Let the Welcome Home Program Welcome You Home!

While this time of year may have you pumped for chocolate hearts and shamrocks, it’s got me pumped for an entirely different reason (despite my love of chocolate) — one of my favorite programs, the Welcome Home Program of the Federal Home Loan Bank of Cincinnati, is officially back as of March 1st! And thanks to F&M Mortgage’s relationship with the FHLB, I get to help homebuyers take advantage of this truly one-of-a-kind program for yet another year!

The Welcome Home Program, a down payment assistance program that assists homebuyers in getting the funds they need prior to the closing of their new home, offers grants to fund reasonable down payments and closing costs incurred in conjunction with the acquisition or construction of owner-occupied housing by low and moderate income homebuyers. In layman’s terms, it provides free money to homebuyers who meet certain requirements. And who doesn’t love free money?

Sounds great, right? Well, there is one caveat:  This exceptional program is only available for a limited time, i.e., until the funds run out. But there’s no need to worry; in my experience, Welcome Home funds have, within the past couple years, been available through early to mid-April. But we’ve got to act fast!

Here are the details:

1. Up to $5,000.00 is available as down payment and closing cost assistance. Please note that the grant is forgivable if the buyer lives in home for 5 years. If sold before, pay back is prorated over 60 months. 
2. The funds are provided as a grant and therefore, no repayment is required.
3. The borrower must have a home under contract (primary residence only) to place a reservation for the funds.
4. The borrower must put at least $500.00 of their own money into the deal (60% of the $500.00 may be gifted).
5. This program is available in conjunction with certain low interest rate programs such as FHA, as well as THDA, USDA and that of conventional loans – but it is not available in conjunction with repair programs such as 203K.
6. While the borrower does not have to be a first time homebuyer, all first time homebuyers must complete a homebuyer education course as part of the requirements to receive said funding.
7. Income limits most definitely apply (it’s basically 80% median).
8. The income limit in Davidson County, TN, is $65,760 for 1-2 person household and $76,720 for 3+ person households.
9. This program may take a little longer to process due to the file having to be underwritten by the FHLB in Cincinnati, resulting in an up to 45 day processing time (but it’s certainly worth it).
10. While it may be used for new construction, the home in question must be completed by December 1, 2018.

Remember, Welcome Home funds will be available for reservation on a first-come, first-served basis beginning at 7:00 AM CT on March 1, 2018, and will remain available until all funds have been reserved.

If your client will be going into a home contract anytime within the next month or so, then it only make sense to have them take a look at the Welcome Home Program. And I can help. Let the Welcome Home Program help welcome your clients into the home they’ve always dreamed of!

97% Conventional Loan Options

As we head into 2018 and continue to be in what we would probably all agree to be a seller’s market, understanding the various lending options plays a key role in getting contracts accepted for your buyers. 

For whatever various reasons that might exist, it seems that sellers are much more inclined to accept offers when the buyer’s financing is with a conventional loan versus an FHA loan.  And while I believe that FHA serves a critical role in home finance (many clients, particularly those with lower credit scores are better served with an FHA loan), there is a very distinct benefit for buyers using conventional loans to make their home purchase – and it’s not just in getting the seller to accept the contract.

There are basically two types of 97% conventional loans: the standard 97% scenario and the Home Ready (HR) option.  To qualify for the standard 97% program, at least one of the buyers must be a first time homebuyer – but there is no income limit.  The buyer doesn’t have to be a first time buyer to qualify for the HR program (although they can’t own any other property at time of purchase), but there is an income limit based on property address.  

The main things to remember is that HR offers a discounted interest rate and mortgage insurance (MI) is cheaper than the standard 97% program.  In many cases, particularly when the buyer has a good credit score, the HR program is better than FHA (less down payment and cheaper MI).  So not only does this type of financing work better for the buyer, because it is a conventional loan, the contract offer is more readily acceptable from the beginning.

Here are the statistics.

Borrower benefits

• Down payments as low as 3%
• Competitive pricing meets or beats our standard loan pricing
• Flexible sources of funds with no minimum contribution requirement from borrower’s own funds (1-unit properties)
• Rental and boarder income may be considered for qualifying
• Others who don't live in the home can join buyer on the mortgage
• Cancellable private mortgage insurance per Servicing Guide policy
• Reduced MI coverage requirements for LTVs above 90% (up to 97%)
• Homeownership education and housing counseling options empower borrowers to become successful homeowners

I’m happy to discuss any specific questions you may have regarding this, so feel free to call. Be sure to check out the following  links for further information. 

HomeReady Fast Facts  |  Income Eligibility Look-up Tool  |  FAQs

Rent or Buy? The Answer is in the RATE!

Mortgage rates are at the heartbeat of my business, offering the greatest insight into whether homeownership is affordable.  So it’s no surprise that when headlines scream that rates are on the rise while others declare that rates are historically low, borrowers have questions and concerns.  Historic context is key to understanding how rates behave – and the key to understanding where we are today. The downward trend of rates the last 20 years will prove that buying a home truly is a better option than renting.  Sure prices have been on the rise, and that makes buyers freak out.  But that’s just part of the equation.  We’ve talked about the Home Affordability Index before, so not going to beat that drum today (basically, the HAI considers price, rate and income to determine how affordable buying a home is).  And while price certainly plays a role, rate is what is the driving factor in payment – which is what matters when considering affordability and comparing to rent.

Let’s consider a couple of things:

1) Rates have been falling for years

We’ll use the 30-year fixed-rate mortgage as a benchmark since they’re the most popular home loan option in the U.S. and often used as a basis for news and research findings. Take a look at this chart showing the 20 year trend line for the 30 year fixed rate mortgage.

