97% loan-to-value Conventional loan with NO PMI?

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.

New Guidance from FHA Regarding Collection Accounts

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.

6 truths about no-cost mortgages

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.

Exercising lease option during foreclosure

If tenants still want to buy, they must play by new rules

By Benny Kass
Inman News®

DEAR BENNY: We have been renting a house with an option to buy for two years now. We recently learned from mail the bank has sent that the property was listed for foreclosure. (No, we have not opened the letters addressed to the owners, but they are from the bank that holds the mortgage and they have been coming every two weeks addressed to both lien holders.) We also received a letter from an attorney indicating that the property was listed for foreclosure.

So it appears that the landlord has not been paying the mortgage. Is there anything we can do at this point?

I feel as though we are being ripped off if we are paying rent on time every month but the owner is pocketing the money. If the owner can’t pay the mortgage, what happens to our deposit and our option to buy next year? –Juan

DEAR JUAN: Why do you think you are getting “ripped off”? Are you using the house? Are you enjoying living there? I would assume the answer is “yes” because you are still interested in buying. No one is taking advantage of you, so I don’t agree that someone is “ripping you off.”

But I do agree that you have the right to inquire about your security deposit as well as your right to buy.

Here’s my suggestion: Before you stop paying the monthly rent, talk with your landlord. I doubt that he really wants to be foreclosed upon, and if you are interested — and able — to buy the house now, that might be a win-win for everyone. You may be able to buy at a bargain price, and the landlord won’t have a foreclosure impacting his credit standing.

Then, regardless of what the landlord says, you should contact the attorney who sent you a letter. Explain your position and see if the attorney can get you in contact with an appropriate, authorized representative of the lender. Unfortunately, too many foreclosure attorneys take the position that they are “hired guns” for the lender, and refuse to get involved, even if only to give you the name of an appropriate representative.

Basically, if you are interested in buying, you are looking for a short sale. You may want to get a real estate agent/broker to assist, as they should know the process. However, the owner/landlord will have to agree.

Finally, to answer your two questions: (1) Will you be able to buy? That depends on the lender, as discussed above. (2) What about your security deposit? Generally, most deposits are the equivalent of one month’s rent. If you know that you will actually have to move, I would just withhold the last month’s rent. I know this technically violates the terms of your lease, but you clearly want to protect your assets. Of course, if there is damage to the house caused by you or your family, that will be your responsibility.

Keep in mind, however, that even if the house is foreclosed upon, whoever ends up owning the property (either the lender itself or a third party) may still want you to stay on as a tenant.

DEAR BENNY: I read the response from your column, by a real estate broker for time shares, with tremendous interest. You did not post the name because you did not want your column to be used as advertising. I do respect that and understand that. I am wondering however, if you would be willing to share that name with me. I’ve been looking for a reputable time-share broker for years and I certainly would not hold you responsible for anything should I contact that person. –Elaine

DEAR ELAINE: I am sorry, but I will not provide such information. There are two reasons: (1) First, I don’t believe it is my role to provide free advertising to anyone; and (2) second, I really don’t know if that broker is honest.

I receive numerous emails from brokers (or companies) claiming they have experience in selling time shares. When I check them out on the Internet, I find that some of them have either been cited by a state agency for fraud/misrepresentation or have a negative rating from the Better Business Bureau.

DEAR BENNY: I am 74. Recently, I have been contemplating paying off my condo mortgage. The remainder is $98,000 at 6 percent. Can you help me through this? On the surface it seems like a good idea, but I’m not aware of all the particulars. I am in good health and will not need the $98,000 in the near future. –Dee Dee

DEAR DEE DEE: That is an excellent question, but not easy to answer. There are many factors that you should consider.

You say you will not need the money “in the near future.” But what about the “far future”? You are a young 74-year-old in good health. Will you need the money when you are 80, 90 or even 100?

Can you take advantage of the tax benefits associated with the mortgage interest you pay, which you will lose if you pay off the loan?

Over the years, I have represented too many clients who were “house rich but cash poor.” What’s the real advantage of having the house free and clear? Or turn this around: What’s the disadvantage of having a mortgage? If and when you die, does it really matter to your heirs whether you have a condo free and clear of a mortgage? I don’t think so.

In my opinion, assuming you can qualify for a refinance loan, you should contact your current lender and see if it will reduce the interest rate. You are currently paying 6 percent, but interest rates (as of this writing) are hovering around 4 percent.

