Jeff Coon

Paying ‘Points'- Good or Bad?

•Discount points- Used to reduce a borrowers interest rate. One point = 1% of the amount borrowed. Rule of thumb is 1 point reduces interest rate by approx .25% on a 30 year loan.

•*Can be deducted on income taxes- ( up front mortgage interest )

•Should a borrower pay points? This depends on the individual borrower's scenario. The mortgage crisis of the last couple years has created a shift in how mortgage rates are offered. With the average loan being paid off or refinanced in a much shorter period of time, lenders are looking for ways to earn a better return over a shorter period of time. Often, the best ‘value' in terms of rate/fee combination is offered to buyers willing to pay around one discount point on their loan.

•Consider the following example:

Sales price $350,000 & 20% ($70,000 )down payment. Loan amount $280,000 and a 30 year fixed rate loan. ‘Zero' point loan at 5.25% ( par rate ) P&I = $1546.17 0.875% Discount point, reduces rate to 5%, new P&I = $1503.10 Monthly savings of $43.07 Initial cost of discount = $2450 After tax ‘net cost' = $1837.50 ( Assumes 25% tax bracket ) Break-even calculation $1837.50 / $43.07= 42.66 payments If the borrower keeps the loan for 43 payments, they break even on this discount. For every month after 43 months, they are saving money. Potential savings over life of the loan=$15,505.20, a ‘sure thing'.

What other reasons are there for paying points?

Sometimes, a buyer may be asked to pay points due to ‘layers of risk' associated with their loan application. To cope with mounting losses on certain types of non-performing loans, Fannie Mae has introduced ‘Loan Level Price Adjustments' or LLPA's. These fees are assessed on an individual basis, and are determined in large part by evaluating the combinations of FICO score, LTV, & Collateral type. Lower scores incur higher charges, the same way that low down payments do. Condo's or multi unit homes, and investment use will also add to the fees assessed. These surcharges can add several ‘points' of extra closing costs to a conventional loan. Buyers may be offered a choice of taking a higher rate instead of paying for these fees up front at closing. Currently, FHA & VA loans do not assess these add-on fees to qualified borrowers.

LLPA's
Loan Level Price Adjustments

As you can see, there may be borrowers who would be required to pay quite a bit in 'extra' closing costs if they are considered risky due to lower scores, & lower down payments.

Give us a call to figure out how to get the best loan for YOU, not your lender!

The Worker, Homeownership, and Business Assistance Act of 2009 has extended the tax credit of up to $8,000 for qualified first-time home buyers purchasing a principal residence. It also authorized a tax credit of up to $6,500 for qualified repeat home buyers.

$8,000 First-time Home Buyer Tax Credit at a Glance

•The $8,000 tax credit is for first-time home buyers only. For the tax credit program, the IRS defines a first-time home buyer as someone who has not owned a principal residence during the three-year period prior to the purchase.

•The tax credit does not have to be repaid.

•The tax credit is equal to 10 percent of the home's purchase price up to a maximum of $8,000.

•The tax credit applies only to homes priced at $800,000 or less.

•The tax credit now applies to sales occurring on or after January 1, 2009 and on or before April 30, 2010. However, in cases where a binding sales contract is signed by April 30, 2010, a home purchase completed by June 30, 2010 will qualify.

•For homes purchased on or after January 1, 2009 and on or before November 6, 2009, the income limits are $75,000 for single taxpayers and $150,000 for married couples filing jointly.

•For homes purchased after November 6, 2009 and on or before April 30, 2010, single taxpayers with incomes up to $125,000 and married couples with incomes up to $225,000 qualify for the full tax credit.

The $6,500 Move-Up / Repeat Home Buyer Tax Credit at a Glance

•To be eligible to claim the tax credit, buyers must have owned and lived in their previous home for five consecutive years out of the last eight years.

•The tax credit does not have to be repaid.

•The tax credit is equal to 10 percent of the home's purchase price up to a maximum of $6,500.

•The tax credit applies only to homes priced at $800,000 or less.

