Mar
6
Life in Reverse
Filed Under mortgage, personal finance | Leave a Comment
One of my friends still sends me the chain or viral emails. You know the kind where they ask you pass them on to five of your friends after reading. Some deal with politics, some are funny, some are tearjerkers, some are thought provoking, and some are repeats of emails that I got a decade ago. I usually read these emails but I almost never pass them on.
One email in particular caught my interest. Called “Life in Reverse”, the premise of the email was you wake up from death, start your life in retirement, end your career at the bottom, go to college before high school, and before you know it you’re taking naps and eating formula. The premise is particularly amusing because it makes you realize that everyone starts off the same way (we all come out of a womb) but not everyone ends the same way.
When you know how the story ends, the choices you make would be much different.
Based on what’s happened the past couple of years with foreclosures and bad mortgages, I’m sure there are plenty of people who want a second chance to make different choices regarding their mortgage.
Jan
1
What lenders look for
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Before lenders lend money, they need to be assured that the funds will be repaid. In other words, is the prospective borrower creditworthy? To find out, they ask for various types of information.
Sub-prime lenders understand you may have come upon some hard times in the past and will look at your more recent credit history.
Lenders look at the risk that you will default on the loan, based on several factors. Those include credit score, history of paying your mortgage or rent on time, debt-to-income ratio, occupancy type (primary residence, second home or investment property), property type (single-family, 2-unit, condo), percentage of the property’s value you want to borrow (60%, 70% 80% 100%), and work history, among others.
Lenders will look at an applicants past credit history, income and the value of collateral being used to secure the mortgage. The lenders will compare this information to their guidelines to determine if the applicant is a good credit risk.
With regards to repayment capability, most banks prefer that a borrower has total debt obligations of less than 45% of gross income. Total debt include any monthly obligations the borrower has, including the proposed mortgage payment, property tax, homeowner insurance, automobile financing, credit card installments, alimony, etc. Utility and food costs are not considered debts and are not included in the Debt-to-Income ratio. Some non-prime mortgage lenders allow a Debt-to-Income ratio of up to 55%.
Lenders will look for job stability, credit worthiness, disposable income, liquid assets, debt to income ratios and loan to value ratios among many other things. Sometimes a borrower can be deficient or weak in one of the above mentioned areas but make up for it in others to still be considered for the financing desired. Lenders don’t typically want to see a lot of job changing or career changing happening. Also, obviously the better the credit the better the chance the lender will be repaid on the debt. Disposable income is how much income is left over after you have paid all of your monthly obligations. Debt to income is a ratio that is calculated based off of how much you make divided by how much your obligations are and LTV (loan to value is simply how much of a mortgage you are borrowing compared to how much your home is valued at. These are all very important items that a lender looks at as a part of your whole package.
Reserves is another factor that lenders want to see. Reserves are simply how much liquid cash you have in the bank to make payments with. If you are a first time home buyer the reserves can be anywhere from 2 -6 months worth of PITI (Principle, Interest, Taxes and Insurance). Various lenders will have different guidelines so be sure to ask your Mortgage Professional how much cash you will need to have in reserves.
Your credit worthiness will affect the interest rate and the number of programs that are available to you.
Jan
1
Second Mortgage
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A mortgage that has rights subordinate to a first mortgage or in second position.
Many current homeowners use a 2nd mortgage to pay off credit card balances. Interest rates on second mortgages are often lower than that of high interest bearing credit card accounts. Interests paid on second mortgages may also be tax deductible for some homeowners. As always, check with a Certified Public Accountant before taking such deductions.
Unfortunately, some borrowers interpret a payment-reduction consolidation second mortgage as a license to take on more non-mortgage debt. A few years later, they look to consolidate again. If their house has appreciated enough, they may be able to, but sooner or later they run out of equity.
A Second Mortgage uses your home as collateral. Your home equity is the part of your home that you actually own and this is the guarantee for your loan.
Some second mortgage loans may extend for as long as 15 or 20 years; others may require repayment in one year. You will need to discuss the repayment terms with the individual mortgage company and select one that offers terms that best suit your needs. For example, if you need to borrow $20,000 to make repairs on your home, you may not want a loan that requires you to repay the entire amount in one or two years because the monthly payments may be too high
Sometimes referred to as a Junior Loan, Second mortgages in all their varieties can be powerful tools to consolidate debts, make home improvements, or avoid paying mortgage insurance. For more information, contact one of our mortgage professionals today.
Be sure to ask if a no closing cost second mortgage is available to you!
When a borrower cannot qualify for 100% financing with their current credit score, they may be able to qualify using an 80/20 combo. The borrower actually gets two loans, one for 80% of the sales price, and the second mortgage for 20%. This allows the borrower to get into the home at 100% financing with a lower credit score than what is required for 100% one loan.
