Your Chicago Mortgage Guy

Private Mortgage Insurance

Most people just think of mortgage insurance as that expensive line item on their mortgage statement, that doesn't seem to do anything for them.  What's forgotten is that without the mortgage insurance, you could never get into the loan without a 20% down payment in the first place.  Lenders take a lot of risk when they take a lien on property, with an equity position over 80%.  As we have seen in the last couple of years, when real estate prices fall, the lender is left holding on to property, without any equity position at all. 

Something that is lost on borrowers though is that Mortgage Insurance is a product.  And, not just one product, but multiple insurance products.  There are different pricing structures for different insurers, different insurance products and they change depending on the assessed risk of the mortgage being insured.  We are going to cover the three main products available to borrowers these days. 

Borrower Paid Mortgage Insurance (BPMI)

This is the most common type of mortgage insurance, and the easiest to explain and sell to the consumer.  Borrower Paid Mortgage Insurance is paid monthly by the borrower.  The amount of insurance is determined by the Loan To Value of the home, FICO score and Loan Type.  Here is an example of how mortgage insurance gets more expensive as the loan to value, and the perceived risk increase.

Download Borrower Paid Mortgage Insurance

If you look closely, you will see that as the Loan To Value goes from 85% to 97%, the rate of mortgage insurance increases.  At 97%, the Interest Rate also increases, but we'll cover that another time. 

While insurance rates don't vary much from insurer to insurer, guidelines can vary wildly.  Each individual insurer has it's own risk tolerances.  They may be different from one another in the maximum Debt To Income that they will limit a borrower too, or they may have different guidelines when it comes to Condominiums or Declining Markets.  The important thing for a lender is to have as many Insurance partners as possible.  That way if one insurer won't insure a file, there may be a second, third or even fourth option.

The benefits to a borrower for this type of Mortgage Insurance are that it is the easiest to obtain, and it goes away eventually.  When the loan to value reaches 78% of the original purchase price, or the appraised value at the time of refinance, the mortgage insurance automatically drops off.  This is the best option if you are in the loan for the long term.  Also, you can get a cheaper rate if you have a loan amortized for 25 years or less.  This is a great trick if you can afford a 25 year, 20 year or 15 year fixed mortgage.  By just lopping off 5 years on the amortization, you can knock of hundreds of dollars a year in insurance payments.  That's something to ask your loan officer about.

Lender Paid Mortgage Insurance

This product crept into the market place about 5 or 6 years ago.  The idea is that the lender pays for the Mortgage Insurance Certificate at closing, and the insurance is paid by raising the interest rate, thus raising the premium paid to the lender.  The lender then takes that increased premium and pays for the Insurance Certificate.  So essentially, your Mortgage Insurance is now built into your interest rate.  Take a look at the following graph to get an understanding of how your interest rate increases as the Loan To Value increases.

Download Lender Paid Mortgage Insurance\

The first thing you might notice is that even though the interest rate is higher, the monthly payment is lower than our scenario's with Borrower Paid Mortgage Insurance.  With the insurance built into the rate, the monthly payment is lower, but only in the short term.  The downside here is that the insurance never goes away.  Not at 20%, not ever.  So, if you are interested in this type of mortgage insurance, it's perfect if you are going to be in your property for ten years or less.  The other advantage to this type of mortgage insurance is that because it is essentially built into your interest rate, it is then tax deductible.  By increasing the amount of interest you pay over the course of the year, you increase the amount of interest you get to write off against your income at the end of the year. 

Single Premium Mortgage Insurance

I love this program, and I don't think a lot of people even know it's out there.  As a borrower, you always have the option to pay your mortgage insurance premium, outright, at the closing.  This eliminates ever paying any mortgage insurance during the life of the loan.  The downside, is it's expensive.  See the attached spreadsheet.

Download Single Premium Mortgage Insurance

This is a great option if you go into a purchase transaction asking for a large closing cost credit.  It allows you to have the seller pay your mortgage insurance for you for the life of the loan.  If the borrower is paying it on there own, you really have to look at the transaction as a whole.  Would that premium be better served going towards down payment?  Depends on the borrower and the transaction.

Here is a final spreadsheet with all three comparisons side by side.

Download Mortgage Insurance Comparison

Remember, any good Loan Officer is going to have all of these options available and you should at least know if there is a better option out there for you.

