What is FMERR?

If you’ve never heard of a Freddie Mac Enhanced Relief Refinance — a “FMERR” loan — you’re not alone. Available to homeowners since the beginning of the year, it’s a refinancing option that helps property owners with little or no equity. The trick? It ignores usual lender requirements for a high loan-to-value (LTV) ratio. This means that homeowners who have not experienced the rise in home prices or are upside down in their mortgages may be able to get a lower interest rate with the help of FMERR.

Real estate prices have generally been rising — but not for everyone.

According to ATTOM Data Solutions more than 5 million U.S. properties — 8.8% — were “seriously underwater” in the fourth quarter of 2018. These are properties where mortgage balances are at least 25% higher than market values. For example, under the “seriously underwater” standard, a home that might sell for $300,000 has at least $400,000 in outstanding mortgage debt.

The FMERR program is open to homes that are seriously underwater and also those that are slightly upside down or only have a little bit of earned equity. Consider a property with a $300,000 fair market value and $298,000 in mortgage debt — it has equity, but not enough to refinance under most mortgage programs.

This not-so ideal home financing situation is problematic for homeowners.

First, homeowners cannot sell unless they pay off the outstanding mortgage debt. This means bringing a big chunk of cash to closing — cash many borrowers simply don’t have. In effect, these homes can’t be sold, which is one reason the real estate marketplace has an inventory shortage.

Second, older existing loans often have high interest rates, so borrowers have large monthly payments. But, if homeowners refinance at today’s rates, then their monthly payments may be much lower.

Lower mortgage payments are good for the lender too. Lower costs make homeownership more affordable, which translates to less risk for the lender.

Freddie Mac Enhanced Relief Refinance Qualifications 2024

Who qualifies for FMERR?

FMERR is not a come-one, come-all deal. There are some basic standards that must be met to qualify.

1. Your current loan must be owned by Freddie Mac. (You can check mortgage ownership by using the Freddie Mac Loan Look-up Tool.)
2. Your loan must have originated after November 1, 2018.
3. Your current loan financing must be “seasoned” at least 15 months. This essentially gives Freddie Mac the opportunity to see how you’ve been making payments.

There are some additional requirements that you must meet to be eligible for FMERR.

Maximum loan-to-value (LTV) ratio

There is no maximum loan-to-value (LTV) ratio for FMERR. You can be wildly underwater and still potentially qualify. If your home is worth $350,000 and you owe $375,000 FMERR may be able to help you lower your monthly payments.

With the Freddie Mac Enhanced Relief Refinance program a lack of equity is okay. In fact, it’s required. If you have enough equity to refinance with other Freddie Mac programs like its 97 LTV refinance program — you can’t use the FMERR loan.

Maximum debt-to-income (DTI) ratio

There is no maximum debt-to-income ratio for FMERR loans in most cases. However, there are some uncommon scenarios where lenders limit the DTI to no more than 45%. Those scenarios include:

• You switch from an ARM to a fixed-rate loan and your monthly payment increases at least 20%.
• You refinance a really small loan, say $50,000. Under federal rules, lenders can charge higher fees for small mortgages. The purpose of this rule is to help lenders cover fixed costs.
• The loan will have different borrowers — someone who co-signed the old loan will not be on the new one.

While Freddie Mac doesn’t have a maximum DTI, your lender might. Lenders want borrowers who do not have too much debt. They’ll compare recurring debt costs for things such as housing, auto loans, student debt, and credit card payments with your gross monthly income — the money earned before taxes. For example, if your household has $8,000 per month in gross income and your recurring monthly costs are $3,440, then your DTI is 43%, which is a DTI level acceptable for many lenders.

Payment history

You must be current on your mortgage payments in order to qualify for FMERR. You must also meet the two following standards:

1. You had no delinquencies in the past six months.
2. You had no more than one 30-day delinquency in the past 12 months.

Also, be aware of “layering” — additional requirements created by lenders above and beyond these Freddie Mac standards. Lenders use layering to reduce risk and different lenders have different appetites for risk. For example, lender A might allow no more than one delinquency in the past 18 months, while lender B is okay with one delinquency every 12 months.

Credit score requirements

No, you do not need a 720 credit score to qualify for a FMERR loan. It’s considered a streamline refinance, which replaces your existing financing with a new loan, so there’s no minimum credit score to qualify.

Other questions about FMERR

Is FMERR restricted to primary residences?

No. You can finance other properties as well. The minimum LTVs include:

Primary Residence

• 1-unit: 97.01%
• 2-units: 85.01%
• 3-4 units: 80.01%

Second Home

• 1-unit: 90.01%

Investment Property

• 1-unit: 85.01%
• 2-4 units: 75.01%

How do FMERR interest rates compare?

In general, FMERR rates are comparable with other financing options. To determine what rates you’ll qualify for, you’ll need to speak to a lender.

