Well we've seen, heard, and can't get it out of our minds how much money the government is spending to revamp this fragile economy. For those of us in the real estate industry this downturn has been a benefit with low mortgage rates brought on by purchases of mortgage backed securities and long term treasuries from the Federal Reserve. What you must realize is this is also the government spending money (they just don't advertise it as that), in order to artificially bring interest rates down and get people to buy homes and refinance. We'll see if this is a good strategy or not. The FED over the last 8 months has expanded its balance sheet trillions of dollars! YES, I said TRILLIONS!!!
Where is all this money going? Who is getting it? How will it be paid back? Very interesting questions. The housing market is showing signs of recovery but interest rates are beginning to come back up. Why? Well lets just say Obama and Congress keep spending money like a kid in a candy store; and now he's talking health reforms that will cost billions more. ??? Borrowing and spending more doesn't seem to be the answer to a borrowing and spending problem. You just wind up with more debt! Speaking of debt; the national debt, which in the history of the United States has only paid off once, has ballooned to over 11 trillion dollars and its growing by over 3 billion a day!!! Wow! That's a big number.
So what do we expect next? A crash? A recovery? Who knows. The bailout plans of last year and the economic recovery plan of the current administration needs to be financed; and in the last few weeks we've had record Treasury auctions including a whopping 104 billion the week of June 22nd. The auctions have been well received but caused an oversupply of bonds forcing more selling than buying pushing bond prices lower and yields higher (higher interest rates). Since our market high on May 21st for mortgage backed securities rates are now roughly a point higher than their lows in May. We've seen some rebounding, however, more auctions are coming (this coming week 73 billion) to fund the bailout plans and deficit spending so this could spell even more volatility for bonds.
If you are in the market to buy a home, rates are still at historical lows. Do not play the gambling game and say "rates will come down if I just wait long enough". With this mind set you'll lose out on a great opportunity. I suggest asking your mortgage broker/banker, if they have daily access to bond quotes and alerts that are set up to let them know when the market shifts in order to provide you with up to the minute advise should a reprice for the worst occur in the middle of the day. This will save you thousand in interest because they can alert you at the right time before lenders reprice on bad news. I know I have access to this, and any mortgage professional serious about their business or their clients will.
On the jobs number released this week; employers shed 467,000 jobs compared with expectations of only 365,000 pushing the unemployment rate to the highest level since 1983 at 9.5%. This is a staggering number and will probably continue to rise. Our peak in foreclosures, in my opinion hasn't happened yet, and we'll probably see more to come the rest of this year and maybe even all of next year. The massive job losses, and more are still to come, will cause financial difficulties for those families that own homes and could cause defaults.
I don't like giving bad news but right now, in these times, we've seen prices being lowered (especially in housing) and you can really get good deals right now. Home prices got out of hand and now the market is correcting itself to bring prices back in line. Now I want to move to the topic of loans.
Many people think home loans are impossible to get. That is not correct. Or that you MUST put 20% down. This again, is not correct. There are several programs still available to help you purchase your first or next home. Government insured loans are a great way to finance the purchase of a new home. Many in the business tried to stay away from government insured loans because they "thought" they were "too difficult" or "too strict" to originate. This is simply not true. My niche is government insured loans such as FHA, VA, Rural Housing, and 203K Streamline loans; these are excellent loans and give borrowers a low or no down payment (VA and Rural Housing) options with competitive interest rates.
One loan in particular I want to speak about briefly is the 203K Streamline or rehabilitation loan. This loan will allow you to take a "fixer upper" and turn into the perfect home. With this program you can finance 96.5% of the purchase and cost of repairs to rehabilitate a home and do the things you want such as flooring, HVAC repairs, purchase of appliances, new cabinets and doors, just to name a few. The amount of repairs cannot exceed $35,000 and cannot be structural. I don't have enough space to talk about this program in full detail but feel free to visit HUD's website for more details (www.hud.gov).
The point I want to make is loans are available and rates, although not in the 4's, are still historically low. So call your banker or broker and if you're interested in buying a home. If you don't have one, I'll volunteer!
Have a happy fourth and god bless!
Until next week!
Friday, July 3, 2009
Monday, February 2, 2009
Can Mortgage Rates Stay This Low?
What is really going on behind the scenes? Well, in a shortened version, it started with a bubble caused by the Federal Reserve, Alan Greenspan, during the Clinton Administration that burst in 2001 and we know what happened next - 9/11. Alan Greenspan dropped the short term federal funds rate to super low of 1%. While this doesn't have a direct effect, mortgage rates dropped to 50 year lows fueled by purchases of treasury bonds and mortgage backed securities by foreign countries and hungry investors for high returns.
Wall Streets ingenious plan of packaging subprime loans into mortgage backed securities and collateralized debt obligations to pension funds, institutional investors, etc, and finally came to a crash with the bust of Bear Stearns two hedge funds that went broke. These two hedge funds bought Alt A and subprime loans packaged into securities with loans that were 2 and 3 year Arms, 100% percent no income no asset loans, and all the other stated income, no income, low credit score loans, that nobody ever thought would go bad. Please, WAKE UP!
