Get Your Mortgage Phil: December 2009

Trade-up home buying has a different set of issues to conquer than the first-time home buying process. The first-time home buying process is about education. The first-time home buyer is figuratively diving into the water for the first time. Whether they make a beautiful swan dive or belly flop depends a lot on how well they were educated before they entered escrow by their real estate agent and mortgage originator.

The trade-up home buying process has an element of education, but it is more about coordination. How does the trade-up buyer coordinate the sale of their existing home with the purchase of their new home? Here are nine points that the trade-up buyer and their real estate agent  need to know about in terms of financing to successfully coordinate the disposition of their current home along with the purchase of the new home:

1. Loan approval does not necessarily mean that you should release loan contingency. A loan approval always has conditions. If you are selling your current home, one condition lenders usually have is a copy of the closing statement from the sale of the current home. What happens if your buyer backs out? How comfortable are you with the ability of your buyer to buy your house? You need to find out all of the conditions from your lender so that you know exactly what has to happen in order to get your loan. Do not release loan contingency until you are aware of the conditions and are confident that you can satisfy these conditions.
   
   
2. Your mortgage originator needs your tax returns, even if the loan approval does not require it. Here is why: some of us try to minimize the amount of income tax we pay. Some of us use form 2106, which allows us to report unreimbursed business expenses on schedule A of our tax return. Lenders deduct this amount from your income for qualifying. Sometimes the lenders will not ask for tax returns, but they almost always ask for form 4506-T. Form 4506-T is a summary of the tax return you have filed with the IRS. If you have unreimbursed business expenses claimed, the lender most likely will re-underwrite the file and may even deny the file because your income is not as much as originally presented! Give your tax returns to your mortgage originator to prevent this problem upfront!
   
   
3. If you plan on renting your current home, you may not be allowed to use the rental income to qualify. I recently wrote a post about this subject - Before You Advise Your Client Rent Their Current Home And Buy Another, You Need To Know This!.
   
   
4. If you plan to sell stocks, bonds, and/or mutual funds for the down payment, you are best served selling prior to having your file underwritten. Here is why: If you do not provide proof of liquidation, many lenders will value the worth of your holdings at 70% of the verified amount. Without proof of liquidation, the lender my determine that you are short on cash to close escrow, even if in reality you are not. Prove it now to save headaches later!
   
   
5. Are you trading-up because of a job transfer? Here is what you need: an employment offer letter, clear of any conditions (drug test is an example), and an affidavit signed by you stating that you will provide a paystub within 30 days of closing.
   
   
6. Try your best to nail down your loan amount and your interest rate up front! Here is why: If you increase your loan amount and/or change your interest rate after your lender has sent their initial disclosures, they may require re-disclosure and a new seven day waiting period before they can close escrow! Set it and forget it!
   
   
7. Take care of your credit score before you write an offer. Most lenders use the middle score of three credit repositories. In addition, the qualifying score most use is the middle score from the borrower with the lowest score among all the borrowers involved in the purchase. Credit scores can be changed if there are errors on the report. Work with your mortgage originator to make these changes now rather than while you are in escrow. 
   
   
8. If you want an impound account, set it up after the close of escrow. Here is why: cash to close is one of the issues that often causes a headache at closing. Impound accounts require more cash to close. Why complicate an already stressful situation? Close escrow, call your lender, and then set up the escrow account when there's not as many hoops to jump through!
   
   
9. Don't count on 100% of your retirement funds as cash reserves. Most lenders are now only counting 60% of the value of retirement funds as cash reserves. For example, if you have $20,000 in retirement funds, the lender will only value these funds as $12,000.  

If you live in San Mateo and you are interested in mortgage rates, here is a great article from Brian Brady. Somehow he is able to make an analogy about mortgage rate forces, and his daughter's actions/reactions at the beach! 

 Financial Advisors, CPAs, insurance agents, real estate agents, estate planning attorneys, and in-home care providers in California need to know that there is a reverse mortgage alternative available.

The reverse mortgage alternative is called Equity Access. Equity Access provides monthly income to homeowners above the age of 60 (the youngest homeowner must be at least 60) in return for a share of the future value of the home.

