To merge or not to merge
PRIVATE MORTGAGE INSURANCE: If your down payment is less than 20% of the purchase price of the home, mortgage lenders require that you take out Private Mortgage Insurance (PMI). This insurance protects the lender in the event you default on your mortgage. PMI has fallen out of favor in recent years due to the 80/10/10 (80% first mortgage, 10% second mortgage, 10% down payment), 80/15/5 (80% first mortgage, 15% second mortgage, 5% down payment), and 80/20 (80% first mortgage, 20% second mortgage, 0% down payment).
On the heels of the mortgage credit crisis comes word that the two bigger players in the mortgage industry may merge. However, after further deliberation, they decided against a merger.
MGIC drops bid for rival Radian
The mortgage insurers agree to end the deal and focus on how to survive in the industry.
By Emily Fredrix The Associated PressMilwaukee – Mortgage insurer MGIC Investment Corp. abandoned its $5 billion bid to buy rival Radian Group Inc. on Wednesday, saying it was in each other’s best interest to concentrate on surviving in the faltering mortgage industry.
Radian had vowed to see the deal through when MGIC announced in August it wanted to back out. But chief executive S.A. Ibrahim said Wednesday that Radian didn’t want to fight and instead needed to weather what he called “an industrywide scramble to survive.”
Investors seemed hopeful for both companies after news of the agreement.
Though Radian’s shares tumbled as much as 9 percent after the market opened Wednesday, they closed up 16 cents at $18.27. MGIC shares fell 29 cents to end at $30.05.
MGIC, based in Milwaukee, had agreed in February to pay about $5 billion in stock for Radian, valuing its shares at $60.78. Shares of MGIC closed the day the deal was announced at $70.09.
As problems mounted in the mortgage market, both companies saw their shares tumble and the deal’s value sink.
MGIC said it did not believe it had to complete its purchase of Philadelphia-based Radian because their joint interest in subprime-mortgage investor C-Bass LLC could be worthless.
The decision to end the deal was mutual, both companies said.
Neither party paid the other to get out of the agreement, according to a news release. The original agreement said there would be no breakup fee if a decision was mutual.
Both companies’ shareholders had already approved the deal, which MGIC had said would close in early October.
But woes felt throughout the mortgage industry made the deal difficult to finish, said Michael Zimmerman, MGIC’s vice president of investor relations.
While this is akin to splitting up, it remains to be seen what this means to the borrower. There aren’t too many PMI companies left and when the two biggest PMI companies are more concerned about surviving, especially when in 2007 PMI is tax deductible, this can’t be a good sign.
FAQ: How do I get the best rate?
From time to time I’ll be addressing client questions that are frequently asked and some questions that are quite obscure. Some questions are mortgage related, some are real estate related, and some are Denver related. My answers won’t be the canned answers you see on most mortgage sites.
Q: “How do I get the best rate?”
A: Let’s assume the following:
- you’re asking about a mortgage on a single family house that’s considered your primary residence
- you’re asking about a first mortgage without a second mortgage
- you have either 20% equity (refinance) or you’re putting a 20% down payment (purchase)
- you have credit scores over 720
- you don’t have any late payments of any kind
- you have assets i.e. money in a checking account, savings account, 401k, mutual funds and/or stocks at established financial institution(s)
- you have statements from the aforementioned financial institution(s)
- you’ve been in the same line of work for quite some time for the same company
- you have a limited amount of debt
- your debt to income ratio is far below the 40% threshold
If you fit this profile you’ll get the best rates because mortgage institutions view this profile as little to no risk. These loans are typically run through an automated underwriting program i.e. computer software that runs an algorerithm (software geek joke) and gives you a loan approval in seconds. Even if you don’t fit this profile 100%, the automated underwriting program may still grant you an approval in seconds. Your history of paying debt (credit score), capacity to pay the loan (income/assets), and the collateral backing the debt (property) all plays a role in getting the best rate.
A new spin on Interest Only Rates
In the last year or two, the 30 Year Fixed Interest Only programs have risen in popularity. These are 30 year loans that have an introductory Interest Only payment for 10 or 15 years before the loan amortizes to a fixed payment schedule.
Confused? Don’t be.
Basically, it’s one loan split into two:
The first loan is an interest only loan for the first 10 or 15 years. So if you took out at $250,000 first mortgage with a rate of 6.5%, the first loan has an interest only payment of $1354.
The second loan is a fully amortized loan for the next 20 or 15 years. So if you only pay interest during the first 10 or 15 years, your principal balance will stay at $250,000. Your second loan will have payments of $1864 (20 year amortization) or $2178 (15 year amortization).
