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

Photo provided by zert.sonstige_2008 on Flickr

Anyone who was recently “floating” their rate in the hopes of another dip in rates can tell you the answer they would now have in hindsight. As they say, hindsight is 20/20.  But if only we all had a crystal ball, would we trust it or still try to out guess the market?

When you are making the decision to lock in a mortgage rate, there are several considerations.  Is the rate you are being quoted a rate you can live with?  What if it goes up .125% or .25% or as this week saw, .5%?  On $200,000 mortgage, for each .125% your payment changes only about $15 per month either direction, but .5% changes it about $62 per month.  So of course, we are all hoping that the rate drops that much before we lock, right?

Unfortunately and maybe fortunately, rates don’t typically fluctuate that much, that quickly.  When it does, it is amazing and horrible, depending on which end of the change you are on.  Lenders will sometimes be able to renegotiate a lock if the rates drop .5% or more for little or no cost to the borrower.  But, there is no going back if the rates go up and you didn’t lock.  

Are you curious what caused the big jump in rates?  We were so we found a great article on the Wall Street Journal that gave some insight into the current mortgage market.  “Mortgage rates are being pushed up in part by a steep increase in yields on long-term Treasury bonds, which have a strong influence on the cost of home loans.”  The article goes on to explain the potential impact this increase in rate will have on the economy as a whole.  The article has a somewhat pessimistic tone on the economy.  Consider where rates are at!  Although a few months old at this point, Scott’s post about rates being at all-time lows is still very relevant and provides some insight as to where we have been and where we are now. 

Bottom line, the decision is yours, but do a gut check and think how you would feel if the payment goes up because you didn’t lock. Will you still qualify for your loan?  Talk to your lender if rates drop after you locked in to see if there is a way to renegotiate for a better rate.  But be prepared to live with the decision you make.  Once you lock, for the most part, just pretend your loan closed already and you are done with the decision and be at peace with it. 

Lending A Hand,

Cindy Howeth

The Good Faith Estimate is divided up into several categories:  The loan fees, the Title and closing fees, prepaid interest and fees and reserves for the borrower’s escrow account.

The 800 section of the GFE are the loan fees, including fees actually collected and retained by the lender as well as fees paid to third parties such as the appraiser. These are the fees you will want to compare with different lenders and brokers.

The 1100 section are the fees charged by the title company.

The 1200 section are third party fees paid to governmental agencies in connection with the loan and real estate purchase.

The 1300 section are fees paid to any necessary third parties, such as inspectors.

The 900 section fees are interest from and including the day of closing to the end of the month, any upfront mortgage insurance required, the first year of homeowners insurance premium that will be paid to the borrower’s insurance company at closing.

On the GFE (Good Faith Estimate) you will notice some letters at the end of line 800: PFC, S, F, POC. PFC means Prepaid finance charge. These are the charges that are associated with calculating APR. S means Seller Paid. These are items that the seller will be paying at closing. The F means FHA allowable. These items are permitted by FHA. Lastly the POC stands for Paid Outside of Close. This means that these items will be paid for, generally, before close.

It is important to keep a copy of the original GFE you are shown, to compare it to the final closing statement before you sign your loan documents.

Items checked as pre paid (PFC) finance charges will affect the final APR of your mortgage.

Federal law requires lenders and brokers to provide a written Good Faith Estimate within three days after taking an application associated with a property from a borrower.

Have each mortgage professional go over the Good Faith Estimates with you. Compare the items line by line. If you notice the cost of any item on a GFE significantly higher or lower than that of the same item on other GFE’s, ask the loan officer to explain the difference. Some dishonest loan officers might “low ball” their settlement costs to gain your business.

Sometimes the fees listed on the Good Faith Estimate can change before closing. Some reasons include-

• Your mortgage broker may have to submit your loan application to a different lender, either to get a better rate or because the underwriter at the first lender didn’t approve your loan (different lenders have different fees)
• If your appraisal is sent to appraisal review by the lender, some lenders charge a fee for that
• If you decide to use a different loan program or a different loan amount
• If you close earlier or later in the month than estimated
• If you decide to use a different home owner’s insurance company, policy, or deductible amount

Generally, other fees may vary a little as they are estimates (such as courier fees, which will rise as more packages are sent), but they should be pretty close.

