What’s the Point of Points?

Let’s get right to the point. What point? Points. I don’t get it. What’s your point? The point is points — what are they, how do they work and should I pay them when I get a mortgage? There’s a lot of confusion about points and when a borrower researches his or her best mortgage options, inevitably there will be an element of points in the debate. So in order to help ourselves find the best terms on any home loan, we need to get this point thing under our belt.

Point One (One Point)

Simply, one point equals 1 percent of the loan amount. If you have a $500,000 mortgage, 1% of it is $5000. Similarly, fractions of a point work the same. In our example, 1/2 point on $500K is $2500. If a lender says you can get any certain rate by paying 3/4 of a point, simply take your loan amount and multiply it by .75%. This rule never changes, despite loan size, type, borrower profile, etc. One point is one percent of the loan amount.

Point Two

Let’s put a finer point on points. We’re going to focus on “discount points” and not “origination points.” Discount points are meant to have a direct impact on the rate that the borrower obtains. “Origination points” are a cost to get the loan itself — independent of the rate provided. An important concept to know here is that on any given day, a mortgage lender can offer the public a range of rates. Let’s say a borrower qualifies for a 4.000% rate with “zero points.” This means that without paying any discount cost, the borrower’s rate would be 4.000%. Easy, right? OK. So what happens if the borrower wants a rate of 3.75%? Is that possible? Yes. But in order to get the lower rate, the borrower will need to “pay” the lender what it would cost to bring the 3.75% rate to “par,” meaning to level equal with the cost of the money at 4.000%. On the lender side, there is more cost associated with lower rates and an “inverse cost” (aka, lender credit) associated with higher rates. So on the scale of, say, 3.500% to 4.500%, the lowest rate would have the highest cost to obtain and the highest rate would have the highest “rebate” or lender credit. Due to regulation, lenders cannot profit any more or less depending on the rate chosen, so the cost or credit to obtain any rate must come from, or go to, the consumer.

Point Three

Does it make sense to pay points when you get a mortgage? Now I must tell you that as a veteran loan originator, many borrowers pay points to get a “sexy” rate. Let’s say a 4.000% rate is available with zero points, but that a 3.875% rate can be bought for a half point. Some will make that investment just to have the ‘3’ handle on their “water cooler rate.” OK, fine. It happens. But the decision to pay points should always include a math calculation and fortunately, it is a simple one. Let’s use our example again and say that 4.000% is available on a $400K loan at 0 points, or “par.” The payment on this loan would be $1910. Now let’s say this borrower hopes to get a rate of 3.750%. The lender comes back and says that 3.750% will cost .75% (3/4 of a point) to obtain. So, we have an investment of $3000 that will be paid at close as discount points, but in return, this borrower will get a 3.750% rate instead of 4.000% for the life of the loan. The payment savings per month in this case would be $58. Remember that the borrower is “investing” $3000 at close to get the $58/M savings, so we divide the cost by the savings to determine the number of months it will take to recover the investment. In this case, it will take 52 months, or a little over four years. If this borrower plans to be in the home and not replace the mortgage within the that time, the choice to pay points may indeed be a good one. However, if the borrower does sell or refinance in that initial window, the investment (or part of it) really will not return. Yes, the borrower got the better cash flow per month, but he/she never realized the true savings the lower rate would provide.

The decision to pay points is a personal one. This is not a “right or wrong” choice and is highly individualized to the scenario and the borrower’s financial plans and goals. Helping a buyer or someone looking to refinance understand how points work, and if paying them is worthwhile, is a conversation we are always happy to have. Call any time if I can be of service!

In the right direction, 

 

Robert J. Spinosa
Vice President of Mortgage Lending
Guaranteed Rate
NMLS: 22343
Cell/Text: 415-367-5959
rob.spinosa@rate.com

Marin Office: 324 Sir Francis Drake Blvd., San Anselmo, CA 94960
Berkeley Office: 1400 Shattuck Ave., Suite 1, Berkeley, CA 94709

*The views and opinions expressed on this site about work-related matters are my own, have not been reviewed or approved by Guaranteed Rate and do not necessarily represent the views and opinions of Guaranteed Rate. In no way do I commit Guaranteed Rate to any position on any matter or issue without the express prior written consent of Guaranteed Rate’s Human Resources Department.

Guaranteed Rate. Illinois Residential Mortgage Licensee NMLS License #2611 3940 N. Ravenswood Chicago, IL 60613 – (866) 934-7283

What Is a Debt Service Coverage Ratio Mortgage?

Real estate investors have long turned to private money loans when conventional mortgage lenders have determined that either they, with their multiple property holdings, or the properties they are looking to buy, pose too great a risk. But for its benefits of closing quickly and not involving an intrusive qualifying process based on ability-to-repay (ATR), hard money loans are expensive and most often have terms that require the investor to refinance or pay off the loan in the short term — not an ideal fit for those who own, or are building, a portfolio of rental properties and who are looking to stabilize their cash flow. Enter the DSCR or “debt service coverage ratio” mortgage. This unique program seeks to provide the investor with a way to qualify for the mortgage without focusing on personal tax returns and debt-to-income (DTI) ratios. These are conventional loans that look more at the property than the borrower — almost like a commercial or private money loan — but with the added benefit of more appealing terms.

Our DSCR or “DCR” (debt coverage ratio) mortgage is designed for borrowers who are experienced real estate investors looking to purchase or refinance an investment property that is held for business purposes. We qualify these borrowers based upon the cash-flow of the subject property and they are not required to provide additional employment or income related information — let’s emphasize this again.  We are focusing on qualifying the property above the borrower. So where, in a traditional mortgage for a primary home, for example, we would be calculating debt-to-income based on the borrower’s paystubs and tax returns, and liabilities that carry over from the credit report, here we are looking at the cash flow of the property instead. Let’s dig in a little deeper.

