5 Things That Can Sink a Mortgage App

A low credit score and lack of income aren’t the only things that can keep you from qualifying for a mortgage. Here are five other things that can sink you as well.

Are you getting a divorce?

 

A divorce proceedings in the works won’t automatically disqualify you from obtaining a mortgage or refinancing, but it can make the picture more complicated. Basically, the lender doesn’t want to get left high and dry in a battle over marital property, or refinance a mortgage when one of the two earners will no longer be contributing to the monthly payments.

 

In fact, people often refinance a mortgage as part of the divorce process as a way of getting one partner’s name off the loan. To do this, however, you have to be in agreement as to who’s going to get the house and the other party needs to be willing to sign off on the deal.

 

Don’t even try to omit the fact you’ve in a divorce proceeding or simply “neglect” to include it – if your lender finds out, which it probably will during the background check, you’ll be turned down for sure. You could also be charged with mortgage fraud for intentionally lying on a mortgage application.

 

Did you change jobs recently?

 

Lenders like to see evidence of a stable employment history before approving you for a mortgage. Typically, that means you should have been in your current job for at least two years before applying for a mortgage or mortgage refinance.

 

That’s not a hard and fast rule. If you’ve recently taken a new job in the same field at higher pay, it probably won’t hurt you. However, if you’re venturing out in a new career direction – even if you’re earning more – lenders are likely to be reluctant until you’ve established yourself. And if you’re starting a new business, it’s going to take even longer before lenders will be assured you’ve got a reliable income.

 

Under no circumstances should you change jobs during the loan application process – sit tight until after the mortgage closes, or you’ll have to start all over again. And if you’ve been unemployed for any reason, you’ll probably have to be in a new job for two years before mortgage lenders will be willing to consider you again.

 

Are you in a lawsuit?

 

Being a party to a lawsuit makes lenders nervous. If you’re being sued, there’s the chance you may get stuck with a large settlement that may make it difficult to meet your monthly mortgage payments. If you’re suing someone and lose, you could be end up with some hefty attorney bills, not to mention the chance of a countersuit.

 

Being a potential beneficiary of a class-action lawsuit doesn’t count. To be involved in a suit, you either have to have filed a suit against someone in court, been served as a defendant or have hired an attorney to represent you.

 

Your mortgage application will ask if you’re involved in a lawsuit of any kind. Again, you have to answer truthfully – this is another situation where you could end up getting charged with mortgage fraud if you misrepresent the facts on your mortgage application.

 

Are you making major repairs?

 

When you’re in the midst of major renovations or home repairs is not a good time to try to refinance. While repairs and upgrades can enhance the value of your home, the same work left unfinished will diminish it. Given that completion dates for home improvement projects can be a moving target, lenders will prefer to see the work completed before signing off on a new mortgage.

 

Some people may seek a cash-out refinance or home equity loan if they find themselves running out of money in a home improvement project they intended to fund by other means. But unless you’ve got a lot of equity already tied up in the home, you’re probably better off seeking to refinance or take out a home equity loan before starting the project.

 

You recently took on new debt obligations

 

One of the last things you want to do before applying for a mortgage or mortgage refinance is to take on a big pile of new debt right before doing so. The classic example of this is buying a car – driving up your debt-to-income ratio right before seeking a new mortgage.

 

Lenders typically want to see your total debt payments be no more than 43 percent of your monthly income, with the mortgage no more than 31 percent. A new car is one major purchase that will sharply drive up your debt load, as will other large purchases – it’s probably best to wait to buy new furniture and carpet until after you’ve secured the mortgage or refinance.

 

Also, be careful about other ways of incurring debt obligations – if you’re co-signing a loan for an adult child to buy a car, for example, that debt registers against your credit, even if you’re not the one who’ll be making the payments. If the primary borrower defaults, you’ll be the one they come to next, and your mortgage lender takes that into account when figuring your debt load.

Making Sense of Closing Documents

The flood of documents to be signed at closing is one of the most confusing parts of the mortgage process. A typical borrower can expect to be presented with over two dozen documents to sign at a mortgage closing. How do you know what you’re signing?

Like anything else, you need to prioritize. While some documents are critical and need to be carefully scrutinized, others are routine and can be quickly dispensed with. The question is, which are which?

 

Fortunately, federal law gives you the right to receive copies of all closing documents 24 hours in advance of closing, so you can review them to ensure everything’s in order. Unfortunately, many borrowers fail to take advantage of this right, trusting instead that everything will be in order.

 

Key mortgage closing documents

 

The key documents are going to be the ones that set forth the actual terms of the transaction itself. These include the HUD-1 Settlement Statement, Truth in Lending disclosure and the mortgage agreement itself. Copies of these should be reviewed prior to closing and the actual documents you sign should be checked again at closing itself.

 

The HUD-1 is a detailed listing of all the costs of the transaction, and specifies who is paying each – for example, the seller typically pays certain costs associated with a home sale. The division of costs between buyer and seller – such as for city and county taxes – should reflect what was agreed upon in the sales contract. Also, any payments to the lender should match those provided in the Good Faith Estimate – and are so marked with the designation “from GFE.”

 

The HUD-1 will also detail a number of other “third-party fees,” such as various types of insurance, real estate agent’s commission and different taxes. Most of these will also have been listed on your Good Faith Estimate, though they can vary by as much as 10 percent from those figures.

 

The final Truth in Lending (TIL) disclosure details all the terms of your mortgage, including the amount borrowed, interest rate, payback term, total interest to be paid over the life of the loan, etc. Some of these will correspond to figures on the GFE and should match. The TIL also provides a figure called the Annual Percentage Rate (APR), which is a way of expressing the total cost of your loan. Basically, the APR is your mortgage interest rate plus an adjustment to reflect the cost of any fees paid to obtain the loan.

 

The mortgage agreement

 

Another major item is the actual mortgage agreement, which is usually in two parts. The first is the actual mortgage note itself, which again states the terms of the loan, gives you the money and commits you to repaying it. It also sets forth such things as when payments are due, grace periods, penalties for late payments and the steps the lender can take if you fail to make payments.

 

A second document, variously called the mortgage or deed of trust, establishes the right of the lender to repossess the property if you violate the terms of the note, most notably by failing to pay the mortgage, taxes or insurance.

 

Finally, the deed is the document that actually transfers ownership of the property to you. Although fairly straightforward, it’s important to make sure everything is in order, including your name, the name of the seller and the description of the property. You won’t take this home with you after closing, but it will be sent to you once it is recorded with the county.

 

Formal notifications

 

Another group that should be paid close attention to are notifications, which spell out certain conditions in your loan or home purchase that might not be covered in the other agreements or which are spelled out separately for emphasis. These will likely include a notice of your right to cancel, which gives you three days to cancel a refinanced mortgage and recovery your money if you change your mind for any reason, and a notice of no oral agreements, which basically means any verbal promises from your lender carry no weight.

 

Another is your initial escrow statement, which details the estimated charges for insurance premiums, taxes, PMI and anything else to be paid from your escrow account over the coming year. Any documents that provide additional information about the terms of your loan or home purchase, or about your or your lender’s rights and obligations, should be reviewed and understood prior to closing.

 

Getting your ducks in a row

 

Another batch of documents might be termed “ducks,” since they’re about getting your ducks in order so the mortgage and property sale can proceed. These include your title and homeowner’s insurance, property survey, private mortgage insurance (PMI) if needed, sewer and water certification, termite inspection and homeowner’s association agreements if required, certificate of occupancy for a new house and all the other things that have to be done before the sale can proceed. These should be reviewed before the sale to make sure they’re in order, but don’t demand close scrutiny.

 

Finally, a last batch of documents are for routine matters, many of them simply confirming that you have received or signed off on other forms, that you have had certain terms of the agreement explained to you or that you understand certain terms of the agreement. They don’t demand a lot of attention from you, but you should at least recognize what they refer to. If not, don’t sign off on them until you’re sure about what you’re signing.

