Mortgage Information Introduction to Mortgage Financing What is a mortgage loan? A mortgage requires you to pledge your home as the lender's security for repayment of your loan. The lender agrees to hold a lien on your title until you have paid back your loan plus interest. If you do not repay your mortgage loan, the lender has the right to take possession of your house and sell it in order to satisfy the mortgage debt. Principal and Interest All mortgages have two features in common. The first feature is the mortgage principal, which is the actual amount of money you borrow. So, if you take out a $70,000 mortgage, your mortgage principal is $70,000. The second feature is the mortgage interest, which is the money you pay for use of the money you borrow. How much interest you pay over the life of your loan depends on a number of factors. The interest you pay on your mortgage can be deducted from your income taxes, which is one of the many benefits of home ownership. Amortization Over time, you will repay your mortgage gradually through regular, monthly payments of principal and interest. The amounts of these payments are calculated to let you own your home debt-free at the end of a fixed period of time. During the first few years, most of your payments will be applied toward the interest you owe. During the final years of your loan, your payment amounts will be applied almost exclusively to the remaining principal. This type of repayment method is called amortization. When you sell your home, you will be required to pay back any remaining principal balance due on your mortgage loan to your lender. Finance Glossary What is PMI? PMI or "private mortgage insurance", also called "mutual mortgage insurance", is an insurance policy that insures the lender for loss that might occur due to foreclosure on a loan that exceeds 80% of a property's value. PMI does not insure the borrower from loss. A premium is paid as part of the buyer's closing costs equaling one year of coverage, and a three month impound of monthly premium is usually also charged. PMI may require that borrowers maintain a minimum of two months cash reserves in their bank account, and additional sums may be impounded through escrow pursuant to the requirements of the lending institution or the PMI company What are points? Points are a one-time, up-front fee charged by the lender to originate the loan. 1 point equals 1 percent of the loan amount. What does APR mean? Annual Percentage Rate (APR) -- Represents the actual note rate of the borrower's loan at the time of the application plus points and certain closing fees added and recalculated as if they were interest, and were computed on an annual basis. The APR is I intended to give consumers a standardized basis to compare the costs of borrowing from different lenders. It is not the actual note rate that will be used to determine the borrower's monthly principal and interest payment. How to use APR for comparison: Is there a wide spread between the APR and the actual note rate? Has a lender has quoted an unusually low note rate, but the APR on the truth in lending statement is equal or higher than the APR stated by competing lenders? Either of these scenarios indicate that a lender might be charging higher points and closing fees to offset a lower note rate. What do the other figures on the "truth-in-lending" statement mean? Finance Charge -- Represents the total interest that would be paid if the loan were repaid over the full contact term (usually 30 years). Points, and certain closing fees paid to originate the loan as specified by Regulation Z are also included in this total. Amount Financed -- Represents the dollar amount of the borrower's loan less points and certain closing fees as specified by Regulation Z. This figure is not the loan amount. Again, a wide spread between the actual loan amount and the amount financed could indicate higher points and closing fees. Total of payments -- Shows total dollar amount that would be paid if the borrower makes all the payments required for the full contract term (usually 30 years). Good Faith Estimate -- Lists fees that are charged to process, approve, and make the mortgage loan. It is a federal requirement that every lending institution send out a good faith estimate (Regulation Z) within three days of the loan application. Loan Application Checklist The essential first step in the home buying process is a "pre qualification" interview with a knowledgeable and experienced loan agent. This important first step will help you set the perimeters of purchase price and monthly costs. You can then make your home buying decision from a position of financial strength, with confidence that you have the ability to complete the purchase. To expedite the process, you'll want to collect the as many of the following documents as possible to bring to your "pre qualification" interview.  YOUR IDENTITY  Copy of Driver's License or State ID Copy of Social Security Card Copy of Resident Alien Card 2 current pay stubs (most recent) 2 years W-2s (most recent) 2 years tax returns (most recent) If self-employed - current P&L Bank accounts: Name of bank, address, account number, balance Copies of 3 months bank statements (most recent) Stock & bonds, IRAs, Mutual funds (copies of most recent statements) If down payment is a gift - gift letter from donor Creditor's names, addresses, account numbers, balances due Name, address, account number, and phone of landlord or current mortgage 12 months canceled checks for rent or current mortgage If negative items on credit report, letter of explanation

