All across the United States the housing market has an abundance of distressed homes for sale. A home sold under distress conditions refers to both short sold and foreclosed home sales. Potential home buyers should understand the differences between these types of sales as they impact the buying process in a number of ways.

As implied, short selling refers to selling a home for less than what is owed. In order to complete this type of transaction, the seller must get the mortgage holder to issue a reduced pay off amount. The primary reason a mortgage holder may issue a reduced pay off is if they believe the homeowner has the potential to go into the foreclosure process. The mortgage holder would prefer to avoid the foreclosure process as it is costly and it tends to drive the property value down even more, resulting in an even greater loss.

Property Condition – Short Sale Pro, Foreclosure Con
Most of the time a person short selling their home will still reside in the property. In the case of a foreclosed home, the seller is the mortgage holder; typically, the prior owner either abandoned the property or was evicted. Normally it is better to have a person residing in the home at the time of or just prior to the sale, as they will still need items such as plumbing and electricity to work properly in order to stay in the home. A foreclosed home on the other hand, may have been empty for many months, and issues with utilities or appliances can be created from lack of use. In addition, a homeowner being evicted from their property is more likely to have a lack of regard for the property’s upkeep, knowing they will have to move out.

Transaction Time – Short Sale Con, Foreclosure Pro
The short sale purchase process is typically much longer than the process when purchasing a foreclosed home. Whereas buying a foreclosed home can fall into normal timelines of one to two months, buying a short sell house can drag on for much longer, sometimes taking upwards of six months. The reason for the increased timeline is that the bank has to decide on whether it would benefit from issuing a reduced pay off. As such, they examine items such as the likelihood of the customer going into complete default and whether other options, such as loan modification, would be better. Additionally, the bank has to determine what they believe the property is worth, whereas a foreclosed home has already had some type of valuation done.

Getting Value – Short Sale Pro, Foreclosure Pro
Typically, the sale of a home under distress will lead to a reduced price in comparison to the traditional non-distressed sale. Regardless of whether you wish to purchase a home being sold short or a foreclosure, getting a home inspection done is absolutely critical in order to understand potential issues with the property you intend to purchase.

*Disclaimer – Loan guidelines change often and may have recently changed; be sure to consult with your lender about current requirements.

Two Ratios – Front End and Back End
Lenders use two types of debt ratios in determining a person’s ability to qualify for a mortgage. The front end ratio is real estate-related debt (mortgage principal and interest, real estate taxes, real estate insurance) divided by gross income. The back end ratio is real estate-related debt plus other liabilities listed on your credit report divided by gross income. Therefore, a person’s front end and back end debt ratios would be the same if there is no additional debt listed on the credit report. However, since most people have additional debt listed on their credit report, most borrowers have a higher back end ratio.

The important thing to understand about the two ratios is that lenders not only look at the total (back end) debt ratio, but they also use the front end ratio to examine the impact of the new real estate debt.

Example – Debt Ratios
Let’s assume a person who applies for a mortgage makes $60,000 a year gross (or $5,000 a month) income. The new mortgage debt including principal and interest, taxes, insurance (both home and mortgage insurance) totals $1,500 a month. Their other debt, including a car loan and two revolving charge accounts totals $750 a month. Their ratios are:

Front End Ratio: $1,500/$5,000 = 30%
Back End Ratio: $2,250/$5,000 = 45%

Max Debt Ratios Allowed? – Not a Given
The first thing to understand about today’s mortgage environment is that the vast majority of loans are reviewed by an automated underwriting system. Neither conventional nor FHA is set up to auto-approve someone based on a single debt ratio limit. Instead, the system takes into account other factors such as down payment, credit scores, and assets in determining whether the borrower’s debt ratios are permissible. For example, someone with a higher credit score may very well be allowed to have a higher debt ratio in comparison to someone with a lower score.

Conventional versus FHA – Debt Ratio Maximum
Conventional back end ratio limits normally top out at 45%, although on occasion an approval will go as high as 50%. FHA’s system will go as high as 56.99% for a back end ratio for more qualified borrowers. However, it’s crucial to point out that many lenders have pre-defined limits that are lower than what the system allows. For example, many lenders won’t lend to anyone who has a back end ratio higher than 45%, regardless of whether the system indicates they’re approved to go higher.