The same idea that Wall Street sold to investors about Internet company stock prices that would just go up and up and up, with no fundamentals backing them, or earnings being put back into the companies, would last forever, is exactly what happened to the Real Estate market. Now you see the mess that we are in. So what does the government about all the foreclosures on homes from people who couldn't afford them? We borrow and spend more money to get people to borrow more. How does that make sense?
The treasury has spent billions of money that we don't have, that we are just borrowing from the Fed at interest, to temporarily price fix to subsidize mortgage rates to...... ta da, get people to borrow more! If we borrowed and spent to much to get into this mess why would borrow and spending more get us out. Multi billion dollar bailout after bailout will cause inflation to rise, interest rates will go back up, and we'll be still in debt paying interest on that debt at higher and higher interest rates crippling us from the debt load.
So back to the question, can mortgage rates stay this low? They can if demand for mortgage backed securities begins to rise again. Now that the treasury has wained from buying MBS, the FED has stepped in and committed to $500 Billion, of which its spent a good portion of it.
I don't like negative thinking or being a doomsdayer, but this low rate environment can't sustain itself. Back in the hottest moment of subprime loans, 65% of those loans were repackaged and given AAA credit ratings. That is the best credit rating you can get. How is that possible to rate subprime mortgage backed securities with the "best credit" ratings available. Sounds kinda of silly don't it?
So where are we going from here? Could we see another Carter Administration with interest rates in the teens? Probably not but I can tell you one thing. If you are in the market, and can afford to buy a home, now is a wonderful time to purchase with lower home prices and interest rates temporarily low by government subsidies. If you are looking to refinance out of an ARM or payoff high interest debt into a longer term fixed rate mortgage, now is the time.
Guidelines have tightened so be prepared for some surprises along the way. Get your information together and speak with a mortgage professional about your financial situation today.
God Bless
Wall Streets ingenious plan of packaging subprime loans into mortgage backed securities and collateralized debt obligations to pension funds, institutional investors, etc, and finally came to a crash with the bust of Bear Stearns two hedge funds that went broke. These two hedge funds bought Alt A and subprime loans packaged into securities with loans that were 2 and 3 year Arms, 100% percent no income no asset loans, and all the other stated income, no income, low credit score loans, that nobody ever thought would go bad. Please, WAKE UP!
The same idea that Wall Street sold to investors about Internet company stock prices that would just go up and up and up, with no fundamentals backing them, or earnings being put back into the companies, would last forever, is exactly what happened to the Real Estate market. Now you see the mess that we are in. So what does the government about all the foreclosures on homes from people who couldn't afford them? We borrow and spend more money to get people to borrow more. How does that make sense?
The treasury has spent billions of money that we don't have, that we are just borrowing from the Fed at interest, to temporarily price fix to subsidize mortgage rates to...... ta da, get people to borrow more! If we borrowed and spent to much to get into this mess why would borrow and spending more get us out. Multi billion dollar bailout after bailout will cause inflation to rise, interest rates will go back up, and we'll be still in debt paying interest on that debt at higher and higher interest rates crippling us from the debt load.
So back to the question, can mortgage rates stay this low? They can if demand for mortgage backed securities begins to rise again. Now that the treasury has wained from buying MBS, the FED has stepped in and committed to $500 Billion, of which its spent a good portion of it.
I don't like negative thinking or being a doomsdayer, but this low rate environment can't sustain itself. Back in the hottest moment of subprime loans, 65% of those loans were repackaged and given AAA credit ratings. That is the best credit rating you can get. How is that possible to rate subprime mortgage backed securities with the "best credit" ratings available. Sounds kinda of silly don't it?
So where are we going from here? Could we see another Carter Administration with interest rates in the teens? Probably not but I can tell you one thing. If you are in the market, and can afford to buy a home, now is a wonderful time to purchase with lower home prices and interest rates temporarily low by government subsidies. If you are looking to refinance out of an ARM or payoff high interest debt into a longer term fixed rate mortgage, now is the time.
Guidelines have tightened so be prepared for some surprises along the way. Get your information together and speak with a mortgage professional about your financial situation today.
God Bless
Sunday, January 11, 2009
New Mortgage Rate Lows
Well how about those mortgage rates? Right after Thanksgiving mortgage rates plummeted to new lows driving up refinance volume to new highs. How did this happen? Why the sudden drop? What is going on and how long will it last?
Readers what we're seeing is yet more government intervention trying to stimulate the housing market, which is roughly 16% of the U.S. economy. Starting in 2007 we started to see home prices drop and record foreclosures pulling home prices down even further. Yes i know it sounds so horrible and people are losing their homes and causing banks to lose billions and billions of dollars, but, home prices must come down to restore equilibrium.
You're probably thinking I'm crazy right now. Dustin what are you talking about? Well its simple. Home prices were artificially inflated and rose too high for incomes to catch up. We're not seeing incomes rising in America and with home values and prices sky rocketing into double digits, people couldn't afford to purchase homes. Not to mention the very lax regulatory initiatives from the government to keep predatory lenders at bay. If anything they promoted it.
The Community Reinvestment Act provisions in 1995 set off a chain of events that led us to the current sub-prime, Alt-A meltdown. Guess what? We're not finished. So what has the government been doing lately to promote growth in the housing sector? Well first the Treasury, and now the FED - also known as the Federal Reserve - has been buying up billions of dollars in mortgage-backed securities issued by Fannie and Freddie. Without going into too much detail, mortgage-backed securities are bonds issued by Fannie Mae and Freddie Mac - which are government sponsored enterprises known as the Federal National Mortgage Association and the Federal Home Loan Corporation - aka Fannie/Freddie.
