What in the world is PMI?  

I’m certain you’ve heard of TMI, but do you know what PMI is?  Here in the real estate world, there is no such thing as “too much information” about “private mortgage insurance!”  Have you ever wondered how PMI will influence you?  If you are thinking about purchasing a home, these issues are important.  Take a few minutes and read this excerpt from Wikipedia and hopefully you will learn a thing or two!    

The annual cost of PMI varies and is expressed in terms of the total loan value in most cases, depending on the loan term, loan type, proportion of the total home value that is financed, the coverage amount, and the frequency of premium payments (monthly, annual, or single). The PMI may be payable up front, or it may be capitalized onto the loan in the case of single premium product. 

This type of insurance is usually only required if the down payment is 20% or less of the sales price or appraised value (in other words, if the loan-to-value ratio (LTV) is 80% or more). Once the principal is reduced to 80% of value, the PMI is often no longer required. This can occur via the principal being paid down, via home value appreciation, or both. The effective interest savings from paying off PMI can be substantial.  

 In the case of lender-paid MI, the term of the policy can vary based upon the type of coverage provided (either primary insurance, or some sort of pool insurance policy). Borrowers typically have no knowledge of any lender-paid MI, in fact most "No MI Required" loans actually have lender-paid MI, which is funded through a higher interest rate that the borrower pays.

Sometimes lenders will require that LMI be paid for a fixed period (for example, 2 or 3 years), even if the principal reaches 80% sooner than that. Legally, there is no obligation to allow the cancellation of MI until the loan has amortized to a 78% LTV ratio (based on the original purchase price). The cancellation request must come from the Servicer of the mortgage to the PMI company who issued the insurance. Often the Servicer will require a new appraisal to determine the LTV. 

The cost of mortgage insurance varies considerably based on several factors which include: loan amount, LTV, occupancy (primary, second home, investment property), documentation provided at loan origination, and most of all, credit score.
If borrowers have less than the 20% down payment needed to avoid a mortgage insurance requirement, they might be able to make use of a second mortgage (sometimes referred to as a "piggy-back loan") to make up the difference.   

Two popular versions of this lending technique are the so-called 80/10/10 and 80/15/5 arrangements. Both involve obtaining a primary mortgage for 80% LTV. An 80/10/10 program uses a 10% LTV second mortgage with a 10% down payment, and an 80/15/5 program uses a 15% LTV second mortgage with a 5% down payment. Other combinations of second mortgage and down payment amounts might also be available. 

One advantage of using these arrangements is that under United States tax law, mortgage interest payments may be deductible on the borrower's income taxes, whereas mortgage insurance premiums were not until 2007. In some situations, the all-in cost of borrowing may be cheaper using a piggy-back than by going with a single loan that includes borrower-paid or lender-paid mortgage insurance.

What is a Foreclosure?

In real estate today, especially when searching for that perfect home, you may come across a foreclosed home.  Simply put, foreclosure is the process by which a homeowner’s rights to a property are forfeited due to their failure to pay their mortgage. 

If the home owner cannot pay the outstanding debt or sell it via short sale (see previous blog post from August 12^th to learn more about short sales), the property then goes to a foreclosure auction.  If the property does not sell at the foreclosure auction, it becomes the property of the lending institution that granted the original mortgage on that property.

It helps to remember that the word “homeowner” in this case is actually a misnomer – they are actually borrowers. When someone buys a home, they sign papers – one of which is the mortgage, or deed of trust. This document puts a lien on the purchased property, making the loan a “secured loan.”

When a lender loans you money without any collateral (credit card debt, for instance), the lender can take you to court for failure to pay.  However, it can be very hard to collect money from you. Lenders often sell this sort of debt to outside collection agencies for pennies on the dollar and write off the loss. This is considered an “unsecured loan.”

A secured loan is different because, although the lender may take a loss on the loan if you default, it will recover a larger portion of the debt by seizing and selling your property (that was put up as collateral).

Here are the five stages of foreclosure:

Stage 1: Missed payments

Foreclosure is a lengthy process, with specifics varying from state to state, but it all starts when a borrower fails to make timely mortgage payments. This is usually due to hardships such as unemployment, divorce, death or medical challenges.

Other times, a borrower may decide to stop paying the mortgage intentionally because the property might be underwater (mortgage exceeds the value of the home) or because he’s tired of managing the property. For whatever reason, he can’t or won’t meet the terms of his loan.

Stage 2: Public notice

After three to six months of missed payments, the lender records a public notice with the County Recorder’s Office, indicating the borrower has defaulted on his mortgage. In some states, this is called a Notice of Default (NOD); in others, it’s a lis pendens -- Latin for “suit pending.” Depending on state law, the lender might be required to post the notice on the front door of the property. This official notice is intended to make the borrower aware he is in danger of losing all rights to the property and may be evicted from the premises.

