With so many new homeowners looking to enter the market because of low rates and low home prices, I know there is often some confusion about loan options. I have tried to give a brief summary of what is available, along with the basic benefits of the program. As always, feel free to contact me for me detail or to ask a question. I hope this is useful.

While financing a home is more challenging today than even a few years ago, it is not as difficult as many people think. If there is a way for you to get a home loan, we will find it for you.  And the good news is that while interest rates remain low, a great home can be very affordable on a monthly-cost basis.

There are a number of loan programs to choose from, and this can be overwhelming to new homebuyers. Below is a brief summary of your options to help give you an idea of what may be best for you.

• FHA Program - a great loan program for financing a primary home with a low down payment of 3.5% of the purchase price.  Rates are low, and although you will pay a monthly mortgage insurance premium, this is the cheapest way for most people to get into a home.

• VA Loan - if you are an active service or retired veteran (or in some cases a widow of a veteran) you may be eligible for a loan guaranteed by the VA. This will allow you to purchase a home with no downpayment (100% financing).  Although rates are generally a touch higher than FHA, there is no monthly mortgage insurance, making this a very attractive program.  VA jumbo loans are also available although some downpayment will be required.

• Conventional Loan - best used if you have a good credit score and plan to make a larger down payment. You will pay monthly mortgage insurance if you put down less than 20%. If you can put down this much, it will reduce your monthly costs significantly.

• USDA Loan - available in rural areas - typically outside city limits - this allows for 100% financing (no down payment) and no monthly mortgage insurance.  Although there is a maximum household income to be eligible, this is a great program if you qualify.

• Jumbo Loan - a conventional loan with a loan amount over $417,000. 

• FHA rehabilitation loan -  if you are looking at a home which needs some cosmetic updating, this loan will allow you to borrow up to an additional $35,000 to be held in escrow to pay for the work, whether it be new kitchen cabinets,  paint or even new appliances. You will need a contractor and bids, making this program a little more in depth, but using it will help you start getting your new home up to your standards as soon as possible. This is especially useful if you are buying a foreclosure which needs some work. 
  

Some other things to think about:

Term - a 30 year loan is most popular. You will pay more in interest over the term of the loan, but by breaking up repayment into 360 chunks, your monthly costs will be lower. 25, 20, 15 and 10 year mortgages are also available.

Fixed or adjustable? - with a fixed interest rate, your payments will not change over the course of your loan. This is by far the safest and most popular option.  An adjustable rate mortgage (ARM) will be fixed for 3, 5 or 7 years, and then adjust annually, either up or down. This is riskier, but can help you save money if you have a particular plan for how long you expect to be in the home.

Your loan officer should be able to help you work through all the above options based on an understanding of your needs, your long term plans, and what you are comfortable with.

What do I need to get prequalified?

It is helpful to both you and your realtor to have a realistic idea of what financing you qualify for and how much you can afford to spend on a home. To this end, a good first step is to get pre-qualified by a loan officer. Given that these days lending is more difficult than a few years ago, a good loan officer will ask for the following documents to give an accurate pre-qualification - this is in your interests.

• Income documents - one month of paystubs and two years of W-2s.
  
• Asset documents - two months of bank statements and other documents related to savings, e.g.  401k statements.
  
• Identification documents - driver’s license and social security card
  
• Permission to pull your credit - you will need to pay the cost for this.
  
• If you are self-employed, you will need to provide two years tax returns for your business.
  

Refinance Options for Underwater Homeowners

We all know people who are having trouble keeping up with their payments but could not refinance because they are underwater (or close to it) on their loan. Many were not willing to refinance because it would push them above the magic 80% Loan-to-Value ratio, which would necessitate getting mortgage insurance (MI) - which either they could not get (usually due to a credit score or a Debt-to-Income issue) or which would increase their monthly payments to the point that is negates any drop in payment from a lower interest rate. 

Well, over the last few months, a couple of programs have been launched or expanded which would help people in these situations - but don't seem to have made much impact in the media, either here in Arizona, or nationally. A large number of people I speak with, even realtors, are not aware of these changes, so I wanted to touch on the basic requirements to qualify.