Qualifying with Debt Coverage Ratio

The debt coverage ratio is calculated by taking 100% of the gross rents divided by the total monthly housing payment (PITIA) of the subject property. If a lease is in place on the subject property, we’ll use that number (with some exceptions) but if a lease is not in place, we’ll defer to the appraiser’s rent schedule. In order to qualify, our property must produce a DSCR ratio of greater than 1.0. So for example:

Property 1

  • Gross Rents = $3000
  • PITIA = $2800
  • Formula to determine DSCR: $3000 / $2800 = 1.07
  • A 1.07 DCR is greater than the 1.0 requirement to qualify, so this property is eligible for approval.

Property 2

  • Gross Rents = $1900
  • PITIA = $2250
  • Formula to determine DSCR: $1900 / $2250 = .84
  • Our DCR is .84 under the 1.0 requirement to qualify, so this property is NOT eligible for approval.

Both fixed rate and ARM programs are available to the investor on a DSCR qualification basis and this further expands the benefit of this qualification method. For those who own multiple investment properties and may not fit the qualifying criteria for a qualified mortgage (QM), the debt service coverage ratio alternative may be the solution you’ve been looking for. We’re here to help and answer any questions regarding your rental properties.

Come on in and cover me, 

 

Robert J. Spinosa
Vice President of Mortgage Lending
Guaranteed Rate
NMLS: 22343
Cell/Text: 415-367-5959
rob.spinosa@rate.com

Marin Office: 324 Sir Francis Drake Blvd., San Anselmo, CA 94960
Berkeley Office: 1400 Shattuck Ave., Suite 1, Berkeley, CA 94709

*The views and opinions expressed on this site about work-related matters are my own, have not been reviewed or approved by Guaranteed Rate and do not necessarily represent the views and opinions of Guaranteed Rate. In no way do I commit Guaranteed Rate to any position on any matter or issue without the express prior written consent of Guaranteed Rate’s Human Resources Department.

Guaranteed Rate. Illinois Residential Mortgage Licensee NMLS License #2611 3940 N. Ravenswood Chicago, IL 60613 – (866) 934-7283

No-Cost Refinances. Too Good to Be True?

With all the talk of trade wars pushing mortgage rates to lows we haven’t seen in a couple of years, perhaps you’ve been thinking of refinancing and maybe even done a bit of research on the topic. It’s likely you’ve come across the term “no cost refinance,“ and you may be saying to yourself, “How do some lenders offer a refinance without costs?” or, “Is this too good to be true?”

It’s important to recognize that all financial transactions involve some costs. In the case of a mortgage these could be lender fees, appraisal fees, charges paid to a title or escrow company and even days of interest on the loan itself. It would not be fair to say that a refinance has “no costs,” but perhaps more accurate to realize there are different ways these costs can be paid. Let’s look at the three most common ways a borrower will cover the expenses of a refinance:

  1. Increased loan amount: Let’s say our borrower has an existing loan balance of $400,000 and closing costs that total $3000. This applicant would aim to finance $403,000 with the new loan. So long as the appraised value of the home will permit and so long as the new rate and payment allow, this would be the most common way we’d see a borrower refinance his or her home loan.
  2. Out of pocket: In our example above, this homeowner would not increase the loan amount, but instead leave it at $400,000 and would write a check, at closing, for the $3000 in total settlement charges. The largest benefit here is that the loan amount does not increase. This is the least common approach we see.
  3. “No Cost” structure: In a no cost refinance, the borrower actually opts to take a slightly higher rate than he could otherwise attain. With the higher rate, the lender will usually be able to offer a higher “rebate” or lender credit, and these funds are then used to pay the settlement charges. The borrower does not increase the loan amount, but foregoes a rate that might otherwise have been slightly lower.

So you may be asking, “Why would anyone deliberately take a higher rate?” The answer comes down to math and a slight shift in philosophy. In the case of the math, a lower rate and payment, no increase in loan balance, and costs that do not need to be paid out of pocket are all desirable and very likely have financial benefit in both near- and long-term. And in a philosophical light, the borrower is accepting that it is better to get most of the benefit at none of the cost than all of the benefit at some of the cost.

What’s the best way to refinance? The answer depends entirely on your own situation. If your subject property is in California, get in touch today and we’ll help you make that determination.

Freedom’s just another word for nothin’ left to lose,

 

Robert J. Spinosa
Vice President of Mortgage Lending
Guaranteed Rate
NMLS: 22343
Cell/Text: 415-367-5959
rob.spinosa@rate.com

Marin Office: 324 Sir Francis Drake Blvd., San Anselmo, CA 94960
Berkeley Office: 1400 Shattuck Ave., Suite 1, Berkeley, CA 94709

*The views and opinions expressed on this site about work-related matters are my own, have not been reviewed or approved by Guaranteed Rate and do not necessarily represent the views and opinions of Guaranteed Rate. In no way do I commit Guaranteed Rate to any position on any matter or issue without the express prior written consent of Guaranteed Rate’s Human Resources Department.

Guaranteed Rate. Illinois Residential Mortgage Licensee NMLS License #2611 3940 N. Ravenswood Chicago, IL 60613 – (866) 934-7283

When Is a Good Time to Refinance?

There’s that great, old maxim that goes, “There are two kinds of jobs in the world; the kind you shower before and the kind you shower after.” And in that spirit, I would offer that there are two kinds of refinances in the world — the kind you transact because you want to and the kind you pursue because you must. We’ll cover both here and we’ll talk about when it may be a good time to consider refinancing your home. But first, some basics.

