Second Mortgages

Eeeeps! Many lenders for second mortgages and home equity lines of credit (HELOCs) are retreating from the marketplace. The old days of cheap 'n easy seconds are fading fast.

Thanks to the Fed, Prime Rate has recently fallen to 7.5%. This usually immediately helps lower the interest rate on many seconds. (Different story with first mortgages, though.) Unfortunately, due to losses and the subsequent pressure to raise underwriting standards, some lenders have dropped out of this line of business and others have eliminated stated income loans and reduced their combined loans-to-value limits. They have also generally raised their margins over Prime and are directing interest rate penalties to borrowers with less than stellar credit scores.

If you are contemplating purchasing residential real estate with less than 20% down, you should consult with a mortgage broker (I happen to know a good one!) immediately to research what the best course of action may be: second mortgage or mortgage insurance. The particulars of your situation need to be taken into account: ability to fully document income or need to go stated; credit scores; employment history; volatility of your area's housing market, etc.

One should also consider the strategy of obtaining mortgage insurance instead of a second and having a motivated seller help pay some or all of your mortgage insurance premium. Another possibility is to ask the seller to pay your closing costs to enable you to put more money down. Or ask for both -- it's a buyer's market in many areas! Make sure these types of seller concessions do not exceed the lender's limits -- generally 6%.

If you are planning on taking out a standalone second mortgage behind an existing first, then be sure to shop carefully. The fine print of an advertised offer may show a 10 or 20 year amortization instead of 30 years, and the pricing may go up after a short teaser rate period. There may be substantial closing costs and a prepayment penalty. Also, if your credit scores are not in a lofty range, the lender may change the offer to a higher rate. If the amount of cash you wish to obtain with a second mortgage is sizable, it may make more sense to do a cash out refinance of your first mortgage.

Mortgages explained and demystified. Call 408/483-2730.

Preparing to Sell

Wow, with the high inventory of homes on the market these days, is it wise to put one's home up for sale?

Some areas are doing better than others, but sometimes one just needs to sell no matter what the market conditions, due to a job change, divorce, job loss, or just wanting to buy another house.

Realtors can offer lots of specific advice about preparing your home and yard for sale, and most of that is common sense. However, if they suggest some "freshening up" that you think is frivolous, make sure that your ego is not getting in the way!

There is another part of preparing to sell that people generally don't think about in advance. Unless you are planning to pay cash for the entire amount of the next home you purchase, you will need real estate financing. As we have been hearing nonstop for the past few months, the mortgage market has changed. You absolutely positively must get preapproved for your next purchase BEFORE you list your property for sale.

What if you didn't? Here is a really rotten scenario that could very easily occur: You list your property for sale and accept an offer. Then you get serious about looking for your next place, and contact a mortgage broker and realtor. The mortgage broker informs you that you will either have to put down more money than you planned on, or offers you a much higher rate than you expected, or tells you that lender guidelines have changed drastically since you last took out a mortgage, and that it will be difficult to find a lender for you. GACK! What now? You're in contract. Don't risk that situation. Get preapproved before you list your home for sale.

Mortgages explained and demystified. Call 408/483-2730.

Assistance programs for first-time buyers -- gone?

Not at all! Some of the best are offered by the State of California through CalHFA. This source has excellent first-time homebuyer programs, with very realistic loan and income limits for high cost counties.

CalHFA also started a wonderful program for teachers in California's high priority schools, called Extra Credit Teacher Program. If you teach in a school that is currently in the lower ranges of API scores, there are some very tasty incentives.

The ECTP provides a deferred-payment junior loan, for down payment assistance – from $7,500 to $15,000, depending on the location of the property, or 3% of the purchase price, whichever is greater. This junior loan is only available when combined with a CalHFA first mortgage loan. If the first mortgage loan is CalHFA’s 30-Year Fixed Mortgage, the interest rate on the first mortgage will be at a special reduced rate. Interest on the junior loan is deferred and may be reduced to zero if the borrower meets continued eligibility requirements.

