Taking the mystery out of the mortgage process

English: Mortgage Backed Security

English: Mortgage Backed Security (Photo credit: Wikipedia)

The home buying process can seem complicated and overwhelming for the average buyer. Helping your customers better understand the different phases in the mortgage loan process early on – and what is expected of them at each step – can help make the process less intimidating and reduce frustration.

Phase 1 – Origination:
This begins the mortgage process and is actually several steps. The loan officer will help the customer learn what their mortgage financing options are through a pre-qualification process, and assist with filling out a loan application and gathering the necessary documents.

Customers should know: They’ll need to provide income, asset and debt information, and their Social Security number to allow the lender to pull their credit report.

Phase 2 – Processing:
The loan processor will then collect, verify and review all required documentation provided by the buyer, order appraisals, order a title search and send all this information in a complete package to underwriting.

Customers should know: Processors will be checking for errors, discrepancies and possible missing information, so customers need to understand how critical it is to provide accurate, complete information in a timely manner.

Phase 3 – Underwriting:
The underwriter analyzes the documentation for accuracy and evaluates the customer’s ability to repay the loan based on their credit and employment histories. An appraisal and title review is completed to ensure the loan program guidelines are met, the title is clear, and to determine risk acceptability.

Customers should know: This is “decision time” as the underwriter weighs the risk of lending money and approves or denies the loan – so customers may be asked for additional financial information even at this stage.

Phase 4 – Closing (or Escrow):
The loan processor coordinates all aspects of the closing with the buyer and the closing agent and/or attorney. The closing agent conducts the closing, ensures that all necessary documents are signed, assures closing fees and escrow payments are made, and confirms that all documents are sent out to be recorded according to state and local requirements.

Customers should know: Before closing they should receive information explaining the closing costs, including a standardized Good Faith Estimate (GFE) of how much cash they will need at closing.

With keys in hand, the process is completed for the homebuyer, but there are still a number of steps that take place behind the scenes after closing.

  • Warehousing: About 10 days after closing, the lender uses their warehouse line [line of credit] to finance the new loan until it is “sold” to an investor on the secondary market.
  • Secondary market: Allows lenders to sell mortgages to investors, providing them [the lender] with new funds to offer home loans to new borrowers. Your customers’ mortgage rates are influenced by the yields demanded by these investors.

Typical investors of mortgage-backed securities in the secondary market include:

  • Shipping and delivery: Once an investor is secured, the loan is packaged with other loans,, and applicable documentation, and becomes part of a mortgage-backed security (MBS). These mortgage-backed securities are then delivered to the investor.
  • Loan administration/servicing: A loan servicer takes care of the administrative duties once the mortgage-backed securities are delivered to the investor. This includes: customer support, collection of mortgage payments, management of escrow accounts and fund recovery efforts.
Thanks to  Coldwell Banker Home Loans

 

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Financial Health: Recovering from Bankruptcy

Buying a home is one of the biggest investments you’ll ever make, so use our tips to make savvy financial decisions before you buy – and maintain your home’s value once you sign on the dotted line.  The following is PART 1 of an excellent guide from FrontDoor:

PART 1:  Financial Health and Recovery

The housing crisis has tightened up credit markets, so it’s more important than ever to have a clean credit report. Use our tips to shore up your credit score before you buy, or restore your credit after a major financial blow.

A.  Recovering From Bankruptcy

What you can expect in the first 2 years after bankruptcy

Filing for bankruptcy should not be a financial monsoon that sweeps away your credit freedom for the rest of your life.

Bankruptcy can offer a fresh start to individuals with overwhelming debt who are seeking ways to brighten their financial horizon. But, improving your credit standing, like diminishing your credit standing, happens over a period of time.

While bankruptcy remains on credit reports for years, if you maintain a good credit history after filing for bankruptcy some lenders oftentimes extend credit for auto and home loans 18 to 24 months after a bankruptcy discharge.

In 2008, more than 1.1 million Americans filed for bankruptcy, a 32 percent increase from the year before, according to the Automated Access to Court Electronic Records. As the U.S. attempts to recover from an economic recession, a credit crunch has created a few hiccups as lenders tighten up credit standards for loan applicants across the board.

The turbulent markets could make the road to credit redemption a little longer, but don’t fret — instead focus on long-term financial freedom.

Know that every application for credit is judged on an individual basis, so the length of time it takes to repair your credit will vary.

What might your recovery period look like?

