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APPLYING FOR A MORTGAGE? KNOW YOUR NUMBERS

When you buy a home, it’s all about the numbers. Your mortgage rate is based on your credit scores, debt-to-income, and how much of a down payment you can afford.

Know your credit scores: Your credit scores can fall between 300 and 850. Lenders use these numbers, which are compiled by three credit bureaus and Fair Isaac to give them a quick snapshot of your credit-worthiness.

Lenders are still in a low-risk mood and are requiring fairly high credit scores from borrowers. To qualify for the best mortgage interest rates, such as a benchmark 30-year fixed rate, your credit scores must be approximately 720 or more. To find out what your credit scores are, visit www.annualcreditreport.com, the site where you can get free copies of your credit report and scores.

Know your income–to-debt ratios: To qualify you, lenders use two ratios — income to mortgage debt and income to total debt.

To qualify for a 30-year fixed rate conforming loan that is federally insured (FHA), your income to mortgage debt can be no higher than 29% of your gross annual income. If you make $5000 gross income per month, your house payment, including principal, interest, hazard insurance and property taxes, should be no larger than $1,450.00.

If you’re carrying credit card debt, student loans, or pay child support, your monthly debt service must be counted. To get the income to total debt ratio, multiply your monthly income by 41%. If you gross $5000 per month, your total debt -including your house payment – can be no larger than $2050.00. That means to qualify for a $1450.00 house payment, your other debt payments can be no higher than $600 per month.

Know your down payment: For most loans, your credit scores affect down payment requirements. If you have a high credit score, you can get an FHA-guaranteed loan with only 3.5% down, but if your scores are low, you may be required to put as much as 10% down. . FHA loans with less than 20 percent down require mortgage insurance that will not be discharged unless the home is refinanced or sold.

Conventional loans are sold by banks as securities to Fannie Mae and Freddie Mac, with the best rates only available to consumers with 20 percent down. You can obtain both FHA or conventional loans with less money down, but expect to pay a mortgage insurance premium, which reduces the risk for the lender.

Where your down payment originates also makes a difference to lenders. If you have saved the money yourself, or it comes from a recent real estate transaction, lenders tend to be more relaxed than if your parents are giving you the money as a gift.

All these numbers have to dovetail and make sense to the lender, so you can comfortably afford the home you want to buy.

Dodd-Frank Act Explained For Real Estate Investors

Some real estate investors and lenders have been sounding the alarm on the upcoming Dodd-Frank changes to seller financing, but most investors will have little to worry over.

As of January 10, 2014, the Dodd-Frank Wall Street Reform and Consumer Protection Act (commonly referred to as Dodd-Frank) went into full effect. The bill was actually signed into law by President Obama in 2010, and since then there has been plenty of buzz around investor circles about its impact and what the Dodd-Frank Act really means. Some real estate investors are worried about some of their seller financing practices and ultimately their assets.

The nearly nine-hundred page bill was drafted, in part, to try and address the many shortcomings of the financial industry, and relevant here is how it modifies mortgage lending practices (including seller-financiers) to try and protect borrowers in the wake of the last housing and financial collapse. Here’s what you will need to know to be in compliance, if you make any mortgage loans or do any seller-financing.

Dodd-Frank Act Explained For Real Estate Investors

Residential and Owner Occupied Only – First and foremost, the new law only applies to homebuyers who intend to occupy the home. If you sell strictly to other investors, the remainder of this article is purely informational and does not apply to you. Similarly, the new law does not apply to commercial deals.

Category 1 – Dodd-Frank distinguishes between individuals, trusts or estates who sell to only one owner-occupant buyer per 1 year and those who sell to more than one buyer per year. For purpose of this article, “Category 1” refers to circumstances where the seller (individual, trust, or estate only) finances one property per year to an owner-occupant. Category 1 does not apply to LLC’s, partnerships, corporations or other legal entities.

