New disclosure rules, going into effect for all new loan applications July 30, may delay your settlement. In fact, some of the major mortgage lenders have begun to alert loan applicants that the new rules will cause brief delays in closing. PNC Mortgage, for example, is cautioning buyers, sellers and real estate agents that "it is wise to plan for at least a 30-day close."
The Truth in Lending Act became law in 1968. Its stated purpose was to promote the informed use of consumer credit by requiring disclosures about loan terms and costs. Unfortunately, over the years, these disclosures have become meaningless and confusing. For example, consumers who obtained a mortgage loan with an interest rate of, say, 6 percent learned -- often at settlement, when they received the disclosures -- that the annual percentage rate, or APR, was 6.25 percent.
Why the difference? Because to calculate APR, a lender has to include more than just the interest rate. If the lender charges points or collects fees at settlement, this affects the calculation. If you are borrowing $300,000 but the lender charges $750 in fees, you really are borrowing only $299,250; thus the APR -- the yield to the lender -- is higher.
More significantly, the Truth in Lending statement is often provided to the borrower only on the day of settlement. Clearly, this defeats the purpose of disclosure. How can you shop and compare mortgage loans if you are already at the settlement table? If you don't like the APR, you may be in default of your purchase contract should you decide to look for another loan and don't close on that date.
The new rules are quite simple, and they apply equally to principal residences and second homes:
-- Your lender must provide you with early disclosures (the Truth in Lending disclosure and the good-faith estimate) within three business days after you make a loan application.
-- If you apply for a loan over the phone (or via the Internet), you can be required to pay only a credit-report fee. Other fees can be collected only after the lender has received signed disclosure documents. If you apply in person, the lender can collect other fees, but only after you have received -- and signed -- the disclosures.
-- You cannot be required to close on the loan (that is, go to settlement) sooner than seven business days after your receipt of the required disclosures.
House prices and mortgage rates are down, which sounds great for buyers and refinancers. But a series of underwriting and appraisal changes taking effect this month is throwing new obstacles in the way of borrowers and loan officers.
Take Fannie Mae's and Freddie Mac's add-on fees for loans purchased after April 1. In some cases, applicants are being hit with extra fees of 3 percent to 5 percent because of the type of property they want to buy or refinance, their credit scores, or the size of their down payment.
Some major lenders that sell loans to Fannie and Freddie are going further -- tightening underwriting rules beyond what either corporation requires. For example, as of April 6, Wells Fargo, one of the country's largest mortgage originators, imposed a minimum FICO credit score of 720 -- up from the previous 620 -- on all conventional loans purchased through its wholesale system that have less than a 20 percent down payment. It also began requiring a total-debt-to-income ratio maximum of 41 percent, down from the previous 45 percent.
Fannie Mae now has a mandatory fee of three-quarters of a point on all condominium loans, no matter how high the applicant's credit score. For a once-popular "interest-only" condo loan with a 20 percent down payment and a borrower credit score of 690, Fannie imposes the following ratcheted sequence of add-on fees: 0.25 percent as an "adverse market" fee, 1.5 percent for the below-optimal credit score, 0.75 percent for the interest-only payment feature and 0.75 percent because the property is a condo. The total comes to 3.25 percent extra, which can be paid upfront or rolled into the rate.
On top of the extra fees from Fannie and Freddie, borrowers are now starting to get hit with two sets of cost-raising appraisal rule changes. Fannie and Freddie have begun requiring all appraisers to complete an extra "market condition" report that includes detailed statistical analyses of local sales and pricing trends, beyond the regular appraisal data. Many appraisers are charging an extra $45 to $50 for the time required to complete the form. Both home buyers and refinancers can expect to pay the higher fees
On top of that, beginning May 1, Fannie and Freddie will refuse to fund loans with appraisals that do not follow a set of new rules known as the "home valuation code of conduct." Among the procedural changes: Mortgage brokers no longer can order appraisals directly but instead must allow lenders or investors to use third-party "appraisal management companies" to assign the job to appraisers in their networks.