Stage 3: Pre-foreclosure

After receiving Notice of Default from the lender, the borrower enters a grace period known as “pre-foreclosure.”

During this time – anywhere from 30-120 days, depending on location of the home – the borrower can make arrangements with the lender via a short sale or make arrangements to pay the outstanding amount owed.  If the borrower pays off the default during this phase, the foreclosure process ends and the borrower avoids home eviction and sale. If the default is not paid off, foreclosure process continues.

Stage 4: Auction

If the default is not remedied by the prescribed deadline, the lender or its representative (referred to as the trustee) sets a date for the home to be sold at a foreclosure auction (sometimes referred to as a Trustee Sale). The Notice of Trustee Sale (NTS) is recorded with the County Recorder's Office with notifications delivered to the borrower, posted on the property and printed in the newspaper. Auctions can be held on the steps of the county courthouse, in the trustee’s office, at a convention center across the country, and even at the property in foreclosure.

In many states, the borrower has the “right of redemption” (he can come up with the outstanding cash and stop the foreclosure process) up to the moment the home will be auctioned off.

At the auction, the home is sold to the highest bidder for cash payment. Because the pool of buyers who can afford to pay cash on the spot for a house is limited, many lenders make an agreement with the borrower (called a “deed in lieu of foreclosure”) to take the property back. Or, the bank buys it back at the auction.

Stage 5: Post-Foreclosure 

If a third party does not purchase the property at the foreclosure auction, the lender takes ownership of it and it becomes what is known as a bank-owned property or REO (real estate owned).

Bank-owned properties are sold in one of two ways. Most often, they are listed with a local real estate agent for sale on the open market. Zillow (the website that is the source of most of this information) lists bank-owned properties for sale. Also, some lenders prefer to sell their bank-owned properties at a liquidation auction, often held in auction houses or at convention centers.

For more information on foreclosures, consult with your local real estate agent! 

Short-Sales:  What you should know

Are you one of the millions of homeowners who short-sold a house in the last few years?  If yes, starting Aug. 16, you may have to wait longer for your next chance at home ownership. 

What is a short-sale?  Well, simply put, short-selling a property is selling a home for less than what is owed on the current mortgage note.  The reason it's called a short sale is because the lender is "shorted" the different between the current selling price and the amount of the original note. 

Short sales have nothing to do with how long these types of sales actually take to transact; the irony is they actually take longer to close than a traditional sale or even a foreclosure sale. 

Any time you short-sell a property, you can expect it to remain on your credit report for seven years, so it's critical you maintain other credit obligations to offset the negative credit effects of the short sale.

The upcoming change

As it stands, you can buy a primary home, second home/vacation property or even an income property with 20 percent down just two years after a short sale.  However, the waiting time to obtain a new mortgage will increase from two years (with 20 percent down) to four years with 20 percent down. 

This change will affect home-buyers whose loan applications are dated Aug. 16 or later.  So what does this mean in the real world?  It could mean devastation for home-buyers.  Consider the following example:

 

A potential home-buyer is currently house-hunting, is pre-approved with a conventional mortgage…but they have a previous short sale just two years ago.

That home-buyer will have three choices:

1.     Wait two more years, earmarking the upcoming four-year waiting time frame.

2.     Wait one more year to procure a Federal Housing Administration loan

3.     Get into contract immediately or, if refinancing, apply for a mortgage prior to Aug. 16.

The new “wait times”

Other factors usually come into play during a short sale such as the possibility of a bankruptcy or another property with occupancy concerns.

Here are the waiting times when seeking a new mortgage with consideration to most credit issues.

Conventional loans

All conventional loans must go through Fannie Mae and Freddie Mac's automated underwriting system each lender uses when originating a new mortgage.

If you have a foreclosure: You'll have to wait seven years from the date the foreclosure was completed and transferred back to the lender to the date of the credit report. 

You can be eligible for a conventional loan three years after foreclosure with extenuating circumstances — such as death of a wage earner, illness or job loss — however, the loan must still pass an automated underwrite, which red flags a previous foreclosure in the past seven years.

Short sale/deed in lieu-short sale: The lender agrees to accept payoff for less than what is owed on the note; the deed-in-lieu borrower assigns the title to the lender and avoids foreclosure.

• Seven-year wait with less than 10 percent down of primary residence
• Four years with 10 percent down on the purchase of a primary residence
• Four years with 20 percent down on the purchase of a primary, secondary or investment property purchase
• Two years with extenuating circumstances, only with 20 percent down

If a Chapter 7 bankruptcy borrower does not pay any debts owed, it's a four-year wait from the discharged date with the re-established credit and no other derogatory credit, but a two-year wait is possible only with extenuating circumstances.

