ChrisCrocker

Adjustable Mortage Rates Adjust

We hear over and over about the risks of Adjustable Rate Mortgages, Interest Only Mortgages or Pay Option Mortgages.  With the Refinance Boom of the past several years, many who refinanced their homes with ARM's are now facing the adjustment period of those loans.

Below is a news broadcast which does a good job of explaining some of the risks involved with these programs.  Also, take note on where the effects are being felt.  3 of the 5 cities mentioned are in the Midwest.  Homeowners in the Midwest cannot afford the rationale of, "Well. its only on the West Coast.  Thats where the bubble really is."  Think again.

All comments and questions are welcomed.

Your Columbia, MO Mortgage Broker

Alternative Loan Documentation

Did you know that more and more lenders are coming out with loan programs that will accept "Alternative Credit Reporting".  What is alternative credit reporting?  Any type of trade line, pay history, or financial obligation other than a tradition credit report.  Things like RENTAL HISTORY cell phone bills, utility bills, or in-store installments can be considered as alternative forms of credit.  As long as you have a 12 month history of making these payments in a timely manner, in many cases, they can be used to show credit worthiness.  This is a huge benefit to anyone who hasn't established a credit history, has no credit scores, or has never used credit before.  People like new graduates, immigrants, or self employed people, now have access to more lending programs.  Expect the rate to be a little higher, simply for the fact that the lender is assuming more risk through this creative documentation.  Rental History is the biggest factor in these programs.  So an excellent rental history is a must.  Ideally, the lender will look for a Verification of Rent from a management company, but if you rent from a private individual, always keep copies of the canceled rent check.  This will allow you to show proof of timely payments in accordance with your lease agreement.

Questions or comments are always welcome

Your Columbia, MO Mortgage Broker

Pre Qualification, Pre Approval

I get questions from every direction about the differences between Pre-Qualification, Pre-Approval, and a Commitment to Lend Letter.  Now, understand, different brokers use different criteria for what defines these three things.  Lenders too.  But as a buyer or seller, think of these three "Letters" as different degrees of approval.  I'll explain them as they apply to my brokerage.

A Pre-Qualification is basically the initial step in BEGINNING to put the finance wheel in motion.  With my company, we consider an applicant Pre-Qualified when we have taken either a phone or face-to-face interview and gotten the nuts-and-bolts of the transaction.  Borrowers Information, Credit, Employment, Income, Property Information, Down Payment (if any), etc.  After reviewing this information, if a lender has a loan program that can accommodate the applicant and their goals, they are Pre-Qualified.  Which leads us to the next level in the approval process.

A Pre-Approval is issued when we have taken all of the information above, we VERIFY (through written documentation) that what our applicant has told us is, in deed, true and accurate.  We will gather and verify recent pay stubs, recent bank statements, etc.  If all this information checks out, at this point a Pre-Approval Letter may be issued to a seller or realtor.  This demonstrates that with the information I have verified regarding the applicant, this applicant is Pre-Approved for a home loan, for a specific amount.  On this Pre-Approval, you will see 2 amounts.  One being the purchase price of the home, the other is the amount of the loan.  I always list conditions associated with the Pre-Approval.  These conditions are things that are still to be determined, not yet verified, or things beyond the brokers control.  Examples might be:

1. All employment and credit information to remain unchanged
2. Acceptable appraisal supporting a value of at least $xxx,xxx.xx
3. Clear 24 month chain of title history
4. Evidence of Flood Insurance, if applicable
5. Evidence of Homeowners Insurance
6. “Clear to Close” issued from lending institution

In short, by issuing a Pre-Approval Letter, I am stating that everything the broker and lender knows, and has verified, about the applicant, tells us that we can loan for this transaction.  The next stage is to document the collateral (the property) used to secure the loan.  This requires the applicant to not only select a property, then order all appraisals, inspections, and insurances that protect the home.

When all of the documentation regarding the APPLICANT AND THE PROPERTY has been documented, verified, signed off by the underwriter, and APPROVED.  Then a Commitment to Lend Letter may be issued.  A Commitment to Lend Letter states that everything has been agreed upon with the lender, and the only thing left to do is begin the closing.  This letter can legally bind the lender to make this loan.  Therefore, lenders make sure that everything thing is in place and double checked before the extend this type of commitment.  After which, the loan will be funded and funds dispersed to the respective parties.

