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Qualified Mortgage Rule Noted Effects

We are nearly a month into the Consumer Finance Protection Bureau’s (CFPB) rules for Qualified Mortgage (QM). I found a helpful guide to the new rules here: CFPB Whitepaper on ATR and QM. So far, the primary issues we are working through deal with upfront private mortgage insurance. This is required for conventional loans greater than 80% loan to value, or loans with less than a 20% down payment. Part of the QM rule says that all origination charges, including mortgage insurance, must be less than 3% of the loan amount for loans greater than $100,000. The confusion is in regards to refundable versus non-refundable mortgage insurance. The CFPB indicates that refundable doesn’t count unless it exceeds the FHA upfront amount of 1.75%. Many of our investors are requiring that we count the upfront mortgage insurance whether or not it is refundable. Before giving an example of how this can affect a home buyer, let’s review the benefit of upfront mortgage insurance.

For example, a $200,000 loan amount on a purchase price of $210,526 (5% down payment) would require mortgage insurance. On conventional loans, 5 options exist for this mortgage insurance: The buyer can pay it monthly, part monthly and part upfront, all upfront, the lender can pay it (by building it into the interest rate), or the seller can pay it through seller’s contribution (the seller isn’t actually paying it, rather it is built into the purchase price and financed). The cheapest option over time of these 5 is buyer paid upfront. Here’s why: the lowest upfront single premium amount is 1.7% of the loan amount. The cheapest monthly premium is .56% annually. Since PMI is required for 5 years, that means the annual cost x 5 is over 2.5%. So, by paying the MI upfront you recoup your money in a little over 3 years, never have to pay the monthly mortgage insurance as long as you have the loan, and don’t have to worry about getting the PMI cancelled.

Why this is important: if the 1.7% counts into the 3% maximum fees calculation, and the lender charges the customary 1% origination fee (I know some lenders advertise no origination fees – they are simply building it into the rate instead), and the underwriting and processing costs exceed .3% (which they generally would or be close to exceeding that), then the total fees would exceed 3% and the buyer would not get the advantage of having the option of doing one-time, upfront mortgage insurance. It also makes no difference if the lender or seller pay this, it still has to be counted into the 3%. Our solution to this is to move to a split premium (buyer paid part monthly, part upfront), or remove the origination fee. The mortgage and mortgage insurance industries also continue to press the CFPB for clear definition on excluding the refundable upfront premium from the calculation.

The other noticeable change has been in underwriting. Thus far, the underwriters have indicated that they will examine income documentation under a modified lens, or in other words some people that would have qualified before will no longer. The best answer for a home buyer: contact our team to review your scenario. We explore every option available to find the best solution for you and do the underwriting upfront (no pun intended!) to eliminate surprises.

 

Benefits to Home Ownership for Business Owners

For business owners, many benefits exist to owning a home near your principal business location. In addition to all the standard benefits of home ownership, business owners can help offset commercial and industrial tax levies by strengthening the residential tax base of a municipality.

When a home is sold it generally carries positive economic value (improvements are generally made by new owners, the supply of homes is decreased). Home ownership has a compounding positive economic effect on a community by improving schools, improving community safety, and providing an additional support base for community services (fire, public safety, etc.). As residential values increase, the share of tax levy burden is shifted away from commercial and industrial to the residential base.

Add in shorter commuting and now not only do you reduce the fuel and maintenance expenses for your vehicle, but you lower your carbon footprint and thus improve the environmental quality of the general area. Expand upon this for your employees by providing incentives to live near your workplace, and now you provide additional strength to the residential base.

Mortgages Unlimited, Inc – Furlong Team can show you ways in which we can partner to offer home ownership solutions for you and your employees to create a win-win for your business, your municipality, and our region.

