The First Lady Of Finance®

From my March 14th, 2010 column in the Sacramento Bee…

Help with downpayment and closing costs is one of the main things so many first time buyers need. Recently many of the programs that were previously available have not been because they have been out of funds. One of the places that can help and has funding for its programs is the non-profit NeighborWorks® HomeOwnership Center Sacramento Region.

Two of the most popular programs available are the NeighborWorks® CalHome program and the NeighborWorks® Citrus Heights program. As with most “special” programs, there are very specific guidelines involved with both programs.

Both programs require a minimum 620 credit score although some lenders may require a slightly higher score. They also both are for first time homebuyers—not have owned a home in the past 3 years–and require that the property be owner occupied and buyers must attend the “Preparing for Homeownership Workshop” at NeighborWorks®.

The CalHome program is for downpayment assistance and the borrowers may receive from $5,000 to $25,000 depending on how much is required to make the home affordable for the buyer. The interest rate is at 3 percent and it is a fixed rate second mortgage. Payments on the CalHome second are deferred for 30 years which means the borrowers have no payments on the second. CalHome is available in certain census tracts and/or redevelopment areas of Sacramento City and County. The borrower must have a minimum investment of $500.

The City of Citrus Heights program is for between $5,000 and $40,000 again depending on the amount of the subsidy needed for the home to be affordable to the homebuyer. This program however is limited to properties in Citrus Heights and has a sales price limit of $230,000. The borrower must have a minimum of 1 percent investment with this program.

Both the CalHome program and the City of Citrus Heights program have income limits of 80 percent of the median income limits for Sacramento County which are adjusted for family size. The income of all adult members of the household will be used in these limits even it the income is not being used for qualification of the borrowers.

The 80 percent median income for Sacramento County for 1 person is $40,800; for 2 people, $46,600; for 3 people, $52,450; for 4 people, $58,250; for 5 people, $62,900; for 6 people, $67,550; for 7 people, $72,250; and for 8 people, $76,900.

There are other restrictions on the property that may be more restrictive than some of the programs being used at this time because there is among other things a Housing Quality Standards Checklist that both programs must meet.

Borrowers must first be able to qualify for a first mortgage which may include the borrower having 2 months of cash reserves for the total monthly mortgage payment. This money is not used as a cost of the mortgage but the lender wants to see that the borrowers do have some reserve in case of a need.

NeighborWorks® also has two other downpayment assistant loans both for a maximum of $10,000. Both require a minimum of 650 credit score and both have a 5.5 percent interest rate and both of these loans are due in 10 years.

The first Down Payment Assistance program is for the greater Sacramento area while NeighborWorks® 2 is available for the City and County of Sacramento and for West Sacramento as well. NeighborWorks® 2 also requires that the buyer’s agent be a member of the Sacramento Association of Realtors®.

Both of these NeighborWorks® programs have an income limit that is 115 percent of the Sacramento median income limits adjusted to family size. For 1 person the limit is $58,650; for 2 people it is $66,988; for 3 people it is $75,398; for 4 people $83,735; for 5 people it is $90,419; for 5 people it is $90,419; for 6 people it is $97,104; for 7 people it is $103,860; and for 8 people it is $110,544.

All of these downpayment assistant programs while all different can help qualified borrowers with their downpayment. But these programs have restrictions that borrowers and their agents need to know about before looking for a property. See a Loan Consultant and see if any of them will help you.

For those of you worrying about loosing out on the federal tax credit for first-time homebuyers, California is working on its own tax credit. I’ll post more details soon!

From my February 28th, 2010 column in the Sacramento Bee…

The loan process has many layers and is often overwhelming to borrowers especially with everything changing so often. In making mortgage loans, lenders use guidelines regarding the borrowers and the property. During the early 2000’s, guidelines were relaxed quite a bit causing many loans to be made that later resulted in foreclosures. Investors took huge losses as well and many lenders went out of business.

Generally speaking, underwriting guidelines for most loans are set by Fannie Mae, Freddie Mac, FHA (Federal Housing Administration) or VA (Department of Veteran Affairs). These guidelines are set so lenders know what each of these agencies will accept and underwriters know how to underwrite the loan accordingly.

Some guidelines cannot be changed or the loan will not be saleable. For instance, FHA (Federal Housing Administration) is changing the upfront premium on their loans after April 5^th 2010.   An upfront premium is mortgage insurance that is added upfront to the loan to reduce the monthly premium which makes it easier for borrowers to qualify. Mortgage insurance protects the lender when there is less than 20 percent down. FHA loans only require 3.5 percent down but loans with so little down are considered very high risk loans which is why they have the mortgage insurance. The new upfront premium will be 2.25 percent, up from the current 1.75 percent.

