The Mortgage Scoop

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Will sales be crashing?  No.  Will rates be going through the roof?  No.  Will the tax credit disappear?  No.  So what could really be so bad you ask?  A change to a little something called Reg Z.

Reg Z (or Regulation Z to be more correct) is the part of banking law that requires lenders to give consumers things such as good faith estimates of closing costs and also the Truth-In-Lending form, which contains the APR (Annual Percentage Rate), one of the more confusing aspects of the mortgage world for consumers to understand.

In an overly simplified way, APR simply tells a consumer how much it’s going to cost them to borrow the money over time based on the loan’s interest rate and certain fees or closing costs.  The original intent was to create a formula that consumers could use to compare different loans where, for example, one had a lower interest rate and higher fees compared to a loan with a higher rate but lower fees. 

The theory behind it was fine when they created it, but for the numbers to work you must assume the borrower stays in the mortgage for all 30 years and never makes any extra or additional payments.  Well, the average loan lasts more like 5 years and many home owners in America want to pay their loan down earlier so they make extra payments.  Both of these factors are not taken into account in APR.

Anyway, that’s not the real issue to be concerned about right now.  What is troubling are the changes to this Reg Z that goes into effect on July 31.  Going forward from that day, lenders must disclose a final APR to a borrower 3 business days before closing–not too different from what the requirements are today–BUT, if the APR goes up or down more than 0.125% (also called 1/8%) the APR must be re-disclosed and the borrower’s loan can not close until 3 business days have passedsince the re-disclosure.

So, if something changes in the costs or interest rate of the loan, the closing must be pushed back.  The only exception is if a person would be losing their home to foreclosure because of the delay.  How likely is it for this size change to occur? 

The reason this is a problem is lenders are hard pressed to even get loans approved on time for closings.  This change will require them to be squared away 4 days before the closing was even supposed to happen.  Even if the lender does their part, the APR can’t be finalized until the title company does their job and issues the HUD-1 Settlement Statement.  Normally a simple thing.  But, in today’s world, if you are buying a bank owned home the bank often requires they approve the HUD before it can become final, and if they take too long to do this it will cause the numbers to shift and closing will be delayed.

Almost none of the mortgage companies I surveyed have done anything yet to prepare for this change, and it’s only a month away.  So that means it’s really likely that when these companies go to close loans in August they won’t have tightened up their systems enough to ensure the numbers won’t change too much.

How much do things have to change to push it pass the threshold?  Not much at all.  Here are 4 examples to show just how easy it is for the APR to move 0.125%.  The first 3 examples use the same basic scenario: $100,000 purchase price, with 20% down, so a loan amount of $80,000 on a 5.0% 30 year fixed rate. 

1. If the interest rate were to go down or up 0.125% because the rate had not been locked in yet, that would move the APR more that 0.13%–forcing the closing back 3 days (6 days if the disclosures are mailed rather than emailed or faxed).

2. Borrower comes up a little short on cash for their down payment and now would need a loan for $81,000.  This would also now require mortgage insurance since there is less than 20% down.  The APR just went up more than 0.14%, closing must be delayed.

3. Let’s say something goes wrong during the final walk through, and now the seller is going to pay $3,000 toward closing costs to make up for the problems.  This would drop the APR more than 0.15%, and would need to be re-disclosed and the closing date pushed back 3 days.

4. For this example we’re going to use an $80,000 price with 10% down, so a $72,000 fixed rate loan at 5.0% over thirty years.  If the seller was to contribute $2,400 (3%) toward closing costs, the APR drops 0.2% and now needs to be redone.  Or, maybe the lender made a mistake and they want to give a $1,000 credit toward closing costs for the borrower.  APR would drop 0.13% and now the closing would need to be delayed.

So, the real question is, how often does the APR change?  All the time.  It’s not uncommon that the final APR is being determined at the closing itself because finally everyone’s fees have to be in and no one can change them, not the mortgage company, the title company, and so on.  The practice of finalizing the APR at closing is no longer an option.

The worst part about these changes to Reg Z is that it will likely create some sort of “doom loop,” where one change causes the numbers to vary too much and then as the closing slides back a new change shows up pushing the closing “clock” back another 3 days and you could very quickly loose weeks over a few simple changes.

