Welcome Realtors and consumers. Tell me your loan scenario or view free videos and guides to the right, or scroll down and read brief articles that affect you and the California real estate loan market. I look forward to earning your trust and business. Give me a call with any questions or scenarios 805-276-1942.
Want to avoid unwanted real estate loan surprises and nightmares? Just simply pull your own credit reports 60 days prior to applying for a California real estate loan. There are a myriad of things that can be misreported on your credit report that can translate to a higher interest rate on your California real estate loan or even a denial of your loan altogether.
Late payments aren’t the only thing that affect your credit report. Things like misreported maximum credit limit vs high credit are seen at times. If you have a maximum credit limit of say $10,000 and you owe $4000 than you still owe less than 50% of the credit limit. You want each card to have less than 50% owed on each credit line. But when the maximum limit matches the high credit (the highest balance you’ve ever had on that card at one time) that’s not good. It looks like you are maxed out on that card. If you want to increase your credit score, it’s wise, before applying for a home loan to spread out your balances to make sure no credit card is showing more than 50% of it’s available credit limit. Some cards have better interest rates than others but we are talking about increasing your overall credit score here. Also sometimes creditors aren’t properly reporting your maximum credit limit which inadvertently can affect your credit score.
By pulling your credit reports 60 days prior to applying for a home loan, you can check into these things and fix it before the lender pulls their credit report. You want to see if any other surprises and inaccuracies are there because once the lender pulls their credit report, that’s pretty much it. If there’s a problem that you can fix and it’s something that would raise your score your lender can do a rapid rescore procedure that could possibly raise your score once the credit issue has been corrected but that could cost hundreds of dollars to fix it.
It’s far cheaper for you to pull your credit reports yourself through a company such as annual credit reports.com. Once a year it’s free. You won’t get your credit scores with the free version, you’ll have to pay for that, but just making sure the information is accurately reported is a must and will save you time and money in the form of a lower California home loan rate in the long run.
Best
KW
The Obama administration is rolling out an updated version of the HARP program, also called HARP 2 and home affordable refinance program, designed to help homeowners who are current on their mortgage but lack equity which is needed to get out from underneath their existing real estate loan so that they can take advantage of today’s low rates.
One thing to keep in mind is that banks are not required to participate in the program and if they do, each lender can add their own rules on top of, also called overlays, the HARP program guidelines. In short, the HARP program guidelines can and will vary for each lender. So which lender is going to have the best and most consumer friendly HARP program? It remains to be seen. Click here to see if you qualify for the HARP program or keep reading below.
Lenders use automated underwriting systems to get loans approved. FNMA and Freddie Mac will have their automated systems updated to reflect the HARP changes by mid March of 2012. The lenders offering the HARP program right now are manually underwriting the program, which is a bit more of a difficult task vs. the automated version. Look for more lenders to be offering the HARP program after mid March when the AUS systems are updated.
So what new changes to the HARP program are going to help you refinance? For starters the value of your home won’t be an issue. You can have a home worth $200,000 and owe $300,000 and it won’t matter. An appraisal however will be required to make sure the home is in lending condition. Credit score requirements will be relaxed but still good credit will be needed. You must also be current on your existing mortgage with no lates in the past 12 months. If you have PMI insurance, you are still eligible for HARP and you can even use your existing PMI carrier. You may also switch lenders with HARP 2, so you don’t have to stay with your existing lender.
If your property has been for sale, HARP says you are still eligible. If the home is now a rental property, HARP is okay with that as well. Loans greater than $417,000 may also be eligible under HARP. The new HARP program is also friendly for lenders as well due to relaxed FNMA and Freddie Mac relaxing their buyback policy put forth on lenders in case the loan goes into default.
As long as your real estate loan was originated after June 1 2009, the HARP program may be an option for you. The question is, how is one lender to another going to implement HARP. Are they going to adhere to the new HARP guidelines as written? Or are they going to put in place a blanket of additional overlays making it a useless program?
There are lenders who are not waiting for the mid March 2012 FNMA and Freddie Mac automated underwriting system update and are funding HARP 2 loans with minimal overlays as we speak. Is the HARP program right for you? Do you qualify for the new home affordable refinance program? Click here to find out.
Best,
KW
Even with all the recent lending legislation passed recently, borrowers need to compare apples to oranges and know that the no cost California home loan is still available. In a nutshell the way it works, the lender bumps your interest rate to create a pool of funds which pays for your all the fees and the Loan Originator and lender income.
