Mortgages: November 2011 Archives

Got a search for that, and it occurred to me that it is a valid question. The answer is yes.

The degree varies. You can simply contact the bank to make yourself responsible for payment. They are usually happy to do this, although unlike revolving accounts you typically will not receive back credit on your credit score for the entire length of time the trade line has been open. Nonetheless, if the bank reports the mortgage as paid as part of your credit, it can help you increase your credit score, so long as the mortgage actually gets paid on time every month. One 30 day late is plenty to kill any advantage for most folks. This is typically free. Hey, the bank has one more person to pay the mortgage! This is often used as a way to start rebuilding credit after a bankruptcy or other financial disaster. A friend or family member qualifies for the loan, then adds the person looking to recover to the loan later.

If you want to go one better than that, you can actually modify the deed of trust to make yourself responsible for payment, although it really has no measurable benefit as opposed to simply agreeing to be responsible, and it costs money to negotiate, notarize and record the modification.

Unless you can get a better rate by doing so, I would advise against a full re-qualification for the mortgage just to add someone. It's a lot of hassle and expense for no particular gain. If you want to get me paid, I'm cool with that, but there are better ways to accomplish the gain to your credit at far less expense.

A Caveat: One thing some people want to try is "trading" borrowers. For instance, a woman who wanted to remove her ex-husband from the loan and add her new husband. That doesn't work. In order to let someone off the loan, the remaining borrowers must qualify on their own without the person to be excluded. In short, a full refinance is required to let someone off the hook. But adding someone can only benefit the lender.

Often, you may run across the "I want a commission" mentality. Someone who wants the commission money more than they want to do what is in the best interests of the bank they work for. The bottom line for the bank is they have money at risk from an outstanding loan, so anything which increases the probability of it being repaid (like adding someone else who's responsible for that money) is a Good Thing from the bank's viewpoint. You want to add another person to the list of those responsible for repayment? That's great as far as management is concerned. Nonetheless, many employees will tell you to do what causes them to be paid a new commission.

Caveat Emptor

Original here

Quite a while ago, when loan standards were other than they have become, I wrote an article with the title Is a VA Loan a Good Deal? Back then, if you could qualify for a loan that was both A paper and full documentation, I could get you a better loan as measured by cost of interest for the same closing cost, maybe even if you didn't have a down payment. Lenders were eager to make loans at 100% loan to value ratio, and since conventional conforming rates have always been the lowest for a given cost, they could beat VA loans despite not being designed for the same situations.

That is no longer the case.

100% financing for ordinary conventional loans has completely self-destructed, at least for now. I am firmly of the opinion that it will be back for full documentation borrowers who can prove actual income via tax returns or W-2 forms, but for right now, it is gone. FHA loans only go to 96.5% Loan to Value ratio, and the down payment assistance programs that formerly enabled people to get FHA loans without a down payment have been put out of business by legislation. This leaves the VA loan as the sole loan program available that currently allows purchase of real estate without a down payment. Not only do VA loans allow over 100% financing, they have absolutely no ongoing mortgage insurance charges. There is a half a percent funding fee charged by the VA, but this is eligible to be rolled into the loan itself, and the funding fee is waived if the veteran has 10% or greater service related disability.

Not everyone is eligible for a VA loan. You must have earned it via time in the armed services. Currently active-duty service-folks are potentially eligible, providing they have met the criteria. In some cases, a spouse of a deceased serviceperson is also eligible for a VA benefit. This still isn't as many people as was true formerly. Thirty years ago, far more people served in the military than currently do. Even though San Diego is a military town, most veterans seem to leave when their tour is over, so the population of discharged veterans is lower than might be expected. They're here, but they have mostly come back because of civilian employment or following spouses who are themselves in the military, rather than choosing to retire here.

Indeed, Active duty servicemembers have an advantage over retirees. They are able to draw a housing allowance if they do not live in military housing - a housing allowance that can pay their mortgage instead of rent, and when reassigned, they can rent the property to another military family, knowing the military family receives that same allowance. A military family that exercises due diligence can retire owning five or more properties, all with positive cash flow, and most likely with huge amounts of equity, if not owned outright. Current BAH allowances for San Diego won't purchase a mansion, but they will cash flow out for quite reasonable properties in desirable parts of town. Since VA loans are all fully amortized, this will eventually pay the mortgage off, leaving them with only property taxes and maintenance for the expense of owning the property.

