During the real estate boom between 2003-2006 property values were increasing in staggering percentages. Borrowers were purchasing or refinancing with virtually no income documentation and/or credit history that was tarnished. Delinquent accounts charged off or in collections were not required to be paid off. A borrower could be one day out of bankruptcy and still get mortgage financing. Borrowers did not have to document where their down payment money came from. In some cases, specifically a No Doc loan, the borrower did not even have to disclose if they were employed! The phrase “anyone can get a mortgage” seemed true, with the downside to these type of mortgage programs being adjustable rate loans with higher interest rates. The thought process was ‘who care’s about that when the only criteria seemed to be that borrowers had at least a 500 credit score, and were alive and breathing’. The dollar amount of mortgages originations hit record highs and credit was flowing fast.

Then the bubble burst. Borrower’s adjustable rates started to reset, sometimes, increasing the interest rate by 5%. Property values started declining leaving borrowers with no equity in their property. In some cases, borrowers who financed 100% of the sales price, now may owe more than what the property is worth. Almost immediately investors stopped buying the exotic mortgage programs leaving borrowers frustrated that they couldn’t refinance their existing mortgage because they were unable to meet the changing underwriting requirements.

So here we are in 2009 after the mortgage meltdown. Mortgage financing is available. Even though what you hear in TV or the internet headlines may suggest otherwise. Rates are still relatively low. Home prices are becoming affordable. A casualty of the meltdown is there are less programs today versus hundreds of first time home buyer programs available two years ago. Conventional, FHA, and VA financing being the most popular choices, and are all backed by the US Government.

The underwriting requirements today are different than what they were 2-3 years ago. Below are a few noted changes:

• Borrower’s now have to show a satisfactory credit history that they pay their debts on time, normally a 2 year current history.
• Many lenders require a minimum credit score of 620
• Borrower’s have to show evidence of income by supplying W2’s, tax returns and pay stubs.
• Lenders are verifying these figures directly with the IRS. Ratio requirements, the ratio between a borrower’s income against their total monthly payments, usually can’t exceed the range of 41-45%. The remaining 55-59% leaves room for borrowers to afford groceries, gas, hair cuts, utilities, etc.
• Borrower’s have to provide evidence of assets for down payment and closing costs.
• The FHA down payment requirement is just 3.5% of the sales price of which can come from a gift from a family member.
• The Federal Housing Finance Agency (FHFA), who controls Fannie Mae and Freddie Mac under the current conservatorship, has implemented the Home Valuation Code of Conduct.
• This revision requires Lenders to change the process in selecting appraisers in an attempt to mitigate any type of influenced appraised values. In other words, this will ensure the current value of the home is not artificially inflated but truly worth the value based on other sales.

“Mortgage Ready” means all of the above. You may be “Mortgage Ready” and not know it. Contact a mortgage professional to discuss your financial situation. Mortgage professionals will help you determine how much you can borrower based on your income. They will order a credit report. And if your credit history is tarnished at the current time, a mortgage professional can give you steps on how to clean up your credit to become “Mortgage Ready”.

Even though some of the more exotic mortgage programs aren’t available anymore, buyers can now be more confident that the home they purchase will be affordable for them in the long term. No surprises.

By Kimberly Neilson, Executive Vice President, McCue Mortgage Company

The immediate appeal of these long-term mortgages is obvious; a longer period of time to pay a loan means that the monthly payments will be lower. However, 40- and 50-year loans don’t reduce monthly payments all that much when compared with traditional 30-year fixed loans. While some will jump at any opportunity to lower their monthly expenses, it is important to know what you will be risking if you decide on an extra long-term loan. 40- and 50-year mortgages come with higher interest rates and build equity much more slowly than traditional loans. Consider this: If you assume a mortgage for $300,000 and you decide on a 30-year loan, you will end up paying $398,334 in interest compared to a 40-year loan which will cost you $591,725 in interest.

If you find your dream home that you plan to live in for the duration of the loan, it makes sense to choose a shorter-term loan so you don’t pay more interest than necessary to pay for your home; on the other hand, if you plan on moving or refinancing in the near future, you may consider these long-term loans. Essentially, 40- and 50-year loans are short-term solutions that are best for people who need the slightly lower monthly payments because they’re temporarily strapped for cash, and who do not intend to hold on to their mortgage until the end of the term. By no means is this a good choice for the majority of borrowers who plan on staying in their homes for a long time and who hope to create wealth by building equity.

The basic rule of thumb to follow when you borrow money is to get the lowest interest rate and the shortest term you can afford. Borrowers need to understand the true costs of various mortgages as they pursue the lowest-possible monthly payments while trying to qualify for increasingly expensive homes. If you find yourself in this particular situation here is what you should do:

1) Consider your goals. For most people, homeownership is a way to build wealth. If real estate appreciation slows, the market won’t be building wealth for you and you’ll need to do it yourself by paying down equity.

