PARAMOUNT MORTGAGE - LENDER'S BLOG

Four Big Money Mistakes of First-Time Homebuyers

First-time homebuyers almost always make a few mistakes when buying their home. Perhaps they pay too much, choose the wrong type of mortgage or neglect to budget for needed home expenses or improvements.

Here are the four biggest financial mistakes of first-time homebuyers:

Spending the maximum on housing

Lenders qualify buyers based on their incomes and debt-to-income ratios. However, borrowers also can spend a considerable amount of money on items such as transportation, savings, food and other necessities that are not counted in the ratios.

First-time buyers can be overly optimistic and excited about buying a home, so they tend to borrow the absolute maximum they can afford.

Instead, they should allow some wiggle room for a partial loss of income or for future unforeseen expenses such as children.

Not getting prequalified early enough

Many first-time homebuyers start house hunting before contacting a lender. This can be a time-wasting misstep if they have unknown credit report errors or other credit problems.

All buyers need to get prequalified early enough in the process so that, if needed, they can make changes to their financial situation. If an error shows up on their credit report for example, it will take time to correct it.

Some buyers may need to spend up to a year saving more money for a down payment, increasing their income, or to correct credit problems.

Misunderstanding the importance of a high credit score

While most consumers know it's important to have a high credit score, not everyone understands how costly a low score can be.

Mortgage lending is done with a tier of interest rates and terms based on consumer credit scores. A credit score of 720 or above will earn you the best rates and save you thousands of dollars over the life of a loan when compared to lower scores.

A score of 680 to 720 can get you good mortgage rates, while a FICO score of 620 is usually about the lowest score to qualify for most loans.

Choosing the wrong mortgage product

First-time homebuyers today typically opt for a 30-year fixed-rate mortgage. Their conservatism is a reaction to stories about the dangers of interest-only and adjustable-rate mortgages. Alternatives to a 30-year-fixed loan sometimes can make more sense.

If a buyer will be relocated by his or her employer in five years, there's no reason to pay a premium for the 30-year loan when a lower rate 5/1 ARM (Adjustable Rate Mortgage) may be a much better loan product for their situation.

Homebuyers eager to build equity in their homes or who are older and want to live mortgage-free in retirement should consider a 15-year fixed-rate loan or, if they can afford it, even a 10-year mortgage to reach their financial goals.

Mortgage closing costs are on the rise

Palm Beach, FL - BankRate.com has released its 2010 annual nationwide survey of mortgage closing costs.

For borrowers looking to finance a new home purchase, interest rates have never been lower saving them thousands of dollars over the term of their loan.

However, BankRate.com says that the other costs of getting that loan have risen sharply.

Big jump in fees?

Holden Lewis of BankRate.com reports, "On average, the origination and third-party fees on a $200,000 purchase mortgage added up to $3,741 in this year's survey. That's a 36.6 percent increase over last year's average of $2,739."

"Fees charged directly by lenders went up 22.8 percent, while fees charged by third parties - for things such as appraisals and title insurance - rose 47.2 percent," continued Lewis.

The average closing fees ranged from the most expensive in Texas at an average of $5,623 to Arkansas where the average was just $3,007.

Missouri ranked 44 in the 52-state survey with an average closing cost of $3,356, up 27.6 percent over the state's 2009 average closing cost of $2,429. Closing costs in Missouri are 10 percent below the 2010 national average.

Did fees really go up that much? Lenders say fees did rise, but a more fundamental change happened on January 1st of this year. The government began requiring lenders to provide accurate good faith estimates of closing costs, or GFEs.

The new rules which update the Federal Real Estate Settlement Procedures Act (RESPA) require mandatory usage of a new GFE, newly revised HUD-1/HUD-1A settlement statements and compliance with newly prescribed estimate tolerances.

Prior to January of this year, lenders were not penalized for underestimating fees in the good faith estimate. Now they are penalized for lowballing fees.

What about overestimating fees? Regulators discourage lenders from overestimating third-party fees, but there are no penalties for doing so.

Because BankRate's survey takes its numbers from online GFEs, some of this year's increase can be attributed to the regulatory requirement for higher accuracy.