•The credit is available for homes purchased after November 6, 2009 and on or before April 30, 2010. However, in cases where a binding sales contract is signed by April 30, 2010, the home purchase qualifies provided it is completed by June 30, 2010.

•Single taxpayers with incomes up to $125,000 and married couples with incomes up to $225,000 qualify for the full tax credit.

For more information, including a F.A.Q. list, visit www.federalhousingtaxcredit.com

FHA Streamline Refinancing

FHA Financing has become more popular again due to the tightening of lending standards, & the evaporation of the subprime lending market. One of the benefits of obtaining an FHA loan is the ability to reduce your interest rate at a later date at relatively low cost, if market rates improve after you get your initial FHA loan. Although some new restrictions are on the horizon, a streamline refinance is still a wonderful tool to help lower your monthly mortgage payments. If you have an existing FHA loan, & are current, & you believe your interest rate is at least a half percentage point higher than the current market rate, then a Streamline Refi may be a good deal for you. Streamline refi's can be done relatively quickly, & with a lot less paperwork than getting a normal fully documented loan. The spirit of the FHA Streamline is to allow borrowers to improve their finances. You can Streamline refinance & change the term to a shorter or longer term, pay a lump sum to reduce your outstanding balance & reduce payments at the same time, or you can simply lower your rate & payment. Just like any other loan, it does not work for everybody, so you will need to consult with a mortgage professional to determine if this would be the best loan type for you.

Closing costs for an FHA streamline refinance can vary from lender to lender, & may be different for loans of different sizes. Just like any new first mortgage obtained, there are certain fees that must be paid. Here is a listing of the more common items you should expect to see:

Title Insurance. There will be a need for a new title policy to be issued, because you'd be getting a new loan, & title must be proven to be clear of liens & judgments. Title insurance is usually based on a percentage of the loan amount, plus service fees for administrative items in association with providing the coverage.

Recording fee. The new loan/mortgage must be recorded, & the old loan/mortgage extinguished. This cost will vary according to local policies in your area.

Escrows/Reserves. A new escrow account for paying taxes & homeowners insurance will need to be established. Often the cost of this may be offset in part or entirely by applying the balance of the current escrow account.

Taxes/Insurance. Any impending insurance renewal or property taxes due may be required to be paid.

Up front Mortgage Insurance, (UFMIP) FHA loans have a mortgage insurance premium that is typically financed into the loan, & there is a pro-rated refund of any existing unearned UFMIP that can be applied to the closing costs. This is typically 1.5 - 1.75% of the new loan amount.

Lender fees: These may vary depending on how your originator is setting up your loan. Application fees, commitment fees, & other small pass through fees may be charged.

Discount points. Discount points can be charged to further reduce the interest rate below the current market rate.

YIELD SPREAD PREMIUM: YSP is a tool that can be used to reduce a borrowers cost of obtaining a loan. In exchange for a borrower accepting a slightly higher interest rate, YSP may be available to be used to offset a borrowers closing costs, & is typically seen as a "lender credit". YSP is also referred to as a 'rebate'.

A typical Streamline refinance transaction results in a borrower bringing anywhere from zero $$$ to about one monthly payment to closing. Normally there is no payment due right away, so bringing this payment to closing is essentially the same as paying your normal monthly payment. There is no limit to the amount of times a borrower can utilize the streamline refi feature of FHA financing. There is often no credit qualifying, no appraisal, & no debt ratios calculated. You must be current on the existing FHA loan. Streamline refinances are relatively inexpensive, & easy to get through the process.

If you currently have an FHA loan, & you are interested in a lower rate, see if your mortgage professional can help you put more money in your pocket each month! There's no risk, & there can only be a good outcome!

APPLYING FOR A MORTGAGE? HERE'S WHAT NOT TO DO

So, you've decided to buy a home, congratulations! Whether you are putting a lot down or a little, or whether you are going to use an FHA or VA loan, or seek conventional financing, there are a few items you may want to take note of & try to avoid doing anything that may harm your chances before making any moves. I will attempt to list as many as I can, & perhaps the Active Rain Community can chime in with anything I may have missed.