If Chapter 13 bankruptcy debts are paid back through court order and scheduled payment plans, and the mortgage applicant receives bankruptcy court approval to enter into the mortgage transaction, it's a two-year wait with extenuating circumstances.

FHA loans

Foreclosure: It's a three-year waiting time to purchase a primary home from the date the foreclosure was completed and transferred back to the lender to the date of the credit report.

Short sale: Three years to purchase a primary home from the date of title transfer. 

Bankruptcy Chapter 7: Two years from the date of discharge to reestablishing credit with no derogatory credit. If a property is surrendered in the Chapter 7 bankruptcy, it is considered to be possible foreclosure, which could increase the waiting time. 

Bankruptcy Chapter 13: It's a one-year wait with a scheduled payment plan on your liabilities factored into debt-to-income ratio, and the mortgage applicant receives bankruptcy court approval to enter into the mortgage transaction. 

Department of Veterans Affairs loans (commonly known as VA loans)

Foreclosure: Two years from the date the foreclosure was completed and transferred back to the lender.

Deed in lieu: One- to two-year wait with re-established credit and acceptable extenuating circumstances.

Short sale: Two years from the date the previous sale closed and was transferred to the new owner.

Bankruptcy Chapter 7: Two-year wait. 

Bankruptcy Chapter 13: One-year wait with bankruptcy court approval to enter into the mortgage transaction.

In summary

As you can see, if you have had a previous short sale, in combination with any other lending risk factor, your waiting time to buy a house might be longer than you think.

Be sure to communicate with a lender who can give you accurate information that pertains to your particular credit situation. Lenders will look at each event and a first-in/first-out order when reviewing your mortgage application. 

The bottom line is, a previous short sale in the past few years may mean you must wait longer.  It is suggested to work with your real estate professional and your lender so they can help guide you.  If you've had credit problems in recent years and hope to buy a house soon, it's important fully understand your current credit situation.  Some may suggest that you pull credit reports to assess your overall situation (you can pull them for free once a year), noting any mistakes or derogatory items, and rectify those items in a timely fashion. It's also helpful to get in the habit of monitoring your credit scores to track your progress over time.

Some information gathered from www.credit.com

Buyer Beware!

(This article originally ran on June 23, 2003, by Ms. Doherty is a free-lance writer in Seattle)
 
“Buyer beware -- very wary.”
That's the advice that real-estate agents give clients who plan to purchase a home in a for-sale-by-owner transaction. They claim that homes that are for-sale-by-owner -- typically abbreviated to FSBO and pronounced "fizbo" -- often cost 10% to 20% above market price, may conceal problems that owners don't know of or hope to disguise, and can take longer to close than broker-marketed homes.

But FSBO experts say such claims are unfounded. Sellers they say, decide to sell their own property because they want to keep the commission they'd otherwise pay a realtor and feel they know its attributes better than a busy real-estate agent. An agent doesn't necessarily know about the details of the neighborhood or lifestyle a buyer is seeking -- school districts, babysitting, park access, the neighbors and other factors.

It's not surprising that real-estate agents and FSBO experts don't see eye to eye on the issue. Both have a vested interest in it.

Fear that a FSBO transaction may not go as smoothly as one handled by a seller's agent doesn't mean you should avoid a home you'd like to own because it's being sold directly by the owners. You might find one while surfing the Internet or driving through a neighborhood you'd like to live in. 

Or you might find one through a buyer's agent -- a representative for the buyer who casts a wide net to find appropriate homes for sale -- regardless of whether a real-estate agent or owner is selling it. Buyer's agents often research homes using FSBO magazines or Web sites and other channels beyond the MLS, where real-estate agents (but not owners) can list homes they represent.

Professionals They're Not 

Buyer's agents say that not all FSBO homes are overpriced or sold by owners who plan to conceal problems. Most FSBO sellers, however, share a few psychological traits that demand extra tire-kicking from a buyer or buyer's agent.

FSBO owners have a reputation among agents for being tight with a buck: They're generally trying to sell a home themselves to avoid paying commission fees to a real-estate broker. Further, they may have an emotional and personal attachment to their property. They can take it personally when buyers or their agents want to negotiate.

Logistically speaking, they may also do paperwork at the last minute or lack housing data -- like exact square footage or full zoning details -- that a real-estate agent would get from a local jurisdiction before listing a home.
Under state law, sellers must provide disclosure forms that detail the condition of the home. Adorna Carroll, a buyer's agent at Realty 3 Carroll & Agostini in Berlin, Conn., urges buyers to secure these forms from sellers, so that negotiations will proceed more smoothly.

