The Mortgage Porter

The Fed is Getting Tougher on Credit Card Companies

In a press release earlier this week, the Fed announced they have approved the final rule amending Reg Z regarding credit cards which will go into effect on February 22, 2010.   The new rules set tougher guidelines on credit cards, especially with regards to protecting consumers against rate changes and how they are billed.  

No interest rate increases for the first twelve months.  There are some exceptions such as if you have a variable rate tied to an index; if your rate is an introductory rate (which in that case, your rate must be fixed for a minimum of 6 months); and if you're more than 60 days late on your bill.

Increases to your interest rate can only be applied to your new balance.  Your old balance will keep the lower rate.

Payments will be applied towards the highest interest rates first when you pay more than the minimum payment.  (Some exceptions may apply).

Statements must be mailed or delivered at least 21 days before your payment is due.  Your due date should always be the same day of the month unless it falls on a weekend, in which case your due date will be the following business day.

Charges you make "over the limit" may be restricted (not allowed) unless you give your credit card company permission.

If you're under 21, you may need a cosigner such as a parent, to obtain a credit card.  Guess those credit card companies will have to stop preying on college students unless Mom or Dad agree to cosign.

No two-cycle (double-cycle) billing.  According to the FOMC's site "credit card companies can only impose interest charges on balances in the current billing cycle.

When your rate or fees are going to change, you must be notified 45 days priorto the change taking place.  You will have the option to refuse the change, however this probably means that your canceling your account.  If you do refuse the change, and your account is canceled, the creditor can impose higher payments by requiring to pay off your account in five years.  NOTE: Canceling your account may be damaging to your credit scores.  Should you get a notice that your rate or terms are changing and you don't agree with it, you are probably better off (as far as your credit score is concerned) paying off the card by applying more principal than canceling it with the creditor.

New monthly statements will show you how long it will take you to pay off your credit card making minimum monthly payments as well as what your monthly payment would need to be if you wanted to pay off your card in three years.

I applaud the new credit card rules.  Since their not going into effect until February 22, 2010 you may want to keep an eye on your interest rates...with just over a month before they take place, sly credit card companies may try to sneak a few changes in before things get tougher. 

Breaking Up is Hard to Do...Especially When You Own a Home Together

I've written articles before about issues to consider if you're going through a divorce and have a mortgage...what if you were never married?  Couples (or single people) often buy homes together...what if worse case scenario, it doesn't work out and one party wants to keep the home?

A divorce decree allows you to refinance to cash out the other spouse and still have the mortgage treated as a "rate term" refinance.  There are significant differences between a cash-out and rate-term refinance.  A cash out refinance is limited to an 85% loan-to-value and the rate is higher (approx. 0.5% in fee at an 80% loan to value with credit scores of 740 and higher).  If there is a court order, it's possible that FHA might allow a cash-out refi with a non-married co-owner.

There's also the issue of excise tax.  An excise tax affidavit is filed whenever a deed is recorded (in the State of Washington).  Excise tax may not be due when the person being removed from vesting is pursuant to a divorce decree.  However, when there is no decree or court order involved and the person is being removed, excise tax may be due as they consider the transfer of that person's interest to the other person "a sale".  I'm told the county may charge excise tax on half of the underlying mortgage.  As of the date this post was published, King County charges 1.78% for excise tax.   Possible exceptions to this would be if the co-owners were registered as domestic partners, or the transfer of the property to one co-owner is by court order. 

Just like a divorce, simply deeding the property over to the party who's remaining in the home does not remove the other person from responsibility or liability of the mortgage.  And it probably makes good sense to contact an attorney who specializes in divorce to assist with the separation of the real estate property.

New FHA Limits on Cash-Out Refi's

If you're considering refinancing and you're interested in taking cash-out to pay off debts, make home improvements or to eliminate a second mortgage that you did not obtain when you purchased your home; you have more reason than ever to start now.

