Temporary Conforming and FHA Loan Limits Set to Expire?

I was talking with one of my top Realtor contacts earlier this week, and he had heard rumors that the FHA loan limits in Boulder County would be resetting substantially lower come October 1, 2011.  I have seen the conforming (Fannie and Freddie) and FHA loan limits change many times in my 15 years as a senior mortgage loan officer.  This year, however, is different.  Usually they are going up or staying the same.  This year, they may be going down.

What’s behind this?
During the financial crisis of 2009 these loan limits were substantially and temporarily raised to compensate for the fact that jumbo loans (larger mortgage loans not covered by some form of government guarantee) disappeared as traditional sources (banks) shut down these programs.   Essentially, if a buyer needed to borrow more than the existing FNMA or FHA mortgage limit, there were limited sources to access the money as a single mortgage loan.

As things currently stand, it looks like the loan limits, if they do actually change on October 1, will go back to the levels that existed in 2009 but this is not a sure thing yet.

Fannie Mae and Freddie Mac loans would return to a maximum of $417,000 for most counties around Denver (they would stay higher in the mountain resort areas).  This means that for Boulder County, the limit would fall from $460,000 to $417,000, while most other Denver metro limits would remain unchanged.

FHA loan limits are a bit more complicated.  Boulder County would fall from $460,000 to $402,500.  Jefferson, Adams, Broomfield, and Denver counties would drop to $368,000.  Larimer and Weld counties would return to $271,050.

What does this mean for you?
As funding sources have returned to the jumbo mortgage market, the government is considering a return to its original mandate, which is to ensure funding for small to medium size mortgages. For mortgages over $417,000, there are a lot more options today than there were in the last two years, such as VA jumbo loans.

What’s my take on this?
The situation is very fluid and can change at a moment’s notice.  If we see more uncertainty in the housing market, loans that are not guaranteed by the government could disappear again. You can count on me to provide updates on this topic as it becomes available. In the meantime, I am happy to talk with you directly about this – or any other mortgage questions you have.  To reach me today, call 720-352-3775 or email me at jlange@pmglending.com.

6 Advantages of a VA Jumbo Mortgage Loan

In the thousands of mortgage loans I’ve helped borrowers with over the years, one thing is certain – every one of my clients is unique, and so are their financial circumstances.   So, in a market environment like today’s that offers fewer (and much more restrictive) mortgage financing options, it can be quite a challenge, finding innovative solutions for the range of complex needs. But it can be done – and that’s why I’ve put a series of mortgage advice articles together to discuss unusual, often overlooked, and sometimes imaginative approaches to a mortgage lending scenario.

Last week I talked about retirement funds as a source for down payments.  This week, the topic is VA loans as a potential source of jumbo mortgage funding (defined as loans too large to be sold to Fannie Mae and Freddie, Mac). You might not realize that Colorado has over 424,000 veterans – and 20,000 veterans in Boulder County alone. So for these borrowers, (and including those in active military duty) VA mortgage loans might be a viable option.

Since the virtual shutdown of the jumbo loan market in the financial crisis of 2008 – 2009, few options have resurfaced from lenders fearful of mortgage risk.  Typically, the terms for jumbo mortgage loans are more restrictive and the rates are considerably higher than loans that conform to Fannie and Freddie standards.  This can make finding a mortgage cumbersome for borrowers with less than stellar credit and limited financial resources – and in many cases – shutting them out of a market entirely.

For eligible borrowers, a VA jumbo mortgage can be really compelling.  And here’s why:

1. 30-year fixed rate structure – unusual for a jumbo these days.
2. Interest rates competitive with Fannie Mae/Freddie Mac 30-year, fixed rate loans.
3. For loans up to $700,000, borrowers with a credit score of 620 can get a rate that’s approximately the same as a credit score of 800.  Compare this to Fannie/Freddie loans, where a low credit score raises an interest rate substantially.
4. No requirement for financial reserves – a big plus.  (These are liquid assets held in some type of an account.)
5. Up to 100% financing.  No down payment for mortgage loans up to a purchase price of $427,500 (the VA limit in Boulder County, CO – limit varies by county.)*
6. Only 25% down payment required for every dollar over the $427,500 limit – the VA will lend the rest up to a loan amount of $700,000.