These programs have interest rates and costs set by CalHFA, so whether you wander from bank to bank or work with a knowledgeable broker, the cost limits and interest rates are the same. Individuals can not apply directly to CalHFA, though it has a very good website with tons of information: www.calhfa.ca.gov

If you are wondering about your eligibility for these loans and would appreciate some help in explaining and advising about first-time homebuyer programs in California, please give me a call (408/483-2730) or shoot me an email: financing@judymcdowell.com

The Truth About the Mortgage Market

Subprime mortgages have now been credited for bankrupting well over 110 lenders and seriously damaging operations at many major mortgage firms. They've reportedly wiped out 5 hedge funds, tens of thousands of jobs, and have led to millions of foreclosures with millions more on the way. And, as if that weren't enough, subprime mortgages are also blamed for massive volatility in the stock, bond, credit, futures, and real estate markets here in the US and around the globe. Some say losses in the mortgage securities market alone could reach hundreds of billions of dollars this year.

This means that, for any Americans looking to buy, sell, or refinance a home, they are confronting a very different market from the one that existed just 6-12 months ago.

How did this happen?
The recent real estate boom was fueled by a period of record home appreciation and historically low interest rates. Banks, in order to compete, loosened guidelines and began offering more funding to more borrowers through riskier, non-conforming or "exotic" mortgages.

These ideal lending conditions persisted for several years, supported by high demand, historical real estate data, home prices, and massive trading volume/profits on mortgage-backed securities and other financial instruments on Wall Street.

Then, in 2006, a slowdown in real estate led to a deterioration of home values, an increase in inventories, and ultimately to today's tightening of credit guidelines, leaving many investors unable to sell or refinance out of their existing positions. Many Americans who had tapped into their equity were suddenly tapped-out and overextended as home values fell. Foreclosures followed in record numbers and a re-valuation of mortgage bonds and other financial instruments created the credit/liquidity domino effect we're now experiencing.

Unfortunately, it's going to get a lot worse before it gets better. According to the latest estimates, over 2 million subprime and Alt-A adjustable rate mortgage (ARM) holders will face payment increases of up to 30%-100% when their loans reset in the next 2 to 18 months. These loans make up less than 40% of the total mortgage market, but the negative effects, as we have seen, of increased foreclosure activity can have a ripple effect throughout the industry and around the globe.

What does this mean to you and your mortgage?

SELLERS: If you're planning on selling your home, be prepared for an even smaller pool of qualified buyers. While some experts predict a settling of this credit crisis over the coming year, tightened credit guidelines and diminishing mortgage products could knock out as many as 15%-30% of potential qualified buyers. Now is not the time to sit and wait for the best possible price. Have a serious talk with your real estate agent. Having experienced buying/selling transactions in your area, he or she can help you price your home accordingly. He or she can also help ensure that your buyers are pre-approved and stay pre-approved throughout the entire transaction.

BUYERS: Get pre-approved by your mortgage professional. While there are a lot of great deals out there, getting credit is becoming tougher and tougher, and it's taking longer and longer to complete a transaction. Remember, what you qualify for today could change tomorrow in a volatile market. For those looking to refinance, keep this in mind. There is no time to delay! Communicate with your lender. Don't do anything that could negatively affect your credit, and make sure you get all your documentation in on time.

ARMs Borrowers: If your ARM is scheduled to reset in the next 2-18 months, you need to schedule an appointment with a mortgage professional right away. Whether your ARM is subprime, Alt-A, or even if you have a pre-payment penalty, don't let a default or foreclosure situation sneak up on you. Did you know that your monthly payments can increase anywhere from 30% to 100% once your loan resets? At the very least, give yourself the peace of mind of knowing what your adjusted payment will be.

Borrowers with less-than-perfect credit: Each week it seems lenders are shedding more and more mortgage products. Many lenders have stopped offering No-Doc loans and are reducing all forms of Stated-Income loans. While it might be challenging, borrowers with credit issues need to see a loan expert. Often they have credit repair resources and other strategies to help you reach your financial goals.

Finally, there's an important concept to embrace: all markets, while cyclical in nature, are self-correcting, be it credit, real estate, stocks, or bonds. For the last 6 or 7 years, real estate was booming and riding high. The correction we're experiencing now – while it seems harsh and could get much worse – is, in a sense, "natural" and directly related to the extremely loose guidelines and perhaps overzealous lending and leveraging during the boom cycle.

