During the housing downturn, the government extended loan limits in certain high-priced housing markets like Seattle. Mortgage companies could issue a conforming mortgage in Seattle up to a balance of $567,500. Loans between $417,000-$567,500 are referred to as “conforming high-balance loans” or sometimes “conforming jumbo loans,” and carry better terms than jumbo loans, though inferior terms than loans of $417,000 and under.

The high-balance limits were issued temporarily and are currently set to expire on September 30, 2011, and in Seattle, our limits will go down to $506,000. Banks will want to make sure that their loans come in under that deadline, so to secure a conforming high-balance mortgage, you need to plan on closing your loan by mid-September, otherwise you will have to find a new jumbo loan product or potentially risk losing your loan altogether if you don’t qualify for a jumbo loan.

This is an important deadline to meet for certain borrowers. If your proposed mortgage amount is $506,000 or under, you will still qualify within the conforming loan limits and don’t have anything to worry about. However, if your proposed loan balance is between $506,000-$567,500, you need to make sure that you get your loan closed by mid-September.

These loan limits could be altered by Congress, but it is unclear on whether or not that will happen. Given the way these things typically occur, there may be a last minute scramble to resurrect the higher loan limits, but whether that has the political support necessary to pass is unclear.

To reiterate, if you are planning to take out a mortgage with a balance between $506,00-$567,500 in Seattle during August or September, you need to act now and work with your mortgage lender to make sure that you hit the deadlines.

Mortgage Closing Costs

When closing a mortgage, there are a variety of fees that the borrower must pay. Many of these are paid to the lender for originating your loan, but a number of them are paid to 3rd party service providers. Lenders will often charge an origination fee as a percentage of your loan amount. They will also tack on other fees like an underwriting fee, documentation fee or other similarly-named administrative fees. Regardless of what they are called, add them all up, and that is what your lender is charging you for originating the loan at a particular interest rate. One of more of these may be negotiable if you are comparing loan offers from various companies.

There are a number of third party companies that are also necessary to get a new mortgage. Your lender will hire an appraiser to value the home and will need you to pay for a new title insurance policy for them. You also need an escrow company to facilitate closing of the loan and disbursement of proceeds. There are likely other charges for things like flood certification, credit reports or document transit and recording. All of those fees must be paid, and there isn’t going to be any negotiation here, as most of these companies “charge what they charge.”

How does a “no-fee mortgage” work?

Make no mistake, everyone involved in your mortgage still gets paid, even on a “no-fee mortgage.” None of these parties work for free, and they only work on loans that will provide them with income.

Mortgages are offered at a range of prices. The current market interest rate is known as the “par rate.” When a lender issues a loan “at par,” there is no additional money available. However, lenders also offer loans above and below par rates, and are willing to pay a premium or receive a payment for those different rates.

Here is a really simple example. Let’s say you borrow $400,000 at the par rate of 5.0%. At par, there is no additional yield spread available. However, they also offer a rate of 5.25% with a yield spread premium back to you of $5,000 and a 4.75% rate if you pay them an additional $5,000. If your loan closing costs total $5,000, you can take the higher rate of 5.25% and pay no fees, but the fees are still being paid via a higher interest rate.

Does a “no-fee mortgage” make sense?

No-fee mortgages can make sense. The most obvious case is when the borrower is short on cash to pay their own closing costs or maybe needs to maximize the dollars that they have available for their down payment.

If you have the cash available for your closing costs, you need to analyze the loan terms very carefully. You are paying a higher than market interest rate for the life of the loan for the privilege of paying no fees at closing. Effectively you have financed your closing costs for the life of the loan, and if you calculate your interest payments on that amount, you’ll see that you are actually paying a lot more over time than if you had just paid the fees upfront. If you hold the mortgage for a relatively short period, you may get an OK deal, but if you hold the loan for 10 years, you are definitely overpaying.

When obtaining a mortgage, always remember that no one is working for free. The fees are there, whether you see them or not, as everyone in the transaction needs to be paid. You either pay your closing costs out of pocket at the time of closing, or you build those fees into your loan via a higher than market interest rate.

Before I get into the checklist, I do need to remind you that lending standards do vary over time. In a booming market, lending guidelines are loosened (too much so in the previous housing boom) and currently have become far more stringent. The only reliable way to understand the current guidelines is to speak with a mortgage loan officer who is familiar with the current guidelines.

