CHFA FirstStep

Through the sale of non-taxable mortgage revenue bonds, CHFA is able to offer mortgage rates at or below market interest rates for first time buyers (anyone who has not owned a home for the past 3 years).

CHFA FirstStep Plus

Same program as the FirstStep with the addition of a second mortgage loan to assist with down payment, closing costs, prepaids and/or temporary buy downs.  The maximum amount of the second mortgage is 3% of the first mortgage amount.

Income Limits

Both of these programs do have income limits associated with them.  The entire household (everyone over 18 who will live in the home) must be below the total income as follows:

• 1 Person Household = $60,800
• 2 Person Household = $76,000
• 3+ Person Household = $87,400

Additional Restrictions

• CHFA is only available within the state of Colorado
• Borrowers must work with a CHFA Approved Lender
• Can not be combined with the Mortgage Credit Certificate
• Must be owner occupied and qualify for FHA, VA or USDA Mortgage Loans
• Additional restrictions may apply and details can be found at CHFA

Interest Rates

Rates can change at any moment but at the moment I type this the First Step Rates are:

• FirstStep = 5.000%
• FirstStep Plus = 5.25%
• Rates can be found on the CHFA website at http://www.chfainfo.com/lender/Single_family_lending_partners_and_realtors/Todays_rates.icm

Lending A Hand

Scott Wynn

The Wynn Team

1. FirstStep & FirstStep Plus
2. No Gifts Allowed for Minimum Contribution
3. No Cosigners Allowed
4. Non-Traditional Credit Must Be Added to Credit Report
5. Risk Score Card
6. No Grossing Up Income

1.  FirstStep & FirstStep Plus

Two new (well a modification from an older CHFA program called MRB First Step) programs to be available starting February 1, 2010.  This program will provide first time buyers, and qualified veterans, with a low interest rate fixed mortgage or down payment assistance in the form of a second mortgage.  This product is funded through the sale of non-taxable mortgage revenue bonds.  What this means to buyers is that typically the rates for these mortgage options are either below market rates or very competitive considering a second mortgage option for down payment assistance is available.

Rates have not yet been released but as they are we will be sure to communicate what they look like.  For additional details you can check out the CHFA website at www.chfainfo.com.

2.  No Gifts Allowed for Minimum Contribution

Effective February 1, 2010 CHFA will no longer allow the borrower’s minimum contribution of $1,000 to come from gift funds.  This will be verified through a 2 month history of bank statements to show the funds were theirs and did not come from other sources.

3.  No Cosigners Allowed

This is not a huge change to CHFA rules.  Up until now CHFA allowed cosigners but the borrower had to qualify independently without the help of the cosigner…what is the point of a cosigner then??  Well, to avoid further confusion CHFA has now eliminated cosigners from being allowed on CHFA mortgages.

4.  Non-Traditional Credit Must Be Added to Credit Report

CHFA is now going to require that any non-traditional credit (credit that is not being reported to a credit bureau – i.e. cell phone, auto insurance, utilities, etc) being used for qualifying must be verified by a credit reporting agency and added to the credit report.  This is something that your mortgage lender will assist with and not something the buyers will do themselves.

5.  Risk Score Card

CHFA has always been one of the most aggressive lenders when it comes to assisting borrowers who have had credit challenges in the past.  CHFA has done well with this approach through homebuyer education requirements prior to closing.  In fact, their foreclosure rate is a fraction of the national average.  To continue to keep their default rate low, CHFA is now requiring lenders to complete a risk score card for all borrowers with a credit score between 580 and 619.  In order to qualify there must be some compensating factors to show that you have the ability to make the payments despite some credit mishaps in the past.

6.  No Grossing Up Income

A common approach for lenders is to gross up income that is not taxed (social security income, child support, etc) since taxable income is used at gross amounts rather than net amounts.  CHFA is no longer going to allow this when qualifying for their mortgage loan options.  Very rarely will this impact someone’s qualifications but something lenders need to know when assisting their customers in qualifying for a mortgage.

Lending a Hand

Scott Wynn

The Wynn Team

Everyone knows that their monthly payments for the first several years of their home mortgage are made up largely of interest.  For this reason, large fluctuations in your mortgage interest rate can really impact your bottom line.  With the recent increases in mortgage interest rates, we thought we should inform new homebuyers of the CHFA MCC program which can make the interest you pay more rewarding.

For loans that close prior to June 25, 2010, buyers who meet the following criteria may apply for the CHFA MCC.

• Household income and home purchase price limits
• FICO score of 580 or higher
• Use the new home as their primary residence
• Have not owned a home as primary residence in the past three years (first time homebuyers) OR are current homeowners looking to refinance certain qualified subprime mortgages, OR who are eligible veterans may apply.

What does it all mean?  The CHFA MCC program allows qualified homebuyers to claim a dollar-for-dollar reduction of income tax liability equal to 20% of their paid mortgage interest on their first mortgage….for as long as they own (and live in) their home!  In addition, the remaining 80% of the paid mortgage interest continues to qualify as an itemized tax deduction.

