Re-Approve Your Pre-Approval

Since December 2007, mortgage lending guidelines have changed very quickly and often without notice. 

Some of the more well-known changes include:

• Broad restrictions on stated income home loans
• Broad restrictions on 100 percent financing
• “Risk-based fees” for credit scores under 740

Some of the lesser-known restrictions relate to property type and occupancy status as well as debt-to-income levels and mortgage payment histories.

Because of the number of changes and their collective scope, home buyers should be prudent and get re-pre-approved for their home loan.

Even if you last spoke with your loan officer four weeks ago, it’s important to know how market changes could ultimately impact your home loan approval.

The market really is that different.  Talk to your loan officer about a re-pre-approval today.

How Picking Up The Telephone Can Reduce The National Foreclosure Rate

“Foreclosure” is the legal process by which a bank repossesses a home from a borrower and, according to RealtyTrac, 1 out of every 100 homes were in some stage of the foreclosure process in 2007. 

This figure is astounding because foreclosure is expensive to both homeowners and banks.  Both parties have an interest in avoiding foreclosure but the process has to start with the homeowner — banks are just too big to start it themselves.

Every mortgage statement has a 1-800 phone number on it.  If you’re about to fall behind on your mortgage payments, make a phone call first.  When you call the toll-free number, a customer service representative talk about your repayment options, or help you design a work-out plan to get your mortgage back to current.

Banks know that more than 80 percent of all foreclosures result from one of the following:

• Job loss/reduction in salary
• Medical issues
• Divorce
• Death

These are life events that draw compassion from banks.  They understand that bad things can happen to people. 

However, the other 20 percent of foreclosures are the result of an inability to sell, an unwillingness to pay, and budget mismanagement.  These reasons are not as acceptable to the banks.

But when a homeowner fails to forewarn his lender of a missed payment, the lender assumes the worst.  It puts the homeowner in the 20 percent category. This makes a work-out plan much less likely and can quickly lead to foreclosure and a loss of the home.

Lenders want to avoid foreclosure as much as homeowners do.  If you’re a homeowner and you’re facing trouble with your mortgage payment, give your lender a call in advance and try to work it out.

If you never call, you can’t possibly get help.

(Image courtesy: Countrywide Financial)

The Right Question: “How Much Do I Want To Spend On Housing Each Month?”

One of the most popular questions that home buyers ask real estate and mortgage professionals is “How much home can I afford?”

It’s a normal question to ask, but it’s not the most effective way to plan your finances. 

Banks will almost always approve you for a home loan in excess of your household budget.

The more appropriate question is: “How much do I want to spend on housing each month?” 

By focusing on a home’s payment instead of its list price, home buyers exert more control over their short- and long-term financial goals.  List price is only one piece of the monthly payment puzzle. 

The cost of owning a home month-after-month is the sum of multiple expenses:

1. The mortgage payment
2. The real estate taxes on the property
3. The condo/management fees to an association (if applicable)
4. The cost of homeowner’s insurance
5. The cost of mortgage insurance (if applicable)

In other words, because monthly payments are combination of costs, buying a home based on its list price does very little to help plan a budget.  A home selling for $300,000, for example, may cost a homeowner anywhere from $1,800 to $3,000 monthly.

This is why “How much do I want to spend on housing each month?” is a better starting point than “How much home can I afford?”. 

Home affordability comes from more than just the list price.

Spreadsheet Formulas: Calculating Home Payments

For a lot of homebuyers, calculating a prospective mortgage payment is an online experience.  For example, a search on Google for “mortgage calculator” returns 39 million options.

Some people, however, prefer to plan on their local hard drive using spreadsheets.  For these people, the hardest part is often figuring out what formulas to use.

Interest Only Payments

Home loans with interest only payments are much more simple to calculate than amortizing loans.

Using the graphic at right as a guide, enter your loan size and your interest rate into two separate spreadsheet cells.

Then, create a third cell and input the following formula that calculates the “Monthly Payment”.  The formula is:

= (Loan Size) * (Interest Rate) / 12

Principal + Interest Payments

For a home loan with (principal + interest) payments, the formula is a little bit more complicated than with an interest only home loan.

Using the graphic at right as a guide, enter your loan size, your interest rate and the duration of your home loan into three separate spreadsheet cells.

Then, create a fourth cell and input the following formula that calculates the “Monthly Payment”.  The formula is:

= - PMT(Interest Rate/12, Loan Term in Months, Loan Size)

For additional spreadsheet formulas and more in-depth reporting, explore your software’s “Help” feature to see what you can find.

6 Things To Avoid While Waiting For A Mortgage Approval

When buying a home, there are two stages in the home loan approval process.

Stage 1 starts when a homebuyer submits a mortgage application to his loan officer for a pre-approval. 