Lenders say they strove to hold the line on their own fees, even though their labor costs have increased to achieve regulatory compliance.

More labor is required to process loans. Under Fannie Mae's Loan Quality Initiative, for example, every applicant's tax documents are checked against an IRS transcript.

Lenders match up Social Security numbers, conduct fraud checks, and pull credit reports just after application and right before closing. Third-party fees including title insurance showed increases in this year's survey.

Housing Affordability Surges Report Says

Cambridge, MA - Harvard University's Joint Center for Housing Studies released a comprehensive homeownership study in June which provides an in-depth analysis of the current state of the nation's housing market.

While the negative metrics of the economy are chronicled throughout the report, housing affordability achieved a "dramatic increase" producing growth in first-time home buyers.

"For those households able to avoid unemployment, meet tighter underwriting standards, and put more money down," when purchasing a home, their mortgage payments were the most affordable in years.

At the height of the housing boom, mortgage payments on a median-priced home peaked at 37.7 percent of median household income. In the first quarter of 2010 "payment-to-income ratios hit a new low of 18.9 percent."

Low interest rates and falling median home prices contributed to the lower payment-to-income ratio. The report states "the median home price dropped from $227,100" in 2006 to a low of "$166,100 in the first quarter of 2009".

Rates on a "typical 30-year fixed mortgage slipped from 6.6 percent to 5.0 percent," during the same period.

As a result, "monthly payments for a median priced home with a 90-percent mortgage fell by more than a third, from $1,300 to $800."

This improvement in affordability was widespread with more than 80 percent of all metro areas reporting lower payment-to-income ratios considerably lower than the highs of the '90s.

According to the National Association of Realtors, the first-time homebuyer share of the housing market climbed from 2006's 36 percent and surged to a high of 45 percent in 2009.

Without these first-time homebuyers, who added "roughly 306,000 sales in 2008-9," overall sales would have "fallen by 63,000" for that period.

The report cites the homebuyer tax credit program as "an important catalyst," for the surge.

The 19 contributing authors of the Harvard study reported "the first-time buyers' share of home sales typically decreases during expansions and increases during recessions." A hot housing market will "price first-time homebuyers out of the market while existing homeowners take advantage of rising prices to trade up."

While the present housing market entices buyers with more affordable housing prices, tighter underwriting standards make qualifying for a mortgage more difficult. "Lenders have reduced maximum debt-payment-to-income ratios, but are requiring larger down payments and higher credit scores."

The study's authors proffer "stricter underwriting can limit the pool of potential homebuyers." At the 38-percent-of-income standard, 17.8 million renters nationwide could qualify with their income for the median priced home in 2008. At a more stringent 28-percent standard, only 12.5 million renters would have qualified.

For the 5.3 million pool of renters that would not qualify for the stricter 28-percent standard, "home prices would have to drop more than 26 percent" in order for them to qualify for a mortgage at the 28-percent-of-income standard.

The State of the Nation's Housing 2010 was authored by the Joint Center for Housing Studies of Harvard University.

Link: Housing

FHA Ready to Reduce Seller Concessions

HUD is preparing to implement a few new policies that will no doubt affect borrowers utilizing FHA's guaranteed loan program.

The rule changes entered the public comment phase last week which will end on August 16. Implementation of the policies would occur thereafter.

These FHA proposed changes are part of FHA's overall strategy to "strengthen their capital reserves" and include:

1. Reducing allowable seller concessions from six to three percent.
2. Updating credit and down payment requirements for new borrowers.
3. Tightening underwriting standards for manually underwritten loans.

FHA faced the results of an audit in late 2009 which showed that the capital ratio of its Mutual Mortgage Insurance Fund (MMIF) had fallen below its statutorily mandated 2% threshold.

In a concerted effort to reduce its risk exposure in the last few months the Administration has raised premiums on its FHA insurance, prohibited seller-financed down payment assistance, stepped up enforcement of its regulations, tightened appraisal rules, banned several lenders from writing FHA guaranteed loans and brought suits against others.

