Dan Marchiando's Mortgage News Blog

There is a lot of conflicting information about how big a down payment needs to be—to purchase a home. Old standards, beliefs, expectations, and traditions die hard.

Down Payment Reality

While the benchmark of mortgage down payments is a twenty-percent down payment, statistics from the National Association of Realtors (NAR) show that nationwide the average purchase down payment in 2016 was just 11 percent. In California, and other states where home prices are higher, that average down payment is slightly higher, but still less than 20%. As might be expected, the average down payment for young first-time home buyers tends to be less than the average down payment for older move-up buyers.

Down Payment Beliefs

Interestingly, surveys by the National Association of Realtors (NAR) and Zelman & Associates show that 39 percent of “non-owners” (renters and those living with parents, etcetera) believe they need a down payment of more than 20%. Twenty-six percent of those surveyed non-owners believe they need a down payment of 15 to 20%. And 22 percent of the non-owners believe they need a down payment of 10 to 14%. That adds up to huge majority of potential buyers who believe they need a down payment that exceeds that real nationwide average down payment.

Below are some of the loan options available, that can make the purchase of a home possible with less than a 20% down payment.

No Down Payment Loans

• VA (Veteran) guaranteed loans with no down payment up to $625,500 in Santa Barbara County. Even larger Jumbo VA loans are available with a down payment. You may know more veterans than you realize; more than 13% of male Americans and more than 1% of female Americans have served in the armed forces.

• USDA guaranteed loans with no down payment, subject to geographic, income, and loan size restrictions.

3% Down Payment Loans

• Conventional Conforming loans to $424,100, with private mortgage insurance.

3½% Down Payment Loans

• FHA government-insured loans up to $636,150 (in Santa Barbara County).

5% Down Payment Loans

• Conventional Conforming loans to $625,500 (in Santa Barbara County), with private mortgage insurance.

10 to 19% Down Payment Loans

• Conventional Conforming loans to $625,500 (in Santa Barbara County), with private mortgage insurance, and Jumbo loans to $1.50 million without mortgage insurance.

If you know someone who might be in the market to buy a home now or in the future, a low down payment loan can be an option. It is a great way to get into a home and start building equity. There are some other very common ways that home buyers can get an assist towards buying a home. The biggest and most common assist comes in the form of GIFTS of cash from family members. The second most common assist involves someone acting as a co-signer on the mortgage loan with the home buyer. To a lesser dollar extent, home sellers can also provide an assist, by providing a credit to buyers, that can be used to offset some of the buyer’s purchase transaction costs. Not everyone is a good candidate for these programs, but I’m happy to work with anyone interested in exploring these financing options.

As always, thanks for your interest,

Dan Marchiando, your California Mortgage Broker and Loan Officer

The Consumer Financial Protection Bureau’s (CFPB) Ability-to-Repay (ATR) Rule went into effect January 2014. The rule was designed to protect consumers from getting trapped in mortgages that they cannot afford, by requiring mortgage lenders to evaluate whether borrowers can afford to pay back a mortgage before signing them up. The rule was required by Congress with passage of the 2010 Dodd-Frank Act, in response to the financial crisis and nationwide foreclosure epidemic. Congress was also no doubt motivated by the recession to pass Dodd-Frank—to provide some protection to the larger economy from collateral damage due to future crises in the banking  and housing industries.

The ATR rule applies to loans made on residential properties from 1-4 units, and applies regardless of whether the property is the borrower’s primary residence, vacation home, or residential investment property. Certain types of loans are exempt from the ATR rule, like some Home Equity Lines of Credit (HELOCs), and reverse and commercial mortgages.

The Ability-to-Repay Rule puts into law conservative but common-sense practices that most lenders were already following since the financial crisis started. The mortgage lenders who survived the widespread failure of banks, long since stopped making risky and exotic Stated-Income, Easy-Documentation, Low-Documentation, and No-Documentation loans. So the Ability-to-Repay Rule has not caused a dramatic reduction in the availability of loans in 2014, because lenders were already requiring full documentation of income and assets. But the ATR will make the return of easy-documentation loans unlikely anytime soon.

Under the ATR, mortgage lenders must look at customers’ documentable income, assets, and savings, and weigh those against the borrowers’ monthly housing payments and other monthly debts. Also, lenders can no longer qualify borrowers based on teaser or introductory interest rates offered on ARM loans—and pre-payment penalties are severely restricted. The Ability-to-Repay Rule does not require lenders to offer any specific type of mortgage—lenders can offer any type of mortgage they reasonably believe a consumer can afford to repay. But lenders do have to evaluate the numbers on the borrowers’ documents, and retain documentation to back up their assessment. In practice, today’s lenders stopped making exotic  and complicated loans a few years ago. Features like Negative Amortization and 1% teaser rates—that failed lenders like Washington Mutual, Countrywide, and World used to have—are not currently being offered. And it seems unlikely those types of loans will return anytime soon.

