Know Your Debt to Income Ratio

A familiar scenario today is as follows: You have been waiting for the right time to buy a house and have decided this could be it. There are great opportunities for buyers; this could very well be a good time to invest in a house. 

However, as the scenario continues, you've been hit by the economy as well and were out of work for a while. Possibly you had difficulty paying some bills and used your charge card(s) more than you normally do. 

How do know if you're able to qualify? Know what your debt-to-income ratio is.

Debt-to-income ratio is a key factor that will be taken into consideration. This is a percentage based on how much your monthly bills (personal debt) are and the amount of your monthly income. The reason for this is to determine if you can handle more debt (your mortgage) and how much more.

To figure your debt-to-income ratio, total your your credit card minimum payments, your car payment(s), student loans, etc. (you are not required to include groceries or utilities). Next, add up what you expect your new mortgage payment to be. Divide the total debt by your total monthly income.

What's the 'magic' number?
The norm is to not exceed 36%. If your number is higher then 36%, you could be denied a loan or be granted a loan but charged higher interest.

Is this a 'no exceptions' number?
Absolutely not! There are lenders who will accept up to 41%. You won't know until you ask. Talk to a knowledgeable mortgage broker. In the meantime, do what you can to decrease your debt-to-income ratio by paying down as much debt as possible.

Backing Out of the Reverse Mortgage Business

I read an interesting article last week by Tara Siegel Bernard. She writes for the Mortgage section of the NY Times and covered a topic I've been giving some serious thought to lately.  Reverse Mortgages. With the real estate market taking such a hit, there are many questions in a lot of people's minds about this type of mortgage and how the senior community is responding.

Will the seniors have the money in their homes that they expected, considering the dropping values in the housing market?

The biggest answer comes from the fact that the nation’s two biggest providers of reverse mortgages are not offering this loan any longer. According to Bernard, Wells Fargo and Bank of America combined for a total 32,058 reverse mortgages. That's 43% of the business! BOA chose to exit this business in February of this year, and Wells Fargo announced last Thursday that they are following BOA's lead.

So, what does this do to the seniors who are expecting to use this lifetime investment to fund some (or all) of their retirement needs? 

With the two big players out of the game, so to speak, there are no heavy hitters. And that means it might be difficult to get a reverse mortgage.

Key components of the reverse mortgage

• You must be over 62 years old.
• If you have enough equity in your home, you can get a reverse mortgage.
• The bank pays you out of the equity in your home.
• You are required to continue to pay the taxes.
• You are required to have homeowners insurance.
• You are required to pay mortgage insurance premiums.

The issues

• Home values are continuing to drop, which decreases the equity in the home.
• Some have taken a reverse mortgage out to pay off the balance due.
• Some now owe more than the house is worth.
• Some aren't paying the taxes.
• Some aren't able to afford the insurance, so have stopped paying for it.
• Banks cannot decline anyone if they meet the age and equity requirement; thus, they are required to issue loans to those unable to pay the insurance and taxes.
• Lenders are required to pay the tax and insurance payments on behalf of delinquent borrowers (with delinquencies, they submit a claim to HUD, which is responsible since it's guaranteeing the loan).

What's next?

While the economy continues to struggle, some action is being taken. HUD provided lenders with some tips to help the borrowers, such as repayment plans and requesting a mortgage counselor's assistance. If neither of these options work, the lender is required to start foreclosure proceedings.

HUD is coming up with a plan for lenders that enables them to determine a loan applicant's ability to make the payments or have a determined amount set aside to pay for the taxes and insurance. There is no indication when HUD will complete this plan.

Things have changed

In past years, prior to the recession, a reverse mortgage was as close to a guarantee as anything could be. The housing market was stable and growing. Equity would grow for these homeowners because the value of the house continued to increase. This meant there would continue to be funds available.

And now ...

•  Wells Fargo and BOA will continue to service their current reverse mortgage customers. 
• The reverse mortgage association will work to ensure that seniors who need these loans will still be able to get them.
• Some anticipate increases in fees due to less competition, especially when the two key players have removed themselves from this market.

It's not just the seniors affected by this. Wells Fargo will be eliminating about 1,000 employees who are currently in the reverse mortgage offices. They are being offered other opportunities within the bank. Half of Bank of America's 600 employees have already been transferred to other positions within the bank.

Are you a senior, or know someone who is, and are interested in discussing your current mortgage? Do you want to prepare for a reverse mortgage? Grandview Lending has years of experience and are trusted mortgage brokers. We are happy to discuss any mortgage options with you.

What's Happening With HAMP

When the Home Affordable Mortgage Program (HAMP) was introduced, it was designed to help those facing foreclosure to remain in their home. The general idea is to help eligible mortgagees receive a lower monthly payment (modified) that would be no more than 31% of their pre-tax income.

Participation in HAMP is voluntary, and most of America's largest banks chose to participate and signed contracts to do so. Incentives were to be distributed to mortgage servicers to assist an estimated 4 million people in need. According to an article in the New York Times, though, only less than 700,000 mods have been processed.

This government program, unfortunately, has not gone smoothly. The article states that:

• The mortgage servicers weren't prepared to handle the amount of paperwork.
• Homeowners complained that paperwork had been lost (more than once).
• Trial modifications dragged on for months. 
• Banks are now facing a new assessment.

And now three of the nation’s largest banks are being penalized for subpar performance -Wells Fargo, Bank of America and JPMorgan Chase. An evaluation, with a scale of one to three, graded the financial institutions on if they had searched and found eligible homeowners, assessed the eligibility correctly and "maintained effective program management, governance and reporting."

This evaluation  resulted in all three banks issuing separate statements. In general, they all said the same thing ... that they are committed to improve their processes and their customer service.

We'll keep an eye on this, with the hopes that those in need of assistance can indeed take advantage of the Home Affordable Mortgage Program and be able to remain in their homes. In today's market, this would be a win for everyone!

Pros and Cons of Conventional Mortgages

Our previous post discussed the advantages and disadvantages of FHAmortgages. For comparison purposes, today we’ll cover a conventional mortgage.

Conventional mortgages are the most common way to finance a house; thus the word “conventional;” they are sometimes called conforming loans. They are any loan that is not insured or guaranteed by the federal government.

This type of loan is usually written as a fixed rate and for a 30-year term. However, more recently they are also being written with adjustable rates and for shorter (15 or 20 years) terms.

Thumbs up:

• Loan fees can be negotiated.
• Creative financing is an option.
• Fixed rates guard against inflation (if the rates go up, yours will remain the same).
• Higher immediate equity guards against a downturn in the housing market (as we are experiencing right now).

Thumbs down:

• Interest rates can be set by the lender, so they could be higher than FHA rates.
• Higher down payments are required.
• Fixed rates can be a negative if you purchase your house when interest rates are high and then are unable to refinance when they drop.

These are just a few of the key points of a conventional mortgage. There are many other options that a mortgage broker can share with you.  Be sure to work with an experienced broker so you will receive the best advice and learn all of your options before making your decision.