It’s inevitable that whenever I mention to a borrower that they might want to consider an FHA 5/1 ARM when either refinancing or even when they are getting their home loan for a purchase, that the question will be raised

“Are they safe?”

Of course this question is rooted in the housing slump and all the news reports about Option ARM’s.

If you look a bit closer you will see that the difference between the ARM’s at the heart of the housing mess and an FHA 5/1 ARM are substantial.

Convention and Interest Only ARM’s

My first encounter with conventional and Interest Only ARM’s was when I was building my first home back in 2004. A friend of mine was building homes and he offered to help me, and a friend build our homes. He said that he had some great contacts for getting mortgages done fast, and since I can’t do my own loan I of course said I would be open to meeting his contact. It was also a nice surprise that they also did Home Loans in Layton where our office is.

I remember having a discussion with my wife’s Uncle whom I hold in high regard with respect to life in general, but especially with financial matters. I told him that I was being offered a loan that started out at 1%!

I had never heard of such a thing, and frankly I had to really think for a while before I felt like I could really get my head around why ANYONE would ever offer such a loan.

The overall theme of the discussion could probably be summarized as “I just don’t get it”.

Musing about Wall Street, where he worked for a good 15-20 years of his Career and about all the different ways that housing was really picking up steam, I still recall at one time one or both of us asking rhetorically “it can’t go on forever like this…can it?”

Two years later, I was still asking the same question and wondering if my understanding of sound fundamental economics might need to be adjusted in the face of some new development. Perhaps housing really could defy economic history and just go up.

Of course we all know what happened within just one more year. Looking back, I made a sound decision in not accepting that ARM, and of all the reasons that it didn’t make sense to me there were a couple that stood out from the crowd.

Here are the factors that separate FHA 5/1 ARM’s from those that caused so much trouble for the housing market.

Prepayment Penalties

Penalties that cost thousands of dollars would cause borrowers to wait until their loan had already become an adjustable rate before they could refinance. New, higher payments often shocked borrowers and led to problems paying either their house or their other bills on time. Late payments made refinancing difficult or impossible. FHA 5/1 ARM’s never have any pre-payment penalties.

Volatile Index

Most ARM’s were based on the LIBOR. I won’t bore you with the details, so I will just say that FHA 5/1 ARM’s are based on the US 1 Year Treasury Bill and not the LIBOR which gives the FHA ARM less volatility.

Caps

With the I/O (interest only) ARM’s of the housing boom rates could often jump up very quickly. Increasing as much as 2 and 3 percent right from the beginning. Alternatively FHA 5/1 ARM’s are capped at 1 percent increase per year based upon the start rate for that year. So if you are starting at say 3.75% on an FHA ARM, after the 5th year passes your rate could not be more than 4.75%. This of course goes on with each successive year after that.

It’s worth noting that the bad ARM’s also had what I call a Parachute. Meaning they rose fast but if rates dropped these loans dropped down slower than they went up. FHA 5/1 ARM’s follow the rates and hold to the 1% cap, meaning they cannot go up or down more than 1% per year. However that also means that if it started at 4.75% and went up to 5.75% in year 7 but then rates went down to 3.75% you could drop down below the 4.75% start rate for the year. Nice!

Streamline option

This in my opinion is one of the strongest benefits of the FHA loan. Put simply, an FHA streamline refinance is like a regular refinance except the lender does not really verify income. They will verify value, employment and credit. The reason it stands out as a benefit is if for some reason you needed to refinance rather than sell, you can do so with less difficulty than a traditional refinance. You can move from an ARM to a Fixed rate loan and vice versa with an FHA loan, even before the 5 year fixed period ended if you wished.

Over all, my general advice to people goes like this. Will you be in the home longer than 7 years? If so, its not likely that an FHA 5/1 ARM makes a lot of sense.

On the other hand, if you will likely be selling within 5-7 years then it might make a lot of sense financially. One client recently dropped from 6.25% all the way down to 4%. Considering thats over a $2,000 per year difference you can see that the savings add up, and if you know what your plans are within that 5-7 year time frame, its worth running the numbers to see if an FHA 5/1 ARM can save you money.

