Vince Kingston

Congress has acknowledged the unique position of Military personal by extending the $8000 homebuyer tax credit until April 1, 2011 for those stationed abroad.  The extension is applicable to Members of the Military, the Foreign Service
and the Intelligence Community provided they are First Time Homebuyers or have not owned a home in the last three years (or have owned their primary residence for at least 5 years and are purchasing a new primary residence, in which case they can qualify for the $6500 credit) and were stationed abroad for at least 90 days from December 1, 2008 and May 1, 2010.  They have also made an exception for those disabled while abroad so that even if you were not stationed abroad for at least 90 days between December 31, 2008 and May 1, 2010, you may still qualify.  You can go here (http://www.federalhousingtaxcredit.com/service_mem.php) to review eligibility guidelines. 

To honor our disabled Veterans, VA will waive the upfront funding fee on the VA home loan.  This makes the VA home loan option for qualified individuals a truly outstanding financing option since the upfront funding fee of 2.15% can be the main disadvantage of a VA loan (however this funding fee is not a cash expense, it is financed into the loan amount so that you end up with a loan amount that is 2.15% higher than the base loan amount).  This means a disabled Veteran can get 100% financing with no mortgage insurance and without any upfront VA funding fee; truly a loan alternative worthy of our Veterans.

I am always available happy to answer your questions.  You can call me direct at 971-221-8525 or email at vince@vincekingston.com 

In the not too distant dark days of the mortgage crisis, Mortgage Insurance companies all but shuttered their doors and withdrew all of their products.  This meant that even though technically Fannie & Freddie were still providing low down payment options, without the requisite mortgage insurance from the MI companies, these programs were useless and only existed on paper.

In a sign of positive change, mortgage insurance companies are now starting to come back to the table and have significantly opened up their product offerings.  This is especially great news for First Time Homebuyers who generally are working with a smaller down payment.  FHA has been the go-to loan for First Time Homebuyers and those looking for low down payment options en lieu of any Conforming options.  However with FHA increasing their Up Front Funding Premium to 2.25%! of the financed amount, FHA has suddenly become very expensive (unless of course it is your only option, which then makes FHA awesome).

Less than 12 months ago, the maximum loan to value for Conforming Financing was 90% and you needed a robust 740 credit score just to qualify for the required mortgage insurance.  Now there is 97% Conforming financing available down to a 720 fico and 95% down to 680!  Maybe the dark days are over and better options are on the horizon.  This is all great news for borrowers as more options means better alternatives and ultimately lower loan costs and payments. 

I am always available happy to answer your questions.  You can call me direct at 971-221-8525 or email at vince@vincekingston.com 

FHA loans are fantastic for many borrowers.  Why you ask?  Primarily because FHA requires the lowest down payment of any loan option (currently just 3.5%) and has no punishing credit score interest rate hits.  For many people without perfect credit and a large down payment, its simply the only option.  However FHA does have one big disadvantage to be aware of: all FHA loans carry an up front insurance premium charge of 1.75% (this will go up to 2.25% after April 5^th this year).  This is not an out of pocket charge, it is financed onto the loan amount and does not affect your minimum down payment requirement.  So the net effect is that on an FHA loan you will end up with a loan amount that is 1.75% (2.25%) higher than if you could use Conforming financing. 

I haven’t met anyone that liked the sound of an up front premium BUT, and this is a big but, FHA loans are ASSUMABLE (Conforming loans are not).  This means that in the future, as long as you are dealing with a qualified buyer, you may be able to offer your interest rate to that buyer and sell your home for a nice premium.  So here is how FHA’s assumability can potentially more than compensate for that up front premium:  You are driven, you are excited, you are a current first time homebuyer and you close on your FHA loan with a 4.875% 30 yr fx interest rate.  Wow.  Now fast forward six years.  You are successful, you have equity now(!), its time to sell your first home and move up in the world.  It’s not hard to envision mortgage interest rates being 7-9% in six years, remember it was only a little over ten years ago where the 30 yr fixed was over 7%, and our country was far less indebted and inflationary then we could potentially be in the future.  So if you are able to offer a potential buyer a 4.875% interest rate in a say 8% interest rate market, it doesn’t take a stretch of the imagination to envision selling your home to that buyer at a much larger premium than the 1.75% up front premium you incurred to get the loan.  And that’s what makes an FHA different; the ability to potentially more than pay for itself some day. 

I am always available for your questions.  You can contact me direct at 971-221-8525 or vince@vincekingston.com 

President Barack Obama is expected to sign a measure today to continue to provide tax credits to homebuyers as well as expand the credit to those who have owned a home for at least five years.