How much higher is the interest rate with a no cost California home loan? The are varying factors, but usually the rate is around .50% higher than on a rate where the borrower pays for their fees upfront on a purchase loan or rolled into the loan amount on a refinance loan. The payment may be a little higher however, there are times when it makes sense to go with the no cost loan. You have to be able to compare the figures.
How long you intend to live in the property is a factor. If it’s a short term stay, the no cost loan many times is the better deal. On a refinance loan it generally takes 7 years to payoff the fees that were added to your loan amount. The no cost loan rate is higher but your starting loan amount is a chunk lower because there are no fees added to your balance. Click here to tell me your scenario or keep reading below
Here’s an example on a refinance loan: $350,000 loan amount based on a 30 year fixed, with fees, at a rate of 3.75% gives a payment of $1,620.90 (principal and interest only). Based on a 30 year fixed rate loan and bumping the rate to cover fees, which are subtracted from the loan amount, we have a loan amount of $343,000 and an interest rate of 4.125% which gives a payment of $1662.34.
At the end of 7 years on the loan with fees, your balance would be $$299,453. At the end of 7 years on the no cost loan, your balance would be $296,028. You’re still $3,425 ahead on the no cost loan, however there’s one more thing to consider.
The total cost of payments looks like this: 84 months at the 3.75% rate payment of $1620.90 = $136,155. The total cost of payments on the 4.125% rate payment of $1662.34 at 84 months = $139,636 so you’re in the hole $3,481 on the no cost. But this cost is a wash with the amount you’re ahead on your balance, $3,425 as illustrated above. So in this case the breakeven point is 84 months or 7 years, and most of the times on refinance loans that’s the way it works out. Want to compare refinance loan figures with fees or no cost? Click here to tell me your scenario
On a purchase it’s different because the buyer has to pay their fees upfront no matter what so the payments using the same loan amount and rates as above, look like this: $350,000 loan amount at 3.75% 30 year fixed = $1620.90. $350,000 loan amount at 4.125% 30 year fixed = $1696.27. That’s $75.37 more per month on the no cost California home loan, but the real take away here is the pool of funds created by bumping the rate goes toward paying the borrowers closing costs! So if they are short funds, we need to know that upfront at the start of the application process to properly structure the loan but this is a wonderful option for those who can afford the monthly payment of home ownership but just can’t come up with all the funds to cover the down payment and closing costs to get into a home.
The no cost California home loan can be a perfect fit for someone looking to refinance their current home loan or the home buyer. Do yourself a favor and compare the numbers and take a look and see if it’s best for you. Click here to tell me you scenario and I’ll get back to you within 24 hours.
Best,
KW
Pic credit Arvind Balaraman
It’s hard enough to find tax deductions these days, and everyone wants to pay less in taxes right? The problems is that lowering your taxable income or adjusted gross income, takes away from your purchasing power when qualifying for a California home loan and the California first time homebuyer, or a home loan in any state for that matter.
There’s one deduction in particular for wage earners, the schedule A unreimbursed expenses, that can create a problem for those trying to qualify for a home loan. I’m not an accountant so I’ll give a readers digest version of this deduction. The schedule A unreimbursed employee expense covers items that are bought with your personal funds that are necessary for your job that your employer won’t reimburse. Things can range from clothes, to mileage, car repair, and many other things.
Here’s where it hurts. If you have $5,000 in unreimbursed employee expenses on your 1040 for the year 2010 for example, the lender will take that sum and divide it by 12 months, in this case $416.67 per month and include this payment into your debt to income ratios. Normally the lender will average the past two years in schedule A unreimbursed employee expense or in some cases if the most recent year was much higher than the prior year, they will use that figure for a worse case example.
Assuming a 30 year fixed rate of 4% that $416.67 per month is a loss in purchasing power of over $87,000 for a new home purchase or a shortage in loan amount for a refinance! Breaking it down further, assuming the information above, per $100 you pay to your creditors in minimum monthly payments, you lose $21,000 in purchasing power!
How does one fix this? I’ve had people file an amendment to their tax return, but it can mean that you may end up owing the federal government money after removing this deduction and there may be a penalty involved.
Since it’s the beginning of a new year and most people have not got their taxes done yet, a W2 wage earner who is looking to buy a home in 2012 may want to scale back their schedule A unreimbursed expenses for the year 2011 or eliminate it altogether. Most home buyers that I run into with this expense have no idea how it affects them when it comes to qualifying for a home loan. Eliminating the deduction may bring less of an anticipated tax refund, or even have you owing taxes depending on your situation but on the other side it definitely helps you qualify for a larger home loan.
