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Impressive Giving; Thank you for all your support.

Today, I wanted to take a brief break for the normal blog that I write to say THANK YOU.  The tremendous support that I receive from the referrals of people that I care about is amazing. I wanted to thank a couple groups that have been such a blessing in my families life.

My Clients, Friends, and Family – Clients are the backbone of my business. It is for them that I do the work that I do. I believein education, communication and support along the way. Sometimes that means that I have to listen my clients as they vent to me the frustration of providing the most intimate documentation. Thank you to all my clients. Seeing you in your home after we close. Seeing the look of relief that you have when we refinance into a more stable loan program.  Even the times that we do not complete a transaction but merely answer the question that eats at you. These are the most precious times to me and I cannot thank you enough for the opportunity to be part of that. May your home bring you memories that will last forever.

Strategic Business Partners – I have worked hard to build a team of business professionals that can assist my clients throughout their life. Your partnership and referrals are so deeply appreciated. Each one of you provide unparalleled service in your chosen profession. Victor Ham of Nationwide Insurance, Brian Qualls of Lang, Richert & Patch;  http://www.planyourestate.net/, Johnny Kovalek of Ameriprise Financial, Brandon Brooke of NY Life Insurance, Peter Bond of Remax Gold, Dayna Neuse of Remax Gold and several other Realtors, Sierra Friend of Core Development, Synthia Smith of Cherish the Possibilities, Nathan Novelo of Harris Appraisal, Lisa Lemmons of the Exchange Bank are just a few of you. Sorry to those that are not mentioned here but is not because I do not appreciate you. You all have been the heartbeat of my business. I had chosen from the beginning that I would not be a cold caller instead focusing on getting to know quality professional such as yourself. I am excited to meet many more of you in the coming years ahead.

Co-workers – Thank you for encouraging me when the times were tough to “keep swinging.” Thank you all for taking the time to teach me what I may not have known and to look at for the greater interest of our profession. Each of you has helped me in some capacity and for that I am grateful.

My wife and Kids – Where would I be without the smiles that lay on your faces when I get home from work. Each of you inspire me to press on and remind me that I have to be the same person at work that I am at home. In fact you call me to be better than that. You ask that I continue to grow each and everyday. You remind me that the most valuable thing I can give to anyone that I come in contact with is respect and love. You mean the world to me.

I will say in very bold print THANK YOU SO MUCH FOR all that you do for my family and I. I have the utmost respect for each and everyone of the groups above. You are all Impressive Givers and your support is awesome!

Spring board into your new home!

Spring is back and the weather is great! Well, let’s just say that the weather is getting better. It does not want to make up it’s mind. It is hot one day and then rainy the next. Today, here in Roseville, we got a little bit of both. We got rain and shine and we even had a rainbow and a leprechaun who must have gotten lost. All that being said I did see through the constant change some great for sale signs out there on some great properties.

Spring is Back!

Spring is Back!

It may be hard to get out there in a car and go look for a home when the rain is coming down and the clouds are dark. It can bring down the attitude and it can make the best of home look dreary. When the sun comes out everything looks a bit prettier and exciting. The flowers are blooming and the allergies are in full effect.

What makes buying a home right now such a great opportunity. It is not the weather although it certainly makes it a lot more enjoyable of a task. Well, there are a few reasons to make the move and spring board into your new home:

1) Extremely Low interest Rates – Historically speaking we are seeing all time lows in our rates. Rates have been in the mid 4’s and have consistently hovered around the high 4’s low 5’s. It cannot get better than that and if it does I am certain that there will be something going on that none of us would want to see.

Why Not?

Why Not?

2) Low Home Prices – The prices on homes today and nearly half of what they were in 2005. This is only four years ago. The affordability is back. If you take a look at price per square foot on many of the resales you will see that you could not build the home that you are looking at for that cheap.

Clearance

Clearance

3) First Time Buyers Credit of $8,000 – The federal government is willing to give you an $8.000 credit when you file your taxes. This is cash in hand that you can receive and the best part of it is that you do not have to pay it back. Get a rebate for your home purchase. Yes, It does smell a lot like cell phone rebates or car rebates.