A 2nd loan, on the same property, that is in a junior lien or subordinate position.
Sometimes a second mortgage is helpful in that it allows a borrower to maximize the cash out available without having to pay private mortgage insurance on one loan with a loan amount over 80% of the home’s value.
If you would like to discuss the advantages and disadvantages of any 80/20 versus a 100% loan, please feel free to contact me. I will be more than happy to run through both scenarios for you, to see which option will benefit you the most.
Usually the 20% loan will have a higher interest rate than the 80% loan. However with the first loan only being 80% loan to value it will generally carry a better interest rate than a 100% loan. If you qualify for a 100% loan and an 80/20 chances are that the 80/20 will have a lower combined monthly payment.
Speak to your mortgage professional to see how getting a second mortgage can save you money every month on your bills.
Second Mortgages are generally available in two varieties, a Fixed Rate Second or a Home Equity Line of Credit or HELOC. A fixed rate second mortgage generally have much higher rates and are for a shorter term 15 to 25 years. A HELOC is also a shorter term but has lower rates that are adjustable and usually tied to PRIME. A HELOC works similarly to other lines of credit or credit cards. You have a total available balance and make payments on the amount of balance you owe. The repayment of a HELOC is also split into two time periods, a draw time, and a repayment time. During the draw period you can use the available equity and pay it back at will and an interest only monthly payment is due on the balance. During the repayment period the remaining balance is fully amortized and a principal and interest payment is made.
To really understand the benefits of these scenarios you will want to contact a mortgage professional and let them evaluate your current situation. You will need to express to them what your goals are for the near and long term future. These are important factors in determining what loan program is right for you.
Jan
1
Home Improvement
Filed Under real estate | Leave a Comment
Advice on Home Improvement:
When contemplating a home improvement project it is important to understand the difference between improving the marketability of your home versus actually increasing the value of your home. While any improvement to your home inexpensive or expensive can increase the likelihood of a faster sale, they do not necessarily increase the value of your home. The actual value of your home is determined by an appraisal. The appraisal takes many things into consideration when determining the value of your home. Some important factors are condition, age, and square footage, number of bedrooms and baths and location. Then he/she compares your home to other like properties in the surrounding area that have sold.
Don’t underestimate the value of proper landscaping and cleaning when showing or appraising a home. A well manicured lawn, healthy and well laid out trees ampersand plants, fresh paint, gleaming floors, and clean exteriors go a long way toward boosting the marketability and perceived value of a property.
Some improvements that add value in the short term are: Adding square footage of living space such as additional bedroom, sunroom, playroom. Adding on a garage or deck will also increase your homes value.
Some of the best additions for adding value to a home are a second bathroom and energy efficient windows. Before you do any home construction project remember to check any local building codes and acquire the proper permits. Additions and modifications done to a home without a permit can cause trouble if you decide to sell your home at a later date.
If you have a home that is outdated then chances are you will not receive full value for the home but even if you do, it might have to sit on the market much longer than if you made some simple improvements. If your interest on your payments are $1,000 dollars a month and it sits on the market 3 extra months then you have actually spent an extra 3K on that property to get it to sell. Sometimes it makes sense to look at this and maybe take 2 or 3K and spend on painting and misc. updates to make the home sell much faster. A good local realtor can help you determine what is selling in your neighborhood and help with the decision of where to place the money for the updates. A simple painting on the interior will do wonders for a home. But don’t loose sight of the curb appeal too. If a potential buyer doesn’t like the outside (curb appeal) they won’t look inside.
Jan
1
Debt to income ratios
Filed Under mortgage | Leave a Comment
Editors Note: Due to the mortgage and credit crunch, debt to income ratios have been lowered making it more difficult to qualify for a loan. If you’re in need of a mortgage in Denver, CO contact us to discuss your mortgage options.
The ratio is expressed as a percentage which results when a borrowers payment obligations on long term debts is divided by the borrowers effective income. This is calculated on a net income for FHA, VA mortgages and on a gross income basis for conventional mortgages. (also referred to as housing expenses to income ratios).
It is important to note that many lenders look at what is referred to as front and back end ratios. The front-end ratio is the housing payment vs. gross income and the back-end ratio is the total monthly (excluding utilities, food, or other non-recurring/variable expenses) vs. gross income. Some lenders will go as high as 55% on the back-end ratio depending upon certain factors such as the borrower’s credit score ampersand loan amount.
Front ratio is calculated by dividing your gross monthly income by your housing expenses - those include principal, interest, real estate taxes, homeowners insurance, mortgage insurance (PMI) and association fees - the latter two you may or may not have and if you have condominium association, insurance is often included in association fee. When calculating back ratio your monthly consumer debt payments are also included like payments for your cars, credit cards, installment loans including student ones, second mortgage, etc.