FHA said it is also "concerned with the issue of layering risk" when qualifying borrowers for loans.  According to the FHA, "The chance of default is compounded in loans where there are low credit scores, high loan-to-value ratios, high debt-to-income ratios, and low or zero cash reserves associated with a loan."

The first new rule reducing seller concessions will bring FHA in line with the guidelines of most conventional lenders.  FHA said it has found that borrowers who had been allowed to "take concessions above 3 percent had a significantly higher risk of losing their homes." 

For example, loans written in 2008 with no concessions had a claim rate against the FHA guarantee of 1 percent. Seller concessions up to 3 percent had a rate of 1.2 percent while those loans with concessions above 3 percent had a claim rate of 1.7 percent.

FHA has required that seller concessions to borrowers in excess of six percent be treated as an "inducement to purchase" and that the FHA mortgage amount be reduced accordingly.  The new rule would reduce the allowed concession to 3 percent, with the permitted mortgage amount reduced dollar for dollar where concessions are given above that level. 

The second proposed rule, which in part requires a minimum FICO of 580 to qualify, will affect few borrowers since lenders primarily use higher qualifying scores.

The third proposed change outlines the compensating factors which can be used by lenders when manually underwriting borrowers with non-traditional credit.

The reliance on FHA guaranteed loan programs is shown in their increase of market share which has jumped from 3% in 2007, representing $57 billion in insurance written, to a high of 30% in 2009 with more than $300 billion written.

Low Credit Scores Have a Huge Impact - But Can Be Repaired

Rejection is always hard to take after applying for a job or being turned down for a loan, "particularly when you aren't given a reason." Sandra Block, Your Money columnist for USA Today reports that lenders will now "be required to tell you why."

President Obama signed into law on July 21st the most sweeping overhaul of Wall Street financial regulations since the 1930s. Among the consumer protections is a requirement that a lender must provide a "copy of the credit score" used in the decision to deny a loan to a borrower.

"Lenders will also be required to give you a free credit score if you're offered a loan with a higher interest rate than the rate offered to borrowers with excellent credit."

The law is not limited to lenders. If you receive an "adverse action" concerning a credit decision, such as being forced to pay a higher auto insurance premium or being rejected by a landlord to rent an apartment, "you'll be entitled to receive a copy of your credit score," continued Block.

Unfortunately, consumers who order a free score from a service like www.annualcreditreport.com will not get the same credit score that a lender may use to make a credit decision. "Lenders and credit bureaus use lots of different scores to evaluate borrowers," says John Ulzheimer, director of consumer education at Credit.com.

The FICO score is the most widely used scoring model, but some lenders use the VantageScore. Additionally, "the credit bureaus have their own proprietary scores, which some sell to consumers," according to Ulzheimer.

But the good news for consumers, "the law ensures that when you are turned down for a loan, or suffer an adverse action, you'll receive the exact score that was used to make that decision," stated Ulzheimer.

Consumers with sub-600 scores usually have serious credit blemishes such as foreclosure, bankruptcy or multiple 90-day late accounts. "Once your score drops below 600, it's nearly impossible to get a loan, and rehabilitating your credit could take years," Ulzheimer says.

A chapter 13 bankruptcy or a foreclosure stays on your report for seven years. Chapter 7, which eliminates most debts, stays on your credit report for 10 years.

Craig Watts, spokesman for FICO, offers a little relief for bankruptcy filers. They can "restore their credit score into the 600s in three or four years by paying their bills on time and maintaining low credit card balances."

If late payments have depressed your score, "you can repair the damage in a year or two by scrupulously paying your bills on time," continued Watts. "The credit score model gives more weight to recent history, so the impact of delinquencies diminishes over time."

Consumers should take steps to improve their score. "If you're in the 650 to 680 range, you're in the frying pan, but not in the fire," Ulzheimer says, however "you're one incident or event away from being in the fire."

Fannie Mae's LQI Tightens Underwriting Rules

Mortgage giant Fannie Mae rolled out its new Loan Quality Initiative (LQI) program June 1, 2010 to tighten underwriting requirements and reduce borrower fraud.