OTHER REAL ESTATE OWNED

	Present value
	Balance due on mortgage: Name, address, account number of mortgage holder

Introduction to FHA 203 Loans

• Zero down payment for first-time buyers!
• Loan amounts in excess of property values to cover needed repairs!
• Investor incentives that allow the full costs of renovating to be stacked on top of the acquisition cost of the dwelling-- all for a 15% down that can be recouped with substantial profits in a matter of months!

Sound too good to be true? Not with the Federal Housing Administration's (FHA) new and improved 203K program. Although it's been on the books for years as the federal government's primary financing tool for home renovations, it never produced many loans because it was considered an administrative nightmare. Now that's been changed!

At the heart of the 203K program is the premise that the best source of affordable housing for moderate and low income home buyers is the fixer-upper. These homes need work and are priced or valued below their potential as a result. Put on a new roof, do some electrical work, modernize the kitchen and give it a fresh coat of paint and it becomes a great starter home for the first-time buyer.

However, this scenario usually breaks down when it comes to locating affordable financing for the renovations. Lenders typically want buyers to come up with large down payments and then finance the renovation expenses separately from the actual cost of the property. Then only after the repairs have been completed might a lender be willing to do a permanent 'take-out' loan on the renovated house.

The 203K is different. It allows borrowers to combine the 'as-is' value of the property, mortgage expenses and the future costs of renovations into one loan up front. Best of all, it extends highly favorable FHA down payment, income and asset qualifying terms to the entire package. This can mean down payments in the four to five percent range for most home buyers. And, if you are a first-timer, the 203K program takes the down payment concept a step further.

How about a zero down! Here's how it works. An investor or renovator locates a rundown dwelling needing repairs and applies for the 203K loan with the intention of turning it over within an 18 month period. His down payment is 15 percent, as required by FHA for all investor transactions, but because he's declared his intention to resell the property to a first-time buyer, his loan amount is calculated differently -- on something FHA calls 'escrow commitment procedure.' What this does is afford the investor or renovator a higher loan amount, one based on the value of the property after all the repairs have been made and the property is ready to be sold on the open market again.

After completion of the renovations, the investor would allow a first time buyer to take over (assume) the loan for a no cash down payment. What makes this deal so attractive is that it addresses the single greatest need of both parties -- fast turn- over of capital for the investor, and cash leveraging for the borrower. One wants to get in and out of the property as soon as possible, while the other is just happy to get in at all. By providing a zero down payment option it opens the property up to a much larger pool of qualified buyers. This translates into quicker sales and the investor gets a faster return on his dollar.

The Basics of FHA 203K

Here's the schedule of improvements that qualify for FHA 203K funding!

$5,000.00 is the required minimum of eligible improvements.

Structural alterations and reconstruction. Repair or replacement of structural damage including chimney repair. Finishing of attics and basements or garages where permitted by locality. Repair of termite damage and treatment against termites and other infestation.

Improved function and modernization. Remodeled kitchens and baths, including permanently installed fixtures and appliances (built-ins). Elimination of health and safety hazards. Resolution of lead based paint or asbestos hazards.

Recondition or replace HVAC (heating, venting, air conditioning) systems and electrical systems. Includes connections to public systems.

Installation of wells and septic on large properties.

Flooring, tiling and carpeting.

Energy conservation. New double pane windows, insulated exterior doors, solar domestic hot water systems, insulation, caulking and weather-stripping. Replacement of leaky jambs, sills, heaters, etc.

Landscaping and site improvement. Patios, decks and terraces that improve the value of the property equal to the investment, or that preserve the property from erosion. Grading and drainage improvements are included. Tree removal is acceptable if the tree is a safety hazard. Repair of existing walks and drives is included if the walks or drives are a safety hazard.