Effective on FHA case numbers issued on or after April 1, 2009; FHA will only insure cash-out refinances when the loan to value is 85% or lower than the appraised value.  Your appraised value is not based on what you feel your home is worth -- it's based on what your neighbor's have sold their homes for in the past few months.

If you have owned your home for less than 12 months, FHA is limiting cash out refinances to which ever is lower: 85% of the appraised value or 85% of the original sales price. 

According to HUD's Mortgagee Letter 2009-08, this is currently a temporary requirement:

"Given the continued deterioration in the housing market, and FHA's need to limit its exposure to undue risk, this reduction to the maximum LTV for cash-out refinances is being instituted on a temporary basis while FHA further analyzes the housing and mortgage industry as well as its own portfolio to determine whether permanent measures should be taken."

Well, what are you waiting for?  You have two weeks as of today for FHA's expanded cash out guidelines of 95% loan-to-value with loan amounts up to $567,500 in King, Pierce and Snohomish counties.   If your home is located in the State of Washington, and you're interested in refinancing, you can apply on line (under Favorite Links).  By the way, I have been originating FHA mortgages for nine years and we have in-house FHA underwriters at Mortgage Master...as I mentioned, I can only help you if your home is in Washington.

Upside down in your home with good credit? March 4, 2009 may be an important date for you.

Just received this email, which I'm sure echos the thoughts of many home owners:

"Been meaning to contact you to get your take on the recent wholesale changes that are coming hard and fast at the mortgage bankers out there and, of course, see if there can be any benefit to a re-fi given the new lending "rules" (for lack of a better term). We're horribly upside-down on our current loan balance vs. current home value, so we don't know what can happen for us, if anything. But if there's a way to get that rate down and send out less each month. we're listening! What do you think about all this?"

Last week, President Obama announced his plans to help stimulate the economy and help provide stability with America's housing.  With the Homeowner Affordibility and Stability Plan, home owners who are "credit worthy" may be able to refinance their home up to 105% loan to value. 

On March 4, 2009, more details are suppose to be announced.  Here's what we understand so far:

• The program is limited to loans held or securitized by Fannie Mae or Freddie Mac.

• First mortgage may not be more than 105% of the value of the property. 

• Borrowers with a second mortgage may still be able to refinance if the second mortgage lien holder is willing to remain in second lien position and if the borrower still qualifies.

• The program will offer 30 year or 15 year fixed interest rates based on market rates.

• The program only applies to the home you live in.  It does not apply towards vacation or second homes or investment properties.

According the the Treasury, this program will not be available until March 4, 2009.  Lenders will become even more buried with refinance business once this happens.  It is to your advantage to be prepared.  By gathering the following information:

• 2008 W2s (if self employed or paid commission, 2 years of complete tax returns)
• Most recent paystubs covering 30 days of income.

• Most recent mortgage statements.

• Information on current monthly debts including amount paid monthly and amount owed.

• Most recent bank statements/asset accounts (all pages).

If your home is located in Washington State, you can apply on line now by clicking the link under my photo.  However, I don't anticipate having more details until March 4, 2009.

More to follow.

Game plan for preparing to buy a home when you're credit score is low

I don't blame anyone for wanting to own a home.  Sometimes when I meet with clients and review their current scenario, a game plan needs to be created so they can work on getting themselves into a better position to buy a home.  The last thing anyone wants is to cram themselves into a mortgage they cannot afford or to commit to a long term payment when they don't have a great track record of making payments on time. Some times a plan may take 6 months or a year or longer before someone is ready to buy a home.

I have someone with low credit scores who wants to buy a home.   She knows she will probably be a candidate for FHA financing because she has little down payment and her credit.  Although FHA is not as persnickety about credits scores as conventional financing, they scrutinize credit history: especially the last 12 months.