Put them in your pocket!

Put them in your pocket!

4) New Home Purchase Credit of $10K in California – If you are in the state of California they will give you an additional 10K for buying a new home. This credit is payable over three years at $3,333 per year and the only requirement is too live in the home for three years. This does not have to be repaid either.

Never been lived in!

Never been lived in!

There are many other reasons to get in to your first home or to upgrade to a bigger home. I am sure that each and everyone of you can think of several reasons of your own. The reasons above are just a few that ring a bell to home-buyers that I work with. When fear is present in society opportunity lurks in the air. Cast away any fear that you may have and get a hold of your favorite Mortgage Broker and your Favorite Realtor and get out there and take advantage of the times. Spring  is back and it is time to Spring board in to your new home!

Mortgage Insurance: Definitions in Mortgage

Mortgage Insurancecan be like gum on your shoe on a hot day. In the years 2002-2007 everyone would avoid Mortgage insurance like is was a plague. The way that we would avoid Mortgage Insurance was by getting an first mortgage and combining with a second mortgage. This type of structuring was commonly referred to as 80/20, 80/10/10 or 75/25. This numbers referred to the LTV/CLTV (https://mattfreeman.wordpress.com/2009/03/19/loan-to-value-definitions-in-mortgage-continued/) .

The break-even of an investor that is lending money is considered to be 80% so if you borrow less than 80% than the investor does not need any protection. If you borrow more than 80% on one loan then the investor wants to have protection in the event you default. When you default and they have to take back the property and they have giving 90% of it’s value their loss can be 10% or greater after all the expenses to foreclose. Please be aware that there are a few exceptions to the rule namely VA and USDA loan programs.

This is where Mortgage Insurance comes into play. The mortgage insurance protect the investor when a consumer defaults and repays them for any losses that they may take. Mortgage Insurance can take on many forms and I suggest that you talk to your Mortgage Professional for the one that may best suit your situation. A few of the types of Mortgage Insurance are as follows:

BPMI – Borrower Paid Mortgage Insurance – commonly used with an FHA loan borrower paid mortgage insurance is paid by the borrower on a monthly basis. For FHA there is an Upfront Mortgage Insurance Premium and then the monthly expense. This monthly expense is in addition to your principle and interest payment, your taxes and you homeowners insurance.

LPMI – Lender Paid Mortgage Insurance – As the name states the lender pays the mortgage insurance premium for you in theory. What they do is raise the rate that you would have gotten by a said amount to cover their risk. The increased rate that you pay covers the losses because the rate is above market. (Why would you want this?)

I am glad you asked that question. In 2007, Mortgage Insurance,  became tax deductible. (please note that I am not a CPA and any information here is strictly to illustrate my point. Please consult your CPA for your situation prior to making a decision). However, there were some provisions to what and who could deduct this premium. If you make greater than 100K gross you cannot deduct BPMI. Those that are in that category would have better tax benefits going with LPMI because the MI is built into the rate and Mortgage Interest is always deductible(primary residence).

The reason that 80/20 or 75/25 or 80/10/10 were popular was because the first mortgage was under the 80% break-even and the second mortgage would generally attach a higher rate by 2-3% to absorb the risk they were taken. Second Mortgage were also smaller loans.

You may here the terms PMI(private mortgage insurance), BPMI, LPMI, MIP(mortgage insurance premium) and it can get very confusing. I always recommend that you consult your professional to help explain anything you may be unsure of.

To end this summary of Mortgage Insurance I like to always give a few examples of what I might recommend and when we need or do not need mortgage insurance.

Ex. 1 –  Purchase Price 100K and you need a loan for 85K. Do we need Mortgage Insurance? The answer is yes. Since we are borrowing over 80% of the value of the home BPMI or LPMI would be needed. Another way to finance this to avoid Mortgage insurance would be to do an 80% first mortgage and a 5% second mortgage and putting 15% down. However, second mortgages are the 2009 dinosaur equivalent. They are almost extinct.

Ex. 2 – Purchase Price 200K and you need a loan for 160K.  Do we need Mortgage Insurance? The answer is no. In this case the LTV is exactly 80% and at this LTV and below there is no need for Mortgage Insurance.

