Financing

What is a Qualified Mortgage?

Online HomesOn January 10, 2014, the Consumer Financial Protection Bureau placed into effect the new Ability-to-Pay rule. This new rule amends regulation Z under the authority of the Dodd-Frank financial industry reform. It requires mortgage lenders to consider the consumer’s ability to repay home loans before extending them credit.  There is also a category of loans, called “Qualified Mortgages”, that limit how much of a home buyer’s income can go towards debt.

A lender is presumed to have met the “ability-to-pay” requirements if the lender makes a Qualified Mortgage. A Qualified Mortgage must meet certain requirements and and cannot have certain risk features such as:

  • An “interest-only” period, when you pay only the interest without paying down the principal.
  • “Negative amortization”, when the loan principal increases over time, even though you are making payments.
  • “Balloon payments”, which are larger-than-usual payments paid at the end of the loan term.  However, these are allowed in some cases.
  • Loan terms that are longer than 30 years.   
  • Generally your monthly debt, including your mortgage, cannot exceed more than 43% of your monthly pre-tax income (there are some exceptions).
  • Qualified Mortgages don’t allow lenders to charge excessive upfront points and fees, and have limits on discount points.

The highlights above were provided by the Consumer Financial Protection Bureau and the Federal Reserve.  More information can be found at http://www.consumerfinance.gov and http://www.federal reserve.gov.

 

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Getting Private Mortgage Insurance Removed From Your Loan

It’s no fun paying a monthly PMI (private mortgage insurance) premium on your loan.  But PMI can generally be removed once you have 20% equity in your home.  If you closed on your home on or after July 29, 1999, federal law provides two ways for you to remove PMI from your loan…automatically or by request.

Your lender must terminate the PMI on the date when your principle balance has been paid down to 78% of the original value of your home.

But why wait?  If appreciation and home improvements have increased your home’s value enough that you now have 20% equity, you can request that the PMI be removed.  Here are the criteria you must meet if you want to request cancellation of the PMI on your home:

  • Your request must be in writing to your lender.
  • You must have a good payment history and be current on your payments.
  • Your lender will probably require an appraisal.
  • Your lender may require that you don’t have a second mortgage or line-of-credit on your home.
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How to: Build and Maintain a High Credit Score

Monitor your credit history!  Consumers are allowed one free credit report a year, from each of the three following  credit reporting bureaus: 1) Equifax  2) TransUnion and 3) Experian.  If you spread them out and request a report from a different bureau such as one every three months, you can keep a good eye on things. Get one free report through Annualcreditreport.com.  If you see any questionable activity on your report, call the reporting bureau right away and get it cleared up!

  1. Take out a credit building loan – or a secured credit card.  15% of your credit score is based upon length of credit history.  Local credit unions offer credit-builder loans and secured credit cards, in which you provide the collateral for the account and build a positive credit history when you pay the debt off each month.
  2. Keep your credit card balances low.  The ideal target for credit cards is no more than 30% of your credit limit.  Amounts owed account for 30% of your credit score and having large balances in relation to your credit line, can have a negative effect on your credit score.
  3. Be on time with your payments!  This is the biggest factor affecting your credit score and accounts for 35% of your credit score.  Late pays have a huge negative impact on your score and delinquents will stay on your credit report for seven years.
  4. Apply for new credit sparingly.  While only 10% of your score, opening multiple accounts or having several new credit inquiries will have a negative impact on your credit score.
  5. Have a mix of credit types.  Ideally, you would like to have a mix of credit, ie., revolving credit, installment loans, student loans, car loans etc. Lenders consider it healthier than having only one kind of loan. This accounts for 10% of your score. 
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3% Mortgages – A Thing of the Past?