In the end, much of the disaster could be avoided if mortgage and title companies were more dead on accurate with their costs estimates.  But, everyone is understaffed because of the trying economic conditions, so errors are more likely to show up, especially when they are simple one because all of our time is focused on avoiding any major disaster.  But now, we have another major disaster to try and avoid.

Consider this another question to ask your potential lenders as you look for your mortgage.  What steps do you have in place to make sure my closing won’t be delayed because of an error in disclosing my APR?

June 28th, 2009 | Category: Industry News | Comments (1)

Would you know a good deal if you were staring at it?  Do you know how to avoid paying too much for a home, ruining this once in a lifetime opportunity for home buyers?  Want to know how you get a $25,000 interest free loan to help you fix up the house you’re going to buy?

Here’s your chance to learn from the expert.  Alec Grebis from the Minnesota Real Estate Show will reveal many of the insider tips and tricks you need to know to get the best deals possible for first time buyers in the Twin Cities.  Come learn by hearing his hilarious stories collected over his 15 years working with buyers.  The information will include many of the special down payment assistance programs that are now available to help you buy your first home.

You will also learn about a new program available to home buyers in the Twin Cities that helps you buy a bank owned home and get money to fix it up with very little down payment required.  This program is currently only available through Cornerstone Mortgage, so there is no other way to get it, and you can learn about it here.

We will debunk many of the myths about the $8,000 tax credit for first time buyers and show you how to get the money in your bank account still in 2009.   We’ll also show you why you won’t get to use that money for a down payment–even though it is now legal to do so.

Whether you haven’t started your home search or you’ve already been pounding the pavement you should attend this class.  Most people that attend who have already started the process are amazed to learn about how little their Realtor and mortgage company has told them about all the options that are available.

To register and for location information email agrebis@houseloan.com
Start Time: 6:30
Date: Thursday, July 23rd

June 20th, 2009 | Tags: classes, First Time Home Buyer, HOP | Category: First Time Home Buyer | Leave a comment

Here’s your chance to learn from the expert.  Alec Grebis from the Minnesota Real Estate Show will reveal many of the insider tips and tricks you need to know to get the best deals possible for first time buyers in the Twin Cities.  Come learn by hearing his hilarious stories collected over his 15 years working with buyers.  The information will include many of the special down payment assistance programs that are now available to help you buy your first home.

You will also learn about a new program that helps you buy a bank owned home and get money to fix it up with very little down payment required.  This program is exclusively available through Cornerstone Mortgage, so there is no other way to get it.

We will debunk many of the myths about the $8,000 tax credit for first time buyers, and show you how to get the money in your bank account still in 2009.

To register email agrebis@houseloan.com
Start Time: 6:30
Date: Thursday, June 18th

June 15th, 2009 | Tags: classes, First Time Home Buyer | Category: Uncategorized | Leave a comment

Foreclosure Remediation Buyer Assistance Program

Foreclosure has affected some suburban Ramsey County communities more than others. Federal Neighborhood Stabilization Program funds are being made available to strengthen neighborhoods where greater numbers of foreclosures have occurred. FirstHOME Buyer Assistance funds continue to be available to first-time buyers of suburban properties throughout Ramsey County.

Under the Ramsey County Opening Doors Program buyers may qualify for up to $10,000 in interest-free, deferred loan assistance based on the eligibility factors described below. Rehabilitation financing of up to $25,000 may also be available for properties that fail to meet housing quality standards at the time of purchase. Funds may be used only to purchase and/or rehabilitate foreclosed homes in the suburban Ramsey County target neighborhoods shown on the attached maps

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Opening Doors Purchase Assistance Eligibility Requirements

Income. Annual gross income may not exceed the limits established by the US Department of Housing and Urban Development. The limit is based on 120% of the median income for the Minneapolis/St. Paul SMSA by household size.  Buyers with incomes less than 80% of median may qualify for up to $20,000 in deferred loan financing through Ramsey County’s FirstHOME Buyer Assistance Program.

1 person - $67,950

2 person - $77,650

3 person - $87,350

4 person - $97,100

5 person - $104,850

6 person - $112,600

7 person - $120,400

8 person - $128,150

Employment.  Buyers are expected to have three years uninterrupted work history.

