Posts Tagged ‘mortgage’

Jumbo Mortgage Rates Falling

September 17, 2010

(Jason Marsh is a well-respected mortgage broker with Mortgage Services III, LLC in Waukesha, Wisconsin. His firm has been a trusted source for mortgage financing for more than 30 years.)

There has been a change in the jumbo mortgage market. Up until recently jumbo mortgage rates were as much as two percentage points higher than conventional mortgage rates. Last year at this time a conventional mortgage was at about 4.875 percent, whereas a comparable jumbo mortgage was as much as 6.875 to 7.5 percent. Recently that pricing has changed dramatically.

Today you should be able to get a 30-year jumbo mortgage in the 5.5 percent range. Of course rates and terms will vary from funding source to funding source, and it might become somewhat dicey if the new jumbo is replacing a first and second mortgage. A second mortgage is often treated as a cash-out transaction and that may get in the way of getting a jumbo.

The defining difference between a conforming mortgage and a jumbo mortgage is the size of the loan. Fannie Mae and Freddie Mac are the federal government organizations that purchase mortgages from lenders and securitize them so that lenders have more money to issue mortgages with the goal of making mortgages more readily available. Each year, the federal Housing Finance Agency updates the conforming loan limits, which specify the maximum mortgage size that Fannie Mae can purchase from lenders. For 2010, the general mortgage limit is $417,000.

Interest rates on jumbo loans are typically higher than conforming loans because of the risk the lender assumes by issuing the loan, and because the lender has to keep the loan rather than selling it. In addition, jumbo loans are almost exclusively adjustable rate mortgages whereas conforming loans can have either an adjustable rate or a fixed rate.
Lenders have higher standards for jumbo loans. In order to qualify for a jumbo loan, you will need at least a 20 percent down payment, a credit score of 720 or higher, and verified income to prove you can repay the loan.

Jumbo mortgages also have caps on DTI ratios (debt to income ratios) of 45 percent. Your DTI is determined by dividing all of your monthly debt including your mortgage by your income. For example, $4,500 in total monthly debt divided by $10,000 in gross income equals 45 percent . You qualify!

*** Important note regarding income: It is calculated on your gross income and not your net take home pay after taxes.

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About Mortgage “Due On Sale” Clauses

September 1, 2010

If you want to leave your home (or rental property with four or fewer units) to your children, grandchildren, or anyone else – and that property is subject to a mortgage – you should know this.

Virtually every mortgage has a “due on sale” clause. The clause states that your mortgage is due in full if you sell or transfer your property. Notice, it doesn’t just happen upon sale. It happens whenever ownership interest is transferred.

On its face this could present a problem. For instance, if you set up a trust and then transfer your ownership to the trust, this clause would result in the mortgage becoming due. If you didn’t pay up with funds from another source or through refinancing, the lender could foreclose on the property. Likewise, at your death, when your ownership interest is transferred to your beneficiaries, the mortgage would become due and payable in full.

Luckily, there is a federal law that trumps the “due on sale” clause. It is the Garn–St. Germain Depository Institutions Act of 1982 and it allows you to place real estate in a trust without triggering the “due on sale” clause. As long as the residential property has less than five dwelling units, the “due on sale” clause in not enforceable when the property is inherited, or when the property is transferred to a revocable living trust – a common estate planning technique that our firm thinks is superior to others in many cases.

Below is the actual language of the Act:

(d) Exemption of specified transfers or dispositions
With respect to a real property loan secured by a lien on residential real property containing less than five dwelling units, including a lien on the stock allocated to a dwelling in a cooperative housing corporation, or on a residential manufactured home, a lender may not exercise its option pursuant to a due-on-sale clause upon –
(1)    The creation of a lien or other encumbrance subordinate to the lender’s security instrument which does not relate to a transfer of rights of occupancy in the property;
(2)    The creation of a purchase money security interest for household appliances;
(3)    A transfer by devise, descent, or operation of law on the death of a joint tenant or tenant by the entirety;
(4)    The granting of a leasehold interest of three years or less not containing an option to purchase;
(5)    A transfer to a relative resulting from the death of a borrower;
(6)    A transfer where the spouse or children of the borrower become an owner of the property;
(7)    A transfer resulting from a decree of a dissolution of marriage, legal separation agreement, or from an incidental property settlement agreement, by which the spouse of the borrower becomes an owner of the property;
(8)    A transfer into an inter vivos trust in which the borrower is and remains a beneficiary and which does not relate to a transfer of rights of occupancy in the property…

Homebuyers Seeking Assistance Get Reprieve

July 7, 2010

On July 2, President Obama signed into law H.R. 5623, the Homebuyer Assistance Improvement Act of 2010.

The Homebuyer Assistance Improvement Act of 2010 provides a three-month reprieve for taxpayers who couldn’t meet a key June 30, 2010, closing date to qualify for the first-time homebuyer credit. Under the relief measure, if a written binding contract to purchase a principal residence was entered into before May 1, 2010, the credit may be claimed if the purchase is closed before October 1, 2010.

