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.

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. 

In the world of Real Estate, there are two very important professionals that the client needs to deal with when purchasing a home. A lot of real-estate agents and mortgage originators team up together to help the client with finding a home and financing the home. As a real-estate agent, you should be aware of the 6 signs to a bad mortgage so that you make sure your client is getting offered the best products around. (Especially if you are working with a mortgage professional that you aren’t familiar with)  As a mortgage originator, you should be aware of the 6 signs so that you aren’t putting your client into a bad mortgage or you can advise someone who is about to get into a bad mortgage.

1. Tells the client that they can be “creative” with the financing. Well, if “creative” constitutes falsifying information then there could be jail time, fines and possibly the full note called due at that time. Unfortunately, there has been a lot of press on mortgage professionals and clients falsifying documents to get the transactions done. Be leery of “creative” financing. Find out all the details and make sure nothing is fraudulent.

2. Being pushed into too high of a payment. The client needs to sit down and make a budget. Lenders don’t account for every little bill the client may have when qualifying them for financing. There are certain items not calculated into the debt ratio that may effect whether or not they can actually make that payment. Lenders also use gross income which the client only has net income to cover the bills.

3. Make sure the borrower is given the proper disclosures. A mortgage professional is required by law to give the borrower a copy of the Truth in Lending (which discloses the APR) and a Good Faith Estimate (which is a breakdown of the estimated closing costs). These documents must be given to the borrower within 3 days of application. Make sure the borrower understands these documents and if they don’t make sure they seek out their mortgage professional to explain them in detail to them so they do understand.

4. Be very careful of those professionals who promise one thing and then deliver another just before closing. If you are using an experienced mortgage professional, there should be no surprises just before the signing. Sometimes situations do come up throughout the process of the loan. However, the borrower should be notified immediately of any issues and how their loan will be changed so together they can decide if the mortgage still meets their budget.

5. Asked to sign blank papers. This is NEVER ok. Nobody involved in a financial transaction such as a mortgage should be signing any blank papers. You need to advise the borrower to put an X thru the document and then sign. If that is unacceptable by the mortgage professional then they need to report that person to his/her superior or the MLD.

6. Won’t give copies of signed paperwork. The borrower has a right to have copies of the initial signed paperwork so they can review them at their convenience. These documents are preliminary numbers in the beginning of the transaction. There should be nothing to hide by the mortgage professional and if they won’t give copies of signed papers, the borrower needs to ask “What are they hiding?”.

These are 6 of the most common red flags that come up when people are applying for financing. It is important that professionals in the real-estate industry are aware of these things, in case, it happens to their client. This way we can all protect the consumer from a bad loan. Bad loans only hurt the industry and the consumer in the long run. It is our job as professionals to help stop this from happening when people are trying to finance their dream home. We all want our clients to realize the dream of home ownership now we need to make sure that their dream doesn’t turn into a bad nightmare with the wrong financing.

Realtors and mortgage originators have been plagued with the declining market policies put into place by Fannie Mae over the last several months. It has been frustrating for clients who want to purchase a home in these areas because they have had to put an extra 5% down. They can find a home for a great price but they are required to have a minimum on 10% down due to the area where they are purchasing. This was discouraging potential buyers from buying homes in the areas hardest hit by foreclosures.

It was also very discouraging for those home owners who needed to refinance their home due to ARM’s expiring. With the value of homes declining in the Las Vegas area, many borrowers were finding that in order to refinance their mortgage and stop the interest rate from adjusting that they needed to borrower 95% of the homes value. With the new guidelines in place for declining markets, it was making it impossible for some people to refinance and stop the interest rate and their payments from increasing. As a result, some were losing their homes which creates more foreclosures on the market.

Fannie Mae has changed their requirements after they have been hearing concerns from professionals in all areas of the real estate industry. Effective June 1st, clients can finance up to 95%  for purchase transactions and refinance transactions. This should help spark the purchase market in areas where the foreclosure ratings are high and reinforce the goal of successful home owning again. It will also help those who are in need of refinancing to get out from under their ARM loan before they can’t afford their payment anymore.

Overall, this is a positive move in the lending industry that should help generate new home sales and stop others from losing their homes because of increasing rates and payments. I am looking forward to seeing how this change will effect the Las Vegas real estate market.

Since the mortgage industry is consistently changing their programs, it has been difficult to keep your borrower qualified and get the loan closed. By the time you submit the loan and you schedule a signing, a million things can change and that causes lots of issues for everyone involved in the transaction.

FHA has proven to be a solid program for those who are looking to purchase or refinance. The interest rates are a little better then conventional pricing on a 30 year fixed. There is a 3% minimum down payment requirement that can be a gift of equity or the buyer can use the down payment assistance program. The seller is also allowed to contribute up to 6% seller concessions. This makes it easier for those clients who don’t have a lot of money to bring to the table.

If the home is in rough shape and needs to have repairs that is not a problem for FHA. There is a program that will allow the purchase of a home in need of repairs and not require the repairs to be done prior to closing. They will lend the purchase price and the amount needed up to $35,000 (I will have to double check that figure) for repairs to the home. It is a strong program for those homes that have been let go and the owners don’t want to put the money into the property before they sell it. Especially works well for REO’s.

If you want more information on FHA financing, please don’t hesitate to contact me.