Property Requirements. 

·         The property must be a foreclosure; pre-foreclosure short sale properties are not eligible.

·         The property must be located in an approved target area.

·         The property must remain owner-occupied and the buyer’s principal place of residence.

·         Eligible properties include foreclosed residential units: single family homes, duplexes, and townhouses.

·         Property must meet housing quality standards (HQS) prior to occupancy. If the property requires rehabilitation to meet HQS, buyers may request up to $25,000 for property improvements.

·          Maximum Purchase Price is $$275,000.

·         The purchase price must be 15% less than the recent (within 60 days) appraised value of the property.

Mortgage Qualification. Borrowers must be able to qualify for VA, FHA, or Fannie Mae approved conventional mortgage financing as determined by the participating private lender. Buyers must contribute at least $2,000 to the purchase transaction. Buyers are expected to contribute at least 30% of monthly household income to ownership costs including principal, interest, taxes, insurance and/or association dues. Ramsey County will work with the buyer’s lender to finance the home.

Homebuyer Training. Buyers must successfully complete an approved homebuyer training program prior to closing the loan. Homeownership training schedules are available at www.hocmn.org.

June 12th, 2009 | Category: Loan Programs, Uncategorized | Leave a comment

I am a preferred lender for the new Saint Paul Heroes First-Time Home Buyers Loan Program that was created to honor those who dedicate their lives to serving the community. the Homes for Heroes program in St Paul, MN provides a loan up to $15,000 to purchase a home in Saint Paul that can be used toward downpayment and closing costs. 

Those eligible include:

Active Military, Active Reserve, National Guard or a Veteran-Qualified Active Duty Service personnel include the U.S. Armed Services or Reserve Forces. Qualified veterans include military members honorably discharged from any branch of the U.S. Armed Forces.

Firefighters, Emergency Medical Technicians or Paramedics – Sworn paid members of a fire department whose regular duties include fire suppression or prevention, emergency medical response, hazardous materials response.

Health Care Workers – Certified, accredited, or licensed health care workers who are employed full- time as a medical resident or fellow, dental hygienist, nurse, nursing assistant, pharmacist, pharmacy technician, physician’s assistant, medical technician, technologist, or therapist.

Police Officers – Individuals commissioned as a police officer by a federal, state, regional, county, or municipal or township government, or a public or private college or university; must be sworn to uphold, and make arrests for violations of the federal, state, regional, county, or municipal, or township law or respond to terrorism.

Teachers – Individuals employed full-time by an accredited or state recognized public school, private school, or federal, state, county, or municipal educational agency as a state-certified classroom teacher or administrator in grades K-12 or higher education.

Public Employees – Individuals employed full-time by a federal, state, regional, county, or municipal, or township government and postal workers.

 
Loans may be used toward:
    • Up to 50% of the required down payment fees 
    • Covering closing costs 
    • Lowering the principal of the mortgage

Terms of the loan: 
    • Zero percent interest 
    • No monthly payments 
    • Repayable at the time you sell your home 
    • Loan will be forgiven if borrower resides in the home for longer than 10 years

Eligible Borrowers and Income Limits: 
First-time Homebuyers who qualify or a fixed rate FHA, VA, RHS, Fannie Mae or Freddie Mac insured loan product through participating lenders in conjunction with the Take Credit!! Mortgage Credit Certificate program and have

Household income at or below the following: 

                                    1 - 2 Persons             3 - more persons
Non-Targeted Areas            $83,900                        $92,290
Targeted Areas                   $92,290                        $92,290

June 11th, 2009 | Category: First Time Home Buyer, Loan Programs | Comments (1)

One of the biggest mistakes people make in preparing to buy their first home is choosing to not have a professional Realtor help them. I see this mistake made way too often and there’s no reason for it to happen. There is no better way to mess up buying a home than to have a real estate agent involved who doesn’t know what they are doing. The only thing worse for a buyer not having a Realtor at all, is to make the mistake of having a Realtor who’s only looking out for the seller’s best interests and not yours.

