Archive for the ‘Finance’ Category

APPROVED LOAN CANCELLATION RISK

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Image representing New York Times as depicted ...

Image via CrunchBase

Home buyers may face an unexpected delay or cancellation of their loan if subsequent financial activity raises any red flags for lenders, especially since Fannie Mae now requires a borrower’s credit to be rechecked right before closing a mortgage.

Making sense of the story

  • Borrowers are advised to keep their credit      picture in the clear by refraining from any purchases that may be seen as      a liability from the lender’s view. For example, the sudden addition of a      $3,000 balance to a new credit card account for an item you’re planning to      enjoy in your new home may cause the lender to send back the loan to      underwriting in order for the calculations to be redone, which could      result in a higher interest rate.
  • If in doubt, borrowers are advised to check      with their loan officer before accruing any new debt so that the purchase      of a new home is not jeopardized.
  • Fannie Mae allows the maximum debt-to-income      ratio to be 45 percent (meaning that a maximum 45 percent of your gross      monthly income can go to cover debt, mortgage and housing expenses).
  • When only one spouse of a couple is named on a      loan, credit rechecks can cause problems if the other spouse has a low      credit score. When the loan is based on one spouse’s income instead of      two, the lender will see a higher debt-to-income ratio.
  • In addition, lenders now routinely re-verify      the employment status of borrowers just before closing, which represents a      standard practice being reignited after the financial crisis. If a      borrower’s employer is undergoing a name change, then the lender also      should be notified to avoid delays.
  • The most creditworthy borrowers may not have      their loan status affected by large purchases before a mortgage is closed,      but those with tighter finances are advised to be more cautious.

 

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THE MUTIPLE OFFER PROBLEM

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THE MUTIPLE OFFER PROBLEM

To Bid or Not to Bid?

In Silicon Valley we are now about 12 months into the latest outbreak of “Multiple Offer Syndrome”.

English: This is one of the huge welcoming sig...

English: This is one of the huge welcoming signs for Google plex in the silicon valley. (Photo credit: Wikipedia)

A large majority of homes are currently being listed on Wed, hold Open Houses Sat and Sun, schedule offers for mid week, and are sold to the best of multiple offers by Friday.

The reason for this is very simple.

There are too many Buyers chasing too few houses. This is a direct result of historically low interest rates which will not start rising till early 1014 at the soonest.

As any Economist will tell you, in a free market the solution to this is equally simple. The law of Supply and Demand will automatically correct the problem.

If there is a shortage of any product more of that product will be brought to market.

In this case where there is a shortage of Houses for Sale, prices will be driven up. As this happens more homeowners will decide to sell, and Builders will accelerate getting new homes into the market. Obviously these things do not happen quickly so you can be sure the current price escalation will continue for at least 12 months and then probably just slow down to the historical norm for Silicon Valley i.e. 5% per year.

 

Looking west over northern San Jose (downtown ...

Looking west over northern San Jose (downtown is at far left) and other parts of Silicon Valley (Photo credit: Wikipedia)

If you are a Buyer who has several times lost out to higher bids you might wonder if it’s better to hold off till the market turns.

Consider the following:

Demand will not slow down for at least 12 months.

Each new sale sets a higher price for the next one in the same area.

In 12 months time it’s a near certainty that interest rates will be higher.

When things slow down and you decide to come back into the market you will be paying 12% to 15% more than today. (Based on price increases over the past 18 months in Silicon Valley.

In the meantime you are paying close to cost of a mortgage (which has major tax benefits) for rent which gives those same tax benefits to a Landlord.

Think carefully before holding off.

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VANTAGESCORE

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FICO logo

Factors contributing to someone's credit score...

Factors contributing to someone’s credit score, for Credit score (United States). (Photo credit: Wikipedia)

There’s a lot of talk about the new Credit Scoring model called VantageScore. Proponents say that it will boost your score and help people with no credit history build a strong credit score.

Here’s the bottom line: don’t waste a single memory cell on it.

Now… the back-story for those those want it:

Until the majority of lenders are using a new scoring model, the FICO score will remain the main credit scoring system out there.

As of right now, major lenders like Fannie Mae and Freddie Mac are not using VantageScore. In fact, I have never heard of a single lender who does use it.

When deciding whether to extend a loan to you, your potential creditors want to know how risky you are. Currently, the model they use to determine your creditworthiness is FICO, and almost exclusively FICO.

So if you want to qualify for a loan, or if you want to qualify for better terms on your existing loans/credit cards, you must follow the FICO model and do things which will improve your FICO score.

Ignore everything else because it will not make an ounce of difference if your lender is not looking at it. All it will do is paint an unrealistic picture of what loan terms you can expect.

I want you to focus on reality. And the reality is this: Almost every lender out there relies on FICO and only FICO when determining a credit score.

NOTE 1: When referring to FICO I mean the credit scoring model used by the 3 major Credit Bureaus, EQIFAX, TRANSUNION, and EXPERIAN.