The biggest impact of the loss of Stated-Income and Low-Documentation loans has been to self-employed borrowers who have a lot of write-offs that reduce their taxable income. Some self-employed borrowers may be forced to claim fewer tax deductible expenses in the future, which will require them to pay more taxes, just so they can qualify for loans.

If you have any questions about loan documentation, please don't hesitate to give me a call or shoot me an email—I'm happy to help and I'm never too busy for your questions. And as always,  I greatly appreciate your referral of friends and family.

Thanks for your interest,

There has been a fair amount of change and new legislation over the past 6 years affecting the appraisal process for residential properties. Some have had a noticeable impact on borrowers, and some are fairly benign or insignificant.

The biggest changes that have occurred, have happened in the process that is used to order residential appraisal reports. Prior to the real estate and mortgage melt down, loan officers usually ordered their client’s appraisals directly from their local and trusted appraisers. However, a few large banks outsourced the ordering to middlemen called Appraisal Management Companies (AMC).  In New York in 2008, the N.Y. Attorney General sued an appraisal management company (AMC) used by the now defunct lender Washington Mutual, for manipulating and potentially inflating appraisal values. This legal action ended up affecting the whole appraisal process over the entire U.S.   Shortly thereafter in 2009, a joint set of rules called the Home Valuation Code of Conduct (HVCC) were temporarily put into place by the huge mortgage giants Fannie Mae and Freddie Mac, in conjunction with their government regulator, the FHFA. With these new rules, lenders were required to use a middleman AMC to order their appraisals, in spite of the fact that an AMC was implicated in the New York scandal (I know, it sounds fishy to me too). The HVCC drove business to appraisal management companies, which were designed to be independent third parties, uninfluenced by mortgage lenders. The majority of the loans being originated then, and now in 2014, were being underwritten to Fannie Mae and Freddie Mac guidelines, so they could be sold off to the mortgage giants. Therefore, mortgage lenders (banks and mortgage banks) started requiring everyone to place all their appraisal orders with an approved AMC, who then contracts with an appraiser to perform the work on behalf of the lender and borrower, adding a layer of cost to the borrower. All of this is due to a few “bad apples” in a state far from California, and involving a lender no longer in existence. Around the same time in 2009 the Federal Reserve used its powers to enact temporary Appraisal Independence Rules with similar requirements. In 2010 the HVCC was refined into a new set of similar rules called Appraiser Independence Requirements (AIR). And later still in 2010, with the passage of the Dodd-Frank Reform Act, the Appraisal Independence Rules were made into more permanent U.S. law, with some minor tweaks. The latest rules no longer require the use of an AMC if the independence rules are followed properly, but lenders have universally stuck with using AMCs for their own convenience. And many lenders have also invested in or created financial partnerships with AMCs that they are now probably reluctant to give up. They do have to disclose these financial relationships to borrowers when loans are made, but borrowers have no ability to choose the AMC or appraiser that does the appraisal.

As I said above, this recent switch to the use of Appraisal Management Companies (AMCs) has added a layer of cost onto borrower's appraisal costs. Initially AMCs tried to hold the line on the cost to borrowers by just cutting the amount of the appraisal fee that went to the appraiser. This caused many experienced and veteran appraisers to push back. And many newer, less-experienced, and out-of-town appraisers filled the void, and for a while appraisal quality seemed to decline. And of course home values had also plunged as a result of the Recession, so there were certainly a lot of people unhappy about appraisals during this time period. The industry seems to have adjusted somewhat to the changes, and now appraisal fees have increased, appraisers are getting a little more for their work, and appraisal quality seems to have improved.

Another more minor change brought about by the Dodd-Frank Reform Act was a requirement that borrowers be given a copy of their appraisal, either electronically or on paper, at least 3 days prior to the closing of their loan. Previously existing law only required that borrowers be notified that they had a legal right to request a copy (in writing) of their appraisal. The idea behind this newer rule, was that it would give the borrower a little time to dispute the quality or value of the appraisal. Where our brokerage practice is concerned, this law provides no real extra protection, because we have always provided a copy of the appraisal to our clients immediately after it becomes available, without the client having to request a copy in writing. And we always review the appraisal for accuracy and discuss the appraisal with our clients, and advocate for our clients to challenge the results of the appraisal if necessary,.

If you have any questions about current appraisal rules, please don't hesitate to give me a call or shoot me an email--I'm happy to help and I'm never too busy for your questions. And as always,  I greatly appreciate your referral of friends and family.

Thanks for your interest,

Dan Marchiando, your California Mortgage Broker and Loan Officer.