Under Category 1, the following applies:

  • Balloon payments are allowed
  • No proof of ability to pay is required
  • Note must be fixed for first (5) years, then may adjust no more than 2 points per year with a cap at no more than 6 points above the original rate (the original rate must be based on prime or an index such as T-bill or something similar).

Category 2 – This category references any individual, trust, or estate who sells to more than one owner-occupant buyer per year, but no more than three (3). It also refers to any LLC, corporation, partnership or other legal entity that sells to 1-3 owner-occupant buyers. To be clear, all legal entities are subject to the law in the same way as an individual seller who sells more than 1 property per year. Sellers in this category must abide by the following:

  • No balloon payments allowed
  • Must determine and show proof of buyer’s ability to pay
  • Allowed to do up to 3 transactions without becoming a MLO (mortgage loan originator) or hiring one (an MLO is the shiny new term for a licensed loan officer).
  • Note must be fixed for first (5) years, then may adjust no more than 2 points per year with a cap at no more than 6 points above the original rate (again, the original rate must be based on the prime rate or a an index like a T-bill or something similar).

Category 3 – For sellers who make more than three home loans (including seller-financed transactions) in one year, the new law requires MLO status or mandates that an MLO be hired to complete all transactions. Sellers in this category, whether individual or legal entities, follow all of the same rules as Category 2 sellers otherwise.

The law does not apply to commercial, multi-family properties with 5 or more units, or vacant lots/land, even if the buyer intends to occupy it as a residence.

Investors who take the time to understand the new changes know there is no need for panic and may, for the most part, continue to operate as they have been. The thing to keep in mind, which has always been the case for scrupulous investors, is professional and fair treatment at all times. Dodd-Frank is simply another approach to consumer protection. Investors can protect themselves and the consumer by simply knowing and following the new rules.

Position Realty
Office: 480-213-5251

How Interest Rates Affect Your Mortgage Payment

National average 30-year fixed rate mortgage interest rates have been under five percent for over five years. They should stay low forever, right?

Economists predict that the soaring economy, improved job outlook and ebullient consumer confidence will cause the Federal Reserve to start raising overnight borrowing rates to banks. Mortgage interest rates will become volatile, and things can change quickly for consumers.

To illustrate changing mortgage interest rates and their impact on your monthly payment, consider what a difference even a small dip and rise in interest rates means to you.

In December 2014, the median-priced home in the U.S. was $209,500, according to the National Association of REALTORS®. If you purchased this home for $200,000 and with 20 percent down and a benchmark fixed-rate mortgage with the December national average commitment rate of 3.86 percent (Freddie Mac), your payment would be $751.01 a month.

You’ll make 360 total payments of $270, 362.59, with $110,362.59 in interest over the term of the loan.

The same home with the same loan on February 5 would be very different. The national average commitment rate is 3.59 percent, your payment is 726.53 and your total payments add up to $261,552.16 and 101,552.16 in interest.

The difference isn’t much — just under $25 a month and $8,810 in round numbers.

But what if interest rates go up as economists predict? The January 2015 outlook by Kiplinger’s predicts that interest rates could go as high as 4.9 percent. What would your monthly payments look like then?

Your monthly payment would be $849.16, for a total of $305,698.59, and interest payments of $145,698.59, a difference of $122.63 monthly and $44,146.43 in interest by the end of the loan.

If you’re interested in buying a home, mortgage rates are unlikely to stay low much longer.

Position Realty
Office: 480-213-5251

Mortgage Rates Remain Near 2013 Lows

Average fixed-rate mortgages are holding near historical lows, but did inch higher this week amid a stronger employment report, Freddie Mac reports in its weekly mortgage market survey.

The economy added 257,000 new jobs in January, following additional increases in December (329,000) and November (423,000).

Despite this week’s uptick in rates, fixed-rate mortgages remain near lows from May 23, 2013, Freddie Mac reports.