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Conventional Mortgage 3% Down Program Going Away

During the weekend of November 16, 2013, Fannie Mae will implement Desktop Underwriter® (DU®) Version 9.1, which will include the key changes described below:

  • The maximum debt to income ratio (DTI) for most programs will be 45%. The maximum loan to value will be reduced to 95% (or 5% down required for conventional financing going forward). Those clients who had a deed-in-lieu or pre-foreclosure sale that haven’t been approvable in the past may now be eligible for new conventional financing.
  • The Furlong Team will accept new clients and purchase agreements under the 3% down program until November 15th.
  • The Maximum Allowable Debt-to-Income Ratio and Minimum Credit Score Requirements sections below have been combined. DU will not apply additional requirements of a maximum debt-to-income ratio (DTI) of 45%.
  • The LTV/CLTV/HCLTV Ratio Cap Lowered to 95% section below has been updated to include information on the timeframes in which mortgage loans exceeding the maximum LTV/CLTV/HCLTV ratio of 95%.
  • DU will continue to allow CLTV ratios of 105% when the subordinate financing is a Community Seconds® mortgage.
  • Identifying a Deed-in-Lieu of Foreclosure or Pre-foreclosure Sale can now be done manually, where DU was unable to read the credit report accurately before. This may help these clients gain approval.

Read the complete Fannie Mae DU release notes here.

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Qualified Mortgage Rule

Upcoming Changes to the Qualified Mortgage Rule

The primary impact home buyers and home owners will see from the Qualified Mortgage (QM) rule is the ability to repay provision. Here in Minnesota, we have been ahead of the national curve due to changes made to state law in 2007 and 2008. Mortgage originators have been required to document a borrower’s ability to repay a mortgage by comparing their income documentation and outstanding liabilities from the credit report and total housing expenses. However, the specific definition of “ability to repay” wasn’t provided, other than to say “reasonable.” The standards will become more strict.

Read the state law here.

Ability to Pay and DTI

The new ability to repay federal law comes with a definition stating that a borrower does not have the ability to repay a loan if their total debt to income ratio (DTI) exceeds 43%. Today, we can get loans approved with a much higher DTI, which for some borrowers does make sense and they do have a “reasonable” ability to repay the mortgage.

However, the primary impact of the new rule will limit everyone to the same DTI regardless of “reasonable” or not. Critics of “reasonable” will state that no one should have a DTI over 43% as that is too high, but they fail to consider a wide array of circumstances where the DTI is not a valid test of ability to repay.

Here are a few examples: self-employed persons, commissioned employees with less than a 2-year history of commission, non-borrowing spouses, roommates that pay rent, part-time employees, and other situations where a “compensating factor” applies but the total income picture cannot be used to qualify the borrower. When reviewing these scenarios under the “reasonable” microscope, it sometimes makes sense to approve a loan with a higher DTI, knowing that they strong ability to repay regardless of the ratio.

The current Consumer Finance Protection Bureau (CFPB as created by Dodd-Frank 2010) rule allows for a “temporary” exception to the 43% DTI rule when the loan is eligible for sale or guaranteed by either Fannie Mae or Freddie Mac. It doesn’t say how long this temporary exception applies, and most FNMA/FHLMC approvals are currently limited to 45% anyway (except HARP refinances and other applications with very strong qualifying criteria).

Read the complete QM Rule here.

Mortgage loan officers will adhere to the Qualified Mortgage rule as it gives us “safe harbor” from future liability if the loan fails to perform (or the borrower defaults, depending on how you look at it). No loan officer will want to be sued because their client could not or did not pay their mortgage payment.

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Why Use Zillow?

As a mostly-inclusive, online real estate search engine, Zillow offers users more information than most real estate web searches. Not only does it incorporate the active listings on the MLS, but also simultaneously shows pre-inventory data.

This pre-inventory is information on mortgages that are in default, or have been to foreclosure auction, and may be becoming available for sale soon. It also has a function for homeowners to list their home for sale without enlisting the services of a Realtor and gaining an audience by doing so.

Users can request information on a home directly from the listing agent in many cases and see a good amount of information on that home, the neighborhood, the other recent sales nearby, the schools, parks, amenities, transportation and property taxes.

One lesson I learned in my elementary education was to always consider the source when reviewing information. It is important to know where the information is coming from, who puts it there, and if it is accurate.

Over the years I have noticed accuracy issues with some of the data, the Zillow Zestimate tool, and foreclosure actions specifically. The last few months I have been searching for another investment property opportunity in my neighborhood, and in comparing Zillow foreclosure data with Hennepin County Sheriff’s Department data I have noticed discrepancies.