As you can see, rates on 30-year mortgages peaked at just over 8 percent in 2000 (they were as high as 18 percent in the early 1980’s). Rates have been on a steady decline over the last 20 years. Sure, there have been ups and downs — the most dramatic of which was the credit crisis that drove rates to historical lows. But even today we find ourselves in close proximity to where we were then.

2) Buying a home was a bargain back then. It still is today.  What about renting?

In June 2000, the median price of a home was $140,000 and the rate on a 30-year mortgage was 8 percent. If a borrower financed this at a 90 percent , the principal and interest payment was approximately $925 a month. Compare that to 2017 when the median  price of a home is $245,000 and the 30-year mortgage rate is 3.8 percent. If a borrower finances this at a 90 percent, the P&I payment would be approximately $1,025 a month. This shows that in the span of 17 years, the average mortgage payment has increased by just $100 for P&I (an 11% increase).

Rental rates, meanwhile, continue to rise with no sign of slowing down. In 2000, the median rent in the US was $602.  By 2015 that number had grown to $959 (a 60% increase in just 15 years).

The bottom line: Homeownership over time is a better investment and more affordable than renting – and even more so in today’s low rate environment.

Thanks to my friends at Movement Mortgage for this data!

Bonds have trended up a tad over the past week and a half, but still well below our lowest rate point of the year back in late August.  30 year fixed conventional still hanging below 4% and FHA under 3.5% for good credit buyers.

Smoke and Mirrors

OK, I’m going to apologize on the front end as this will be a little longer read than my typical update.  But I’m pretty passionate about the topic, so forgive me.  I’m over all of the gimmicks out there designed to pay off your mortgage faster.  Honestly, I think it is the wrong argument anyway, or at least wrong from an execution standpoint, and I’ll get to that shortly.  The two I’m going to pick on today are the bi-weekly mortgage and the concept of using a HELOC in place of a mortgage as strategies for paying off a mortgage faster. 

I’ll start by focusing on the whole concept of what is really required to get a mortgage paid off quickly.  It’s not rocket science.  If you want to pay a loan off faster, and it doesn’t really matter what type of loan it is, you simply pay more than what is required.  There is no magical formula that makes the debt disappear.  It requires discipline and effort.  You want to lose weight?  Eat less calories and get on a treadmill.  You want to save money?  Do a budget and manage your finances by it.  Want to be a better golfer?  Go to the driving range.  You get my point…  The bottom line is that to accomplish anything out of the ordinary, your behavior has to be out of the ordinary.  It’s all about discipline.

A bi-weekly payment plan will definitely help you pay a loan off faster.  You are simply making 26 half payments every year – in essence, one extra principal payment per year.  I don’t have a problem with these plans unless there is a fee involved.  The reality is that you can make that extra payment on your own – either portioned out monthly or annually, and accomplish the same thing with no extra cost.  So why pay a fee (most of the bi-weekly programs out there charge one) to do what you can do by yourself? It’s all about discipline.

Recently I had a client decide he would buy his home using a HELOC to finance it versus a traditional mortgage.  He was wooed by a company’s claim that by using its strategy, he could pay his home off in 7-8 years using a HELOC versus the traditional mortgage.  This concept intrigued me enough to get the book, offered by the company promoting the strategy, and read it.  I was open minded about it hoping to learn something when my natural skepticism hinted that I wouldn’t.  I guess I should have been immediately more skeptical when glancing through the 127 page book, I noticed the last 56 pages were about strategies to make more money and credit repair.  I read it anyway – and was once again confirmed by the fact that if you make anything sound too good to be true, not only is it, but sadly there are those out there that will believe it – and ultimately buy it.  At the end of the day, the concept is nothing more than paying a loan off faster by paying more than is required monthly.  Granted, I believe that a HELOC is a great product and can be used strategically to both grow and protect wealth.  I have one myself.  But the central argument used in the book is that it is all about debt balance and not rate.  I couldn’t disagree more.  Banks make money based on the rate.  You eliminate balance by paying principal.  They faster you pay principal, the less interest (rate) you pay – that’s the whole point, to pay less interest.  You can definitely get your loan paid off faster using this strategy, but it is just another gimmick.  You are simply paying more than what is required versus a traditional mortgage.  There is actually a real danger here and that is you are using an inferior product (a loan with a rate that fluctuates) to accomplish what can be done on your own – paying extra on the debt.  And I’m sure there is probably a pretty good sized fee from the company touting the strategy to help you get everything set up.

But are we really even focusing on what is in my opinion the more important concept?  I agree that it is all about getting out of debt.  But what does that really mean?   Most would say that it means owing no money to anyone.  I disagree.  I’ve stated for years that being debt free isn’t really about having no debt – it’s about having the ability to pay off the debt anytime you want to.  In other words, it’s about having more financial resources than money owed.  If you have $200,000 in a safe investment and owe $150,000 on your mortgage, you have the ability to pay that loan off anytime you want – you are debt free, you just choose strategically to have debt.  I used to crack up listening to The Money Game back in the early 90’s with Dave Ramsey and Roy Matlock.  They used to argue about this concept.  Back then mortgage rates were around 8% and the rate of return on equity investments was around 12%.  Dave wanted people to pay off their mortgage and Roy argued that it made more sense to invest the money versus paying off the mortgage – an alternative to the traditional thought of being “debt free”.  I love Dave, but I was always on Roy’s side when they argued this topic.