Beyond these guidelines however is where some of the confusion comes in. Lenders need to get the money from Investors who will buy the loans. Investors can have some addition guidelines—these are called Overlays.

Overlays are put in place to further protect the Investor from more loan defaults. One example of an Overlay in place by many Investors is regarding credit scores. While FHA, VA or FannieMae may have a limit that they won’t go below, a certain Investor may have an even higher credit score requirement and the lender must follow that guideline in order to be able to sell the loan to the Investor.

Low credit scores are one of the greatest risk factors in making a loan. Lenders are seeking to lessen the risk as much as possible and having higher credit scores required is one of the easiest ways to lessen that risk. Lenders then are requiring this because it is an Investor Overlay.

Another Overlay can have to do with the loan amount. The Lender may require an add-on (extra cost) for a loan amount that is too low or may have a minimum loan amount that they will do. They may also require an add-on for a high loan to value (LTV).

Still another Overlay may have to do with appraisals. The Investor may require more than one appraisal on a property if the loan is over a certain amount, it is a non-owner property or for some other reason that concerns that particular Investor.

Investors look at where the greatest number of defaults were with loans and that is where they are more prone to add Overlays. Cash-out loans for instance are yet another area where Overlays may occur.

Overlays mean that Lenders not only have to follow the underwriting guidelines of whatever program a borrower is using like FHA but then they have to check out any Overlays a given Investor may be requiring.

Sometimes real estate agents or borrowers themselves hear about some new change in say FHA loans—something that seems to have eased up on some guideline. The problem is that lenders may not be able to put that change into affect for a while because they need to find out what the Investors are going to do about that regulation. This time delay can be very frustrating to all involved, including loan consultants who want to make the loans.

It may seem that Overlays have made getting loans even more difficult but in an era where taxpayers have had to bailout large banks and many homeowners have lost their homes, using more caution in making loans may ultimately serve borrowers more.

Now is such a wonderful time to buy if you really are qualified to buy—low sales prices, low interest rates—but the right time isn’t the same for all buyers.

From my column February 21st, 2010 column in the Sacramento Bee…

Knowing the terminology when you are shopping for a home helps. Here are a few terms that may have confused you.

• MORTGAGE INSURANCE—Mortgage insurance (MI) is what the borrower pays if there is there is less than a 20 percent downpayment. MI insures the lender because loans with less than 20 percent down are considered high risk loans. With MI the risk to the lender is lessen and they are more willing to take the risk. However due to the high number of defaults in recent years, MI companies are requiring more down in order to insure the loans too.
• PITI—PITI stands for principle, interest, property taxes and homeowner’s insurance. PITI is often used when describing the monthly payment a borrower will have. The PITI is what the lender will use in qualifying a borrower. Sometimes you will see it as PITIMI and with that, monthly mortgage insurance is included in qualifying the borrower because they are putting down less than 20 percent.
• HOME WARRANTY—Home warranty insurance insures certain things in your home like appliances, plumbing, electrical and heating and air conditioning. In some cases you can pay for additional coverage that will include a swimming pool and its equipment. This insurance is not the same as homeowners insurance and usually only covered the first year in a home. In recent years however, the policies have been extended and borrowers may renew them every year. This insurance is very helpful now especially as homeowners are very reluctant to file claims on their homeowners insurance for fear of increased premiums. In addition to the yearly premium on the home warranty, there is a service fee for someone to come out. You must use the service company that the home warranty company selects in order for the work to be covered. Fees for a visit can range from approximately $55 to $75 but that is all the homeowner pays if it is a covered item—even if they have to come out more than once—and that includes parts. It is a very good thing to have especially for first time homebuyers.
• MELLO ROOS—Mello Roos fees are an assessment on newer properties that help take care of the infrastructure in that area. This fee is found on most newer properties built after 1985 and can be found especially in areas like Elk Grove, Natomas, Antelope, Lincoln, Loomis, Folsom and Rocklin where a lot of new development has occurred. When you are getting preapproved by a Loan Consultant, the Loan Consultant often has no idea where you will be looking and so they may only have considered the PITIMI in qualifying you. Mello Roos fees can run up to several hundred dollars but the Loan Consultant won’t know that information until you find a property. If you are going to be looking at newer homes, be sure your Loan Consultant knows that and then don’t push for the maximum you qualify for until you check out additional fees like Mello Roos.
• HOA DUES—HOA dues are homeowner’s association dues. HOAs are typically found with condominiums but they can also be found on homes in communities where they have amenities like a swimming pool, tennis courts or a gym. HOA dues cover a variety of things and they also range in price from $100 to over $500 a month. Typically they would cover common areas which would include the pool and club house but also the common grounds. With a condo, they may also cover the outside of your property for things like painting. Again, it is important that your Loan Consultant know about any such fees on a property as soon as possible to make sure you still qualify for that property.
• REO PROPERTIES—REO properties are bank owned properties. These are properties that have been foreclosed on and the bank has taken back. REO properties can be priced aggressively because they are costly for the bank to hold on to and the bank wants to sell them as quickly as possible. These properties are often in need of repair because they might not have had repairs made on them by the previous owners or they might have been vandalized which often occurs when properties stand vacant too long.
• SHORT SALES—Short Sales are owner occupied properties. These properties are typically upside down which means the borrower owes more than the property is worth in today’s market. When the owner however still wants to sell, they list the property with a real estate firm and the offers are presented to the bank to see if the bank will accept a sale at a price less than what is owed to them. These sales typically take longer because the bank has an owner in there that is already making the payments and they are not eager to take a loss on a property if it is not necessary.

