Deadline for Cheapest FHA Loans is Here!
Heads up! May 24 is the deadline for applying the cheapest FHA loan. An FHA loan is commonly called a First-Time Home Buyer’s loan, because the down payment requirement is only 3.5% of the purchase price. You do not have to be a first time home buyer to qualify for the loan, but you do need to live in the house as your primary residence for at least one year. This is not a loan for investors. The loan is backed by the Federal Housing Administration, and you may obtain the loan through any bank or mortgage lender that is licensed with the FHA. (Most lenders are.)
The reason I am calling May 24 the deadline for applying is because the private mortgage insurance fee increases on June 3rd. In order to make the June 3rd deadline, your loan file must have an FHA case number by that date. Because it can take a few days to get the case number, your loan officer needs to receive your application, along with all required financial documents by about May 24.
What is the FHA Price Increase?
FHA 30-year fixed rate loans with a down payment of less than 10% down will have the monthly mortgage insurance fee for the life of the loan–regardless of equity.
Loans with 10% or more down will have the fee for 11 years.
Previously, the MI fee could be cancelled after 5 years if you had at least 22% equity.
The mortgage insurance fee protects the lender in case you default on the loan. The insurance is for the lender, but the borrower pays for it. FHA is increasing the time the fee must be paid in order to protect their investment reserves. Currently, FHA has about $4 billion in reserves.
The only way to get out of the monthly MI fee early would be to pay off the loan by refinancing into a conventional loan.
If you can get your purchase contract signed this week, it would be in your best financial interest. I suggest that you speak with your real estate agent and loan officer about this looming deadline.
New Mortgage Rule Could Hurt Homebuyers
Fannie Mae and Freddie Mac, the two government-sponsored mortgage enterprises, will stop providing money for the following types of loans, beginning January 10, 2014:
1) 40-year mortgages
2) Interest-only payment mortgages
3) Pick-a-Payment” negative amortization loans
4) Any loan with more than 3% in fees and points (total)
I’ll be the first to say, “Good riddance!” to the first three, but let’s look at limiting fees and points to 3%, no exceptions.
Previously, the law limited total fees and points at 7% –unless the borrower signed a waiver form three days before signing the loan documents. That little loophole–the waiver form–enabled lenders to reap a high profit on small loans. Now the pendulum is swinging in the opposite direction.
In states where home prices are high, most loans don’t have an excess of 3% in points and fees anyway, so the new law won’t make a difference.
On a $400,000 loan, 3% = $12,000. That is more than they need to make. (Although some disagree and do charge that much.)
But in states where you can get a decent house for only $50,000, this fee cap could cause a major problem. If total fees cannot exceed $1,500 and the title company charges half that, then $750 does not leave enough profit for the lender to pay the loan officer, loan processor, underwriter, doc draw person, and funder–let alone pay the rent, utilities and management.
Will this cause mortgage lenders put a lower limit on the loan size they’re willing to accept? Already, some limit their loan size to $100,000 or similar. What will happen when the new law cuts down profitability even more?
Homebuyers who want to purchase real estate in the low price range might find themselves hard pressed to locate a lender. They would then have to search for a lender that does not use Fannie Mae or Freddie Mac money. In other words, search for the two or three out of a hundred that have other sources for funds.
On the other hand, this could present an opportunity for more investors to provide private money for small real estate transactions. Private lenders are not subject to rules imposed by the FHFA committee.
Will Zero Balances Hurt Your Credit Score?
Kenya sent me a good question, one that is important for everyone to understand.
Q: “Can keeping my credit cards at a zero balance hurt my score? My score seems to fluctuate with no real changes to my profile.”
A: There are several elements that go into answering your question, Kenya.
First, it does not hurt your credit score to pay off your balance in full every month. It would be unfair to force people to carry a balance from month-to-month and waste money on interest in order to get the best score. The proper use of credit is paying off the balance every month.
However, if you do not use a credit card for more than six months, you will not receive any points for that card. So technically, not using a card doesn’t give a negative hit to your score like a late payment does, but you won’t receive a reward for using that card either. Therefore, for max. credit points, you want to use the card every once in a while. Buying something you’d buy anyway–such as toothpaste and a tank of gas–is sufficient. Having a small balance-to-limit ratio is best for maximum points.
The most common reason for seeing a fluctuation in scores for no apparent reason is using a credit monitoring service. This is because those services are not using the actual scoring algorithm used by the credit bureaus for mortgage lenders. While those scores might be somewhat helpful, they are not to be relied on. In the mortgage business, we don’t consider them to be your real scores.