Refinancing your mortgage(s) allows you to change the terms of your current loan or loans, by replacing them with a new one. Yes, you will go through the loan process again and there will be associated costs. Analyzing the recovery period on the costs involved will be a component we’ll address below, but even in the case of a “no cost” refinance, just accept that there are always some expenses. Next, because your title does not transfer in a refinance, it is very unlikely your property tax basis will change via refinancing. Many homeowners express that concern, but it is a concern that is generally unfounded. You can most often refinance without fear of triggering a reassessment and seeing your property taxes go up. Finally, there are two, broad categories of refinances; rate and term, and cash out. A rate/term refinance will cover just the payoff of your existing loan balance and perhaps your closing costs. A cash out refinance will pay off the existing loan or loans, your closing costs and will allow you to “cash out” some of the equity in your home. In other words, you walk away from escrow with a check. And no, you do not pay income taxes on those proceeds, as they are not income, but equity instead.

Refinances of Choice

By far, most refi activity is driven by rate. If you hold a mortgage at 5.000%, for example, and rates drop to 4.250%, and a refinance at the lower rate can save you $250 per month, you can consider making the switch. Now if it costs $3000 to refinance the loan, you will “recover” your closing costs in the first year you hold the new loan, but thereafter, you are saving $250. Some might argue that part of your savings stem from resetting the loan term back to 30 years — and they would be right. But nothing prevents this borrower from refinancing then continuing to make the original payment they had with the old loan, right? By doing so, they might even get ahead of total interest payments. So a refinance by choice provides options for saving in the near-term or long-term, depending on the borrower’s objectives. And we help them analyze and figure this out.

We’ll occasionally help a borrower convert a 30-year fixed into a 15-year fixed loan to hasten pay down of the loan. Sure, the payment almost always goes up in these cases — so this would definitely fall into the “choice” category — but if the owners can afford it, the reduction in term interest can offer a real financial benefit.

Next, we have the “cash out” refinance where the borrowers will use the proceeds to finance home improvement, a large purchase, college tuition, etc. I’ll even go so far as to say a debt consolidation refinance can fall into the “choice” category because there are occasions where a borrower’s debt may still be manageable but a careful review suggests that by consolidating it with the mortgage, the overall financial result is positive. And then there are other occasions where debt gets out of control and a refinance is really the only way to bring it back to a manageable state. That brings us to our next category…

Refinances of Necessity

Debt consolidation refinances where a borrower can significantly reduce payments are NOT, I repeat, not a free lunch. If you build student loan, credit card and other consumer debt into your mortgage, you might effectively be financing short-term debt at higher rates over a much longer term at lower rates. Still, interest is accruing in both cases.  Further, it’s incumbent upon the borrower to avoid racking up new debt once the old ones are consolidated. That kind of fiscal discipline must go hand in hand with a debt consolidation refi if it truly to move the homeowner forward financially. Other refinances of necessity happen when a loan has a balloon feature. In these cases, the loan holder must change the terms of the note before the balloon payment is due. Even though not as dire, we’ll often see a refinance used to get a borrower out of an ARM loan that will begin adjusting in the future and into a fixed rate loan. I’ll also group refinances to drop PMI (or FHA MIP) in the ‘necessity’ category. Sure, paying the insurance premiums perhaps isn’t life or death, but most borrowers do feel that if they can drop PMI and save right now, that’s something worth acting upon instead of waiting.

Individual financial situations are as unique as houses themselves. Refinancing is a tool that can help accomplish a wide array of financial goals, but regardless of the intended outcome, it’s vitally important that the math and the costs are understood. In each case, we help our refinance clients develop a better understanding of what’s at stake today, during the process and into the future. If you feel we can help you with your refinance decision, get in touch any time.

Back Jack, do it again, 

 

Robert J. Spinosa
Vice President of Mortgage Lending
Guaranteed Rate
NMLS: 22343
Cell/Text: 415-367-5959
rob.spinosa@rate.com

Marin Office: 324 Sir Francis Drake Blvd., San Anselmo, CA 94960
Berkeley Office: 1400 Shattuck Ave., Suite 1, Berkeley, CA 94709

*The views and opinions expressed on this site about work-related matters are my own, have not been reviewed or approved by Guaranteed Rate and do not necessarily represent the views and opinions of Guaranteed Rate. In no way do I commit Guaranteed Rate to any position on any matter or issue without the express prior written consent of Guaranteed Rate’s Human Resources Department.

Guaranteed Rate. Illinois Residential Mortgage Licensee NMLS License #2611 3940 N. Ravenswood Chicago, IL 60613 – (866) 934-7283

The Lenders, The Dreamers and Me

Immigration, as a topic, has been in the news a lot lately. Without weighing in politically, at least overtly, this is a matter close to my heart as it’s not hard for me to forget that my grandparents fit the classic Ellis Island mold that shaped the lives of countless Italian-Americans. A couple of years ago, I was honored to write a piece for our industry’s M Report, and in it, I tried to imagine what it was like for my immigrant grandfather to obtain his first mortgage here in the United States. Just conjuring his experience shed new light on my own value proposition and how I might better serve some of the most financially vulnerable, as they take a huge step towards realizing a big part of the American Dream, home ownership.

By now, most of us have heard of “the Dreamers.” These are individuals who have what is known as D.A.C.A. (Deferred Action for Childhood Arrivals) status. Their citizenship, or lack of it, is part of what I want to cover here today, but it’s just a component of the larger policy towards lending guidance by Fannie Mae (FNMA). And FNMA’s guidelines apply to other non-U.S. citizens as well. Can they get a mortgage? If so, what paperwork must they provide? Let’s take a journey to discover what’s possible.

