Personal Home Loan Mortages

Property values influence the value of your home and your borrowing power. The new mortgage environment is definitely going to affect homeowners. Refinancing qualifications have changed. Appraisal values influence the guidelines used to qualify loans. Everything has changed!

Have you heard that the current mortgage crisis could affect you? What can you expect if you happen to have an “adjustable rate” mortgage or a subprime loan? What does the term “credit crunch” mean? These and many other questions are the topic of conversation of every media outlet. When we get down to it, the changes in lending practices are important. Being informed now, could save you from a headache later. If you purchased a home or refinanced a home in the last to or three years, these questions can be a starting point as you prepare to talk to you lender.

What loan products do you have?

a. 30 Year Fixed Rate

b. Adjustable Rate

c. Interest Only

d. Payment Choice Arm (negative amortization).

What is the margin and index of the adjustable rate? When is the next adjustment period? On what basis did the loan officer you worked with qualify you? I could go on with these questions but the bottom line is if you cannot answer most of these questions about your mortgage, then you should consider contacting your lender now. At the very least you need to have a mortgage checkup! Getting a second opinion is also recommended. Finally, here are some additional questions to ask. What is going on with the property values in my neighborhood?

a. Are they increasing?

b. Are they stagnant?

c. Are they declining?

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Property values influence the value of your home and your borrowing power. The new mortgage environment is definitely going to affect homeowners. Refinancing qualifications have changed. Appraisal values influence the guidelines used to qualify loans. Everything has changed! Get informed today. Have you called your loan officer, lately? Questions and Comments?

Michael D. Cook, Sr. is a mortgage a mortgage originator with over 15 years experience in the industry. He has a reputation for educating his clients so they make the best choices about the financing for their personal needs. More than that, he has resources to assist those with credit and income issues to begin to position themselves for home ownership. Michael believes we have too much debt in our country and has joined the crusade to stamp out financial illiteracy

michaelcookdoesloans@gmail.com

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In my last article I discussed some of the history of the VA Home Loan and how the program works. In this article I want to get into more detail regarding underwriting of the VA loan and how to prepare to use this very important benefit.  As I mentioned in the last article VA does not lend the money to the end user of the loan. They act as a guarantor of the loan against default. In other words they are there to say to the lender, if you make this loan to our Veteran, we will make sure you get paid back the money the veteran borrowed if he/she should not repay the loan.  However it is still up to the lender to do their due diligence to insure the veteran qualifies based on guidance set up by the VA Administration. There are some very tricky things in the VA program regarding underwriting the loan that are not normally seen in “conventional” or “FHA” government insured loans.

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The VA loan only has one “debt ratio”. The debt ratio is a calculation that divides the gross debts of the borrower into their gross income to give the “percentage of debt to the income”. For conventional and FHA loans this is done with only the mortgage payment and then the mortgage payment and all other debts remaining at time of settlement. They call this a front ratio (the mortgage payment divided by gross income) and the total ratio (the mortgage payment plus all debts divided by gross income). With VA however the ratio is only based on the mortgage payment and all debts divided by gross income. It would be really simple if things stopped there but of course that’s not the way things work. After determining the debt to income ratio for the loan, (in the case of VA the ratio for approval purposes is 41%), then the underwriter has to determine something called residual income. This is a very complicated calculation involving the number of persons living in the home, the loan amount and the region of the country you are purchasing your home in. This is called Residual Income for Family Support.  There are charts which show the division of the residual amounts. There is a chart which can be found on the VA website which will give you specifically how much residual income is needed based on the above criteria. The chart can be found on VA’s website, along with a prequalification matrix.  The website address is: http://www.vba.va.gov/ro/cleveland/steps_to_va_loan.htm#Determining%20Eligibility. You can either click on the link or copy the link and paste it in your URL to go to the website.

Although this sounds a little complicated it is still a great benefit to using your VA Eligibility for purchasing a home. As is stated by VA “VA guaranteed home loans benefit veterans because they do not need to make a down payment and there is no upper limit or required cap on the income of the borrower.  Without a down payment as security against foreclosure, lenders receive a certificate of guaranty from VA.  In essence, as gratitude for honorable military service, the government is vouching for the veteran’s trustworthiness to repay his/her debt.”