I doubt that you are having your credit report pulled by a mortgage company every few months; and if you were, I would tell you to stop doing that as it is harmful to your credit.
The bottom line is that you should take those scores with a grain of salt. When your mortgage lender pulls your credit report, your actual scores will be different anyway.
For people who need to restore or repair their credit, take a look here. The information is as relevant today as it was in 2010.
Where Does the Lender Credit Come From?
On your mortgage estimate, you might see a credit for several thousand dollars to be used toward closing costs. I’ve been asked, “Is this legit? Is this real? Where does that money come from?”
To answer, when a lender gives you an interest rate higher than par rate, there is an extra profit, or extra cash that can be given to you as a credit. Par rate is the base rate that does not yield extra profit to the lender nor require money (charged in percentage points) to buy it down. Par rate changes daily.
A perfect example is a set of two mortgage estimates I reviewed yesterday for one of my coaching clients. The lender had given him these choices for a 30-year fixed rate, 10 percent down payment, top tier credit:
Choice #1
3.375% with a cost of 0.4 percentage points. For his loan amount of $405,000, that was a cost of $1,701.
Choice #2
3.75% with a lender credit of $8,059. That would give him over eight grand to pay his closing costs. The lender had that much money to give, because 3.75% was over the par rate of 3.4% (on that day).
Which is Better?
The difference between these two loan offers is $9,760. (A cost of $1,701 versus a credit of $8,059.) Talk about going from one extreme to another!
First, I do not recommend paying $1,701 to get an interest rate one eighth of one percent (0.125%) lower than par rate. For his loan amount, it would take five years just to break even on that cost. That is BAD! He could use his money more wisely than paying down the rate. Also, he happened to be tight on money for closing costs after he made is 10 percent down payment, so why would he spend so much extra to buy down his rate? It makes no sense. I had to wonder why the loan officer even presented such a bad option.
I recommended asking for 3.5% with zero cost. This is because 3.5% is the closest rate to par rate for the day (yesterday). Depending on the day he locks in, there may or may not be a small credit, depending on exact par rate.
However, if he found that his dream house — the one he and his wife fell totally in love with and absolutely had to have — took all of his cash for the down payment, leaving him without enough left for closing costs, then taking the higher interest rate (and higher monthly payment) so that he’d get the big lender credit to cover closing costs was a viable option.
Personally, I would rather see him take 3.5% par rate on a more affordable house with a lower monthly payment.
But for a person with a low debt ratio and high income, the higher interest rate is not a turn-off, and the lender credit is an advantage one might choose to take.
By the way, if you read Mortgage Rip-Offs and Money Savers, you know this lender credit is the Yield Spread Premium (YSP). Per new lending laws, if a lender is charging an origination fee (including processing fee, underwriting fee, administration fee, application fee), then any YSP they receive must be given to the borrower as a credit. However, if the lender is a bank or a direct lender using their own money to fund the loan, they do not have to reveal or credit you any extra profit they make. And don’t bother asking, because they will never tell you what their overage/profit is. Most will deny it altogether, because as a bank or direct lender, they don’t call it YSP; they call it SRP (Service Release Premium).
If you have any questions about lender credit, please feel free to ask. And once again, thank you for stopping by to read my blog.
Should Your Realtor Choose Your Lender?
I’d love to hear feedback from both real estate agents and home buyers on this newly released statistic.
According to a study by Campbell Surveys and Inside Mortgage Finance, real estate agents controlled or influenced 45% of homebuyers’ choice of lender.* Is this a good or bad thing? Let’s look at both sides, and then you can draw your own conclusion.
In Favor of Using Your Realtor’s Preferred Lender
A Realtor’s #1 concern is that the transaction gets closed–and on time. There’s nothing worse than having the lender mess up the process so a lose/lose/lose situation is created. If a bank has inept, inefficient, or crazy processing and underwriting so that your loan doesn’t close on time, it can create havoc with your moving schedule and purchase contract. The seller might not agree to extend your contract if there is a higher back-up offer. You could lose out on the house of your dreams; or if the seller agrees to an extension, your moving schedule gets messed up. The real estate agent doesn’t get paid on time, or perhaps not at all if the deal is lost.
Who then could blame a Realtor for recommending a lender he or she knows is efficient and has a history of closing on time?
Against Using Your Realtor’s Preferred Lender
Do you care if you pay hundreds–or perhaps a couple thousand–dollars more for your loan? Do you care if you get the lowest interest rate and lowest monthly payment? Do you care if you pay a boatload of junk fees, thereby perpetuating the problem of lenders taking advantage of unsuspecting and uneducated borrowers?