For a decade or more, VA loans were pretty much useless in high cost areas because of loan limits too low to purchase desirable properties. There for a while, they were only useful for one bedroom condominiums here in San Diego because the price of housing had so far outstripped VA loan limits that that was all that could be bought with them. That has now changed, both because prices have fallen and because VA loan limits have risen dramatically thanks to new legislation. San Diego has a current VA loan limit of $537,500 (here are loan limits for high cost areas nationwide) and recent legislation has extended VA loan limits above "regular" conforming loan limits..

The one limit to VA loans is a good one to have: They require documentation of earning enough income to be able to afford the payments, either through tax returns or w2 form. This prevents something that has happened all too often of late, real estate agents and loan officers selling someone a property that there is no way there are able to afford in the longer term. This was another reason VA loans were often bypassed in the last few years, but I actually like this protective feature. Debt to Income Ratio is more important to protect the borrower than it is to protect the lender!

So even though not everyone is eligible for a VA loan, if you are one of those who has earned eligibility through service to the country, the VA loan has become the best "magic bullet" currently available to assist you in buying real estate. By not having a mortgage insurance requirement, or boosting the basic rate through adjustments as other loans have, and by requiring full documentation of income, they not only aid the veteran in affording the property, but have a significant protective element.

Caveat Emptor

Original article here

Many people are uncertain as to what closing costs are.

Basically, they relate to the costs of doing the transaction. There are people who work on getting your loan through the process of approval and funding, and those people have got to be paid. Anytime you're talking about a fee for a service that needs to be performed in order to get a loan done, that's a closing cost. This includes even origination, which is normally quoted in points, as the fee that the loan provider takes for getting the loan done. Not all loans have origination fees in points, but I'd say that in excess of 95 percent of all sub-prime loans and at least two thirds of all A paper loans nationally do. Of course, all loans have origination fees of some sort - the people putting your loan together and getting it funded are not working for free. It can be paid via Yield Spread, secondary market premium, or a couple other ways that don't result in an apparent cost to you, but you are paying for origination somehow. Nobody does loans for free.

Every loan has closing costs. They are a fact of life. You can choose to accept a higher rate on your loan such that the lender will agree to pay your closing costs, but that is not the same thing as not having them. Indeed, you should be very wary of someone quoting you significantly lower closing costs that anyone else.

When you are talking about closing costs, the vast majority of all loan providers used to pretend that so-called "third party" fees such as title, escrow, attorney fees in the states that use attorneys, appraisal, and notary fees do not exist. That has mostlychanged with the requirements of the new 2010 Good Faith Estimate. Although there are still holes in the rules, most of the games lenders play have changed towards misquoting the tradeoff between rate and cost.and then act all surprised when you complain about these extra fees that weren't on your beginning paperwork. Until the new rules came into effect (and it still happens because as I said there are loopholes in the new rules) people told me before they sign up for a loan that my fees seem high, compared to what someone else is telling them. The difference, of course, is that I'm telling them about all the third party fees upfront and the other folks they are talking to are doing their best to pretend those fees don't exist. They not only exist, but you're going to pay them as a part of any loan. Who would you rather do business with, someone who pretends it's going to cost you half as much as it will, or someone who tells you the real cost right at the start?

Now the critical difference between recurring and nonrecurring closing costs in that nonrecurring happen once, to do your loan, and then they are done. Recurring closing costs are those things that happen every month, like interest, property taxes, insurance, and the impounds for doing them, if applicable. Mellow-Roos and homeowners association dues also fall within the definition of recurring, but those items I just named are pretty much the full extent of the recurring closing costs. Pretty much everything else is nonrecurring. For example, you only need one appraisal, one notary fee, one escrow, and one title insurance policy per loan.

One thing that is often counted as a closing cost that should not be are discount points, which instead of being a charge for a service are a charge by the bank to give you a better rate than you would otherwise get. There is always a trade-off between low rate and low cost. The lender will give you a lower rate if you pay for it, but they won't give it to you free. Also, the new rules treat Yield Spread as a cost rather than what it has legally become: an offset to fees that causes the consumer to spend less money, making direct lender loans appear better than they are in comparison to Yield Spread.

The importance of the distinction between recurring and nonrecurring closing costs is mostly in purchase situations. If there is an allowance from the seller for closing costs, the wording for this on the purchase contract can be critical. Nonrecurring closing costs are far more limited than recurring, and just the impound account can add thousands of dollars to what you, as the seller, end up paying if you agree to recurring closing costs. It's up to you how bad you want to sell the property, but a buyer who needs you to pay recurring closing costs is likely not a very qualified buyer, and their loan is pretty likely to experience snags. I counsel my sellers to insist on substantial deposits and sharply limited escrow periods in such cases, and if the buyer is allowed discount points as part of what you're willing to pay, count on the fact that they are going to use the entire allowance you give them. If the buyer has a choice of allowing you to keep some of that money or buying themselves a lower rate, which also means lower payments, what do you think they're going to do?