  

The steps to take in taking advantage of your VA benefit are as follow:

1.       Determine your eligibility. You can do this by completing VA Form 26-1880, which is a 2 page form and sending it along with your DD-Form 214 (statement of active duty or proof of service participation) to the VA Eligibility Center. The address to send the request is PO Box 20729, Winston- Salem NC 27210. Based on length of service and type of service, VA issues a certificate for each person determined eligible to apply for a VA guaranteed home loan.

 

2.       Get prequalified. Getting prequalified is very important step before going out to look at property. The prequalification process will tell you how much home you are able to purchase (purchasing power), as well as what documentation will be required by your selected lender. Many real estate agents will want to know you are prequalified prior to taking you out to visit potential homes. Prequalification saves you time and energy in the home selection process. To get prequalified you will need to provide the loan originator with your W-2’s for the most recent 2 years, a copy of your LES or pay stubs for the most recent 2 months, 2 months bank statements with all pages, any asset statements, such as savings, IRA or 401K’s, ect. Remember the more assets you can show the lender, the easier it will be to obtain your approval, even if the “debt ratio” is a little higher than the guidelines allow. Assets can also help if you fall short on the residual income requirement. In addition, the lender will require a credit report usually from the three credit bureaus, Equifax, Trans Union and Experian, with a credit score. If you do not have credit or a credit score then you may be able to use alternative credit to establish a history of repayment of debt. For this you may need to provide the lender with your rental history for 12 months, your utility bills if you are paying those, car loan history, if it’s not reported on your credit report, or even your car or cell phone bill can sometimes be used to establish credit where none exist. If you have additional income from other sources be ready to disclose the income and provide the lender with proof of it’s stability and the likelihood that the income will continue for a minimum of three years. This can include disability income, child support payments, retirement income or social security income to name a few.

3.       Viewing and selecting a home. This process is usually the fun part of the process. Most homebuyers will engage a real estate agent to work on their behalf. Keep in mind there are buyer’s agents and sellers’ agents and/or listing agents. The difference is determined by whom the agent represents. The listing agent may just be one that lists the home for the seller but may not be actively involved until there is a contract to present to the seller. The listing agent or selling agent will usually represent the seller in the transaction and will not be actively working on the behalf of the purchaser. A buyers’ agent will be one that actively works with the buyer in helping them select the home, write the purchase offer contract and negotiate with the seller or the sellers’ representative in determining the terms of sale. You may want to interview a few agents before selecting one to work with but it is suggested that you engage a buyers’ agent to represent your interest in the negotiation process. Home buyers who wish to obtain a VA guaranteed loan should make sure that the sales contract includes a phrase, sometimes called a financing contingency, making the contract subject to approval for a VA guaranteed loan.

4.       Once you have determined a home you wish to purchase then the contract must be written and ratified (terms agreed upon by all interested parties). Then the contract is submitted to the lender along with a request for an appraisal of the property. Again here is where the VA loan differs from the conventional or FHA loan process. The VA Appraisal can only be assigned and preformed through VA unless the lender participates in the VA Lender Appraisal Processing Program. This is a change from the past when all VA appraisals were done directly through VA itself. Now the lender does not have to send paperwork on the appraisal to VA until after the home purchase transaction is closed. Not all lenders participate in this program so you should check with your prospective lending institution to see if they do participate. This can save you lots of time on the purchase transaction if the lender does participate in the program. The appraisal of the property is not to be confused with a “Home Inspection”. In the appraisal process the appraiser is determining if the property is sufficient collateral for the loan. The “Home Inspection” is used to determine the working order of major systems and the condition of the home overall. An appraisal is required by the lender, whereas the home inspection is an option. However it is highly recommended that if you are buying a home a home inspection be obtained from a qualified and licensed home inspector. Your real estate agent will usually be able to provide you with a list of home inspectors to choose from.

5.       Closing the sale. Once the home and loan have been approved by the lender, the home buyer will need to contact a licensed insurance agent to obtain home owners insurance on the property. This insurance is designed to protect the lender and homeowner against from property damage and loss. Remember the security for your home loan is the property itself so the lender wants insurance that the property can be replaced should a tragedy occur. This will be a requirement for the lender, but the choice of a home owner’s insurance company is the choice of the purchaser. Shop around and make sure you are getting the best policy for your money. After all this is done you are now ready to go to settlement. Again the settlement process is simply where the transaction is consummated between the seller and the buyer. Settlement is where the legal transfer of the property takes place and the process can differ from state to state or legal jurisdiction. Choice of a settlement company or attorney is also strictly the choice of the home buyer and is governed by Federal law know as the Real Estate Settlement and Procedures Act. This law is designed to protect the buyer from paying more than they should for this service or from Realtors or Lenders “steering “the buyer to a particular settlement company for undo gain.

