When purchasing a home, one of the main things to consider should be a pre-approval
letter from a reputable mortgage company. A pre-approval letter will help guide one of the largest financial decisions you will make in your life. One of the first questions that should be addressed in the qualification process is the down payment. There are many loan options with varying down payment requirements. These vary from a VA loan with a $0 down payment, to an investment property needing a minimum of 20% down.
One of the most common loan options for first time borrowers has been a FHA loan. This has been the product of choice for many homebuyers that are restricted to a limited down payment. The down side to a FHA loan is the mortgage insurance. Although FHA allows a low down payment of 3.5% the cost of mortgage insurance can sometimes divert borrowers to another loan product. FHA has an upfront mortgage insurance fee of 1.75% and an annual mortgage insurance fee of .40% to 1.45%, depending on the loan amount.
Another popular loan product is the “Lender Paid Mortgage Insurance” loan where the down payment can be as little as 5% with no upfront or annual mortgage insurance charged to the borrower. In exchange for not being charged mortgage insurance, the LMPI loan has an interest rate of about .40% higher than a conventional interest rate if the borrower was going to have a 20% down payment.
An option that has become even more popular ever since FHA increased the term of mortgage insurance from 5 years to the full 30 year term, is the conventional loan with mortgage insurance. The conventional loan with mortgage insurance allows the borrower a choice to pay the mortgage insurance upfront or pay as part of the monthly payment. One of the nice features of this product is once a borrower has 20% equity, either by appreciation or paying down the loan, the borrower can order an appraisal and have the mortgage insurance eliminated.
The most attractive interest rates and loan products are available when a borrower has 20% for the down payment however these three loan products can be great financial tools when looking to purchase a home with a limited amount of available funds for the down payment.
Homeownership is a rite of passage many of us dream of. Owning a home means putting down roots and having a space that is truly yours. It’s a significant moment of your life when you finally own a home.
But owning a home can be daunting because of the responsibilities and obligations that come with it, combined with the initial process it takes to get there. When done properly, though, buying and owning a home is a process that limits your financial risk, increases your investment power, and saves you tons of money over the long term—and it can even save you money immediately.
Renting has little to no ROI. Renters don’t have to worry about maintaining a residence or paying the mortgage. But if you’ve been renting long term, chances are you’re already performing home maintenance on some level and you’re at your landlord’s mercy when it comes to major repairs. And when it comes to paying the mortgage, there are many advantages over rental payments, which don’t provide any return on investment beyond securing a place to live through the end of the month or lease.
How much is rent actually costing you? Consider the amount one pays over a 10-year period. A $1000/month rental payment adds up quickly to a whopping $120,000 over 10 years, when the same amount of money could have gone toward reducing 1/3 of the debt on a 30-year home mortgage by essentially making the payments to yourself instead of a landlord. Wow!
Here are 9 more benefits to owning your own home:
1. Homeownership is an investment. Unlike a car and many other purchases that decrease in value, a home is a purchase that appreciates over time. While each local market has its own unique factors, the national median home price goes up each year, even in times of recession. As you pay your mortgage each month, your debt amount goes down, while the value of your home continues to rise. This creates the buying and reinvestment power better known as equity.
2. Gain equity. When it comes to homeownership, investment and equity are directly related. As you make mortgage payments each month, part of the payment goes toward the interest, while the rest pays down the principal balance. Equity can be better defined as the part of the principal balance you’ve already paid, or the percentage of your home you already own. Paying the principal is like depositing money in the bank, because that money becomes available for reinvestment in the home itself or a new home.
3. Take advantage of tax benefits. The federal government encourages homeownership (which in turn encourages economic growth) by offering tax incentives for homeowners. The biggest one is the option to deduct interest from mortgage payments on your income tax return, especially at the start of a mortgage when most of the payment is applied to the interest. Payments on private mortgage insurance (PMI) and certain home-related purchases also qualify for tax benefits.
4. Stabilize your housing costs. A fixed-rate mortgage means you’ll have the same mortgage payment for the term of the loan (usually 30 years), while monthly rental payments will continue to climb. And even adjustable-rate mortgages (ARM) have a fixed cap on them. Homeownership also stabilizes other home-related expenses like utilities and gives you more control over your ability to make investments in your property that keep those expenses down.