Many first time home buyers come to me with the idea that if they don’t “hire” their own Realtor they can save money. After all, it’s become pretty easy to search the internet for homes you might want to buy, so why pay someone to do this for you? Not only does a buyer not pay a Realtor directly to help them buy a home, but a talented Buyer’s Agent should be able to save you money through their negotiating skills and ability to help you determine the real value of home so you don’t overpay.

Let’s start by covering the misconception that a buyer has to pay money to have a real estate agent help you find a home. Here’s an example of how it usually works:

Sam the Seller wants to sell his home, and he wants to hire a Realtor to help get his home sold, so he hires Larry the Listing Agent. Sam agrees to pay Larry 6% of the sales price of his home for Larry’s help. Larry could try to sell the home himself and keep all 6%. But, he knows that it’s in Sam’s best interest to let as many potential buyers know about the home as possible. So Larry puts the home on the MLS (Multiple-Listing Service) which is the massive computer database that Realtors search daily looking for homes for their clients. As part of putting the home on the MLS, Larry lets all the other Realtors know that if they find the buyer for Sam’s home, Larry will share the commission with them that Sam has agreed to pay him. This allows buyers to have Realtors help them find homes without having to pay out any of their own money. This is especially important today when most first time home buyers don’t even have the money for a down payment or closing costs.

So, if the buyer’s Realtor is getting some of the money Sam has agreed to pay Larry, are they really working for Sam the Seller also? The answer is: it depends.

There are 5 types of relationships (called Agency) Realtors can have with clients, but only one these requires a Realtor to look out for the buyers best interests. This is called a Buyer’s Agent. The seller will likely have a Realtor to help them negotiate the best sales price for them. You should have someone to help you negotiate the best buying price and terms of your home. You need to hire a Buyer’s Agent.

When it comes to negotiating the purchase of your home, there are many important factors that go into your offer beyond the price you are willing to pay. Sometimes these factors can even outweigh the price. I have had clients get the home they want even though they offered less than other buyers when the sellers are presented with multiple offers to choose from. A talented Realtor is going to help you recognize how to make the strongest offer possible—without over paying for the home.

How do you know how much to offer the seller for their home? The price the seller is asking for was likely recommended by their Realtor based on what other people are trying to sell similar homes for. What other people want for their homes doesn’t matter. What matters is what the home is really worth. A Buyer’s Agent has much better access to finding out the true price homes have sold for—which is what you really want to know, because that helps you determine the real value of the home. There are few mistakes worse than overpaying for a home, because when it comes time to sell this home you will never be able to fully recover this financial mistake.

As painful as paying too much for a home can be, an even worse nightmare can be buying a home that has problems you never even knew about. Realtors look at hundreds, sometimes thousands, of homes a year. They know where to look for potential trouble spots. As important, they know other professionals (such as home inspectors) to bring in and help ensure that there aren’t problems with the home.

A quality Realtor will be able to help you find a home, determine if that home is suitable for your needs and negotiate the best terms for you to buy that home. The final piece they provide is helping guide you through the process through the closing. Almost every transaction runs into at least one potential snag, it’s the ability of the professionals involved that make the issue a mountain or a mole hill. Would you rather have someone with the experience to solve problems working for you, or are you willing to risk being out maneuvered by the Seller’s Realtor?

If you were starting a rock band, would you hire an experienced musician or your buddy that is a stud at Guitar Hero and air guitar contests?  Of course you want the real thing, not just someone who likes to pretend they know what the professionals know. Having a professional Buyer’s Agent is one of the most important steps you can take to make the home buying process both enjoyable, and financially rewarding.

Alec Grebis has been a mortgage loan originator since 1995. At Cornerstone Mortgage he specializes in working with first time home buyers to find unique programs that save money. He is a preferred lender for the Minnesota Real Estate Show on KTLK—100.3 FM, has authored over 20 articles on home buying and has presented over 323 home buying seminars.

June 10th, 2009 | Tags: First Time Home Buyer, realtor | Category: Buyer Info, First Time Home Buyer | Leave a comment

Buying a home is obviously a huge decision. Amazingly, most people don’t spend much time educating themselves on the home buying process. Instead, they rely on advice from friends, family, co-workers or the first Realtor they meet at an open house. While these may be good places to get information from, the best way to learn is from real estate professionals that deserve your trust—because they earn it by sharing with you what you need to do—whether you work with them or not.