How does that affect the consumer? Consider the notification one Connecticut brokerage firm recently received from a major lending partner: Starting April 15, all good-faith estimates provided to applicants must indicate a flat $455 charge for appraisals arranged through the appraisal management company. The broker previously charged $325. Consumers will now have to pay the appraisal fee upfront, before any inspection or valuation is completed.
What happens if the appraisal comes in low and the applicants can't qualify for the refi or purchase program they sought? Tough luck: They'll have just two choices: Either pay another $455 for a second appraisal, with no assurance that it will solve the problem, or cancel the application.
Jeff Lipes, president of Family Choice Mortgage, which serves the Hartford, Conn., area, said the effect of the underwriting, credit-score and pricing changes is to "squeeze some people who are creditworthy by any reasonable standard out of the market."
For instance, as a result of the restrictions on condos, Lipes said, "whenever we hear the word 'condo,' we shiver" because the deck is stacked against loan applicants.
Even for prime borrowers with 800 FICO scores and 50 percent down payments, Lipes said, "I can't tell them that we're certain we can get you a mortgage." A welter of recent rule changes from Fannie Mae have made some condo units in projects with commercial tenants or high percentages of investor units almost impossible to refinance.
In Naples, Fla., John Calabria, president of BancMortgage, said, "It has become such a nightmare to lend money" because of the layers of add-on fees and higher mandatory down payments and credit scores. One high-income client sought to put down $200,000, or 25 percent, to buy an $800,000 condo as a second home but couldn't because the minimum down payment on such a unit is now 30 percent.
"That's ridiculous," Calabria said. "Some of this just doesn't make sense."
Kenneth R. Harney's e-mail address is KenHarney@earthlink.net.
The economic stimulus bill just signed into law contains two major items for 2009 homebuyers. - The measure increases the first-time homebuyer tax credit to $8,000 and does away with its onerous repayment requirement. - It also reinstates the 2008 loan limits for FHA, Freddie Mac, and Fannie Mae loans, which were FannieMae loans, generally higher than the ones that have been in place for 2009.
For existing homeowners who have put off making energy-saving improvements, the time to act is now. The law has kicked up the 10% tax credit for certain energy-related expenditures to 30%!
First-Time Homebuyer CreditWith the repayment requirement now ditched, the first-time homebuyer credit deserves a fresh look by potential firsttime buyers, many of whom were underwhelmed by the old credit with its 15-year payback.
The credit is 10% of the cost of a home, so a house costing $80,000 will be enough to qualify for the full credit. The credit is refundable, which means that the government will pay you the difference if your tax liability is less than your credit amount.
The credit is designed to encourage purchasers to stay for a while. If you sell the home or stop using it as your principal residence within three years of the date of purchase, the credit will be recaptured.
There is an income limit, above which you won’t qualify for the credit. You must have “modified” adjusted gross income (MAGI) of $150,000 or less if you are a couple filing a joint return, $75,000 or less if you’re single to get a full credit. You can still get a partial credit up to $170,000 MAGI (joint) and $95,000 (single) based on where your income falls within the $20,000 phaseout range.
What constitutes a “first-time homebuyer?”It is a person who has not owned a principal residence in the three years prior to the date of purchase of the home for which the credit is being claimed. If you are a first-time buyer who bought on or after January 1 of this year, you already qualify for the credit.
If you haven’t bought yet, you have until December 1 (not the 31st!) 2009 to buy and get the credit.
Restoration of 2008 Loan LimitsThe stimulus bill restores the emergency 2008 high-cost FHA and Fannie Mae/ Freddie Mac loan limits for the remainder of 2009. Those limits were equal to the greater of 125% of the 2008 local area median home price or $271,050 for FHA and $417,000 for Fannie and Freddie, with an overall maximum cap of $729,750. For the few areas where the 2009 limits were higher, the higher limits will apply.
For communities with particularly high home prices, there may be some additional help from the new legislation. The bill permits HUD to increase the loan limit for a “sub-area,” i.e. an area smaller than a county. These exceptions would also be capped at $729,750. © 2007, Real Estate Information Services, Capitol Assets, Choice Real Estate, Inc.
