South Bend Home Loan

Tuesday, November 19, 2013

How to Save Money On Mortgage Insurance

If you are buying a home, you may have been told that you will pay for mortgage insurance as a part of your monthly payment.  You probably don't quite understand what that is though or, more importantly, how you can reduce the cost of it.  Let's dig into this topic to see if we can save you some money.

What Is Mortgage Insurance?

First, you need to know what mortgage insurance is.  Mortgage insurance (also called MI or PMI) is an insurance policy which compensates lenders or investors for losses due to the default of a mortgage loan.  In a nutshell, if you don't pay the loan back and the bank has to foreclose on you, it covers the shortage so that the bank doesn't take a loss.  The cost for this insurance is added into your payment each month, making you pay more for the home.

What Determines the Cost?

The cost for mortgage insurance is impacted by several factors.  The most important one is the type of loan you are using:
  1. VA Loan - a VA loan has no monthly mortgage insurance cost which is awesome.  Because this type of loan is only available to eligible Veterans, it isn't a fit for most buyers.  If you are a Veteran though, DEFINITELY look into this.  It's a significant savings.
  2. USDA Loan - a loan guaranteed by the USDA has a lower monthly cost for mortgage insurance (currently 0.4% of the loan amount per year).  This is normally one of the lower priced routes to go, but, like VA, this type of loan isn't for everyone.  It can only be used when buying in USDA eligible areas.  Your household income can't exceed a certain level also.  To look at the income and geographic limits that pertain to you, go here:  USDA Property and Income Eligibility.
  3. FHA Loan - For most FHA buyers, there is a big-old charge for mortgage insurance added into you payment.  Currently, it's 1.35% of the original loan amount annually (paid in 1/12th increments each month).  Typically FHA is the most expensive option so it should not be a buyers first choice unless other factors about FHA make it necessary.  FHA is more flexible with lower credit scores, lower down payments and higher debts so sometimes this higher charge for mortgage insurance is necessary to get these looser guidelines.
  4. Conventional Loan - If you're not a Veteran or buying in a USDA eligible area, this is the option you should be exploring more because it gives you more control over the mortgage insurance premium.  How's that, you say?  I'm glad you asked.....

Getting Cheaper Mortgage Insurance on Conventional Loans

There are reasons why conventional financing won't work for certain buyers (see FHA bullet above for a partial list).  If you don't need the increased flexibility offered by FHA financing, though, you can typically save money by using Conventional financing and getting savvy on the mortgage insurance.  Here's how to reduce the cost:
  • Increase your down payment - the cost for mortgage insurance is tiered based on the percentage of down payment you have.  It gets cheaper with every 5% threshold you hit.  These are the current rates with Radian (one of the top four MI providers):  For 5%-9.99% down - 0.59% per year.  For 10%-14.99% - 0.44% per year.  For 15%-19.99% down - 0.28% per year.  With down payments of 20% or more, mortgage insurance is no longer needed.
  • Increase your credit score - those rates mentioned above are assuming your credit score is 760 or higher.  What if it's 720 or 740 though?  That MI cost with 5% down increases from 0.59% to 0.67% per year.  If your score is 700 it goes up to 0.94%.  Given how much the premium can move with a relatively minor change in your credit score, it's worthwhile to try to get your score up as high as you can before buying a home.
  • Have your lender shop it around - the last important step is to make sure you're working with a lender who shops the mortgage insurance around to more than one provider.  Surprisingly, not all do this.  As a matter of fact, MANY don't.  Make sure the lender you pick does so that you're not paying more than you need to be.
Buying a home is more than just finding a new place to live.  It's an investment in your future.  Wise investors do the upfront homework needed to make sure they aren't overpaying on all aspects of the purchase, including the mortgage insurance. 

Wise home buyers also get wise counsel.  Make sure you are doing that by working with a mortgage lender who understands the nuances of mortgage insurance and will educate you on ways you can save money when buying your new home. 

Lori Hiscock is a Sr. Loan Officer at Ruoff Home Mortgage‘s South Bend office.  One of Michiana’s top mortgage loan officers, Lori started her lending career in 1995 after obtaining her bachelor’s degree in Finance from Western Michigan University.  You can connect with Lori Hiscock or apply online here.

Thursday, November 14, 2013

What You Need To Know About Collections

When I discuss credit report collections with my buyers, they are often confused by them.  Sometimes they were not aware that they existed at all.  Other times, they knew they were there but they're shocked that they're still reporting, often after many many years. 

Given the global confusion about collections, I thought I'd share a little information about how collections work and the timelines related to them.

Statute Of Limitations

There are two timelines to be aware of in terms of collections:  The credit reporting time limits and the state's statute of limitations. 