The Real Estate Journal (Wall Street Journal’s Real Estate section) has an article on this loan, called New Type of Mortgage Surges in Popularity.
Back to Back Escrow
This generally happens when you are selling a property and buying one at the same time. It is set up to allow you to complete the purchase of one property, and immediately complete the sale of your current home.
When you want to buy a new house, but you still need to sell your present home, you can make the offer on the new house contingent on the concurrent or back to back escrow closing of the two properties. This contingency will protect you if something goes wrong with one of the deals. Many home sellers would consider an offer like this with a contingency for a back to back close much less attractive than one that did not have such a contingency.
Back to Back escrows, are also known as concurrent escrows.
Often this happens when doing a refinance and there is a first mortgage and a second mortgage by different companies. Often they will ask for a simultaneous close.
Other sites: Broker Outpost | Delinquency | FSBO| Pay Option Arm Calculator
Buy Your First Home
Editors Note: Due to the mortgage and credit crunch, many no down payment or 100% mortgages are no longer be available. If you’re in need of a mortgage for purchase or refinance in Denver, CO contact us to discuss your mortgage options.
Are you interested in buying your first home. Its easier than you might think! Did you know that in 2005, 43% of all first time home buyers used mortgage programs with no down payment?A good mortgage professional can help find a loan program to make your dream a reality.
One thing to consider when purchasing your first home is all the extra expenses. The hidden cost of homeownership. When renting you often don’t have to pay for garbage collection, water etc. These are just some of the hidden costs involved.
You may want to consider Down Payment assistant program to help with down payment or closing costs when purchasing your first home. In addition to this you may ask for seller contribution of 3 – 6% for additional help. Your real estate agent can help you structure the contract.
With the many programs that are available to you as a first time home buyer, you should have no problems finding the right program for your buying needs. Your mortgage professional will be able to go over different options and inform you how to get your home purchase done with no down payment and zero out of pocket expenses.
The payment on your new home has tax advantages. Your payment could be slightly higher the your current rent payment, but, because of tax advantages, you could actually be saving a couple of hundred dollars a month.
Many first time home buyers that do have the additional savings for a down payment and closing cost choose to use 100% financing options and seller contributions so they can save those funds for things like new furniture, remodeling or painting, landscaping, etc. Don’t forget that once you own the home you will want to make it your own with some personal touches.
Many first time homebuyers purchase a home with a first and second mortgage. By doing this you can avoid mortgage insurance and you can purchase a home with no down payment. Your first mortgage will be 80% of the purchase price and the second mortgage will be 20% of the purchase price. The second mortgage will either be done as a home equity line of credit, a HELOC, or a second mortgage.
Other sites: Loan Officer | FSBO | VA | Investor Loans | Selling your home with a real estate agent | Why is my credit bad | MIP| Pay Option Arm Calculator
Cash-Out Refinance
Editors Note: Due to the mortgage and credit crunch, Cash-Out Refinances may be harder to obtain. If you’re in need of a Denver Refinance contact us to discuss your mortgage options.
With a Cash out-Refinance the money you get at closing can be used for many purposes such as future investments, College, or debt consolidation. Money can be used to pay off current monthly debt which could lower your personal Debt to Income ratio. Consult a Mortgage Professional in regards to how much you should extract from the equity built into your home.
You can get cash out through a first mortgage, a second mortgage or a home equity line of credit (helot). Some lenders will require that you stay within certain loan to value (LTV guidelines) for cash out. Conforming limits are 90% LTV and FHA cash out is limited to 85% LTV. Many subprime lenders will go to 100% cash out with good credit.
Whenever you take a decent amount of cash out from your home, your LTV (loan to value ratio) will probably exceed 80%. To avoid paying mortgage insurance on these loans, many borrowers split the amount borrowed into two loans, a first and a second. Typically, the first mortgage has a LTV of 80%, but there are loan programs where having the first mortgage at 70% LTV offers more favorable terms to the borrower. The lower the LTV ratio, the less risk the lender will have in offering you a loan.
FHA update on October 31, 2005 allowing for a cash out refinance to go as high as 95% LTV. Previously the guidelines only allowed for a maximum of 85% LTV. These changes will allow many borrowers to take advantage of the equity in there homes and still obtain low rate financing.
Taking cash out on a home refinance is one of the many factors a lender takes into account when evaluating the risk of the loan. In certain situations, taking cash out may cause the lender to perceive the loan to be of higher risk. This could result in a slightly higher interest rate or additional restrictions on qualifying for the loan.