Next we talk about Loan Level Pricing Adjustments and how Fannie and Freddie decided to stick it to everyone.  Fun stuff!

Joe Burke

Your Chicago Mortgage Guy

773-742-6707

joe@yourchicagomortgageguy.com

 

Conventional Financing - Fannie Mae and Freddie Mac

When you hear us talk about 'conventional' financing, what we are referring to is mortgages backed and underwritten to Fannie Mae and Freddie Mac guidelines.  It's as simple as that these days.  There just aren't any other conventional financing options anymore.  Whether you walk into a Bank of America branch and get conventional financing, or through a Broker, we are all pretty much looking at the same underwriting guidelines and programs. 

The basic Fannie Mae and Freddie Mac program guidelines are the same for every institution.  Within those guidelines are product specifications that still go all the way to 100% financing.  That is only the first part of the story though.

Any loan package delivered to Fannie Mae and Freddie Mac requires not only Private Mortgage Insurance, but specific coverages as well.  Just like your car insurance, the higher the risk, the higher the rate of insurance.  In the case of mortgages, the closer you get to 100% financing, the higher the rate of insurance.  The worse the credit scores, the higher the rate of insurance.  You get the idea.  Now, the Mortgage Insurers are under no obligation to back every product that Fannie Mae and Freddie Mac have guidelines for, and this is where the product that we sell to the consumer is really crafted.

Like I said, currently there are guidelines in place at Fannie and Freddie for loans up to 100% Loan To Value of the subject property.  Five years ago we could even take that up to 103%, with mortgage insurance.  When individual markets began declining in value in 2008, Mortgage Insurers pulled back in a big way.  They immediately eliminated anything over 95%.  Then, they began scaling back to 90% and even 85% in some markets.  Slowly over the past two years, they have begun creeping back up to 95%, and most recently to 97% financing.  If you look at the guidelines currently in place at the Mortgage Insurers today though, compared to five years ago, there is a marked difference.  Current guidelines are significantly more stringent than they were previously.

So, what's out there?  The following programs are currently available for conventional financing.  Without getting into individual program guidelines and credit score requirements and differences in interest rate or origination fees, this is what we are offering as an industry right now, both for Single Family Homes as well as Condominiums.

• 97% Conventional Financing - Interest rate will be at least .50% higher than 95% conventional Financing
• 80% - 95% Conventional Financing - You shouldn't see any difference in interest rate, although the closer you get to 95%, the higher the mortgage insurance.

Stay tuned for the next post, where we will cover Loan Level Pricing Adjustments and Credit Score Requirements, followed by a post that is more specific to Mortgage Insurance Guidelines and some FICO score examples.  This will help to put it all into focus.

Happy Selling!

Joe Burke

Your Chicago Mortgage Guy

773-742-6707

joe@yourchicagomortgageguy.com

 

 

Mortgage Boot Camp

Happy Friday Everyone!

So, when I posted last week regarding a new 97% Financing option, I just kind of figured the general response would be 'Woo Hoo'!  But, the response I received was a lot more '97 percent?  I didn't even know we could go to 95%?'.  And I started thinking about it.  I guess most of what you get from us in the mortgage industry is the negative.  We can't do this, we can't do that, we are cutting this program, and you need a higher FICO score for this program.  That's on us.  We should be telling you about what you can do.  What can be financed and what you can safely tell your clients is out there so that you can sell more property. 

Over the next couple of weeks I am going to post regularly regarding current Mortgage Programs and Guidelines.  Not the negative, but the positive.  What you can go out and sell this Spring.  What is going to get your First Time Home Buyers into their first Condo or Single Family Home.  What is going to get your move up buyer out of their condo and into that next property. 

We are going to cover Conventional and FHA.  Mortgage Insurance and FICO scores.  We'll go over what exists in terms of Second Mortgage products and what you can expect in the Jumbo market. 

So, stay tuned.  There is a lot of great information on the horizon. 

Joe Burke

Your Chicago Mortgage Guy

773-742-6707

joe@yourchicagomortgageguy.com

97% Conventional Financing. It's Back....

I have to admit, I am still pinching myself to see if this is real.  It is.  This isn't about Fannie Mae or Freddie Mac.  They have had guidelines, that never really went away, for 97% financing.  This is about the Mortgage Insurance Industry insuring these mortgages.  And, they're back.

