By Casey Moseman of www.lasvegascustomloans.com

A couple years ago, FHA was the most rarely used program for lenders.  It was the most time consuming and cumbersome program to send your borrower through as compared to the stated or conventional programs being offered to just about any borrower.  Now FHA it is a staple for the typical lender and if you are a lender and don’t know it, you better!!!

FHA began as an initiative to stimulate the lending and mortgage industry after the depression of 1929 and was introduced by president Herbert Hoover.  The most problematic piece of the economy at that time was the housing market.  Construction workers were out of work, homes were deteriorating and foreclosures on mortgages were increasing.    

Since job growth is a major economic factor that stimulates real estate, it’s no wonder that the housing market went downhill during and after the great depression of 1929.  In 1934 FHA was created and by the end of that year the first home in the United States built was done so using FHA insured financing - in New Jersey!!

Most people have heard of FHA financing but few borrowers know the true workings of an FHA insured loan. 

10 Important Facts about FHA

1.  FHA does not lend money to borrowers for homes - FHA insures the mortgage.  A lending institution still funds the loan. 

2.  FHA is not government funded.

3.  FHA is a non-profit organization that stays in business from the mortgage premiums it collects through the mortgage.  Mortgage Premiums are paid to FHA via A.) the upfront mortgage premium which can be added into the loan amount of 1.5% and B.) the monthly premium sent in with your mortgage payment of .5%

4.  FHA insures make sense loans.  It is true that they are not as credit score driven as the conventional loans, however, the content of your credit report is still important and very relevant. 

5.  FHA will insure mortgages to people who have had Bankruptcies, however, they do not like borrowers who have had bad credit after the bankruptcy.  This is very important.  Additionally, there should be a good reason for the bankruptcy and the borrower needs to document the reason for the hardship in writing.  Ask yourself this question, would you lend yourself the money based on your credit history.  Does it make sense to lend the money?  Do you show a likelihood that you will repay the mortgage?  Credit History is important and cannot be treated frivolously.

6.  FHA likes documentation.  You will be required to prove documentation that you earn enough money to pay for all your existing debts plus the mortgage payment and still remain under a conservative debt ratio.  

7.  FHA likes job history.  2 years in the same industry is the minimum.

8.  FHA likes first time home buyers

9.  FHA has loan limits.  You can visit FHA loan limits to see what the restriction is for your county.  The federal government recently increased FHA loan limits so be aware that this is in place until the end of 2008.    

10.  FHA requires that judgements be paid off.  Any delinquent IRS, federal or student loan debt will disqualify the borrower.  Make sure your taxes and student loans are current and paid timely.

When I get phone calls from sellers inquiring about selling their Las Vegas Home as a short sale, the first question I ask, “Is your lender Country Wide?”  As I wait for their answer, I am quietly hoping it is not Country Wide!  Any Las Vegas Real Estate Agent knows why I am hoping it is not Country Wide!  So for those of you who are not Las Vegas Real Estate Agents, let me explain why!

Country Wide is the largest Lender in the United States so it would be an under statement to say they are inudated with foreclosures and short sales.  But that doesn’t concern me, what concerns me is representing my client.  So after I meet with my client, I have them complete a financial packet that I know Country Wide will be requesting.  As soon as it is completed, I send it over to Country Wide and call them every other day hoping to get my client’s file assigned.  Instead, I get your file probably won’t be looked at for at least 30 days at which time it will be assigned to an asset manager and then you will receive a phone call.  Even though they say 30 days, it’s more like 45 to 60 days!

Once you are assigned to an asset manager, good luck getting a hold of them.  Don’t bother trying to leave a message as their voice mail is usually full!  When you do get lucky and finally get a hold of them, they usually don’t have any answers :(  So needless to say, my experiences with Country Wide have not been the most enjoyable!

One of the most common things said when I am talking to a potential client on the phone is “I don’t want you to run my credit because it will drop my score”. This is one of the most annoying statements made when you are trying to qualify a client for a mortgage. You simply can’t give them proper information without reviewing the credit report. So, I decided since how credit scores are calculated are somewhat of a mystery to everyone that I would do some research on this topic.

Each time a consumer applies for a loan, credit card or auto loan, they are having their credit checked. These credit checks are used by lenders to determine if the consumer is able to obtain financing. Every time a lender checks a consumers credit history, it shows up on the consumers credit bureau (Experian, Trans Union and Equifax) as an inquiry. These inquires can drop the consumers credit scores if too many inquiries are made in a certain period of time.

Many lenders rely on the FICO scores they pull when running a consumers credit history. These scores are tabulated by software from Fair, Isaac and Company, INC along with what information on the consumers history. Due to increasing pressure on Fair, Issac and Company to release how their software works, they have released information on how their scoring model calculates a FICO score for the consumer.

