I’ve been receiving a lot of questions on the HARP 2.0 program so I thought I’d put up a new blog post addressing the most common questions:

Who Qualifies?

Homeowners who have a Fannie Mae or Freddie Mac serviced mortgage that was originated prior to June 2009.  If you are unsure if Fannie Mae or Freddie Mac owns your loan, you can find out at the links listed on the right of this website under Other Useful Sites or visit Fannie Mae or Freddie Mac.

Do I have to use my current lender?

Not necessarily.   HARP 2.0 will be available at a variety of mortgage lenders.

When is the HARP 2.0 Program Going to be Available?

Freddie Mac loans will be available March 12th and Fannie Mae loans will be available March 19th.  Some servicers may be offering the program now to their current loan portfolio, however, the program will not be available to the broader public until the dates mentioned.  If you have a interest in shopping around, it is in your best interest to wait till March 12th or 19th.

What if the value of my home has fallen?

HARP 2.0 fixed rate mortgages will have an unlimited loan to value while ARMs will be capped at 105%.   In some cases, an appraisal waiver will be granted as well.

What are the interest rates?

The interest rates on HARP 2.0 loans are similar to the interest rates on regular refinances.  In fact, in many cases, the rates on HARP loans may actually be lower than rates on a regular refinances.

Will a HARP 2.0 refinance hurt my credit?

No.  HARP 2.0 refinances are normal refinances and do not have a negative impact on your credit score.

I refinanced under HARP 1.0 guidelines.  Am I eligible for HARP 2.0 refinances?

No.  Your loan must have been originated prior to June 2009.  If you have refinanced after June 2009 through either HARP 1.0 or a regular refinance, you are not eligible for HARP 2.0.

What if my loan has Private Mortgage Insurance?

Most PMI companies have indicated that they are transferring PMI coverage on HARP loans.  However, some mortgage lenders may not allow PMI transfers.

What if my loan has a second mortgage or a home equity line of credit?

The second mortgage lender must agree to subordinate to a new first mortgage.  Most second mortgage lenders are agreeing to subordinate behind HARP refinances.  However, there may be some lenders who will not.  When you apply for a HARP 2.0 refinance, the lender will simultaneously request the second mortgage lender to subordinate.

Can I payoff my second mortgage or home equity line of credit with a HARP refinance?

No.  The HARP guidelines do not allow for combining a first and second mortgage into one loan.  If you have the equity, you can do so under regular refinance guidelines requiring an appraisal and income verification.

What credit score is required for a HARP 2.0 refinance?

There are no minimum FICO scores required.  However, be aware that lenders may still require higher FICO scores.

What if I no longer live in the home and rent the property?

Investment properties are eligible.

If you believe you may qualify for a HARP 2.0 refinance or have any questions, don’t hesitate to give me a call.

Like many Americans I traveled over the holiday season last month and as I passed through the security lines at Chicago O’Hare and Harstfield Airport in Atlanta I couldn’t help but think of the parallels between the Transportation Security Adminstration and the present state of mortgage underwriting.  I know, you are thinking what can the TSA possibly have in common with underwriting a mortgage?   Well, if you look at your experience with the TSA, you can actually understand how mortgages underwritten. 

Anyone who has flown since 9/11 2001 has experienced some of the mindless security measures that average everyday folks have to go through at airports just to get on a plane.   No one actually believes that restricting you to 3.5 oz of lotion in your carry on bag or confiscating your pocket knife is really going to prevent the next act of terrorism.    The TSA guards are simply doing as they are told.   It really isn’t so much their decision to confiscate the 3.6 oz of lotion, but if they don’t they wouldn’t be doing their job.  Millions of people travel every year, however, it only takes one act of terrorism to bring down the entire system as we saw on 9/11.  