The statute of limitations is the time limit during which a creditor can sue someone for a debt.  The limit varies depending on the state and the type of debt in question.  For debts with written contracts or promissory notes attached, it's 10 years in Indiana.  For oral contracts or open ended accounts (credit cards, phone contracts, etc.), the limit is 6 years.

This statute only says that a creditor can no longer use the courts to force you to pay a debt after that window.  Here's what the statute of limitations does not do:
  • Keep a collector from filing a lawsuit against you anyhow - sadly, a creditor can still file a lawsuit.  You can use the statute as a basis to win that suit, but they could still bring you to court or, more likely, threaten to in the hopes of collecting from you.
  • Erase the debt - the debt doesn't go away after this window expires.  They just aren't supposed to sue you beyond that, but you still owe the money and they can still try to collect.
  • Stop credit reporting - this is where collections impact most people.  These often show up on the credit report and are factored into the credit score.  The statute of limitations doesn't stop a creditor from reporting the debt against you to the credit bureaus.
One important thing to know - you can reset the clock on the statute of limitations without being aware of it.  Simple things like agreeing to make a payment or even acknowledging that the debt is yours can restart that six or ten year window.  Given this, it's wise to be VERY cautious when talking to a creditor and volunteer nothing about the debt in question. 

Credit Reporting Time Limit

While it's good to know about the statute of limitations, what home buyers really need to understand is the rules for credit reporting time.  How a creditor reports your debt to the credit bureaus is what will impact your score and your ability to get a mortgage.

Here's the good news.  Creditors can only keep information about a delinquency, collection or charge off on your credit report for 7 years from the original default date.  They can not sell it or play other sneaky games to 're-age' the debt.  You can admit that it's yours all you want and it won't mess things up.  The law says that it can stay on your report seven years only.

That being said, creditors can do a lot of unpleasant things to mess up your score in those seven years.  A popular tactic recently has been to report old collections as if they are currently past due.  A person may have stopped paying AT&T in 2009 but AT&T (or, more typically, the collection agency that they sold it to) is reporting it as if it is a current bill that is past due right now.

Because the credit scoring model places higher weight on recent activity, these 'recent late payments' on an old debt can really pull down your credit score.  That's exactly why the creditors are doing it. They want to put pressure on you in hopes that you will pay them to make it go away and improve your credit score.

What You Should Do

Home buyers often ask me what they should do in situations like this.  Normally, my answer is 'Pay them.'  If you have open collections and an ability to pay them off, you should.  Even if a creditor is playing nice right now, there's no guarantee that they won't start reporting you as late down the road. The best way to keep them from doing something to pull down your score is to pay off the debt and be done with it once and for all.

If the creditor isn't reporting recent activity though and the debt is over five years old, sometimes it's wise to let it slowly fade away.  Paying it now could actually pull your score down temporarily because it would show as a recent activity on a collection account. 

The problem with leaving it alone, though, is that it's a gamble.  There is no guarantee that the creditor won't start getting creative once their time limit gets close to running out.

Really, the best route is to sit down with someone who has a strong working knowledge of credit scoring and can review your situation with you.  Together, you can work out a plan to handle the collections and get you in the right place to buy a home.  Do you think that you don't know anyone who understands credit reporting?  Sure you do (hint - it's me). 

Give me a call or drop me an e-mail.  We'll get a plan in place to get you into your home as soon as possible!

Lori Hiscock is a Sr. Loan Officer at Ruoff Home Mortgage‘s South Bend office.  One of Michiana’s top mortgage loan officers, Lori started her lending career in 1995 after obtaining her bachelor’s degree in Finance from Western Michigan University.  You can connect with Lori Hiscock or apply online here.

Monday, November 11, 2013

What Lenders Hate Admitting To

I'm going to admit to something that lenders try their best to keep secret.  Sometimes sales fall apart and it's because of something on the lender's side.

GASP!  I know, you're shocked.  What a huge, unexpected surprise.

OK, probably not.  Most Realtors can tell you a horror story or two of sales that fell apart, often at the last hour, because of something that the lender uncovered.  If you asked a lender directly about their personal experience with a dead sale, though, they'd probably give the "Oh, that never happens on MY deals." type of answer.

Truth be told, it happens to ALL lenders and this week it happened to me.  A client had a bankruptcy that included his home in 2009 but for some reason the bank didn't process the sheriff's deed until 2012.  I didn't find this out until the CAIVRS was run which was a week into the contract.

The homebuyer was angry.  I was nauseous.  The Realtor was kind but disappointed.  All in all, it was a rotten situation for everyone (definitely worse for the homebuyer).  Hindsight being 20/20, we all wondered why I hadn't run CAIVRS before the offer was made.  Truth be told, the underwriter and I had both looked at the file before giving the preapproval letter.  Neither of us thought that taking that step earlier than normal was needed.

