Understanding Foreclosures and Short Sales

With foreclosures and short sales being such a large part of current Real Estate inventory here in Pennsylvania it’s important for potential Buyers and Sellers to understand what they are and how they differ.

What is a Short Sale?  Jack and Jill bought a house on the hill and their value came tumbling down. They now owe more on their home than the current value. Jack and Jill decided to sell and after meeting with a Realtor realized that they would need an additional $30,000 to clear title so the home could be sold. They do not have the money. The Realtor suggested a short sale that would work like this; List the home and when an agreement of sale comes in that Jack and Jill accept, it would then be sent to the mortgagee (lender/s) to see if they would agree to accept a less than full payoff. Basically if they would forgive Jack and Jill $30,000 and be short on the sale!   Short Sales generally take longer to get the lender approval and it may delay you several months, so a good Realtor is essential to avoid a huge waste of time. Remember that a debt forgiven may be income to the IRS and/or the lender can place a deficiency judgement meaning they accept the sale but still want their $30,000. Current rules may allow a bypass on both, sort of a get out of jail free card. Jack and Jill need to make sure they get the terms in writing prior to! After a short sale you will be eligible for most new financing:

  • Two Years= 80% Max LTV, 90% LTV Extenuating Circumstance
  • Four Years= 90% Max LTV
  • Seven Years= LTV per Eligibility Matrix 

What is a Foreclosure?  There are 3 basic documents that we will look at here. 1. Deed/Title is who owns the property. 2.  The Mortgage is signed by all owners of the home accepting the lien on the property used as collateral. 3. The Note is what we commonly think of as the mortgage but is really like a big IOU for the money borrowed. When you fail to meet the terms of the Note the lender can then use the Mortgage to gain Title to the property in the process called Foreclosure. You can’t sell it till you own it! The foreclosure process in PA is handled by the Sheriff’s Department so they are considered a “Sheriff Sale” along with other types of sales such as delinquent taxes, etc. Same as a short sale you can be hit with IRS income and/or deficiency judgements so negotiate before the foreclosure happens.  Once foreclosed the properties usually come on the market as HUD homes (FHA), HomePath (FNMA), REO (real estate owned, Bank) and several others. Most are listed in the MLS and a good Realtor should be able to get you access to those that are not listed as well.

A foreclosure will most times be a minimum of a 7 year waiting period for new financing. Extenuating circumstance is now 3 years = 90% LTV.

What is Deed in Lieu?  Jack and Jill may elect to voluntarily hand over or surrender the title in lieu of the foreclosure process. This saves the lender time and money so Jack and Jill might be able to cut a little better deal with the lender. Same eligibility and other rules as short sale.

more info: http://pafhamortgage.com/real-estate/foreclosure-short-sale/

Disclaimer: This is meant as generally information and legal counsel is recommended if you are considering any of these actions in order to protect yourself. Information from FNMA seller Guide 3/31/2011.

By Bill Frantz  at PaFhaMortgage.com

I Want the LOWEST Mortgage Rate!

Me Too! As a Mortgage Professional giving people what they want would seem to be the easy sale. Wait… don’t we have record foreclosures because Lenders gave borrowers what they wanted? Rates and payments that seemed too good to be true “1.75% fixed Payment Loans” and you could “choose you payment option each month” and do it with “NO Money Down” and “No proof of income” to make it really simple. To be fair it’s like the gun dispute “guns don’t kill people, people kill people”. Let’s assume it was not a bad mortgage product, it was just sold to 99.7% of the wrong borrowers!

The lowest rate on a poorly constructed financing package is a bad deal! With recent changes in how loans are priced and disclosed it is more important than ever for a consumer to understand some mortgage basics.

You have done your homework and decided that a 30 yr fixed is your best option and you want to purchase with 10% down needing a loan of $200,000. Seems easy enough, the only thing left is to get the lowest rate, or is it? Let’s break down your payment or PITI (Principle, Interest, Taxes, Insurance) Insurance, what insurance? Homeowners, Fire, Hazard which are really just different names for the policy that covers your house. Additionally with 10% down you will need Mortgage Insurance. Mortgage Insurance protects the lender if you default so do not confuse this with insurance that pays your mortgage if you are disabled or pays it off if you are deceased. First lets look at the P&I associated with rate on $200,000.

Which rate is better?   4.75% P&I $1043.29 or 4.875% P&I $1,058.41. The 4.75% rate saves us $15.12 per month and times 360 payments saves $5,443.20.