Lots of changes in mortgage approval process

Due to the upswing in delinquent mortgage payments in the subprime area and also, to some extent, in conventional loans, mortgage program offerings and underwriting standards are in a state of flux.

Many lenders have dropped out of the subprime market, and those that are left have tightened standards. They are dropping the two and three year ARMS which turned into nightmares for many unqualified borrowers. For the most part, only five year ARMs and 30 or 40 year fixed rate mortgages are available to subprime borrowers. Requirements for down payments are more stringent, as are rules for stated income loans. The least credit-worthy borrowers will have a tough time finding a lender, and they will not be able to find financing without a substantial down payment.

In the conventional market, there are still many loan programs available, but lenders are starting to qualify interest-only loans on the fully amortized payment amount, and are raising their standards for loans to borrowers with middling FICO scores. 100% financing is available, but at a higher price, and more lenders are requiring impound or escrow accounts (wherein borrowers pay their property tax and homeowners insurance along with the monthly mortgage payment). Many lenders are showing their preference for fully documented income and asset information by no longer allowing W-2 wage earners to be approved for stated income loans.

New underwriting rules are being announced almost daily from one lender or another, so if much time elapses between prequalification and actually submitting a loan package to a lender, the terms or pricing may change.

SILICON VALLEY COMMERCIAL REAL ESTATE MORTGAGES

Commercial property in Silicon Valley has rebounded after a prolonged downturn which began in 2001. Vacancies in all classes of commercial real estate are down sharply, and rents are up. Business owners and investors can look at a vastly improved (and more realistic) economy in Santa Clara County, California, and see strong indications for purchasing.

There are now many lenders interested in making small ($100,000 - 2,000,000) commercial loans. More lenders means more competition for borrowers, so it really makes sense to have someone shop for you. Loan programs are available for fully documented borrowers, stated income and even "no docs". Many lenders have relaxed the traditionally higher down payment requirement for commercial property, and are willing to loan with borrowers only putting down 10% or even as low as 3%.

Commercial loans are underwritten differently than residential mortgages, and interest rates depend on a lot of variables. To obtain the lowest rate and most appropriate financing, it's best to have a licensed mortgage professional research the gamut of lenders for you and help you through the process.

THE FEDERAL RESERVE AND MORTGAGE RATES

Consumers are often confused when it comes to the subject of the Federal Reserve and how it affects mortgage interest rates. News coverage of the Fed can actually cause the confusion.

The Fed affects short-term interest rate maturities, the Federal Funds Rate, and the Overnight Lending Rate. These factors have a direct impact on the Prime Rate. However, it is a mistake to conclude that changes made by the Fed will cause a similar movement in mortgage interest rates. Mortgage interest rates fluctuate with the market for mortgage-backed securities, which trade on a daily basis. Money to purchase mortgage-backed securities comes from overseas investors as well as domestic investors, and the flow of huge sums of money to and from these securities is subject to competition from the stock market and complex economic and political influences.

A key (but not infallible) indicator for the movement of mortgage interest rates is the 10 year Treasury bond yield. It is widely quoted, and if it is heading up, you should be prepared to face higher mortgage rates. It fluctuates constantly, and so do mortgage rates.

Commercial property, investment property, residential property loans: What's the difference?

There are different classes of loans to consider when one needs to obtain a mortgage to finance the purchase of income property. Commercial loans are underwritten differently from residential loans, and the interest rates, fees, appraisals, terms and prepayment penalties also are in a different league.

Residential loans are the everyday mortgages people obtain for their homes. They are available for 1-4 units, whether or not the owner/buyer plans to live there. If the buyer does not plan to inhabit the premises, the loan will be classified "non-owner occupied", and there will be an upfront fee plus possibly some restrictions on loan to value ratios and other guidelines. If the buyer plans to inhabit one of the units, then some of the guidelines and fees may be relaxed. However, whether 1-4 unit property is owner occupied or non-owner occupied (strictly investment), the loan process and general parameters are similar.

