The Mortgage Porter

You Can Have (Almost) Any Mortgage Rate

The question is, how much do you want to pay for it?  I'm getting phone calls and emails from potential clients wanting to refi at the media-hyped 4.5% or even 4.875%.  Last Wednesday, for about 2 hour, rates did actually dip to those levels...did you lock?  Did you even know about it (Special Tip: if you follow my Twitter updates, you were ahead of the game--you can even have my updates set to send you text messages)? 

You can still have the rate of 4.750% for a 30 year fixed but instead of 0 points, it will now cost around 2 points.  On a $400,000 loan amount, thats $8,000 for what would have been zero dollars in origination/discount fees in just less than a week!

This morning's rate for a 30 year fixed based on a credit score of 720-739 for zero points (origination/discount, as reflected on lines 801, 802 or 808 of your Good Faith Estimate and HUD-1 Settlement Statement) for $400,000 loan amount and $500,000 sales price is 5.00% with 1 point (apr 5.238).   This is 0.5% higher to rate than last Wednesday's low point--$120.55 higher in monthly mortgage payment based on a $400,000 loan amount. 

What can you do?  Obviously shopping around or trying to catch the lowest rate can be very costly.  Locking your interest rate is just the first step in the mortgage process.  I've posted tips on what I would do if I were interested in refinancing here.   In addition, I would determine at what point does refinancing make sense based on how long it will take to break even (how long you plan on staying in your home/retaining the mortgage). 

For example, if you have a 30 year fixed rate at 6.5% and a principal and interest payment of $2550, you will break even on your closing costs in about 15 months by refinancing today at 5.00%.  (Based on $2400 closing costs plus 1 point/monthly savings of $403).  If you're planning on possibly moving in a year, then I wouldn't recommend this.  However, if your plans don't including moving--you're throwing money away every month after the 15 month period if you don't "catch" a low rate.

I recommend selecting a respected Mortgage Professional and agree to a "forward lock" where you start the application process and tell your Mortgagage Professional that "if rates get to X% at Y points/closing costs, please lock our rate".  When mortgage interest rates increase by 0.5% to rate in just a few hours, this may be your only way of securing the low rate you're striving for.  With that said, if you currently have a rate where it would make sense to refi at today's rates, I think you should seriously consider doing so--especially if you benefit from a no-cost refinance where you would break even immediately.  Should rates dip to the low media speculated levels, you can always refinance again.

Another hazard on waiting for your rate is contended with appraised values of your home.  The appraisal is based on what 3-4 homes similar to yours located around your neighborhood has recently sold and closed for.  If they sold at a bargain price--guess what, you're home is now going to appriase for about that too.  If you have a oodles of equity (low loan to value) then this may not be a huge issue...however, with refinances, I would say appraisals have been the biggest nail biter. 

If you're a home owner, please do contact your local Mortgage Professional to see if it makes sense to refinance now (I happen to know of an excellent one who can help homeowners with property in Washington State).  If you have a set rate in mind, be sure to let them know what it is.  Work with a Mortgage Professional who has the ability to obtain you a lower rate AFTER you lock should they improve more than 0.125%. 

Last, don't rely on the media to tell you when mortgage rates are low.  The media is always late and with rates changing on average three times a day in our current market, they simply can't keep up (not to mention all the factors that go into pricing a rate). 

Refinance when it makes sense.

Estimating Your Property Taxes

Sometimes the information shown on tax records may not be what a person will actually pay for their property taxes.  This is common with new construction or if the property is currently qualified for an exemption, such as for a Senior Citizen.

Right now I'm working on a estimate for a newly built home.  King County records are showing the property taxes at $1,810 for 2008 on a home that has an assessed value for 2009 of $917,000.   This is obviously not accurate (or it's one heck of a sweet deal).  I found this information via my preferred title company's website.  You can also find this by visiting King County's website.

To determine a better picture of what the taxes will be you'll need to know assessed value and what the Levy Rate is for that property. 

The assessed value of this property is currently $917,000 and the levy rate is 9.51580.  This means that homes within this levy code are taxed $9.5158 per every $1,000 of assessed value.  For this specific property: 917 x 9.5158 = $8,725.99. 

You can see there's quite a difference between $8,725 and $1,810 what is currently being reported.  Their real estate taxes are going to go up at least $7,000  (not including what happens after the tax assessor decides the home is worth more--always plan on  your mortgage payment adjusting due to your taxes and insurance--which are not fixed).  In this case, the taxes shown are based on the land and not the improvements (the newly built home).   However, the home buyer would be responsible for "back taxes" or omit taxes if they would have relied on the lower tax amount.