 

Many Uses for a Mortgage Calculator

A mortgage calculator is a handy way to figure out how much of a mortgage loan you can afford, or what your monthly mortgage payments would be if you borrow a certain amount. But there are lots of other ways they can be useful in handling your mortgage-related finances as well.

Think refinancing. Think tax time. Think accelerating your mortgage payments or paying off your loan early. Think comparing different mortgage options to determine which is best for you.

 

 The basic function of a mortgage calculator, of course, is to determine what the monthly mortgage payment will be on a home loan of a given size, interest rate and duration. You plug the numbers in and the calculator gives you the answer. Some also include features that allow you to calculate related costs such as homeowner’s insurance and taxes to figure out what your total monthly housing bill will be.

 

Using the mortgage amortization schedule to your advantage

 

But a mortgage calculator can also do much more, particularly if it can provide an amortization schedule showing how fast you’re paying off the loan. An amortization schedule will not only show how much you’re paying in principle and interest each month, but also updated totals for each over the life of the loan.

 

This is a powerful tool, because it quickly shows how changing various terms of a loan affect how much you pay, how fast you pay it off and how much your interest payments are. Running different numbers through the mortgage calculator can help you determine which are the best mortgage options for you and help you adjust your financial strategies. Some examples are:

 

Mortgage shopping/ interest rates, points and closing costs

 

Discount points allow you to reduce your interest rate by paying a fee up front, typically equal to 1 percent of the amount borrowed for reducing the interest rate by one-eighth of a percentage point. Similarly, you may be comparing two mortgage offers, one of which has higher closing costs but a lower interest rate than the other. Which is the better deal?

 

Paying additional costs upfront for a lower interest rate is a strategy that typically takes several years to pay off. Using a mortgage calculator amortization table to compare the two loans, you can see at what point the costs of one loan will fall below that of the other, and decide whether the difference is great enough to make it worth your while.

 

Accelerated payoff

 

Thinking about paying off your mortgage faster? Wondering how much sooner you’ll pay off your 30-year mortgage if you make a small, but consistent, increase in your monthly payments during the early years? The amortization table will not only show your new payoff date, but will also illustrate how much faster you’re building equity, if your goal is to sell, refinance or eliminate private mortgage insurance (PMI) in a few years.

 

Refinancing

 

The big question about mortgage refinancing is whether the closing costs needed to obtain a new loan are worth the lower interest rate you can obtain by refinancing. Using the mortgage calculator, you can add in the new closing costs, along with the reduced interest rate and new payment schedule, then use the amortization chart to see how long it will take you to reach the “break even” point. You can also see what your total savings would be over the life of the loan, as well as your total interest payments compared to your current mortgage.

 

Interest payments

 

Interest payments are an often overlooked aspect of mortgage costs, especially when refinancing. You’ll save money by reducing your interest rate or paying your mortgage off faster – BUT – you’ll also lose the tax breaks those interest payments provide. Since mortgage interest is what allows many homeowners to itemize their deductions in the first place, it’s good to know just when your interest payments might fall below the cutoff on an accelerated payoff or refinanced mortgage. Also, tax impacts tend to lessen the overall savings of reducing your interest payments, so it’s good to take that into account.

 

These are just some of the ways you can use a mortgage calculator and amortization schedule to your advantage. Basically, if you’ve got a question about the pros and cons of different approaches to handing a mortgage, you’ll find it in the amortization tables. It’s worth your while to get familiar with them.

 

Feel free to check out CORNERSTONE MORTGAGE'S loan calculator.  Here is the link. 

http://www.cornerstonestl.com/calculators/index.html

 

 

Five Tips to Help Raise Credit Scores

Start by getting free copies of your three major credit reports at the government-authorized site annualcreditreport.com.

1. Check your reports for accuracy. Financial columnist Liz Weston, author of "Your Credit Score," says to look for credit cards or other accounts that aren't yours, negative entries that are more than seven years old, duplicate past-due items and incorrect Social Security number or date of birth.

2. Dispute errors. Credit bureaus are required by law to investigate mistakes you bring to their attention and report back to you. Typically, they ask the creditor that reported the past-due information to check its records. If the creditor can't verify the info or doesn't respond, the item should be deleted.

3. Pay your bills on time. Payment history makes up more than one-third of the typical credit score determination, Weston says, so paying bills on time all the time is essential to maintaining good scores. If you're forgetful, consider setting up automatic payments through your bank.

4. Pay down your debts. Lenders look at how much of your available credit on cards and credit lines you are using. If you are maxed out or close to it, lenders could assume you're on the financial edge and not lend you money.

5. Keep credit cards and other revolving accounts open. You may be tempted to close old accounts you're not using, but that won't help your credit scores and may actually hurt them. It reduces the amount of your available credit, which can lead to lower scores.

A New Life, New Home, New Mortgage

Are you entering a new phase in your life and looking for a new home to match? A major life transition often involves a new home, be it getting married, relocating to a new job or retiring. However, with mortgage credit being as tight as it is these days, there are some pitfalls you want to be sure to avoid.

First, don’t run up a lot of new charges on your credit cards. This is one of the most basic and obvious rules of qualifying for a mortgage, but it’s one that’s easily overlooked when you’re in a life transition. Wedding expenditures, expensive trips, an extensive new wardrobe, new golf clubs or other pricey toys – all can drive up your credit balances very quickly. Best to hold off on the spending until the new house keys are in hand.

Similarly, avoid opening new lines of credit. This can include new credit cards, but also can be other major purchases as well. A new car to go with that prestigious new job or a boat as a retirement gift to yourself may be what you’ve always wanted, but they could make lenders a bit uneasy when evaluating your loan application. You may not get turned down flat, but you could find yourself paying a higher interest rate than you might have.

One of the biggest rules of applying for a mortgage is, don’t quit your job immediately beforehand. Retirees, this means you! You’ll find it a lot easier to qualify for a new mortgage if you do it while you’re still earning your regular income, rather than trying to qualify on the diminished payout you’ll get from a pension or retirement account.

If you’re changing jobs, you might want to nail down the new house before you start the new job. While a boost in income can make it easier to qualify for the mortgage you’re seeking, the fact that it’s a new and untried position may cause some lenders pause.
If you’re getting married on the other hand, you may want to wait until the knot is tied before mortgage shopping. Or, at the very least, unite your finances before the ceremony. You’ll find it a lot easier to qualify for a mortgage with a combined income than if you’re trying to do one on just one person’s credit.

However, if one of the two of you has damaged credit, it’s best to apply for the mortgage and buy the home under the other person’s name and finances alone. That way, the two of you won’t be handicapped by the one partner’s lower credit score.

If you’re looking to upgrade from your current home, you may find it difficult to qualify for a new mortgage if you still owe on another. That’s particularly true if you’re underwater on the loan, or owe more than the property is worth, and especially so if you’re looking to buy a new home in the same community as the old. Lenders are leery of homeowners who are seeking to “buy and bail” – obtain a mortgage for a new house at today’s reduced market prices, then dump the old one once the new property is in hand. You may find that you need to put some more money into your old mortgage, at least bringing it to a positive equity position, before you can qualify for a new one.

A final mistake many people make is failing to check out their credit before applying for a new home. This can be a problem for well-established persons who are entering retirement or taking on new jobs, and who assume their finances are in order. However, anyone can have major errors on their credit reports. These can be corrected, but it takes time – it’s best to order your reports from all three major credit reporting agencies at least six months before you plan to purchase to allow time to call attention to and correct any mistakes.

Foreclosure Sales Decline Second Straight Month

Foreclosure sales nationwide decreased 7 percent from 73,000 in April to 68,000 in the month of May, according to HOPE NOW’s data.

Foreclosure starts increased 8 percent from 163,000 in April to 176,000 in May.