Conclusion
If your debt ratio is holding you back from qualifying, take the time to learn what your ratios are and determine exactly how far away you are from qualifying. Something simple, such as a small raise or a small reduction in purchase price may lower your debt ratio enough to purchase now rather than later.

*Disclaimer – Loan guidelines change often and may have changed; be sure to consult with your lender about current requirements.

There are many factors to consider when deciding on the type of loan to use when purchasing a home. Understanding the differences in down payment requirements plays an important role in forming your home buying strategy. These differences are items such as the amount of the down payment required and what source of monies are allowed. Understanding these differences will put you on the right path in deciding the proper loan for you.

The Amount of Down Payment Required
As of 2011, conventional loans require a minimum 5% down while FHA requires 3.5%. Be careful though, as closing costs and escrow funds (monies for taxes and insurance), if not paid for by the seller, would be in addition to the down payment. For example, let’s assume the purchase of a $200,000 home for each of these types of loans:

Conventional – $200,000 purchase price X 5.00% required down = $10,000
FHA – $200,000 purchase price X 3.50% required down = $ 7,000

On a typical purchase, closing costs and escrow monies typically range from an additional 1% to 5% of the purchase price ($2,000 – $10,000), depending on the loan program, points charged, and cost of insurance and taxes on the property. Both loan types require providing documentation regarding the source of all monies paid at closing.

Documenting Funds to Close – Why does the lender require this?
Regardless of loan type, your lender will need to verify that you have the funds necessary to pay for the down payment, closing costs, and escrows. The reason the lender requires this proof is to ensure that the borrower didn’t take on additional debt in order to come up with the required funds; this ensures that the debt ratio used to qualify the borrower hasn’t changed.

Types of Funds Allowed
Bank Accounts – The most common source of funds comes from bank or credit union accounts (checking, savings); be careful though, as the lender will typically require one or even two months’ proof, such as all pages of bank statements, that you had access to these funds. For example, putting a large deposit into one of these accounts during the loan process won’t satisfy underwriting, and additional documentation as to where these monies came from will be required.

Gift Funds – Conventional lending is more restrictive regarding using gift funds than FHA. For example, conventional rules state the borrower must meet the required minimum down payment on their own, regardless of whether there’s a gift, unless the gift is 20% or more. For example, using the $200,000 purchase price again, the borrower would be required to put a minimum of $10,000 of their own money down unless the gift is $40,000 or more and at least $40,000 of the gift is used for the down payment. FHA, on the other hand, allows for all or a portion of the 3.5% down payment to come from a gift.

Additionally, be sure to carefully review whether the person giving the gift is eligible to make the gift. While direct family members are eligible, other persons, such as the seller or loan officer, aren’t allowed to gift monies. If you’re fortunate enough to have someone interested in providing you monies for your down payment, make sure your lender will allow the use of these funds.

Retirement Accounts
Although use of retirement funds is allowed under both programs, there are tight restrictions and additional documentation that would be needed. You will be required to not only document that you have access to these funds, but in addition, you will need to disclose the terms of any payments associated with withdrawing those monies. For example, let’s assume you desire to pull $10,000 from your 401(k) account for a down payment. Most of the time you will have to do so in the form of a loan to yourself and an associated payment schedule would be created to replenish these funds. That new payment would now figure into your debt ratio, so be careful that this new payment doesn’t impact your loan qualification.

Conclusion
With proper planning, meeting either conventional or FHA down payment guidelines can be easy. Remember, you’ll need to know both how much and what type of monies are allowed in order to meet guidelines, so speak to your lender to ensure your down payment plan is sound.

Here are a few tips to increase your credit score sooner rather than later. Word of advice — speak to your loan officer or credit advisor PRIOR TO making any changes to your credit to make sure it will have the positive impact you desire.

