Friday, April 2, 2010

The What and Why of PMI

In years past if you wanted to buy a home a down payment of at least 20% was required. It was simple; if you needed long term financing for the home, the bank required that you have a considerable amount of “skin in the game”. They would finance the difference, but you had to put down the 20%.

The President was Jimmy Carter, the year was 1977, and the Community Reinvestment Act (CRA) was made law by the congress. The CRA required all financial institutions receiving FDIC Insurance be evaluated by Federal banking agencies to determine if these institutions were extending credit to all communities in which they were chartered to do business. This act sought to address discrimination in loans made to individuals and businesses in low and moderate income neighborhoods.

Implementing this law proved challenging and potentially more risky. Lenders knew that credit extended to lesser qualified borrowers had a higher possibility of default. At the same time, creditors realized that extending credit for these loans not only provided much needed capital for some communities, it could also prove to be a source of new profitable business. But lenders had to find a way to minimize or even cover the increased risk on these loans. And thus, Private Mortgage Insurance (MI) was born.

MI is offered by a business providing a financial guaranty to a lender extending mortgage credit to a borrower who has less than 20% to put down on a home purchase. The MI business in effect assumes a portion of the lender’s risk in making that mortgage loan. For sharing the risk, the MI company collects a premium from the lender and the lender typically recovers these costs from the borrower. The risk for the MI company is that the borrower will default on the loan and the insurer having to pay a claim to the lender.

Here’s an example of how it works.

Anita Lohn is buying a home for $150,000 and she has a 10% down payment, or $15,000. Her lender acquires an MI policy on her remaining $135,000 mortgage reducing its exposure to loss from $135,000 to about $101,000. Mortgage Insurance typically covers the top 25% to 30% of the mortgage. In Anita’s case, the MI will absorb approximately 25% of her remaining mortgage.

FHA home loans have their own Federally backed mortgage insurance. These loans benefit home buyers in two ways. First, the required down payment of 3.5% of the purchase price is less than required on conventional loans. And the monthly mortgage insurance premium is also reduced. At the same time, most FHA loans require an up front mortgage insurance premium that the borrower has the option of either paying at the time of closing, or rolling into the total loan amount. As of April 5, 2010 this up front mortgage insurance premium will be 2.25% of the home’s purchase price. Borrower’s should be made aware that FHA mortgage insurance is scheduled to last a minimum of 5 years, regardless if the home owner pays the loan balance down below 80% of the home’s value.

There are two common confusions about MI. First, mortgage insurance is not the same as property and casualty insurance. The property insurance covers the home owner’s risk to fire and other damage to their home. MI provides no such coverage. Second, MI is not the same as mortgage life insurance. This type of insurance covers the balance remaining on the mortgage when the insured home owner dies or becomes disabled. MI covers the lender’s risk, and the home owner gets to pay for it.

Private mortgage insurance makes it possible for families to buy homes with minimal down payments. For first time home buyers, MI helps them clear the hurdle of a large 20% down payment. In most cases the costs associated with MI are tax deductible at least through 2010. Households with adjusted gross income of $100,000 or less may deduct 100% of these costs. It’s best to consult your tax accountant for the full details on deducting MI costs.

Friday, March 26, 2010

V.A. Benefits Extend to Home Ownership

Yesterday we celebrated my office celebrated our move to a new office on South Broadway in Edmond, by cutting a ribbon and having quite a few friends over for a cook-out and prize drawings. Our guest of honor was U.S. Army Veteran Major Ed Pulido. During his presentation, the Major highlighted several of the many benefits available to veterans, including the V.A. benefit for home ownership.

This valuable benefit has helped tens of thousands of veterans own their own home. Because of their sacrificial service to their country, veterans have the opportunity to move into a new home aided by several special financing arrangements.

100% financing. This is one of the most distinctive features of V.A. home financing. Any approved veteran can find a home, make an offer and move into that home with no down payment. For many this is the only way they can ever afford to move into a home. Until a couple of years ago, conventional financing also offered 100% financing for qualified buyers, but now only V.A. and the Rural Development loans provide no down payment options.

4% seller concessions. Regardless of whether a home is purchased through a home mortgage or the buyer pays cash, all home transactions have closing costs. There are appraisals, title work, filing fees and in some cases actual surveys are required. In most cases these costs range from $3,200 to $5,700 depending on the price of the home being purchased. In Oklahoma county, the average home sells for about $150,000. Seller concessions are actual dollars the sellers agree to apply from the proceeds of their home to the buyers closing costs; in effect, they “concede” these monies to cover the costs of the buyer closing on the purchase of their home. 4% of that $150,000 home is $6,000, more than enough to cover even excessive closing costs.

No monthly Mortgage Insurance. This feature of a veteran’s home financing is another huge feature. Mortgage insurance is a fee charged by the lender for loans that exceed the 80% loan to value threshold. This means that home loans exceeding 80% of the home’s value are typically charged a monthly fee to cover the lender’s perceived exposure to higher risk for extending the mortgage beyond what is considered “prudent” in the industry. This monthly fee is based on the amount of the loan combined with several other factors. V.A. home mortgage financing has no such monthly fee and saves the veteran between $40 and $150 a month.