Now you are a homeowner. Remember you are buying a home first and an investment second so make sure the property meets your personal short term and long term goals. Also remember that VA is a great program.

If you wish to contact me about the information in this article you may email me at michaelcookdoesloans@gmail.com or call me at (443) 852-1584. Happy Home Ownership!

 

Michael D. Cook, Sr. is a mortgage a mortgage originator with over 15 years experience in the industry. He has a reputation for educating his clients so they make the best choices about the financing for their personal needs. More than that, he has resources to assist those with credit and income issues to begin to position themselves for home ownership. Michael believes we have too much debt in our country and has joined the crusade to stamp out financial illiteracy

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One of the benefits of military service is the VA home loan. Although this is a very good benefit, many active and non-active military personnel don’t understand how the benefit works or what steps they need to take to use the benefit. Over the next several weeks I want to explain the benefit, how it works, what the pros and cons of the VA home loan are, and how you may qualify for a home using this important program. Firs t, let’s take a look at the history of the VA Home loan program.

After World War II many soldiers returning from the war were injured while fighting over seas both physically and emotionally. This was also a time when the country was coming out of a depression. The capital markets had been in a prolonged downturn, and home ownership was stagnant. The economy needed to be stimulated.  The Serviceman’s Readjustment Act of 1944 was designed to both award the returning warriors and act as a stimulus for the economy at the time.

The maximum amount of the benefit at that time was limited to 50% of the loan not to exceed $2,000.00, loans were limited to 20 years and the maximum interest rate was 4%. Wow, how times have changed. Home loans could be used for purchase, construction costs including repair or improvement of a residential property which a veteran intended to occupy as their home. The initial enactment of the law gave the veteran between 2 and five years to use the benefit.

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Immediately it was recognized there were serious shortcomings with the initial bill. These shortcomings were addressed in law one year later. The guarantee was increased to $4,000.00. The loan terms went to 25 years and 40 years for farm loans. Also the VA began to make direct loans in areas where VA loans could not be guaranteed. This practice remained until 1980 when VA revised the direct loan program to only be available in connection with specially adapted housing grants for veterans with certain severe disabilities. It should be noted that there was a time limit on how long a veteran had to use their benefits. It varied depending on the length of service and which war or conflict the veteran was involved in and if the veteran had a “severe disability” as determined by the VA.

By 1970 the laws governing the VA housing benefit had evolved a great deal. The president signed a new VA housing bill which eliminated the time limit on the use of the benefit. In essence the bill of 1970 revitalized the entire VA housing benefit program and insured it would remain a viable option for Veterans from that time forward.

One area that confuses many veterans is the idea of guarantee, entitlement, and eligibility. I had a veteran in one of my home buyer seminars. She brought her entitlement papers with her but thought that she could only get a home for $36,000.00 because that’s what the guaranteed amount stated. I want to take the last part of this article to explain how the entitlement works.

The VA program is not an insurance program like FHA. In the FHA program the loan is insured against the borrower defaulting. VA losses are not offset by insurance premiums. VA does collect a Funding Fee to offset administrative expenses. The VA only guarantees a portion of the mortgage against default. If the loss in a foreclosure process exceeds the amount of the VA mortgage guaranty, the lender is at risk for the difference. When a VA mortgage goes into default, VA has the option of taking over the problem by auctioning the house and paying off the lender, or remitting to the lender the amount of the guaranty in cash and letting the lender dispose of the property. VA lending is more risky for lenders because the lender is at risk for future losses beyond the guaranteed amount. Because of this lenders may charge higher points for VA mortgages as compared to say FHA or conventional loans. Also lenders may add qualification standards that exceed those set by VA.