These companies buy mortgages from banks and mortgage lenders, and promote the funding of mortgages by providing liquidity to lenders, through their purchases, freeing up lender capital to continue to fund these loans. Fannie and Freddie then package these loans into securities and sell them to investors worldwide while providing a specific guarantee to investors for any losses and receipt of timely interest payments. When money flows into this secondary market, it drives the price of these bonds higher, resulting in lower yields, thus lower mortgage rates.
Well before the Treasury and Fed stepped in, this market was unstable and had little confidence from investors, and for good reason. Our country was seeing rapid foreclosure with no end in sight. So steps were taken to try to subsidize mortgage rates in hopes that it would make mortgages more affordable thus bringing buyers back into the market, stabilizing home prices, and stimulating the economy.
Its worked in generating business but very few realize what had to be done in order to do this. The Treasury, in order to pay for this, has been issuing billions of new bonds, which is debt, in order to achieve its goal. Now for many of you, this may not send off red flags in your head. Not because you're unintelligent, but because nobody explains it to you. Believe it when I say, if it doesn't want to be known, it won't be told, but that doesn't mean you can't find out or learn.
The government is expected to run a 1.2 trillion dollar deficit in 2009. YES YOU READ THAT RIGHT, 1.2 TRILLION DOLLARS. This means that we are spending 1.2 trillion more than we're taking in and on top of that we are borrowing this money from the Federal Reserve and foreign countries. If Obama gets his stimulus package through Congress it'll turn into 1.6 trillion dollars.
So while I'm very happy to be busy behind keeping up, I'm very concerned about our countries debt load, and the burden it will place on my children and their children for years to come. This debt must be paid and if interests begin to rise again, and they will, this debt will become harder and harder to service putting an even greater burden on the government and leave them to no other option but raise taxes on EVERYTHING they can.
Be very aware of what our government is doing and speak out against actions that will jeopardize the well being of our economy, families, country, and our civil liberties. We are spending our way into bankruptcy leaving us at the mercy of foreign countries who, some of them, don't like us very much. Think your dollar is worth something? Think again. Since the inception of the Federal Reserve in 1913, our dollar has lost 96% of its value and it continues to drop.
WAKE UP AMERICA, its time to be heard!
God Bless!
Copyright © 2008 by Dustin Swigart
Readers what we're seeing is yet more government intervention trying to stimulate the housing market, which is roughly 16% of the U.S. economy. Starting in 2007 we started to see home prices drop and record foreclosures pulling home prices down even further. Yes i know it sounds so horrible and people are losing their homes and causing banks to lose billions and billions of dollars, but, home prices must come down to restore equilibrium.
You're probably thinking I'm crazy right now. Dustin what are you talking about? Well its simple. Home prices were artificially inflated and rose too high for incomes to catch up. We're not seeing incomes rising in America and with home values and prices sky rocketing into double digits, people couldn't afford to purchase homes. Not to mention the very lax regulatory initiatives from the government to keep predatory lenders at bay. If anything they promoted it.
The Community Reinvestment Act provisions in 1995 set off a chain of events that led us to the current sub-prime, Alt-A meltdown. Guess what? We're not finished. So what has the government been doing lately to promote growth in the housing sector? Well first the Treasury, and now the FED - also known as the Federal Reserve - has been buying up billions of dollars in mortgage-backed securities issued by Fannie and Freddie. Without going into too much detail, mortgage-backed securities are bonds issued by Fannie Mae and Freddie Mac - which are government sponsored enterprises known as the Federal National Mortgage Association and the Federal Home Loan Corporation - aka Fannie/Freddie.
These companies buy mortgages from banks and mortgage lenders, and promote the funding of mortgages by providing liquidity to lenders, through their purchases, freeing up lender capital to continue to fund these loans. Fannie and Freddie then package these loans into securities and sell them to investors worldwide while providing a specific guarantee to investors for any losses and receipt of timely interest payments. When money flows into this secondary market, it drives the price of these bonds higher, resulting in lower yields, thus lower mortgage rates.
Well before the Treasury and Fed stepped in, this market was unstable and had little confidence from investors, and for good reason. Our country was seeing rapid foreclosure with no end in sight. So steps were taken to try to subsidize mortgage rates in hopes that it would make mortgages more affordable thus bringing buyers back into the market, stabilizing home prices, and stimulating the economy.
Its worked in generating business but very few realize what had to be done in order to do this. The Treasury, in order to pay for this, has been issuing billions of new bonds, which is debt, in order to achieve its goal. Now for many of you, this may not send off red flags in your head. Not because you're unintelligent, but because nobody explains it to you. Believe it when I say, if it doesn't want to be known, it won't be told, but that doesn't mean you can't find out or learn.
The government is expected to run a 1.2 trillion dollar deficit in 2009. YES YOU READ THAT RIGHT, 1.2 TRILLION DOLLARS. This means that we are spending 1.2 trillion more than we're taking in and on top of that we are borrowing this money from the Federal Reserve and foreign countries. If Obama gets his stimulus package through Congress it'll turn into 1.6 trillion dollars.