The differences in these letters is, more times than not, an target for confusion between buyers and sellers.  I hope this information helps you see the importance of a "quality" Pre-Qualification, Pre-Approval, or Commitment Letter.  If you have any comments or questions from your own experiences, please make a comment.

Foreclosure Homes

First, What is Foreclosure?  Foreclosure is the process in which a bank or investor tries to recover any unpaid amount on the loan by either taking possession or selling the property.  As you may already know, banks are not in the "home owning business".  They are in the deposits and lending business.  When a property is foreclosed upon, the bank doesn't look at the situation as "I've got a home valued at $200,000.00, but only $150,000.00 outstanding on it.", they look at it as "I haven't seen the $1300.00 interest payment in 3 months, I need to get that money back and loan it to someone who will pay the interest"

So, you can see where there may be some opportunity, as a buyer, to purchase a home at a discount.  However, you should be well versed on market conditions, strategies, and risks of purchasing a foreclosed home before a transaction of this type.  But for the purposes of this post, lets look at the options on "how" to purchase a foreclosed home.

There are 3 opportunities to purchase a foreclosed home:

1. During Pre-Foreclosure
2. At Auction
3. Purchasing a Bank Owned (REO)

Purchasing a home during the pre-foreclosure stage is exactly as the title indicates.  You approach the a homeowner that may be having difficulties meeting their mortgage obligation.  You offer to buy the home outright.  In this scenario, the homeowner may have an opportunity to walk away with some of the equity in the house, and avoid any derogatory marks on their credit.  The buyer may be able to purchase the home well below the market value

When the home has reached the Auction Stage, buyers have the chance to bid on the house at public auction.  Buyers are usually required to pay cash for the property.  This leaves little chance to inspect the title work of the property and the home itself, but this is where you can find some of the best bargains.

If the lender was unable to resolve the issues with the original homeowner, and was unable to sell the house at auction, then the lender will assume ownership of the property.  Usually, the lender will try to sell the home as quickly as possible to recoup any defaulted amounts and costs associated with the foreclosure.  In many cases, as a foreclosure buyer, have missed a window of opportunity.  Because, by the time it reaches this stage in the foreclosure process, your less likely to find as large of savings as you would have in the earlier stages.

So, if you have considered searching out foreclosure homes, you should definitely do your homework.  They can be a risky transaction but lucrative.

All comments and questions are welcomed. . .Your Columbia, MO Mortgage Broker

Interest Rates

To understand why mortgage rates change we must first ask the more general question, "How do interest rates change?" It is important to realize that there is not one interest rate, but many interest rates:

• Prime rate: The rate offered to a bank's best customers.
• Treasury bill rates: Treasury bills are short-term debt instruments used by the U.S. Government to finance their debt. Commonly called T-bills they come in denominations of 3 months, 6 months and 1 year. Each treasury bill has a corresponding interest rate (i.e. 3-month T-bill rate, 1-year T-bill rate).
• Treasury Notes: Intermediate-term debt instruments used by the U.S. Government to finance their debt. They come in denominations of 2 years, 5 years and 10 years.
• Treasury Bonds: Long-debt instruments used by the U.S. Government to finance its debt. Treasury bonds come in 30-year denominations.
• Federal Funds Rate: Rates banks charge each other for overnight loans.
• Federal Discount Rate: Rate New York Fed charges to member banks.
• Libor: : London Interbank Offered Rates. Average London Eurodollar rates.
• 6 month CD rate: The average rate that you get when you invest in a 6-month CD.
• 11th District Cost of Funds: Rate determined by averaging a composite of other rates.
• Fannie Mae-Backed Security rates: Fannie Mae pools large quantities of mortgages, creates securities with them, and sells them as Fannie Mae-backed securities. The rates on these securities influence mortgage rates very strongly.
• Ginnie Mae-Backed Security rates: Ginnie Mae pools large quantities of mortgages, secures them and sells them as Ginnie Mae-backed securities. The rates on these securities influence mortgage rates on FHA and VA loans.

Interest-rate movements are based on the simple concept of supply and demand. If the demand for credit (loans) increases, so do interest rates. This is because there are more buyers, so sellers can command a better price, i.e. higher rates. If the demand for credit reduces, then so do interest rates. This is because there are more sellers than buyers, so buyers can command a lower better price, i.e. lower rates. When the economy is expanding there is a higher demand for credit, so rates move higher, whereas when the economy is slowing the demand for credit decreases and so do interest rates.