Omit taxes can be a nasty surprise to someone who has purchased a new construction home--this is why it's so important to make sure your tax information is as accurate as possible.

Typically, without actual tax information, we will use 1.25% of the sales price to estimate property taxes.  Hopefully we're estimating on the high side and in reality, your taxes are more palatable, as in this case. 

Is My Preapproval Still Valid with all the Rate Changes?

My clients and readers ask such great questions...I just received this one from one of my clients that I've been working with since June of this year:

"...with all the rate changes how is our pre-approval looking? It the original amount still applicable?"

This couple are still in the process of finding their next home to purchase.  They were very savvy meeting with me early in the process so we could work on one of spouse's credit scores.  While spending a few months to improve the credit scenario has paid off, rates have recently gone up.  In fact, as of right now rates are 0.625% higher than what I quoted them exactly one week ago.

When you are preapproved for a mortgage, it really has little to do with the sales price or loan amount.  It's all about the payment and debt to income ratios.  There's actually a limit to rate/payment that you're qualified for.  This couple's interest rate limit is 6.625% with a maximum qualifying total debt to income ratio (per the automated underwriting system) of 46.21%.

This means that if once they find their home, if rates are near 6.625% for their program, that property taxes or their home owners insurance could bump them beyond the allowed debt ratio figure.  Preapprovals are generally based on estimated taxes and insurance.

Before you make an offer on a home, I strongly encourage you to provide your Mortgage Professional with the property address and/or the annual tax information so they can re-evaluate your debt to income ratios.

Here are some options when the interest rate or payment exceeds your preapproval:

• Negotiate the seller paying points to buy down the rate back to the lower approved amount (this is why you need to contact your Mortgage Professional BEFORE you make an offer).
• Put more money down on the home to lower the loan amount/payment.
• Buy less home.
• Pay off a debt to lower your debt to income ratio.
• Re-run your scenario at the higher rate with actual taxes and insurance to see if you're still approved.

Of course, if someone adds new debt or if the information has changed (maybe their down payment that was in the stock market and took a huge hit); the preapproval may no longer be valid either.

If you're currently preapproved to buy a home, I suggest you contact your Mortgage Professional to find out what your current "maximum rate/payment".  We've had constant program changes and you may want to verify your scenario has not been impacted.

Related post: How long is a preapproval letter good for?

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. 

Can I buy a $620,000 home with a low credit score?

This morning I received this email:

My wife and I found a house we are in love with. I wanted to write and tell you our situation, maybe you can tell us if we are even in the "ballpark".    The house we like is 620,000. We have 20% to put down. We have very little debt and well documented income. I have a low credit score, 660 or lower. Is this worth pursuing or is the credit score too low?

Based on current guidelines/pricing, you really need to have your credit scores above 660 if you're considering loan amounts above "true conforming" (presently $417,000). It's very possible that this couple can buy a home utilizing an FHA jumbo mortgage which leans more towards credit history rather than credit score.  Here are some factors that would indicate whether or not this is a possibility for this couple:

• Credit history.
• Loan limits.

Unfortunately the loan limits where this couple are considering to purchase are much lower than what we have in the King County area.  They're wanting to buy in Clark County which currently has a temporary jumbo limit of $418,750.   They would need about $200,000 for their down payment with the seller paying closing costs and prepaids (est. at $12,000).   Or they could opt for conforming financing with a loan amount of $417,000 and try to get a conventional approval (with a larger down payment, it's possible).

If they were buying in King, Pierce or  Snohomish County, the loan limit is currently $567,500 and would have the option of putting less than 20% down (as low as 3.5%), should they wish assuming they qualify for the payment.

Regardless of where the property is located, the last 12 months of credit history is more critical than credit score (as long as the credit scores are 600 or higher) for a purchase using an FHA insured loan.

FHA loans are full doc and will need to be sourced and seasoned.  Buyers should be prepared to provide their last 2 years of W2s (and possibly tax returns) as well as at least 30 days of income on their paystubs.

Remember, we should be learning in early November what the new jumbo loan limits will be.  I'll keep you posted!

Tips for homebuyers and sellers

Yesterday I was interviewed by Melinda Fulmer for a MSN Real Estate article.   Here were a few of my pointers (with some clarification) for buyers:

1.  Plan on having a down payment.  FHA will allow as little as 3.5% for your down payment which can be gifted or loaned by family members.  However I do like to see those shy on savings practice making mortgage payments to a savings account until they have at least 6 months of mortgage payments "in reserves".   This account is not to be used for your down payment--it's in case of an emergency.