Let’s look at an example:  “Bill,” an eligible veteran, is looking to purchase a primary residence in Boulder County for a price of $768,125.  He has a credit score of 620 and much less than a normal 20% for his down payment.  With the VA jumbo mortgage loan however, Bills needs a down payment of just 9%, equal to $68,125. This means, I can put him in a VA jumbo loan for up to $700,000 – which gives us a 91% loan-to-value ratio.

You can see why this is an important consideration for jumbo mortgage loans today, because when you compare this to other jumbo options that typically require at least 20% down, credit scores typically above 700, and substantial financial reserves, the ability to purchase a home in the jumbo mortgage segment becomes much more of a reality.

Delivering mortgage advice is one of the things I most enjoy about my work in mortgage financing. Perhaps you are – or you know of – a veteran, an unmarried surviving spouse of a veteran, or an active duty person who is seeking a mortgage. If so, I’d love to help explore your VA loan options. Call me today at 720-352-3775.

*Some Colorado counties are much higher – for example, Pitkin, Eagle and Lake are all over $850,000. 

Out of the Box: Using retirement funds for a home purchase

As a mortgage finance professional with three decades of financial services expertise, I find myself wearing several hats when on the lookout for ways that can help my clients buy a home with less stress and more cost efficiency. One topic that often comes up is using retirement funds as an alternative source for a traditional down payment on a home purchase.  As a Chartered Financial Analyst (CFA), tapping into retirement funds – for any use other than intended – always gets my attention! So let’s explore the pros and cons.

A home buyer typically needs to provide 20% of the purchase price in her own funds when getting a “standard” mortgage (there are many other flavors of mortgage, but for now, we’re talking vanilla!)  This is called the down payment, and represents her equity stake in the home.  To the lender, the 20% equity cushion represents his protection against loss in the case of a default.  However, if the borrower has less than 20% for a down payment, she’ll need to borrow more than 80% in her mortgage, which means the lender has less protection against loss in the case of default, and will require mortgage insurance to cover the additional risk.

For example, let’s assume the buyer has only enough funds for a 10% down payment.  To avoid paying mortgage insurance, she might borrow 80% as a first mortgage and 10% as a home equity line.  This is a common structure called an 80/10/10.  Sometimes, however, it may make sense to tap into retirement savings instead of getting a home equity line.  An example would be if the buyer’s income is not sufficient to qualify for both the first mortgage and the home equity line.  Which brings us to today’s topic:

There are three ways to tap into retirement funds, depending upon how they are invested:

1)  Liquidation of an IRA:  There are two concerns with this approach:  Up to 40% of the proceeds will be withheld by the financial institution (where the IRA is on deposit) to pay taxes and penalties, requiring the buyer to liquidate $16,667 to gain access to $10,000.  The 10% penalty for early withdrawal may be waived for the purchase of a primary home (consult a tax professional) but that still would result in a liquidation of $14,286 to gain access to $10,000.  In most cases I recommend against this approach, as it may cripple your retirement savings.

2)  Withdrawals from a Roth IRA:  The beauty of the Roth IRA is that the buyer can withdraw principle contributions (leaving in any earnings) without any tax or penalty as these contributions were made on an after-tax basis.  Again, the retirement picture is harmed, but not as severely as in the first scenario as there are no tax implications.  To get $10,000 the buyer needs to take out only $10,000 as long at these funds were after-tax contributions.