So while I'm very happy to be busy behind keeping up, I'm very concerned about our countries debt load, and the burden it will place on my children and their children for years to come. This debt must be paid and if interests begin to rise again, and they will, this debt will become harder and harder to service putting an even greater burden on the government and leave them to no other option but raise taxes on EVERYTHING they can.
Be very aware of what our government is doing and speak out against actions that will jeopardize the well being of our economy, families, country, and our civil liberties. We are spending our way into bankruptcy leaving us at the mercy of foreign countries who, some of them, don't like us very much. Think your dollar is worth something? Think again. Since the inception of the Federal Reserve in 1913, our dollar has lost 96% of its value and it continues to drop.
WAKE UP AMERICA, its time to be heard!
God Bless!
Copyright © 2008 by Dustin Swigart
Saturday, December 13, 2008
State of The Housing Market
Wow its been a very busy two weeks. Starting November 25 rates took a dive and have stayed down to levels not seen since the beginning of the refi boom in 2002. About mid week, rates had only been lower on 5 days in the last 50 years and 6 days where they were the same. this should be some great news for the market but we haven't seen alot of buyers jump back in yet.
I've been so busy with refinances working morning and night. While this is good for business, the whole purpose of the Treasury buying plan was to pull buyers back in helping to reduce our bloated inventory and stabilize home prices. I'm already starting to see some signs of stabilizing home prices and I think we've reached the lowest point we're going to see so and only back up is where we should focus our attention.
You'll hear alot of professionals and economists give their opinion on the market saying we're going to see more declines, mortgages are few and far between, and credit is so tight; just to name a few. I'm not saying credit hasn't been tight, I'm just saying that the media does make it sound alot worse than it is creating even more fear. Fear is the worst thing we need right now.
What happened in the mortgage market needed to happen to flush out the risky loans, bad mortgage brokers, and corrupt title companies. I'm not happy about the record foreclosures but little was done to regulate these people. The few bad apples ruin it for everybody else. Loans are plentiful, especially government insured loans like FHA, VA, and Rural Housing loans.
When shopping for a mortgage make sure you work out your budget, that you have at least 3.5% down (this will be the new FHA requirment Jan 2009), and take into consideration costs that are associated with buying a new home. Its been communicated by the media that you can't get a loan unless you have 20% down. This is simply not true.
Copyright © 2008
I've been so busy with refinances working morning and night. While this is good for business, the whole purpose of the Treasury buying plan was to pull buyers back in helping to reduce our bloated inventory and stabilize home prices. I'm already starting to see some signs of stabilizing home prices and I think we've reached the lowest point we're going to see so and only back up is where we should focus our attention.
You'll hear alot of professionals and economists give their opinion on the market saying we're going to see more declines, mortgages are few and far between, and credit is so tight; just to name a few. I'm not saying credit hasn't been tight, I'm just saying that the media does make it sound alot worse than it is creating even more fear. Fear is the worst thing we need right now.
What happened in the mortgage market needed to happen to flush out the risky loans, bad mortgage brokers, and corrupt title companies. I'm not happy about the record foreclosures but little was done to regulate these people. The few bad apples ruin it for everybody else. Loans are plentiful, especially government insured loans like FHA, VA, and Rural Housing loans.
When shopping for a mortgage make sure you work out your budget, that you have at least 3.5% down (this will be the new FHA requirment Jan 2009), and take into consideration costs that are associated with buying a new home. Its been communicated by the media that you can't get a loan unless you have 20% down. This is simply not true.
Copyright © 2008
Wednesday, November 26, 2008
Super Low Mortgage Rates - What Happened?
I'm sure all of you have been seeing the news of how bleek the economy is. To me its blah, blah, blah, blah. But now the Treasury is stepping up to the plate in an effort to reduce mortgage rates to the point that people jump into the market and start buying or refinancing. This is going to pull the first time homebuyers back in and start getting some inventory off the market.
The Treasury announced a purchase plan of roughly 600 Billion dollars that they will use to buy mortgage-backed securities and government issued treasuries over the next couple of months. So what does this mean? How long will this last? I'm not sure but for those of you who don't know why this makes rates go down I'll explain briefly.
Mortgage rates are tied to mortgage-backed securities. These are bonds that are issued by Fannie and Freddie which contain securitized mortgage loans. Pools of loans are put together then packaged into securities and sold as bonds. Now there are three areas of risk with these, credit risk (default risk), IR (interest rate exposure), and early redemption (pre-payment). Now as rates go down, pre-payment is more likely because people can refinance into a lower rate. When pricing these bonds for sale we must take into consideration bond convexity. Bond convexity is simply the measure of sensitivity to the duration of a bond to changes in interest rates. So what does this mean? Well it means that to compensate the risk of payoff to investors these bonds are priced at a spread (fixed margin) over government treasuries, usually the 10yr bond.
So in order for the purchase of mortgage-backed securities to work effectively the Treasury will also buy government bonds to drive down their yields resulting in lower spreads, thus resulting in lower mortgage rates. They are hitting this thing from both sides
By purchasing both government and mortgage-backed bonds, the Treasury is essentially subsidizing mortgage rates. As they buy up these bonds, prices go higher resulting in lower yeilds. Lower yeilds mean lower mortgage rates. I can tell you its worked. I've taken eight loan applications over the last two days and I expect it to get better after Thanksgiving.
