Business With Greg Mortgage and Real Estate Blog

Earlier this month PMI started to tighten up their guidelines even further. Effective 6/1/2008 most companies are discontinuing insurance for all Cash Out refinances and any Conforming loan receiving a level loan approval.

Last year I had a vision of what 2008 would hold for the industry. I felt that Conforming lending would tighten up so much that Government financing would take over most of the market.

Sure looks like the vision was fairly accurate. However, can the Government financing avenues continue to stay where they are with guidelines and absorb the Conforming fall out? We will see what the investors allow in the upcoming months.

In the past there was enormous opportunities for investors to obtain mortgages. I saw loans at 100% financing on Stated income with a credit score of 620. Now things have changed dramatically and investors are struggling to finance their investment properties through a standard residential mortgage lender.

 The biggest problem we are seeing today is the way most real estate investors verify their income. Some investors are fortunate enough to work a job in which they receive a W2 and can fully document enough income to support the lenders requirements. But, the majority who were earning their living off buying and selling homes, renting homes, and sometimes self employed are not going to be able to show enough income on their federal tax returns to satisfy income requirements. Out of the applicants I see I would say it is roughly 95% of real estate investors cannot satisfy full documentation requirements.

Early last month the PMI companies stopped insuring reduced documentation loans. That meant a lender would have to risk the loan not being uninsured when over 80% LTV. Most lenders stopped doing reduced documentation loans over 80% period whether owner occupied or for investment. Very few do any loans under 80%.

With that being said the old method of buying a property, renting it out, pulling cash out of the home, and buying another is a hard dream to come by unless you can fully document your income. Most lenders who used to allow an investor to utilize full appraised value within 1 year of ownership have discontinued doing so. You are limited to the aquisition cost plus the cost of documentable home improvements.

So, if you are thinking of becoming a real estate investor and using financing to do so then many of the things you have heard about the past have expired. It is still a valid opportunity and it is still a great way to earn a living or to supplement your primary income. The minimum down payment these days is 10%. You would need to fully document your income. You may find a reduced documentation loan out there still allowing 75% LTV and 25% down payment. So be prepared. There also is rehabilitation loans for full documentation up to around 80% LTV.

It has become eminent that America needs to take charge of their finances and learn how they can better their situation for obtaining credit. In the past you could have a variety of issues and still obtain loans for what you need. Today the financial sector is not buying high risk or buying very little.

 The first thing you need to do is find out what is on your credit report. There are a variety of free credit report companies out there. But, beware of their tricks to get you to pay money. You are entitled to 1 credit report from all 3 credit bureau repositories 1 time per year that is free with no strings attached. The site to order this report is http://www.annualcreditreport.com There is no other site that does not have a free trial or strings attached.

When you get your reports verify everything on them is accurate. Then work on paying off creditors you owe. If you want to open new credit you should pay off the old credit you still owe first. After doing so take the time and dispute all items that are paid on your credit report so it reflects them accuratly.

One of the biggest problems I see is medical bills. The best thing you can do is follow up with the hospital or specialist and make sure the bill was paid by your insurance. If it was not try to work out an arrangement to pay payments. If you do not they usually sell them to a collection company who will likely not work with you and demand payment in full.

Also if you have filed a bankruptcy and discharged debt the creditors sometimes show delinquent and that you owe a balance. They should show 0 balance and discharged through bankruptcy. Most common reason for this is your attorney did not notify the creditors that your bankruptcy had discharged.

If you are trying to re-build your credit then a secured credit card or 2 will do the trick. Keep any credit card balance under 30% of the credit limit to maximize your score. I personally reccommend Orchard Bank for a secured card. They were charging 7.49% as of the date of this post and very minimal charges if any. You also earn money because your deposit sits in a savings account.

Avoid buying cars while your credit is not good. Paying 25% on a vehicle or a loan with a finance company is not the best thing you can do to re-establish your credit. Plus it is very expensive!

I will try to expand on this post over the next few weeks. There are many ways you can take control of your credit.

Early this month the PMI companies decided to discontinue insuring reduced documentation loans. These loans were commonly referred to as Stated Income and/or Stated Assets. As a result many lenders withdrew these programs from their product lines. Un-insured loans on a reduced documentation basis have become a risk that investors are unwilling to take. Although few lenders still offer loans under 80% LTV the majority increased the minimum credit score requirements.