So, is this a game changer?  Yes, and no, not at all.  With the release of the new LLPA's(Loan Level Pricing Adjustments) by both Fannie Mae and Freddie Mac, a 97% mortgage will run you roughly .75%-1.00% above a typical 95% financing mortgage.  The monthly mortgage insurance isn't cheap either.  But, there will be instances where the consumer chooses to go with this product over a similar FHA mortgage.  

In the end though, I think this is a symbolic product gesture.  Yes, I made that up, but I think it's true. Making 97% financing available again is symbolic of the fact that the Mortgage Insurance Industry is loosening guidelines again.  What it really means is that an actuary somewhere sees opportunity with less risk than they did previously.  Even as Fannie and Freddie tighten there pricing model in the wake of new regulation about to hit us in April, somebody out there is starting to see a light at the end of the tunnel.

Hopefully this is just the beginning.  We could certainly use the product.

Joe Burke

Your Chicago Mortgage Guy

joe@yourchicagomortgageguy.com

773-742-6707

 

FHA FMIP Increase, and lots of other acronyms...

It's official, and it doesn't look like it will be delayed or changed.  Effective April 5th, 2010, FHA Upfront Mortgage Insurance Premiums will increase to 2.25% of the base loan amount.  Currently the Mortgage Insurance Premium(MIP) is 1.75% of the base loan amount.  This will effect every FHA loan originated and receiving an FHA case number on or after April 5th, 2010.  Just in time for the expiration of the Home Buyer Tax Credit.  Nice that these agencies are all talking to one another about timing impementation of these items.

Here's how it works.  If you have a $100,000.00 purchae price, and are putting down 5% through FHA, your base loan amount would be $95,000.00.  Take $95,000.00 and multiply it by 2.25% and you end up with a Mortgage Insurance Premiuim (MIP) of $2137.50.  As the borrower, you can either pay that up front, or roll it into the loan amount.  If you roll it into the loan amount, your new initial loan is now $97,137.50.  The MIP is now called your Financed Mortgage Insurance Premium (FMIP).  Currently at 1.75%, that MIP is $1662.50, so there is a significant increase in cost to do an FHA loan.

So, why would HUD do this?  Especially right before the tax credit is coming to an end?

The upfront MIP you pay at close goes into an insurance pool that supports all FHA Insured mortgages, nationwide.  Every time someone defaults on a loan, this insurance pool is dipped into.  Put simply, this insurance pool is going broke.  It is WAY below the federally mandated minimums that it is supposed to maintain, and it will be flat broke before the end of the year if all of the current trends hold.  So, by increasing the FHA premiums for new borrowers, it should help stabilize and hopefully increase the liquidity of this insurance pool.  Unfortunately new buyers are paying for the sins of past buyers.

Joe Burke

Your Chicago Mortgage Guy

773-742-6707

joe@yourchicagomortgageguy.com

How Do I Know I Am Getting Quoted Accurately On My Mortgage Insurance?

I have been in the mortgage business for eight years now and it never ceases to amaze me how badly some of my customers are misquoted when shopping for their mortgage package.  I say "mortgage package", because that's what it is when you take into account the cost of the loan and in particular, any mortgage insurance you might be paying.  It happens over and over again where I will get Good Faith Estimates from other lenders with Mortgage Insurance quotes that either just wrong, or really, fraudulent. 

When a potential borrower is out shopping for a mortgage on a 10% down transaction, they are getting quoted three things;  Mortgage Rate, which is easy to shop from lender to lender, Closing Costs, which while confusing, can usually be compared to one another, and monthly Mortgage Insurance payments, which are nearly impossible to decipher. 

So how is your Mortgage Insurance payment calculated?  Each individual lender has a relationship with one or more Mortgage Insurance Companies that will insure their loans at the level required to securitize and sell those loans to Fannie Mae and Freddie Mac.  Like any insurance, the higher the risk level, the higher the rate of insurance.  Fannie and Freddie determine the risk level when the file is run through their automated underwriting engines.  The Mortgage Insurance Companies have corresponding tables that determine how much you pay for this coverage.  Here's the thing though.  From one Mortgage Insurance Company to another, these rates are, in almost every case, identical.  So, how is it possible then that I might quote a mortgage insurance payment at $103.33 per month while a competitor is quoting $86.67 per month?  It's the Loan Officer.

