Soft Market Classification!

Swiftly and without notice the mortgage landscape is ever changing. The latest curve ball that could blindside a buyer just hours before closing and stop any qualified buyer in their quest to purchase a new home is the requirement for an additional 5% down payment. When could this happen? When lender receives a conventional appraisal classified with “soft market” conditions.

Most of metro Atlanta has now been tagged as a “SOFT MARKET” area. Declining purchase prices and over six months of inventory are but only two examples of what might show up on a conventional or jumbo appraisal. The result is that if a buyer is pursuing max financing and attempting to put as little down as possible, the appraisal (which usually is received only a few days before a 30 day close) could dictate the buyer must put an additional 5% down. Independent of the financial strength of the buyer, a purchaser could be required to put more money down only a couple of days or hours before closing.

Do not let this soft market shocker be a last second spoiler for your purchase transaction. As industry leaders and professionals we have to educate our buyers on the front end of the financing process. Buyers must know that if they are pursuing financing with the minimum amount down, they must be prepared to either put more money down or switch to FHA financing once the appraisal is received. Buyers in the jumbo market may not have the luxury of FHA being plan B.

Here is a quick scenario-

Buyer is putting 5% down on a sales price of $323,000 on a property in Metro Atlanta.

Buyer should know in first stages of financing conversation that based on appraisal the property could be subject to soft market classification.

Buyer could:

1. Pursue exception with lender and mortgage insurance company to still only put 5% down payment. Buyer must realize that 5% down for conventional financing is the exception not the rule and closing delays could be experienced as this attempt for exception is now in the hands of a mortgage insurance company
2. Buyer could put an additional 5% down and still go with conventional financing terms.
3. Buyer must understand 80/15/5 financing is about as hard to find as a dinosaur
4. Buyer to consider FHA financing

In the end FHA is usually the wisest choice numerically and emotionally. The fact that FHA usually has a higher rate tricks borrowers to thinking it is a bad choice but the numbers do not lie and buyer can put 3.5% down going FHA, the monthly mortgage insurance factor for max financing is about half with FHA vs. conventional. Even though the FHA rate is normally higher the buyer puts 1.5% less down, has a lower mortgage insurance payment and minimal difference in PITI. Emotionally there is less uncertainty going FHA which allows expectations to be managed and an overall smoother buying experience.

Mortgage Insurance: Friend or Foe -PART 2

FHA is a great solution for filling the void for 95% conventional financing. FHA offers down payment for 3.5% of the sales price. FHA requires a very reasonable monthly MI fee plus a one time upfront fee. FHA refers to its MI as MIP (mortgage insurance premium). The upfront fee is currently 1.75% of the base loan amount. There is an option to either pay that fee out of pocket at closing or finance back into the loan amount. 99.5% of the buyers elect to finance the fee back into the loan amount, preferring to bring less cash to closing table and finance the amount over the term of the loan. TWO NOTES ON FHA MIP: 1) When a homebuyer sells his/her home they should contact HUD (the government lending body providing FHA financing) and see if they are eligible for MIP refund of the original 1.75% upfront fee. Refund amount and eligibility will be based on length in the loan among other factors. 2) After having the FHA loan for five years, home owner can petition FHA to drop monthly MIP premium. Contact HUD for more details on what requirements are. NOTES ON VA AND CONVENTIONAL MI: VA The best loan available today! AND to the most deserving! No monthly MI. 100% financing if veteran has full eligibility. VA loan does require a VA Funding fee that can either be paid out of pocket or financed back into the loan amount. VA funding fee will depend on number of times veteran has used VA eligibility to purchase home. CONVENTIONAL Expect minimum of 10% down and increase in MI premiums due to perceived market risk, past losses due to non-performing loans, and dropping home values. Frequently a buyer will ask if MI is required if the house appraises for substantial higher value than purchase price. Lenders will go off the appraised value or sales price, the lesser of the two. Instant equity can be realized on a refinance, establishing an equity line, or when sold, but not on the purchase. Check with lender servicing your loan on what requirements are to drop PMI (private mortgage insurance). Expect a two year seasoning period from the date you purchase until one can petition for MI to be dropped and a loan to value of less than 80%. Finally if you are pursuing conventional financing (purchase or refinance) ask your mortgage consultant to educate you on “lender paid mi”.

Mortgage Insurance: Friend or Foe -PART I

What the Heck is MI….Anyway! Be glad we have Mortgage Insurance (MI) today. MI is providing opportunities for home buying. Creative loan structuring by most all lenders from 1999-2007 greatly reduced the number of loans with mortgage insurance. There has never been more of a need for mortgage insurance than the present. I hope the information below provides the purpose of mortgage insurance, clarification of terminology on the major three types of financing (Conventional, FHA, VA) and when a buyer can request for MI to be dropped. Mortgage Insurance (MI) is used to diversify the risk of foreclosure for a lender. Many people see MI as penalty or useless to the buying process. I completely understand their perspective. In economic prosperity MI is seen less as benefit but rather an ugly, unwanted necessity. However I would like to suggest MI is a reason that today people can still get residential financing with less than 20% down. If the risk was not diversified for the banks making home loans, minimum down payment requirement would easily be 20%. Today very few if any borrowers in metro Atlanta can get a primary residence 95% conventional loan with mortgage insurance, which proves my point that without PMI (private mortgage insurance) more money is required for down payment. While lenders are willing to lend to borrowers with 5% down the MI companies are not (except on rare occasions). Additional proof of what the mortgage lending landscape looks like when MI companies do not participate in loans is in the arena of second homes and investment properties. In the majority of cases on both of these classifications, 20% down payment is required, which eliminates the need for mortgage insurance. It appears that for the foreseeable future, mortgage insurance will be issued on primary residences with at least 10% down. In time as the real estate market begins to heal I hope we see a MI companies reenter the game and issue MI on primary residences for 95% conventional financing as well as second homes and investment properties. When will that be? Once home values start to rise again and foreclosure rates drop.

“T Minus 55 and Counting”

55 business days until Thanksgiving, November 26. The following Monday is November 30th. For all practical purposes, November 25 is the last business day of November. In order for homebuyers to be eligible for the tax credit, they must close on or before November 30. With September just underway, December 1st sounds distant. However, a hard look at the calendar suggests the window is closing sooner than one might think. Over 50% of sales taking place in this market have banks/ institutions as sellers. It appears to be taking three to four weeks for banks/ institutions to respond to offers and contracts to be finalized. With more foreclosures hitting the market at attractive prices and more buyers hustling to take advantage of the tax credit before it expires, expect a juggernaut. Additionally the speed lenders can close loans has slowed. New legislation on appraisals and disclosure has drawn out the time it takes to close a loan. Appraisals are reviewed with more scrutiny, and legislation mandates a final Truth and Lending statement must be viewed 3 days before closing. Overall loans require more documentation in today’s environment which takes time to obtain. If an offer is sent today and it takes several weeks to get accepted and 25 days to get the loan approved and closed, then the close date would be right around Halloween. Theoretically, the real estate contract needs to be finalized by the end of this month to ensure closing date does not surpass 11/30/09 and jeopardize the tax credit benefit. I am not suggesting that the window of opportunity closes by end of September. I am suggesting that NOW is the time to act. Now is the time to contact your realtor and develop a strategy of buying a home with the awareness that time is crucial.