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Homeowners are still wanting to take cash (or equity) out of their homes for whatever reason – debt consolidation, home renovation, college tuition, etc.
Many people I talk to want to add a second mortgage to gain access to that home equity.
They are under the impression that a fixed rate second mortgage is free and the mortgage rates are the same as those advertised for the 30 year fixed mortgages, for example.
They are mistaken, however.
The underwriting criteria is virtually the same for a new fixed rate second mortgage than the criteria used when underwriting a new first mortgage.
So the “hassle factor” for the borrower is the same.
So why not replace the first mortgage with a new first mortgage and take the cash out at the same time?
It makes sense as long as the mortgage rate is dropping or the loan term is being reduced.
In addition, a homeowner can get a new first mortgage with the lender paying the third party closing costs.
This can be a pretty good deal.
What about a home equity line of credit also known as a HELOC, instead of a fixed rate second mortgage? Would that be a better option?
It depends on when the homeowner needs access to the cash.
If you don’t need the cash immediately and just want “access” to your home’s equity, then a HELOC would make sense.
With a home equity line of credit HELOC, the homeowner is billed only on what they use.
It works like a credit card - zero balance, zero payment.
Note however that the home equity line of credit is a variable rate mortgage (yes, it is a mortgage) and is tied to the Prime Rate, which currently is at 3%, very low indeed.
However, the Prime Rate can increase and was as high as 8% 5 years ago.
In conclusion, it may make more sense to do a cash out refinance with a new first mortgage and take cash out instead of putting on a new fixed rate second mortgage.
This is a great question and one that many people think about.
You see the mortgage rates and they’re really low. You know that the mortgage rates are lower than what your current mortgage rate and your friends are telling you that they just refinanced their mortgage at such and such mortgage rate.
You’re thinking, “I better get on the wagon so I can save some money”!
So you do your research and see the mortgage rates, the new proposed mortgage payment and you’re ready to move forward and apply for the mortgage loan refinance.
Here comes the work.
The first thing you’ll need to do is complete a mortgage loan application.
You can do this face to face with a mortgage broker or loan officer, over the telephone or even online.
It takes about 15 minutes to complete a mortgage loan application.
Next, you’ll need to dig up your income and asset paperwork.
Unfortunately (or fortunately), depending on how you view it, there are no more “no documentation” loans available for mortgages.
Specifically, if you’re employed, you’ll need copies of your last 30 days pay stubs, copies of your last 2 years W2s and copies of your last 2 months bank statements or a quarterly brokerage account statement.
If you own rental property or if your self employed, you’ll need to include copies of your last 2 years tax returns as well.
All pages, all schedules.
In addition to the income and asset paperwork, you’ll need to supply copies of your photo id, a copy of your homeowners insurance declaration page, and a copy of your current mortgage statement.
Finally, there will mortgage loan disclosures that you’ll have to sign and send back to the lender.
So, there it is – the list of paperwork you’ll need to supply to refinance your mortgage.
For some people, it’s a hassle to dig it up and provide it.
For others, not so much.
If you’re going to save thousands of dollars by lowering your mortgage rate, isn’t it worth the hour or so in time it’ll take to complete the mortgage application and locate and provide the supporting paperwork?
Whenever a person applies for a mortgage loan, whether to refinance an existing mortgage loan or when buying a new home, the mortgage lender is required to provide a Good Faith Estimate of costs.
After all, the transaction isn’t free.
Let me begin by outlining the 4 parties involved in the mortgage transaction.
1. The mortgage lender
2. The title company
3. The home appraiser
4. The county clerk’s office who records the mortgage
These parties all do work to complete the mortgage transaction and they get paid for their work.
Now, they are all independent.
The mortgage lender doesn’t control the mortgage transaction exclusively; however, the mortgage lender is required to estimate what the other parties (i.e. title company, appraiser, county clerk’s office) will charge for their work.
When the mortgage lender prepares the Good Faith Estimate of costs, they are estimating what the third parties will charge.
In the old days, prior to April 2010, the mortgage lender wasn’t responsible for underestimating the third party fees.
Why does this matter – you ask.
It matters because in the “old days” some unscrupulous mortgage lenders would deliberatley underestimate the third party fees to make the bottom line closing cost figure look low in an attempt to show that they are cheaper than the competition.
When the borrower would get to the closing table, they would see their closing costs are higher. Whoa.
