Mortgages: August 2022 Archives

I've heard this story, in all of its variations, at least hundreds of times.

Someone will send me an email and say "They told me not to make my loan payment because I was going to skip one. So I spent the money on something else. Now they're telling me they can't fund my loan and I can't come up with the cash to make this month's payment!"

First off, engrave this into your soul: You will never skip a mortgage payment. The interest accrues every month and it must be paid every month. What many loan providers do is plan to add an amount equal to your monthly interest charges to your loan balance. This gives the illusion of skipping that payment, but you not only made the payment, you're now paying interest on the extra amount you borrowed.

I never tell people not to make their loan payment. At most I will tell them to wait a few days to give the loan a chance to fund. This lets them know it is still a concern, still an item they need to stay on top of. This way, if there's a funding issue they still have the ability to make their payment. I'm pretty certain I've never had a funding issue like that, but I'm also certain if I said anything different, the universe would bite both me and my next client. The universe is hostile and you always want a Plan B (and Plan C if practical).

Here's how it works: At the end of every month, you've got a fifteen day grace period to make your payment (i.e. by the 15th of the following month) before any penalties begin. So if your new loan was funded any time prior to the 16th, everything is at least under control. If you pretend you're skipping a month's payment, you've just added an amount roughly equal to the principle you pay in six months back into your loan (on top of all the other closing costs if you didn't pay them in with cash out of your bank account)

So quite predictably what happens is at the end of every month there is a massive wave of loan fundings to take advantage of this as unscrupulous loan officers pretend this month is free. Escrow gets so busy at that time of month that things get lost in the shuffle quite often. It's for this reason that I prefer to avoid funding loans in the last two or three business days of a month. If you're not trying to pretend your client is skipping a payment that they aren't skipping, things become much easier.

Let's say we fund your loan on the 28th of the month. Actually, this works anytime between the first of the month and the 15th of the next month, but the last few days of the month is typical. You can pay for the interest due in cash or by rolling it into your new mortgage. Either way will get the job done. It depends upon which is more important to you: having the cash from pretending you didn't need to make a payment, or not losing about six months worth of principle payments. By paying this interest, in either case you are covering the payment that would be due for that month.

Here's where it gets a little tricky, but not much. If you fund on the first of a new month or before, the interest paid is for the ending month, and the new loan starts accruing interest immediately. There will be a payment due at the end of that month. If you fund from the second to the fifteenth of the new month, the new loan needs to cover the interest for two months (either by rolling it into your balance, paying it cash, or some combination). In this case, the new loan (or cash you put into the deal) covers the ending month and the new month just beginning. It's also for twice as much money, by the way. This is why some very unscrupulous loan officers can advertise "Skip two payments!" even though there is never a single second on any loan when it is not accruing interest.

As long as everything goes well enough for the new loan to fund by the 15th of the new month, everything is at least under control. Yeah, you might have chosen to roll all the costs into the new loan but that's okay as long as you go into it with your eyes open having made a conscious choice.

But what happens if they tell you "Don't worry about your loan payment!" and then it doesn't fund? (or doesn't fund in time!)

Well, problems. If you're fifteen days late on your mortgage, expect to get hit with a penalty of at least 4% and more likely 6%. Work out the interest rate, and you'll see the interest rate on payments late that sixteenth of the month is 96 to 144 percent!

If that were all there were, that would be bad enough but livable. Usually it puts people a full month behind on their old mortgage. That noise you just heard was your credit score being nuked. I have seen a single 30 day late make a difference of 150 points on the Fair-Issacsson (FICO) model. Plus if you think you had difficulty qualifying for a prime mortgage before, wait until you see what happens after you've got a thirty day late! This usually ends up becoming what subprime calls a "rolling thirty" for several months until you get the extra money from some other source, but A paper (i.e. the good loans) doesn't have a "rolling thirty" category - every single one of those late payments hits you again as yet another late payment within the past 24 months.

Then there's the problem of where you've going to get the money to replace what you've spent because you were told you didn't have to make a payment this month. It's not coming out of some hyperspatial vortex. My clients would have to get it from somewhere. What if they really don't have it?

This sorry little charade that many loan providers play even has an ultimate downside. There is no need to skip a month's payment. You, the client, will get full and complete credit for any cash you put into the transaction or your loan. It may take a little while to get back to you, but you will get it. In the meantime, however, it may spell difficulty for your cash flow. You made that payment but your old lender hasn't yet credited it (or it cannot be confirmed that you made the payment)? You will get the money back when the accounting all finalizes. The reason we tell people they might want to hold off is that quite often it takes a few days between mailing the check off and the time that the old lender admits that they got it. You can't close the old loan off unless you pay the full amount the old lender is asking for right now. If you can't close the old loan off, you can't fund the new loan. Escrow has to pay the loan off in full by the old lender's payoff demand. If more money comes in later, the old lender needs to send it back to you when it does.