In some ways, mortgages mirror the TSA.   Most homeowners are not out to commit fraud or buy houses they can’t afford.  However, it only takes a small number of failed loans to bring down the entire system.  One failed mortgage could easily wipe out the profit on 100 good mortgages.  As a result, mortgage underwriting has to be very diligent to ensure that bank’s money is protected.  In addition, much like the TSA, the rules are often being driven from a higher source, so nuance and common sense are not allowed.   With the TSA, if the rules say you have to take your laptop out of the bag, then you have to take laptop out of the bag.  With mortgages, if Fannie Mae and Freddie Mac say you need a 740 FICO score, then you must have a 740 FICO score.    The parallel to the TSA agent at the gate is the mortgage underwriter at the bank.  Both are just following the rules as laid out by their superiors.  With the TSA, the rules are dictated by Homeland Security.  With mortgages, the rules are dictated Fannie Mae and Freddie Mac.

Just like with the TSA, the rules come about by learning from experience.   The ounces rule in regards to liquids was brought on because someone tried to use liquid to make a bomb.   You take your shoes off because of the shoe bomber.  Much of the mortgage underwriting guidelines are brought on by catching borrowers or other parties who are attempting to defraud the bank.  Everytime the TSA and banks learn of a new trick, they go back and update their approaches so that they can catch the perpetrators.   Because neither the TSA or banks can actually know everyone they are dealing with, it is important to remember that it is the process that matters, not who you are or the risk associated with any particular individual. 

So the next time you are complaining about how much paperwork is involved with a mortgage or why an underwriter is asking for seemingly stupid documentation, you have to take a step back and think about the process and realize that the underwriter is not simply just trying to be difficult.  There are certain processes and documentation that must be completed on EVERY mortgage.  Just as the TSA agent isn’t asking you to take off your shoes because they want to really see your nail job, the underwriter isn’t asking for documentation just to be difficult.  There is a purpose and it is the follow the process to the letter and ensure the bank will not be a victim of fraud and the mortgage has value on the secondary mortgage market.

I get a ton of questions from borrowers regarding FHA mortgages and their pros and cons so I thought I would throw together a quick primer.

What is FHA?  FHA is mortgage insurance through the Federal Housing Administration.   Essentially, the FHA is agreeing to insure the mortgage if lenders make them to their guidelines.   The goal of FHA is to expand homeownership.

Who qualifies?  Pretty much anyone buying a primary residence.  There aren’t any income limits and you do not have to be a first time home buyer.  

What are the Credit Score Requirements?  Technically, FHA doesn’t have credit score requirements, but you would be hard pressed to find a mortgage lender who doesn’t require at least a 640 FICO score.  The other nice thing about FHA mortgages is that borrowers are not penalized for lower FICO scores like they are with Fannie Mae or Freddie Mac backed mortgages.

What are the Property Types?  FHA mortgages can be used to buy single family homes, condominiums, or multi-units (up to four units).   When purchasing condominium units, the development needs to be FHA approved. 

What Type of Mortgages?  FHA offers 30 year fixed rates, 15 year fixed rates, and 5/1 ARMs.

How are the Rates?  FHA mortgage rates are very competitive and in some cases, can be lower than the prevailing rates on conventional mortgages.

How much of a down payment is needed?  On most FHA loans, the minimum down payment is 3.5%.  The down payment can be a gift from a family member.

What about PMI? FHA has two forms of private mortgage insurance (PMI).   Upfront PMI and monthly.   The Upfront MI is 1% of the loan amount and is financed (added to the balance of the mortgage).  The monthly PMI factor is 1.15% (Loan Amount x .0115/12 = monthly PMI charge).

In summary, FHA can be a great financing alternative to conventional mortgages.  Typically, FHA works best if the FICO score is less than 740 and if the property is a condominium because you can avoid some of the price adjustments that come with conventional financing.   In addition, if down payment funds are limited, FHA may be the best option.  Typically, I run the numbers for both conventional and FHA to see which is best for my clients.

As always, if you have any questions regarding FHA or mortgages in general, do not hesitate to give me a call.

One of the terms that consumers hear frequently is PITI.  PITI is just short hand for Principal, Interest, Taxes and Insurance.   Put another way, this is the just the TOTAL monthly payment on the home that lenders consider for underwriting and most consumers use for budgeting their monthly housing expense.  

Principal & Interest – This is the mortgage payment net of any taxes or other ancillary monthly charges associated with owning the home.  For example, if you have a $300,000 mortgage at 4.5%, the principal and interest payment is $1520.06. 

