Category: Mortgages and Loans

If you are shopping for a home, then you are undoubtedly looking for the best mortgage deal to finance the most important purchase in your life. Perhaps you have read about 97% loan-to-value (LTV) conventional loans with NO PMI (private mortgage insurance), and thought “No PMI, this is a really good deal.” Some mortgage companies call it the “FHA loan buster”; a lower down payment loan than FHA with NO up-front PMI and NO monthly PMI! All of the advantages of a FHA loan, but no worries of FHA-related issues during the appraisal.

Beware when considering a conventional loan with these terms. The interest rate on this type of loan is generally much, much higher than your standard conventional loan. Most likely, you will pay much more in interest over the term of the loan as opposed to the PMI in a standard conventional loan. You can pay down the mortgage to 80% LTV to remove the PMI in your conventional loan, but you will always be stuck with a high interest rate in a no-PMI conventional loan.

Do you want the best deal and the most options for your next mortgage? Please contact me and I will put you in touch with the best mortgage professionals for the job. I work with an excellent network of professionals who work hard to get the job done at the best deal for my clients.

For case numbers assigned on or after April 1, 2012, FHA will require that collection accounts with a total outstanding balance equal to or greater than $1,000 be resolved. The borrower must either pay the account(s) in full with verified funds or provide evidence that they have entered into payment arrangements with the creditor(s) with a minimum of six* months verified payments (i.e. “paid as agreed”). The payment arranged must be included in the calculation of the borrower’s DTI.

Note: Paying “down” of balances on disputed accounts and collections to reduce the singular or cumulative balance to below $1,000, is not an acceptable resolution of accounts.

FHA continues to require judgments to be paid off. An exception to the payoff of a court-ordered judgment may be made if the borrower has an agreement with the creditor to make regular and timely payments with a minimum of six* months payments made according to the agreement. The monthly payment must be included in the borrower’s debt-to-income ratio.

While buyers avoid overcharges, they also pay a higher interest rate

By Jack Guttentag
Inman News®

“Is shopping for a no-cost mortgage a good strategy in today’s market?”

No-cost mortgages are relatively easy to shop because of their simplicity, and this is as true today as it was when I last visited the question in 2004. Greater simplicity increases the likelihood of finding a better deal or avoiding a worse one. Yet borrowers who expect to have their mortgage for a long time may be ill-served by a no-cost mortgage and would do well to consider an alternative strategy.

What are no-cost mortgages?

A no-cost mortgage is one on which the lender pays the borrower’s settlement costs, including the mortgage broker’s fee if there is one, with the following exceptions:

• Per diem interest, which is interest from the closing date to the first day of the following month;
• Escrows for taxes and insurance, which are borrower funds set aside to assure payment of the borrower’s future obligations;
• Homeowners insurance;
• Owner’s title insurance;
• Transfer taxes charged by governmental entities.

Don’t confuse no-cost with no-cash

This is one of the worst mistakes a borrower can make. “No-cash” means the borrower does not have to pay the settlement costs at closing, but the lender doesn’t pay them either. The costs are added to the loan balance, so the borrower pays them over time, with interest.

Borrowers pay a higher interest rate on a no-cost mortgage

No-cost mortgages don’t eliminate costs to the borrower; they convert them from costs paid upfront to costs paid over time in the interest rate. The lender finds that rate by estimating the costs for which he would be responsible, and then finding the interest rate that justifies paying those costs.

For example, Doe is borrowing $200,000 on a 30-year fixed-rate loan. The lender’s price schedule on this loan includes the following quotes: 4.25 percent with zero points; 4 percent with 1.5 points; and 4.75 percent with a 2.125-point rebate. Points are upfront payments — one point is equal to 1 percent of the loan amount. Borrowers pay points to the lender, but lenders credit borrowers for rebates.

Let’s assume Doe wants a no-cost loan. The lender calculates that it would cost $4,000 to assume responsibility for the settlement costs Doe would otherwise pay, including the lender’s own fixed-dollar fee. He thus charges Doe 4.75 percent for a no-cost loan. The rebate of 2.125 points at 4.75 percent is $4,250 on a $200,000 loan, or enough to cover the $4,000.

No-cost mortgages help protect against being overcharged

In selecting a loan provider, borrowers typically shop for rate and points, ignoring other settlement costs. They usually find out about these costs after they submit an application, and then they receive “estimates” that are subject to change. This provides lenders with opportunities to pad their own fees and mark up those of third parties.

When responding to a borrower inquiring about a no-cost loan, however, lenders do not have that luxury. A borrower shopping for a no-cost loan has only one price to consider — the interest rate — and lenders have to assume that they are being rate-shopped. The rates they quote, therefore, are likely to cover their true costs, which could be well below the costs faced by borrowers who don’t go the no-cost route.

