I’d like to thank Kristen Emery at Princeton Capital in Palo Alto for providing me with the first bit of information that actually explains what the changes to conforming loans will mean to someone in Silicon Valley trying to buy a home.

A little light reading for you:

We have seen a whirlwind of legislative activity these past few weeks! There is much confusion surrounding the recentlypassed Economic Stimulus Package and higher loan limits. Unfortunately, the new law can be confusing to decipher, andnot everyone will benefit. For this reason, we have provided an outline below that clarifies what this new law means for youand how you can benefit from the higher loan limits. 

Description and Overview:An economic stimulus package just passed Congress on February 7, 2008 and was signed into law by the President onFebruary 13, 2008. This new law is effective immediately and includes a temporary increase in both the FHA andconforming loan limits to as high as $729,750 in high cost areas. This means that the interest rates on many mortgages willgo down because these loans are now eligible to be purchased by Fannie Mae and Freddie Mac or insured by the FederalHousing Administration (FHA). Previously, the FHA was only allowed to insure loans with balances lower than $200,160 -$362,790, depending on the county where the property was located. Also, Fannie Mae and Freddie Mac were only allowedto purchase loans with balances at or below $417,000. This resulted in limited options and higher financing costs for thosewith loan balances above these limits. The new law substantially increases these limits in high cost areas and opens upnew options and lower financing costs for many people. 

How to Determine “High Cost” AreasThere are two things you must know in order to determine if you are in a high cost area: 

1. Understanding the Formula

If 125% of the local area median home price exceeds $417,000, the temporary loan limitwould be that 125% of the median home price with a cap of $729,750. Here are threeexamples to illustrate this concept: If the median home price in your area is $375,000, 125% of that number is$468,750. Thisis above the current $417k conforming loan limit. Therefore, the conforming loan limit inyour area WILL change and go up to $468,750. This number is also higher than thehighest FHA loan limits, so therefore your FHA loan limit will also go up to $468,750. If the median home price in your area is $650,000, 125% of that number is $812,500.This number is greater than the maximum cap of $729,250. Therefore, the conforming loan limit in your area willincrease to highest allowable amount under this new law which is $729,250. (Our median home price is $612,000 for Santa Clara County). 

2. Determining the Median Home Price in Your Area

The Secretary of Housing and Urban Development (HUD) will publish the median house prices within 30 days of the billgoing into effect (30 days from February 13, 2008). HUD does not have any interim stats or information for us to use. However, the bill also states that HUD can use any commercially available data if they are unable to compile theinformation on their own within the 30 day timeframe. With that in mind, it is likely that HUD’s numbers will be relativelyconsistent with the data published by the National Association of Realtors (NAR), which already has a solid track record oftracking and publishing this information on a quarterly basis. Therefore, until HUD actually publishes their version of the median home prices, the most accurate way to get thisinformation today is to utilize the data that is published by NAR. Ironically, NAR just released their latest median homeprice update for the 4th quarter of 2007 on February 14, 2008! Contact me today and I’ll research your info and let youknow exactly what the median home price is in your area and how you can benefit from this information. 

What do all the dates mean?

There is some confusion because the bill has a provision that says the higher limits areonly effective for loans originated between July 1, 2007 and December 31, 2008. Inshort, the reason it is effective beginning July 1, 2007, is because the credit crisis startedto unfold in July and August of 2007. Mortgage market conditions rapidly deterioratedalmost overnight. Many secondary market investors suddenly refused to purchase loansthat couldn’t be sold to Fannie Mae and Freddie Mac. (For more info on how this processworks, please see the article entitled Saga of the US Mortgage Industry.) Unfortunately, many mortgage banks had already funded these loans in their ownportfolio or through their warehouse lines of credit. Their intention was obviously to sellthese loans on the secondary market after the loans were funded. However, the creditcrisis prevented them from doing so, and they were stuck holding these loans in theirportfolio. The July 1, 2007 date in the bill is designed to allow these lenders to unloadthese mortgages and sell them on the secondary market to Fannie Mae and Freddie Mac. 