These 7 steps were designed to help you be a smarter buyer as you begin your home search. It’s based on the first time home buying seminars I’ve taught over the past ten years and with input from my past clients and from top Realtors in Minnesota.

1) Pick a team of real estate professionals who will take the time to help you learn what you need to know about buying a home. You should expect to work with both a Realtor and a mortgage lender who want to understand your needs and goals. You can then work with them to develop a home buying strategy which allows you to meet your goals in terms of both affordable monthly payments and quality of home.

2) Learn the different financing options. There are many new mortgage loan programs available today that didn’t exist even two years ago. There are loans that let you buy a home with little or no down payment, loans that have extra benefits such as down payment and even monthly payment assistance. There are even loans that have reduced mortgage insurance costs. Learning which options are available will allow you to buy your home with more confidence and much less stress.

3) Get pre-approved for a mortgage. Whether the real estate market is hot or slow, sellers will accept an offer from a pre-approved buyer over any other offer. Getting pre-approved means you meet with a mortgage lender, review your credit and supply them with all information they need such as income and asset documents (think paystubs and bank statements). The mortgage lender will then work with an underwriter to approve you for a mortgage up to a certain loan amount—this will give you your spending limit for your new home.

4) Create both a wish list and a reality list of what you want in a home. Everyone has a wish list of what they want in a home. The home of their dreams. But, you probably can’t get all of those features in a home you are qualified to buy. After you learn how much you can spend on a home, you should go back through your wish list, and decide which of those items are most important to you—things that you must have to be willing to move, and which things you can live without. This will give you a reality list. By trying to find a home in your reality list, you will be less frustrated by what you can’t have, and happier knowing what you can get.

5) Decide how long you might live in your new home. While you will never know for certain how long you may live there, having an idea of how long it might be is important. If it will only be for 5 to 7 years (which is the national average) you should consider certain loan programs that will benefit you for in the short run. For example, some ARMs will start with a fixed rate for 3-7 years before their rates can change, and these loans will have lower interest rates for than standard fixed rate loans. Also, if you will only be in the home a short while, it’s very important to consider how easy it will be to re-sell your home. The advice of your Realtor is very important here. Otherwise you could end up in a home which no longer meets your needs, but stuck because it is too tough to sell it again at a good price.

6) Be flexible and keep it simple. Being willing to work with the seller of a home, makes you a much more attractive buyer. For example, being willing to work with them on when you close can make a huge difference. Also, if you are willing to be less nit-picky about minor details, you will seem to be easier to work with. This may make someone more willing to sell the home to you instead of someone you could be competing against to buy the home.

7) There is always another home that will meet your needs. You may not get the first several homes you want to buy. Someone else might win out if you are competing to buy the home. That’s okay. Just remember, there will always be another home that will meet your needs. At the same time, when you see that perfect home, be ready to act fast. Dawdling over your offer could give someone else the time to come in and steal the home away from you. This is still true even if you’re in a “Buyer’s Market.”

These seven tips will be very important to you when it comes time to be ready to buy your home. Doing some homework ahead of time will help you enjoy the experience much more. Many people say that buying a home is the biggest decision in most people’s lives. In reality, the biggest decision you make will be your mortgage. Over a thirty year mortgage you will spend about three times as much on your mortgage as you will spend on the purchase price of your home. Do yourself a service and take the time to properly prepare for your purchase and your mortgage.

Alec Grebis has been working with first time buyers in the Twin Cities since 1995. At Cornerstone Mortgage he specializes in working with first time home buyers to find unique programs that save money. He is a preferred lender for the Minnesota Real Estate Show on KTLK—100.3 FM, has authored over 20 articles on home buying and has presented over 323 home buying seminars.

June 9th, 2009 | Tags: First Time Home Buyer | Category: Buyer Info, First Time Home Buyer | Leave a comment

Trying to decide which mortgage company you should start with to guide you down the path to owning your first home? Here are eleven basic questions that will help you clear away the companies you don’t want to go near.