Taxes - Simply the property taxes on the unit.  Property taxes in Chicago and metro area suburbs typically range from 1.5 to 2% of the purchase price.  So the taxes on a $300,000 property in Chicago would be approximately $300,000 x 1.5%/12 or about $375/month.

Insurance - The insurance component of PITI really can stand for several different items:

• Mortgage Insurance:  If you are paying private mortgage insurance on the loan, this is also included in PITI
• Condo Fees/HOA Fees:  If the property you are buying or own has a monthly assessment for amenities, this is included in PITI
• Hazard Insurance: When you own a home, you must maintain insurance on the property.  Owners of houses pay a seperate hazard insurance policy.   Condo owners pay hazard insurance through their monthly assessment.  However, condo owners also have what is known as a Ho6 policy which is a seperate policy from the one paid through their assessments covering the contents of their unit.  This is also included in the PITI.

The summation of all these items is your PITI.

The new HARP 2.0 guidelines were released at the end of the day and there really isn’t anything earth shattering just yet from the announcement.  So what are the meat and potatos of HARP 2.0?

No LTV & CLTV Restrictions on Fixed Rate Mortgages:  Loans that qualify under HARP no longer have LTV and CLTV restrictions.  This means you can be significantly underwater and still refinance if you have or are getting a fixed rate term.  ARMs and mortgages with greater than 30 year amortizations are limited to 105% LTV; however, no restrictions on CLTV.

Lower LLPAs: Loan Level Price Adjustments are basically what Fannie Mae & Freddie Mac charge mortgage lenders for making loans to borrowers who aren’t perfect  These are being limited to .75 bps which is a significant improvement.  What this means in layman terms is that mortgage rates will be more competive for borrowers who may have less than perfect credit scores, higher LTVs, condos, etc.  

No LLPAs on 20 Year or Less Amortizations:  In order to encourage homeowners to payoff their mortgages, the LLPAs have been entirely removed on shorter amortization loans.   This should make shorter amortizations more attractive by allowing borrowers to qualify for lower rates.

No Income Verification:  It looks like there may not be a need for income verification if the borrower has maintained on time payments for at least six months and no more than one thirty day mortgage late in the past year.   However, income verification is required if the new principal & interest payment is increasing by more than 20%.  This could be a good thing for many borrowers who are self employed or who may not meet current guidelines but are still able to make their mortgage payments.

Bankrutpcy/Foreclosure/Short Sale:  The time requirement for each of these has been removed so it seems as if borrowers who may have filed bankruptcy, had a foreclosure or short sale may be eligible. 

At the end of the day, it remains to be seen exactly how much this will help current homeowners who want to take advantage of lower rates.  There are still some issues with the program that have not been addressed.  The first is that the mortgage must have been originated prior to June 2009 which excludes a ton of current homeowners.  Removing this hard date would open up the program to recent borrowers as well as those who may have refinanced already; many of which are above current market rates. 

Second, HARP remains voluntary so we will see if lenders impose their own “overlays” on the guidelines.  Lenders are not required to follow these guidelines to the letter.  There are still questions if second mortgage lenders are going to subordinate without an appraisal or an unlimited CLTV.  Mortgage insurers will also have to play as well.

The program is supposed to be available for applications on or after December 1st, 2011.  However, LTVs above 125% may have to wait till March 2012.  It isn’t clear why this takes four months to implement .

My prediction is that we may see some refinances that were previously locked out, but I am not expecting a huge refinance boom under these guidelines.  This program will help some people, but it is not going to save the housing market.   There are still millions of loans that aren’t Fannie and Freddie backed that can’t refinance so until those mortgage are systematically addressed, this will continue to be a like taking an aspirin for a gun shot wound in my opinion.

You can see if your loan may be eligible for HARP by clicking on the Fannie Mae or Freddie Mac Loan Up links on the far right column of this blog.  Alternatively, you can just give me a call to see if you qualify.

