Northern Virginia Real Estate Blog

For the 4th consecutive year, the government has set the conforming mortgage loan size limit at $417,000.

A conforming mortgage is one that, quite literally, conforms to the mortgage guidelines set forth by Fannie Mae or Freddie Mac.

The 2009 conforming loan limits, as released by the government, are:

• 1-unit properties : $417,000
• 2-unit properties : $533,850
• 3-unit properties : $645,300
• 4-unit properties : $801,950

Loans in excess of conforming loan limits are more commonly called “jumbo”, or “super jumbo” home loans, depending on their size.

Out-sized mortgages like these are often more costly than their conforming-mortgage counterparts because jumbo loans are not guaranteed by the U.S. government like Fannie Mae loans are.

There are exceptions to the loan limits, however.

Left over from the Economic Stimulus Act of 2008, specific, “high-cost” areas around the country have their own conforming loan limits, not to exceed $625,500.  There are 59 designated high-cost regions in the U.S., most of which are in California.  Don’t worry though the DC metro area, including Arlington, Fairfax and Loudoun are included.  As if you didn’t already know this area was expensive - but it’s nice to know that the government agrees.

The adjusted conforming loan limits in Northern Virginia, are:

• 1-unit properties : $625,500
• 2-unit properties : $800,775
• 3-unit properties : $967,950
• 4-unit properties : $1,202,925

Loan limits are re-assigned each year, based on “typical” housing costs around the country.  Since 1980, as home prices have increased, so have conforming loan limits.  As home prices have fallen in recent years nationwide, however, the conforming loan limit has not.

Conforming mortgage guidelines are the Home Loan Rule Book, delineating between applicants that approved for a mortgage and those that do not.

Effective today, the rule book just got a little bit tougher.

According to Fannie Mae, homeowners converting their primary residence into a second home or investment property will be subject to additional underwriting scrutiny. Fannie Mae is leery of lending to people that may be over-extended.

The complete underwriting update is available at the Fannie Mae Web site but some of the more important points are summarized below, divided into Second Home and Investment Property.

Second Home Guideline Changes

• Without 30 percent equity in the second home, mortgage applicants must have 6 months worth of PITI (what is PITI anyway?) reserves for both properties in their bank accounts.
• With 30 percent equity, the PITI reserve can be reduced to 2 months.

Previously, there was no minimum reserve requirement.

Investment Property Guideline Changes

• With 30 percent equity in an investment property, 75% of the monthly rental income can be applied toward the applicant’s monthly household income.
• Without 30 percent equity, rental income may not be applied to the applicant’s monthly household income and 6 months PITI is required for both properties.

Previously, 75% of the rental income was allowable regardless of equity, and minimum reserve requirements were 2 months.

Even though just a small percentage of Americans own second homes or investment properties, the conforming mortgage guideline changes impacts homeowners everywhere.

This is because more restrictive guidlines lead to two separate, but concurrent, outcomes:

1. The demand for homes reduces because fewer buyers qualify for mortgages
2. The supply of homes increases because fewer sellers can refinance into more affordable home loan

Less demand and more supply places downward pressure on home prices.

Now, remember that mortgage guidelines continuously evolve and what’s accurate as August 1, 2008, may not be accurate six months down the road. In other words, confirm what you’re reading about mortgages online with your loan officer before making any real estate-related decisions.

As mortgage lenders limit how much money they will lend and to whom, co-signing home loans is growing in popularity.

“Co-signing” a home loan is when a third-party — usually a parent or relative — promises to make repayments to the bank in the event that the borrower falls behind on his obligations.

Money experts usually advise against co-signing notes because of the long-term financial risks, but people still do it for a number of reasons including “wanting to help”.

If you’re thinking about co-signing a home loan for a friend or loved one, it’s important to consider the implications of sharing credit with another person.

The four questions below may help you with your decision:

1. Why can’t the borrower get approved on his own? Is it because of poor credit ratings? Lack of income? History of foreclosure? Hopefully, if you’re co-signing for a loved one you already know this, but it doesn’t hurt to ask a few questions in order to get the whole story.
2. If the borrower stops paying the mortgage, can you afford to make the full payment due each month? Many people don’t think of it this way - but that’s really what you’re signing up for. Your name is on the note and you are responsible for making the payments if the person you co-signed with can’t … or won’t.
3. If the borrower defaults on the mortgage and doesn’t notify you, how will a foreclosure on your credit rating impact your family finances? If you do decide to go through with it, it’s a good idea to keep up with the mortgage company in order to make sure payments are being made. A foreclosure on your credit history can severely limit your credit rating for many years to come.
4. When the co-signed loan appears on your credit, will the debt load prevent you from getting approved for your own loans in the future?