If you can refinance, I submit you will accomplish your objectives as well as my concerns.

And whether or not you refinance, there is a compromise position. Every month, add a little extra money when you pay your mortgage. That will reduce the loan principal, and shorten the term of your loan. If you do this, however, make sure you note on your check and on the payment coupon that this is “extra principal.”

DEAR BENNY: Due to the death of my former husband, I find myself owning a rental cottage with my two children. Due to the tough real estate market, and also family sentiment, the kids (ages 20 and 24) and I want to hold on to it as a rental property at least for a couple of years. I fully understand that co-owning property with children is not recommended, but the real estate market and the family memories for now make our decision.

We will have the property retitled. As 50 percent owner can I require some sort of property use agreement for the kids (who’ll each own 25 percent) and me to sign? I want to avoid the family cottage from becoming a hotbed of nightlife or other misuse. And if some sort of property use agreement is done, who does that for us: a real estate or estate attorney? –Cyndi

DEAR CYNDI: Yes, you can enter into a property use agreement with your two children, and a real estate attorney can assist you. It’s no different from the co-ownership agreements I draft for unmarried clients.

But let me ask you a question: Why do you have to put them on title? As you know, in general I do not think it’s a good idea, primarily for the tax consequences.

You should go on title on your own, but prepare a last will and testament giving your two sons the property on your death. You indicated that this might be a rental property. If so, shouldn’t you keep all of the rental income?

And you further indicated that you might sell in a couple of years. Again, why complicate title, so that you don’t have to get your son’s consent for any such sale?

My suggestion: Put the house in your name, and if your kids want to use it, spell out the rules and regulations. You may even want to charge them a security deposit just in case there is any damage caused by them or their guests.

Incidentally, you should also check with your tax adviser to see whether there would be any taxable consequences to you should you decide to add your sons on title. The Internal Revenue Service might consider that to be a gift.

Benny L. Kass is a practicing attorney in Washington, D.C., and Maryland. No legal relationship is created by this column. Questions for this column can be submitted to benny@inman.com.

Top 5 tax breaks for homeowners

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.

Realtors Applaud Congress for Reinstating FHA Loan Limit

November 18, 2011

Realtors® Applaud Congress for Reinstating FHA Loan Limits

WASHINGTON (November 17, 2011) – The National Association of Realtors® commends Con­gress for reinstating the loan limit formula and maximum cap for Federal Housing Administration-insured loans for two years.

“As the nation’s leading advocate for homeownership, we applaud members of Congress for restoring FHA’s previous loan limits, which will help reduce consumer cost burdens, stabilize local housing markets and allow qualified, creditworthy borrowers to access affordable mortgage financ­ing,” said NAR President Moe Veissi, broker-owner of Veissi & Associates Inc., in Miami. “The reinstated loan limits will help provide much needed liquidity and stability to communities nation­wide as tight credit restrictions continue to prevent some qualified buyers from becoming home own­ers and the housing market recovery remains fragile.”

The provision reinstates the FHA loan limits through 2013 at 125 percent of local area me­dian home prices, up to a maximum of $729,750 in the highest cost markets. The floor will remain at $271,050. The loan limits for Fannie Mae- and Freddie Mac-backed mortgages will remain at 115 percent of local area median home prices, up to $625,500.

NAR believes the reinstated loan limit formula and cap change will help make mortgages more affordable and accessible for hard-working, middle-class families throughout the country, not just wealthy individuals or those in costly markets. Nearly two-thirds of buyers who will be helped by the loan limits provision have incomes below $100,000.

“It’s a misconception that only wealthy borrowers benefit from the maximum cost loan lim­its; middle-class home buyers living in all areas of the country deserve the same access to affordable mortgage financing and the same opportunity to achieve homeownership that home buyers enjoy in the most affordable regions of the country,” said Veissi. The legislative action will have an impact even in communities with loan limits well below the maximum cap; the reset last month impacted 669 counties in 42 states and territories, with an average loan limit reduction of more than $68,000.

The bill also provides for a short-term extension of the National Flood Insurance Program through December 16, 2011. NAR strongly urges Congress to use the additional time to complete work on a five-year reauthorization of the program, which ensures access to affordable flood insur­ance for millions of home and business owners across the country.

The National Association of Realtors®, “The Voice for Real Estate,” is America’s largest trade association, representing 1.1 million members involved in all aspects of the residential and commercial real estate industries.


Information about NAR is available at www.realtor.org. This and other news releases are posted in the News Media section.