“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!

• Paying your bills on time (Late payments are HUGE credit killers)

• Don’t get in over your head (A good rule of thumb is never use more than 45% of your income on Housing and Transportation expenses combined) This actually has little bearing on your actual credit score, but the implications are obvious, people in over their head tend to get in trouble, have late payments etc.

• Get on a Budget (Like the old saying goes, those that fail to plan, plan to fail) Its hard…I KNOW it is, but this is one of the single greatest indicators of financial success. Those that dont have discipline in their spending rarely have a good credit score for long.

• Use credit as a tool. (It is a means to an end. ALWAYS have your outcome in mind when you use credit. Using it without a purpose is a recipe for disaster) Building a credit score by charging items that you HAVE the cash to pay for, or supplementing cash flow for a business are valid reasons to use a credit card. Christmas spending that you didn’t save up for…is NOT.

Dave Ramsey often refers to credit scores as “I Love Debt Scores” and he is right. He is the prototypical “millionaire next door” meaning despite him having an above average income, he lives below his means, saves money, invests it well, follows a budget and DOES NOT USE CREDIT AT ALL. For this reason, he does not have a credit score.

Credit Cards: Your Best Friend…Your Worst Enemy

This scenario plays out at least 3-4 times a week when I meet with people about getting a home loan.

I ask the borrowers if they know anything about their credit. If it is good they tell me how they ALWAYS pay everything on time and always have since 1982 and they have cut up all their credit cards because they don’t believe in them.

I then pull their credit and they are dismayed to find that they do not have amazing credit scores. They might be average, or low, or non existent.

“WHY!?” they ask.

And I tell them; You don’t believe in Credit cards.

There are essentially two factors that come in to obtaining and maintaining good credit. Depth, and Credit usage. These are my own terminology, and are not actual words used by the credit bureaus or the industry at large per se. I simply use them to illustrate ‘how it works in the real world’.

You see paying your house or car on time every month is OUTSTANDING…when a human looks at your credit. It says you are responsible, it says you care about paying your debts.

On the other hand the mathematical equation used to determine your credit score (called an Algorithm, and typically provided by FICO or Fair Issacs Corporation) looks at this factor with little weight in the over all big picture.

On the other hand, a person with the very same credit profile who also has 3 revolving (read credit cards) lines of credit that had perfect payment histories over a 5 year period, who never carried more than a 30% balance (this number is somewhat debated amongst credit experts and varies from 10-45%) would likely have a much higher credit score.

So in laymans terms…a Credit score is an indicator of who borrows money and pays it back the most often. Or who makes the banks a lot of interest. THEY will have high credit scores.

Why? Because Credit Bureaus are in the business of selling information.

They sell YOUR information to lenders.

Lenders want to know who will make them money.

Credit scores indicate who will make them money.

Thus, having and using credit cards will get you a high credit score.

Lesser Known Facts

Here are some pointers that are not quite so commonly known about obtaining and maintaining a great credit score

• Never use more than 30% of your available credit (It’s a good rule of thumb for your spending, but its crucial for your credit score) There are times when you actually need to “go into debt to go into debt” meaning if you know you are coming up on a large purchase such as a house, refinancing or a car it might be worthwhile to put a balance on your credit card(s). This needs to be done well in advance of applying for the new credit because creditors typically only update once a month. So if you charge your groceries on the 20th, and go apply for credit the next day, it won’t show up and your credit score won’t be affected.

• Open and Maintain 3 revolving lines of credit for 5 years (Often opening a new revolving line of credit for a borrower with zero credit cards will provide an immediate boost to their scores) Having said that, over time they will need two more to establish good credit depth in the eyes of the credit bureaus. The longer this history is reported the better credit scores tend to be.

• Become an Authorized User (This was supposedly done away with, but we have proven it still works with certain companies) The idea comes from a law that was passed in the 1970’s to allow parents to help their kids build up a credit history. Essentially you can take and add your child or spouse (or relative, or…well anyone) and add them as an authorized user to an existing credit card account. Once this information reports to the credit bureau they “piggy back” on your account and your good credit history would report on your report AND theirs. In theory this could allow whoever was added to the account to make charges. However if the card holder provides their own address for the new authorized users card to be delivered to, they can destroy the card and make it impossible for the authorized user to make any charges to the account. For those looking to build a credit history this can be a valuable tool.

• Open an Overdraft Protection Line of Credit Often people who “dont believe in credit cards” will simply refuse to give in, even for the sake of getting better credit scores. If you fall into this category, one option is to apply for an overdraft protection line of credit. Yes it is still technically a credit card. However its purpose is very different. It merely protects you in the event that you ever go beyond your checking account balance. However the bureaus see it as a credit card. This is a great strategy for building a credit score without having to give in to the evil forces of capital one.