Caveat Emptor (and Vendor)

Original here

One reason to check your referral logs every day: Sometimes you can find great material for an article. I got one about the three day right of rescission.

This is a feature (or bug, depending upon your situation) with every refinance on a home that is a primary residence. The reason it exists is that loan documentation is massive, and confusing to the non-professional, sometimes intentionally so on the part of the lender. Some will throw massive documents at you so fast at closing that you never do figure out what's really important, delaying those documents until you show signs of just wanting to get it over with. Furthermore, until you see the final documents at signing, there is literally no way to prove that what your prospective loan provider quoted you on the Mortgage Loan Disclosure Statement (California) or Good Faith Estimate (the other 49 states) is actually what they intend to deliver. There's a lot of paperwork that can be put under your nose to make it look like that's what I intend to deliver, but until you have the final loan documents sitting in front of you, none of it means anything. Just because they give you those wonderful forms like a MLDS or GFE or TILA or anything else does not mean that is what they intend to deliver. The only document that is required to be an accurate accounting of the loan and all the money that goes into and comes out is the HUD-1, and that comes at the end of the process, and you get it at the same time as you sign the note.

I have said it before, but there are three documents you need to concentrate on at loan closing. Everything else is in support of those. They are the Trust Deed or Mortgage, the Note, and the aforementioned HUD-1. An unscrupulous lender certainly can slip stuff past you on other forms, but most won't bother. These three forms will tell you about 99.9 percent of the shady dealings. Some lenders and brokers will actually train their loan officers in how to distract you from the numbers on these three documents.

Once you have signed all of the requisite paperwork to finalize your loan (the stuff you sign in front of a notary at the theoretical end of the process), there is potentially a waiting period that begins. Purchases have no federal right of rescission, nor do refinances of rental or investment property, but if it's your primary residence and you are refinancing, you have three business days to call it off. Note that some states may broaden the right of rescission, and some may even lengthen it, but they can't lessen what the federal government requires.

As an aside, just because you have signed "final" documents does not necessarily mean your loan will fund. There are both "prior to docs" conditions as well as "prior to funding" conditions. The former means they must be satisfied before your final loan documents are generated, the latter means they must be satisfied as a condition of funding the loan. I want to emphasize that there will always be "prior to funding" conditions, but they should be routine things that make sense to do at that time, in that they cannot realistically be done any sooner. Many lenders, however, are moving "prior to docs" conditions to "prior to funding." This has always been prevalent for so-called "hard money" loans, but recently sub-prime lenders in particular have been emulating their example. The reasoning for doing this is simple. Once you've signed documents, you are bound to them unless you exercise right of rescission. Once right of rescission expires, you are bound to them period, until they either fund the loan or give up on the possibility of funding it. I strongly advise you to ask for a copy of outstanding conditions on your loan commitment before you sign.

Assuming that there is a right of rescission applicable, once you have signed final documents, the clock starts ticking. The day you sign documents doesn't count. Sundays and Holidays don't count. It is possible that Saturdays don't count, depending upon the law in your state. Here in California, Saturdays count unless they are holidays. It is three business days. So let's say that you sign final documents with a notary on a Monday of a normal five day week. Tuesday, Wednesday, the Thursday all go by while you have still got your right of rescission. Thursday midnight the right of rescission expires, and the loan can fund on Friday. Note that no lender can or will fund a loan during your right of rescission period, and every so often an otherwise excellent loan officer will have you sign loan documents before some other conditions are finished so that the right of rescission will expire in timely fashion to fund your loan before your rate lock expires. Remember that if the rate is not locked, the rate is not real, but all locks have expirations.

Applicable rights of rescission cannot be waived, cannot be shortened, and cannot be circumvented. Ever. There literally is no provision to do so in the law. This is both intentional and, in my opinion, correct. Kind of defeats the purpose of having it, which is to give you a couple days to consult with third party professionals before it's final, if it can be waived, because you can bet millions to milliamps that the sharks you are trying to protect folks from would have the folks sign such a document if it existed.

Now, just because the right of rescission has expired and the loan can be funded does not mean that it will be funded, much less on that day. For starters, good escrow officers will not request funding upon a Friday because the client will end up paying interest on both loans over the weekend for no good purpose. Once they request funding, the lender has up to two business days to provide it, and then the escrow officer has two business days to get everybody their money.