There are two programs - for Fannie Mae loans, DU Refi Plus (catchy title!), and for Freddie Mac loans, The President's Making Homes Affordable Program (who thinks of these?). If you have a conventional loan (not FHA, VA or USDA) then you most likely have a loan owned by Fannie or Freddie. (Note - it will be serviced by Bank of America, Citi, Flagstar, etc)

The programs have a few differences, and investors may have some extra requirements, but the main points are:

• You can refinance up to 125% of the home value.  This is huge for many homeowners. For example, if you owe $310,000 and home prices have fallen to the point that your home is worth $250,000, you are at 124% Loan-to-Value and can potentially refinance. The previous limits on these programs were 105%, so this is a big improvement, and will bring a large number of homeowners to a place where they at least have an option. However - there is a catch. As most lenders will consider a higher LTV to come with a higher risk, the interest rate also gets higher. So if you are at 120% LTV with a 6% interest rate, this may not be worthwhile. If your rate is higher, maybe it is. You really need to have a good loan officer run some scenarios for you to determine if this is in your long term interest and something worthwhile for your unique situation.

Coming back from hunting in Willcox, AZ last weekend, I drove through Redington Pass. It was the first time for me to come through this area. One of the interesting things for me about Tucson is that, as the city is abutted by mountains on two sides, some of the major roads actually become dirt trails leading up into the mountains. This is the case for Tanque Verde Road, which transforms from four lanes to being a mountain trail within a matter of miles.

Redington Pass is popular with ATVs, dirt bikers and hunters, but the main road is actually in pretty good condition. If you live in Tucson and have never been out there, I highly recommend a trip. The views of the mountains are spectacular, and the pass is full of deer, javelina, coyotes and even a healthy population of mountain lions. There are also some beautiful homes out there - a rough commute I imagine.

Most impressive for me though were the saguaro cacti. We have big ones all around Tucson, including in Vail, where I live, but I have not seen any which compare with these. It can take a saguaro up to 75 years to develop an arm, and can live for over 150 years. I can only guess at how old this one is.

A few more in the same area - there are a large number of very old and developed cacti here, bigger than what we typically see around urban areas. These are genuinely beautiful plants, even though they aren't pretty in a convention sense.

I'm Simon Smart, a loan officer in Tucson with Sunstreet Mortgage. If I can do something to help you out, give me a call.  

As a transplanted Scotsman, I was reading the BBC news this morning when I came across an article about a beautiful, rural fisherman's cottage which was recently put up for sale in Kent, on the English coast. Think rustic, think peaceful, think fresh air and the sound of gulls. If you are having a hard time imagining it, here is a picture from the listing. By the way, this little three bedroom gem, with half an acre of land, is going for a touch under US$400,000. 

Great you think. Perfect for me and the family. Let's go take a look. I'm ready for some rustic, rural living. And then you arrive:

Yes. That is a gargantuan nuclear power station. I hope you like catching three-eyed fish.

So, I am curious what realtors on active rain think. Have you ever 'omitted' something from a listing to get people out there, at which point they will realize it's not such a big deal. ("It's okay, with prevailing winds you are upwind of the garbage dump.") Or do you think it is best to be upfront and honest and see what happens.

Or do you have any good stories about listings you have been to where there were some hidden surprises?

As always, if I can help you or your clients in any way with, just give me a call (unless you are trying to sell me the above cottage.) 

Simon Smart, your Tucson and Arizona loan officer

I just got back from a training session for volunteer Crisis Intervention Officers with the Pima County District Attorney Victim Witness Unit. One of the most essential skills for dealing with crime victims who are in crisis is being a good listener - part of the job is to bring those victims out of crisis, to allow them to begin processing what has happened and allow them to begin to build a plan for getting through the experience. Now, I'm not saying that those skills might help us all to be better at our jobs...but maybe they could help. Certainly for me, as a loan officer in Tucson, it is important to really listen to what my clients want and what their long term plans are - this will have a huge bearing on the best way to structure their home financing.