What is the YSP or Discount Points?  YSP is the Yield Spread Premium that either the bank keeps or the lender may credit it to you. Discount points you would pay to reduce your interest rate. Lets assume the difference between 4.75% and 4.875% is 1 percent or 1 point and would equal $2,000. Which is the better rate now? Would you trade $2,000 for $5443.20? Could you use an Extra $2,000 to lower your  closing cost?

Mortgage Insurance Options?  You do know you have options. Lets assume a 760 credit score you could choose monthly MI or .62 ($103.33) or Single 1 time at 1.25 ($2,500) that you can pay 1 time upfront or may be able to finance into your loan. ($202,500). Take a look at your payments adjusted with the MI insurance

  • MONTHLY
  • 4.75%     $1,146.62
  • 4.875%   $1,161.74 ($2,000 YSP Credit)
  • SINGLE (cost $2,500)
  • 4.75%     $1,043.29
  • 4.875%   $1,058.41  ($2,000 YSP Credit or cost $500)
  • FINANCED
  • 4.75%     $1,056.33
  • 4.875%   $1,071.64  ($2,000 YSP Credit)

 If we now compare 4.75% monthly MI against 4.875% Financed MI we have a monthly savings of  $74.98 and we saved $2,000 on your Closing Cost. Let me say this a different way… You would need a rate of 4.00% with monthly MI to match the payment of the 4.75% financed MI…

You also have the option for an 30 yr fixed 80/10/10 loan to avoid PMI…

Rate saved $15 per month and product saved $90 per month and we just compared 1 option… I agree that rate is important but the lowest rate will not make up for the wrong financing package! When shopping for a mortgage ask about rate but also ask about options and alternate programs!

For more info on these topics:  YSP, MI Programs and Split Loans checkout the   NORSTAR UNIVERSITY  

By Bill Frantz

Mortgage Prepayment No-No’s

Mortgage Prepayment is always a hot topic! On TV, in Magazines and on the internet I am constantly being hit with the latest and greatest  “debt free”  Guru’s product or strategy that makes me cringe when they say “How to pay off all debt including your mortgage in 5 years”. It is an absolute that you will pay less interest on a 15 year loan vs. a 30 yr. There is absolutely the sense that owning something and not having a payment makes sense and feels good! Prepaying a loan is good just look at the interest savings! Being debt free is fantastic. Here’s why I cringe… They take a position as an advisor without giving you both sides of the facts. If you chose option 1 and saved $100 dollars you would be happy. If you later found out there was an option 2 that you could have saved you $300 but they didn’t tell you how do you now feel about option 1?  What if it wasn’t $300 but $30,000! Let’s break it down and you decide which option is best for you. 

Is all Debt the same?  NO… You may have secured or unsecured debt. Unsecured debt is your word that you will pay. A secured debt will have collateral like a car, boat or your home. A car and a home loan may not be the same. Two questions you need to answer. Is the interest deductable? Does the secured item appreciate over time? The general answer for these questions would be “No” for a car and “Yes” for a home.

Is all debt Bad?  NO… You need to understand your debt  and understand if it is a good debt or a bad debt and how it impacts you personally! If you are unable to pay off your credit card in full each month that should be a warning sign that you may be developing bad debt. Your home will appreciate over time and you may also get a tax deduction.

Is Appreciation the same if I have a Mortgage? NO…The rate of appreciation may be the same but a financing creates leverages your return on investment.

HOUSE 1 is bought cash for $100,000 and appreciates at 2% per year for 5 yrs and now has a value of $110,408 or a 10.4% return on investment.

 HOUSE 2 is bought for $100,000 with $20,000 down and the balanced financed. Appreciation is the same 2% but what changes is your return on investment. $10,408/$20,000= 52% return!! This is leverage.

Why should I have  a mortgage on HOUSE 2?  Bingo! This is the real question behind Mortgage Prepayment! If I have the cash why would I have a mortgage? Great question but let me ask, What was the LOI on your money? LOI stands for “Loss Of Interest”.  Where did you get the money? You would need to pull from a 401K $142,857 minus 30% (10% penalty and 20% taxes) to net $100,000 to buy the home cash. Ouch! it may be wiser if possible to take a loan from your 401K to get minimum down and pay the loan back to yourself and use OPM for the rest. Unless it was cash in your closet you will not earn any future interest! $80,000 invested for 5 years with a 3% return would be $92,741. That’s a $12,741 LOI. At 5% it would be a $22,102 LOI. You need to determine if it is cheaper to borrow your money or cheaper to use the Lenders money. OPM- Other People’s Money. Think of home equity as a bank account. If you had $100,000 in a 30 yr CD at 2% would that be a good deal?