Mortgage Considerations for Condos

1. Is the condo FHA approved? – FHA loans are frequently being used right now by borrowers with less down payment money available. (Currently you can get an FHA loan with as little as 3.5% down.) In today’s market, anywhere from 20%-50% of condo buyers may be using FHA loans, particularly at lower price points. In order to obtain an FHA loan on a condo, the entire condo complex must be FHA approved. That is a multi-month process and is critical for condo marketability at the moment. Even if you don’t need to use an FHA loan to buy, purchasing in a complex that is FHA approved does make it easier when it comes time to sell, as you have a larger market of potential buyers.
2. Does the building have a rental limit? – Rental limits are common, but not universal, in condo complexes. From a condo owner perspective, having no limit on rentals gives you maximum flexibility if you decide to move out and rent your place, but it can have severe consequences on the ability to resell units in the complex. Banks see a building that is primarily owner-occupied as a lower risk and will only offer condo mortgages on buildings that are occupied by a majority of owners. For conventional loans the current limit is typically 70% owners/30% renters. FHA loans are more generous, offering loans for buildings that have 50% owners/50% renters. If a building exceeds this limits, buyers cannot obtain mortgages and you are forced to sell to buyers who have all cash, severely lowering your market value. As a side note, if you intend to buy a condo and rent it, make sure that the complex is within its rental cap, otherwise your ability to rent the unit will be put on a waiting list.
3. Pending or active litigation – Recently built condos may have construction defects that need addressing. Frequently condos will pursue the condo builder with a lawsuit to try to get them to fix construction defects or recoup costs involved with the fixes. Condos that are in active litigation will not be able to obtain new mortgages until the litigation is complete, which can take a couple of years. Pending litigation presents the same problem if the Homeowners Association (HOA) documents indicate that a lawsuit is imminent. There is a grey area where condos are considering litigation or negotiating with the builder prior to litigation where loans may still be possible, but the moment litigation ensues, you can only buy units in the complex with all cash.
4. Special assessments – Condos that do not have enough money in reserves to pay for large repairs will be forced to issue a special assessment to each unit owner. This could be as small as a couple thousand dollars, or as large as $100k or more. Buying a condo that has an active special assessment is not an automatic cause for alarm, provided that you can negotiate a suitable agreement with the seller to pay for some or all of the assessment. Condo lenders will want to see that the special assessment has been paid prior to issuing their loan. You also want to evaluate if the special assessment has plunged a large number of unit owners into default, which leads to other problems.
5. Too many units in default – Condo lenders do have guidelines about the maximum number of owners who can be in default on their HOA dues. Too many people late on their HOA payments means too much risk to the lender, and they will not make loans on the building. You need to review HOA documentation to determine the current status of HOA payments to watch out for this one.
6. Reserve study & underfunded HOA reserves –  Many condos have a reserve study conducted every few years. The purpose of the study is to evaluate the lifespan of all systems in the building and estimate the cost and timetable for their replacement or repair. Banks making a loan on condos want to see that the HOA has an adequate reserve balance in anticipation of future repairs, and they also want to see that monthly reserve contributions are being made to maintain or increase that balance. FHA wants to see 60% reserve funding, and conventional loans typically want to see a current reserve study and at least 10% of the annual budget being placed in reserve for future repairs.

As a condo buyer, it pays to understand the current lender requirements for condos. You want to buy into a condo complex that enables you to freely get mortgages, even if you don’t need one, and you also want to make sure that you won’t buy into a complex that is going to be a problem to resell in the future. Availability of mortgages for a particular building is key to maintaining market values. Cash buyers are few and far between and will demand a steep discount if they know you can’t get any other buyers.

Adzookie is a mobile advertising network, and it looks like they are trying a novel approach to billboards, tapping homeowners across the country. You’ve got to commit to at least 3 months and maybe up to a year, and they offer to paint it back to the original color when the advertising is over, but of course that means that you have to start paying the mortgage bill again.

Will be very curious to see if this takes hold in any neighborhoods in Seattle.

Many of the homes that buyers see in this market, especially homes that are distressed, come on market in tough shape, with no one on tap to make repairs – except for the future buyers. In other cases, having financial help with making updates could mean the difference between a house you like and a house you love. The FHA 203 (k) Rehab Loan is a loan program that rolls the cost of home repairs into the amount of the home loan. This loan program helps the buyer free up cash to make these repairs, and also provides some assistance to the new buyer in managing the remodel/repair process.