Will my monthly payment go down with a FMERR loan?

With a lower interest rate you will most likely see a smaller monthly payment. But, this isn’t always the case. For example, monthly payments may increase if you switch from an ARM to a fixed-rate mortgage or to a shorter-term loan.

When does the FMERR program expire?

The FMERR program is set to end September 30, 2019 — your refinance must CLOSE before this date. This means you need to apply 30-60 days beforehand to ensure the loan will close in time.

If you’re wondering whether the FMERR program will be extended, no one knows. But, it’s not something to count on. The better strategy is to apply now, while the program is unquestionably available.

The post Freddie Mac Enhanced Relief Refinance (FMERR) Guidelines for 2024 first appeared on My Mortgage Insider.

Answer: Private mortgage insurance and mortgage life insurance are two very different financial products.

Check your your mortgage rates. Start here (Sep 16th, 2024)

Private mortgage insurance (PMI) vs mortgage life insurance

Private mortgage insurance is required by lenders when home buyers purchase a home with less than 20 percent down. If the home buyer is unable to pay the mortgage, then the property is foreclosed and sold at auction. The mortgage insurance company pays the lender for some or all of the loss.

Mortgage life insurance is something completely different. While the beneficiary of private mortgage insurance is the lender, the beneficiaries of mortgage life insurance are your heirs.

With a mortgage life insurance policy, you can typically buy coverage for 15 or 30 years. If something happens, the insurance company steps in and pays off the mortgage balance.

Check your your mortgage rates. Start here (Sep 16th, 2024)

What to consider with mortgage life insurance

As with all insurance policies, there are a number of issues to consider.

First, since the mortgage balance is declining with each payment it follows that the death benefit available from mortgage life insurance is also falling. With some policies, however, there may be a residual coverage amount, say not less than 20 percent of the original loan amount.

Second, because mortgage life insurance is “insurance,” the money paid out by the policy is tax-exempt. See a tax professional for details.

Third, you can typically get a rider with mortgage life insurance which allows you to add a second person to the policy. In other words, if the property is owned by two people and one dies, the policy will kick in to pay off the mortgage balance. This will allow a co-homeowner, such as a spouse, to own the property free and clear of any mortgage debt.

Fourth, insurance coverage may not be available for home buyers above a certain age. Alternatively, lenders cannot engage in age discrimination and must make mortgages available to any qualified home buyer regardless of age.

Fifth, you may be able to find a mortgage life insurance policy that has a premium waiver that goes into effect in the event of disability. If you see such a clause it will be important to review exactly what it means with an insurance broker. Get your answers in writing.

Sixth, you need to determine who actually gets paid in the event of death. Does the mortgage insurance company step in and directly pay the lender, or does the insurance company write a check for your heirs? This is a matter of personal preference.

In some cases, you may prefer a mortgage-free property while in others you might want your heirs to get the cash if you are certain they can continue to carry the loan.

Seventh, check to see if the premiums are level for the life of the policy. In some cases, you may find that the insurance company can raise the premium. This raises a question: Is there a maximum monthly premium cap?

Is mortgage life insurance worth it?

The question that arises with mortgage life insurance is whether it’s actually the right insurance product for home buyers. It pays out only in the event of death which means you might want to speak with insurance brokers and consider term life insurance policies as an alternative.

For instance, payment upon “death” or only an accidental death, not death from disease or old age. With a life insurance policy, the payout is tax-free but the benefit does not decline over time.

For details and specifics speak with such experts as insurance brokers, tax professionals, and fee-only financial planners.

Check your your mortgage rates. Start here (Sep 16th, 2024)

The post Mortgage Life Insurance or Private Mortgage Insurance – Which is Better? first appeared on My Mortgage Insider.

Answer: Let’s imagine that you have a mortgage with a $150,000 balance. To you, it’s a debt and a liability. To a lender, your mortgage is an asset that produces a given level of income and maybe even appreciates in value.

In this particular case, the mortgage has been sold by the owner, a party you know as your lender.

Is this something to worry about? Not at all.

Check today's mortgage rates (Sep 16th, 2024)

First, a mortgage is a contract between you and a lender. The fact that there is now a new lender in the picture does not change the terms of your agreement. The interest rate remains the same, and the mortgage terms do not change. What’s different is that your payment will go somewhere else – but this won’t affect your mortgage.

Second, federal rules require that you receive two types of notices: a disclosure and a transfer of servicing notice. These notices might be combined into a single document.

You must get the disclosure at least 15 days before the transfer, and the servicing notice must be provided not more than 15 days after the change.

As a matter of convenience, and to save postage, a lender has an incentive to send both at once.

Third, for a new mortgage, you can be given the transfer information at closing.

Fourth, the disclosure must include such information as the date of the transfer, a toll-free or collect call telephone number where you can get information and ask questions and the date the current servicer will no longer accept your checks.