What about the mortgage payment on HOUSE 2?  If you borrowed $80,000 and you are in the 20% tax bracket the net interest paid in 5 years would be $19,234. Remember the LOI if you invested at 5% would be $22,102 money. It would be cheaper to have a mortgage! Money you either put in as a down payment or a prepayment is like investing at the after tax rate of your mortgage!

What if I take a 15 Yr loan instead of a 30 yr to save interest?  NO…  Mortgages are simple interest. Take a look at the 1st payment of an $80,000  15yr vs. a 30yr loan.

15 Year Loan at 5%: $632.63 total with $333.33 interest and $299.30 principal.

30 Tear Loan at 5%: $429.45 total with $333.33 interest and $96.12 principal.

The interest is calculated on the unpaid principle balance times your interest rate divided by 12. The amortization calculates the amount of principle needed to pay the loan in a set term. On a fixed payment loan a prepayment will shorten the term forcing a re-amortization of the loan. The rate is the rate. A 15 year loan will have a lower start rate than a 30 year because the Lenders risk is reduced. A lower interest rate makes less sense to prepay. Nothing is absoulute and there seems to be exceptions to most financing rules which is my issue with gross generalizations. A 15 year might make sense because your credit score forces you into a higher risk group and the interest rate will be much higher on the 30 yr vs. a 15yr. This is more a factor regarding loan selection resulting from pricing overlays than prepayment and should be considered with a loan professional or accountant.

What other factors should I consider? How does the mortgage fit into your overall money picture? Ask yourself WHY? Here are some common answers:

  • I want to own my home
  • I don’t want to pay all that interest
  • I don’t want a mortgage when I retire
  • I want to have security
  • I want to build equity so I can borrow it for children’s education
  • I want to build equity so I can do a reverse mortgage

Savings are good. Investments are better! Prepaying a loan is saving and using Leverage, OPM and maximizing tax advantages will provide a better overall return by investing in yourself!

Would you choose a or b? You own a home with a value of $400,000.

  • a. Home free and clear
  • b. $300,000 invested at 5%, $100,000 mortgage at 6%

Let’s assume you are retired and the $300,000 is your  401K and the taxable interest income monthly of $1,250 is offset my your mortgage interest (P&I $599) and tax deduction vs Free and clear who live on SS income only because they wanted to prepay the mortgage and couldn’t afford to invest in the 401K and are now thinking about a Reverse mortgage because they can’t make ends meet.   You decide.

By Bill Frantz

Debit cards wrecked my credit

How can a Debit Card hurt my credit score?

To be fair let me say that a Debit Card will not directly impact your credit score. That’s the point! A Debit Card will not impact your credit score. First lets take a look at the Debit Card.

Pros:

  • Convenient
  • Easy Access
  • Track Spending
  • Secured by Pin #

Cons:

  • Easy Access
  • Possible Fees
  • Risk
  • Secured by Pin #

 If I’m robbed and a thief steals my cash I am aware of it but there are thieves that will steal your debit information and clean out your account while the card is still safe in your pocket. Debit Cards should be protected as if they are cash and you should NEVER share your Pin #. This is not about the Pros and Cons of Debit Cards and their use is really a personal preference.

Being in the Mortgage industry I see a lot of credit reports and I am alarmed recently at the number of people that do not meet current standards for Lenders/PMI Companies. There are 2 things the Lenders are looking at. The first is your FICO credit score. Second it is your trade-lines in your credit profile that drives your score. Many Lenders/PMI Companies have credit overlays that want to see 3 to 4 open and active trade-lines or accounts for the last 12 months. Many people have either shut down or don’t use their credit enough to to keep their credit profile healthy because they rely soley on their Debit Card. You could have an 800 credit score and have an unhealthy profile! It’s like having a spare tire with NO air. Looks great in the trunk until that dark rainy night on the side of the road when reality strikes.

A profile may look like this:

  • Car loan 9 months old
  • Switched card B, for card C ,for better rate 6 months ago
  • Keep card A for emergency haven’t used in 2 yrs
  • Have a current Mortgage 3 yrs old

This profile has 4 accounts but only the Mortgage would count as an open and active trade-line. It is a good idea to pull your credit report at least every 1-2 years and make sure to keep your profile healthy and this will give you a FICO score you can depend on.

