Beginning February 15,2010, mortgage brokers can no longer order their own appraisals for residential real estate loans backed by the Federal Housing Authority. Instead, the appraisal selection process will be in the hands of appraisal management companies. 

The idea behind the creation of the new law is to remove bias from the process. Previously, loan officers and other representatives form loan companies could order their own appraisals. As a result of greed, there have been cases where the real estate appraisers have inflated values of real estate on appraisals as not doing so may have impacted getting future business from that same loan officer/loan company. In theory, the idea was sound. 

In practice, the idea is flawed. The major problems are twofold. 

First, the appraisal management companies tend to be regional or national companies. They do not think locally. A s a result they do not hire appraisers based on their local knowledge or expertise. Rather, they hire who’s cheapest. Appraisal management companies make their money by the spread between what they pay the appraiser and that they charge the lender. The cheaper the appraiser, the more profitable it is for the appraisal management company. As such, the use of non-local or inexperienced appraisers is becoming more common. 

Secondly, the timeliness of the appraisers turn around time is becoming extended. It is taking more time to process mortgage loans as a result.

The Worker, Homeownership, and Business Assistance Act of 2009 has extended the tax credit of up to $8,000 for qualified first-time home buyers purchasing a principal residence. The tax credit now applies to sales occurring on or after January 1, 2009 and on or before April 30, 2010. However, in cases where a binding sales contract is signed by April 30, 2010, a home purchase completed by June 30, 2010 will qualify.

The income range for eligible purchasers has been expanded so that the credit doesn’t begin to phase out until the modified adjusted gross income of purchasers exceeds $125,000 for single filers, $225,000 for joint filers. The old phase-out thresholds were $75,000 and $125,000, respectively.

The credit has also been expanded to cover purchases of a new principal residence by people who have lived in their current principal residences for at least five out of the last eight years. However, they will only be eligible for a $6,500 maximum credit.   The tax credit applies to sales for those purchasing a principal residence after November 6, 2009 and on or before April 30, 2010 (or purchased by June 30, 2010 with a binding sales contract signed by April 30, 2010).

More information is available at www.federalhousingtaxcredit.com

Updated by Tony Pigatti TPigatti@Archerbank.com

1)      Check your credit.  You have the right to receive a free credit report once a year from each of the 3 major credit bureaus-Equifax, Experien, and Transunion.  There are also other sites that charge a fee like www.myfico.com or www.freecreditreport.com.

2)      Work with your realtor and lender to help determine how much you can afford and what product is best for you.   It is important to focus on what monthly payment you feel comfortable with and not how much the bank can qualify you for.  Generally, you should spend a maximum of 30% of your gross monthly income on your housing payment including taxes, insurance, and assessments if the property is a town home or condo.  Also, your total debt should not exceed 41% of your income.

3)      Ask your lender for your credit score.  More so than anything else this determines what rate you get.  In this market you need a score of 720 or higher to receive the best terms a lender has to offer This is not always the case but the higher the score the better the terms.  Having this information makes it easier to check lenders pricing as a credit score is needed to quote a rate.

4)      Shop around.  Although rates and fees are a very critical part of the process, make sure you get a recommendation from your realtor, your family and or your coworkers.    Knowing that someone you know has had a successful transaction with that lender will go a long way in giving you the confidence that they can close your loan.  

Writtne By Tony Pigatti of Archer Bank TPigatti@ArcherBank.com

The cost of loan modifications.

This topic has been in the minds of many homeowners as they try to keep up with their mortgage payments.  One of the solutions often suggested by attorneys, the media and politicians are loan modifications.   A loan modification is simply a temporary change in the loan terms resulting in a lower payment.   In other words the interest rate is reduced or the term is extended.    The issue at hand is how mortgage servicers may report mortgage loan modifications to the credit reporting agencies and, secondly, how that credit reporting impacts the consumers’ FICO credit scores. According to the Consumer Data Industry Association, the credit bureaus have agreed to guidelines that loan modifications will be reported as a “Partial Payment Plan.”

The problem with this decision is that FICO credit scores interpret the notation of a “Partial Payment Plan” as negative. Consumers will see their scores decrease because of such a classification. How much their scores decrease will depend on from where their scores started. A score of 550 isn’t going to decline the same number of points as a score of 750.

This situation may not seem fair or consistent with other credit reporting issues, but one thing is certain and that is before you agree to a loan modification make sure you are fully aware of all of it’s implications including how your lender will report the loan modification to the credit bureaus.

