FHA will keep lending during shutdown

10-01

Applications for all government-backed mortgages will continue to be processed during a government shutdown, according to the U.S. Department of Housing and Urban Development.

HUD originally said on Friday that it would stop working on applications for loans guaranteed by the Federal Housing Administration if the lights go out in Washington. But it reversed that position over the weekend.

“The HUD Contingency plan posted on Friday mistakenly included incorrect information about a potential shutdown’s impact on the FHA single-family loan program,” HUD said in a statement. “FHA will be able to endorse single family loans during the shutdown. A limited number of FHA staff will be available to underwrite and approve new loans.”

HUD said it will continue processing loans “in order to support the health and stability of the U.S. mortgage market.”

Loans backed by the FHA and the Veteran’s Administration, as well as rural development loans backed by the United States Department of Agriculture, accounted for 45% of all mortgages used to purchase homes issued in 2012, according to the Federal Reserve. The FHA alone insures about 60,000 loans a month.

Fannie Mae and Freddie Mac, the giant government-controlled mortgage companies, had already said that their operations would be unaffected by a shutdown. Those companies pay for their operations out of the fees that they charge lenders.

It’s not clear how the FHA will still be able to handle the large load of loan applications when, according to the new contingency plan, it is planning to furlough more than 96% of staff members.

“There will be a limited number of exempted FHA staff available to underwrite and approve single family home loans,” said Jereon Brown, Deputy Assistant Secretary for Public Affairs. “The underwriting and approval process will definitely be slower than normal.


(Source: CNN Money)

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The right way to pay off debt to get a mortgage

09-30

Trying to secure a mortgage right now? From higher mortgage rates, to rising home prices to the contraction in buying power — securing financing, for some, can be no easy endeavor. As prices, and rates rise simultaneously, lenders will still place the weighted emphasis on “real income,” or, the amount of monthly payment you can afford — as that’s what the loan is truly made against. Unfortunately, the amount of debt you have effectively chips away at your “real income.” So before you try to get a mortgage, you might want to pay down your debt. Just make sure you do it the right way.

Before we delve into the specifics, here are some quick terms you need to know:

• Debt to income ratio (DTI): Represents the total amount of monthly debt payment (including the house payment) divided into monthly income. Whenever this number exceeds 45% of the gross monthly income, things get tricky.

• Real Income: Also known as “qualifiable income,” the net income considered for the housing payment after present liabilities are factored in. If you have $5,000 in monthly income × .45, that gives you $2,250 as a total debt allowance. If your other debts total $250 per month, that means your real income is $2,000 per month. Real income is also equivalent to a proposed housing payment.

• Debt: Refers specifically to the minimum payment obligations the consumer is responsible for. This has nothing to do with the total amount of debt, but what the monthly payments are. Lenders are looking for cash flow, how much or how little of it there is.

Tip: Debt erodes income (ability to borrow money) at a ratio of 2:1; it takes $2 of income to offset $1 of debt.

Now, the strategy for paying off debt to qualify differs when buying a house from refinancing. Let’s look at the differences:

Paying Off Debt When Buying a Home

When buying a home, and prior to attaining an accepted purchase offer, paying off debt to qualify is simply a function of learning how much more buying power is achievable by eliminating debt like credit cards, student loans or car loans.

A qualified mortgage lender can run “what if” possibilities, which could become crucial in your endeavor to purchase not only the right home, but ultimately the home you can afford. Let’s say there’s $5,000 left on your car loan, you have the cash in the bank and the car loan payment is $600 per month. $600 per month on a car loan reduces your ability to purchase to the tune of more than $100,000 in loan amount. Consider this: A $100,000 mortgage loan at 4.5% on a 30-year fixed rate mortgage translates to $506 per month, $94 per month less than if you didn’t have the debt. If you pay off the debt in full, your DTI is reduced, improving your ability to qualify and increasing your real income.

How to Pay Off the Debt and Still Meet the Lending Credit Standard

If you’re paying it off pre-contract, simply inform your mortgage company and they can do a third-party validation and the debt can be omitted. When paying off during the escrow process, monies will have to be sourced and paper trailed, which is a little more technical, but still achievable. The same goes for credit cards and other payment obligations.

