Ask an expert thread -> Mortgage Lending hosted by Eikon

[Eikon]

I'd like to propose a series of these threads. We all have an area of expertise outside of cars. Usually it has to do with our career of choice.

As a part of the NICO FAMILY I'd like to see more sharing of knowledge and advice in other areas.

To do my part, I'm going to host a thread about my area of expertise... Mortgage Lending.

I've been a loan officer for nearly 5 years. I've spent a lot of time learning and researching the industry. I've been exposed to banking, real estate, credit, and other related industries. I'd be happy to share information, knowledge, advice, etc... with anyone here on NICO.

So go ahead and fire away at me if you have questions or comments.

Are you looking to buy a house? First time and you are lost and have lots of questions? Questions about how mortgages work? Tips for what would be best for you? Questions about the industry as a whole? The sub-prime crisis? The credit crises, etc?? Fire away!

*I am NOT out to solicit business. I would actually be the first to tell you that you're better off working with a local lender. So please don't mistake my intentions here.. I'm simply willing to give back to this awesome family.

[bobotech]

I'm in the process of wanting to refi my new house.

I have a modest home with about a 98k payoff on one f those subprime loans. Has huge interest.

Anyway, been talking to my bank. I have around a 686 credit rating (not that great but much better than what it was several years ago when I bought the house). The repayments have been perfect on my loans.

Anyway, I now what to refi and my bank is in the process of getting me a 30 year fixed loan for about 6.25-6.5 percent. My home is worth around 120-130k according to rough guessetimates.

What do you suggest or what kind of advice can you give me?

[Eikon]

My first suggestion is to get another quote on the refinance interest rate. Rates have dropped about 1/2% over the last two weeks. So if you're rate was quoted to you say two weeks ago... You should double check to make sure you're getting the best deal available.

Second... get a copy of your credit report so that you know what you're working with. I always give a copy of credit to my customer. If you have an easily repairable issue that may be harming your credit score.. you'd be wise to fix the issue for the short term and delay your refinance. That way the long term result (30 year fixed rate for example) isn't based on a short term (easily solved) problem.

Third... Be aware of the 80% Loan to Value ratio. At 80% or less you don't have to pay PMI. That's a big savings!

If you are over 80% LTV, check into getting a small second mortgage in order to keep the 1st under 80.

Be sure to get a Good Faith Estimate and Truth In Lending form from your bank. Review the costs involved to be sure they are not charging you points or fees that you are not expecting to pay. Feel free to scan and email to me if you want a second opinion.

Do everything in your power to get off the adjustable subprime loan and onto a nice conventional fixed rate program!!!!

Let me know if you have follow up questions or want to talk in more detail.

[ishkabibble]

I have a condo with <80% LTV. I'm moving out of state and turning the condo over to a rental property management company and I will break even or take a very small loss.

My FICO is 780+. Will I be able to get a 30yr mortgage on a primary residence in the other state with 20% down, or are the credit markets tightening up too much to get a mortgage on a second property?

[Eikon]

I have a condo with <80% LTV. I'm moving out of state and turning the condo over to a rental property management company and I will break even or take a very small loss.

My FICO is 780+. Will I be able to get a 30yr mortgage on a primary residence in the other state with 20% down, or are the credit markets tightening up too much to get a mortgage on a second property?

Yes, you are fine. The old house will be a rental property. The new house will be your new primary residence. You will have no problem with the financing of your new house due to property classification. Now your debt to income ratio on the other hand... that depends on the the underwriter. Most will take 75% of your rental income and subtract that from your payment... then add the amount to your debts. They always use 75% as a rule to cover potential vacancy. So if you are tight on the debt to income ratio, the old property could be harmful to you even though your actual monthly cash flow is breakeven.

[ishkabibble]

That's good to hear. Thanks!

[S13_love]

So can you tell me some info about the NINA (no interest,no assest) loans, i mean... who actually thought that was a good idea!?!? Also when im looking to buy a house when im about 26 or 27 years old (7 to 8 years from now) should i expect a decent house to be priced around $400-$500,000 (there's no way in hell i'll be able to afford that)? whats the average price of 3 bedroom/2 bathroom home right now?