2) Match the mortgage to your time frame. You can protect yourself from soaring interest rates by making sure your rate is fixed at least for as long as you plan to remain in your home.

3) Settle for less house. Stretching yourself too thin to buy a house is a recipe for disaster. Even if no major systems break down, the routine costs of maintenance and repair can swamp someone who is unprepared. Also, house payments that are too high for the homeowner to comfortably afford can result in deferring other important goals such as saving for retirement. Do yourself and your finances a favor by making sure you pick a house you can truly afford.

Do plenty of research to find the mortgage that’s right for you. To see how much interest you will pay and how much equity you will build with a certain loan, check out www.bankrate.com and plug in your numbers.

SGI Solutions, LLC is a private real estate investing company based out of Hartford. To learn more about SGI call 860-524-9338 or visit their website at www.sgi-solutions.net.

Titles

To understand what a lien or encumbrance is, you must first understand the basics of a title search.  All property ownership records are recorded at the Town Clerk Offices throughout the state of Connecticut.  Each town is responsible for keeping its own records, and a search of a title can only be conducted in the town in which the property is situated.  The title search is necessary to (a) identify the owner of the property, so you can obtain a deed from the proper owner; (b) determine that there are no title defects in the chain of title, so the owner can properly convey title to the buyer; and (c) determine what liens and encumbrances are attached to the title.

It is the job of the title searcher and your attorney to make sure that the proper owner conveys title to you and that there are no title defects.  The topic of title defects will be saved for another article, but you should expect that your attorney would not close on your purchase if there is a title defect.  Simply stated, there must be a continuous chain of ownership of the title and the owner conveying title to the buyer must be able to sign a warranty deed that guarantees that the owner has absolute title to the property and can convey it to the buyer.

Proper Encumbrances:

An encumbrance is any instrument that shows up on the title search as validly attaching to the status of the title to the property.  Some encumbrances are necessary for the development of your property and will always remain on the title to your property. The most common of these encumbrances would be easements and restrictions.   

An easement is a right that a former property owner of the property granted to another party for the purpose stated within the easement.  A most common easement would be granted to the electric utility company so that electric wires could run over the property to service the needs of the property.  Similar utility easements may be granted for water, sewer, or other needs.  Certain utility easements may be granted solely for your property, while others may service a community.  In any event, these easements are necessary for your property and are very common.  Rarely, but it does happen, an easement adversely affects a homeowner because the location of the easement may not allow certain improvements to your property by virtue of such easement’s location.  Most often I have seen this arise when a homeowner wishes to place a swimming pool in the back yard and finds that an easement location prohibits the pool to be placed at that specific location.  Again, these are rare instances but something that you should think about.

Another common encumbrance may be a restriction placed upon a specific community.  Whether you are purchasing a common-interest community or a home, rules, regulations, or restrictions may attach to your property.  Carefully read these restrictions and make sure they are acceptable to you.  Some restrictions are very general and would not affect your use and enjoyment of the property whatsoever, while other restrictions may be quite specific and exhaustive.  It is not uncommon now to have restrictions in the community that dictate the color you may paint your home; the number, if any, of pets that you may have; or the placement of satellite dishes.  You should become familiar with these restrictions before you are committed to purchase your home.  

Liens:
Now we are left with the topic of liens.  This is actually a very simple issue for the home buyer.  Simply stated, you should be purchasing your home without any liens.

When the title search is conducted, it will invariably show that your home is subject to a lien. The most typical lien of course is the mortgage that is placed upon the property for the homeowner’s purchase.  This mortgage will be paid off at your closing so that the title is free of this lien and then presumably you will be signing your own mortgage document and placing a lien on your home in the form of your mortgage.
       
In addition to a mortgage or mortgages (it is not uncommon for people to have a first mortgage and then a home equity loan), other liens may be found from the title search. Again, these liens must be satisfied at the closing from your purchase proceeds.  Other common liens could be attachments or mechanics liens by third parties wanting to get paid for services performed at the property for which payment was not made pursuant to an agreement between the homeowner and the service provider.  Additionally, the homeowner may have pledged their home as collateral for a business loan.  Again, all these liens must be satisfied and released. 
       
 Finally, there is something called an inchoate lien.  The term “inchoate” really means “begun but not yet finished”.  This is a term commonly used to describe all municipal liens – that is real property taxes, water, sewer and district taxes.  These are liens that have attached to the property but may not show up on the title search as specific recorded liens.  That is, monies are due for these municipal functions and if not timely paid, will attach to the property and will be obligations of the new homeowner even if these charges were due by the previous homeowner.  Therefore, unlike other liens discussed above, these liens do not have to have a specific recorded instrument showing they are due.  It is therefore incumbent upon your attorney to make sure that all of these charges are current at the time of closing.