Freddie Mac reports the following national averages with mortgage rates for the week ending Feb. 12:

  • 30-year fixed-rate mortgages: averaged 3.69 percent, with an average 0.6 point up from last week’s 3.59 percent average. A year ago, 30-year rates averaged 4.28 percent.
  • 15-year fixed-rate mortgages: averaged 2.99 percent, with an average 0.6 point, rising from last week’s 2.92 percent average. Last year at this time, 15-year rates averaged 3.33 percent.
  • 5-year hybrid adjustable-rate mortgages: averaged 2.97 percent, with an average 0.5 point, up from last week’s 2.82 percent average. A year ago, 5-year ARMs averaged 3.05 percent.
  • 1-year ARMs: averaged 2.42 percent, with an average 0.4 point, also up from last week’s 2.39 percent average. Last year at this time, 1-year ARMs averaged 2.55 percent.

Position Realty
Office: 480-213-5251

How to Use Your Retirement Funds for Real Estate

In this articles, we will examine how one can use the tax-deferred money in their retirement plans to take advantage of real estate investing opportunities. This article explains how you can use your 401(k) funds to diversify your portfolio mix into real property.

The 401(k) Plan

First, it is important to understand some basic features of a 401(k) program. The 401(k) is a subsection of the Profit Sharing Plan section of the Internal Revenue Code. It allows for employee deferrals on a pre-tax basis. Employers may make this type of plan available to their employees by adopting an acceptable format forsuch a plan. There are limits of how much an employee can contribute. Adoption of such a plan also permits the employer to match employee contributions and to make profit sharing contributions (at the employer’s discretion).

An individual employee may contribute up to about 20% of annual compensation, to a maximum of $9,500 per year. Employers may make matching contributions (such as 25 cents on the dollar) up to 8% of total compensation for each employee. Sometimes profit sharing contributions may also be made and, under certain circumstances, one may have a combined package of 401(k), match and profit sharing/money purchase up to $30,000 in a given year. All of this is variable, and one rule does not apply for all cases.

If you are an employer, you can design the features of the plan and provide the investment alternatives for yourself and your employees. If you are an employee (not defined as an employer), you are permitted to operate your deferrals and investments as established by your employer. If some of the features we discuss here are not available to you as an employee, you may wish to discuss them with your employer to determine whether they can be adopted by your 401(k) plan. If your present plan does not permit the flexibility we are about to discuss, remember any plan may be amended and restated to make such capabilities available.

How to Use the 401(k) for Real Estate and Notes

After all this, how can the funds in your 401(k) plan be used for real estate transactions? Once you have found out that your 401(k) plan funds can be used for real self direction, and the trustee of the plan also permits such transactions, the rules are simple:

You can purchase assets into your plan which are not prohibited. Real estate is not prohibited. You may not deal with yourself or members of your family (other than siblings).

All Transactions Must Be Arm’s Length

This means that you can purchase mortgages with your plan assets. This means you may purchase real property in your plan for income purposes. While debt-financed properties may be subject to unrelated business income taxes, in almost all investment cases we are aware of this has not applied.

How It Works

How does it work? First, you find the property or note. These are self-directed plans, and no one is going to give you a list of real property to chose from. It’s all up to you. Remember, you take all of the risks and receive all the benefits. Neither the employer or the plan trustee has any obligation to you in a properly designed plan. Second, you request that the administrator of the plan ask the trustee of the plan to purchase the asset you have selected for your benefit in your plan. All this is performed through written documents. Third, the security interest in the asset you have asked to be purchased is perfected for the benefit of your plan account. Income and expenses are allocated to your account.

How Often Can You Do This?

As often as you like. Some people like to buy distressed properties, fix them up, and then sell them. Others buy discounted notes. Some purchase income streams. There are as many options as one can think of, provided you follow the rules.

