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THE RETURN OF ALT-A?

If you haven’t heard the term, “Alt-A” before it’s because it’s a behind-the-scenes term that lenders use. Maybe you’ve heard of the terms “low-doc,” no-doc” or “sub-prime.” These are the loans most responsible for the real estate bubble and then crash of the early 2000’s. These loans were abused horribly to get people into homes they couldn’t afford with predictable results.

 

There is talk in the industry of bringing these loans back, but in a much different way than they were used in the past (so you can put your pitchforks down, at least for now). There is a small population of potential homebuyers who can’t qualify for a regular loan through normal underwriting. It could be a small business person who can’t show a net profit because they are plowing everything temporarily back into the business, or someone whose income fluctuates greatly from month to month or even year to year. These are people that can afford to make their house payment and are considered good credit risks by some lenders, but the “Alt-A” loan business dried up several years ago.

 

There are lenders that may be willing to lend to these borrowers again, albeit at a higher rate than they would to a regular W-2 wage earner with a 10-year history on the job. So if you are one of these types of people, check with your favorite lender representative to see if there is an option for you now even if you were turned down as recently as last year.

 

Now, if lenders start to encourage buyers to lie about their income again to take on a loan they really can’t afford (“liar loans”), then by all means get out your pitchforks and I’ll meet you at your bank with the tar and feathers!

GET YOUR CREDIT “SCORE”?

I heard a radio ad recently by a company claiming you can get your credit score for free on their website. I found the ad highly misleading because they aren’t telling you the whole story. This is like when someone asks you to hand them a “Klennex” or to “Xerox” something for them. Those are brand names, but we know what they meant, a facial tissue or a copy, as it were. I think that 99% of the people that hear that radio ad think they will get their actual OFFICIAL credit score. This is called a “FICO” score and is a trademarked name. See the below definition from www.myfico.com:

 

“’FICO®’ scores are the credit scores most lenders use to determine your credit risk and the interest rate you will be charged. You have three FICO® scores, one for each of the three credit bureaus – Experian, TransUnion and Equifax. Each score is based on information the credit bureau keeps on file about you.”

 

The company behind the radio ad I mentioned will give you something called a “VantageScore” that is supposed to be close to average of your three FICO scores, but it’s not the ACTUAL FICO score. (I’ve seen many complaints online that the VantageScore is often much lower than the average of the 3 FICOs, so beware.) To get your real FICO scores, you have to pay for them at www.MyFico.com.

 

You may have heard that by law the credit report companies have to give you your scores every year for free. They have to give you your credit REPORT for free every year, but not your FICOs. That website is www.AnnualCreditReport.com.

 

If you’ve applied for any kind of loan recently, you can ask your lender what your FICO scores are, or ask them for a copy of the credit report.

DO I DIVORCE MY MORTGAGE COMPANY, TOO?

When a couple divorces, and they agree that one of them will keep the house, they often forget that the lender expects BOTH parties to be responsible for the original loan until it is paid off. This is true even if a court has declared that only one of the parties is to be responsible for the payments.

 

Many a divorced person is surprised to get a call from their lender when the payment is late and they say, “But the judge said that my (ex-husband/ex-wife) is supposed to make that payment…” A divorce decree does not void a loan agreement. If the responsible party doesn’t pay on time, the other party must pay it, and then collect through the courts from the one that was supposed to pay it.

 

While this might not seem fair, the lender’s position is justified. They made a decision to lend a large amount of money based on an application from two people. Even if one of the parties doesn’t produce an income, they still have assets and their credit rating to protect, which the lender relied upon when making the loan in the first place.

The party not living in the home may have concerns about the payments being made on time to protect their credit rating. In addition, having that loan on their credit report will make it difficult to qualify for another loan, since the lender will include that payment when calculating their debt ratio.

There are several solutions: The property can be sold, which will pay off the old lender, and both parties will be relieved from liability. Another solution is for the remaining party to refinance the loan in their name only. The catch here is that they do need to qualify on their own.

FED INACTION ON RATES

So last week nearly all the “experts” expected the Federal Reserve to finally raise their key interest rate by a quarter of a percentage point. It’s been hinted at for quite a while now. The last few jobless reports and inflation reports seem to support the decision. Most of the financial world had factored that rise into the expectations, formulas and financial products. But then the Fed surprised with NO change, and stock markets across the globe dropped at the announcement.

