FHA Loans and FHA Mortgages

Good Faith Estimates – Such an extremely vital part when shopping for a mortgage. Yes, rate is some what important, but seems to be the primary focus so many times. Not to sound rude or out of character, but a monkey can quote a rate. And I am dead serious about this.

For any of you in the process of buying a home or refinancing your current mortgage, this is a must read.

I have been in the mortgage industry for over 16 years and this subject has to be my biggest pet peeve out there. I have written about this a few times, which you can read below.

                               – You didn’t get a good faith estimate?

                               – Understanding what a good faith estimate is 

                               – APR vs mortgage interest rate

Basic information to look for when shopping for a good faith estimate………

1. Only compare the lenders fees, which are located on lines 800 to 820.
2. Do not compare good faith estimates and the truth-in-lending disclosure (TIL) that shows the APR. It’s very easy to manipulate the APR. Lenders can leave out certain fees.
3. Beware of what property taxes the loan officer uses for properties that you are looking at. And make sure that they escrow the correct amount on your good faith estimate, which is on lines 1003 & 1004.
4. Here is my biggest pet peeve !!!!!  You should be given a good faith estimate once your loan officer qualifies you. When your loan officer pulls your credit, takes down your income information, and is able to come back to you with a purchase price, with rate and payment, you are now qualified. If this is the case, they should be able to give you a good faith estimate (GFE) right there and then. Okay, so you called them up. Most of us have e-mail and that loan officer should be able to e-mail you a copy. It doesn’t take no longer than 24 hours, no matter how busy they are. Don’t allow them to use this as an excuse. And if it takes them 2 days to get you a GFE?  Don’t even use their services, no matter what. Not unless they tell you when you will be getting one. Things do happen. But the key thing to remember is if you are qualified to buy a property or to refinance, then you should get one within a half hour. People, your information is already in the system. That is the only way to qualify you. Then next step is just to e-mail it to you. That SIMPLE….
5. One last major point…..  as Lenn Harley mentioned in a comment, you need to obtain all the good faith estimates on the same day. Just one day could make a huge difference. Especially in taoday’s market, with rates changing drastically within 24 to 48 hours at times.  You just don’t want to shop yourself out of the market.
   

2 quick stories…….

  –  I have a client right now that is looking to buy a home in Maryland. They first went to Countrywide and was pre-qualified for a home of $250,000. I asked them what payment that they didn’t want to go over and they said $2,000 a month. I also asked them what the taxes were on the properties that they were looking at in that range. They said $3,400 to $4,200, so I bumped it up $100 extra per year.

They found me online from a few of my blogs. I work in New Jersey and don’t know their area well, but I know what questions to ask, as you can see above. The other lender?  She is using taxes of $2,400 a year. I was even shown the GFE. OUCH. You know what, these buyers qualify very easily. But in my worst case scenario, the payment difference is going to be by $150 a month. And you know what, most of the taxes are about $4,100/month. And this lender is local….  There are a few points in this story. A very good loan officer doesn’t have to be local. And a very good loan officer needs to ask the right questions, besides knowing how to qualify.

  –  2nd story….  I met a couple two days ago who settled on their home a year ago. It was even a referral from a friend. This loan officer had them bring $2,500 more to settlement, the day of settlement. This is a totally different pet peeve and different subject, which I will write about later. But word to the wise, this is called bait and switch. If your loan officer changes your rate and or costs at the very end, typically the day before or the day of, don’t sign the papers if there is a huge difference. Don’t let anyone force you to sign, even a lawyer. The only thing that you could lose at that moment is your deposit. But let me tell you something, if you have the right documents, you can take them to court and win in most courses. This is if they won’t come back down to what was originally offered. Why can I say this? If anything is ever changed prior to settlement, the lender is suppose to get you to sign a new good faith estimate.

 

Overall…. choose your mortgage professional wisely and not just based on a great good faith estimate.