NOTE 2: Be very careful of anyone claiming to be able to improve your Credit Score. I am aware of many scams but only 3 legitimate services that will actually get it done.

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SHORT SALES-THE END??

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Silicon Valley

Silicon Valley (Photo credit: Wikipedia)

For about 2 years now my market (Silicon Valley) has seen a steady increase in sales prices. This is finally causing changes in Banks approach to Short Sales.

I just had my 1st experience where a Bank (BofA) cancelled a previously approved short sale when they realized that the current value of the property is now higher than the amount of the loan.

They have now re-started the Foreclosure process where they can expect to get all of their money back and not have to take a loss after all.

This also gives the owner/borrower the opportunity to minimize the Credit hit by selling the property before the foreclosure completes, and maybe even get a little money back themselves.

I firmly believe that the age of the Short Sale Specialist is coming to it’s end and all those useless seminars will disappear with them.

However, there

Bank

Bank (Photo credit: 401(K) 2013)

for the home owner who is falling behind  if the Banks begin to think it might be smarter to foreclose and lose a lot less than previously, rather than expend time and effort trying to keep the afloat.

The next 6 month will be very interesting.

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FHA BONUS

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Interest Rates

Interest Rates (Photo credit: 401(K) 2013)

FHA loans with a 3.5% minimum down payment are often the only choice for 1st time buyers.
They get a lot of bad publicity from uninformed sources who compare them wrongly to conforming loans needing much higher down payments.

The reality is that the FHA loan is neither designed, nor sensible, for high down payment buyers.

However it does have one very powerful advantage over the traditional conforming loans; FHA LOANS ARE ASSUMABLE at the same interest rate as they started at.
In future years this may be a very valuable feature when selling the property.

First let’s understand that 1st time buyers in California typically sell that 1st house after approx 5 years.

Now let’s consider what level mortgage interest rates will be at that time, and compare with todays. We will assume a $400,000 FHA mortgage

CURRENT (historically low) 3.5% = $1,796/ month.

FUTURE (5 years)(20 year average) 6.0% =$2,398/month.

SAVING = $602/Month.
Now in 5 years time you are selling your home and have a smart buyer trying to decide which of 2 similar houses is the best deal might they well prefer the one where you can:
1. Buy and take over the existing mortgage which is $602/month cheaper for all time
OR
2. Go through all the hassle of getting a much more expensive mortgage for as long as you own it.
Assuming they sell after a typical 5 year period there is a difference of $36,120!!!.

MAYBE IT’s WORTH FINDING OUT WHICH IS THE BEST MORTGAGE FOR YOU, Not for the loan Agent who did not take the time to explain ALL your options, and the long term implications of each one.

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THE DIGNITY MORTGAGE

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About 6 years ago the greedy incompetent Banks managed to effectively take mortgages back to the Dark Ages. Since then the idea of having mortgages designed in the interest of the Borrower has been totally abolished.

Now at last we are hearing stirrings of intelligent ideas coming from the industry.

BEFORE READING THE REST OF THIS ARTTICLE PLEASE BE AWARE THAT THERE ARE NO SUCH THINGS AS “SUB PRIME MORTGAGES”. THERE ARE ONLY “SUB PRIME BORROWERS”.

Housing advocates are pushing for a new type of loan, called the “Dignity Mortgage,” They are approaching bankers and federal regulators proposing this.

The Dignity Mortgage would be geared to applicants who have rebuilt their finances since losing their homes and or jobs during the past 5-6 years, but who have been able to get steady employment and repaired their credit scores since then.

Despite this it is very difficult to get a regular mortgage from the standard lenders at this time says Faith Bautista, who heads the National Asian American Coalition.

The Dignity Mortgage would target Borrowers who had a good credit history prior to the collapse, and have been able to save at least a 10% down payment since then.

Since it would be a higher risk loan, it would come with a higher rate for a higher risk. For example, borrowers would pay 1.25 percentage points above more creditworthy borrowers (e.g. 4.75 percent if more A+ borrowers were paying 3.5 percent), the Los Angeles Times reports.

However, if borrowers made timely payments for five years, the deal could greatly improve.

“At that point, the extra money they had paid in interest would be used to reduce the mortgage balance, and their rate would be cut to whatever borrowers with sterling credit and 20 percent down payments were charged at the time the loan was made,” the Los Angeles Times reports in explaining the proposal.

Source: “New Type of Subprime Loan Pushed,” Los Angeles Times (Jan. 29, 2013)

Loan

Loan (Photo credit: Philip Taylor PT)

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STATE OF THE MARKET Jan 1st, 2013

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For Santa Clara – San Mateo – South Alameda – Santa Cruz Counties.