2. Be picky when selecting your loan originator.  I do believe in getting referrals from people you financially respect.  You can also try "googling" their names to learn more about the loan originator and their qualifications. 

Borrowers may be better off working with loan originators who have are able to provide FHA loans--even if they're not considering FHA financing.  Many conventional loans are having to switch to FHA financing as the underwriting is more forgiving and rates may be better depending on mid-credit scores. 

3. Get prequalified as soon as possible.  This is a good way to get to select your loan originator (this is not the same as a preapproval).  During this stage, you'll be able to see how detailed oriented the LO is what their personality is like--what type of programs do they recommend.  A LO should provide you a Good Faith Estimate without any commitment from you.

4. Rate lock strategy.  Ask your LO what they can do if rates improve after you lock.  Right now, with the turbulent markets, many lenders are offering free rate float downs as long as the lock meets specific criteria.  This provides borrowers with the assurance that the rate will not be higher than the current rate lock and that should rates improve, they may have the opportunity to "float down" to that rate.  Do make sure to obtain a written lock confirmation.

For sellers, I suggest that they insist on a preapproval letter to be included with their offer.  They should also carefully read the letter, it should address the buyer's credit, income/employment and where the down payment is coming from along with the type of loan they're approved for. Preapproval letters are sadly not worth more than the paper they're written on, however they can provide you with some clues about the lender the buyer is working with.  If a seller has two identical offers, the buyer's lender can make a huge difference in whether or not the transaction closes smoothly.

What takes place between signing and closing?

What happens between signing documents and closing? Watch this video featuring The Talon Group's Chief Title Officer, Tim Daniels as he explains what happens with your loan documents after you finish signing at the escrow company.

Declining Home Values: Good for Buyers - Bad for Refi's

Last Wednesday's Seattle PI featured a front page article by Aubrey Cohen: Home values drop by double digits.   According to data by the NWMLS, the median sales price for houses in August 2008 for Seattle was $464,800; a 7.8% drop from July 2008 of $428,500 and 14.5% drop when compared to the median sales price from August 2007 of $501,000.   King County also dealing with a double digit drop.   The median sales price for houses in King County in August 2008 was $423,950; a 4.7% drop in one month with July 2008 at $445,000 and a 11.2% drop compared to August 2007 at $447,345.

If you're a home buyer in this market, you're in the drivers seat...and sitting pretty at that.  Listings are up 18.3% in King County (condos and houses) as compared to August of 2007; giving you plenty of choices.  Sellers are more likely to contribute towards your closing costs and prices are more attractive than recent years.

What if you all ready own a home and you're considering refinancing?  Even though your home is your castle, the appraiser must use 3 recent sales (over the last 6 months is preferred) of homes similar to yours to come up with an appraised value.  This can be a little tricky with fewer sales AND lower sales prices.   Using the King County figures above and rates I've quoted at Mortgage Porter, this is how a refinance could be impacted:

Joe and Suzy purchased their home in King County for $447,345 in August 2007 utilizing a 30 year fixed mortgage at 6.625% with a loan amount of $357,900 (20% down payment).  They are now interested in taking advantage of our lower rates and decide to refinance since rates are close to a full 1% lower with zero points and they're going to stay in their home for at least the next five years.   They have not paid additional towards their principal and their current balance is now around $354,250 with a principal and interest payment of $2,291.67.

An appraisal reveals that their home, based on what others like theirs have recently sold for, is now worth $423,950.  The best priced rate/term refinance (assuming perfect credit) is an 80% loan to value.  80% of $423,950 is $339,160.  If Joe and Suzy want to drop their rate by one point, they would need to bring in $15,000, not including closing costs if they want to avoid private mortgage insurance.  (Second mortgages are now pretty tough to come by these days).

Joe and Suzy's home may be worth more than average.  Loan originators do not know what the value will be until we receive the appraisal.  I do have some resources available (such as researching comps via the title company) however, it's just a rough idea.  Be wary of any loan originator who promises you that your home value will be perfect for a refinance.