Permanent loan modifications decreased only slightly from April to May, falling from 86,000 to 85,000.

Proprietary modifications totaled 53,000, a 7 percent decrease from April.

Seventy-eight percent of proprietary modifications included reduced principal interest payments; 57 percent had reduced principal interest payments of more than 10 percent; and 88 percent were fixed-rate modifications.

Modifications completed under the Home Affordable Modification Program (HAMP) totaled 32,398 in May, a 12 percent increase from April.

HOPE NOW also reported that 60+ day delinquencies increased only slightly at a rate of one percent, totaling 2.67 million for the month of May.

“Despite increases in foreclosure starts and a decrease in proprietary modifications this month, there were still a few bright spots in fewer foreclosure sales, an increase in HAMP loan modifications and the third straight month of relatively flat 60+ day delinquencies,” said Faith Schwartz, Executive Director of HOPE NOW.

HOPE NOW is an industry-created alliance of mortgage servicers, investors, counselors, and other professionals.

“Since 2007, mortgage servicers have completed 4.6 million permanent loan modifications for the nation’s homeowners and there has been no slow down in the efforts to keep as many families as possible in their homes,” said Schwartz.

CFPB Releases Round Two of New Mortgage Disclosures, Seeks Feedback

In the ongoing effort to combine Truth in Lending and Good Faith Estimate forms into a single document, the Consumer Financial Protection Bureau today released the second drafts of two sample mortgage disclosure forms, and is now seeking public comments.
The CFPB released the first round of revamped forms on May 18, after which it received more than 13,000 comments on the disclosures.

The feedback was “largely consistent with the one-on-one interviews we conducted with consumers, lenders, and brokers, and we’ve incorporated much of it into our new prototypes,” the CFPB wrote on its website.

While the first round of prototypes focused on the front page, or “shopping sheet” of the disclosure forms, the second round focuses on the back page of the forms, which covers the closing costs.

The new forms incorporate feedback from the first round of public comments, in an effort to present a design and explanation that is easily understood by consumers.

As in the previous round of review, the CFPB aims to address whether the forms help consumers understand closing costs, whether brokers and lenders can easily explain the information to customers, and seeks feedback on possible clarifications or improvements that the CFPB can implement into the next round of forms.

The request for feedback is open through Tuesday, July 5.

http://www.consumerfinance.gov/knowbeforeyouowe/

FOR IMMEDIATE RELEASE: Cornerstone Mortgage is now ranked the 3rd fastest growing privately held company in the St. Louis Region.

St. Louis, Missouri (June 1, 2011)-Cornerstone Morgage, Inc.-a privately held St. Louis based mortgage banking firm-has been ranked the 3rd fastest growing privately held company in the St. Louis region by the St. Louis Business Journal.

In addition, for the second year in a row the St. Louis Business Journal named Cornerstone Mortgage the fastest growing mortgage banker in the area.

According to Jim Dean, President of Cornerstone Mortgage, this kind of phenomenal growth in a very unstable economic climate is due in part to "Hiring and retaining Loan Officers with an average of 15 years experience and are licensed at both the state and national level, unlike most bank lending officers.  These professionals come to closing with a check for our clients and have eliminated all the complications in the loan process."  Mr. Dean also stated, "As an independent mortgage banker, we're not reliant on any other company to originate, fund and service loans.  This means we can offer pricing advantages over the larger lenders."

Cornerstone Mortgage, Inc. is a locally owned an operated Mortgage Banking firm with a proven track record in retail mortgage originations.  Founded in 1995 by Jim Dean, President/CEO and Angi Stevenson, Senior Vice President, Cornerstone Mortgage has 42 Loan Officers (all state and nationally licensed) and 6 locations serving the St. Louis metropolitan area.  In 2010, the company originated in excess of $500 million in residential home loans and was ranked the #1 fastest growing mortgage banking firms by the St. Louis Business Journal.  Cornerstone Mortgage, Inc. has been accredited by the Better Business Bureau since 1996 and has an A+ rating. 

When Realtors or Builders Recommend a Lender

If your Realtor or builder make a suggestion for a lender, be sure to talk to that lender. There are several reasons they make recommendations.

One reason Realtors and builders make suggestions is because they want to recommend someone reliable. Reliability is important to you, so that you don't end up with a horror story to tell. Reliability is also important to the seller, the agents, and everyone involved in your transaction because is the deal doesn't close, everyone walks away with nothing.

When agents and builders recommend lenders, they often develop a certain amount of "clout" in dealing with those lenders. This can help in a situation where you need to cut through "red tape" and get something done quickly.

When buying a new home, dealing with a recommended lender is often very important. This is because there are a lot of intricacies involved in new homes that do not exist when buying resale. If you "shop" around to find your own lender, you may end up with someone who quotes a great rate and is great with refinances or resales, but has no experience with new homes. This can lead to problems or delays.

Over the last ten years, real estate companies and builders have built up their own mortgage brokerages. "Bundled services" like this make sense because it adds another profit center to the company. This is useful because it helps real estate companies to offset higher commission splits with their agents.

In the early days of "bundled services," the loan officers and staff were often sub-par and the quality of service may not have been so great. Things have improved since then. However, because this is "captured business," sometimes these lenders don't have as much incentive to offer you great deals or lower rates. All you have to do is let them know you are "shopping rates" and they will probably work toward accommodating you as much as possible.

Never automatically disqualify a recommended lender, but be sure to be ask questions about any relationships between the lending company and your builder or real estate agent's company. That will help you be more vigilant on getting the best interest rate and the lowest costs.

CONCLUSION
Make sure to do a little shopping for yourself. By knowing the interest rates of the market and making sure your loan officer knows you are looking at rates from other institutions, you can use that as leverage to make sure you are obtaining the best combination of service and lowest rates.

Advantages of Paying Your Mortgage Bi-Weekly

Start paying your mortgage bi-weekly instead of monthly and shave up to 5 years off of your payment period.

One easy way to pay down your mortgage faster is to write bi-weekly checks instead of monthly ones. Pay on this twice-a-month schedule and you’ll get in an extra mortgage payment per year.

Sounds weird, but here’s how it works: Of course, there are only 12 months in the year, so you would think that bi-weekly payments would only equal 24 total payments. Because all of the months are made up of a different number of days, when you break down the year into 14-day increments, you actually get 26 bi-weekly time periods.

That’s why when you pay your mortgage bi-weekly rather than monthly, you can fit in 2 extra payments or 1 extra month’s payments.

Seeing as you are probably already getting paid bi-weekly anyway, it makes sense to just go ahead and set up your mortgage payments according to your pay schedule. Right?

There are actually a couple of different schools of thought about this.

First of all, if you don’t already have your financial ducks in order and have things high-rate credit card debt, you should take care of that first.

If your other debts are stable, it makes sense to pay down your mortgage faster, especially if there are no prepayment penalties or fees attached. Pay an extra check every year and you could shave as much as five years off of your thirty-year mortgage, which will save you a lot on interest and also you peace of mind.

Some finance experts have different opinions on this, though. The thought is that there are either better ways to prepay, or better ways to invest that extra money (if you have it).

Instead of tying up your extra cash in mortgage payments, some recommend that you save up the extra money and just make one extra payment at the end of the year. This way, you’ll have that cash available for emergencies and other investments during the year. One downside to this strategy is that the longer that you don’t pay down your mortgage, the more interest you’ll be paying throughout the year.

Some suggest that you consider whether or not that money is better spent on higher payout investments instead of prepaying your mortgage. If you’ve got a 7% mortgage then it makes sense to refinance or prepay. If you have a 4% mortgage, though, it’s likely that you can do better things with you cash than prepay the mortgage.

While there are many ways to accomplish paying your mortgage down faster, the bi-weekly strategy is one of the easiest—especially if you are the type of person who lacks the discipline to use extra money to pay down your mortgage and needs some sort of structure to make it happen.