Basics of the FHA 203 (k) Rehab Loan:

• The cost of the homes repairs are built into the total loan amount.
• The home must appraise for the post-improved value. Your agent will be asked to show sold comps that support this value.
• Buyers can qualify with as little as 3.5% down.
• The loan process needs at least 60 days to close.
• The loan closes PRIOR to any work being done, and all repairs must be made within 6 months of closing.
• Many types of properties are eligible, but at this time you do have to plan to live in the home. (Must be owner-occupied)
• At the time of posting, the minimum repair amount is $5,000 with a max loan amount of $567,500 in King County.
• This program can be used for home purchases as well as refinances.
• There are many other guidelines – please contact your lender to review.

What types of repairs can be included?

The program is quite flexible in the types of repairs that can be made. It is very clear that “luxury repairs” are NOT included (addition of a swimming pool or hot tub, photo murals, barbecue pits, outdoor fireplaces, for example). However, allowable repairs include:

• Remodeling or structural alterations and reconstruction
• Aesthetic Upgrades (kitchen, bath, hardwoods, painting)
• Roofing
• Internal systems (heat, hot water, plumbing, electrical, AC)
• New appliances
• Landscape work & site improvements
• Energy conservation improvements and handicapped accessibility
• Modernization

 Process

The loan process is obviously more complex than other types of loans. One thing to remember is that you will be assigned an FHA consultant. The FHA consultant will work with you to write up a list of desired repairs and improvements, assist you in working with a contractor (the contractor does need to be approved by the bank), reviewing estimates (only one is necessary), inspecting work, and paying out the money.

It would be beneficial to use a contractor well versed in these types of projects – they are familiar with the standard of service, the timelines, and the paperwork and money distribution side of things.

 Is the FHA 203(k) right for me?

While not for everyone, this type of program would fit well with:

• Buyers who don’t have the cash on hand to make needed updates and repairs.
• Needs a support team in place to help with the project management of home improvements. Consider your lender, the FHA consultant, the contractor, and your real estate agent as a virtual team available for you throughout the process.
• Buyers who understand the risks and rewards of going through a home improvement process.
• Someone with a flexible living situation – if you can’t live in the home throughout the repair process.

 A word of caution: Only choose lenders that have verifiable experience processing the FHA 203 (k) Rehab loans and can prove that they have the team in place to successfully close this type of transaction. Change lenders if you have to!

Thank you to Eric Aasness of Bank of America for the great overview of how these loans work. We always recommend speaking to a lender to discuss the details of what loan programs are right for your personal financial situation.

When getting a mortgage, there are three key individuals in the process: the loan officer, the loan processor and an underwriter. Your interface to the lender is a loan officer, sometimes called an account manager, mortgage banker or relationship manager. Their job is to collect a complete and accurate loan application package from the borrower, and provide quotes and estimates of your loan terms. Loan officers usually have a processor that helps them to gather, submit and track application status along the way. The other key person in the mortgage process is the underwriter. The underwriter reviews loan files to see if they fall within the bank’s lending guidelines and are the ones who will ultimately approve or deny a loan application.

Where is My Loan Being Underwritten?

If a loan application is going to be delayed, it is going to happen while waiting for underwriting to review the file. Some lenders have a local team that can take your application and approve your loan in the same local office. Other lenders centralize loan processing and underwriting in offices in other states. I will let you guess which of these two models is more efficient at approving loans. Without fail, the loans that I see get delayed are the ones that have to go to these central processing facilities. Most of them enter a black box, with no clear timelines for review. It is sometimes difficult to reach anyone who can provide a loan status, and you end up waiting your turn in the queue. Time zone differences with the underwriting department can also be your enemy in this process.

Local underwriting helps alleviate these sorts of delays. It is not to say that local underwriters cannot also get overwhelmed with transaction files and cause delays, but they are in more direct contact with the loan officer and can do a better job at communicating timelines and prioritizing files that are in danger of being late. Given a choice, you should opt for loans that are processed at least in the same time zone and preferably locally.

Surprisingly, the size of bank has little to do with how their loan processing is setup. Some large banks use local teams, while other use regional or national processing centers.