 

So what gives? If lower interest rates are “good” for the business world (I put that in quotes because many people DON’T think they are good long-term, but that’s another article, or two!), then why wouldn’t people be cheering low interest rates? Borrowers can borrow more at cheaper rates for cars, homes, etc. and that stimulates buying, which leads to more profits, so why the concern?

 

Since the Fed was expected to raise rates based on the data that was out there for public consumption, people are wondering what other negative data are they looking at that isn’t made public? The worry investors have is that maybe things are worse than we’ve been told!

 

I think the Fed just didn’t want to rock the boat after the recent collapse of China’s stock market, which isn’t anywhere close to being resolved. So they were trying to provide some stability and project an image of calmness to the market, which seems to have backfired on them in the short-term. They did leave open the option of raising rates “soon” so we’ll just have to wait and see.

 

DELAYED CLOSINGS

The effects of the mortgage meltdown from several years back are still being felt today and will continue into the future. One of the biggest regulatory changes that came out of that crisis is the Dodd-Frank Act, which created the Consumer Finance Protection Board. The goal was to protect consumers and hopefully avoid another major mortgage problem.

 

They have already made some pretty major changes to the lending process in regards to what goes on behind the scenes of how mortgages are approved and then sold on the secondary market. Up next are some MAJOR changes to the disclosure documents borrowers receive in regards to the terms and costs of their loan. They will simplify them in the hopes of making them more understandable for the borrower. There will actually be fewer forms, which is amazing. The first one is the Loan Estimate which comes after you apply for a loan. The next is the Closing Disclosure which spells out exactly all the fees, rate and terms of your loan.

 

I’ll save you all the boring details except to say that borrowers will have to receive the Closing Disclosure at least 3 business days PRIOR to signing their final loan documents. ANOTHER 3 day waiting period is triggered if the Annual Percentage Rate goes up more than 1/8th of a percent for fixed-rate loans or ¼ of a percent for adjustable loans, or a prepayment penalty is added or the basic loan product changes (say from a fixed-rate to adjustable or interest-only).

 

These changes go into effect for mortgage applications submitted on or after 10/3/2015. So if you apply for a loan after that date, don’t count on a 30 day closing for most transactions. It may take 40-45 days. Maybe once everyone gets used to this we can get back to 30 day closings.

RESET AND RECAST

Over the next 12-18 months, many homeowners are going to see changes to their mortgage payment. A few will see their payments go down but some will see a MAJOR increase.

 

The ones that see their payment go down are the ones that took an adjustable-rate loan. Many of them have been fearing their payment will go up, only to be pleasantly surprised that their payment will actually go DOWN since mortgage rates have dropped quite a bit since they took their loan out 5-10 years ago.

 

Others won’t be so lucky. One of the more popular loans made back in 2005 and 2006 was a loan that had a fixed rate for 10 years and then the loan resets and recasts. Reset means the rate is adjusted by adding what’s called a “margin” to an “index.” Let’s say your loan paperwork states that your loan will be a 4% for a set period of time, and then it resets to “LIBOR plus 2%.” “LIBOR” is a common index that lenders use. 2% would be the margin that would be added to whatever LIBOR is at when your mortgage resets. The good news is that right now LIBOR is less than 1%, so your new reset interest rate in this example would be a little less than 3%.

 

So if that was the only change, the person in this example would see their payment go down. However, the loan may also “recast.” If your loan was interest-only for those 10 years, it may convert into a principal-reducing loan, which could increase the payment quite a bit. But on top of that, it will also likely need to be paid off in 20 years (since you are 10 years into a 30 year loan). These two changes can REALLY spike your payment.

FHA REFINANCE OPPORTUNITY

Do you have an FHA loan where the rate is higher than today’s market rates? Then there is good news for you! Rates are still very, very low and it’s not too late to take advantage of them. And if you happen to have an FHA loan, there is a program you need to know about.

 

It’s called the “FHA Streamline Refinance,” and it’s only for borrowers that already have an FHA loan. They are very fast and simple to do. You can lower your rate and your payment and it’s a pretty easy process. There is no credit check, no employment verification and not even an appraisal! On top of that, the rate that FHA charges for PMI (private mortgage insurance) went down recently. So not only could you get a lower interest rate, but lower PMI, too.

 

There are some qualifications, but they aren’t too cumbersome: You must be current on your existing loan, it must be at least 6 months from the date you bought the home, you can’t take cash out, and it must reduce your mortgage payment by at least 5%. There are fees associated with this process, but you can usually roll them into your loan.

