Friday, March 21, 2008

PMI Guideline Changes

Changes just keep coming. These changes are coming in "alignment with the Economic Stimulus Act of 2008." Though the opening letter paints a bright picture of these changes, they are actually making adjustments and tightening their standards. These changes are going into place on April 15, 2008.

Here is the link to read the full letter and information regarding these changes:

Here is a summary of the changes...

  • LTV and FICO "requirements are effective regardless of any AUS decisions or recommendations."


  • --Cash out Refinance loans are no longer eligible

  • --Investment properties are no longer eligible

  • --Limited Documentation loans are no longer eligible

  • --Interest Only loans are no longer eligible on Investment Properties

  • --Owner Occupied/Primary Residence I/O, then borrowers must qualify using full PITI (Principal, Interest, Taxes, Insurance)

Besides the above major points, PMI also developed a matrix to better explain its requirements. A couple of examples:

  • One unit SFD (basic single family detached home) - Max LTV 90% with min fico score of 680.

  • Jumbo Loans on Full Doc PMI up to 85% LTV with min fico score of 700.

Other than the above, finding PMI for certain types of loans and borrowers is going to become increasingly difficult. The best new option is FHA loans as long as they remain under the $346,250 limit threshold.

There is no telling how far and fast the guidelines can change from these most recent changes. The goal is to stay encouraging to our borrowers and buyers of homes and consult them from the beginning of the process on how to improve their credit and save money in order to buy their first or second home. In addition, a mindset change must take place regarding the largest purchase the average American will ever make, a home. It has seemed as though it was a fleeting decision made by buyers who were not educated properly. This has left a path of destruction in its wake and made it difficult for those who would be qualified and responsible buyers to even secure a loan. A process where we work for the things in life we want and desire to have must begin to unfold. This will keep us away from the past few years when Americans over-extended themselves hoping to "cash-in" on values and have found themselves without a strong and secure financial background to rely on.

Let's make a decision as realtors and loan officers to educate our buyers and take care of them in their dream of home ownership, not using it as a way to cash in on their lack of understanding of the industry we enjoy so much.

I hope your week is going well and it finishes off as strong as it began.

Fannie Mae Changes

Changes occur everyday in the mortgage lending industry. In order to be the most efficient Loan Originator, it is important to stay on top of these changes and be aware of programs that become obsolete and new programs that may become available. As I discussed a couple of weeks ago, FHA loan limits have increased, which may ease a borrower's necessity to put down more than 5% toward their new home purchase. It may also allow for a refinance to someone who's current loan falls within the new limit of $346,250. This change doesn't affect everybody or ease the difficulties within the housing market and lending sector's of the financial industry. It may lend for new opportunites for an LO to prove their worth to Real Estate Agents and Title Companies.

Fannie Mae Guideline Changes Effective June 1, 2008

Market deterioration has led to the implementation of "revised standard pricing requirements for certain risk attributes" (See Announcment 08-04 from Fannie Mae). Which means, the higher the risk then the higher the price in originating a loan with Fannie Mae (Conventional, Conforming Loan Limit's <417k).>
  • LTV & Credit Score
  • Cash-Out Refi's & LTV & Credit Score
  • 2-4 Unit Properties.
  • On June 1, 2008, any loans will have the adjustments. Basically, they (Fannie Mae) developed a matrix that the lower your credit score and the higher the LTV the more expensive the pricing for the loan. This translates into higher rates for borrowers with lower credit scores and less money into the transaction.

    For example:

    • 95% LTV with 650 Credit Score = 1.75% adjustment to rate
    • 60% LTV with 700 Credit Score = .50% adjustment to rate

    The same type of mindset has been applied to cash-out refinances with Fannie Mae, after June 1, 2008, not providing cash-out refinances over 90.00%.

    These changes will significantly affect the rate environment that we are in and may make it more difficult to qualify borrowers and convince them of the rate structure. It is imperative that the word gets out to those buyers who may be on the fence and to those people who may be holding out for a better rate. Sure as day, unless they have a low LTV and impeccable credit their rate will be affected.