Also, remember those "prior to funding" conditions I spoke about a couple of paragraphs ago? If there's something substantive, it usually should have been taken care of prior to signing docs, leaving procedural stuff for prior to funding. But sometimes it can be in your interest to move them, if it means your loan is more likely to fund within the lock period, so you don't have to pay for lock extensions. On the other hand, there has been a movement towards making as many conditions prior to funding as possible, simply because once you have signed final documents you are more tightly bound to that lender.

In summary, if a right of rescission is applicable, start counting with the next business day after you sign final loan documents. After three business days, the right of rescission has expired and the loan can fund. Assuming a normal five day week, and that Saturday counts, as it does in every state I've worked in:

Caveat Emptor

Original here

Mortgage - Questions you must ask every provider about every loan when you are shopping. Permission is hereby granted to print this out and use it for non-commercial purposes so long as no alterations are made and copyright is preserved.

(Disclaimer: This list is trying to be as exhaustive as possible, but is likely missing some important questions. If you have one that I missed, send it to me: dm at )

Is there a prepayment penalty?

If so, for how long and under what terms?

What is the interest rate?

What is the amortization period?

Is there a possibility that the note will be due in full before the amortization pays it off? (Vaguely equivalent to "is there a balloon?" but a broader question)

Is the payment interest only, or principal and interest?

(if interest only) how long is it interest only, and what happens afterward?

Is there any possibility of negative amortization (the balance increasing) if I make the minimum payment? (See my post on the Negative Amortization Loan)

Is the nominal rate different from the real rate of interest I would be charged?

How long is the rate fixed for?

(If fixed for less than the full period of the loan) What is the rate based upon when it adjusts, what is the margin, and how often does it adjust?

What is the industry standard name for this loan type?

Is the rate you are quoting me based upon full documentation, stated income, NINA or EZ Doc? (Note: At this update everything but full documentation is essentially gone, but the others are likely to make a comeback eventually)

(If full or EZ doc) Assuming I have other monthly payments of $X (where $X is your other monthly payments), how much monthly income do I have to document in order to qualify? (If this is more than you make, Warning!)

How many points TOTAL will I have to pay to get that rate?

How many points of origination will I be charged?

How many discount points will I have to pay?

What are the closing costs I will have to pay?

(because they are allowed to omit third party costs from all estimates and totals, you must add the answers to the next three questions to the previous question unless the provider specifically includes them)

How much will the appraisal fee be?

How much will total title charges be?

How much will the escrow fee be?

Who will my title company be?

Who will my escrow company be?
(If escrow company is not owned by title company, i.e. same name, be prepared for unknown additional title charges).

How much, total, will I be expected to pay out of my pocket?

How much, total, will be added to my mortgage balance?

With everything added to my mortgage balance, what will my payment be?

How long of a rate lock is included with this quote?

What do you need in order to lock this loan?

I used to tell people to ask for a rate and cost guarantee up front. Unfortunately, due to changes in lender policy that are now universal, it has become cost prohibitive to lock a loan upon application. If a loan is locked but not funded, the lender will add additional cost to future loans from a loan officer. Note that this doesn't hit the consumers whose loans don't fund personally, but if your loan officer is the kind to disregard the hit, they will have been hit with bumps in their cost structure, costs that they will go out of business over if not passed on to you. Better loan officers have now replaced this with a set margin for their company and an ongoing discussion as to when to lock.

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After you have finished talking to this person, go check out the numbers. If you have a calculator that can handle mortgage calculations, use it. If you're able to do the calculations yourself, even better. Otherwise, do a web search for payment calculators or mortgage calculators or amortization calculators, and try out a couple of different ones (because some web calculators on lenders sites are programmed to lie!). This is math - there is only one right answer! The numbers should come out the same except for rounding errors! If the difference is more than five dollars in any case, that's a red flag! (You should also make certain the reason for the difference is not operator error. For instance, automobile payment calculators assume a different first payment than mortgage calculators, but student loan calculators should be compatible with mortgages.)

Original here

There are several possible options to deal with this issue, depending upon the exact situation.

For A paper, both spouses must qualify, credit score-wise. If one spouse's credit is not up to the level that lender wants (and fannie or Freddie require) they will be unable to qualify together. The way around this is a quitclaim to the spouse who has a good credit score as sole and separate property. The catch is that then the good credit score spouse has to qualify for the loan on their own. If the other spouse is the one that makes all the money, if the good score spouse is in a profession where the needed income isn't believable for stated income (stated income is essentially gone as of this update; this was a legitimate use for stated income although the risks should be discussed), or a whole list of other possible reasons, you may have to go sub-prime, which is also essentially gone. You will not be able to qualify for the same level of property you could with two documentable incomes.