These loans were commonly used by individuals who were self employed. In the past there were loans that allowed Bank Statements to be used as Full Documentation. This method was vastly allowable in the sub-prime sector. Very few lenders remain that accept Bank Statements. Those who do typically have very high interest rates. If you are self-employed you should begin to consult with an accountant regarding how to show income on your taxes for future loan needs.

A declining market has become a subject we have mentioned over the past year quite frequently. The overall economy plays an important role. But, even when the economy was thriving there still were markets that declined in value.  I am also going to discuss my opinions on what I feel about the industry changes that affect these area’s. 

Some changes in the lending industry have been made to offset the risk on properties located in these markets. It is in place to prevent the inevitable which seems to be the properties will continue to decline in value. Fannie Mae and Freddy Mac have both decided to reduce their maximum LTV by 5% in these area’s. From a risk standpoint I feel ”A” change was needed. However, there are other consequences involved that make this change a further disaster not only for the investors but for the economy in the market.

First thing you have to understand is the piece I wrote yesterday about how 100% financing is becoming almost unavailable and how credit score restrictions are simotaneoulsy reducing the number of qualified home buyer’s. The changes are weeding out consumers who missmanage credit and do not have significant liquid assets. The pool of qualified buyers is greatly reduced yet again. Then you are adding that they will need another 5% down payment in the affected counties. This change is not going to help the economy in these areas. It is not going to stimulate home prices to increase. It is going to make them decrease and also decrease more rapidly. People with limited down payment funds are going to consider moving to the next county that does not have the restrictions.

So, the banks holding loans in this area will be hurt by this as well. People may not have options to refinance any longer. 90% is the maximum LTV for cash-out refinancing under a Fannie Mae or Freddy Mac program. They will be declined to 85% LTV maximum.

Maybe, in these area’s a better idea would be to adjust the loan price and not the LTV.? That would still keep standard financing open and available yet offset the risk of a declining asset.

I fully support our government and their decisions. But, they recently injected some 200 billion into Fannie Mae and Freddy Mac. Wouldn’t it be wise to inject money like that into helping buyers with down payment money to try and restore balance in the housing market? Federal grant money is available to qualified individuals in qualified neighborhoods. How often is it used? I do not see a whole lot of Economic Divisions in the counties who help people buy homes in Urban and Suburban areas.

I want to open a debate on how we should move forward here to improve the situation we are in.

The United States  Department of Agriculture has been offering loans for quite some time. Many area’s are approved to use this type of financing. This loan works simular to FHA or VA as far as qualifying. However, you are subject to income restrictions and geographical area’s. Not all area’s are approved for USDA.

This loan is now one of the strongest ways to finance a home in the qualified area’s. The loan provides 102% financing which allows you to finance the 2% Funding Fee.

There used to be geothermal restrictions on homes. This past year this requirement was eliminated.

If you have a 620 credit score you are Credit Approved. If you are 1 day out of bankruptcy or foreclosure and you have a 620+ you can buy a home!

There is no limit to the amount a seller can contribute to your closing costs and pre-paid items.

There is no PMI.

There is no cash reserve requirments.

There is no sourcing or seasoning of cash required to close if any. So, if you bury your money in a cookie jar that is acceptable.

So, remember this loan and ask your loan officer about it. Or if you want to check the area’s that are approved or check to see if your income qualifies then visit http://eligibility.sc.egov.usda.gov

With the collapse of sub-prime lending many loan products vanished. However, most of these products were doing a short term benefit with a long term catastrophy.

Most loan officers were forced to put customers into an FHA, VA, or USDA loan. These loans are very good loans with low interest rates and helped keep things going for most home buyers and help people with refinancing.

President Bush announced the FHA Secure program to try and bail out those who could no longer afford their mortgage due to an increase in their adjustable rate mortgage.

Then this past month more bad news. The PMI companies stopped insuring 100% mortgages. As a result the Fannie Mae and Freddy Mac 100% programs cannot be insured so they are no longer available.