Here are some of the features:

• There are no closing costs to enter into an Equity Access Agreement
• No debt is incurred with an Equity Access Agreement
• The homeowner does not have to pay off their mortgage(s)
• The homeowner decides how long they want payments for (from 10 to 25 years)
• The homeowner decides how much equity they want to share
• An attorney is required to review the Equity Access offer to protect the homeowner
• There are no income requirements

1. The age of the youngest homeowner
2. The value of the home
3. The amount of mortgage balance(s)
4. The type of mortgage(s)
5. How long they want payments
6. How much equity they want to share

All of this information is placed into the Equity Access calculator. The calculator then determines the monthly payment.

If the payment is less than what the homeowner would like, there are ways to manipulate the calculation. For example, the homeowner could agree to share a larger percentage of the future equity. Or they could shorten the term of payments to be received. 

There are probably other professionals that could benefit from this information. If you know of a certain type I missed, I would love to know.

Which is better, a reverse mortgage or Equity Access Agreement? Like any financial tool, one product may be more suitable than the other. But it's nice to know that senior homeowners in California now have an alternative.

Spread The Word!

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Jumbo Loan Blog

Normally, homeowners in Atherton don't want a 15 year fixed rate because the payments are too high. Now there is a twist on a 15 year fixed rate that can keep your payment low!

This loan has a 40 year term. Initially it is a 15 year fixed rate. During the 15 year fixed rate term, the payments are interest-only. Because the payments are interest-only, the payment is a lot lower than an amortized 15 year fixed rate. 

Here's the neat part - if you pay principal during the 15 year fixed rate term, the payment decreases because the payment is based on the reduced balance!

After the 15 year fixed rate term expires, the rate adjusts once. The rate is determined by adding .5% to the Fannie May 60 day rate.

The new payment is based on the new rate, amortized over 25 years. Hopefully you have paid off enough of the principal during the 15 year fixed rate period so that the payment doesn't increase! The new rate can't be more than 5% higher than the initial rate.

As you know, homes in Atherton are very expensive. This program works well here because the maximum loan amount is $5 million.

This loan program is available to purchase or refinance expensive homes, such as those located in Atherton. One of the nice features is that there is no limit on the dollar amount of cash-out. Many loan programs are limiting the amount of cash-out to refinancing homeowners.

Another nice feature is that this program can be used to finance second homes at a slightly lower loan-to-value percentage. It is one of the few competitive jumbo loan programs that I am aware of that allows cash-out on second homes.

If you own a home in Atherton or in other expensive areas of California, and like the idea of a 15 year fixed rate with interest-only payments to keep the payment low, contact me to see if this program is a good fit for you.

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Jumbo Loan Blog

When someone buys a home before selling their current home, they may have a problem: if they have a mortgage on the old home, that debt is included in their debt-to-income ratio.

In the old days (pre-2008), home buyers who did not sell their home first had at least a couple of ways to offset their mortgage debt.

Some lenders would accept the income reported on a rent survey prepared by a licensed appraiser. Other lenders would accept a rental agreement.

The lender would subtract 25% of the income obtained by either of these methods off the top to account for expenses and vacancy. They would then subtract out the PITI (principal, interest, taxes, and insurance). If there was a positive balance left after this calculation, it was added to the homebuyer's income. If there was a negative balance, it was added to their debts.

Most lenders still use this method to calculate the positive income or negative debt. Now, however, there is a twist. You need to be concerned with the amount of equity in the old property. In addition, more documentation is required for rental income to be included. 

Fannie Mae now requires the following documentation to use rental income from a primary residence converted into a rental property:

• An executed lease agreement
• receipt from the tenant of a security deposit
• supporting documentation of deposit of the security deposit into the homebuyer's account

Here's something mortgage brokers and real estate agents should be aware of - it sure caught me by surprise! 

My client applied for a refinance of his first and second mortgage. We sent out two files.

We sent the file for the first mortgage to Provident Funding. We sent the file for the second mortgage to US Bank. He applied for an equity line to replace his current equity line (his current equity line lender will not subordinate).

Both loans were initially approved. Provident Funding asked for the loan approval of the equity line. 

We supplied the approval. Provident said they would not allow this equity line to go behind it because it has a pre-payment penalty!

The pre-payment is all of $350 if he closes the equity line in the first three years. I don't know of any equity line lender that does not have an early closure fee - do you?

Does anyone know if this is a Fannie/Freddie rule, or is this unique to Provident Funding?

Just another stupid reason to turn down a perfectly good loan, in my opinion.

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