The First 6 Months

The most damage to your credit will be immediately after you file, says Candy Wright, group manager of counseling at GreenPath Debt Solutions (www.greenpath.com), a non-profit consumer-counseling service. “If you have accounts that you’re not including, like a mortgage, that will actually help your credit over time if you keep your account current.”

First, you should find an experienced and trustworthy lawyer who specializes in bankruptcy, or seek low-cost legal aid services.

Take the time to learn the difference between Chapter 7 and Chapter 13 bankruptcy and which works best for you. Under Chapter 7, also referred to as “liquidation bankruptcy,” you pay nothing to unsecured creditors, but may be required to liquidate non-exempt assets (like a house or car worth more than a certain amount). Chapter 13, often called a “wage-earner’s plan,” means you pay back a portion of your debts over a period of time and are not required to liquidate assets.

Next, be prepared to spend up to six months awaiting bankruptcy discharge, which releases the debtor from personal liability for some or all of his or her debts. During this time, creditors are notified and given time to respond to your bankruptcy claim. You should not pursue any new credit during this period.

6 Months to a Year

Your credit history won’t clear up immediately — even if you’re current on your bills, it will take several months for your credit to improve on paper.

“After six months to a year, if you’re in good standing, then you will establish a track record of turning yourself around that will be reflected in your score,” says Director of Consumer Education Steve Katz of TrueCredit (www.truecredit.com), a credit monitoring agency. “Keep in mind the impact of bankruptcy is a lot of late payments, and if you have a foreclosure you might still be accountable for that mortgage and those things can linger on for quite awhile.”

If you re-affirm debt, or agree to repay a portion of a debt, the positive effects of repayment will begin to show up on your credit report. If not, rental payments or other types of credit that are reported to credit bureaus may have a positive impact as you re-establish your credit.

The First Year

Request your credit report from all three credit bureaus after bankruptcy the first year and each subsequent year. As you begin to rebuild your credit, it’s important to track your credit history and remain in good standing.

“It’s kind of like your report card from school, so you want to try to always improve your score,” says Ralph R. Roberts, a bankruptcy and foreclosure expert and creator of KeepMyHouse.com. The way to improve: Pay on time, every time.

The Second Year and Beyond

Each year after the first has less of an impact on your credit history. However, bankruptcy will stay on your credit report for 10 years. For that period of time, any lender viewing your credit report will see an indication that you filed for bankruptcy and may take that into consideration before extending a line of credit. If you become more financially healthy in the seventh year, for example, it will have less of an impact than the 1st or 3rd year of bankruptcy.

Your credit requires a lifetime of maintenance, and while bankruptcy is a major roadblock, worry less about a timetable and more about weathering the financial storm by relying less on credit cards and survive by living a debt-free lifestyle.

NEXT:  Part 1, Item B:  7 Ways to Improve your Credit Score

 

How, when, why to take a reverse mortgage – Pt 1

[“Reverse Mortgage” AKA “Home Equity Conversion Mortgages” HECMs]

  Photo from Shutterstock

FHA-insured reverse mortgages, also called home equity conversion 
mortgages, or HECMs, allow seniors to withdraw cash from their 
home while retaining the right to live there indefinitely. 
They are a potentially powerful tool for helping seniors live 
better lives during their retirement years, and new HECM options 
enlarge the possibilities.

However, the benefits can also be frittered away, with little lasting benefit to the senior, and all too many seniors are doing just that. About two-thirds of all HECM borrowers today withdraw the maximum amount of cash possible at closing, which leaves the senior with no borrowing power for the future. While some seniors have compelling reasons for withdrawing the maximum amount of cash at the outset, many are making a mistake.

HECMs are complicated

Underlying the mistakes that seniors make is the complexity of HECMs and the fact that few seniors understand them. The new options increase the complexity. While there is no way to make HECMs simpler, or to raise the IQs of senior borrowers, the likelihood of bad decisions can be reduced by improving the quality of advice that they receive, and the quality of the information to which they have access.

The role of counselors

Every HECM borrower must be counseled by a Department of Housing and Urban Development-approved HECM counselor, but counselors are not preventing borrowers from making serious mistakes. Even if counselors were financial planners qualified to advise seniors on how a HECM fits into a retirement plan, which most are not, under HUD rules, counselors are not supposed to recommend one HECM option over another. Many HECM borrowers, furthermore, turn off their hearing aids during their counseling session.