They would call the mortgage lender and complain while at the closing table, saying the costs are higher than what was represented on the Good Faith Estimate.
The unscrupulous mortgage lender would respond saying they estimated the third party fees - that they aren’t the mortgage lender’s fees. Oops. Sorry for the mistake.
Fast forward to present day.
Now, mortgage lenders are responsible for accurately quoting third party fees on the Good Faith Estimate.
Specifically, they are given a 10% tolerance threshold when estimating third party fees.
What this means is that if the Good Faith Estimate shows third party costs at $1000 and at closing the borrower sees the third party fees at $1500, there’s a problem.
The the mortgage lender, under this scenario, is allowed to make a mistake on third party fees up to $100 or 10% – any amount over that 10% has to be refunded to the borrower.
So, let’s says the Good Faith Estimate shows third party fees at $1000 but at closing the third party fees amount to $1500.
The mortgage lender is allowed a 10% or $100 mistake which would bring them to $1100. The $400 difference has to be refunded to the borrower.
In conclusion, when getting a Good Faith Estimate of costs from your mortgage lender, know that the third party fees listed at closing on the HUD-1 Settlement Statement cannot be more than 10% of the third party fees listed on the Good Faith Estimate.
Any amount over that is due to be returned to the borrower!
There are positive changes ahead for the FHA streamline refinance guidelines!
Beginning June 11, 2012, FHA is changing (i.e. loosening) their FHA streamline refinance guidelines, making the FHA streamline refinance a smart refinance option for homeowners.
Let me explain.
If you currently have a FHA mortgage and want to refinance the mortgage using the FHA streamline refinance program, you’re going to have to pay higher UFMIP (upfront mortgage insurance premium) and a monthly MIP (monthly mortgage insurance premium).
FHA, which stands for the Federal Housing Administration, increased the premiums collected on all FHA mortgages beginning April 2010 because FHA needed to replenish it’s mortgage insurance premium reserves.
(I’m guessing with the increase in FHA mortgage defaults, FHA had to pay out a number of claims, dropping the mortgage insurance reserves they held.)
FHA, beginning June 11, 2012, is lowering the UPMIP to .01 % of the loan amount and the monthly MIP to .55%.
That means instead of paying 1.75% in UPMIP which would amount to $1750 on a $100,000 mortgage, for example, the UPMIP is reduced to $1000.
Similarly, the monthly mortgage insurance premium would be reduced to $45/month under this scenario, no matter what the mortgage loan to value ratio.
This is good news for homeowners who currently have an FHA mortgage and want to refinance the mortgage but can’t because they aren’t saving money under the “old” FHA streamline guidelines.
The mortgage rates are very low, but if you have to pay a high monthly MIP, it wipes out the monthly savings.
Now homeowners with FHA mortgage can refinance into a FHA streamline mortgage and save money as the UPMIP and monthly MIP premiums will be lowered.
There are certain requirements however.
Here they are:
You have to be current on your existing FHA mortgage and the FHA mortgage had to be endorsed by FHA before May 31, 2009.
To be endorsed by FHA means the date FHA endorsed you for insurance coverage, not your close date.
This usually takes place within 60 days from your mortgage close date.
To check your endorsement date you can call FHA at 800-697-6967 or the FHA Resource Center at 800-225-5342, Monday – Friday 8 am to 8 pm ET.
So, good news beginning June 11, 2012 for homeowners who currentrly have an FHA mortgage.
If you qualify, you can a refinance your existing FHA mortgage into a FHA streamline mortgage and potentially save thousands of dollars by not paying current (and higher) FHA UPMIP and monthly MIP premiums!
This is the 64 thousand dollar mortgage question.
Mortgage rates are remarkably low and I’ve written about this for a while now.
But looking into the crystal ball, what do I see for mortgage rates?
While no-one can predict with certainty (it’s kind of like predicting the price change of a stock), we can make an educated guess about whether mortgage rates will continue to drop.
Generally speaking, as the United States economy remains weak, mortgage rates will remain low – even at these low levels.
As of this morning, home prices for the first 3 months of 2012 hit new lows across the country. Nationally, home prices are at 2002 levels.
There are little signs of inflation in the economy, which are keeping mortgage rates low.
There is unease in European and US stock markets about Greece’s part in the European Union, which has caused more money to flow into mortgage bonds, keeping mortgage rates low.