Choosing the Right Mortgage Professional

You have countless choices of loan officers, but many buyers make a critical mistake and simply walk into their local bank branch to apply for a home loan. In-branch loan officers often wear many hats taking loan applications, opening checking accounts and processing deposits. Anything not mortgage-related is a distraction, and you are best served by loan officers who do mortgages for a living. If you walk into a bank branch, ask for a referral to one of their loan officers who doesn’t have to worry about branch duties.

Mortgage brokers also present an interesting wrinkle in this discussion. Mortgage brokers do not originate loans, but simply act to broker your loan application to an appropriate mortgage lender. There are quality mortgage brokers out there, but they add another layer of complexity and communication to the process. Your mortgage broker will submit your application to a wholesale mortgage rep at the lender, who acts as their point of contact for processing your loan. That rep then works with a processor and underwriter to get the loan approved. When things go wrong and get delayed, the additional layer of communication does present challenges.

Ask the Right Questions Before Applying for Your Mortgage

Nothing is more painful than loan delays when closing the purchase of your home. One way to avoid them is to ask the right questions, which almost no one does.

1. Where is my loan going to be processed and underwritten?
2. What is your current turnaround time for loan underwriting?
3. Do you have a mechanism for escalating files that are in jeopardy of being delayed?
4. Can you provide statistics on what percentage of loans you close on time?
5. Will you provide any guarantees or fee reductions if my loan is late?

By asking the right questions upfront, you can avoid painful loan delays at the back end of the home buying process.

A BPO is short for a Broker Price Opinion, which is a report prepared by a real estate broker that gives their opinion of the current market value for a particular property. In this market downturn, the BPO has become an important tool that banks use to determine an estimated value for properties that are being foreclosed, properties that are in a short sale or properties that are candidates for a loan modification or mortgage refinance.

Why Banks Need a BPO?

Banks need a neutral party to estimate values for a variety of reasons. Most importantly, they want to know what their equity (or lack thereof) is for a particular piece of real estate. There are a variety of Automated Valuation Models (AVM) that banks can use for a rough estimate of property values, but real estate is highly localized, and there is no substitute for an in-person, local analysis of a property and its neighborhood. A BPO, combined with AVM data, can provide banks with a reasonable estimate of what a piece of real estate is worth.

BPO Basics

I’ve personally done BPO reports for six different companies, and they are very consistent across different banks. Here are the criteria that are evaluated as part of a BPO:

1. Exterior vs Interior – Most BPOs are actually exterior, or drive-by reports. Brokers need to visit the property in person and take photos of the home and neighborhood, paying special attention to any obvious defects on the outside. It is a little challenging to determine an exact value without seeing the interior, but you have to estimate what it might be like based on the exterior appearance and any historical data and photos that can be found.
2. Comparable Properties – BPO reports usually include 3 comparable properties that are currently on the market and 3 comparable properties that have sold in the past 3-6 months.
   1. Within a 1-mile radius of the subject property.
   2. Above Ground Living Area (AGLA) is +/-10% from the subject property. (Finished basements carry very little weight compared to above ground living space.)
   3. Age is +/-10-20 years from the subject property. Usually it needs to be within a 10-year range for modern properties and a 20-year range for older homes.
   4. Similar bedroom/bathroom configuration.
3. Neighborhood Data – BPO reports include neighborhood statistics to help the bank get a better understanding of current market conditions. Are local property values declining or stable? Are there many bank-owned and short-sale listings that are dragging down values? What is the “pride of ownership” for a particular neighborhood? What is the average marketing time for listings in the neighborhood?
4. Adjustments – No two pieces of real estate are the same. You may find a home that is nearly identical, but has a better view. Sometimes a home is very similar, but has one extra bathroom. BPO reports usually include adjustments, which are amounts that a broker estimates a buyer would apply when making an offer.
5. Repair List – If obvious repairs are needed, like a new roof, those are incorporated with adjustments to the property value.
6. Value Estimate – Based on the recent sales of comparable properties, the broker will provide an estimate of what the property will sell for during a typical 90-120 marketing timeframe. Often the report also asks for a “quick sale” estimate, which is a lower price where there property will sell within a month.

Can I Help the Broker With a BPO for My House?

By their nature, BPOs and appraisals are designed to be free of influence by parties who have a vested interest in the transaction. Actually, for an exterior BPO, you may not even realize that your property has been visited and a report completed. But if an interior BPO is ordered, you may know that the broker is going to visit the home. Applying pressure or trying to influence the final value of the BPO is a big no-no, but if there are important facts or hidden details about a home that will influence its potential value, educating the broker about these can be appropriate during their interior inspection.