5. Gain control over your living space. Renting doesn’t usually come with a lot of options for modifying your living space to better suit your needs. Renters with changing needs must also deal with changing residences. Homeownership means you can make improvements to your home, and home improvements usually lead to increased home value, both financially and in daily home life. The power of equity can give homeowners the extra financing they need to reinvest in their homes when cash funds aren’t an option.
6. Increase your own sustainability. Homeownership can help you create a sustainable future in many different ways. Long-term renters lack sustainability because a high percentage of their income usually goes toward housing expenses that are constantly increasing. Locking yourself into a mortgage payment helps level out living expenses, so when income goes up it can be budgeted elsewhere. Paying off a mortgage allows homeowners a long-term plan to significantly reduce their living expenses as they move toward a retirement budget.
7. Stop moving. Homeownership increases sustainability and stability. Moving from rental to rental is a major inconvenience and a financial and emotional burden. Renting can mean that you never really know where you’ll be living next or what your expenses will be. Staying in the same home allows a financial and emotional investment in both your living space and your community.
8. Social benefits. Staying put for longer periods of time also creates social benefits that range from friendships with neighbors to community involvement and consistent educational opportunities for children.
9. Use your investment to make another investment. The equity that comes from paying a mortgage is what allows many individuals and families to make future investments in the same home, a higher-valued home, or second home. A home equity line of credit helps homeowners use the part of their home that’s already paid off to obtain financing for investments apart from the home itself, such as purchasing a boat or RV.
Homeownership comes with a bevy of benefits; these are only a handful. What other benefits have you experienced with homeownership? What makes you want to own your own home?
On July 30, the Reverse Mortgage Stabilization Act of 2013, a House of Representatives bill, was approved by the Senate. The next stop for the legislation is the President’s office, where it is expected that he will sign it into law.
For seniors who already have reverse mortgages, nothing should change—you shouldn’t have anything to worry about. Butfor those considering the option, it is important to understand what the potential ramifications of this bill could mean in terms of loan eligibility and cost. For those who’ve already had an analysis but haven’t moved forward with the reverse mortgage, you may need to get an updated analysis, and quickly (more on this under “What Does it All Mean?”).
What is a Reverse Mortgage?
This financial solution that taps into the equity of your home is only available to people over the age of 62. By taking out a reverse mortgage, the homeowner no longer makes a mortgage payment in principal or interest. The loan, plus interest, is due when the homeowner dies or decides to move. It is an attractive option for people who have built up strong equity in their home and want to tap into that cash for retirementor other expenses. The reverse mortgage process is overseen by the Federal Housing Authority and must follow guidelines that call for proper home maintenance, among other details. Before this bill, there were virtually no credit or income requirements for seniors wanting the reverse mortgage option but that could soon change.
Background on Legislation
In a 2012 audit of the FHA’s insurance fund, it became clear that the reverse mortgage program needed some modifications to prevent government losses. The Reverse Mortgage Stabilization Act was introduced in May by Representative Denny Heck, a Democrat from Washington, and Representative Mike Fitzpatrick, a Republican from Pennsylvania. Instead of calling for a sweeping overhaul of the entire reverse mortgage program—a move that could negatively affect senior citizens who rely on it—the bill instead gives the U.S. Department of Housing and Urban Development (HUD) the authority to take a closer look
at losses and where to specifically make changes.
HUD has until September 30th to decide if it needs bailout help from the U.S. Department of the Treasury, or if some adjustments to the reverse mortgage program will be enough to keep the initiative financially stable. Some financial experts say that the reverse mortgage program has lost money simply because of property value decline and that tighter restrictions will only hurt the seniors who need the low-cost financial help. Whatever the reason for the financial squeeze, it is clear that HUD has some decisions to make, and quickly, to avoid asking the U.S. Treasury for help for the first time in nearly 80 years.
Possible Reverse Mortgage Changes
Seniors who apply for and already benefit from the reverse mortgage program are likely to see some changes, including:
No Fixed Rate Standard option. This change actually took place back in April, but is important to note for seniors planning to apply for a reverse mortgage. The Fixed Rate plan allowed borrowers to take out a larger amount of money upfront at a higher interest rate (2 percent). Instead, borrowers can opt for the Standard Adjustable Rate or Saver programs, which both limit the amount of withdraws but also come with a much lower interest rate. In the case of the Saver Program, interest is only .01 percent.