So if someone ever tells you not to make your loan payment, ask them if what they really mean is to wait. Because if they really mean "Don't make your loan payment this month": they are risking an awful lot of potentially bad consequences to you, the borrower, if they can't actually fund your new loan. And judging by the amount of email I've had on this subject, it really does happen pretty much every day and to quite a few people per day.

Caveat Emptor

Original article here

One of the things I'm seeing a lot of these days is blanket advice on bridge loans.

A bridge loan is a loan that you take out with the explicit intention of having it be short term. The most common situation is a loan against property A, which you own but plan to sell, so that you can put a down payment on property B (or buy it outright) right now.

The motivation for this comes from the fact that people get paid to do bridge loans, and they are typically very easy loans to do. Frankly, the people making the recommendation make more money by doing the bridge loan than by not doing it, and they are not motivated to do the calculations and legwork to see which is the better deal for the consumer.

When it comes to money, blanket recommendations of any sort are automatically suspect, and usually wrong. Every situation is different, and there can be factors that cause an ethical professional to recommend something in one case where they would recommend against in another superficially similar one.

Bridge loans are no exception. In the example above, the advantage is that they make you a more qualified buyer, and can get you better rates on the loan for the new property. The disadvantage is that their closing costs are just as high as any other loan. So you're spending about $3500 extra plus points plus junk fees (if any). They are also, by definition, cash out refinances. The rate-cost tradeoff for cash-out refinances is less favorable than for purchase money loans. In plain English, they cost more.

The next major issue that arises is that they can make it more difficult to qualify for the loan on the new property, which can often mean that you need to go stated income or NINA when you might otherwise have qualified full documentation, which means you got a higher rate on the new property anyway, and that you're going to want to refinance your new purchase as soon as Property A sells anyway, sending another set of loan costs down the drain. Don't get me wrong, I love to do loans, and my pocketbook loves for me to do loans, but it's a good loan officer's job to look after your interests first.

Finally, choosing a bridge loan can force a choice upon you: A good loan that puts you in the position of having a need to sell within a specified time frame, and a mediocre loan that may not. The best (lowest) rates are for short term loans. Always have been, always will be. However, if the market sours, this can cause you to either accept an offer you would not have otherwise considered, or flush another set of closing costs down the toilet, when if you had chosen the mediocre loan, you would have been okay indefinitely.

Let's crunch some numbers. Let's say you have a property currently worth $250,000 that you bought for $125,000 and have paid down to $100,000. You want to upgrade to a $400,000 property now that your promotion and raise have settled in.

The first thing you do is pull cash out to 80 percent. On a 30 day lock of a 30 year conforming fixed rate loan, assuming you've got good credit, when I originally wrote this was about a 6.5 rate without points, and you'll actually get about $96,500 of that $100,000 you take out. I looked at shorter term fixed rate loans as well, but with the yield curve inverted right now since you're planning to sell, anything without a prepayment penalty is about the same, and a prepayment penalty is contra-indicated, as it means you'll have to pay thousands of dollars when you do sell.

You take and put that $96500 down on a new home purchase loan on a $400,000 home. It's over 20% down, so no PMI concerns, and no splitting into a second loan. But because you've got that $200k loan sitting over there, now you have to go stated income on the loan for the new home.

Actually, at this update, I don't know of any stated income loans. What that means is there's no way to qualify without coming up with more cash or waiting for the first property to sell. This means moving twice or hoping your buyer will let you lease the property back long enough to find a new property. Or simultaneous closings, a massively stress-inducing plan, because you're betting your ability to close on someone else being on-the ball.

But when we had it, stated income was one way of making this work. This means you traded no verification of income for a higher rate/cost tradeoff. In the example we're using, your rate would have been about 6.75 without points. Soak off another $3500 in loan costs, plus purchase costs of maybe another $1000. You now have two loans, one for $200k at 6.5 and one for about $312,000 at 6.75. Now the original home sells. Let's say you got full value of $250,000. You pay 5% in real estate commission, and maybe 2% more in other costs. That's $17,500, so you get $32,500 in your pocket. You have three choices, two of them productive. You can 1) Spend the money, 2) Invest the money, or 3) Use it on the other mortgage. A paydown, where you just plop the money down and keep making your same old current payment is a good idea (Unless there's a "first dollar" prepayment penalty), but most folks are obsessed with lowering their payment. So they take that $32,500, and of which $3500 is loan expenses, and (because now they can do full documentation), they end up with something like a $283,000 loan at 6.25 percent, assuming rates don't move. Total cost of loans: $10,500 assuming you pay no points for any of your loans. Perhaps possible for someone with above average credit. Not likely if your credit is below average.