Listening skills can be broken down into eight skills, and I will go through each of them. Most of them we all know already, but I found tonight that studying this tonight gave me a chance to analyze which of those skills I don't use enough, and what I can work on to be more effective in dealing with people.

Active Listening

Pretty simple but very important. This is eye contact, body language, and the little noises we make to show that we are engaged and interested by what the other person is saying. It shows that we are not daydreaming about being somewhere else or working out what to say when it is our turn. 

Mirroring

Assuming a similar body language, posture, attitude or tone of voice. This creates a feeling of connection and commonality. It makes people comfortable because we are not being adversarial. And of particular interest to me this evening - if someone is defensive, for example their arms are crossed and they are tense or angry, you can mirror that. If you gradually loosen up and adopt an open, comfortable posture, they will often follow you and relax.

NOTE - don't mirror people in a creepy way. This has to be done naturally. In fact it is natural and people do it all the time. Next time you are in Starbucks or somewhere people meet their friends, look at how they naturally mirror people. We are just looking to use this natural behavior to put people at ease - not to manipulate them. 

Open Questions

Basically a question which encourages someone to continue to talk and open up and let us learn more about where they are at. If it is open, it can't be answered with a 'yes' or a 'no'. It allows the person we are listening to to continue to stay in the driving seat of the conversation, and shows again that we are interested. 

TIP: What, who, when, where and how questions are great. Why questions tend to illicit a defensive a defensive reaction from a lot of people. Contrast the reaction to "Why were you late making your credit card payment?" with the reaction to "What happened that caused you to be late making this payment?" 

Closed Questions

Have to be answered yes or no. Generally not useful because they put us back in control of the conversation. But of course, sometimes necessary, especially if the conversation needs to come back on track or we need to ask the person to make a clear choice. We just need to be aware of these so that we know when to use them and when not to. It is a good practice when we find ourselves asking a closed question to figure out how to ask it as open ended. An example for realtors - "Do you like this house?" doesn't provide much information to find a more suitable one. Maybe try "How does this one meet your criteria?"

Parrotting

Simply repeating one key word from what someone just said. It doesn't break the flow of their talking, but shows that you are listening, interested, while encouraging them to expand on that point. This is something I don't tend to do, but it seems very effective and I will be experimenting with it.

Experimenting?

Just trying it out in my daily conversations with people to see how it works.

Reflecting

This relates to getting to the core of how someone feels, and allowing them to bring out that emotion. For example, if someone is asking me questions about the lending process, I might key into the fact that they are having trouble understanding it all. So I might say "It sounds like you are maybe feeling a little overwhelmed by all this new informations." And that allows them to admit that they are, and that I am probably going a little fast and using way too many acronyms, and that I lost them five minutes ago, and they were thinking about trying find another loan officer who actually speaks English. (For the record I generally do.) So now we can be open and candid and solve a problem before it really arises. This also helps them to feel that I am relating to them as a real person.

The really neat thing which I learned tonight about reflecting is that IT DOESN'T MATTER IF YOU ARE WRONG. If you misread their emotions, they will simply correct you, and tell you how they are feeling. And again, we have removed a barrier to effective communication. 

Paraphrasing

Basically summarizing what the person we are listening to just said. This is a good practice for those of us who tend to daydream, because it forces us to listen so that we can summarize. Again, this shows that we value what is being said, and illicits further explanation. 

Silence

Big, scary, empty silence.... ...  .... .... .... ....(tumbleweed) .... .... ........ .... .... .... .... .... ....(stomach gurgling, man I'm hungry) .... ...... .... .... ......

......Somebody say something!

This is a really useful tool if you can be comfortable with it. How many people do we meet on a daily basis who are comfortable not filling moment of silence with some kind of sound. And don't we feel comfortable around those people. In dealing with a crime victim, often their thinking ability is radically reduced or slowed, so it is important to be able to just sit in silence while they process. Someone buying a home is not impaired to the same degree (okay, i know we've all had a client who was close) but hey, they are making a big, expensive, long-term decision. Maybe they would appreciate a little silence while they process what is perhaps new information?