No lump-sum payouts. In the past, seniors had the option to take all of the value of their loan out upfront. This bill will place limits on the amount that is initially available to reverse mortgage borrowers. The exact details of payment amounts and percentages will not be known until HUD sends out official Mortgagee Letters.
Creation of escrow and impound accounts. In order to cover tax and insurance costs, HUD is considering a requirement of impounds or escrow accounts. The bill passage gives HUD this authority, though no official decision has yet been released. If this mandate goes into effect, borrowers will have less money at closing and there could be a significant delay in when the borrowers see the money. It could also mean no equity to the borrower when all the numbers are crunched.
Stricter qualifications. Before the Reverse Mortgage Stabilization Act, seniors did not have to meet traditional financial loan requirements. There were no credit or income checks and the program hinged simply on the equity in the borrower’s home. HUD is now considering the addition of a “financial assessment” portion of the application process. If implemented, prior credit and current income could impact a senior’s ability to obtain a reverse mortgage.
Higher loan costs. A side effect of all the other possible HUD changes to the reverse mortgage program is that it will all add up to higher costs for borrowing seniors. Before this legislation, reverse mortgage lenders were often willing to take on the initial costs to the borrower, like closing costs or origination fees. Lenders were able to do this based on calculating how much they could get for selling the loans on the secondary market. With more limits on the loans, lenders cannot receive as much for selling them so they do not have as much money to put toward borrowers’ costs. This means more money out of borrowers’ pockets to pay for their loans.
What Does it All Mean?
If you are a senior and considering a reverse mortgage to help improve the quality of your retirement years, the terms of your loan may no longer reflect earlier estimates. If you have already had an analysis completed but haven’t moved forward with a reverse mortgage yet, you’ll need to get a current analysis from reverse mortgage professionals like The ARAMCO Group. Be sure to do this before the secondary market worsens (as the experts predict will happen) and before the changes proposed in this bill are implemented.
The seniors who will most be hurt by any or all of the potential changes are those who may have eligibility issues. Seniors may also soon have to pay more in borrower’s costs, and not have a lump-sum payment option. If you feel like a credit or income requirement could hurt your chance at obtaining a reverse mortgage or to make the most of the equity in your home, do not wait to reach out to a reverse mortgage professional. If HUD changes eligibility requirements, the money you had planned to use may no longer be available to you.
Again, make sure you consult reverse mortgage professionals like the ARAMCO Group if you’re concerned about your own unique situation. The ARAMCO Group’s president and CEO is a Certified Reverse Mortgage Professional (CRMP)—a designation that comes with passing numerous classes and a comprehensive exam, and that has been given to less than 50 reverse mortgage brokers nationwide. The benefits of working with a CRMP are numerous—stay tuned for our next blog post to learn them!
With over 30 years of combined experience in the mortgage business, especially processing and underwriting, The Aramco Group would like to point out a few misconceptions about underwriters, and the loan process. One misconception that surrounds underwriters is a general belief that their main responsibility is to find problems with the loan application and look for reasons to deny the loan.
If that was the case the underwriters and their lending company would be out of business fairly quickly. In fact, underwriters are trying to do the exact opposite of that. Their main responsibility is to find ways to approve the loan with all the necessary complete documentation. In other words, their action whether it be an approval or denial of a loan should be supported by legitimate documents.
It is true that some underwriters might be more lenient than others; however, almost all of them are following some form of basic standard underwriting rules. They have to understand and evaluate your financial situation for the applied loan program.
In the beginning of the loan process, the underwriter asks for the necessary documents or legitimate copies of provided ones. The initial request and each time thereafter add a minimum of 7 to 10 days to the process of the loan. In general, borrowers still are not providing the complete set of requested documents. They send in what they think should be good enough to satisfy the underwriter’s request.
This back and forth request of information and forwarded documents goes on for a few times and meanwhile the borrower feels that they are providing substantial and official documents that should suffice for the loan process. The borrower can feel a sense of discouragement and be under the impression that the underwriter is trying to find excuses to deny the loan otherwise. It is important that an open and clear line of communication be set between the borrower and underwriter so that the loan process can move forward as seamless as possible.