Improved accessibility for the Handicapped. Providing space for wheelchair access, lowering kitchen and bathroom cabinets and fixtures, widening doors and providing ramps, etc., are included.

FHA 203K Guidelines

These basic 203K guidelines will help insure a hassle-free transaction!

Work with a mortgage company that is familiar with the 203K process.

Be realistic about "nice to have" but unnecessary rehab. Many 203K loans are limited to the borrower's ability to qualify for enough mortgage to fund HUD required repairs. "Wish lists" should be prepared with thought as to the priority of each item on the list.

Remember that rehab money is provided AFTER completion of part or all of the work on a "reimbursement" basis. Not all contractors will agree to front all of the material and labor costs without the owner's assistance.

State licensed contractors provide the best insurance of a timely, complete and quality rehabilitation effort. FHA 203K inspectors tell us that the majority of 203K construction project problems are caused by borrowers attempting to make repairs themselves, and failing to pass inspection. A contractor will usually get the job done in 30 - 60 days; saving time, money and worry for everyone.

Get a termite report as early as possible, HUD requires it. A thorough termite inspection report can prevent many problems in the rehabilitation effort.

Have the utilities on for the inspection.

The Loan Wolf Mortgage Guide

Contributed by Randy Johnson
Independence Mortgage Company
 

Many otherwise prudent people choose a Lender on the basis of very subjective thinking, like, "We have banked there for 15 years," or "I see their ads on TV."

Shopping for a loan can save you a lot of money but most people (as many as 80% by some estimates) go about shopping in the wrong way. They "shop" for a loan the way they shop for a new barbecue. Loans are not like barbecues.

The variations between loans are far too complex for that approach. Most people get confused by the staggering array of choices and that's why they don't get the best results. I wrote this brochure and my book THE LOAN WOLF MORTGAGE GUIDE, to help folks just like you.

First, you should understand the relationship with your lender: it is commercial, PERIOD. I don't see any evidence that big institutions care much about their individual customers anymore. That includes you. Does anyone at your bank remember your name? In spite of advertising which tries to convey personal concern, they have a millions of customers and they will "care" about you just so long as you meet their criteria. When you don't, you are history! That's all right because you shouldn't care from whom you get your loan either because the money is ultimately coming from Washington or Wall Street anyway.

Second, many lenders look at themselves as wolves and their customers as sheep to be shorn. I want to turn YOU into a wolf, to level the playing field, to give YOU power so you can negotiate from knowledge and strength.

Third, although the Government mandated disclosure forms are supposed to be for your protection, the type is so small and the text so long that they are difficult to comprehend. Indeed, they can actually be used to hide the truth as well as reveal it. You want to find someone to give you competent advice, not someone who will just hand you forms!

The following tips are based upon my 16 years of experience in funding over $400 million in loans. They will help you get the right loan for your family at the best rate.

1. Immediately get a credit report from TRW, TransUnion, or other bureau. You have plenty of time to correct any mistakes. A FICO score above 680 is excellent.

2. Do NOT call a bunch of lenders and ask, "What are your rates?" Almost every lender has at least a dozen programs, each with 10 or more rate vs. fee alternatives. That's over 100 choices. See the sample Wholesale rate sheet to see what I mean. Many lenders quote a program which was designed specifically to snooker the telephone rate shoppers. It will "sound good" because it was designed to "sound good." Other lenders may not tell you the truth. Some Loan Reps purposely lie to phone shoppers in order to induce borrowers to apply with them. You are not smart enough to "catch them." Beware of "Zero Point" or "Zero Cost" loans. They are sucker loans. Remember - Nothing is free!

3. Your objective is to find a lender you can TRUST. Ask advice from your friends, co- workers, neighbors who are homeowners. Some of them will have had positive experiences with a lender. Call the lenders they refer you to, make appointments (what the phone is for!), and interview them in person. You need to assess the competence and communication skills of the Loan Rep who will be handling your transaction. Personally, I would avoid the huge institutions which hire Go-fers for $7 per hour and call them Mortgage Consultants. They don't know much and have no power within their institution to help you. You want a rep who will help you and, if needed, "go to the mat" for you.