Federal Reserve rules went into effect in late 2009 and were made final in 2011, to help homeowners keep track of who owns their mortgage loan, and who to contact if they have loan servicing issues. This issue can be very confusing to borrowers, because borrowers often assume that the company that collects their monthly mortgage payment (the loan Servicer), is also the owner of their mortgage (the loan Investor). But in reality these two roles are usually split early in the life of the loan. Generally speaking, banks and mortgage bankers originate loans to borrowers, often through mortgage brokers like Paragon Mortgage. Their business model is creating new loans--not holding loans as an investment for 30 years. They will oftentimes sell the loan to an investor like Fannie Mae or Freddie Mac, often before the first mortgage payment is due. If the bank or mortgage banker is big enough to have an efficient and cost-effective loan servicing department (to collect the monthly payments and send monthly statements), then the bank will keep the responsibility to service the loan, but sell the loan to an investor. If not, then they will sell the loan to an investor, and sell the servicing right/responsibility to a company that specializes in servicing loans. In the past, this habit of selling the servicing of mortgages loans could happen all too frequently, leaving homeowners very frustrated with the constant changes. There has been considerable consolidation in the mortgage industry in the  years since the start of the Great Recession in 2008, so I think that in the future, we will hopefully see less turnover of mortgage loan servicing.

What the New Rules Require

The new rules now require the company that purchases your mortgage as an investment (the Investor), to send you a letter within 30 days telling you of their ownership, the date the transfer occurred, and contact information should you need to contact them or their agent. These new rules only apply to a borrower's principal residence and do not apply to vacation, rental, or business property loans.

What About the Loan Servicing?

 If the servicing of your loan has also been transferred, then the current loan servicer is required (by different and older rules) to send you a letter telling you who the new loan servicer will be, and their contact information. This letter is sometimes called a "goodbye" letter. The new loan servicer is also required to send you a letter confirming that they have now acquired the responsibility to collect your mortgage payment for the loan investor. This letter is sometimes called a "hello" letter. Sometimes both of these legally-required notices are combined into a single letter addressed from both servicers. There is a 60-day grace period after the transfer: during this time you cannot be charged a late fee if you mistakenly send your mortgage payment to the old servicer.

If you have any questions after reading this, please don't hesitate to give me a call or shoot me an email--I'm happy to help and I'm never too busy for your questions. And as always,  I greatly appreciate your referral of friends and family.

Thanks for your interest,

Dan Marchiando, a California mortgage broker and loan officer.

January 21, 2014 Newsletter message.

A lot has been happening in the mortgage industry over the past few years, as a result of the Recession that started in 2007, and I thought it would be useful to you to have an update on a few of the more important issues, over the next few months.

What's happening with loan amounts?

Conforming loans were reconfirmed for most of 2014, at the 2013 limit of $417,000. High-Balance (aka Super-Conforming) loans in Santa Barbara County were reconfirmed for most of 2014 at the 2013 loan limit of $625,500. The High-Balance limits for San Luis Obispo and Ventura Counties are also unchanged for 2014, at $561,200 and $598,000. The Conforming and High-Balance programs are important because they make up the majority of home loans being made since the start of the Recession, and they are also the least-expensive loans for home borrowers.

A federal agency called the Federal Housing Finance Agency (FHFA) -- on an annual basis -- determines the maximum-size loans for these two loan programs. The FHFA is supposed to determine these maximum loan sizes based on a complicated formula that involves statistical home sale prices, however they are not apparently mandated to use the formula. In the summer of 2013, for a variety of reasons, including the fact that home prices are lower than before, the agency was considering lowering the max loan amounts for Conforming and High-Balance loans. Fortunately, because of lobbying from members of Congress and several industry and consumer groups, these maximum loan limits were continued at their 2013 amounts, so as to not limit access to these important and less-expensive mortgage loans.

Jumbo loans will continue, to be any loan bigger than a county's High-Balance loan limit, which would be anything greater than $625,500 for Santa Barbara County.

The Veteran or VA loan maximum, for their 100% financing loans, actually increased for Santa Barbara County, from 2013's $593,750 to 2014's $643,750. With a down payment, VA loans can go as high as $1 Million.

Where are purchase loan interest rates these days?

Conforming (maximum $417,000)      4.375%, APR 4.410%

High-Balance (Super-Conforming)     4.500%, APR 4.525%

Jumbo                                                 4.875%, APR 4.899%

(effective Friday 1/17/2014)

If you have any questions about any of this, give me a call or shoot me an email--I'm happy to help and I'm never too busy for your questions. And as always,  I greatly appreciate your referral of friends and family.

Thanks for your interest,
Dan Marchiando

I frequently see articles and websites talking about the different types of credit scores available, and these articles usually say something like "...90 percent of mortgage lenders use the FICO score...". I've been in the mortgage business for about as long as FICO scores have been around, and I can say with some confidence that FICO scores are the only scores used by all conventional and government home mortgage lenders, for first mortgage loans. The majority of these first loans being originated today are sold to Fannie Mae or Freddie Mac, and these institutions only use the FICO credit score. Lenders obtain a FICO score from each of the three credit aggregating agencies or bureaus--Equifax, Experian, and TransUnion. The credit data and scores from each of the three bureaus are combined in a single commercial report called a "Tri-merge" credit report. These exact/same commercial reports are not available directly to consumers.

Other credit scores that you might be sold as a consumer are almost never FICO scores, and most often do not use the same numbering scale that FICO uses. So it can be somewhat like having someone telling you the temperature in Celsius, when all you can relate to is Fahrenheit.