To ease any frustration and facilitate and expedite the process, the borrower will be given a checklist of all required documents that are necessary for the loan packet. It is imperative that the borrower return the packet with all the required materials on the checklist, failing to do so will slow the application process down tremendously.
This misconception comes from incomplete information and documents in the file. Receiving the initial documents, then submitting the loan to the underwriter and a few times back and forth of requesting additional documents, we get to a point that the underwriter has enough information to make a decision and support it with the information they have on hand. This is a risky process because if the proper information is not disclosed the loan may be denied, that is why it is absolutely necessary that a borrower disclose any and all information that the underwriter may need to complete the loan.
The Aramco Group has a dedicated team of professional loan processors willing and able to help you through your loan process. Feel free to call one of them to discuss the process and how they can help you close your loan as efficiently as possible.
Starting today, The Aramco Group Loan Processors will be giving weekly tips to help borrowers speed up their loan process.
Getting started is very simple. First, PROVIDE COMPLETE DOCUMENTATION. When we receive a file and the basic documentation is missing, we are not able to submit the file to the lender for an approval.
When our Loan Officers send out an application package they include a list of required items, so make sure to complete the paperwork in its entirety and don’t forget to read the list. You will be able to tell which documentation is applicable to you.
Here is a list of the most common items that we have found borrowers overlook providing to us:
- Complete bank statements that are not older than 60 days. Complete also refers to any blank pages within the statement as well.
- Copies of your tax returns from the previous 2 years. Again, we’d like to stress that complete copies of your tax returns need to include any blank pages as well. If you have K1’s for an S Corporation or Partnership the lender will need copies of those as well. If you own more than 25% of the S Corporation or Partnership the lender will require returns from the previous 2 years.
*Helpful Hint* - California tax returns are not required; lenders are only interested in the Federal tax returns.
Some of the other necessary items we need to promptly process your loan are:
- Copies of 1 full month of paystubs.
- A copy of your monthly coupon Homeowner’s Association dues or you can provide us a letter on the Homeowners Association’s letterhead showing the monthly dues as well.
- A copy of your mortgage statement if the loan is a refinance. Your lender will also want to see your current interest rate as well and what the term of your loan is (30 yr., 15. yr. etc) to confirm that it makes sense for the borrower.
- If you are divorced and have children a complete copy of the divorce decree will be required showing if there are any child support or alimony payments required.
Here is a list of the most common items NOT disclosed to us that can expedite the loan process:
- Property owned
- Any new debt recently incurred
- Judgments and liens that have been recorded against the borrower.
The Loan Processor’s job is to try to anticipate what documentation the lender will require to approve the borrower’s loan. It is important to disclose all information to us.
Taking this little bit of extra time at the beginning of the process could save you not only time, but alleviate any stress and hassle in receiving your loan.
The Aramco Group considers our Loan Officers, Loan Processors and Borrowers a team, our common goal is to get the loan approved and closed in a timely manner. It is imperative to keep the lines of communication open as to avoid any mistakes that can slow the loan process down. If you have any concerns or questions regarding the loan process, please feel free to call one of our Loan Professionals, they will be more than happy to assist you.
Chances are you may already qualify for a reverse mortgage and you don’t know it yet. The requirements are as follows:
• Both you and your spouse must be 62 years of age or older
• Live in your home and have sufficient equity in it
• Must continue to pay your property taxes and homeowners insurance and the up-keep of your home.
If you meet the eligibility requirements mentioned above, then you are ready to begin the process of applying for a reverse mortgage. It is a eight-step process and each step will be discussed in detail below.
1. Examination of Financial Situation – The beginning of the process will have you meet with a reverse mortgage professional, a member of the National Reverse Mortgage Lenders Association. They will review your current financial situation and make sure you fulfill all the requirements needed to proceed with the reverse mortgage process and will benefit from it.
2. You will be Provided a Reverse Mortgage Analysis – Once you provide your basic information, you will be provided with different options of receiving payments from the loan. Your options are:
a. Fixed monthly payments
b. Lump sum payment
c. Line of credit
or a combination of the above.