1. Do you offer FHA loans?
2. Do you offer CASA loans?
3. What special loan programs do you offer first-time home buyers?
4. What rehab loans do you have for first time buyers?
5. Do you offer face-to-face appointments?
6. Do you offer evening appointments?
7. Do you offer a closing cost guarantee?
8. Do you have in-house underwriting or do you need to send loans out for final approval?
9. Do you fund your own loans or do you have to rely on other lenders to get the money?
10. Where can I read articles you have written, or materials you have created?
11. What makes Interest Rates change?

1. Do you offer FHA loans?

You do not want to buy your first home without having a FHA loan as an option for you to choose. FHA loans currently require the smallest down payment options available to most buyers (VA loans are the only zero down loans left, but are only available to Military Veterans). Currently the minimum down payment required is 3.5%. So, on a $100,000 home you would need $3,500 for your down payment. FHA loans also offer more credit flexibility than Conventional loans (the other option besides VA) with lower credit score requirements and more willing to approve buyers with past credit issues if the past 12 months have been good.

2. Do you offer CASA loans?

You know those “special” first time home buyer programs you hear about but seem harder to find than the Loch Ness Monster? Well, the CASA loan through Minnesota Housing is the probably the best of them all. It usually has a lower interest rate, and offers down payment assistance and some buyers even qualify for monthly payment assistance! Someone using the CASA loan that qualifies for all levels of assistance normally can buy about $30,000 more home for the same monthly payment buyers using “normal” loans can. Who wouldn’t want more home for less money? This is the best way to get it.

3. What special loan programs do you offer first-time home buyers?

Doesn’t everyone deserve the special treatment at some point? Well, when buying your first home it’s easier to get it than for any other home you will ever buy. There is the CASA loan, but there are so many other options as well. If you are a first time home buyer and make less than $85,000 then you likely qualify for at least one of these programs. If you are buying a home in the city limits of Minneapolis or St. Paul you might get a City Living loan that has grant money for down payments (these programs are currently out of money, but have been replaced by other programs that can help such as the Take Credit program). There are even specific programs for neighborhoods, like the Folwell neighborhood in Minneapolis where you can get $4,000 for down payment and closing costs. Looking for a more suburban life? There are special loan programs in Dakota County, Scott County, Washington County, Ramsey County, Anoka County and more.

4. What rehab loans do you have for first time buyers?

Most of the homes first time buyers are getting are bank owned properties. Let’s face it, many of these homes have been neglected, beat up or straight up trashed. But, almost all of them would be a great place with $10-20,000 of money to fix it up. But, almost no one has that kind of cash. So, skip right to using the “Easy Button” with either the HOP loan or an FHA 203k loan, giving you enough money to buy a home and fix it up all at one great interest rate. Oh yeah, did I mention you still only need 3.5% down to use that loan. Almost all first time buyers should have this program as at least an option for them to fall back on.

5. Do you offer face-to-face appointments?

The only time you might feel more confused in your life than when you buy your first home is when you bring your first child home from the hospital. Just like you want highly skilled professionals to meet with and prepare you for parenthood (and child birth), you should want the chance for a face-to-face consultation to prepare you for buying a home. After all, it will be the first major financial decision of your life.

6. Do you offer evening appointments?

Bankers like to work during the day. Most people’s jobs like them to work during the day too. So, wouldn’t it be nice to not have to take time off from work to meet with your mortgage person? The nice thing about an evening appointment is you don’t have to give up any of your weekend for the only other alternative to meeting during “bankers’ hours.”

7. Do you offer a closing cost guarantee?

Surprises on the day of closing on the purchase of your home are not fun. They really aren’t fun when they result in you needing more money then you expected. They are down right maddening if the reason why you need more money is your mortgage company decided to jack up the fees they’re charging you to get a loan from them. Make sure your lender promises to guarantee their costs won’t go up on you.

8. Do you have in-house underwriting or do you need to send loans out for final approval?

The Underwriter is the person who says “yes, no or maybe” to your loan approval. Would you prefer to know that your mortgage person can walk down the hall and talk with them if there is a problem, or wait and hope to hear from some faceless person hundreds or thousands of miles away? Right—which is why you want to make sure they have “in-house underwriting.”

