10 Home Loan Tips for 1st Time Home Buyers

After years of declining home values, there are many new affordable opportunities for first time homebuyers to finance a new home.  If you are looking to make the move from a rented apartment to a home of your own, you are not alone. The convergence of low home prices, still-low mortgage rates and appealing tax incentives makes 2009 a good time to buy a home for many people. If you are looking to buy, here is what you need to know:

Home prices are low. Home prices dropped at a record annual pace of 18.7% this past March. That means discerning buyers can find real bargains. Mortgage interest rates are still good. While interest rates have risen from their historic lows earlier this year, they still are appealing. In mid-June, rates hovered around 5.70% for a 30-year fixed-rate mortgage.

Tax credits will help. 1^st time homebuyers can get money back from tax credits implemented as part of the 2009 American Recovery and Reinvestment Act. An $8,000 credit is available to first-time buyers for homes purchased before December 1, 2009. Home financing legislators are considering increasing the credit to $15,000 and expanding it to include other home buyers

Credit scores matter. While houses are widely available, home financing is limited to those with good credit. Credit scores range from 300 to 850, with the median U.S. credit score about 725. A score below 680 usually results in a higher interest rate or denial of credit. Check your credit score before you make any home buying decisions. If your score is lagging, wait a few months and work to improve the score by paying every bill on time, paying down as much debt as possible and disputing any erroneous information on your report. Note that it can pay to do your homework researching FHA mortgage rates and lenders — credit scores do not decline if multiple similar credit report requests are submitted within a close time period (usually a few weeks).

You must have savings. A down payment is essential today. Ideally, you can put down 20% of the purchase price (see #7 regarding PMI). If not, talk to your mortgage lender about your options.  Do not stretch too far. Standard underwriting guidelines call for keeping housing expenses below 35% of total income. Breathing room in your budget will help you keep your home even if something unplanned does occur. If you are uncertain, wait to buy.

Understand private mortgage insurance (PMI). Home mortgages with less than 20% home equity (which means a 20% down payment for those purchasing a home) require PMI in case the owner defaults on the home loan. When the home owner pays a conventional home mortgage down to 80% or less of the home’s value, the home owner can request the home lender to cancel the PMI and then be able to stop paying the additional amount. Meanwhile, PMI is tax-deductible, at least through 2010.

Know the real costs of buying. The principal and interest on a mortgage payment are only the beginning of home-related costs. Escrow payments - the funds withdrawn to cover home insurance and taxes - and PMI can add a few hundred dollars per month to a mortgage payment. In addition, home owners must pay for repairs and maintenance. A rule of thumb is to budget 1% of the home’s purchase price per year for upkeep.

Know whether you can pay off early. If the mortgage loan has a prepayment penalty, borrowers face hefty charges if they pay it off early. This provision also can apply to future mortgage refinancing, so be forewarned. Review Truth in Lending disclosures to find out.

Buyer beware. Some of the lowest prices on homes today are “fixer-uppers” or homes sold “as is” because of foreclosure. Invest in a home inspection before agreeing to purchase any home. The inspection will inform you of any faults in the home and help you determine the approximate cost to remedy those problems.

For many Americans, the time is right to take advantage of today’s excellent home buying opportunities. If you are among

Short Sided Mortgage Reform Bill

Freddie Mac’s most recent mortgage market survey shows that a thirty-year home loan with fixed interest rates that dropped to 4.80% this week.  At the same time, congress is putting their finishing touches on HR 1728, the Mortgage Reform and Anti-Predatory Lending Act of 2009 that claims to address several aspects of the mortgaged origination, loan securitization and servicing process. The mortgage bill was debated Thursday at a House Financial Services Committee hearing.  HR 1728 would require loan officers to determine a borrower’s ability to pay back a home loan, and only extend mortgage refinancing when there is a “net tangible benefit” to the borrower. Loan officers would no longer be able to collect yield-spread premiums or other compensation that many critics say served as incentives to steer borrowers into higher risk home mortgages that cost the consumer higher fees and terms that benefit the mortgage lender.

Last week, Fed Chief, Ben Bernanke talked about the need for government regulation to protect homeowners and American consumers. The central bank had approved new home financing regulations aimed at curbing abuses on home mortgages. The mortgage lending revisions would restrict mortgage lenders from offering home mortgages without proof of a borrower’s income and would require lenders to make sure risky borrowers set aside money to pay for taxes and insurance.  As FHA loan market-share grows, so does the risk for defaults, foreclosures and more “egg on the face” for mortgage companies that originate FHA mortgage loans.