3. Counseling with a HUD (Housing and Urban Development) Representative – Counseling is a required step in the reverse mortgage process. You will meet with an independent counselor in your community to receive a better understanding of the details that are associated with a reverse mortgage and fulfill the Government requirements.
4. Sign you Loan Application and Disclosures
5. Home Appraisal – This process is necessary as well since the home will be used as collateral and it must meet specific Federal Housing Association guidelines. If repairs are needed then a portion of the loan is set aside to fix those repairs. Items which involve health and safety are required to be completed prior to the close of escrow.
6. Loan Processing – When all of the above have met the required criteria the loan goes through the underwriting process. In this process all pertinent information if verified to be correct such as property ownership and title insurance, allows the loan to move into the closing stage of the process.
7. Closing – The closing requires the signature of a notary or an attorney for verification of the documents. Once this is complete the applicant has a 3 –day period to cancel should some concern arise. This is called the “3-day right of rescission.” If the applicant is satisfied, then the loan process is complete and the applicant can begin receiving payments.
8. Receive Your Money!!
It might seem like an intimidating process, but having the right professionals with you every step of the way makes all the difference. Feel free to contact us here at The Aramco Group. A reverse mortgage professional will be more than glad to answer any questions you might have about beginning the process of a reverse mortgage.
Recent numbers are stating that the housing industry is seeing a substantial increase in the price of homes. New home sales in San Diego County are up 17% from last year, the highest for this period of the year since April of 2007. As appealing as this is to home owners, some analysts believe the Federal Reserve policy of lowering interest rates is creating a temporary jolt especially now that the spring buying season is in effect. This is leading home buyers to adopt a “get in while I can” mentality. Housing supply is close to a 20 year low with new construction limited, and investors are buying homes and converting them into rentals. Demand, on the other hand, is growing because of the purchasing power that is allotted to home buyers from the Federal Reserve’s low interest rates thus boosting the price of homes. Before 2008, a 30-year fixed mortgage was around 6%, in today’s market the 30-year fixed is hovering around 3.5%. With interest rates being so low people are realizing that the price they are currently paying in rent can be better used as a mortgage payment and adding an asset to their name. What happens though, when median wages do not keep pace with rapid housing increases? The answer is the market will be left with homes too expensive to buy because of the illusion of the low monthly payments brought on by low interest rates. The fact is that interest rates will begin to rise again and when they do, home buyers will have to spend more of their income to buy a home. This will lead to homes prices becoming stagnant so income can catch up and those areas that see a rapid appreciation in value might see it fall eventually.
So as the expression goes, “strike while the iron is hot.” Now is the time to lock in those low interest rates and put yourself in the dream home you have always wanted. Contact one of our real estate or mortgage specialists for details; they will be more than willing to talk to you about your options. With absolutely amazing weather year-round how could you not take advantage of buying and investing in San Diego? It’s the right call to make.
Early retirement can have a dramatic effect on the amount of Social Security payments an individual may receive. However, deferring Social Security benefits can be a very appealing idea for those that are in a position to do so. By delaying retirement benefits until the age of 70, deferred payments can grow by an additional 8% a year, greatly surpassing the rate of inflation which has averaged approximately 3% over the past 5 years. If delaying retirement benefits seems like a suitable option, one point to consider is to sign up ONLY for Medicare at age 65. It is important to note that not opting to sign up for Medicare within 3 months of eligibility can delay coverage and become more costly. A good way to supplement your income in retirement is with a reverse mortgage. With a reverse mortgage you can access the equity in your home and receive monthly payments allowing your social security benefit to grow. Listed below are a few payment distribution options to supplement your retirement income with a reverse mortgage:
- Lump Sum – the full amount at closing.
- Tenure – fixed monthly payments for as long as the homeowner resides in the current residence.
- Term –equal monthly payments for a fixed number of years.
- Line of credit – taking out any amount necessary until the credit line is depleted.
- Any combination of the above for even more flexible options.
Please feel free to contact our CRMP (Certified Reverse Mortgage Professional), Mehran Aram or any one of us at The Aramco Group with any questions you may have regarding reverse mortgages. One of our specialists will be more than happy to assist you.