However, the July 1, 2007 date has no bearing whatsoever on new refinance transactions!

In other words, it doesn’tmatter when the loan you are refinancing was originated. The old loan could have been originated in 2005, 2006 oranytime before or after July 1, 2007 and it would have no effect whatsoever on your current purchase or refinancetransaction.

If you are refinancing a new loan today, whether it is a purchase or refinance transaction, that loan issubject to the new limits set forth in the bill. 

The other date of December 31, 2008 means that the old limits will go back into effect after this year. In other words, now isthe perfect time to buy a new home or refinance your mortgage because after this year, your costs will be higher and youroptions more limited again. 

When does this all go into effect?

February 13, 2008 – immediately upon the President’s signature. Therefore, HUD is obligated to publish the median homeprices within 30 days of that date. However, Fannie Mae, Freddie Mac, and various wholesale lenders may have different policies as to how these new loans are going to be priced and underwritten.

 - - - Information provided by:

Kristen Emery

Princeton Capital

Tags: 2008 real estate market, 4---mortgage-mania, Conforming Loans, first-time buyer, Mortgage, Mortgage Forgiveness Debt Relief Act of 2007

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Yikes! What do all these acronyms mean, and which one is the best type of financing for your? For most homebuyers (and their realtors), they don’t care how the loan gets done, they just want it done – with as little work and hassle as possible. Behind the scenes, lenders are actually getting very creative in the types of documentation programs that they require (or waive). Some of these variants may make a difference on the pricing, speed and riskiness of the transaction, so it’s a good idea for all parties to become at least a little bit familiar with these strange acronyms.

GLOSSARY:

FD – Full documentation. The crème-de-la-crème of real estate financing, and the most traditional documentation type. Borrower provides full income documentation (2 pay stubs, 2 W2s or 2 years tax forms for all borrowers) and full asset documentation (2 months full statements of all accounts used to qualify assets). Traditionally this is the documentation format with the best pricing.

Minimum/Reduced Documentation types:

SIVA – Stated income verified assets. This has become one of the most popular documentation formats, especially in cases where a fast escrow is needed. Borrower states his/her income but does not have to provide any documentation. Asset document is still needed, but only to show a set amount of reserves. This format is popular among hi-tech executives because of the variable components of their income – bonus, patent pay, ESPP, stock pay, etc. – most of which are highly variable and changes each year, so it’s difficult to document it without inviting unnecessary underwriter scrutiny. While it is technically one step down from FD, most A paper lenders have exceptions where if the borrower’s credit score is high enough, they will accept SIVA documentation and still offer FD pricing. Hey, you CAN have your cake and eat it too!

SISA – Stated income stated assets. You guessed it, in this format, the borrower simply states the income and asset on the loan application, and off it goes. No documentation needed! This makes everyone’s job easy – borrowers, agents, brokers, lenders. Again, this type of reduced documentation usually comes at a slight rate penalty, but with a high enough credit score, I have a number of lenders who can and will waive these penalties. So, for someone with good credit, they can zip through the entire loan process with a SISA submission, and still get the lowest rates on the market. The only thing to be careful about is that SISA guidelines are more conservative when it comes to the amount of money that you can borrow. So, as you approach the higher purchase price (over $1M), super-jumbo loans (loan amounts >$1M) and/or high CLTV (combined loan-to-value of over 85%), SISA loan types may place limitations that FD loan types don’t have.

NR – No Ratio. This reduced documentation type actually fits between SIVA and SIVA. In this program, you don’t provide any income information; you don’t even state a number on the loan application. However, you do provide asset documentation. As you know, in the loan business, cash is king. So, if you have good credit and enough reserves in the bank, underwriters may not care what your income is. So, instead of exaggerating and trying to state an income that is simply not true, it is much safer to go the route of No Ratio. In fact, stated income have been so abused by so many brokers that lenders are cracking down on stated loans and starting to look carefully at the income stated and job type. They will do a sanity check and if the numbers don’t make sense, the loan WILL NOT GO THROUGH. No Ratio is becoming popular because it allows the real estate team to close a transaction as fast as a stated loan, without the increasing risk with the underwriters. Even though the borrower normally has to a pay a small premium for a No Ratio loan, this is a small price to pay when compared to fraud and the risk of losing the escrow deposit when the loan doesn’t come through under another program type. Make sure you discuss with your financing advisor the pros/cons of using stated vs. no ratio on your loan program. As a realtor, you should also be sure that your financing partner is up to speed on the recent mortgage market developments, and not prone to forcing a loan through a stated program where it will ultimately fail and result in avoidable risk and agony to your hard-won transaction!