If a property exceeds 4 units, is mixed-use or strictly for business or any type of non-residential purpose, then a commercial mortgage is required. Lenders generally demand a higher down payment for this type of loan, and the appraisal must go into much greater depth regarding the value and income potential. The appraisals for small commercial properties cost several times what one pays for a residential mortgage, and lenders base much of their approval decision on the appraisal.

What may come as a surprise to many people is that some small commercial loans are available as "stated income" (meaning the lender doesn't verify the income amount you state on your loan application) and even "no doc" (the lender does not ask for any statement or documentation about income, employment or assets).

Take action to protect your credit during divorce

Divorce is a sad event. If it’s inevitable, then be sure to protect your credit status.

Surprise discovery of maxed-out credit cards or a spouse's refusal to pay certain bills can lead to a total breakdown in communication and the destruction of at least one spouse's credit, and maybe both.

It doesn't have to be this way. By creating a specific plan to maintain one's credit status, anyone can ensure that "starting over" doesn't have to mean rebuilding credit from scratch.

The first step is to obtain copies of your credit report. (Once a year, you may obtain a free credit report by visiting www.AnnualCreditReport.com.)

Create a chart, and list all of the accounts that are currently open, with the following information: creditor name, contact number, the account number, type of account (e.g. credit card, car loan, etc.), account status (e.g. current, past due), account balance, minimum monthly payment amount, and who is vested in the account (joint/individual/authorized signer).

Next, make the plan.

There are two types of credit accounts, and each is handled differently during a divorce. The first type is a secured account, meaning it's attached to an asset. The most common secured accounts are car loans and home mortgages. The second type is an unsecured account. These accounts are typically credit cards and charge cards, and they have no assets attached.

When it comes to a secured account, your best option may be to sell the asset. This way the loan is paid off and your name is no longer attached. Or you may be able to refinance the loan. In other words, one spouse buys out the other. This only works, however, if the purchasing spouse can qualify for a loan by themselves and can assume payments on their own.

Your last option is to keep your name on the loan. This is the most risky option because if you're not the one making the payment, your credit is truly vulnerable. If you decide to keep your name on the loan, make sure your name is also kept on the title. The worst case scenario is being stuck paying for something that you do not legally own.

In the case of a mortgage, enlisting the aid of a qualified mortgage professional is extremely important. This individual will review your existing home loan, along with the equity you've built up, and help you determine the best course of action.

When it comes to unsecured accounts, you will need to act quickly. It's important to know which spouse, if not both, is vested. If you are merely a signer on the account, have your name removed immediately. If you are the vested party and your spouse is a signer, have their name removed. Any joint accounts (both parties vested) that do not carry a balance should be closed immediately.

If there are jointly-vested accounts which carry a balance, your best option is to have them frozen. This will ensure that no future charges can be made to the accounts. When an account is frozen, however, it is frozen for both parties.

If you do not have any credit cards in your name, it is recommended you obtain one before freezing all of your jointly-vested accounts. By having a card in your own name, you now have the option of transferring any joint balances into your account, guaranteeing they'll get paid.

It is also important to know that a divorce decree does not override any agreement you have with a creditor. So, regardless of which spouse is ordered to pay by the judge, not doing so will affect the credit score of both parties. The message here is to not only eliminate all joint accounts, but to do it quickly.

Understanding the Lender/Appraiser Relationship

Borrowers are often confused by the appraisal process. Frequently they are disappointed by the value an appraiser assigns to their home, and can’t make sense of the written appraisal itself. It is important to know that appraisal guidelines are set by lenders, and that these guidelines have become stricter recently. Also, there are different types of appraisals with different rules, depending on what the use will be.

Basically, lender guidelines require appraisers to arrive at a fair market value on homes based on comparable sales in the same area, with adjustments to value based on the local marketplace. For instance, if the subject property does not have a fireplace but one of the comparison properties does, then an adjustment for that feature is made according to the appraiser’s best estimate of the value for a fireplace in that particular neighborhood. There are no national or state averages.

Upgrades to new homes can usually be included at full value, because the only way to obtain the upgrade is to pay more for it. However, it’s difficult to capture the full cost of remodeling or renovating an older home. This is because the property had value in its original condition, and the incremental value of the remodeling or addition has to be supported by comparisons within the same marketplace.

