The focus this month in the financial world is on Fannie Mae and Freddy Mac. The nations two largest sellers of mortgage backed securities, or MBS's for short. Mbs's are secured investments that Fannie and Freddy sell to investors at a price, very similar to a stock. In the past these investments were a great way for investors to diversify their portfolios with a steady flow of income at relatively low risk. They key term there is low risk... As the housing boom was taking off at the beginning of the millennium, the qualifying guidelines for mortgages magically seemed to relax and allow people with little to no credit purchase homes. Shady lenders pushed loan programs like negative amortization, interest only payments, and the dreaded adjustable rate mortgage.
The reason no one had a problem with this extremely lax system is simple, and in the end all comes down to money. Imagine that! The problem was that home prices across the nation were increasing at an alarming rate. Which got lenders thinking, "Hey, home prices are going up so fast does it really matter if people qualify for these mortgages? I mean if they don't make their payments and we do foreclose upon them we could actually sell the homes for more than what's owed on them!"
Brilliant...
Who would have thought that after unprecedented growth there would be a rapid adjustment downward to correct it? Many were obviously blinded by greed. Banks across America are suffering. Although, I will tout my Wells Fargo horn a bit here and say we have come out on top of all of this mess. Our strong ethical leaders did not pursue the path of the quick buck and are now in a dominating position in the market place.
Anyway I digress. Fannie and Freddy were showing strong signs that they were running out of money due to the large amount of foreclosures hitting the market. Our government got the gerbil wheel into high gear..."If Fannie and Freddy go bankrupt and there's no one to back mortgages we are going to be in some deep trouble!"
We probably would have spiraled into the worst economic times since the great depression had the good old government not stepped in and threw down some serious cash to keep things going.
Thankfully they did and this is what it means for me and you.
Lower interest rates on conventional mortgages, and we don't spiral into a depression.
The 30 year fixed mortgage is holding steady at about 6.00% . That's down more than half a point when the rate was at about 6.625% last month.
Rates are down and the government is giving first time buyers a $7,500 interest free loan if they buy a home in the next 9 months. Hmm... I think now might actually be a great time to buy!
Monday, September 15, 2008
Saturday, August 9, 2008
Mortgage 101: The Basics of Obtaining a Mortgage
You've finally reached that point where you're ready to make the biggest purchase of your life. It's time to buy your first house!
Well, at least you THINK you're ready to buy a home. However, what you think you can afford, and what a bank is willing to lend you may be very different. There are many factors involved when it comes to qualifying for a home loan, and the more you educate yourself about these qualifying factors, the less trouble you will have when you apply for a mortgage. If you need some more clarification on these topics visit my website http://www.getaloanforahome.com/ and send me a message, or simply give me a call, I'm always available to help.
THE 5 C's (Credit, Cash as Income, Cash to close, Characterists, Collateral)
Credit:
Your credit report is one of the most important factors a lending institution will consider when determining your ability to pay back a mortgage. Whether you realize it or not every single transaction you make that involves borrowing money is reported on your credit report. If you have a generally good history when it comes to paying off your debts you will most likely have a good FICO (Fair Isaac Corporation) score. A FICO score is a number ranging from 300 to 850 which helps creditors immediately determine your ability to pay back a debt ( You want at least a 620 when you apply. However if there are extenuating circumstances which caused a dramatic decline in your score you may still be approved with as low as 500).
A FICO score is derived from a compilation of data from three different credit bureaus, they are Equifax, Experian, and TransUnion. The math and algorithms involved in determining this number is complex but this link http://en.wikipedia.org/wiki/FICO_score gives a good breakdown of what factors determine your FICO score.
If you have tried to obtain your "Free Credit Report" from sites like http://www.freecreditreport.com/ You probably were disappointed when they actually make you pay for your score...but I thought the commercial said FREE...ridiculous. If you would like to know your credit score ( for free, I promise) please visit my website http://www.getaloanforahome.com/ and send me a message. I will send you an email/call you back with your score, and tips to improve it.
Cash (monthly income)
Obviously a crucial factor in determining what you can afford is how much you make in a given month. Mortgage bankers will always base calculations off of your income before taxes ( Gross Income). As a general rule of thumb your housing payment (with taxes and home owners insurance expense) should not exceed 35% of your monthly gross income. This ratio is just a guide to lenders, it is not set in stone. For example if you have a phenomenal FICO score, let's say 807, then you may be able to obtain financing on a payment that is over 60% of your gross monthly income.
