Nov 302017

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By G. Steven Bray

Your mortgage credit score is based on a credit model developed almost 20 years ago, and Federal Housing Finance Agency (FHFA) Director Watt says that’s not going to change anytime soon.

Many in the credit industry acknowledge that the FICO 4 model, the use of which is required by Fannie Mae and Freddie Mac, is deficient. It doesn’t differentiate between paid and unpaid collections. Nor is it able to distinguish medical collections, which seem to have little predictive value of credit risk. It also poorly models student loan debt, which has ballooned in the last 10 years, and only incorporates negative information for rent and utility payments.

Congress is trying to force a change through The Credit Score Competition Act, which would encourage Fannie and Freddie to consider other credit scoring models, including the newer FICO 9 and VantageScore models.

Watt contends that Fannie and Freddie already consider the same or greater levels of credit data in their computer models that determine whether a borrower qualifies. He also notes the change would be quite expensive. He prefers to wait until after Fannie and Freddie merge their investment security platforms, slated for 2019.

However, Watt fails to mention that Fannie and Freddie impose a minimum credit score, which prevents folks from qualifying regardless of how Fannie and Freddie tune their computer models. Fannie and Freddie also use credit score for determining interest rates and mortgage insurance coverage.

The death of down payment assistance?

 Loan Guidelines, Residential Mortgage  Comments Off on The death of down payment assistance?
Nov 032017

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By G. Steven Bray

Recent surveys indicate that saving for a down payment is one the biggest hurdles to homeownership. With rising home prices, that hurdle may seem like a moving target. Some homebuyers are turning to down payment assistance programs for help.

Well, Freddie Mac just threw cold water on one popular method of funding these programs. It’s called differential rate pricing or premium pricing. The lender provides assistance equal to 3 to 5% of the loan amount in exchange for a substantially higher interest rate. As Freddie correctly discerned, the result is a no down payment, higher-rate mortgage, which violates current conventional loan guidelines. As of 11/1, Freddie will disallow its use with low down payment loan programs.

I have not heard if Fannie Mae is planning a similar prohibition, but given that both agencies are owned by the government, one has to wonder. FHA officials have been squabbling among themselves for over a year about the legality of premium priced programs. For now, they are permitted.

If you’re struggling to find the funds for a down payment, I suggest you check out my Can I Qualify with limited savings videos for ideas. You also may want to check with your city or county for down payment assistance that doesn’t use premium pricing. Keep in mind that most of these programs have income and purchase price limits, and you may have to repay some or all of the assistance if you don’t stay in the home for 5 to 10 years.

Waive the appraisal to save some money

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Sep 212017

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By G. Steven Bray

Fannie Mae and Freddie Mac for a while now have allowed some borrowers who refinance their mortgages to forego an appraisal. Each has internal, computer-based valuation models, and if they feel sufficiently confident in a homeowner’s estimated value, they will accept it in lieu of an appraised value.

This month, both Fannie and Freddie announced they will start waiving appraisal requirements for some purchase transactions. The change could save a homebuyer $500 and shorten the mortgage process by a week or two.

Neither has released its formula for deciding when to offer the waiver; however, it’s expected that most waivers will go to homebuyers making large down payments, and that waivers will be offered on only 5% to 10% of transactions. Your mortgage lender will notify you of the waiver option after plugging your transaction into Fannie’s or Freddie’s computer-based underwriting system.

Even if you receive a waiver offer, you still can choose to get an appraisal. I suspect a significant number of homebuyers will waive the waiver and order an appraisal to make sure they’re not paying too much for their homes.

LLC-financed rental homes won’t prevent use of Fannie loan

 Investment, Loan Guidelines, Residential Mortgage  Comments Off on LLC-financed rental homes won’t prevent use of Fannie loan
Apr 172017

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By G. Steven Bray

One of the more frustrating loan guidelines encountered by rental property owners is the limit on the number of financed properties. Fannie Mae limits the number to 10 – 4 for best-rate financing. While Fannie hasn’t changed that guideline, it has changed which properties count towards it. Previously, properties financed through an LLC counted towards the limit. Now, if the borrower financed the property through an LLC so that the borrower is not personally liable on the mortgage, Fannie excludes the property from the total.

This should be a nice change for investors who use multiple financing tools to manage their properties. Investors often use shorter-term bank loans to finance the initial acquisition of a property, and bank portfolio loans often will allow a seasoned LLC to sign the note. Now, if the investor wants to roll a property into long-term, lower-rate, conventional financing, those short-term loans won’t get in the way.

Keep in mind that financed primary residences and vacation homes still count towards the total. Also keep in mind that some lenders will count a spouse’s financed properties towards the total even if the spouse isn’t on the new loan. Finally, remember that the limit only includes one-to-four-unit residential properties. Anything else, including land, commercial properties, and timeshares, do not count towards the total.

Fannie sweetens HomeReady mortgage program

 Loan Programs, Residential Mortgage  Comments Off on Fannie sweetens HomeReady mortgage program
Mar 272017

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By G. Steven Bray

In an effort to encourage homeownership for lower-income consumers, Fannie Mae has expanded its HomeReady loan program. The program allows as little as 3% down payment and sweetens the interest rate for those who qualify.

The program has income limits in most areas, and until recently the limit was 80% of median income in many areas. Fannie raised the limit to 100% of an area’s median income, and in special low-income census tracts, the program has no income limit.

Fannie also changed the program to allow borrowers to own another home. This may be appealing for those who currently own a home and don’t want to wait for it to sell before closing on their new home.

The program is attractive for a couple reasons:

– First, the program allows for a higher debt ratio, up to 50% of a borrower’s income. In addition, the income of a roommate or significant other can be considered for qualifying even if that person is not on the loan.