Last Words:

The subject of liens and encumbrances as they affect title is a very complicated issue.  This article should help you understand what to ask your attorney to make sure that you are getting your home subject to only those encumbrances that are customary.  In short, you should make sure that the property is free of all liens and subject to only those encumbrances which you are aware of and understand how they affect the property you are purchasing.
       
Mike Reiner is an attorney and president of Reiner, Reiner and Bendett PC in Farmington, Connecticut. For more information, contact him at 860-255-5001 or by Email at MReiner@reiner.com.

Homeowners thinking of refinancing should meet with a housing counseling agency that is certified by the US Department of Housing and Urban Development. These agencies provide free services and help homeowners (and potential home buyers) realistically understand their financing assess and repair credit if necessary. The also advise homeowners about refinancing options.

 Housing counseling agencies also combat predatory lending by helping unwary borrowers avoid unreasonably high interest rates and other conditions that can result in loss of equity, increased debt, default, or even foreclosure. Over the past several years, our nation has made tremendous strides in expanding access to capital for previously underserved borrowers. Despite this progress, too many families are suffering today because of a growing number of abusive practices in mortgage lending and financing.

 “We cannot overstate the importance of meeting with a housing counseling agency,” says Julie Fagan, HUD’s Connecticut field office director. “This should be the first stop for anyone thinking of purchasing a home or refinancing an existing home loan.”

To help you understand if refinancing is right for you, here are some helpful tips:

* Meet with a HUD-approved, nonprofit housing counselor. This is a free service. To contact an agency near you, call 800-569-4287. This is an automated line that requests that you enter your ZIP code to get referrals to a local housing counseling agency.

* Evaluate how long you plan to live in your home to determine if refinancing makes financial sense. The total savings in the monthly mortgage may be less than the closing costs to refinance, if you do not stay in your home long.

* Compare terms (interest rate, points, and fees) between at least three reputable lenders.

* Beware of unsolicited mail offers. If an offer sounds too good to be true, it probably is.

* It is rarely a good idea to refinance unsecured debt (credit card debt) into a new first mortgage. You end up paying for those credit card purchases over the next thirty years at a great expense!

* Do not let anyone persuade you to make a false statement on your loan application, such as overstating your income.

* Do not sign any blank documents or a document containing blanks.

* Do not let anyone persuade you to borrow more money than you know you can afford to repay.

* Don’t sign anything you don’t understand. Watch out for high fees, prepayment penalties, or other unfavorable terms. Ask for help from an attorney or a HUD-approved housing counseling agency if there is something you do not fully understand.

* Get everything in writing. Sometimes verbal promises are made by lenders, yet the costs or loans terms presented at the closing are not what you agreed to.

* If you lock in your interest rate, make sure you get written proof. If you choose not to lock in the rate, then the rate is “floating,” and the rate is set just before the closing. During a time of increasing interest rates, not locking in the rate can lead to a higher interest rate and therefore a more expensive loan.

* Find out what protections are available for borrowers who fall behind on their mortgage. HUD/FHA loans have Loss Mitigation programs that allow borrowers to work-out repayments over time with the lender in the event of a mortgage delinquency. In fact, more than 200 families in Connecticut have been able to stay in their homes and avoid foreclosure this year because of the HUD/FHA Loss Mitigation program.

Remember, a good start is to first meet with a HUD-certified housing counseling agency. To find the nearest agency, call 800-569-4287 or visit www.hud.gov.

 During the emotional excitement of buying a home, you may encounter terms with which you are unfamiliar. For some people, it can be a bit embarrassing to ask what they consider too many questions. Others may make a note of their questions but forget to revisit them. To ensure that you have complete confidence during your home loan process, invest a moment to read this information and become familiar with the concepts and terms you’ll encounter. Knowledge is power, and the more you know, the more successful your decisions will be and the more soundly you will sleep at night having made them. 

1. Adjustable Rate Mortgage (ARM)–Also referred to as a Variable Rate Mortgage–a mortgage in which the interest rate is adjusted periodically based on a pre-selected index. For example, let’s examine a 5/1 ARM at 6.25% with 5/2/5 caps and a margin of 2.75 over the LIBOR index:

 A.     5/1: the “5” means that the interest rate is fixed for five years. The “1” means that the interest rate adjusts one time every year after the first five years. 

B.     6.25% means that the interest rate is fixed at 6.25% during the first five years. This is called the initial start rate. 

C.     5/2/5 caps: 

1)      The first number“5”–means that the interest rate can adjust up to 5% over the initial start rate in the first year after the fixed period ends (year six). If the initial start rate is 6.25%, the interest rate can go up to 11.25% in year six (6.25% initial start rate + 5 = 11.25%). 