There are also other factors to consider other than the savings. Getting rid of your mortgage sooner has a whole emotional angle in that it can lift the weight of a financial burden off of your shoulders and prepare you to start thinking (if you aren’t already) about focusing all of your energy and money on things like college tuition or retirement.

How Much Do You Know About FICO?

Ten Facts About the History of FICO

A three digit number that tells the story of your past and holds the potential of your future? Nope, it’s not your weight or your cholesterol. And hopefully it’s not the score of your latest golf round, yikes! Of course, it’s a credit score---one of the very first things you want to know about a potential borrower. So you always know your customers’ credit scores, but do you know anything about where they came from?

While the exact method behind calculating these revealing little numbers remains a mystery, here are a few fun facts you may not have known about the history of one of the most powerful numbers in our lives.

Ten Facts You Didn’t Know About FICO:

1. FICO actually stands for the Fair Isaac Corporation, a company started in 1956 by an engineer and a mathematician.
2. It wasn’t until 1958 that FICO created its first credit scoring system for American Investments.
3. Later that year, FICO sent out 50 letters to America’s biggest lenders asking to explain their credit scoring system. They got one response.
4. One of the best investments founders Bill Fair and Earl Isaac ever made? The $400 each of them contributed to start the Fair Isaac Corporation.
5. Remember Montgomery Wards? In the early 1960’s FICO built their first credit scoring system.
6. In 1995, nearly 40 years after FICO began; Fannie Mae and Freddie Mac recommended the use of FICO scores to evaluate mortgage loans.
7. In 2010 FICO introduced their national FICO certification for mortgage lenders with AllRegs.
8. FICO also boasts that it has more than half of the world’s top 100 banks as their clients.
9. Even more impressive, nine of the top ten Fortune 500 companies are FICO clients.
And finally…

10. Just how prevalent are FICO scores in the mortgage industry? Today, FICO scores are used in 3 out of 4 US mortgage originations.

Six Reasons to Pursue an ARM

Adjustable Rate Mortgages have gotten a bad name over the years, but that doesn’t mean that you shouldn’t consider one for your mortgage or refinance.

Adjustable Rate Mortgages or ARMs got a bad name during the housing market crash. Homebuyers took advantage of the super-low rates and then couldn’t keep up when the ARM adjusted and their monthly payments jumped a few hundred dollars. In the end, it caused many to lose their homes.

While this bad rap is understandable, it’s not totally justified. In part, it can be chalked up to uneducated homeowners who took a risk that they didn’t quite understand.

An ARM is not an inherently bad thing; it’s just a tool that can either be used constructively and with a purpose or haphazardly and perhaps destructively. It can be a great investment tool for people looking either for a primary mortgage or for a refinance.
Here are a few reasons to consider an adjustable rate mortgage:

1.) Low rates: the rates on ARMs are almost always lower than on 30-year fixed rate mortgages. ARMs are best when fixed rates are high and you think that they’ll go down in the future when you can refinance.

2.) You don’t plan to be in your home for that long: If you are only planning on being in your home for a few years, an ARM makes sense. Get a 5/1 ARM (meaning that the fixed rate remains for 5 years) at 3.32% vs. a 30-year fixed rate mortgage at 4.78%, and save a lot of money. Move after 5 years and you’ve come out ahead.

3.) Monthly savings: utilize an ARM and you can save hundreds of dollars per month, even with closing costs. Pay what you would be paying on a higher, fixed-rate loan and pay down your mortgage even faster.

4.) Market rates might go down: It does happen! Market rates might actually go down when it comes time to readjust your loan, which could leave you in an even better position.

5.) You are wealthy: If you are wealthy and have liquid assets that you can stand to lose, then you can probably handle the risk of a rate change.

6.) You are buying a cheap house: Most people need to stretch to purchase a home. However, if you are one of the lucky ones who is purchasing a house that is below your means, then take out an ARM and pay what you would have paid on a fixed-rate anyway and pay down the mortgage faster.

A dose of reality before you pursue an ARM

The ideal ARM homeowner is someone who can anticipate the increased costs after the fixed-rate period or has a solid exit strategy. If you can only afford a house at the lower teaser rate, then an ARM is not the right product for you.

You should always consider what would happen in a worst-case scenario. What if mortgage rates go up to the maximum allowed under the contract? Can you afford that? What if you are not able to refinance or flip your house after the set period is over? Can you afford that?

While an adjustable rate is a good deal it is a gamble that shouldn’t be taken lightly. Only do it if you totally understand the risks and have cleared it with a financial professional who understands your finances. It can be a positive experience if you totally understand the risks involved.

For more information on ARMs, check out the Federal Reserve’s guide to ARMs.

Things Not to Do Before Purchasing a Home

Debt-to-Income Ratios and Car Payments

You see, when determining your ability to qualify for a mortgage, a lender looks at what is called your "debt-to-income" ratio. A debt-to-income ratio is the percentage of your gross monthly income (before taxes) that you spend on debt. This will include your monthly housing costs, including principal, interest, taxes, insurance, and homeowner’s association fees, if any. It will also include your monthly consumer debt, including credit cards, student loans, installment debt, and….
…car payments.

How a New Car Payment Reduces Your Purchase Price

For example, suppose you earn $5000 a month and you have a car payment of $400. Using an interest rate of 8.0%, you would qualify for approximately $55,000 less than if you did not have the car payment.
Even if you feel you can afford the car payment, mortgage companies approve your mortgage based on their guidelines, not yours. Do not get discouraged, however. You should still take the time to get pre-qualified by a lender.
Next, you contact a loan officer to get prequalified for a mortgage loan. You state your desired price and how much you can put down. You provide your income and may even supply pay stubs and W2 forms. The loan officer methodically crunches the numbers (by telephone, in person, or even over the internet).
However, if you have not already bought a car, remember one thing. Whenever the thought of buying a car enters your mind, think ahead. Think about buying a home first. Buying a home is a much more important purchase when considering your future financial well being.
Do not buy the car. Buy the house first.

No Major Purchase of Any Kind

Review the article titled, "Don’t Buy a Car," and apply it to any major purchase that would create debt of any kind. This includes furniture, appliances, electronic equipment, jewelry, vacations, expensive weddings…
…and automobiles, of course.

Don’t Move Money Around

When a lender reviews your loan package for approval, one of the things they are concerned about is the source of funds for your down payment and closing costs. Most likely, you will be asked to provide statements for the last two or three months on any of your liquid assets. This includes checking accounts, savings accounts, money market funds, certificates of deposit, stock statements, mutual funds, and even your company 401K and retirement accounts.
If you have been moving money between accounts during that time, there may be large deposits and withdrawals in some of them.
The mortgage underwriter (the person who actually approves your loan) will probably require a complete paper trail of all the withdrawals and deposits. You may be required to produce cancelled checks, deposit receipts, and other seemingly inconsequential data, which could get quite tedious.
Perhaps you become exasperated at your lender, but they are only doing their job correctly. To ensure quality control and eliminate potential fraud, it is a requirement on most loans to completely document the source of all funds. Moving your money around, even if you are consolidating your funds to make it "easier," could make it more difficult for the lender to properly document.
So leave your money where it is until you talk to a loan officer.
Oh…don’t change banks, either.