We’re going to use our DACA scenario and we’re going to assume that our borrower has an Individual Taxpayer Identification Number, or ITIN. To be eligible for a conforming loan, a borrower must have a valid Social Security Number or ITIN.  That is Step 1. Next we’re going to verify legally present status in the US. We can use this borrower’s EAD or “Employment Authorization Document” to accomplish this in our case here, but other documents that will verify status are Green Cards, work visas, entry stamps and I-551 stamps. So even though we are talking about a DACA example here, you can see that this flow chart would also apply to those on work visas such as the H-1b, L-1, etc.  Verifying status is Step 2.

Once we have confirmed an SSN or ITIN and verified status, we will next attempt to meet standard income and employment guidelines, as well as all other credit qualifying aspects of the loan they seek. But keep in mind, this varies very little from what a US citizen might expect. For example, can we verify employment? Is there a history of earnings? Is the borrower self-employed? Assuming we can document stable employment and meet the requirements above, our DACA homebuyer may indeed be eligible for a conforming loan.

Creating a path to ownership for those on a path to US citizenship is an objective Fannie Mae is promoting through its practices and policies. We understand these and I feel a responsibility to help those new to our country share in the American Dream. If you need my confidential assistance, don’t hesitate to get in touch. Many years ago, my grandfather bought a property in Brooklyn, NY, and became an American homeowner. All of our family’s generations to come benefited from that decision and that outcome. The rest, they say, is history —- the modern history of the United States of America, if you ask me.

I lift my lamp beside the golden door, 

 

Robert J. Spinosa
Vice President of Mortgage Lending
Guaranteed Rate
NMLS: 22343
Cell/Text: 415-367-5959
rob.spinosa@rate.com

Marin Office: 324 Sir Francis Drake Blvd., San Anselmo, CA 94960
Berkeley Office: 1400 Shattuck Ave., Suite 1, Berkeley, CA 94709

*The views and opinions expressed on this site about work-related matters are my own, have not been reviewed or approved by Guaranteed Rate and do not necessarily represent the views and opinions of Guaranteed Rate. In no way do I commit Guaranteed Rate to any position on any matter or issue without the express prior written consent of Guaranteed Rate’s Human Resources Department.

Guaranteed Rate. Illinois Residential Mortgage Licensee NMLS License #2611 3940 N. Ravenswood Chicago, IL 60613 – (866) 934-7283

FHA FAQ

Maybe you just got the news from your loan officer that you need an FHA loan in order to qualify for your home purchase. “Oh brother,” you say, another acronym, additional lending jargon and still more ways to be confused about the whole mortgage process. Or not? What are the differences between an FHA loan and a “regular” or conventional mortgage? Let’s take a look at some of the most frequently asked questions that swirl around FHA loans and cut right to the chase of what you need to know in order to determine if an FHA loan is a good fit for you.

 

Q)  Is an FHA loan different than a regular mortgage?

A) Not really. At the end of the day, you’ll probably find yourself in a 30-year fixed rate loan. In fact, the core loan program is no different than a conventional or “conforming” mortgage but when you get an FHA loan, the lender who makes the loan to you is “insured” by the Federal Housing Administration.

 

Q)  Do I have to be a first-time buyer to get an FHA loan?

A) No! There are no first-time buyer requirements for FHA borrowers. Shoot, you can even refinance an existing conventional mortgage with an FHA loan if it ends up being the best option.

 

Q)  What’s the minimum down payment requirement for an FHA loan?

A) 3.5% in most cases. And even in high-cost areas where FHA loan amount maximums on a single-family home get to $726,525 (as of May, 2019), you can still put down only 3.5% if you qualify.

 

Q)  Do all FHA loans have mortgage insurance?

A) Yes, they do, but there are some key things to know about how it works. First, when you obtain an FHA loan, the lender will add UFMIP (up front mortgage insurance premium) of 1.75% of the loan amount to the loan balance but not to the loan-to-value. In effect, this form of insurance is paid as part of your regular payment of principal and interest because it is added to the initial loan balance. Then, you will also have monthly MIP (mortgage insurance premium) as an additional component of your total monthly housing payment. The amount of MIP and the duration for which it will stay depends on your scenario. Ask me or your loan officer if you have questions about this.  FHA loans require an impound account for taxes and insurance so when you make your payment each month, the MIP will be included in the total (along with principal and interest, property taxes and homeowner’s insurance).

 

Q)  Are the rates good on FHA loans?

A) Yes! Comparatively speaking, you’ll find that FHA rates are excellent.

 

Q)  My credit isn’t the best. Will I still qualify?

A) FHA has a very forgiving tolerance for lower FICO scores, as well as some of the shortest seasoning periods from a past bankruptcy, foreclosure or short sale. If you have credit challenges in your past, an FHA loan might just be the best fit for a mortgage with decent terms.

 

Q)  Are there any prepayment penalties on an FHA loan?

A) Never. And if rates get better in the future, you may be able to avail yourself of an FHA streamline refinance.

 

Q)  Can I use a non-occupant co-borrower to help me qualify?

A) Yes. Also known as “co-signers,” FHA loans permit a family member, for example, to assist with your qualification if you are unable to go it alone.

 

Q)  Are gift funds allowed for my down payment?

A)  Yes, and they may constitute 100% of the down payment.

 

Q)  I have a lot of student loan and credit card debt. Is that OK?

A) All of your obligations are considered in an FHA qualification, but we allow a maximum total debt ratio of 57%, which is very forgiving (conforming loans max out at 49.99%). Be mindful of the fact that if you live in a community property state (like California) and you are married, the liabilities of your spouse must be considered as well, even if that person is not on the loan itself.