    It isn't likely that this change will solve the problems that arose over the last 6-12 months within the market or keep them from occuring again. However, now is the time to make sure that lenders and investors have done their due diligence to ensure they will insure the financial industry weathers the storm that blew in last Spring. Stay tuned tomorrow for more changes regarding PMI (Private Mortgage Insurance).

    Hope you have a wonderful final week in March.

    Thursday, March 20, 2008

    This Week's Top Stories

    This has been a week of big stories and interesting changes within the Financial Industry and overall economy of the United States. Here are some links to articles regarding these stories.

    JP Morgan takeover of Bear Stearns for $2/share.

    Fed cuts Overnight Lending Rate to Banks by 3/4 Point.

    Mortgage Rates (30 YR Fixed) hold steady despite cut.

    Stocks are Rallying Today.

    Obviously, it has been a week of newsworthy items. From takeovers to Federal Reserve Rate cuts, we continue to see the country and its leaders fight to stave off a Recession. But we need to keep our eye on a few items: Unemployment, Job Growth Rates, Consumer Confidence/Spending, and inflationary concerns. Still a tough road ahead.

    The mortgage industry continues to see a tightening due to mortgage backed securities losses and the "credit crunch" that is largely affecting the ability of borrowers to obtain new loans or refinance old ones. Tomorrow, I will discuss the upcoming changes to Fannie Mae's guidelines that will affect interest rates for customer's based on credit score, as well as discuss PMI (one mortgage insurance company) and their response to the Stimulus Package.

    Make it a great Thursday.

    Thursday, March 13, 2008

    FHA and the FED

    Over the last month or so lenders have continued to tighten and remove loan programs that were once available. This is mostly due to the lack of liquidity within their own portfolio. They no longer have the resources to fund deals that aren't "A" paper deals (which means good credit, adequate reserves, significant down payment, etc.). This has caused most investors/lenders to reduce the amount they will lend on purchases and refinances. Programs aren't available without a 5% cash contribution for purchases and upwards up 10-15% in value on refinances. In addition, Mortgage Insurance companies are too reeling from the credit and housing crisis. Some have put a cap on how high they will allow LTV/CLTV to go for coverage. In AZ the cap is at 90% (though some exceptions can be made - it is a difficult process). Add to all this that rates are about .375%-.50% higher than they were 30 days ago and the plot continues to thicken.

    The above may sound bad but in reality it is a switch for the better. People that can afford homes and have adequate resources are getting into great loan programs that will help them for years to come. Lenders and Investors are not just thinking about the money they are thinking about the borrower and making the best decision for their company as well as the borrower. Though it isn't always easy, it is necessary.

    Two newsworthy events occurred within the last 10 days. The first is in regards to FHA. In Maricopa County, the loan limit was raised from $263,500 to $346,250. The second was in regards to the Federal Reserve. "The Fed said it will make $200 billion available to financial institutions in an effort to ease a crisis of confidence that is making it harder for families and businesses to borrow money" (Tomoeh Murakami/Washington Post). What does this mean for borrowers?

    FHA Change to $346,250.00

    1) LESS DOWN PAYMENT/CASH TO CLOSE: FHA loans allow for at least a minimum contribution of 3%. (In light of most programs outside FHA, currently requiring a 5%contribution).
    2) CREDIT ISSUES: If there are some deragatory issues on your credit, you still may qualify for FHA based on your DTI ratios and Income Stability.
    3) REFINANCES: For those borrowers that have ARM's that may be adjusting, if your loan is less than this amount you may be able to refinance up to a higher LTV if your home's value was hit by the recent market turndown.


    1) INCREASES LIQUIDITY WITH LENDERS/INVESTORS: It is no secret that Mortgage Companies and Banks were hit by this recent change in home values. The companies lost so much money that there is very little room to offer products that may cost the companies more money. They have become safe and so in turn it becomes more difficult to find a decent program with little cash requirement. This extra liquidity may give some companies the opportunity to loosen their standards.


    We may not know how all of this will eventually shake out but we do know that relief in some form may be available. That is good news. Keep your eyes and ears open for more updates down the line. Make it a great day.

