Archive for Home Loans/Mortgages/Financing

FHA? Home Path? Which is better?

21 June 2011

FHA or Home Path from Fannie Mae – which home loan program is better?  And most importantly – why??

Let’s take a look:

First of all, they both allow home buyers to buy a home with a low down payment and fairly liberal qualification guidelines, so both mortgage programs are a great way to buy a home!

FHA and Home Path

If you purchased a $250,000 Single Family Home with FHA financing, your down payment would be $8,750.  Your loan amount with the Up Front Mortgage Insurance Premium (UFMIP) would be $ 243,662.50.

As of today, the interest rate would be about 1% lower than a Fannie Mae Home Path Loan.  Advantage FHA? Not so fast!

Because FHA adds the monthly FHA Mortgage Insurance Premium to the payment, the FHA interest rate is effectively 0.90% higher than it appears, and this amount is not tax deductible.

So far, the FHA and the Home Path effective rate end up abut the same.

Home Path offers 97% financing, so the down payment on the   home loan would be $7,500.

FHA allows for 96.5% of the purchase price to be financed, so again, the differences between the two home loan programs are minimal.

Home Path does not have the Up Front Mortgage Insurance Premium $242,500 – neither the amount paid in escrow nor the monthly add on amount.  In addition, HomePath Loan does not require you to get an appraisal – saving $500 to $600.

One advantage shared by both FHA and Fannie Mae Home Path home mortgage programs are lucrative Seller Credits, reducing the amount of your closing costs by as much as 6% of the purchase price – provided you know how ask for them!

With either of these home mortgage options, make sure you get a lender who is very familiar with these programs.  Ask your Certified Home Path Lender for more information about Home Path Loans, then see how it compares with the program offered by an experienced FHA mortgage provider.

Whether you choose FHA or Home Path really depends on you!

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Buy A House With Bad Credit?

18 June 2011

Buy a house with bad credit? Are you kidding - after what our real estate market has been through??

Buy a House With Bad Credit

Well, you have more options than you may think! Let’s take a look at two of them:

FHA has long been one of my favorite methods for financing a home purchase. It requires less down payment than most other loan programs, it has uses more liberal guidelines for the income required to qualify, and it allows for a more forgiving credit history.

This last part is a big deal!

While conventional lenders look for a minimum FICO score of around 660, FHA can go much lower – to around 620, I am told.

In addition, they more likely to consider an explanation of any derogatory entries on your credit report. That is, if a derogatory credit trade was due to a medical issue or an unusual one-time event, FHA is more likely to view that as an anomaly rather than a pattern of disregard for your obligations.

In addition, FHA is more forgiving and has a shorter time period required after a foreclosure or bankruptcy than conventional lenders.

FHA is certainly one place to look if you have had unfortunate events in your credit history.

Another place is local credit unions.

I received a message the other day from Golden One Credit Union telling me about a program designed to help Californians who have lost a home to foreclosure or filed bankruptcy obtain financing to purchase a new home!

Naturally, there are factors involved in qualification and there are loan limits, but at a $417,000 loan amount, this may be a perfect way for a borrower who has suffered a financial calamity to re-enter the real estate market and begin the process of re-establishing their credit.

Before you worry about bad credit, it is important to find out how bad it is.  And how recent.

With these or any other loan program, it is always best to speak with a professional mortgage consultant – and one you can trust!

Any loan program, regardless of your credit history, has many details that should be explained and clearly understood before you enter into a contract to purchase a home of borrow money.

But many people who have suffered the downside of these difficult economic times think they will never be able to own a home again. For many, this is simply not true.

It may be that, if you buy a house with bad credit, you may just make your credit good again!

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Will the Financial Reform Act Make Home Loans More Expensive?

21 March 2011

Recently, Congress enacted the Dodd-Frank Act, also known as the Financial Reform Act, to stop some of the home loan practices that they say helped bring about the current real estate recession.

Financial Reform Act – the Dodd Frank Act

It is far reaching and all-encompassing.  Read what the NY Times says about the Dodd- Frank Act

I called my friend John King of Wells Fargo Private Mortgage Advisors, a division of Wells Fargo Bank, and asked him how this would affect the cost of obtaining a home loan in the future.