4. Determine which loan program is best for you. Here are three very simple guidelines. First, do NOT pay for 30 years of expensive rate protection (what the 30 year fixed rate loan does) if you are only going to be in your home for 5 years. Second, if you are a Teacher or retired Minister, you are in no position to take risks; you need a fixed rate loan. Third, if your income is rising, if rates are falling, or you're only going to be in the house for a few years, an ARM is probably more suitable for you.

5. If you choose an ARM, if rates have risen, choose a loan tied to a lagging index such as the 11th District Cost of Funds. If rates are falling, choose a loan tied to T-Bill's, CD's, or LIBOR. Re-fi when the rate environment changes.

6. For the common programs, the differences in rates between reliable Lenders is minuscule. For example, most Conventional loans are sold to FNMA or FHLMC which buy loans from 24,000 banks, S&L's, and mortgage bankers. Each of those 24,000 lenders have the same "cost of funds" on any given day. You want a lender who will "sell" you FNMA money at the lowest mark-up. (Remember what I said about Trust?)

7. Your lender is legally obligated to send you the RESPA and Good Faith Estimate of Closing Costs within 3 days of application. Insist on this!!!! Read them and ask questions until you understand them. While this disclosure is not binding on the Lender, it will show the costs and fees on the program on the date you applied, a good starting point. Many people think that their rate is locked in at the rate shown. This is not the case! You need to find out your lender's lock policy. The market can change rapidly so developing an executing a good lock-in strategy is very important.

8. If you are dealing with a Mortgage Broker, insist on seeing the rate sheets from his sources of funds. If he refuses to show them to you, get up and leave. When you find a Mortgage Broker who will work with you (who won't keep secrets from you), negotiate what their commission (their points) and other fees will be on top of what the money source's rates and fees are. Then get an Agreement in writing that they will not charge you more than the agreed upon commission. When it comes time to lock your rate, get some help figuring out which rate/fee choice is best for your needs. Get the name of the Manager.

9. If you are dealing with a Direct Lender, ask the Loan Officer, "How are you compensated?" If you get the answer, "I'm on commission," ask, "Does your company have certain programs or pricing options on which you get "overages" or extra commissions?" If so, you want to identify those programs and you obviously want something else. Get the name of the Manager.

10. Your Settlement Agent (Escrow in some states) will call you when loan documents are delivered to them. You have enough to do at escrow just signing your loan docs. It's a poor place to review anything, so have them Fax the RESPA forms and the note to you. Compare these forms with the initial RESPA forms you were given. In the event there is more than a minor discrepancy, call the Manager to get an explanation (now you know why I suggested you get his/her name.)

If you see the letters, "P.O.C." it means the Mortgage Broker is getting paid something in addition to their Loan Origination Fee. That's OK if the Origination Fee and the amount P.O.C. add up to what you agreed upon in #8. (e.g.- 1 point Origination and 1/2 point P.O.C. is OK is you initially agreed that they would make 1 1/2 points total.) If you have a problem, go to the Manager and complain vigorously. Lenders who are not honorable - there are some - are used to blowing off people who just complain a little. If you are right and if you are insistent about not signing loan docs until they are correct, they will correct the error rather than deal with the mess you can create with their Regulators.

11. (Well, I had to get one more in.) Most people have a benign relationship with their mortgage. The coupon comes every month and they just pay what it says to. They do not remember what the rate is and if it's an ARM, they are only dimly conscious of the variations. Every year Lenders make millions of dollars of profit off of people who weren't aware that somewhere along the line they could have re-fied into a lower cost loan. Here's some good advice: develop an active relationship with your mortgage. Write down the key features of your loan and pay attention to the market. If you find a lender you can trust, ask him to keep you informed of developments which could be of benefit to you.

There are some terrific Loan Agents out there and if you are pleased with yours, reward that person and his firm by referring them to friends. If you are dissatisfied, there are a Regulatory bodies in every state and HUD in Washington who can examine cases of irregularity. Don't be shy. Our industry would be a lot better off if people DID complain when they are abused.

