In order to do a FHA loan on a condo the condo devlopment must be approved by HUD. In order to search if a specific condo is HUD approved (so that a buyer can obtain a FHA loan) visit this link.
Category: Mortgage Programs
ACCESS loan for 0% down financing.
0% down financing is getting harder and harder to find these days. The most common approach of creating 0% down financing is through the FHA loophole which allows for a seller to contribute the 3% required down payment via a down payment assistance program such as Nehemiah and Ameridream. However, the Federal Government will eliminate this flexibility with the passage of the latest housing bill. As of October 1, 2008 these loans will no longer be available.
Once that is gone what will be next? I may have found the answer with the ACCESS program we offer in conjunction with National Homebuyer Fund. This program will provide a 2nd mortgage for a homebuyer who meets the qualifications up to 100% of the purchase price (the website states 105% but we can’t get mortgage insurance beyond 100%). Here are a few key points of the program:
*The ACCESS 2nd mortgage cannot exceed 8% of the purchase price & cannot exceed 100% combined loan to value. The structure which creates the lowest monthly payment is a 95% primary mortgage and 5% combination mortgage.
*The ACCESS 2nd mortgage is a 20 yr. mortgage with a fixed interest rate which will be 2.00% higher than the rate on the primary mortgage. It has principal and interest payments.
*The ACCESS 2nd mortgage can be used in combination with a variety of 1st mortgage products including 30 year fixed rates with interest-only payments.
*The ACCESS 2nd mortgage carries no prepayment penalty.
*In order to qualify for this program the applicant cannot have income which exceeds 140% of the median household income (In the Portland area the limit would be $86,800).
Give me a call today if you’d like to see is this program will work for you!
Your Guide to Understanding Mortgage Insurance
When a home buyer takes out a new mortgage and has less than 20% down often times they will be required to provide mortgage insurance to the lender (exceptions exist when we’re able to provide “combination loans” which are fairly uncommon these days).
Mortgage Insurance (also known as “mi” or “pmi‘) is insurance which covers the lender against a portion of their losses should the loan they make result in payment delinquency or foreclosure.
There are various forms of mortgage insurance which home buyers should be aware of. Here is a brief explanation of each:
Borrower-paid mortgage insurance (BPMI)– This is the most common form of mortgage insurance. The insurance premiums for this form are paid for by the borrower on a monthly basis and varies depending on the loan amount, loan-to-value, and credit score of the borrower. With this form of mortgage insurance the borrower can often request that the mortgage insurance payment be removed from their monthly payment once they have established a 24-month clean payment record and can demonstrate that they have 20% equity in the property. However, it’s important to note that the only legal requirement the lender has to eliminate the mortgage insurance is under the Homebuyers Protection Act which states that the lender is not required to eliminate the mortgage insurance until the loan balance is scheduled to reach 80% of the original purchase price based on the original amortization schedule.
Lender-paid mortgage insurance (LPMI or “No mi”)– With this form of mortgage insurance the borrower accepts a modestly higher interest rate in exchange for not having to make a monthly mortgage insurance payment. Often times these plans create the lowest possible monthly payment and can be most tax efficient. The drawback of LPMI is that the increase a borrower accepts to their interest rate is permanent so even when they have achieved 20% equity in their home their rate will remained at the higher level.
One-time or “upfront” mortgage insurance– With this form of mortgage insurance the borrower makes a one-time mortgage insurance payment at the outset of taking the loan and then does not have to make any additional mortgage insurance payments for the duration of the loan. This option works best for a home buyer who is seeking to create the lowest possible monthly payment and has enough money to cover the additional settlement charges (but not enough to put 20% down).
Split mortgage insurance– Split mortgage insurance combines aspects of the BPMI & the one-time mortgage insurance forms. With a split mortgage insurance structure the borrower pays an upfront or “one-time” mortgage insurance payment at closing & accepts a monthly BPMI payment as well. The most common form of this is with the FHA program. With a FHA loan the buyer finances an upfront mortgage insurance premium into the loan amount and makes a monthly mortgage insurance payment. These two amounts are less than if the borrower did the BPMI or one-time mortgage insurance exclusively.
2nd mortgage options
What is a 2nd mortgage/ home equity loan?
A 2nd mortgage is a loan that is originated and subordinated behind a first mortgage. 2nd mortgages are also referred to as home equity loans, junior liens, or combination loans. These loans can take on various forms. The two most popular 2nd mortgages are the Home Equity Line of Credit (HELOC) and the Fixed Rate Home Equity Loan.