So there you are. Probably nothing new for most of us, but I found that by looking at these skills I was able to find a lot of ways to improve my communication, and I hope someone else can benefit from it to. If you have any tips or skills for better communication to add, please do so below. We all learn by sharing together.

I'm Simon Smart from Sunstreet Mortgage, a mortgage banker here in sunny Tucson. If there is anything I can do to help you or a client, don't hesitate to give me a call. I'm always happy to to help, or just to chat (or even just to listen). Good luck out there everyone.

I recently had the pleasure of attending a great presentation from a senior person at HUD's outreach program at the Tucson Association of Realtors. The goal of the program is to educate realtors and lenders about how the FHA works, and how it benefits the community. There was a lot of great information, and a lot of misconceptions addressed, so I am going to run through some of the main points that were made. As the FHA has been around since the 1930's, it has been through a lot of changes, which are ongoing. During the real estate bubble, very few buyer were using FHA loans, so many changes went unnoticed by realtors - changes which make FHA financing much more attractive than it was when everyone was going conventional.

FHA Mortgage Insurance does drop off

All FHA borrowers pay mortgage insurance, regardless of LTV, but it can drop off. For this to happen, the loan must have been open for at least five years, and the LTV must drop below 78%. If the buyer is putting 20% down, it is easy for a loan officer to tell them to go with a conventional loan - but it is worthwhile running a comparison with an FHA loan, especially if they have a lower credit score, due to the lower interest rate. And when I talk about a comparison, I mean the cost of the loan over five years or ten years or however long the borrower plans to be in the home - taking into account the FHA mortgage insurance dropping off. With rates being so low right now, the chances of them wanting to refinance is less, which means they need proper long term planning when discussing a loan.

Incidentally, FHA rates are lower than conventional rates right now - and one reason for that is that FHA mortgage insurance covers the lender for 100% of the loan, not just the typical 25% to 30% covered by conventional mortgage insurance. Because the risk to the lender is less, that risk does not need to be priced into the interest rate. Result - a better rate for FHA borrowers, even with less down and lower credit scores.

"Mortgage Insurance only helps the lender - why should I pay it?"

Great questions - and one every loan officer has probably fielded. And it is true that with conventional mortgage insurance, the borrower pays, and that provides the lender security that a portion of the mortgage is insured in the event of default. It does nothing for the borrower beyond let them get the mortgage in the first place.

FHA insurance does the same thing - it pays into the FHA fund which is used to pay back lenders in a default situations. But - and I'll admit I did not know this - it can be used to help the borrower.

As an example, when a borrower loses their job, get sick or has an event which causes a temporary inability to keep up with mortgage payments, the FHA does not want a foreclosure on their hands. If the borrower talks to a HUD Housing Counsellor, they may be able to miss three payments while they get back to a place where they can make their payment. This amount is not forgiven, but is put on the property as a silent second to be paid off upon refinancing or sale of the home. And the best part? That silent second is at 0% interest. At a later date, the same borrower could have another hardship and have a 0% silent third. In all the borrower can be up to a maximum of 12 months behind on payments and carry the debt at 0%. 

Doesn't that sound better than how most non-FHA loans are dealt with when the borrower is late? (i.e. automatic foreclosure after three months). It also will have a less traumatic effect on the borrower's credit score than a loan modification.

FHA and Predatory Lending

HUD does audit some (not all) FHA loans. In the event that the lender has charged an excessive amount for the loan - for example, high junk fees, buy down points without the rate actually being bought down, or high title fees - HUD can require that lender to pay excess fees back to the borrower as a principle reduction. I know excessive is a relatively loose term, but some borrowers really get hauled over the coals on this. In my office, we recently saw a Good Faith Estimate from one of Tucson's well known lenders where they were making almost nine points on the loan. Fortunately we were able to work with that person and save them a lot of unnecessary expense.