Written by guest blogger Tony Pigatti of Archer Bank TPigatti@Archerbank.com

Mortgage insurance insures the lender in case of a default by the borrower and is required on conventional financing when the down payment is less than 20%.  

The bank or mortgage company you obtain your financing from will seek to obtain the mortgage insurance coverage on your behalf.   However, the premiums are typically paid monthly by the borrower as part of your mortgage payments and are tiered at 5%, 10% and 15% down payments. 

The smaller the down payment the higher the mortgage insurance rate. What you may not be aware of his mortgage insurance is becoming increasingly more difficult to obtain.  A few examples of their “newer” requirements are:

•  Minimum credit score of 700
• Total debt to income ratio not to exceed 41%. 

While the reasons for this are many, but when you are in a business of insuring defaulted loans clearly there have been better times for this industry as more than 10% of all mortgages are 30 days or more past due.   With out mortgage insurance you would have to obtain FHA financing or be forced into putting 20% down.  Not that long ago most banks would loan you part of the down payment in a second mortgage to avoid the mortgage insurance premiums but that option for the most part is no longer available. 

If you do obtain your financing with mortgage insurance you may be able to cancel the insurance within 12-24 months if upon review of a new appraisal the necessary equity of 20% is now there.   The responsibility lies with the borrower to initiate this review process.   It is becoming increasingly important to discuss this situation with your lender as early in the process as possible.

Any mortgage questions?

Call the author of this piece:

Tony Pigatti

Vice President Residential Lending

Archer Bank

Office #708-237-4049

http://www.metrobankgroup.com

Who is this Fannie Mae  I keep hearing about?

No, it isn’t the candy company.  Fannie Mae or the Federal National Mortgage Association was established in 1938 to make mortgages more readily available under FDR’s New Deal.  In 1968 it was chartered by Congress as a stockholder-owned corporation in order to remove its activity from the annual balance sheet of the federal budget.  The corporations purpose is to purchase and securitize mortgages ensuring that funds are consistently available to the institutions that lend money to home buyers. 

That is the technical definition but what does that mean to me?   Without FNMA obtaining a mortgage today to purchase a home would be very difficult.   In simple terms banks lend out their deposits and make money on the spread between what they pay in interest versus what they collect in interest.  In theory once a bank would lend out all of their deposits there would be no money left for anyone else to  borrower.  Thus the need for FNMA as once the banks lends the money they sell the loan to FNMA at a profit but also get their principal back.

FNMA also determines how much you need to put down, what credit scores you need,  how much income is required, basically all of the rules of the mortgage industry are dictated by FNMA. 

You may have heard that FNMA was taken over by the government in September of 2008 after huge losses and losses of investor confidence.  While the future of FNMA is still uncertain the importance or significance of the  role they play is not.. 

Written by Tony Pigatti or Archer Bank. TPigatti@ArcherBank.com

By Tony Pigatti of Archer Bank

Good credit, your greatest asset?

I realize that we are in very challenging economic times today.  However, not many things can have a larger impact on our lives than our credit rating.    One of the more obvious implications of poor credit performance is increased borrowing costs or worse yet, the fact that you may be unable to borrow money at all.   Some of the less obvious implications are credit card and insurance rates.  The credit card companies can adjust your interest rate if you miss your payment deadline by just one day or your credit score falls from the level when the credit card was approved.  Think of the implications of a $10,000 credit card balance going from 5% to 15%.  That is an extra $1000 per year in interest!  Insurance companies also take credit performance into account when quoting automobile or home insurance.  Premiums can increase 20%-40% or more for a poor credit rating.   Apartment complexes also verify credit and poor credit which could prohibit you from even renting an apartment.  For the 6 million + Americans out of work, many employers do credit checks as part of their evaluation process which could be the difference in getting the job or not.    As a mortgage lender I have often advised clients to do whatever possible to pay your mortgages on time, followed by your car loans and credit cards.  If you get behind and have to miss a payment, your utilities have the least amount of impact.  As of today, NICOR is the only local utility company that reports payment histories to the credit bureaus.  Certainly, do not let it go to the point of cancellation of service, but missing a payment with a utility company could have no impact on your credit history at all. 

So is good credit our greatest asset?  Only you can decide.

Direct all of your financing questions to TPigatti@ArcherBank.com

To FHA or to not FHA?

