What’s ahead for home loans in 2010

This year could bring significant changes from 2009 for those seeking home loans. Over the last year, home prices fell to 2003 and earlier levels in many parts of the country. In addition, home loan rates declined to the lowest levels on record and this combination led to the highest home affordability levels ever recorded. Here’s a recap of what happened in 2009 and what you need to know for the year ahead.

Would You Like a Sweetener with that Rate?

Interest rates throughout 2009 were artificially low. That’s because in late 2008, the Federal Reserve put into place a program for purchasing Mortgage Backed Securities with the intention of lowering mortgage rates. They were successful with reported rates by Freddie Mac falling below 5.00% several times in 2009.

Without this program mortgage rates would have been at least 1.00% higher, and potentially even higher than that. Did you know that a change of 1% in a home loan rate impacts the amount someone can borrow by roughly 10%? For example, if rates are in the low 5.00% range today and they shoot up to the low 6.00% range, $250,000 home buyers may become $225,000 home buyers. 

Look for rates to return to 2008 and previous levels as the Fed ends the program on March 31, 2010. While rates will not immediately increase to 6.00% or higher, know that without additional intervention, rising rates are inevitable. Expect that under worst case scenarios, rates could dance around the 7.00% range.

Show Me Your Docs

Contrary to what you may see or hear in the media, money is widely available for people who want to finance their homes. There is one caveat, though. People need to be able to demonstrate that they qualify for the loan amount they are pursuing and that they have been willing to repay debt they have accepted in the past.

To obtain financing today, a borrower needs to supply the lender with all documentation pertaining to their income, liquid assets and potentially items related to their credit reporting. The best preparation path to follow is to gather most recent paystubs for 30 days of earnings, two years W-2s with complete tax returns and three months statements, all pages, for any liquid assets used for qualifying.

The free wheeling days of borrowing whatever people thought they could repay are gone. While some exceptions may be granted for strong compensating factors, total debt to income level will be capped at 45%.

If you haven’t checked out your credit reports recently, now is a good time to do so if you plan on seeking financing in the next 12 months. You can pull up your reports for free at AnnualCreditReport.com. Examine your reports for any inaccuracies and work to get them corrected prior to seeking financing. You can also seek assistance from your mortgage professional.

Have We Hit a Bottom in Housing?

If you simply look at the data that is reported, one could surmise that the bottom in U.S. home prices was hit in 2009. One nationally respected index for home price reporting, the S&P/Case-Shiller Home Price Indices, indicates that home prices turned for the better around mid-year in 2009.

While all markets are different and some may continue to show signs of weakness, most communities have demonstrated strength and should continue to do so. However, some potential headwinds do exist for the second and third quarter of 2010, following the expressed expiration dates of several stimulus programs: The Mortgage Backed Securities purchase program and home buyer tax credits, both of which are directed at the housing and the mortgage markets.

Foreclosures and short sales will also continue to influence many of the hardest hit markets as unemployment and resetting adjustable rate mortgages weigh on distressed homeowners.

Dates to Remember

Two dates lie on the horizon that will impact interest rates and potentially home prices. The first program scheduled to end is the Federal Reserve’s program for purchasing Mortgage Backed Securities. Announced in November of 2008, the Fed began purchasing $1.25 trillion in mortgage bonds in 2009 which will culminate at the end of March. As the intention and result of this program was to lower rates, mortgage rates will likely begin to rise after the program concludes.

In addition, April 30, 2010 is the last day to enter into a home purchase contract and still potentially qualify for a federal income tax credit of up to $8,000 for first-time home buyers and up to $6,500 for repeat home buyers. The credit can be claimed only on contracts that close by June 30, 2010.

Act Now…Not Later

While no one knows for certain what the future holds, one thing does appear clear. Home loan rates and home prices both will be higher in the future. If you or anyone you know is looking to purchase or refinance a home, waiting could be costly!

Vienna, Virginia: Fannie Mae has updated its automated underwriting software recently. The changes are major and could affect how many potential home seekers actually become homeowners. Having a loan underwritten by an actual person are almost non-existent these days. Both Fannie Mae and Freddie Mac feel they are better served using their proprietary software programs.  Desktop Underwriter^® (DU) Version 8.0 has changes to credit score requirements and mortgage insurance coverage will include:

Maximum Debt To Income Ratios (DTI). This is the ratio of how much of your monthly income is being consumed by your monthly debt.

• Maximum DTI lowered to 45%, with flexibilities offered up to 50% (as approved by the software)

Minimum credit score requirement for home buyers in Fairfax, Virginia and Alexandria, Virginia

• Minimum credit score increased from 580 to 620 (excludes Fannie Mae^® DU Refi Plus^TM
• The REfi Plus loan is for homeowners that loans are owned by Fannie Mae (this is different than who you make your payment too) Click below to find out more. Find out if Fannie Mae or Freddie Mac owns your mortgage

High Balance Mortgage Loans over $417,000 to $729,650

• 2009 Temporary high-cost area loan limits will be supported by the new software.
• Eligibility guidelines and Appraisal Field Review requirements have changed

Mortgage Insurance (MI) – Coverage Changes

• Reduced MI and lower cost MI options will be retired for loans underwritten using new software
• With this change, Fannie Mae has introduced a new minimum MI coverage option with associated Loan Level Pricing Adjustments (LLPA’s). These are add-ons Fannie Mae charges for different loan scenarios.