In conclusion, as long as there is unease in the equity (or stock markets) combined with a weak US economy, mortgage rates will remain at these low levels.
We may see them creep up or down a quarter of a point or so, but generally speaking, mortgage rates will stay low as long as there is no inflation in our economy and investors remain unsure about investing money in stocks.
If you haven’t considered refinancing your existing mortgage loan into a lower mortgage rate or shorter term loan, now is the time!
“Is a home appraisal required when refinancing a home mortgage?”
I get that mortgage question every now and then.
Here’s the answer.
If your current mortgage loan is a FHA mortgage, then you may be eligible for a FHA streamline refinance without an appraisal.
This is beneficial from the standpoint that you can lower your mortgage rate and mortgage payment and not have to deal with the loan to value guideline that you would face if a home appraisal was needed.
Also, you save yourself about $375, which is the rough cost of a new home appraisal.
If you’re in a conventional mortgage and want to refinance into a new mortgage loan, then in all likelihood, a new appraisal is needed.
The way this is determined is that when the mortgage application is initially underwritten by an automated underwriter (which is a mortgage underwriting software), the automated underwriter will do an electronic valuation to get an idea of the home value.
If the automated underwriter determines that there is sufficient equity in the home, then a new home appraisal may be waived.
Mortgage lenders, however, at their discretion, can require a home appraisal despite an electronic appraisal waiver.
The home apprisal is critical in the transaction as it verifies the current home value and condition of the home, which is the mortgage lender’s collateral.
In conclusion, when refinancing a convenional mortgage, a home appraisal will – in all liklihood – be required.
Sometimes, you may be given an appraisal waiver if it’s determined by the automated underwriter that there is a lot of equity in the home.
Also, if you currently have a FHA mortgage, you may be eligible for a FHA streamline refinance without an appraisal.
“Can I get a mortgage with bad credit?”
I get this mortgage question from time to time and the answer is: “It depends on how bad the credit.”
(Sorry for the non-direct answer but very little is “black and white” in the mortgage world these days.)
If your credit scores are below 620, you’re going to have a hard time getting a mortgage, or should I say conventional mortgage.
A conventional mortgage is also known as an “Agency Loan,” or a mortgage that is sold to Fannie Mae or Freddie Mac.
(By the way, getting a co-signer with credit won’t help.)
Those institutions have underwriting guidelines that the mortgage lenders have to follow.
One of the guidelines says that if the middle credit score is below 620, the loan isn’t “saleable” to Fannie Mae or Freddie Mac.
This means you’re not going to get the mortgage with a credit score below 620.
The subprime mortgage days are over so this isn’t an option.
However, there are 2 alternatives for people with bad credit who want to get a mortgage.
The first is to work to improve the credit scores so you can get a conventional mortgage. This may take some time – it just depends on why the credit is bad.
The second is to find a “private” lender who doesn’t look at credit when they underwrite the mortgage application.
These mortgage lenders are called “hard money” lenders and despite your bad credit, they will loan you the money at a high mortgage interest rate.
In addition, they require a good amount of equity in the property, usually no less that 40%.
The good news is if your credit scores are just mediocre – say between 620 and 660 – you can get a mortgage.
However, there will need to be “compensating factors” such as low debt to income ratios and/or a relatively low loan to value ratio, usually 80% or less.
Another compensating factor is to have a good amount of cash assets saved – at least 6 months of mortgage payments.
In conclusion, you can get get a mortgage with bad credit – it will just have to be from a hard money lender and it’s going to cost you a high mortgage rate and lots of money down.
Some people I talk to who want to take advantage of the low mortgage rates have mediocre or below-average credit scores.
Naturally, they’re inquiring about lowering their current mortgage rate or lowering their monthly mortgage payment or even taking their mortgage term down from a 30 year fixed to a 15 year fixed mortgage.
All this makes sense.
The problem some of them encounter is that with below-average credit scores, they’re unable to qualify for a mortgage.
By the way, when I say below-average credit scores, I mean credit scores below 620.
So the next question they’ll ask is “What if I get a co-signer who has really good credit scores to help me qualify for a mortgage?”
Here’s the answer.
A co-signer with good credit scores won’t help you qualify for a mortgage because the mortgage lender looks at the low middle credit score and uses that as the representative credit score when they qualify you.
What that means is that if your middle credit score is 600 and your co-signer’s middle credit score is 800 (which is excellent), mortgage lenders are going to use the lower mid score – or the 600 in this example.