9. Do you fund your own loans or do you have to rely on other lenders to get the money?

Just like you want the person who controls the fate of your mortgage approval under the same roof as the person working on your loan for you—you want that lender to have control over whether or not the money for your mortgage actually gets to closing on time. This is one of the risks in dealing with a mortgage broker—many of them don’t have direct control over getting the funds to the closing.

10. Where can I read articles you have written, or materials you have created?

The mortgage guy (or gal) is telling you he really knows what he’s doing, but how can you be sure? One great way to do that is find out if he or she has any published articles or other materials they have created. They may have slick looking stuff created by some marketing department somewhere, but that doesn’t tell you squat about what they themselves actually know and can communicate.

11. What makes Interest Rates change?

Most mortgage people honestly don’t know much if anything about causes mortgage rates to change. Ask the person you are talking to what makes them change. If their answer has anything to do with the “10 year Treasury Bond” or the “Federal Reserve” go ahead and hang up the phone. They don’t have a clue.  If they talk about Mortgage Back Securities, blah blah blah, then they actually probably know something (here’s an article to help you understand it better).

Alec Grebis has been helping Minnesotans buy their first home since 1995.  He specializes in the unique loan programs and assistance available through various government and non-profit agencies.  You can listen to him on the Minnesota Real Estate Show on 100.3 KTLK FM.

June 9th, 2009 | Category: First Time Home Buyer | Leave a comment

When I take a phone call about mortgages in my Twin Cities office I know I am talking to a first time home buyer when they start with the following kind of statement:

“I want to get a zero down loan to buy a $250,000 house with a total monthly payment of $1,200.”

This is essentially impossible to do (even when there were zero down loans).  The reason why is simply math, but most people don’t understand the equation.  Your monthly payment is made up of PITI (Principle and Interest, Taxes and Insurance).  But, more importantly in the above scenario, is to understand what creates the Principle and Interest number.

Principle and Interest payments are a combination of the following: the size or amount of mortgage, the interest rate and the length of time you are taking the loan for, such as 30 years (the amortization period).  Because the loan is being amortized over a period of time and you need to pay back both principle and interest it is not a simple formula–unless you have the payment factors in some sort of table or chart.

For example, if you were getting a 30 year fixed rate loan at 6.0%, the payment factor is 5.99, let’s round it up to 6 to keep it simple.  This means every $1,000 you borrow at these terms will cost you $6.00 a month.

In this case, if the $1,200 payment the caller wanted was just to cover the Principle and Interest on the loan that would equal $200,000 using the $6 per $1,000 rule of thumb.  The only then to get the $1,200 to equal a $250,000 loan would be to either a lower interest or a mortgage for a longer period of time such as the 40 year loans that were popular several years ago (and not really available any more).

Since mortgage companies have to work with the interest rates the marketplace makes available, it is impossible for us to simply “make” a $1,200 payment equal a $250,000 mortgage unless the rates were already low enough for that to happen.  So, if we can’t force the payment to equal a loan amount what else could happen to make this payment possible and still let you buy that purchase price? 

The only way to do that is to make up the difference with a larger down payment.  You could buy a $250,000 home and have a $1,200 principle and interest payment if rates were 6% on a 30 year mortgage.  But, the only way for that to happen would be to come up with a $50,000 down payment to add to the $200,000 mortgage you would get out of a $1,200 payment at those terms.

In other words the following things combine to determine the payment and purchase price:

• interest rate
• length of mortgage
• down payment

and they are all tied together.  So the only way to increase the amount you could buy would be either coming up with a larger down payment or be willing to take on a higher monthly payment.  Often the issue comes down to the cliche of “Champagne taste on a beer budget.”

In reality, the best approach is to determine how much of a monthly payment you can afford.  Then have a mortgage professional translate that into a mortgage amount (and a purchase price based on the down payment available).  Then you need to work to find the best home you can get based on those terms.  You will also need to factor in how much of your payment will get eaten up by property taxes, home owners insurance and mortgage insurance.  Your mortgage pro can help you with that too.

There just isn’t a magic wand that can pull all the pieces together, the numbers have to be based on reality.  Just a few years it seemed like everything was based on fantasy, and look at the mess that created.

June 9th, 2009 | Category: Buyer Info | Leave a comment