 

FYI…….   If a loan officer doesn’t volunteer a good faith estimate right when they qualify you for a mortgage… or it takes longer than 24 hours…. then the loan officer in most cases does’t wamt you to see their good faith estimate. It’s sad to say, but usually so true. Don’t let anyone tell you differently. They don’t want you to compare apples to apples. And in all honesty, why should you give them the benefit of the doubt or even consideration still… no matter how nice they sound. It could cost you money in the long run.

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Experience & Knowledge at its BEST !!!

Today, the Federal Reserve and other central banks globally cut their funds rate a 1/2 percent.  The decision today reduced the Fed’s benchmark to 1.5 percent and lowered its discount rate by the same amount to 1.75 percent. This was in fear of global market turmoil and trying to stimulate the U.S. economy.  Because of this move, the stock market moved in a positive manner, up slightly this morning. It gained 100 points early this morning, but not has lost 196 points as of 12:20 pm EST.

The Fed’s Open Market Committee voted unanimously for today’s move, said in a statement, “incoming economic data suggest that the pace of economic activity has slowed markedly in recent months. Moreover, the intensification of financial-market turmoil is likely to exert additional restraint on spending.”

 WARNING…. WARNING…… WARNING…..

This is not to say that mortgage interest rates have dropped. Sometimes in the past, mortgage interest rates did become lower in weeks after the Fed drop. There have been times when rates went up. There are many variables for these two factors to take place. Sometimes rates were lowered previously to the Fed lowering the discount rate.  The issue here is that its extremely hard now to predict where rates would go. Even by those that call themselves experts, it’s a flip of a coin. If correct, they are geniuses, if not, they are failures. Keep in mind, they have a 50% chance to be a genius.

The discount rate is for short term lending. The mortgage interest rates are when it comes to financing your property are considered long term rates. 

Overall, there is no true indicator to how rates will rise or fall anymore. It was a safe rule of thumb to say when the stock prices fell, the bond market became better in which mortgage rates became better. The indicator to watch for this is the 10 year bond.  At close of business yesterday, the 10 yr bond closed at a yield of 3.59. At 12;28 pm EST today, the 10 yr yield is now 3.67. This increase usually means that mortgage interest rates will go up.

A few topics of conversation and key points……

  – It’s been said that the short term rate reduction is a good thing, but for long term, it probably won’t have a giant effect.

  – This will not help the real estate market out of its troubles, but it should help the financial sector.

  – What the authorities are trying to do is to stabilize the current situation in the credit and money markets.

  – A reason for the Fed Rate cuts is seen as inflationary and inflation is not good for mortgage rates.

  – The bottom line, this news from our government is just trying to instill consumer confidence.

There is a lot more detail that I could give you, but you need to have a simple understanding to when you hear that the Feds lowered interest rates or that the Feds cut rates, it doesn’t mean that mortgage interest rates went down also.  I just wanted to make this simple to understand.

The definitions below are from Bloomberg News. 

Federal Open Market Comiittee - 
The body that is responsible for setting the interest rates and credit policies of the Federal Reserve System.

The Feds Fund Rate -
The interest rate that banks with excess reserves at a Federal Reserve district bank charge other banks that need overnight loans. The Fed funds rate, as it is called, often points to the direction of US interest rates. The most sensitive indicator of the direction of interest rates, since it is set daily by the market, unlike the prime rate and the discount rate.

The Discount Rate - 
The interest rate that the Federal Reserve charges a bank to borrow funds when a bank is temporarily short of funds. Collateral is necessary to borrow, and such borrowing is quite limited because the Fed views it as a privilege to be used to meet short-term liquidity needs, and not a device to increase earnings. In context of NPV or PV calculations, the discount rate is the annual percentage applied. In the context of project financing, the discount rate is often the all-in interest rate or the interest rate plus margin. 

Mortgage Back Securities (MBA’s) 
Securities backed by a pool of mortgageloans.