Choosing Between Mortgages

One of the most critical aspects to the process of purchasing a home, besides choosing the actual home, is deciding which type of mortgage will best suit the consumer. Most mortgages are made for 15 or 30 year loans. That can be a long time to be tied down to a payment. The loan applicant will need to take into consideration how much money they can qualify to borrow, how much they have to set aside for payments and whether they are comfortable taking a risk with a variable interest rate loan.
Many consumers want the reassurance they will be able to access the lowest interest rates at all times. A fixed rate mortgage will not allow this. With a fixed rate mortgage, the interest rate remains at whatever the prime rate was when the loan was originated, for the duration of the loan; even if that is 30 years. A variable rate mortgage loan offers more flexibility but also more risk. With a variable interest rate loan, the consumer will be able to take advantage of lower interest rates if the prime rate falls. This can be a substantial amount of savings over the course of the loan. There is a risk, however that the prime rate will rise, which means the homeowner will be paying more money in interest on the mortgage loan. The fixed rate consumer does not have this concern.
There is a compromise between the fixed rate mortgage loan and the variable rate mortgage loan. A capped loan allows consumers to access lower interest rates if they become available, but protects them from high interest rates above a certain limit. Another compromise is a discounted mortgage. In this type of mortgage loan, the consumer takes out a mortgage for a variable interest rate loan. While the interest rate will fluctuate in accordance with the current prime, the interest rate the consumer pays will always remain a certain number of points below whatever the current prime rate is.
While it is important for the consumer to shop around for the best interest rate, the lowest interest rate is not always the best. Lenders, like other companies, rely on competition and advertising for their business. Some banks and lending institutions will advertise a phenomenally low interest rate in order to attract prospective borrowers. The interest rate may be as much as a few points below what other lenders have offered. Consumers should be aware, however that this low interest rate may come with a high price tag. In order to makeup for the lost revenue of the low interest rate, lenders will include restrictions and penalties in the terms of the loan. Frequent restrictions included limiting the attractive low interest rate to only a portion of the entire length of the loan, such as one to three years. After that time period, the interest rate will rise to the current prime rate at the time. Another common restriction allows the lender to charge a penalty to the consumer should they decide to refinance the loan with another lender at a later point in time. The penalty is often so cumbersome it makes the savings of refinancing minimal.
Finally, lenders may try to make up the difference by requiring the consumer to purchase home insurance through them, rather than allowing them to shop around for competitive rates. Provided there are no requirements or penalties attached to a low interest rate, it can be quite advantageous for a consumer to shop around before making a final decision on a lender.
The prospective homebuyer will also need to make a decision between a 15 year mortgage and a 30 year mortgage. Both have advantages and disadvantages.
With a 30 year mortgage, the consumer is tied down to a payment for a much longer length of time. The payments are often smaller, but only because they are being spread out over a shorter period of time. In addition, interest rates may be slightly higher with a 30 year mortgage because the lender is going to be at risk for longer.
Fifteen year mortgage payments are almost always larger than 30 year mortgage payments, because the loan is being paid off in a shorter amount of time. While the monthly payment difference between a 15 year and a 30 year mortgage may not seem that substantial, when viewed in terms of long term, it becomes tremendously important. A 15 year mortgage at a low interest rate can amount to a huge difference in savings.

Are Short Sales A Good Bargain?

By JR Hevron, Published: March 25, 2011
In this economy, where many homeowners are desperate to sell their homes, short sales can be a great bargain for the well-informed homebuyer.

“A short sale,” according to Greater Minneapolis/St. Paul realtor and real estate blogger Tom Sommers,“is when the seller is saying to the bank, “we can’t afford to stay here due to financial hardship. Can you let us sell it for less than we owe?” That’s what creates the short.”

 

The bank often agrees to the short sale because it guarantees, even at a loss, a larger percentage of money back. Also, the bank doesn’t have to go through the expense of the foreclosure process and doesn’t have to kick anyone out of their home.

A short sale can also keep the property in better condition than a foreclosure, which is good for the bank and the homebuyer. “Lots of times short sale homes are in better condition,” says Sommers, “because the people are still living in them and are not wrecking the house.”

 

Many homeowners who face foreclosure take out their frustration on the lender by damaging the property. This might include expensive but easily repairable damage like removing valuable appliances or fixtures, but can also include breaking windows, cutting up carpets, and in some extreme cases—dumping powdered concrete down drains and toilets!

 

The best way to take advantage of the benefits of a short sale is to find an agent who understands the foreclosure process. The timeline may change from state to state, but the facts are essentially the same. A person can try to sell their house as a short sale at any time. However, if a house is in foreclosure and there has been a sheriff’s sale, there is a six-month redemption period for an inhabited property between the sale and when the property gets turned over to the winning bidder.

 

Any time during that redemption period, the homeowner can try and sell it. An owner can try to pay what they owe and get the house out of redemption and keep the home. Most people want to try to short sale it, though. However, the minute that redemption period is up, it’s fully foreclosed. It doesn’t matter if a buyer has a purchase agreement on it or not because the seller has no right to it anymore.

 

“The earlier that you can get to a property in a short sale situation before a sheriff’s sale,” says Sommers, “the bank is going to be more willing to go through the short sale because they haven’t invested as much money to go through the foreclosure. So, it gives you more time to have a successful process so that you can have a close.”

 

This all highlights the need for an agent who has a deep understanding of the process and knows just when to jump in. “Let’s say you have three houses that are the same price, same area, same amenities and everything,” says Sommers. “One of them is not even at the sheriff’s sale yet, the second one is halfway through the redemption period, and the third one’s only a month from redemption. Even though all three look alike, the first one that hasn’t even hit the sheriff’s sale is your best bet.”

 

It’s also important to have a knowledgeable agent when it comes to understanding the terms of your purchase. “You have all of these other contingencies like the short sale contingency addendum that you not only need to understand before you sign, but you also want to make sure that you have all of the necessary information in front of you. If you’re not used to doing short sales, you could call and not get the information that you need.”

 

In addition, you should also speak to an attorney and a tax person to review any documents and give you advice before you sign anything. “As a real estate agent, that’s something I can’t do,” says Sommers. “I can’t give you legal advice and I can’t give you tax advice.”

 

Lastly, it is the nature of the short sale that sometimes, no matter how talented and experienced an agent is, a deal can fall through. “There are so many great agents out there who do wonderful work on short sales,” says Sommers,”but their hands are tied because the bank or an investor or whomever makes a decision and just says “no.””

 

A homebuyer who is shopping for a short sale should expect the whole process to take at least four months. Ultimately, this wait is worth it. “I think that short sales wonderful,” saysSommers, “as long as you go into it knowing that you have to be patient, because it’s the patience that pays off.”

 

5 Tips for Buying a Foreclosure Home

By JR Hevron, Published: March 23, 2011
Homebuyers looking for a bargain by purchasing a foreclosure should educate themselves on the process ahead of time.

In this market, many homebuyers looking for a bargain consider purchasing a foreclosure. Their thinking is that they’ll accept a house that needs a bit of work in exchange for a big discount.

 

While there are some deals to be had on foreclosure houses, it pays to educate yourself on the purchase process ahead of time. “A lot of people are in love with the idea of a foreclosure because it sounds like a great deal—and it can be,” says Greater Minneapolis/St. Paul realtor Tom Sommers. “But at the same time you have to be willing to do some work on the home, even if it is as little as carpet and painting.”

 

Sommers shared a few points on the foreclosure purchasing process:

 

1) Figure out if a foreclosure home is for you.

While a foreclosure home sounds like a good idea, it’s not right for everyone. Who is it not right for? “Probably someone who is a first-time homebuyer that doesn’t want to do any amount of work at all and just wants to physically move into a property,” says Sommers.

 

To make sure that the homeowner is prepared for a foreclosure purchase, Sommers often takes clients out to see foreclosure properties as well as regular residential properties in the same price range. “I usually encourage homebuyers to look at anything in their price range. If the foreclosures seem to be too much for them, they usually figure that out on their own.”

 

2) Find an agent who specializes in foreclosures.

The do-it-yourself mindset of someone who wants to purchase a foreclosure home might lead them to think that they can take that same approach to finding and closing the deal on a foreclosure home. A foreclosure home is not a normal purchase and having an experienced person walk you through the process can be extremely helpful.

 

“I’m here to safeguard you and minimize your risk by making sure that you understand what you’re getting into,” says Sommers. “That includes making sure that you have the right title people, a good closing team, and help putting everything together so that you have the best experience.”