Typically, employers will use the completely self-directed option for compliance with 404(c) of the code for self trusteeship safe harbor. Some combine the complete self direction along with a number of mutual fund choices, making complete self direction available on a non-discriminatory basis to all employees. There is a cost associated with this.

As can be imagined, the process of purchasing notes and real property is a labor intensive process; the process of purchasing mutual funds in a daily valuation environment is almost fully automated. Your 401(k) administrator can provide you with the costs. If your administrator doesn’t handle complete self direction, there are some that will. It’s up to you, as an employer or employee to ask. You may be surprised at the answer.

Position Realty
Office: 480-213-5251

How To Pay Off Your Mortgage Faster

42% of Americans Say Their Mortgage Is The Debt They Most Want to Eliminate

A mortgage is often the largest debt that one undertakes and as a result, many homeowners look to pay it off as soon as they can. In addition to reducing overall debt, paying off your mortgage early enables you to purchase a second home or investment property. Try one of these strategies to reduce your mortgage principal.

  • Make bi-weekly mortgage payments
    Bi-weekly payments involve 26 half payments each year instead of the standard 12 full payments. By making 13 full payments each year, you’ll pay down the principal sooner and reduce the amount of interest you’ll pay over the long run.
  • Increase your mortgage payment
    You can also increase the amount you pay towards the principal of the payment each month. Most people have higher incomes a few years into their mortgage than they did when they first took it out. Keeping your payment on par with your increases in income will help reduce your mortgage amount significantly and may also reduce the amount of your monthly payment over time.
  • Make additional payments
    If bi-weekly payments or increase your monthly mortgage payment are not feasible, try to make extra payments when you can. If you have extra money at the end of the year, put it toward your principal.
  • Refinance with a shorter-term mortgage
    If you have a 30-year mortgage, you can refinance the loan for 10, 15, or 20 years. While the payments will be higher each month, you’ll be able to pay the loan off much sooner.

1 in 3 homeowners own their home free and clear.

If you’re considering paying off your mortgage early, consider the following:

  • Do you have the cash available to pay down the debt? If you’re accumulated 6 months in emergency reserves and have paid off other loans and credit cards, your mortgage should be the next debt you target.
  • Will you have enough cash to save for retirement and other financial goals?
  • How long do you plan to stay in the home? It may make more sense to keep your money liquid and not tied up in a home you might sell in a few years.

Position Realty
Office: 480-213-5251

Borrowing Costs Ease Slightly This Week

Fixed-rate mortgages dropped slightly from the previous week, holding near yearly lows, Freddie Mac reports in its weekly mortgage report.

Mortgage Trends:
Freddie Mac released the following national averages with mortgage rates for the week ending Sept. 25:

  • 30-year fixed-rate mortgages: averaged 4.20 percent, with an average 0.5 point, dropping from last week’s 4.23 percent average. Last year at this time, 30-year rates averaged 4.32 percent.
  • 15-year fixed-rate mortgages: averaged 3.36 percent, with an average 0.5 point, dropping from last week’s 3.37 percent average. A year ago, 15-year rates averaged 3.37 percent.
  • 5-year hybrid adjustable-rate mortgages: averaged 3.08 percent, with an average 0.4 point, rising from last week’s 3.06 percent average. Last year at this time, 5-year ARMs averaged 3.07 percent.
  • 1-year ARMs: averaged 2.43 percent, with an average 0.4 point, holding the same as last week. A year ago, 1-year ARMs averaged 2.63 percent.

Where Is The Adjustable-Rate Crisis?

A major concern in the onset of the housing crises how the payment adjustments of the large number of adjustable-rate-mortgages over the coming years would impact the values of home. It was seen that this category of homeowner would be most vulnerable to resetting mortgage payments in the coming years. These are the loans that carried below market “teaser rates” and/or negative amortization. Not only would these payments jump at the first adjustment but the indices they tied to were bound to rise and that could create a compounded crisis in the housing market. Many foresaw a steady stream of delinquencies, foreclosures, vacancies resulting in falling home values. At least, that was the conventional wisdom.