Fifth – and this is the biggie – you have important protections when loans are transferred.

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According to the Consumer Financial Protection Bureau, “during the 60-day period beginning on the date of transfer, no late fee or other penalties can be imposed on a borrower who has made a timely payment to the transferor servicer (former servicer). Additionally, if the transferor servicer (former servicer) receives any incorrect payments on or after the effective date of the transfer, the transferor servicer must either transfer the payment to the transferee servicer (new servicer) or return the payment and inform the payor of the proper recipient of the payment.” (parenthesis theirs)

Translation: Your old servicer just can’t dump you. They have certain obligations to make sure your account is correct and timely.

In addition to the transfer of your account from one servicer to another, there is also the matter of money.

Most loans today have escrow accounts to hold funds for the payment of costs such as property taxes and property insurance.

In a transfer situation, the original servicer will transfer the escrow funds to the new servicer. Your insurance company and local taxing authority will be notified regarding the transfer so they know who to bill.

If you do not have an escrow fund, then the new loan owner cannot require that you establish one. However, with a new escrow analysis, your monthly payment may rise or fall to reflect changes in tax and insurance costs.

IMPORTANT: If you receive a notice telling you to send mortgage payments to a new servicer, contact your current servicer to confirm the transfer request. Ask if the transfer notice is correct and get your current loan balance, escrow balance, and the date when the last payment was received. Check to assure the information you receive is accurate.

The reason to be cautious is that we live in a world where new forms of fraud constantly arise. As an example, this summer the Federal Trade Commission and the National Association of Realtors warned home buyers about a new mortgage scam.

“Hackers have been breaking into some consumers’ and real estate professionals’ email accounts to get information about upcoming real estate transactions,” said the FTC. “After figuring out the closing dates, the hacker sends an email to the buyer, posing as the real estate professional or title company. The bogus email says there has been a last minute change to the wiring instructions and tells the buyer to wire closing costs to a different account. But it’s the scammer’s account. If the buyer takes the bait, their bank account could be cleared out in a matter of minutes. Often, that’s money the buyer will never see again.”

As always, be careful out there.

Check your home buying eligibility. Start here (Sep 16th, 2024)

The post My Mortgage Has Been Sold. Am I In Trouble? first appeared on My Mortgage Insider.

Since mortgage lenders compare your monthly payments to your income to see how much house you can afford, monthly car payments will affect your mortgage eligibility.

But auto loans and auto leases are not viewed as the same by mortgage underwriters. Here’s what you need to know if you’re in the market for a new car and a mortgage at the same time.

Check today's mortgage rates. Start here (Sep 16th, 2024)

Your debt-to-income ratio and your car payment

When you apply for a mortgage loan, or even a pre-approval, the lender will check your debt-to-income ratio, or DTI ratio.

DTI shows whether borrowers can reasonably afford all of their monthly bills along with the new mortgage loan payments.

Lenders typically look for DTIs of 43 percent or less, though FHA lenders may approve a loan with up to 50 percent DTI in some cases.

If you earn $9,000 a month before taxes (gross income), then 43% of your income equals $3,870. All of your debt payments — including your new mortgage payment — would need to fit within this $3,870 budget.

A car payment plus a house payment should fit within this budget for most households. But what about things like student loans and credit card minimum payments — and what if you’re buying a second or a third car?

All of a sudden, that new car payment could limit the size of your home loan.

Will leasing a car affect buying a house?

Whether you lease or buy a new car, you’ll add money to your monthly expenses.

But there is a difference between buying and leasing a new car from the point of view of mortgage underwriters.

Even if you have a $450 monthly car loan payment and a $450 a month auto lease payment, these are seen differently by mortgage lenders.

A lease payment is essentially rent. At the end of the lease, your equity in the vehicle is zero and your net worth does not increase. You also have decisions to make once the lease term ends:

• You can lease another vehicle
• You can buy the vehicle you’ve been leasing
• You can buy another vehicle

These choices have one quality in common: They mean your need to make monthly payments will continue unless you’re able to buy a car for cash.

With an auto loan, the situation is different. Each monthly payment gives you more equity in the vehicle. After the loan is paid off the car is yours. It’s an asset that you can keep without making a monthly payment or trading in for another car.

Having a paid-off vehicle helps strengthen your mortgage application.

When car payments are not considered a debt

While car lease payments are always considered a debt for DTI purposes, that’s not always true with car loans. They may not count against you even if you pay out big money each month. This is partly because, under Fannie Mae and Freddie Mac rules, lenders can ignore monthly auto loan costs if 10 or fewer payments remain.

“Lease payments,” says Fannie Mae, “must be considered as recurring monthly debt obligations regardless of the number of months remaining on the lease.

