FHA Loans and FHA Mortgages

I just got meme’d by Jeff Dowler yesterday because Mary McKnight had meme’d him over the weekend.  My first thought was, rut row, because I did about 3 of these last year. For many of you that don’t know what a MEME is, it’s an Internet chain letter that I am suppose to talk about myself. These would be normally things that most wouldn’t know about me and I would share with anyone on the Internet in a blog. And for those of you who want to take a peek in regards to who Jeff Belonger is, here is one of the 3 meme’s that I wrote. What’s this MEME phenomenon going on in the blogging world? Well, I have been tagged, or in this case, Memed !!!

Now, Mary McKnight took it a step further. As I have explained, meme’s are suppose to be things that most people wouldn’t know about you. Mary decided to make this next wave of meme’s in a question format, asking 8 questions. The good part about this, I won’t be reveling secrets about myself that only the government knows about me. And the rules for this next wave of meme’s?  You must answer the 8 questions and meme 8 new people and they must respond in their own blog.

So, I guess I need to move forward and reveal myself in these next 8 questions……

1. Who is your favorite musical artist? (post a youtube video)

This is so unfair. Not only is it hard for me, but just after a 3 day weekend to where I didn’t have to think at all.  And now I am being asked to think…. again, I have so many, but here is one of them. Michael Jackson….not my favorite artist, but one who changed music in the 1980’s.  Sure, there has been so much controversy that has surrounded him in the last 2 decades, but he was one to revolutionize music videos, especially with his video,Thriller. But PYT was a favorite of mine from high school.

Overall, I could go back in history and pick so many more. But Michael Jackson stands out and so does Madonna. Both very creative when it came to music and opening the doors for music videos.

2. Who is your favorite artist (post a flicker photo)

Another tough one, because I like abstract art, contemporary art, sculptures, and architecture. I have been to many museums, including the Louvre in Paris, France. But I am feeling like a kid today, after spending all weekend with my 3 nieces and 3 nephews, ranging from 9 years of age to 6 weeks old.  And kids make you want to be a kid again at times. And why not forget about the oldies, that I wish kids had these days.  What about Charles M. Schulz……   remember any of these?  These were some of my favorites.

3. Who is your favorite blogger?

Gee, another tough one.  I was just introduced to blogging about 21 months ago. I am just now getting out in the blogoshere, reading other bloggers, besides those on Active Rain.  My favorite bloger? I would have to say those bloggers that are not only true to themselves, but those that are upfront, honest, and caring when it comes to the general public and consumer. Making sure that they just don’t get an opinion, but the true facts, not being misled.

4. If you could meet anyone (alive or dead), who would it be and what is the most interesting thing about them?

Okay, the questions just seem to get tougher and tougher. I would love to pick all the easy ones, that most people mention when asked this question. Such people as Einstein, Jesus, Mother Theresa, Martin Luther King Jr, Winston Churchill, General Patton, Jeff Belonger….. and the list could go on forever. And maybe this person would be on many lists also. But someone that I found very interesting and who I would have loved to sit down with would be Benjamin Franklin. Gee, what wasn’t interesting about him. One of our founding fathers for the United States, who invented the lightning rod, bifocals, and the Franklin stove. He was also a painter, author, and a politician.

Overall, I know I could come up with several others, but he did so much back then that has influenced the way that we live, one way or another.

5. What did you want to be when you grew up?

I wish I could be more creative here. It wasn’t a scientist to save the world, someone finding cures to all diseases. Nor was it a lead singer in a group, or even anyone famous. Just that I wanted to be a fireman when I was little. Didn’t many of us pick this when we were younger?  I guess it goes back to the fact that I love helping people, hence why I love being a loan officer, for which I have been doing mortgages for almost 16 years now.

6. What is the most interesting piece of trivia you know?

Okay, I don’t know if I should be  Cliff Clavin here and just spout out a bunch of useless information. But for those that know me, you should know the answer. In any case, some interesting trivia. Not sure if this counts, but do you know that in Vermont, you can’t have more than 2 drinks in front of you at any given time. Meaning, if you wanted to do a shot and a beer, you would have to buy one and drink it, before you can have the other. And this next rule might make sense then. You can have an open container of beer in the car and drink it, as long as it is the passenger in the car. Now, I found these out when I use to go snow skiing in Vermont in the late 90’s. So I am not sure if these are true any more.

Here is something interesting for you music buffs.  REM got their name by randomly flipping through the dictionary, so says my music channel.

7. If you could live in any point in history what would it be and why?

Well,  I was never a history buff in HS nor enjoyed it, but have grown to love history as I have gotten older. As I mentioned, I love a lot of what went on during World War II.  But I guess what intrigues me the most would be the history of the Roman era and the Egyptian era. As I have mentioned, I love architecture and would love to have been there when they made the Coliseum and the pyramids. But I wouldn’t give up today’s plumbing and refrigeration.