Comparisons must be taken from market activity within the last six months, and usually from closed sales. However, pending sales may be considered if there is a dearth of comparables or if the lender wants to see if there is a trend up or down. The guideline actually is for appraisers to base their opinion on the value of comparable properties which have closed escrow, and for any supporting evidence from pending sales merely to substantiate the opinion.

If property values are quickly rising, appraisers may be able to note this and put more weight on the information from pending sales and listings. Currently, lenders are more apt to insist on conservative appraisals.

In the case of very large loans or if a lender suspects an inflated appraisal, they may perform a field review. If they find that the value is too high, they will use their own appraised value, which can mean that the loan amount is reduced, or the terms of their offer worsen. Avoid problems and unhappy surprises by working with careful mortgage brokers who use reputable appraisers!

How to prevent real estate, mortgage and insurance companies from mining your credit report without your authorization

The major credit firms (Experian, Transunion and Equifax) offer a rather abhorrent product to real estate, mortgage and insurance companies.

As everyone knows, when a borrower applies for a loan or asks to be prequalified, the lender pulls a credit report. What is for sale by the credit agencies is the fact that a mortgage firm (bank or broker) has made a credit inquiry, as well as the individual’s name and address. To the types of companies which stoop to this method of obtaining leads, this is a signal that someone is considering a real estate purchase, and they would like to contact such individuals with advertising of their own.

In this country, we all advertise, and we all compete. But do many people know that the credit agencies are allowing this information to be mined, and if they knew, would they like it?

There is a way to stop it. Check out this website: www.optoutprescreen.com
It has a super simple way to restrict this type of use of your personal information.

Don’t Forget These Write-offs!

When there is a real estate transaction, there will usually be write-offs. Make sure you claim every one you are entitled to.

POINTS
If there are origination fees, and if they are paid for the use of money, the IRS considers them tax-deductible. If the fees are classified as a service fee, then they aren’t.

For details, including how much you can deduct in the year the points are paid, check out IRS Publication 936.


PREPAYMENT PENALTIES
Sometimes borrowers simply must refinance or sell their property even though a nasty prepayment in involved. If this happens, the prepayment penalty IS tax deductible.

REAL ESTATE TAXES
Property taxes are deductible.

MORTGAGE INTEREST
The year-end statement from the mortgage lender will detail exactly how much interest was paid during the year, and it is all deductible.

MORTGAGE INSURANCE
Recently enacted legislation enables mortgage borrowers to deduct the cost of mortgage insurance. There are limitations, so be sure and check out the fine print of the new law.

HOME CONSTRUCTION LOAN INTEREST
Interest on a construction loan is deductible during a period of two years before the new residence is inhabited by the borrowers.

OTHER CLOSING COSTS
Some of the settlement fees (the charges you would pay no matter if you were paying all cash or financing the property) may be added to the cost basis of the property. Common ones include title abstract fees, recording fees, transfer or stamp taxes, owner’s title insurance. These may apply to seller or buyer.

DOUBLE-CHECK
Don’t overlook the need to verify the applicability of these to your individual situation.

A Farewell to ARMs:

Payments Increase for Millions with ARMs
Refinance Before Adjustable Rate Mortgages Reset

Since June of 2004, the Federal Reserve has systematically increased the federal funds rate, causing short-term interest rates to follow suit. As a result, consumers with Adjustable Rate Mortgages (ARMs) tied to volatile short-term rate indices, such as the LIBOR, are finding themselves at the mercy of the Federal Reserve’s war on inflation.

“Higher interest rates function as a tax on people who hold variable debt,” says Daniel Gross, reporter for The New York Times, a “truism that is particularly apparent to homeowners holding adjustable rate mortgages.” In his article, Gross cites Mark Zandi, chief economist at Moody’s Economy.com, who estimates that nearly $2 trillion in ARMs are due to reset by the end of calendar year 2008. This could potentially increase the total interest payments of ARM holders by an estimated $50 billion in 2009, compared to today. For many of these borrowers, reset minimum monthly payments could increase upwards of 50% to even 100% of what they’re paying now – if they haven’t already. And the worst may not even be over!

