Mortgage Planning Tips

Fannie Mae, the giant mortgage finance company that helps shape lending guidelines, is raising minimum credit score requirements and will limit the amount of overall debt that borrowers can carry relative to their incomes.

Starting Dec. 12, the automated system that Fannie Mae uses to approve loans will reject borrowers whose credit scores fall below 620. Previously, the cutoff was 580. Also, a borrower’s maximum debt-to-income ratio (the percentage of a consumer's monthly gross income that goes toward paying debts) has been lowered to no more than 45%. The company will raise the level to 50% in cases with "strong compensating factors."

These changes are the latest in a series of crackdowns by the mortgage industry and could surprise some prospective home buyers. The lowering of the debt-to-income ratio is a big deal and will result in many more loans being declined from otherwise strong borrowers.

As such, it is more important than ever for both Real Estate agents and their prospective home buyers to work with a true mortgage professional who will roll up their sleeves and go the extra mile in advising home buyers and getting them properly pre-approved.

Once you decide to apply for a home loan, your application will be submitted and sent along to a loan underwriter, who will determine if you’re a sound borrower. The underwriter can approve, suspend, or decline your loan application; if the loan is suspended, you’ll need to supply additional information or documentation to move it to approved status.

So how do underwriters determine the outcome of your mortgage application anyways? Well, there are the three Cs of underwriting, otherwise known as credit, capacity, and collateral.

Credit has to do with your credit history, including past foreclosures, bankruptcies, judgments, and basically measures your willingness to pay your debts. These items will be reflected in your three-digit FICO, which can actually eliminate you without any further underwriting necessary if you fall below a certain threshold.

Capacity deals with a borrower’s actual ability to repay a loan, using things like debt-to-income ratio, salary, cash reserves, loan product and more. This covers whether the loan is interest-only, an adjustable-rate mortgage or fixed, cash-out refinance or simply rate and term. The underwriter wants to know that you can repay the mortgage you’re applying for before granting approval.

Finally, collateral deals with the borrower’s down payment, property type, and property use, as the lender will be stuck with the home if the borrower fails to make timely payments.

Now it’s important to understand that the three C’s are not independent of one another. All three must be considered simultaneously to understand the level of layered risk that could be present in your application. For example, if the borrower has a less-than-stellar credit score, limited asset reserves, and a minimal down payment, the risk layering could be deemed excessive, leading to denial.

This is the underwriter’s discretion, and can certainly be subjective based on other factors like job type, how long the borrower has been in the job, why the credit score is less than perfect, and so on. The underwriter must decide, based on all the criteria, if the borrower is an acceptable risk for the lender, and if the end product can be resold without difficulty to investors.

In the current market, underwriting guidelines have tightened dramatically making it a priority for you to get pre-approved in advance and work with a true professional such as a Certified Mortgage Planner to help you structure your loan so you will not have an underwriter suspend or decline your loan application.

Effective July 30th 2009, there were mandatory changes implemented with regard to disclosing the Truth and Lending and the Regulation Z. These new disclosure requirements affect all transactions in the mortgage industry including both Brokers and Bankers.

Here are the two main changes that Real Estate Agents need to be aware:

1.    Initial TIL now required on all purchases and refinances of primary residences and second homes. The loan cannot close (i.e. document signing) until seven (7) business days after the initial TIL disclosure has been mailed.

2.    An increase in APR by more than .125% requires re-disclosure of the TIL at least 3 business days before closing. If mailed, the TIL is considered “received” 3 business days after mailing. The loan cannot close until three (3) business days after re-disclosure TIL is received (when applicable). This means that if the APR is off by more that .125% the closing will be delayed by up to 6 business days!

Personally, I always make sure that our numbers are very accurate so this won't change much for our team unless a 3rd party charge to APR comes up last minute. But loan officers who haven't been disclosing accurately all along can create a real problem for both listing and selling agents.

This re-disclosure will just punish the borrowers, sellers and agents because there will be a minimum 3 day delay for the borrower prior to closing. Sellers may be unable to extend if they are going to buy another house and have a simultaneous closing.

The SOLUTION to work with a professional you trust and one that has and will continue to disclose all fees truthfully instead of trying to “polish” up the good faith estimate to look cheaper initially. For listing agents it will become critically important to get correct title fees if the seller picks the title company. For selling agents that pick the title company, getting correct fees to the buyer’s lender is equally important.