One question I always get from borrowers is how is it that mortgage brokers are cheaper than mortgage banks.  Wouldn’t going to the bank directly be cheaper since you are cutting out the middle man?  The answer is a resounding NO.   Even though advertisers want you to believe that cutting out the middle man saves you money, the reality is that many industries are more cost efficient with middlemen and this results in lower costs for consumers.   However, in order to explain how mortgage brokers and the wholesale mortgage market works, it is often times easier to use an industry most consumers can relate to – retail gas stations.

Everyone has at some point or another bought gas for their car.  In addition, everyone has also probably noticed that there are brand name gas stations and Mom & Pop gas stations.  On any road trip, you will often find a BP or Mobil gas station across the street from a no name gas station.  You will also notice that the no name gas station is almost always a penny or two cheaper than the the brand name gas station.  However, what you don’t realize is that the no name gas station is also probably selling you BP gas just as the BP gas station across the street!

So what gives?  How can the no name gas station sell BP gas cheaper than BP sells out of its own gas stations?  Most people don’t realize that BP and other major gas refiners sell their gas on the WHOLESALE market so that other retail gas stations can sell their gas.  Essentially, the refiners have so much capacity, they can’t possibly sell it all themselves through their own retail channel, so by using the wholesale market, they are able to garner additional sales at very low costs.

The reason the gas is cheaper is because the operational costs of wholesaling the gas is cheaper than selling it through their own retail channels.  The no name gas stations have less over head so they can sell the gas cheaper than the large gas station chains.  BP sells the gas cheap enough on the wholesale market that the no name gas stations can still mark up the gas with their profit margin and still undercut BP or other major refiners.   In addition, the no name gas station can also buy gas from other sources.  So if BP isn’t cheap enough, they can buy gas from Mobil.   Or maybe Shell.   Or other refiners you’ve never heard of.   This gives the no name gas station more pricing power than the large retail chain because they are not beholden to buying gas from one source.  So at the end of the day, even though you may skip BP to save the one or two cents per gallon, there is a high likelihood, BP still made money off you indirectly by selling their gas to the no name gas station you patronized.   BP gets your dollar one way or the other.

This is EXACTLY how mortgage brokers and independent mortgage lenders operate.  They are able to obtain mortgage financing on the wholesale market from major depository and pass through lenders.   Because the mortgage broker’s overhead isn’t as high, they can pass the savings on to their clients.   In effect, the major mortgage lenders utilize mortgage brokers as an outsourced sales force to push their products because brokers can do cheaper.  The highest costs associated with originating mortgages is obtaining clients and by offering mortgages through the wholesale channel, mortgage lenders can get access cheaply to new mortgages through mortgage brokers without the high overhead costs.  With this model, everyone wins.  Big banks get a new loan to service, the mortgage broker makes a commission, and the consumer gets a lower than market interest rate.

Remember when the gun control lobby was pushing cooling off periods on the purchase of handguns?  Basically, you had to wait five days before you could take possession of handgun. The theory was that the cooling off period would give the gun buyer an opportunity to reconsider their actions if they were thinking about suicide or blowing someone away as a result of an argument. Most people don’t know that federal regulations also require mortgages to have a cooling off period when refinancing a primary residence.

Under Regulation Z of the Truth in Lending Act, borrowers refinancing a primary residence (home you live in) are required to have a three business day right of recission period. Basically, before the lender can fund your new loan, we have to wait three business days. During the three business day period, the borrower can cancel the loan for ANY REASON and is entitled to a refund of any prepaid fees to the lender. The recission period does not apply to second homes or investment properties.

The rule is in place to “protect the consumer” from making a bad choice about their mortgage. I guess there could be a situation where someone refinances their home and some how the new mortgage is not in their best interest. In theory, the recission period is supposed to give the borrower an out so they aren’t pressured into taking a predatory mortgage. Of course, the reality is that very few homeowner’s ever exercise their right to rescind a refinance transaction. If there is any predatory lending going on, I highly doubt it is going to be stopped by the recission period which assumes that the borrower knows their loan is predatory.