For more info on credit scores checkout this post:

“How Credit Really Works”

By Bill Frantz

Pricing Your Home To Sell

Correctly pricing your home to sell in any market can be a challenge. In a declining market it becomes more difficult and in the current market it can be impossible to define Fair Market Value! Here’s why. Fair market value is defined by a willing, knowledgeable Buyer that in unpressured to purchase from a willing, knowledgeable Seller that is unpressured to accept a Fair Market Price. With the cumulative pressure  of roughly 30% of  homes for sale being HUD homes, Foreclosures, Deed in lieu, REO’s, Short Sales and sellers with financial distress this does not qualify as unpressured Sellers. Reality is that there is No Fair Market Value only Market Value.

Unless someone is buying cash the value of a home will be determined to a large extent by the Lenders willingness to finance a given property as determined by the appraisal. The appraiser will need a minimum of 3 similar homes as close to the subject property that have sold recently. If 2 of the comparable homes happen to be foreclosures you may have a value issue or basically a dead transaction. Buyer an Seller may both agree that the value is not fair yet it is still the market value. Even the lender may realize that foreclosures in the area sell for 15% below market but unfortunatle the appraisal is the value that will determine the financing!

Forget what you think your home is worth. Forget what the neighbor sold his home for a year and a half ago. Forget what you paid and forget what you owe. These have nothing to do with your value today. You do need to look at all the comparable sold data and your current competition and honestly come up with a range of value that is realistic. Once you set your price and it is tested for say 1-2 weeks and you have no traffic you are probably too high and need to reduce quickly espescially if the area is still declining. The drop needs to be significant enough to get ahead of the market and be noticed. Buyers are looking for the deal and a home that is in top salable condition at the right price will still have competing of

Next you want to look at where you want to be. Remember that now you are the Buyer! It is quite possible that you will be able to gain more on your purchase than you lost on your sale and at the end of the day you very well may have come out ahead. Be open minded and flexible. Look at creative financing and possible seller assist as a way to help close the gap.

Looking for more info check out these sources:

“Price vs. Value”

“Appraisal”

By Bill Frantz

I lost my Buyer Agent

Mary was moving to PA and looking for her dream home. Mary had a friend that recommended a PA Realtor that Mary decided to use. Like many buyers Mary loved to look at all the homes and pictures on the Internet.

Mary’s new Realtor seemed nice enough and was sending a few homes but Mary was seeing so much online that the new Realtor wasn’t sending and she didn’t want to miss a thing. When asked why these other homes were missing the Realtor explained that the criteria that Mary had given him as a “Must Have” in the home, such as the “fireplace”, “2 car garage” and “finished basement” were missing from these other homes so they were filtered out. They agreed that he should adjust to loosen the search for more results. Mary continued to search and a few weeks later came upon a home she just had to see. Mary called the Realtor and stated that she wanted to look at this home. The Realtor was going out of town for the weekend and told Mary he would call first thing next week to arrange the showing. Mary agreed but after viewing it several more times online she just had to see it now!

Mary called the Listing office and was promptly connected to a Realtor. Mary said she was driving in from out of town and would like to see this home that she found online. The anxious Realtor  also offered to show Mary several other homes in the area at the same time. They agreed to meet Saturday morning. Mary didn’t hit it off with  anxious Realtor and quickly looked at the homes without much conversation.

Mary loved the home and excitily called her Realtor first thing Monday to have him write an offer. “That’s a problem” the Realtor stated. Mary was confused as they had reviewed the PA Consumer Notice and she had even signed a  Buyer Agency contract. 

 The Realtor explained the PA rules of procuring cause and that Mary’s actions created a situation where “anxious Realtor” may be entitled to the commission offered by the Listing office and that if she wished him to continue representing her that Mary would need to pay for his services directly because the listing commission would only pay one cooperating agent commission and that would be “anxious Realtor”. Procuring cause may kick in anytime a potential purchaser physically enters a property for sale, an open house or even new construction. If not accompanied by your agent the commission may go to the Agent present.

What if  “anxious Realtor” is also the Listing Agent and now becomes a Dual Agent. Who represents Mary?

This is how Mary lost her Buyer Agent. CHOOSE DON’T LOSE

For more info checkout these resources:

“PA Consumer Notice”

By Bill Frantz

FHA Delivers Another Blow To Buyers!

 The Federal Housing Administration or FHA as they are commonly known will delver another blow to potential home buyers on April 18 2011. 