For sub-prime, the spouse who makes more money is the one that will be used as the determination, so as long as the second spouse is in the same vague general ballpark, score-wise, you can still use both incomes to qualify. If one spouse makes slightly more money but the other spouse has a much higher credit score, it was usually necessary to do the stated income with the spouse who has the better score as the sole borrower. You can't do this if one spouse is a doctor and the other works fast food, but you can if they're both in the same industry, or in industries where the incomes are roughly comparable, so long as the job titles and employment history don't render the claim unbelievable. The classic example of this working is both spouses in sales, paid on commission. In some instances, a quitclaim can still be the way to go. However, note that with the current state of the market, it is necessary to stay within what the spouse with the usable income can afford on their own. Note that there are still risks that need to be discussed, most notably to the spouse with the better credit score, but it could be done when this article was originally written. It will probably come back at some point, but it's anyone's guess as to when.

Now if you do a quitclaim, the property doesn't have to stay quitclaimed. As soon as the loan funds and records, you can quitclaim it back to husband and wife as joint tenants with rights of survivorship, or whatever you want. Quite a few spouses are understandably reluctant to give up all ownership interest, but it's a temporary measure; it doesn't have to stay that way. As soon as the loan funds and records, you get the spouse who qualified for the loan to quitclaim it back to husband and wife, or the trust, or however they want the vesting to be. The better escrow officers I work with will usually have the quitclaim back made up and sent out for signatures without even being asked (I found this out one time when my clients didn't want it quitclaimed back, and called me when they got the form in the mail. I just told them to shred it, and called the escrow office to tell them thanks but not to bother).

Caveat Emptor

Original here

With a lot of people running around like Chicken Little screaming about the sky falling, a lot of folks who would like to buy property due to the much-lowered prices are wondering if there is any way they can qualify for the loan. There are lots of people out there over-exaggerating the difficulty of getting a loan. Well, we do have some events in the market that make it harder, but despite the Chicken Littles, the answer to the question is "probably yes." There are some exceptions, and some caveats for those who do, but most people actually can qualify for loans to buy property.

The big caveat is that it may not be a huge beautiful home straight out of the showplace magazine in the best area of town. With the death of stated income and no ratio loans, you have to limit yourself to what you can document the ability to make the payments for. The ultimate sin of stated income was that it allowed unscrupulous real estate agents and lenders to sell people properties which there was no way they were going to be able to afford in the long term. There will be legitimate borrowers hurt, and hurt badly, by its demise, but the aggregate damage done by recurring abuse of stated income was far greater than the damage that will be done by its demise. I would like to be able to do stated income, but I can't think of any way to prevent its abuse, and so far, neither has anyone else. Yeah, I may think I'm a good guy, but everyone thinks (or claims) they're the Good Guys, including those who most emphatically are not. Stated income has been so abused in the last few years that I cannot bring myself to excessively mourn its passing despite the damage said passing will do.

The worst fall out of stated income abuse is all of the foreclosures, but right behind that is the death of the idea in the minds of most of the public that maybe someone who makes minimum wage thirty hours a week might have to settle for a property that might not be as big, as beautiful, and as desirable as the person who makes ten times the national median. If you want to make these folks able to afford the same property, there are only two ways to do it: make all properties equally unattractive, or give the government the power to decide who gets the good stuff, which merely substitutes one privileged group (those with special influence over the government - i.e. the point of a gun) for the current privileged group, who at least earned their money via transactions freely entered into where the other person must have seen some benefit. The guy making minimum wage realistically has two choices: Figure out a way to start earning the same money as the guy making ten times national median, or learn to accept that he can't afford quite as expensive a property, and instead of making with the Green Eyed Monster, be happy with what he can afford. There are ways to improve your property, and improve what you can afford, and I love helping those who will put forth the effort, but it's considerably more involved than waving some metaphorical magic wand. For those who think the prices are going to come down further, they are already headed back up around here. You can sit in denial while they do so, or you can take advantage before it gets worse. If you're willing to work towards your goals, I've written before about the best and quickest way to actually afford something you can't afford right now

Okay, enough with the economics lesson. You're here because you want to know if you'll qualify for a loan now, and probably how much you can qualify for. There are basically three loan programs in the first tier for consideration for most borrowers: conventional A paper, FHA, and VA. I'm going to cover each major criterion: loan to value ratio, credit score, debt to income ratio, in order for each in successive paragraphs, followed by an affordability table.

