Brad Anderson’s Blog

Financing Solutions with David Reed

Taming the Jumbo Mortgage

Everyone knows the jumbo loan market has been out of whack for nearly 18 months. “jumbo” loans, those amounting to more than $417,000, took it on the chin when mortgage investors stopped buying subprime and alternative loans. For that reason, jumbo rates can be as much as 1.50 percent higher than conforming rates. Historically, jumbo rates were only about a quarter of a percent higher than a conforming rate, but this new spread has kept many out of the housing market: especially those that I call, “just jumbo.”

So what exactly is “just jumbo?” It’s a loan amount that just exceeds the conforming limit of $417,000 and typically reflects a sales price in the $500,000­­–$600,000 range. Many local markets offer homes in this price category, but the marked difference in rate from conforming to jumbo is slowing down sales. What is the difference in payment between a conforming loan at 6 percent and a jumbo loan at 7.50 percent? On a $500,000 jumbo loan, mortgage payments jump from $2,997 to $3,496 a month. That’s almost $500 more!

Fortunately, with some changes in strategy, we can put a major dent in that increase in payment by buying a property with two loans — a first mortgage and a second. With the first mortgage at or below the conforming limit, the second mortgage then eliminates the need for private mortgage insurance, or PMI. And still, with only 10 percent down on a $500,000 sale.

For example, let’s say we have a sales price of $500,000 and you put 10 percent down. With a jumbo loan at 7.50 percent, the monthly payment on a 30-year note is $3,146 plus a PMI payment of about $188, for a total of $3,334. Using a 40 percent debt ratio means that you need to make about $9,700 per month to qualify.

Now, let’s make the first mortgage for $400,000 at 6 percent (conforming) with a second mortgage at 7 percent on a $50,000, 30-year note. The mortgage payments would be $2,398 and $332 respectively, for a combined total of $2,730. That’s a savings of over $600 per month, and now the income to qualify is almost $1,500 less at $8,200 per month! Do you think that has an impact on affordabilty? I do.

Here’s another idea: sellers can carry back that second note to provide some additional income, providing an even better second rate for the buyer!

The Federal Housing Administration (FHA) recently altered its guidelines as a result of the Economic and Housing Recovery Act of 2008. One significant change was the elimination of the seller-funded down payment assistance program. Often used by builders through non-profit organizations such as Nehemiah and Ameridream, this program enabled the seller of a property (either an individual or a builder) to “donate” an amount equal to the funds needed by a buyer for a down payment on a home when securing FHA financing.

As of Oct. 1 of this year, the FHA will no longer allow seller assisted down payments. Not only that, but the FHA actually increased the down payment requirement from 3 percent to 3.5 percent—a setback for those who want an FHA loan and are already having problems saving enough money to close on a home.

Fortunately, there is another financing option that can bring these folks a little closer to home: family loans. This feature is unique to  FHA. And while it‘s not permissible for buyers to borrow the down payment from individuals when securing any other type of mortgage, FHA’s guidelines allow buyers to borrow from family members. But to obtain a family loan, borrowers must keep some specific requirements in mind: 

• The family member making the loan can be a parent, grandparent, son, daughter, stepson or stepdaughter, or a legally adopted child or foster child.
• The term of the loan cannot be less than five years.
• The FHA loan and family loan combined cannot be greater than 100 percent of the value of the home.
• The scheduled loan payments, if any,must be factored into the buyer’s debt ratios.
• Funds cannot be directly or indirectly associated with the seller, or anyone in the transaction who has a financial interest in the sale.

Now let’s combine the family loan with another advantage afforded by the Housing and Recovery Act of 2008: the $7,500 tax credit. If Grandpa is a likely candidate to supply a family loan, then he might want to know how he would get paid back. If the buyers are first timers and qualify for the tax credit, then Grandpa could get repaid come tax time.

Remember that lenders will want to verify the source of all funds to close the transaction, so be prepared to provide a copy of the loan agreement that spells out the terms and verifies that Grandpa has sufficient funds available to make the loan.

Sometimes when a window closes, another one opens, So while the recent Housing Recovery Act of 2008 has put the squeeze on the seller-funded down payment assistance program, a family loan can provide another avenue to closing on a home.

Written by David Reed, Texas-based mortgage banker with more than 20 years experience

and author of Mortgages 101 and Mortgage Confidential.