BPO Versus Appraisal

If you think this sounds like an appraisal, you are correct. Appraisals serve the exact same purpose as a BPO, but are performed by licensed appraisers and involve a deeper analysis of the property. Appraisals are more costly and time-consuming because they involve an interior inspection, along with floor plan sketches and square footage measurements.

Banks utilize BPOs as a lower-cost, quicker alternative to appraisals in a variety of situations. There is considerable debate in the industry between brokers and appraisers about the qualifications and education level of real estate brokers compared to appraisers. Appraisers do have more formal training than brokers when it comes to property valuation, and in theory should be better equipped to provide accurate property value estimates. Speaking from practical experience, however, there are good and bad appraisers, and a knowledgeable broker may be equally skilled in preparing an estimated value.

The debate between BPOs and appraisals is a valid one, but the current market economics pretty much dictate that BPOs are a preferred method for banks to value their loan assets. BPOs have faster turnaround times and usually cost a tiny fraction of what a formal appraisal does. Banks still use formal appraisals in many situations, but the BPO remains a preferred tool for many banks.

In today’s lending environment, there is always the possibility of delays in the process. The appraisal process is lengthy and difficult to control, and strict underwriting requirements may sometimes require more documentation and review time, particularly with more complex personal finances or credit situations. This is understandable and part of the game. No matter how simple your loan situation may seem, sometimes these hurdles come up, even with the best lenders. What separates out the best lenders from the worst is their ability to communicate what is happening to all parties in the transaction in a timely manner and prevent unanticipated delays.

One of the largest problems we see with lenders today is that many of them seem to operate in a perpetual state of “hurry up” on the transactions that are supposed to close soon, while ignoring the rest. Our agents have lost count of the number of times a lender is given a full 45 days to close a loan, then to have the rug pulled out from under them on the day before closing saying “the lender needs one more week.” Maybe I am wrong, but I can’t help but think that many lenders ignore the files closing later, and only pay attention to the urgent ones that are about to close. The consequences for real estate agents and home buyers for missing contract deadlines are significant. It is unfortunate that lenders cannot be held accountable in the same way, as their delays cause grief with buyer and sellers, often causing delays in moving, extensions of leases, or financial penalties.

Most buyers shop for a loan on financial terms only, picking the lenders with the best rate and fees, while ignoring the service aspect of the business. The difference between a smooth and relatively painless home loan process and a total nightmare relies on the service provided by loan officers and their support staff. Loan price is certainly important, but don’t ignore this important criteria when evaluating your loan options. Here are some tips when choosing a lender.

1. Look for recommendations – Seek recommendations from friends, colleagues or real estate agents that have had a successful transaction with a particular loan officer. Real estate agents can be a particularly good source of recommendations because they have experience with numerous lenders from numerous transactions. As a real estate broker myself, I have a list of lenders that I trust, but I also have a list of lenders that I would like to avoid. Ask your agent if they have worked with your chosen lender before and whether the experience was positive or negative.
2. Communication skills – This can be hard to evaluate, but you want a loan officer who communicates openly and instantly when your loan status changes.
3. Full time mortgage professionals – There are a fair amount of part-time mortgage professionals out there who originate home loans to supplement their income. We have yet to have a positive experience with a part-time loan officer. You want someone with experience who does nothing other than originate home loans for a living.
4. Pays attention to deadlines – A loan officer should be able to provide a timeline of how the loan process will proceed and should be able to provide updates as you progress through that timeline.
5. Being local helps – There are definite benefits to working with local lenders, even if they are employed by large national banks. Local loan officers are in your time zone, available to meet in person if needed, and aware of local market conditions. That cheap lender you found 2000 miles away on the internet won’t look so good when your loan process goes horribly wrong.
6. Honest and open about the numbers – The best loan officers we work with are upfront about all financial aspects of the transaction. They clearly outline the fees and rates and readily describe how they are compensated in the transaction.
7. Personality fit – This is the intangible part of your lender choice. Talk to a few lenders and find out who you feel most comfortable with. The loan process can be intimidating and stressful, and you want someone on your side that is easy and reliable to work with.

All is not bad in the world of home loans. There are great lenders and loan officers out there, but sometimes you need to spend the extra effort to find them. It will pay off with a smoother transaction.