Since payment on cash out refinances can be spread across over up to 40 years, it is often advisable to use the proceeds for investing in something enduring. Using cash out from home equity for Value adding home improvements or for financing a new business are excellent options whose benefits you will continue to reap long after the last payment is made.
Besides setting the maximum LTV limit with Cash-Out Refinances, some prime lenders also limit the maximum cash-out dollar amounts.
Some non-conforming lenders will allow cash-out up to 125% of the value of your home.
Cash out Refinances can help many people better their financial situations by improving their monthly cash flow. However, many of these borrowers after paying off high interest rate debts often find themselves in the same situation down the road because of a failure to control their use of credit. These people wind up being in a worse situation because now they have no equity in their home plus high interest rate debts to pay.
If you’re looking to take out unlimited cash out when refinancing consider a rate and term refinance of your first mortgage and a home equity loan second mortgage option. Taking cash out proceeds from your second mortgage allows you to get a better rate on your first mortgage.
CLTV
Editors Note: Due to the mortgage and credit crunch, high CLTV mortgages may be harder to obtain. If you’re in need of a Denver Mortgage contact us to discuss your mortgage options.
CLTV, also know as Closing Loan to Value, is the percentage of how much a house is worth compared to how much is owed on all mortgages on the property. Example: House is worth $300,000 and 1st mortgage balance is $130,000 and second mortgage balance is $80,000 (total of mortgages is 130k + 80k = 210k)= 70% CLTV
A loan that is 100% CLTV means that you owe the same amount that the home is worth – you have no equity.
Many times you will need to do a second mortgage at a different bank than the first, as to avoid a conflict – due to Combined Loan to Value(CLTV) guideline restrictions on the first mortgage that is also financed by the same bank.
CLTV is also referred to as combined loan to value and is used by lenders to figure the overall risk of a loan. The higher the combined loan amount compared to the properties value will affect what programs and rates you will qualify for.
Other sites: Loan Officer | 1003 The Loan Application | Investor Loans| Pay Option Arm Calculator
Commercial Loans
Commercial Financing is underwritten on a case by case basis. Every loan application is unique and evaluated on its own merits, but there are a few common criteria lenders look for in commercial loan packages. Financial Analysis A key component in making an underwriting evaluation is the debt coverage ratio (DCR). The DCR is defined as the monthly debt compared to the net monthly income of the investment property in question. Loan to Value Most commercial lenders will require a minimum of 20% of the purchase price to be paid by the buyer. The remaining 80% can be in the form of a mortgage provided by either a bank or mortgage company. Credit Worthiness For businesses less than three years old, personal credit of principals will be evaluated. This may hold true for longer periods of time for tightly held companies. For corporations, business performance and credit ratings will be evaluated with a proven track record. Property Analysis Fair Market Value and Fair Market Rent will be analyzed. Special use property may require additional underwriting. Age, appearance, local market, location, and accessibility are some other factors considered.
To calculate the debt service coverage ratio, simply divide the net operating income (NOI) by the mortgage payment(s). For the sake of simplicity, let us assume that there is only one mortgage on the property: $500,000 First Mortgage 11% Interest, 30 years amortized Annual Payment (Debt Service) = $57,139 Then: DSCR = Net Operating Income (NOI) = $65,000 Total Debt Service $57,139 DSCR = 1.14
Most lenders will have a set Debt Coverage Ratio that they will want to see when considering underwriting the project. For example, retail property lenders may want to see a 1.3 DCR and an apartment lender may want to see a DCR of 1.2 or 1.25. The riskier the project, the higher the DCR.
There are several Lenders that will fund small commercial projects, similar to residential financing. Ask your Broker or Banker about these companies.
Depending on the market value and equity which you may have in your home or any other residential properties you may already own, it may be possible for you to refinance or obtain a second mortgage or HELOC to help cover all or part of a small to medium sized commercial real estate investment.
Commercial loans are for the most part a little harder to get than a residential loan.
Because higher loan amounts are often associated with Commercial Loans, some commercial lenders may require two appraisals from different certified appraisers if the loan amount exceeds a threshold limit. Certain lenders also require the service of their own approved appraisers.
Commercial properties are those other than a single family residence, 2-family, 3-family, or 4-family home. Properties that are 5 units or more, even though all units are of residential purposes, are considered commercial properties and require commercial financing. “Mixed-use” properties, those with a commercial unit and one or more residential units on the second/third floor, are also financed with commercial loans.