I’ll give you a simple example related to the whole HELOC versus mortgage concept – and I’ll be generous to the HELOC concept assuming that the rate never changes.  The last two times the Fed started increasing the Fed Fund rate (that prime is tied to), prime topped out around 8%.  Prime is currently 4.25%, so we’ll use that figure.  The 30 yr mortgage is at 3.75% right now, so we’ll use that figure as well.  We’ll assume a $200,000 mortgage and that the payoff target is 8 years.  The P&I payment on the mortgage is $923 per month.  We’ll assume an average of $4,250 per year of interest on the HELOC (that is averaging the interest over 8 years with constant rate assuming the balance will be paid down to zero by the end of 8 years).  To pay off the loan on a monthly basis would require a payment of $2,392 ($2,038 in principal dividing $200,000 by 96 (8 years) plus $354 in average interest).  So the first 8 years will require an additional payment of $1,469 versus the 30 yr mortgage.  If the person with the mortgage invests that extra $1,469 over the 8 year period at 6% (very conservative as pretty much any 10 year period in the history of the equity markets provides a return of 8%+), the total saved/earned will be $181,337.  By the way, his principal balance at this point is ~$163,000, so he’d have the cash needed to pay off the balance if he wanted to at that point – with some left over.  But here is where the real magic exists.  Let’s say that the person that did the HELOC and paid his loan off in 8 years now invests the $923 per month (the amount the mortgage guy will still be paying) over the next 22 years.  His investment will grow to $506,687. Let’s assume that the guy with the mortgage, who invested his money over the first 8 years, continues to pay his mortgage and never pays an extra penny towards his investment or paying his mortgage early (I’m keeping the amount paid by each the exact same for the full 30 years). The investment he grew over the first 8 years will be worth $653,454 by the end of the 22nd year.  He comes out $150,000 ahead.  So who was the real winner? And all of this assumes the HELOC rate never changed, the investment return was below average, and isn’t considering the tax benefit of the interest paid.  Thank you compound interest – the only real magic in this entire equation.

So I guess my point is that regardless of strategy, and I believe I’ve proven that investing versus paying down the mortgage (particularly in this low rate environment) makes more sense, what doesn’t make sense is to use gimmicky options, especially if there is any type of fee involved, to pay the mortgage off early.  If you want to do that, get a safer fixed rate option and just pay extra.  Or, in my opinion, invest the difference and work towards having the cash available to pay the loan off when you want to.  Either way, it’s all about discipline – not a hokey strategy.

We’ve seen a couple of dips since we started our run to better rates at the beginning of July.  But the one we had last week took us out of the upward moving channel for the first time.  It will be interesting to see if that continues over the days and weeks to come, but we’ll keep you posted.

Student Loans – from a qualifying standpoint

We have talked in the past about student loans and how it is my opinion that this will be the next financial crisis faced by the American public.  Americans owe over $1.4 trillion in student loan debt, spread out among about 44 million borrowers. That’s about $620 billion more than the total U.S. credit card debt. The average Class of 2016 graduate has $37,172 in student loan debt, which is up six percent from 2015.  This is not something that is going away any time soon and it has a significant effect on first time home buyers and the age that they are able to buy their first home.  But what I want us to look at today is how we (mortgage lenders) consider student loan debt from a qualifying standpoint based on the most common types of mortgage loans they are eligible to obtain.

·        Conventional (which includes the 97% Home Ready program) – we use whatever the credit report reflects as the monthly payment for qualifying purposes.  If there is no payment listed, the loan is in deferment for example, then we have to use a 1% of the total balance as the monthly payment unless the borrower can provide paperwork showing what the exact payment will be when repayment begins.  So if the student loan debt is $50,000, the borrower has no payment and no documentation reflecting what the payment will be, then we have to count a $500 monthly payment when calculating the debt ratio.  But if there is a payment listed on the credit report, we go with that payment.

·        FHA – we use the greater of the payment that is listed on the credit report OR 1% of the balance when calculating debt ratios.  As an example, if the borrower has $50,000 in student loan debt with a $250 monthly payment (typical for someone in an income based repayment plan) or no payment because the loan is in deferment, we would have to count a $500 payment when calculating the debt ratio even though the required payment is much less.

·        THDA – same as FHA

·        USDA – same as FHA

The requirement that FHA, THDA and USDA have of counting a minimum of 1% for student loan debt can play a significant role in qualifying a first-time home buyer for a mortgage.  It is important that we (everyone involved in a real estate transaction) understand the implications of this and make sure both we and our buyers understand it.  The price a buyer can qualify for is limited by what debt ratios allow and our requirement to potentially count a higher payment for student loans in that ratio, than what the borrower is actually paying, can certainly lower the price he/she can afford.

Welcome Home

It’s that time of year again – one of my favorite programs is back (and as usual, it is for a limited time).  We once again get to take advantage of F&M’s relationship with the Federal Home Loan Bank of Cincinnati to provide this special grant that is truly one of a kind.  The Welcome Home fund is taking reservations now (started March 1st) and will be available until funds run out.  The funds have run out by mid-early April in both of the last two years.  Why?  Because it’s free money!  Details are listed below and you are welcome to call me if you have any questions.  Let’s help as many people as we can with this program!

·         Amount available - $5,000 per transaction

·         The funds are provided as a grant and no repayment is required

·         Borrower must have a home under contract (primary residence only) to place a reservation for funds

·         Funds may be used for down payment and associated closing costs

·         Borrower must put at least $500 of his/her own money into the deal (60% of the $500 can be gifted)

·         Most loan programs are available (FHA, THDA, USDA and conventional – but no repair programs like 203K)

·         Doesn’t have to be a first time homebuyer, but all first time homebuyers must complete homebuyer education course

·         Income limits apply (it’s basically 80% median)

o   for Davidson county, the limit is $65,760 for 1-2 person household and $76,720 for 3+ persons

·         These programs take a little longer to process due to the file needing to be underwritten by FHLB in Cincinnati, so please allow 45 days to process)

·         It may be used for new construction, but home must be completed by December 1, 2017

If you have a client that is going under contract any time in the next month to month and a half, it would make sense to at least have him/her look into this if you think there is even a possibility of qualifying for this grant.  It is awesome!