In some states, if there are changes to the initial estimate but before closing, new GFE’s are required to be sent out prior to closing.

A Good Faith Estimate can inform you of the some or all of the costs necessary to complete a real estate transaction, but changes such as title, real estate or lender issues may arise through no fault of your mortgage broker. While your mortgage broker is responsible for giving you a Good Faith Estimate, it is not the responsibility of your mortgage broker to guarantee third party costs.

It is important for borrowers to understand the Good Faith Estimate because the fees listed are what they are being charged to close their loan transaction. Borrowers should have all fees explained to them by their loan officer and to challenge any fees they feel are unnecessary.

The Good Faith Estimate also discloses the interest rate on the loan, the approximate monthly payment and the amount the borrower will need to bring to closing.  Some sellers pay some or all of the borrowers closing costs.  These amounts are also show on a Good Faith Estimate. 

Understand that a Good Faith Estimate (GFE) is just that, only an estimate. Your costs at closing and the monthly payment can vary from the amount on the GFE.

Good Faith Estimate documents with unrealistically low figures are a common tactic used by less scrupulous mortgage companies to “bait and switch” borrowers by locking them into a loan process with the promise of abnormally low rates and fees, only to change the deal at the last moment, often at the closing table itself.  Be sure to check out who you are working with and make sure they are reputable. 

Lending A Hand

Highs & Lows

Freddie Mac been recording average interest rates since about April of 1971.  All of my results will be since that time frame, since that is the data I am working from.  I wanted to know what the highest and lowest monthly average has been.

Highest: 18.45% in October of 1981

Lowest: 5.23% in June of 2003

After a quick calculation, I determined that the average rate, since April, 1971, is 9.11%.

How Do Today’s Rates Compare?

Here is a chart of the average monthly rates for 2008:

January	5.76
February	5.92
March	5.97
April	5.92
May	6.04
June	6.32
July	6.43
August	6.48
September	6.04
October	6.2
November	6.09
December	5.29
Average	6.04

Historically, you can see that rates are very low.  An average for a year of 6.04%, which the lowest monthly rate we have seen is at 5.23%.  Look at December of 2008 – we were at 5.29%, only .06% difference from the lowest rate since 1971.

Now consider the weekly survey of rates, according to Freddie Mac, for January 8 was 5.01%!!!  That makes current rates at HISTORIC lows.

What Does This Mean?

The lowest historic rates means the cost to borrow money for a home is less expensive then it has been since 1971!  Let’s compare – what would the monthly principal and interest payment be at the highest, lowest, average and current rates be for a $200,000 mortgage amount on a 30 year fixed term:

Highest: $3,087.71

Lowest: $1,101.93

Average: $1,625.10

Current: $1074.87

Look at the spread between the highest and current!! That is $2,012.84 per month!.  Over 5 years it would be $120,770.  Crazy, huh?!  I think so.

Consider the Cost of Homes, Too!

Not only are rates are historically low levels, but home prices are also low.  If you want the raw data, check out the Office of Federal Housing Enterprise Oversight’s Historic Price Index Data.  The data shows that a home in October of 2008 is at, about, the same price as a home in May of 2005.  There have only been 10 periods of declining home prices month to month since January 1991, according to this data.  The longest continuous drop in prices month to month, before 2007/2008, was from March 1992 to June 1992 (4 months).  Compare that to May 2007 to January 2008 where it dropped every single month for 9 months, went up in February 2008 and then dropped again for 8 more months between March 2008 and Oct 2008 (when the data ends).  This means homes are cheap!!  As cheap as they were in 2005.  That doesn’t happen, so take advantage of it.

So What Should I Do?

Buy!  Refinance!  Invest!  Take advanatage of these great rates, but do it wisely.  Check out a few posts related to refinancing or purchasing:

• Mortgage Refinance – Does it Make Sense?

• 8 Questions to Ask Your Lender

Lending a Hand,

Scott Wynn