Paying Off Debt When Refinancing

When you’re refinancing, the lender’s going to require that your credit obligations — such as a car loan or credit card — are paid off in full and closed to prevent the possibility of your accumulating further debt, thus potentially affecting your ability to repay in the future. Moreover, the lender would call for an escrow account to pay off the debt through the loan closing.

When it comes to paying off debt to qualify in refinancing, different lenders will vary on their specific approaches. Generally, though, the accounts will have to be closed as well. That won’t prevent you from reapplying for credit after the mortgage has closed, however.

How to Pay Off the Debt and Still Meet the Lending Credit Standard

The monies you use to pay off your debt, similar to a purchase transaction, will have to be sourced — and you’ll have to have proof that the obligation has been closed. If possible, pay the credit card in full, learn the date the creditor reports to the bureaus, then apply for the mortgage after the creditor has reported it to the bureaus. Doing this will show the updated balance on the credit report, which will improve real income (revealing less debt), making the process more streamlined.

If you have debt that otherwise could be eliminated and have the means to pay off the debt, strongly consider doing so, as higher credit risk mortgages tend to be more pricey overall — compared to those for borrowers with lower debt-to-income ratios and better credit scores.

As you get ready to buy a house or refinance your mortgage, it’s important to pull your credit reports and credit scores to see where you stand. You can get your credit reports for free once a year from each of the three credit reporting agencies, and you can monitor your credit score using one of many online tools.


(Source: YAHOO! Homes)

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Why You Should Be Investing In Real Estate

09-27

As entrepreneurs find success with their primary business ventures, many search for the proper investments for their profits.

Of course, we can and should all start traditional tax preferred vehicles like an IRA and 401k. These are the bedrock of good ‘benefit’ planning for ourselves and our employees. I’m also convinced more entrepreneurs should consider rental real estate as an important part of their portfolio.

I realize many business owners shrug off this concept after the recent downturn in real estate values, but let me list a few reasons that may change your mind:

1. Gain more leverage. Real estate is one of the few investment vehicles where using the bank’s money couldn’t be easier. The ability to make a down payment, leverage your capital, and thus increase your overall return on investment is incredible.

2. Grow, tax-free. Buying rental property based on speculation of its value is a dangerous tactic since cash flow is the key. However, appreciation over the long-run is certainly realistic and at the least you should be considering a tax-deferred strategy. In the future, you may even consider a 1031 exchange, charitable trust, or an installment sale to lesson your tax liability further.

3. Tax free cash flow. It’s no secret that because of depreciation and mortgage interest deductions (if you leverage your capital), your cash flow should be tax-free. That’s right! The far majority of the time an investor will never pay taxes on their cash flow and can wait for capital gains on the sale of the property in the future.

4. The tax write-offs against your other income. Depending on your classification as an Active Investor or Real Estate Professional and your income level, there is a good chance your rental property will not only give you tax-free cash flow, but an overage of tax deductions you can use against your other income. With that said, this is something you want to discuss with your tax professional before investing so your expectations are realistic.

5. Increased tax deduction strategies. Rental property affords investors with another incredible opportunity to convert personal expenses to potentially valid business deductions. Don’t forget that rental real estate is a business. This means that travel expenses to check on your properties and payments to family members who manage your properties (such as students away at college) can be deductible and increase the tax benefits when it comes to cash flow and the future sale of the property.

6. Rental real estate is a forced retirement plan. Americans are terrible savers. We lack the self-discipline to put a monthly deposit into our IRA, SEP or 401k as small-business owners. However, buying a rental property is a significant commitment that you are required to commit to and maintain. You will always be grateful in the long-run when you don’t give up on it and build future cash flow and wealth.

I meet with a lot of successful entrepreneurs, and almost every one of them has taken profits from their businesses over the years to invest in rental property. Based on this fact and the list above, I have consistently urged my clients to buy one rental property a year and already have clients with rental properties earning them money they never imagined they’d have.

The far majority of us will never get rich overnight. It takes long-term investing and a diverse portfolio to build true wealth. Don’t forget real estate as an important part of the equation.