THDA Has A Great New Program

In essence, THDA will now allow a buyer, who is buying in a designated zip code, a second mortgage of $15,000 that is completely forgivable if the buyer lives in the home for 10 years.  Here are the highlights for the program:

·         Available March 1st, but applications may be taken now.

·         Must qualify for the THDA Great Choice (the normal program – standard guidelines, 45% max debt ratio for example)

·         Must meet standard income limits and house acquisition price limits and meet IRS requirement for first-time homebuyer

·         Must be in a designated zip code (see flyer below)

·         New construction is NOT eligible

·         Pre and Post purchase homebuyer education is a requirement

·         Rate and fees for first mortgage are same as normal Great Choice program (nothing added for this program)

·         $15,000 second mortgage available for down payment, closing costs and prepaid items

o   $15,000 second must be taken in full – if more than needed, the first mortgage is reduced accordingly

o   No payments made on second mortgage during repayment terms of the first mortgage

o   If home sold in first 5 years, the full second mortgage must be repaid

o   Starting in year 6, the second mortgage is forgiven at a 20% per year rate through year 10

o   If home is owned longer than 10 years, there is no repayment due for the second mortgage

For additional information on THDA qualifying, go to www.thda.org; the updated guidelines for this new program will be available next week. 

If there are other available options like USDA, VA or our internal bank product, I’m not normally a big THDA fan due to the higher rate and added fees (compared to the traditional FHA program).  However, for a first time buyer who is buying in one of the zip codes listed on the attached document, this is a really good option.  You are welcome to call me if you have any questions.

Check out the flyer from THDA below for more specifics and eligible zip codes:

Loan Limits - Movin' On Up!

Welcome to the New Year!  For the first time in over a decade, Fannie Mae is increasing its loan limits for conventional loans.  It is nothing drastic, but certainly a move in the right direction.  For quite some time, the maximum loan amount for a conventional loan in the Nashville MSA has been $417,000 – anything over that amount went into the “jumbo” category.  The new number for Fannie is now $424,100.  But maybe what is the better news from Fannie is that they moved their loan limit for their expanded program (High Balance Agency product) up to $466,900.  The expanded program has a slight rate bump (typically .125% for 30 year fixed with no more than .25%), but also allows up to 95% loan to value.  So in essence, someone could put 5% down on a home priced at $491,450 with only a slight bump to the rate.  Remember that jumbo loans require 20% down and typically have a rate bump of .25-.375% above the Fannie rates.  So this is a nice option.

Also, and probably even better news than the Fannie loan limit increase, is that FHA is also increasing their loan limits.  The new limit for the Nashville MSA (which now includes Maury County) is $466,900.  So with a 3.5% down payment, someone could buy a property at $484,000 and still do a maximum FHA loan.  This becomes an even bigger benefit for a buyer with a sub-720 credit score (and dramatically for a sub-700 score).  So keep that in mind when you have a client with minimal down payment but who qualifies for close to $500,000 in price.  These options could come in handy – and we always have the combo option available (where we keep the first mortgage at the Fannie limit and do a second mortgage up to 90% so that a buyer can buy a more expensive home and only put 10% down (versus taking a jumbo loan and putting 20% down).  You are welcome to call me if further explanation is needed.

Lastly, I want to touch on rates very quickly.  Hopefully the jump in rates post-election wasn’t a shock to anyone – we’ve been discussing it for several months.  The 30 year conventional fixed rate jumped about .75% in the 2 weeks after the election.  The big question now is whether or not we are done with the rate jumps.  My personal opinion, and this is based solely on instinct and how the charts read from a technical standpoint, is that we will see rates hanging between 4% - 5% throughout 2017.  I think we’ll push 5% by summer and then drop back down into the mid 4’s by year end.  But I definitely believe that the sub 4% rates on conventional loans are likely a thing of the past.  Not to worry – sub 5% rates should not slow down our market at all.  It will be another very good year for real estate in Middle Tennessee!

Why Do You Not Have a Home Equity Line of Credit??

Obviously this question doesn’t apply if you either don’t own a home or don’t have very much equity in the one that you do own.  However, if you have a home with decent equity (more than 10%), then the question certainly applies.  In my opinion, everyone should have a home equity line of credit (HELOC) in place if they are able.  Also, understand that I’m suggesting that you have a credit line in place, not necessarily that you use it – and I’m certainly not suggesting that you borrow on it without a plan in place to pay if off quickly.  A HELOC is kind of like a gun.  It can be a very dangerous thing if not used properly.  But when used in the proper manner, it can be a great weapon in your overall financial arsenal.

It provides two very important components:  the first is liquidity if needed and the second is a great source of temporary funds if needed for an immediate purchase.  I see scenarios all the time where people have a ton of equity in their homes but don’t have much liquid cash in the bank.  A HELOC is a phenomenal emergency fund in that situation.  Because you only pay interest on funds you have actually borrowed, you can have a HELOC in place with no cost to you.  For someone who has equity in their home, but little cash on hand, having a HELOC in place is a great safety net as it provides funds that can be drawn immediately in times of emergency.  I’m not telling you that you don’t need an emergency fund – the lack of an emergency fund is probably the biggest thing that gets folks into debt (well, maybe other than the lack of discipline to save for purchases versus buying on credit – but that’s another discussion).  Having a HELOC in place is just a safe back-up while you build up your cash savings.  If an emergency occurred and you couldn’t cover it with cash, the HELOC is there if needed.

A second great use of a HELOC is for when you have a financial opportunity to make a purchase (house flip for example) that will make you money.  I would never suggest this as an avenue to finance anything that depreciates or an investment that did not allow the HELOC to be paid back quickly.  But it is great to have available if an opportunity like that comes along.  And having one in place might give you the encouragement needed to be looking for these types of opportunities.  Remember that a HELOC is normally tied to prime, so the rate can fluctuate.  That is why it is not a good long term borrowing strategy.  But the interest payments are typically tax deductible and the payments are interest only.  So when used properly, it can be a good source of funds to buy investments where you can make your money and get out (pay the balance of the HELOC off) quickly.