A pre-approval is a “walk-through” mortgage approval that says — at a given purchase price and downpayment amount — the home loan application will very likely be approved.

Stage 1 ends when the buyer signs a purchase contract on a home.  At this point, the “walk-through” approval is useless because the buyer now needs a real home loan approval from an underwriter and not a loan officer.

Thus begins Stage 2.

During the second phase of the approval process, a mortgage underwriter is reviewing income, assets, credit, job history, and other items, too; the underwriters job is to make sure that the buyer meets the bank’s criteria for lending.

If the loan officer did his job in Stage 1, Stage 2 is just a formality.  And most times, it all goes according to plan.

Occasionally, though, a homebuyer sabotages his own mortgage approval by inadvertently changing his “risk profile”.  It doesn’t happen on purpose, of course — it just happens.

So, consider this a quick primer of what not to do while you’re between Stage 1 and the completion of Stage 2 of the home loan approval process.   Following these pointers will help keep the risk profile consistent.

1. Don’t buy a new car (or take on a larger lease payment)
2. Don’t quit your job or change industries (and certainly don’t switch to a heavily commissioned role)
3. Don’t transfer large sums of money into or out from your bank accounts (and remember that “large” is relative)
4. Don’t miss a payment to a creditor (even if you don’t think you owe it)
5. Don’t open a new credit card (even if you’re getting 10% off your new bedding)
6. Don’t accept a cash gift without talking to your loan officer first (because there’s rules on how to accept them)

There’s other items, too, but this a good start. 

Now, avoiding these mistakes may not be practical for everyone.  Therefore, if you know you’re going to violate a “rule”, check with Tyler Ford or Todd Abelson first. 

There are a lot of “gotchas” in mortgage lending and it helps to have professional guidance for your individual questions.

What’s Your After-Tax Mortgage Rate?

Many homeowners are entitled to two major tax deductions — one for annual interest paid on a home loan, and another for real estate tax bills paid to government.

Calculating your approximate tax credit is basic:

1. Add mortgage interest paid and real estate taxes paid together
2. Find your marginal tax rate
3. Multiple your tax bracket by the sum of Step 1

So, for a homeowner that paid a combined $13,000 in mortgage interest and real estate taxes last year, and who is in the 28% marginal tax bracket, a tax credit of $3,640 may be due from the IRS.

This credit is one reason why some people sometimes refer to “after-tax mortgage rates”.  An after-tax mortgage rate is the adjusted interest rate after the IRS doles out credits and is calculated as follows:

(After-Tax Mortgage Rate) = (Mortgage Rate) * (1 - Marginal Tax Rate)

The same homeowner with a 6.000% mortgage rate, therefore, has an after-tax mortgage rate of 4.32%.

Because not every homeowner is eligible for mortgage interest and/or real estate tax deductions, and because not every homeowner should claim them, you should consult with your accountant to see how tax credits fit into your tax liability schedules. 

Federal income taxes are highly personal and require the attention of an experienced professional.

Learn About How The Income-Equity-Credit Triangle Helps Define Mortgage Planning

All mortgage approvals are strictly based on what I call the Income-Equity-Credit Triangle. 

The stronger the elements of the triangle, the more likely a person will qualify for a conforming (or “prime”) mortgage.

The triangle’s three corners are defined as follows: 

• Income: The relative strength of income versus debts.  Also referred to as debt ratio.
• Equity: The percentage of equity in a home.  Also referred to as loan-to-value, or LTV.
• Credit: The middle of a person’s three credit scores, as reported by the three major credit bureaus.

When all three elements of the Income-Equity-Credit triangle conform to the guidelines, the “Mortgage Approved” target is fully visible.  This means that the home loan application is very likely to be approved.

When any one element is weak, on the other hand, the triangle’s area shrinks and a home loan approval becomes much less likely or likely with different terms.

Weakness in one of the three areas usually requires exceptional strength in the two other categories to outweigh the drag on the mortgage approval.  Read the rest of this entry »

How Prepaid Items Can Make Your “Closing Costs” Look Inflated

When buying a home, you pay for more than just physical property at the closing table.  You also pay a series of charges.  Commonly, homebuyers lump all of these charges under the heading of “closing costs”. That’s a miscategorization.

Many changes on a HUD-1 Settlement Statement are specifically not  closing costs. They are more appropriately designated as “reserves” or monies “paid in advance”.

These “prepaid items” include:

• Advance mortgage interest paid from the closing date to month-end
• Real estate taxes paid into an escrow account
• Homeowners insurance paid into an escrow account

Read the rest of this entry »

Mortgage Migraine? “How to Select the Right Mortgage”

As you start to consider your mortgage options, you may quickly find yourself overwhelmed with the various options that are available.

So whether you are purchasing a home or wanting to refinance let us point you in the right direction.

Below is a download that will help you select the right mortgage.