 

One issue that people without an agent face is losing a house because all of the paperwork isn’t in order. “The advantage of working with a professional like myself is that I know the process inside and out,” explains Sommers. “The key to getting a foreclosure is having your offer written correctly the first time.”

 

It is also key to have someone who can follow through for you. “Having someone on your side who is representing you will ensure that after the offer is presented and the bank gives you a verbal acceptance, there will be a follow up with the listing agent to make sure that you get a signed purchase agreement.”

 

The purchasing agreement is not something for amateurs to take on. “There are so many contingencies in a purchase agreement,” says Sommers. “Not only is it my role to make sure that you are aware of and understand the contingencies in a purchase agreement, it’s also my role to make sure that these contingencies are met properly so that you don’t lose your hard earned money or that the deal doesn’t fall apart over something that could have been avoided.”

 

3) Have all of your financing worked out ahead of time

As with any purchase of residential real estate, you should have your financing worked out before you start looking for a house. It’s important to figure out what you can pay every month before you start the house hunting process so that you don’t fall in love with a house (foreclosure or not) that you can’t afford. “You don’t want to buy something that is out of your comfort zone for what you want to spend monthly. It’s not a good deal if you are house poor,” says Sommers.

 

You should also get prequalified so that you can quickly jump on a bargain foreclosure if it does come your way. “Make sure that you get a really good loan officer and get a prequalification so that when you do find the home that you want to buy,” says Sommers, “you have all of your information right in front of you and you are able to put together an offer right away.”

 

4) Educate yourself on 203(K) financing.

If you decide to purchase a foreclosure that a bank does not consider inhabitable because it lacks toilets or carpeting or needs other work, you will likely need to get a 203(K) mortgage that allocates funds for the repairs.

 

“Right now, that seems to be the best option and it’s a wonderful program,” says Sommers. If you are going to use the 203(K) program, be sure to have a knowledgeable loan officer who can to explain everything about the loan. “Also, make sure that you get several different bids from several different contractors,” says Sommers , “because once you’ve chosen the contractor and you’ve had the bid submitted and you get the money for the 203(K), you are locked in.”

 

5) Consider traditional residential real estate.

In this market, you might as well take a serious look at traditional real estate as well. “The sellers of traditional real estate have realized where we are in the market, so they have really adjusted their prices a lot,” says Sommers. “You can get a nice, single family home at a reasonable price and still end up getting a deal. It’s not a foreclosure, and you won’t have any issues because there’s no work to do and you can literally just move right in.”

 

After all of this, you may be wondering if foreclosure properties are still a deal. “I do still believe that there is an advantage on the foreclosures,” says Sommers. “If you are still looking strictly from a pricing standpoint, you are going to get typically a better deal. It’s like anything else, though, you have to have an agent going through with you and taking care of everything ahead of time to let you know if it really is a good deal in the long run.”

 

7 Hidden Costs Of Home Ownership

By JR Hevron, Published: March 11, 2011
The cost of home ownership is more than just your mortgage payment. Take note of these seven hidden costs and be prepared for the actual payments.

When you are looking for a mortgage, there is a huge difference between what you qualify for and what you can afford. Unfortunately, many lenders and online calculators use the terms “afford” and “qualify for” interchangeably. They are not the same thing!

 

“If the bank tells you that you can afford a mortgage of $1500 a month,” says Gil Bricault, a broker associate at The Family Team at Coldwell Banker Cahoone in Westerly, Rhode Island, “that may be technically true. But if that’s really the maximum that you can pay, there’s really no slack, no room for error—especially if you have a bad month or if you or your partner loses your job.”

 

Some say that you should add 40% to your base mortgage payment to get the amount that you will eventually pay. Just like with online calculators, it’s a good figure to start with. In the end, though, to figure out the amount that you will actually end up paying on a monthly basis, you’ll need to do a much more nuanced calculation. Sadly, there is no easy, cookie cutter method for figuring this out.

 

Read on for seven costs that you should factor into your final equation when budgeting for your monthly expenses:

 

1) Emergency Fund

While an emergency fund isn’t a monthly payment, per se, it is something that you should be contributing to regularly. “The first advice that I give to buyers,” says Gil Bricault,” is to not cut themselves too short when they are budgeting a down payment. They should make sure that they have at least two to four thousand dollars in some sort of emergency fund.”

 

Again, there’s no cookie cutter formula for how much you should have on hand in your emergency fund. Keep in mind, though, that if you live in a more expensive house, everything is going to cost more to fix.

 

Also, when thinking about how much to save, consider the age of your house. “If you buy a 35-year-old home with a 35-year-old heating system with a 20-year-old roof, there’s a greater probability that something will go wrong than if it was a brand new home,” says Bricault. “The older the house, the more money that I would have available.”

 

2) Maintenance

The expense of monthly house maintenance is something that pays off long term. Things that are small problems today become big problems tomorrow—then you’ll really need to tap into that emergency fund.

 

Things that come under the topic of regular maintenance include lawn, landscaping, pest control, and repairs (plumbing, broken faucets, windows, etc.). This cost is going to vary month to month, but $100 is generally a good average amount to set aside.

 

In terms of preventative maintenance, you should also have your heating/ac system looked at twice a year to make sure that it is working properly. The cost of the inspections will take care of problems before they get bigger and will save you money on monthly cooling and heating costs with a more efficient system.

 

Some other things to think about: if you don’t have public water, you should be testing your well every year for bacteria; if you have a private septic system, you should plan to empty it every couple of years.

 

3) Utilities

Utilities are a monthly expense that is at least a little bit more predictable. However, if you’ve been a renter up till now, you may end up paying for more than you are used to. Plan to pay for electricity, heating, cooling, water, and sewer.

 

To get an estimate, ask local utility companies to provide you with the monthly average utility bills for the seller. Keep in mind that these figures may not be completely representative. “You need to think in terms of who has been living in the house,” advises Bricault. “If you’ve got three teenage girls and the previous tenants were a middle-aged couple who was out of the house all of the time, your water bill might be twice as much.”

 

Overall, cover yourself by budgeting more for utilities than you think that they’ll cost. “I think you’ll always find that your heating cost runs a little higher than you thought,” says Bricault. “Add 10-15% in your mind. If you think it’s going to be $1000 a year on heating oil, it’s probably going to be $1150.”

 

4) Property Taxes

This is another more predictable monthly cost. However, don’t just go on what is quoted on the house listing. That figure is often based on the old assessed value of the house. Call your county property assessor's office to get a more accurate estimate. Local tax rates vary, but your home is typically taxed on its assessed value, an amount that is equal to a fraction of its appraised value, which can change.

 

In this economy, you can expect regular increases in your taxes. “Taxes are going to go up. Real estate taxes, particularly,” says Bricault. “I don’t know of any communities out there that are not in trouble. At the end of the day, somebody has to write the check and it’s always on the back of the homeowners. When you look at the rate of the growth in taxes, it’s far above the rate of inflation. Just assume that there are no bargains in taxes and they’re only going to go up.

 

5) Insurance

Homeowner’s insurance protects you from fire and theft. Flood insurance is a whole different policy and you may be required to purchase it if you live in a flood-prone area.

 

Again, what the current homeowner has the house insured for may be irrelevant. “You should get a quote up front,” says Bricault. “The bank is going to want the house insured to at least the mortgage value and we always recommend to our clients that they get it insured to the replacement cost. Get an actual quote or you could be in for a big surprise.”

 

If you couldn’t pay the full 20% of the value of the house for your down payment, you’ll also need to purchase private mortgage insurance, which will add to your monthly charges. It’s one reason among many to wait till you have that 20% before getting a mortgage.

 

6) Association Fees

If you are purchasing a home in a subdivision, a condominium, or even an apartment, you may have to pay association fees or maintenance fees to keep up the common areas and pay for shared expenses like lawn mowing, security, or a front-desk attendant. These fees vary, but can add up to more than $100 a month.