[Eikon]

So can you tell me some info about the NINA (no interest,no assest) loans, i mean... who actually thought that was a good idea!?!? Also when im looking to buy a house when im about 26 or 27 years old (7 to 8 years from now) should i expect a decent house to be priced around $400-$500,000 (there's no way in hell i'll be able to afford that)? whats the average price of 3 bedroom/2 bathroom home right now?

Well, NINA stood for No Income No Asset. I say "stood" in the past tense because they are quite dead and probably will never been seen again. The basic tenant of underwriting is to look at four different things. 1.) The borrower's ability to pay (debt to income ratio). 2.) The borrower's credit history. 3.) The security of the loan - an appraisal of the house itself. 4.) The borrower's assets - cash available and reserve accounts. The NINA loan basically removed two of the four key underwriting areas. They basically approved or denied loans based entirely on the person's prior credit history and the value of the house itself. Naturally they charged a higher rate for the added risk... But it was a very bad loan idea.

I really can't give you any advice on what the housing market will look like in 7 years. It's different in every part of the country, and my crystal ball is at the shop being repaired... What I will tell you is to be very very careful with your credit from now til then. Use a few credit accounts (car loan, personal loan, credit cards, etc...) very wisely. Keep them open and use them, but never run up a balance.. always always always pay on time. 6+ years from now you'll save a ton of money by having good credit. Also.. start saving up some downpayment money now.. Sock away 5% of every paycheck from now til then.. that should get you on the way.

[HashiriyaS14]

Get me some no-recourse development loans! I've got some parcels in NE DC that I'd love to assemble and make into a retail center, lol.

Obviously a joke, as no-recourse debt is rarer than a sober Amy Winehouse right now.

[Encryptshun]

I have a 30-year fixed at 6 1/8. I closed in April of 2007. I am currently paying PMI and I understand the "5-years or 80% LtV, whichever comes first" clause in my mortgage contract (I'm financed through Wells-Fargo).

My question is, with the housing market in a slump does that hurt my LtV ratio, since from a market perspective my house is worth 4% - 8% less now than I paid for it?

[telcoman]

So can you tell me some info about the NINA (no interest,no assest) loans, i mean... who actually thought that was a good idea!?!? Also when im looking to buy a house when im about 26 or 27 years old (7 to 8 years from now) should i expect a decent house to be priced around $400-$500,000 (there's no way in hell i'll be able to afford that)? whats the average price of 3 bedroom/2 bathroom home right now?

Start saving at least 10% of your income. Contribute to a 401k or IRA.If you start saving now at your age in 7 or 8 years you should be well on your way. Give up the beer, drinking, movies Stay home with gf & watch DVD's, bring your lunch to work, put off marriage and children until you can afford the house. I wish I could have a do over.Just my $.02

Telcoman

[Encryptshun]

Eikon, please don't let Telco's post distract you from my legitimate question. Thanks!

[AZhitman]

(...but good advice from telco, definitely....)

Seth (and other experts): I still own my old house... I owe $68K on it, and at one point (just before the precipitous drop), it was worth around $225K. Right now, I'd be lucky to get $160K for it.

It's currently being rented out, and I collect about $200 per month more than the mortgage (15-year fixed at 5.875%) in rent.

I haven't even thought about selling, because of the crappy market.

So, if and when the market rebounds, do you anticipate a glut of former rental props hitting the listings and KEEPING prices down due to excess availability?

I'd love to pull all that equity, but not at the risk of selling "low"... Not to mention the fact that other investments aren't doing so hot, so no real attractive place to sink that cash.

[HashiriyaS14]

(...but good advice from telco, definitely....)

Seth (and other experts): I still own my old house... I owe $68K on it, and at one point (just before the precipitous drop), it was worth around $225K. Right now, I'd be lucky to get $160K for it.

It's currently being rented out, and I collect about $200 per month more than the mortgage (15-year fixed at 5.875%) in rent.

I haven't even thought about selling, because of the crappy market.