My advice – start a search with Zillow to get information, but rely on a licensed Realtor when buying or selling a home. I’m excited to see this tool grow, and the monitoring they have in place on their real estate forums is great, and the service they provide in connecting home buyers with professionals is unparalleled in our industry.

Go to Zillow’s Bloomington Page

See our reviews on Zillow here

Steve Furlong on Zillow

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New Changes to FHA Mortgagee Letter

This message was released by the U.S. Department of Housing and Urban Development covering the newest update to FHA loans.

Mortgagee Letter 2013-26

Date: August 15, 2013

To: All FHA-Approved Mortgagees

Subject: Back to Work – Extenuating Circumstances

Purpose: The purpose of this Mortgagee Letter (ML) is to:

  • Provide minimum underwriting standards and criteria for evaluating
    borrowers who have experienced an Economic Event, as defined in
    this ML, that resulted in a severe reduction in income due to a job loss
    or other circumstances resulting in reduced Household Income;
  • Describe the use of housing counseling to qualify under the provisions
    of this ML
  • Amend HUD Handbook 4155.1, Chapter 4, Section C to add an
    Economic Event to the list of examples of extenuating circumstances
    and instruct lenders to use the guidance for Back to Work –
    Extenuating Circumstances established in this ML as Chapter 6
    Section G, to underwrite an applicant with an Economic Event; and,
  • Revise HUD Handbook 4155.1, 4.A.7.e, to clarify the process for
    requesting a review of information contained in CAIVRS for
    borrowers seeking an FHA-insured mortgage in accordance with the
    provisions of this ML.

Introduction:
FHA is continuing its commitment to fully evaluate borrowers who have experienced periods of financial difficulty due to extenuating circumstances.
As a result of the recent recession many borrowers who experienced unemployment or other severe reductions in income, were unable to make their monthly mortgage payments, and ultimately lost their homes to a pre-foreclosure sale, deed-in-lieu, or foreclosure. Some borrowers were forced to file for bankruptcy to discharge or restructure their debts. Because of these recent recession-related periods of financial difficulty, borrowers’ credit has been negatively affected. FHA recognizes the hardships faced by these borrowers, and realizes that their credit histories may not fully reflect their true ability or propensity to repay a mortgage.

To that end, FHA is allowing for the consideration of borrowers who have experienced an Economic Event and can document that:

  • Certain credit impairments were the result of a Loss of Employment or a significant loss of Household Income beyond the borrower’s control;
  • The borrower has demonstrated full recovery from the event; and,
  • The borrower has completed housing counseling.

Housing counseling is an important resource for both first-time home buyers and repeat home owners. Housing counseling enables borrowers to better understand their loan options and obligations, and assists borrowers in the creation and assessment of their household budget, accessing reliable information and resources, avoiding scams, and being better prepared for future financial shocks, among other benefits to the borrower.

Effective Date:
The guidance in this ML is effective for case numbers assigned on or after August 15, 2013 through September 30, 2016.

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Economic Event-Related Mortgage Foreclosure

FHA now allows financing approval with bankruptcy or foreclosure at least 12 months old.

The lender must verify and document that:

  • A minimum of twelve (12) months have elapsed since the date of foreclosure or deed-in-lieu
  • The foreclosure or deed-in-lieu was the result of the Economic Event.
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President Obama Reflects on Steve Furlong’s Question

 

President Obama discusses the future of Fannie Mae and Freddie Mac. Steve Furlong had his question directly answered by the President!

See the full webcast here:
http://www.whitehouse.gov/photos-and-video/video/2013/08/07/president-obama-answers-your-housing-questions-zillow

The question was: “President Obama: If Congress is successful in scaling Fannie Mae and Freddie Mac down, what model fills the gap?”

His answer was that less government involvement in the mortgage securitization process is needed. He is searching for effective ways to spur private investment in mortgage securities, but to gradually make any changes so as not to harm the delicate recovery of the housing market.

Our take on this is one of optimism for improved financing options and flexibility as the current market is restrictive for many clients in being able to obtain financing. We are up for any challenge in helping to guide families home and work with every client until the end result is achieved – home ownership!

Glossary of Real Estate Terms

Welcome to our Real Estate Glossary. We hope that these definitions will help you to better understand the home buying and selling process.

