September 30, 2010

Real Estate Appraisals 101

Today we hear more and more about appraisals as part of the real estate process. Tough markets, like the one in which we find ourselves today, bring the subject to the forefront more so than in times of booming sales and bidding wars.

In fact, these days, more often than not appraisals can be one of the biggest roadblocks to a successful purchase – or sale – of a home. Why is that? What makes an appraisal so critical? And while we're at it, just exactly goes into an appraisal?

Simply put, an appraisal is an informed estimate of the value of a property. It's the number lenders refer to when deciding whether, or not to approve loans. It could be said that appraisals are meant to help buyers and lenders avoid potentially bad investments. Here's what you should know about how it works.

The seller of a home will probably have a real estate agent, who will use a CMA, or comparative market analysis, to determine a realistic asking price for the home. While the information is useful, the lender will look to a specialized, local third-party professional to provide the "official" home valuation report. And that professional is... you guessed it ...the appraiser.

You see, arriving at that final appraisal figure is no easy task -- to be accurate, an appraiser needs an educated, trained perspective and understanding of all of factors that have to be carefully weighed with respect to the state of the real estate market in that specific area.

For example, major factors of the appraisal have more to do with the neighborhood than the home itself:

•The type of area: Is it part of a development? Or is it stand alone acreage?

•The recent sales prices of comparable homes located nearby

•The average sales time of this type of property in that area

•The proximity to desirable schools and public facilities

This information can be found by various sources -- from driving down the street and observing the surroundings, to gathering information at the local tax assessor's office and county courthouses, through MLSs (multiple listing services), by conducting interviews and more.

It's a lot to consider, so you can see how having experience valuating properties within a given neighborhood is critical to arriving at an accurate appraisal.

But what about the property itself?

The appraiser will tour the home as a potential buyer would tour the home. Clean, updated, well-maintained homes will appeal more to buyers – and chances are, they'll appeal more to the appraiser as well.

First impressions aside, for his analysis the appraiser will generally consider only permanent fixtures and real property -- that is, property that's permanently dug into, or set upon, land. So, a building is real property -- a couch is not. Added touches, like sconces or other added fixtures, are nice but do not count toward the appraiser's assessment.

After taking stock of the real property, the appraiser estimates the square footage of the home. Typically, the more space in a home, the better. GLA, or gross living area, is calculated by measuring the exterior of the home. The appraiser will note the GLA and then will look to calculate actual living area space. So that means he deducts the measurements of non-living areas, such as garages or covered porches. (Although, surprisingly, finished basements are calculated separately from the above-ground GLA.)

All said and done, depending on the size of the property, an appraisal should take anywhere from 15 minutes to three hours.

But don't ask the appraiser for the value of the property while he's still there - he won't have it yet. After the walk-through, it's back to the office for some number crunching. Buyers (and lenders) can typically expect a report within a few business days.

And who pays for the appraisal? Although the Lender arranges for the Appraisal, the buyer pays the bill. For an average home, that's usually around $300 to $500.

September 29, 2010

15 Year Fixed Rate Loan...Is it Right for Me?

A 15-Year Fixed Rate loan works well for borrowers who are nearing retirement and want to be debt-free when they get there. Because payments in a 15-year scenario are amortized over half the length of a 30-Year Fixed Rate loan, the monthly payments will be significantly higher in comparison. This is an important factor to consider before committing to a 15-year loan. However, the interest rate on a 15-Year Fixed Rate loan will be lower for the same reason - financing for 15 years costs much less than financing for 30 years.

If a borrower is 50 years old and would like to be debt-free when retiring at age 65, then a 15-Year Fixed Rate loan will allow the borrower to meet that goal as far as their mortgage is concerned. However, if there is any question as to whether the borrower will be able to commit to the higher monthly payment, the alternative is to take a 30-Year Fixed Rate mortgage and make pre-payments with some consistency. If the borrower has the discipline to make those extra payments whenever possible, he or she can still attempt to meet the same goal.

I prefer to educate my borrowers so they can compare the benefits of each program and have the opportunity to review loan options with their financial advisors.

September 27, 2010

Rates have been so LOW... Hours have been so LONG... I needed a weekend of R&R!!

My Brother's Steve and Mike and the "Catch of the Day!"

A Remora, these crazy little creatures can grow up to 3 feet long!

My Mahi-Mahi! I still have my phone in my hand for those important calls!
A Loan Officer should always be available to their clients!!!

We are home and we have dinner!!

September 22, 2010

Loan Points - Are Loan Points a Tax Deduction?