"Every state has different disclosure requirements," Ms. Carroll says. Buyers of FSBOs should learn what those requirements are and demand the most extensive disclosure.
"Buyer's agents have a lot more work to do when the home is a FSBO," says Ms. Carroll. "Every FSBO transaction is unique."

The Commission Issue
 
Despite their reputation, FSBO sellers may become more flexible the longer a house sits on the market in order to close a sale. Janet Branton saw that happen when she considered buying a FSBO condominium in Chicago. She hired a buyer's agent to help with her condo hunt, and after identifying a building she'd like to live in, her agent located two units there that were on the market -- one a FSBO, the other represented by a real-estate agent. The units weren't substantially different in terms of their size and layout, and their prices were similar.

However, as Ms. Branton began preparing to make an offer she grew worried about whether the FSBO sellers would pay the commission she'd owe her buyer's agent. FSBO sellers are stereotyped as stubborn when it comes to paying commissions for buyers and negotiating prices downward. 

But she knew she could negotiate the commission with the real-estate agent representing the other unit. Ms. Branton, however, was pleasantly surprised to learn the FSBO seller was open to paying her agent's fee.
"They were more than willing to compensate my agent," Ms. Branton says. "The property had been on the market for three months."

What You Need to Know
 
Buyers can take several steps to minimize potential problems when evaluating a FSBO home. Perhaps the most important is to make sure you have a mortgage pre-approval before you put in an offer. FSBO sellers may be trying to sell the home fast and entertaining multiple bids, and you may have to act quickly, says Terry Watson, a buyer's agent in Chicago-based GM King Realty.

Another critical measure is to arrange for a bank or other neutral entity to manage the escrow or "earnest money" applied to the down payment on the home, something a licensed real-estate agent would normally do, he says. Don't let the seller hold the money in escrow.

Additional precautions that buyers should take (or make sure that their agents take) before buying a FSBO home include:

1. Secure a seller's permission to buy what's known as a "C.L.U.E. report" -- a five-year insurance claims history of a particular property.
C.L.U.E. stands for Comprehensive Loss Underwriting Exchange. A C.L.U.E. report is similar to a credit report, but with insurance-claims data. The reports require seller permission, but cost only $13 and are available online from a company called Choice Trust.

"The big thing to look for is a water-related claim… and the possibility of mold," Mr. Watson says. "Sellers don't always tell buyers about this."
Mr. Watson says that C.L.U.E. reports will reveal any claims that sellers haven't mentioned. But, equally important, they will help buyers who have become owners. Many buyers purchase a one-year initial insurance policy when closing on a home. Most insurers will, at renewal, look at a C.L.U.E. report to evaluate recalibrating rates and coverage. If a C.L.U.E. report wasn't used initially, he says, owners may get a rude awakening upon learning their own – or their home's – insurance history is damaging.
"They can cancel on you if you don't get a good C.L.U.E. report," he says.

2. Get a competitive market analysis (CMA) for the neighborhood where the home is located.
Real-estate agents -- even if not involved in the transaction – may be willing to provide them. This is a document that outlines selling prices on homes of varying sizes in different neighborhoods. Separately, Choice Trust will, for $9.95, sell property-value data gathered from tax assessors' offices – at either the street address or ZIP code level.

Fred Turner, vice president and co-owner of Homes for Sale By Owner Inc., a Chicago-based producer of FSBO magazines and seminars, says that he encourages owners to do this research on the assumption that their prospective buyers may be doing it. For instance, he recommends that FSBO sellers get three separate real-estate agents to provide CMA quotes -- if they can locate willing agents -- or go to the city's deeds office to look at "green sheet" data used to determine property taxes. In major markets, some limited home-price data are available online at no charge at www.homeradar.com and www.domania.com.

If you can, try to research recent FSBO sales in your neighborhood. A CMA will only represent MLS data – that is, data on homes sold by agents, which exclude homes sold by owners -- so "it's not the whole picture," Mr. Turner says. He adds that he once bought a home from a seller who was represented by an agent at 25% off the original price.

Learning that a FSBO is overpriced before a bid is made can save a lot of time and effort, as buyers and sellers often learn in the middle of the purchase process or from a bank declining to make a loan because it's for more than a home is worth.

3. Hire a "vicious" home inspector to check electrical wiring, moisture levels, carbon monoxide, asbestos, lead, electromagnetic fields and radon.
Many sellers aren't lying to buyers when they don't disclose problems in their home, Mr. Watson says. "They just don't know or tell them [the extent of a problem]," he says.

"It's a seller's market right now. I'd say about 25% of the transactions we do are for sale by owner," Ms. Carroll says, noting her market is particularly active with respect to FSBO transactions. "Initially, [a FSBO listing] doesn't raise any flags for the buyer," she says. "Afterward it does."