Where this regulation fails is that it really just raises costs for all consumers instead of protecting a small minority of borrowers from predatory lending. It raises costs because it adds unnecessary time to a refinance rate lock that the consumer ultimately pays for through higher interest rates.  Mortgages rates are locked for set time periods. The longer the bank has to lock the interest rate, the more expensive for the consumer. Because banks typically only can lock mortgage rates in 15 day increments, the recission period can cause a 30 day rate lock to become a 45 day rate lock. Depending on pricing, this could add .125% or even .25% to the consumer final rate to account for the recission period in the rate lock.    For example, a 30 day rate lock really is more like a 25 day rate lock in some cases when factoring in the dead time of the recission period.   Therefore, a bank would need to lock rates for 45 days to ensure there is a enough time on the rate lock to actually process, underwrite, and fund the mortgage.

So how does the recission period work in practice?  If you were closing today Monday, November 14th, the signing of closing documents would take place today.  However,  the title or escrow company does not fund the mortgage until three business days later.   So the days counted in the recission period would be Tuesday, Wednesday, and Thursday.  The loan would fund on Friday, November 18th.  In layman terms, the loan wouldn’t be official until Friday, November 18th.   The old bank is not paid off until then and the new bank mortgages doesn’t go in effect till then.

Unfortunately, there are no provisions so a borrower can’t even waive the recission period.  While the intent is noble, the effect raises costs for all consumers whether they know it or not.   In my nearly decade as a mortgage originator, I have yet to see one borrower ever use the recission period to get themselves out of a predatory loan.

One of the most common terms you will hear when applying for a mortgage to either refinance or buy a home is “LTV.” LTV is simply shorthand for Loan-To-Value. All this means is the outstanding loan balance relative to the appraised value of the property.

For example, if you buy a $400,000 home and put 20% down, you have a mortgage of $320,000. Therefore, the LTV is 80%.

LTV is important because it is a major component of pricing and underwriting mortgages. The lower the LTV the better because it means the lender is taking on less risk in the event of a default.

There are other versions of LTV that you may hear as well such as “CLTV.” CLTV means Combined Loan To Value. CLTV is used when there is a second mortgage or home equity line behind a first mortgage. For example, if you refinanced and took out a home equity line of 10% of the appraised value in the situation mentioned above you would have a $320,000 first mortgage and a $40,000 second mortgage. Together these two mortgages add up to $360,000. Therefore, the CLTV is $360,000/$400,000 or 90%. CLTV also is considered when pricing and underwriting mortgages as well.

The last version of LTV is “HLTV” which stands for High Loan To Value. This is a play on the CLTV when a borrower may have an open or revolving line of credit on the home. In the CLTV example above, we are assuming the balance on the home equity line is the maximum. However, there are situations where the balance is lower than the credit line. HCLTV is how we calculate the maximum loan to value if we assume the credit line is maxed out.

For example, let’s say you have home equity line for $40,000, however, your only carry a balance of $20,000 on the credit line. The first mortgage is $320,000 and the value of the home is $400,000. Our LTV, CLTV, and HLTV would be as follows:

LTV is $320,000/$400,000 = 80%

CLTV is $320,000 + $20,000 = $340,000/$400,000, so 80% LTV & 85% CLTV.

HLTV is $320,000 + $40,000 = $360,000/$400,000, so 80% LTV, 85% CLTV, and 90% HLTV.

Many lenders are scrutinizing HLTV because even though a homeowner may not carry a balance on a second mortgage, the potential to have a balance on the credit line increases the risk to the lenders so they must take this into consideration. 

As always, if you have any questions do not hesitate to shoot me an email or give me a call.

Of all the dumb legislation and regulations related to housing market, a bill being proposed John Isaacson (R-GA) and Michael Bennet (D-CO)  ranks right up there with the dumbest.  The bill is called the Sensible Accounting to Value Energy Act.

These two mental midgets are proposing that banks considering the monthly utility costs of a home when underwriting mortgages for a potential borrowers. Their thinking is that utility costs are a significant burden on home owners and therefore should be considered as part of the underwriting process for government sponsored mortgages (Fannie/Freddie/FHA). There are some obvious reasons as to why it makes no sense to try to include utility costs in mortgage underwriting. The most notable being that different families have different utility needs and usage. For instance, some families may blast air conditioning/heating all year long while others may enjoy natural ventilitation or using fireplaces. Utility costs are extremely variable depending on the owner of the home.