(Source: Entrepreneur Media, Inc)

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Top schools equal higher home prices

09-26

An analysis by Redfin illustrates the steep price premiums that homeowners are willing to pay for homes served by top-ranked schools, offering the latest concrete evidence that buyers place remarkable importance on the quality of schools.

The sky-high premiums help explain the ongoing race among listing sites to provide razor-sharp school information.

They could also add fuel to a debate over whether buyers and the real estate agents representing them give too much weight to rankings, which school officials say don’t always provide a complete picture of the differences in the quality of education provided.

Redfin’s study found that buyers pay an average of $50 more per square foot for homes served by top-ranked schools than for those served by average-ranked schools. It also found found that, even within the same neighborhoods, buyers will pay substantially more for homes served by top-ranked schools than they do for comparable homes served by average-ranked schools.

“Homes just a short distance apart with nearly identical attributes are selling for drastically different prices,” the report said. “We’ve looked across the country at homes that have sold in the last three months and found five examples where the prices vary on identical homes by as much as $130,000.”

Not accounting for home size, San Jose, San Francisco and Los Angeles, Calif., carry the highest price premiums for top-ranked schools while Queens, N.Y., Raleigh, N.C., and Eugene, Ore., carry the lowest of all the metros that Redfin analyzed.

redfind-school-study

The report adds to a growing body of evidence that suggests that many homebuyers are ready to shell out substantial cash for access to top-notch schools.

Three out of 5 homebuyers who responded to a recent realtor.com survey said that school attendance boundaries would be a factor in choosing a home, and most of that group said they’d be willing to go above budget or give up amenities to have their children go to their school of choice.

The online survey, conducted this summer, found that of those who said school attendance boundaries were important:

  • 23.6 percent would pay 1 to 5 percent above budget.
  • 20.7 percent would pay 6 to 10 percent above budget.
  • 9 percent would pay 11 to 20 percent above budget.
  • 40.3 percent would not go above budget.

Some school officials have questioned whether buyers and their agents are relying too heavily on test scores and school ranking sites when pricing listings.

The San Francisco Chronicle has reported that buyers in San Mateo County, Calif., are willing to pay premiums of $200,000 or more for homes served by schools that score only slightly better than other schools in the same school district. School district officials told the newspaper that homebuyers and their agents may read too much into simplified school rankings offered on real estate sites, and are working with Realtors in the hopes of helping them gain a better understanding of what qualities make for a good school.

For its study, Redfin analyzed listings on multiple listing services that sold between May 1 and July 31; school zone boundaries provided by Maponics; and additional school data provided by Onboard Informatics and GreatSchools.

(Source: Inman News)

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How to use your home equity

09-25-2

Rising home values are fueling a return in home-equity lending, allowing consumers to remodel, consolidate debt or help pay tuition bills.

By the middle of 2012, home prices had finally gained enough ground for lenders to begin marketing these loans and lines of credit again, and for homeowners in many areas — particularly along both coasts — to have equity to borrow against.

“The demand is starting to increase, particularly in the coastal markets,” says Kelly Kockos, Wells Fargo senior vice president and home-equity product manager.

In the second quarter of 2013, 2.5 million residential properties returned to a state of positive equity, according to propertydata firm CoreLogic, bringing the total number of mortgaged homes with positive equity to 41.5 million. Just 7.1 million homes — or 14.5% of all residential properties with a mortgage — are underwater.

Tapping into this growing equity isn’t as easy as it once was, however, and borrowers can’t take out as much as they could before the housing bust, when many were using the cash to live beyond their means.

These days, says Greg McBride, senior financial analyst with Bankrate.com, most lenders won’t let you borrow against every nickel of equity, like they did before the housing bust. “Lenders now require you to retain a 20% equity stake,” he says.

You’ll also have to document your income and ability to repay the loan, unlike in years past. And lenders, burned in the foreclosure crisis, are now requiring a full appraisal of your home.

“There are a lot of lenders that are still suffering from their previous decisions in home-equity [lending],” says Keith Gumbinger, vice president of mortgage-data firm HSH.com. When overvalued properties that had home-equity loans fell into foreclosure, those lenders recovered nothing.