"Property will not be eligible for FHA Loan"

It is quite common to see properties listed on the MLS which stating that 'buyer will not accept FHA buyers' or 'property will not meet FHA standards'. This is outdated, and it may be worth running from an agent who recommends you do not accept FHA offers. As a seller you may be cutting yourself of from a great number of buyers for no reason.

One common misperception is that FHA borrowers are weaker than conventional buyers. In some ways this may be true, but from a seller's perspective they are the same, with perhaps an even higher chance of delays or fall-through on a conventional loan. Especially with the new HVCC affecting conventional appraisal speed and quality. An FHA buyer is by no means a sub-prime borrower.

Another misconception is that FHA loans require the property to be in perfect condition. This used to be true, but now FHA is much more relaxed about work which needs to be done for the loan to close. Their main guidelines are that the property needs to be healthy, safe and secure. Among other things, FHA no longer requires the following to be repaired prior to loan approval:

• Missing handrails (except for major stairways)
• Cracked windows 
• Minor plumbing rates
• Poor workmanship
• Defective floor coverings
• Permits for additions

Effectively FHA's appraisal guidelines are now very similar to Fannie and Freddie's. So bring on those FHA buyers.

Finally, where fairly major work is needed for a property before the homeowner is going to move in, we have the FHA 203(k) Rehabilitation loan. I will discuss this in more detail in another post, but this is going to be a very important program if we are going to be able to get buyers into homes which have been foreclosed on and damaged or stripped by the previous owners. 

Good luck out there everyone. Give me a call if I can do anything to help.

Recently a number of realtors and home builders I have been talking with have told me that they did not know there was a such thing as a VA Jumbo Loan. In fact, there may be some loan officers who don't know about it, and tell their borrowers that they have to take a straight jumbo loan if they are borrowing more than the $417k conforming limit. And that, to be frank, costs those borrowers money up front and in the long term.

WHAT'S WRONG WITH A STRAIGHT JUMBO? 

Absolutely nothing - if you want to finance more than $417k of the purchase price, and have no VA entitlement, you are going to be taking a stroll down Jumbo Street. Expect to put down at least 20%, up to 30% in distressed markets. And the rate you will pay will likely be between 1% and 1.5% higher than a standard conventional loan rate - today that means between 6% and 6.5%.

HOW DOES THE VA JUMBO LOAN DIFFER?

Let's look first at what the VA does. Essentially, it guarantee's the lender for 25% of the loan amount, to a limit of $417k. So if the lender loans $100k, and has to foreclose, and sells it for $75k, the lender doesn't take a loss. Instead the VA sends the lender $25k. And this is why lenders are willing to provide 100% financing to veterans - the higher risk is balanced out by the VA stopping them getting burned if the loan goes bad. 

Now, the VA isn't made of money, and doesn't like having to send out a check for much more than $100,000. So they only guarantee that 25% up to the $417k conforming limit. If a veteran wants to borrow more, they have to put down 25% of whatever they borrow over that limit. Now, this sounds like a lot, but lets look at an example.

Let's say our buyer wants to buy a property for $800,000. With a standard jumbo, he will put down 20% - $160,000 - and perhaps pay 6.25% - about $3950 per month. 

With the VA Jumbo, he has to put down 25% of what the VA doesn't guarantee - a down payment of $95,750. And at a rate of say 5.5%, he is paying $3999 per month (a little more because he has a higher loan balance.) Monthly costs are pretty close in this example - but our buyer has an extra $64,000 in the bank when he closes, i.e.. he put down 12% and not 20%. More money at a lower rate. Do you think we have a happy buyer?

Good luck out there everyone. If there is anything I can do to help, or even answer a question - drop me a line. The more knowledge we share as a group, the better service we can deliver to our clients.

This was such a valuable and important point from my colleague Jane Pettinnen here at Sunstreet Mortgage that I wanted to reblog it. Jane has been in the industry for 30 years (should I tell her I just turned thirty?) and is a font of knowledge on lending.