Tip # 1 – Review your credit report in detail

This one seems obvious, but based on experience, too often consumers have an erroneous account or misreported item on their credit of which they are simply not aware, because they haven’t taken the time to carefully review their report. Be smart about pointing out errors, since sometimes they will work out in your favor, and there’s no law stating you have to remove a mistake that helps your score!

Tip # 2 – Review your revolving account balances (credit cards)

While Fair Isaac (the FICO people) doesn’t give out their exact formula, the understanding is that owing more than 30% of your credit limit on any credit card hurts, owing more than 50% hurts more, and being maxed out (100%) is killer! So, take the time to review your balances, and make appropriate adjustments. If, for example, you owe $350 on a credit card with a $1,000 limit, you’ll likely see a bump in your score if you pay down your balance to below $300.

Another technique that may cost you nothing is to see if your credit card company will increase your limit. Remember, this only helps if you don’t increase what you owe on that card.

Tip # 3 – Get current!

Being past due on any open account is a score killer. If there’s anyway to get and stay current, each and every month that passes by will result in a boost to your scores. The derogatory item will remain on the report for several years of course, but the fact it’s not currently late has an enormous positive impact on your scores.

Tip # 4 – Start now

If your strategy is to increase your scores over the long term, now is the time to open accounts versus later. All other things being equal, the longer an account has been open, the higher the credit scores; in other words, the scoring models like older accounts. Remember though, this is not to suggest taking on more debt; you may simply want to open an account or two and leave a small or zero balance on the account monthly.

Tip # 5 – Review the type of credit outstanding

For those who have little or no credit, it’s important to have a mix of different types of accounts. For example, from a credit score perspective you’d be much better off having an installment account, such as a car loan, and a credit card account versus having two credit card accounts; so attempt to have different types of credit accounts if possible.

Early in 2013, the Federal Housing Administration (FHA) and the Department of Housing and Urban Development (HUD) announced changes that would be made to the FHA mortgage insurance policy, beginning on April 1, 2013. Changes were made to both the mortgage insurance premium policy and the length of time those policies remain in effect.

In summary, these changes include a higher Mortgage Insurance Premium (MIP) for case numbers assigned on or after April 1, 2013 as well as a change that will require mortgage insurance to be paid for a longer period of time, and in some cases, for the life of certain FHA home loans.  Some types of refinancing, however, such as certain single family streamline refinance transactions that are refinancing existing FHA loans that were endorsed on or before May 31, 2009, are excluded from the MIP increase. Please contact your loan officer or other mortgage professional for details of these changes or for any other questions you may have regarding mortgage loans.

MIP Rate Increase
According to the FHA official site, on most FHA loans the annual premium will increase by 10 basis points (0.10 percent), or $100 per year for each $100,000 in loan amount.

For Jumbo FHA loans ($625,500 or higher) with a term longer than 15 years, the increase will be 5 basis points (0.05 percent), or $50 per year for each $100,000 in loan amount.  Jumbo loans with terms of 15 years or less will increase by 10 basis points (0.10 percent) or $100 per year for each $100,000 in loan amount.

The premium itself varies depending on the loan size, term, and loan-to-value (LTV) ratio.  Please see the following example:

For a $500,000 30-year loan with an LTV ratio greater than 95 percent, the new premium will be 1.35 percent, or $6,750 per year, up from 1.25 percent, or $6,250 per year. On a monthly basis, the premium increase amounts to about $42.

These premium increases do not apply if a borrower refinances an existing FHA loan that was endorsed on or before May 31, 2009, into a new FHA loan under the streamline refinancing program.

FHA is not changing the one-time premium borrowers pay up front (UFMIP); it remains at 1.75 percent of the loan amount.

In addition, the FHA has eliminated the exemption from the annual MIP for loans with terms of 15 years or less and LTV ratios of less than or equal to 78 percent at origination.  For case numbers assigned on or after June 3, 2013, the annual MIP rate for all loans with terms of 15 years or less and LTV ratios of less than or equal to 78 per cent will be 45 basis points (0.45 percent), or $450 per year for each $100,000 in loan amount.