Remember everyone has 3 credit scores, each generated by the 3 credit bureaus: Equifax, Experian, and Trans Union.
This borrower has 1 option.
It is to figure out why the credit scores are low and take steps to repair the credit.
Once the mid credit score is above 620, they can qualify from a credit standpoint and see if they’ll qualify for a mortgage based on the other mortgage underwriting criteria: debt to income ratios and loan to value ratio.
In conclusion, adding a co-signer with good credit won’t help you get a mortgage loan if your credit scores are “outside the mortgage lender credit score guidelines” as the mortgage lender will use the low middle credit score – no matter what the co-signer’s credit score – when qualifying you for a mortgage loan.
With the overwhelming number of bankruptcy filings out there many people wonder whether they will ever be able to get a mortgage loan to buy a new home or refinance their existing mortgage loan.
Many people ask me: “I’ve had a bankruptcy, can I get a mortgage loan again?”
Or, “How long do I have to wait before I can get a mortgage loan after my bankruptcy?”
First, you are able to get conventional mortgage financing after you’ve had a bankruptcy.
You just have to wait some time. It’s called “bankruptcy seasoning.”
Here’s what it means.
If you’ve had a Chapter 7 bankruptcy, then you have to wait at least 2 years from the bankruptcy discharge date to apply for a FHA mortgage loan.
For a conventional mortgage loan, you have to wait 4 years after the bankruptcy discharge date.
If you’ve had a Chapter 13 bankruptcy, then you have to wait 1 year from the bankruptcy discharge date to be eligible for a FHA mortgage loan.
For a conventional mortgage loan, you have to wait 2 years.
Just remember that you want to reestablish good credit after the bankruptcy discharge.
Also, after the bankruptcy discharge, in addition to reestablishing credit, concentrate on maintaining good credit by paying the bills on time and keep the credit card balances low or at zero.
If there are credit issues after the bankruptcy discharge date, your credit scores will suffer and you’ll be less likely to qualify for either a conventional or FHA mortgage loan.
So don’t despair, waiting 2 years after a Chapter 7 bankruptcy or 1 year after a Chapter 13 bankruptcy isn’t a lot of time.
You will be able to get mortgage financing again!
This mortgage question I get a lot and it specifically relates to a home loan refinance transaction.
Many homeowners will ask me whether they can include their closing costs in the loan amount when refinancing their mortgage loan.
The short answer to that home loan question is “yes” – as long as there is enough equity and the mortgage loan amount doesn’t exceed mortgage loan to value underwriting guidelines – mortgage closing costs can be included in the mortgage loan amount.
Now, is the mortgage rate higher if the closing costs are financed?
The answer is “no, the mortgage rate isn’t higher” although there is a condition.
If the refinance transaction is a “cash out refinance,” which means the homeowner is taking additional cash out of their home for whatever reason – debt consolidation, home renovation, college tuition, etc. – mortgage closing costs can be financed and there will be no increase in the mortgage rate.
If the homeowner isn’t taking cash out of their home but is simply taking on a new mortgage loan to lower the mortgage rate, lower the mortgage payment or change the mortgage type or mortgage term, then they can include the closing costs in the loan amount.
This transaction type is called a “rate and term refinance,” also known as a “no cash out refinance.”
Now, here’s the caveat.
When doing a rate and term refinance, the homeowner can finance the closing costs and there is no change to the mortgage rate.
However, if the homeowner ends up taking 1% or $2000, whichever is less, over and above financing the closing costs, the mortgage transaction type changes to a cash out refinance and the mortgage rate can increase.
For example, if the mortgage loan amount is $100,000, on a no cash out refinance, the homeowner can finance their closing costs and can get back an additional $1000 – which is 1% and is less than $2000 – and can still maintain the same mortgage rate.
However, if the “cash to borrower” exceeds $1000, the transaction type changes to a “cash out refinance”, and the mortgage rate may increase.
So make sure if you’re including your closing costs in the mortgage loan amount and you’re doing a rate and term or no cash out refinance that the cash back to you at closing doesn’t exceed 1% or $2000, whichever is less.
Otherwise, prior to closing on the mortgage refinance, your mortgage loan officer may tell you that the mortgage rate may have to increase because the mortgage transaction type changed.
If this were to happen, however, the easy fix would be to lower the mortgage loan amount so the cash back to you doesn’t exceed the 1% or $2000 rule.