In summary, Mortgage insurance is a fee that is paid by you and it is to protect the investor that is taking the chance on lending you more that 80% of the value of the home. It can be dropped when your home reaches that 80% LTV range but can be difficult to do. If you have an FHA mortgage they require 60 payments and a LTV of 78% before you an get rid of it.

If you have any questions regarding what is in this post please leave a comment or call me in the office. Thank you for your time.

As Always, Thank you for reading.

Matt Freeman

Loan to Value: Definitions in Mortgage Continued

Buying a new home or refinancing your existing mortgage is something that hopefully everyone will experience at one point in their life. Mortgages are tailored for the individual or couple that is buying the home. They are assessed by the overall risk the investor will have on the loan based on the qualifications of the consumer. Yesterday we discussed DTI or Debt to Income which is the borrowers ability to repay the debt. Today I would like to take a look at the collateral side of lending commonly referred to as LTV or Loan to Value.

Like DTI, Loan to Value is also expressed as a ratio. It is the amount you will finance for the purchase or refinance divided by the value of the home. The home is what is used as collateral and the greater the equity the lower the risk. Another way to put that would simply be low LTV lowers the risk and high LTV increases the risk.

Let’s look at an example for a refinance transaction. You currently owe approximately 150K on your home. An independent appraisal has determined that the value of your home is approximately 300K. The loan to value on your home would be:

loan amount / appraised value = LTV   150K / 300K = 1/2 = 50%.

We never would use the 1/2 in the example as the number is always expressed as a percentage however, for the example I wanted to illustrate the correct math. 50% LTV would be considered as a low risk loan to value. That means that you have 50% equity in the home and in the event the lender had to take back the property via Foreclosure they would be able to sell for a profit.

80% LTV is considered the break even point for an investor that has to foreclose on a property. They spend approximately 20% of the equity in fees, marketing and reduction of price as well as the holding costs if they are to retake the property. This is exactly why they need insurance know as Mortgage Insurance when our LTV exceeds 80%.

Let’s take a loook at another example. You are buying a home and you have 3.5% to put down as a down payment. The home that you would like to buy is selling for 100K. This means that you would need to finance 96, 500K of the purchase:

LTV = Loan Amount/Appraised Value = 96,500k / 100,000k = 96.5% LTV(please note that purchase price and appraised value can be different. In the event they differ on a purchase the investor will base LTV off the lower of the two.)

We have looked at a few basic examples of LTV here today. The last thing that I would like to dicuss briefly is CLTV. CLTV stands for combined loan to value. This is when you have two or three loans on a property. If you have a loan for 100K and a second mortgage for 50K and the value of the property is 300K how would you determine the combined loan to value? Let’s look at an example:

Loan 1 + Loan 2 / Appraised Value = CLTV; 100k + 50k / 300k = 150k / 300k = 50% CLTV.

These are very basic examples and I must tell you that there is always an LTV and sometimes a CLTV. You will have both in many cases:

Example above the LTV = 100k / 300k = 33% and the CLTV = 100k + 50k / 300k = 50%.

CLTV may also be referred to TLTV or HCLTV which are total loan to value and heloc combined loan to value.

I hope that you enjoyed this information on LTV. Stay tuned for definitions of credit and mortgage insurance coming soon.  As always thank you for listening.

 

 

Definitons: DTI also known as debt to income

DTI also known as debt to income is becoming one of the most important factors when obtaining a loan. The debt to income is a ratio of your debt versus the gross monthly income. This ratio is largely evaluated when determining the risk of the loan. Here is how we calculate your debt to income.

Front end debt to income is the total housing expense divided by your gross monthly income. Total housing expense includes your principle and interest, mortgage insurance, taxes and homeowners insurance monthly. This is commonly referred to as PITI, principle, interest, taxes and insurance. The mortgage insurance is not always charged.

Ex. (excludes mortgage insurance) 100K loan amount @ 6% interest = $599.55 principle and interest + $104.17 taxes and $30 for homeowners insurance = $733.72. If you make $3,000 per month gross then your front end DTI will be $733.72/$3000 = 24% housing debt. This means that your housing debt monthly is 24% of your gross monthly.