3)  Borrowing from a 401(k):  Often, one can borrow up to 50% of the balance in a 401 (k) in the form of a loan, up to a maximum of $50,000.  Thus, if the buyer needs $10,000, he must have a balance of $20,000 or more in his 401(k).  This is a loan which can be paid back into the fund without penalty, so in essence the money is still in the account, only it is now invested in a loan upon which the borrower pays interest (and which has a 5 year repayment time-frame.)  There is no hit to the retirement picture, since the borrower is also the owner of the 401(k), the money is still invested, and growing.  And from a loan qualifying basis, the monthly payments to the 401(k) loan do not have to be included in the qualifying ratios of the borrower in getting approved for their mortgage.

Most people will have a mix of IRAs, Roths, and 401(k)s, especially if they have had several jobs during heir career.  As always, consult a tax professional before making any early withdrawal or loan from your retirement assets.  And when you are ready to start the home buying process, please give me a call, and I can help you figure out the best loan options for you.

Five Simple Rules for a Successful Low-Stress Loan Approval

In these days of tougher lending standards, getting a mortgage loan approval can be extremely stressful and frustrating. Often, however, much of the stress is self-inflicted and unnecessary. If you follow these five simple rules and procedures, your loan is far likelier to close on time with minimum stress. Please take a moment to read these simple rules and understand the requirements.

1. A fast turn-around: This is the most important rule. A low-stress loan approval is all about time, or lack thereof. So when we ask you for documents to support your income, assets, employment and other factors as part of a loan applications, get those items back to us in two days or less. Make it your highest priority. Letting the loan applications languish on your kitchen counter means less time to deal with curveballs and snags that send your stress (and ours) through the roof. You loan is NOT the only one we are working on, so if we have to drop something else to backtrack with you, the whole system gets bogged down.

2. Give us EXACTLY what we ask for: When we ask you for your entire Federal tax return or complete account statement, give us exactly what we ask for, the first time. We’re asking for your documents a certain way, because that’s what we absolutely have to have to get the loan approved. We have no choice but to comply with the loan documentation requirements of the various loan programs, so neither do you. Giving us only part of what we ask for wastes everyone’s time (see #1 above) and causes unnecessary delays, expensive relocking fees and increased stress.

3. Don’t incur any new debt: Once you have made loan application, DO NOT go out and apply for any more debt! No new car, no new furniture, no nothing until AFTER the closing. Your credit will be rechecked the day of the closing, and if any new loans pop up, or your credit card balances rise, you may end up with your loa un-approved. On a purchase, that could mean you lose the house (and your earnest money). On a refinance, having to send the loan back to underwriting means expensive loan lock extension fees. Just say NO to any new debt or even credit inquiries during the loan approval process.

4. Don’t move your money around: Once you’ve applied for the loan, don’t shift your financial assets from one account to another. We have to have a paper trail for all financial assets on the loan application. Discuss with us the timing and method of liquidations to come up with your cash for closing.

5. Don’t disappear! A surefire way to ask for trouble is to schedule your second honeymoon, your long-awaited wilderness camping trip, your “time away from it all” during the loan application process. Disappearing while your loan is being processed is an irresistible invitation to the gremlins of mortgage mayhem, one that is always accepted. We will try to track you down in the Australian Outback, but if you are incommunicado when we need that one more account statement to satisfy the underwriter, the approval process stops dead in its tracks until you are back in the saddle.

Congress has been busy

Homebuyer Tax Credit: Congress has passed an extension of the Homebuyer Tax Credit closing deadline, the Homebuyer Assistance and Improvement Act (H.R. 5623). The extension applies only to transactions that have ratified contracts in place as of April 30, 2010 that have not yet closed. The new closing deadline for eligible transactions is now September 30, 2010.

Flood Insurance: The United States Senate has passed the National Flood Insurance Program Extension Act of 2010 (H.R. 5569) an extension of the National Flood Insurance Program until September 30, 2010. This will allow transactions to move forward. The bill is retroactive and covers the lapse period from June 1, 2010 to the date of enactment of the extension.

Have a great 4th of July weekend!

Strategic Defaults – A BAD Idea!

Thinking of blowing off that upside-down property? Think Again!