Suppose instead, that you just leave that $100,000 loan sit on your original property. You're still going to have to do stated income on the new loan on the new property. But instead, you go with a 80 percent first, 15 percent second (another thing you can't do at the update because no second mortgage holder will go over 90% loan to value ratio) because you can come up with $25,000 until the first property sells. Same 6.75 rate on the first, and the second is an interest only at about 10.25, just to use the same lender whose sheet I happened to pull from the stack for the exercise. Loan costs, $4000 without points, which I priced the loan to avoid. First house sells, you get $132,500, replace the $25,000, and pay off that second, leaving you a $320,000 loan and about $47,500, holding cost assumptions constant ($1000 in non-loan costs). You could do a paydown, leaving $272,500 balance on a 6.75 loan, or you could take $3500 in closing costs and refinance to 6.25, just as above, leaving a balance of $276,000 if you don't pay any points. Total loan costs, $7500 and you only have to avoid paying points twice (once, as opposed to twice, if you take the paydown option. It takes a little under 37 months to break even on your interest savings). Furthermore, in less than hot markets, it gives you greater leverage with your seller to pay some part of your closing costs: "Do this, or I don't qualify". They have the home on the market for a reason, and they can help the buyer in hand or they can hope for another buyer to come along.

In this example, not doing a bridge loan saves you about $6500, less the additional interest (about $512/month) for the second mortgage until your first home sells, but plus approximately $541 per month interest every month between the time you initially refinance your original property and the time it finally sells, a longer period of time. Plus one set of possible mortgage points. So it's not difficult to construct scenarios where it's a good idea not to.

Let's look at a different scenario, however. Let's say instead of upgrading, you're already in the $400,000 home, and looking to downsize to a $100,000 condo. Furthermore, let's say you bought for $200,000 and are now down to $160,000 owed, just to keep the proportions consistent. You borrow out to $265,000 (paying $3500 in loan costs), which you qualify for full doc at 6.25. You then pay cash for the condo (including $1000 for purchase transaction costs, and you've still got $500 in your pocket). Furthermore, an all cash, no contingency transaction is a powerful negotiating tool for a seller to give you a good price. Then when your original property sells, costing you say 7%, or $28,000, in selling costs. You net $107,500 in your pocket. If you did no bridge loan, let's still assume you can come up with $25,000 on the short term, and you still qualify full documentation. Your rate on the condo is 6.375 without points, holding assumptions consistent. Then you sell the first property for the same $400k, paying the same 7% ($28,000) and paying off the $80,000 loan on the condo as well as replacing the $25,000. Net still $107,500 in your pocket, less additional interest charges for a little longer period, but you cut your stress level and put yourself in a stronger bargaining position, which is likely to be worth doing.

There are any number of reasons and factors to do a bridge loan or not to do a bridge loan. You may not have a minimum down payment without a bridge loan. That's probably the most common, as not all properties and purchases are eligible for 100 percent financing (at this update, the only way I know to get 100% financing is with a VA loan, and some require as much as a forty or even fifty percent down. The way a necessary transaction is structured. The presence or absence of 1035 exchange considerations is often a factor. Your credit score may limit you, or your ability to qualify full documentation may dictate the advantage lies in a different direction. Every situation has the potential for factors that may dictate an answer other than that given by pure numerical computation, and there are therefore, no valid blanket answers to the question of whether or not to do a bridge loan.

Caveat Emptor

Original here

What is a good interest rate for a house that is for someone with low income?

Well, if you make enough to afford the property, your income isn't a factor on the interest rate you get! You either qualify or you don't. Banks may charge an additional fee for low loan amounts, but your income is not the issue, except as to whether or not you qualify for the loan as it is submitted. The lender does not care if you just barely scrape through, or if you have a hundred times the minimum income to qualify. Kind of like there's no such thing as "a little bit pregnant." You either are or you aren't. Same thing with loans: You either qualify or you don't. It's possible you might qualify for a better program than you got, or that you might qualify with another program where you don't qualify with this one, but those aren't questions that the underwriter or the underwriting process are going to address. They're questions your loan officer needs to get right before the loan is submitted.

There may be programs you are eligible for, such as Mortgage Credit Certificate or a locally based first time buyer assistance program. These programs can make it easier to qualify, in that they effectively raise your take home pay, they keep you from having to borrow so much, or even that the save you from the choice of PMI or splitting your loan. However, be aware that every single one of these programs requires full documentation qualification for a loan that's fixed for at least three years and fully amortized, or fixed and interest only for at least five years. Stated Income and negative amortization loans are not (and never have been) permitted with any of these programs that I am aware of. The idea is that you buy a property you can afford and stay in it for a long time, not a property you cannot afford, and get foreclosed upon. These programs also have income limits that many people might not consider "low." Up to $96,000 per year here locally can still qualify - the big concern is whether there's money still left in the budget for these programs when your application is ready for approval.

Nobody is really going to give you money at a lower interest rate than someone else, just because your income is lower. If this means you have to settle for a condo when you want a single family detached property, or a less expensive home than you would like, well, that's what everyone else has to do. There is no special magic wand that enables low income people to stretch beyond their normal means in purchasing a home. There's a lot of unscrupulous people who have gotten paid a lot of money pretending that there is, but there isn't. Stretching beyond your means is pretty much a guaranteed disaster. If not now, then a couple years down the road. Better to get it fixed in your head as to what you can really afford and live within that.

Caveat Emptor

Original article here