HELOC’s
A HELOC is a line of credit much like a credit card that is secured against the equity in a home. These are most often originated after a person has owned a home but can also be originated as a part of a purchase transaction.
HELOC’s have extremely flexible terms and is an excellent financial tool for homeowner’s with a large equity position in their home. HELOC’s typically have a 10-year “draw” term. During this period a user may borrower up to the maximum amount of the line of credit and pay it back as many times as they wish. Due to the flexible nature of the draws HELOC’s have variable interest rates that are based on the prime index plus a fixed margin. Margins on HELOC’s can vary from -0%-3.00%. The margin is determined by the borrower’s credit and equity available in the home. During the draw period borrowers make a minimum of interest-only payments based on the average balance during a given billing period (much like a credit card). The borrower may make additional payments at any time which will go towards reducing the balance owed against the line of credit. In the event that a borrower does not use the HELOC they will not pay any interest. Some HELOC’s do have an annual service fee charged for the maintenance of the account.
Fixed Rate Home Equity Loan
The most common fixed rate home equity loan is a 30/15 balloon program. With this loan a borrower will take out a sum of money and make payments based on a 30-year amortization at a fixed rate. However, at the end of 15 years if the borrower still had this loan they would be forced to pay-off or refinance the remaining balance. Typically these loans do not carry any penalty to prepay them early.
When would a 2nd mortgage make sense?
We originate 2nd mortgages in many different cases. 2nd mortgages are used as combination loans in purchase transactions in order to allow the client to avoid paying for costly private mortgage insurance. 2nd mortgages are also used when a client needs to borrow a small sum of money for a short period of time to satisfy an unbudgeted obligation. Since 2nd mortgages are relatively inexpensive to originate often times they can be more cost effective than refinancing a larger primary mortgage.
Pros & Cons of the Oregon Bond Program
As mortgage lenders continue to restrict their lending guidelines in response to the “subprime fallout”, it is no wonder that mortgage originators are increasing their reliance on FHA and state-sponsored first time home buyer programs to fill the void.
In Oregon we have the Oregon Bond Program. This particular program is offered through the Oregon Housing and Community Department and is funded through tax-exempt mortgage revenue bonds.
On the surface, the Oregon Bond Program appears to be the “end all, be all” program for ANY first time home buyer. However, it is my goal with this blog post to inform you of the positive and negative aspects of this loan option.
Positive Aspects of the Oregon Bond Program:
- Low/No down payment requirement. The Oregon Bond program has two down payment options for first-time home buyers. The first option called the “Rate Advantage” has a lower interest rate and carries a minimum down payment requirement of 3%. The second option called the “Cash Advantage” requires 0% down on the part of the home buyer. However, at the time of this posting the Cash Advantage program was temporarily suspended.
- Interest Rate. The Oregon Bond Program has a very attractive interest rate. At the time of this blog posting a borrower could lock in a 30-year fixed rate @ 5.75% for the Rate Advantage option. This is about .375% less than a comparable FHA option.
- Flexible credit approval. Like the FHA loan program the Oregon Bond loan can be fairly flexible in terms of an applicant’s credit score. Unlike conventional loans, there are not adverse rate adjustments for applicants with lower credit scores.
Negative Aspects of the Oregon Bond Program:
- Mortgage Insurance. The Oregon Bond loan program carries fairly expensive mortgage insurance requirements. Just like the FHA loan the mortgage insurance is structured with a 1.50% upfront mortgage insurance premium that gets financed into the loan plus a .50% monthly premium that is built into the monthly payment. For example, a $200,000 loan would get financed @ $203,000 to fund a $3,000 mortgage insurance policy at closing plus $83.33 per month.
- Recapture Provision. This provision is often overlooked by borrowers and loan originators, but it can be a costly oversight. With an Oregon bond loan the home buyer may be subject to a recapture tax when the home is sold in the future. For a detailed explanation of this provision I would encourage you to research it at the Oregon Bond website. I will do my best to explain it here. The recapture tax is collected at a rate as high as 6.25% of the original loan amount if the home is sold within the first 9 years of the loan at a higher price than it was initially purchased for if the loan holder’s income exceeds a certain threshold (currently about $70,000) at the time of sale. For example, a home buyer takes a loan out for $200,000 today to buy a home for $225,000. In 5 years, they decide to sell their home. At that time they sell their home for $275,000. If their household income at that time exceeds the threshold (determined at that time) then they would owe $12,500 (6.25% of $200,000) in recapture tax, even if they had refinanced during the course of owning the home.