First, a little background. Loan decisions are based on numerous factors, some of which are FICO score, employment history, income documentation, payment history, debt ratio, & more. You may already have everything you need in place, but perhaps feel that you should make some changes, to 'pretty up' your individual situation prior to applying. Sometimes, this is the case, but quite often, things you change can actually hurt you, no matter how much sense they seem to make.

For example:

Let's say you make some pretty good money at your current job, but feel with stronger income, you may be easier to approve or even afford more home. So you trade in your $50k base salary for a job with a $30,000 base, but with monthly commissions, or overtime giving you the potential to earn up to $70k annually. Sounds good, right? I mean, more income means more $$$ to pay that loan with. Unfortunately for you, you have now reduced your income in the eyes of an underwriter! That's right, since you don't have a 2 year history of getting paid overtime, or commissions, this 'extra' income cannot be counted in terms of qualifying. the majority of loan programs require you to prove a successful 2 year history of this type of income, & you have now reduced the available income to be used for qualifying. LOAN DENIED.

Another common mistake is to try to 'clean up' your credit report prior to applying for a loan. Maybe you've gone to one of the online websites that provides you with your credit report, & you see a few old collection accounts that are for small amounts of money. Or perhaps, you feel you have 'too many' credit cards & think you should close out any you are not using. Unfortunately, these moves can have a devastating effect on your credit report, by actually LOWERING YOUR CREDIT SCORE. That's right, what you have done by paying off old collection accounts is to update the 'last action' date on those accounts bringing them back to life & into the crosshairs of the FICO scoring machine. Your mortgage lender probably does not care about collections under $1,000 & more than a year old, so ask your loan officer if they should be touched before you do anything with them. As for the accounts you are not using? By closing them, you are actually denying yourself available credit! Part of the FICO scoring model is based on the amount or percentage of utilization of your available credit. The higher percentage you have available, the better. Another factor is age of tradelines. If you close an account with a ten year history, you are robing your credit profile of an important asset! Again don't make these moves unless you have been instructed to do so by someone involved with your loan application. Otherwise, you may have your LOAN DENIED.

Need a new car? Please resist the urge until after your loan has been closed to upgrade from your $200 a month payment to that sweet deal for $550 a month, especially if you've got a high debt ratio to begin with! Family member needs a new ride? Please don't co-sign for them just yet, as their new debt becomes your new debt! Even if you are not making the payments, you are responsible for them, & this payment will be counted against your available income in terms of qualifying. You want to live in a new home, not your new car, so don't get your LOAN DENIED.

Other words of general advice:

Don't put off buying a home so you can wait to save just a little more money. If interest rates go up just a little bit, the extra money you will have saved may not offset the difference in payments.

Please get pre-approved before starting to go out & shop for a home in earnest. This will save you & your agent a potentially significant amount of time, & will help you understand the relationship of price to payment, as well as finding out that you can actually get the loan!

There are other 'don'ts' so be sure to find yourself someone to discuss your individual situation with. I have listed some of the most common items we encounter that are easily avoidable. Best of luck in your search for the perfect home, & let's hope you also get approved for a great loan!

Short Sales- What a Buyer needs to know

If you're thinking about purchasing a home, you may be seeing a lot of listings with the notation " short sale". There are many bargains to be had in the current market. Before you make an offer, it pays to know a little about the seller's situation. If you are able to successfully purchase a short sale property, you will often find yourself with some instant equity, because many of these homes are sold under current market value.

If a home is being sold for less than what the current seller owes on the property-and the seller does not have other funds to make up the difference at closing-the sale is considered a short sale. Many more home owners are finding themselves in this situation due to a number of factors, including job losses, aggressive borrowing against their home in the days of easy credit, (using their homes as "ATM's"), and declining home values in a slower real estate market.