Just because the subprime era is over, it doesn’t mean there aren’t plenty of rip-offs and over-charges going on, because there are!
Yesterday, I heard from a homebuyer who said he got his mortgage broker to delete $1,558 in stupid junk fees, because he was aware and knew better, thanks to reading Mortgage Rip-Offs and Money Savers. Now he has that much more cash in his wallet he can spend on something new for his house.
Ultimately, It Is On YOU
No one cares about your loan more than YOU. It is your right and your responsibility to know what is fair, what is an over-charge, and what is easily negotiated. It is up to you who you choose to give your business to, so you need to make an informed and responsible decision.
Maybe your real estate agent’s preferred lender is a great choice. On the other hand, maybe it is an expensive choice. Get a load of this…
In a large training session for multiple lenders, the so-called mortgage guru told the packed-out audience: “Try to get referrals, because you can charge them more. When a friend or agent refers a borrower to you, they don’t shop and they don’t look at price.”
Having worked in both retail and wholesale lending, having been behind closed doors in sales, underwriting, doc draw, rate lock, and all the rest, I can tell you there are both Mortgage Stars and Loan Sharks out there. It’s a situation of Homebuyers Beware. Choose with your eyes wide open.
As always, I welcome your opinion–whether or not you agree with me. And thank you for stopping by.
* Source: Housing Wire
Legitimate Ad or Marketing Ploy?
I was listening to my radio when on came yet another ad by a local mortgage company. Maybe you’ve heard a similar ad and wondered if it was a great company to get a loan from. Or maybe you’re a real estate agent and wondered if this company could get your buyers good financing.
In this ad, the owner of the mortgage company was telling listeners about his fantastic, historically low interest rates and APRs (Annual Percentage Rates). Fine, no problem. But then he capped off the ad by saying, “With us, you never pay an upfront fee!” Like it some kind of unique, special deal: no up front fee.
THE TRUTH: Federal banking law forbids any mortgage lender–including banks, direct lenders, credit unions, or brokers–from collecting any money up front, unless you want them to pull your credit report; and in that case, they can ask for payment for the credit report only (which is normally less than $30).
It is illegal to ask you to pay a few hundred dollars, for any amount whatsoever, for an application fee, processing fee, acceptance fee, or any other type of fee. Other than paying for the credit report, a lender must not ask for any money without first providing you with a Good Faith Estimate.
If you already know your credit score or know that you have excellent credit with at least three accounts on record, then there is no need to have your credit report pulled before you are ready to commit to that lender. If you are shopping for a good loan, do not disclose your social security number or let the loan officer pull your credit.
Ask the loan officer for a Cost Estimate or a Fees Worksheet. It doesn’t matter what they call it, the up front estimate does not require a credit report pull. Before 2010, it was the Good Faith Estimate that was given up front; now it is the Cost Estimate. It’s the same thing, different title at the top of the page. Due to (insipid) federal regulations, lenders were forced to change the title of the upfront estimate. You have the right to receive this without cost, obligation, or credit pull.
The radio ad I heard, the one bragging about “we have no upfront fee” was on Christian radio. So listener beware: just because an ad is on your favorite station, it doesn’t make it 100 percent honest. No upfront fee is the law. Touting it as unique to your company is a marketing ploy. So if you don’t like shady ploys, ignore those ads.
“Is My Mortgage Broker Ripping Me Off?”
A home buyer gets a new Good Faith Estimate right before closing that is almost $5,000 more expensive than the original GFE. He wants to know if this is legal, or if he’s getting ripped off. Here is his question with my answer.
Q: We are purchasing a new home. The builder gives us incentive to use their mortgage broker and lender. The broker gave us a good faith estimate before the start of building. This GFE said we would receive credit of about $2,000 to offset the $6,000 origination fee. Four months later, as the home nears completion, we locked in on a rate. For some reason, the broker then sends a new GFE. Pretty much the same as the old GFE, except the new GFE says we would only receive about $180 to offset the $6,000 origination fee. Is this legal? Thank you.
A: In my opinion, you are getting ripped-off. However, what your loan officer is doing is 100 percent legal. So yes, he can do that. I’ll explain why, and what you should do about this now.
The so-called credit is actually the YSP (Yield Spread Premium) the lender makes by selling your loan to the wholesale lender. Your loan officer is giving you the YSP as a credit to help pay for their (exorbitant) fees. The YSP is directly tied to the interest rate. When the interest rate goes down, there is a bigger YSP to credit to you. When the interest rate goes up, there is less YSP money to credit to you.