    Friday, March 7, 2008


    In order to begin the actual process, it is necessary to complete a loan application. The form is called a 1003 - Uniform Residential Loan Application. It can take anywhere from 30 minutes to an hour or more depending on the amount of information that you will be providing to the Loan Originator. (By that I mean- the more accounts you have, income sources, real estate holdings etc. the longer it may take to complete)

    In today's age of technology, Loan Originator's have access to software that allow us to input your information into the system and pull credit as well as run Automated Underwriting all while taking a phone application. It is convenient and provides almost instant feedback to the customer if they are willing to spend the time with the LO.

    The application doesn't lock you into any programs or interest rates, its purpose is to show intent on your part to complete the loan process with the LO and to provide the LO with the ability to make a sound credit decision on your behalf. Normally, a fee is associated with taking a pre-approval and/or application. The fee is to cover the costs of pulling credit, running AUS, etc. It in no way provides the LO with any income. If they are charging you more than $25-$50 and you haven't decided on a program or agreed to an appraisal then be careful (they may be taking you for a ride). However, once a loan program is agreed upon and the initial disclosures are signed the fee may be higher. Again it allows us to cover the costs of the appraisal, credit, AUS, and is credited back to the borrower at closing.

    For example: If there is a solid deal in the works, then I may charge $350 to get the ball rolling. This is a good faith payment from you that you are willing to do the loan with me and that I can go ahead and order the appraisal. If you are specifically asking for a pre-qualification/pre-approval for the purchase of a new home then I will more than likely collect the $50 fee and when you are ready to go collect the remainder of the upfront fee for the application.

    In a nutshell, you will be asked about income, debts, assets, credit history, schooling, dependents, social security number, address, job, race, nationality, real estate, and much more. This will provide a solid base and give the LO the chance to provide a sound credit decision with regards to your file. There are two fees, either pre-qualification/pre-approval or an application fee.

    Once you are ready then the next step begins, deciding on the program and terms. Stay tuned for more information next week on programs and terms.

    Have a safe and wonderful weekend.

    Wednesday, March 5, 2008

    Credit Matters

    The recent changes in the market can be attributed to many different variables but none more noticeable than the Sub-Prime Mortgage problem that is affecting current loans and the ability of the home owners/investors to make payments. The sub-prime lending that was rampant about 2-3 years ago made it easier for those with deficient credit history and non-qualifying income to receive a loan. When most of these deals were put into place they came with the caveat that house prices would increase and thus make it possible to refinance into a better loan when a) their credit deficiencies were cleared or b) they could qualify for the loan. Clearly, this was not the case. As things began to turn in late 2006, homes were not moving as quickly as they were being built and the next wave of homebuyers balked at the home prices. Coupled together with rates adjusting on the ARM (adjustable rate mortgage) products and the home-owners inability to make payments and we now find ourselves in a huge market correction that has never before occurred.

    What does that have to do with you and the rest of those anxious home buyers? It means that it is important to take the necessary steps to be educated about purchasing a home so that you don't "bite off more than you can chew" in the process. It may seem silly, but maybe the best plan is not to buy your dream house the first, second, or even third time around. It is hard to enjoy the house of your dreams when you are constantly worried if you can make your payment. Trust me, my dream homes is the home owned free and clear. A goal in life should be to find yourself living debt free but that is a subject for a different blog.

    Back to credit...

    A major component of the loan approval process hinges on your credit score. Underwriters accept what is known as a tri-merged credit report. This report calculates the credit score from each of the three credit reporting agencies (Equifax, Transunion, and Experian). Most investors and lenders will accept the middle score of the three (or your average credit score). There are times when there are large swings in your score, mainly due to the different credit companies reporting procedures, but often the scores are very similar.

    Note: You are entitled to one free credit report per year by the Fair Credit Repoting Act. I have used It is the only free site and authorized by the FTC for supplying the reports. It is a good tool to see what you financial debt obligations are and if you have paid them on time.