We frequently hear we’re supposed to regularly check our credit reports. And staying on top of this is especially important when starting to shop for a new home. There are three main credit bureaus: Equifax, Experian, and TransUnion. These bureaus store consumer credit histories by the millions, and hundreds of thousands of businesses tap these bureaus for their data about you. Unfortunately, mistakes can happen. Especially if you’re not the only “Bob Johnson” or “Susan Smith” who lives in St. Louis. 

Let’s say you receive a copy of your credit report and find a mistake—what do you do?  What if there’s an old collection account showing as unpaid when you have the paid receipt and a letter stating that the account has been settled?

Your credit report will show which of the three credit bureaus are reporting the error, and you’ll get a toll-free number to call.  But if you have ever called one of these numbers, you know to expect anything but friendly service. You know the drill, “Press 1 for English, Press 2 if you are a consumer, Press 3 if you’d like to enroll in our…” and so on.  It’s likely you’ll either leave a voicemail or listen to some sales pitch for a credit protection service. But all you want is to get your credit fixed so you can clean up your report.

You’ll be asked to fax your documentation, fill out some forms and then wait for the bureau to fix the report and update your file. This can take time, sometimes weeks. Luckily, there is an easier way: let your loan officer handle it for you.

That’s right. You can give that very same documentation to your loan officer and they can  have the offending item removed from your credit report in minutes. How can they do it so quickly?

Mortgage lenders use credit reporting agencies. Often. And those same agencies hire customer service representatives to make sales calls to all those mortgage companies.  One of their services allows the lender to provide the corrected documentation showing the collection account as having been paid to the credit agency, who will then update the credit report almost immediately. What once showed up as an “unpaid” collection account now rightly shows as “paid.” It’s that easy.

It’s important to regularly check your credit, and if you do find yourself in a situation where your credit report has an error on it, don’t go to the bureaus directly. Instead, take advantage of the relationship your lender has with the credit agencies. Your mortgage specialist can fix things much quicker than you can.

Written by David Reed, author of Mortgage 101 and Mortgage Confidential.

Financing Solutions with David Reed

Government Grants

For first-time buyers, often the first thought that comes to mind is, “I need a down payment.” This is often followed by the question, “Now, where do I get that down payment?”

Depending upon the loan type, a home mortgage typically requires 3 to 5 percent down. If you have the money, then you’re set. But what if you don’t?  What if you’re renting? You can afford a mortgage within your means, but coming up with the down payment money needed to begin the transaction can be challenging. So, where can you turn?

One of the most overlooked sources of down payment funds is likely right under your nose—in the form of government bonds and local grant programs.

These programs either provide outright monetary grants for down payment or money to buyers in the form of a forgivable loan. In essence, the government will help you buy your home and you typically only have to pay back the money if and when you sell that same property.

In the past it was challenging to find these special programs, but now all you need is your agent, a computer, an Internet connection, and a search portal such as Google or Yahoo.  Enter the search terms “down payment assistance (followed by your city, state or province)” and see what pops up! It might just be the answer to helping you buy your first home.

Written by David Reed, author of Mortgage 101 and Mortgage Confidential

“What do you think about rates … should I lock in now or wait to see if they fall further?” Think I’ve been asked that a time or two over the past 18 years? You better believe it.  It’s a good question—one that goes through every single buyer’s head at some stage. 

A quoted interest rate is no good unless you’ve confirmed, in writing, that your loan is indeed “locked,” or guaranteed for a designated period of time. You need to be proactive with your locked rate as well and don’t assume that your loan officer already locked you in. In fact, your loan officer shouldn’t lock in your rate without your specific instructions. If it was locked in and rates went down you’d be pretty mad, wouldn’t you?

While neither real estate agents nor loan officers are in the business of predicting the future, it’s still possible to make a prudent choice in the face of uncertainty. Would you rather lock in your rate and watch rates fall or not lock in your rate and see rates go up?

If you decided to lock and rates go down, you’ve secured the market rate that you were happy with. But if rates went up and you didn’t lock, you’d be paying for that mistake for the rest of the loan.

There is an even worse possible scenario: After not locking in your rate, rates shoot up and you no longer qualify for the loan. So it’s important to ask yourself:  “Which way would I rather be wrong?”

If you are comfortable with the rate you’ve been quoted, talk to your real estate agent about the possible consequences of waiting to lock it in.