 

Q)  Can I finance a condo with an FHA loan?

A)  Yes, but the condo project must be FHA approved and not all will be on the FHA approved list, which you can find HERE.

 

Q)  Can I get a renovation loan through the FHA?

A) Yes. The FHA 203K loan is specifically designed for renovation projects.

 

Q)  I found a two-unit home that I love. Will FHA permit multi-unit real estate?

A) Yes, the FHA program allows properties between one- and four-units. You can use the rental income from the other units to help qualify, though some restrictions and important guidelines apply. If you are considering a multi-family dwelling, be sure to discuss this with your loan officer.

 

Q)  Can I use an FHA loan for an investment property?

A)  No. FHA loans are limited to primary residencies only.

 

Of course, you may have other questions about FHA mortgages that are not addressed here and that’s an invitation to get in touch at any time and let me know what’s on your mind. The FHA program has helped countless buyers realize the dream of responsible home ownership and if you think it may be a good fit for you, we look forward to being of service.

Frequently asked, seldom imitated… 

 

Robert J. Spinosa
Vice President of Mortgage Lending
Guaranteed Rate
NMLS: 22343
Cell/Text: 415-367-5959
rob.spinosa@rate.com

Marin Office: 324 Sir Francis Drake Blvd., San Anselmo, CA 94960
Berkeley Office: 1400 Shattuck Ave., Suite 1, Berkeley, CA 94709

*The views and opinions expressed on this site about work-related matters are my own, have not been reviewed or approved by Guaranteed Rate and do not necessarily represent the views and opinions of Guaranteed Rate. In no way do I commit Guaranteed Rate to any position on any matter or issue without the express prior written consent of Guaranteed Rate’s Human Resources Department.

Guaranteed Rate. Illinois Residential Mortgage Licensee NMLS License #2611 3940 N. Ravenswood Chicago, IL 60613 – (866) 934-7283

Having Your OREO and Depleting It Too

Asset-backed or asset qualifying mortgages are not endangered species around here. Not a week goes by where we don’t field an inquiry from a home buyer or homeowner seeking a mortgage but devoid of the typical income qualifying requirements; paystubs, W-2 forms and tax returns that show what they really earn in any year. So using assets to qualify for a mortgage has become a viable alternative for those who have strong credit and who have demonstrated the ability to save and invest. These individuals can often parlay their (liquid) net worth into qualifying power, and maybe the best part is that they do not need to sell or otherwise touch those assets.  Asset depletion, asset utilization, asset amortization or asset-backed loans — whatever you want to call them — are, indisputably, no longer mortgages relegated to the high-rate outer fringe of the lending industry.

But up until this time, one of the major hindrances to qualifying for an asset-backed loan is that we have not permitted borrowers to use the equity in other real estate owned (OREO) as a way to qualify. Yes, we count cash-equivalents, stocks, bonds, mutual and exchange-traded funds and even retirement accounts in some cases. But equity in other real estate? It was a non-starter. You could literally have millions of dollars worth of property in your portfolio but we would not consider it, except on the liability side of the equation. That’s changed with our new asset qualifying program and here are the key things to know.

Asset Utilization

Utilization of financial assets will be considered as borrower income to help qualify for their monthly payments. The assets themselves do not need to be liquidated, moved, pledged or otherwise. We can also use asset depletion to supplement other sources of income, including employment-based income, Social Security and the like. The key thing to know with this program is that after the down payment and closing costs have been made (in the case of a purchase) the borrower must have $450,000 in ‘net’ assets, and this is further governed by the requirement to have the lesser of $1MM or 1.25 times the loan amount in ‘qualified assets.’ Let’s examine each category and then give an example of a purchase scenario.

Net Assets

On our asset-backed mortgage here, your “net assets” are those that remain in your accounts after you’ve closed the transaction. Further, whatever that number will be, we’ll apply a qualifying percentage to those balances. Non-retirement investments are counted at 85% of their total value, retirement accounts at 80% and other real estate owned (OREO) at 75% of its equity position, determined by an exterior appraisal or broker price opinion (BPO). Remember, post-close, we need to have no less than $450K remaining via all sources.

Qualifying Assets

In order to drive asset-based income, we use our net asset total above, but must assure that it first meets or exceeds 125% of the loan amount or $1MM, total, whichever is less. We will then take the net asset total and apply a utilization draw schedule of 120 months. The resulting figure can be used to create or supplement qualifying income.

Digging In

Let’s use the test case below to demonstrate the power of this program:

  • Purchase price: $500,000
  • Down payment: $100,000
  • Loan amount: $400,000
  • Estimated closing costs: $10,000

Qualifying assets:

  • $25,000 in checking/savings (utilized at 100% for a total of $25,000)
  • $100,000 in a money market fund (utilized at 100% for a total of $100,000)
  • $120,000 in stocks/bonds/mutual funds (utilized at 85% for a total of $102,000)
  • $200,000 in retirement accounts (utilized at 80% for a total of $160,000)
  • $600,000 in equity in OREO (utilized at 75% for a total of $450,000)

Net assets: $837,000 (qualifying assets) – $110,000 (transaction requirements) = $727,000

In this case, $727K is greater than 1.25 times the loan amount ($500,000) and greater than $450K in post close, so we can deplete the amount. If we divide $727K by 120 months, we derive $6058 in monthly qualifying income. This can be added to any other income the borrower documents, or it can be used on its own, if sufficient to make debt-to-income ratio requirements.