Mortgage rates are on the rise!  Doug Duncan, chief economist for Fannie Mae says “It’s unlikely that rates will ever be that low again.”  Here is what is finally pushing the interest rates up:

  • The Fed is no longer going to stop rates from rising.  The Fed has kept rates at their lowest levels by buying up billions of dollars in Treasury bonds and mortgage-backed securities.  This has allowed lenders to offer low interest rates and still make money on the loans.  It was expected that the Fed would slow its purchase of bonds and securities by the end of the year, it now looks like that could happen at any time.
  • The economy is not as bad as it once was.  During the recession the Fed lowered interest rates to stimulate the economy.  Since conditions have improved and the market believes the economy is getting stronger, the Fed will be less likely to lower the short term rates and they will start to creep up.
  • Jobs have also picked up.  This is another good marker for the economy, although slow, hiring is advancing rather than retreating.

These factors along with mortgage interest rates in the 3% range are just about unprecedented and will kick interest rates up.  Just today, rates have surpassed 4%.  The good news is that even if the rates rise a full point or two they will still be historically low.

Source:  money.cnn.com – Why 3% Mortgages are a Thing of the Past

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Financial Assistance Offered to Military First-Time Home Buyers

The Pentagon Federal Credit Union Foundation, a nonprofit organization, is offering a new grant referred to as the Dream Makers program. It offers financial assistance to first-time home buyers who are veterans or active-duty military members. Qualified individuals including active -duty personnel, veterans, retired members of the military, and employees of the U.S. Department of Defense and the Department of Homeland Security, may be eligible for a grant of up to $5,000 to use as down payment and closing costs when buying their first home. The grants can be applied to a mortgage from any financial institution.

To view eligibility requirements, visit www.pentagonfoundation.org/dreammakers

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What’s the best website for real-time interest rates?

Sorry to disappoint you, but there really is no good site for real-time loan rates. Mortgage Experts, Chris & Debbie Thomas of American’s Morgage, LLC, explain why you can’t rely on the rates posted on websites: “There are many adjustments to the rates that are never shown to the public. These adjustments are known as ‘loan level pricing adjustments’ and they can affect the interest rate tremendously – sometimes by as much as a few percentage points.” 

Chris & Debbie provide these examples of things that affect rates:

  • Rate lock period
  • Occupancy type (primary residence, second home, or investment property)
  • Amount of the loan
  • The borrower’s credit scores
  • Amount of the down payment
  • Property type (single family residence, townhouse, or condo)
  • Subordinate financing (is there a second loan?)

“Unless a lender asks a borrower for all of this information (and much more), they can’t possibly provide an accurate quote” says Chris. “Web sites that list rates (real-time or not), are either lead-generating web sites that sell the borrower’s contact information to multiple lenders, or bait and switch sites intended to get the borrower to call.”

Chris says “the very best way to get an accurate rate quote is to use lenders who tell you that they cannot possibly give you an accurate rate quote without gathering the information listed above and more.” Don’t rely on misleading rate quotes on the Internet – for accurate rate information, call an experienced lender.

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Be Prepared to Talk With a Lender


Here are the questions that a Lender would need answered prior to offering you an “accurate” rate quote:

  • What type of loan are you looking for? FHA? Conventional? VA?
  • How much will you be putting down as down payment?
  • What is the loan amount – how much do you need to borrow?
  • For how long or what will the term of the loan be for? (10,15, 20, 25, 30 or 40 years?)
  • Are you looking for a fixed rate or adjustable rate mortgage?
  • Are the payments to be principal and interest or interest only?
  • Is this for a personal residence, a second home, or an investment property?
  • Is this a single family residence, condo or multiple unit property?
  • What is your credit score? This is important for you to know, because every 20 points in your score below a 740, raises the interest rate for a conventional loan. Lenders use the “middle score” from the three credit reporting agencies. If there are two borrowers, a lender will use the lower of the two middle scores.
  • How long does the interest rate need to be locked – when will you be closing?
With the exception of your FICO (credit) score, you should be able to answer all of these questions if you have counseled with your Realtor first. Remember, you don’t like surprises and neither does your Lender. So be honest and open about your financial status from the very beginning, because everything you say to the lender will have to be verified before you can be approved for a loan.
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