Broker vs. Banker

There are many benefits to using a broker over a banker. What are they? Brokers get paid when they write loans, bankers get paid regardless. Brokers work when there is work. Bankers work during the day. Familiar with the term "banker’s hours"? What about flexible lending options? Not all borrowers have perfect credit. Some have below average credit for very valid reasons, such as medical expenses or emergencies. Banks may not even talk to them, but brokers work with hundreds of lenders and can usually find a lender for their client. There are many benefits for the customer to use a broker. If you get a good broker it is very beneficial. One good thing about using a bank is reputation. Banks are better regulated than brokers and if you get a bad broker they may try to take advantage of you. When you are working with a bank or a broker make sure you have a good relationship with your loan originator. Till tomorrow!

Out for the week

I am in class all week, but I will continue to post on monday.

Stated Income

As mentioned in the previous blog post there is a loan that will allow you to state your income. No pay stubs required. However, most investors require a verbal or written verification of employment. There are a few guidelines that you must remember. Investors do require a reasonable income. For instance you can't state 100k a year when you are employed at a job that normally pays minimum wage. Assets will strengthen your loan application when you are doing a stated income loan. If you have a 401k or a significant amount of assets in any account tell your loan officer. This loan was created for self employed and commission employees who have trouble proving all of there income. Have a great weekend!

Commission or Self Employed?

I work with many clients who are either self employed or get paid on commission. Often times when I inquire about my client’s income, they state a figure before any deductions and in most cases I am required to use a lower amount for income. I do not believe my clients are lying to me, but they may not understand how banks calculate income. How do banks calculate commissioned and self employed clients? Most investors require two years of employment in the same line of work. What you can do to figure your income is add the last two years gross income after all of your tax write off’s. Take the number and divide by 24. They want your monthly average for the last two years. I put an example below.

2005 Income 2006 Income Months Income Used

($75,000.00 + 62,000) / 24 = $5,708.33

In some cases business owners and commissioned employees may want to choose a stated income or no documentation loan. We will discuss that tomorrow. Till then happy buying and selling!

Secondphobia?

I speak with some clients who have a fear of second mortgages. Secondphobia is understandable, but is not always good. Many people have misconceptions of second mortgages. Years ago second mortgages were not as common as they are today, but back then people were less willing to spend more than they make. Unfortunately in society’s quest to keep up with Jones’s people over spend and get themselves into tight situations. If you have untapped equity in your home, you may want to access that to consolidate your debt and change your spending habits to keep yourself from getting into that situation again. In most cases the interest you pay on the second mortgage is tax deductible and depending on your credit score, your interest rate could be lower than what you are paying on your unsecured debt. Until tomorrow…..

80/20? Who likes fractions?

In every industry there is jargon and unfortunately I think banking has the most by far. Remember fractions? Most people don’t use them every day like we were all warned by our math teachers. One fraction in particular has made it into the industry and it’s 80/20. It’s not really a fraction as much as it is a banker’s vocabulary word. This simply means doing 80% of your purchase price on one loan and 20% on the other loan. This will keep you from paying mortgage insurance. However, this is not always the best for the customer. The problem with the second mortgage is that interest rates are typically higher than on second mortgages. If your rate is high enough on the second mortgage your payment may be more than if you took one loan and paid mortgage insurance. You have to balance it out. Also, often times the second mortgage is interest only. This may save you a small amount off your monthly payment, but in most cases it’s really not worth it. Until tomorrow happy buying and selling!

Mortgage Insurance?

What is mortgage insurance? Some people are under the impression that it's an insurance that will pay off your mortgage in case of an emergency. This is the wrong impression. Many years ago consumers could not purchase a home with no money down. Often times a down payment was a gift from friends or family. It was too risky per investors. Over time investors began to realize that there was a market for no money down loans. How would they manage the risk? Mortgage insurance. On a conventional loan you are required to pay mortgage insurance if your Loan to Value (see previous blog post) is over 80%. If you default on your loan the mortgage insurance protects the investor not the home owner. Many brokers and bankers will do 80% loan to value on one loan and write a second mortgage on your home for the other 20%. This will keep the buyer from paying monthly mortgage insurance premiums. Beware of FHA mortgage insurance. The premium is less than a conventional loan, but you are required to pay mortgage insurance for five years regardless of your homes appreciation of if you pay the balance down below 80% loan to value. We will discuss 80/20 loans tomorrow. Until then happy buying and selling!

How To Calculate Your Loan To Value Ratio

Loan to value is a very important ratio when it comes to lending. It's often referred to as LTV. How do you calculate and why is it so important? In order to calculate your loan to value you take the loan balance and divide by the value of your home. I provided an example below:

Loan Value LTV
85k / 100k = 85%

Why is it so important when it comes to lending? It's a measurement of risk. The lower your LTV the less likely you will default. If a person has a substantial amount of equity in their home, they are less likely to walk away from it. The lower the LTV the lower your rate and in most cases if you are under 80% LTV you will not have to pay mortgage insurance. What is mortgage insurance and why are some people required to pay it? We will discuss that tomorrow. Till then, happy buying and selling!

Manufactured Home?