The mortgage reform bill would also drop the trigger for mortgages to be considered “high cost” and subject to the more stringent requirements of the Home Ownership and Equity Protection Act (HOEPA). Mortgage lending companies remain adamant that home loans subjected to HOEPA are difficult or impossible to securitize and sell to secondary-market investors.  To encourage responsible lending, the bill would also create a limited “safe harbor” from lawsuits for “qualified mortgages” prime, fully documented, thirty-year mortgage loans. Those mortgages would be exempt from some of the bill’s requirements.  I find that “exemption” very interesting.  Let me tell you this smells like a short-sided mess that enables the politicians to pat themselves on the back while enhancing their image as “tough” on mortgage crooks.  From a distance it looks great, but they appear to be tacking this bill on poor legislation that lacks the foundation we need for fair and responsible lending.  - Commentary written by

HUD Updates FHA Mortgage Letter and Cracks Down on Lenders

The Dept. of Housing and Urban Development recently released an important FHA Mortgagee Letter that is imperative for mortgage brokers, lenders and finance companies that plan to see FHA loans in their future.  In an effort to protect the public trust and the FHA Insurance Fund, HUD is enforcing that mortgagees are accountable for their lending practices. FHA expects each mortgagee to exercise the same level of care in originating, underwriting and servicing an FHA insured home loan as it would for home financing in which the mortgagee would be entirely dependent on the property as security to protect its investment.  When a mortgagee fails to comply with HUD’s policies and procedures, HUD will take the appropriate action.  For example, brokers or lenders that materially violate FHA program statutes, regulations and handbook requirements may be referred to the Mortgagee Review Board for appropriate sanctions, which may include termination of mortgagee approval.

HUD believes that many lenders have not lived up to the ethic codes and high standards required with FHA underwriting guidelines. HUD believes that many FHA lenders have not lived up to the ethic codes and high standards required with FHA underwriting guidelines.  That could become a problem because home mortgages that do not meet FHA mortgage lending standards to the letter are likely to result in foreclosure or a home loan default that cause FHA insurance to rise. Assistant Secretary for Housing, Brian D. Montgomery recommends that if you have questions regarding this Mortgagee Letter, please call the FHA Resource Center at 1-800-CALL-FHA (1-800-225-5342).  Read the complete FHA lending article > FHA Mortgage Loans Update with New HUD Rules for Lenders.

Does Credit Report Study by FICO Consider the High Cost Regions?

The father company that created credit scores, FICO released new results of a credit line study measuring the breadth of credit card limit reductions as well as the subsequent impact to consumer’s FICO credit scores. The study is the first of its kind since credit card issuers began to heavily ramp up their credit limit reduction activity in early 2008. Let’s consider some note-worthy points of the credit report study by FICO: 16% of the U.S population had their overall available revolving credit reduced between April and October of 2008. With credit bureau databases holding 200+ million consumer credit files, this would seem to indicate that at least 32 million cardholders lost some of their credit limits during the study timeframe of April 2008 through October 2008.

Bad credit mortgage options remained non-existent for struggling homeowners seeking home refinancing with fixed rates and lower loan payments.  Millions of homeowners have been turned down by mortgage lenders across the country, because of low credit scores, delinquent mortgages, negative equity or employment instability.  Some homeowners may qualify for loan modification plans if they happen to have their mortgage collateralized by Fannie Mae and Freddie Mac.  However, only conforming home mortgages qualify for the federal mortgage modification program.  Jumbo home loans do not qualify for a federal or FHA mortgage that ensures foreclosure prevention through a loan workout or mortgage refinance loan.

According to FICO, “Credit utilization rate has proven to be extremely predictive of future repayment risk, so it is often an important factor in a consumer’s credit score.  Credit holding companies started taking a pro-active approach to borrowers who access a significant proportion of their credit available because they are much more likely to default on their credit card terms with debt settlement, credit counseling or bankruptcy. However people maintaining lower credit utilization levels whose credit cards and home equity lines of credit are not maxed out are much more likely to continue making their credit debt payments as agreed.

5 % of the population, or 10 million consumers, saw their limits reduced because of some sort of risky credit activity including late payments, accounts in collections, or a negative public record added on their credit reports. The credit score decrease is likely due in part to an increased credit utilization percentage, while the score increase is likely due to the reduction of credit card balances. News reports also indicated that the home loan defaults and credit card debt negotiations have caused the credit repair industry to explode.

Read the complete credit report article > Thousands of Credit Card Consumers Report Credit Line Reductions in 2008.