Probably the easiest way to understand what Yield Spread Premium is all about is to look at a fictitious sample of a lender’s wholesale rate sheet. In this example, the Par Rate is 5.0%. If your mortgage broker originates a loan at 5.0%, no YSP is paid. If you pay a slightly higher interest rate, say 5.25%, there is a YSP credit of 0.733% of the loan amount available that can be used to compensate the broker or to pay your closing costs. For a $400,000 loan, this translates into a credit of $2932. The inverse is also true. If you pay an additional 1.35% of the loan amount, you can “buy down” your rate to a below-par rate of 4.75%. All mortgage are priced this way, though most times these rate sheets are not seen by consumers.

How can Yield Spread Premium be used by home buyers?

There are three ways that YSP can be used in a transaction.

1. Buyer pays a higher interest rate so that their mortgage broker receives YSP as compensation on the “back end” of the transaction.
2. Buyer pays a higher interest rate so that YSP can be used to pay for closing costs.
3. Buyer “pays points” at closing to reduce the interest rate on their loan.

How do I know if I am paying YSP as part of my loan?

Mortgage brokers are required to disclose the payment of YSP on both your Good Faith Estimate and and your HUD-1 closing statement. Banks and other direct lenders do not have to disclose YSP at all. There is considerable controversy over this discrepancy, and many in the industry want the disclosure laws to be the same across both types of lenders. (We agree and believe that both should have to disclose YSP.) However, for now, only mortgage brokers are required to make this disclosure. There is a major flaw in the current disclosure laws that allow the YSP to be disclosed as a range on your Good Faith Estimate. I have seen Good Faith Estimates say that “YSP may be paid to your mortgage broker between 0%-4% of your loan amount.” Clearly that is a huge range and varies from a reasonable deal to a total rip-off. In this case, you won’t see the final YSP until closing, which can lead to abuse of this practice by unethical mortgage brokers.

Should I even be paying YSP at all? Why can’t I just get my loan at the Par Rate?

This is an excellent question. YSP can serve a legitimate purpose in loan transactions by helping borrowers to reduce their cash out of pocket for loan fees or mortgage broker compensation. However, it is a practice that is too frequently abused from the experiences I have had with some lenders. On more than one occasion with our buyers and on personal transactions, I have had mortgage brokers sneak in a big YSP payment to themselves on the closing statement. Sometimes this equates to thousands of dollars and a borrower who is paying a higher interest rate than they needed to. It is easy to hide from unsuspecting buyers since it is not part of the direct fees being charged to them on the closing statement. Don’t be fooled if a mortgage broker tells you that “You are not paying that amount. I get it directly from the lender.” You ARE paying that amount to your mortgage broker via a higher interest rate.

How do I ensure that I am not being taken advantage of through YSP payments to my mortgage broker?

The best way to ensure that you are not taken advantage of is to be diligent and ask questions. An ethical mortgage broker should be able to answer these questions directly when asked.

1. How am I paying for your mortgage services and what is the total amount that you charge for helping me with my loan? Do you charge an upfront origination fee or other processing fees? Are you also being paid on the back-end by the lender? If so, what YSP amount will you be making?
2. Am I able to get the Par Rate on my loan? If so, what fees will you charge me.
3. If your broker shows a “range” of YSP payments on the Good Faith Estimate, ask them to clarify and give you an exact amount. There is no reason they cannot be more specific with this number, though it can change up until you lock your rate. 
4. At the point you locked my interest rate, what was the Par Rate? Ask to see that day’s rate sheet if needed.

A good mortgage broker does a lot of work when helping you get a loan and they deserve to be compensated. However, borrowers should work with brokers who are upfront and ethical about how they charge for their services, both in direct fees and indirect YSP payments. If a mortgage broker claims that they charge only 1% for their services, they should not be tacking on another 2% via YSP payments. The correct answer in this case is that “I charge 3% of the loan amount for my services. 1% is paid by you at closing and the other 2% is paid to me by the lender as a Yield Spread Premium.”

If you can’t get a straight answer on the fees that you are paying, it is wise to seek an alternative mortgage broker. A trusted real estate agent can help you review your Good Faith Estimate and closing statement to watch for potential mortgage issues.