This person has a few late payments this year, the last one being as recent as August.  FHA financing is most likely out of the question for her until August next year assuming she does not make any other late payments between now and then. She can work on her credit for the next 10-12 months (until she has 12 months since her last late payment).   She doesn't have any collections but she does have a few small accounts that are "maxed out". 

• Credit card "A" with a balance of $477 and a limit of $500.
• Credit card "B" with a balance of $323 and a limit of $300.
• Credit card "C" with a balance of $215 and a limit of $300.

1. The first thing she should do is focus on getting card "B" under the limit of $300.  She's getting whammo'd with her credit scores for being extended beyond what her credit limit is with this account (in addition to being maxed out).   She should at least pay it down enough to make sure that her interest fees won't keep popping her over her limit.
2. Next she should select one of her two smallest cards to pay down to at least just below 50% of her card limit.   Card "C" would only take about $65 to bring her debt down to 50% of the line limit (300 x 50% = $150).
3. Then pay down the next card to at least 50% of the limit.  "Card B" will take $150 (assuming she's paid the extra $23 that has pushed her over the limit) to be at 50% of the credit line limit.
4. Credit card "A" will take a little extra cash at $227. (500 limit x 50% = $250.  477 - 250 = 227).

She needs to keep her credit below 50% of the credit line at the very minimum.  I know I said FHA is not as picky as conventional.  However, you do want your credit scores above 600 in order to receive better pricing (620 and higher is even better).

Not only will this help her with qualifying for FHA financing, she's probably also paying higher insurance rates due to her current credit scores. 

She has a decent income and no savings.   She needs to use this time of working on her credit to also build up her reserves.  Not only for what the lender will require (3.5% minimum down payment for FHA as of January 1, 2009); but for her sake should her income change or issues arise, she should have a minimum of 6 months worth of living expenses saved (FHA does not require this, I'm suggesting it).

She has been considering homes priced around $275,000.  FHA's minimum required investment for this home next year will be $9,625.  The seller can pay the remaining closing costs and prepaids as long as she has met the above requirement (which can be a gift or loan from family members)--this would need to be negotiated in the purchase and sale agreement. 

The proposed mortgage payment would be around $2,000 (including taxes, home owners insurance and mortgage insurance).  This is $700 more per month than what she is currently paying for rent.  Once she has corrected her credit, she should practice making a $2000 mortgage payment by paying the difference ($700) into a savings account that she leaves untouched for her down payment and to hopefully create a savings cushion.  $12,000 in savings would be ideal (6 months of mortgage payment) but not required.   If she has no savings, it will take her just over a year to pay $700 per month to come up with the down payment (9625 divided by 700 = 13.75).  Another 17 months to have a savings cushion of $12,000. 

I know this isn't instant gratification.  It is developing responsible financial habits.  There are expenses to owning a home beyond renting.  One of my last homes required a new roof just months after moving in to the tune of $15,000.  Savings has always been important and it's even more true in our current economy.

She's all ready moving in the right direction by contacting a Mortgage Professional who is interested in her long term financial well-being and is willing to help her create a game plan.

Check out my related article:  Getting on Track to Buy Your First Home. 

Should You Refi?

Last week I did a quick alert on the 30 year fixed hitting high 4's-low 5s and I received an excellent comment from Sandy:

"...With all the costs and everything of refinancing, how much lower do rates need to be than what you currently have, before it makes sense to think about refinancing? I am just curious, as we have a 30yr fixed loan that is in the low 5s."

You would think this is a simple question with a simple answer.  There's much more to it.  Here are some things to consider if you considering refinancing your mortgage:

How long do you plan on staying in your home?   There are cost to the mortgage even if you're getting a "no cost mortgage" where the hard costs are actually financed into the interest rate.   If you cannot break even on the cost before you plan on selling or refinancing again (low 4's to high 5's would be unlikely), then refinancing for the purpose of reducing your rate may not make sense.