It is up to the individual Loan Officer to know what the mortgage insurance rate is and to quote that rate as part of their Good Faith Estimate.  So, either they aren't looking at what that rate is, or they are quoting something low to make their monthly payment look like it is less than yours.  Here's the problem.  When the borrower gets to close, the monthly mortgage insurance is going to show up at whatever rate Fannie or Freddie determined for it's coverage, not what's on the Good Faith.  The borrower has no recourse at close to say, "Hey, wait a minute, that's not what you quoted me", and usually don't ever even notice. 

Here are rate cards for four of the biggest Mortgage Insurers in the industry.  Download Radian Rate Sheet, Download MGIC Rate Card, Download PMI Rate Sheet and Download Genworth Rates.

Now, if you are putting down 10% on a condo, it's likely that you will be required to have either 17% or 25% coverage.  So, if you go to these rate cards and look at 25% coverage for a 30 Year Fixed, you will see a corresponding factor of .62%.  So, on a 200,000.00 mortgage, times .62% and divided by 12 months, you will end up with $103.33 per month.  What I see all the time is that lenders are quoting last years rates.  Either they don't know their product well enough to know that these rates have increased over the past year, or they are intentionally quoting a lower rate hoping you won't notice until closing, or at all. 

So what do you do?  Ask your loan officer how they calculated your mortgage insurance rates.  Ask to see their rate cards.  Ask who is insuring their loan.  Save your Good Faith and compare it to the monthly payment at closing.  Or, just call Your Chicago Mortgage Guy!!

Joe Burke

Your Chicago Mortgage Guy

773-742-6707

joe@yourchicagomortgageguy.com

Private Mortgage Insurance and the Mortgage Industry - 1 of...

This is a topic that I think a lot of mortgage professionals shy away from.  The reason is that it is confusing.  Very confusing. 

Essentially, there are two sides to our industry these days.  Fannie Mae and Freddie Mac have a very specific set of guidelines when it comes to underwriting mortgages.  For the most part, the mirror one another, although there are still a few things that are particular to each.  But, that is another post entirely.

So, Fannie Mae and Freddie Mac basically put out a set of guidelines and we as sales people go out and sell what they are offering in terms of product within these guidelines.  For example, both Fannie Mae and Freddie Mac, and their particular underwriting engines, still allow for 95% financing on both Single Family homes and Condominiums.  They have Loan Level Pricing adjustments that are particular to the Loan To Value and the property type, but essentially, they are saying we will still allow you to go to 95%.  But wait, you need Mortgage Insurance for us to purchase this loan!

And, that's where the Mortgage Insurance Industry comes in.  Until recently, Insurers, were likely to insure anything that Fannie and Freddie put out there in terms of product offering.  If Fannie and Freddie said you can do 100%, the MI companies put out rates to cover these loan.  Not any more.

If you are a Real Estate Agent or are actively pursuing a mortgage, you may have already run into this.  Why are some lenders going to 95% on condos through Conventional guidelines, while others are only offering FHA?  It's there MI partners. 

In this market, MI companies are assessing which types of Fannie and Freddie products they are willing to insure as part of their own product portfolio.  Individual lenders have relationships with one or more of these different MI companies.  These relationships are not based just on what the MI partner can get them though.  The individual bank is going to align themselves with an MI partner that has a similar appetite for risk as they have themselves.  And here is why.

Let's say that you apply for a mortgage with one of the last Banks or Broker's that is offering 5% down mortgages on condominiums.  If at some point during your transaction, if the MI partner, for whatever reason, pulls out of that market because it decides that 5% condo loans are too risky, you are likely out of luck.  It is my experience that you will not get a warning on this and more importantly, you will be very lucky as a loan officer to get any loans that you already have in your pipeline closed under the old guidelines.  Just something to think about when you decide to work with the only lender and MI company that originating loans that have been deemed to risky to the rest of the industry.

Now, that being said, if my company went back to 95% on condo's, I would be out there selling it.  I would also be making sure we had a back up plan in place if we can't get it closed through conventional means.  That means that no matter what the circumstances, make sure you read up on FHA and are prepared to move in that direction in the event that your MI partner pulls out.

Next time we'll talk about how my competition is quoting MI rates that are two years old and half of current rates.  Misquote or unethical?

Joe Burke

Your Chicago Mortgage Guy

773-742-6707

joe@yourchicagomortgageguy.com