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Tighter mortgage guidelines since late-2008 are forcing home buyers to make bigger downpayments.  Anecdotally, the change has led to a surge in buyers taking gifts of cash from family members.If you’re among those accepting a cash gift from family, it’s important to know that you can’t just deposit the money in your bank account.

There is a proper way to accept a cash gift and it requires 3 distinct steps:

1. Complete and sign an acceptable gift letter
2. Document the gifter’s withdrawal of funds with teller receipts
3. Document the giftee’s deposit of funds with teller receipts

See, mortgage lenders pay close attention to gifts-for-downpayments.  For one, lenders have to make sure that downpayment cash is “clean” (i.e. not laundered).  And, secondly, they want the gift to really be a gift and not a loan-in-disguise.

This is why lenders will often require that a signed, dated letter accompany the home loan application.

As an example:

I am the [relationship to recipient] of [name of recipient] and this letter serves as evidence that I am gifting [name of recipient] [amount of gift] to be used for the purchase of the home at [complete address of property].

This is a gift — not a loan — and there is no expectation of repayment.

Signed,
[Signature of gifter]

To further appease lenders, gift recipients should make sure that gift funds are not commingled at the time of deposit.  If the gift is for $12,000, for example, the bank’s deposit slip should indicate that a $12,000 deposit was made — nothing more, nothing less.

Don’t add a random $50 check to the deposit, in other words.  If you have a separate deposit to make, make it as a subsequent transaction with its own receipt.

It’s also worth noting that gifting funds between family members can create both legal and tax liabilities.  If you’re unsure about how donating or receiving a gift may impact you, call or email us directly.  If we can’t help you with your questions, we can refer you to somebody that can.

Suze Orman recently appeared on The Today Show and gave 5 minutes of practical money management advice.  Not everyone’s a fan of Ms. Orman, but this is an interview worth watching.

The segment’s theme is “What should you do first?“, pitting real-life financial scenarios against each other, including:

• Pay off credit card debt, or save for an emergency?
• Pay off student loan debt, or pay off credit card debt?
• Save for retirement, or save for a child’s college tuition?

The advice is practical and relevant to most homeowners’ lives and, although financial tips are never one-size-fits-all, there’s some real gems in the segment.

Watch the entire interview at The NBC Today Show website.

Both mortgage guidelines and the economy have tightened since 2006, bringing more attention to “joint homeowners” — non-spousal partners that buy and share a home as roommates.

The practice is not new, but, anecdotally, co-purchasing is becoming more common.

In the video above – filmed two years ago but still on-target today – real estate expert Barbara Corcoran provides good advice for co-purchasing partners.  Like any business relationship, it’s important to plan ahead.

• Hire an attorney to draft contracts and agreements
• Have a plan for when one or both parties wants to move or sell
• Consider life insurance policies on each other

The over-riding theme for co-purchasing arrangements is to be prepared.  Done right, however, they can create two proud homeowners where there would have otherwise been none.

The basis of most mortgage lending is credit scoring.  In general, the higher a person’s credit score, the lower his offered mortgage interest rate.Despite the many credit scoring models in use today, however, just 3 are relevant to American homeowners:

• The Equifax BEACON^® score
• The Experian Fair Isaac Risk Model
• The TransUnion EMPIRICA^®

Generically, these scoring models generate what are commonly known as “FICO” scores.

FICO scores are measurements of probability.  The higher a person’s credit score, by definition, the less likely a person is to default on his home loan.  This is one reason why credit scoring has added importance lately — mortgage lenders are very careful about what they’re lending and to whom.

Notably, minimum FICO thresholds have been added to all types of mortgage loans.

FICO scoring has 5 main components as listed above.  Payment history and credit capacity are two of the largest pieces, but a myriad of other factors contribute to a credit score, too.  For example, the longer your reported history of managing credit, the more favorably your credit score will respond.

The myFICO.com website does a terrific job with credit education, explaining in plain language the ins-and-out of credit scoring and ways to boost your score.  It also makes a free, 20-page PDF available for download.

Whether you’re a homeowner or lifetime renter — consider it required reading.