We were wrong and the purchase fell apart. 

So why do I share this?  I share it because it's time to be open and upfront about this topic.  Fall through happens.  It's such a standard part of this business, that banks track it constantly to judge the quality of the files being provide.  They want a low fall through ratio, of course, but they never expect 0% fall through.  Mortgages falling apart mid-contract is just  a painful part of this industry.

That doesn't mean that Realtors shouldn't hold their lenders up to a high standard.  Many lenders are more thorough upfront and this definitely help more sales make it smoothly to the closing table.  A Realtor should look at the lender's track record and reputation in the community.  If the lender has a strong reputation and is known for closing the loan, the rare fall through should be understood as a part of the business.  If sales seem to regularly fall apart though, that may be a sign that the lender is not as detailed on the front end as he should be.

All to say, Realtors - be picky.  Hold us lenders up to a high standard.  Don't hold us up to perfection though.  Try as we might, things will sometimes go wrong.  If it does, please know we'll learn from it and find ways to avoid that pitfall for the next buyer you send our way.

Friday, November 1, 2013

Mortgage 101 - Mortgage Types

A Realtor friend emailed me yesterday to ask if I had some basic mortgage information she could use.  She was teaching a pre-licensing class to potential future Realtors and wanted to have something to share with people who might know little to nothing about the mortgage side of home buying. 

Sadly, I didn't have anything to give her.  My material is typically written with the seasoned Realtor in mind.  What she needed was handy in my hyper little brain though, so I stopped what I was doing, put together a simple grid of options, and sent it over.

As I looked at the grid, I realized it could be good information for other Realtors and homebuyers as well so - fun fun! - I'm posting it here.  Let's take a minute to dive into Mortgage 101...

Mortgage Types

People who are new to the real estate industry don't always know that there are different types of mortgages.  While Realtors don't need to become experts on mortgage types, it's important for them to have a working knowledge of what mortgages options are out there and the pros and cons for each.  Here's a brief summary of the four most common ones:

What it is
This is your ‘plain vanilla’ mortgage made by a bank to a buyer with no third party involved
FHA loans are loans insured by the Federal Housing Administration (part of HUD).
·         Lower monthly mortgage insurance, making the overall payment lower
·         No mortgage insurance needed if 20% down
·         If mortgage insurance is needed, it can go away once buyer has 20% equity
·         property standards are not as picky
·         Less paperwork involved
·         More flexibility with bruised or newer credit, limited savings or tighter debt-to-income
·         Down payment can be gifted from a family member
·         Interest rate is often lower than that for a conventional loan
·         Lower minimum down payment needed than with conventional (3.5% vs. 5%)
·         Holds buyer to a higher standard in terms of credit, savings and debt-to-income
·         Larger down payment needed (5% minimum typically)
·         Interest rate and monthly mortgage insurance are more expensive with lower credit scores
·         Monthly mortgage insurance is typically more expensive and it normally stays for the life of the loan
·         FHA charges a 1.75% upfront fee (rolled into the loan balance)
·         The property needs to meet a higher standard than is needed for conventional loans
·         More paperwork is involved

What it is
USDA loans are guaranteed by USDA for homes in areas deemed ‘rural’
VA loans are guaranteed by the Department of Veteran Affairs for eligible Veterans
·         No down payment needed
·         Monthly mortgage insurance is less expensive, making the overall payment lower
·         In some situations, the cost for repairs can be rolled into the loan
·         Interest rate is often lower than for a conventional loan
·         No down payment needed
·         No monthly mortgage insurance, making the overall payment lower
·         VA Funding fee can be waived if Veteran has over 10% disability
·         Interest rate is often lower than for a conventional loan
·         Only homes in eligible areas can be financed with USDA mortgages
·         USDA needs to review all files which often delays the closing process
·         The home needs to meet minimum property standards set by USDA that can be more stringent than on some other loan types
·         Property needs to meet a slightly higher standard
·         Seller has to pay for certain fees that typically are paid for by buyer (termite inspection and title company closing fee)
·         More paperwork is involved

 Does this chart cover everything that needs to be known about these types of loans?  Absolutely not!  It's purely a high-level overview of some of the more important details.  It does help to give a working knowledge, though, of what options a buyer has. 

When your buyer is ready to dig into their options deeper and determine which one truly benefits them the most, call me.  I'll review their situation in depth to see where they're going to get the most bang for their buck. 

Lori Hiscock is a Sr. Loan Officer at Ruoff Home Mortgage‘s South Bend office.  One of Michiana’s top mortgage loan officers, Lori started her lending career in 1995 after obtaining her bachelor’s degree in Finance from Western Michigan University.  You can connect with Lori Hiscock or apply online here.