Credit Score Effecting Interest Rates

The new risk rating outline by Fannie Mae is here. As I was pricing a loan yesterday for a customer, the difference was clear. Fannie Mae and its underwriters will take the lowest middle score of the two borrowers applying for the loan. In this case, the lowest middle score was 697. This completely changed the outcome in regards to pricing.

We were looking specifically at LPMI programs (Lender Paid Mortgage Insurance) and BPMI (Borrower Paid Mortgage Insurance). Under the LPMI program, the interest rate difference was up to a quarter different. From 6.50% with a credit score of 731 to 6.75% with the credit score of 697. This has ramifications not only in how much they may pay, but also in qualifying for a loan.

For example (an extreme example but nonetheless plausible) - Let's say that the borrowers would qualify at a rate of 6.625% but at 6.750% the total debt ratio becomes too high and they can't qualify. Obviously, short of changing programs or going through a manual underwrite, which still may allow them to be accepted for the loan, these borrowers may not be able to purchase this new home. This would be devastating, especially if the credit score difference had very little to do with delinquent payments or a borrower over extending themselves. With the couple I was dealing with yesterday, they had very little debt and were working themselves through the last credit card. Unfortunately, they had a balance that was too high vs. their allowable credit (just over 50%) and that is more than likely what caused the lower score.

In short, be aware of your credit score, it will be vital for your next home purchase.
Check out my blog post on March 5, 2008 for tips on how to improve your credit scores and what to watch for in terms of your credit history.

P.S. There is good news on the horizon for the couple above. The credit reporting agencies are developing a better way to evaluate credit score in light of the recent tightening in the credit markets. This will hopefully allow people to have a credit score that is more indicative of their credit history and not as arbitrary (at times) as the current system. Check out this article for information on Credit Changes http://www.denverpost.com/business/ci_8016232.

Construction and Lot Loans

It doesn't matter what you hear...you can still get Constuction Home Loans and Lot loans for Primary Residences and Investors. True, they may not be based on value or future value of the property, however, you can still get them.

One great option is Silver State Bank. We are a construction and lot loan portfolio lender with the goal of taking a person from lot loan financing to construction financing to permanent financing with as little hardship as possible. We do this effectively with our wonderful Loan Servicing Team (which is where I got my start) and our definitive programs that are simple and easy to follow.

Here is a quick run down for you:

1) Lot Financing - 70-80% LTV depending on borrower's qualifications. Usually a 2 year loan with a balloon payment.

2) One -Time Close Construction - 70%-80% LTV again depending on qualifications. Standard 3/1 ARM I/O product with 2 YR waivable PPP. This has one interest rate locked in from beginning of construction to the end of the three year term. Then the loan can adjust every year from then on.

3) Several Broker Options - Opportunity to broker your loan to another lender with 30 YR Fixed or longer term ARM financing for jumbo loans at no cost to you upon completion or whenever you desire to refinance.

Overall, the main benefits to using Silver State Bank are: the ability to use one bank for every stop along the way from lot purchase to final end loan, the ability to have quick draws (24-48 HRS in Maricopa County), servicing done in AZ with live person and direct access to me, the LO, should there be a problem, and service you can trust.

I believe that if you are looking for a great lot loan and find it, then Silver State Bank may be the best place for you to go. Give me a call at 602-670-3272 for any questions. Thank you.

Analyzing Self-Employed Borrowers

The great American Dream, outside of owning your own home, is probably running your own business...at least for some. The freedom that comes with watching something grow, setting your own hours, working for your self and working hard is in itself satisfying. But with anything there are positives and negatives and with the many positives comes a negative in the underwriting world of lenders.

Fact of the Times = If it isn't on paper then it can't be counted.

The lending world has reverted back to its pre "lend money to anyone" phase. Investors are being selective in the loans they want to purchase and in turn underwriters are having to explain and underwrite files with no holes. The days of Stated Income/Stated Asset for a wage earner are gone and it will be a long time before those programs return. The only harm is that the SISA program for Self-employed or 1099 borrowers with excellent credit has dried up as well. This is harmful for two reasons...

1) Self-Employed/Small Business Owners account for 18.6 million in the U.S. (See link. --Statistic from 2003, however one could assume the numbers have and will continue to increase)

2) Self-Employed borrowers accounted for 44% of all loans closed in 2006.

This means that as the numbers of self-employed borrowers increases, those persons are going to be in need of mortgages. If they can't get a mortgage due to the structure of their business and taxes, it is going to be difficult for these borrowers to qualify for homes and "move-up" in the housing market. If they can't move up, then they won't sell their home and the market will continue at a stand still. It will be important to begin seeing the programs return for Stated Income Self Employed borrowers in order to refinance them and get them into new homes.

The truth is there are many different variables affecting the current market and the above is just a piece of the puzzle. Self-employed borrowers can take the following steps to prepare their finances in order to present a full, clean documentation file to a lender:

1) Showing two or more years of Self-Employment history.