2)      The second number –“2” –means that in every year after the first adjustment in year six, the interest rate can adjust up or down up to 2% annually. 

3)      The third number – “5” –means that the interest rate can never go up more than 5% over the initial start rate during the entire life of the mortgage. In this example, the maximum interest rate over the life of the mortgage would be 11.25% (6.25% initial start rate + 5 = 11.25%). 

D.     2.75 margin–In this example, the margin of 2.75 over the LIBOR index    means that after the first five years, the interest rate would be calculated by adding 2.75 to the London Interbank Offered Rate index at the time of the adjustment.  See your certified mortgage planning specialist (CMPS) for more information on various types of ARMS and which index is better for your situation. 

2. Annual Percentage Rate (APR)–An interest rate that reflects the cost of a mortgage as a yearly rate. This rate takes into account any points and fees (closing costs) and is based on the loan going to its full term. APR can often be manipulated by lenders, and it is often inaccurate with ARMs.

3. Appraisal–A written report containing an estimate of property value and the data on which the estimate is based. Appraisals are prepared by a licensed appraiser who is independent of the seller, buyer, lender, and real estate agent. The appraiser inspects the subject property and compares it with other similar properties that have sold in the area to determine the fair market value. The mortgage lender bases the loan-to-value ratio on the appraised value of a property and not its sales price. If you are refinancing a property, an issue called “seasoning” may come into play. This affects which value the lender allows you to use when determining the mortgage balance.

4. Assumption–An agreement between buyer and seller in which the buyer assumes responsibility for the seller’s existing mortgage. This agreement could potentially save the buyer money because closing costs and the current interest rates, which are possibly higher than when the existing mortgage originated, do not apply. In most residential mortgage transactions, loan assumption is not an option because the seller’s existing mortgage normally has a “due on sale” clause that requires the seller to pay off the mortgage if the house is sold or if ownership is transferred. This issue often comes into play with real estate investment strategies.5. Buydown–A method of lowering the buyer’s monthly payment for a short period of time. The lender or homebuilder subsidizes the mortgage by lowering the interest rate for the firs few years of a loan. This strategy can be very effective in today’s market.

6. Closing–Also referred to as settlement. The meeting at the conclusion of a real estate sale in which property and funds are exchanged between the parties involved. 

7. Closing Costs–The total points and fees that are associated with completing a mortgage transaction or a house purchase or sale. Often, a good negotiation strategy for both the buyer and seller is for the seller to pay closing costs on behalf of the buyer.  

8. Debt-to-Income Ratio–The ratio, expressed as a percentage, that results from dividing a borrower’s monthly payment obligation on long-term debts by the borrower’s gross monthly income. 

9. Down Payment–Cash paid by the buyer at closing that makes up the difference between purchase price and the mortgage amount. 

10. Earnest Money–Money a buyer gives to a seller as a deposit to commit the buyer to the future transaction. Earnest money is subtracted from closing costs. 

11. Equity–The value an owner has in real estate over and above the obligation against the property. Equity is fair market value minus the current mortgage and other liens. Real estate equity should be managed just like any other investment.

12. Escrow–Funds given to a third party that holds the funds to cover payments such as tax, insurance, and earnest money deposits. 

13. Fixed Rate Mortgage–A mortgage in which the interest rate remains constant and fixed throughout the life of the loan 

14. Loan-to-Value Ratio–The ratio between the amount of the mortgage loan and the appraised value of the property 

15. Market Value–The price that a property could possibly bring in the marketplace 

16. Origination Fee–A fee charged by a lender for processing a loan application. The fee is usually computed as a percentage of the loan, and some lenders use the term as another name for points. 

17. PITI–Refers to Principal, Interest, Taxes, and Insurance 

18. Points–Prepaid interest charged by the lender. One point is equal to 1% of the loan amount (on a $200,000 mortgage, one point = $2,000). 

19. Private Mortgage Insurance (PMI)–Insurance that protects lenders against loss if a borrower defaults. PMI is required when the loan-to-value ratio is greater than 80%. The PMI payment may not be tax deductible and is usually added to the monthly mortgage payment ; however, there are ways to finance up to 100% of your home’s value and avoid PMI. These strategies include Piggyback Mortgages and Lender Paid Mortgage Insurance. In today’s market, Lender Paid Mortgage Insurance can often be the best strategy.

20. Underwriting–The decision-making process of granting a loan to a potential homebuyer

If you have questions about any of these terms and how they might apply to you or your mortgage, ask a CMPS professional for more details. 

Nikolay and Marina, a Connecticut couple and parents of two, emigrated from the former Soviet Union and came to the United States. Today they are achieving the American dream with a little help from USDA Rural Development. As new citizens, Nikolay and Marina needed assistance navigating their way through the sometimes daunting process of American home buying as well as finding financial aid, to keep their monthly payments within their budget.