- Inflexible guidelines. Although the Oregon Bond program is flexible in some degree (mostly credit and down payment), it is considered to be inflexible in other areas. For example, the program requires a 2-year work history in the same industry and school does not count. For many home buyers they have only been out of school for less than 2 years. These borrowers would not qualify for an Oregon Bond program but may qualify for FHA loans. Furthermore, there is a very limited set of Oregon Bond lenders to choose from. Therefore, an Oregon Bond application is subject to the underwriting tendencies of a few different lenders. This differs greatly from FHA where we can originate almost anywhere.
- Income limits. Unlike the FHA loan program, the Oregon Bond loan program REQUIRES that an applicant be a first time home buyer (defined as not having owned in the previous 3 years) and may not have a household income that exceeds a certain level (depending on the county that the property is in). For the Portland-Metro area the income threshold is about $70,000 at the time of this post.
- Processing. Oregon Bond programs have to be reviewed by the lender and the state of Oregon. Typically speaking the process for getting an Oregon Bond loan is much more cumbersome and time consuming than a traditional FHA loan. We like to ask for 45-60 days to get an Oregon bond loan done, whereas we can do FHA loans in a much shorter time frame.
What is a hybrid ARM?
The most common ARM products we originate are hybrid ARMs. With a hybrid ARM the interest rate is fixed for an initial period of time before it reaches an adjustable rate period.
3/1, 5/1, 7/1, & 10/1 ARM’s– The most common hybrid ARM’s are the 3/1, 5/1, 7/1, and 10/1 ARM’s. With these loan products a borrower is able to lock in an initial interest rate for 3,5,7, & 10 years respectively. In most interest rate environments the borrower is able to lock in a lower rate for these initial periods than if they were locking into a 30-year fixed rate. Since most homebuyers do not stay in the same home or keep the same mortgage for more than 5 years these loans can provide the same level of interest-rate security as a fixed rate mortgage with a lower interest expense. After the initial fixed interest rate period is up these loans then go into an adjustable rate period where the interest rate will adjust either annually or every six months.
How do 7/1 Interest-only ARM’s work?
With a 7/1 interest-only ARM the loan will carry a fixed rate for the initial 7 years of the loan. After that, the interest rate will adjust on an annual basis. For the first 7 years of the loan the borrower may make interest-only payment on the outstanding balance. At the end of 7 years the payments will amortize annually based on the remaining term of the loan.
For example, let’s say we could lock a loan today @ 6.00% on this program for a $300,000 loan. For the first 7 years the borrower would make an interest-only payment of $1,500 per month. At any time the borrower could make a payment above and beyond the interest-only payment which would be applied to principal. Because the loan carries an interest-only payment they could expect their payments to decrease upon paying down a portion of the principal.
After 7 years let’s assume the rate adjusts to 8.00% and the balance was still $300,000 (because the borrower elected not to pay any principal over the first 7 years). At that time the monthly payments would increase to $2,380 which reflects a 23 year amortization at 8.00%.
This loan can be a great program because for most home-buyers the 7 year fixed period offers plenty of interest-rate security while the interest-only payment provides plenty of cash-flow flexibility.
Bi-Weekly payment programs, are they a good idea?
I am often asked by customers whether or not signing up for a bi-weekly repayment plan is a good idea. So that this post doesn’t exceed 10,000 words I am going to ignore the first question to ask which is “should I be in a hurry to pay off my mortgage?” given that you probably have a low fixed interest rate which carries tax advantages. In other words, are their other financial goals that deserve more attention (i.e. building a liquid savings account for security, paying off other debts, boosting retirement savings, boosting college savings, etc.)?
In general I oppose the bi-weekly payment plans because I think the companies that offer them deceive consumers. Here’s why:
With bi-weekly payment programs the lender or a 3rd party servicer will typically charge $250-$500 to sign up for the program. They will then automatically draw one half of your total monthly payment every 2 weeks and apply it to your mortgage. The marketing materials for these programs lead consumers to believe that the reason they are paying down their principal quicker is because they are paying one half of their mortgage payment earlier in the month and therefore avoiding interest on that portion of their mortgage payment during the second half of the month. But this is not accurate.