So, if and when the market rebounds, do you anticipate a glut of former rental props hitting the listings and KEEPING prices down due to excess availability?

I'd love to pull all that equity, but not at the risk of selling "low"... Not to mention the fact that other investments aren't doing so hot, so no real attractive place to sink that cash.

I will pre-empt my advice by saying that I don't work in single-family residential, but I am currently developing and selling about 875 units of multifamily residential, from $150k condos to $3 million townhomes.

The market rebound is driven, in part, by the ratio of available supply to the demand for housing at a given price point. One of the ways we track the health of the market is via "months supply", or how many months of excess inventory is available on the marketplace relative to how fast houses are closing.

Thus, the market rebound won't really occur in a given area until the aforementioned units, rental or owner-occupied, have been sold through.

My advice to you is that given how much of a hit you've taken on value, if you've got a property that's still delivering positive cash flow, leave it alone. Rental rates are still seeing increases, so you can probably sit on it indefinitely unless you suddenly need to tap all that cash in an emergency.

I wouldn't sell any positively-cashflowing property in this environment, let alone one that has sustained such a massive value hit, unless I had an incredible opportunity for the resulting cash. If you've got no such opportunity, I'd definitely advise you to let it sit. Let those guys keep paying down your loan for you.

[Eikon]

I have a 30-year fixed at 6 1/8. I closed in April of 2007. I am currently paying PMI and I understand the "5-years or 80% LtV, whichever comes first" clause in my mortgage contract (I'm financed through Wells-Fargo).

My question is, with the housing market in a slump does that hurt my LtV ratio, since from a market perspective my house is worth 4% - 8% less now than I paid for it?

Most PMI policies require you to request the PMI to be removed when you have reached 80% of the value of the home. They will not automatically remove the PMI until you reach 78%. I've not heard of a company that has a maximum term for PMI like the 5 years that you mentioned, but anything is possible. I have heard minimums imposed.

The loan to value ratio is determined by your purchase price (in the case of a purchase) or your appraised value (in the case of refinance) at the time you took out the current mortgage. So in your case, even though the market has declined, they cannot reduce the basis for your LTV. That happens to be a plus for you at the moment.. but historically that's fact has been frustrating to many people. Usually home prices go up, and everyone wants to use the current (higher) value as their basis for that LTV equation. In order to do so, they will require you to have an appraisal done and pending approval of the appraisal, they may accept that higher value. The other frequent "out" of PMI is to simply refinance your loan into a new one that doesn't require it.

So the simple answer to your question is... No - the current value of your house doesn't affect your LTV basis unless you have an appraisal done to "officially" introduce a new value. Clearly that wouldn't be wise to do at the moment.

[Encryptshun]

Thanks, Eikon!

[Eikon]

Eikon, please don't let Telco's post distract you from my legitimate question. Thanks!

Telco's advise is very wise! I completely agree with it.. up to the part about putting off marriage and children. I disagree with that part as I think the house and mortgage exist to serve the family and not vice-versa.

[audtatious]

So, doing a refi....Owe 124k, house is valued around 230k (no PMI). Wife and I both have 800+ FICA. I have the house and the G37 (1.9% @ 3years), no other debt. We've been offered by the holder today a refi @5.65% (or maybe 5.75%...this was last week) for 10 years (currently 5 years into a 30-year tearm at a much higher interest rate). The monthly payment is not much more that what I pay now with the extra I put in monthly.....

Any better deals out there?

And why is Bush causing all these problems? The bastid.....

[Eikon]

So, if and when the market rebounds, do you anticipate a glut of former rental props hitting the listings and KEEPING prices down due to excess availability?

I'd love to pull all that equity, but not at the risk of selling "low"... Not to mention the fact that other investments aren't doing so hot, so no real attractive place to sink that cash.