Keep in mind, when first time homebuyers are not buying homes this leaves the market flooded with inventory. The sellers of this inventory can't buy another home until they sell theirs and so on and so forth. So see the first time homebuyer is essential and will cause a domino effect once they've returned to the market.
Now not all first time homebuyers have vanished but most of them are on the sidelines not sure what to do. I can't stress enough that this is a cycle that we will come out of eventually. The government is doing what they can to stimulate the market and we should see housing begin to stabilize when inventory begins to come back down to healthy levels.
The trends, in some areas, are starting to show positive signs of improvement. The one thing the media leaves out is that there ARE STILL loan options out there and banks are lending. The media makes its sound as if financing has all but vanished. This is simply not true. If you are in the market NOW is the time to jump. Don't wait for it pass by. There has only been a handful of days in four decades where rates have been lower. Rates have dropped about a full point in the last two days. This doesn't mean they will stay down so make a move if you're on the fence.
Realtors start picking up the phones.
Happy Thanksgiving!
Copyright © 2008 by Dustin Swigart
The Treasury announced a purchase plan of roughly 600 Billion dollars that they will use to buy mortgage-backed securities and government issued treasuries over the next couple of months. So what does this mean? How long will this last? I'm not sure but for those of you who don't know why this makes rates go down I'll explain briefly.
Mortgage rates are tied to mortgage-backed securities. These are bonds that are issued by Fannie and Freddie which contain securitized mortgage loans. Pools of loans are put together then packaged into securities and sold as bonds. Now there are three areas of risk with these, credit risk (default risk), IR (interest rate exposure), and early redemption (pre-payment). Now as rates go down, pre-payment is more likely because people can refinance into a lower rate. When pricing these bonds for sale we must take into consideration bond convexity. Bond convexity is simply the measure of sensitivity to the duration of a bond to changes in interest rates. So what does this mean? Well it means that to compensate the risk of payoff to investors these bonds are priced at a spread (fixed margin) over government treasuries, usually the 10yr bond.
So in order for the purchase of mortgage-backed securities to work effectively the Treasury will also buy government bonds to drive down their yields resulting in lower spreads, thus resulting in lower mortgage rates. They are hitting this thing from both sides
By purchasing both government and mortgage-backed bonds, the Treasury is essentially subsidizing mortgage rates. As they buy up these bonds, prices go higher resulting in lower yeilds. Lower yeilds mean lower mortgage rates. I can tell you its worked. I've taken eight loan applications over the last two days and I expect it to get better after Thanksgiving.
Keep in mind, when first time homebuyers are not buying homes this leaves the market flooded with inventory. The sellers of this inventory can't buy another home until they sell theirs and so on and so forth. So see the first time homebuyer is essential and will cause a domino effect once they've returned to the market.
Now not all first time homebuyers have vanished but most of them are on the sidelines not sure what to do. I can't stress enough that this is a cycle that we will come out of eventually. The government is doing what they can to stimulate the market and we should see housing begin to stabilize when inventory begins to come back down to healthy levels.
The trends, in some areas, are starting to show positive signs of improvement. The one thing the media leaves out is that there ARE STILL loan options out there and banks are lending. The media makes its sound as if financing has all but vanished. This is simply not true. If you are in the market NOW is the time to jump. Don't wait for it pass by. There has only been a handful of days in four decades where rates have been lower. Rates have dropped about a full point in the last two days. This doesn't mean they will stay down so make a move if you're on the fence.
Realtors start picking up the phones.
Happy Thanksgiving!
Copyright © 2008 by Dustin Swigart
Friday, November 21, 2008
FHA vs Conventional
Not many people know the difference between conventional and FHA loans, and up until the recent market turmoil, FHA was a bad word in the housing market. What's the reason? FHA was a little archaic, with no modernized changes in many years, and the complex appraisal process made this program undesirable in a market flooded with no down payment programs.
Well I've got great news for you. I'm going to break down some differences between them. Now I won't be able to mention every single difference here, but I will give you some of the major differences in regards to rates, down payment, mortgage insurance, and underwriting differences.
Conventional loans are offered in many ways ranging from adjustable rates coming in 1,3,5,7,and 10 year hybrid arms, interest only loans, and 10,15,30, and 40 year fixed rate loans. FHA loans are offered in 3,5 yr arms and 15 and 30 yr fixed rate loans.
Some lenders offer different terms but these are the most common offered. Not ever lender will be the same in their product offerings.
So lets get into some of the differences now.
RATES:
Conventional loans in terms of pricing, or rates, have very high risk adjustments for lower credit scores and higher loan to values. Loan to values are calculated on purchases, as the loan amount divided by the purchase price. For example lets use a purchase price of $125,000 and a loan amount of $100,000. The loan to value would be calculated as 100,000/125,000 = 80%.
In this scenario the ltv (or loan to value) is 80% meaning the borrower is putting 20% down. The higher the ltv the higher the pricing. Lets say a borrower has a 650 credit score and they have 10% down, their rate would be considerably higher than someone with a 720 credit score and the same down payment. Conventional loans will also have pricing adjustments for multi-family properties, FHA does not.
