Mortgage Miracles Happen

October 28, 2010

Seller concession, FHA vs. Conventional

When  buying and selling a home, one of the big motivating factors a buyer will buy one house over another is based on seller concessions.  In simplistic terms, seller concessions is the seller contributing money that the seller would receive and crediting those funds back to the buyer to assist in paying for closing costs.  This is a very big motivating factor for many first time home buyers as well as move-up buyers.

There are two (2) types loans that have drastically different guidelines of seller concessions to each other with residential mortgage loans, FHA and conventional loans.  If you are a seller, a buyer or a real estate agent or real broker and you are involved in this process of buying or selling a home, then understanding the difference between an FHA and a conventional loan for seller concessions is going to save headache right before closing when the lenders doc drawer is trying to send docs to the title company and everything is co-sure.  When those involved don't understand what is permitted and what is not permitted, then deadlines are missed an finger pointer and relationships can be ruined by those that don't understand the basic guidelines of these differences of loan products.

     1) FHA Seller Concessions
6%
There are no limitations to what percent base on credit scores nor based on the buyers down payment and LTV (loan to value).

Seller contributions allowed up to 6% of the sales price, but seller contributions may not exceed the actual amount of closing costs, pre-paid expenses and discount points
§ UFMIP, when paid by the seller, is included in the 6% limitation o Seller must pay all or no UFMIP – Partial financing of UFMIP is not allowed

§ Any seller contribution exceeding 6% of the sales price results in a dollar for dollar reduction to the sales price before calculating the maximum loan amount

Job Loss Insurance
§ May be paid by builder or seller of property
§ HUD-I must reflect payment made directly to the insurance company
§ Amount paid on behalf of the borrower is included in the 6% seller contribution limitation
§ A copy of the insurance policy is required at closing

Homebuyer Counseling
§ May be paid by builder or seller of property
§ Amount paid on behalf of the borrower is included in the 6% seller contribution limitation (typical fees are $250)
§ A copy of the homebuyer counseling certification is required prior-to-closing

2) Conventional Guideline for Seller Concessions

Contributions/Concessions

Borrower closing costs paid by the property seller or by any other interested party to the transaction (i.e. builder, developer, real estate agent, lender or any of their affiliates) are considered contributions. Items paid by the property seller that are the responsibility of the seller are not contributions (i.e. real estate sales commissions, charges for pest inspections or costs that the property seller is required to pay under state or local law). Funds the purchaser receives from a non-participant to the sales transaction are not considered contributions, even when they are used to pay closing or settlement costs (i.e. the property purchaser’s employer or a family member).

Standard Conforming
·  Primary residence/second home > 90% LTV = 3% of value.
·  Primary residence/second home > 75-90% LTV = 6% of value.
·  Primary residence/second home < 75% LTV = 9% of value.
·  Non-owner occupied properties = 2% of value.

Super Conforming
·  Primary residence/second home = 3% of value.
·  Non-owner occupied properties = 2% of value.

The amount of any contributions in excess of the limitations set forth above will be considered a sales concession. Any amount contributed by an interested party that exceeds the costs to close the loan, must be considered a concession and subtracted from the purchase price.
Additional examples of contributions granted by any interested party to the transaction that are considered to be sales concessions (regardless of the of the limits above) are:
  • Vacations.
  • Furniture or decorator allowances.
  • Personal property items being left in the property.
  • Automobiles.
  • Moving costs or other "giveaways.".
For purposes of determining the LTV and CLTV, the dollar amount of any sales concessions or contributions that exceed the maximum allowed must always be deducted from the purchase price. The LTV and CLTV are then calculated using the lower of the reduced purchase price or the appraised value. The appraisal must reflect the effect that any subsidies, contributions or sales concessions have on the market value for the property. The AU Feedback must accurately reflect the LTV and CLTV adjusted for any financing or sales concessions in the transaction.

Must pay all or no UFMIP – Partial financing of UFMIP is not allowed

§ Any seller contribution exceeding 6% of the sales price results in a dollar for dollar reduction to the sales price before calculating the maximum loan amount

Job Loss Insurance
§ May be paid by builder or seller of property
§ HUD-I must reflect payment made directly to the insurance company
§ Amount paid on behalf of the borrower is included in the 6% seller contribution limitation
§ A copy of the insurance policy is required at closing

Homebuyer Counseling
§ May be paid by builder or seller of property
§ Amount paid on behalf of the borrower is included in the 6% seller contribution limitation (typical fees are $250)
§ A copy of the homebuyer counseling certification is required prior-to-closing
If you are a buyer with a limited amount of down payment and you need seller concessions, you ough to be leaning towards having an FHA mortgage rather than  a conventional loan.  Everyone wants to have a conventional loan based on what the stigma in the air is.  When you look at the benefits that come with an FHA loan, it may just outway a conventional loan and you will find this is the way to have your financing work out.  This is why there is mortgage insurance to help individuals and families that are good borrowers.

October 20, 2010

Go with refinancing and pay your house off in 20 years or less & save ten's of thousands of dollars.