TransUnion and its subsidiary TrueCredit sell consumers the VantageScore. Experian and their subsidiary Experian Direct sell the PLUS score to consumers. And Equifax mostly sells their proprietary "Equifax Credit Score". These alternative scores are sometimes referred to as "educational scores". Many of the websites that you can visit for scores will not disclose to you that the scores they sell are not the same scores that are used by mortgage lenders. The few that do, bury this disclosure in fine print that you really have to search for.

The only place where you can reliably purchase the FICO score as a consumer is through MyFICO. But the cost is fairly high ($19.95 for each of three different scores), so I don't recommend that consumers purchase their FICO scores unless they have a really compelling reason to do so. I do however recommend that consumers access their free credit reports through the website AnnualCreditReport.com. This is the legitimate site that the government required the three credit bureaus to create for the benefit of consumers in 2004. Because these free reports are available to consumers, I also don't generally recommend the various (and expensive) credit monitoring services.

If you have any questions about any of this, give me a call or shoot me an email--I'm happy to help and I'm never too busy for your questions. And as always, I greatly appreciate your referral of friends and family.

Thanks for your interest,

Dan Marchiando

A question that I often hear from people about mortgage loans, is whether someone can take over the payments on another person’s mortgage, especially when a property is inherited from a parent. Generally speaking, most residential mortgage loans have what is called a “Due-on-Sale Clause”, which prevents just anyone from taking over payments on another person’s mortgage loan when the property is sold or otherwise transferred to another person. This part of the mortgage contract allows the lender of the money to immediately demand payment of the whole mortgage principal and interest balance. Being in breach of the Due-on-Sale Clause allows the lender to use the foreclosure process to enforce the immediate repayment of the mortgage loan.

However, in 1982, the Garn-St. Germain Act was passed, and later codified into U.S. Code Title 12 – Banks and Banking; Chapter 13 – National Housing; § (Section) 1701j–3. Preemption of due-on-sale prohibitions.

This federal law created very specific and consumer-friendly legal exemptions to the typical “Due-on-Sale Clauses” that lenders put into mortgage loan contracts. These exemptions ONLY apply to residential properties, which are comprised of one to four units. The property needs to be residential, but it does not need to be occupied by the giver or the receiver as their primary residence. There are 9 exemptions, and the most important ones of interest to the average homeowner would be these:

. . . lender may not exercise its option pursuant to a due-on-sale clause  upon—

(5) a transfer to a relative resulting from the death of a borrower;

(6) a transfer where the spouse or children of the borrower become an owner of the property;

(7) a transfer resulting from a decree of a dissolution of marriage, legal separation agreement, or from an incidental property settlement agreement, by which the spouse of the borrower becomes an owner of the property;

(8) a transfer into an inter vivos trust (“living trust”) in which the borrower is and remains a beneficiary and which does not relate to a transfer of rights of occupancy in the property;

Acquiring a property through inheritance, family transfer, or divorce, while using the protections of this law, does not mean that the person is formally “assuming” the obligations of the mortgage. However, the person acquiring the property would most likely be financially motivated to continue making the mortgage payments so as to not lose the property through foreclosure, due to payment default.

This matter is fairly complicated, and there are a large number of variables to be considered. This article and the information contained herein is provided for informational purposes and is not legal advice. Readers should not act upon any information contained in this information without first seeking the assistance of legal counsel who will apply the applicable law to your specific circumstances.

Thanks for your interest.

Dan

1. Payment History or Habit - 35%
The largest factor in a credit score is payment habit. Credit blemishes pull down scores based on four metrics: Recency, Size, Severity, and Number. Recent late payments, large late payments, very late payments, and lots of late payments do the most damage to credit scores.
 
2. Balances or Amounts Owed - 30%
Large balances owed, lots of accounts with balances, and high utilization of credit affects 30% of a credit score.
 
3. Length of Credit History - 15%
A longer credit history of on-time payments will increase scores. The average age of active accounts, and the age of the oldest and newest accounts are all factors, so resist the temptation to close your oldest accounts, or open un-needed new accounts.
 
4. Types of Credit Used - 10%
While not a key factor, this category rewards borrowers who have a history of using a mix of different types of credit, like credit cards (called revolving), installment loans (like car loans), and mortgages.
 
5. New Credit - 10%
Also not a key factor, this category considers the recency and number of new accounts and the recency and number of credit inquiries by credit granters like banks and mortgage companies.
 
You can read more about this subject at MyFICO.com.
 
Thanks for your interest.