If your are 100% commissioned employee, or you receive bonuses, you may be in for a surprise when you cannot get a loan for nearly as much as you had hoped for. Current guidelines require a lender to use a 2 year average when qualifying a commissioned/bonused employee. For example a magazine sales man makes $28,000 his first year selling magazines, But next year he discovers a sales tactic which really increases his profits and he makes $65,000. Because he is 100% commissioned the income I would have to use if he applied for a loan would be 46,500. Same principle applies for bonuses. I will have to average them over a 24 moth period.
If you work in an industry where you receive cash or tips and you don't report these items on your tax returns you will most certainly NOT qualify for a mortgage. Lenders must calculate income based on what you report to the government. This is often why it is difficult for business owners to obtain home financing because many times they write off so many items that at the end of the year there is little to no money reported to the IRS. If you would like to calculate how much home you can afford again I will direct you to http://www.getaloanforahome.com/ and click "Calculators" on the left side.
Cash (for closing)
It use to be that you could show up to closing without a cent and step into your new home soon after. Unfortunately, this is rarely the case these days. While there are still down payment assistance programs out there such as Ameridream http://www.ameridream.org/ There are concerns that federal legislature will soon eliminate many down payment assistance programs. Ameridream will continue to operate until October 1st 2008. After that we are unsure what will happen.
The minimum down payment required by lenders today is 3% of the total loan amount. This type of loan is a government insured FHA loan http://www.hud.gov/offices/hsg/fhahistory.cfm. If you want a $200,000 loan you need to put down at least $6,000. In addition to that you will need to come up with closing costs. Estimate $2,000-$4,000. If you obtain financing from a Mortgage Banker such as myself, with Wells Fargo Home Mortgage your closing costs will be lower. A mortgage brokers fees will be on the higher end. If you can't come up with cash to close FHA allows a relative or close friend to gift you the cash. If you're thinking about putting the down payment on your credit card to earn some reward points, you're out of luck. Lenders need certified checks; no plastic accepted. There is a one way you can use your credit cards to help you out with a down payment, but you'll have to contact me personally to learn more about that creative method...
Characteristics
No, we don't care if you're a blond or brunette, characteristics refers to the type of financing you are applying for. You don't really have to worry about this area of the 5 C's. Some loans have higher risk than others. A 15 year fixed is less risky than a 1 year adjustable rate mortgage. Whatever loan you think you want won't have much effect on your ability to be approved. If you're not sure what you want a good lender knows the right questions to ask to fit you into the best program available.
Collateral
The collateral on a home loan is the home itself. Different types of homes have different levels of risk. One of the most common types of homes is a single family owner occupied residence. This type of property is also viewed as a low risk to lenders. The reason an owner occupied single family residence is viewed as a low risk, has more to do with the fact that the home is OWNER OCCUPIED. This simply means that you consider this your primary residence and you live there the majority of the year. From a bankers view point this is ideal because a person who lives in the home they just bought is more likely to keep it in good condition for the life of the loan. On the other hand, an investor buying properties left and right to rent them out, will probably not keep the properties as nice, and may neglect them to the point where the value of the home is less than the current loan balance. Investors often have to pay higher interest rates because of the risk involved. Again if you are just looking for a place to call home you will not have to worry so much about whether you are buying a condo or a single family home.
I hope you found this information helpful. If you would like further advice feel free to email me at Ryan.P.Scully@WellsFargo.com or visit me on the web at http://www.getaloanforahome.com/
Well, at least you THINK you're ready to buy a home. However, what you think you can afford, and what a bank is willing to lend you may be very different. There are many factors involved when it comes to qualifying for a home loan, and the more you educate yourself about these qualifying factors, the less trouble you will have when you apply for a mortgage. If you need some more clarification on these topics visit my website http://www.getaloanforahome.com/ and send me a message, or simply give me a call, I'm always available to help.
THE 5 C's (Credit, Cash as Income, Cash to close, Characterists, Collateral)
Credit:
Your credit report is one of the most important factors a lending institution will consider when determining your ability to pay back a mortgage. Whether you realize it or not every single transaction you make that involves borrowing money is reported on your credit report. If you have a generally good history when it comes to paying off your debts you will most likely have a good FICO (Fair Isaac Corporation) score. A FICO score is a number ranging from 300 to 850 which helps creditors immediately determine your ability to pay back a debt ( You want at least a 620 when you apply. However if there are extenuating circumstances which caused a dramatic decline in your score you may still be approved with as low as 500).