No Documentation Types:

NINA – No Income No Asset. In this documentation type, borrower provides no documentation, and leaves the income and asset sections blank on the loan application. In other words, borrower discloses absolutely no information about himself/herself except for his/her credit history. The one thing that lenders will verify verbally is employment. They will call the company if the borrower is a W2 employee, and will require a CPA letter if the borrower has been a self-employed individual for at least two years. Other than this, the entire loan decision is made on credit-worthiness. Obviously, pricing will be quite a bit higher than FD or the stated programs. Again, cash is king; so if you are putting enough money down, say at least 35-40% down payment, then your pricing would likely be similar to a FD loan!

ND – No Documentation, or No Income No Asset No Employment. This loan type is generally geared towards retired individuals, or borrowers in between jobs, or just starting out on their own business. Nothing is provided and nothing is considered by the lender except for the credit report. Normally, there is a ceiling on how high the loan amount can go, and how high the LTV (loan-to-value) can be, as these types of loans are perceived to be most risky for the lender. This generally will require a healthy down payment to ensure that the borrower has enough equity at stake and most likely will not default on the loan.

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Now, you ready for the quiz? In reality, the only person who needs to know all these formats cold is the mortgage specialist. A good mortgage specialist will know exactly which format, or formats, would best fit his/her client’s situation right after the initial discovery interview. S/he will use this information to help guide the pricing and initial preapproval process, and guide his/her clients to prepare the proper documentations on time. Neither the client nor the agent really need to know about the various loan types. What they need to be sure is that they have a mortgage specialist knowledgeable of all of the new and old documentation types so that the loan can be packaged in a way for minimum underwriting risk and maximum speed to close. Also, if you are an agent who tends to work with busy executives, or families with small children, it also helps to work with a mortgage specialist who is experienced enough to obtain a SIVA or SISA approvals without any pricing penalties to save your clients valuable time – who wants to spend time collecting statements and other documentation when they could be shopping for their next house?

Tags: Buyer and seller tips, Documentation, Financing-Process, For buyers, Full Documentation (FD), Loan-Application, Mortgages, No Documentation (ND), No Income No Assets (NINA), No Ratio (NR), Preapproval, Real estate, Stated Income Stated Assets (SISA), Stated Income Verified Assets (SIVA)

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Well, nowadays, and at least in the Bay Area, that is no longer the question. Bay Area buyers have become accustomed to hearing agents, and their friends, emphasize the importance of being “preapproved”. But like many overused and underexplained topic, few people actually fully understand the power of a properly executed preapproval, and how to distinguish it from its more commonplace cousin, a prequalification.

If you are in the market for to buy a home, especially in some of the more competitive neighborhoods of the Bay Area (such as Palo Alto, Menlo Park, Los Altos, Mountain View and San Carlos), your agent – if he or she is any good – will ask you to meet with a qualified mortgage advisor as soon as possible to get prequalified or preapproved. This will serve two main purposes: 1) the agent will be able to serve you best by understanding the range of your affordability and not waste anyone’s time, and 2) you will be able to focus your search on what you know you can comfortably afford and not fall in love with something that was not meant to be. The purpose of the initial meeting with the mortgage specialist is to get “prequalified”; however, you can also get preapproved at the same time. So what’s the difference, and who cares?