No-cost loans can also limit broker fees

On no-cost loans that go through brokers, the broker’s fee is an additional cost that must be covered by the rate. This can limit broker fees because lenders cap the rebates they are prepared to offer for higher interest rates.

A study of brokered loans by Susan Woodward some years ago showed that total settlement costs including broker fees were $1,500 lower on no-cost than on other loans. While no breakdowns were available, it is likely that most if not all of the $1,500 saved was a result of lower broker fees.

Borrowers with long time horizons might do better with a different strategy

The benefit of the no-cost loan stems from the ability to avoid overcharges by shopping a simpler transaction. However, the cost of the higher interest rate on the no-cost loan mounts over time, and at some point the costs will exceed the benefit. If overcharges can be avoided, a borrower with a long time horizon will do better paying higher settlement costs in order to get a lower interest rate.

Such borrowers need an alternative strategy that will both assure competitive pricing and allow them to select the combination of upfront costs and interest rate that provides the lowest cost over their time horizon. Such a strategy can now be executed on my website, www.mtgprofessor.com.

The writer is professor of finance emeritus at the Wharton School of the University of Pennsylvania. Comments and questions can be left at www.mtgprofessor.com.

REThink Real Estate

By Tara-Nicholle Nelson
Inman News®

Q: We bought a house this year! We put $33,000 down and the bank financed $28,000. Can I write this off on my 2011 taxes? How much of it?

A: First things first: Congratulations! You’ve become a homeowner, and seem to have done so using an enviable financial arrangement. But now that you own a home, you might need to shift the way you think and look at some things, including your taxes and other financial matters.

Owning a home is one of those landmarks that signify financial adulthood. And one of the things that responsible financial adults do is get professional help when the situation requires it. Taxes are one of those areas that often do warrant calling the pros in.

I’m not just shilling for the tax prep industry here, either: The ultimate aim of using a tax professional is to make sure you get every deduction, credit and other tax advantage for which you qualify, without jacking up your chances at triggering the universally dreaded Internal Revenue Service audit by claiming dubious deductions.

Your mortgage debt is fairly small, as was your home’s purchase price, though I don’t know whether they are large or small in the context of your overall financial picture (i.e., income, assets, investments, etc.).

The fact that you saved or somehow came up with such a sizable chunk of change to put down makes me hesitate to assume that your finances are as simple as your mortgage balance might otherwise lead me to believe.

So, it might be the case that you can easily handle your own taxes — in fact, it’s even possible that your real estate-related deductions won’t even outweigh the standard deductions, so that filing a simple form without even itemizing your deductions is actually the financially advantageous move.

Whether that’s the case cannot be determined in a vacuum — you may have other financial and tax issues going on. But with software and tax preparation services as inexpensive as they are, starting at under $20 for simple returns, I think it behooves you to get some professional advice and ensure you get the deductions you need.

Hiring a tax preparer might be a worthwhile investment to make, even if just this year, so he or she can brief you on what records you should keep and strategies you should do moving forward, like home repair and improvement receipts, or documentation of your use of an area of the home as a home office.

Now, let’s talk more substantively about the deductions that are available to you, in the event you do decide to itemize your taxes (IRS Publication 530 offers a more nuanced view into Tax Information for Homeowners):

1. Mortgage interest deduction. Assuming this home is your personal residence, 100 percent of the mortgage interest you owe and pay before Dec. 31, 2011, is deductible on your 2011 taxes. In January, your mortgage lender will send you a form documenting the precise amount of interest you paid, although most lenders also now make this form immediately available to borrowers online.

Chances are good that you paid some amount of advance interest on your home loan at closing — expect to see that on your statement from your lender, but you should also be able to find it on the HUD-1 settlement statement you received from your escrow agent at closing.

2. Property tax deductions. Again, assuming that this is the home you live in most of the time, you should be able to deduct 100 percent of the property taxes you’ve paid to your state and/or local taxing agency this year.

3. Closing-cost deductions. Discount points and origination fees paid to your mortgage lender and/or broker at closing are frequently deductible, but there are rules around this, which tax software and/or professionals can help you make sure you meet. Also, state and local transfer or stamp taxes paid at closing are generally deductible on your federal returns.

Beyond these basics, there are various home improvements (especially those that increase your home’s energy efficiency), state and local tax credits for buying a foreclosure, and other tax advantages that might be available to you.

My advice is to work with an experienced, local tax preparer or, at the very least, use reputable tax preparation software to ensure that you get the maximum tax advantages available to you as a result of your new role as a homeowner.

Tara-Nicholle Nelson is author of “The Savvy Woman’s Homebuying Handbook” and “Trillion Dollar Women: Use Your Power to Make Buying and Remodeling Decisions.” Tara is also the Consumer Ambassador and Educator for real estate listings search site Trulia.com. Ask her a real estate question online or visit her website, www.rethinkrealestate.com.