So how much home can someone purchase using the VA guaranty program? Well the answer is VA does not actually set a limit on how much mortgage a beneficiary can have. It only limits the amount of the guaranty they will extend for each mortgage. This guaranty allows for no down payment loans of up to the conforming limit as of January 2005. Conforming limits are higher in some areas than in others. For instance, the conforming limits in Alaska, Hawaii, Guam and the Virgin Islands are higher than those in Maryland. Here is an example of how the VA guaranty works.

Let say the veteran wants to purchase a home for $350,000.00. If the loan amount is any amount up to $41700.00 the Veteran can purchase the home for 100% or in other words with no money down. This means the seller can pay normal closing costs origination and up to 2 discount points. (I will discuss points and fees in an upcoming article.) Let’s say the veteran wants to purchase a home above the $417,000.00 amount, would the veteran still be able to use the VA benefit in this instance. The answer is yes, however the veteran would in this case have to put a down payment. The key here is the loan amount, not the purchase price. Here’s an example:

                                $500,000.00 Sales price

                                $ 10,750.00 Funding Fee (Based on First Time use)

                                $510,750.00

                                -$417,000.00 (Conforming Loan Limit)

                                    93,750.00 (Amount over the maximum loan)

                                          X25% (VA Guarantee when loan amount is over conforming limit)

                                $ 23,437.50 (Amount of down payment needed by Veteran

 

As you may see from the example this can be a little complex at first glance, which is why you want to consult your mortgage professional to get your questions answered or you can email me at michaelcookdoesloans@gmail.com or call my office at 888-637-3339.  

 

 

Michael D. Cook, Sr. is a mortgage a mortgage originator with over 15 years experience in the industry. He has a reputation for educating his clients so they make the best choices about the financing for their personal needs. More than that, he has resources to assist those with credit and income issues to begin to position themselves for home ownership. Michael believes we have too much debt in our country and has joined the crusade to stamp out financial illiteracy.  Don’t hesitate to call Michael or visit his websites:

 www.1800yeshome.net

 

Financial Destinations                             

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What is the future for the mortgage industry?

What can I do if I want to purchase a home now?

Should I wait for this thing to settle down?

Not everyone will fit in the FHA (Federal Housing Administration) box. There are creative financing options available for those who are in challenging loan situations. Those borrowers that don’t fit the traditional FHA box will have to have more “skin in the game”, (down payment) than ever before.

Credit scores are playing a significant role in getting approvals today. If you are self-employed or a borrower with difficulty proving your income, you will need to save money in order to show significant cash reserves and down payment money.

Some of those working in the “grey” or cash market will have to start reporting their true income to the IRS if they want to participate in home ownership. If not be prepared to have at least 20% of the purchase price of the home to put down. Real estate investors will need to look to “hard money lenders” and not “conventional lenders” to finance properties for rehabbing or to flip. Folks this is called common sense underwriting principals. Lenders are going to require verification of income and assets of the borrower, meaning “No Doc” and “Stated Income” loans will be harder to come by. The lender is going to require the borrower to prove their ability, willingness and predilection to repay the loan is not unusual. It’s the normal way that things have been done.

If you want to purchase a home now, the most important thing you can do today is contact a loan officer and talk to them about your credit situation. Let them advise you about positioning your credit for approval. Good credit and credit scores are key to getting loan approval. A professional loan officer will know how to advise you. If the loan officer you are speaking with seems unsure about what you should do, you need to speak to another loan officer. Be prepared to follow their advice about what to do with your credit. Some things you may have thought about credit may be incorrect so be prepared to listen and follow their advice.

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The second most important thing you can do is start saving some money. I don’t care if it’s $10.00 a month. You will need to show some pattern of savings. This is extremely important not because you will have to have the money for closing costs, although that may be necessary, but the underwriters like to see that you have the ability to save for a “rainy day”.

Thirdly, you need to adjust your wants to your budget. In other words if your wants are for an 8000 square foot mansion but you really can only afford to pay for a 2500 square foot rambler, then adjust your wants. Remember that you don’t have to have the mansion today. Buy the rambler, build some equity, save more money, increase your income and eventually you will have the mansion. The bible says “hope deferred makes the heart sick”, meaning if you have expectations and they are not realized right away, it creates frustration. So don’t frustrate yourself with unrealistic desires. There’s nothing wrong with having goals and dreams, but be in the reality of now. Start where you are and build to where you want to go. You are not going to win the lottery so get over it. Patience and consistent work will get you there. The Chinese proverb says “the journey of a thousand miles begins with one step”. So make that first step and make it today.