Mortgage delinquencies are on the rise nationwide, but the news may not be as bad as it appears at first glance.Using anonymous data from its national credit database, TransUnion reports that 4.58 percent of American homeowners were at least 60 days past due on mortgage payments last quarter.

Comparing the statistic to the data from a year ago, the credit reporting agency goes on to say that mortgage delinquencies are up 53 percent.

Although fair, the comparison carries a distinct, negative connotation because if we flip the data to its positive, the statistics don’t seem nearly as menacing.

Consider: In the last quarter of 2008, 4.58 percent of homeowners were delinquent on their respective mortgages.  The positive sign, therefore, is that 95.42 percent of homeowners were not delinquent on their home loans.

Furthermore, in looking at TransUnion’s data for the 5 largest states in the Union, it’s clear that the national delinquency rate is being skewed by California and Florida.  New York and Texas, for example, exhibit delinquency rates below the national 4.58 percent marker.

North Dakota’s delinquency rate hovers near 1 percent.

Headlines are designed to attract eyeballs and nothing else. To get the complete story, therefore — the real story — it never hurts to dig a little deeper into the facts.

(Image courtesy: TransUnion)

When a homeowner sells his home and decides to buy a new one, there are 3 basic options for the residence — sell it, keep it, or rent it.Unfortunately, no matter which path they choose, move-up homebuyers in need of a new conforming mortgage will find qualifying for a home loan to be more difficult this season than in the past.

Mortgage guidelines are dramatically tighter for people “carrying two mortgages”.

Among the changes this spring’s buyers face:

Selling the primary residence
If you plan to close on your new home prior to the closing of your existing home — even if it’s only by a day – both payments must be listed as monthly debts on your mortgage application. This will disqualify the majority of homebuyers.

Converting your residence to a second home
If your current home has less than 30 percent equity in it, your mortgage application for the new home will not be approved unless you can show 6 months worth of mortgage payments + taxes + insurance in reserves for the current home and new home combined.

Converting your residence to an investment property
If your current home has less than 30 percent equity in it, any rental income derived from a tenant is disallowed on your mortgage application for the new home.  You must still count the mortgage payment + taxes + insurance as a monthly debt.

In other words, being a move-up buyer isn’t as simple as it used to be.  New lending rules make buying a new home an exercise in timing and financial planning.  And the rules are expected to get tougher, too.

Therefore, if you expect to be a move-up buyer in the next 12 months, consider moving up your timeframe or — at least — planning ahead for it.

Understanding the new mortgage landscape and how they can influence your upcoming purchase may be the difference between getting approved for a home loan, and getting turned down.

Even though its effective date is April 1, 2009, mortgage applicants should start seeing Fannie Mae’s new fee structure from lenders beginning this Monday, January 12.The reason why Fannie Mae’s mandatory loan fees are hitting lender pricing so far in advance is because lenders can take up to 30 days to package and sell a loan to Fannie Mae post-closing.  In effect, this moves the April 1 start date to March 1.

Then, figuring that March 1 is roughly 45 days from now and that 45 days is a normal window on which to close on a home or on a refinance, the start date again pushes back, this time to January 15.

Given lenders’ typical timeframe to close, fund, and sell a loan to Fannie Mae, in other words, it’s normal that pricing reflects the fee changes two-and-a-half months in advance.  Homebuyers and would-be refinancers would do well to take notice.

If you are floating a mortgage rate today — or shopping for one — consider locking it in before the close of business.  Effective Monday, any number of traits in your home loan could increase your closing costs:

• Your credit score
• Your downpayment / equity percentage
• Your home’s property type
• Your reason for wanting a mortgage
• Your loan type

For a complete look at Fannie Mae’s new, mandated loan fees, visit the Fannie Mae web site.  If you have trouble interpreting the worksheet, call or email me and we can talk about it together.

When conforming mortgages started defaulting en masse in late-2007, mortgage guarantor Fannie Mae created a loss-offsetting, fee-generating scheme dubbed “loan-level pricing adjustments”.The concept was basic: For mortgage applicants with high-risk profiles, collect up-front payments to offset potential long-term losses.