 

7) Home Improvements

Here’s another cost that’s hard to predict. Once you own your own home and can do pretty much whatever you want with it, you’re going to get the urge to upgrade, replace, and paint things.

 

For this one, the costs are not just in cash, but also in your time. Home improvements take a lot of time and work and if you are a new homeowner, you will likely do a lot of them yourself. You have to consider how much you get paid and whether it is better to spend that time making more money or paying somebody to do the upgrades for you.

 

Thinking about the hidden costs of home ownership is not fun. It’s necessary to budget for them, though, or you might end up unable to make your payments at some point down the road.

 

Buying a home is such an emotional decision,” says Bricault. “It’s kind of like falling in love, but at some point you have to become objective. None of these expenses are reasons not to buy a house. I still think that you’re better off controlling your future by owning, but I think that you have to go into it with both eyes open.”

 

Ultimately, your realtor and broker should help you to figure out these hidden expenses. “If you’ve got a good realtor and a good mortgage company,” says Bricault, “they’ll touch on all of these things.” How do you know if you don’t have a good realtor or mortgage company? “Simple. You'll know if they talk more about the house and not about you and your finances!”

Mortgage Rates Impacted by Japan, March 15, 2011

By David Coster, Published: March 15, 2011
Mortgage rates will plunge today as the stock market sells off dramatically following a worsening crisis in Japan.  The danger of a major radiation leak from the damaged nuclear reactors seems to have increased.  The potential impact of such an event on the global economy is very difficult to predict.
Mortgage Rate Trend Direction:     Down
Economic Reports/Rate Impact:    New York Empire Index, 8:30 AM ET, Moderate Rate Impact
                                                                Import Prices, 8:30 AM ET, Moderate Rate Impact
Key News:                                           Japan, Saudi Military in Bahrain
SummaryAll eyes and ears are focused on news out of Japan this morning as evidence of a worsening nuclear crisis emerges to place further stress on a nation still searching for survivors or victims of the earthquake and tsunami. The impact on the Japanese economy will be severe.  How this translates into an impact on the global economy and the US economy is a huge unknown.  Today, traders are playing it safe and moving into assets like bonds, including mortgage-backed securities.  Consequently, mortgage rates are moving lower today.
Impact of economic reportsThe economic data released today, while generally positive is being completely drowned out by the events in Japan.  A statement by the US Federal Open Market Committee of the Federal Reserve will be watched closely for its analysis of the economic impact of the events in Japan.
Impact of international or political eventsContainment of the nuclear reactors that were compromised is the biggest challenge, among many, facing the Japanese government and people.  It will likely be several days more before the full extent of the tragedy is known, keeping markets in a similar posture as today.
In Bahrain, where unrest is intensifying, reports that Saudi Arabia has sent 1000 troops and that one of those troops may have been killed, demonstrate how precarious this situation is as well.  Should the unrest move across a short bridge into Saudi Arabia and then threaten the flow of oil its impact on the world economy could be catastrophic.

Questions About Title Insurance

What Is Title Insurance?

Title insurance is protection against loss arising from problems connected to the title to your property.
Before you purchased your home, it may have gone through several ownership changes, and the land on which it stands went through many more. There may be a weak link at any point in that chain that could emerge to cause trouble. For example, someone along the way may have forged a signature in transferring title. Or there may be unpaid real estate taxes or other liens. Title insurance covers the insured party for any claims and legal fees that arise out of such problems.

Is Purchasing Title Insurance Obligatory

It is if you need a mortgage, because all mortgage lenders require such protection for an amount equal to the loan. It lasts until the loan is repaid. As with mortgage insurance, it protects the lender but you pay the premium, which is a single-payment made upfront.

Does Title Insurance Do Anything For Me?

The required insurance protects the lender up to the amount of the mortgage, but it doesn’t protect your equity in the property. For that you need an owner’s title policy for the full value of the home. In many areas, sellers pay for owner policies as part of their obligation to deliver good title to the buyer. In other areas, borrowers must buy it as an add-on to the lender policy. It is advisable to do this because the additional cost above the cost of the lender policy is relatively small.

Doesn't the Lender Policy Indirectly Protect Me?

No, title policies are indemnity policies, they protect against loss, and a lender policy would only cover the lender's loss. Of course, the fact that the insurer issued a policy to the lender indicates that the title has been searched and nothing amiss has been found, but no search is 100% dependable. That is why an insurance policy is issued.

When Does Title Insurance Protection Begin and End?

With the exception noted later, title insurance only protects against losses from claims that arose prior to the date of the policy. Coverage ends on the day the policy is issued and extends backward in time for an indefinite period. This is in marked contrast to property or life insurance, which protect against losses resulting from events that occur after the policy is issued, for a specified period into the future.

For How Long Is the Property Owner Purchasing Title Insurance Covered?

Indefinitely. The owner’s protection lasts as long as the owner or any heirs have an interest in or any obligation with regard to the property. When they sell, however, the lender will require the purchaser to obtain a new policy. That protects the lender against any liens or other claims against the property that may have arisen since the date of the previous policy.
For example, if the contractor you failed to pay for remodeling your kitchen places a lien on your home, you are not protected by your title policy; the lien was placed after the date of the policy. You will probably be required to get the lien removed before you can sell the property. But in the event the lien hasn’t been removed and a search has failed to uncover it, the new lender will be protected by a new policy.

Will Title Insurance Protect Me Against False Claims That Arose After I Purchased the Property?

The standard policy does not, which is a weakness. Many events beyond your control can reduce the value of your house after you buy it. If it is a newly-constructed house, sub-contractors claiming they had not been paid by the builder may place a lien on the house. Identity theft can result in a new mortgage you know nothing about. A neighbor could build on your land without your knowledge, thereby adversely possessing and possibly eventually taking your land. Or you may suddenly be told that you must correct a zoning violation of the previous owner.

To deal with these issues, a new policy with expanded coverage has been developed. I am told it is virtually standard in California and is available in many other states, perhaps at a small price increase. It is usually referred to as the ALTA Homeowner’s Policy.

Does Title Insurance Coverage Rise With Increases in the Value of My Property?

No, but coverage under the ALTA policy referred to above increases by 10% a year for the first 5 years after issuance, to 150% of the initial amount. You can buy additional coverage as a rider to the policy.

If your policy does not have such a rider and your property has appreciated sharply in value, you may be able to purchase additional coverage on the same policy by paying an incremental fee. The fee should be modest because because no new title search is involved. The coverage will only apply to title defects that existed prior to the original date of the policy. To extend the coverage to events that may have clouded the title since the original policy, you would need to take out a new policy with a new search and pay the full rate.

Why Do I Need to Purchase a New Policy When I Refinance?

You don’t need a new owner’s policy, but the lender will require you to purchase a new lender policy. Even if you refinance with the same lender, the existing lender’s policy terminates when you pay off the mortgage. Furthermore, the lender is concerned about title issues that may have arisen since you purchased the property, such as the lien mentioned in an earlier question. A new title search will uncover the lien, and you will have to pay it off as a condition for the refinance.

Insurers generally offer discounts on policies taken out within short periods after the preceding policy. In some cases, discounts are available as far out as 6 years from the date of the previous policy. Ask for it, it may not be offered if you don't.

Does the Fact That Title Insurance Companies Pay Out Very Little in Claims Indicate That it Is Overpriced?

No, it may be overpriced, but not for that reason. Because title insurance protects against what may have happened in the past, most of the expense incurred by title companies or their agents is in loss reduction. They look to reduce losses by finding and fixing defects before the policy is issued, in much the same way as firms providing elevator or boiler insurance. These types of insurance are very different from life, property or mortgage insurance, which protect against losses from future events over which the insurers have no control.

Are Title Insurance Premiums Fair to Low-Income Borrowers?