Is this the right time to buy a home? Well the bottom line is there is not a better time than RIGHT NOW! This is a “BUYERS MARKET”. What does buyers market mean? Here are the facts. There is a large amount of housing inventory on the market and more is coming on the market everyday. Meanwhile there are not as many buyers in the market currently. Economics 101 says if there is a large supply of something and a smaller demand for that something, the buyer has the ability to negotiate a better price. Why? Because if the buyer doesn’t get the terms he/she wants they can go right next door and negotiate with someone else for a better deal. This doesn’t mean that the seller is going to give away their product for free. Buyers shouldn’t be over confident. Sellers can still refuse to sell if they are not going to be compensated for their product; however, the seller is more willing to negotiate because they know there is an abundant supply of what they are selling.

In maybe more practical terms a buyers market means that sellers are more willing to offer the buyer assistance with closing costs, and down payment in order to induce the buyer to purchase their home. One mistake I see is the buyer negotiating the sales price of the home rather than negotiating the closing costs. I suggest that you reverse that thinking unless you just have so much money you don’t need any of the sellers’ money. Remember when you purchase the home below market that eventually hurts you, not the seller.

Why is that Mike? Well I guess you will have to come back next week and I’ll tell you why then.

Michael D. Cook, Sr. is a mortgage a mortgage originator with over 15 years experience in the industry. He has a reputation for educating his clients so they make the best choices about the financing for their personal needs. More than that, he has resources to assist those with credit and income issues to begin to position themselves for home ownership. Michael believes we have too much debt in our country and has joined the crusade to stamp out financial illiteracy.

michaelcookdoesloans@gmail.com

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Mortgage Crisis

 

How are regular everyday people being affected by the current crisis in the mortgage and financial industry?

 

How will this mortgage environment change my life? What can I expect to happen if I am a homeowner with a “adjustable rate” or a subprime loan? What is the credit crunch? How does this all affect me and my family?

 

These and many questions like these are the talk of many people who only a few months ago might not have known a “subprime loan” if it walked up and shook their hand. When we get down to it, it’s the affect on the average person that is important. So what if some company that had made millions of dollars only a few years ago was now shutting it’s doors or declaring bankruptcy? So what does it mean to me? Well it may mean a great deal to you in more ways than you can imagine.

Let me start with a basic question, How many of you brought a home in the last two or three years or refinanced your home in the last two or three years? Okay so that’s almost everyone in the room. Now how many of you can tell me what type of mortgage product you received. Is it a fixed rate for 30 years or is it an adjustable rate? What is the margin and index if it’s an adjustable rate? When is the next adjustment period? Is it interest only or a payment choice arm (negative amortization) loan? Do you know what negative amortization is? On what basis did the loan officer you worked with qualify you? I could go on with these questions but the bottom line is if you cannot answer most of these questions about your mortgage then you very well may be in a dire situation. At the very least you need to have a mortgage checkup from your preferred loan officer. Maybe you need to get a second opinion as well if that loan officer didn’t explain these things to you in the beginning.

 

Here are some additional questions you need to be asking yourself. What is going on with the property values in my neighborhood, are they going up or are they stagnant or are they declining? Why is that important you say? Well, if you have an adjustable rate mortgage and you need to refinance you may not be able to? Why? Because of the declining value of your property, and the increasingly tight restrictions by lenders on those who wish to borrow.

 

Now you see how this new mortgage environment is going to have an affect on you as a home owner. If you are going to need to refinance your mortgage because the rate is about to adjust and the value is not there or the guidelines or program you used to qualify is no longer the same, you may not qualify. Your property may not appraise for enough for you to get refinanced, or the company you did your loan with may not be in business today. Are you prepared if your mortgage payments are going to rise due to the increase in interest rate? What is the plan?

 

Just like once a year you do a physical checkup, it may be time for you to do a financial check up. Have you called your loan officer, lately?

 Michael D. Cook, Sr. is a mortgage a mortgage originator with over 15 years experience in the industry. He has a reputation for educating his clients so they make the best choices about the financing for their personal needs. More than that, he has resources to assist those with credit and income issues to begin to position themselves for home ownership. Michael believes we have too much debt in our country and has joined the crusade to stamp out financial illiteracy

 
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