MORTGAGE INSURANCE:
Conventional mortgage insurance is issued through private providers such as MGIC, Radian, RMIC, and PMI. These companies have their own guidelines when issuing mortgage insurance on conventional loans. In recent months all of them have gone to minimum credit score requirements and specific underwriting guidelines to mitigate risk. I've seen loans make it all the way to closing and fall apart because mortgage insurance could not be obtained. Mortgage insurance for multi-family properties will vary on conventional loans but will not be impacted on FHA.
Another note on this is unlike conventional loans that use private companies to obtain mortgage insurance, FHA is fully self funded by the upfront and monthly mortgage insurance premiums they collect. When comparing FHA you will see that the upfront costs associated with the loan are a little more expensive. This is because FHA will charge an UFMIP (up front mortgage insurance premium) that is equal to 1.75% (on purchases, streamline refinances are lower) of the base loan amount - I'll explain this in more detail under the down payment section. The monthly mortgage insurance premium will depend on the ltv. It'll will either range from .005% to .0055% of the loan amount. So for a $100,000 dollar loan amount the yearly mortgage insurance would be $500-$550 a year respectively. This is considerably lower than conventional which would range from .0075% - .0099% of the loan amount. Do the math that almost twice as much.
FHA 15 year loans have lower mortgage insurance, and if you put 10% down on a 15 yr loan, there is NO monthly mortgage insurance. This is not the case with Conventional.
Since FHA is fully self-funded, if you are approved for the loan, you're automatically approved for the mortgage insurance. This is not the case with the private mortgage insurance companies.
DOWN PAYMENT:
While as I write this we'll probably be in the process of receiving more changes, this is the most updated information available in regards to down payment. Conventional loans, non jumbo, which are loans above the annual Freddie Mac and Fannie Mae conforming limits, require 5% down payment. If the property is located in a declining market - which would be determined by the appraiser, Freddie or Fannie, or the MI company, you would need an additional 5% down payment. Below is the list of the conforming loan limits for 2009.
General max limits (for single family residences) are $417,000 and high cost areas $625,000.
For Alaska, Guam, Hawaii, and U.S. Virgin Islands, general is $625,000 and high cost is $930,000. For 2, 3, and 4 units these limits are higher. You can visit Fannie Mae's website at www.efanniemae.com for a full chart of loan limits.
For FHA, as of 2008, will be 3% down payment. Starting January 2009 minimum down will be 3.5%. Congress deliberated awhile on what to change the down payment requirements to on FHA loans. Ideas were thrown around for 1.5% or even $0 down. The fear was that FHA would be the new "sub-prime", so they changed it to 3.5%. The idea here is for people to have some skin in the game. If they've invested their hard earned money into the home, they are less likely to walk away from it without exhausting every avenue. FHA loan limits will vary by county and state and will adjust for high cost areas just as Fannie and Freddie do. You can find a detailed list at http://www.hud.gov/pub/chums/file_layouts.html
Now above I spoke about the UFMIP (up front mortgage insurance premium). How this would be calculated is to take the purchase price, in this case we'll use $100,000. You reduce this by the amount of down payment, for this example lets just say you are putting 3% down. This would be a base loan amount of $97,000. You then multiply this by the 1.75%, which equals $1697. This would be added to the base loan amount to get your total loan amount, which would equal $98,697. This is also the number used to calculate your monthly mortgage insurance. This was the additional up front cost I was talking about earlier. Even though you have this on FHA loans, the overall costs after a full analysis could be substantially lower versus using Conventional financing.
UNDERWRITING DIFFERENCES:
I could spend awhile on this section so I'll try to keep it short and sweet. Most lenders use Freddie Mac and Fannie Mae's automated underwriting systems, LP and DU - loan prospector and desktop underwriter - to evaluate loan candidates and shorten the time taken to make an underwriting decision. These systems have built in risk models that evaluate the data submitted and either give an approval or a denial based on that information.
FHA doesn't technically have a minimum credit score requirement, but this doesn't mean that you can get any credit score approved. When talking about having a no minimum credit score requirement, this is concentrating on those who do not have enough credit to pull a credit score. When this is the case, FHA underwriting guidelines will allow you to get what is called non-traditional credit references establishing a credit history with rent payments, utility payments, cell phone, etc. Not having a credit score will not eliminate the borrower from obtaining FHA insured financing. With the private mortgage insurance companies now implementing minimum credit scores for approval, FHA insured financing is the better option for the borrower.
While this isn't nearly all the differences when underwriting these loans, just know that FHA insured financing has more flexible guidelines then conventional loans, so this would be the better option for borrowers who've had credit issues in the past. This would provide them with low cost financing, making the purchase of the home more affordable, which is the goal of the program.
Please keep in mind this is only some of the major differences between the programs and you should still consult a professional when evaluating your options on buying home. This does not mean you shouldn't sit down at the dinner table with a piece of paper and write out ALL of your expenses, to determine if purchasing a home is right for you.
When being qualified for a loan, lenders only use debt reporting on the credit report for qualification purposes so please, do your due diligence and write out how much you have coming in and how much you have going out, taking into consideration things that may come up, before you invest savings, 401k, or other sources of funds into purchasing a new home.
Please be an informed buyer.