From my February 14th, 2010  column in the Sacramento Bee …

Tax time is one of my favorite times! No, I’m neither crazy nor an accountant but tax time in that special time of year when people—even the most disorganized—seem to get organized at least as far as what I need. They can put their hands right on those W-2s and the income tax returns which is often a problem for people later in the year when those things have found their way into the back of some shelf or drawer or worse yet…the shredder!

Here are some other things that you might be discussing with your tax preparer other than how can you get a Tax Credit which is also a wonderful thing to discuss.

1. If you are not a homeowner, then ask about the potential benefits to you personally of homeownership. There are many benefits to homeownership but depending on your income they may vary and you need to know what works best for you.
2. If you are a homeowner with equity of over 30 percent and have considered buying a second home for vacation home or for a rental home, now is a perfect time for those who are qualified. For vacation homes, remember that foreclosures and the declining market have created wonderful opportunities to buy in places like Palm Springs, the coast and the mountains. For investment properties, you can look right here in our area for some wonder opportunities. Your tax person can best advise you on how either of these might benefit you tax wise. A Real Estate Agent can tell you about where some good values might be and a Loan Consultant can tell you whether you qualify for a loan for such a property. Don’t forget too that a rental property might be where you plan to retire at a later date.
3. Are you a self employed buyer who writes off as much income as possible? This is most self employed people do to help them with their taxes. If you hope to buy something this year, though, be aware that lenders typically use your “adjusted gross income”. That’s the figure found on the bottom front page of your 1040. Previously many borrowers used “stated income” for self employed borrowers but those days are long gone and stated income loans are not too likely to reappear for anytime in the foreseeable future. The stated income loan was largely designed to help self employed borrowers but there was just too much abuse of the program. Ask you tax preparer if showing a little more income this year—despite the added taxes—might work out for you.
4. If you purchased a property or refinanced one, then be sure and take your closing papers into the tax preparer because you might be able to write off some things. The closing statement is the final breakdown of costs that the Title Company gave you when you closed escrow. This is usually referred to as the Settlement statement or the HUD I. You receive many estimates of costs when you are buying or refinancing but this is the final breakdown of costs and it will have the Title Company’s name on it.
5. This real estate market has led to many very unfortunate situations for homeowners in both our area and the country as a whole. Some have been forced into foreclosure or short sales. Still others are deciding whether they should go the short sale route or not. Short sales are where the homeowner owes more than the value of the property. Sometimes these homes are listed and when a buyer is found, the offer is presented to the lender holding the current mortgage to see whether they will settle for less. Whether you have taken that path or are considering it, perhaps you should ask your tax preparer if there would be any tax consequences involved.
6. And certainly if you are hoping to buy a home this year, ask your tax preparer about the current Tax Credit, what is involved and how it will help you. A Tax Credit works as a dollar to dollar credit against money owed the IRS. If for instance, you owe $10,000 and you have an $8,000 Tax Credit, then you would only owe $2,000. It was renewed for this year and is spurring a lot of people to buy this year!