Joe and Suzy's options (if they want to refi) are:

1. Bring in $15,000 plus closing costs (approx. $2600) to closing to pay down principal to 80% of present value.  Principal and interest payment = $2,033.44 - based on 30 yr at 6.00% at 0 pts (apr 6.063).   A savings of $258 per month, at a cost of $17,600, Joe and Suzy really need to decide if this is the best use of their money.  Based on their monthly savings, they'll break even in approx. 5 and a half years.   
2. Private mortgage insurance.  Paying off the entire mortgage balance plus closing costs provides a loan to value of approx. 85%.  Principal, interest and mortgage insurance based on 5.875% at 0.75% pts (apr 6.005) = 2,227.70.  This is a monthly savings of $63.97.  Suzy and Joe do not have to bring in $15,000 to pay down their principal, however it will take almost 7 years to break even on the cost of this refinance. 
3. Rates with LPMI (lender paid mortgage insurance) are not competitive for this scenario. 
4. FHA has monthly and upfront mortgage insurance.  Unless their motivations are other than reducing their rate, this is not a valid option for this scenario.

Even if our local market has hit bottom, appraised values will be impacted for several months until home values begin to appreciate.   Appraised values are a reflection of what has sold in the past.  Appraised values may continue to trend lower for refinances. 

Glenn Crellin, director of Washington Center for Real Estate Research at Washington State University states (from Aubrey Cohen's article) regarding the recent drop in rates from the Fannie/Freddie takeover his expectation is:

"those decline in rates are going to be relatively short term." 

And to those who are trying to get the "bottom" of the market for home prices, he says it's "nearly impossible".  Let's face it, we really won't know where the bottom is until prices are heading back up.

If you are considering refinancing, I do recommend that you contact your mortgage professional soon and "be real" about your home value.  I don't encourage waiting with median sales price declines at 4.7 (King County) to 7.8 (Seattle) per month as it's eating away at your equity and refi options. 

If you are considering buying a home, proceed with getting preapproved so you're ready to make an offer should you find the home you're looking for.

Related Post:

When Appraisals Come in Low for a Refi

How Will the New Jumbo Limits Impact You?

If you're buying a home $520,000 or below over the next year, you won't really be impacted by the reduced FHA Jumbo and Conforming Jumbo limits.   However, if you're considering buying a home with minimum down, you're losing $45,000 of financing power on January 1, 2008 with a $522,100 loan limit.

I wrote an article at Rain City Guide in June about how much home $17,550 can buy you in King, Pierce and Snohomish County with the current loan limit of $567,500.  The answer: $585,000 utilizing a FHA Jumbo.   Once the new loan limit is in place for our region, the most you can buy with minimum down will be closer to $540,000.   Although the new minimum required investment at 3.5% (effective October 1, 2008) will increase the amount required to $18,900 (based on a $540,000 sales price).

Want to do conventional 20% down and stay away the "true jumbo" rates by utilizing the maximum conforming jumbo?  Currently, a sales price (or appraised value in the case of a refinance) of $709,000 will get you pretty close to the existing limit at $567,200.  As of January 1, 2009, that sales price (or appraised value) is reduced to $652,500 for a loan amount of $522,000.

Refinances may also be impacted depending on what the payoffs are on the existing balances and if it's classified as a "cash out" refinance (second mortgages not obtained from when you purchased your home is considered cash out) which have tougher guidelines than a "rate term" refinance.  Underwriting guidelines continue to tighten and will continue as well.

As always, I highly recommend that if you are considering buying or refinancing in the next year, to contact a local Mortgage Professional at your earliest convenience.   The loan limits may not even impact you, it's never to early to prepare considering our current climate. 

FHA Minimum Down Payment Increasing January 1, 2009

With the passage of HR 3221, the minimum required investment of a home buyer utilizing a FHA insured mortgage is increasing from roughly 3% to 3.5% effective January 1, 2009.  You may think this sounds like small change, but with larger loan amounts, this adds up.

For example, if a home buyer is utilizing a FHA Jumbo and they are buying a home priced at $500,000.   Their current minimum required down payment of 3% is $15,000.  Effective January 1, 2009, the minimum required down payment of 3.5% is $17,500; a difference of $2,500 for the amount required to invest into the transaction.   With a home priced at $300,000; the current required investment from the buyer would be $9,000.  As of January 1, 2009, the new amount required will be $10,500.

What does this mean to you?

If you are planning to buy a home utilizing a FHA insured mortgage, be aware of the changes to the minimum down payment requirements.   After December 31, 2008, you'll be required to come up with additional funds towards your down payment which may be a gift or loan from family members.

If you are wanting to take advantage of the lower down payment requirement, meet with a Mortgage Professional who is qualified to provide FHA loans (not all loan originators are, you can check HUD's site to verify).

Editors Note: this post wass been modified to correct the effective date.