FNMA is cracking down on “strategic” defaulters. A “strategic default” is one where the borrower has the ability to make the payments, but decides to stop paying anyway.  These days this is often because the borrower is “upside down” on the mortgage (i.e. owes more than the house is worth).

A variation on this theme is the “Buy and Bail” strategy.  This happens when a qualified buyer purchases a new primary residence with the stated intent of turning the former home into a rental.  Then once he has moved into the new place, he stops making payments on the old residence.  This is also considered a strategic default. 

So be aware: If you walk away from a loan you have the means to make payments on, you will be “locked out” of FNMA loans for 7 years!

Show Me The Money! – What Are “Settlement Charges” in a Refinance?

Okay, this is getting repetitive. The TV ads are back at it, and so are the radio and internet come-ons. Rates are really low – we get it! So just get yourself refinanced, if you haven’t already!

Perhaps more useful is a discussion of where the money goes that you put into a refinance. I like to use what I call the “Four Bucket Method” of explaining the cash flows of a refi.

You start with a principle balance on your old loan, and you end up with a principle balance on your new loan. Every penny of the difference (if any) between those two numbers, plus every penny of any cash that you bring to the closing, has to fit into one of the following four buckets:

1. Origination Fees and Discount Points: These are fees that you pay to buy down the interest rate. Thus, they are considered “pre-paid interest,” and are treated as such by the IRS.

2. Closing Costs: These are one-time fees paid for things like the appraisal, credit report, title insurance charges, recording fees, processing, underwriting, etc. This bucket captures everything that isn’t escrows, isn’t points, and isn’t interest.

3. Escrows: These are deposits into an escrow account for taxes and insurance. This bucket also captures payments directly to the insurance company or the county for tax and insurance premiums that are due and payable at the time of the refi that don’t actually pass through the escrow account because of timing.

4. Interest: This includes accrued interest on the old loan up through the funding date, and pre-paid interest on the new loan up to the first day of the next month after funding. This number is roughly equivalent to one month’s mortgage payment, and represents the payment you get to “skip” by doing the refi.

So if your lender can’t explain where all the money is going, refer to this method and figure it out for yourself (and then get another lender).

FNMA Update: Borrower Occupancy

If buyers are not selling their old home, they will have to prove that they are really moving into a new primary residence if they want a FNMA loan. This may require such radical measures as presenting a contract with a moving company, checking the home after closing to prove they have actually moved, etc. Implementation of this requirement has yet to be figured out, but the bottom line is that fraud involving misrepresentation of owner-occupancy is going to be ferreted out.

Managing Your Credit Prior To Closing

FNMA has continued to tighten up lending standards and quality checks, and recently announced some new rules and procedures that realtors and consumers need to take into account when buying or selling a home.

Undisclosed Liabilities: Borrowers will have their credit checked multiple times during the loan process, including once at application and once right before closing. Any new liabilities or increased balances on credit cards, HELOCS, etc will have to be taken into account, even if the loan is already approved. If the debt-to-income ratio increases by 2%, the loan has to be re-underwritten. So in addition to delaying the closing, a loan could become “un-approved” if the client runs up too much additional debt between application and closing.

If you’re a realtor, think about what that means. You are 24 hours to closing, and suddenly your buyer no longer has an approved loan!!! You are past the loan conditions deadline. The borrower no longer qualifies. He loses his earnest money. It gets really ugly from there…

This is going to happen to someone. Don’t let it be you or your client.

A buyer should not do ANYTHING credit related while waiting to close on his loan. No credit checks, no applications for a new credit card, no new car, no furniture on credit…NADA! This is really important.

Eurozone Woes Create Opportunity for US Borrowers

Hello Gang. Here we are in late June. Already halfway through 2010!

Globally, the attention has shifted from the sub-prime mortgage meltdown to a nasty Euro zone credit-default fondue. The nascent economic recovery has stalled, and investors are finding a safe haven in US Treasury debt.

Bottom line, rates for good old US Treasury securities denominated in suddenly rock-solid US greenbacks are at historic lows, and that translates into really good rates on mortgages.