What is most important is to understand where to get tax advice. Ask a professional because they are the ones who know the details and the tax regulations. Ask other people other people and you are dealing with opinion—”opinion” that may prove to be costly to you in the end. This is tax time and this is the time to ask your tax expert!

When it comes time for your application appointment, it helps to be prepared.  Having the needed documentation will make it easier for your loan officer to get your application started.  Below is a list of helpful documents to bring to your appointment.  This is a broad list to cover all possible borrowers, so some documents may be relevant to you and your co-borrower while others are not.

IDENTIFICATION

• Current photo identification (drivers license, I.D. card) for each borrower
• Resident alien card

INCOME

• Current pay stubs (one full month)
• W2s/1099s (last two years)
• Evidence of social security/retirement income (i.e. copy of check or award letter)
• Federal tax returns, with all schedules/attachments (last two years)
• Partnership/corporate tax returns (last two years)
• Signed year-to-date profit and loss statement
• K1s for all partnerships
• Evidence of child support income (i.e. 12 months of canceled checks)
• Rental agreements on all rental properties

ASSETS

• Bank statements, all pages (last three months)
• Money market statements
• 401k statements
• Original gift letter
• Copy of transfer of gift funds to escrow or your bank account
• Verification of donor’s ability to give funds (i.e. bank statement)

CREDIT

• Account numbers for installment and revolving debts
• Last 12 months mortgage payment history
• Landlord addresses (last two years)
• Complete divorce settlement documents
• Complete bankruptcy papers
• Explanation of derogatory credit

Good luck with your appointment!

Some people are confused about the Tax Credits whether they are filing this year or hoping to use it for a purchase this year. This page at Internal Revenue Service website will lead you directly to information on the Tax Credit.  You will need to file certain forms and bring in some papers from the close of your house but that information is on this site.  Let me know if this helps you!

One of the biggest oxymorons is the term Short Sale! Short Sales may be many things but they are never “short” in duration. Short Sales are where the buyer owes more than the value of the home versus REO’s where the home has been foreclosed on and the bank owns the property.

Some people think that a Short Sale is the next step before a foreclosure but that isn’t necessarily true. Sometimes the borrowers just want out of the house they are in because they are moving or even looking for a rental with a lower payment.

If buying is confusing in the first place, Short Sales make that confusion even greater. Looking at some of the terms involved with the Short Sale process may make that process at least a little easier to understand. –

• LENDER—For purposes of this column, Lender refers to the holder of the note on the property being sold. Loan Consultant will refer to the person who is doing the loan for the buyer. They would both be normally referred to as “the Lender” which is why I want to distinguish them here.

• ACTIVE SHORT SALE—This is where a property is listed for sale with the Real Estate Company. Being listed is the same as with any other property only it is identified as a Short Sale so both the agents and the buyers know how to deal with the property.
• ACTIVE SHORT SALE CONTINGENT—This means that an offer has been sent to the Lender. The offer was accepted by the owner of the property but now that offer has to be sent to the Lender for approval. Generally speaking it will take 60 to 90 days to get that approval from the Lender but is may be as little as 45 days and as long as a year since so much depends on the Lender involved.While in this stage, back up offers may be accepted and often are as the property is still on the market. The Lender may come back asking for more money from the buyer. That buyer may counter with more money or they may decide they don’t want the property for the price the Lender is asking. In that case, the Lender will look at the backup offers and decide which will net the most money for the Lender.
• PENDING—Pending is when the offer has been approved by the Short Sale lender and the sales is waiting to close. This after the accepted offer by the owner has been sent to the Lender.
• APPROVAL LETTER—This is a letter from the Lender approving the sale of the property. This is a demand that goes into title.
• SHORT SALE ADDENDUM—The Short Sale Addendum does two basic things. It first identifies a time period where the buyer expects a reply from the Lender. This time period needs to be reasonable like 60 to 90 days if the buyer really wants the property. The other thing has to do with the remove of contingencies. Again a normal period for the loan contingency for instance to be removed would be 17 days after the Approval Letter is received by the buyer’s agent.

One of the problems that can occur with the Short Sales is that the buyer waits for months for the Approval Letter and then the Lender wants the property to close right away. Most ask for a 30 close buy some are a little more realistic. Real Estate Agents typically will wait to ask for an extension on this time period until 3 to 5 before the estimated close so they can be more accurate on the time.

Some of the Lenders are more difficult to work with and will ask for huge fees if the property doesn’t close on time while others are more willing to work with the buyer and the buyer’s agent.