If you have the equity needed to get a HELOC, it’s my opinion that you should – unless you know that you just can’t trust yourself to use it wisely.

First Time Homebuyers - Are We Asking the BEST Questions?

 was asked this week by a national publication to help answer the question “What are the best loan programs for a first time homebuyer?”  I gave them my opinion, but came to the conclusion that this really isn’t the best question that needs to be asked. Most first time homebuyers get so wrapped up in trying to maximize their purchase that they lose sight of how that affects their day to day and financial future. The 2 best questions to ask are these- How is this purchase going to affect my budget? And what is my exit strategy?

Most people in general don’t seem to have a budget. Money simply comes and goes with the hope that there is more coming in than going out. First time homebuyers therefore, are more interested in where the home is located, how big it is, what the amenities are and its curb appeal. These are all very important things, but how the payment will fit their budget is the thing that is going to be most life impacting.

I’ve written on this topic before, but as a brief recap, I personally believe it is critical to establish a monthly budget where ALL monthly expenses total an amount that is no more than 80% of the monthly net figure. This allows for a comfortable cushion that permits any individual to give or save up to 20% of their bring home pay every single month. What kind of value could we as real estate and finance professionals add to our clients if we had this in mind throughout our work? Can we accept the challenge of finding the house that meets their wants within the proper boundaries of what’s best for their budget? That is real care and concern for the success of the people we serve.

The next step is to have an exit strategy for any purchase. Both the home specifics as well as the financing are critical to this part of the equation. It is just as important to consider the home’s desirability by the general population as it is determining how well it fits the immediate needs of the current buyer. For a first time homebuyer, the likelihood of them staying in the home until retirement is unfathomable. Most don’t stay in the home more than 5-7 years. So considering the ability to sell in the future needs to be of utmost consideration in the purchase now.

I’m encouraged to be working with individuals as great as you all reading this blog. Together we have the opportunity to help our clients succeed financially. And as you know, the right home purchase, especially for a first time buyer, is a huge part of that equation.

TRID is Here

This will be the last week of files getting into process with the old GFE, TIL and HUD-1.  Starting next Monday we will be under the new TRID guidelines where the GFE and TIL will be replaced by the Loan Estimate and the HUD-1 will be replaced by the Closing Disclosure.  I’m not going to rehash what has already been expounded upon over and over the past 6-9 months.  But here is my thought in a nutshell:  DON’T FREAK OUT.  Sure the 3 day deal is going to be a challenge and there will be some delays along the way.  But the CFPB finally did something right as it relates to disclosure (what the documents cover, the simplicity of understanding them, matching initial paperwork with final paperwork, etc….).  So we take the good with the bad and we move on.

Speaking of moving on, thought I’d give you some suggestions related to the things you can do when advising your clients when they need a mortgage (most of these apply specifically to Realtors, but are worthy recommendations to any client you may be advising from a financial standpoint):

Top 5 things that you can do to help your lender with your client’s mortgage process

1.  Encourage your clients to be on a 48 hour alert – any time the lender asks for documentation or sends disclosure forms to sign, return within 48 hours (24 if possible, but never more than 48 hours).  Lenders will not ask for documents or disclosures unless they need it.  Prep your clients to be ready to respond efficiently.
2. Encourage your clients to get their homeowner’s insurance lined up as soon as the home is under contract (and on FHA transactions, get termite inspection done and letter to lender within 2 weeks of contract acceptance).
3. Only work with title companies that are awesome - agree to have the title work done within 1 week of home being under contract and are all over getting closing figures (used to be HUD-1’s) back to the lender quickly after receiving instructions from the lender.
4. Provide complete contract (including all addendums – like FHA/VA) to lender the moment all signatures are obtained.  TN Property Disclosure or exemption is required on all loan transactions.  Include a copy of the earnest money check.
5. Set the actual closing date and time with the attorney within a week of contract acceptance and basically get everyone involved (in your specific transaction as well as any that might be a part of yours from a “domino effect”)

What Does it Mean to be Debt Free?

I had a great conversation last week with a client.  We’ll call her “Jill”.  Jill was in her early 50’s and had just gotten divorced from her husband of 20+ years.  She had gotten about $400,000 in the divorce and kept her retirement account (another ~$250,000).  I knew her financial counselor and he had already advised me that her return on the retirement account that he had managed for her over the past 20 years had been 7.2% during that time period.  She had a great job and shared with me that she intended to work for at least 10-15 more years.  She was buying a house for $400,000 and asked for my advice on what made the most sense from a financing perspective.  Her main goal was to be debt free, so she had planned on paying cash for the house.  I told her that I loved the idea of being debt free, so I asked her what that meant to her.  As expected, she told me that to be debt free, “I don’t owe anyone any money.”  While I didn’t disagree with her, I asked her another question.  I asked her “If you have the ability to pay off any debt you may have, but choose to have debt anyway, are you any less debt free?”

She was well versed financially and I could see the wheels spinning in her mind – I could tell that she had never really thought about it from that perspective.  I showed her that she could put $80,000 down on the house (20% to avoid MI) and get a 15 year loan at 3% with a $2,209 monthly payment.  Even though she didn’t really want a mortgage payment, this payment fit well within her budget.  If she paid the loan for the full 15 years, her total payments would be $398,000 (so she paid back the principal + $78,000 in interest).  I showed her that she could invest the other $320,000 at 3.5% (which was less than half of what her average return had been – I wanted to be ultra conservative), and that investment would grow to over $536,000 by the end of 15 years.  At 7%, it would be $883,000.  And even at 2%, it would be over $430,000 (so the additional $110,000 is still way more than the interest paid over that time).