In the past year FHA or the Federal Housing Authority financing has increased its market share dramatically.   In 2007 FHA financing accounted for less than 5% of all mortgage originations. Their market share doubled in 2008 and could possible double again in 2009.   The primary reason for this the elimination of many of the alternative mortgage products, but other factors need to be examined.  This being said here is a list of some of the reasons why consumers chose FHA financing:

1)      Lower Down Payment requirements.  FHA only requires 3.5% down where conventional financing requires 5%.

2)      Gifts for Dow Payments.  FHA permits the entire down payment to be a gift, conventional financing requires that the initial 5% must be from the borrower own funds unless there is a 20% down payment.

3)      Minimum credit scores.  FHA has no limits on credit scores.  Most lenders do have self imposed limits of a 620 minimum credit score, but in order to obtain conventional financing with mortgage insurance a 680 minimum score is required.

4)      Interest Rates.  For the most part FHA charges the same rate regardless of your credit score where conventional financing rates can vary based on your credit score.  For those with credit scores between 620 and 680 the interest rates on FHA financing tend to be more favorable than conventional rates.

5)      Loan Limits.  Although this is county and State specific FHA recently increased their maximum loan amount in the 6 County area surrounding Chicago to $410,000 from $271,050.  The maximum loan for conventional financing is $417,000.

To find out if FHA could be a viable option for you, contact TPigatti@ArcherBank.com

The myth behind bank appraisals… During my career I have heard countless customers say, “Bank appraisals are always low or conservative.” I think it is worth noting what the bank is asking the appraiser to do. Very simply, the appraiser’s job is to provide an independent opinion of the current market value of the property.

They are required to compare the home to other homes of similar size, design and construction in the same general area that have sold in the last 12 months.

We do provide the appraiser a copy of the sales contract for a home purchase but interestingly enough we are not allowed to provide the appraiser the owner’s estimate of value on a refinance. Also, the appraiser’s job is not to justify the price paid for a home or the amount needed to complete a transaction. It is to determine the collateral for our loan and more importantly protects the bank in case the client defaults on the loan.

The appraisal report is an art not a science and is just one person’s opinion of a property’s current value. In theory, if 10 appraisers are hired to appraise your home we could receive 10 different values. So are bank appraisals conservative? Maybe–in this market place where property values continue to decline being conservative seems like a prudent move to protect the assets of the bank. From a homeowners perspective, it can be very problematic long term in obtaining financing with an inflated or aggressive appraisal.

In May of this year a Home Valuation Code of Conduct will go into effect to further insure the independence and accuracy of the appraisal process and provide additional protection to home owners, banks and mortgage investors.

Tony Pigatti

Vice President Residential Lending

Archer Bank

Office #708-237-4049

Cell #630-254-8946

www.metrobankgroup.com

Similar to today’s stock market, mortgage interest rates have been extremely volatile, going up and down without rhyme or reason on a daily basis.  Historically, you would expect that the rate quoted would last at least throughout the day, but today it may be gone as soon as you hang up the phone with the loan officer. This type of environment makes the decision as to when to lock your interest rate a very difficult one.  To aid in the decision process, keep the following information in mind:

Interest rates can be locked for as little as 15 days and as long as 60 days, with 30 and 45 day locks, as well. However, the longer the bank holds the rate the higher the rate will be.  The difference today between a 60 day rate lock and a 15 day rate lock can be as much as a .25 point in rate. 

An obvious conclusion is that the shorter the rate, lock the better the deal, which is true with one caveat.  You must close in the time period selected or you lose the rate.   In a normal environment it only takes a few weeks to process a loan, but these times are far from normal.  There are so many things involved with closing a real estate transaction that closing loans in 15 or even 30 days consistently can be very challenging.  It isn’t that it cannot be done.  It can be done, but everything, and I mean everything, most go smoothly.

It is also worth noting that most banks prioritize the process of a loan to purchase a home versus a refinance.  This being said, with the recent drop in interest rates mortgage application volume has sky-rocketed causing the process to take longer than normal.  In response to this, most lenders will require a refinance customer to lock their rate for 45 or 60 days as it may take that long to process the loan request while still prioritizing those purchasing homes. With respect to a loan to purchase a home, the agreed upon closing date on the real estate contract will determine the lock in period, not the lender.

Choosing when to lock your interest rate is a personal decision with no right or wrong decision but working with an experienced service minded loan officer and being responsive to any and all requests can and will go a long way to improving the chances that you can obtain the best rate available.

Contributed by Tony Pigatti of Archer Bank Tony can be reached at TPigatti@archerbank.com