2) Owning 25% or more of the business

3) A strong two year average of income.

4) No significant decline in your busines income.

5) Lenders may require; Business License, Personal Financial/Corporate Financial Statement, 2 Years Tax Returns (personal and business), etc.

It is important to have your financial information in order when applying for a mortgage to insure that they underwriter can get complete information and file on you. It is possible to get a mortgage, it just may be a bit more of an exhaustive process.

See article "Chasm Grows between Home Lenders and Self Employed." for related information.

Tax Deadline Approaching

Tomorrow is the last day to take care of what many people consider to be a hassle...taxes. However, tax time doesn't have to be a time to dread. It can be an easy and relatively painless process if you follow these few steps.

1) Be Organized throughout the Year. -- Don't wait until April 14th to try and pull everything together to complete your taxes yourself or for your CPA. It won't go well. Instead, track and monitor the items you will deduct throughout the year so that at tax time you will be ready with the information and amounts for your 1040.

2) Consult a Tax Professional -- If you don't know what you are doing or are feeling overwhelmed. Ask around and find someone you can trust. CPA's (Certified Public Accountants) can guide you through the process and even take care of your taxes in less than an hour. Sure it might cost a little bit, but if you are due a refund, then consider it paid through those funds. Plus, the time and headache of figuring it out on your own will be minimal. There are many resources for finding a tax professional. Search Accountant's World.

3) Research Tax Tips Online. -- MSN Money and Turbo Tax are two sites that you can use for any minor questions. If you understand most of the tax information you will need, then you can look up some other tips or even use Turbo Tax to help file your taxes.

4) Promise to do Better for Next Year, Today -- If you are reading this and you still haven't completed your taxes or filed your extension for 2007, plan to take care of your taxes earlier. Saving stress by planning ahead is always a good way to go.

Remember, taxes come every year and the more moving parts you have as it relates to income, i.e. Self-Employed, Commissions with no taxes (1099-R), Personal Business, Capital Gains, etc. the more you may need to find a local CPA that may be able to help organize and help with your taxes. It may be the best hour you spend to find out the best way to manage yourself through the rest of this year.

Good luck with 2007 and set a goal to make 2008 better. Have a great week.

WAMU – Out of Wholesale Business

In recent news…We can add another casualty to the Mortgage Lending business. Washington Mutual halted its Wholesale Division operation and will no longer “mak(e) loans through mortgage brokers”. They are also closing down 186 home lending offices and cutting 3,000 jobs as well.

See article “Washington Mutual Gets $7 Billion from TPG-Led Group”

Though not a significant blow dealt to me specifically, as an originator, it does remove another option for brokers to place a loan for a borrower. This comes in the face of the continuing credit crises and difficulty for Home Owners to refinance and for Home Buyers to purchase a home.

As I reviewed the available programs today, it became apparent that the Stated Income program is all but obsolete. We are looking to find a lender who will continue to fund Stated Income loans, but the truth of the matter is that 99% have removed the programs entirely. This is definitely a harsh blow dealt to all borrowers. The only question that remains is…when will these products return? 18, 24, 36 months…

At the core of this correction was the greed with which lenders used perceived values as a saving grace for those looking to buy or refinance a home. And as I have mentioned in previous articles, one should not bank on perceived values, a home is only worth what the next person will pay. Just like the shoes you wear are only worth the money you use to purchase them. Sure, sometimes people will over pay and according to this market people will wait to try and under pay to find a great deal as well. This, however, does not change the fact that this market correction is affecting everyone, and perhaps unfairly at best.

So, without further ado here are some tips as to approach your next purchase or refinance…

1) Make sure you can afford the payment. Do not be duped by someone else. Think about what you realistically make, learn your personality, and make a decision. If you think you will make more in the future, because you just have to…knock off 5% of your income. This may keep you safe.
2) Save for the house. Yes you can still find nearly 100% financing, they are hard to find in Arizona but it is a possibility. With changes to FHA limits and DPA programs it is possible, however, if you can’t (SEE #1) afford the payment. Take a deep breath and think.
3) Educate yourself on the process. Take a pro-active approach to your financial situation and seek out those who wish to teach and not those who wish to tell. If you haven’t learned something from your Loan Originator, they aren’t doing their job.
4) Good Luck and Hold On. I can’t say when this credit crunch and housing crises will subside. But I implore that you don’t give up on the house just because it is worth less than you thought. You made a loan and are responsible for the terms held within the note. A foreclosure is going to hurt you financially and in your future for a long time to come. Giving up usually leads to a huge hill that must be climbed again. Climb it now and save yourself the harm of trying to climb again, and again, and again.

Keep emailing and responding to the blog…I love the feedback.

A New Name: Choice Bank and Silver State Bank Merger Complete

On April 1, 2008, the merger between Choice Bank and Silver State Bank was successful. This has been, for me, an exciting week with new possibilities and a positive outlook for the future. It is early in the process and the changes mostly involve processing and internal issues. However, the new name comes with it a hope for newer and more efficient systems and tactics that will ensure the success and dreams of the original Choice Bank founders are reached.