Inquires on a credit report are an indicator of risk. And according to Fair Isaac and Company, the more inquires made means the more likely the consumer will not be able to pay his bills. When consumers want to buy or refinance a home, they usually contact more then one mortgage company for information. In order for the consumer to get accurate information from several mortgages companies, they need to have their credit checked by each mortgage company which in turn leads too many inquiries (especially if using an online site). Since too many inquiries leads to lower scores, eventually the consumer could lose out on decent financing because their scores are too low.

Now for some good news and a way to combat that dreaded statement in the beginning of the article. There is a new policy at Fair Isaac and Company, the software will ignore all auto and mortgage related inquiries that occur in the previous 30 day period from the time the credit is checked by the lender. These inquiries will not be used to tabulate the credit score for the consumer. For each 14 day period prior to the 30 day period, only 1 inquiry will be counted no matter how many inquires where made during a particular 2 week period.

Inquiries on a credit report carry the lowest impact on the scores. Things like high balances in relation to credit limit, recent late payments, judgments, and bankruptcy carry more weight in tabulating a score. This information should be very usual to combat the consumers resistance to pulling credit b/c it will effect their scores. Real-estate agents and mortgage professionals need to remind their clients that it is critical to sit down and review credit in order to provide options on the mortgages that they qualify for. This is the only way to provide the client with accurate information.

According to FBI Special Agent, Scott Hunter Las Vegas is called “mortgage fraud ground zero“!  This problem is becoming so wide spread that special task forces have been created to combat the problem.  Every week you read in the paper or view the news about another real estate industry professional being arrested for some type of real estate or mortgage fraud.  Just this month, Cindy Birkland was arrested for alledged mortgage fraud!  According to the FBI, mortgage fraud is becoming one of the fastest growing white collar crimes in the United States!

Mortgage Fraud is usually committed by several individuals who all have a certain role within the scheme.  Usually a loan officer, borrower, real estate agent and/or an appraiser.  The most common type of mortgage fraud is a “straw buyer”.  This is where the bank lends hundreds of thousands on a home that is way over inflated due to an appraiser setting an unrealistic value.  The group splits the money and never has any intention on making any payments on the home.

More to follow…

The dreaded mortgage application process isn’t so scary if you know what to expect. 

Here is a quick breakdown of a few questions that I address during the initial  phone or office  interview and mortgage application:

1.  Have you spoken with any other loan officers regarding this transaction?

I like to know what a borrower has been going through prior to speaking with me.  If there have been several credit reports pulled by other banks, I don’t want to contribute to possibly lowering their score by pulling another report.  I also ask this question because I want to know why the borrower is talking with other loan officers.  Is it a rate and closing cost thing, or did the previous banks not fulfill a certain need or expectation?  It just makes more sense to find out what people want up front, so that I can focus the rest of my time serving their specific need. 

2.  Will this be a primary residence, second home, or investment property, and how long do you plan on keeping it?

These two questions usually start a conversation about the borrower’s intentions and real estate investment goals.  Buying rates down, ARMs vs. 30 yr. fixed, FHA, conventional, seller paid closing costs…..  There are several mortgage opotions to consider for each individual circumstance.  It is nearly impossible to have a productive discussion about rates, programs, and closing costs until you have clearly articulated your real estate investment goals with your loan officer.  It is absolutely acceptable to ask a loan officer what their rates are, however, be prepared to supply a little more information so that your loan officer can apply the best rate that fits your scenario. 

3.  Total monthly payment and down payment you have budgeted for?

Again, back to the needs and goals of the client.  It is common for a borrower to ask a loan officer what they are approved for.  However, you may be approved for more than you actually want. 

Here are a couple of easy forumulas that you can apply  when calculating a monthly payment, down payment, and total purchase price:

Banks look at a borrower’s Debt to Income ratio (DTI) as a factor for mortgage loan approval.  40% is a safe DTI to pay attention to for figuring out what you might be approved for.  This means that your total monthly minimum payments, including the new mortgage, cannot be above 40% of your total verifiable gross monthly earnings.  Credit score, down payment, and assets are compensating factors that a bank will consider for approval if your DTI is above 40%. 

EX:  Total monthly gross income - $2,000

      %40 DTI = $800 a month in total allowable payments

A good rule of thumb for determining a total mortgage payment is by multiplying $70 for every $10,000 loan amount.  I’ve found that this is a safe calculation which also includes taxes, insurance, and mortgage insurance. 

So, for this scenario, the borrower would be approved for a loan amount of around $114,000.  If this borrower had a $200 a month car payment, then the the loan amount would drop to $85,000. 

$800 a month total @ 40% DTI

- $200 a month car payment, leaving room for a $600 a month mortgage payment. 

$600 divided by 70 = 85

85 x $10,000 = $85,000 total loan amount. 

*Remember, that 40% is just a good starting point.  I’ve had borrowers approved up to a 65% DTI who had great credit, a significant down payment, and plenty of assets in the bank. 

So, why do I ask a client what type of mortgage payment they want?  Simple, if they are approved up to $900,000, but only want a $1500 a month payment with zero down, I’m going to let their agent know to stay around the $200,000 - $230,000 purchase price range. 