Sincerely,

Dan Marchiando

As I was considering potential New Year resolutions recently, I remembered that I needed to pull my personal credit report from AnnualCreditReport.com. This is the truly free site that was required by federal legislation in 2003, and became accessible in California December 1, 2004 (The  Federal Trade Commission FTC.gov serves as regulator for this site). You can see by this date that these free annual reports have been around for over 8 years, and yet in spite of that fact, statistics show that very few people are taking advantage of this free service to monitor and protect their credit information. A December 2012 report by the new Consumer Financial Protection Bureau (CFPB) “… estimates that as many as 44 million consumers obtained copies of their consumer (credit) file disclosure(s) annually in 2010 and 2011 – either as a result of obtaining free annual file disclosures through annualcreditreport.com (15.9 million), (or) through one of many various credit monitoring services (26 million)…” To give this some perspective, the reader should know that there are currently about 238 million adults in the U.S. And the CFPB report states that each of the three big credit bureaus or agencies—Equifax, TransUnion, and Experian— has over 200 million separate credit files, which means that approximately 84% of the adult U.S. population has a credit file that can be checked. But on an annual basis, only about 18% of the adult population is viewing their credit information, and only about 7% are doing so using the free service at AnnualCreditReport.com. In fact, these CFPB statistics show that more people have accessed their credit reports from paid credit monitoring services, than they have from the free AnnualCreditReport.com service.

Because I am always promoting the free service available at AnnualCreditReport.com I was surprised to find that even I’m really not that good about remembering to pull one of my three free credit reports every 4 months. But I have an easy solution now, that you can employ too, that involves your smart phone and/or a calendar program like the Google or Outlook calendar. I just set a recurring annual event/appointment with a reminder alarm—in February—to pull my credit report from Equifax, on AnnualCreditReport.com. And then I created a recurring annual reminder in June for TransUnion, and another one in October for Experian.

Why is it important to check your credit regularly? I can think of two good reasons. One, a significant percentage of credit users are subject to various forms of identity theft every year, and secondly, because statistics show that a significant number of individual credit files have errors—some serious, and some more benign. By checking your credit on a rotating basis every 4 months, you can do a pretty good job of monitoring your credit file, for no dollar cost, and a small investment in time. Once you’ve done it a few times you will likely find that it goes pretty quickly. And by checking your credit online in this fashion, you can also more easily dispute errors in your file electronically, rather than through the mail. Like maintaining a house or a car, it is usually advisable to do regular maintenance , before problems turn into even bigger problems, and cost more to fix.

To help you in getting started using AnnualCreditReport.com, I’m providing a link here to the official site, and a short illustrated PDF tutorial, "Annual Credit Report Website Instructions", on pulling your credit at one of the three bureaus. Be aware that there are a large number of imposter sites and sites with similar names that try to hook people using search engines, so watch your typing fingers, and a be sure to bookmark the official site for next time.

Thanks for your interest.

Sincerely,

Dan Marchiando

Adjustable-Rate Mortgage (ARM) Improvement Continues

Adjustable-rate mortgages (ARMs) are continuing to improve, and the offered interest rates are now attractive again. Actually, some of these ARM loans never really went away. When lenders and investors don’t want to make ARM loans, they don’t take them off the menu so-to-speak, they just price them unattractively compared to their 30-year fixed-rate loans.

So what has changed?

1) The interest rate savings, between ARM loans and traditional 30-year fixed rate loans has increased most recently, making ARM loans worth considering , depending on the personal circumstances of the borrower. So a 30-year fixed-rate loan might have an interest rate of say 4.50%, while a 7-year ARM loan might be available for under 3%; enough of a difference to make an ARM worth looking at.

2) All the more exotic, confusing and complex ARM loans, like negative-amortizing “Option ARMs”, “PayOption ARMs”, “Pick-a-Pay”, NegAm, “Flex-Pay”, plus all the short-fused subprime ARMs are now gone from the market, as the lenders (i.e. WAMU, World, and Countrywide) who marketed them have all disappeared.

3) Almost all the currently available ARM loans are based on a single interest rate index, namely the one-year LIBOR index. Indexes like COFI, COSI, CODI, CMT, 1-Year Treasury, T-Bill, and MTA have all but disappeared from use. While there are still legions of existing ARM loans in place that are based on these rate indexes, new ARM loans based on these indexes are not being offered. Home Equity Lines of Credit(HELOCs) continue to be offered based on the Prime Rate index.

4) The “interest-only” feature for ARM loans is less commonly seen, but is still available. In past decades, as ARM loans evolved, the interest-only feature ended up being included with most ARM loans, and the interest rate on Interest-Only ARMs were often the same as for loans without the interest-only feature. Today most lenders price their Interest-Only ARM loans with slightly higher interest rates than they do their regular or fully-amortizing ARMs. This slightly higher interest rate takes away some of the lower payment advantage that the interest-only payment has over the fully-amortizing, principal and interest payment of the more plain-Jane ARM loan.

5) As recently as about 2008 or 2009, lenders were qualifying borrowers—or determining their ability to repay loans—based on the lower monthly interest-only payment. To put this in perspective, a $400,000 7/1 interest-only ARM at 4% would have a monthly payment of $1,333. But a fully-amortizing loan at the same 4% interest rate would have an initial monthly payment of $1910. So when crunching the debt-to-income ratio of a borrower, they would use the lower initial interest-only payment to qualify. On interest-only loans in 2011, lenders are using the higher fully-amortizing monthly payment to compute debt ratios and qualify borrowers, even though the loan allows the borrower to pay less for the first few years of the loan. The affect is that interest-only loans no longer make it easier to qualify borrowers for larger loan amounts.