Not only can a co-signed home loan create serious financial burdens, but it’s a long-term commitment, too.

Once the note is co-signed, the only way to separate the signers is terminate the note entirely. The two ways to accomplish that are to remortgage the home out of the co-signer’s name, or to sell the home and retire the debt.

Co-signing on a mortgage is not “bad” but bad things can happen should the primary signer face personal and/or financial difficulties. Before agreeing to share credit, consider the implications should something go wrong. I’m not trying to scare you, or talk you out of co-signing for a home loan with someone. However, given that this situation usually arises when a loved one needs help, it doesn’t hurt to throw a little logic and analysis into mix. Many people make these types of decisions solely on an emotional basis … and they may regret it later when the situation changes.

Getting approved for a conforming home loan just got tougher.

Again.

As home loan defaults mount, government-sponsored financier Fannie Mae has imposed new guidelines on what it will lend and to whom, highlighting the need for a strong credit profile and a downpayment.

Some of the new restrictions on home buyers include:

• 580 minimum credit score requirement on all home loans (which 85% of Americans have)
• No more than one instance of a 60-day late payment on a mortgage in the last 12 months
• 5-year moratorium on new mortgage credit with a prior foreclosure on record

In other words, Fannie Mae is outright declining mortgage applicants whose credit is weak and whose payment history shows signs of trouble. But, it’s not just the “fringe” borrowers that are finding it harder to get a mortgage.

Buyers with strong credit profiles are being hit by new changes, too.

One such change says that owners of second homes must now have a 10 percent equity position in their homes; 15 percent if the property is in a “declining market”.

This is up from 5 and 10 percent, respectively, and represents a growing trend to make homeowners have a “stake” in their own homes. Downpayment requirements are higher for all mortgage products, in general.

Fannie Mae’s changes are the third set of restrictions imposed since December 2007 and more tightening is expected over the next few months. That makes now a compelling time to buy a home — borrowing money will be more restrictive (and more costly) later.

If you are actively shopping for homes and have not been pre-qualified in the last few weeks, reach out to your loan officer and get checked against the latest set of mortgage guidelines.

It’s better to know today than after you make an offer.

(Image courtesy: myFico.com)

More commonly called “points”, discount points are up-front fees charged by mortgage lenders in exchange for lower mortgage rates.

The cost of one point is one percent on the loan size and discount points appear on Line 802 of the HUD-1 Settlement Statement.

As a general guideline, each point paid lowers a mortgage lender’s offered interest rate by 0.250%.

For example, a $200,000 home loan offered at 6.000% can be had for 5.750% if the borrower agrees to make an up-front payment of one point ($2,000).

In addition to lowering your interest rate, discount points (as well as other closing costs) may be tax-deductible, too. Therefore, be sure to provide any settlement statements from the previous calendar year to your accountant during Tax Season.

FHA stands for Federal Housing Administration, a by-product of the National Housing Act of 1934 and now a sub-group within the U.S. Department of Housing and Urban Development (HUD).

The FHA is not a lender nor does it build homes.

The FHA exists to insure lenders against loss in the event that a homeowner defaults on a mortgage.

Mortgages backed by FHA are often called “FHA loans” even though it’s somewhat of a misnomer. A more appropriate name would be “FHA-insured” loans because that better describes the FHA’s function.

With the FHA’s guarantee, mortgage lenders are enticed to make loans on which they would otherwise pass and the explicit backing from the government holds mortgage rates low for borrowers.

FHA loans are often used by borrowers with less-than-20-percent downpayments and, therefore, tend to require mortgage insurance payments.

For FHA loans above 80%, mortgage insurance rates are 0.50% annually (paid monthly) with an up-front payment of 1.5% against the loan size and due at closing.

Homeowners with 15-year fixed FHA loans, however, are exempt from the annual insurance payments.

For all homeowners, though, when the loan balance reaches 78 percent of the home’s value, the annual MI is no longer required.

Mortgage rates for FHA loans are typically higher than comparable conforming mortgages but because of new, risk-based pricing from Fannie Mae and Freddie Mac, homeowners with credit scores under 680 are finding FHA a viable alternative.

And often with lower rates.

Source
FHA Loan
Wikipedia, April 1, 2008
https://en.wikipedia.org/wiki/FHA_loan

When mortgage rates change rapidly, it’s a fiscal challenge to shop for a home and/or home loan.

Lately, mortgage rates have been especially volatile, mirroring the wild moves of the stock market.

Here’s how up-and-down stock markets have been in 2008: Through last week, the S&P 500 Index changed more than 1 percent per day on 28 separate days.

This represents 52 percent of all trading days and is the most volatile measurement since 1938.