Do you have an Adjustable Rate Mortgage?  If you're going to retain your property longer than the remaining fixed term on the ARM (adjustable rate mortgage), you may want to consider refinancing into a fixed mortgage.

Do you have private mortgage insurance or a second mortgage?   Sometimes if someone has pmi or a piggy back second mortgage, refinancing may make sense if the can restructure the existing mortgages into one and if the blended rate of their existing mortgages are higher than what the new mortgage would provide.

Do you have a Jumbo mortgage?  Depending on what your mortgage balance is and your current rate, it may make sense to restructure your mortgage into a conforming mortgage.  This can be done by paying down the mortgage at closing or using a second mortgage, such as a HELOC or fixed second.

Would you like access to your home equity?   Refinancing can provide cash for home improvements, college tuition, debt consolidation, or what ever else you wish to do with your equity.   Most cash out refinances are priced higher than a rate term refinance.

Are you getting a divorce or separation?  If you have a mortgage with another person and the relationship is dissolving; you will need to refinance in order to remove the one who's not staying in the home from the mortgage.   Divorce decrees and Quit Claim Deeds do not remove someone's liability from the mortgage.  Plus, it's a huge risk for the person who is no longer staying in the home.   Refinancing to remove an ex-spouse from the mortgage and to cash out their equity is not priced as a "cash out" refinance--it's treated as a rate term refi.

Are you concerned about your home value declining?  Refinances are priced based on loan to value and there are underwriting guidelines that limit how high a loan to value may be.  In "declining markets" lenders have additional restrictions on loan to value lending limits.

Here are some quick "Do's and Don'ts" for your refinance:

• Do get a good faith estimate from your Mortgage Professional.  If you have not heard from your Mortgage Professional since you closed your loan or over the past few months, you might need a new one (they could be out of the business).   
• Do not rely on a simple "rate quote" without knowing the costs involved.
• Do complete a loan application and provide the information your Mortgage Professional needs to lock in your interest rate.
• Do not try to "play the market" and get the lowest rate...it's far too volatile in this climate.   If the rate makes sense, lock it!

Must reads:

Picking your next mortgage by rate shopping?   You might as well be playing liars poker.

I'm happy to adopt your ARM.  No refi required.

 

Please Don't Neglect Your Unhealthy Mortgage

Today I received a phone call from a CPA who was trying to help her clients who have a "toxic mortgage".   She was hoping I would be able to save them...there was a time that I probably could perform a "rescue".   In fact it was just a few months ago before the current mortgage melt down.   Believe it or not, when applied correctly, subprime mortgages could mean the difference of someone being able to save their home assuming they were able to be disciplined enough to keep (or get) their finances healthy.  This family will not qualify for FHA or FHASecure (they don't have an ARM that's adjusted).   What they need is a subprime (now known as "non-prime") mortgage to buy them a little time.   Now their time is running out.

Part of their problem began with working with an unsavory loan originator who is now out of the business.   The LO brokered their loan to a subprime company I would not work with.  (Even though we're approved with around 80 lenders, give or take depending on the day, I tend to select 5 preferred prime lenders and 3-5 subprime/alt-a...this lender was not on my list of preferred). 

Shortly after closing, their lender informed them that they did not have home owners insurance...they did.  They provided documentation showing their insurance to the lender.    The lender did not respond and instead, ordered insurance for them at a hefty price...jacking up their payment beyond what they can afford.   Now they're sliding down a very slippery slope and the lender is not cooperating.   They are behind on their mortgage a couple months.  They called out for help too late.   

NOTE:  Other lenders may be more willing to cooperate with homeowners...you need to act quickly and contact your lender if you're having difficulty with your payment. 

Homeowners:  the very moment you think you may be having trouble with your mortgage or debts, please contact your Mortgage Professional right away.   If you don't have one, you can always contact your CPA or other trusted financial advisor for a referral.   Please don't wait until you have a "mortgage emergency"...get help, even if you just have the sniffles.