According to the two GFEs you received from your broker, the interest rate when up significantly in the past four months, and that’s why the credit decreased. But there’s something very wrong here.
First, why hasn’t your loan officer been keeping in touch with you about interest rates as your loan progresses? You don’t suddenly get a $2,000 surprise at the last minute! (Not with a good loan officer.)
Second, why didn’t your loan officer give you a choice between rate and credit? No one in their right mind locks in a rate with a net $5,000 fee. Surely, you did not approve that lock-in!?
The reason your loan officer sent you a new GFE is because the pricing changed so drastically, making it a legal requirement to give you a new GFE disclosure. But that GFE should not have been a surprise. There should have been a discussion and approval by you ahead of time. If not, then this loan officer is one of the types I warn people to avoid in my books.
I can tell you this: No one — and I mean NO ONE that is ethical or reasonable — is selling loans with a $5,000+ origination fee nowadays. And that is what this loan officer is trying to sell you now. That is a rip-off. It is not in your best interest to pay that kind of origination fee. A competitive origination fee would be in the $600 to $900 range, depending on your location.
You are in the driver’s seat here. You do not have to stand for this bait-and-switch, over-charge. You have options, and it is not too late.
First, you should tell your loan officer that you will not be paying more than $900 in total origination fees. You would like to know if he’d prefer to give you a new rate lock and GFE, or if he’d prefer to lose your business altogether, because you will move on to another lender if you don’t receive an acceptable GFE within the next 24 hours.
There are so many different good, ethical, honest lenders you could go with. There is no reason to pay an extra five grand. There are lenders that can close a purchase loan on a rush basis in three weeks, so you still have time if you act now.
What’s more, when you allow yourself to be ripped-off, you send a message to this loan officer that his tactics work and that he should keep on doing this to other home buyers. Only when we choose to stop accepting high priced loans will the high priced lenders either lower their prices or go out of business.
In your case, it appears that you are not receiving any kind of special deal by going to the builder’s pet broker. You are paying for it with that ridiculously high $5,000 origination fee. That is one of the common rip-offs I expose in my mortgage books.
By reading Homebuyers Beware or Mortgage Rip-Offs and Money Savers, you will know how to properly shop for a good, ethical loan officer. You will understand par rate and YSP. You will understand why to ask right up front, “What is par rate?” and “How long is the rate lock you quoted me?” You will communicate to the loan officer by how you speak that you are a savvy borrower who will not be scammed or ripped-off.
I got sick and tired of the lies, junk fees, over-charges, and rip-offs. And that is why I decided to stand up for the American home buyer by writing Mortgage Rip-Offs and Money Savers. Thanks to the American public, it has become the top mortgage book on Amazon — and that means a lot of good folks have become money savers.
Best wishes to you.
Home Buyers: FHA Mortgage Loan Rules Change Today
This is no April Fool’s Joke: The price of getting an FHA loan — commonly called a first-time home buyer’s loan — has gone up today.
FHA (Federal Housing Administration) is a government sponsored enterprise that provides money to banks and mortgage lenders. This price increase comes from FHA; therefore, it doesn’t matter which lender you choose, the price increase is now set by federal banking law.
Change #1: Begins April 1, 2013
For all FHA loans with a down payment less than 5% down, the monthly mortgage insurance fee (MI) has increased. Fortunately, it is a small increase of 0.1%. Previously, the monthly MI was calculated at 1.25% of your principal and interest payment. Now it is 1.35%.
This small increase to all home buyers will add up to a lot more profit for FHA, who has been struggling since the mortgage meltdown to be profitable.
Most home buyers taking an FHA loan are putting down 3.5%. That is the #1 attraction to the FHA loan. If you have 5% to put down, you’re going to want to take the conventional loan instead. The only reason a person with 5% to put down would take the FHA loan rather than the conventional loan is if their credit could not qualify for conventional. FHA is more generous with credit requirements.
If your FHA loan hasn’t closed yet, but your loan officer got the FHA case number prior to today, April 1st, then your MI will be at the lower rate of 1.25%.
Change #2: Begins June 3, 2013
This is the biggest and worst change. For a 30-year fixed rate with less than 10% down, FHA will collect the monthly MI payment for the life of the loan.
This means you do not get to cancel the MI fee when you have 22% equity. You could have 90% equity and you will still be paying that pesky MI fee that protects the lender in case you default on the loan.
Setting You Up to Refinance
If you take an FHA loan, it’s like you’re being set up to refinance when you have sufficient equity (and credit) to get into a conventional loan. The problem with refinancing is that there is a cost to getting a new loan and you have to start all over again at the 30-year mark (unless you take a shorter term loan).