The back end ratio which is very closely looked at will take into account the minimum monthly debts that you are expected to pay that report to your credit. Examples include credit card minimums, car payments, student loans, or any other note loan. So the back end ratio will be the housing expense + all the minimum amounts due divided by your gross monthly.

Ex. car payment = $300, credit cards = $300 and student loan = $200 then you have $800 debt load per month. If the house payment is $733.72 + $800 = $1533.72 divided by the gross monthly income of $3000 will give you the back end ratio of 51%.

51% back end ratio would be considered very high and you would have to have compensating factors.

When evaluating your own debt to income simply remember the new total housing payment + other debts that are required to be paid on the credit divided by your gross monthly income should give you an idea. The recommendations for an FHA loan are 31/43 which would include the additional payment of mortgage insurance. Dave Ramsey in his book The Total Money Makeover recommends that your housing payment or front end ratio should never exceed 25%.

Loan Officer Selection: More confusing than the BCS?

All right the verdict is in and it is time to buy that first home. You have been waiting for this your entire life. You have pictured the home in so many ways. You have decorated the inside and decided on the yard decor. Whether it is you and your spouse or you alone or even if your parents are involved, it is such an exciting time. Whatever the team may be you begin to jump behind the computer and look at homes on line. You may even know a Real Estate agent or have a friend or relative that has referred one. You may have even taken a drive on the weekend to see the inside of that house that you have been eyeing and met the listing agent. Who Knows? One thing is for certain “It is time to buy a house!”

Buy me please!

Buy me please!

 

Fast Forward about two weeks or so and you have sat done with all those that will financially contribute to the home. You have discussed the affordable house payment if you will based on what you know that you take home. There are a few battles, maybe a budget , maybe not, you may have considered the increase in square footage also will increase the utilities or even may have thought about the down payment. You have also thought about how you would decorate and the schools that the kids would go to.  Restaurants have been taken into consideration and you get the point. What is missing from all the talk? How to get the MONEY!cash1

Choosing the right Loan Officer to help you finance the biggest purchase in your lifetime is the last thing that many homeowners think about. They think about the cost, the down payment, and look at homes that may be in the price range all before they find out who might help with this.

Disclaimer: This is not always the case but many times this is the truth as I have found it over the years so please do not get offended. If you do I am sorry in advance as this is not the intent!

After a client has viewed the homes on line or seen them in person the Real Estate agent that they have hired sits them down and says we really need to get you pre-approved. We will not be able to write an offer on a property that you may like until I have a letter of pre-approval from your lender. From here the conversation can go many ways:

1) Parent Referral- since my parents are going to co-sign they have suggested that we use the lender they have always used. This may or may not be ok. The parents may have used a bank, may have not needed FHA so their lender may not have this option, their lender and the kids may not click.

2) Friend of Family- We have a long time friend of the family that has always said to use them when it came to this point so we are going to call them. RUN! This is a recipe for disaster most of the time!

3) Realtor Referral – (my personal favorite because it is 70% of my new business.) The Realtor says I have a person that will be great for you and I would like you to talk to them. I will be the first to admit that I may not be the Loan Officer for everyone although I would like to be.

4) Referral from Someone you Trust- One of your closest friends has just had a wonderful experience or maybe they are a colleague but that is the way that you are going.

5) Referral from Retail Bank to Broker- (another large source of my business). Many banks do not do Government Loans so we get the run off as Brokers.

6) Found a lender on line (Yikes!) – many do some shopping on line and get a few quotes. This hardly ever works out.

I am certain that there are other ways that clients choose to find the person that they will use to deliver the money but these are a few that I run across often.

Why then is the selection process of one of the most important decisions seem so random? It seems to be done so nonchalantly or the opposite it is an interrogation of fees charged and based solely on the lowest cost. Two opposite extremes and why it seems to be like the BCS Confusing!

For those that do not follow college football the BCS stands for Bowl Championship Series. Through sophisticated algorithms teams are ranked based on wins, losses and the quality of their opponents. This ranking helps the selection committee choose who should play for the National Title. This is the pinnacle of College Football. This is the very highest achievement a college football team and school can attain. They play their hearts out all season and the decision is left to an algorithm.