Let’s look at an example (simplified for illustration purposes – for a full example check out CHFA’s MCC example):

$150,000 Purchase Price @ 5.5% Interest Rate

Homebuyers who purchased a new home with a loan amount of $150,000 at an interest rate of 5.5% will get double the tax refund related to the home mortgage only.  The $1,650/yr in additional tax deduction (from MCC) equates to a monthly savings of $137.50 which FEELS like a LOWER INTEREST RATE.  Calculating it out the effective interest rate you would be paying in this scenario would drop from 5.5% to 4%!!

Not all lenders participate in the program, so to be sure you select one who does, visit CHFA’s website.  This is a huge advantage for qualified buyers!  There is another added benefit we are able to extend to our borrowers.  Very few lenders, yes we are one of the few, allow borrowers to use the monthly tax savings to qualify for a larger loan amount, which means they have more purchasing power!  In this particular scenario, the borrower can now qualify for a $174,000 loan instead of the $150,000 loan.  The borrower can adjust their W-4 withholdings to receive the extra money during the year.

There has to be a catch, right?  Well, there is, although the likelihood of a penalty is fairly small.  Borrowers who participate in the MCC program are subject to recapture tax.  We stated the likelihood of a penalty is small (only 1 customer in our 13 years, and over 500 customers, of doing these types of loans has ever had to pay the penalty) and here’s why.  Three things must occur simultaneously to trigger recapture tax.

1. The buyer has to sell their home in the first 9 years of ownership
2. The income of the buyer has to have increased significantly – over the maximum limits for the year they sell and
3. The buyer has to make a profit on the sale of the home.

There is a one time fee to participate in the CHFA MCC program, but your refund in the first year will more than make up for the fee in the first year.

If you are looking to buy in the state of Colorado and would like to use this program, contact us and we will help you!

Lending A Hand

Marla Wynn

The Wynn Team

Phot provided by escape_identity on xanga

The mortgage business can be a confusing industry to understand. There are different types of loans, different types of lenders and different paths for loans after closing. All of these can impact your ability to get approved for a mortgage loan, the terms of the loan or how smoothly the process goes. I bring this up because of a situation that happened just the other day….

We received a call from a mortgage loan officer at a different mortgage company who calls us when she is unable to get a loan approved with her company. As I mentioned in the opening paragraph, each mortgage company is different. In this situation, the lender who was unable to assist her customer works directly for a depository bank where their underwriting guidelines are tighter than a traditional mortgage banker. She realizes this and knows she can turn to us when she has a situation where her underwriting department can not approve a loan. In this case the reason she could not approve the loan was due to ratios.

Qualifying Ratios

In mortgage terms, ratios are the percentage of your income used for the house payment and debts.  There are two ratios that are looked at when you qualify for a mortgage:

Housing “Front End” Ratio:

This ratio is the percentage of gross income for all borrowers on the loan in comparison to the monthly payment you are looking to qualify for.  For example, if you were looking to qualify for a payment of $2,000/mo and had a total income of all borrowers of $10,000/mo the ratio would be 20%:

$10,000/mo gross income divided by $2,000/mo PITI mortgage payment

Debt “Back End” Ratio:

The debt, or “back end” ratio, is the percentage of gross income compared to all debts of the borrowers on the mortgage, including the new housing payment.  Continuing with the example above, if these borrowers had an additional $2,250 in monthly debts (cars, student loans, credit cards, etc) the total amount of debt would be $4,250 ($2,000/mo mortgage payment and $2,250/mo in other debts).  Calculating the percentage would result in 42.5%:

$10,000/mo gross income divided by $4,250 in debts

What lenders look for:

Based on the reason for this post there is no hard and fast rule associated with ratios, each lender is different.  For the lender that was unable to do the loan, her max “back end” ratio was 45%.  Ours is dependent on the overall risk of the loan.  When we receive a loan we complete a full loan application and run the loan through a computerized automated underwriting software program that determines whether the risk is acceptable to approve the mortgage loan.  The highest ratio we have seen approved in recent months has been about 59% (keep in mind this is with the best credit and a large amount of assets).  Typically, we like to see the ratio at about 50% or less.

Back to our scenario again, this customer had a ratio of 50.23%.  Because the other lender’s max ratio was 45%, she was unable to do the loan.  We ran the automated underwriting program to make sure I was able to offer financing and I received an approval.  The next step was determining how to set up the rates and fees.

Rates & Fees

When most people are looking to select a mortgage lender it seems obvious to look at a lenders rates and fees, right?  Well, yes but there is more to it than what it may seem.