Adjustable-rate mortgage (ARM): a mortgage in which the interest rate is adjusted periodically based on a pre-selected index. Also sometimes known as a variable-rate mortgage.

Amortization: loan payment by equal installments of principal and interest, calculated to pay off the debt at the end of a fixed period.

Annual percentage rate (APR): the interest rate reflecting the cost of a mortgage as a yearly rate. It allows homebuyers to compare different types of mortgages based on the annual cost for each loan.

Appraisal: a document giving an estimate of a property’s fair market value; generally required by a lender before loan approval.

Assessment: a local tax levied against a property for a specific purpose, such as a sewer or street lights.

Balloon (payment) mortgage: usually a short-term fixed-rate loan which involves small payments for a certain period of time; after that time period elapses, the balance is due or is refinanced by the borrower.

Cap: a consumer safeguard on an adjustable-rate mortgage that limits how much a monthly payment or interest rate can increase or decrease.

Certificate of eligibility: document given to qualified veterans entitling them to Veteran’s Administration guaranteed loans. Obtained by sending DD-214 (Separation Paper) to the local VA office with VA form 1880 (request for Certificate of Eligibility).

Certificate of reasonable value (CRV): appraisal issued by the Veteran Administration showing a property’s current market value.

Closing: the meeting between the buyer, seller, and lender or their agents where the property and funds legally change hands.

Commitment: agreement, often in writing, between a lender and a borrower to loan money at a future date subject to the completion of paper work or compliance with stated conditions.

Construction loan: short term interim loan to pay for the construction of buildings or homes. Usually written to provide periodic disbursements to the builder as progress is made.

Contract sale or deed: contract between buyer and seller of real estate to convey title after certain conditions have been met.

Conventional loan: a private sector loan, one that is not guaranteed or insured by the U.S. government.

Credit report: documents an individual’s credit history, listing all past and present debts and the timeliness of their repayment.

Debt-to-income ratio: the ratio, expressed as a percentage, which results when a borrower’s monthly payment obligation on long-term debt is divided by their gross monthly income.

Deed of trust: in many states, a document used instead of a mortgage to secure the payment of a note.

Default: failure to make the monthly payments on a mortgage.

Delinquency: failure to make payments on time. This can lead to foreclosure.

Down payment: the portion of a home’s purchase price paid in cash and not part of the mortgage loan.

Earnest money: money given by a buyer to a seller as part of the purchase price to bind a transaction or assure payment.

Equal Credit Opportunity Act (ECOA): a federal law requiring lenders to make credit equally available without discrimination by race, color, religion, national origin, age, sex, marital status, or income from public assistance programs.

Equity: an owner’s financial interest in a property; calculated by subtracting the amount still owed on the mortgage from the fair market value of the property.

Escrow: an account held by the lender into which the homebuyer pays money for tax or insurance payments.

FHA: the Federal Housing Administration provides mortgage insurance to lenders to cover most losses when a borrower defaults; this encourages lenders to make loans to borrowers who might not qualify for conventional mortgages.

FHA loan: loan insured by the FHA open to all qualified home purchasers. While there are limits, they are generous enough to handle moderately priced homes almost anywhere in the country.

FHA mortgage insurance: a policy paid at closing to insure the loan with FHA.

Fixed-rate mortgage: mortgage with payments that remain the same throughout the life of the loan because the interest rate and other terms are fixed.

Foreclosure: a legal process in which mortgaged property is sold to pay the loan of the defaulting borrower.

Hazard insurance: form of insurance in which the insurance company protects the insured from specified losses, such as fire or windstorm.

Lien: a legal claim against property that must be resolved before the property is sold.

Loan-to-value (LTV) ratio: a percentage calculated by dividing the amount borrowed by the sales price or appraised value of the home to be purchased.

Lock-in: guarantees a specific interest rate if the loan is closed within a specific time.

Market value: the highest price that a buyer would pay and the lowest price a seller would accept on a property.

Mortgage insurance: a policy that protects lenders against some or most of the losses that can occur when a borrower defaults on a mortgage loan; usually required with a down payment of less than 20%.

Mortgage modification: an option that allows a borrower to refinance and/or extend the term of the mortgage loan thus reduce the monthly payments.

Origination fee: fee charged by a lender to prepare loan documents, make credit checks, inspect and sometimes appraise a property; usually a percentage of the loan’s amount.