If the FHA loan is the only one you can qualify for, then it’s better than missing out on becoming a home owner and acquiring more personal wealth through real estate ownership. However, since you will probably want to refinance or sell in the not-so-distant future, your focus needs to be on paying the lowest lender fees possible.
There are still a lot of needless junk fees being charged today. This is one reason I offer my Cost Estimate/Good Faith Estimate review and consultation service. Just last week, I saved a home buyer $751 in lender fees through this service. So please, do your proper shop-and-compare before committing to any certain lender. And then, if you are buying with the FHA loan, you can be confident you know the rules and are getting the best deal you possibly can.
Short Sales Still a Long Haul to Close
For home buyers who are waiting to hear back on an offer to buy a short sale property, it’s been a lot like waiting for a personal letter from Santa. Many folks lose faith long before it happens. I know buyers who made offers on more than 20 homes and still were not home owners. That’s a lot of time and effort, for both them and their real estate agents. Now Freddie Mac (the Federal Home Loan Mortgage Corp, a government sponsored enterprise) aims to improve this situation by shortening the time.
The company that handles the current home owner’s loan (the servicer) now has 30 days to make a decision on your offer — if they have the authority to do so. However, if a different bank actually holds the loan note so that the servicer is required to pass it along, they have 60 days to respond.
Yes, waiting two months is better than waiting six to twelve months, as happened so often last year, but it’s still a long time to put your life on hold while you wait in suspense. By contrast, a private party selling a home will typically respond to your offer within one to three days.
Servicers are required to acknowledge receipt of your offer within three days, so at least you know your offer didn’t fall into a black hole or get eaten by a dog.
If the servicer ends up needing more time than 30 days to review your offer, they must provide you with a weekly status update.
Why should it take a month or more to decide whether or not they’re willing to sell for the price and terms of your offer? One scenario is when they want to wait to see what other offers might come in. Another scenario is that it takes a committee of bankers to approve a short sale; and frankly, getting that one property off their books is not a priority for them.
If your dream home is a short sale situation and you don’t mind waiting a month or more with the understanding that your offer might not be accepted, then proceed with patience. But if you don’t have the time or emotional endurance for a long haul to close, then speak with your Realtor about limiting the homes you preview to ones that are owned by private parties.
Higher Rate, More Fees For “Service”?
Would you pay a higher interest or more lender fees if you thought you would receive better service during your loan process?
That is the question home buyers were asked in a survey by Carlisle & Gallagher Consulting. People in the 18 to 35 age group said yes, they would pay more for better service.
The two areas of most frustration were (1) slow loan processing, and (2) lack of communication for what was going on with the loan.
As a mortgage industry insider, here is what I’d like home buyers to know.
First, you do not have to pay more for better service. In fact, paying more will not buy you faster processing and more communication. To get better service, you need to choose a better lender.
Second, you will not find out who will give you the best service by asking the question, “Will you give me good service?” Or, “What is your service like?” All salespeople — including loan officers — are going to tell you what you want to hear. Promises of “great service” mean nothing.
Instead, ask specific questions and then listen to your gut instinct. For example, ask, “What is a realistic closing time?” If the answer is more than 30 days, you know this is a lender with slower service than others. If the answer is, “We do 60-day rate locks,” you know this is a lender with slow service who is trying to tell you slow service does not matter.
Another question you can ask: “What is your system for keeping me updated during the loan process?” The loan officer should give you a clear, specific answer and not dance around the subject. Pay attention to your gut instict.
Another good question: “Will you personally be handling my loan all the way through the process to closing, or do you hand it off to another team member?” If the loan officer tells you the loan is handed off, you know that no one individual is going to care about your overall service, because each team member is responsible for only a small segment. No one individual is responsible for making sure you’re happy. When a loan officer handles the loan from start to finish, that person has a greater incentive to provide timely communication and good service.
Personally, I would never work with an “assembly line” type of lender. Nor would I recommend one.
I am a fan of mid-size and small lenders — both banks and mortgage brokers. I find that on average they close loans faster. But to be fair, it’s not the lending institution but the individual loan officer that makes the most difference. There are also top-service loan officers at large banks, and loan officers who are lazy about service at smaller companies.
A great loan officer — the type I like to call Mortgage Stars in my books — will not charge more for providing the excellent service and communication you should receive.
As always, thank you for stopping by to read my blog. I welcome your opinion, and you’ll find the Comment link at the top of this post.