The reason that a bi-weekly plan accelerates the principal reduction on your mortgage quicker than the regular amortization schedule is NOT because you’re making the payment earlier in the month but because you are making 13 payments per year instead of 12 (there are 52 weeks in a year, 26 bi-weekly periods, and therefore 13 total payments made).
With that said, any consumer can create the very same impact by simply making one extra payment per year or by increasing your monthly mortgage payment by 1/12th of your principal and interest payment. For example, if your monthly principal and interest payment is $1,200 per month then you could add $100 per month (1/12th of $1,200) and have the same impact as the bi-weekly payment program without signing up or paying a fee.
What is a Home Equity Line of Credit (HELOC)?
A HELOC is a line of credit much like a credit card that is secured against the equity in a home. These are most often originated after a person has owned a home but can also be originated as a part of a purchase transaction.
HELOCʼs have extremely flexible terms and is an excellent financial tool for homeownerʼs with a large equity position in their home. HELOCʼs typically have a 10-year “draw” term. During this period a user may borrower up to the maximum amount of the line of credit and pay it back as many times as they wish.
Due to the flexible nature of the draws HELOCʼs have variable interest rates that are based on the prime index plus a fixed margin. Margins on HELOCʼs can vary from -.50%-3.00%.
The margin is determined by the borrowerʼs credit and equity available in the home. During the draw period borrowers make a minimum of interest-only payments based on the average balance during a given billing period (much like a credit card). The borrower may make additional payments at any time which will go towards reducing the balance owed against the line of credit. In the event that a borrower does not use the HELOC they will not pay any interest. Some HELOCʼs do have an annual service fee charged for the maintenance of the account.
WSJ.com article points out importance of 30 yr mortgage & liquidity
I originate very few 15 year mortgages. The reason? I believe that cash is king. Given that mortgage rates are at historical low levels I would rather see my clients take out a 30 year amortizing mortgage and invest the difference instead of potentially creating a cash-trap with a 15 year loan. Here’s an article that was published in the Wall Street Journal that places a 30-year mortgage at the top of the list for “surviving a cash crunch”:
Take Seven Steps
So You Survive
A Cash Crunch
By BRETT ARENDS
April 12, 2008
No one wants to get caught in a cash crunch. Look at what happened to Bear Stearns.
Investors can’t go running to the Fed.
Sometimes all it can take is a surprise bill, or a sudden loss of a job, to put your family’s liquidity in peril. And these are treacherous times. The economy is rocky. Employers are cutting jobs. And some investments — including home values — are turning wobbly just when you may need them most.
The Federal Reserve, alas, isn’t going to bail you out if you get hit by a liquidity crisis.
So where can you turn? If you’re worried, check out your emergency lines of credit now, before there’s a crisis.
Here are the seven habits of highly liquid people.
1. Refinance your mortgage over 30 years. Just switching your remaining debt from, say, a 20-year schedule will slash your monthly outflows by nearly a fifth. Borrowing against your home is the cheapest form of consumer debt.
2. Set up a home-equity line of credit. They’re usually cheap to arrange, and you can draw on it when you need it. Right now, rates are as low as 5.25%.
3. Get a free float from a new credit card. Some still offer zero-percent interest on balances transferred from your current card. As always with the credit-card sharks: Watch out or they’ll find a way to sock you with fees anyway.
4. Get your money back early from the IRS. Most Americans prepay too much tax, and the average refund is nearly $2,500. File a new W-4 with your employer to cut your monthly withholding. You have to estimate your likely bill in good faith. If you end up prepaying too little, you can make it up by Dec. 31. If you don’t, you will have to pay 7% or so in penalties. The rate fluctuates, but it’s a lot cheaper than an unsecured loan.
5. Set up unsecured financing sources now, while you don’t need them. Ask your bank for an overdraft facility, of course. And apply for some emergency credit cards. Yes, the rates are usurious, so don’t use them unless you have to. But someday you may have to.
6. Check out how to borrow from your 401(k) retirement plan. Most plans allow this, though the rules vary. The limits are often 50% of your balance, up to $50,000. It can take anywhere from a few days to a few weeks to get the money. Note: You may end up paying taxes, plus a 10% penalty, if you don’t repay the money when you leave your employer, or within a specified period. It is usually five years. Check the rules ahead of time.
7. And, most obvious: Start saving. Most middle-class families can save thousands a year just by paring back on discretionary bills. This is a good time to slash those bills to the bone.