“This is because the expiration of a lease agreement for rental housing or an automobile typically leads to either a new lease agreement, the buyout of the existing lease, or the purchase of a new vehicle or house.”

The story with auto loan payments is different.

Does leasing a car affect your credit score?

Whether you lease or buy, a new vehicle can impact your credit score.

With a lease, you have a monthly payment obligation. When the lease ends, there’s likely to be either a new lease or a new monthly cost for a vehicle purchase. In either case, credit utilization is increased, and that can reduce your credit score.

Paying down a recurring loan balance should strengthen your credit report, increasing your credit score. Higher credit scores can mean lower mortgage rates and easier loan applications.

How car leases impact government-backed mortgages by loan type

Government-insured loans like FHA, VA, and USDA loans have their own underwriting rules. Each loan type views auto leases and loan payments differently.

FHA mortgages and auto leases

Payments on car leases will always be included in your DTI for an FHA loan even if the lease term expires soon.

But if you have a car loan that will be paid off within 10 months, FHA lenders won’t have to include the car payment in your DTI. To be excluded from your DTI, the amount of money due on your auto loan each month can’t exceed 5 percent of your gross monthly income.

While some loan programs will allow you to pay down your loan balance to reach the 10-month threshold before buying the house, the FHA does not.

VA mortgages and auto leases

The VA does not distinguish between auto loans and auto leases, but individual VA lenders can, and they most likely will. The VA says debts and obligations with fewer than 10 remaining payments can be ignored for DTI purposes.

But, it also says that lenders must include “accounts with a term less than 10 months that require payments so large as to cause a severe impact on the family’s resources for any period of time.”

Confused? You bet. To clarify matters the VA gives this example:

“Monthly payments of $300 on an auto loan with a remaining balance of $1,500, even though it should be paid out in five months, would be considered significant,” says the VA.

Why? Because “the payment amount is so large as to cause a severe impact on the family’s resources during the first, most critical, months of the home loan.”

USDA mortgages and auto leases

Like FHA loans, USDA loans will always include auto lease payments as monthly debts to find your debt-to-income ratio. But auto loan payments may not count toward DTI.

If you owe 10 or fewer monthly payments on your car, USDA lenders won’t have to include your car payment in your monthly debts.

Reduce recurring payments before applying for a mortgage

Paying down your debt — auto or otherwise — before buying a home should help you qualify for a better mortgage loan.

Lower debt creates a lower debt-to-income ratio, and a lower DTI ratio can open up more home loan options for borrowers.

Paying down your credit cards, for example, will lower their minimum monthly payments, and lenders typically use minimum credit card payments when they calculate your DTI. Full repayment on an installment loan, such as a student loan or car payment, should help even more.

Lower monthly payments can increase your home buying budget

Generally speaking, lower monthly debt correlates to a bigger possible mortgage, which means lowering your monthly payments wherever possible could mean a bigger home buying budget.

Plus, your lower DTI can help you land a lower interest rate or help you qualify for a lower minimum down payment.

Reducing your monthly obligations has the added benefit of improving your credit history which also helps your mortgage or refinance eligibility.

Never buy a car after applying for a mortgage loan

A lot of first-time home buyers are just starting out in their financial lives. Along with buying a house, they also need to buy a new or used car.

But financing an auto purchase right after applying for a mortgage can wreak havoc on your home buying process. The new car payment will throw a wrench in your DTI, and underwriters will notice.

Wait until after you’ve closed on the home — and officially become a homeowner — to get a car loan, no matter what the car dealership says.

FAQs

Will leasing a car affect buying a house?

Yes. Any kind of monthly debt, including a new lease payment, will affect mortgage eligibility. A lease may affect buying a house more than a car loan. Leasing or financing a car right after applying for a mortgage loan could change the conditions of your loan offer.

Does leasing a car affect your debt-to-income ratio?

Yes, mortgage lenders will include your lease payment in your monthly debts when it calculates your debt-to-income ratio. Higher monthly debts can affect the size of your loan, your mortgage interest rate and your required down payment amount.

Does a car lease count as debt?

Yes, car leases count as debt from the point of view of mortgage loan providers. Student loans, credit card minimum payments, and personal loan payments also count as debt. Utility bills and other living expenses such as groceries and gasoline do not.

Does having a leased car affect getting a mortgage?

A car lease can add hundreds of dollars to your monthly payment obligations. Mortgage lenders consider your other monthly payments as they assess your eligibility for a home loan. Too much monthly debt can limit your mortgage eligibility.

Does leasing a car hurt your credit score?

A car lease interacts with your credit history much like a car loan would. The lease adds a hard inquiry and a new credit account which often lowers a borrower’s credit score at first. But making regular lease payments should add positive data to your credit history, potentially increasing your credit score.

The bottom line: Buying a car and applying for a mortgage

So will leasing a car affect your home buying process? Yes, it most likely will. In some cases, a lease will have a bigger impact on a mortgage application than a car loan would.