Lender incentives

HUD limits the origination fees that borrowers can be charged to 2 percent of the first $200,000 of property value, plus 1 percent of the amount above $200,000 but with a cap of $6,000. In addition, lenders collect a premium paid by the wholesalers to whom they sell the HECMs. On the day in July that I checked, these premiums were 7.625 percent on fixed-rate standard HECMs, and 4.875 percent on standard adjustable-rate HECMs. Premiums are paid on the initial loan balance only.

Thus, a senior of 72 with a $400,000 home will generate premium income for the lender amounting to $20,600 if he draws maximum cash on a fixed-rate mortgage; $13,200 if he draws maximum cash on an adjustable-rate mortgage (ARM); and $600 if he elects an annuity on an ARM. In the last case, the initial loan upon which the premium is based consists only of the financed settlement costs. Note: The reasons for this enormous spread in originator income will be discussed in another article.

The bottom line is that lenders have a strong incentive to encourage borrowers to withdraw cash upfront. Unfortunately, in many cases, borrowers don’t need much if any encouragement.

Borrower bias against ARMs

Most senior homeowners had one or more forward mortgages during their life, from which experience many emerged with a bias against ARMs. They may not have had one, but they heard about them and knew that they were risky. So when offered a choice of fixed- or adjustable-rate HECMs, they opt for the fixed, which requires that the full value of the HECM be taken in cash.

Borrower bias against ARMs combined with lender financial interest in maximum cash withdrawals make for a perfect marriage. But not one made in heaven.

Borrower bias against HECM ARMs is misconceived. On forward mortgages, borrowers are exposed to the risk that a future interest rate increase will make the monthly payment unaffordable, but there is no such risk on a HECM because borrowers have no mortgage payment to make.

A future increase in the rate on a HECM does result in a more rapid increase in the senior’s loan balance, but this hurts only borrowers who use all or most of their borrowing power by drawing cash at the outset. To the extent that the senior reserves some part of his HECM borrowing power as an unused credit line, future ARM rate increases work to his benefit because the line grows at that rate.

The upshot is that seniors with needs best met by an annuity payment, and/or by husbanding a credit line for future use — which is most of them — should not shrink from taking an ARM.

Information available to borrowers

While HECMs are complicated, we live in an information age replete with sophisticated tools for expositing complicated ideas. Lucid exposition of the full implications of each possible course of action can overcome a borrower’s preconceived bias and the entreaties of interested loan originators.

The tools available to HECM borrowers, however, are a sorry lot. The existing calculators focus entirely on how much the borrower can draw, without any supporting information on the future consequences of a given selection. So I decided to develop my own. [end of Part 1]

By Jack Guttentag, Inman News®

This week’s MORTGAGE TIPS: The FHA 203(k) Mortgage

Purchase and Renovate: Recapture the American Dream

Pick appropriate ladders

Often times home shoppers will come across a fixer-upper property that just fits the bill; perfect in every way except that it needs just too many costly repairs to bring it up to acceptable condition. And what’s worse, the buyer has little or no money to pay for the needed renovations. Now there is a way to make it all possible: It’s the FHA 203(k) mortgage. With a 203(k) loan, your buyer can purchase a property in need of repairs and refurbishing and roll the renovation costs into one, easy mortgage loan based on the home’s post-improved value.

For example, if they wanted to buy a house in which the kitchen had been torn out, they could include in the mortgage loan, the cost of new cabinets, counter tops, flooring, a refrigerator, stove, oven, microwave, sink, dishwasher, garbage disposal, and the cost to design and install it. Plus, get up to six months of mortgage payments included in the loan to cover the mortgage payments while they’re renovating.

Floor plan before kitchen renovation

And the down payment terms are extremely favorable too – they only have to come up with 3.5% of the home’s purchase price and repair costs. For example, if they were buying a house that cost $150,000 and the repairs cost $15,000, their down payment would be just $5,775.

If you have a buyer shopping for a home and seriously considering a property in need of repairs and updates, the 203(k) mortgage can really simplify their purchase. Just make sure that you work with a mortgage lender who is experienced with the 203(k) program.

You can learn more about the 203(k) loan and other FHA loans by contacting an FHA-approved lender. To find a qualified lender in your area who is experienced with FHA 203(k) mortgages, visit online at http://www.hud.gov

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April 13, 2012

Don’t let your mortgage application get rejected

Half of refinance applications are abandoned or rejected, as are 30 percent of purchase mortgage applications, according to the Mortgage Bankers Association. All told, the Federal Financial Institutions Examination Council (FFIEC) says that well over 2 million mortgage applications were rejected las…