Mortgage outlook for ‘08Mortgage shoppers will find a more difficult landscape to navigate in 2008 than in recent years. Borrowers will find loan standards have been tightened for many products and costs are going up for other. Some mortgage products have vanished entirely, along with many lenders. In fact, in the wake of a turbulent year, you may not find your previous mortgage specialist under the same banner, as many have relocated… however, Choice Finance® is still here for you. As a lender, we have new products that are only available in-house.
You may have also noticed the continuation of historically low mortgage rates, especially this week and last. Thirty-year conforming fixed-rate mortgages actually dipped the first week of December. Rates had not been lower since September 2005. A week later they were again higher, but that was almost exactly where they were at the same time in 2006. What do these rate differences really mean? For each $100,000 of loan amount, a 5-year ARM would save about $14 and a 1-year ARM about $38 (for one year, anyway). The lower interest rate for the 15-year mortgage will require that you make a payment $225 higher than with the 30-year mortgage. To calculate the effect for a higher loan amount, just multiply. For a $250,000 loan amount, you would multiply by 2.5, giving you a savings of $35 for the 5-year ARM, $95 for the one-year ARM and a $562 payment increase for the 15-year fixed.
The 2007 conforming limit of $417,000 will stay the same in 2008, the third year in a row at that level. Conforming loans are eligible for purchase by Fannie Mae and Freddie Mac, which makes them more marketable and thus cheaper and more widely available than “jumbo” loans that exceed the conforming limit. Good credit scores, always important, will be even more so for homebuyers in 2008. Likewise, downpayment money from your own pocket is once again highly valued. Fannie and Freddie are, in general, demanding higher scores and bigger downpayments.
What is a good credit score? That has gotten stricter. A score of 620 used to demarcate subprime territory, but that dividing line is getting muddied. Scores into the upper 600’s now can carry significant penalties versus those closer to 700 and up. One example of the new credit score inflation is that Fannie Mae and Freddie Mac are adding new fees to the pricing of mortgages in which the credit score is less than 680 with a downpayment of less than 30%. Fannie Mae and Freddie Mac both posted losses for their last quarter and are looking to this “risk-based” pricing to help get them back in the black. The fees take effect on March 1st, but most lenders are already charging them.
Similarly, some private mortgage insurance companies are also raising premiums on borrowers making low downpayments who have credit scores in the mid- to upper-600s. Again, the companies have suffered losses on just these types of loans, they say, so higher premium prices are their answer. It has long been understood that having little downpayment money in a home creates a situation where the homeowner has less commitment to working things out if problems arise. For that reason, FHA has sought to end a practice by which sellers could make a contribution to a nonprofit group, which then grants the money to the homebuyer for a downpayment, technically bypassing rules that prohibit direct seller downpayment assistance. A federal court blocked the FHA move temporarily, keeping the program in place for now, but FHA is a good bet to get its way eventually, either winning in a higher court or through other administrative action. If you intend on using this program to purchase this year, understand that it is vulnerable.© 2007, Real Estate Information Services, Capitol Assets, Choice Real Estate, Inc. & Choice Real Estate of VA, Inc., & Choice Finance® John Burley of Choice Finance®
The Burley Team represents decades of experience. The Burley Team started on the side of the lenders. Representing the banks, The Burley Team put together hundreds of loans. With the experience of working for the banks at their side, John and Arlene moved to the customer's side of the desk, originating thousands of loans and getting the best terms to meet the needs of their customer.
John and Arlene's clients are not limited to what one person can accomplish, they have the team. The team that can work together so seamlessly and efficiently so response times are quicker, customer service is greater, and loans close faster. A team where information is not lost in transmission, where time is not lost because of lack of communication, and mistakes are eliminated. Families and investors can count on us for their financial security and their family's future. With over 30 years of experience in finance, marriage and parenthood, we know that every mortgage transaction greatly impacts lives of not only you, but your entire family.
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