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With the First Time Home Buyer Tax Credit, I’m seeing more buyers wanting to get preapproved to take advantage of the $8000 credit. The credit expires on November 30, 2009 which means in all reality that home buyers who qualify and who are wanting to take advantage of this benefit need to be in contract by early October. FHA is a popular program for first time home buyers and many have wondered what the difference is between FHA and conventional financing.

Here are some quick stats on FHA financing:

• FHA mortgages allow people to purchase a home with as little as 3.5% down payment. Down payment may be a gift from family members.
• Sellers can contribute up to 6% of the sales price towards actual closing costs and prepaid expenses once the buyer meets the 3.5% minimum down requirement.
• FHA has both upfront and monthly mortgage insurance regardless of down payment. (FHA monthly mortgage insurance remains with the property for a minimum of 60 payments, unless the mortgage is paid off.) 
• Unlike conventional financing, FHA insured loans currently do not have “risk-based” pricing for credit scores over 620.
• FHA loans are assumable. With today’s low rates, this could be attractive should mortgage rates be higher in the future.

Let’s compare a transaction based on a sales price of $400,000 with 5% down payment based on mortgage rates from September 14, 2009 at 12:00 pm. Let’s assume these are first time home buyers with mid-credit scores of 700.

FHA 30 Year Fixed  

The base loan amount (95%) is $380,000. FHA has upfront mortgage insurance of 1.75% which is typically financed into the mortgage. The adjusted loan amount would be $6,650 (1.75%) + $380,000 = $386,650.

Current rate at 95% LTV (loan to value) is 5.000% (APR 6.008%). The payment would look something like this:

• Principal and interest:  $2,075.62
• Est. property taxes:  $416.75
• Est. home owners insurance:  $50.00
• Monthly mortgage insurance:  $158.33
• TOTAL EST PAYMENT:  $2,700.62

5% down provides a slightly lower monthly mortgage insurance rate (0.50% vs. 0.55%) than 3.5% down payment. However, if a buyer wanted to, the could purchase a $400,000 home with $14,000 (3.5%) as long as the seller pays their closing costs and prepaid expenses. Remember, that down payment can be a gift from a family member as well.

Note:  The rate/payment above would apply whether your credit score is 620 or 800 when using FHA financing.

Conventional 30 Year Fixed

5.000% down payment and private mortgage insurance at 5.000% (APR 5.157).

• Principal and interest: $2,039.92
• Est. property taxes:  $416.75
• Est. home owners insurance: $50.00
• Monthly private mortgage insurance: $297.67
• TOTAL ESTIMATED PAYMENT:  2,804.26

Private mortgage insurance with conventional financing can be quite enjoyable if you’re into being completely nit-picked. FHA guidelines tend to be more practical. Conventional financing also has price hits based on loan to values and credit scores. The credit score that you are judged by is the middle credit score. If you are financing your home with someone else, it’s the lowest middle score of all buyers that your rate and underwriting decisions are based on.

I admit, I’m probably biased towards FHA financing for most first time home buyers who are shy on savings. And, if someone has roughly 5% down payment, I think they should consider using just 3.5% down to save the remaining 1.5% down ($6,000 based on our example of $400,000) for their bank accounts. Owning a home does have expenses and most lenders will want to see home buyers with a minimum of two months reserves (two mortgage payments or roughly $5500 based on our example) in the bank AFTER closing regardless of what the underwriting guidelines state.

To learn which program is right for you, I recommend meeting with a local mortgage professional who is experienced with both programs. Even if you’re planning on using conventional financing, do ask your loan originator if they are approved to do FHA loans as well (and how long they’ve been originating FHA loans) and if their office has in-house FHA underwriting.

About Rhonda Porter

Rhonda Porter is a Mortgage Originator at Mortgage Master Service Corporation, a family-owned correspondent lender that has been helping Washington residents with residential mortgages for over 30 years.  Rhonda joined the Mortgage Master team in April of 2000 and appreciates the advantages of being able to select from many lenders and banks to work with while the processing, underwriting and funding all take place at her office.  She feels this is the best of both worlds for the consumer.  Mortgage Master is a direct endorsed HUD approved lender and offers FHA, VA, Conventional and USDA programs.  Prior to assisting people with their mortgages, Rhonda was in the title and escrow industry for 14 years.   She strongly feels that consumers should learn as much as possible about mortgages and the real estate process so they can make informed decisions.  She writes a nationally recognized blog, The Mortgage Porter and was recently named 2009′s Best Tweeting Mortgage Broker by the Seattle Weekly.