Conventional

Conventional A paper is the most tightened of the programs, and still more people can qualify than not, even with the tightened qualification standards. Here's the skinny in the current market: Most conventional loan programs want no more than a 90% loan to value ratio, but 95% has become more available of late as mortgage insurance companies return to that market. Turning that around, that means you need a 5-10% down payment for conventional conforming loans (loan amounts up to $417,000 on single family housing), with standards for "temporary conforming" ($417,001 to your area's limit) aka "Jumbo Conforming" loans not too much harder. Nonconforming (above your area's limit) has significantly larger down payment requirements. There are ways to get down payments in most circumstances if you want to, but the era of being able to in any wise pretend that real estate is somehow immune from real world consequences - like agents and loan officers who told people "Nothing down! Just sign on the dotted line and walk away if it doesn't work out!" are over - and this is one casualty of the current meltdown that nobody with any sanity will mourn. Real estate is a wonderful investment, properly done, but those jokers weren't doing it right. In order to be doing it correctly, you have to plan ahead for what happens next, and have a plan to deal with it.

Where A paper lenders were accepting credit scores as low as 620, now they are pretty much wanting to see credit scores of 700 or at least 680, at least for loan to value ratios above 80%. It's not difficult to improve credit score into that range if you will try, but it can take a few months. Your choice: You can make the effort and get it done, or you can miss the best buying opportunity we are likely to see in at least the next ten to fifteen years. Or, you can somehow come up with a higher down payment. Your choice. Lenders have the money; they are entitled to set terms for lending it out. You don't want to meet those terms, you can wait until you have enough to pay cash - and paying all cash for real estate isn't nearly such a good investment.

Conventional loans still want to see the exact same 45% debt to income ratio they always have. There is room for some slop at high credit scores or with certain kinds of income, but if you plan for 45% in the first place, you're still within the loan guidelines they will accept. The way to figure this is easy: take 45 percent of your gross pay. Not what actually hits your account - but what your employer actually pays out. From this number, Subtract your ongoing debt service. That's the maximum you can qualify for. If you want to keep it to less, that's actually a good thing in my opinion, but the general issue is that most folks want to buy a more expensive property than they can really afford. Hence, the stated income debacle, among other problems. The number of people who can stay strong and within a budget when they're being shown much more beautiful properties "for not very much more on the payment" is relatively small. One reason I keep telling people to shop by purchase price, not payment. If it's outside of your budget, it might as well be on the moon for all of the good it will do you.

This 45% of gross income minus ongoing debt service has to cover all of the ongoing expenses of owning a property. Principal and Interest on the loan, monthly pro-rated property taxes, and homeowner's insurance. If they are present, it also has to pay homeowner's association, temporary assessments such as Mello-Roos, and any other regular recurring expense of owning that property. For instance, assuming a 10% down payment, 6% principal and interest fully amortized loan (high at this update), California default property taxes, and $100 per month for homeowner's insurance, plus 1% PMI for 90% financing (If they promise there won't be PMI for single loan at 90%, they are lying unless it's VA), here's a table of how much you need to make to afford it (assuming $200/month of other debt):

FHA

FHA loans are a federally insured loan program that anyone can theoretically get. FHA loans allow an initial loan to value ratio of 96.5%, so you only need 3.5% for a down payment. On the minus side, they charge a 1.75% funding fee, and PMI-equivalent of either half a percent annualized for loan to value ratios below 95%, or 0.55% annualized for loan to value ratios of 95% or greater. The upshot is that they are not free, but you can borrow up to 98.25% of the purchase price of the property (providing the appraisal supports that value). This is the lowest down payment of any generally available loan currently available.

The enabling regulations for FHA loans still do not require any minimum credit scores, which is all well and good, but the lenders have instituted a requirement for credit scores that vary from 580 to 640 in order for them to be willing to participate. They who have the gold make the rules, and they've had what are euphemistically called "adverse results" with lower scores. You may have read about that. The good news is that it's even easier to improve your credit score to this level than it is to improve to the scores conventional loans require.

Maximum allowable debt to income ratio for FHA loans starts lower, at 43%, but the FHA is willing to issue a waiver up to about 49% pretty easily if you will still have some significant money you can access after the down payment (6 months PITI reserves), or in other words, if the down payment does not represent every penny you have in the world. Nonetheless, if you start and plan for 43% and limit yourself to that, you are better off than if you try to go over. According to what people are most often trying to do with FHA, here is a table of what you can afford with 3.5% down payment, assuming 1.25% (California) property taxes, and the same $100 per month insurance as the previous example, and a base loan rate of 6.25%, as FHA rates are usually but not always slightly higher than conventional. Note that the slightly higher monthly costs are a result of the higher amount borrowed - the cost of money is actually slightly lower under the assumptions given. Once again, I'm assuming $200 per month of other debt; FHA is a lot less forgiving about front end ratio than conventional.