This leads to a fundamental concept:

• Bad news (i.e. a slowing economy) is good news for interest rates (i.e. lower rates).
• Good news (i.e. a growing economy) is bad news for interest rates (i.e. higher rates).

A major factor driving interest rates is inflation. Higher inflation is associated with a growing economy. When the economy grows too strongly, the Federal Reserve increases interest rates to slow the economy down and reduce inflation. Inflation results from prices of goods and services increasing. When the economy is strong, there is more demand for goods and services, so the producers of those goods and services can increase prices. A strong economy therefore results in higher real-estate prices, higher rents on apartments and higher mortgage rates.

Mortgage rates tend to move in the same direction as interest rates. However, actual mortgage rates are also based on supply and demand for mortgages. The supply/demand equation for mortgage rates may be different from the supply/demand equation for interest rates. This might sometimes result in mortgage rates moving differently from other rates. For example, one lender may be forced to close additional mortgages to meet a commitment they have made. This results in them offering lower rates even though interest rates may have moved up!

There is an inverse relationship between bond prices and bond rates. This can be confusing. When bond prices move up, interest rates move down and vice versa. This is because bonds tend to have a fixed price at maturity––typically $1000. If the price of the bond is currently at $900 and there are 10 years left on the bond and if interest rates start moving higher, the price of the bond starts dropping. The higher interest rates will cause increased accumulation of interest over the next 5 years, such that a lower price (e.g. $880) will result in the same maturity price, i.e. $1000.

Get a Free Copy of Your Credit Report

I talk with people who ask the initial questions like "When should I start looking for a home?" or "Whats the first thing I need to do?"  I always advise them that we will usually begin the pre-approval process about 60-45 days from when the borrower is planning to make a formal offer.  But before that, I always say, "Go ahead and get a copy of your credit report.  This way we can address any problems or misinformation that might effect your pre-approval when you're ready."  The major reasons I suggest this are:

1. Its always better to be proactive about your credit, than reactive.  "Reactive" usually costs time and money.
2. The borrowers credit inquiry has no repercussions.  By law, a borrower can receive a free credit report once a year, specifically for the reason of reviewing the information for accuracy.
3. You'll be prepared and ready to answer questions that your mortgage broker will ask.  "Are you aware of the collection that was filed 2 years ago?"  "Has this tax lien been satisfied?"
4. Also, you'll have a better idea of your credit score.  You can communicate in an educated manner about the loan programs you do or don't qualify for.

Naturally, the next question is, "How can I get a copy of my credit report?"  There are 2 ways to do this.  You can either call the credit bureaus directly at :

• TransUnion - (800)888-4213
• Experian - (888)397-3742
• Equifax - (800)685-1111

And request a copy of your report.  You'll have to go through a little automated system mumbo-jumbo, but ultimately, they'll send it to you in the mail.  They'll usually include information on how to correct or dispute the information within the report.  Or, you can got the websites like Annual Credit Report.com, or myFICO.com.  These sites will get a report from all three bureaus for you, however these reports usually don't have scores associated with them.  But, for $9.00 or $10.00 they'll calculate the scores for you.  Also, remember (with the exception of Annual Credit Report.com, which is operated by Federal Trade Commission)that these are private companies, so be prepared to hear about their credit repair services, credit monitoring services, or other solicitations.

In any event, staying familiar and informed with your credit profile is a necessity for a hundred reasons.  Whether your shopping for a new home or any other large expenditure, its always a good idea to know your credit situation before you start making offers or applying for financing.

Any other credit pro's have more suggestions?  Comments always welcome.

Your Mortgage Professional for Missouri

Mortgage Blog for Business

I just read a great post at the MortgageBlog.com.  This posting summarizes many of the benefits I have been experiencing with my blog.  The thing that first drew me to create a blog page was the convenience.  I immediately saw the opportunities of push-button publishing.  No longer do you have to hire a webmaster, spend thousands of dollars, and countless hours trying to create a static site that will accommodate all your clients and partners needs.  With the weblog, I can post and adapt with the experiences, demands, and interests of my readers.  The ability to easily adapt creates a valuable tool to attract, inform, and benefit my clients and partners.  For the most part, I try to use my page as a resource for my clients and partners.  But the great thing about this medium, is that it invites participation and fosters new ideas.

This is how it was described to me.  A blog is a discussion.  Its a forum that is dynamic and informal.  The days of having a website with flash media, some email accounts, and vague introductory text are over.  "Flash is Trash, Content is King", has become the new catch phrase.  Readers have become desensitized to graphics, bells, and whistles.  Blogs require participation from both sides of the discussion, and search engines thrive on recent and relevant content.

