Three things to avoid when applying for a mortgage:

1. Large deposits of money that may be difficult to account for. Borrowers are required to account for monetary gifts they will use toward the purchase of a home. If your monthly income is only $5,000, and you make a $10,000 deposit into your bank account, lenders will worry that you have not fully disclosed all gifts that you plan to use to purchase your home.
2. Do not open new lines of credit. New credit cards, car loans, or other major purchases can jeopardize your plans to secure a mortgage. We tell our clients that new credit or large purchases can push your debt-to-income ratio beyond the limits of your perspective mortgage. Applying for a mortgage? Hold off on the new credit!
3. A large distance between the home’s address and the address where you work. If you plan to purchase a home several hours away from your workplace, lenders worry that you may not plan to use the home as your primary residence, and will instead use it for rental income or will flip and sell the house. Plans such as these need to be made clear to a lender when you are applying for a loan. If you are hoping to purchase a home far from your workplace, lenders have even been known to ask for a letter from an employer, certifying that you work from home several times a week.

So if you are thinking about applying for a mortgage or even refinancing keep these tips in mind. You can connect with reputable mortgage lenders on our Cincinnati Mortgage Lender’s  page or contact us with questions about buying a new home.

Trulia's rent vs buy chart from q1 2011

The next major mortgage crisis may be caused by renters as they prepare to enter retirement. Liz Davidson of Forbes says

“that today, there’s another mortgage crisis in the works—that is, NOT having one—choosing to rent when you can afford to buy; choosing to forgo building equity in a home as a major source of retirement security…”

Home Ownership as a Source of Retirement Funds

What Davidson is point to is the fact that Americans are choosing to rent, gun shy from the recent housing market implosion and they are doing so at their own long term peril. Homes are assets and as you pay off your mortgage you are essentially creating a savings account that you draw from when you sell your home. Whereas renting does not build any asset that can be liquidated for cash later on in life.  Davidson lays out some frightening math:

Two families. A. Rents for $1,500 per month. B. Takes on a $1,500 per month mortgage.

A’s rent goes up 1% per year. Over the course of 30 years A will have paid $900,000 in total rent. (You have to assume rent increases – no one signs a 30 fixed rental agreement!)

B’s mortgage stays constant and B pays out $540,000 over the course of 30 years.

Here is where things get truly scary!  A has to continue to pay out rent. B now owns the property out right. A can not sell his rental. B can. And since we assumed that there was 1% inflation we have to appreciate the value of B’s property by 1% per year. If the original home was worth $300,000 at purchase it will be worth approximately $390,000.  That is straight cash that they can access when they sell and use to pay for retirement.

The next mortgage crisis is the crisis of not enough people having a mortgage!

6 months of Ohio mortgage rate information from Bankrate.com

Rates on 30 year fixed mortgages are now at record lows according to the Washington Post and that is great news for those of you who are looking for a mortgage!

The average rate on a thirty year fixed rate mortgage has fallen to the lowest rate ever on records dating back to 1971. This month the rate on a thirty year fixed rate mortgage dropped to an astonishingly low 4.15%. Five years ago, the average rate for this same kind of loan was 6.5%. In 2000, the rate hovered at 8%. In fact, the last time rates this low were available was the 1950s – talk about a throwback!

With mortgage rates as low as they are, now is a great time to buy. Recent clients have been able to lock in low mortgage rates, helping them to afford houses that would have been out of their budgets just a year or two ago. The current low rates can make a real difference in the size of your monthly payment. As a Realtor in Cincinnati, I am always thrilled to help clients to find the home of their dreams at a mortgage rate they can afford. Send me an email today so that I can help you find an an affordable home of your own!

The Mortgage Bankers Association predicts that loans made outside the QRM framework “will be costlier…” J.P. Morgan Chase estimates that the 5-percent risk-retention requirements could increase rates on loans that don’t qualify as QRMs by up to 3 percentage points. In short those that do not have 20% down payments could be penalized up to 3% interest points on their loan.

What is a QRM – Qualified Residential Mortgage is a 20% down payment that is a conforming loan. Who this benefits: This benefits the banks because it forces home owners to have more ‘skin’ in the game and take a larger stake in the ownership of the home. It is intended to reduce the chance that people will walk away from their homes because they have more money to lose.

Who this hurts: This 20% is an unnecessary hurdle for the middle class American who is otherwise very creditworthy, is at low risk of default, and would have purchased using previous mortgage programs requiring less than 20% down.