Short Soap Box: I once had a potential client tell me that they had a list of ten candidates and that I made the top two on the spreadsheet only to be told that I was the first loser. The consolation prize. The reason was that in the end the other guy was $200 cheaper but they liked me a lot better. HMMMMMM!

Choosing the right Loan Officer can be a daunting task and one of the most important decisions that you will have to make. In 2009 and moving forward there should be some criteria to how you choose. If you are referred by someone you should ask some questions and even meet with the Loan Officer to determine your level of comfort. I tell each and every client when we get together that this is an opportunity for us to get to know each other and determine if we are a good fit to work together. Ask questions and let the Loan Officer answer them. This is what we are here for you. To help make the process as smooth and understandable as possible.

In conclusion, maybe the decision of a Loan Officer requires a little more thought. Do not let the committee determine who you are comfortable with. Many of the new homes will try to get you to use their lender. If you are not comfortable it is your right to negotiate. Hopefully this lender will be their for the rest of your home purchase career. The BCS is confusing and is always a let down. Don’t let your lender choice be this way. Take control. Get a referral from someone you trust as mentioned above and take the time to meet with this person. In the end it will pay big dividends for you. You may just win the National Championship or better yet get the perfect financing for the perfect new home.

The 8 stages to homeownership. An illustrative guide for buyers

Stage 1 – Pre-approval – The pre-approval process is a time that you meet with your Loan Officer and talk through the financial side of the purchase. The loan officer will take an application and gather all of your documentation required for pre-approval. This documentation includes but may not be limited to the following: Last Two Years Tax Returns, current pay-stubs covering 30 days (W-2), last two years W-2’s, two month’s bank statements all pages and all accounts, most recent statement for 401K, money market, cd’s, stock, mutual funds and the like. Other items can include mortgage statements, homeowner’s insurance declaration page, bankruptcy papers, divorce papers, lease agreements and more. The more detailed you are with your documentation the more accurate the pre-approval will be. Loan Officers review the documentation, check credit, verify income and run your scenario through our automated engine to receive an automated approval. The automated approval assesses risk and cross references secondary market guidelines to determine your borrowing capability. The accuracy of the information inputted into the system is everything. The automated approval will give you a list of items that you will have to provide to obtain funding of your loan in the end.

 

Stage 2 – The House Hunt – After you are pre-approved by your Loan Officer they will issue a pre-approval letter to you and your Realtor. As far as the lending side of things you are on a hiatus. Your loan cannot be locked until you have found a property. We lock the collateral not the borrower. During the house hunt your loan officer will keep you up to date on any guideline changes, industry news, and rate movement. They will also be in communication with your Real Estate agent to make sure that your team is all on the same page. When you find a home that you like you will place an offer and wait for the response. There may be counter offers and you may have to write more than one offer before you have an offer accepted. Your Real Estate agent will guide you through this process and provide great advice on how to approach the house hunt.

 

Stage 3 – Offer Accepted – Now that the offer is accepted and you are in contract to buy the home. There are several things that will occur during this stage. The first few days will be a flurry. In my practice I like to meet with you again and obtain updated information if the hunt has taken a few months. Along with gathering updated information we will go over current rates and pricing, fees, and determine if we want to lock now or hold off. At this point a check for the appraisal is collected and the appraisal is ordered, preliminary title reports are requested, and I request a copy of the fully executed contract. (Please note every loan officer will approach this differently and certain loans such as VA have different appraisal processes.) Gathering the information above from the Title Company and the BANKS can sometimes be a process. The title companies on the Bank owned properties are located all over the place. I have worked with one in Philadelphia. At the same time Your Real estate agent and you will be ordering inspections such as home and termite if you choose too. It is highly recommended and your Real Estate agent will talk you through this. Once the documents above are gathered the loan package will be submitted to our wholesaler of choice to be underwritten.