Mortgage financing is impacted by stock market changes because when money flows into stocks, it tends to come from bond markets. And, when money leaves stocks, it tends to “gets parked” in bond markets.

Because mortgage bonds set mortgage rates, you can understand how stock market volatility can make it difficult to predict what home loan payments might look like.

Volatility is expected to continue for the next several quarters so if you see a mortgage rate you like today, consider locking it right away — it probably won’t last long.

Source
U.S. Stock Volatility Climbs to Highest in 70 Years, S&P Says
Jeff Kearns
Bloomberg, March 20, 2008
https://www.bloomberg.com/apps/news?pid=20601213&sid=av840GLwE4UA&refer=home

When buying a home, there are two stages in the home loan approval process.

Stage 1 starts when a homebuyer submits a mortgage application to his loan officer for a pre-approval.

A pre-approval is a “walk-through” mortgage approval that says — at a given purchase price and downpayment amount — the home loan application will very likely be approved.

Stage 1 ends when the buyer signs a purchase contract on a home. At this point, the “walk-through” approval is useless because the buyer now needs a real home loan approval from an underwriter and not a loan officer.

Thus begins Stage 2.

During the second phase of the approval process, a mortgage underwriter is reviewing income, assets, credit, job history, and other items, too; the underwriters job is to make sure that the buyer meets the bank’s criteria for lending.

If the loan officer did his job in Stage 1, Stage 2 is just a formality. And most times, it all goes according to plan.

Occasionally, though, a homebuyer sabotages his own mortgage approval by inadvertently changing his “risk profile”. It doesn’t happen on purpose, of course — it just happens.

So, consider this a quick primer of what not to do while you’re between Stage 1 and the completion of Stage 2 of the home loan approval process. Following these pointers will help keep the risk profile consistent.

1. Don’t buy a new car (or take on a larger lease payment)
2. Don’t quit your job or change industries (and certainly don’t switch to a heavily commissioned role)
3. Don’t transfer large sums of money into or out from your bank accounts (and remember that “large” is relative)
4. Don’t miss a payment to a creditor (even if you don’t think you owe it)
5. Don’t open a new credit card (even if you’re getting 10% off your new bedding)
6. Don’t accept a cash gift without talking to your loan officer first (because there’s rules on how to accept them)

There’s other items, too, but this a good start.

Now, avoiding these mistakes may not be practical for everyone. Therefore, if you know you’re going to violate a “rule”, check with your loan officer first.

There are a lot of “gotchas” in mortgage lending and it helps to have professional guidance for your individual questions.

For a lot of homebuyers, calculating a prospective mortgage payment is an online experience. For example, a search on Google for “mortgage calculator” returns 39 million options.

Some people, however, prefer to plan on their local hard drive using spreadsheets. For these people, the hardest part is often figuring out what formulas to use.

Interest Only Payments

Home loans with interest only payments are much more simple to calculate than amortizing loans.

Using the graphic at right as a guide, enter your loan size and your interest rate into two separate spreadsheet cells.

Then, create a third cell and input the following formula that calculates the “Monthly Payment”. The formula is:

= (Loan Size) * (Interest Rate) / 12

Principal + Interest Payments

For a home loan with (principal + interest) payments, the formula is a little bit more complicated than with an interest only home loan.

Using the graphic at right as a guide, enter your loan size, your interest rate and the duration of your home loan into three separate spreadsheet cells.

Then, create a fourth cell and input the following formula that calculates the “Monthly Payment”. The formula is:

= - PMT(Interest Rate/12, Loan Term in Months, Loan Size)

For additional spreadsheet formulas and more in-depth reporting, explore your software’s “Help” feature to see what you can find.

Many homeowners are entitled to two major tax deductions — one for annual interest paid on a home loan, and another for real estate tax bills paid to government.

Calculating your approximate tax credit is basic:

1. Add mortgage interest paid and real estate taxes paid together
2. Find your marginal tax rate
3. Multiple your tax bracket by the sum of Step 1

So, for a homeowner that paid a combined $13,000 in mortgage interest and real estate taxes last year, and who is in the 28% marginal tax bracket, a tax credit of $3,640 may be due from the IRS.

This credit is one reason why some people sometimes refer to “after-tax mortgage rates”. An after-tax mortgage rate is the adjusted interest rate after the IRS doles out credits and is calculated as follows:

(After-Tax Mortgage Rate) = (Mortgage Rate) * (1 - Marginal Tax Rate)

The same homeowner with a 6.000% mortgage rate, therefore, has an after-tax mortgage rate of 4.32%.

Because not every homeowner is eligible for mortgage interest and/or real estate tax deductions, and because not every homeowner should claim them, you should consult with your accountant to see how tax credits fit into your tax liability schedules.

Federal income taxes are highly personal and require the attention of an experienced professional.