A short sale is different from a foreclosure, which is when the seller's lender has taken title of the home and is selling it directly. Homeowners often try to accomplish a short sale in order to avoid foreclosure. But a short sale holds many potential pitfalls for buyers. Know the risks before you pursue a short-sale purchase.

You're a good candidate for a short-sale purchase if:

• You're very patient. Even after you come to agreement with the seller to buy a short-sale property, the seller's lender (or lenders, if there is more than one mortgage) has to approve the sale before you can close. When there is only one mortgage, many short-sale experts say lender approval typically can take 30-60 days. If there is more than one mortgage with different lenders, it can take much longer for the lenders to approve the sale. There is often bickering over which lender gets their way.
• Your financing is in order. Lenders like all cash offers. But even if you can't pay all cash for a short-sale property, it's important to show you are well qualified and your financing is set. If you're preapproved, and can close at any time, your offer will be viewed more favorably than that of a buyer whose financing is less secure. Larger down payments often trump lower ones. Seller concessions for paying your closing costs are permitted, as long as the lender in control of the sale agrees.
• You don't have any contingencies. If you have a home to sell before you can close on the purchase of the short-sale property-or you need to be in your new home by a certain time-a short sale may not be for you. Lenders like no-contingency offers and flexible closing terms.

If you're serious about purchasing a short-sale property, it's important for you to have expert assistance. Here are some people you will want to have on your team:

• An experienced real estate attorney. Only about two out of five short sales are approved by lenders. But a good real estate attorney who's knowledgeable about the short-sale process will increase your chances getting an approved contract. Also, if you want any provisions or very specialized language written into the purchase contract, a real estate attorney is essential throughout the negotiation.
• A qualified real estate professional. You may have a close friend or relative in real estate, but if that person doesn't know anything about short sales, working with him or her may hurt your chances of a successful closing. Interview a few agents and ask them how many buyers they've represented in a short sale and, of those, how many have successfully closed. A qualified real estate professional will be able to show you short-sale homes, help negotiate the purchase when you find the property you want to buy, and smooth communications with the lender. (All MLSs permit, and some now require, special notations to indicate that a listing is a short sale. There also are certain phrases you can watch for, such as "lender approval required.")
• Title officer. It's a good idea to have a title officer do an initial title search on a short-sale property to see all the liens attached to the property. If there are multiple lien holders (e.g., second or third mortgage or lines of credit, real estate tax lien, mechanic's lien, homeowners association lien, etc.), it's much tougher to get that short sale contract to the closing table. Any of the lien holders could put a kink in the process even after you've waited for months for lender approval. If you don't know a title officer, your real estate attorney or real estate professional should be able to recommend a few, & will often request this on your behalf.
• Mortgage Loan Officer. Before you begin to shop for any home, you should get pre-approved for your mortgage. Know what your parameters are, & your limits. It is important to checkk back with your lender often so that you are aware of current rates & trends, as well as any guidline changes that may affect your ability to qualify. A local lender that can work closely with your attorney & real estate agent is a good choice.

Some of the other risks faced by buyers of short-sale properties include:

• Potential for rejection. Lenders want to minimize their losses as much as possible. If you make an offer tremendously lower than the fair market value of the home, chances are that your offer will be rejected and you'll have wasted months. Or the lender could make a counteroffer, which will lengthen the process.
• Lousy terms. Even when a lender approves a short sale, it could require that the sellers sign a promissory note to repay the deficient amount of the loan, which may not be acceptable to some financially desperate sellers. In that case, the sellers may refuse to go through with the short sale. Lenders also can change any of the terms of the contract that you've already negotiated, which may not be agreeable to you.
• No repairs or repair credits. You will most likely be asked to take the property "as is." Lenders are already taking a loss on the property and may not agree to requests for repair credits. If the home is in need of serious repair, one option for those needing financing is to obtain an approval for an FHA 203k "rehab" loan, which allows for repairs to be financed with the loan.

The risks of attempting to purchase a short sale are considerable. But if you have the time, & patience to see it through, a short sale can be a win-win for you and the sellers.