For some car shoppers, it may be best to wait a few months until you have completed your home purchase. For specific advice on your situation, it’s best to speak with a professional mortgage loan officer.

Check today's mortgage rates. Start here (Sep 16th, 2024)

The post Should You Buy or Lease a Car Before Applying For a Mortgage? first appeared on My Mortgage Insider.

Answer: For most mortgages today there are five reduction strategies to consider without refinancing.

First, there is the occasional prepayment. In this situation, every so often you add money to your mortgage payment by using the “extra principal” line on your payment coupon.

If you go this route, be sure to check your mortgage balance in the coming month to make sure the additional payment was properly credited.

Second, usually the term “extra principal” means that the borrower chips in some money here and there to reduce the principal balance. However, it sometimes happens that the borrower wants to make a single substantial payment, say $10,000 or $20,000.

If this is the case, do not simply make a larger payment without first calling the loan servicer and asking if the payment will be considered a “curtailment.”

If it is counted as a curtailment, the interest rate remains unchanged, the loan balance is significantly reduced, and in turn the lender will lower the minimum monthly payment because less is needed for the loan to be self-amortizing over its remaining life.

The terms of a curtailment must be worked out with the lender in advance so that everybody understands what will happen once your payment is received.

Third, you can plan to make regular prepayments, say $100 every month. For example, if you have $175,000 mortgage at 4.25%, the monthly payment for principal and interest will be $861.

Add an extra $100 per month to the mortgage and it will be repaid in 293 months instead of 360 months, meaning the loan-term will be reduced by 67 payments.

Since most 30-year loans do not actually last three decades, what will most likely happen is that you’ll sell or refinance and simply owe less to the lender at closing.

Fourth, you can effectively decide your loan length. If you increase the monthly payment on our $175,000 loan to $1,317, the loan will be repaid in 15 years – or by paying $1,084 per month you can have 20-year financing.

Fifth, you can create what is effectively a bimonthly payment. Instead of paying $861 for principal and interest each month, we can instead pay $430.50 every two weeks if we go the bimonthly route.

While such as schedule will surely pay off the loan more quickly, it is not a plan which most lenders will accept – mostly because they do not want to handle 26 payments a year.

The solution is to keep lenders happy and get the same essential result as you would with a bi weekly payment. This can be easily done by dividing your current monthly payment by 12 and adding the result to the extra principal line of your payment coupon.

In this case, we would take $861, divide by 12, and that gives us $71.75. If we add $861 plus $71.75 the total monthly payments will be $932.75. If you multiply $932.75 times 12 you get $11,193.

Alternatively, if you multiply $430.50 times 26 you get the same result.

You will sometimes hear about third parties who offer to operate bi-weekly payment programs on your behalf. Naturally, if you enroll in such a program you will have to pay various fees and charges, money better spent on paying down the mortgage.

Since your mortgage agreement is with the lender, you must make sure that all payments required for the mortgage are paid in full and in a timely way. If a third party happens to be late with a payment or does not make it at all, then it’s your credit that will suffer.

For these strategies to work your loan must allow prepayments without penalty. In today’s mortgage marketplace most financing bans penalties, but there are some loans out there where you can still get dinged for prepayments.

Typically, if your mortgage coupon has a line that allows you to add “extra principal” or something similar then you should be okay.

If you have any questions about penalties call your loan servicer and ask what penalties – if any — apply to your mortgage.

The post How Can I Quickly Cut My Mortgage Debt? first appeared on My Mortgage Insider.

Answer: Imagine that you want to buy a home for $200,000. With a conforming mortgage, you will put down 20 percent or $40,000. Because of the down payment size there’s no requirement to buy mortgage insurance. You borrow $160,000 and with a 4.25 percent interest rate fixed over 30 years with monthly payments on principal and interest at $787.10.

With an FHA loan, the numbers for the same $200,000 property look like this:

• You put down put down 3.5 percent ($7,000). You agree to finance $193,000. This is the “base” loan amount.

• You then pay a 1.75 percent up-front mortgage insurance premium (the up-front MIP). The total cost is $3,377.50. You can pay the up-front MIP at closing, but to save cash most will add it to the debt. The result is a final mortgage amount of $196,377.50, but we’ll round it to $196,378.

• With the FHA program you also pay an annual mortgage insurance premium (the annual MIP). At the time this article was written, the annual MIP is calculated at .85 percent of the outstanding mortgage balance.
• The monthly payment for principal and interest is $966.06. The monthly expense for the up-front MIP is $136.71. The total monthly cost is $1,102.77.

If we look at the two options, we can see that if we buy with 20 percent down our monthly cost is $787.10 versus $1,102.77 with FHA financing. Closing costs for both loan options are extra.