Trusted Advisors (Real Estate Agents, CPAs, CFPs, etc): Please keep an ear out for your clients who may have adjustable rate mortgages or are may be having difficulites with their mortgage payment.   Even if an ARM isn't scheduled to adjust for 12 months or more, the sooner someone meets to with a Mortgage Professional to make sure their credit and everything else is in line to restructure the mortgage (if needed), the better for all.

All home owners should meet with their Mortgage Professional at least annually to have a "mortgage check up" or Annual Review.   This is a service that I provide to my clients.  I'll provide more information about the Annual Mortgage Review in a separate post.   

My point is, the more time you allow yourself to fix a "sick" mortgage situation, the better your odds are of finding a cure.

Refinancing with FHA...now that's Paris Hilton HOT!

What?  You've never thought of FHA mortgages as "hot"?  Read about this scenario of a client I recently helped and you just might be cooing "that's hot", too!

A family contacted me to help them refinance out of their subprime short term ARM and to consolidate some revolving debt they had built up.   Their 2/28 ARM was getting ready to adjust and their prepayment penalty was over.   This was the time to proceed with restructuring their mortgage and monthly debt.

The high balances that were being carried on the credit cards had weighed down their credit producing mid-scores of 648 and 582.   FHA is not credit score sensitive.   FHA does heavily consider the past 12 months of the credit history...late payments will negatively impact the chances for loan approval.  These clients just had too much credit debt and a nasty mortgage they needed to pay off...perfect candidates!

Here's what's so HOT about FHA refinances:

• Up to a 95% loan-to-value cash out with one mortgage (vs. a 1st/2nd combo).
• Even though there's upfront mortgage insurance (unless it's a condo), the monthly mortgage insurance is reduced compared to other 95% LTVs with mortgage insurance.
• Very competitive rates.
• Underwriting is focused on credit history vs. credit scores.
• Alternative sources of credit is allowed.
• Chapter 13 buyouts are allowed as long as payments have been made on time for the past 12 months and it is approved by the bankruptcy trustee approving the refinance.
• Fixed  and ARMs products available.
• No income limits or geographic restrictions.   (There are loan limits with FHA loans).

In this current market, without the FHA mortgage, my clients would have been forced to

1. Refinance into another crappy subprime loan due to their credit scores and DTIs (this is just buying time).
2. Keep their current mortgage and try to make the payments after the ARM adjust (almost certain failure).
3. Sell their house and move their family.

With this refinance, the family will be increasing their monthly cash flow by over $400 per month (before tax benefits) and swapping revolving debt for tax preferred mortgage interest.   They will also have a cash afterwords to complete a bathroom remodel and fund an "emergency savings" account.

FHA refi?   Yah, that's hot! 

Buying a house when you have a lot of debt

A reader who recently moved to Seattle contacted with a question that I think many will relate to.   He contacted me offering his story:

"One idea you may be interested in writing about are house buying options when you have good credit and income - but a lot of credit card debt. We're paying off the credit card debt slowly -- very slowly, and seeing housing prices rise 15% or more annually. It's frustrating because as time goes by -- the dream house only gets further out of reach. We will be able to buy a nice house -- but not the dream house we could if not saddled with the credit card debt. The credit card debt also isn't tax deductible!"

I work with many families who have visions of their "dream home" while they're trying to manage monthly debts.   And as if buying a home wasn't stressful enough on it's own, many home buyers seem to feel panicked over our local appreciation with home prices.   It's a definite balancing act of buying as much home you can afford without "betting the ranch".   If you're over burdened with credit cards AND you take on a hefty new mortgage payment, you could be setting yourself up for financial (and emotional) disaster.   

I do not encourage using a mortgage such as an Option ARM for sole purposes of stretching into your dream home.   If you make the minimum payments (which most will opt for) the deferred interest will reach it's cap and you will be faced with a much higher mortgage payment.  If you cannot afford the mortgage payment using a fixed period ARM or fixed rate product, you probably cannot afford the home.   