Icing on the Cake

Asset-utilization mortgages have been in existence for a bit of time now and are gaining popularity each month. But our use of OREO is unique and a force multiplier for these types of qualifications. If you own real estate that has a lot of equity in it, and you need an alternative qualification method, perhaps because you’re self-employed or have variable income, give us a call and let’s review your profile in this new light. The results might be sweet.

Oh, oh, Oreo, 

 

Robert J. Spinosa
Vice President of Mortgage Lending
Guaranteed Rate
NMLS: 22343
Cell/Text: 415-367-5959
rob.spinosa@rate.com

Marin Office: 324 Sir Francis Drake Blvd., San Anselmo, CA 94960
Berkeley Office: 1400 Shattuck Ave., Suite 1, Berkeley, CA 94709

*The views and opinions expressed on this site about work-related matters are my own, have not been reviewed or approved by Guaranteed Rate and do not necessarily represent the views and opinions of Guaranteed Rate. In no way do I commit Guaranteed Rate to any position on any matter or issue without the express prior written consent of Guaranteed Rate’s Human Resources Department.

Guaranteed Rate. Illinois Residential Mortgage Licensee NMLS License #2611 3940 N. Ravenswood Chicago, IL 60613 – (866) 934-7283

Rental Income from Accessory Units. Hot or Not?

I don’t know about where you live, but here in Marin County, accessory dwelling units (“ADU”), also known as accessories, 1+’s, granny units, in-law’s, mother-in-law’s, etc., are all the rage. When we discuss remodel projects with our clients, adding an accessory is often high on the list. After all, if permitting allows, the thought of having the extra space to accommodate guests, parents or children, short- or long-term renters or maybe just create the proverbial doghouse in marriage under the strain of any/all of the above, can be appealing. But from a mortgage guideline standpoint, if you have or build an ADU, can you use the rental income it may generate in order to help you qualify for a home loan?

Get in the Zone

In order to answer our question about qualifying income, we have to address two key elements first:

  1. What is the legal description of the home?
  2. What type of loan are you seeking to obtain?

Let’s take a look at the first question from both the angle of the legal description of the property and also the method by which an appraiser might likely approach the opinion of value. It’s safe to say that if the property was built as a single family dwelling (SFD or SFR — for “residence”), adding an ADU will not change that. Usually the footprints of the structures will be sufficiently different such that the property would always be viewed as an SFD. When a second structure is built on one lot, per zoning requirements of course, and that home becomes a true second residence (different address, different utility meters, etc.), now we may be looking at a legal duplex instead. But for the scope of our conversation, let’s stick to the 1+ scenario. When an appraiser is hired to complete a report on an SFR with an accessory, he or she will check a box on the report that shows the property is a “1+” and the report will be done on a 1004 form (as opposed to the appraisal form 1025, which is used for 2, 3 and 4 units).

Now traditionally, if you have sought a mortgage for a legal 1-unit property, even with an accessory, and that home was your primary residence, lenders would NOT allow you to use the rental income in the qualification process. Boarder income (room rents), short-term rentals (AirBnB, VRBO, etc.) and even rents resulting from legitimate lease agreements on an ADU were a dead-end. This proved problematic for both buyers and owners of these properties because often the ADU, and its income-producing properties, were important characteristics in the desirability of the home itself. Absent categorization of the property as a legal 2-unit, rental income was out and borrowers had to qualify with employment-based income primarily. To further the confusion, some buyers would think they were buying a duplex, which has a higher conforming loan limit, and base their down payment and other terms off of that assumption, only to have their hopes dashed when they learned the home is legally an SFR with an accessory. As with many things in the inherently complex world of real estate, the grey area could be vast and the consequences serious.

What’s Changed?

Conforming loan programs (save for HomeReady) still adhere to the approach above, but there are some very promising options for the use of rental income if you require a jumbo mortgage. For the most part, we have really strong options for the inclusion of rental income from an ADU with a number of jumbo investors. The gold standard tends to be that the rental income must have been declared on the borrower’s tax returns for the last two years. In short, a history is required to document stable income production from the ADU. Now as you might suspect, this is going to preclude a purchase loan, where the buyer would not be able to produce such a history. In that case, we have another investor that not only accommodates ADU income on a purchase, but will use an appraiser’s opinion of market rent for the unit (as opposed to requiring a lease agreement).

ADU, short-term rentals and boarder income are all a reality in many markets. And the trend appears to be increasing in terms of the popularity of these property and the financial benefits they can bestow to the owner/borrower. It’s also a fact that not all mortgage lenders have the programs that will take this income into consideration and have it work to the borrower’s advantage. We are one of the lenders who will and if you have any questions about the generation and use of the rental income from your one-unit, primary home, give me a call any time.

ADU 4 U n Me, 

 

Robert J. Spinosa
Vice President of Mortgage Lending
Guaranteed Rate
NMLS: 22343
Cell/Text: 415-367-5959
rob.spinosa@rate.com

Marin Office: 324 Sir Francis Drake Blvd., San Anselmo, CA 94960
Berkeley Office: 1400 Shattuck Ave., Suite 1, Berkeley, CA 94709

*The views and opinions expressed on this site about work-related matters are my own, have not been reviewed or approved by Guaranteed Rate and do not necessarily represent the views and opinions of Guaranteed Rate. In no way do I commit Guaranteed Rate to any position on any matter or issue without the express prior written consent of Guaranteed Rate’s Human Resources Department.

Guaranteed Rate. Illinois Residential Mortgage Licensee NMLS License #2611 3940 N. Ravenswood Chicago, IL 60613 – (866) 934-7283

What’s a Qualifying Payment on a Mortgage?

