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Trick for Treat: Mortgage Rates Defy Federal Funds Rate Cut

October 30th, 2008

To much fanfare, the Federal Reserve cut interest rates on October 29th. That was supposed to be this week’s Halloween treat for the markets. The trick came the next day, when Freddie Mac’s survey of mortgage rates revealed that 30-year rates had risen sharply for the week. 

So what gives? A clue to why market rates moved contrary to the federal funds rate could be found in two other pieces of news:

For the time being then, despite the Fed’s actions, things got tougher for borrowers rather than easier. This highlights some realities of what the Fed can and cannot do.

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First Time Homebuyers Face New Fannie Mae Requirements

October 29th, 2008

Happy New Year to first-time buyers! Now, unless you have perfect credit and a solid application, get your butt to a housing counselor. In 2009, Fannie Mae will require counseling for first timers using non-traditional credit to qualify or getting a MyCommunityMortgage loan. You already have to undergo pre-purchase counseling and landlord training if you want to buy multi-family property (like a duplex or four-plex) with a MyCommunityMortgage loan.

Only  independent and certified third-party agencies or counselors are accepted, and your education will include budgeting and credit, choosing a home, and obtaining a mortgage. Homebuyers receive custom assessments of their financial positions aincluding their readiness for homeownership, and an analysis of their finances and credit history. Click HERE to find a list of accredited counselors.

Mortgage Approval for Self-Employed Borrowers

October 28th, 2008

Fannie Mae considers you self-employed if more than 25% of a business. If you are newly self-employed, you already face many challenges getting your business up and running successfully. Very few lenders are willing to add a mortgage to that challenge. So, hurdle number one is that you need to establish a track record–in most cases at least two years in your new line of work.

Second, you have to show that the business generates enough cash flow to make a mortgage payment. And keep careful records of that income. If you show revenue on your books but then deposit it into a personal account (or split it between a personal and a business account), you may not be given full credit for it. So once your business has filed a tax return or two, and you can back it up with current financial statements and bank records, the lender can take a look at your income.

There’s more to analyzing income than grabbing the bottom line off the Schedule C. Some items, like depreciation, get deducted from your taxable income but are added back for underwriting purposes. Depreciation isn’t actually money that leaves the business; you don’t pay a “depreciation bill” each month. So it counts as cash you have access to for making mortgage payments. Conversely, you’ll be adding back that exclusion for meals–underwriters assume that you eat even if you aren’t with a client! If you deduct employee business expenses on a Form 2106, those get subtracted as well.

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Buying Foreclosure Property: Purchase Loan or Refinance?

October 23rd, 2008

There are several ways to buy distressed properties–prior to foreclosure, on the courthouse steps, or from the bank that owns them (these are called REO properties, or Real Estate Owned by the bank). Contrary to what many believe, buying at auction isn’t usually the cheapest way to purchase foreclosures. At this point, the lender has not gone through the process of valuing the property and preparing it fore sale–so the reserve price is often equal to what is owed.

And today’s foreclosure properties are often so over-financed that they aren’t worth what is owed. So by assuming that an auction is automatically a good deal , you could end up paying more for a home than it’s worth. Not to mention the disadvantage of having to pay cash, deal with possible title issues, and the fact that many sales don’t allow the inspection of the property. And that’s why many many foreclosure sales go on and no one even shows up to bid.

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Mortgage Rates Zig and Zag: This Week It’s Down

October 23rd, 2008

As expected, mortgage rates continued their manic behavior, heading downward this week as focus shifted to the likelihood of recession: 

Certainly, this is the most troubling economic environment in a generation — but one with at least some glimmer of hope.

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Fannie and Freddie Cutting Fees?

October 20th, 2008

Mortgage clearinghouses Fannie Mae and Freddie Mac announced that in addition to rescinding fee increases they may be scaling back current surcharges. During the Mortgage Bankers Association’s annual meeting, a discussion panel revealed that Fannie and Freddie are in the process of reevaluating pricing of their loan guarantees and working harder to keep borrowers out of foreclosure.

Currently, all but the most bullet-proof of applications are loaded with risk-adjustment fees–extra charges for higher loan-to-value ratios (in addition to the mortgage insurance required for these loans), ARMs or even fixed rate loans exceeding 15 years, interest-only, 40 years terms, investment property, multi-family property, cash-out refinances, condos, high-rises, mobile homes, etc., and big add-ons for credit scores formerly considered acceptable or even good. Fannie Mae’s Loan-Level Price Adjustment Matrix, gives this example:

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Upside Down Sellers Remain Stuck According to Wharton Study

October 17th, 2008

Homeowners upside down on their mortgages are finding themselves unable to take advantage of professional opportunities elsewhere, move up to nicer neighborhoods, or get their children into better school districts. Mobility in this country, the study found, has decreased in the wake of the foreclosure boom–a surprise to many who assumed that those displaced by foreclosure would be free to move, increasing the overall mobility in America. That Wharton School study, Housing Busts and Household Mobility, found that households who would expect to be upwardly mobile have been stuck fast by the inability to retire their mortgage by selling their homes.

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Pulling the Trigger: Riding the Rate Roller Coaster

October 16th, 2008

What does the sharpest mortgage interest rate increase in 21 years teach us? When columnists were happily touting the favorable mortgage rate market just last week? If you were one of those with loans locked in and ready to go, you know the answer. It’s that if you want to take advantage of interest rate decreases you can’t be casual. The borrowers who were already approved could wait until rates dropped into their range, then strike and complete their mortgage refinance. Those who dithered didn’t make it. So get preapproved. And keep your approval updated (once every six months should do it unless something changes like an applicant getting a new job). A good loan officer can keep you informed when your target rate is available, lock your loan, and complete your refinance–as long as you’ve done your job and taken care of the preliminaries.

Plans, Politics and Mortgage Rates

October 16th, 2008

As national and global economic plans were unveiled, the stock market careened between seven-hundred point losses and nine-hundred point gains, then back to huge losses again. Overall, the losses far outweighed the gains, despite a general impression that world governments were taking all the right steps to address the credit crisis.

Meanwhile, each of the two major-party Presidential candidates came out with mortgage plans of their own, but these didn’t create a ripple in the markets.

Why then? Because the financial markets are starting to focus on the real problem. Meanwhile though, some potential home buyers who understand that problem and how it affects them may find the that the mortgage and housing markets are presenting a compelling opportunity. 

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Co-Ownership: Your Way into a First Home

October 13th, 2008

As mortgages become harder to come by, with lenders ratcheting up income and down payment requirements, those starting out could get discouraged–or they could get together. Co-ownership of their home is becoming an acceptable way for promising young people to make a housing investment while prices are low. Most of them are in the early stages of careers and they fully expect to make more in the future. So why not make their initial home investment pay big as well?

Pros of Co-Ownership. Co ownership means that two incomes are used for qualifying, so the borrowers may buy a home that neither could afford on his or her own. Pooling assets for a larger down payment also makes them eligible for cheaper financing, lower mortgage insurance premiums, and better rates.

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