No doubt, the monthly FHA loan cost is higher. But is it somehow unfair?

If we take a careful look at the two options we can see some interesting distinctions.

First, if we buy with 20 percent down the initial loan amount is $160,000 versus $196,378 for the FHA borrower. Since we’re borrowing an additional $36,378, this explains one reason for the higher cost of FHA financing,.

Second, we have not assigned any value to the $36,378 NOT paid by the borrower who puts down 20 percent.

Let’s imagine that we can invest $36,378 into a five-year certificate of deposit (CD) that pays 1.85 percent annually, roughly the rate as this is written. The account will earn $672.99 annually or $56.08 per month.

Now we can see that a borrower who puts down $40,000 really has a higher economic cost than just the mortgage payment. The real cost of the loan with 20 percent down is the monthly mortgage payment, $787.10, plus any lost monthly interest, $56.08, or a total of $843.18. Now the cost of conforming and FHA are somewhat closer.

There are a few points to be made here.

First, the typical FHA borrower doesn’t have the option of financing with 20 percent down because he or she simply doesn’t have $40,000 in cash, not including cash for the closing costs.

Second, without $40,000 downpayment a buyer cannot buy with a conforming loan. Unless they can buy now it, means a potential purchaser loses out if home values rise – plus they cannot lock-in today’s prices. By not purchasing, an individual may also face higher housing costs if rental rates increase.

Third, mortgage insurance has value. In this case, it enables a purchaser to buy with 3.5 percent down instead of the traditional 20 percent. FHA insurance also protects lenders in the event of default, the reason they are willing to accept a far lower down payment.

Fourth, with fixed-rate financing at today’s rate, the FHA borrower has locked in a bigger loan than the borrower who pays 20 percent up front. The individual who pays 20 percent up front has invested an additional $33,000 for the downpayment in our example.

Without refinancing, the buyer cannot capture a better return if interest levels for savings increase nor use the money for other purposes such as funding business or paying tuition.

The bottom line: There’s risk in every transaction, whether it is real estate, stocks, bonds or any other type of investment. We don’t know if home values, interest rates and rental costs will rise or fall in the future.

However, we do know is this: The FHA mortgage program gives individuals without 20 percent down the opportunity to buy real estate at today’s prices. In exchange, the FHA borrower pays an insurance premium.  

It’s up to each individual to see if FHA financing and real estate ownership make sense. Given their needs, finances and personal preferences, each home buyer should do what’s in their best interest.

The post Is Mortgage Insurance Overpriced? first appeared on My Mortgage Insider.

Answer: According to the Consumer Financial Protection Bureau (CFPB), “shopping for a mortgage with someone else is the same regardless of whether you and the other person are married, registered domestic partners, unmarried partners, or just friends.

“Lenders cannot discriminate against you based on your marital status. However, there are different things to consider depending on who you are getting a mortgage with — particularly when it comes to the real estate title and the tax implications.”

While lenders cannot discriminate, they do have rules they can apply to joint borrowers. For example, they will generally use the lowest credit score between the co-buyers. They will also combine the incomes of all buyers when evaluating the application.

What are the obstacles for unmarried buyers?

The real issues unmarried co-buyers are likely to face involve those “title and tax” concerns mentioned by the CFPB.

For instance, how much of the property is owned by each party? How will tax deductions for mortgage interest and property taxes be divided? What are the obligations of each party if you split up? If the downpayment is a gift for one co-borrower who gets the money if you break up?

These generally won’t be your favorite questions to ask with your boyfriend or girlfriend, but they’re important to know.

In the lender’s eyes you will be mortgage co-signers. That means each of you has a 100 percent obligation to repay the mortgage. One of you loses a job? Doesn’t matter, the payment must be made. One of you moves out? Still doesn’t matter.

If the payment isn’t made, both credit reports will get dinged.

If one of you is supposed to pay the mortgage and the payment isn’t made, both of you are responsible for the debt. For example, if you borrow $200,000, you are each responsible for the full repayment of the $200,000 and not some lesser amount.

“Keep in mind,” says the CFPB, “that property, marriage, and inheritance laws differ widely from state to state. Your rights and responsibilities also change depending on how the property is owned and titled.

Consulting with a real estate agent can help

“Not all states offer all kinds of titles or define them in the same way. Depending on the state, some types of titles may have different implications based on whether you are married or not. Some states, known as ‘community property states,’ have special rules for married couples.”

You and your co-buyer are best served by first consulting with a local real estate attorney or legal clinic before buying a home or searching for a mortgage.

You’ll want a formal ownership agreement which details how the title will be held and the ownership percentage of each party, among other things.

In addition, both parties should have a will and such other paperwork as you may need to assign property ownership in the event of a death or if someone cannot express their preferences.

Is this fun stuff? No, but if there is a dispute or other problem it will be a lot cheaper, faster, and easier to resolve problems with proper paperwork than without.

