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

 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. 

This particular gift was about two years in the making. Renae knew she wanted a home, but like many other people taking those first steps, saving for a down payment was going to be quite a challenge. Daycare for her then two-year-old daughter Kimberly and other life expenses seemed to make homeownership a very distant fantasy, a dream, but hope came through a telephone call. “A friend from Maryland told me about a program called NACA. She’d attended an orientation and called to tell me about it.” 

NACA, which stands for Neighborhood Assistance Corporation of America, is a nonprofit organization whose mission is to set a new national standard for providing loans to low- and moderate-income people and those who are considered to be sub-prime borrowers. NACA provides prime loans to borrowers who might otherwise be subject to predatorily high rates and fees for the opportunity to own a home. New homebuyers receive the lowest rate (as of this writing it is 5.5%), with no down payment, no closing costs, no fees, and no need for “perfect” credit.

At first glance the program may sound too good to be true. Renae remembers, “I was skeptical. I didn’t think it was a legitimate program. I called Fannie Mae, who looked into it for me. The folks from Fannie Mae told me that it was legitimate and a good program to participate in.” 

NACA CEO Bruce Marks had seen his share of potential home buyer heartaches. As a union activist for the Hotel Workers Union in Boston, Marks helped negotiate the first housing trust fund, which allowed union workers to use part of their wages to save for a home. He didn’t stop there. He also spearheaded an evaluation to expose predatory lending and its devastating impact on local neighborhoods. Through a two-and-a-half-year research report that focused on then Boston-based Fleet Bank, Marks was instrumental in negotiating an eight–billion-dollar reinvestment program for low- and moderate-income people. Marks calls his NACA program “the best mortgage product in America.”

What does Renae now think of the program? “I love it! They helped me to get repairs done to my new home before I bought it. I was also able to save enough to cover move-in expenses and not end up broke because of it.”

NACA, however, is not a “free ride” to home ownership. “I had to start a savings plan that I could afford and saved that amount of money each month. I was held accountable by NACA, so that I could be able to own my own home. I had to save enough to cover the cost of inspection, one month’s worth of mortgage, three months of property taxes, and one year of homeowner’s insurance. It wasn’t hard to save, because they helped me create a monthly budget.” 

Monthly budgets can show a new buyer where spending “leaks” may be, and NACA facilitators like Chris Lee in Springfield, Massachusetts, helps applicants fill in those gaps so they can save more than they thought.

Remae recalls, “The toughest part might have been house hunting. At times it was discouraging, because the housing prices in this region at the time were higher than I could afford.”

When asked what day she finally got the keys to her new home, Renae exclaims, “July twenty-fifth. The first thing I did was go back to the house, order some pizza, and invite my family and friends for dinner.”
For Renae, owning a home is the beginning, and not the end, of her homeownership journey. The biggest differences she says are the yard work and “writing the check for my mortgage.”

Renae is still active with NACA and its mission. “I speak to new home buyers at NACA orientation classes to encourage people to participate in the program.”