A FICO score is derived from a compilation of data from three different credit bureaus, they are Equifax, Experian, and TransUnion. The math and algorithms involved in determining this number is complex but this link http://en.wikipedia.org/wiki/FICO_score gives a good breakdown of what factors determine your FICO score.
If you have tried to obtain your "Free Credit Report" from sites like http://www.freecreditreport.com/ You probably were disappointed when they actually make you pay for your score...but I thought the commercial said FREE...ridiculous. If you would like to know your credit score ( for free, I promise) please visit my website http://www.getaloanforahome.com/ and send me a message. I will send you an email/call you back with your score, and tips to improve it.
Cash (monthly income)
Obviously a crucial factor in determining what you can afford is how much you make in a given month. Mortgage bankers will always base calculations off of your income before taxes ( Gross Income). As a general rule of thumb your housing payment (with taxes and home owners insurance expense) should not exceed 35% of your monthly gross income. This ratio is just a guide to lenders, it is not set in stone. For example if you have a phenomenal FICO score, let's say 807, then you may be able to obtain financing on a payment that is over 60% of your gross monthly income.
If your are 100% commissioned employee, or you receive bonuses, you may be in for a surprise when you cannot get a loan for nearly as much as you had hoped for. Current guidelines require a lender to use a 2 year average when qualifying a commissioned/bonused employee. For example a magazine sales man makes $28,000 his first year selling magazines, But next year he discovers a sales tactic which really increases his profits and he makes $65,000. Because he is 100% commissioned the income I would have to use if he applied for a loan would be 46,500. Same principle applies for bonuses. I will have to average them over a 24 moth period.
If you work in an industry where you receive cash or tips and you don't report these items on your tax returns you will most certainly NOT qualify for a mortgage. Lenders must calculate income based on what you report to the government. This is often why it is difficult for business owners to obtain home financing because many times they write off so many items that at the end of the year there is little to no money reported to the IRS. If you would like to calculate how much home you can afford again I will direct you to http://www.getaloanforahome.com/ and click "Calculators" on the left side.
Cash (for closing)
It use to be that you could show up to closing without a cent and step into your new home soon after. Unfortunately, this is rarely the case these days. While there are still down payment assistance programs out there such as Ameridream http://www.ameridream.org/ There are concerns that federal legislature will soon eliminate many down payment assistance programs. Ameridream will continue to operate until October 1st 2008. After that we are unsure what will happen.
The minimum down payment required by lenders today is 3% of the total loan amount. This type of loan is a government insured FHA loan http://www.hud.gov/offices/hsg/fhahistory.cfm. If you want a $200,000 loan you need to put down at least $6,000. In addition to that you will need to come up with closing costs. Estimate $2,000-$4,000. If you obtain financing from a Mortgage Banker such as myself, with Wells Fargo Home Mortgage your closing costs will be lower. A mortgage brokers fees will be on the higher end. If you can't come up with cash to close FHA allows a relative or close friend to gift you the cash. If you're thinking about putting the down payment on your credit card to earn some reward points, you're out of luck. Lenders need certified checks; no plastic accepted. There is a one way you can use your credit cards to help you out with a down payment, but you'll have to contact me personally to learn more about that creative method...
Characteristics
No, we don't care if you're a blond or brunette, characteristics refers to the type of financing you are applying for. You don't really have to worry about this area of the 5 C's. Some loans have higher risk than others. A 15 year fixed is less risky than a 1 year adjustable rate mortgage. Whatever loan you think you want won't have much effect on your ability to be approved. If you're not sure what you want a good lender knows the right questions to ask to fit you into the best program available.
Collateral
The collateral on a home loan is the home itself. Different types of homes have different levels of risk. One of the most common types of homes is a single family owner occupied residence. This type of property is also viewed as a low risk to lenders. The reason an owner occupied single family residence is viewed as a low risk, has more to do with the fact that the home is OWNER OCCUPIED. This simply means that you consider this your primary residence and you live there the majority of the year. From a bankers view point this is ideal because a person who lives in the home they just bought is more likely to keep it in good condition for the life of the loan. On the other hand, an investor buying properties left and right to rent them out, will probably not keep the properties as nice, and may neglect them to the point where the value of the home is less than the current loan balance. Investors often have to pay higher interest rates because of the risk involved. Again if you are just looking for a place to call home you will not have to worry so much about whether you are buying a condo or a single family home.
I hope you found this information helpful. If you would like further advice feel free to email me at Ryan.P.Scully@WellsFargo.com or visit me on the web at http://www.getaloanforahome.com/
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