News yesterday from the desk of acting FHA commissioner, Carol Galante, illustrated some drastic changes to come for the reverse mortgage product. Due to the FHA’s $16.3 billion deficit as evidenced from the latest annual audit, the FHA is attempting to shore up its accounts by implementing changes to the reverse mortgage product as early as January 31st. These changes will be extremely significant and are as follows:
- Elimination of the standard fixed rate reverse mortgage
- Capping the loan amount, leaving borrowers with 20%-30% less cash back
- Increased mortgage insurance
- New credit and income qualifications
If these changes occur on January 31st it will mark the end of the reverse mortgage’s most popular product, the fixed rate lump sum HECM. Americans have selected this product overwhelmingly since its introduction in 2008 due to the large lump sum of cash it provides as well as the security a fixed rate brings to a person’s retirement. The good news is that any reverse mortgage started before January 31st will not be affected by these new rules, but unfortunately it seems as though the standard fixed rate reverse mortgage’s days are numbered.
In addition to the elimination of the fixed rate reverse mortgage, many Americans will be affected by the new credit and income qualifications. Currently qualification is solely based on age and equity, but with these changes occurring, lower income and lower credit score borrowers might experience difficulty qualifying for a reverse mortgage. The proposed increase in mortgage insurance and cap on loan amounts will also leave you with less cash back, as the FHA endeavors to cure its $16.3 billion budget deficit.
If you have any questions regarding these changes or if you would like to begin a reverse mortgage for yourself before these changes take place on January 31st, please feel free to give us a call as we are more than happy to help you decide if a reverse mortgage is right for you.
The financial world has grown accustomed to the reverse mortgage as an effective method of converting the equity in a senior’s home into much-needed cash. But for years, due to the steep price tag, this retirement product simply hasn’t made sense for many affluent seniors who rather than coveting a large amount of cash, could simply benefit from a reserve of funds. These factors have influenced many well-to-do retirees away from the reverse mortgage, and into conventional lines of credit. The recent introduction of the HECM Saver line of credit though, has presented seniors with an extremely viable retirement strategy which has perked the ears of some of the most prominent financial planners in the country.
After learning of this novel reverse mortgage option, Harold Evensky, CFP and Research Professor at Texas Tech University, and Dr. John Salter, CFP, Texas Tech Professor and Vice-President of Evenksky & Katz Wealth Management, set out to determine if in fact this new HECM Saver line of credit would aid their clients in retirement. After thousands of retirement simulations and a publication in the prestigious Journal of Financial Planning, their question was answered with a resounding, YES. In particular, their results focused on the benefit of having access to a HECM Saver line of credit so that it could be tapped into during down years instead of depleting other portfolio assets when cash was needed.
This “insurance-type strategy” which utilizes the equity in a senior’s home only when necessary and then is paid off when excess funds are available, was shown to be statistically significant in increasing the probability of retirement portfolio sustainability. Due to the positive results discovered by Evensky and Salter, and other intensive research projects such as the study released by Boston College’s Center for Retirement Research, our country’s most forward-thinking financial minds are now recommending the HECM Saver line of credit not as a “loan of last resort,” but as a wealth preservation strategy.
The HECM Saver is simply a lower cost reverse mortgage, with savings arrived at by eliminating up to $12,000 in upfront FHA mortgage insurance premium, and up to $6,000 in origination fees in some cases. Due to the lower amount of cash disbursed, lenders expose themselves to less risk and are able to offer affluent seniors the benefit of a reverse mortgage with fees similar to most refinances. Most importantly, the HECM Saver line of credit requires no monthly payments, the line of credit can’t be frozen by the bank, and stringent credit and income qualifications simply don’t exist; making it a fabulous alternative to a conventional line of credit.
Even with many luminaries in the financial advising community increasingly turning to the reverse mortgage as a viable retirement strategy, the HECM Saver line of credit is still underutilized. But with the latest evidence supporting this fantastic product I believe over the upcoming months and years the industry’s most prominent financial advisors will increasingly familiarize themselves with the HECM Saver, so that they can continue to offer the soundest options for their client’s retirement in a rapidly changing world, where they are commissioned with the most difficult task of preserving a client’s declining wealth over an ever-increasing lifespan.
Mehran Aram CRMP, President/CEO
The Aramco Group