Thanks for your interest,

Dan Marchiando

VA Loans Remain a Viable and Affordable Option

Veterans Affairs (VA) guaranteed loans used to be of little use in higher-cost areas of California, especially in the tri-counties of Santa Barbara, Ventura, and San Luis Obispo counties where home prices usually have been too high to work with the previous low loan amounts possible with the VA guarantee. But all that changed couple years ago, when the limits were raised. Now VA loans are possible up to $1,000,000 (see the chart following). And VA loans can be used by retired vets or people in active military duty, and by veterans of the Reserves and the National Guard. VA loans are used when the borrower doesn’t have the traditional 20% down payment saved; they aren’t necessary or used when the vet has a 20% or greater down payment.

For background, the VA does not actually make loans, and they do not subsidize the interest rates of loans made to veterans. But the VA does make guarantees to mortgage lenders, for loans that lenders make to qualified vets. The government’s guarantee is the incentive or icing that motivates lenders to make VA loans. And currently lenders also likely find it attractive, and perhaps politically-correct and patriotic, to be seen making loans to vets. Plus, the strength of the government guarantee is currently probably considered stronger than the strength of the insurance available from battered private mortgage insurance companies. VA loans typically have rates nearly identical to rates available to conventional borrowers; the rates are usually no worse and no better than rates on comparable government-insured FHA loans, or private-insured Fannie Mae or Freddie Mac (Conventional) loans.

VA guaranteed loans involve a “Funding Fee,” that is paid to the VA, to guarantee the loan. The fee is due up-front at loan origination, and the amount varies based on the amount of the vet’s down payment. If the vet puts no money down (assuming they qualify), then the funding fee is 2.15% of the loan amount. If the vet puts 5 to 9% down payment, then the Funding Fee drops to 1.50%, and if the vet puts a down payment of 10% or more, then the funding fee drops to 1.25%. (The fees are slightly higher for Reserves and National Guard) The fee can be added to the loan amount (assuming once again that the vet qualifies), or it can be paid at the sale/loan closing by the buyer, the seller, or by the lender making the loan. I recently priced a loan for a vet client who had 10% down payment saved, and the vet loan was much cheaper than a privately-insured Conventional Fannie or Freddie loan, and way cheaper than the FHA insured loan. And, in my scenario, the rate was an attractive 5%, and the lender would pay the Funding Fee, and there were no additional points needed.

If you or someone you know is a California vet, in active military service, or is in the Reserves or National Guard, please call or email me to inquire about vet and VA loans in California. Thanks for your interest! Dan

A client recently supplied me with just the first two pages of her 3-page bank statement. The lender doing her loan insisted on seeing all three pages. The client insisted that this was ridiculous, as the last page just contained a form to help reconcile her account, which she had already tossed. What follows is the long story about how the current rules have evolved.

In the real old days, lenders didn't trust (bank) statements, so they made loan officers get a "verification of deposit" (VOD) sourced from each bank or institution directly. The form also required that the bank include an average balance for the most recent two months, and this average amount was used by lenders as the value of the asset or account. This was called "Full Documentation".

Then the industry started allowing "Alternative Documentation," which is essentially borrower-supplied bank statements for the most recent 3 months. The loan officer was supposed to see the original documents and certify they made the copies themselves.

Eventually lenders became more trusting, and the original copy thing became less common, and eventually lenders would even accept just one monthly statement as proof of a person's assets.

Since the real estate and mortgage melt-down of 2008, lenders stopped trusting borrowers of all types; even the most honest church-goers. The trust pendulum has swung hard in the opposite direction from before.

The last pages of statements usually contain boiler-plate information, or forms to help reconcile the account's balance. Sometimes they are literally blank, with just the institution's logo and a page count. But they also often contain information about over-draft protection loans, or car and personal loans, or 401k loans. Lenders discovered that people sometimes hid the fact that they had these debts by leaving off the last pages of their statements, claiming that there was nothing important on them. But in today's lending environment, where trust and maybe common-sense have been thrown out, lenders have become adamant about receiving each and every page of bank and institution statements. So if page one of your statement says "Page 1 of 5," then the lender will insist on seeing all 5 pages. Lenders have also become increasingly stricter about the quality of the copies that they receive. They often won't accept copies where the information along the edges of the statement have been lost or "cut off" in the copier or scanner. Once again, they are concerned about the potential information that might have existed along the margins.

All is not lost if you’ve already thrown out the last page or two of your statement. With the advent of online (banking) account access, most everyone can easily obtain a nice clean PDF copy of their most recent statements in minutes. If you’ve never set up online access for an account, you may have to set up a user name and password first, but you should be able to obtain the statements pretty quickly. Most lenders have now gone largely paperless, so you may be able to supply your lender with a PDF copy via email, instead of having to deliver or mail a copy.

