Posts Tagged ‘mortgage insurance’
It is clear to anyone who has a home loan or who even just reads about the financial news, that drastic changes have occurred in the housing market.
As an almost “perfect storm” of mortgage related factors converged on the economy and harried homeowners have felt the sting of lower housing values, rising rates and a severe credit crunch.
It should have been predictable that any market that had the run up that the housing market had was destined for a steep fall. But many homeowners who used these soaring values to borrow on easy credit terms, even with lousty credit ratings, were bound to be caught in a trap as the prices fell.
The loans that were granted to less than perfect applicants were sure to be the first to suffer when prices came down and interest rates increased. As a result of loose credit policies, many borrowers who really couldn’t afford the mortgage payment were left exposed when there was a rise in their adjustable rate mortgage. They could not refinance since there was little to no equity left in the home, and interest rates had increased. This is a recipe for disaster.
As more foreclosures occurred, the increasing glut of homes for sale further pushed down housing values. And lenders didn’t care that these less than prime loans that were causing 60% of the defaults only made up 20% of the market. Indeed, two states alone, Florida and California, were responsible for 36% of the foreclosures nationwide.
Even so, banks clamped down on mortgages throughout the country in a knee jerk reaction, so that all applicants had to meet strict criteria.
What does this mean? Some say it is a return to the way things ought to be. Some people may regret that the time of easy credit and low down payments are gone, however.
Banks now want their borrowers to put up a good down payment (at least 10%, and in most cases more), have a credit rating of 700 or more, and they are lending on lower home values.
The good news for buyers who can raise both the necessary cash and their credit score, is that mortgage rates are still low historically, and there is a lot of very good real estate inventory to choose from at very attractive prices.
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One and one half million families in 2007 and a projected two and one half million families in 2008 are going to face the problem of foreclosure because they are caught in a sub-prime loan that they were granted in spite of the fact that they had bad credit.
Easy credit was the perfect solution at this time, especially when there was no down payment required and the initial rates were pretty attractive tickler rates.
Now that home prices are falling, and the reset rate on these adjustable rate loans are rising, many of these homeowners are facing real problems.
Interest rates close to 10% meant mortgage payments of over $2,000 on homes that cost only $200,000. Every small adjustment in the ARM (Adjustable Rate Mortgage) could result in a $300 to $400 increase in the mortgage payment. Re- financing is not an option since credit conditions have tightened and home values have fallen. “Upside Down” loans, cases in which the outstanding loan balance is higher than the value of the home are becoming common.
How can these borrowers cope? There are some federal programs under consideration that may help, but homeowners have to look into what they can do.
The most important advice you can receive is not to ignore the problem. If it looks like this month’s payment is not going to be made, be sure to call the lending institution and explain the situation. Illness or a loss of employment will almost force the bank to devise a payment plan for you, but if you have just been foolish with your budget, don’t expect a lot of sympathy.
Contact a counselor. The Department of Housing has an approved list of professional counselors who may be able to advise you about steps you may take.
Reduce overall expenses, especially any credit card debt. You may not be able to cut down on food or electricity, but luxury items such as premium TV or phone plans can be lowered. The savings can go to your high interest credit card balances or to catch up on mortgage payments.
Find out if you are eligible for government assistance. Some low income families who were not behind on their loans before their ARMs rate reset, may qualify for a 30 year fixed rate loan insured by the government.
There are some more drastic solutions, but if nothing else works, you may not have a choice.
Dump the property. This is probably far from the most opportune time to sell your house, but many lenders may take the proceeds of the sale in full settlement. It is better for them than a prolonged foreclosure process.
Choose bankruptcy. This last solution is not at all attractive, since it will have a negative effect on your life for many years. Your credit rating will, of course, be even further damaged, but your loans may be consolidated and some even eliminated, allowing you to catch up on things.
Answers do exist, but not if the homeowner waits for them to come to him; aggressively addressing the issue may be the only way to avoid losing your home in foreclosure.
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Generally speaking, there are two types of home loan borrowers: prime and sub prime. A borrower with a good credit rating and low debt, and he is diligent about paying his bills on time, he will be considered a prime borrower.
On the other hand, a borrower with a bad credit score, extened debt and who always pays his bills in a tardy manner is a sub prime borrower. As a general rule, a credit rating of under 660, with a debt to equity ratio of over 50% and two or more late payments in the last year, will mark a sub prime mortgage candidate.
Some borrowers, even if they possess good credit ratings and low debt (although this is unlikely) will be considered a sub-prime borrower if they declared bankruptcy in the previous 5 years.
The risk a lender takes on a loan is factored into the pricing of the loan, so sub prime borrowers have to pay a higher interest rate.
Since there have been so many foreclosures of sub prime mortgages over the last year, lenders are becoming stricter regarding lending to sub prime borrowers.