Qualifying. It’s always harder than it looks, right? I’ve talked before about my erstwhile career as an Ironman triathlete and for those familiar with that sport, they’ll confirm that qualifying for the race in Kona is way harder than they make it look on TV. I suppose it’s the same with getting into certain colleges, but since I struggled to get out of high school, I’m going to let someone else blog about that…

No, today, we’re going to talk about qualifying for a mortgage and specifically we’re going to cover the payment that we lenders use behind the scenes whenever any time of ARM loan is selected. Common mortgage programs, such as a 5/1 ARM or 7/1 ARM, are known as “hybrids” and the payment the lender uses to determine your debt-to-income ratio (DTI) and your asset reserve requirement will often vary from your “note” rate, which is the rate on which your actual monthly payment will be based. So how does the borrower keep this straight and avoid trouble in the loan process?

Getting a Fix on Qualifying Payment

While most of what follows could get a bit complex, one aspect of qualifying payments is simple. If you are obtaining a fixed rate loan (30-year fixed or 15-year fixed), your lender will use the actual payment for your qualification parameters. And most borrowers still do choose a fixed rate loan. If you’re one of them, very little of what follows might apply to your qualification and since blog posts about mortgages are generally pretty boring, this might be a great place to stop.

But what if you’re opting for, say, a 10/1 ARM? This is (usually) a 30-year term, but only the first 10 years of the term have a fixed rate (hence the “10” in 10/1). After year ten, the loan will become an adjustable rate mortgage (ARM) and will have an annual adjustment (that’s the “1” in 10/1) for the remaining 20 years. Because the adjustable rate will be determined by combining a fixed margin with a variable index, it’s impossible to know at the time of loan origination where the rate will go during the last 20 years. Yes, the adjustments will be governed by caps, but still the lender must allow for a rate that could possibly be higher than the fixed, start rate. In these cases, the lender will specify how the loan originator should qualify the borrower.

Examples, please…

When we have an ARM, as above, there are three common qualifying payment scenarios a lender will require, plus another for extra credit (no pun intended):

  • Qualify at the note rate. From time to time, we’ll see this on the 7/1 and 10/1 ARM and it’s usually a great deal where you can find it. Often a borrower’s greatest qualifying power can be found with programs of this nature. As stated, we treat these ARMs like a fixed rate loan for qualifying purposes. Whatever your locked/note rate, that is your qualifying rate.
  • Qualify at the higher of the note rate or the fully-indexed rate. Where lenders don’t use the note rate on a 7/1 or 10/1, we’ll often see this structure. Let’s say our index is the 1-Year LIBOR and that, on the day of lock, the index is 2.6%. The loan’s margin, for example, is 2.25%. To obtain the fully-indexed rate (FIR) we add the index and margin, so here we have 4.85%. If the borrower is locking at 7/1 ARM at 4.125%, under this profile he’d still need to qualify for the loan based on a rate of 4.85% as it’s the higher of the two. Further, his asset reserve requirement would need to be based on the payment at 4.85%.
  • Qualify at the higher of the note rate + 2% or the fully-indexed rate.  We see this a lot with the 5/1 ARM. Borrowers often think that because the note rate can be lowest on this program, it may afford them the greatest qualifying power. Unfortunately, they have to think again. Lenders artificially increase the qualifying payment on shorter-term ARMs to offset risk of the fewer amount of fixed years and this frequently conspires to make the 3/1 ARM and 5/1 ARM harder to qualify for than their brethren of 7 or 10 years.
  • Interest-only? All bets are off… OK, not really. But as an extension of the logic on the 3/1 and 5/1 ARM qualification, lenders in the age of the Qualified Mortgage (QM) have to qualify interest-only loans to a much higher standard of the borrower’s expected ability to repay. For this reason, interest-only loans typically have the highest qualifying payments of all programs. Usually, if you have a 10/1 interest-only loan, the lender might be required to use the higher of the note rate or fully-indexed rate, amortized over the period of time that is not fixed (in this case, 20 years). And as we know, shorter amortization periods mean higher payments, all other things equal.

So there you have it. Punching your ticket to the big dance, whether it’s the college of your dreams, the toughest day in endurance sports or your next home purchase, might involve some qualifying gymnastics. If you could use a good coach, give me a call any time.

I am pleased to inform you…

 

Rob Spinosa
Vice President of Mortgage Lending
Guaranteed Rate
NMLS: 22343
Cell/Text: 415-367-5959
rob.spinosa@rate.com

Marin Office: 324 Sir Francis Drake Blvd., San Anselmo, CA 94960
Berkeley Office: 1400 Shattuck Ave., Suite 1, Berkeley, CA 94709

*The views and opinions expressed on this site about work-related matters are my own, have not been reviewed or approved by Guaranteed Rate and do not necessarily represent the views and opinions of Guaranteed Rate. In no way do I commit Guaranteed Rate to any position on any matter or issue without the express prior written consent of Guaranteed Rate’s Human Resources Department.

Guaranteed Rate. Illinois Residential Mortgage Licensee NMLS License #2611 3940 N. Ravenswood Chicago, IL 60613 – (866) 934-7283

ARM vs. Fixed

If Stairway to Heaven is the most overplayed song, then the 30-year fixed mortgage has got to be the most overplayed loan option. And like the iconic tune, the 30-year fixed is really great. I mean for most borrowers, it’s the clear way to go. No rate changes, 360 equal payments and if you don’t refinance, sell the house or kick the bucket first, the loan is fully paid off 30 years down the road. But even if the 30-year fixed is a great and popular option, is it the best option for everyone? We’re seeing that more and more homeowners are opting for ARM loans these days but with that choice comes additional complexity and terminology to understand, so let’s roll up our sleeves, bear our guns and get our arms around ARMs.