The second issue is that counting utilities adds yet another layer of complexity to an already overly complicated underwriting process. The debt ratios that banks use have been developed over many
decades and already reflect that there are some unaccounted costs when it comes to home affordability. To require specific documentation is simply not necessary. In addition, one has to ask when enough is enough. For example, some people probably spend more each month on gas for their cars than they do for utility bills for their home. Should we also require require borrowers to disclose what type of car they drive and their weekly commute to better gauge how much they spend on gas for their cars?

The third issue is that a responsible homeowners should know how to budget for their own utility costs. Dare I say if a homeowner can’t afford their utilities, they can’t afford the house. Secondly, if they can’t figure out that they have to consider the miscellaneous upkeep associated with owning a home, maybe they aren’t quite smart enough to be a home owner. As we found out during the housing bubble, home ownership is not meant for everyone.

Finally, there may be other motives associated with this piece of legislation. When you read between the lines of the bill and look at who is supporting the legislation you get a clearer picture as to what the real intent of the legislation might actually be – creating supposed “green jobs.”   The LA Times reports:

“Dozens of housing, energy and environmental groups have endorsed the new legislation including appraisers, large home builders, the U.S. Green Building Council, the Natural Resources Defense Council, green-designated real estate brokers, the Institute for Market Transformation and the National Assn. of State Energy Officials, among others.

Business groups such as the U.S. Chamber of Commerce are backing the legislation because they see it as an employment generator that requires no federal budget outlays and no new taxes or programs. A joint study by the American Council for an Energy-Efficient Economy and the Institute for Market Transformation estimated that 83,000 new jobs in the construction, renovation and manufacturing industries could be created by the legislation if the new underwriting rules were phased in over a period of years.”

When I read that quote, my transalation is that some how this legislation or future legislation is going to force homeowners to make energy efficient upgrades to their homes. By tying the utility costs to mortgages, homeowners who do not make these upgrades will be a significant disadvantage in the market place if borrowers cannot get mortgages to finance their property.

I’ll let you know how this legislation is progressing in future posts.

While we always like to think positive thoughts, the mortgage market is in a state of continual flux right now and credit worthy borrowers can find themselves without financing. In order to protect themselves in case their loan disappears, buyers need to ensure they have negotiated for a mortgage contingency in their purchase contract.

Real estate contracts may look simple being only a page or two in length with fill in the blanks but don’t lose sight of the fact that they are legally binding. While buying a home looks like fun and games on HGTV, this is the most serious and largest financial purchase of your life. Once you agree to buy a home, you cannot just decide to walk away because you had a change of heart. This is why most sellers require significant earnest money deposits to know that the offer is being made in good faith. They want to ensure you have an incentive not to back out of the transaction at the last minute. Earnest money typically is 5% of the purchase price but the amount you put up as a buyer is entirely negotiable.

But what happens if the deal falls apart because you can’t get a loan? Be thankful for a mortgage contingency. This is a date that is negotiated within a real estate contract that gives the buyer a way out of the contract and protects their earnest money in case they are unable to secure unconditional financing by the agreed upon date. While the date of the mortgage contingency is negotiable, it is usually 30 days from the acceptance of the contract by both parties.

Once you pass the mortgage contingency date, your earnest money is at risk and the seller can legally keep it if you fail to close as agreed upon in the contract no matter how much of a sob story you can come up with. Buyers should be working diligently with their lender to ensure they have unconditional financing in place by the contingency date. In addition, this is why it is a fool’s game to pick lenders solely based on lowest rates. The lender actually has to perform per the contract and a low rate promise doesn’t mean jack squat if they cannot get your mortgage approved in a timely manner.

During a seller’s market, mortgage contingencies are often left out of contracts because seller’s have the upper hand. They can find someone else who is more secure about their financing prospects. Also, all it took was the ability to fog a mirror to get a loan in the last several years so the risk of not being able to get financing was fairly slim. However, now that it is a buyer’s market, sellers have to accept contingent contracts if they want to sell their home in a timely manner. More importantly, the contingency is just one additional layer of protection in this unpredictable mortgage market.