2012 saw a continuation of 3 major trends which began in mid 2012:
1. A RAPID INCREASE IN SALES PRICES:
o. As always, Up and Down movements start at the low end of the market and rise or fall till they include the whole price range.
o. Typically this is over a 2 to 3 year period, after which prices settle down to a 3 to 5% annual increase till the next Boom or Bust. This places us about half way through the current upward stage of the cycle.
2. MAJOR REDUCTIONS IN SHORT SALES & FORECLOSURE.
o. This is mainly due to banks finally co-operating with the Federal Government sponsored Loan Modification programs i.e. HARP, HAMP, and HAFA. These programs are also allowing many current homeowners to refinance into much lower payments even when there is little or no equity in the home.
3. LARGE INCREASE IN NUMBER OF QUALIFIED BUYERS:
o. First time Buyers who thought they were priced out of the market in 2008 now find the reduced prices and Tax benefits make owning cheaper than renting, and are jumping on the home ownership wagon.
o. Multiple Federal Government supported low/no down payment loans i.e. FHA, V/A etc.
o. Multiple great 1st Time Buyer programs from the IRS (MCC), plus Santa Clara County, (MAP), and San Mateo County (HEART) 3% down payment programs.
o. A flood of Investors, both domestic and foreign, who see California Real Estate as a great investment when compared to more traditional options.
HOW MIGHT THIS SITUATION AFFECT YOU.
1. MOVING UP? (New baby, bigger house, better school district etc).
o. Excellent time in most situations. Get top dollar for your current home in strong Sellers Market, and a good deal buying into a more expensive property where it’s still more of a Buyer’s Market.
2. MOVING DOWN? (Kids all grown and gone, retirement, want smaller but closer to Grand children etc).
o. Good possibility of top dollar for current home in strong Sellers Market, and getting a good deal buying outside our market area where prices are seeing little if any improvement i.e. anywhere other than the Bay Area.
3. STAYING HERE? (No reason to move).
o. Nice to see home equity growing again. Get refinanced as soon as possible. Call for advice if needed.

MORTGAGE FRAUD ALERT

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English: A sign advertising foreclosure rescue...

English: A sign advertising foreclosure rescue, name and number blanked out following discussion. (Photo credit: Wikipedia)

Despite frequent publicity and legal actions the Fraudsters and Scam Artists are still ripping off vulnerable and financially stressed homeowners with promises to fix their problems for a few thousand dollars up front.

They promise to obtain loan modifications, mortgage relief, and foreclosure rescue. Once the cheque is cashed they are no longer to be found.

There are many services available that legally try to help with these kinds of problems; however, they do not require payment up front which is totally illegal.

THE GOLDEN RULE IS THIS:

ANYONE ASKING FOR AN UP FRONT PAYMENT IS A CRIMINAL TRYING TO CHEAT YOU.

 

 

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MCC. FREE MONEY FROM THE IRS

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Many States, Counties, and Cities have great programs to help 1st Time home buyers, but few if any are better then the Federal Governments Mortgage Credit Certificate (MCC) program.
This turbo charges the existing TAX DEDUCTION for mortgage interest by allowing 15% of it to be taken as a TAX CREDIT.
Here’s an example:
If you pay mortgage interest of $24,000/year you can take 15% of that ($3,600) and deduct it dollar for dollar from your total tax liability.
To put it simply; if your total tax bill was $20,000 it will be reduced to $16,500. You have now got a tax free pay raise of $250/m.
You can now tell your employer to reduce the amount they take from your paystub so you get the benefit of this right away with an extra $250/month in your pocket.
This program is administered by the Counties, and your Mortgage Broker/Bank, but be aware that not all of them are familiar with it. Be prepared to educate them.

HARP – HAMP – HAFA etc

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For borrowers unable to afford their mortgage payment, listed below are the options you will need to consider in the following order… HARP is always your 1st Option

1.) HARP (Home Affordable Refinance Program) this allows you to convert to a low 30Y Fixed. You must have a Fannie or Freddie loan with good credit and be current on your payments.

2.) HAMP (Home Affordable Modification Program) this is where most of the borrowers will be; however not everyone will qualify. You will need to have a financial hardship and there are front and back end financial conditions that need to be met.

3.) HAFA (Home Affordable Foreclosure Alternative) If you were denied a loan modification and unable to afford your mortgage payments, then you may want to consider selling your property at a loss (Short Sale). Your lender would first need to agree to the short sale and the credit impact will be two years and is less damaging then a foreclosure.

4.) Deed in Lieu (DIL). This is where you give the property back to the lender by signing a Deed-in-Lieu of Foreclosure. This also avoids a Foreclosure. DIL is not possible if you have more than one loan i.e. 2nd mortgage or Home Equity Line of Credit as these stay in force and the 1st mortgage holder would have to accept responsibility for them.

5.) Foreclosure. People with excellent credit are now foreclosing on their properties by walking away from it. They believe the property will not go up in value and have suffered a substantial loss from it. Consequences apply as this will stay on your credit report for 7 years.

6.) Bankruptcy. Regardless if it’s a Chapter 7 or 13, it will stay on your credit report for 10 years.
With the new Bankruptcy ACT of 2005 it is now more difficult to file for Chapter 7 and most likely you will need to file a 13, which still requires you to pay back your debts.