8. What is the most interesting job you have ever held?

Not sure if interesting in this case can be clasified as fun. I was in the U.S. Army from 1986 to 1988. Not only do I take a lot of pride that I served our Country, even though it was during peace time, but it was different. Something that not many people will ever have the chance to explore or try. I learned a lot about myself back then and what I was capable of. Remember that old saying, “mind over matter".  Besides, it was an adventure, besides a job.  And currently, I absolutely love what I do now and that is helping people obtain the American Dream. No matter if it’s a purchase or a refinance. What I currently do now, I couldn’t really call it a job. But yes, it’s definitely an adventure also.

Now it’s my turn to have some fun, since I get to pick 8 people. And don’t get me wrong, I have fun when I get to share a little something about myself. Just don’t take everything that I say too seriously. The part that I do take seriously is my work, making sure that my clients not only get a fair deal, but understanding what they are doing. So, drum roll please…..   & don’t forget the meme law…. Each person chosen must answer all 8 questions and ask 8 other people to answers these same questions on their blogs!

So, when I call your name, please step up and show us what you got !!!

Greg Swann – BloodHound Blog

Patrick Kitano – Transparent Real Estate

Jason Sardi – The Insider’s Insight on Mortgages

Dan Green – Life in Queen City

Missy Caulk – Ann Arbor Real Estate Talk   Missy was already tagged by someone. (picking another)

Ed Rybczynski – Title-opoly

Tom Burris – Dallas Loan Guy

Beth Ramsey – Huntsville Real Estate

Virginia Hepp – Mesquite, Nevada  Real Estate Homes & Condos

Mortgages and points, sounds like evil words. It could save you thousands. I have been doing this for almost 16 years now. When I first got into this industry, sure, I was green….brand new. Sure, I had classes in High School and College in regards to financing, economics, managing your money, and even some accounting classes. But what got me were the lawyers and the accountants that told their clients not to do mortgages with points associated to them. Or your next-door neighbor that got this great deal with zero points and that this was the way to go. Even the talk radio shows that might have been talking about one specific thing in regards to points and zero points, but that you came into the middle of the program. So who should you believe? Don’t believe this next statement….  “points are suppose to mean that, we as loan officers, make more money.”  This is not true.  Points are used to buy down the rate.  Now, there are many that abuse points to make more money, but this should not be the norm.

One of my first questions when speaking to a client, refinancing or purchasing, is what their goals are for the near future and their long-term. Now, many of us don’t have these so-called crystal balls that many claim to have. Things can happen at any time. But I have a lot of passion in what I do and I care what I do, helping those clients to achieve their dreams. By giving the consumer options in what kinds of mortgage programs there are and the costs behind these programs, I can help them achieve this dream and their goals.

This scenario can sometimes be simple math and not the calculators online that tell you if you should refinance or even buy a house. These calculators are a formula made up by someones calculated guesses and certain factors included. I am not looking for the typical answers of; “I want Zero points” and “I want a no cost loan". Just because the client says that they want this type of loan, doesn’t mean that it fits their needs.

I am going to use an example in regards to someone doing a mortgage of $300,000. Let’s keep the example simple by stating the only closings costs will be zero points and with 2 points. I am not using credit scores or mortgage insurance.  Again, keeping this very simple.

Part 1

At this point, the difference of payment is $120.89 a month. The total points that you will be paying is $6,000. Basic math says that it would take you 49.63 months to recoup the points that you paid. That is less than 4.2 years, which means that your break even point on paper is 4.2 years. But let’s take it one step further. Assume that you are in a 28% tax bracket for income tax purposes. You will be writing off $1,680 on your taxes the next year.  So if you subtracted the $1,680 from the $6,000, you actually paid $4,320 in points.  Now your break even point would be 35.73 months which would make that slightly less than 3 years. WOW….. So if you stayed in your house for more than 3 years, you are making money.

You need to consult your accountant on the different tax deductions when it comes to purchasing and refinancing. There is also a difference in how much you can write off depending on if you are purchasing a home or refinancing your home.

Part 2

Here is where so many lenders fail in educating the average client or where the client doesn’t see the true savings. You also have the amortization of the loan.

If you kept the loan for 3 years (the break even point) at 6.375%, your principal balance would be $289,008. If you were paying 5.75% for those same 3 years, your principal balance would be $287,725. This is a difference of $1,283 savings by paying 2 pts to get your interest rate lower.

Summary :  Overall, in reality, your break even point would be less than 3 years, because of the amortization. It would almost be 2 years if you stayed in the house for 3 years. Talk about putting your money to good use. Another reason why sometimes putting less down and using that extra money for your rate would make more sense.