• Stay Away From Store Credit Whether its a Jewelery store, Home Depot, Best Buy or Sears…just pass. Not only are the rates and fee’s often exorbitant, even in comparison to some major credit cards, but they are not “created equal” in the eyes of the credit bureaus. For the purposes of building credit stick to good old fashioned credit cards.

• DON’T dispute every single thing on your credit report Often so called credit repair companies will dispute everything on a persons credit that isn’t a perfect account. This can do more harm than good at times. The math behind your credit score is complex to say the least. It is heavily weighted towards the newest items, and as things age they become less important to how your score is calculated. One curiosity is that sometimes removing a negative item from your credit can LOWER your score. One example is a satisfied collection account that was revolving. Odd as it may sound, sometimes these get reported as open and revolving accounts. Losing that history will lower your score.

Following these tips will help anyone get the best rates on any type of loan be it a Mortgage or a Car Loan. Credit is increasingly used in Insurance as well to help determine risk. Not to mention by prospective employers for Job candidates.

We Finance Anyone

But I digress. In recent years since the sub prime melt down, this has started to change. Initially FHA began requiring a minimum 580 FICO score. Many lenders moved their own guidelines to 620, in spite of FHA’s lower mandate. Now, we are seeing many lenders inching towards the 640 mark as a minimum credit score requirement to get a loan.

So what does this mean for anyone looking to buy a home or refinance in Utah?

Well, first you need to know that not ALL lenders are requiring a 640…YET.

We can still help even if you have NO credit score, below a 600 Credit score, and of course if you have great credit we can help you.

What you need to remember is that it is crucial that you are very diligent about protecting your credit rating. If it is good now, make sure it stays that way by following our tips on how to get and keep a great credit score. If you have poor credit but want to buy a home, we are just the guys you want to talk to. We have over 8 years of experience helping people improve their credit so they can buy a home.

Call or Email us today and we will show you how we can over come credit issues and help anyone own a home.

My Friend Justin McHood over at Mortgages Unzipped 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.

This is something that has bothered me for a long time, so I wanted to take a moment and clarify REALLY who “GETS” to choose the title company.

YOU DO. The guy paying the charge for the services performed.

Not your Agent

Not your Agent’s Broker

Not your Mortgage Broker/Loan Officer

YOU.

Now having said that, how would you know which one to choose? Lets talk about that for a moment. This is where our discussion becomes about roles. See, sometimes how things ought to be, are often close to how they are…but like my 5th grade teacher used to always say (and I mean always) Close only counts in Horseshoes and Hand Grenades.

He also would say “You want me to turn you into a water buffalo?” Why a Water Buffalo you ask?, “Because a Water Buffalo’s hind quarters are up higher than its ears…after I kick your @** yours will be too”

Yeah, those were the days. When teachers could say that kind of stuff and not have the ACLU and the evening news there an hour later.

So back to how it ought to be. Professionals in the Real Estate industry are trusted advisers. We should know who you would want to use, not because we were “Bamboozled”, but because you will get the very best service you could get, for a reasonable price.

I will add as a disclaimer, that where you obtain title is a negotiable item in a contract. A seller can specify that if you wish to purchase their property you must use the specific title agency that they require. This is perfectly legal, and common when purchasing bank owned properties. However, in any other circumstance it is your right to choose as the buyer or seller. You might even ask your agent, or loan officer why they chose the agency they are recommending. A good loan officer or Agent will have done their homework and will be recommending someone based on Competency, Service, Communication, Efficiency and Speed, and of course price, but not at the expense of the other necessities…the last thing you want when dealing with the most expensive purchase you will ever make is the guy that is the cheapest just because they are the cheapest.

Someone other than my 5th Grade teacher said “The bitterness of poor quality remains long after the sweetness of a low price is forgotten” -Benjamin Franklin

When it comes to a good Title and Escrow officer, I couldn’t agree more with good old Ben.

Now, I’m off to Walmart…I need milk.

Foreclosures are everywhere, people are defaulting, loan modification companies have commercials during prime time because the demand is so high. The news of mortgages being more difficult to get is covered regularly, yet many people are surprised to find that they do not qualify for the lowest rates available due to increasingly strict credit requirements from lenders.

During the heyday of easy mortgages someone with a below average credit score could obtain a loan, including borrowers who’s scores were as low as 500 using the standard FICO model of 350-850 for determining people’s credit worthiness. Now however, Lenders are increasing the credit score requirements. In 2009 Lenders changed the requirements twice from 620 to 640, and within months of the initial change from 640 to 660.