We are local Mortgage Bankers located in Layton Utah, and we like helping people understand their home loans. We write this blog and other articles to share information and answer questions. If you want to get a home loan and live in Northern Utah, give us a call, shoot an email or drop by!

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Pitfalls to Avoid in Utah Short Sales

by Utah Mortgage Expert on June 14, 2010

You’re a Utah realtor, and you thought that in today’s real estate climate, handling Utah short sales was the way to go. You took a few classes and thought you were ready to go. “How hard could it be?” you asked yourself. “Hey, I’m already trained to sell homes; short sales aren’t exactly rocket science!”

Well, you’re right, short sales aren’t exactly rocket science, but if you are unaware or unprepared, there are several big pitfalls that could bite you and your client for some real money.

Here are some short sale pitfalls to look out for:

Pitfall 1 – Money in the bank is not safe

One of the first things you may want to recommend to your client is that they immediately close out any accounts they may have at any bank that services or holds their mortgage and second mortgage. The reason is that many banks have a clause in their bank account agreement documents that allows them to take funds from one account to pay for another account. This clause is in the fine print of most bank’s account agreements that hardly anybody ever reads.

So if your client has a checking account and their mortgage with Bank X and they are late on their mortgage payment with Bank X, then Bank X may sweep their checking account to get money for the mortgage payment. Banks have even gone so far as to extend overdraft protection on a checking account to cover the mortgage payment. And depending on the bank documents this all may be done without notification. Huh, not the kind of situation I want my money in.

Pitfall 2 – Don’t forget about the cash contribution

This little pitfall can come in several places and cost you any further referrals from your client. If you don’t pay attention cash contributions could bite you and your client hard when it comes time for settlement.

Pitfall 2a – Second mortgage holders are tending to want to be paid something now when there is a short sale involved. Your home seller’s goal when they sell their house should always be to have nothing to worry about after the short sale is final. For second mortgage holders – in many cases – they want to be paid some percentage of their balance say: 5-10% to have them satisfy their lien position. Make sure you prep your home seller for this increasing possibility.

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What Your Agent Must Know Before Writing An Offer

Generally speaking, experienced Real Estate Agents have a firm grasp on the basics of the Home Loan Approval Process. However, the lending world has changed so much recently that even some Mortgage Originators themselves have found it challenging to keep up with all the new regulations and rules that keep coming out of Washington as well as from each lender.

New laws, disclosure requirements, new guidelines for appraisers, risk based pricing, credit score, secondary approval layering,  property type, HOA and Condo insurance requirements, Title and property flipping rules are just a few of the rules that can cause problems for a borrower applying for a Utah home loan.

With that in mind, Real Estate Agents can help their clients avoid many problems by being aware of a few important details during this phase of the transaction.

home loan mortgage salt lake ogden laytonIt is very important for home buyers to get a full loan approval, sometimes called Underwriting Approval before spending any time looking at new homes with an agent. Put simply, this gives you a line by line break down of any issues that need to be clarified or corrected in order to get approved for a home loan.

To help you with this process, we have listed some of the top issues your Agent should keep their eye on while helping you with the process of finding a home:

7 crucial loan issues Agents must look for:


Property Type -

Different property types can have specific lending guidelines that influence down payment, credit score and mortgage insurance requirements;  Property types include: Condo, Town House, High-Rise, Dome Home, Single Family Residence and Shoe House. Utah does not typically see a large variety of homes available but its important to know what your lender will require if you are considering any type of property that is outside the typical single family home for the area.

As an example, if the appraisal process takes three weeks but your average time for an approval is two weeks, then its probably not a good idea to write a your offer with a closing date 4 weeks out.

Residence Type -

Investment, Owner Occupied, Second Home. The residence type is different from the property type, and might be called “how it will be lived in”. This can dramatically change the amount a lender will loan or the rate they will charge, or if they will do a loan at all. A seller may ask “Am I required to sell my property before moving into a different one?” or “If I buy a home in the same city as my current home is it considered a second home?”  “If I buy a home for my children is it classified as an investment property?” The answers to these questions make a big difference when you look for a home loan in Utah.

Rates and Locks -

A typical rate lock period is 30 days, and pretty much the only way to change the rate after locking is to switch mortgage lenders.  Interest rate pricing also has certain adjustments for credit score and down payment, and property or residence type, all of which could have a big impact on monthly payments and ultimately approvals.