VA

The VA loan is a benefit earned by those those who have served in the armed forces. I don't know what the minimum service requirement is, but I do know that they allow a maximum loan to value ratio of 103%. A veteran literally does not have to come up with a down payment. Not only that, but they can include up to 3% of the purchase price into the loan on top of the purchase price. Not one other (non-scam) program I am aware of has ever loaned over 100% of value of the property, and this one is still doing it. Unlike the FHA, the VA only charges a funding fee of half of one percent, and no financing insurance. Furthermore, the funding fee is waived for those with 10% or more service disability. I certainly wouldn't serve in the armed forces just to be eligible for a VA loan, but it is a nice thing that veterans earn for all that they have gone through.

Credit score is as the FHA: none required in the regulations, but the lenders want to see the same basic minimums (580 to 640), and for the same reasons. Once again, credit scores are not fixed and immutable and they can be improved as well as hurt by events. Just because you suffer a blow to your credit does not mean you cannot counter-act it with by making an effort to improve it.

Debt to income ratio is the same as the FHA at 43%, with the same waivers possible for higher. Given the way most folks use VA loans, I am going to use an example of loans for 103% of purchase price, at 6.25% (for the same reasons as FHA), with, once again $200 per month of other debt service assumed. Once again, the reason it is as close as it is to the others here is due to higher loan balances under these assumptions. If you compute the same situation for all three loans, the person with VA eligibility will pay less than either of the others until the loan to value ratio is below 80%, when the conventional loan will be best. Keep in mind that in this case, the VA loan balance is about 14% higher than the conventional, yet the cost of housing is very comparable, and the VA has by far the lowest down payment requirement ($0).

Now there are other programs that make it easier to afford real estate, or to come up with the down payment. The Mortgage Credit Certificate and your locally based first time buyer program are a way to increase affordability and possibly come up with a down payment without saving it yourself. The drawbacks to these programs is that their budgets tend to be very limited, and what there is evaporates quickly when they do get an allocation of funds. The three basic loan types are there 365 days per year, and I've never heard of them being unwilling or unable to lend to a buyer who met their qualifications. Providing you meet them, you can get a loan, and therefore, you can buy real estate if this market strikes you, as it does me, as significantly underpriced, given the scarcity and ability of people to pay. Or as Warren Buffet says, "The time to buy is when there is blood in the streets." This principle is no different for real estate than it is for stocks or whole companies. If you can afford to buy with a good sustainable loan, you will be very happy that you did in a very few years.

Caveat Emptor

Original article here

I was approached by these folks a while ago via email.

I attempted to get them to write up the experience themselves but I wanted to write something about this before I completely forgot about it. This whole exchange is indicative of games loan providers play in order to make money.

I'm going to sketch this out chronological to the extent possible. What happened was Mr. and Ms. A got a postcard in the mail quoting low payments for their loan amount. They thought it looked great, and called the loan provider. The loan provider talked about these great payments on a loan that looked fairly real, and quoted an APR of 6.18. He told them that this was a great loan, and compared it to a 5/1 ARM in such a way that that was what they thought they were getting. No worries, because they were going to be transferred by his company in two to three years.

They asked my opinion about another item having to do with the loan, and something about what they said sounded funky to me.

Well, i believe what I'm getting is called a 5/1 ARM. Each month i have the 4 options of minimum payment, interest only payment, 30 yr payment, or 15 yr payment. (payments respectively would be either $A, $B, $C, or $D)

The minimum payment stays the same for every 12 months, then increases by about $90 each subsequent yr. I know minimum is not ideal, but i live in an area with high appreciation, and because of the ridiculous value of property in the area, & the school system in this county, it continues to appreciate regardless of trends elsewhere.

I'm told the loan comes standard with 3 yr prepay. I can pay the points I mentioned to make it a 1 yr, but it doesn't affect my interest rate coming down. That's at about 6.18%

Well, the part about property appreciating regardless of trends elsewhere is just plain wishful thinking. There is nowhere that is insulated from economic conditions. Nonetheless, it's not what we're talking about here. Does this loan sound like something I keep writing about?

Here's what I sent back:

That particular loan is actually a Negative amortization loan. I explain those here (same link as last paragraph - ed).

They are not wholly without redeeming qualities, but they are something to be done with a trembling hand and much looking over your shoulder. At the current rate, expect $725 to get added to your balance the first month - and rates are rising, so this is likely to accelerate, and your underlying rate is completely variable on a month to month basis. Even if they don't rise and you make the minimum payments, you will owe approximately $X after two years - an increase of $18,620 in your balance! Will it be an issue if you owe $18,600 more when you go to sell it? I think it likely that the answer is yes, but it's your call.