If your income can absorb the additional payment created by the schedule A itemization, than you’re okay, but there are many people out there who are unable to purchase or refinance for their loan amount desired simply because they didn’t know how the schedule A unreimbursed employee expense affects them on the other side of the equation.
A sharp Loan Originator should be able to catch this before they run your credit report. The Originator should ask several questions in regards to the type of industry you work it. Many sales professionals, nurses, building subcontractors among others have this expense and are entitled to it. Hopefully the income is sufficient to absorb your monthly obligations, new housing payment as well as your schedule A unreimbursed employee expense (if there is one) and you’ll be able to qualify for your new California home loan.
Best,
KW
FHA loans offer more flexible options and guidelines for a college grad who is now a prospective homebuyer looking to secure a California home loan.
If a borrower has less than a full time 2 year work history, FHA will allow school attendance history toward the 2 year work history. So if a college graduate who has been in the work force for less than one year can use their school attendance for the other year to make for 2 years. Many conventional FNMA lenders do not allow this. It does help if the graduate’s degree is in the same line of work in which they studied, but not required.
FHA also allows for a longer employment gap as well. So if the graduate took some time off after graduating before looking for work FHA is a bit more lenient on that than conventional lending.
FHA also allows for non-occupant coborrowers, conventional does not. Mom and Dad may be tapped out from paying for school and can’t give that hefty cash gift to help buy a home, but with FHA they can go on the loan to help qualify without having living in the property or give the large cash gift to help qualify for the California home loan.
FHA has had the above guidelines for years but it’s easy to forget them. Fannie Mae and Freddie Mac guidelines are constantly changing and hard to keep up with like the Khardashians! Just keep in mind that FHA is college grad friendly and generally has looser guidelines without compromising the interest rate.
Best,
KW
Are there loans without private mortgage insurance or mortgage insurance where less than 20% equity, or less than a 20% down payment exists? YES. There is a loan option called lender paid mortgage insurance. What happens is that the lender buys the private mortgage insurance instead of the borrower. The cost for the lender who buys in bulk can be much less than an individual private mortgage insurance policy that an individual borrower can purchase (thru a lender).
On a lender paid mortgage insurance loan, the lender bumps your interest rate in exchange for purchasing your private mortgage insurance policy. Lender paid mortgage insurance loans are only available on conventional loans not FHA and as you’ll see it’s an alternative worth exploring.
So let’s go over a loan scenario comparing three loans, a conventional loan with private mortgage insurance, an FHA loan with mortgage insurance, and a lender paid coventional mortgage insurance loan.
Scenario: A buyer with a 720 FICO score wants to purchase a single family residence property for $300,000 using a 10% down payment.
Projected payments on a 30 year fixed rates :
Conventional loan amount $270,000 at a 4% rate: p&i – $1289 + $121 pmi=$1410/month.
FHA loan amount $272,700 (higher because of the possible upfront mortgage insurance premium) $272,700 at 4.125% rate: p&i $1323.60 + 261.34 m.i. = $1584.94/month
Lender paid mortgage insurance loan amount, $270,000 at 4.5% rate: p&i- 1368.05/month.
Even though the rate is higher the overall payment is……lower. Plus you’ll have a larger mortgage interest tax deduction due to the higher interest rate.
In this case the higher interest rate loan, is a better overall loan. Borrowers must look at the bottom line and not just the interest rate.
Now what can be done for those borrowers with less than a 720 FICO score? FHA and it’s version of mortgage insurance will still be an option for them and some lenders have deals with a 3.5% down payment and 620 FICO score can still be had although most lenders have moved up to the 640 minimum.
But for those with higher scores loans without private mortgage insurance are alive and well, the message just needs to reach the masses.
If you would like to forward me your loan scenario, please click here. I’ll get back to you in 24 hours and let you know if the No PMI California real estate loan fits your situation.
Best,
KW
In the California home loan world you may come across the term “overlay”. An overlay ia an additional rule that a lender applies to an already existing list of guidelines associated with a specific loan program.
For example, Fannie Mae guidelines say it’s o.k. that applicants can payoff credit card debt to help them qualify for a home loan while at the same time being in the process of obtaining a California home loan. However, individual lenders may add an overlay that says no it’s not o.k. to do this.
Overlays vary from lender to lender which can cause confusion. One lender may have an overlay on a specific issue and the next lender may not have an overlay on that same issue, it’s lender preference.