MIP Payment Duration
FHA borrowers will have to continue paying annual premiums for a longer period of time – in most cases, for the life of their mortgage loan.  According to the FHA, the new “life-of-the-loan” MIP requirement begins with FHA case numbers assigned on or after June 3, 2013.  The following two paragraphs are excerpts from the HUD/FHA web site (www.hud.gov):

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• For all mortgages regardless of their amortization terms, any mortgage involving an original principal obligation (excluding financed Up-Front MIP (UFMIP)) less than or equal to 90 percent LTV, the annual MIP will be assessed until the end of the mortgage term or for the first 11 years of the mortgage term, whichever occurs first.

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•  For any mortgage involving an original principal obligation (excluding financed UFMIP) with an LTV greater than 90 percent, FHA will assess the annual MIP until the end of the mortgage term or for the first 30 years of the term, whichever occurs first.

To learn more about the policy changes mentioned here, contact your loan officer or other mortgage professional, or the FHA by telephone at 1-800-CALL-FHA, or go to the HUD/FHA web site.

Most people mistakenly assume that the company to which they make their monthly mortgage payments to actually owns their loan. This is rarely the case. To understand why the recipient of your payment is unlikely to be the owners too let us define a few items and roles.

Mortgage Note

A mortgage note, otherwise known as a promissory note or real estate lien, is associated with mortgage loans. This document lays out specifics such as initial loan balance, interest rate, payment amount, payment due dates, and number of months to be paid.

Mortgage notes are similar to bonds in that they can be bought or sold and offer the investor, or the person or entity that purchased the note, a set stream of payments over the life of loan.

The Mortgage Owner

The entity that owns the mortgage note is the owner of the mortgage. More often than not the company to which a person makes their payment to is not the actual owner of the mortgage.

The Mortgage Servicer

The servicer is the entity that collects payments on behalf of the owner. Additionally, a servicer is responsible for a number of related items such as collecting past due payments owed to the mortgage owner (the holder of the mortgage note).

Why Knowing the Difference Matters

When Pursuing a New Loan

Often times when people are choosing a lender with whom to work, with they will inquire about whether the loan originating company will keep their loan. In reality, this is very rare. Even the largest banks in the U.S. sell their mortgage loans to outside organizations such as Fannie Mae. In 2012, an estimated 86% of all mortgages were backed (meaning insured or bought) by the government.

The important point is to know that your mortgage note as well as the mortgage servicing rights can and are often sold, regardless of the size of the institution who originated the loan. Regardless of whether your note is sold or not, the parameters of your note, such as the interest rate, cannot change! Other factors that are of more consequence, such as your comfortability with your mortgage loan originator or the speediness of your lender, should be considered.

When Considering a Refinance

A number of refinance programs were created in an effort to help those impacted by the housing crisis. For example, Fannie Mae and Freddie Mac offer the Home Affordable Refinance Program (HARP) which is currently in its second iteration. If you have a conventional loan it is very likely that Fannie or Freddie owns your loan even though you make your payment out to another entity.

Important Refinance Links

For information on how to find out who actually owns your loan and your rights you can go to HUD’s website: https://portal.hud.gov/hudportal/HUD?src=/program_offices/housing/ramh/res/rightsmtgesrvcr

Does Fannie Mae own your loan? Go here to find out: https://www.knowyouroptions.com/loanlookup

Does Freddie Mac own your loan? Go here to find out: https://ww3.freddiemac.com/corporate/

VA Refinance Program Details: https://benefits.va.gov/HOMELOANS/irrrl.asp

FHA Streamline Details: https://portal.hud.gov/hudportal/HUD?src=/program_offices/housing/sfh/buying/streamli

USDA Refinance Details: https://www.rurdev.usda.gov/hsf-refinance_pilot.html

The ATR has added another layer of responsibility on lenders above and beyond meeting guideline-specific program requirements. ATR has eight specific underwriting factors all lenders must consider on residential mortgage loans. That’s an important distinction, as it adds a layer of lender responsibility previously not there. For example, years ago Fannie Mae and Freddie Mac were purchasing loans that contained very little income or asset documentation, these were often referred to as “liar loans.” If Fannie Mae and or Freddie Mac decided to loosen guidelines, lenders were still required to meet ATR rules. So regardless of any of the loan purchasers’ or guarantors’ documentation desires, the overarching federal rule dictates underwriting factors and subsequently the documentation necessary to meet the law’s requirements.

