Posts Tagged ‘Terms’

Mar 8

Michele

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Overlays Add to the Humps

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 5th 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.

Mar 6

Michele

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Terms Help Process

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.

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