If a lender does Fannie Mae loans, they already have to follow a set of strict guidelines. If the lender does not follow each Fannie Mae guideline, the loan can not be deemed a Fannie Mae loan, which hurts the borrower and the lender. Again the lender can put even stricter overlays on top of the Fannie Mae guidelines to make the loan more difficult to obtain. Lenders are conservative in todays market. Some lenders do portfolio loans which means they don’t have to follow Fannie Mae guidelines, they can make their own guidelines. But a lender limits its liquidity if they do this, which in this market is not wise, but yet some lenders do portfolio loans.
Overlays like it or not are here to stay. The key is to have an open line of communication with your Loan Originator so that you don’t run into any unnecessary overlays that can hurt your chances on qualifying for a California home loan refinance or purchase loan.
When qualifying for a California home loan gift funds and their rules are coming into play these days more often. A gift, when it comes to real estate lending is quite simple. A gift is a sum of money that is given to a home loan applicant preferrabley by a blood relative, for the sole purposes of being applied toward aiding the applicant to qualify for a home loan.
The gift of funds is given to a the applicant with no strings attached. It can not be a loan so it’s not to be repaid in any way shape or form. The gift donor will sign a letter to this affect. If the letter being written in any way insuates the gift is to be repaid, the funds will not be allowed to be used in conjunction with the California home loan. In addition to the gift letter from the donor, expect the lender to ask the donor to show documentation that they had the funds in their possession for at least 30 days prior.
This documentation usually is in the form of the most recent asset statement ie..bank statement. In no way can the gift funds be “mattress money”, which is cash stored at home rather than in an institution. The lender will not allow these funds.
Gift funds can be used for a California home loan refinance, or a purchase loan.
Gift funds can be used for a variety of issues to help a home loan applicant qualify for a California home loan. The gift funds can go tward increasing the applicants down payment, towards cash reserves, paying off debt, and toward closing costs for the loan.
All gifts are subject to the guidelines mentioned above and to individual lender guidelines. Some California home loan programs may not allow gift funds so it’s essential you check with your Loan Originator first if you think you may need or have access to gift funds.
It is also vital that you do not deposit the funds into ANY of your liquid accounts until your Loan Originator says it’s ik. to do so. These funds have certain rules attached to them that if aren’t followed will disallow the gift funds and their intended purposes. Keep in mind sometimes lender guidelines don’t follow general common sense!
Gifts are a wonderful way of helping home loan applicants to qualify for a California home loan. Make sure and work closely with your Loan Originator and follow the lender gift rules to the “T”, to ensure that the gift funds help rather than hurt the chances of securing a loan.
Best
KW
Okay. The hurt is over. You’ve moved on to a new home after losing your home to foreclosure or a shortsale. But now your situation has improved and you’re now thinking about owning a home again in the future but how long will the credit world hold your traumatic event against you? Well there’s several answers depending on the type of event that caused the loss. Conventional and FHA ers have different answers and waiting periods .
Let’s start with conventional. In regards to to foreclosure and the home was given back to the bank with no owner participation, the waiting period before you can obtain a conventional loan is 7 years from the date the foreclosure is completed and transferred back to the bank if they had NO extenuating circumstances. BUT it’s 3 years from the date of forclosure was completed and transferred back to the bank with acceptable extenuating circumstances AND a 10% down payment. These rules are for primary home purchase and rate/term refinances only. Non-owner and second homes not allowed.
FHA is a bit more forgiving. On a foreclosure where the home was given back to the bank and no owner participation, it’s 3 years from the date the foreclosure was completed and transferred back to the bank and less than 2 years, but not less than 12 months from the date of the foreclosure completed and transferred back to the bank if the result of acceptable extenuating circumstances.
A short sale is looked at differently by FHA and Conventional as well and how long a borrower must wait before applying for a home loan. Let’s start with Conventional. If the home sold but the sales price didn’t cover the amount owed, it’s 7 years from the date the sale closed and transferred to the new owner or transferred back to the bank when you have 10% or less of a down payment for your new home purchase. It’s 4 years from the date the sale closed and transferred to the new owner or transferred back to the bank with a 10% -19% down payment for the new home, and 2 years if you have a 20% down payment. If you have acceptable extenuating circumstances that caused the short sale, than you may wait 2 years from the date the sale closed and transferred to the new owner or transferred back to the bank AND having at least a 10% down payment for the new home.