Then these past 2 weeks we were bombarded with an effective immediately memo for FHA mortgages. Most companies will no longer do an FHA loan that is NOT approved by Desktop Underwriter. So, most people with credit blemishes who have a credit score lower than 580 cannot get an FHA or even a VA mortgage. This eliminates the possibility of borrowers using FHA Secure in most cases as well.

The only true 100% financing left is USDA and VA. About half the lenders offering USDA impose the credit score minimum on that program too.

 I knew this all was going to happen sometime this year. What you buyers need to know is how to buy a home. You may need a down payment. There still are a few ways to come to a closing with no out of pocket money. Also remember that a 401k can help you with a down payment that is not subject to an early withdraw penalty.

Also, remember that houses located in declining markets will require additional money down or further lending restrictions of -5% LTV.

So, the predictions have been made and we have seen some drastic meassures by the feds to help the economy. So have things changed?

So far from my personal expirience it seems that people are starting to buy houses. They are also taking advantage of the interest rates being low. Although the overall numbers may not lead to more activity than 2 or more years ago. I think our industry will see a great 2008. Competition has started to become less and less. There are less lenders, real estate companies, and loan officers.

In the past few weeks I have seen a dramatic change. More applications. More purchases. More people inquiring. I think somewhat driven by a bargain of lower home prices.

Lending is still being re-shaped. There are still issues at hand. But, overall I truely beleive this is a great time for a consumer to take advantage!

With REO listings growing and getting a higher demand from home buyers I thought I would start a post about the financing avenues.

In the past there was typically a problem in the lending community with education on how to include repairs and rehabilitation in a home purchase. So many loan officers would say they cannot do it or imply it is not available. Some would offer it and say you have to have good to excellent credit.The fact is that all the above is a myth and that the problem is loan officer education on the subject.

Programs available:

1) Construction/Rehab: This program is commonly offered by lenders whom do Home Construction.

Some limitations include:
a: Good Credit with limited or no delinquency.
b: Down Payment requirements of 5% or up to 25%.
c: Imposing a minimum on the Rehab project. Example: Rehabilitation minimum of $50,000.
d: Higher interest rates, limited amortization options, and sometimes only available as an ARM or Balloon.

Some factors that may help buyers:
a: More options for draw schedules.
b: More options regarding verification of income and assets.
c: Some offer self-rehab although limited.

2) FHA 203K: This program is offered by Approved FHA lenders. However, there is a course you have to complete as a Loan Officer to be able to do these loans. So, it is rare to find someone that offers an FHA loan and also is able to offer 203K. HUD has a list of approved FHA lenders and approved 203k consultants on their site.

Some drawbacks include:
a: Full Documentation Only. Most self-employed individuals struggle to be approved due to lack of profit showing on their Schedule C.
b: Limited Draw Schedules although it allows most of the work to be done more quickly.
c: Owner Occupied Only! No investors.

Some factors that may help buyers:
a: No Credit Score Requirement!
b: Limited to No Down Payment!
c: Typically there is no minimum requirement on rehab project.
d: Low interest rates regardless of credit score!

3) FHA 203Ks: This program is like the above but it is a streamline version. There is no additional requirement for a Loan Officer to do them. They only have to work for a company that is FHA approved.

This program is probably one of the best to use on any home. If your buyer has good credit or bad credit the rate is low.

The limitations:

- Up to $35,000
- Cannot do anything requiring blueprints

Say you hate the kitchen cause it is puke green. Done!

The house has no appliances. Done!

You are disabled and need wheelchair access. Done!

You want to gut it to the studs and hang new drywall, flooring, kitchen, bath, appliances, siding, windows, lighting, a new roof, down spouts, FURNACE, plumbing, HVAC, electrical, add a deck, add a porch, add a patio, basement finishing/remodeling/waterproofing, septic and a well. Done!

Perfect. Even those borrowers with limited credit, no credit, flawed credit can qualify.

 Fannie Mae also has a nice product available called Homestyle. It typically requires a 5% down payment but there are ways to get around that. FHA is far superior though.

Federal grant money is available to homeowners needing money for repairs and home buyers needing help with down payment. Home buyers can also repair a property with grant money.

How? Call your county! Contact their Planning and Development division. Some have various names for this but anyone working for the county who deals with real estate should know who you need to talk too.

 The county you should contact is the one in which the house is located.