Well, rest at ease. Recent data appear to show that this window has largely passed. Lender Processing Services’ (LPS) September Mortgage Monitor reports that 63% of outstanding hybrid adjustable-rate mortgages (ARMs) have already passed their initial rate reset.

Of those that have not reset, about three-quarters were originated post-crisis when underwriting was tighter and most loans carried credit scores of 760 and above. LPS Senior Vice President Herb Blecher explained, these scores portend good performance of ARMs should mortgage interest rates rise as anticipated. “Only 36% of outstanding hybrid ARMs are in a pre-reset status, and the vast majority of those are coming from newer vintages where loan quality has been pristine.”

The remaining pre-reset loans originated during the boom-boom years where underwriting criteria was much more relaxed then as post-crisis criteria, some may say it was even loose. These borrowers could be most negatively impacted by upward resets in their monthly mortgage payments but LPS sees little cause for concern. The report found that interest rate indices would need to rise nearly 300 basis points for most of these pre-crisis hybrid rates to increase appreciably. In fact, many of these borrowers are finding their payments dropping.

The study also looked at prepayment rates and their relation to the rate of prepayments and rising rates. LPS found prepayments are at their lowest level since May 2001 as rates continue to rise. The decline crosses all investor categories including GNMA and GSE sectors which both fell over 50% since rates began to climb last May.

Prepayment of loans with LTV ratios above 100% (HARP eligible) have declined over 40% in the same period.

Interest rates drive refinances which in turn drives prepayments and originations. Overall origination activity is down more than 9% m/m and near 18% y/y.

Last month LPS reported that delinquencies increased 4.3% from August to 6.4%, in-line with seasonal patterns, but are still down 9.9% y/y 2013 and 12.6% compared to September 2012.

The foreclosure rate declined 1.3% to 2.63% and is down 23.6% year-to-date and nearly 33% y/y. Foreclosure inventories continue to improve and new problem loans remain close to pre-crisis levels.

Home prices are up about 9% y/y but started their seasonal dip. Home sales remain robust with the share of distressed sales falling from 33% of all sales in 2011 to 19% last month.

Position Realty
Office: 480-213-5251

Time Is Ticking on Tax Break Expiration

The Mortgage Forgiveness Debt Relief Act of 2007 is days from expiring if Congress doesn’t act to extend it. If the act expires, home owners will be responsible for paying income taxes to the IRS on a certain portion of their mortgage that is forgiven in a short sale, foreclosure, or principal reduction.

“That means if someone owes $150,000 on their home and it sells for $100,000 in a foreclosure auction, they could owe taxes on the remaining $50,000,” CNNMoney explains. “For someone in the 25 percent tax bracket, that would mean paying $12,500 in taxes on the foreclosure. Similar taxes would apply for amounts that were forgiven in short sales and principal reductions.”

Allowing the act to expire could have a “chilling effect on home owners considering a short sale,” says Elise Brooks Perkins, communications director for the Financial Services Roundtable. Perkins says that more sellers may back out of completing a short sale without the forgiveness, which ultimately could prolong the housing recovery.

How many people does this stand to affect? More than 50,000 home owners are foreclosed on each month, and the number of short sales has increased to about half a million a year. What’s more, about 1 million borrowers stand to have principal reductions on their mortgages.

“Even if Congress allowed the mortgage debt forgiveness to expire, not all borrowers who lose their home to foreclosure, sell their home in a short sale or have their principal reduced will take a tax hit,” CNNMoney reports. “If the debt is discharged in a bankruptcy, no tax is due. And anyone who is insolvent — meaning they have more debt than assets — at the time the debt was forgiven would not have to pay the tax. And in some states like California, certain borrowers are protected against paying the tax because of the way the state treats foreclosures.”

PositionRealty.com
Office: 480-213-5251

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