Prequalified means that the mortgage specialist has taken a detailed discovery interview of your financial and credit background, along with your housing goals. Based on the information collected, s/he should be able to make a professional decision (based on his/her years of experience and the guidelines published by the lenders) whether or not you are “qualified” to get a loan and approximately how much you can qualify for. Let me stress that this is a decision that the mortgage specialist will make, NOT the person/organization who will ultimately lend you the money. Needless to say, the prequalification has the following weaknesses:

- There is no assurance whether you will actually get a loan or not

Preapproval, when done properly, is much more powerful. It is a prequalification taken to the next step. Preapprovals can take 2 forms:

CONFORMING LOANS ($417K and under)
For conforming loan amounts, the mortgage specialist can actually upload your file information into one of two national approval engines (Fannie Mae or Freddie Mac sponsored), and within minutes, obtain a printed formal approval of your loan amount and any pertaining conditions. This approval, because it is governed by a set of approval criteria that is universally accepted by all lenders, can then be submitted along with the hardcopy of your loan file to your lender of choice. That lender’s underwriting department will in turn accept and adopt the findings generated by this online engine. Hence, once you received an from this online engine, you can be fully confident that your loan is essentially approved. The reason that mortgage specialist don’t automatically do this is because (sadly) most people in the industry are not properly trained financial advisors and simply don’t know how to use this application, or are not even aware of it! Those who are aware are often deterred by the extra work and/or upfront cost, and so simply downgrade their clients’ to a “prequalification,” assuming that they won’t know the difference anyways.

NON-CONFIRMING (AKA JUMBO) LOANS (Over $417K)

For Jumbo (non-confirming) loans, preapprovals are a bit more complicated, and controversial. Since the national (Fannie Mae or Freddie Mac) engines that are uniformly accepted by all the lenders approve up to $417K – the conforming loan amount limit – many loan agents simply treat jumbo loan preapprovals like prequalifications. That is to say, they use their judgement to see whether a loan would be approved. In most cases, and especially if the agent is seasoned and dependable, the preapproval will not be at risk. But, if time permits and the agent has access to underwriters, it is always safer to discuss the actual loan package with a specific underwriter and obtain a verbal approval. In this case, the loan is not only in good shape according to the agent, but actually considered “approved” according to the person who would ultimately be granting the funds. This “preapproval” is very important – basically, as long as the borrowers can subsequently provide the required documentation (according to loan type) to support what was disclosed to the underwriter, than the written approval would be provided almost immediately upon submission.

Preapprovals, when executed properly, provide buyers with peace of mind when they need to go in with an aggressive offer, such as bypassing finance contingencies. If a loan is preapproved, either through the automated engine or verbally with an underwriter, buyers can be assured that their financing is confirmed within the payment terms of their comfort level, subject to slight market movements prior to locking a loan. However, if a preapproval was not done properly, and the buyers waived finance contingencies, they could be in a sticky situation. I have inherited many clients who have learned this lesson the hard way, having had to back out of a beloved house they won through multiple offers due to a prequalification error, and risking their deposit in the process.
Lastly, while it’s a hard sell, what people don’t realize is that a strong preapproval from a reputable mortgage specialist should placed the buyers in a more desirable position than even a 100% cash buyer. The sellers have no control over what a cash buyer will do with their money between offer acceptance and close of escrow. While not probable, it is possible that the purchase money could go down the drain through a big Vegas visit, or disappear through a bad stock day. Conversely, if the bulk of purchase money is coming from a reputable lender, and the lender has already preapproved, then sellers can have the comfort of knowing that the money is not going anywhere and not accessible to the buyers for any purpose except to buy the house. As a seller, I would much rather to see a strong preapproval than an all cash buyer.

SUMMARY:

- Make sure you know whether you are getting a prequalification or a preapproval (hint, latter is better!) If the person you’re speaking to can’t explain the difference to you – SWITCH!

- If you are getting a preapproval, ask which lenders you have been preapproved with (and why those were chosen)

- Before you waive finance contingencies, make sure that the person doing your preapproval has verified your credit, your cash reserves, and your household income

Tags: Financing-Process, For buyers, Good realtors, Home buying, Loan Application, Menlo Park, Mortgages, Mountain View, Multiple offers, Palo Alto, Preapproval, Prequalification, Real estate, Willows

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