Adjustable Rate Mortgages

Many people choose adjustable rate mortgages to finance the purchase of a home. Here are some of the facts you need to know to make your decision: 

Typically, adjustable rate mortgages are seen to have two strengths. First, adjustable rate mortgages tend to less expensive over the life of the loan, than fixed rated loans, especially early on. This is because the lender is willing to charge a lower rate because the borrower shares some of the risk should the rates go up.

In addition, the lower entry rate of an ARM can often allow borrowers to qualify more easily for a loan, or for a more expensive home.

Adjustable rate mortgages have an interest rate that increases or decreases over the life of the loan based upon market conditions. A financial index governs the changes in the interest rate. When the index rises, so will the interest rate of the ARM. When the index falls, the interest rate of the ARM will decrease.

There are different indices to which an ARM may be linked, for instance: The Federal Home Loan Bank Board's national average mortgage rate, or the U. S. Treasury rate.

Generally, the more sensitive the index is to market changes, the more frequently the rate can increase or decrease.

Most ARMs have semi-annual or annual caps that limit the amount your interest rate or payment can go up or down during that period. An additional protection is a lifetime cap that limits the amount your interest rate can adjust over the life of the loan.

Interest Rates: Cause and Effect

Understanding Mortgage Interest Rates

As the nation's bank, the Federal Reserve controls short term interest rates by raising or lowering the sum of money in the banking system. Short term rates include the Federal Discount Rate (Rates at which banks borrow money) and the Prime interest rate (rates at which consumers borrow from banks).

Mortgages are considered a long term rate since home loans are typically for a 15 or 30 year period. Long term rates are influenced only indirectly by the Federal Government.

In the "second money market", mortgages are sold in "pools" to investors. On any given day, those rates are set by the market. As mortgage-backed-securities are bought by investors, funds are channeled back into the market, so that lenders can make more new mortgage loans.

The nature of a long term, mortgage-backed security is that the investor buying the security agrees to accept a fixed rate of interest for the life of the investment. For instance: 7% for 30 years; but this means the investor must be confident that a 7% yield won't end up a lousy return over the period if other market interest rates rise.

That is why a surge in the job market can spook investors; and drive mortgage interest rates up.

Investors naturally associate stronger economic growth with rising interest rates and potentially rising inflation. Why? Because a greater number of employed Americans means more consumers clamoring for goods and services.

When the economy shifts to faster growth, investors don't want to own lower yield, long term securities. But if mortgage-back-securities aren't bought by investors, funds for making new loans are depleted. So, to compete with higher, short term yields in a rising market, higher yields on long term mortgage-backed- securities are demanded.

But, let's keep the current rates in perspective. Rates are still near a generational low. Lenders are offering a wide variety of programs to fit every need. Special community and government programs are available

FHA Loan Limits Increased

Effective 1997, Fannie Mae, Freddie Mac and FHA are increasing their loan limits. Freddie Mac and Fannie Mae's loan limits are going up from $207,000 to $214,600 on all conforming loans. This increase also has the effect of increasing the maximum FHA loan amount, which is indexed to 75% of the Fannie Mae/Freddie Mac conforming loan amount. Consequently, the maximum FHA loan amount is now $160,900.

This is expected to have a beneficial impact on the housing market, especially since the FHA program is the type of financing used many first time home-buyers.

Secrets of Loan Underwriting

What do lenders look for in a loan application?

A loan application is, in essence, a snapshot in time of the borrower's past history. It is the foundation from which an underwriter forms an opinion about the borrower and begins to interpret the information gathered which results in a loan decision.

It is critical, therefore, that the loan application be completely filled out.

Most underwriters use the 4 C's of underwriting to form an opinion about the applicant. The 4 C's are listed below:

Character

    Who is this individual(s)?

    Has he/she been a homeowner previously?

    What does he/she do for a living?

    Is his/her education in line with what he/she claims to do?

    Has he/she been on the job for a stable period of time? (2 years min)

Capacity

Does the applicant have the ability to repay the debt?

Is the income stated verifiable and is it steady, ongoing income?