Mortgage Insurance (MI) - Changes to Financed Mortgage Insurance Requirements

• Desktop Underwriter (DU) will be updated to allow financed MI using either a single premium plan that is paid at one time upfront, or a split premium plan that has both an upfront and monthly component

2-Unit owner-occupied interest-only LTV/CLTV changes. Loan To Value and Combined Loan To Value – Essentially state how much equity is in the home. 80% LTV is the same as stating a home has 20% equity for real estate in Fairfax, Virginia and Alexandria, Virginia.  

• Maximum LTV/CLTV reduced from 80/80% to 75/75%

Expanded Approval (EA) are gone!! A paper borrowers are the only ones that will be able to get a loan in the future.

• EA II and III recommendations will no longer be offered by DU 8.0

Fairfax, Virginia: The Treasury Department released guidelines and updated forms on November 30, 2009 for its new Home Affordable Foreclosure Alternatives Program (HAFA) for homeowners in Fairfax, Virginia and Alexandria, Virginia area. The HAFA program is supposed to compliment the HAMP program and applies to loans not owned or guaranteed by Fannie Mae or Freddie Mac. The intent of the HAFA program is to assist additional homeowners that are in distress while setting out clear guidelines for mortgage servicers and mortgage holders. The HAFA program also provides incentives to servicers.  The HAFA program is for homeowners in connection with the following situations:

1. A short sale
2. A deed-in-lieu of foreclosure (DIL) used to avoid foreclosure on a loan eligible for modification under the HAMP program.
3. Servicers participating in HAMP are also required to comply with HAFA when working with homeowners in the Fairfax, Virginia and Alexandria, Virginia areas.

The Governments home affordability plan has some new changes for loans not currently serviced by Fannie Mae or Freddie Mac.

Link to HAMP participating servicers: MakingHomeAffordable.gov.

Link to the website: www.hmpadmin.com

Link to the 43 page guidelines that could help homeowners the Fairfax, Virginia and Alexandria, Virginia areas: https://www.hmpadmin.com/portal/docs/hamp_servicer/sd0909.pdf

The supplemental directive 09-09, is effective April 5, 2010, but participating servicers may elect to implement HAFA prior to April 5, 2010, in accordance with the supplemental directive guidelines.

• Program offers eligible homeowners viable alternatives to avoid foreclosure;
• Preventing servicers from attempting to reduce real estate commissions established in the listing agreement as a condition for short sale approval;
• Releasing borrowers from future liability for the debt; and
• Providing financial incentives to borrowers, servicers and investors.
• Provides a viable alternative for homeowners who are HAMP eligible but cannot keep their home.
• Allows the use of financial information and forms already in the system in connection with a loan modification.
• Enables the homeowner to seek pre-approved short sales terms before listing the property.
• Requires borrowers in the Fairfax, Virginia and Alexandria, Virginia areas to be fully released from future liability for the first mortgage debt. At this time I am not sure how this applies release of second mortgages or HELOCs liability. (No cash contribution, promissory note, or deficiency judgment is allowed).
• Provides a standardized time frame and process for handling alternatives;
• Financial incentives:
  • $1,500 for borrower relocation assistance
  • $1,000 for servicers to cover administrative and processing costs
  • Up to $1,000 for investors for allowing a total of up to $3,000 in short sale proceeds to be distributed to subordinate lien holders (on a one-for-three matching basis).

What factors determine your credit score?

Payment history – 35%
Amounts owed – 30%
Length of credit history – 15%
New credit – 10%
Types of credit used – 10%

Obviously the single most important factor is your record of paying your bills on time. As delinquent accounts age they factor less into the calculation of your credit score. Here is what we did to help one of my clients move into her home.

Mary was referred to me by her sister, Jane.   Mary had contacted several other lenders to get a loan, but they were not able to get her a fixed rate mortgage with a decent rate. Mary wanted to purchase a home in Vienna, Virginia and since the home was from her parent’s estate, she felt comfortable going with a two part plan to get the home and a great rate. Mary had some initial credit issues left over from a nasty divorce, where her ex had run up some credit card bills and other liabilities in her name and then left Mary to make good on the debt he actually incurred.

Once we reviewed her credit we were able to setup a two part plan. Part one was to purchase the home from the estate and part two was to clean up her credit, then refinance into an A paper program a short while later.  We chose this route because timing was critical in closing before a certain date. Mary’s income and assets were sufficient for the initial loan program used to purchase the home.

The credit plan was to reallocate some of her revolving debt over several cards, instead of just one card. We also paid down an installment account to less than ten months so we wouldn’t have to count the monthly payment in her ratios. Once we had these two items taken care of, we sent the proper documentation to the credit agency we use to have Mary’s credit rescored. The rescoring process to about seven days from start to finish, and the outcome was a score high enough to move forward with the purchase. This still left us with some follow-up credit work that needed to be done at a later time.

I am happy to say, Mary is in her house, credit scores have increased and she is a happy homeowner.