The measure will allow repeat homebuyers who have been in their current home for five years up to $6,500 in tax credits and extend the $8,000 first-time homebuyer tax credit that was about to expire in November.  First-time homebuyers are defined as people who have not owned a home in the previous three years. Repeat buyers must have owned their current home at least five years. 

Purchase agreements must be signed by April 30, 2010, and closings must be final by June 30. Note that the Fed has indicated its mortgage backed securities (MBS) repurchase program responsible for the current low mortgage rates will expire at the end of March 2010.  The Fed will gradually slow the pace of the MBS purchases to avoid any wild swings in rates.  What this means is that potential homebuyers should expect rates to gradually increase during the first quarter of 2010.  With this in mind it may prove more effective to time your purchase for late 2009 or very early 2010 to secure a mortgage rate comparable to today's low rates.   

The credit is available for the purchase of principal homes costing $800,000 or less, meaning vacation homes and rental properties are ineligible. The credit would be phased out for individuals with annual incomes above $125,000 and for joint filers with incomes above $225,000.

I am always available for your questions.  You can contact me at vince@vincekingston.com or 971-221-8525 direct.

One of the primary determinants of mortgage qualifying is the borrower’s ability to repay.  This is actually a paradigm shift from just a few years ago.  In times past, more weight was put on the collateral (the property itself and how much equity was available) as well as borrower assets.  This paradigm is what gave rise to the now infamous N.I.N.J.A loans (no income verified, no job verified, only assets) and Stated Income loans.  It was believed that as long as there was substantial equity in the property (down payment) and that the borrower had good credit scores and significant liquid assets, that this constituted as good a risk as a borrower who could actually demonstrate employment and income.  This belief has been painfully refuted for lenders over the last several years as Stated Income loans have one of the highest default and foreclosure rates.  This is why even with a significant down payment and $400,000 liquid in the bank, most lenders will still not extend mortgage financing to a borrower who cannot show employment and qualifying income.  The best option in the above situation would be for the wealthy (but no job/income) borrower to get a co-signer on their mortgage application who does have qualifying income and employment.

In terms of Employment, the traditional guideline calls for at least two year employment history same line of work.  In practice, there are dozens of exceptions to this rule and it is rarely if ever an obstacle to qualifying.  For example, I have worked with many, many borrowers who had extended job gaps (Peace Core, unemployed, backpacking around Europe, following Phish, etc.) who have had no problem qualifying as long as they have current employment and a good explanation letter for the job gaps.  In regards to the same line of work requirement, again in practice this is typically never an issue as in the majority of cases even seemingly very different jobs can be construed as more or less same line of work.  In addition, lenders will count schooling as work history.  This is why the recent college graduate with only one month on the job is still considered to have 4+ years work experience (if in fact they were in a 4 year degree program).  However where the two year rule does become more binding is when your current employment is Self-Employed and/or 1099.  Lenders hold the self-employed and contract employee to much stricter standards and in almost all cases will insist on a full two year history of self-employment (proven with most recent two years tax returns).

In terms of Income, as a W2 employee you are qualified off of your Gross monthly income (see pre-approval blog # One for how debt ratios work).  As long as you are a full time W2 employee, lenders will give you 100% of your Gross hourly or salary income (before taxes) as qualifying income.  Lenders will not use overtime and bonuses as qualifying income unless they have been received for two years.  If they have been received for two years, they will take a two year average and use that as qualifying income.  Part time W2 employees must have a two year history of part time work in order to use their income as qualifying income.  I put this in italics for emphasis because from experience I know this can be hard to accept however, it is a Fannie Mae/Freddie Mac/FHA guideline and in most cases lenders will stick to it strictly.

For Self-Employed and 1099 contract employees, it can be a little tougher to qualify as lenders will not use gross income as qualifying income, rather they will grant only the net income as qualifying income (after all business deductions).  This means that a self-employed individual who grosses $100k per year but after deductions shows net income of $40K will be qualified off of the $40K (broken down monthly), not the $100K.  The good news is that self-employed borrowers can always use a Co-Signer to help them gain additional qualifying income and ultimately qualify for the loan.    

Much like physics, Chinese, or Facebook for those over 50, the mortgage pre-approval process can seem inscrutable and intimidating to the uninitiated.  However with a clear understanding of what lenders are looking for, you will be able to confidently determine where you stand and take the mystery out of your home financing options.

This blog and the next three blogs will explain the four pinnacles of pre-approval and give you insight into the pre-approval process.  I promise you, this is the correct First Step in the home buying process.  People love to look at houses, but hate to think about financing.  Trust me, I understand this better than most.  However it’s important to spend your and your Realtors valuable time looking at homes you actually qualify for.  In addition, a pre-approval letter will be required prior to making any offer or a seller considering your offer.  This ensures the seller you actually qualify to purchase their home.  The good news is that with a competent, focused lender or mortgage broker, the pre-approval process is nothing more than providing some cursory documentation, and your pre-approval letter can be prepared very quickly (typically same day in most cases).  Then it’s GO TIME, home hunting!