Appraising a commercial property is often more costly than appraising a residence of equal size
Another name for the Debt Coverage Ratio in the context of commercial mortgages is the Debt Service Coverage or Debt Service Coverage Ratio
The most important ratio to understand when making income property loans is the debt service coverage ratio. It equals Net Operating Income (NOI) divided by Total Debt Service.
Condominium
Condominium – A form of ownership in which individuals purchase and own a unit of housing in a multi-unit complex; the owner also shares financial responsibility for common areas.
For many first time home buyers, a condominium is an ideal starter home.
An individual condo owner holds title to the condominium unit only, not the land beneath the unit, so condos can be stacked on top of each other.
Despite being similar, town homes or townhouses are not considered condos. They are considered an attached single family residence or a planned unit development.
Condos serve as a great purchases for someone who doesn’t have a large family and doesn’t want the burden of cleaning or the maintenance that a larger home requires.
Condos are classified as high rise, more than five stories, and low rise, less than five stories.
On most condo projects a home owner association has been established to maintain the grounds and common areas.
Condominiums typically require slightly higher homeowners association dues to pay for insurances that are required and up keep of amenities and common areas.
For a mortgage loan secured by a condominium unit to be eligible for delivery to Fannie Mae (FNMA) or Freddie Mac (FHLMC), the condominium project must be approved by FNMA and FHLMC. In order for a condominium development to be accepted, it must meet certain requirements promulgated by Fannie Mae and Freddie Mac. Some of the more important requirements are, the minimum number of units already sold, the number of owner occupied units and units being rented in relation to total number of units in the development, and if any one investor holds title to more than a certain percentage of total units.
Condominium boards often require an interview with a condo buyer to ensure the potential occupants meet their requirements. Some of the condo boards’ criteria are the occupant’s family size and income situation.
The Condominium Market is booming across the United States. Apartments are being converted into condominiums in record numbers and prices continue to rise. This phenomenon is being met with mixed emotions by some. On one hand it reduces rental units available for those not financially capable or interested in home ownership. On the other hand it is argued that Condominiums aid many buyers in getting in on entry level home ownership.
A great way for young adults to get started buying their first home is by using the FHA “Kiddie” Condo Loan Program. This type of mortgage allows a person to co-borrow with a blood relative (e.g. parent, grandparent, sibling, etc.) who helps qualify for the loan using their income or assets. Both borrowers take title to the property and sign for the loan.
One advantage to owning a Condo is not having the requirement for a survey to be done.
Some lenders will consider a mortgage loan secured by a condominium to have more risk than a loan secured by a single family residence. In this case, the lender will charge a slightly higher rate of interest for the condominium loan.
This is an ownership where the owner gets title to a unit, in a multiple dwelling plus a proportionate interest in some of the common areas.
Some financial “gurus” have advised against this because you are turning unsecured debt into secured debt. While this is basically true the fact is that defaulted unsecured debt can be secured against real property very quickly once the debtor is sued for it and a judgment is received.
In order to decide if a debt consolidation is your best action, you should figure what you are paying now and how that will translate in the length of time it will take you to pay off those credit cards. You may find that rolling those debts into your mortgage will save you thousands of dollars in interest payments.
A mortgage agent can help you decide if refinancing credit card debt into a mortgage is your best option. Using financial calculators available, they can compare how long and how much it will cost you to pay off credit card debt using your current monthly payments vs. refinancing the debt into a new mortgage. Very often the monthly and lifetime savings is large.
One major difference between unsecured (e.g. credit card) debts and secured (e.g. mortgage) debt is should a financial disaster arise, such as health issues, or lose a job, and a homeowner defaults on unsecured debts, he can file bankruptcy protection and keep the home, whereas if he defaults on mortgage payments, he would be forced into foreclosure.
If you are planning on selling your home in the near future, you may want to rethink consolidating. You need to make sure that you have enough equity to pay for realtor’s commission and down payment or closing costs on the new home.
If you have gotten buried in a hole with credit card debt it could be a necessity to refinance your home and pay off your credit card debt. It has been known to save thousands of dollars. On the other side of the spectrum, if you only have 5 months left on a credit card bill it is note wise decision to bury that into a mortgage.
You can consolidate your credit card debt through use of your first mortgage or by obtaining a second mortgage or a home equity line of credit, also known as a HELOC. A HELOC works with the same basic principals of a credit card. It is a revolving account that as you pay the equity line down, you have that money available to you to use again. With a second mortgage you simply have a set term (5 years, 10 years, 15 years, etc…) that you will pay on the loan for and when it is paid off you are relinquished of your obligation to this debt and the account closes. All 3 (1st mortgagee, 2nd mortgage or HELOC) are excellent choices for debt consolidation but you and your mortgage broker will need to figure out which one makes the most sense for your particular situation.