By Todd Baker. Todd Baker is a resident of Prosper, Texas and a Certified Mortgage Planner. To comment or for additional information please send an e-mail to tbaker@imortgageplanner.net or call 972-890-9155.

Many buyer’s are ready to do their part to revive the economy but are finding out that despite a good credit score, full income verification and an ample down payment they cannot get a loan.

The denials are occurring for a wide array of reasons: the buyers’ incomes are adequate but irregular; they are self-employed and take many deductions, reducing the taxable income on which lenders focus; their credit scores are below the cut-off point, which has been raised drastically; their down payments are less than 20 percent.

Mortgage Brokers and Bankers say if you’re self-employed, you have virtually no chance of getting a mortgage now unless you are working with a real professional and begin planning for the purchase well in advance to make sure that you can meet all of the tightened underwriting guidelines.

The credit pendulum has swung too far. Whereas lenders were much more accommodating even 6 months ago, getting your buyer approved and funded will require full adherence to all Fannie/Freddie underwriting guidelines. Fannie Mae, the government-controlled company that buys mortgages, is so dominant in the lending market that its rules set the standard. It recently toughened its policies, saying it would count only 70 percent of the value of stocks and mutual funds when calculating a buyer’s assets. Previously, that figure was 100 percent.

To insure a smooth and successful transaction it is crucial for buyers to work with a local Mortgage Professional well in advance of any purchase to prepare the file for underwriting so that any potential issues or red flags can be corrected. Failing to address such issues in advance may result in the underwriter issuing a loan denial or developing a biased against the borrower’s file that will be hard to overcome.

By Todd Baker. Todd Baker is a resident of Prosper, Texas and a Certified Mortgage Planner. To comment or for additional information please send an e-mail to tbaker@imortgageplanner.net or call 982-890-9155.

Sure, housing’s in a hole but there’s potent case for buying now! Ignore the headlines. That’s no easy thing. How do you tune out all the chatter on recession, housing woes and the credit crunch? When prices are falling, few people have the discipline to buy stocks, a house or other assets. But those that do pull the trigger excel in the long run. As John D. Rockefeller famously said, “The way to make money is to buy when “blood is running in the streets.”

Let’s assume you’re emotionally ready to be a homeowner. You have god credit, plan to stay in the home for five years and have been waiting for the perfect entry point. Its time to get serious—before an inevitable rise in interest rates wipes out your advantage. The market forces that will make home prices stop falling are the same forces that will push mortgage rates higher. So anything you gain by a further drop is prices may be offset by rising financing costs.

Consider a typical home that sells for $400,000. You put a down payment of 20% and get a 30 year fixed rated at 4.5%. Monthly principal and interest come to $1,621.39. Let’s now assume that 12 months form now the same house goes for 10% less, or $360,000. But by then the FED is raising rates to stem inflation and mortgage rates rise to 6%. Your monthly payment would be $1,726.00 and you will actually pay much more over the life of the loan!

In conclusion, if you had waited a year to buy, you would have actually paid more, and missed out on a year’s worth of tax benefits from owning real estate. The housing correction won’t last forever. Ricks always seem most acute when the headlines give you ulcers. But that’s exactly when you should think long term and get off your thumbs.

    The upside of the housing slump has been that potential homeowners previously priced out of the market are finding that they can afford the American Dream thanks to a combination of lower resale and new home prices along with record low interest rates. The national average interest rate on the benchmark 30-year, fixed-rate loan averaged 4.78% in the week ending May 1, 2009, down from last week's 4.80% and the year-ago 6.06%, according to Freddie Mac's weekly survey.

    In order to take full advantage of this wonderful opportunity, it is important to contact a knowledgeable and reputable mortgage professional who can evaluate your current financial situation. A Certified Mortgage Planner can help.

    There is no universal, optimal choice of mortgage product and potential borrowers are advised to consider their goals and capabilities, and take these factors into account when evaluating potential mortgage options. For example, when evaluating a specific type of loan, there is more to consider than just the monthly payment and interest rates. It is necessary to always consider the tax deductibility of mortgage interest, your spending habits, capacity to save, risk tolerance and future goals. A good loan choice is the one that is designed to integrate into your short and long term financial goals.