The Four Pinnacles of Pre-Approval are Debt to Income Ratios, Credit Scores, Employment/Income, and Reserves/Assets.  Today I will briefly explain Debt to Income Ratios and how lenders use them to determine how much mortgage you qualify for.

Lenders will apply a debt to income ratio to your gross monthly income to determine your maximum qualifying mortgage payment (Gross income means before any taxes are taken out).  Once this is known, using current mortgage interest rates and factoring in the down payment you have to work with, your maximum qualifying mortgage amount can then be calculated.  The most important and universally applied debt to income ratio is called the Total Debt to Income Ratio, Back End Ratio, or simply DTI.  Typically the maximum DTI will always be 45%.  As an example, say your gross monthly income is $4000.  $4000 x 45% DTI = Maximum mortgage payment of $1800.  Now since it is called the Total Debt to Income Ratio, we need to first subtract out any other monthly debt payments to arrive at the true qualifying mortgage payment (these are only debts that show up on your credit report, they do NOT include things such as taxes, utilities, insurance, etc).  Only the minimum monthly debt payments count; so if you pay extra on your credit card every month that is great (!), but we only care about the minimum payment on that card, not what you actually pay.  So in the above example, if we have $150 in other debt payments then our qualifying mortgage payment is $1800-$150 = $1650.  Now since the mortgage payment must also include taxes and insurance (and mortgage insurance if applicable) we must subtract out an estimated cost for these items.  Let’s presume taxes, insurance, and mortgage insurance (because we will be using less than 20% down payment) equal $300.  $1650-$300 = $1350 qualifying mortgage payment.  Using today’s interest rate of 5% on a 30 yr fixed loan, a $1350 payment would support a maximum mortgage of $251, 480.  If we have a 10% down payment, then our maximum qualifying purchase price equals $251,480/90% = $279,422.  Now we actually know what price range to focus on!

Of course this is a brief example and there are many variables that can change this number, sometimes substantially so.  For example, all other things being equal, if I used a 6% interest rate vs. the 5%, then the maximum mortgage payment and purchase price would be reduced to $225,168 and $250,187 respectively.  This can make a huge difference in your buying power and is an obvious reason Home Buyers flood the market when we have a lower interest rate environment as we do now. 

Stay tuned for the next blog detailing pre-approval pinnacle number two:  Credit scores.  I am always available for your questions regarding physics, Chinese, and Facebook, as well as the mortgage pre-approval process as it applies to your unique situation.  You can contact me any time at vince@vincekingston.com or 971-221-8525.              

A recent article from Bloomberg.com points out what is obvious for those in the Portland real estate industry:  New appraisal requirements that went into effect May 1^st of this year are wrecking havoc on home sales.  Fortunately it doesn’t affect many first time homebuyers as the new appraisal guidelines only apply to conforming loans, not FHA.

www.bloomberg.com/apps/news?pid=20601213&sid=aacHqlTB6jTg 

I blogged about my concerns regarding the new HVCC (Home Valuation Code of Conduct) regulations in May.  Those concerns have turned out to be true.  Yes there were cases where the combination of unethical loan officers and appraisers conspired to commit fraud but the vast majority of participants conduct themselves ethically.  HVCC increases costs and frustration to borrowers, almost guarantees closing delays (which can endanger borrower rate locks), and encourages faulty and erroneous appraisals.  Prior to HVCC loan officers could have a working relationship with any appraiser of their choice.  Naturally like any good relationship the appraisers were communicative, economical, and attentive to detail because good business begets more business.  With HVCC, appraisals are randomly dolled out to appraisers in a lottery fashion and loan officers have no control over the process.  This means that a very important level of responsibility has been stripped away form the process.  The appraisers know that, within reason, even if they displease the borrowers and commit errors, they will continue to receive appraisal orders randomly through the HVCC.  The result?  A ten fold increase in the number of appraisal errors.  Anecdotally I can confirm that every appraisal I have ordered through HVCC has had significant errors that unfairly affected the homes valuation.  This is misguided and clumsy regulation for a market that our country desperately needs to recover before the economy as a whole can hope to recover.

The good news is that I am not the only one who feels this way.  There is tremendous pressure from all corners to repeal HVCC.  The horror stories are in the tens of thousands just since it went into effect a little less than two months ago.  I suspect we will see HVCC repealed by the end of 2009.  And borrowers and the real estate market as a whole will rejoice!

I am always available for your questions.  You can contact me anytime at 971-221-8525 or vince@vincekingston.com.