With Short Sales you need 2 things before you even get involved with one. The first thing is patience because as I said, Short Sales are an oxymoron. The second thing that is the most important thing in your success with a Short Sale is to work with a Real Estate agent who really understands Short Sales and is willing to work with them. As with any special category, Short Sales require a different mind-set. There are many wonderful agents who do not want to work with Short Sales so when you are looking for an agent and you think you might want to look at Short Sales, discuss it upfront with your agent.

How people look at credit varies greatly. Some borrowers are concerned if they once had a three-day late on some payment while others consider collections and judgments to be standard with most people.

How lenders look at credit has become much more standardized with the use of FICO^® (Fair Issac and Company) credit scores. Credit scoring is a method of determining the probability that a borrower will repay a debt based on their past credit history.

The lender is looking at three basic areas with a borrower: income, assets and credit. The income tells whether the borrower can afford the payment. Assets tell how a borrower handles their money. To the lender, though, the credit has become the key issue in loans because it basically tells how a borrower looks at their financial obligations.

Sometimes a borrower makes a lot of money but gets sloppy about paying the bills using the “I’m too busy” excuse. They feel that because they had money in the bank and “could have” paid the payment that it’s somehow all right to be late. A lender is more impressed with a borrower of modest means who always pays their bills on time.

In the past a borrower with credit problems who used the “I was young” or “We were having a good time” excuses might have found a sympathetic Underwriter. With the use of credit scoring, however, lenders have found a method of predicting which loans will be good ones with a great deal more accuracy.

FICO^® scores are a number the credit bureau assigns a borrower after looking at around 35 different factors. Each of the bureaus gives the lender a number for the borrower and the lender generally uses the middle score. Scores range from around 300 to 850. Unlike weight and golf scores, the higher the FICO^® score, the better it is. Most conventional loans require scores of at least 620. FHA and VA loans are not using FICO^® scores at this time but the more the statistics support the success of the credit scoring, the more likely it is that they too will start using the FICO^® scores in the future as well.
Good credit has been a matter of pride for some borrowers but beyond that it can financially benefit borrowers as well. Car dealers have been using credit scoring for years which is one of the reasons buying a car was so much easier than buying a house. But what about those 1 and 2 percent loans for cars? Are they for everyone? No, they are for borrowers with good credit. Borrowers with credit problems pay increasingly higher interest rates on their cars depending on how bad the credit problems are.

Depending on how low the FICO^® scores are, homebuyers may also need to pay higher interest rates as well. Some loan programs like 103 percent loans can require scores as high as 700.

What are these scores based on? The scoring takes into account a number of things in addition to the very obvious ones of bankruptcy, foreclosures, collections, late payments and judgments. Having too much or too little credit can be a problem. A borrower may have zero balances on all their accounts but have high limits that would allow them to charge up as much as $100,000.
High balances on all of your accounts can count against you even if they are all paid on time. Too many open accounts are a problem as well. Some borrowers can have 45 to 65 accounts without realizing it. The reason is that when you buy a washer or computer or piece of jewelry, most people don’t close out the accounts when they are paid off. Calling isn’t enough nor is cutting up the card. Some borrowers have added a lot of accounts by moving balances from one account to another in order to take advantage of low introductory 6-month rates. If they are not closed out in writing, these open yet unused accounts can count against you.

Some people feel they can avoid credit problems by only paying cash for everything but if a borrower has no credit history, the lender has no way to determine how they handle credit.

How old accounts are is important too. Opening three new accounts won’t help get a score until they are at least six months old so the bureaus have a number of months to review.

Time is a big factor in credit scoring. For instance a late payment three years is not given the same score as one three months ago. Typically collections and judgments are required to be paid off.

A borrower may have thousands of dollars worth of unpaid collections and judgments but feel their credit is better off because they didn’t file bankruptcy. That isn’t always the case. With reestablished credit a borrower may be able to some loans two years after the discharge of a bankruptcy and a conventional loan four years after the discharge of a bankruptcy. The key is to reestablish credit. Borrowers should also send a copy of the discharge papers along with the schedule of debtors released to each of the three major credit bureaus. Once this is done, the credit report will only show a few lines stating that there was a bankruptcy and when it was discharged.

It is all too easy to get credit cards these days and even easier to find things to put on them. Remember though that you are painting your own credit portrait when you buy on credit and that portrait will stay with you and affect your ability to buy cars and homes now and in the future.