I also showed her that it is more than just the return.  If she paid cash, she would have liquidated pretty much all of her liquid savings.  Sure, she would have no mortgage.  But she would still have taxes, insurance and all of her other bills as well – with no solid safety net.  What happens if she lost her job or had a medical set back – or really any emergency that required immediate cash?  I asked her “which is the better place to be in – no debt and no money, or debt but plenty of cash to live on if things go bad?”  She was already convinced, just from the investment opportunity, that getting a mortgage was the more financially astute thing to do.  But when I reminded her of the importance of being liquid, it was an easy decision.  And the reality is that she will still have the ability to pay the loan off any time she wants to if her monthly budget changes and she no longer wants to make a mortgage payment.

When I hear people talk about the great feeling they will have when they go to bed knowing their mortgage is paid off, I understand and empathize with that feeling.  But in my opinion, it is much better to go to sleep knowing that there is money invested safely, earning a return, and ready/able to pay the mortgage off whenever I choose.

Education is a Good Thing

In my opinion, too many loan officers are threatened when their clients start asking questions, particularly if they are asking the questions of other loan officers.  I love it when they ask me questions.  It not only shows their desire to learn and make educated decisions, it allows me to coach them and use my 25 years of experience to advise them well.  And when they are asking questions of multiple lenders, it simply validates what I’m advising them (they either get wise counsel and realize I’ve advised them well or they get crazy answers and realize how important it is to be working with someone who is on top of his game).

But here is the catch – it isn’t easy!  Staying on top of all the changes (pricing, products, compliance, underwriting changes, etc…) is hard work.  Being the best means giving more effort than the person beside you.   It means reading up on things like sales techniques, communication, market data, and all sorts of personal growth ideas.  How about you?  Are you willing to go the extra mile to make sure that you encourage questions?  Whether you are a doctor, financial planner, lawyer or a Realtor, clients who are asking questions should be an inspiration, not a threat.  When you are prepared, questions give you the opportunity to shine!

I sat in on a buyer consultation last week with a Realtor buddy of mine and I loved what he told his client.  He said, “My job is not to sell you a home.  My job is to educate you and empower you to make a great decision.”  I left that meeting not only impressed by his words, but challenged to continue treating my job as that of an educator and master of my trade.  It was kind of ironic because right after that meeting, I got the monthly update from the GNAR.  In it contained the link below from our friends at the CFPB.  They have finally done something that I really like.  This little brochure is something that is phenomenal to provide your clients.  It is a great tool that can help your client understand the lending process better and make educated decisions.  And that is what we should be about, educating our clients so that they can make great decisions!

http://files.consumerfinance.gov/f/201503_cfpb_your-home-loan-toolkit-web.pdf

A Loan Program You Need in Your Arsenal

I’m talking about USDA.  This is a phenomenal program and if you are not familiar with it, it’s time that you get well acquainted.  It may be somewhat of a niche program, but for the right buyers, it is a game changer.  I have four of these loans in process right now and every customer that is getting this program is thrilled. For example, I locked one in last week at 3.25% on a 30 year fixed with a $232,000 sales price in Mt Juliet, paid a 1% lender credit to help with closing costs, and got the seller to contribute $3,500 plus title.  The buyer is getting this home for no money out of pocket and a payment based on a 3.25% rate.  I’m still a little giddy thinking about what a great deal it is.  Below are the main highlights and drawbacks (although I should probably just call them parameters versus drawbacks).

Benefits:

• Requires no money down
• Seller can pay closing costs and prepaid items
• Credit qualifying is very reasonable
• Rates are phenomenal
• Monthly mortgage insurance (called a guarantee fee) is cheaper than FHA by 35 basis points

Parameters:

• Must be in a designated area (rural property)
• Household income limit (most of our MSA is $75,650 per year)
• Can’t own another home (don’t have to be a first time buyer, just can’t own another home at closing)

To find if a specific property is available, simply go to http://eligibility.sc.egov.usda.gov/eligibility/welcomeAction.do, click “single family housing” under the Property Eligibility tab and type in the address.  You can also zoom out from this spot and see the areas that are eligible (anything that is not in the shaded area is eligible).  With properties so difficult to find in the city limits, it might be worthwhile for your buyer to look a little further out (Spring Hill, Mt Juliet, Thompsons Station, parts of Nolensville, Fairview and Pegram are just a few that might surprise you).  You might just find a diamond in the rough – and get them a great loan program at the same time!

Lesson #6 - Living On 80% of Your Net Income

When I qualify someone for a loan, all I’m looking at from a debt ratio standpoint is how much is going out each month in debt payments as a percentage of how much is coming in from a gross monthly income standpoint. Most of the loan programs we do allow that number to go up to 45%. While I’m neither advocating that percentage nor am I an opponent of it, I do have a recommendation that I believe is better. I call it the 80% Solution. It is simply setting up your budget every month so that the total of the money you spend does not exceed your net monthly income by more than 80%. As a simple example, if someone’s income is $60,000 per year and she is in a 25% tax bracket, her net income is basically $3,750 per month ($60,000/12*.75). She would be limited to $3,000 per month ($3,750*.80) to cover ALL expenses – including her house payment, if she were “living” within the 80% rule.

Keep in mind that qualifying ratios will still prevail when determining the amount of monthly payment a borrower can qualify for. So in the example listed above, the maximum debt payment that she could have per month (counting her house), would be $2,250 ($5,000*.45). In other words, her house payment plus all of the other debt obligations that she may have (student loans, car loan, credit cards, etc….) could not exceed that $2,250 figure. What I’m suggesting here is not overriding this number. I think it is just a better mechanism to help a potential borrower stay financially fit. It works out great when both of these numbers are in sync – where a borrowing client meets the qualifying ratios (debt payments, including mortgage, fit within the required ratio allotment), thus allowing him/her to purchase the home, but also when there is a commitment to keep total expenses in check (80% or less than net income), allowing for a lifestyle that is less burdened by monthly obligations in relation to net income.