Points: prepaid interest charged at closing by the lender. Each point equals 1 percent of the loan (e.g., 2 points on a $100,000 mortgage would be $2,000).

Prepayment: permits the borrower to make payments in advance of their due date, thus saving money on interest.

Prepayment penalty: charges for the early repayment of debt.

Principal: the borrowed amount, less interest or additional fees.

Private mortgage insurance (PMI): insurance paid by the borrower. This may be required by the lender when the down payment is less than 20%.

Realtor: a real estate agent or broker affiliated with the National Association of Realtors and its local and state associations.

Recording fees: money paid to the lender for recording a home sale with the local authorities, thereby making it part of public records.

Refinancing: paying off one loan by obtaining another; refinancing is generally done to secure better loan terms (like a lower interest rate).

RESPA: Real Estate Settlement Procedures Act allows consumers to review information on known or estimated settlement cost once after application and once prior to or at a closing. The law requires lenders to furnish the information after application only.

Second mortgage: a mortgage made subsequent to another mortgage and subordinate to the first mortgage.

Survey: a measurement of land, prepared by a registered land surveyor, showing the location of the land with reference to known points, its dimensions, and the location and dimensions of any buildings.

Title: a document that gives evidence of an individual’s ownership of land.

Title insurance: a policy, usually issued by a title insurance company, which insures a home buyer against errors in the title search. The cost of the policy is usually a function of the value of the property, and is often bome by the purchaser and/or seller.

Title search: a check of public records to be sure that the seller is the recognized owner of the real estate and that there are no unsettled liens or other claims against the property.

Truth-in-lending: a federal law requiring disclosure of the annual percentage rate charged to home buyers shortly after they apply for the loan.

VA loan: a long-term, low- or no-down payment loan to veterans guaranteed by the Department of Veterans Affairs.

Verification of employment (VOE): a document signed by the borrower’s employer verifying his/her position and salary.

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Real Estate Professional Roles

List of Real Estate Roles

Mortgage Specialist

This finance professional prequalifies you for the mortgage. He/she reviews your income and ability to afford a home, credit history, and the subject property to insure the loan meets current guidelines. He/she can discuss the financial advantages of home ownership vs renting. May be helpful in helping you create a budget, discuss down payment options, reviewing mortgage guidelines and programs if you ask. Be sure to check for an NMLS certification indicating that the individual has been reviewed by the State of MN for licensing.

Title Agent

Insures ownership of the property is legally transferred and without defect. This person reviews any liens that may be on the property, delivers documents to the county to record ownership and the mortgage (if applicable) and administers the closing of the purchase and mortgage.

Realtor

A Realtor helps you in locating and negotiating the purchase of your new home. He/she is essential in not only locating the right home for you, but creating strategies in the offer process, getting the most for your money, and coordinating the transaction on your behalf. It is important to work with a Realtor that comes with a recommendation and is reputable.

Property Insurance Agent

The Insurance Agent provides protection of your home and belongings for your family. The Agent will review the property appraisal, discuss with you the personal belongings that need to be insured and comprise a policy that covers you where you need it. A great Agent will review the entire policy with you, let you know what is not covered and will provide options for additional insurance. Property insurance is not only required when you have a mortgage, but is essential for the security of your home and your financial stability.

Appraiser

A property appraiser determines the value of the property for lending purposes and helps to insure that you are paying a fair price. The appraised value represents the local market by reviewing similar properties that have sold recently. The appraisal process today is an anonymous one, meaning the appraiser is independent and has no influence from the Realtor or Mortgage Specialist, insuring that you are getting a truly independent estimate of market value.

Inspector

It is a great idea to have the home inspected within the allowed time on the purchase agreement, typically 10 days from the date on the agreement. An inspection determines the condition of the plumbing, heating, cooling and electrical systems and the structural integrity of the property. They are licensed and trained to look for defects and point them out to you, the buyer, to insure that the property you are buying is of good condition.

County Assessor

Bloomington is in Hennepin County, who is responsible for administering property taxes. In order to reduce the tax on your home, you will need to homestead your property with the Assessor. You can do this, along with access other valuable services, at the Bloomington Assessors Office at 1800 W. Old Shakopee Road.