The post on Mortgageblog.com goes on to explain how the tool of a web log benefits the local, service driven broker.  Alas, another great tool to reinforce the expertise and consumer based mortgage adviser.

I welcome any of your successes or comments.

Seller Paid Closing Costs

Back in the day, you would have to hike up hill, both ways, in the snow, barefoot, to the bank carrying a 20% down-payment and a 12 year old Scotch (just to butter up the president of the bank).  Then we saw the introduction of ARM's, Interest Only and No Money Down Loans.  But soon, buyers realized that No Money Down did not equal No Closing Costs.  So, with increasing property values we see more and more buyers/sellers using "Seller Paid Closing Costs".  So lets take a little time to look at "Seller Paids"

Call 'em what you want:  Seller Paids, Seller Concessions, Seller Contribution, Allowances, etc.  Good or Bad, they have become another tool to get home buyers into houses with little or no money to contribute to the transaction.  By using Seller Paids in the purchase agreement, the seller is basically just allowing the borrower to roll closing expenses into the loan against the house.  It works like this, You're buying a home for $100,000.00 and the seller has agreed to allow for $2000.00 in concessions.  That allowance can, unless otherwise stipulated in the purchase agreement, be used toward any expense of the transaction.  In the event that the total costs don't use the whole $2000.00, it can be used to reimburse the buyer for any cost which were Paid Outside of Closing (POC), for example the appraisal or earnest money.  And vice versa, if the costs of the transaction exceeds the $2000.00, the buyer is then responsible for the difference.  Most lenders will cap these concessions at 4%-6% of the loan amount.

I USED TO get this question a lot, "Well, if the property appraises at $110,000.00, can I just get that $10,000.00 out to do improvements?"  The answer is always "nope".  The lender will only loan the lesser of the purchase price or the appraised value.  The reason I say USED TO, is because in the last few years, property values had been going up and up.  And buyers/sellers found creative ways to roll many expenses, including closing costs, into the loan amount against the home.  What we're experiencing now is a correction or slow down in the market.  Property values are not increasing as quickly as they have in the recent past.  So many of the people that rolled closing costs into their purchase, could potentially owe more on their home than the market will bare.  So instead of just "rolling it in", many buyers are finding out that "Seller Paid Closing Costs" aren't available because of equity issues.  In contrast, it is a buyers market, so many sellers are getting more creative and aggressive to sell their homes.  So, some sellers will take a 2 or 3 thousand dollar hit by including Seller Paid's, just to sell the property.

Are these closing costs really paid by the seller?  Technically yes, but theoretically no.  Yes, some costs may be listed under the sellers expenses on the settlement statement.  But no, because in the big picture, what is passed to the buyer as a concession, could have been used to negotiate a lower price.  As a buyer, your paying more for the home.

So, what are your goals as a buyer?  Does it make more sense for you to put those costs into the loan?  In the short term?  In the long term?  Or, does it make better financial sense to pay those up front and not finance those costs for 15 or 30 years?  Do you, as a buyer, have the ability to pay closing cost in cash?

Again we arrive at a reoccurring theme in these discussions.  A good mortgage professional will look at the goals of their client, the conditions of the market place, and the tools (loan products) they have in order to extend financing options.  I look forward to your questions or comments.

How Does A Mortgage Broker Get Paid? How Much?

I'm creating this post to see who wants to weigh in on a heated debate.  How is a Mortgage Broker paid?  Its a slippery slope that almost always goes from "How" to "How much".  So, to start things off, let's start with the nuts and bolts.  There are two things to remember.  Brokers can be paid by the Lender (the back), and brokers can be paid by the borrower (the front).  Sometimes brokers are paid by one or the other, sometimes by both.  But for the sake of this post, lets assume there are no Seller Paid Closing Costs (look for that post next week)

When Mortgage Brokers are paid by the lender (known as the "back end" of the transaction), it is in the form of Yield Spread Premium (YSP).  YSP is a commission that is paid to the broker by the lender for completing a mortgage loan with their company.  The amount of this commission is ultimately determined by the market.  Yes, there is an opportunity for "front end" closing costs to be paid in exchange for a higher rate, but this doesn't mean that those closing costs disappear.  It just means that the broker will pay those expenses out of their YSP in the form of a broker credit.