Is the increase in monthly housing expense reasonable?

What is the source of down payment?

Does the applicant have a history of savings?

Will there be sufficient reserves at the close of escrow to give the applicant "breathing room"?

Credit

How much credit appears on the loan application?

Are there any mortgages for every property (unless shown free and clear) listed on the application

Is there a history of heavy credit use?

Does the loan app indicate a previous judgement, bankruptcy, foreclosure or pending lawsuit?

Does the applicant pay alimony, child support? (This questions also reflects on capacity).

Collateral

Where is the subject property located?

In a worst case scenario, (a foreclosure) would we (the lender) be able to recoup this investment?

Does the future marketability appear to be strong in the area?

This complete picture helps the underwriter see the whole picture so to speak and is able to make a clear "common sense" decision on the credit worthiness of an applicant.

The "100% Loan"

When buying a home, the down payment can be the biggest roadblock to home-ownership. But now lenders have recognized this problem and have come up with an innovative way to combat this problem. Homebuyers who don't have enough for a downpayment now have an option - the 100% home loan.

Here's how it works: Suppose you and your spouse's income qualifies you for a $150,000 home purchase but you don't have enough for a down payment. You asked grandma if she could help and she said she'd like to but she can't afford to lose the interest income from that CD she has at the bank or maybe she doesn't want to hand over thousands of her hard earned money as a gift. Now she can pledge 25% of the purchase price in the form of an interest bearing CD with that bank instead of gifting a downpayment. The bank then lends 100% of the purchase price. The bank holds this sum as collateral until the loan has been reduced to 75% loan to value. Using a simple strategy in addition to the current rate of inflation (2% on average) these funds could be released in as little as three years!.

Some of the benefits are the following:

1. You can deduct more mortgage interest, Grandma continues to earn interest on her CD which she can get back in three years!
2. You're now able to buy with no down.
3. There is no PMI which is an additional cost.
4. The pledgors can total three and can be anyone living anywhere in the United States. (It doesn't necessarily have to be a relative, but cannot be the seller.)

A drawback is that if the borrower is foreclosed on, the pledgor loses their funds. There are many other variations available which we haven't discussed when it comes to down and pledgor funds. The pricing is no different than your conventional loan. You can borrow up to $400,000 and can take advantage of the No Income Verification loan which means no tax returns, no W2's, for self employed borrowers no profit and loss statements!.. So you just may want to ask grandma if she can help. It's very likely she now can!

Loan Pre-Approval

A pre-qualification is a good start as a rule of thumb as your first step in purchasing a home however the only drawback is there is no obligation to make a loan. The terms pre-qualification and pre-approval are often used interchangeably but there is a big difference! A pre-approval letter obligates the lender to make the loan, subject to the appraisal. While a pre-qualification letter or certificate means very little as the lender has no obligation to make the loan! A pre-approval letter can be obtained by your lender usually at no cost and is good typically for a period of 60 days.

Many homebuyer's prefer to find a home first then try and locate financing later. Here are a couple of reasons why you should not use this approach. One, you may be looking in a higher price range and fall in love with a home you cant afford or qualify for. Two, when making an offer to purchase a home, a pre-approval letter from a lender provides you with leverage in pricing and other negotiable items you would may have without it.

From a seller's perspective, if there is a choice between your pre-approved offer and another offer without a pre-approval, more often than not the seller will accept the pre-approved offer. Why? Even if it's a lower priced offer, the seller, and the seller's agent, know it's more likely to close and take less time, since a credit report, underwriting, and other steps in the process have already been done and approved. If the seller were to accept the other offer without the pre-approval, they run the risk of taking their property off the market for weeks on a potentially non-qualified borrower while the pre-approved borrower may move on and purchase another home!

As you can see it's to your advantage to get "pre-approved" with a lender before you begin looking for a home. This will give you and your realtor the leverage needed to successfully negotiate the offer to purchase your future home without any unnecessary surprises!

If you are looking for a Mortgage Representative, E-mail me . I will then send you names & phone numbers of some very good Mortgage Reps.

Information on terms, conditions and programs are subject to change.