Plain Vanilla ARM (Adjustable Rate Mortgage) Loans are Making a Comeback

For the past year or two, for purchase loans and refinance loans, we have been doing almost exclusively 30-year fixed rate mortgages. In part this has been due to the fact that ARM loans have been price by lenders with worse rates than their fixed rate loans. But in the last few months this situation has normalized, and ARM loans once again have a rate advantage over fixed rated loans.

Interest-only payments are available with most of these ARM loans, but lenders are no longer throwing this feature in for free. Interest-only loans in most cases have slightly higher rates than non-interest-only loans. The effect of the slightly higher rate cancels out some of the lower payment advantage that interest-only loans can have. Also, lenders used to qualify borrowers on the lower interest-only payment, when computing the borrower’s monthly debt ratios, but this advantage has also been lost in the mortgage meltdown.

So why would you take an ARM loan when purchasing or refinancing your current loan? You might do it if you really needed or wanted the lower payment and rate, and knew that you would only be keeping the loan for a short period of time. Notice that I said “keep the loan,” and not “keep the property.” Some people we do purchase or refinance loans for know that they will be selling in 5 or 10 years, or know that they will be refinancing in 5 or 10 years, and opt for the ARM loans because of the savings they have. For people who don’t know what their future holds in the near-term, it makes more sense—while rates are very low—to just stick with the traditional fixed-rate mortgage loan.

These ARM loans are very basic loans—no negative amortizing loans are left. Almost all the ARM loans today are based upon the LIBOR index, which is currently about 1%; and all the ARM loans that I’m aware of have very typical 2.25% margins on them; none have prepayment penalties.

So what are rates for Conventional Conforming ARM loans like these days? Well, everybody’s situation is likely to be different, but a typical scenario ARM rate on a $417,000 purchase loan amount with excellent credit, at no more than 80% loan-to-value on a non-condo property, might look like this if locked for 30 days today (05-04-10):

30-Year Fixed rate: 4.75% interest rate, 4.88% APR

10-Year ARM rate: 4.25% interest rate, 4.00% APR

7-Year ARM rate: 4.00% interest rate, 3.69% APR

5-Year ARM rate: 3.625% interest rate, 3.47% APR

You may notice that the APR on the ARM loans is actually less than the start rate. That will take a little explaining, so that will have to be the subject of another blog posting. Stay tuned, and thanks for reading my blog. Call or email me with any questions you might have about purchase or refinance mortgages. Thanks!

Let’s say a lender qualifies our intrepid home shoppers Kyle and Steph for a certain loan amount—the “maximum loan amount.” Can they really afford it? Or will they be comfortable paying that amount?

Home buyers should not assume that just because the lender will qualify them for a certain loan amount, that that is in fact the loan amount they should seek.

I’ll try to explain what I mean here. In spite of tougher lending standards today in 2009, lenders still approve loans where the borrowers spend a high percentage of their income on debt payments. When underwriting a loan, a lender computes and looks at two different debt ratios. In simple terms, a debt ratio is just expenses divided by income, or the percentage of income that gets consumed by recurring payments. The first of these ratios is the Housing Ratio, and the second is the Total Debt Ratio. Some lenders only consider the Total Debt Ratio which is always the higher of the two ratios anyways.

Lenders do not consider the borrower’s age, tax situation, plans for retirement, plans for a new car or vacation, or plans for a family. Borrowers know their circumstances the best and should adjust their borrowing to suit their particular situation.

The Housing Ratio is computed in this way: The lender adds the total monthly principal and interest payment of the proposed loan(s), to the monthly cost of property taxes (in California they always assume 1.25% of the purchase price), plus the monthly cost of homeowner’s insurance, plus the monthly cost of a homeowner’s association condo or PUD fee. Utilities and maintenance are not included. Payments are broken down into monthly amounts, even though in reality they may be paid annually or semi-annually (i.e. insurance and property taxes). All these housing costs are then divided by the GROSS Income of the borrowers to compute the borrowers’ Housing Ratio.

The Total Debt Ratio is computed by taking all the housing costs discussed above, plus all the other monthly “debt” payments, and dividing that by GROSS Income. Examples of other monthly debt payments include all the required minimum payments from credit card accounts, plus car loan and lease payments, plus student loan payments, plus alimony and child support, etcetera, etcetera. It bears mentioning that lenders do not consider the outstanding balance of credit card revolving accounts in the equation, even if it is the borrowers’ habit to pay off credit card balances every month. Lenders only take into account the minimum payment that requires payment each month. Generally this amounts to about two percent of the outstanding balance at the time the statement cycle ends. So a credit card account with a $1,000 balance on the monthly statement might have a minimum payment of only $20, and this would be the minimum payment that a lender would use to compute the Total Debt Ratio. While this practice may increase the maximum mortgage that borrowers qualify for, it may conflict with the actual habit or intention of borrowers who choose not to carry balances on their credit cards.