Why not 20%? Many Americans have the cash but would rather use the money to invest in the stock market, bonds, retirement accounts, or other investment vehicles that are shorter term, and possibly more stable. Money tied up in a down payment is money that can not be accessed until the house sells. Some people also want to keep cash on hand to replace a roof, an A/C unit, or do other home improvements.

How this hurts the real estate market:

1. Existing homeowners who have lost equity because they are selling for less then they purchased for will be hard pressed to save more as they prepare to move up to a larger house. This requirement effectively traps them in their existing home. This ties up homes that are ideal for first time home buyers. It cuts into inventory!
2. Current first time home buyers have to save substantially more money, and this either forces them to rent longer than they want, or purchase a home that is well below the amount they could qualify for if they had 20%. This discourages early home ownership.
3. It takes capital out of the hands of homeowners who otherwise would have used that money to do move-in upgrades like paint, counter tops, new floors and appliances that will help them sell their house when they eventually go to move.
4. The money tied up in their house can’t be used to stimulate the economy by employing contractors or in other ways like: travel, buying a new car, on clothing or electronics. Individuals are not spending so they can save or are taking on more credit card debt once they are homeowners.

What this bill will not fix: This will not fix the foreclosure crisis because increasing down payments will not change a person’s finances if they: get laid off, have a catastrophic illness, have an accident that keeps them out of work, go through a divorce, or any other life event that disrupts their income flow. All this does is take money out of the economy and gives it to the banks to hold. It does not mitigate their lending risk one bit on an individual basis but what it does do is give the banks just a bit more money in advance in the case of a default.

Focus on the Fix: Legislation should focus on making sure that borrowers are creditworthy and have a low chance of default. In addition lenders need incentives to get borrowers into the right programs for their needs. Getting the right borrowers into the right loans will help build a stronger foundation for future lending.

Looking for additional information on Mortgages or Real Estate in Cincinnati? Contact me!

Fannie Mae is becoming more strict with their loan requirements as they deal with how much money condo associations keep in reserve.  Every condo association is unique, and they cover a number of services for their residents. Some cover trash, water, even cable tv in some cases. Most associations cover the maintenance of the exterior of the units; paint, roof repairs, gutters, landscaping, and community shared resources like pools and playgrounds.

Condo Association Finances

Recently Fannie Mae has been scrutinizing the financial strength of these associations before they will make a loan. Fannie Mae wants these associations to have at least 10% of their total annual budget in reserve. The lender wants to make sure that in the case of a weather emergency such as hail or a wind storm, the association has the funds to make the repairs to their investment. Remember – the lender owns the home and the homeowner makes mortgage payments to buy it back from the lender.

If you live in a condo or townhouse community that has a condo association you should make sure that they are keeping their reserve fund fully funded. Attend the meetings and ask for copies of the budget so you are always informed.  Keeping your association on the right fiscal track will help make your community more attractive to buyers and to the lenders who will finance their purchase.

If you are interested in buying or selling a condominium in Cincinnati please call me at 513.518.1140

Minimizing Risk To The Lenders

The only way for lenders and banks to minimize their risk exposure is to only initiate qualified residential mortgages (QRM). Under the proposed rule, qualified residential mortgages will have very high standards. Among them: Borrowers would have to come up with a 20 percent down payment. But regulators say they don’t think the qualified residential mortgage should be the new national standard for mortgages.

How The Changes Impact Cincinnati Mortgages

At this point it is unclear how this is going to impact the local mortgage market. If these changes go into effect it is clear that the lenders will be more interested in acquiring QRMs, and that may translate into higher rates for non qualified mortgages. Steve O’Connor, a senior vice president for public policy at the Mortgage Bankers Association says “I think it will limit credit options for borrowers and make products more expensive for a lot of borrowers.”

Minimal Impact In The Short Term

The rules will not take effect and be enacted until later this year. Moreover, the loans that are backed by the government aren’t subject to the rule. Currently Fannie Mae, Freddie Mac and the Federal Housing Administration back approximately 90 percent of the mortgage market. For more information see the extended article on NPR.

Understanding Mortgage Language

LTV = Loan To Value ratio. This is a  ratio of the value of your home vs. how much you are borrowing. If you home is worth $100,000 and you borrow $85,000 then you have an 85% LTV.