WARNING…. WARNING…. WARNING……  As I have been writing this, it’s now 1:30 pm EST, and the stock market has only lost 80 pts now, yet the 10 yr yield as now risen to 3.82. That is an increase of .23 since the close of business yesterday. For mortgage rates, that is not a good sign. And as this went on, we just received a interest rate freeze from our investors, which means that mortgage interest rates will become higher later today. As you can see, it will be a yo-yo for the next few months, just as it has been for the last several months. One other key factor to the rise and fall of mortgage interest rates are the MBA’s. Mortgage Backed Securities. Again, this could get confusing, so I will leave this alone for now.

****Don’t play with the float / lock game unless you are speaking to a true mortgage professional.

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Experience & Knowledge at its BEST !!!

FHA loans have been used 30% more as the choice of mortgages as of lately in many parts of the country. What I hate hearing is that they have taken the spot of the subprime loans. This is not true by any part of the imagination. This statement is from those that are inexperienced in both the mortgage industry and the real estate industry. The realization has been that 30% of the subprime mortgages in the last 5 years previous to the last 1 1/2 years should have been FHA mortgages, not subprime.

The subprime loan for many years could go down to a 500 credit score, as long as you had more money down. But your rate was usually higher. The better your score, the less you needed to put down, the lower your rate. Sounds good, right?  Wrong, because the subprime rate was always higher than the FHA rates.

To compound this, so many said just because you had a conventional loan, that you had the better loan. This was not always true when putting 3 percent down. In most cases, you were told this, because that particular lender was not FHA approved. Now?  Even with 10% down and credit scores less than 680, FHA loans in most cases, will be the best mortgage for you.

Okay, you could argue the fact that this is just my opinion. True, even though I have over 16 years of experience as a loan officer in the mortgage industry. But numbers don’t lie. Let me show you…..

The example below is based on a $300,000 purchase price with 5% down. One reason why conventional rates are a little higher in this scenario as in FHA rates is because Fannie Mae and Freddie Mac have added penalties per se. If you are putting down less than 30% and your credit score is less than 680, certain fee penalties would apply to you, which would increase your rate.  The FICO (credit score) that I am going to use is 659, which is above the average credit score and I will still show in this example that FHA loans are cheaper, even with 5% down.  

***And keep in mind, some lenders have penalties on FHA mortgages with credit scores under 620. And many lenders can’t do FHA loans under 580. I can still do credit scores down to 530 with a manual underwrite.***

Disclaimer :  These rates are based on today’s rates for a 30 year mortgage and can change any time because of various market conditions. To compare this scenario apples to apples, the fees are the same and with zero points. The conventional rate also includes the penalty for the 659 credit score.

Some of you might be saying that you will be adding $4,897.00 onto your principal balance if you did the FHA mortgage because of the FHA one-time mortgage insurance premium. This is correct and I don’t want to confuse you with more numbers and charts. But here is a quick breakdown. If you kept your house for 5 years, which most people sell in a 6 year period, you would have saved $12,807.00 in payments in 5 years. This is a difference of $7,910 that you have saved!!!   And one other thing that is very small, but still makes a difference. You will be subtracting a few more dollars per month from your principal because your interest rate is lower, which would offset the interest that you would write off on the 7.125% rate. Just something else to remember, but consult your tax consultant or CPA. 

FYI –  If you sold your house in less than 3 years, you are entitled to a refund of the upfront mortgage insurance premium (UFMIP) of $4,897.

How dto I find an FHA approved lender?    You want to make sure who you are dealing with is FHA approved.

Why do I say this?  Not all lenders are approved FHA and some may tell you that you don’t qualify FHA because in reality, they aren’t FHA approved. Another reason might be is because a conventional or subprime loan would be easier than a FHA mortgage.

You can find a HUD approved lender in your area by going to the following HUD website: http://www.hud.gov/ll/code/llplcrit.html     DISCLOSURE (just be careful of the spelling of the lender. If I put in my company’s full name, Infinity Home Mortgage Company, Inc, it tells me that there is no such company. If I put in Infinity Home Mortgage, it shows my company as being FHA approved. Just keep this in mind. You can always call HUD also. (202) 708-1112

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Experience & Knowledge at its BEST !!!