This is critical for loan originators, Realtors®, and most importantly home buyers to understand. Loan originators and Realtors® can greatly facilitate the smoothness of a home purchase transaction by setting proper expectations at the very beginning of the purchase process. In the past, many loan originators would only begin to gather documentation after a purchase contract had been executed. In today’s environment that approach could lead to trouble, as often times the buyer’s understanding of what is considered proper documentation may not meet the lender’s standards now being dictated on a federal level.

The “documentation dance” starts when buyers supply documentation that results in additional documentation being required. Here’s a typical scenario in today’s loan environment. Home buyer supplies loan officer with a bank statement that has a “large deposit.” This deposit is clearly not related to employment, i.e. stems from a deposited check or cash. One of the ATR rules is to document current debt obligations. People can borrow money from sources (friends/family/acquaintance) that won’t report on credit. As such, the lender will require proof of where the money came from and document that there isn’t a financial payment related to those monies. This can lead to needing gift letters, or adding debt to a buyer’s credit report, or any number of documentation issues and requirements.

The best approach is to work with one another with a sense of urgency and supply whatever documents are requested as quickly as possible. Additionally, understand it’s necessary to be up front and honest about requests as underwriting will get to the bottom of whatever questions arise.

Finally the ATR rule applies to all “residential mortgages.” This is important to note as there’s no lessening of underwriting factors as it pertains to loan size. In other words, lenders are required to document a $40,000 mortgage the same as they would a $400,000 mortgage.

For more information on ATR and QM you can see previous blog postings here:

QM and the Ability to Repay Changes – Plenty of Options Still Available

Amendments to the Ability to Repay Standards Under the Truth in Lending Act

Some Ways You Can Tell Your Information May Have Been Stolen

• You receive calls about debts that aren’t yours
• You receive bills that you know you did not incur
• Bills or statements you normally receive don't show up
• You see withdrawals from your bank account that you didn't make
• Your checks don't clear when there should be sufficient funds to cover them
• Your checks are refused by merchants
• Unfamiliar accounts or charges appear on your credit report
• You are notified by the IRS that more than one tax return was filed in your name, or that you have income from an unknown employer
• You receive medical bills for services you did not receive
• Your health plan rejects your legitimate medical claim because their records show you’ve reached your benefits limit
• A health plan won’t cover a claim because you are being billed for a condition your records don't show you have
• You get notice that your information was compromised by a data breach at a company where you do business or have an account.  When the organization that lost your information lets you know about the breach, they should explain your options.

Immediate Steps to Prevent and/or Repair Identity Theft

If your wallet, Social Security card, or other personal, financial or account information are lost or stolen, and you take action quickly, you can stop a potential identity thief from doing more damage.  Be sure to check your bank and other account statements and report any unusual activity, and follow these steps as soon as possible:

Place a Fraud Alert
If you believe that you have been (or are about to become) the victim of identity theft or fraud, you should place a fraud alert on your credit report with one of the three main nationwide credit reporting companies.  Confirm that the company you call will contact the other two companies.  Be sure the credit reporting companies have your current contact information so they can get in touch with you.  The alert lasts 90 days, but can be renewed, so be sure to mark your calendar.  Note that a fraud alert does not prevent a lender from opening credit in your name, but it does require a lender to take certain measures to verify your identity first.

Order Your Credit Reports
As you may already know, you can request a free credit report from each of the three main nationwide credit reporting companies once every 12 months.   By staggering your requests, you can get a report every four months. If you have already used up your three free credit reports within the past 12 months, for a nominal charge (typically $10 to $15) you can get a current report.  Review your credit reports carefully, and if you find any unfamiliar accounts or charges, report them immediately.  Following is the contact information for the three main credit reporting companies:

- Equifax - 1-800-525-6285 or www.Equifax.com

- Experian - 1-888-397-3742 or www.Experian.com

- Transunion - 1-800-680-7289 or www.Transunion.com

Create an Identity Theft Report - An Identity Theft Report gives you some important rights that can help you recover from the theft.