Lower debt to income ratios allow you to get the best rates and quicker loan approvals.
Borrowers having trouble qualifying for loans on the basis of their debt to income ratio should speak with a loan officer about paying off certain high monthly payment consumer debts or exploring stated income alternatives to their selected loan program.
Conforming loans will require lower debt to income than your subprime loans. Once your mortgage professional knows what your income is and has as chance to pull your credit he or she will be able to determine what category of loans you will qualify for. This is done is the first stage of the loan process called the pre-qualification.
Your debt to income ratio is a simple way of showing what percentage of your income is available for a mortgage payment after all other continuing obligations are met. The ratio is one of the many things a lender considers before approving your home loan.
As one of the underwriting criteria, Debt-to-Income ratio carries much weight in the loan approval process. For homeowners with occupations that are difficult to document income, many lenders offer loan programs in which DTI ratios are not considered in the underwriting process.
Debt ratios tell the lender whether or not you will be able to afford the proposed payment. The lender looks at the total gross income before taxes and other deductions and uses this number in the factor to determine the income you qualify with.
The lower your income to debt, the more secure the lender feels.
Your debt to income ratio (DTI) is a key indicator of your true financial picture. Your debt to income ratio is calculated by dividing monthly minimum debt payments (excluding mortgage or rent, utilities, food, entertainment) by monthly gross income. For example, personal gross monthly income of $3,000 who is making minimum payments of $1000 on debt (loans and credit cards) has a debt to income ratio of 33 percent ($1000 / $3000 = .33). Contact A Mortgage Professional to help you determine your DTI.
Jan
1
With a debt consolidation loan, all your debts will be consolidated into one simple monthly payment. Debt consolidation works to eliminate your late fees and reduce your interest rates to make that one monthly payment lower than ever. Avoid taking drastic steps such as bankruptcy Debt consolidation programs are viewed as positive by banks and creditors. By engaging in a debt consolidation loan, your creditors realize you are making a good faith effort to repay your debt. Creditors are willing to work with debt consolidators to reduce your payments and in turn, your debt. Pay off your debt quicker and easier than you ever thought possible with a debt consolidation loan.
The ability to convert short term debts into small long term financing is one of the most powerful arguments for refinancing, and can help reduce your total monthly expense by up to 50% or more.
When should you consider a refinance for debt consolidation?1. If you are only able to pay the min balance on credit card debt each month. 2. If you have credit cards with high interest rates.3. If your credit cards are maxed out.4. High interest auto or recreational vehicle loans5. High interest personal loans or college loans
Not only can a refinance save you money each month, but for many people debt consolidation refinance: Is a second chance to get their finances under control. Provide an opportunity to learn how to better manage their credit in the future. Very often can improve your credit score, which in turn could save you more money by giving you access to better insurance rates.
In most cases you can deduct the interest paid on your mortgage on your federal taxes. You cannot deduct interest paid on credit card, vehicle or personal loans on your federal taxes.
Why would you want to pay 18-24% interest on credit cards when rates are 1/3 to 1/4 of that for your home. It just doesn’t add up and make sense to continue to pay those high rates when you have the option of lowering those rates. This can save you thousands of dollars not to mention you will only have to write one check instead of multiple checks every month.
You will not always be able to consolidate all of your debt. If you simply have too much debt to consolidate, you should focus on paying off the accounts with the highest interest rates first.
It is important to understand that although a consolidation loan may help you get your finances under control, it doesn’t “eliminates debt”, as some unscrupulous companies claim. Rather, it rolls all of your debt into one loan, with one payment and one interest rate. Debt consolidation should not be seen as an open door to apply for more credit. It should be seen as a tool that will help you get your finances under control, once and for all.
Homeowners who are heavily in debt and have difficulty managing their finances should always consult with a financial advisor before using debt-consolidation loans to get temporary relief. By taking out a debt-consolidation loan, which uses the home as collateral, to pay off credit card debt and other obligations, which are unsecured debts, essentially transfers all unsecured debt into one that is secured by the home. While defaulting on credit card debts usually leads to nothing more than a bad credit profile and some collection calls, defaulting on a mortgage can result in foreclosure of the home.
Jan
1
Can I Get a Mortgage With a Bankruptcy?
Filed Under mortgage | Leave a Comment
This can be summed up in one word - Yes. Aggressive programs from aggressive lenders makes money available for people who have filed a BK.
A bankruptcy does not exclude you from getting a mortgage. It simply means you are a higher risk to the lender. Your rate may be higher, the fees a bit higher but the mortgage can still be obtained.
You will often want to plan a two step strategy when refinancing out of bankruptcy. Refinance once now to get your affairs in order, pay off debts, lower your overall monthly expenses, and help you rebuild your credit, and then a second refinance in two to three years to take advantage of your new credit score and any additional equity in your home you may have built or gained through appreciation.