A 5/1 is something entirely different. It is a "A Paper" Thirty year loan with the interest rate fixed for the first five years, then adjusting once per year based upon LIBOR, not COFI or MTA. As A paper, there is not an embedded pre-payment penalty. Right now, in California, I have them at about 6.25 no cost no points no prepay, or 6.5 interest only, and truly fixed for five years.

Furthermore, there was another issue with the loan quote:

If I do the math, the first payment gives a principal balance of $X+2000, the second payment gives a principal balance of $X, The third gets $X+500 and the fourth $X+1300. If these are the numbers your loan provider gave you, which of these numbers is correct? Any of them? Unless you're paying the 1.5 points out of pocket, your loan provider should give you a quote which adds them to the amount you are borrowing. Did they do this, or did they pretend it was going away by magic?

They responded:

(sic)
oooh. sounding scary. So i left them a mssg asking which it was, a negative amortization loan, or a 5/1 ARM. I also asked for more info as I was sent spreadsheet which is missing some info. I am fwding the spreadsheet if you don't mind the attachment.

Well the loan provider had named the spreadsheet "2005_Pay_Option_Work_Sheet.xls" Pay Option is one of those "friendly sounding" names for a negative amortization loan. Well, I knew before what kind of scum bucket this loan provider was before I opened it, but doing so was confirmation, good enough to convict in court except that what he did isn't illegal, only immoral and unethical. Yep, it had all of the characteristics of a negative amortization loan as prepared by the worst kind of financial predator. Three or four payment options, including minimum, interest only, and 30 year amortized? Check. Prepayment penalty if you made any other payments (The so-called "one extra dollar" prepayment penalty I talk about here, which is not necessarily characteristic of negative amortization loans but certainly seems to occur there more than anywhere else). Check. Yearly minimum payment increases of about 7.5 of base minimum payment%? Check. Complete lack of disclosure that if you make the minimum payment your balance increases by hundreds of dollars per month? Check. About a 5 percentage point absolute spread between nominal rate and APR? Check. Complete failure to disclose that the "teaser" payment is based upon a "nominal" (in name only) rate of 1%? Check. Failure to disclose that the real rate was month to month variable from day one? Check. Failure to disclose that the index it was based on had risen in recent months and that unless said index went back down, the real rate would be rising? Check. Failure to include real and known closing costs in your loan quote? Check. That last is kind of minor as compared to everything else, but I'd be upset in a major way if it was the only thing wrong he did.

I sent Ms. A an email which said, in part:

"Option ARM" is a common, friendly sounding name for what is still a negative amortization loan. Everything about this loan, from the fact that it has a "payment cap" which is unrelated to a rate cap, screams negative amortization loan.

The 5/1 is a different loan provided for comparison, as the sheet tells you, and is a better loan for almost all purposes, as the second column of the comparison tells you. A 3/1 might have a slightly lower rate, or it might not. Ditto any of the 2 or three year subprime variants.

Intro period is telling you the period the competing is fixed rate for.

MTA loans are based upon a moving average of the treasury rate over the last twelve months. Since they've been going up, your real rate is likely to increase as some older and lower rates drop out of the computation in upcoming months.

Pay attention to the two footnotes on the payment options. "deferred interest" is characteristic of negative amortization.

(Name redacted for publication). They are not the only such company, but the translation into real english of their name must be "watch out for our piranha"

These loans are very commonly pushed because most people "buy" loans based upon payment, making them very easy loans to sell because unless you understand the drawbacks, you will think this is the greatest loan since sliced bread. These are up to forty percent of all new loans in the last year in some areas (including here), and are likely to contribute to a crash in housing values soon.

There are sharks and wolves out there, as this illustrates. Why people who would never buy a toaster oven without checking at least two vendors will sign up for a mortgage without shopping around is beyond me, but people do it. This is a trap that can be very hard to avoid unless you know what's going on, but if you talk to a few loan officers, and and go back and forth, chances become much better that you'll be saved by one of Jaws' competitors telling you what's really going on. Other, competing loan providers deal with this stuff every day. After a very short time, we get to the point where we can recognize it in our sleep. But we can't alert you to these kind of issues if you don't give us the chance.

Luckily, these folks gave me the chance.

They were in another state, and so I didn't get any business out of my good deed, but that's okay. I got this article. And now, you folks can read about it, and be forewarned.

Caveat Emptor

Original here