If a borrower wants to improve his chances, the first thing he should do is try to improve his credit score. Bringing down the size of debt and being diligent about paying bills will show a lender that recent credit history has improved.
The borrower should make sure to keep all records so that he can show the bank the recent history.
One situation where a borrower can have little to no hope of getting a new home loan is the situation where the outstanding balance on a home loan exceeds the current market value of the underlying property.
A good first step to take is to talk to a mortgage consultant who has a lot of experience. Such a broker may find avenues the borrower may not have considered, as well as advise him how to his credit, and what other steps he may want to take to qualify for a loan.
A good broker will also have the nerve to tell a borrower that his case is very poor and he will not receive a loan.
Disreputable brokers may ignore these facts, and go ahead with an application even if there is no chance of it being approved, just to collect the application fee.
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Like most things we do, if we outline the steps, it makes the job easier if you are shopping for a home.
It would be wonderful if we could state that the steps are 1. Shop for a home. 2. Obtain a mortgage. 3. Move in.
But, as so often in life, one step depends upon another. The first thing is what size home loan you will need. Before you know how much you require, you need to know how much the house you want to buy costs. Before you know which home you prefer, you need to know how much you can manage to spend.
We can see, therefore, that shopping for your home cannot be the first step in the process-first you have to know how much home you can afford. This is why it is a good idea to make your first step in home shopping a consultation with a mortgage broker.
The first thing a mortgage specialist will do is complete an analysis to see how much you can afford to pay based on your income, fixed expenses and down payment amount.
You won’t regret taking this important step, for two reasons. First, you will have a clear idea of the amount you can afford for your house and second, your mortgage broker may obtain for you a mortgagecommitment, which will help sellers and real estate agents realize you are a serious buyer. A prospective buyer who obtained a loan commitment has a big advantage over a buyer who does not.
Now you have all the tools you need to shop for your home: how much you are able to spend, and the power to spend it. The main issues for most people is the location (near job, family, etc.), the school system (both if you have children and also to protect the property value) and what price you can pay. You may have to settle upon a smaller home in a preferred area to remain within your budget. Conversely, a buyer may opt for a larger home in a less preferred neighborhood.
Once those basics have been decided upon, you next look at such things as the style of house, or nice extras, such as a large yard, or a pool. Each family has its own idea of what he wants.
Now is finally the time to get in touch with a real estate agent and start shopping because you now have all of the necessary information to make the right choice about a home.
1. How much you can spend. 2. The location you prefer. 3. The style you like. 4. The amenities that are important. Now, and only now, should you get in touch with a real estate agent to go look at property, since you have the right tools to make the decision.
-What you can afford for your home -Your preferred location -Your preferred style -Added features that are important to you. At this point, you should be ready to get in touch with a real estate broker and start shopping, since you have the really important information:
* How much you can afford for the home * Where you want to live * The style you desire * Additional features. Now you are prepared to go to a real estate agent and tell him what you want, since you have the right information:
1) What you can afford 2) Where you want to live 3) The style of house you prefer 4) The extras you consider desirable
Happy home shopping!
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If you want a quick and easy application process for your mortgage, one of the best things you can do is have as much as the documentation ready for the lender. You will be required to give this information in any case, so it is best if you are proactive and get the items ready before the bank asks for them.
This list will assist you in preparing all of the items the lender will need and you will be able to furnish most of them at once instead rather than of piecemeal as they are requested. Your bank may not ask for them in this order.
- A list of your standard living expenses, such as how much you pay in rent, if you have student loans, credit card or personal loan payments and child support; be sure to have all of the financial institutions and account numbers for each of these.
-Proof of assets. Copies of bank statements. The bank will want to confirm your assets and so will request a recent copy of all bank and brokerage accounts in your name, including retirement (401, IRA) accounts. Have a list of your vehicles’ make and models. If you have an interest in a business, bring a copy of the tax return for the business. If you have any real estate investments, you will have to show how much you earn in rent, and the assessed value of the property.
-Copy of any divorce decree if it has any bearing on the mortgage.
-Employment History for the past two years, indicating name, address and telephone number of employer and employment dates.
-The previous two year’s W-2s and your pay stubs from the most recent pay periods. This will confirm your salary for this period for the bank. If you are self employed, you should supply copies of the last two years tax returns, for personal and business, balance sheets and profit and loss statements. If you are retired, you should supply a copy of your Social Security Award letter, and a copy of your most recent retirement or pension payment (or a copy of your bank statement if it is direct deposited).
-Be sure you know the addresses of where you lived over the last two years.
-A copy of the purchase agreement for the home you are purchasing. -If you are refinancing your current home you should provide copies of your home insurance and your title insurance.
Giving all of this information to your prospective lender at the outset will get the wheels turning for your application, instead of them calling you and requesting documents one at a time, which will really delay the process.
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