4.  Employment, residence history, income, and assets. 

Just remember the number 2.  A bank will need two year’s employment and residence history.  As far as conditions, be prepared to bring provide the most recent two bank statemens, W2s, Tax Returns, and pay stubs. 

If you have all of this stuff prepared ahead of time, the application should be smooth and painless. 

Hold on Dorothy, we aren’t in Kansas anymore. Back when our parents were financing their home, there was basically one choice…the good ole 30 year fixed mortgage with 20% down payment. Wow, have times changed. There is a new breed of mortgages out there, Exotic Mortgages, as they are called by some in the mortgage industry. These loan innovations have made home buying much easier for those willing to take a higher risk in order to purchase the American Dream. These Exotic Mortgages allow the consumer to put little money down and make low monthly payments. These mortgages have poured fuel on one of the hottest and longest housing booms in history.

The Federal Reserve’s push to take away little money down, low interest rates and red hot home prices have now faded. With them went the conditions that made these Exotic Mortgages worth the risk to consumers. One would think, the love affair with these mortgages would have faded away.

But no…..Far from it.

In fact, the Exotic Mortgages have worked their way into the U.S. housing landscape as what some would consider a permanent fixture. These mortgages have proven themselves to be a key lever for many borrowers at the same time they have also become a great danger. Consumers need to consult a mortgage professional with many years of experience to help navigate them thru the Exotic Mortgage matrix to make sure they are entering into the best program for their situation.

Even though the good ole standby 30 year fixed mortgage still seems to be the mortgage of choice by most home buyers, there are still those who seek out the Interest-only loans, Pay Option ARM’s and Hybrid Fixed ARM loans. This rings true in the more expensive areas when the only way to afford a home maybe to utilize one of these programs.

These Exotic Mortgages worked well when double digit home-price gains built equity leaving home owners with cash in their pockets and when low interest rates helped ward off the potential sting of upward rate adjustments. However, these things are no longer true in today’s market. Interest rates are higher then a year ago and home-price gains have cooled, if not, eroded in some areas.

One of the major problems that home buyers face is that household income isn’t increasing at the rapid rate that interest rates are rising. This in turn creates greater hurdles for the home buyer when trying to purchase an affordable home with an affordable payment. Once again, can’t stress enough that the borrower needs to  work with an experienced mortgage professional so that they have someone to guide them on a plan for purchasing the home and later refinancing the home to meet their financial situation.

For some consumers the gamble pays off. Today there seems to be more of an informed, savvy consumer who wishes to be in more control of their finances and instead of tying up available cash flow into their mortgage payment, they would rather invest it elsewhere. Mortgages are not meant to be one-size fits all because typically the consumer is not staying in their particular mortgage for more then a few years. There is more of a risk taking attitude these days b/c most people aren’t worried about paying off their mortgages like back in the good ole days.

Here is a brief look at some of the more popular mortgages, their advantages and their risks.

30 Year Fixed  Interest Only Mortgage - this mortgage allows the borrower to make interest only payments for the first 10 years of the loan. The principal is then repaid over the remaining 20 years. Advantage - rate stays the same and there are initial low payments. Disadvantages - fixed rates typically higher then adjustable rates, payments increase dramatically in the 11th year, borrower isn’t building in equity in the first 10 years unless the house appreciates.

Adjustable rate interest only mortgage - this mortgage is best for those who have a proven track record of managing their finances. Advantages - rates can go down, initial payments are lower, borrower can pay down principal anytime and it resets the next month’s payment. Disadvantages - risk of payment shock if rate goes up and when amortization period begins, not building equity during interest only period (unless house is appreciating), sometimes there are balloon payments at the end of the interest only period, and at the end of the initial fixed rate period the rate can adjust every month.

40 year fixed mortgage - this is for the borrower who is focused on long term value of their property and wants to build equity regardless if the home is appreciating. Advantages - stability of a fixed rate, lower payment then 30 year fixed and a predictable payment each month. Disadvantages - rate a bit higher then the 30 year fixed, build equity at a slower pace and balloon payment after 30 years.

Option ARM - popular product over the past few years b/c it allows several options to repay the mortgage. Advantages - 4 ways to make a payment: interest only, fully amortized 30 year fixed payment, fully amortized 15 year payment or minimum payment for 12 months.  Disadvantages -  when the loan is recast and fully amortized payments are required, there is a substantial increase in payment during year six, there are gradually increasing minimum payments over the first 5 years and it shouldn’t be used to qualify someone who doesn’t qualify for a traditional 30 year fixed mortgage.

The mortgage industry will always evolve as the need for non traditional lending exists. There will always be risk takers as well as traditional borrowers. It is a requirement that a mortgage professional learn each and every program available to the consumer and know exactly when those programs are appropriate for the consumers financial situation. It is our job to advise clients on each program they qualify for based on their current credit, financial situation and long term goals. Consumers need to be leery of those mortgage professionals who push certain mortgage products on them just for the sake of closing the deal. Remember, your mortgage professional isn’t making your payment, you are.