Here is his response:

“In a word, “Yes”.

It will be more expensive in the long run to get a loan due to all of the new “Financial Reform” legislation hitting the mortgage industry.

This type of legislation is always written with the “intent” of protecting the consumer from the evils of the industry the legislature seeks to regulate.  Unfortunately there is “No Free Lunch” in anything we do.

When you force any industry to conform to new, stricter regulations, there is always the cost of interpretation, implementation and consistent policing of these regulations.

In the past year, the size of the home loan industry has been whittled down substantially.

With implementation of both California and Federal Licensure of Mortgage Originators, and the most recent SAFE Act (which actually does background investigations of mortgage originators), we are definitely seeing a much higher grade of lending professional and mortgage originator in the business today.

However, this is a cost to the banks and mortgage originators themselves which increases the cost of doing business.

Sooner or later, these costs will be added to the price we pay in rates and fees to get a loan.”

To get more information about rates, fees, and other aspects of the home loan process, contact John King of Wells Fargo Private Mortgage Advisors, a division of Wells Fargo Bank. 

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What is a FICO Score and How Does It Affect My Credit?

14 March 2011

A FICO score is a numerical score used to determine credit worthiness.  Banks and lenders use it to assess credit risk.

The name is an acronym for “Fair Isaac Corporation” and was founded in the late 1950’s by William Fair and Earl Isaac in Marin County, California.  It became a publicly traded company in 1987 and relocated to Minneapolis, Minnesota in the early 2000’s.

Although it is not the only numerical method of determining borrower credit worthiness, it was among the first to gain wide-spread acceptance and continues to be the most well-known.

Before its wide-spread use, credit risk was assessed by on a case-by-case (or borrower-by-borrower) method that was criticized for being uneven and potentially discriminatory. Since the FICO scoring method uses five basic factors to determine a borrower’s credit, other personal factors such as age, race, type of employment, and marital status do not come into play.

The five factors are:

  1. Payment History: This accounts for around 35% of the FICO score and examines items such as ability to pay debts, history of paying on time, and any delinquent or “past due” accounts.
  2. Amounts Owed: The second highest portion of your FICO score at 30%, this takes a look at how much you owe in relation to available credit, number of accounts, and account balances.
  3. Length of Credit History: 15% of your FICO score looks at how long you have been borrowing (and hopefully, repaying) your consumer debt. Inn most cases, the longer the better!
  4. New Credit: New or recent credit lines opened accounts for 10% of the FICO score.  It is used as an indicator of how much new debt (and, therefore, with a rather unpredictable history) you have.
  5. Type of Credit: FICO scores like to see a diversity of credit on your credit report.  This factor accounts for 10% of the overall FICO total score.  Credit lines such as credit cards, mortgages, auto, etc., show a willingness and ability to handle diverse types of debt and payment arrangements.

The FICO scoring method has come under criticism lately because, as borrowers and lenders learn more about how the scores are calculated, it is assumed the results can be skewed one way or another.

However, most lenders – certainly most home mortgage lenders! –  still use the FICO scoring method as a way to determine who and how much money they are willing to lend.

Visit Transunion and get a free credit report

Visit Equifax to get a free credit report

Visit Experian for a free credit report

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Is It True The IRS PAYS You To Buy A Home Instead of Rent?

9 March 2011

Buy a Home vs Rent

With many real estate people, all they ever tell you is “Buy a home!”  In many cases, this is good advice, but it may surprise you why!

The other day, a young first time home buyer told me he couldn’t understand why he would pay hundreds of dollars more in house payments to buy the same home he is renting now.

It is true that his monthly house payment would be substantially more than his current rent, but he is forgetting one of the biggest short term benefits of of owning his home instead of renting - the mortgage interest tax deduction from his taxable income which lowers his total income tax owed to the IRS!

If the mortgage interest he would pay on this loan is about $1600 per month – typical for a home loan on a $430,000 purchase – this can be added to his property taxes and deducted from his taxable income, reducing his income tax bill.

That could be about $2000 worth of tax deduction every month he has his mortgage!

If he is in the 28% tax bracket for Federal Income Tax and approximately 9% for California Income Tax, this means over one-third of this amount would be returned to him in the form of income tax savings.