Slingin’ ARM Lingo

When one starts examining an adjustable rate mortgage, things can get interesting, fast. Why? Because unlike the straightforward concept of a fixed rate loan, ARMs have several features that govern how they will work over the course of their term. We’re going to cover each below. But first…

The programs we’re going to cover on the ARM side are technically “hybrid” loans, and that’s all we really tend to see here in 2019. True, adjustable rate mortgage that do not have an initial fixed rate period are rarities in the residential home loan environment. So even though we call any loan that has adjusting features an “ARM” most of the mortgages you’ll encounter will have at least three years fixed at the start. And it is by this very start rate that an ARM loan will get its name; 3/1, 5/1, 7/1 or 10/1, that first digit designates the amount of fixed years at the beginning of the term. True, most of these loans will have a total 30-year term, but once beyond the fixed rate period, the loan begins adjusting and remains that way for the remainder of (what is usually, but not always) the 30-year total term.

Index and Margin

So what happens once a hybrid ARM converts to adjustable? You’ll recall that in our examples above (3/1, 5/1, etc.), we learned that the first number defines the fixed years at the start, but what about the “1”? What does that mean? It means that once the loan begins adjusting, it will do so once per year. Years ago, you’d even see a 5/6 ARM, for example. In that case, 5 years fixed to start and then adjustments every six months. But back to our fixed-to-ARM conversion. Let’s say we have a 7/1 ARM. We’ve held the loan for all seven years to start and now we are beginning the adjustable rate period. The loan servicer will take a margin, which is fixed and dictated by the loan’s Note, and add it to an index, which is adjustable and named at the start. A common margin might be 2.5% and a common index might be the 1-year LIBOR. So again, seven years in the future, the servicer will combine 2.5% with whatever the 1-year LIBOR is at that time and that will provide the fully-indexed rate (FIR). Were it not for ARM caps, this would be the borrower’s rate for the next year. But, not so fast, ARM loans are governed by limits on how much they can adjust and that’s our segue way to caps.

Caps

Hybrid ARM loans will usually have three caps; a first adjustment cap, a periodic cap and a lifetime cap. The caps are relative to the start rate. Caps will read something like this: 5/2/5. This would mean the loan has an initial 5% cap above the start rate, a 2% cap from year to year once adjusting and a lifetime cap of 5% over the start rate. A “floor” rate may also be designated and this would be the lowest the rate could go at any time during the term, despite what the index might otherwise dictate. Let’s jump into some examples:

Case 1: 7/1 ARM, 5/2/5, Margin of 2.5%, Index is 1-Year LIBOR, Floor is margin, start rate is 3.500%

This loan will have a 3.5% interest rate for 84 payments. After that time, let’s say the index is 6%. The servicer goes to adjust the loan and the FIR is now 8.5% (index of 6% + margin of 2.5%). The first adjustment cap of 5% over start rate has not been exceed and the borrower’s rate can jump to 8.5%.

Case 2: 7/1 ARM, 5/2/5, Margin of 2.5%, Index is 1-Year LIBOR, Floor is margin, start rate is 3.500%

Our borrower continues to hold the loan in Case 1. At the beginning of year nine, the index is now down to 2.5%. The FIR is now 5%, however the 2% periodic cap would limit the rate reduction to 6.5%. If the index remains the same, the borrower’s rate could then drop to 5% in year 10.

Case 3: 10/1 ARM, 2/2/6, Margin of 2.5%, Index is 1-Year LIBOR, Floor is margin, start rate is 4.000%

The borrower has 120 payments at 4.000%. During this time, the 1-Year LIBOR goes to 18% and stays there for 20 years. In year 11, the first adjustment cap would limit the borrower’s rate increase to 6% and it would stay there for a year. In year 12, the periodic cap would limit the next change also to 2%, so the borrower would pay 8% that year. Finally, in year 13, the life cap would limit the FIR to 10% and keep it no higher than that for the remainder of the loan’s full, 30-year term.

ARM vs. Fixed

So which is best? As you might suspect, this is a highly individual choice that involves the universal risk/reward concept. If you plan to stay in the home for less than 10 years, for example, and if you can tolerate the possibility that your rate and payment could increase if you overstay your expectations, a 10/1 ARM could be a great fit for your needs. Every month you pay at the rate that is less than what you would have obtained by taking a 30-year fixed, you save. This is how most borrowers will assess the choice. But there is another camp too, and I have visited it many times over the course of my career in advising those looking to buy or refi. There are simply some who will not sleep well at night thinking that their mortgage payment might ever go up. For this group, it’s best the math gets set aside and a fixed rate option moves to the front. Like other financial risks in life, one can pay for insurance, and a fixed rate loan provides that in the mortgage lending world.

If it ain’t broken, 

 

Robert J. Spinosa
Vice President of Mortgage Lending
Guaranteed Rate
NMLS: 22343
Cell/Text: 415-367-5959
rob.spinosa@rate.com

Marin Office: 324 Sir Francis Drake Blvd., San Anselmo, CA 94960
Berkeley Office: 1400 Shattuck Ave., Suite 1, Berkeley, CA 94709

*The views and opinions expressed on this site about work-related matters are my own, have not been reviewed or approved by Guaranteed Rate and do not necessarily represent the views and opinions of Guaranteed Rate. In no way do I commit Guaranteed Rate to any position on any matter or issue without the express prior written consent of Guaranteed Rate’s Human Resources Department.

Guaranteed Rate. Illinois Residential Mortgage Licensee NMLS License #2611 3940 N. Ravenswood Chicago, IL 60613 – (866) 934-7283