Why is it so difficult to finance a manufactured home? Their was one incident in recent years that changed the face of lending for manufactured homes. A young couple purchased a singlewide trailer with some land. They were having difficulty making payments, so instead of letting the bank take their home they picked it up and moved it. The bank was left with just the land, which without the home was worth significantly less than what was owed. Lenders, being a finicky as they are began to get worried and put strict borrowing guidelines for those purchasing manufactured homes. This incident was not a trend, but no one wants to be stuck holding the bag. Tomorrow we will discuss what exactly is a manufactured home.

Oh The Joys of Interest Only. How To Calculate and is it Worth it?

When I first started into this business I was under the impression that interest only was never a good product for my customers. Over time and with more experience I realized that in some cases interest only was the best product for my customer. If you are borrowing less than $150.00 you will not see a significant difference in payments between interest only and principle and interest. However, if you are purchasing a higher priced home your payments will be significantly less than principle and interest. When is interest only the best product? One the East and West Coast and areas where homes are appreciating rapidly, it’s difficult for first time homebuyers to purchase a home. With the interest only, the clients will have a lower payment and will see a financial gain in the appreciation. Beware of ARM loans. Also, many business owners try to take tax advantage of the interest only products. How do you calculate the interest only payment? Take the gross amount of the loan, multiply it by the interest rate and divide by twelve. Here is an example:

$250,000.00 Loan
6.5 Interest rate

$250,000.00 x .065=$16,250.00
$16,250.00/12=$1,354.17

Monthly Interest Only Payment= $1,354.17

Reverse Amortization? Oh My!!!!

There is a popular mortgage product that is being marketed as a low price mortgage, but in all reality it's very expensive. It's called a reverse amortization loan. This loan offers the client three payment options. For example, if you borrowed $250,000.00 from a bank at a rate of 6.25, your monthly principle and interest payment would be $1539.29, your interest only payment would be $1302.09. When you make an interest only payment you are not paying down the principle. Now lending institutions are offering a third payment option. When you receive your payment coupons you will be given three options. The options are listed below:

1. Principle and interest $1539.29
2. Interest only $1302.09
3. Flex payment $651.05

Part of your principle and interest payment is credited toward your principle and interest only just pays the interest on the loan without paying any principle. The Flex payment option credits the $651.05 to your interest only payment and the other half of the interest only payment is actually added to your principle balance. When you take a reverse amortization loan you are actually adding to your balance when you make the minimum monthly payment. These are very rarely a good product for most people. It is a niche product, but some brokers and lending institutions attempt to take advantage of people by offering teaser rates or payments. Tomorrow I will let you know how to calculate and interest only payment. Make it a great day!

If it's too good to be true then.....

"Mortgage rates as low as 1%" "$350,000 for as little at $500.00 a month" These are all sample solicitations I received in the mail over the past month. Being real estate professional I know that they are just marketing pieces to get potential customers to call or get you in the door, but unfortunately not everyone can recognize that. At first it was a comical mailer and then it made me a little angry. These are the people that give the mortgage business a bad name! Responding to such ads can be an easy way to get taken advantage of. Often times the low 1% rate is for an introductory period of time, like one or two months, literally. The $500.00 a month piece could be introductory or a reverse amortization loan. I will explain reverse amortization loans tomorrow. Make it a great day!

Are Bi-Weekly Payments Really Worth It?

Many banks offer the convenience of making bi weekly payments. This method allows the borrower to make half payments every two weeks. However, this could be more costly than it’s worth. Typically on a 30 year fixed mortgage, you can pay off your home up to five years early. This is how it works. Since you are paying half mortgage payments you are making 13 payments a year. You are making one extra payment per year. Now let’s do the math. One bank I know charges $250.00 to enroll in its bi-weekly program. Then they charge a transaction fee of $10.00 on every payment. The first year the bank is making an additional $370.00 on top of the interest you are already paying them. You can have the same effect on your mortgage if you divide your principle and interest payment by 12 and add that to your monthly payment. You can do that for free! For example, if you monthly principle and interest payment is $1200.00, just add $100.00 to your monthly payment! One last piece of advice; be sure to tell the bank that you want the extra $100.00 to be paid toward your principle and not toward your next payment. Banks often hold overages instead of applying them to your principle balance.

FHA or Conventional?

Often times people call and request an FHA loan. FHA loans are a good product, but not always the best. It’s the loan officer’s job to interview you and make sure they find the right product for you. FHA can you give you a good rate with credit scores down to 585, but there is a catch. FHA requires a 3% down payment and you will have to pay mortgage insurance. The mortgage insurance for an FHA loan is less than the mortgage insurance on a conventional loan, but with FHA you will have to pay mortgage insurance for five years regardless of how much your home appreciates in value. There are some non-conventional mortgages that offer a higher rate, but with no mortgage insurance. You may be better off taking that route and it could potentially be less out of pocket at closing. Also, FHA charges a funding fee, which is kind of like an escrow account for you mortgage insurance. Often time loan officers just roll that into the loan, so even though you are bringing in 3%, your loan to value could be higher than 97%. If you have good credit try using a conventional 80/20 for 100% financing, but be careful with the 20% as the rates are much higher on second mortgages. Your payment could be lower if you just pay the mortgage insurance. Remember it’s your loan officer’s job to find the best product, but ask questions to make sure they are doing what is best for you!