Similar to the auto insurance model in which younger drivers pay higher premiums, the riskier the applicant, the higher the fee.

At the inception of the program, Fannie Mae defined ”risk” as a combination of borrower credit score and home equity percentage.  In general, lower FICOs and higher LTVs paid more costs.

Effective April 1, however, Fannie Mae’s definition of risk is expanded.  By a lot.  Fannie Mae’s new loan-level fees now impact any conforming mortgage that meets any of the following criteria, with the exception of fixed rate loans of 15 years or less.

• Up to 0.75% fee: Secured by a condo/co-op with less than 25% equity
• Up to 0.50% fee: Features a junior mortgage (i.e. HELOC, HELOAN)
• Up to 1.00% fee: Features interest only payment options
• Up to 1.00% fee: Secured to a 2-unit property
• Up to 3.00% fee: Is designated as “cash out”

Each 1 percent in fees equals 1 percent of the borrowed amount. Therefore, a condo buyer with a $200,000 first mortgage and a $25,000 line of credit is subject to a mandatory 1.25% charge of $2,500, due at closing.

However, it doesn’t stop there.  Fannie Mae has also adjusted its original FICO-LTV matrix so that nearly every applicant — irrespective of credit score — will face higher closing costs on their home loan.

Mortgage rates may be falling, but the cost of financing a home is rising.

Fannie Mae’s latest announcement is its fifth risk-based pricing update in the last 15 months.  It’s likely it won’t be the last, either.  Therefore, if you’re torn between to buy a home now or later, consider that the cost of waiting may outweigh the benefits of falling prices or falling rates.

During the holiday season, retailers bombard shoppers with at-the-register offers to “open a charge card and save 15%”.It’s an immediate money-saver, but for Americans in the market for a new home loan, taking advantage of the in-store savings could be a long-term loser.

This is because new credit card applications are damaging to credit scores.  According to myFICO.com, “new credit” accounts for 10 percent of a credit score; recent applications may signal weakness in a borrower’s profile.

Meanwhile, conforming mortgage lenders make rate adjustments for low credit scoring applicants.  As an example, a home buyer with a 20 downpayment and a 715 credit score would face an interest rate adjustment of 0.125%.

Below 700, the adjustments are even worse.

It’s okay to take advantage of in-store savings during the holiday season, but be aware of how it may impact your credit score.  If you’re not applying for a new home loan in the next six months, chances are that you’ll be alright.

But, if you will need a new home loan, consider whether saving 15 percent on a $200 purchase is worth it if the long-term cost is paying an extra 0.125 percent on your new mortgage.

(Image courtesy: myFICO.com)

A mortgage is a contract between a bank and borrower, defining the terms by which a home loan must be repaid.The paperwork, signed by both parties, includes provisions for things like:

• The interest rate
• The length of the loan
• The amount of money to be borrowed

But, like all loans, a mortgage loan can be paid off at any time.  So, when market interest rates fall, homeowners will often exercise their right to an “early payoff” by securing a new loan that pays off the old one.

This process is most commonly known as a refinance.

A refinance is the changing of the loan terms against a property, often for a better interest rate or a lower monthly payment.  When the refinance process is complete, the original lender’s loan is paid in full using the money from the new lender’s loan and the former’s relationship is officially terminated.

There’s no rule against how many times a person can refinance, nor is there an easy way to determine whether or not a refinance makes sense.  In general, if you can reduce your monthly payment while limiting your closing costs, to refinance is a smart decision.

However, there are other reasons to refinance, too, including:

1. To convert from an ARM into a fixed rate mortgage (or vice versa)
2. To extract equity for paying off third-party debts or for cash
3. To extend a loan from 15 years to 30 year for payment relief

Because there are fewer third-parties involved with a refinance, it’s often simpler and less expensive than a comparable purchase transaction.  The paperwork stack is often smaller, too. Depending on your credit score, relative LTV (loan balance divided by the worth of your home) and the loan product that best suits your situation, rates have been as low as 4.75% this week.  Call or email us to see if a refinance would make sense for your family!