Why 80% and not some other number? The primary focus behind this specific number is that it allows someone to have an immediate 20% that can be either given away or saved. I believe that both are critical. We are blessed beyond our imaginations (go spend some time in a third world country where the largest percentage of our planet’s people live, and you’ll immediately agree with me). With that blessing comes a great responsibility for us to help. Secondly, as I’ve written about many times, and it is the underlying theme to the “Your Mortgage Matters” book – having adequate savings is crucial to financial health. Living within that 80% framework will go a long way to satisfying both of these objectives. Obviously anything lower than that number is just icing on the cake, providing more flexibility for everything else. If you, and our borrowing clients, can manage to do this, or even better, financial success is sure to follow.

What You Can Do To Help The Mortgage Process

This month, we’ve had two different clients that didn’t get their closing package until the day before closing and the HUD wasn’t ready until a few hours before the closing. Starting in August, these loans wouldn’t even have been allowed to close (new rules we addressed in our update a few weeks ago where we explained that lenders will be required to provide the final HUD to buyers three days in advance of closing). It is my team’s responsibility to get loans processed timely and make sure closings happen efficiently and I own that responsibility. There is nothing more displeasing, and stressful for all involved, than when there are last minute issues that have to be addressed the week of closing. But we are all on the same team (mortgage loan officer, borrower, seller, agents and attorney) and everyone wants the same thing – an efficient on-time closing.

For the mortgage process to work, accomplishing the end goal, there has to be cooperation from all involved. In both of these scenarios where issues were still being addressed at the last minute, we did not get timely help from our borrowers, following instructions and getting documents provided to us – and one of those deals was a three week turnaround from application date to closing date.

We have an incredibly efficient process and we communicate very clearly from start to finish. We encourage timeliness in every facet.  But if we don’t have full cooperation from our borrowers when it comes to providing documents and returning disclosures, we are limited in how quickly we can make progress. What can you do to help? Here are a couple of suggestions:

• Let your clients know how important it is to provide all documents requested and the importance of providing them quickly.
• Encourage them to respond quickly to any follow up requests and to sign and return disclosures immediately.
• Remind them that they are responsible for obtaining homeowner’s insurance and to go ahead and get that set up the week their contract is accepted.
• Provide the final contract as soon as all signatures are obtained.
• Order a timely home inspection. We typically hold up the appraisal until the inspection is complete and acceptable. So the sooner the inspection is done, the sooner the appraisal can be done.
• Make sure the closing attorney is either on the contract or identified soon after contract acceptance.
• Go ahead and schedule closings (time and date with the attorney) well in advance of the week of closing.

These are just my thoughts on a couple of things that I believe will assist the mortgage process. I’m open to any suggestions you may have as well – and this goes for my end too. It’s our job to get to closing on time and as efficiently as possible. When we work together to this end, it is a win-win for all. An encouraging word from you requesting a timely response from your buyer regarding all things mortgage related, can go a long way to making the mortgage process much smoother.

Recent Credit is Critical

It is amazing how much weight the credit scoring models put on recent credit. Let me give you three examples:

1. In the first scenario, an individual who had perfect credit (car, student loans, house, all perfect resulting in a score exceeding 780), had three student loans go bad six months prior to applying for a loan – each had 90 day late payments. There was also a car loan that was late the month before the application. His score had dropped from the high 700’s to low 500’s.

2. Another individual whose score was over 690, dropped to 615 thanks to one 30 day late payment on a car loan two months before buying a home.

3. A third individual had a bankruptcy (chapter 7) from 2 years prior, a short-sale that took place about the time of the bankruptcy, multiple late payments on various accounts leading up to the bankruptcy, and only one new credit item opened since the bankruptcy (a small credit card opened a year before application). Yet her credit score was over 680.

If you compare the first scenario to the third scenario, there is a spread of over 150 points in score. The third individual committed what most would consider a much more egregious action from a credit standpoint – bankruptcy and short sale to go along with multiple late payments. The first individual always had great credit. And the issue causing the score drop was “only” late payments. There was no collection, judgment, foreclosure or bankruptcy. He was just late. The difference – time frame. For the third individual, whose score is over 680, all the derogatory credit issues occurred 2+ years before credit was checked. Yes, they were certainly much worse in the extent of the lack of payment, but because there had been 2 years with no negative issues, the score had moved back up. Same thing goes for the second individual referenced here as the first individual. One minor late payment dropped the score by 75 points, making qualifying nearly impossible. And it was simply because the late payment was so recent.

I give these examples simply to show illustrations of how devastating it can be to a credit score when late payments are recent. Our clients need to be aware that paying bills on time is critical – particularly the closer they get to wanting to buy a home.

Are You Ready? Is Your Lender Ready?

There is a big change coming later this year...All mortgage applications taken after August 1 will require the closing documents to be provided to the consumer at least three business days prior to consummation. This is thanks to the new TILA-RESPA Integrated Disclosure rule. I have attached a brief recap below. (I say brief because the actual document is over 1,600 pages).

Think about this for a minute: When was the last time your lender had your client’s closing package to the attorney and the attorney had all of the documents prepared 3 days ahead of closing? I know, it’s frightening to consider. Well, in less than 6 months, that is going to be the new reality for all of us.

Fortunately, for my team, we have exceeded getting all of our purchase closing packages to the attorney at least 48 hours in advance of closing, over 85% of the time, covering the past 4 years. But even with an exceptional track record like ours, we are going to have to raise the bar even higher.