Submit a report about the theft to the Federal Trade Commission (FTC) at https://www.ftc.gov/ . When you finish writing all the details, print a copy of the report. It will be called an Identity Theft Affidavit

Bring your FTC Identity Theft Affidavit when you file a police report

File a police report about the identity theft, and get a copy of the police report or the report number.  Your FTC Identity Theft Affidavit and your police report make an Identity Theft Report.

Update Your Files

Create a log and record the dates you made calls or sent letters

Record the date of each call and the names and telephone numbers of everyone you contact.  Prepare your questions before you call and write down the answers

Send letters by certified mail and ask for a return receipt.  Send copies of your documents and reports, and keep the originals.

Tip

You can also submit a complaint to the Consumer Financial Protection Bureau (CFPB) at https://www.consumerfinance.gov/ or by calling 1-855-411-CFPB (2372).

Summary
The above steps should help stop the immediate damage resulting from identity theft.  If you are a victim of identity theft and have created an Identity Theft Report there are some additional steps you can take to help prevent or address other issues which may arise.  The following Federal Trade Commission (FTC) site provides information on placing an extended fraud alert and/or a credit freeze on your credit file:

https://www.consumer.ftc.gov/articles/0279-extended-fraud-alerts-and-credit-freezes

Why a Veterans Affairs (VA) Loan? Among other things, a VA home loan can be used to:

• Buy a home or a condominium unit
• Build a home
• Simultaneously purchase and improve a home
• Buy a manufactured home and/or lot.

Currently, banks are requiring large down payments for many types of loans, putting home ownership out of reach for many prospective buyers.  A VA loan still allows the borrower to buy a home, up to a loan amount of $417,000, or even higher in designated high-cost areas, with no money down.

A VA Loan offers two benefits which can substantially lower your monthly payment:

1. Private Mortgage Insurance (PMI), an added monthly expense required for conventional loans where the borrower finances more than 80% of the home's value, is not required on a VA loan
2. VA home loans are backed by the government, meaning banks can assume less risk with the loan and possibly price it lower than a rate for which you would qualify from a bank. The interest rate offered on a VA loan may be significantly lower in comparison to the rate on a conventional loan.  A lower rate combined with monthly PMI savings can substantially lower your monthly payment.

Getting qualified for a VA loan is easier

The qualification guidelines are less stringent for VA Loans.  Because the loan is backed by the government, banks have relaxed the strict lending rules for VA Loan applicants, making VA loans easier to obtain.

Additional Benefits of VA Home Loans

• VA home loans have more lenient credit and debt ratio guidelines. You may qualify for a VA loan even if you can’t be approved for other loan types
• The VA program won't deny a loan based solely on a low credit score, and most lenders don't tier interest rates for better scores. The VA program usually looks at only the previous 12 months of credit history, unless bankruptcy, a tax lien or a collections issue factors into your situation
• Borrowers can often refinance to a lower rate within the VA program without re-qualifying for the program through the VA Streamline Refinance Loan
• With a VA loan, you can refinance or sell your home at any time without penalty
• The seller is allowed to pay all of your closing costs up to 4% of the purchase price
• If the borrower has a service-related disability, they may qualify for the lender to waive the funding fee, further reducing closing costs.

Eligibility for a VA Home Loan

In comparison to other mortgage loans, a VA-guaranteed loan has much more flexibility regarding FICO score requirements.  Sufficient income, a valid Certificate of Eligibility (COE), and other criteria are required as well.  The home must be for your own personal occupancy.  The requirements for active service members, veterans, spouses, and other beneficiaries to obtain a COE vary, depending on the nature, period and duration of the service.  Please contact your mortgage professional for additional information, for help in determining your eligibility, and to get pre-approved for your loan.