Top 10 Facts about the 2010 Homebuyer Credit

February 1, 2010

If you are in the market for a new home, you can still claim the Homebuyer Credit. Here are 10 important things to know:

  1. You must buy – or enter into a binding contract to buy a principal residence – on or before April 30, 2010.
  2. If you enter into a binding contract by April 30, 2010, you must close on or before June 30, 2010.
  3. For qualifying purchases in 2010, you have the option of claiming the credit on either your 2009 or 2010 return.
  4. First-time buyers get an $8,000 credit.
  5. You can qualify for a credit if you’ve lived in the same principal residence for any five consecutive year period during the eight year period that ended on the date the new home is purchased and the settlement date is after November 6, 2009. The maximum credit for long time residents is $6,500. However, married individuals filing separately are limited to $3,250.
  6. There are income limits to getting the credit in 2010. The full credit is available to taxpayers with modified adjusted gross incomes up to $125,000, or $225,000 for joint filers. It phases out between $125,000 and $145,000 ($225,000 and $245,000 for joint filers).
  7. Use IRS Form 5405 to claim this credit.
  8. No credit is available if the purchase price of the home exceeds $800,000.
  9. The purchaser must be at least 18 years old on the date of the purchase. For a married couple, only one spouse must meet this age requirement.
  10. A dependent is not eligible to claim this credit.

So you want to sell your house?

January 25, 2010

We are quickly approaching the home selling season in Wisconsin. In my experience, buyers get busy on the first warm sunny weekend in February or March so it’s time to get ready.

What’s the first step? Find out what your home is worth. That means getting it appraised. Yes, that will cost you. In Wisconsin it may be $350 or more but it’s well worth it. You need to know the right price to offer it for sale. Later, when you get an offer, you need a basis for negotiating price.

Many will bypass the appraisal step to their detriment. Frequently they think getting a market analysis from one or more real estate brokers is a fine substitute. It is not. Appraisers are trained and skilled at establishing the fair market values of properties. Real estate brokers are trained and skilled at selling properties. Brokers’ market analyses are really sales tools. They use them to get listings and convince buyers/sellers to take action. They do not use the same procedures and techniques as appraisers.

Because market analyses are sales tools, brokers have a built-in conflict of interest. My past experience with Mrs. H is a good example. Mrs. H wanted to sell her home. I recommended that she get an appraisal. She agreed, but she also wanted to get market analyses from a few brokers. I suggested she wait for the appraisal. What happened next reminded me a lot of “Goldilocks and the Three Bears.”

Three brokers provided market analyses. The first broker said Mrs. H should ask for $560,000. She was not happy. The second broker said Mrs. H should list for $625,000, suggesting that the first broker did not know what she was doing. Mrs. H was much happier. Then she met with the third broker. He said the other brokers were not as experienced as he was, and clearly Mrs. H should list her house for $700,000. Mrs. H was ecstatic. FINALLY someone understood how special her home was. She hadn’t yet received the appraisal, but she signed.

The appraisal came in at $600,000. The property sat without an offer for six months, despite lowering the asking price twice. The week the listing contract was set to expire, the broker brought her an offer for $560,000. Mrs. H was floored and took the property off the market. The following spring, Mrs. H had the property reappraised. She listed it accordingly and got a $600,000 offer in five days.

Brokers will tell you that the most important thing you can do when selling your home is to offer the property at a realistic price right from the start. Your property gets the most exposure and buyer activity when it is first on the market. Lowering the price later is a failing strategy. When a property doesn’t sell, buyers may think there are problems. Besides, it is very hard to get buyers to come back for a second look.

Get an appraisal now so you are ready to talk to brokers and buyers. Get recommendations for appraisers, but not from your broker. Do not use an appraiser who is also a broker. You need someone who is independent, someone whose only income comes from the fees charged for appraisals. A fee-only appraiser has no conflict of interest. Their success is directly tied to establishing an accurate opinion of the fair market value of the property.

Next time I’ll address what brokers bring to the table when selling your property. A good broker makes a difference.

Lessons Lost

January 19, 2010

Our parents (parents of baby boomers and earlier generations) emphasized savings. We were told that credit was a last resort. There were layaway plans in which desired products were set aside by shop keepers until the price was fully paid in installments. There were Christmas Clubs at the local bank or savings & loan so we could sock a little away each month and have the money for Christmas presents in December. Even most cars were purchased largely with cash (until the early 60s when financing became freely available). About the only thing purchased with credit was houses, but you were expected to have at least 20 percent for the down payment. Again, it wasn’t until the 60s, with the acceptance of mortgage insurance, that people started buying houses with as little as five percent down. And, as we all know, by 2005 purchases were being made with zero down.

Prior generations had two frequently expressed rules. First, you should have at least six months of living expenses saved before you used credit or invested in anything. Second, you should pay off your home mortgage before you retire. With the financial meltdown of the last couple of years, many believe we should return to these principles and this view of credit.

Here’s my take. In order to have a financial safety net, access to cash (financial liquidity) is important. Many of us thought having an equity line of credit was enough. Clearly it is not. Financial institutions called them due during the crisis, leaving borrowers with no way to pay them off much less meet other needs. Our parents were right. You need ready cash available for emergencies. Six months worth may be enough but for us baby boomers I think it should be more.

Because I think having cash is so important, I don’t necessarily agree with the second rule. If you want to stay in your home and have cash protection, the best alternative may be getting a long-term, flat rate mortgage while you are working and still can. This requires some figuring out because you will need to be able to pay the mortgage after you retire, and for as long as you want to stay in your current home. Seeing a good financial planner is recommended.

That’s what I did. I got a 30-year mortgage at age 61. I took enough cash out of my home to pay 2+ years of expenses, and put it in safe, short-term investments. I have always slept well and now I am assured I will continue to do so.