That would make his net monthly outlay about the same as he is currently paying in rent!

But that is not all.  By using this income tax deduction, he may also be able to itemize other deductions, further reducing the amount he owes for income tax.

And he is able to deduct some of the costs of purchasing that home – loan origination fees and discount points – in the year he buys his home, too.

Before you apply this strategy to your own personal situation, you should always consult an income tax professional.  The IRS and the California Franchise Tax Board have very strict rules about what can and cannot be deducted, and you need to examine the entire picture before making this very important decision to buy instead of rent.

Read about the Mortgage Interest Deduction and other mortgage related topics on the IRS website

Read about how the State of California treats the Mortgage Interest Deduction on the California Franchise Tax Board website.

However, when you consider the fact that owning your home allows you to take advantage of future home price appreciation and insulates you from rent increases, today’s lower home prices and traditionally low interest rates may provide the perfect environment to make the place you call home actually your own home!

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Are Stated Income Home Loans Still Available?

7 March 2011

Recently, I had the opportunity to present John King of Wells Fargo Private Mortgage Advisors about the availability of stated income home loans.

Are Stated Income Home Loans To Blame?

Stated Income loans have been blamed for the financial crisis and have often been described as liar loans – where the home buyer lies about how much money the make or even if they are employed!

a photo of John King - Wells Fargo Bank, Private Mortgage Advisor

John King - Wells Fargo Bank, Private Mortgage Advisor

In spite of this stigma, the original lending philosophy of these stated income home loans may not have been that flawed.

Basically, home loans are based on risk.  The more income you have, the less inherent risk is involved with you being able to make the payment.  In addition, the original no income loan programs swapped the risk connected with no verification of income with a substantial increase in down payment and money in savings.

The more of your own money you have invested in the home purchase, the more likely you will be to make the house payment, no matter how much you earn.

Let’s hear what John King has to say about stated income home loans:

Robert Lilley Brokerage: “Welcome, John – It is always good to see you! Tell us about Stated Income home financing.”

John King: Well, (laughs) if you ask those Self Employed Buyers who have been using this form of income documentation for many years, they are saying “When will it return!”

If you ask a Capital Markets Executive (Those who buy and sell Mortgage Backed Securities) they say “We hope never!”

If you ask a politician they say “Not right now… unless it affects my ability to get re-elected!”

RLB: “Yes, a far cry from a few years ago when stated income was used merely a lazy way to provide home loan qualification documentation!”

JK: “In today’s mortgage market, I see guidelines getting more conservative, giving us much less ability to offer those who would have “properly qualified” for stated income loans back then.

Recently, however, a specific niche product offered through Wells Fargo Bank does allow for a borrower with significant assets to qualify for a loan using these assets as a basic for the income qualification.”

RLB: (laughs) “And I’m sure you are dying to tell us all about it!”

JK: (laughs) “Well, of course!  Seriously, this “Asset Dissipation” calculation is an exclusive product that can allow a buyer/owner who has considerable assets and not much income showing on their IRS1040’s to possible qualify to either Purchase or Refinance a home in today’s market.”

RLB: “So, all I have to do is go into a Wells Fargo Bank branch and ask about this stated income product?”

JK: “Well, not exactly.  Not all Wells Fargo Bank loan officers have this program available to them.  You must consult a member of the Private Mortgage Advisors team.”

RLB: “Like you?”

JK: “Yes, I am proud to say that I am a member of the Wells Fargo Bank Private Mortgage Advisor team”

RLB: “How difficult is it to get more information on this loan program, John?  If not all Wells Fargo mortgage bankers have it available, how would a home buyer find out more about this?”

JK: “Just send an email to me and I will be happy to provide details.  It may not be right for every home buyer in every situation, but it could be another method of buying that perfect home for a particular buyer who could not otherwise qualify for a home loan.”

RLB: “Thank you again, John!”

Contact John King of Wells Fargo Bank Private Mortgage Advisors LLC, an Affiliate of Wells Fargo Bank NA

This interview is not intended as an encouragement to borrow money or use financing to purchase a home.  It is merely an informational item, keeping you informed about some of the options available when purchasing a home.

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