Our typical recommendation when buying a home is to allow ~30 days from contract acceptance to closing, but new regulations in the mortgage industry may lengthen the time needed to obtain a mortgage, according to some of our lenders. In today’s online world, 30 or more days sounds like a long time to complete a home purchase, but there are a number of processes that happen during that time, some of which are time-consuming. As a buyer, your inspection period and subsequent inspection negotiations usually take 7-16 days, so you must allow time for this to take place. However, inspections generally do not delay closings. It is the mortgage approval process that takes so much time, and two new government regulations are definitely slowing things down.

1. Home Valuation Code of Conduct (HVCC) – This went into effect on May 1, 2009 and is intended to shield appraisers from the influence of lenders and loan officers. Essentially it prevents loan officers from selecting or having direct contact with appraisers. In addition, it requires that borrowers receive a copy of the appraisal three days in advance of closing. Both of these requirements have increased the time needed to receive an appraisal, which definitely slows down the loan approval process. There have been reports of appraisals taking more than two weeks to complete and lengthy appraisal times jeopardizing buyer’s ability to lock their interest rates.
2. Mortgage Disclosure Improvement Act (MDIA) – This was passed as part of the Housing and Economic Recovery Act (HERA) and regulations went into effect on July 30, 2009. For mortgage applications, it changes the disclosures required for borrowers and the timing of their delivery. Specifically, if there are changes to your interest rate of more than 0.125%, the lender must issue a new Truth in Lending statement and allow a minimum of 3 business days before closing. In the past, a new disclosure could be provided at closing. If you are floating your rates, this could definitely delay the transaction at the end of the process.

While the intent of these new regulations is to protect consumers, it is clear that in their initial implementation, both of these are going to bog down the loan approval process. There are many issues that remain to be resolved here, as many loan officers are complaining about the quality of appraisers being used in this new process. Apparently some appraisers being selected have little or no experience with the properties and geographic areas that they are being asked to appraise, resulting in poor or faulty appraisals and lengthy review times.

While it remains to be seen how the Mortgage Disclosure Improvement Act will impact loan closing timelines, we are going to go with our lender’s recommendations for now. To be conservative, you need to allow at least 45 days to close your home purchase. 30 days is now a “bare minimum” in order to complete a transaction and represents a significant risk of delays and extensions at the end of the process. We are hopeful that the kinks in these regulations are worked out, since 45 days is simply too long in an already inefficient process.

When I opened it, it instructed me to contact the loss mitigation department in regards to my existing mortgage. It claimed that they were “willing to negotiate the terms of your existing mortgage to a more reasonable monthly payment and rate of interest.” It then went on to claim that I had thirty days to contact them, otherwise I might “no longer be eligible for a loan modification.” Sounds like an attractive offer, doesn’t it? Problem is that my mortgage with National City was paid off close to three years ago! Pretty hard to modify a mortgage that no longer exists!

Now read the bottom line. “We are not an affiliate or nor endorsed by, nor associated with National City Bank”!! Clearly this is an offer to dupe unsuspecting home owners out of fees to try and negotiate a loan modification on your behalf. Clearly this company has not authority to “negotiate the terms of your existing mortgage.” Home owners need to be aware and protect themselves from schemes like this.

Chelsea Mitchell from Redfin advises:

“So, that said, I’d beg to differ over how much of a “better deal” you really are getting. I’d be willing to pay the mortgage broker a little extra to be reachable, explain processes and get my loan processed on time, just for peace of mind.”

So if you are buying a home, which should you choose? While banks are swamped and sometimes bureaucratic, we continue to have good luck with our recommended loan officers at MetLife and Countrywide. When lenders are busy, a good loan officer can make all of the difference. We also continue to refer clients to our trusted mortgage brokers as well. Even in a market where the number of mortgage brokers is contracting quickly, the good ones are still able to pull together great loans for their clients.

Our conclusion is that both mortgage brokers and direct lenders have their place in today’s volatile mortgage market. If you are searching for a recommendation, ask your real estate agent. We work with lenders every day and don’t take our recommendations lightly. We have no financial incentive when you choose a lender and make our recommendations based on past experience with other clients. Your agent should give you a handful of lender recommendations. Take those recommendations and interview each one. You’ll likely find a lender who you feel most comfortable with.