In closing:

Again, these are examples and not including other lender costs or even mortgage insurance depending on your down payment. This comparison is just for informational purposes in explaining how points and no points work. And yes, you would need that extra money to even buy the rate down. But you can also get it from the seller, in a seller’s concession. This doesn’t always apply to everyone because of the money issues. And it also comes down to your monthly and yearly goals, may it be short term or long term. But this is a good dissection of what your money can do for you and how it can work for you. And one of the old MYTHS of points is that the lender is making more money. This is not true at all, as long as your lender is comparing true apples to apples.

***These rates and points are an example from 05/21/2008 for a 30-day lock on a conventional loan with credit scores above 680 and no mortgage insurance. It all depends on your income and credit qualifications in order to get these rates.*** 

Piecing together your credit can sometimes be confusing. That’s why you should always seek a qualified loan officer that is a FHA Expert. 

In all honesty, credit is not as difficult as it may seem and FHA has made it easier for you to qualify for your dream home. There are just some important facts that the average consumer needs to know.

Several key facts :

  –  You don’t need credit scores or No minimum credit scores. You need to pay attention to this part, because many lenders will advertise this. But they fail to tell you initially that every investor out there has credit score requirements though. HUD writes the guidelines, but in this case, the investors can make up their own also. Many lenders can’t even go below a credit score of 580.  We at Infinity Home Mortgage can go down to 500. 

  –  Non-traditional credit can be used. 

  –  Very flexible on credit issues when it comes to collections, charge-offs, judgment, and even liens.

What an underwriter looks for usually is good established credit in the last 12 months. This is not written in stone, but definitely helps. The beauty about FHA loans is the fact that your credit could be less than perfect less than 12 months while purchasing a house. It comes down to the reasons why and a make sense approach. We understand that things happen in life, but they do need to be documented.

Great assets of FHA loans and the credit requirements : 

  –  A Chapter 7 bankruptcy (liquidation) needs to be 2 years old from date of discharge. Less than 2 years depending on extenuating circumstances.

  –  A Chapter 13 can be 12 months out of bankruptcy while in repayment (not discharged), as long as you can show 12 months of payments on time.

  –  Usually want to see reestablished credit with no lates after a bankruptcy. But the best part of this is that the underwriter at his or her discretion can overturn the time frame of a bankruptcy depending on if the circumstances were out of your control.

                    – Death in the family

                    – Loss of job(s)

                    – Sometimes divorce –  not always, depending on the circumstances.

  –  Consumer Credit Counseling – sometimes viewed the same way as a Ch. 13 bankruptcy, guidelines are similar. The lender needs to see a 12-month payment history from the credit-counseling agency showing satisfactory payments and a letter from agency saying that the loan will not adversely affect the applicant’s ability to repay current debts.

  –  Foreclosure – Generally 3 years must have passed. But the catch here is, we don’t use the date when you went into foreclosure. It’s 3 years from the date that the house was sold after it went into foreclosure. This is on HUD insured loans. There are extenuating circumstances and exceptions that can be made.

  –  Delinquency or Default on Federal debt – This seems to be overlooked by many loan officers. You can not obtain a FHA loan if delinquent or obligated on any type of federal lien. ie. school loans, etc.  The account would need to be brought current, paid, or otherwise satisfied. And a payment plan is satisfactory as long as it’s in writing and that you have established some payments on time. 

What happens if I have no credit at all?

We call this non-traditional credit. Here is a list of things that we could use. But we would need some type of proof.  And we usually want to show a 12 month payment history on letterhead from that agency, store, or company.

  –  car insurance – showing your monthly or quarterly payment, how long, never late, how much a month.

  –  utility bills

  –  cell phone bill

  –  repayment of loans or past debt – doctor bills, collection accounts, etc etc

  –  child care payments

  –  store accounts and so much more….  anything that can be documented to show a credit history on paper

Unique credit traits of FHA loans that conventional loans don’t offer :

  –  At the discretion of the underwriter, collection accounts and medical collections can be opened. More times or none though, collections outside of medical usually have to be paid off.

  –  Many say that if you have a lien show up on credit, that it needs to be paid in full. It depends on the type of lien and if it doesn’t show up on title. Example : If you have car repo that is now a lien on your credit, as long as you have a repayment agreement and have made at least 6 months of payments on time, this is acceptable.

Summary :  FHA loans can be manually underwritten even if it comes back as a refer. As long as we can determine decent credit risk, several things can be overlooked. But we would need compensating factors. 2 months in reserves is usually a good one. In many cases, at least 6 months in reserves is very strong. There are others, such as 10% down or no payment shock. (10% or less of an increase in new mortgage payment)