Our goal, starting at the beginning of this year, is to get every purchase closing package to our attorney 72 hours in advance. Granted, we can’t hold the attorneys accountable at this point to also prepare their docs, but we can certainly keep up with our performance. The reality is that when we get to August, we will likely need to have our closing docs out at least 4 days prior to closing, to give the attorney a day to prepare the docs for signature. Raise the bar again!!

Change is a constant for all of us in real estate. I’d suggest you start thinking now about how you can tweak your own process and timeline. A simple example would be to make sure you are scheduling all home inspections within 3 days of contract acceptance. This will allow your lender to get the appraisal ordered sooner, particularly on a deal with a short time frame. And, you certainly need to be thinking through all of the potential contractual issues, those that are typical and those out of the norm that tend to come up at the last minute, causing a change to the contract affecting the numbers. Any change to the numbers affecting the Closing Disclosure will require a restart to the 3 day wait. It’s a brave new world!

I’d also suggest that you work with a lender that is prepared for what is coming. Those that consistently miss closing dates and/or have packages coming in at the last minute are going to struggle mightily with this. Now is the time to start preparing!

Click Here if you'd like to read a recap of some important related items.

Welcome Home!

One of the cool things about working for F&M is that they participate in the FHLB (Federal Home Loan Bank) of Cincinnati’s Welcome Home program. This may be one of the coolest programs out there for low to moderate income buyers.

Welcome Home grants are used to fund reasonable down payments and closing costs incurred in conjunction with the acquisition or construction of owner-occupied housing. The grants are limited to $5,000 per homebuyer. All funds are reserved for specific homebuyers purchasing specific homes and cannot be transferred to other homebuyers or to other homes, and the funds are on a first come, first served basis.

Welcome Home funds will be available for reservation beginning at 8AM ET on March 2, 2015, and will remain available until all funds have been reserved. The funds are typically completely reserved (thus exhausted) by early April, so there is a narrow timeframe to take advantage of this. Once the funds are exhausted, FHLB will no longer accept requests for funds. Here are the basic eligibility requirements:

• Applicants do not have to be first-time homebuyers. However, all first-time homebuyers must complete a homebuyer counseling program.
• Income limits are based on 80% median income for the appropriate county.
  • For Davidson and surrounding counties, 1-2 person families must have household income of less than $61,440
  • For Davidson and surrounding counties, 3+ person families must have household income of less than $71,680
• Homebuyers must contribute at least $500 of their own funds toward down payment and closing costs (60% of these funds may be received as a gift).
• Must be used for primary residence and one to four unit properties are eligible
• Funds are to be used for reasonable down payment and closing costs
• Funds must be used in conjunctionwith a government loan (like FHA, THDA, VA or USDA; but not 203K)
• There is no repayment required of the funds if the property is retained for at least five years.  If property soldinside of the five year retention period, the loan must be paid back.  However, 20% of the initial loan balance is forgiven each year.  So if the property is sold in year three, for example, 60% of the initial grant must be repaid.
• If earnest money is paid and reflected on the HUD, the buyer may not receive that back through the use of these funds.
• The review period for the grant can take a couple of weeks, so quick-turn contracts will not work with this program.

Click HERE to view the 2015 guidelines for the program if you are interested.  Feel free to call with any questions.

It's Back!

For several years I’ve been recommending to anyone with a decent credit score that they do whatever they can to come up with a 5% down payment to avoid FHA financing. As the mortgage insurance charged by FHA continued to become more and more expensive, that type of financing became somewhat of the “new sub-prime” loan for those with minimal down payment and poor credit scores. However, with the introduction of the new monthly fee for mortgage insurance being charged at 85 basis points versus 135 basis points (see my update from two weeks ago – it goes into effect January 26th), FHA is back in business!

FHA has once again moved to the forefront of viable loan options for first time buyers and move up buyers with minimal proceeds coming from selling their current home. If FHA continues to price their loans competitively from a rate perspective, an argument can be made for anyone with a smaller down payment to consider this option over a conventional loan. For the past several years, the 30 year fixed rate for an FHA loan has been around .5% better than a conventional 30 year fixed. So right now, someone with good credit can get a conventional loan at 3.75% or an FHA at 3.25%. If the loan amount were $150,000 for each, the P&I would be $42 cheaper on the FHA due to the lower rate. For the very best credit scores, the MI factor is still around 30 basis points higher on FHA versus a 95% conventional loan, so for the same loan amount, the borrower would pay $37 more for the FHA loan. FHA still wins by $5 – and this is for borrowers with the best credit scores. As the credit score gets lower, the impact to both the rate and the MI for conventional is significantly greater than FHA. FHA only requires 3.5% down and for the most part, offers more lenient underwriting guidelines than conventional loans.

Fannie and Freddie made big announcements back in the fall that they’d be rolling out new 97% loan options this year. I can assure you that the rates and MI costs for those higher loan to value loans will be greater than what they are at 95%. With the new change FHA has made, it may render Fannie and Freddie’s 97% loans pretty insignificant.The one major argument that is still in favor of a conventional loan is that the monthly mortgage insurance can be removed at some point in the future (minimum of two years), whereas the FHA monthly mortgage insurance payment is permanent. But in most cases, it is at least 4-5 years down the road before that is possible on the conventional loan, and the average first time buyer isn’t in a home much longer than that anyway.

And don’t forget that FHA loans are assumable (on a qualifying basis). If rates go up in the next few years, even if only to the 5.5 - 6% range, how attractive might a house be to a buyer if he/she can assume the existing loan at 3.25%? Something else to think about...

Oh, one more thing – you might suggest to anyone that purchased a home in 2013 or 2014 using an FHA loan, to consider refinancing that loan to take advantage of the lower MI.