Low interest rates. Most qualifying veterans can move into a new home with no money down, paying little to no closing costs, have no monthly mortgage insurance and have their mortgage fixed at a low 30 year rate. In most cases interest rates on V.A. loans are at or near low conforming rates.

Certificate of Eligibility (C.O.E.). This is the verification the veteran must obtain from the V.A. in order to qualify for this type of home financing. The V.A. issues this certificate when requested by the veteran or the veteran’s approved lender. Interest veterans can find an informative booklet about how to obtain your certificate of eligibility at:

DD-214. This is a form all discharged veterans are familiar with. It is their discharge paper. In order to obtain your COE through your lender, you will need a copy of your DD-214.

Credit score and verifiable income. Like all other home mortgages, lenders have minimum thresholds of requirements that must be met for their approval of your home mortgage. Minimum credit score requirements are a 580 and the maximum debt to income ratio is around 42%. The debt to income ratio is obtained by dividing the minimum monthly payments appearing on a credit report (including the new mortgage, home owners insurance and taxes) and dividing that number by the monthly gross income. Other types of financing will allow for higher debt to income ratios, but they also require a higher minimum credit score and a minimum down payment of at least 3.5% of the purchase price.

There is a short laundry list of other features, benefits and requirements that can be discussed with your lender of choice. If you are considering a V.A. home mortgage, please discuss all of these items with your lender before signing any paperwork.

Friday, March 19, 2010

Don't Make These 7 Mortgage Mistakes

The Federal Tax credit is quickly coming to an end (April 30th). Hundreds of OKC metro home buyers are rushing to contact their realtors to get under contract by the deadline. While that’s great business for everyone involved in the real estate industry, home buyers can be unknowingly making several critical mistakes potentially costing them thousands of dollars over the life of their loan.

Regardless of whether you are a self-employed construction worker, or the CEO of a large corporation, buying a home represents making a purchase that is three to six times your annual income. You’re going to need financing for that large purchase and knowing the ropes before making this step will save you Lots ‘O Cash and tons of grief.

Failing to fix your credit. I talk with mortgage lenders and realtors every week who are amazed at the number of people who apply for a mortgage with their fingers crossed just hoping to be approved. They haven’t checked their credit much less done anything to fix the blemishes that tarnish their report. There are any number of websites that will provide your complete credit report with scores for a small fee. Take advantage of these resources to find and fix any errors on your credit report. Of course if the report is accurate and still showing bad credit, you’ll need more time to affect the fixes necessary to qualify for a home loan.

Not looking for first time home buyer programs. These programs are sponsored by cities and state organizations and typically offer down payment assistance to home buyers who meet certain criteria. If you are in need of this type of assistance and are interested whether or not you meet the criteria, contact your city administration for any help they might have. You can also check with the Oklahoma Housing Finance Agency at as well as Community Action

Getting pre-qualified instead of pre-approved. Most home buyers are confused by the difference in these two terms. Pre-qualification is a more casual process where the mortgage provider may or may not pull your credit and based on the information you tell them issue a pre-qualification letter. The pre-approval process usually requires you to submit tax returns, current pay stubs and bank statements before the banker issues your letter which states you are pre-approved for the loan.

Taking too big of a loan. Remember what Mama used to say? “Just because you can doesn’t mean you should.” Oh, your Mama didn’t say that? Well mine did, and it’s wisdom that still holds true. Just because you can qualify for the larger loan amount doesn’t mean you should do it. Remember that life will always throw you a curve ball when you least expect it. Take out a mortgage that anticipates the surprises of life and still allows you to make the monthly payment without too much stress.

Not shopping for the best loan. I’m constantly amazed at many of the mortgage quotes people show me when they are shopping for a new home loan. Even with the new Federal requirements that reveal many of the hidden fees and “fuzzy math” used for too long by many mortgage brokers, home buyers still ask me to review their mortgage quotes which contain hundreds and sometimes thousands of dollars of junk fees. Lesson to be learned; take time to shop for your best deal.

Forgetting about closing costs. Getting your new home loan is one thing. Getting to closing with enough cash to close is another. These expenses typically include attorney fees, title insurance, prepaid home owners insurance and property taxes, points and lender fees. These costs usually total around 3% to 5% of the price of the home. The unprepared home buyer sees these costs and gets the proverbial “deer in the headlights” expression. Plan for these costs by having your lender prepare an accurate cost to close spread sheet.

Not preparing for enough cash on hand after you move in. It’s expensive to move. Rent a truck, put down utility deposits, new curtains, a few throw rugs, several meals eaten out and then something unexpected will happen…it always does. The hot water heater goes out; the garage door lift burns up; the door locks have to be replaced; or one of a hundred other possibilities. If you don’t plan for these unexpected events, moving into your new home can become your new nightmare.