According to Ben Bernanke, the Federal Reserve’s chairman, the real estate market is experiencing a “substantial correction”. This, economists say, is the result of the Fed’s attempt to engineer a “soft landing” by systematically increasing interest rates to control inflation without fueling a recession. Fed officials believe that they are making strong progress towards this difficult goal. However, even moderate economic growth will give the Fed room to increase short-term rates further, according to David Leonhardt of The New York Times. This means more bad news for ARMs holders with life-caps at 10% or more, and even worse news for the estimated 70% of Option ARM borrowers who chose the minimum or negative payment options of their mortgages and are now actually accruing (and compounding) a larger balance than what they originally borrowed.

If you or someone you know has an ARM, however, all is not completely lost. There is still time to take advantage of alternative loan programs, such as intermediate fixed-rate and tiered-rate loans, that can effectively limit one’s liability before rates increase again. These programs enable borrowers to stabilize their finances and know exactly what their monthly payments will be over the next few years while the Fed does its best to stifle inflation. Remember, the Fed has a habit of overcorrecting the market before changing policies, which means rates could still increase even after their goal of a soft landing has been reached.

If you do foresee a sustained period of paying an interest rate that is significantly higher than what you want or are able to pay, see your mortgage professional today. Don’t be a casualty of the Fed’s war against inflation. Ask about intermediate fixed-rate or tiered-rate products to hold you over until the Fed flips the script and rates finally begin to decrease.

An experienced and resourceful loan professional will have access to a variety of loan programs including 3, 5 , or 7-year fixed-rate products as well as tiered-rate programs to counter fully-indexed ARMs and Option ARMs. A 5-year fixed rate mortgage, for instance, converts to an adjustable at the end of that fixed tenure. Taking out such a loan, with no prepayment penalty, may make a lot of sense right now because it will provide some interest rate relief in today's market, while buying the consumer time to refinance once rates begin to decrease.

Tiered-rate products, on the other hand, are essentially fixed-rate loans that act like adjustable rate loans but offer the security of a built-in cap. In fact, these loans actually adjust in your favor, saving you money in the first years of the loan before reaching their final fixed rate. Various types of these tiered-rate products exist, and each offer different money-saving options. See your mortgage professional for the one that’s right for you. Just be sure, however, that he or she caps you out at a rate that’s lower than your current interest rate to receive the full benefit of these products. Finally, confirm that your mortgage professional will be keeping abreast of market conditions and will be ready to refinance you once rates do decrease, saving you even more.

Buydowns and Why Sellers Should Consider Them in Slow Markets, and Why Buyers Should Negotiate for Them

WHAT IS A BUYDOWN?
A buydown is when, during the sale of property, the seller credits the buyer an agreed-upon amount to help the buyer obtain financing at a reduced interest rate. The seller is thus effectively arranging to pay loan origination points for the buyer.

TEMPORARY vs LONG TERM BUYDOWNS
A temporary buydown buys the mortgage interest rate down for a period of one or two years. Typically it’s structured like this: the real note rate of the loan is, for instance, 6.5%. With a temporary buydown, the rate is reduced to 4.5% the first year, increasing to 5.5% the second, and adjusting to 6.5% at the start of the third year. This makes sense if you don’t think you will stay in the property long, or if you have some other expenses (college tuition, a second mortgage, race track losses (!), etc.) that you need to pay off within a couple of years.

A long-term buydown simply buys down the rate permanently. Typically, it’s an interest rate reduction of 1/2 to 1%. Doesn’t sound like much? How about this: a 1% rate reduction on an interest-only mortgage of $800,000 = $8,000/year = $667 lower monthly payment! If the subject property’s asking price is $1,000,000 (hence the $800,000 [or 80%] first mortgage amount), this could be accomplished with a $20,000 contribution (through escrow) from the seller INSTEAD of lowering the price $20,000.

DOWNSIDE TO SELLER
None, really, unless the market is solid or rising and properties are selling briskly at full asking price or better. If, however, the market is slow and you want to increase potential buyers’ interest in your property, it won’t cost you more than a price reduction, and it could cost you less, since the benefits to the buyer are so large.

UPSIDE
Huge!

For details and help with planning a buydown offer (whether you are on the selling or buying side) – please give me a call or shoot me an email.