Per Mortgagee Letter 11-10 issued on Feb. 14th 2011: The Annual Mortgage Insurance Premiums are increasing on loans that do not have a valid FHA case number prior to the date. FHA will also cancel case numbers issued prior to April 18th 2011 that have not met certain criteria in the last 6 months and this includes new construction.

How bad is the increase?    27.7% in your monthly MIP

  
 
 

FHA new MIP cost 4-18-2011
How much will it cost you?

 If you are taking out an FHA loan for $200,000 your annual MIP cost will will increase $500.00 per year or $41.67 per month!!

 

The new increase doesn’t take effect until April 18th 2011. If you are currently under contract make sure the lender has a valid FHA case number and if you are looking you still have time to get under contract and avoid the increase. Remember you do not have to close on the home you just need a valid FHA case number prior to April 18th 2011.
 

 PaFhaMortgage.com
 
 By Bill Frantz 

Avoiding PMI with a Split Mortgage

PMI or Private Mortgage Insurance can significantly increase your monthly payment and the cost of home ownership. Let’s face it without PMI many conforming home buyers would simply be locked out of the market unable to make the required 20% down payment necessary to avoid PMI. Not all PMI is equal and there are many programs available that are great alternatives to the standard monthly BPMI that we will discuss in the future. I would just like to inform buyers of an option that does still exist called a split loan. Here’s how it works. On a 1st mortgage there is no PMI required at a max LTV (loan to value) ratio of 80% (20% down). You may add a 2nd mortgage on top of the first that will not trigger the need for PMI. These may also known as a Piggy Back loan. They would be expressed as 80/5/15,  80/10/10,  80/15/5,  80/20 and may also be structured various ways to fit your needs such as 75/15/10 etc. The  numbers represent:  1st mortgage/2nd mortgage/down payment. There are many options of 1st and 2nd mortgages that can be combined to create a custom financing option to meet your specific needs.

Another great use of a split loan is to extend your purchasing power by maintaining a conforming first loan of $417,000 and adding a 2nd to avoid the increased pricing of Jumbo financing.

By Bill Frantz

PaFhaMortgage.com

Waiting for a Housing Bottom may Cost You

The only way to truly see the bottom is in the rear view mirror! The market needs to turn upwards before the bottom is defined. When you see the upturn you have already missed the bottom. If you were waiting to Refinance you may have already missed your opportunity but in a Purchase rate it’s just one factor in home affordability. A 1% hike in rates could erode your purchasing power by $10,000 for the same monthly payment! “OUCH”.  Another factor is that seller assist will quickly disappear when Real Estate finds firm footing further reducing buying options and increasing out of pocket expense. “OUCH”.  Again the bottom is defined by an upturn which means Home prices will also be rising. “OUCH”. Market Bottom is also local as it starts in small ways as certain neighborhoods and areas turn upward long before the bigger picture grows enough to show up on the Evening News! In the Greater Philadelphia Metro Area this is the BOTTOM!  Home affordability is such that in many cases it’s cheaper to buy than rent… Waiting can be a very expensive price to pay!

By Bill Frantz

Can You Stay In The House During A Short Sale?

Can you stay in the house while a short sale is being worked out with your lender?

Yes! Actually, your lender usually prefers you stay in the house, even if you are not paying the mortgage.

Why Does The Lender Want You Stay?

If you stay in the house, you are protecting the house, which means you are protecting the lender’s investment.

Here’s how you help the lender by staying in the house:

  • You are keeping the heat on, thereby protecting the house from freezing pipes and water damage.
  • You are keeping the house ventilated, thereby reducing risk of mold.
  • By occupying the house you are reducing the risk of vandalism.
  • By keeping the lawn mowed you are keeping the county inspectors from attaching penalties against the house that eventually your lender may have to pay.
  • You are maintaining the house as a home, rather than leaving it as an abandoned property.

All your simple actions of staying in the house help protect the lender from additional losses. Some lenders stipulate that you MUST stay in the house to qualify for the short sale.

Sounds Unlikely The Lender Will Want You To Stay In The House?

One easy way to find out is to call your lender and ask. You must get transferred out of the collections department to a department that is set up to help you avoid foreclosure. These departments have a variety of names;  Home Retention Dept., Foreclosure Workout Dept., Short Sale Dept., or Loss Mitigation Dept.

Ask them the same question: Can I stay in the house during the short sale, even if I’m not making mortgage payments?

You may be pleasantly surprised by their answer.

You should also confirm your decision with an attorney.

By Dave Halpern

Found at: www.activerain.com