The post Can I Buy Real Estate With A Friend? first appeared on My Mortgage Insider.

Answer: If you purchase a home for $295,000 and finance with an FHA mortgage at 4.25 percent your costs will look roughly like this:

• • The home costs $295,000

• • The 3.5 percent down payment will be $10,325

• • The base loan amount will be: $284,675

• • The FHA has a 1.75 percent upfront mortgage insurance premium at this time, which here amounts to $4,982.

• • Instead of paying the upfront premium in cash at closing you add $4,982 to the mortgage debt. There is now $289,657 to finance.

• • The monthly payment for principal and interest is $1,425.

• • The FHA also has an annual mortgage insurance premium equal to .85 percent of the outstanding mortgage debt. The monthly cost is $202.

• The cost for the FHA loan is $1,627 per month for principal, interest and mortgage insurance.

If you add up the insurance costs over five years, you have $4,982 upfront plus an additional $12,120 ($202 x 60 months) over the life of the loan for a total of $17,102.

So yes, that’s a lot of money.

As an alternative, you might want to look into piggyback financing. Piggyback financing uses two loans, a first mortgage equal to 80 percent of the purchase price and a second loan equal to 5 percent, 10 percent, or 15 percent of the purchase price.

In other words, you can buy with as little as 5 percent down.

Let’s say that you have 80 percent financing at 4.25 percent and a 15-year second loan at 5 percent. Now the numbers look like this:

• • The purchase price of the property is $295,000
  • You put down 5 percent or $14,750
  • The first loan is equal to $236,000. The monthly payment for principal and interest at 4.25 percent over 30 years is $1,160.90
  • The second loan is for $44,250. At 5 percent over 15 years the monthly cost is $349.93
  • The total monthly cost is $1,511

Things to consider with a piggyback mortgage

In the scenario above, the home buyer saves about $116 a month and pays nothing for insurance.  
After five years, the FHA borrower owes $263,031 while the piggyback loans have a combined remaining balance of $247,297.

The FHA borrower had a $10,325 downpayment versus $14,750, a difference of $4,425. Notice that the $4,425 is not an interest cost, but a direct reduction of the amount owed.

In this example, the piggyback home buyer is ahead by $18,269 ($15,734 in the form of a smaller loan balance minus $4,425 in the form of a bigger down payment = $11,309 as well as $116 saved each month x 60 months = $6,960. In total, $11,309 plus $6,960 = $18,269).

The piggyback example constructed here is purposely conservative. Both loans are fixed-rate and self-amortizing, so there will never be a balloon payment.

After 15 years – if the financing is kept in place that long – the entire second loan will be repaid, thus cutting the home buyer’s monthly payments.

It’s possible to do piggyback loans differently. For instance, a home buyer might get a 10-year second note with payments scheduled on a 30-year basis. That will create a much lower monthly cost for the note but will also leave a balloon payment, something which represents a risk of not having the cash or credit to pay off the final payment.

As an example, imagine that you have a $30,000 second loan at five percent. If the monthly payments are calculated over a 30-year period, the cost each month for principal and interest will be $161.05.

If the loan is only outstanding 10 years the, balloon payment will be $24,402.

Piggyback loans can be a money saver for qualified home buyers, one with little upside risk if correctly structured. For specifics, speak with loan officers regarding piggyback loan options and ask them to run the numbers.

The post How Does A Piggyback Mortgage Cut Financing Costs? first appeared on My Mortgage Insider.

I’m now interested in buying a home but not clear how lenders will count my income.

Answer: Job switches are not uncommon. According to the Bureau of Labor Statistics, the typical worker has held the same job for just 4.2 years. Given this reality, it’s not surprising that lenders have guidelines that show how to handle such cases.

Depending on what type of mortgage you are trying to get, there are going to be different guidelines to follow.

FHA mortgages

The Department of Housing and Urban Development (HUD) says that lenders may consider self-employment income if the home buyer has been self-employed for at least two years.

If the buyer has been self-employed between one and two years, then the lender may only count the income if the the home buyers “was previously employed in the same line of work” where the buyer is now self-employed “for at least two years.”

Those looking to get an FHA loan will have to follow these guidelines when applying.

VA loans

According to the VA, self-employment for “less than two years cannot usually be considered stable unless the applicant has had previous related employment and/or extensive specialized training.”

It adds that a prospective home buyer with less than one year of self-employment “can rarely qualify.”

There are other requirements that come with VA loans. Applicants must be active or retired military members, and in some instances, their spouses can be eligible as well.

Fannie Mae

One of the two big buyers of conforming mortgages, Fannie Mae says “self-employment income can vary from year-to-year and because of the increased chance of uneven cash flows, self-employment adds a layer of risk that is not present with salaried borrowers.”