A rate increase of only 1% could mean the difference between an approval or denial.

Headlines and (Un)Employment -

You and I aren’t the only people that watch the news. Underwriters stay up to date with current events as well and borrowers who’s pay is determined by commission or could be affected by the economy may have to jump through a few extra hoops to prove that their employment and income is secure.

Job changes, periods of unemployment or property location are other things to consider that may cause a speed bump in the home loan approval process.

Title and Property Flips -

Banks consider a “Flip” any property that has been purchased by an investor and is then sold to a new buyer within a 30-90 day period.  Often, an investor will do some cosmetic fix ups like fresh paint, carpet, or landscaping and try to re-sell the property for a good profit margin.

It may be a perfectly reasonable transaction BUT many lenders have strict rules in place that prevent borrowers from getting a loan on properties that were not owned for more than 90 days by the previous person.

This rule is something that is constantly being reviewed. Lenders have changed it several times, and will likely change again. It is important that your agent is aware of any potential issues and is able to help anticipate how to deal with them. A great Title Company is your best friend when it comes to avoiding headaches with title issues.

Homeowner’s Association Insurance -

Certain lenders will require Condos and Town House communities to have insurance and reserves coverage based upon specific ratios on the number of units that are owner occupied vs. rented in the community.

It can cost up to $300 to receive an HOA Certification, and the process can take a few weeks so make sure your Due-Diligence period in the purchase contract allows for ample time to obtain the necessary requirements for the lender.

Appraisal Ordering Procedures -

Many new consumer protection laws dealing with Appraisals have been created to prevent future foreclosure epidemics. Regulators are continually reviewing the effect these new regulations have on the market and the industry.

Sadly, some of the new appraisal regulations have significantly delayed the home buying process, and have even brought down neighborhood prices in some areas.

VA, FHA and Conventional home loan programs all have different appraisal ordering procedures and policies, so its important that your agent is aware of which home loan type you are approved for so that they can anticipate any delays and allow time for them in the purchase contract.

Keeping you and your Agent informed during the home loan approval process can save you time and stress in the home buying process. Working with a direct lender can also speed up your Utah Home Loan approval.

The Professionals at Utah Mortgage Team are Mortgage Experts, and are committed to making sure your loan is done quickly so that you can focus on finding a home without the stress of wondering whether your home loan will get approved. We work with anyone in Utah and cover Salt Lake City, Layton, Ogden and all major cities in Northern Utah.

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Credit and Divorce…

May 10, 2010

Going through a divorce often causes a person to take a good look around and “take inventory” of their life, but often forget the implications of the divorce and credit.
Many married couples or life partners apply for credit cards, auto loans, and mortgages jointly. One aspect of understanding how to build credit, means knowing how divorce can [...]

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Lending Strategy Lets You Get a Mortgage With bad credit

May 7, 2010

Buying a home with bad credit is more common than you might think.

EVEN if you filed Bankruptcy, or had a Foreclosure YESTERDAY.

This technique is decades old, but so few people know how to do it that even many Realtors don’t know how to make this happen.

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Real Property Attorneys in Utah

May 3, 2010

Transactions in real estate can be very complicated. When a buyer and seller sit down at the closing table, essentially all of the heavy lifting has already been done by the realtor, financing parties, and the real estate lawyers who prepared all the documents the buyer is about to sign. Before closing day, [...]

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How to get a good credit score

March 30, 2010

How to get a great credit score

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Minimum Credit Score for FHA likely to increase

March 30, 2010

Lenders and FHA are increasing minimum credit score requirements

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When Buying a New Car is NOT a Good Idea

February 24, 2010

When Buying a New Car is NOT a Good Idea
Whether you’ve received a raise or have saved enough money to actually make a large purchase – it’s likely that you’re going to be affected by something that most individuals are affected with in the same situation – the desire to spend it. You might [...]

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When Purchasing or Refinancing, Who chooses the Title company…and should you care?

January 7, 2010

humorously explained how most people end up choosing a title company when they purchase a home or refinance. In the end the answer is, they rarely do…choose that is.

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