Copyright © 2008
Well I've got great news for you. I'm going to break down some differences between them. Now I won't be able to mention every single difference here, but I will give you some of the major differences in regards to rates, down payment, mortgage insurance, and underwriting differences.
Conventional loans are offered in many ways ranging from adjustable rates coming in 1,3,5,7,and 10 year hybrid arms, interest only loans, and 10,15,30, and 40 year fixed rate loans. FHA loans are offered in 3,5 yr arms and 15 and 30 yr fixed rate loans.
Some lenders offer different terms but these are the most common offered. Not ever lender will be the same in their product offerings.
So lets get into some of the differences now.
RATES:
Conventional loans in terms of pricing, or rates, have very high risk adjustments for lower credit scores and higher loan to values. Loan to values are calculated on purchases, as the loan amount divided by the purchase price. For example lets use a purchase price of $125,000 and a loan amount of $100,000. The loan to value would be calculated as 100,000/125,000 = 80%.
In this scenario the ltv (or loan to value) is 80% meaning the borrower is putting 20% down. The higher the ltv the higher the pricing. Lets say a borrower has a 650 credit score and they have 10% down, their rate would be considerably higher than someone with a 720 credit score and the same down payment. Conventional loans will also have pricing adjustments for multi-family properties, FHA does not.
MORTGAGE INSURANCE:
Conventional mortgage insurance is issued through private providers such as MGIC, Radian, RMIC, and PMI. These companies have their own guidelines when issuing mortgage insurance on conventional loans. In recent months all of them have gone to minimum credit score requirements and specific underwriting guidelines to mitigate risk. I've seen loans make it all the way to closing and fall apart because mortgage insurance could not be obtained. Mortgage insurance for multi-family properties will vary on conventional loans but will not be impacted on FHA.
Another note on this is unlike conventional loans that use private companies to obtain mortgage insurance, FHA is fully self funded by the upfront and monthly mortgage insurance premiums they collect. When comparing FHA you will see that the upfront costs associated with the loan are a little more expensive. This is because FHA will charge an UFMIP (up front mortgage insurance premium) that is equal to 1.75% (on purchases, streamline refinances are lower) of the base loan amount - I'll explain this in more detail under the down payment section. The monthly mortgage insurance premium will depend on the ltv. It'll will either range from .005% to .0055% of the loan amount. So for a $100,000 dollar loan amount the yearly mortgage insurance would be $500-$550 a year respectively. This is considerably lower than conventional which would range from .0075% - .0099% of the loan amount. Do the math that almost twice as much.
FHA 15 year loans have lower mortgage insurance, and if you put 10% down on a 15 yr loan, there is NO monthly mortgage insurance. This is not the case with Conventional.
Since FHA is fully self-funded, if you are approved for the loan, you're automatically approved for the mortgage insurance. This is not the case with the private mortgage insurance companies.
DOWN PAYMENT:
While as I write this we'll probably be in the process of receiving more changes, this is the most updated information available in regards to down payment. Conventional loans, non jumbo, which are loans above the annual Freddie Mac and Fannie Mae conforming limits, require 5% down payment. If the property is located in a declining market - which would be determined by the appraiser, Freddie or Fannie, or the MI company, you would need an additional 5% down payment. Below is the list of the conforming loan limits for 2009.
General max limits (for single family residences) are $417,000 and high cost areas $625,000.
For Alaska, Guam, Hawaii, and U.S. Virgin Islands, general is $625,000 and high cost is $930,000. For 2, 3, and 4 units these limits are higher. You can visit Fannie Mae's website at www.efanniemae.com for a full chart of loan limits.
For FHA, as of 2008, will be 3% down payment. Starting January 2009 minimum down will be 3.5%. Congress deliberated awhile on what to change the down payment requirements to on FHA loans. Ideas were thrown around for 1.5% or even $0 down. The fear was that FHA would be the new "sub-prime", so they changed it to 3.5%. The idea here is for people to have some skin in the game. If they've invested their hard earned money into the home, they are less likely to walk away from it without exhausting every avenue. FHA loan limits will vary by county and state and will adjust for high cost areas just as Fannie and Freddie do. You can find a detailed list at http://www.hud.gov/pub/chums/file_layouts.html
Now above I spoke about the UFMIP (up front mortgage insurance premium). How this would be calculated is to take the purchase price, in this case we'll use $100,000. You reduce this by the amount of down payment, for this example lets just say you are putting 3% down. This would be a base loan amount of $97,000. You then multiply this by the 1.75%, which equals $1697. This would be added to the base loan amount to get your total loan amount, which would equal $98,697. This is also the number used to calculate your monthly mortgage insurance. This was the additional up front cost I was talking about earlier. Even though you have this on FHA loans, the overall costs after a full analysis could be substantially lower versus using Conventional financing.
UNDERWRITING DIFFERENCES:
I could spend awhile on this section so I'll try to keep it short and sweet. Most lenders use Freddie Mac and Fannie Mae's automated underwriting systems, LP and DU - loan prospector and desktop underwriter - to evaluate loan candidates and shorten the time taken to make an underwriting decision. These systems have built in risk models that evaluate the data submitted and either give an approval or a denial based on that information.