Self-employed buyers also have a higher chance of become delinquent on payments, meaning higher risk for lenders.

Because of this, Fannie Mae requires two years of work history to show their earnings – and prove that they will continue to make around that month in the future.

Some homeowners can use just 12-24 months of self-employment if they are still working in the same field as they were before they became self-employed.

Freddie Mac

Freddie Mac, the other big buyer of local mortgages, requires that those with less than two years of self-employment history must prove they have at least two years of experience in the field.

The home buyer must also show tax returns which “reflect at least one year of self-employment income.”

So through Freddie Mac, two years of self-employment history is not required in all cases.

Portfolio lenders

While most mortgages are made within the guidelines above, there are loans that lenders originate and keep, so-called “portfolio” loans.

Since portfolio loans can have guidelines that can be different from the usual standards, it’s possible that some lenders might be willing to finance a self-employed home buyer with less than a year or two of experience.

The bottom line

Qualified home buyers who have been self-employed for at least two years should fly through the system. Those with one to two years of self-employment will need to fully document their income and experience plus they can expect more lender scrutiny.

Home buyers with less than one year of self-employment will likely need to wait before applying for a mortgage unless they can find a friendly portfolio lender.

The post How Long Must I Be Self-Employed To Get A Mortgage? first appeared on My Mortgage Insider.

Answer: The mortgage industry is moving as quickly as it can toward automation. In an ideal world, home buyers and refinancers will type in their names and a few other pieces of information and the computer will instantly determine their ability to get a mortgage.

This sounds great in theory, but in practice we all tend to be a little different and one result is that the lending system has a few fudge factors built-in. The good news is that such flexibility tends to benefit you.

For example, loan programs often have a strict debt–to–income ratio (DTI), say not more than 43 percent.

In other words, up to 43 percent of your gross monthly income can be used for housing expenses such as the mortgage, property insurance, property taxes and recurring debts which might include auto loans, minimum credit card payments or student loans.

If the DTI ratio can somehow be higher, a home buyer might obtain a larger loan or more readily qualify. This is where compensating factors become important.

A compensating factor is really just an adjustment that lenders can make. However, they can’t just fudge the numbers. They have to operate within the requirements of the loan for which you are applying, and they also must meet their own standards.

What are examples of compensating factors? The answer varies according to the loan program and the lender. However, a good basic list looks like this:

Energy-efficient mortgages

When homes have better energy efficiency it means that homeowners have lower monthly costs for utilities. If a home meets certain energy efficiency standards the lender is often able to increase the DTI ratio.

Cash reserves

Lenders really dislike the idea of risk. The less risk represented by a given loan, the happier the lender.

If a lender sees that you have good savings habits and as a result have bulked up your cash reserves, they may be able to adjust your DTI higher.

As an example, if you have reserves equal to three monthly mortgage payments or six monthly mortgage payments in addition to all the projected costs to acquire the property, the lender is likely to be ecstatic.

By traditional standards, it may not seem like a big deal to have a few months of savings socked away. However, millions of Americans simply don’t save. The evidence? A study by the Consumer Financial Protection Bureau (CFPB) estimated that the typical payday loan amounted to less than $400.

Consistent payments

If you have been renting for some time at a given monthly rate — and your new mortgage payment will be similar, perhaps less than your current rental cost, or even a touch higher — lenders will be happy to consider that fact when reviewing your application.

In a sense, they know from your rental history you will be able to handle the new monthly payment, and that reduces lender anxieties.

Minimum discretionary debt

It’s okay to have a mortgage application that shows debt. After all, an applicant with both savings and no debt is fairly rare. What lenders would like to see for those who do have debt is that it meets certain standards.

With FHA financing, little or no discretionary debt can be a compensating factor according to HUD:

• When the Borrower’s housing payment is the only open account with an outstanding balance that is not paid off monthly.
• If the credit report shows established credit lines in the Borrower’s name open for at least six months.
• The Borrower can document that these accounts have been paid off in full monthly for at least the past six months. One reason to keep checks and bank statements is to document payments.

Additional income

Not all income earned by applicants can count toward their qualifying income. For example, a bonus here and there or some extra overtime are unlikely to help your qualifying income level.

However, if additional income can be documented for at least a year, the lender may be able to use such income is a qualifying factor.

Residual income

The VA loan program qualifies borrowers in part by looking at what is called “residual” income. Since VA financing has very few foreclosures, the residual income standard can be seen as a strong measure of financial stability.

The idea of residual income is to see how much cash a borrower has at the end of the month given income, family size, and location. The more cash the better. Lenders can sometimes use the same system to create a compensating factor for non-VA loans.

The bottom line

When speaking to lenders, ask if you qualify for a little assistance through the use of compensating factors. You may not need them to qualify, but if you do they can mean the difference between getting the loan you want versus a mortgage which is too small or maybe even an application which is declined.

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