 

Stage 4- Underwriting – Once we have chosen the wholesaler that will provide you the money to buy your home we submit the loan package that we have created to be underwritten. The cleaner the package we submit the smoother the process. This is why I am so through upfront and ask you to provide all the information and all pages of everything. The reason that there is an underwriting process although you were already approved through our engine is that we have to have a human check to make sure that the data that we entered in the computer is supported by our documentation. They are checking income, assets, credit depth, appraisal, title reports and contracts for accuracy, missing signatures, appropriate calculation and use of income such as overtime. This underwriter will be overly thorough in today’s market environment so this process will take time. The time varies depending on who we choose to work with and their current volume of business. One thing that will delay the underwriting process is incomplete files. Again, this is why it is important to work with a Loan Officer that can package a clean file for underwriting and important for you to provide everything they ask for to the best of your ability. This stage can be as quick as 48hours and some wholesalers are running 20+days. If the wholesaler is quick it can because they are well staffed, the rates are not that great, they specialize in few products or if they are slow it could mean all the same. The goal of this process is to get a conditional loan approval from our underwriter.

 

Stage 5 – Loan Approval and Conditions – Once the underwriter has approved the loan they will issue a conditional loan approval. There are conditions that are labeled prior to documents and there are prior to funding conditions. Many of the conditions are behind the scenes and should not be a requirement of you as the borrower. If you are through upfront with documentation there should be minimal conditions at this stage. Some examples of typical prior to document conditions include updated pay-stub, appraiser to provide more data, estimated closing statement, W-2 or letters to explain items that may need clarifying. Some example of prior to fund conditions may include insurance or 4506T results. The conditions I have given as examples are not the only conditions that may occur they are meant for example only.  At this point our job is to quickly gather the conditions and submit them back to the underwriter to be satisfied. This process, like underwriting, varies on the time to complete. The quicker we get back the conditions necessary the quicker we move to the next step. Once the underwriter has cleared the conditions we move to the next stage loan documents.  

 

Stage 6 – Loan Documents – When the Underwriter clears the prior to loan document conditions we are able to order your loan documents to be signed. Loan Officers fill out a request for loan documents and submit this to the wholesaler. The wholesaler has a department that works specifically on preparing loan documents to send to the title company. Again, this is a process and every wholesaler will vary on the time that it takes to get the loan documents sent out. In the electronic era that we live in the loan documents are most commonly sent via e-mail. Once the title company receives the loan documents they will prepare the estimated settlement statement and send to your loan officer to review. The settlement statement reflects the costs, loan amounts, down payment requirements and any deposits you have already made as good faith. The Loan officer will review this statement to make sure that it is in-line with the good faith estimate and what you discussed with your loan officer originally. There are a few items that are pro-rated so the numbers will very slightly. Once the settlement statement is reviewed for accuracy either the title company or the loan officer or a combination will schedule a time for you to sign. The signing will take place at the title company, at your home with a notary or at an alternate location that is convenient to all parties. The signing of the loan documents is where you agree to the terms of the loan. You will in front of a notary acknowledge this agreement. Once the signing is complete the title company will overnight the signed package back to the wholesaler for the next stage.

 

Stage 7 – Funding – Once the wholesaler receives the returned package from the title company they will review the package for completeness. This again is a process that varies from institution to institution. Once the file is reviewed they will issue a funding checklist with any outstanding conditions to be satisfied. There should be very few conditions if any at this stage that require you as a borrower to do something. Between your loan officer and the title company all conditions will get completed. That does not mean that you will never have any conditions required of you. There are cases that you will have to provide additional documentation. This is a rare case as all of it should have been handled prior to documents. Once the funder has cleared all the conditions they will fund your purchase. This is the process of sending a wire of the funds from the loan to the title company to be combined with your down payment to complete the purchase. Once the wire is received the escrow officer will release the file to be recorded in the county of the purchase. Now for the last stageJ

 

Stage 8 – Recording – The purchase transaction is recorded with the county recorded so that you are officially the homeowner on record. Congratulations you have made it through all eight stages of the home ownership process.

 

* These stages do not represent the process for every loan officer or lending institution. They constitute the process I have learned as a Mortgage Broker and through my time in the industry. You may use them as a general guide to help better understand the stages that you may encounter when buying a home. This is for illustration and not intended to be the ultimate guide to home-ownership.

 

 


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