These rules could derail some closings for buyers who rack up purchases or even take out new store credit cards before their home sales have closed.

Part of the LQI requires any lender that sells its mortgages to Fannie Mae to determine that "borrower liabilities incurred up to, and concurrent with, closing are disclosed and evaluated in qualifying the borrower for the loan."

But exactly how lenders go about doing this is up to them. In many cases lenders will be checking for "undisclosed liabilities", such as new credit lines for autos or credit cards and they will verify the borrower's employment status.

Last-minute "refreshed" credit reports could be pulled to find out whether a borrower has obtained or shopped for new debt between the date of the loan application and the closing.

Borrowers who have made applications for credit of any type - for furnishings and appliances for the new house, a car, landscaping, a home equity line, a new credit card - risk having their closings put on hold pending additional research by the lender.

If a borrower has taken out new loans that are sizable enough to affect his debt-to-income ratio calculations used in his original mortgage approval, the added debt load could render him ineligible for the mortgage.

In other words, the buyer's loan approval may be in jeopardy if their credit status has changed before the loan closes. 

Under the terms of the standard purchase and sale agreement, a borrower who loses his financing just days before the closing due to LQI issues could potentially forfeit his deposit. Buyers' attorneys should think about how to address this in their P&S riders.

The bottom line for borrowers is that these last-minute credit checks could result in a closing delay, pricing adjustment, or, worse, loan approval cancellation.

The best rule for borrowers to follow is to avoid obtaining or applying for new credit, or even increasing utilization of existing credit, before their closings.

As the real estate industry adjusts to the dynamic changes in the economy, it is more important than ever to seek out professional, knowledgeable advice from a Paramount Mortgage Banker when starting the process of obtaining a home mortgage.

New Guidelines for Choosing Appraiser, Comps

Senate Extends Tax Credit Closing Deadline to September 30

Washington - An extension of the closing deadline passed unanimously in the Senate just hours before the June 30, 2010 closing deadline expired on an estimated 180,000 first-time and repeat home buyers nationwide.

House lawmakers easily passed the standalone bill earlier this week on Tuesday. The bill, HR 5623, extended the deadline for closing to September 30.

The Senate however, saddled the legislation with an amendment extending unemployment benefits, complicating efforts to get the deadline extended. The unemployment benefits extension was eventually stripped out of the final version.

The National Association of Realtors (NAR) estimated that 3,600 Missourians would have been affected by the original June 30 deadline. These home buyers had signed contracts, but were not able to close by the required deadline.

Once the deadline extension becomes law, tax credit buyers need not worry. Language in the bill to extend the deadline to September 30 would apply retroactively.

Separately, the U.S. Senate also passed the National Flood Insurance Program Extension Act of 2010 (H.R. 5569), which extends the National Flood Insurance Program until September 30. The House passed the bill last week.

The bill will retroactively cover the lapse period from June 1 to the date of enactment of the extension.

1,295 Prison Inmates Got Home Buyer Tax Credits

As Congress debated the extension of the closing deadline for legitimate home buyers, USA Today's, Sandra Block reported Thursday the "IRS is tracking thousands of fraud cases" involving "millions of dollars in home buyer credits."

The IRS tightened reporting requirements for taxpayers who claim the credit in response to earlier reports of widespread fraud. According to the Treasury's Inspector General, "additional controls are needed."

Among the fraud reported:

1,295 prisoners, including 241 serving life sentences, received $9.1 million in credits even though they were still incarcerated at the time they reported they purchased their home.

2,555 taxpayers received $17.6 million in credits for homes purchased before the dates allowed by law.

10,282 taxpayers received credit for homes that were also used by other taxpayers to claim the credit. In one case, 67 taxpayers used the same home to claim the credit.

To address concerns that prison inmates have been claiming the homebuyer tax credit, Senate Democrats announced a substitute amendment to HR 4213. The amended bill has a provision to allow the Internal Revenue Service to disclose tax-return information to officers and employees of state agencies charged with the administration of prisons.

Deadline Looms for Missouri's HOPE Tax Credit

Contact your mortgage banker for a free, informative HOPE flyer with all of the tax credit information for your buyers.