Why Should I Pay My Neighbor’s Mortgage?

Last week’s long-awaited foreclosure relief effort from the Obama administration touched a nerve among homeowners who didn’t get in over their heads in the borrowing frenzy. Or who are also struggling to make their payments but do not want or expect government help.    Why, they ask, should my taxes be used to help pay my neighbor’s mortgage? 

John Berlau on Obama’s Mortgage Rescue Plan

How will the homeowner bailout affect responsible borrowers such as myself? I purchased my condo two years ago, borrowed what I knew I could afford considering my budget, and am not at risk of foreclosure. It seems unfortunate that we are bailing out those who did not borrow responsibly or did not truly understand their mortgages before signing them. So on top of me not seeing any advantage from the housing bailout, my taxes will most likely increase as well.

— Lars M., Evanston, Ill.  You’re not alone in wondering why your taxes should be used to help your neighbor make their mortgage payment.  The Obama administration’s plan to use $75 billion of tax dollars help some homeowners pay their mortgages touched off a huge backlash. Apart from a flood of mail to the Answer Desk inbox, the outrage was galvanized by CNBC’s Rick Santelli, who covers the commodity markets in Chicago. On Thursday, Santelli gave voice to that outrage in an on-air rant that — among other things — called for a “tea party” this summer to protest the administration’s plan to “subsidize losers’ mortgages.”   It was apparently a rant heard ’round the world — or at least ’round YouTube. On Friday, White House press secretary Robert Gibbs felt the need to respond directly to Santelli’s attack on the Obama’s foreclosure relief plan by noting that many homeowners facing foreclosure won’t be eligible for help, including investors and people who “long ago knew they were in a house they couldn’t afford. Instead, he said, the plan is targeted toward helping people “who aren’t yet in trouble keep from getting in trouble.”  Gibbs also pointed out that millions more Americans will benefit from the government’s comprehensive effort to drive down mortgages rates, allowing homeowners who aren’t in trouble refinance to a better rate and save money.  Preventing foreclosures also pays benefits to anyone who owns a home by slowing — and possibly stopping — the ongoing slide in home prices. Each new foreclosed property — sold at fire sale prices — drives down the value of every other home on the street.  “If you live in a home that’s near one that’s been foreclosed, your home value likely has dropped by about 9 %, which for the average home is about $20,000,” Gibbs told reporters Friday. 

According to the U.S. census, there were about 75 million owner-occupied homes at the end of 2008. By our math, that means that the $75 billion being spent to prevent foreclosures works out to about $1,000 per owner-occupied home. Which means you’re spending $1,000 in taxes to head of the loss of $20,000 on the value of your house. These days, that doesn’t seem like such a bad investment.  Gibbs invited Santelli to the White House to go over the plan and explain why it helps all homeowners.  “I’d be happy to buy him a cup of coffee,” said Gibbs. “Decaf.” If my home is already in the foreclosure process, can the homeowner bailout help? Or is it too late? — Alicia O.  It’s not necessarily too late if you meet the criteria and your mortgage lender is willing to extend a loan modification. Many mortgage lenders have agreed to stop foreclosures already in progress until they have a chance to review them to see if the home can be saved with the help of the new plan.Unfortunately, not everyone is going to be eligible for help.

If you can’t show that you have enough income to cover the revised loan modifications, the plan can’t help.   The main provision of the plan is a series of financial incentives (payments) to lenders who agree to cut your monthly payment. The   The main provision of the plan is a series of financial incentives (payments) to lenders who agree to cut your monthly payment. The two most common ways to do this are to lower your interest rate to the current market rate or to stretch out your payments for 40 years. (You’ll still pay as much; you just get longer to do so.)   So if you live in the home backed by the mortgage you want to change, and if you’re current interest rate is much higher than the market rate (about 5.25% at this writing), you may be a good candidate for a new, more affordable loan. Even if you are already in foreclosure.  The goal is to come up with a monthly payment that amounts to no more than 31% of your monthly income. If, after cutting your rate and stretching out your payments, you still don’t have enough income to meet that 31% threshold, the plan probably won’t work for you.  Aside from the burden of unaffordable monthly payments, many homeowners are carrying a mortgage that’s bigger than their home is worth. In some cases, lenders may be willing to reduce the principal down to the level of your home’s current value. After all, if they foreclose, they’re going to lose that money anyway.  But that’s up the lender or the company “servicing” your mortgage for the investors who own it. The program is entirely voluntary.  Read the original article.