When the customer and I talked for the first time we talked about how his loan was set up with the other lender and how the loan would be set up with me.  We were both offering FHA Financing, 30 year fixed mortgage with no pre-payment penalty.  The area where there were some differences was surrounding his rates and fees.  My fees were just slightly (within a couple hundred dollars) higher.  When I started to inquire with this customer on what his most important factor was related to rates and fees we discussed two things:

Amount Due at Closing:

Outside of your down payment, the closing costs on a mortgage are going to be the biggest factor in the amount of funds that are needed to close on your home.  Closing costs include:

• Lender Fees (how the lenders get paid)
• Mortgage Fees (interest and set up)
• Real Estate Fees (HOA, taxes)
• Title/Lawyer Fees (closing of your mortgage and real estate transactions, insurance)
• Government (recording, taxes)

Amount You Pay Over Time:

The amount of money you will pay over time on your mortgage is going to depend on how long you keep your mortgage, the rate and the balance.  Obviously, the lower any of these 3 factors are, the less you will end up paying.

Choosing Between Lower Due at Closing or Over Time:

Due to the size of the mortgage loan and the term of the mortgage loan most people decide that it would be best to have the lowest rate and balance possible instead of trying to minimize their out of pocket expense at closing.  Of course, we also don’t want to have to bring a ton of cash to closing, otherwise there would be no need for a mortgage, right?  In my previous post To Fee or Not to Fee, I explained why someone may want to increase their rate to cover some of their closing costs.  That is exactly what this customer decided to do.  We discussed many options but it came down to these 2 options:

1. 5.25% Rate, 1% Origination Fee, 0% Discount Points
2. 5.50% Rate, .25% Origination Fee, 0% Discount Points

The customer was mostly concerned about conserving his cash and could manage the slightly higher payment ($20/mo).  He opted for the higher rate and was very happy to not have to bring the extra cash to closing that would have been needed with option #1.

The biggest thing to understand about the mortgage business is that there are options.  There are options on who you use to obtain your mortgage, what mortgage company they work for, whether they are a banker or broker, how to structure your loan and whether to increase your rate to cover some of your costs.  Understand your options and select a good lender who can explain these options to you and look out for your best interest.

Lending A Hand

Scott Wynn

The Wynn Team

Bonnie and Clyde (fictional names, of course) called us up the other day to get qualified for a home purchase.  Apparently the robbery profession isn’t what it used to be.  Anyway, we started through the questions to complete a pre-qualification, including:

• Legal Name
• Home Address
• Current Employer
  • Job Title
  • Length of Time with Employer
• Income
  • How Often Pay Received
  • Type of Pay
    • Hourly/Salary
    • Bonus
    • Overtime
    • Commission
    • Self Employment
    • Etc
• Assets
  • Checking
  • Savings
  • Investments
  • Retirement
  • Gifts (from relatives)

Once this information was gathered we had a couple of choices:  we could run a credit report to see what the score looked like or we could discuss the debts as Bonnie and Clyde knew them.  In this case Bonnie and Clyde decided to run the credit report to so we could a listing of all of their debts as well as the scores.  Here is how it turned out:

Bonnie

• 563 Experian
• 581 TransUnion
• 593 Equifax

Clyde

• 536 Experian
• 544 TransUnion
• 538 Equifax

Our most recent post discussed the representative score for a mortgage.  In this case the representative score would be a 538.  538 credit score is not sufficient to qualify for A-Paper mortgage options so we discussed Bonnie and Clyde’s options with them:

Options When One Borrower’s Scores are Higher than the Other:

1. Remove the borrower with the lower score

By removing the borrower with the lower credit scores you can effectively increase the representative score for the loan.  In this case, if we removed Clyde, the representative score would go from 538 to 581 (removing Clyde removed the lower of the two representative scores so now we just go with Bonnie’s)

2. Change borrowers

In some cases there are opportunities where we can remove a borrower with a low credit score and use another person who will be occupying the home. An example we see commonly is multi-generational families living together. If the husband and wife are looking to purchase with the husband’s mother, we now have 3 borrower options (husband, wife and mom). If say, husband can not qualify due to credit scores, mom may be added to the loan in place of the husband.

3. Work to increase the credit score(s)

Although this is the hardest option which typically takes longer than the other options this is the option most customers must opt for because the other options are not available to them. In a situation like this your mortgage lender may have options to assist you in methods to increase your credit score. If not, you may also seek out a credit repair company to assist you (BEWARE: some credit repair companies are nothing but scams to take money from people in desperate situations so do your research or get a referral).

In our case, Bonnie made the majority of the income so removing Clyde was an option that worked well since at the time we assisted Bonnie and Clyde the minimum credit score required was a 580.  When you remove a borrower from the loan their income is removed too.  This is why in Bonnie and Clyde’s situation, Bonnie making most of the money and having the higher score worked to their advantage.

Credit Requirements (Not Just Credit Score)

When we looked at Bonnie’s credit we not only needed to make sure she met the credit score requirement at the time (580) but we also needed to make sure she met the credit requirements for the loan in which she was applying.  Bonnie was interested in FHA financing due to it’s lower down payment, lower monthly payment and easier qualifications.  Each situation is different so there is no way to list the exact qualifications that must be met but for a general idea of what FHA requires check out our post about FHA Mortgage Loan Requirements.

Bonnie did meet the credit requirements and from the initial questions her qualifications looked good.  The next step was to complete the pre-approval process.

Lending a Hand

Scott Wynn

The Wynn Team