FHA again is much more forgiving on a short sale when compared to Conventional. It’s 3 years from the date the sale closed and transferred to the new owner and no waiting period if the borrower had no late payments on any mortgages and consumer debts within the 12 month period preceding the short sale AND they are not taking advantage of declining market conditions.
Now what is an extenuating circumstance you may ask? That is up to lender interepretation. Typically it may be a job transfer, not a job loss. It may also be a natural disaster with your home such as a fire or flood. Anything other than that is really up to the lender as to what they call an extenuating circumstance.
In regards to deed in lieu of foreclosure waiting periods, Conventional rules are the same as their short sale guidelines as mentioned above, and for FHA deed in lieu of foreclosure waiting periods are the same as their foreclsoure guidelines as mentioned above.
I will cover bankruptcy waiting periods for FHA and Conventional loans in a future article.
These guidelines are applicable as of June of 2011 and may change in the future. If there is one thing we can depend on in this real estate lending environment, it’s that nothing stays the same for long!
Best
KW
Debt consolidation refinance loans are commonplace. Rolling in credit cards debt and obtaining home improvement funds are two of the most popular things homeowners include in a cash out refinance.
The past 10-15 years people would routinely run up debt knowing that they have equity available to pay it all off if they wanted to. When the credit card payments got too high, it just made sense to pay it all off with the debt consolidation refinance loan and start over again. The only problem was that many times the homeowner didn’t learn anything from that experience. In other words they just kept on spending, spending and spending and instead of accumulating equity in their home, they consumed it.
Banks knew this, but didn’t care because equity was on the upswing and debt consolidation loans were a cash cow to them and all involved. It was a win-win situation. A happy homeowner, Loan Officer, and the bank made money as well.
But now if a homeowner needs to payoff debt with the proceeds of the debt consolidation refinance loan, most Fannie Mae and Freddie Mac loans will not allow the loan to be done. In a down real estate market where many homeowners have little equity, the bank is more concerned that if they give a homeowner a cash out debt consolidation refinance loan, the homeowner will walk away from the property. That’s not putting much confidence in today’s homeowner is it!
If a homeowner has ample equity in a home, say it’s ballpark value is $450,000 and they owe $175,000 in mortgages on the home, that should be ample equity to qualify for an additional $40,000 making a new loan of roughly $210,000 right? They have greater than 50% equity in the home, no brainer right?
Not so fast. If the homeowner’s $40,000 in debt is all revolving debt that is to be paid off adds up to $1000.000 per month in monthly payments and by paying it off and rolling it into a new mortgage would save them over $800.00 per month that would be saving them a ton of money every month and be a safe mortgage for the bank to invest in right? In this case wrong. When doing a monthly payment scenario between the existing monthly payments and what it would be after the loan, the bank underwriters see that this homeowner is struggling to make ends meet. They are accumulating too much debt and not living within their means and this may mean that they may put themselves right back into the same situation a few years later, so if the homeowner has a debt ratio of 65% prior to the loan, and they need to roll in all the debt into the refinance to get their debt ratios down to 40% the bank may not do the loan.
Sounds ridiculous right? You have the equity, and paying off the debt would give you so much breathing room which would in turn enable you to make your mortgage payment. It’s a safer bet for the bank to have a less stressful homeowner who can make an affordable mortgage payment. That’s not the way Fannie Mae and Freddie Mac (now owned by the government) sees it. So if a homeowner needs to payoff debt with the proceeds of the loan, they probably won’t be able to qualify for Fannie Mae or Freddie Mac loan.
It seems that the government is trying to force us to live within our means. They believe that banks were too loose in handing out debt consolidation refinance loans. But when you make a blanket rule or statement, you are excluding some common sense debt consolidation refinance loans that make sense and can really help people. This is a kneejerk reaction to yesterdays free wheeling loose lending practices and wild west spending habits of consumers, and now lending has tightened as a result.
There are non-Fannie Mae and Freddie Mac lenders out there that will do the loan scenario above. It comes with more hurdles and even comes with a rule that states the homeowner must close out each revolving line/credit card that is being paid off. The lender will issue a letter for each credit line being paid off and it’s included with the final loan papers which requires the homeowners signature. The lender may even go as far as asking the escrow officer or who ever is signing the final papers with the borrower to take out the actual credit cards and have them cut up by the homeowner with scissors.
This cutting up of credit cards was an old school thing that was done over 20 years ago, but now it’s back! The debt consolidation loan is still alive and kicking but it’s tougher to get, and comes with more strings attached and even possibly a pair of scissors.
Best KW