I don't expect much selling of rental properties for quite a while. My basis for that opinion is on the mortgage market and not the real estate market.. go figure. I could very well be wrong on this... but I'll give you my opinion and let you decide for yourself if you agree or not:

I believe rental properties are going to be stable and low transaction for a while due to changes in the mortgage industry. Here is why:

1.) Profitability and stability of rental income will increase consistently for a few years. Rents are going up across the country today. The reason is supply and demand. Fewer people qualify for mortgages now because of the massive tightening of credit policy. All those borderline people who were able to get out of renting and buy houses due to all the stupid mortgages that were given out to anyone with a pulse... They can't buy houses anymore. You have to be solid now to get a mortgage... that means strong credit and some of your own money for downpayment. These people (and it's a TON of people nationwide) will be stuck renting for years to come. So with way more people stuck renting.. the demand for rental properties will increase substantially. Plus the supply of rentals isn't exactly increasing quickly to offset.. very few building projects are underway now compared to years ago. Higher demand allows landlords to raise rent and it decreases the likelyhood of vacancy. So I find it unlikely that a lot of rental property owners will be looking to sell.

2.) It's gotten really hard to buy a rental property. The demand for the purchase of rental properties may increase rapidly given my expectation of a hot rental market. But recent changes in the mortgage world have made it very very difficult to buy these properties. I've done loans in the past for buyers with decent (but not excellent) credit, ZERO down payment, no income documentation, and no downpayment. Those days are long gone. Now it takes 720+ credit, 10 to 20% down, a strong income vs. debts, and a lot of assets in reserve. That's tough for people who want to buy investment properties. Typically that kind of person doesn't have physical assets... they wind up having lots of equity in homes through the years, but very little actual cash deposits. Anyhow.. point is there are not going to be very many buyers available... I think that will be well known in a short time and many seller's will just not try to sell.

If I were you.. I'd sit on that place for a long time. Hire a property manager to deal with it so that you don't have the stress and time requirements. Let the tenant pay off the rest of the mortgage and then you'll be pulling in nice income indefinitely on the house.

My own personal retirement plan is rental properties. I want to have 4 duplexes paid and clear by the time I retire. That would give me more than enough monthly cash flow to live comfortably for as long as my body holds out.

[Eikon]

So, doing a refi....Owe 124k, house is valued around 230k (no PMI). Wife and I both have 800+ FICA. I have the house and the G37 (1.9% @ 3years), no other debt. We've been offered by the holder today a refi @5.65% (or maybe 5.75%...this was last week) for 10 years (currently 5 years into a 30-year tearm at a much higher interest rate). The monthly payment is not much more that what I pay now with the extra I put in monthly.....

Any better deals out there?

And why is Bush causing all these problems? The bastid.....

Damn that GW! If the dems had been in office you probably wouldn't have any debt at all.

A 10 year fixed huh? This morning I would have said 5.25% would be more reasonable on a 10 fixed. But after the Fed met today the market is going up this afternoon... 5.625% now... It'll be back down tomorrow... crazy market...

Should you do it... good question. I'd have to know more about your financial situation to give you more sound advice. Here's a couple of thoughts on the idea. 1.) why increase the interest you pay on the car from 1.9 to 5.5 and lengthen the overall time you are paying on it?2.) If you talked to a financial advisor.. what sort of return do you think he could get you if you invested those extra funds each month rather than paying down the mortgage? Are there any secure channels that would earn you more than 5.5% return with little risk?3.) Are you comfortable enough with your current income to sustain those higher payments for the next 10 years? Do you have months when things get real tight? Consider the fact that paying extra each month on your existing mortgage can reduce its term significantly AND still give you the flexibility to just pay a lower minimum if you run into a month here or there where things get tight. 4.) Are the closing costs inline... have you considered that extra amount into your payments.5.) Have you checked with any local credit unions? They play by there own rules, and once in a while you'll find some pretty crazy deals. One local place here ran a 4.55% on everything deal for 2 weeks... that included mortgages up to 15 year terms.. yikes..

[audtatious]

No reason to extend the car payments or anything as the house and car are the only two payments we have. Everything else is paid off and we are putting money away. I prefer to get the car paid off asap as it is and get a better mortgage even if it is for short-term only (may sell the house in the spring).

[Eikon]

If you were to sell the house this spring, how much money would you have wasted on closing costs for a refinance?