Planning to buy a new home around year’s end? Try to wrap things up by Dec. 31. The reward for meeting that deadline is a deduction for this year if you have to finance the purchase with a mortgage loan on which you pay "points."
How Do Points Work?
What are points? They are additional, up-front fees, instead of higher interest rates. When money is scarce, lenders routinely charge points, also known by such designations as "loan origination fees," “premium fees,” or "loan discount;” one point equals one percent of the amount borrowed.

How Do Points Qualify as a Tax Deduction?
The key to points being 100 percent deductible in the year of payment, along with your other home-mortgage interest, is that you pay the points to obtain a specific type of loan. It must be a loan to buy, build or improve (as when you add or remodel a room) your main home, that is, your year-round home, as opposed to, say, a second home that you use as a vacation retreat or property for which you charge rent.
What Does the IRS Say About Loan Points?
Here is how the IRS reads the law when you refinance an existing mortgage. Generally, refinancing points are not deductible in full in the year you pay them unless they are paid in connection with the purchase or improvement of a home. This is true even if the new mortgage is secured by your main home. Translation: Refinancers must write points off in dribs and drabs over the life of the loan — divide the points paid by the number of monthly payments to be made over the life of the loan.
To illustrate, you pay $4,000 in points and will make 360 monthly payments on a 30-year mortgage. Your allowable deduction is $11.11 per payment, or a total of $133.33 for 12 payments.
This IRS allocation requirement has been backed up by a 1988 Tax Court decision, though the Eighth Circuit Court of Appeals rejected the allocation rule when points are paid on a long-term mortgage that replaces a short-term loan with a balloon payment.
When refinancing a second time, or if the loan is paid off early, take a deduction in the payoff year for all remaining points not yet deducted.
The law makes it easier for the IRS to check on whether a homeowner properly deducts points. The lender has to report to the IRS the amount of points, other than refinancing points, paid directly by a borrower. The amount must be listed on Form 1098. Like 1099 forms from banks and brokerage firms that report dividend and interest information, 1098 forms are sent to the IRS for use by its computers, which compare 1098 figures with amounts listed as deductions for points on Schedule A of Form 1040.
How About Seller Paid Points?
Other complications kick in when you are the seller and pay points to induce the lender to arrange financing for the buyer. You cannot count the points as interest. But as a selling expense, they reduce the amount of any gain you realize from the sale and are deductible by the buyer, who then must do some paperwork. He or she has to subtract the amount paid from the purchase price in computing the home’s basis — the figure used to determine gain or loss on the sale of an asset.
Are Prepayment Penalties Tax Deductible?
Be mindful of another wrinkle if you prepay the mortgage on a principal residence and are hit with a hefty penalty (a percentage of the unpaid balance) for the privilege of paying it ahead of time. No matter what the lender calls it, that extra charge is fully deductible home mortgage interest.
Julian Block is an attorney, syndicated columnist and former IRS special agent (criminal investigator). This article was excerpted with permission from the pamphlet: "The Home Seller's Guide to Tax Savings: Simple Ways For Any Seller to Lower Taxes To The Legal Minimum," which can be ordered by sending $19.95 for a postpaid copy to J. Block, 3 Washington Sq., #1-G, Larchmont, NY 10538.

September 21, 2010

What a rate cut means to homeowners

How to keep ahead of rates and lower them when your card issuer hikes them up.

By Gerri Willis, CNN

September 20, 2010

New FHA Changes

It's official: FHA was just given authority to change the amount charged to borrowers for both the Up Front and the Annual Mortgage Insurance premiums...and change them they did.
This will impact how you write up your FHA purchase agreements, as well as any monthly payments you might estimate for clients – so I wanted to get word on the new guidelines to you right away.
The new premium amounts will be effective on all FHA case numbers assigned on or after October 4, 2010 – so your clients that already have an FHA transaction in process won't be impacted, but new FHA clients who come into process on or after October 4th will be subject to the new guidelines.
Here's what you need to know:
  • The Up Front Mortgage Insurance premium is now 1.0 % for all standard FHA programs, including on purchase money mortgages. This is a significant change from the 2.25% Up Front Mortgage Insurance typically in place on FHA 30 year Fixed Rate transactions.
  • ...but don't break out the party hats just yet – the Annual Mortgage Insurance premium is now .90% for LTV's greater than 95% on 30 year loans...and this is also a significant change from the .55% we've been accustomed to using when we calculate the monthly payment.
  • There are different annual premium amounts for lower loan to values and for 15 year terms, so call me for more details if needed. And by the way, FHA now has the authority to raise the Annual Mortgage Insurance premium “at will”...up to I'll be keeping closely tuned to any changes and will be sure to keep you informed.
And if you have any other questions about how these changes will impact your clients, call or email me anytime. I'm always happy to review your clients' situations, and help them secure the home of their dreams.