In life we dream of growing and changing, making ourselves better each and every day. In this merger we have done just that. Choice Bank has the increased capacity to market effectively, to expand further, to reach a new and exciting audience, and to stand up as a community bank with strength, power, and the desire to meet each customer's needs. It is a new day for Silver State Bank. I am lucky and proud to be a part of the growth in the valley over the next few years. If you don't know of us yet...you will know of us soon.

On to the week in the Mortgage Industry. Rates were up and down this week, which followed the pattern of the Stock Market. They are very consistent at week's end with last weeks rates. Investor options for us, as brokers, have come and gone and the ability to be involved with heavy hitters in the construction industry is increasing. Sometimes overnight, products that were once available are removed and it leaves a bumpy wake in its path. However, it keeps us on our toes as originators and forces us to continue to evolve.

List of Current and Upcoming Trends in the Mortgage Industry

• FHA and VA Loans - the way to go for low down payment and Down Payment Assistance programs.
• Longer and more heavily scrutinized underwriting by all investors.
• Rates are going to be soon be tied to credit score. Great Credit Score = Better Rate and vice versa.
• More activity from buyers (Pre-qual activity up)
• Rates may continue to increase overall. See article on Bankrate.com for more information.

Stay tuned for more information. Call me with any questions. Make it a great Friday and have a fantastic weekend.

Bernanke speaks on U.S. Recession

This morning I had the opportunity to listen to Fed Chairmen Ben Bernanke speak on the Bear Stearns "bail out", the current Housing condition, and the potential for U.S. Recession. First, let me say, Mr. Bernanke does appear as though he genuinely is looking out for the best interests of the U.S. Economy and consumer. With that said, I have been reading stories on the CNN Money website from Americans who are struggling to make ends meet. This may seem every bit the norm, as there have always been classes of people (upper, middle, and lower), but I do believe that the struggles of so many Americans goes far beyond a normal level. My question is what can be done about these troubles.

There are two sets of thoughts:

1) Those struggling made bad decisions (their own uneducated decisions) that brought them to their current situation.

2) Those struggling are victims of circumstance and unfortunate misgivings that have landed them in a situation of which they are no longer in control.

Both sets of thoughts put the blame in two places, either on the person or on external factors. The housing turn down, for most, was likely an external factor. Many people, and I have heard countless stories from my work as a Mortgage Loan Originator, believed they have/had equity in the house that, on paper, is no longer there. The problems with this arise when they chose a Mortgage that may not have been explained properly or chose cheaper payments now in leiu of sound financial decision making. The other side of the housing turn down occurred when people wanted what they couldn't afford to actually pay off, and in the meantime were given a loan that allowed them to make payments while continuing to lose in the process. ARM's, Interest Only, Negative-Amortization loans, etc. All programs that if not used properly can have a profound impact on one's financial future.

I subscribe to a great Real Estate blog by Steve Belt at Realty Executives in Scottsdale, Arizona. His blog is http://www.realphoenixliving.com/. Yesterday, he wrote an article about the mindset of the public and their ideas about housing. I believe he said it best when he said, "...a home is: a place the average person lives in for 5 years, making memories." You see, we all look for great deals and hope to someday have enough financial security to retire comfortably. However, we are viewing homes, not as places to live and dream, but as a place to invest and make money. Sure, there are people who are very successful at buying and selling homes for profit, but it is their job. They wouldn't understand the inner workings of Apple, or Tax Accounting, or our legal system. And, if they stepped into those arenas they may find themselves to be unsuccessful in those ventures, unless they devoted their time and resources to being great at those specific occupations.

So here is the bottom line, be in control of your finances. Don't go based off of what you can't control but what you can. A home, for sure, is an investment, but not at a price you can't afford or aren't willing to sacrifice for in order to keep. Be educated and intelligent about your decision to buy the house and when you found your home and can afford it, then make the purchase and live in your home to enjoy it.

With that said, let me go back to the start of the article and Mr. Bernanke. He stated that the housing crisis is in the center of the current economic situation and a big part of the problem. Unfortunately, he offered little as to what the Fed may do to help struggling Americans.

• Should stuggling Americans be helped in this crises, should tax-payer money be used to bail out those who can't make payments and face foreclosure, should those who are more fortunate or were responsible be made to foot the bill to fix this situation?
• Can blame be placed on the purchasers of mortgage backed securities, the broker shops who supplied bad loans to people in rough spots, or the investors who were looking to make a quick buck?
• Lastly, can we find a way to fix or regulate the industry in a fashion that will prevent the same problems from occurring again?

I am not sure there is a definitive answer and the debate is ongoing as to what should be done. I do believe it starts with educating the average American about the mortgage process and finding ways to give guidance to those who are seeking it. It starts with education and continues from there. I would be thrilled to know your thoughts on this issue and how you believe we can begin to mend the issues and prevent them from happening again.

Make it a great day