– Second, Fannie absorbs some of the risk premium usually associated with low down payment loans. Fannie requires a lower mortgage insurance rate and allows a lower interest rate than is usually associated with these loans.

HomeReady borrowers are required to complete a homebuyer education course, and one naturally wonders whether that compensates for the lower risk premium assigned by Fannie. Time will tell whether the default rate on these loans justifies the favorable treatment.

Get ready for larger conforming loans

 Loan Programs, Residential Mortgage  Comments Off on Get ready for larger conforming loans
Dec 012016

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By G. Steven Bray

The maximum conforming loan limit is going up in 2017. This is the max loan size for a Fannie Mae or Freddie Mac mortgage, what we sometimes call a conventional loan. The new limit will be $424,100, up from $417k.

This is the first increase since before the financial crisis. The Housing and Economic Recovery Act of 2008 established $417k as a baseline and directed the Federal Housing Finance Agency to adjust the limit each year to account for changes in the national average home price. However, the Act required that the limit not rise until home prices had recovered to their pre-crisis level.

The FHFA set third quarter of 2007 as the official pre-crisis price level, and the price level in the third quarter of this year exceeded it by 1.7%. The increase in the loan limit matches that increase.

The new loan limit is effective Jan 1st.

Will your credit score improve with trended data?

 Credit Scoring  Comments Off on Will your credit score improve with trended data?
Apr 252016

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By G. Steven Bray

Fannie Mae has announced that this summer it’s going to require that lenders start using “trended” credit data to qualify borrowers. What in the world is trended credit data and how will its use affect your ability to qualify for a mortgage?

Currently, your credit report is a snapshot in time of your credit usage. The report shows your current account balances, limits, and minimum payments. A trended credit report shows how those amounts have varied over the last two years. Thus, it augments usage with insights into your credit habits. Do you pay off your credit cards each month? Do you pay more than the minimum balance? A trended report will reveal these habits.

TransUnion claims credit scores based on trended data will increase the number of what it calls prime and super-prime consumers by more than 3 million. Analysts expect those who pay off their credit card debt every month will see their scores rise. Other winners may include folks whose trended data shows their revolving balances decreasing over time.

One way to cash out an LLC-held rental property

 Investment, Loan Guidelines, Residential Mortgage  Comments Off on One way to cash out an LLC-held rental property
Apr 162016

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By G. Steven Bray

Yesterday, we discussed how Fannie Mae has rescinded a portion of its loan guidelines concerning investors’ ownership of properties in LLCs. Specifically, according to conversations with Fannie, the change means an investor must move a property into his or her name 6 months prior to being eligible to take cash out of the property.

However, Fannie left open one avenue for cashing out a property in an LLC. It’s called the Delayed Financing program. If an investor purchases a property using cash, and holds the property in an LLC, the investor may pull out up to 75% of the equity within the first 6 months of ownership as long as all the members of the LLC will be on the cash out loan.

Note the two important conditions: It must be a cash purchase, and the cash-out refinancing must close within 6 months of purchase.

I suspect Fannie may eventually realize how silly the conflicting guidelines are, but the inertia that must be overcome to correct them is pretty grand.

In the meantime, please don’t forget that neither Fannie nor Freddie allow you to close a loan with an LLC holding title to the property. You must close in your name. Many investors move properties to their LLCs after closing, but be aware that doing so could trigger the loan’s “Due on Sale” clause.

Fannie makes it harder to cash out rental properties

 Investment, Loan Guidelines, Residential Mortgage  Comments Off on Fannie makes it harder to cash out rental properties
Apr 152016

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By G. Steven Bray

Investors who choose to hold their properties through LLCs need to be aware of a recent change Fannie Mae made to its loan guidelines. The guideline in question was called Continuity of Obligation, and Fannie enacted it in response to the financial crisis to combat fraud. The guideline established a timeframe a party must have owned a home prior to being eligible for refinancing.

For investors, the guideline specifically identified a property held by the investor in an LLC as meeting the requirement as long as that same investor was refinancing the property in his or her own name.

Earlier this year, Fannie rescinded the guideline in whole. The problem for investors is that means Fannie also rescinded the specific carve out for LLCs. Based on recent conversations with Fannie, without the carve out, an investor must first move the property into his or her own name prior to refinancing.

This becomes a big deal if the investor is trying to cash out the equity in the property. Fannie Mae still has a 6-month “seasoning” requirement for cash out loans. Without the LLC carve out, the investor now must move the property into his or her name 6 months prior to being eligible to take cash out of the property using a Fannie loan.

There still is one option available to investors using LLCs, and we’ll look at that tomorrow.

Buying real estate using a trust

 Loan Guidelines, Residential Mortgage  Comments Off on Buying real estate using a trust
Sep 232015

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By G. Steven Bray

For financial planning purposes, homeowners occasionally choose to hold their property in a trust. I’ve had this situation arise several times recently, so it’s a good time to review some of the conventional loan guidelines concerning ownership in a trust.

Fannie Mae and Freddie Mac are in the business of lending money secured by real estate. Thus, they must be able to foreclose on the real estate in case the borrower defaults. Thus, a trust used in connection with a conventional loan must be a revocable trust, also known as a family trust. This guideline, revocable as opposed to irrevocable trust, probably stops more loans involving trusts than any other.

Also of consequence is that the grantor of the trust must be a natural person and must be a trustee, and the primary beneficiary must be the grantor. The income and assets of the grantor are used to qualify for the mortgage, and the grantor is liable for repayment of the mortgage.

Finally, it’s important to remember that Fannie and Freddie still do not allow borrowers to title property in a corporation’s name, even a single-member LLC. This is true even if the borrower agrees to be personally liable for the mortgage.