Loans and lines of credit
Most lenders offer two basic home-equity products. The first is the home-equity loan, in which banks make a one-time lump sum disbursement of funds against your home equity, with a fixed rate and a fixed repayment schedule of five, 10, 15 or sometimes 20 years.

Borrowers paying a contractor for major home renovations or consumers consolidating debt or paying off a large medical bill often use this loan.

At the end of August, the last period for which data are available, the average rate for a home-equity loan to a borrower with good credit (FICO score of 740 or above) for 10 years or longer was 6.28%, according to HSH’s survey of 370 lenders. That’s an attractive rate, analysts say, especially when compared with the interest on credit cards. However, it’s not as cheap — at least in today’s low rate environment — as the home-equity line of credit (HELOC) that borrowers can draw down over time, using a checkbook to borrow money as needed.

This credit typically comes with a variable rate, based on the prime lending rate and a margin of one or more points. In September, the prime was at 3.25%, making these loans cheaper than traditional home-equity loans for most people. Exactly what rate you get will depend largely on your credit score and the amount of equity you have in your home, Gumbinger says. At the end of August, the average rate among 370 lenders for a HELOC to a good-quality borrower was 5.2%, according to HSH.

This lower rate has made HELOCs the most popular choice, as well as the most widely available, analysts say. These lines work well for do-it-yourselfers working on a project over time, and those who have recurring expenses, such as college tuition or even wedding expenses.

“There’s a lot more flexibility around when you borrow and how you repay,” McBride says. “And you’re not paying interest on something you haven’t used yet,” he adds. As with a credit card, you can make a minimum payment when money is tight or accelerate payments as you see fit.

Lenders like them because they are less risky, Gumbinger says. For instance, they can cut off the rest of a $20,000 credit line if a borrower fails to repay the first $10,000 on time.

The process
Securing a home-equity loan isn’t nearly as easy as it was before the housing bust. In fact, today it looks a lot like applying for a first mortgage: You’ll have to gather documentation of your income and assets to apply. Your home also must appraised, so lenders can know how much credit to extend to you.

Here’s a rough idea of how lenders would make that calculation:

If your home appraises for $200,000 and has a mortgage of $150,000, you would have $50,000 in equity, but would probably only be able to borrow about $10,000, to retain the 20% stake most lenders are requiring.

The minimum loan most lenders will do is $10,000, Gumbinger says. Kockos says that’s true for Wells Fargo. However, the bank’s HELOCs have a minimum of $20,000.

Many homeowners are surprised to find that they can’t borrow as much as they would like. “Everyone thinks their home is worth more than it is,” McBride says.

Of the 41.5 million mortgaged properties with positive equity in the second quarter, 10.3 million had less than 20% equity. These “under-equitied” mortgages accounted for 21.1% of all mortgages in the second quarter, according to CoreLogic.

Risks
As with any variable-rate loan, HELOCs can move up with shifts in interest rates.

And borrowers should consider the risk of consolidating credit card and other unsecured debt into a home-equity loan or HELOC. While you can write off the interest on these loans on your taxes, McBride says, you’re also converting this debt to a secured position, which could threaten title to your home should you not pay it off on time.

here are also closing costs to consider, just as there are with a first mortgage. While some lenders will absorb these costs — sometimes in exchange for a slightly higher interest rate — others will not. Moreover, if lenders waive or defer these costs, they may bill you for them if you close the account early.

Moreover, there are rules that borrowers must be mindful of, such as meeting the minimum draw for a HELOC within a certain period of time, as well as early termination fees. These fees can be costly, so read the fine print when applying for a loan.

Consider the time frame over which you would use the line or sell your home. Does that meet the lender’s minimum requirements, or will you be stuck with a penalty or deferred closing costs?

Borrowers should shop on the basis of both rates and fees, as they can vary widely by lender. “Home-equity markets are open, but not equally,” Gumbinger says. “Individual lenders in a market may not participate or may not be all that competitive. You really do need to shop around.”


(Source: MSN Money)

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