Financing Solutions with David Reed

Taming the Jumbo Mortgage

Everyone knows the jumbo loan market has been out of whack for nearly 18 months. “jumbo” loans, those amounting to more than $417,000, took it on the chin when mortgage investors stopped buying subprime and alternative loans. For that reason, jumbo rates can be as much as 1.50 percent higher than conforming rates. Historically, jumbo rates were only about a quarter of a percent higher than a conforming rate, but this new spread has kept many out of the housing market: especially those that I call, “just jumbo.”

So what exactly is “just jumbo?” It’s a loan amount that just exceeds the conforming limit of $417,000 and typically reflects a sales price in the $500,000­­–$600,000 range. Many local markets offer homes in this price category, but the marked difference in rate from conforming to jumbo is slowing down sales. What is the difference in payment between a conforming loan at 6 percent and a jumbo loan at 7.50 percent? On a $500,000 jumbo loan, mortgage payments jump from $2,997 to $3,496 a month. That’s almost $500 more!

Fortunately, with some changes in strategy, we can put a major dent in that increase in payment by buying a property with two loans — a first mortgage and a second. With the first mortgage at or below the conforming limit, the second mortgage then eliminates the need for private mortgage insurance, or PMI. And still, with only 10 percent down on a $500,000 sale.

For example, let’s say we have a sales price of $500,000 and you put 10 percent down. With a jumbo loan at 7.50 percent, the monthly payment on a 30-year note is $3,146 plus a PMI payment of about $188, for a total of $3,334. Using a 40 percent debt ratio means that you need to make about $9,700 per month to qualify.

Now, let’s make the first mortgage for $400,000 at 6 percent (conforming) with a second mortgage at 7 percent on a $50,000, 30-year note. The mortgage payments would be $2,398 and $332 respectively, for a combined total of $2,730. That’s a savings of over $600 per month, and now the income to qualify is almost $1,500 less at $8,200 per month! Do you think that has an impact on affordabilty? I do.

Here’s another idea: sellers can carry back that second note to provide some additional income, providing an even better second rate for the buyer!

My listing at 3300 Edgewood Ave N, in Crystal has Sold. There are more homes like this out there, so contact me to find a new home, or to sell your home. The market is picking up, and well priced homes are moving.

Brad Anderson

763-486-5338

BradAnderson@kw.com

www.BradAndersonHomes.com

You’ve watched the news and read about it in the papers. You know, the “credit crisis” and how buyers need 20 percent down in order to buy a home? And even if you found a buyer with 20 percent down, lenders aren’t making loans anyway. So, why bother, right? Wrong!

We’re right smack in the middle of what just might be the biggest disservice ever perpetrated on potential home buyers.  It seems the press just can’t get enough of all the gloom and doom in the housing industry.  The fact is that mortgage money is as available today as it was a year ago and loans are being made this very moment with little or no money down. And, no, platinum credit isn’t required.  You just need to know where to look.  Who are these lenders? They’re right down the street.

Federal Housing Administration (FHA) loans are exploding onto the mortgage scene; recent estimates are that one out of five mortgages are FHA loans. FHA loans never went away, their reemergence is a result of the collapse of the sub-prime market. FHA doesn’t technically have a minimum credit score, although, in practice, lenders won’t approve an FHA loan with a credit score below 500. But that’s a far cry from the notion that an 800 score is the only thing lenders care about.

The best part?  FHA only requires 3 percent down. 3 percent. And that 3 percent can come in the form of a gift or grant.  FHA borrowers only need to have $500 in a transaction.  All the while, FHA mortgage rates are as good or better than their conventional counterparts.

Low or no down payment, extremely competitive rates and easier qualifying.  No wonder FHA is moving up the charts!

Please contact me if you would like more information about FHA loans or help getting into your first home.

Open house this Sunday from 1 to 3 at 3300 Edwood avenue north in Crystal. Come and join me at this great house. listen

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What Twin Cities area home buyers and renters need to know…

• Never has there been a more robust supply of homes for sale from which buyers can choose…let’s go shopping
• Interest rates have declined and are again approaching historic lows…advantage buyers
• Declining interest rates and moderated home prices mean housing affordability has rebounded to the high levels experienced during the boom part of this decade (link to historic HAI)…buyer motivation
• Whether it begins this spring, next fall, or one year from now, these circumstances will cause pent up buyer demand to soon unfurl, so as to take advantage of this new environment…opportunity is knocking
• The newly revised mortgage limits for FHA financing will open up more opportunity to new home buyers (link to MAAR “FHA” release)…new avenues to home ownership
• The stage is set for a real estate market rebound…catch the wave early on
• Your best investment for building long-term family wealth is homeownership..start building your future today

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