FHA itself has increased its requirements for several popular loan programs such as the FHA Streamline Refinance, which at one time did not require a credit score. Although FHA still will accept borrowers on a purchase as low as a 580, the vast majority of lenders have increased their own requirements to 620 in spite of FHA’s allowance.

While a 620 FICO will allow you to get FHA financing through most lenders, you will not get the best rates available. Lenders have criteria that they consider to be risky, such as lower credit scores or gaps in employment history that will increase the rate you are able to obtain. These are called ‘hits’ to the rate. In order to avoid the rate hit on an FHA mortgage a borrower needs to have a minimum 660 FICO score.

Many people assume that credit help is something that you only need if you have been through Bankruptcy or were irresponsible with your credit in the past, however, it is becoming increasingly common for people who thought they had no credit issues whatsoever to have need of someone who can help them understand the in’s and out’s of the credit laws.

If you are looking to refinance or purchase a home in the near future, obtain a free copy of your credit report and make sure there isn’t anything lurking there that could prevent you from getting a great rate.

One thing that sets Utah Mortgage Team apart is that we will help you get the best rate rather than simply telling you what you qualify for at the time that you talk with us. We don’t care how long it takes…there isn’t any pressure to do a loan or make a decision. We love to see people save money and have better credit in the process. So whether its a quick fix or several months in the making, we can lower your mortgage payment with our credit expertise.

One of the most common questions I get when they call to ask about streamlining their FHA loan, is “What’s a streamline?”.

This is great question, and the answer I tell my clients is: “When you hear Streamline think ‘Easier, Cheaper, Faster’”.

The bottom line is this; FHA is giving people the benefit of the doubt since they have already qualified once before for the loan.

SO because of this FHA allows you (Until November 17th 2009) to take advantage of the lowest rates available without having to fully qualify for the loan again. In other words you can skip much of the ‘jumping through hoops’ that happened when you first purchased the home.

These hoops that you skip can include: The appraisal, income documentation such as providing pay stubs, tax returns, bank statements etc., and some lenders even allow you to streamline without providing a credit score.

There are however some restrictions placed on an FHA streamline refinance. Because FHA is giving you the benefit of the doubt and not requiring a new appraisal of the property. You cannot exceed the original loan amount that you borrowed including the Upfront Mortgage Insurance Premium of 1.5% that FHA charges.

Additionally, you cannot remove a borrower from the loan via a streamline refinance. If you need to remove someone from the loan such as in the case of a divorce, the person remaining on the loan must re-qualify for the loan on their income alone.

Be sure to discuss with your Utah Mortgage Lender the different options you have available to you through the FHA Streamline program.

Lately, there have been quite a few headlines in the news regarding mortgage fraud – both right here in Utah as well as in the national media. Because of the current housing crisis that the country is in, many people point to “mortgage fraud” as being one of the primary contributing factors that put the country in the current economic crisis it is in. And although to some people it may seem to be a case of “too little, too late”, agencies such as the FBI are cracking down on mortgage fraud.

From The FBI Warning: on MortgageBankers.com Website:

Mortgage Fraud is investigated by the Federal Bureau of Investigation and is punishable by up to 30 years in federal prison or $1,000,000 fine, or both. It is illegal for a person to make any false statement regarding income, assets, debt, or matters of identification, or to willfully overvalue any land or property, in a loan and credit application for the purpose of influencing in any way the action of a financial institution. Some of the applicable Federal criminal statutes which may be charged in connection with Mortgage Fraud include:

• 18 U.S.C. § 1001 – Statements or entries generally
• 18 U.S.C. § 1010 – HUD and Federal Housing Administration Transactions
• 18 U.S.C. § 1014 – Loan and credit applications generally
• 18 U.S.C. § 1028 – Fraud and related activity in connection with identification documents
• 18 U.S.C. § 1341 – Frauds and swindles by Mail
• 18 U.S.C. § 1342 – Fictitious name or address
• 18 U.S.C. § 1343 – Fraud by wire
• 18 U.S.C. § 1344 – Bank Fraud
• 42 U.S.C. § 408(a) – False Social Security Number

Utah Mortgage Fraud: Does It Really Still Happen?

Although that some people think that mortgage fraud doesn’t happen anymore, it is alive and well. Mortgage fraud is happening right here in Utah right now. If you know of anyone who has been a victim of mortgage fraud, or know of a mortgage fraud scheme happening right now, be sure to contact the FBI.