 

One thing I like to point out whenever anyone considers a refi is the payoff period. Some people refi if it will save them anything per month, even $50. But keep in mind that if you’ve had your loan for 5 years, and then you refi, you now won’t pay it off for another 30 years. So you always have to weigh the savings NOW against having to make 5 more years of payments at the end (IF you are planning to keep the loan and home for 30 years, which very few people do nowadays!).

 

DOWN PAYMENT—THEN AND NOW

In the early 1900’s, home loans were rare. You either had to save over a lifetime, or inherit money in order to buy a home for cash. The few home loans that existed required at least 50% down. The loan itself was a balloon loan due in five years or less. Thankfully, times have changed. Down payment requirements have fallen dramatically over the years.

 

A few decades ago most lenders settled in around the 20% down payment scenario and that was the “norm” for quite a while. Then 10% down become popular, then it went to 3% down, and then nothing down, and then during the height of the mortgage mania, they’d give you a loan for 125% of the value of the property! Of course that was crazy and that blew up in their faces big-time!

 

When the real estate bubble burst, many lenders reverted back to 20% down, but even then loans were hard to get. Good borrowers were having trouble getting loans even if they had the 20% down. And many other borrowers just couldn’t come up with 20% down. So the government radically revamped their lending programs and became the “lender of last resort.” 3.5% down payment loans became abundant, although they came with higher fees in the form of mortgage insurance.

 

Now that prices are back up and foreclosures and short sales have diminished greatly, lenders are feeling more optimistic again. Yes, to get the best rates and terms with lowest fees (initial and monthly fees) you are still looking at 20% down. But if you don’t have 20% down, there are now lots of programs again for 10%, 5%, 3.5% and even 0% down. But thankfully I haven’t seen the return of the 125% loan again!

INVENTORY UPDATE

It seems like there is always some “expert” warning us about some upcoming economic disaster, and they have plenty of logical arguments and graphs to back up their arguments. For a while there we were worried about all the “shadow inventory” where they thought the banks were holding foreclosed off the market but were about to dump them on us all at once and our inventory was going to rise drastically. Then it was all the adjustable rate mortgages that were going to reset and cause another flood of foreclosures. Then they said interest rates were going to rise, which was going to put a huge chill on the buyer activity. All of these were supposed to lead to MUCH higher inventory of homes for sale.

 

Well, Chicken Little was wrong, again. As of the end of January, inventory of homes for sale is still very low across all of East Contra Costa County. Brentwood is hovering around 100 resale homes for sale. Oakley is just under 50 resale homes for sale, Antioch has 158 and Discovery Bay has 50.

 

It did look like inventory WAS rising last year. On a percentage basis, most of our local towns saw inventory increase 50-100% last year, which sounds like a huge increase. But keep in mind that, for example, in Brentwood last year we started the year with about 75 resale homes on the market. So when it went to about 150, that was a big percentage increase, but still low by historical numbers.

 

Normally such low inventory numbers would mean that it’s a “Seller’s Market” which means prices will continue to rise. However, since we are bumping up hard against what is “affordable” for buyers, we’ll have to wait and see how this year plays out.

LOWER FHA PREMIUMS

Good news for low-down payment home buyers! FHA has reduced their mortgage insurance premiums effective 1/26/2015.

 

We rarely saw FHA loans in California in the past because their loan limits were so low. That all changed when the mortgage meltdown happened and FHA raised their loan limits. For a while it seemed like FHA loans were the majority of loans being made. So when FHA changes their guidelines, it has a pretty big impact on the mortgage market.

 

Mortgage insurance is actually broken into two different types on every FHA loan. There is the upfront mortgage premium (a lump sum that can be paid at closing or added to the loan balance) and then there is a monthly insurance premium. As recently as 2007, the upfront fee was 1.5% and the monthly premium (which is paid as part of the monthly payment) was .5%. Starting in 2008 FHA started losing tremendous amounts of money, so they started raising their fees, which they did 6 times from 2008-2013. They wound up at 1.75% for the initial premium and 1.35% for the annual premium. This was a huge increase as FHA struggled to stay solvent. They also changed the rules regarding how easily the monthly insurance premium could be removed, which means they made it harder to stop paying it.

 

Now that home values are on the rise again, fewer loans are going bad and FHA is collecting premiums longer than they used to, FHA has decided to lower their upfront premium to 1.35% and the annual premium to .85% for FHA loans of less than $625,500. This may save the average buyer $150-250 per month, depending on their loan amount. So if you were just shy of qualifying for your home of choice before, call your lender back!

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