FHA doesn't technically have a minimum credit score requirement, but this doesn't mean that you can get any credit score approved. When talking about having a no minimum credit score requirement, this is concentrating on those who do not have enough credit to pull a credit score. When this is the case, FHA underwriting guidelines will allow you to get what is called non-traditional credit references establishing a credit history with rent payments, utility payments, cell phone, etc. Not having a credit score will not eliminate the borrower from obtaining FHA insured financing. With the private mortgage insurance companies now implementing minimum credit scores for approval, FHA insured financing is the better option for the borrower.
While this isn't nearly all the differences when underwriting these loans, just know that FHA insured financing has more flexible guidelines then conventional loans, so this would be the better option for borrowers who've had credit issues in the past. This would provide them with low cost financing, making the purchase of the home more affordable, which is the goal of the program.
Please keep in mind this is only some of the major differences between the programs and you should still consult a professional when evaluating your options on buying home. This does not mean you shouldn't sit down at the dinner table with a piece of paper and write out ALL of your expenses, to determine if purchasing a home is right for you.
When being qualified for a loan, lenders only use debt reporting on the credit report for qualification purposes so please, do your due diligence and write out how much you have coming in and how much you have going out, taking into consideration things that may come up, before you invest savings, 401k, or other sources of funds into purchasing a new home.
Please be an informed buyer.
Copyright © 2008
Saturday, November 15, 2008
Wasn't The Bailout Money for Bad Mortgages?
Well we were all sold the fact the 700 billion dollar bailout was for troubled mortgage related assets. This topic should concern you since you and I will have to fit the bill for this as taxpayers. Now the money is being used to take minority positions in banks and other companies such as AIG.
Now you have the auto industry, city governments, state governments, and everybody else coming with their hands out looking for cash. The big three have been said to be burning through one billion dollars a month a piece. Now they want $25 billion dollars to get them through these troubling times.
Since when do we socialize losses and privatize profits? The TARP or Troubled Asset Relief Program was intended to buy toxic mortgage loans from struggling banks in attempt to help ease the credit crunch. Now the money is being used to take stakes in banks urging them to lend more. Instead banks are not lending and in some instances they are using this money to fund acquisitions of other banks.
Secretary of the Treasury Hank Paulson is now switching gears from his original plan and backed his decision by saying in an interview, "Our assessment at this time is that this is not the most effective way to use TARP funds," he told the nation Wednesday.
So what now? Wasn't the whole problem stemming from the mortgage industry with all these exotic mortgages and mortgage-backed securities? Frustrating as it is we must deal with it now. As you should be concerned about the actions of the government with the use of our taxpayer money I urge you to stay focused on your business.
Just to be clear mortgages have not dried up. Loans are still available to consumers. The percentage of FHA loans being originated is growing rapidly and will continue. These mortgage loans are never talked about by the media. So even though banks are struggling with bad loans on the books, this too shall pass, and the market will stabilize. If you are in the market to purchase a home now is still a great time to buy one.
Look at using FHA financing for purchasing your new home. If you have less than 20% down you will need mortgage insurance, you will come out better with FHA mortgage insurance anyway as this, in some cases, is half the cost monthly. FHA only requires a minimum of 3% down right now, then Jan 1 you will 3.5% down payment.
While conventional loans still have hefty delivery fees for credit score adjustments and loan to value adjustements, FHA rates will be more competitive.
You can find out more by visiting my website at www.53.com/mlo/dustin-swigart. You can also email me at dustin.swigart@53.com
Copyright © 2008 by Dustin Swigart
Now you have the auto industry, city governments, state governments, and everybody else coming with their hands out looking for cash. The big three have been said to be burning through one billion dollars a month a piece. Now they want $25 billion dollars to get them through these troubling times.
Since when do we socialize losses and privatize profits? The TARP or Troubled Asset Relief Program was intended to buy toxic mortgage loans from struggling banks in attempt to help ease the credit crunch. Now the money is being used to take stakes in banks urging them to lend more. Instead banks are not lending and in some instances they are using this money to fund acquisitions of other banks.
Secretary of the Treasury Hank Paulson is now switching gears from his original plan and backed his decision by saying in an interview, "Our assessment at this time is that this is not the most effective way to use TARP funds," he told the nation Wednesday.
So what now? Wasn't the whole problem stemming from the mortgage industry with all these exotic mortgages and mortgage-backed securities? Frustrating as it is we must deal with it now. As you should be concerned about the actions of the government with the use of our taxpayer money I urge you to stay focused on your business.
Just to be clear mortgages have not dried up. Loans are still available to consumers. The percentage of FHA loans being originated is growing rapidly and will continue. These mortgage loans are never talked about by the media. So even though banks are struggling with bad loans on the books, this too shall pass, and the market will stabilize. If you are in the market to purchase a home now is still a great time to buy one.
Look at using FHA financing for purchasing your new home. If you have less than 20% down you will need mortgage insurance, you will come out better with FHA mortgage insurance anyway as this, in some cases, is half the cost monthly. FHA only requires a minimum of 3% down right now, then Jan 1 you will 3.5% down payment.
While conventional loans still have hefty delivery fees for credit score adjustments and loan to value adjustements, FHA rates will be more competitive.
You can find out more by visiting my website at www.53.com/mlo/dustin-swigart. You can also email me at dustin.swigart@53.com
Copyright © 2008 by Dustin Swigart
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