Question:
Dear Ben,
My wife and I are trying to figure out if it's a smart move to refinance our current loan -- we just finished paying off the first year -- and go from a 30-year fixed-rate mortgage to a 20-year fixed-rate mortgage.
I don't know if it is better to use the money we spend on the origination fees and settlement fees or to put that money directly toward the current mortgage principal. Here are the numbers:
Current loan
·         30-year fixed-rate loan of $317,400 at 5.375 percent.
·         Paying $1,777.35 a month plus $479.79 for escrow for a total monthly payment of $2,257.14.
We've paid off one year of the original loan to a loan balance of $312,649.24. I had put down 25 percent when I bought the house for $423,000.
New loan
·         20-year fixed-rate loan for what I assume will be $312,649.24 at 4.375 percent.
·         Pay $1,956.94 a month plus $479.79 for escrow.
I will also have to put down $7,500 for closing costs.
Added bonus: We were also thinking of putting another $30,000 toward the principal since this money is currently in a money market account and not earning very much. Should we put this money toward the new loan or the old loan? Any insight would be greatly appreciated. 

Answer:
I ran the numbers for you, too. At $7,500, I think your closing costs are a little high.  A Closing cost study has the national average for closing on a $200,000 purchase mortgage at $3,741. Have your lender walk you through the projected costs.
Mortgage rates are lower now than the rates you provided, but I've used your 20-year rate for the illustration below:
 20-year rate expense
Existing 30 year Mortgage
Refi with a 
20-year mortgage
Loan amount:
$312,649
$312,649
Interest rate:
5.375 percent
4.375 percent
Loan term (months):
347 months remaining
240
Mortgage payment:
$1,777.34
$1,956.94
Total payments:
$616,738
$469,666
Total interest:
$304,089
$157,016
Effective interest expense1:
$228,067
$117,762
1 Assumes 25 percent marginal federal income tax rate and no state income tax impact.
Saving 1 percent on the interest rate and shortening the loan term to 20 years cuts your interest expense in half. The effective interest expense assumes you can fully utilize the mortgage interest deduction on your federal income taxes.
I also ran the numbers for your additional payment scenario. The additional principal payment is larger for the existing mortgage by $7,500 because you don't have to pay any closing costs. You would want to make sure there isn't a prepayment penalty before making that big of an additional principal payment on the existing loan.
Additional payment expenses
Existing mortgage 
w/additional principal
 
of $37,500
20-year refi 
w/additional principal
 
of $30,000
Loan amount:
$275,149
$282,649
Interest rate:
5.375 percent
4.375 percent
Loan term (months):
265
240
Mortgage payment:
$1,777.35
$1,769.16
Total payments:
$470,722
$440,599
Total interest:
$195,573
$141,950
Effective interest expense1:
$146,680
$106,462
1 Assumes 25 percent marginal federal income tax rate and no state income tax impact.
As you can see, there's a $40,000 difference, after-tax, in interest expense by refinancing, plus making the additional principal payment. You'd want to make sure you're not emptying out your emergency fund to make the additional principal payment.
My rule of thumb with additional principal payments is to go ahead and make them if you expect to earn less after-tax on your investments than the effective rate on your mortgage. This is assuming you can fully utilize the mortgage interest deduction.
Even if closing costs are to be on the high side,  I'd go with a refinance, presuming you plan to be in the house long enough to justify those closing costs.

October 1, 2010

FHA Higher Loan Limits Extended, a necessary evil for the housing market!

There wasn't much fanfare, and it literally happened in the cover of night, but sometime after midnight Thursday morning, the U.S. Congress passed an extension of the increased Fannie/Freddie/FHA loan limits for high cost housing markets to a maximum $729,750.
Big deal, right? Well, yes. 


The higher loan limits for high-priced housing markets were instituted back in 2008, when President George W. Bush signed the Housing and Economic Recovery Act.
At the time, the mortgage market had crashed entirely, and the only games left in town were Fannie, Freddie, and FHA.
They each had a loan limit of $417,000, which knocked an awful lot of potential borrowers out of the game. The move was designed to moderate the credit crunch and promote borrowing and buying. 

Since the peak of the housing boom in 2006, home prices are down 28 percent (S&P/Case-Shiller). That means many higher-priced markets aren't quite so high-priced anymore. Of course there are still hot spots, many in California, where the median home price is well over $417,000, but the national median home price currently stands at $178,600 (National Association of Realtors). 

More important than home prices, however, are the players in the mortgage market today, or, shall I say, the lack of players in the market. Fannie, Freddie and FHA are originating around 90 percent of all new loans today. Higher loan limits therefore afford higher risk to these entities. The Federal Housing Administration (FHA) reports that loans over $400,000 have a higher risk of default. 

Government officials continue to claim they want to increase private sector mortgage activity, and they have to. In order for the Obama Administration to expunge Fannie and Freddie from the U.S. mortgage market successfully, they have to ensure there's a market in existence behind them. Right now there isn't. Investors don't want to touch anything that doesn't carry a government guarantee. 

 Letting the loan limits drop to the previously legislated $625,000 limit, some argue, would have at least been a little boon to the jumbo market, which is struggling for business right now. But would it really juice the private mortgage market?
Some claim the only way the private market will ever recover is to start rolling back the loan limits, at least slightly, because if we continue the government loan limit status, nothing will change and the government will control 90 percent plus of the mortgage market for the foreseeable future. 

The trouble with that argument is that at the present time there are no investors for the loans.
There has been exactly one jumbo securitization in the past year, and it wasn't all that big.
Why?

Because potential investors in potential private label mortgage securities need to know what the new structures of these loans will be; they need comfort that their interests are aligned with the interests of all the players that exist between them and the borrowers (servicers, appraisers, etc.).

The Dodd-Frank financial reform bill did not mandate risk retention by any of the intermediaries, at least not yet. Policy makers have a year to define what exactly is a "qualified residential mortgage." So bottom line, without the increase in the loan limits, a fairly sizeable part of the mortgage market would have ground to a halt.
Lawmakers had no choice.