It is also possible to refinance while you are currently in a chapter 13 bankruptcy. You will have to get permission from the bankruptcy court and show that you have made payments into the plan on time for at least 12 months. Keep in mind that the maximum loan to value on these types of loans are typically from 70%-80% depending on the lender.
To offset some of the higher rates that you may get after filing a bankruptcy you may choose to go with a short term arm such as a 2/28 or 3/27 where the payment is fixed for 2-3 years and at that point you can come back and refinance into a program that better fits your needs.
The type of bankruptcy that was filed will be the first determining aspect in deciding what type of mortgage financing you qualify for.
There are many programs that allow up to 100% financing 1 day out of a bankruptcy. Of course your credit score needs to be able to support this also. Basically if you have managed to straighten out your credit since the bankruptcy it is possible to have a decent credit score by the time your bankruptcy is paid off.
Getting a home loan after bankruptcy is not too difficult with sub-prime lenders, although the borrower should expect to pay a higher interest rate. Because of the high bankruptcy mortgage interest rates, when choosing different types of bankruptcy home loans, potential borrowers should expect to refinance the mortgages to lower interest rates after they have a chance to rebuild their credit in a couple of years.
Your chances for home financing will increase if you carried some accounts through the bankruptcy. Some lenders will also use your cancelled rent checks for a trade line.
On a chapter 7 bankruptcy lenders usually look at the discharge date and not the file date. On a chapter 13, a lender may look at the file date unless the chapter 13 has been dismissed. Your mortgage broker will be able to get the best lender for your particular situation.
Oct
19
There is a great debate within the inner-mortgage circles these days. Should we, as loan professionals, encourage clients to borrow as much money as possible? Or would consumers benefit more if we helped them to understand the advantages of 15-year amortization schedules and pre-paying principal? Let’s examine the pros and cons of both strategies.
Leveraging Your Property. In order to understand why you’d want to borrow as much as possible for your home purchase, you must first grasp the concept that equity has a zero rate of return. Here’s an example:
If Consumer “A” buys a home for $300,000, and puts 20% down, then they have $60,000 in equity. Over the next 5 years, the property appreciates $100,000 in value. Consumer “A” now has $160,000 in equity.
Consumer “B” buys a home for $300,000, and puts no money down. At the end of 5 years, that same home is now worth $400,000. Consumer “B” has $100,000 in equity, which is the same appreciation as Consumer “A”, a net $100,000.
As you can see, your down payment has nothing to do with your rate of return. What becomes important is how you choose to manage the $60,000 you didn’t use as a down payment. If you use it for frivolous activities, such as buying toys or going to Las Vegas, it would be more prudent for you to use that money as a down payment. Especially since this will enable you to obtain a lower interest rate.
However, if you were to invest the $60,000 in a vehicle that can out-earn the cost of that debt, then this could be a formula for success. This is why some lending professionals suggest putting as little down as you possibly can, maximizing your tax write-off, and investing the rest. This principle has been applied for many years in the life insurance game. The old saying goes, “Buy term and invest the rest.” The key component is taking the money you would have used as a down payment and creating an asset accumulation account. This account should earn a significant enough rate of return to enable you to pay your mortgage off entirely and achieve the ultimate goal of being debt-free.
Paying Your Home Down Rapidly. There are very few times over the course of my career that I have seen a client with zero debt and no financial difficulties. Choosing to pay off all of your debt can reduce stress and help you to gain freedom of cash flow for investment opportunities. A 15-year mortgage or a bi-weekly payment strategy provides structure. It can also put you on track to have your mortgage paid off within a set timeframe. Simply put, it contains built-in discipline.
It’s important, however, to understand that regardless of how rapidly you pay your home off, you’re not getting any greater rate of return on your investment than if you paid it off slowly.
Conclusion. So how does one determine which scenario is best? The choice depends entirely upon the individual. Savvy consumers who are disciplined, and are comfortable taking chances from an investment perspective, would do well with the first scenario. Over the course of time, it’s been proven that your rate of return over the long-haul will be far greater than the rate you’d pay for a mortgage in today’s rate environment. It’s important to seek the advice of a skilled investment advisor to ensure success with this strategy.
The second scenario is best for those who have a difficult time managing their money or who’ll sleep easier at night knowing they have a plan in place to pay their loan off more rapidly. Be sure that your budget can handle accelerated payments. When consumers “bite off more than they can chew” with a 15-year mortgage, they frequently end up having to refinance back into a 30-year schedule.
If you find this subject intriguing and would like to know more, I recommend that you read a book titled, Missed Fortune 101, by Douglas Andrew. It’s an outstanding read that is very simplistic and goes into far greater detail than I can cover in this column. Douglas is a financial planner who advises safe-structured investments such as whole life policies and tax-free fixed income instruments.