Consolidating credit car debt into your mortgage can save a homeowner hundreds and sometimes even thousands of dollars per month by lowering their total monthly obligations. When you consolidate credit cards into your mortgage you also are able to lower your interest rates on those credit cards which essentially saves you a lot of money but you are able to write off the interest on your tax returns from your mortgage and you can not do this with your credit cards.
If you want to use a refinance loan to consolidate some of your debts, you’re going to have to borrow more than the actual amount remaining on the loan that you’re refinancing. This additional amount will be used to pay off those debts that are being consolidated and will affect the monthly payment of your refinanced loan. By doing this, however, you can make your finances and outstanding debts much more manageable and will likely become debt-free much faster.
When deciding to refinance for debt consolidation you might want to consider how long you will have to pay your credit cards if you are only making the monthly minimums. This can take you much longer in most cases than paying on a traditional 30 year fixed mortgage.
Other sites: Mortgage Broker | Investor Loans | Reduced Documentation Loans | Fixed-rate mortgage | Increasing your homes value | Why should I refinance | MIP | Rehabilitation mortgage | VA| Pay Option Arm Calculator
FHA
Federal Housing Administration; established in 1934 to advance homeownership opportunities for all Americans; assists homebuyers by providing mortgage insurance to lenders to cover most losses that may occur when a borrower defaults; this encourages lenders to make loans to borrowers who might not qualify for conventional mortgages.
For an FHA loan, your monthly housing costs should not exceed 29% of your gross monthly income. Total housing costs include mortgage principal and interest, property taxes, and insurance. Those four terms are often lumped together, and referred to as PITI.
FHA loans also have no prepayment penalty. Qualifying guidelines assist the average buyer in each particular marketplace. Some underwriting guidelines are less restrictive than those of conventional fixed-rate loans, and can vary based on the marketplace. The lender is insured against loss for the life of the FHA loan. It is possible to place subsequent mortgages after an FHA first mortgage.
The seller or other third party is allowed to pay part of, or all of the closing costs associated with the loan. FHA loans are assumable, but the assuming party must qualify. Any FHA loan originated prior to December 1, 1986, are simply assumable. Meaning the purchaser does not need to formally qualify for the loan. Loans are assumed at the note rate under which they were originally originated. The exception being on ARMs, in which case are assumed at the loan’s current interest rate.
Now looking at the down side of the FHA loan. This type of loan can cost the seller more money in the form of non-allowable. Non-allowable are fees FHA will not allow the borrower to pay such as a processing fee etc… This may not be a deal killer by any means but it is something to take into consideration when writing the offer on the home you intend to purchase.
A FHA mortgage is when the government guarantees Federal Housing Authority loans. You can put down a smaller down payment on a FHA loan, but you will also be required to pay mortgage insurance.
What are the advantages to using FHA financing? There is a low down payment requirement. The down payment is 3 percent, up to the maximum loan amount allowable in your particular region. The entire down payment can be gifted or borrowed from a relative (on most other loans the down payment must be sourced and seasoned).Unlike conventional loans, there are no reserve requirements of two months’ PITI payments at closing. The interest rates are typically lower on FHA loans, than what they are on conventional fixed-rate loans.
FHA loans have lower maximum loan limits compared to that of conventional mortgages. The maximum loan limits vary county by county and are adjusted every year to reflect increasing home prices. FHA loans are not for every one in that the loan limits are too low for higher price properties and that the application process takes longer than conventional mortgages, so in a hot real estate market where houses receive multiple offers, buyers using government loan often lose out to those using convention mortgages.
For an FHA loan, your monthly housing costs should not exceed 29% of your gross monthly income. Total housing costs include mortgage principal and interest, property taxes, and insurance. Those four terms are often lumped together, and referred to as PITI.
Your total monthly costs, adding PITI and long term debt, should be no more than 41% of your gross monthly income. Long term debt includes such things as car loans and credit card balances.
Your FHA loan will also carry Private Mortgage Insurance (PMI). The PMI payment is lower than what it would be if you had a similar conventional loan scenario. Unlike conventional loans, the PMI will remain with the FHA loan for the life of the loan.
Federal Housing Administration Loan. This loan is issued by the Insuring Office of the Department of Housing and Urban Development.
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