    Your credit score can affect what products you have available to you and what interest rate you may receive. The catchy part is some investors (the ones who purchase the loans if the loan is brokered) don't penalize or better a person's interest rate if their score is above 680+. While others will have different breaks at 700+, 720+, etc. Typically, if your score is 720 or better then your credit will help you in the process. If your credit is <660,>
  • Make payments on time. There are three time frames to consider. 30+, 60+, and 90+. If you are over 30 days late in making your minimum payment on credit cards, car loans, mortgage payments, etc. then you are considered delinquent. These are all reported to the agencies and negatively impact your score. Over 60 days is worse and by 90+ you are in default (really bad for your credit)
  • Total balance on Credit Cards should not exceed 30-35% of the max credit allowed on the card. For example: On a $1000 credit limit, your total balance due at the end of the period (when the agencies are reported to) should not be over $300-$350. Your credit score is linked to the amount of credit used vs. the amount available.
  • Consider signing up with one of the agencies for periodic credit checks. For as little as $10/month you can sign up for a service through either Equifax, Experian, or Transunion where they monitor and give you updates on your credit status. This can help against fraud as well as keep an eye on any other adverse activity that may affect your credit report.
  • Lastly, understand that though you may be discouraged now about your credit situation, you can always improve it. Think of it like this, if you have adverse or deficient credit, it can mean to an underwriter that you were irresponsible with the credit given to you in the past. Credit isn't a free gift but it is an opportunity to prove that you are trustworthy in making payments and handling responsbility. If you haven't handled your past credit efficiently, it may be time to begin taking control of the situation and improving your credit.

    (There are other situations that may impact your score: Bankruptcy, Divorce, Death, Injury...the comment above is not to make light of different situations that may be present that were out of the control of the person(s) involved - sometimes things happen in life that may knock us down, but knowing how to manage issues now may help in the future and allow us to stand a bit taller)

    There are more things to consider with credit and various ways to make changes but these are the basics. If you are in significant debt, maybe focus on eliminating that debt first before moving up or into home ownership. If you have good credit and can afford the home, then get pre-qualified and start house hunting. It is a great time to buy if you are ready for the responsibility.

    Monday, March 3, 2008

    Loan Process

    Before we get started this week, I am going to give you a few organization tips for you finances to help in the loan process.

    Here are three key items to consider that will help you begin to organize your financial life so you can see what it will take to qualify for your next home purchase or refinance.

    1. Income
    • How are you paid? -- Salary (W-2 wage earner), Commissions, Bonuses, Independent Contractor (1099-R), Cash.
    • What is your monthly income? -- Once you find out how much you make, there are two things to consider your Gross Income (before taxes) and Net Income (after taxes - what you actually take home)

    2. Debt

    Three main types of debt -- Mortgage, Installment, and Revolving.

    • Mortgage - Amount you owe against a property...can be primary residence, second home, or investment property.
    • Installment - Usually a loan in connection with a car and the amount due each month.
    • Revolving - Debt associated with credit cards.

    3. Assets

    • How much do you have in your savings account?
    • Do you have any other liquid assets? - Cash that you is easily accessible.

    From there you can deduct a couple very important items for what you can qualify for in a purchase and what type of products may be available to you. To find out your Debt-to-Income ratio, first add up all your debt (mortgage, revolving, installment) and divide it by your gross income.

    *For example - ($25 C/C, $325 I, $125 C/C, proposed mortgage $1375 / $5500 Income) = 33.6% DTI back end ratio.

    There are two ratios - Front End and Back End. The front end ratio is your mortgage debt vs. income and the back end encompasses all debt (see example above) vs. income. Typical DTI ratios are 33%/45%. You can usually qualify for higher ratios, i.e. 43/55 but the higher the ratios the harder it may become to fit the loan.

    Lastly, what amount do you have in reserves? In this market, you can expect to put at least 5% down on any purchase of a primary residence. Due to the distress market label (see article from Tuesday, February 26) even the flex products and "My Community" mortgages are requiring a cash contribution. On a $220K purchase price you can expect to need at least $11k in cash to bring into the deal.

    Hopefully, this will get you started with finding out how to set your dreams for achieving that home purchase. It is always good to evaluate your current financial situation and discover what it will take to accomplish your goal of home ownership. Please email me or comment on this blog if you have any questions.

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