureau amended Regulation Z, which implements the Truth in Lending (TILA), adding the ability-to-repay (ATR) rules.

The new ATR rule simply states that lenders must make a reasonable, good faith determination of a homeowner’s ability to repay their mortgage.

To abide by the new ability-to-repay rule, lenders instituted a “Qualified Mortgage” (QM). These mortgages often include more certain, stable features, making it more likely that the borrower will be able to afford their mortgage.

Non-Prime Lenders Re-Enter the Market

“Subprime” carries a lot of negative connotations after being one of the causing factors behind the recession of 2008.

Non-prime has taken the place of subprime to create programs for borrowers that do not fit into the constraints of the new standards.

Those that still find it difficult to fit into the box of a traditional mortgage program are finding non-prime loans a perfect alternative.

Bank Statement Qualification Standards

Bank Statements are an ideal alternative for the self-employed and independent contractors to prove their income. The programs were designed for those whose tax returns and employment history do not show all the income they’ve truly earned.

At a cursory glance, these mortgage applicants seem to carry more risk than they actually have, because they don’t meet the QM standards.

As opposed to requiring tax returns, W-2’s and paystubs, lenders are basing their approvals on a combination of bank statements and a profit & loss statement for the business.

With Bank Statement programs, the personal deposits from the past 12-24 months are used to calculate income. Some lenders have even gone as far as allowing the use of the businesses bank statements.

Cash Flow Products for Investment Properties

Purchasing investment properties, also known as non-owner occupied properties, provides valuable investment opportunities for the casual homeowner and the seasoned investor alike.

The problem with purchasing these properties is that getting favorable financing terms for investment properties isn’t easy.

What the investor cash flow programs offer is the ability to qualify purely on the cash flow generated by the property, and not the personal income of the borrower. This allows the borrowers to avoid the pitfalls of debt-ratio requirements.

Hard Money Fills the Gap

“Hard money” is a form of financing made by private businesses or individuals for investing in real estate.

Investors often use hard money lenders when purchasing properties in need of work. Properties that are not ready to be immediately occupied make traditional financing next to impossible to obtain.

The key characteristics of Hard Money loans are:

  • Beneficial for short term stop-gap measures
  • The assumption is always that the property will foreclose and decisions are based on property value
  • Often much shorter term with balloon payments due in 6 – 36 months
  • Most don’t require any form of income verification.

Non-Prime Mortgage Program Shortcomings

In this post collapse mortgage era we are seeing very stringent lending guidelines and non-prime loans can be a great alternative for those looking to get a no-doc loan.

However, most of these non-prime mortgages come with a set of their very own stringent requirements to qualify.

While lenders exist with lower overall requirements, they typically will want to see a downpayment of at least 20 percent.

Credit score requirements offer a wide range from excellent credit to some that will go as low as a score of 500.

Interest rates for non-prime mortgages are also not what borrowers expect and will generally be several percentage points higher than their prime loan counterparts.

Origination fees and closing costs are also customary with these types of loans.

In Summary

Over nine million self-employed professionals in the US who have sufficient income fall short of lenders’ income reporting requirements. Fortunately for these homeowners, as well as many others who simply don’t fit the traditional financing mold, great alternatives are starting to once again re-emerge. If you would like to find out more about no doc mortgages, click here to schedule a call with our advisor.