MIP = Mortgage Insurance Premium. If you are taking out a home mortgage and are putting down less than 20% (so your LTV is 80%+) you will most likely be required pay for an insurance policy that protects the lender in the case that you default on your loan.

Why FHA is Increasing Mortgage Insurance Premiums

So with that being said, FHA is raising MIP for borrowers, most likely because as with all insurance policies, premiums go up when more and more lenders cash in their policies on defult loans. Considering the number of foreclosures, and therefore the number of mortgage insurance policies that have been paid out, it makes sense that premiums go up. Just like flood insurance premiums go up after a flood.

How Much FHA is Increasing Mortgage Insurance Premiums

1. These changes are effective April 18^th, 2011.

2. The Annual Insurance Premium will increase .25% for standard forward mortgages*. The Upfront Mortgage Insurance** remains at 1.00%. * Forward mortgage: A mortgage that is secured by the property at time of purchase.  **Upfront Mortgage Insurance: The Mortgage Insurance Premium (MIP) that lenders must remit within 10 calendar days of the mortgage closing or disbursement date, whichever is later (Mortgagee Letter 2005-28).

3. The Annual Premium was .90% is now 1.15% for LTVs GREATER than 95% on 30-year loans

4. The Annual Premium was .85% is now 1.10% for LTVs EQUAL to or LESS than 95% on 30-year loans

5. The Annual Premium  was .25% is now .50% for LTVs GREATER than 90% on 15-year loans

6. The Annual Premium was 0% is now .25% for LTVs EQUAL to or LESS than 90% on 15-year loans

To illustrate, on a home priced at $163,000 with 3.5% down, the monthly payment was $118 per month and is now $151 per month– a $33 per month increase.

If you have questions about how this change could impact your mortgage call me at 513-518-1140.

1. Poor credit: Even with cash for a down payment you better come to the table with a  credit score of 693, according to CNN Money. Since 693 is above the national average it is clear that banks are only looking to lend to above average borrowers.

2. Insufficient liquidity: You may not want to put 20% down, but unless you have some substantial cash in your accounts in reserve do not expect to get a mortgage. Banks want borrowers who are as invested in their own homes as they are.

3. Lack of income: The recent economic downturn hurt a lot of people financially due to job loss. Unfortunately the bank wants to lend to those who can show multiple years of steady employment. This can be a big hurdle in the loan process, particularly for retired borrowers.

4. Lying on the application: Banks have learned their lesson and are no longer putting up with borrowers stretching the truth on their applications. Mortgage brokers have also taken note and are requiring actual income documentation now.

5. Debt: Borrower that are carrying extra debt (credit cards, personal loans) and have an unfavorable debt to income ratio are being denied loans. Talking with your broker can help you identify the fastest way to balance your debt to income ratio.

6. Unemployment: We are back to point 3. Banks want to lend to people they think can afford to pay it back. A big part of that is a steady job.

7. Self employment: Lenders are looking at self-employed applicants with a lot more scrutiny these days. be prepared to show tax returns and income statements. You reduced your self employed taxable income, but did you hurt your chances of getting a home loan?

In most cases your mortgage lender should help you understand why you are not being approved and give you guidance on how to get approved. If they are not, contact me for recommendations, or visit my Cincinnati mortgage resources page. More information on this available at RSI media.

I am seeing this situation more often, where some wants to turn their current owner occupied into investment property and purchase a new owner occupied home. To summarize, if they do not have a history as a property manager, they WILL NOT be able to use the rental income for qualifying, even if they meet requirements of previous credit policy for equity and reserves.

If at least 30% equity in the current Primary Residence can be documented, 75% of the rental income may be used to qualify if each of the following requirements are met:

Rental income is documented with a fully executed lease agreement

For conforming loans: Two months Principal, Interest, Taxes and Insurance (PITI) for both properties OR the standard post-closing liquidity/reserve requirements, whichever is greater

For nonconforming loans: Six months PITI for both properties or 10% post-closing liquidity, whichever is greater

Proof is provided that a security deposit was received from the tenant and deposited into the borrower’s account

The borrower’s tax return must reflect a two-year history of managing Investment Properties, as evidenced by two years filed and signed IRS 1040 tax returns when rental income is documented with a fully executed lease agreement

All other Credit Policy prior to Feb. 12 continue to apply

NOTE: If the borrower’s tax return does NOT reflect a two-year history of managing Investment Properties, rental income may not be used qualify.