I think it is important here to emphasize that all lenders use GROSS Income, not “take-home” pay or NET Spendable Income, which is the income that is left after taxes, social security, SDI and everything else is taken out. Think of Net Spendable Income as the amount that you might actually receive on your pay check.

Many lenders allow Housing Ratios and Total Debt Ratios to exceed 50% of GROSS Income and to approach 60% of GROSS income, and this is where the rub can come. For some people, these “one-size-fits-all” ratios may be too much. I think it might be easiest to explain my point by using an example.

Borrowers Kyle and Steph have combined GROSS income of $8,000 per month, but after taxes etcetera, they take home about $5,515. They charge ordinary expenses to their credit cards and pay off the balance most every month. This is where their monthly money goes as renters:

Now a lender qualifying borrowers Kyle and Steph may decide that they can afford to spend 50% of their GROSS income on housing, or $4000 in this example. What affect would this have on their monthly budget? Well, $4000 is the majority of their “take-home” pay! Now they will most likely realize some income tax savings eventually, which means that their spendable income could increase in the future. And they will no longer be paying rent or saving for a down payment. But they will have maintenance costs for the home that they didn’t used to have. So here’s what their monthly budget might look like immediately after they purchase a home:

As you can see, their income doesn’t cover all their expenses, and they “go-in-the-hole” by $914 if they don’t change their spending habits. Can they align their spending with income again? Let’s see if we can help them trim some expenses:

If Kyle and Steph are willing to give up HBO, wash their cars in their new driveway, stop saving for retirement temporarily, take more brown bag lunches, cancel their gym membership, suspend taking vacations, cut out restaurant meals, slash their gift giving and defer some maintenance on the house, they can almost make it. As you can see, Kyle and Steph have to make a lot of sacrifices to their lifestyle to make this scenario work.

This exercise is not intended as an indictment of lending practices, or as an indictment of home ownership. Rather it is a cautionary exercise to use good sense when asking to be qualified for the MAXIMUM loan amount. Take the time to crunch the numbers yourself, to determine what you can comfortably afford. With careful thought you are probably the best person to determine what you can afford.

The House and Senate finally pounded out a bill that both could pass on Friday the 13th of February. The president signed the bill as promised on Tuesday after the Presidents' Day holiday. The law has many components to attempt to get the economy back on it's feet, and includes efforts to help housing.

This makes the third "stimulus" bill we've had since the beginning of 2008. To lay down some history, first we had the Economic Stimulus Act of 2008 (ESA) which was passed in February of 2008, and gave some people rebate checks, and also allowed Agencies Fannie Mae and Freddie Mac to purchase loans up to $729,750, and FHA to insure loans up to $729,750. These limits were designed to end 12/31/08. In July 2008 another law called the Housing and Economic Recovery Act of 2008 (HERA) was passed. This law included a component that allows larger (so-called High-Balance) loans also, and took over when the ESA loans ended. Unfortunately, it only allows loans up to $625,250, and in the case of Santa Barbara County, only allows loans up to $603,750. Underwriting for these loans in 2009 has become slightly easier than in 2008, but not by a lot. These "High-Balance" loans have interest rates that are approximately one-quarter to three-eighths higher than traditional Conforming loans that have a max of $417,000 in 2009. These traditional Conforming loans will almost always have the lowest interest rates of any home mortgage available in the market.

The American Recovery and Reinvestment Act (ARRA) is reinstating the $729,750 max loan amounts that Agencies Fannie Mae and Freddie Mac can purchase, and the $729,750 max loan that FHA can insure. This will hopefully help out all the people who were unable to take advantage of the short window of opportunity in 2008, and should help sell some homes, which should be supportive of values on more expensive homes up to a point. The most expensive homes will still struggle to find decent financing. It may take Fannie Mae, Freddie Mac, the FHA, and the lenders we deal with a few weeks to make the necessary changes in their systems, but I am hopeful that we will be able to originate these larger loans by around late March. 

The ARRA also includes components that give tax credits of $8000 to qualified first-time homebuyers who purchase in 2009, and unlike 2008, the credit doesn't need to be repaid unless the taxpayer sells the home within three years.

The ARRA also includes a nice tax credit for energy efficient windows, doors, furnaces, and air conditioners. The credit is for 30% of the cost up to a max credit of $1500. That means that $5000 of new double-pane windows for my seriously leaky house will only set me back $3500 after taxes. I'm definitely going to look into that benefit. Hopefully it will create some jobs too.

The these two tax credits probably won't help much to stimulate home sales for a couple reasons. New home buyers need the most help coming up with the down payment and closing costs for a home at the time escrow closes. And they need it shortly thereafter to pay for moving, painting and furnishing their new home. The tax credit doesn't come until several months later when the homeowner files their 2009 tax return in 2010. So they don't get the help when they need it the most, so it won't make the jump into homeownership an easier hurdle. A swing and a miss? No, I think it is still helpful, just not a homerun.

Thanks for your interest,

Dan