It's very possible that home buyers may need to redefine what their dream home is.  Buying a home that needs a little TLC or is a little further out from the city may afford you more comfort when it comes to your monthly cash flow.   Plus, you may receive a better return on this type of property should you decide to sell it in 5 or so years, using the net proceeds (profit) to purchase your "dream home". 

For example, this 1800 sq. ft. completely remodeled rambler (now subject to inspection) was recently listed in Kent for $349,950.   It's on a corner lot, in a popular neighborhood with four bedrooms and 1.75 bathrooms.   I'm not a Real Estate Agent, but I would bet that similar homes in Seattle would sell for closer to $500,000.   Having the lower payment and more funds in the bank from a reduced down payment can translate into a higher quality of life.   I know...I know...you do have to factor in commute times with our traffic.   But once you're home, you are HOME.

I will go into more details about this families information in future posts.   They were gracious to share their information with me and their story is certainly not unique.

Divorce, your mortgage and your credit

Whether you're married or are a couple who own a home together and are now facing a separation, dissolving a partnership is never easy.   Even if both parties are amicable and agree to the break up, it is a very emotional time.  You may just be thinking about who gets to keep the house...or you just may want out and not even care about the property.   Your mortgage and credit history is probably the last thing on your mind...however, you may want to consider protecting the credit that you've worked hard for.   

Do contact an attorney who specializes in divorce.   Even if you just contemplating a divorce and you're not certain you will file.  It's important to find out the facts and get legal advice from a professional. 

Obtain your current credit report.   You can get a free copy from www.annualcreditreport.com.    Review it to make sure that your debts are in order and that the other party is not using your credit for "retail therapy".    Identify which accounts you may want to close if they have your name on them.   The credit company may be all too happy to issue your own card in your own name.    Having an ex-partner with your credit, even if you're getting along now, can wreck havoc on your scores.   If your name remains on an account they have, even if they pay the debts on time, if the balances exceed 30% of the limit on a credit card, your credit score will suffer too.   

Consider closing any joint accounts immediately that are not in use and removing your name from any accounts that you are a signer on.

Secured accounts, such as loans attached to vehicles and mortgages must be dealt with too.   You might consider selling the items that have secured loans in order to remove your name and liability from the debt.   Otherwise, you should consider refinancing the loan.   Plus, the payments may be factored as your debt when qualifying for new loans, such as a  mortgage.

Should your ex-partner decide they want to keep the house, require that they refinance the mortgage so that your name can be removed from the debt.   Deeding the property from one person to another does not remove the liability of the mortgage.   Even if your partner is a really nice person right now, if they lose their job 5 or 10 years from now, and your name is still on the mortgage, it will dramatically impact your credit if the bills are not being paid. 

If your ex-partner does not qualify for a refinance of the property, then how can you expect them to make the payment?  It's too risky.   

One of my friends went through a divorce.  Her ex really wanted the house.  He did not qualify for the mortgage on his income alone and wasn't thrilled when she insisted that he needed to refinance to take her name off of the mortgage.   Although it was a tough decision, they sold the house and split the proceeds.   He remarried and bought another house with his new wife and in just a few years, filed bankruptcy and the home was foreclosed.   Imagine what would have happened to her credit if she would have accepted the cash offer of her share of equity without refinancing the mortgage out of her name?  She would have been responsible and included in the foreclosure.   Her credit would have been trashed and it would be extremely difficult for her to buy a home.   

Should you divorce, your divorce decree will not override your agreements with creditors.   It's important to be proactive and to always take steps to protect your credit.  Although credit scores are reflective and not permanent, bankruptcy and (especially) foreclosure will impact your credit scores and interest rates for years.

Remember, take precautions with your mortgage, credit history and consult with an attorney if you are considering a possible divorce.