Probably they are more than fair. Most title insurance costs arise in preventing loss rather than paying claims, and prevention costs are not much different for a small policy than for a large one. Despite this, premiums are scaled to the amount of the mortgage or the value of the property, which suggests that smaller policies may be under-priced and larger policies overpriced.

Does Title Insurance Guarantee Me That I Will Be Able to Sell My Property If An Unforeseen Claim Arises?

No. Title insurance does not prevent loss of marketability due to a title claim, any more than fire insurance prevents fire. If a claim arises, you probably won’t be able to sell your property until the claim is settled by the title insurer. The interest of the owner and the insurer may clash in such cases. The owner usually wants settlement immediately, whereas the insurer wants to minimize the cost of settlement, which may require time-consuming negotiations with the claimant.

Why Are There Such Large Variations in the Cost of Title Insurance in Different Parts of the Country?

One major reason is that the services covered by the title insurance premium vary in different parts of the country. In some areas, the premium covers not only protection against loss but also the costs of search and examination, as well as closing services. In other areas, the premium covers protection only, and borrowers pay for the other related services separately.

To complicate it further, in some states the charges for title-related services are paid to title insurance companies, which perform the functions but charge separately for them. In other states, borrowers may pay attorneys or independent companies called abstractors or escrow companies.

Of course, what matters to the borrower is the sum total of all title-related charges. These also differ from one area to another in response to a variety of factors. The 50 states have 50 different regulatory regimes, which affect charges. So do local costs, competition in local markets, and other factors. This is a largely unstudied segment of the economy that would make a nice PhD dissertation for a student in economics!

Does a Borrower Have the Right to Purchase Title Insurance on Her Own?

Yes, although few exercise it. Most leave it up to one of the professionals with whom they deal – real estate agent, lender or attorney – to select the carrier. This means that competition among title insurers is largely directed toward these professionals who can direct business rather than toward borrowers. This has begin to change with the development of the internet, however, and one new insurer has emerged to market directly to borrowers. See Buying Title Insurance on the Web: Entitle Direct.

If a Borrower Does Shop For Title Insurance, Would it Pay?

Perhaps. It is difficult to generalize because market conditions vary state by state, and sometimes within states. You would be wasting your time shopping in Texas and New Mexico because these state set the prices for all carriers. Florida also sets title insurance premiums but not other title-related charges, which can vary.

In the remaining states, the situation is murky and it may or may not pay to shop. Insurance premiums are the same for all carriers in “rating bureau states”: Pennsylvania, New York, New Jersey, Ohio and Delaware. These states authorize title insurers to file for approval of a single rate schedule for all carriers through a cooperative entity. Yet in some there may be flexibility in title-related charges. More promising are “file and use” states – all those not mentioned above -- which permit premiums to vary between insurers.

Are Title Insurance Premiums Deductible?

 

Under existing rules, they are not. If the tax code was logically consistent, however, premiums paid by borrowers on lender policies -- those that protect only the lender -- would be deductible. The same is true of mortgage insurance. See Are PMI Premiums Deductible?



Get $35K For Repairs With The Streamlined FHA 203(k) Mortgage

Tempted by foreclosure or “as is” listings but wonder how you can afford to make them livable? FHA’s streamlined 203(k) mortgage is your answer.

You’ve probably seen listings for impossibly cheap foreclosure or “as is” homes and asked yourself just how bad they could be. Pretty bad, actually! Sometimes the owners of these homes simply could not afford to maintain them. Other times, though, the owners went out of their way to trash them.

 

“I've been experiencing a lot of clients lately in these situations,” says Seattle-based FHA 203(k) residential mortgage banker Dan Keller. “Mr. and Mrs. First Time Homebuyer have found a really good deal on a foreclosure, but the previous homeowners either (1) abandoned the home and damaged it prior to getting foreclosed on, or (2) They took personal property such as appliances, cabinets and flooring with them prior to getting foreclosed." In both of these cases, the bank that foreclosed (new seller) will not restore the home. Instead, they sell it at a discount, "as is,” and the only way to purchase a home like this is with a substantial down payment or an FHA 203(k) rehab loan."

 

The catch-22 for some of these foreclosed or “as is” homes is that the bank doesn’t plan to make any repairs, however, the buyer can’t get FHA financing without flooring, appliances, toilets, and other basic functional items.

 

Also, most other mortgage financing programs will not close a loan unless the condition and value of the property provides adequate security for the lender. A lender typically requires any improvements to be finished before a long-term mortgage is made. What this typically means is that lenders don’t want to give you money for a home that is falling apart even if you plan to use that money to put the home into livable condition and make it into a worthwhile investment.

 

The beauty of the 203(k) program is that it streamlines this whole process. Basically, the FHA 203(k) loan program is an FHA mortgage and a home improvement loan rolled into one 30-year fixed mortgage loan. It’s about $495 more in fees and about a quarter or three tenths of a point higher than basic FHA rates.

 

There are two types of FHA 203(k) mortgage: regular and streamlined. The regular version is for property that needs structural repairs while the streamlined version is for homes that need non-structural repairs. Both types of loans can be used for either a purchase or a refinance.

 

The streamlined version lets homebuyers finance an extra $35,000 into their mortgage for home improvements before they move in. This extra funding can pay for repairs that will help the home to pass the appraisal inspection for regular FHA or VA home loans. It can also simply close the gap between in personal finances between the down payment and the repairs necessary to make a house livable.

 

Here’s how a typical Streamlined FHA 203(k) purchase works. Let’s say that a house lists for $200,000. The buyer inspects it and figures out that the house needs $20,000-$25,000 in repairs. They offer $180,000 to the seller and, after the seller (hopefully) accepts, get a loan for $200,000 that pays for the total cost of the house with the repairs.

 

“I’ll give you an example of a client that I just closed on this week,” says Keller, to further explain the process. “They put in new carpet, new hardwood floors, new granite counter tops, a backslider door, and a fence in their backyard. It ended up costing about $26,000, which they negotiated into the contract. They got a check at closing for 50% of that $26,000. After a contractor does the work, he will request a second draw and get the rest of the cash. Then, we have an FHA appraiser come out and verify that the repairs have been done the clients are good to go.”

 

If you are a first time homebuyer, the FHA Streamlined 203(k) may end up being essential to your purchase, especially if you plan to buy a short sale, foreclosure, or fixer upper. “I’m a big advocate of this great loan program,” says Keller, “Especially as we continue to navigate through this foreclosure rich market. Since the banks that foreclose and re-sell these homes aren't willing to pay for the much needed repairs, the FHA Streamlined 203(k) loan program is really the only financing option for many of the great deals that are out there.”

By:

JR Hevron - MortgageLoan.com

Home Safety and Crime Prevention Tips

Whether you own a home or not, safety and crime prevention are usually at the top of the list when it comes to protecting you and your family. Here are a few ideas that you should find helpful:

•Use double-cylinder dead-bolt locks with at least a one-inch throw on all exterior doors. And, of course, keep your doors locked.

•Secure all windows and sliding glass doors with secondary locking devices.

•Install a peep-hole with a 90-degree viewing area in exterior doors.

•Keep your garage doors closed and locked at all times.

•Install exterior lights (motion detectors are great, too) around your home - especially around doors, walkways and driveways.

•Keep shrubs, hedges and bushes cut down and away from walkways, doors and windows. Don't give the bad guys a place to hide.

•Ensure your house number is easily seen and is well lit at night - for emergency responders.

•Keep your gates to the backyard locked.

•If you keep a spare key hidden outside, don't hide it in an obvious place like under the doormat, on top of the door frame, or in a flower pot. The bad guys check those places first.

•When on vacation, ensure your home continues to look "lived in" by having lights turned on and off (by neighbors or electronic timers), newspapers and mail picked up, and the lawn mowed.

•Don't have the attitude "it won't happen to me". That's usually the attitude most victims had before they "had it happen to them."