When a Mortgage Broker is paid by the borrower it is referred to as the "front end" of the transaction.  More times than not, a borrower would usually see a Loan Origination Fee and Processing Fee.  Depending on the type, documentation, and risk of the loan, a borrower may be charged additional fees.  These fees can be listed as Loan Origination, Processing, Credit Report, Broker Fee, Administration Fee, etc.

Now . . .How MUCH should a mortgage broker be paid?  This is where people usually start grandstanding.  Typically, closing costs can cost anywhere from 3% -6% of the loan amount.  Closing Costs are defined as a sum of ALL costs involved with the transaction.  To include:

• Lender Fees
• Broker Fees
• Appraisal Fees
• Title Fees
• State and Local Taxes
• Prepaid Items/Reserves
• Inspection Costs
• Homeowners Insurance
• Title Insurance
• And maybe more

The mortgage broker is just a piece of this amount.  My point is that there are several entities that are involved in the transaction.  All are hired to protect the interests of the borrower or the lender.  How much of that goes to the broker, depends on a variety of factors, many of which are beyond the control of the broker.  But mainly determined by the amount of work, time, and expertise that is necessary to complete the loan.  Just as an auto mechanic would charge for labor, or an attorney bills for hours.  A mortgage broker is entitled to charge whatever they feel their services are worth.  He/She may be priced too high or priced too low, just like any other services.

I hear this all the time, "a Loan is a loan, so why would a broker charge different borrowers a different amount?"  Well, to put it simply, no two loans are the same.  Some can be closed in a matter of hours with little or no documentation.  But, some can be closed over 45-60 days and require numerous forms and types of redundant documentation.  Or some don't close at all  (who should the broker bill in that event?)  So to say their all the same is a huge misconception.  The argument I always hear is "its just as easy to close a $50,000.00 loan as it is a $350,000.00."  That may be true through nothing but coincidence, certainly not a general rule.  The things that determine the difficulties and challenges of a loan seldom have anything to do with the loan amount.  It has everything to do with:

• The borrowers credit history
• Will the borrower be living in this home?
• Will there be a down payment?
• Is the borrower self employed?
• Is the property a single family residence?
• Are there repairs that need to be made?
• Is there anything unique about the property?
• And most definitely 100 other factors.

As with any profession, you get what you pay for.  Many brokers offer an array of services in order to build a lifelong lending relationships.  Others charge a minimum and extend no service other than shuffling paper work.  I don't speak for every broker, and certainly not the bad apples.  But there are a huge majority of mortgage brokers that pride themselves on their accomplishments and "can-do" attitudes.  A true mortgage professional sees the value in repeat business and a client for life.  A slow down or a flat market will weed the others out.

Always committed to making clients for life, your Missouri Mortgage Broker

Government Home Loans, FHA and VA

All mortgages fall under one of two classifications; Conventional or Government.  There are several distinctions within Conventional;  Conforming, Non-Conforming, Jumbo, Sub-Prime, etc.  But, with Government loans, there are only 2 distinctions FHA or VA.  Both FHA and VA are funded by private lenders, not the government.  But because some of the risk is shifted away from the lender because of government programs, they offer opportunities where conventional products might not

FHA is a loan that is insured by the Federal Housing Administration.  Meaning, that the borrower will have mortgage insurance, however it is usually a lower rate than that of conventional mortgage insurance.  Some features of an FHA loan would be:

• Low down payment requirements
• Lenient credit, debt, and income guidelines
• Down Payment and closing costs can be in the form of gift funds or can be rolled into the loan amount.
• Fixed and Adjustable rates are available

VA Loans offer many of the same benefits as FHA with a couple very significant differences.  The biggest is that the VA guarantees the loan.  This does not mean you are guaranteed a loan.  This means that, if you meet the eligibility and qualification guidelines, the VA will guarantee the lender against a certain portion of loss in the event of foreclosure, etc.  Why is that important?  Because of that guarantee, the lender feels all warm and fuzzy and will extend some features like:

• No down payment required
• VA loans are assumable loans
• No Mortgage Insurance
• Lenient credit, debt, and income guidelines
• Fixed and Adjustable rates are available

Government loans aren't the answer for everyone, but they do offer significant advantages for home buyers that meet certain criteria.  There are a lot of misconceptions from realtors and banks about the processing and underwriting for these loans, but any reputable mortgage broker can easily guide your loan through so you can maximize the benefits available to you.