September 18, 2010

Can a low credit score sink your mortgage?
  • Consumers need good credit scores to get top mortgage rates.
  • Risk-based pricing determines how much you'll pay.
  • Borrowers with poor credit should consider FHA loans.

Does a low credit score mean you can't get a home mortgage?

Since 2007, when Freddie Mac and Fannie Mae introduced "risk-based pricing," consumer credit scores have played an increasingly pivotal role in the mortgage application process.

"Fannie Mae and Freddie Mac looked at credit scores and loan performance and realized that borrowers with lower credit scores are far more likely to default on their loan than borrowers with higher scores," says Douglas Benner, a senior loan officer with Embrace Home Loans in Rockville, Md.

How credit scores change mortgage payments
Credit scoreRate*Monthly payment
on $300,000 home
760-8504.072 percent$1,445
700-7594.294 percent$1,484
680-6994.471 percent$1,515
660-6794.685 percent$1,553
640-6595.115 percent$1,632
620-6395.661 percent$1,734
*As of Sept. 14, 2010
Source: Research Services

As a result, credit score requirements are now stricter. Consumers need high scores to qualify for the lowest mortgage rates, says Gibran Nicholas, chairman of The CMPS Institute, an organization in Ann Arbor, Mich., that trains and certifies mortgage bankers and brokers.

"Consumers with a score as low as 620 can sometimes qualify for conventional financing, but they will pay a higher interest rate and points," Nicholas says.

What's a good score?

FICO generates the most widely used credit scores, which are based on credit reports from three credit reporting agencies: TransUnion, Equifax and Experian.

"FICO scores rank-order consumers by how likely they are to pay their credit obligations as agreed," says Craig Watts, public affairs director for FICO.

Nicholas says a credit score of 740 is the threshold for qualifying for the best interest rates from conventional mortgage lenders.

"Typically, risk-based pricing tiers shift about every 20 points. So if your score is 680, you may need to pay 1.5 points at the closing or a higher interest rate," Nicholas says.

"If your score is 640, you will need to pay 3 points at the closing. On a $400,000 loan, that means you could need $6,000 or $12,000 extra."

Consumers can choose to pay points or a higher interest rate.

Benner says borrowers with a score in the mid-600s will likely pay 0.75 percent higher interest than the lowest current rates.

PMI and credit scores

Conventional loan borrowers who make a down payment of less than 20 percent also need to meet private mortgage insurance guidelines in addition to qualifying with the lender.

Here again, credit scores make a big difference in a borrower's ability to secure a mortgage.

"Most PMI companies will not approve a loan for anyone with a credit score below 680," Benner says. "In addition, the amount of the loan they will insure changes based on the credit score. On some properties, such as a cash-out refinance or a second home, the PMI companies insist on a credit score of 720 or higher."

Nicholas says that in a declining market where home prices are still dropping, such as Michigan, PMI companies can require a credit score of 720 or higher.

How to overcome poor credit

Benner says borrowers with credit challenges should apply for FHA-insured loans.

"While FHA has not yet set a minimum credit score, most lenders will only qualify borrowers with a score above 620 and some have even set the minimum for FHA loans at 660," Benner says. "My company is one of the few that goes down to 540, but this depends on the consumer meeting other guidelines such as a reasonable debt-to-income ratio and savings."

The FHA has proposed limiting loan approvals to borrowers with credit scores of 500 and above and to require a 10 percent down payment from borrowers with credit scores between 500 and 579.
Another proposal would require borrowers with a credit score below 620 to have cash reserves of at least one month's mortgage payment available following the closing. Nicholas anticipates these changes to be in place in early 2011.

Borrowers who are turned down for an FHA loan through their automated system can request manual underwriting so that a live person reviews their loan application, Nicholas says.

"Be prepared with a letter of explanation for your low credit score, such as a one-time event or illness rather than a pattern of not paying your bills," Nicholas says.

Nicholas says if one lender won't do manual underwriting, another might.

Other compensating factors that can help a borrower overcome a low credit score include a low debt-to-income ratio, stable employment and substantial savings.

Benner says that FHA loans are available to all borrowers regardless of income or whether they are first-time homebuyers, as long as the home price meets area loan limits.

Another way to qualify for a mortgage when you have poor credit is to make a larger down payment.

"If you can put down more than 20 percent you won't have to meet PMI requirements," Benner says. "You may need to pay extra at the closing or a slightly higher interest rate, but you can qualify for a loan."