Virginia

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The Factors Lenders Use to Evaluate Your Mortgage Application

When banks evaluate your application for a mortgage, there is a rough formula they use to determine how credit worthy you are and whether to approve your application. Understanding this formula can help you strengthen your application and increase your chances for getting the loan you want.

When banks and mortgage companies evaluate your application for a mortgage, there is a rough formula they use to determine how credit worthy you are and whether to approve your application. Understanding this formula can help you strengthen your application and increase your chances for getting the loan you want.

In general, there are four main criteria that banks and mortgage companies use to evaluate a borrower. They are: income, assets, credit, and appraisal. Lenders do not just evaluate the quantity but also the quality of each criterion.

Income

Lenders look at how much money a borrower makes but also the stability of that income. Has the borrower earned similar amounts in past years? Is the borrower's employment status secure and have they worked at the same company for some time? Do they have a stable employment situation? A borrower who makes $10,000 in one year and $300,000 the next has the quantity but not necessarily the quality. Lenders like predictability.

Assets

How much money does an individual have in the bank and in investments? Has this amount increased steadily or because of a $50,000 gift from grandpa? Lenders like to see stable, year-over-year increases in assets. One time gifts do not provide the same level of comfort that the borrower can continue to increase savings every year.

Credit

Lenders look not only at the credit score, but also at the credit score trends. Has the borrower maintained a high credit score over time? Does the borrower have other debts that they have responsibly paid off? Has the borrower shown that they can manage debt? Lenders prefer an individual who has responsibly managed some debt over someone who has never taken out a loan before. So, in this case some debt is better than never having debt at all.

Appraisal

The amount that a house appraises for it important, but so is the quality of the appraisal. Borrowers want to see that the appraisal was done by an independent, qualified individual who can accurately assess the value of a house. Did the appraiser take the time to really inspect the house, take pictures, and evaluate the condition of the property? Drive by appraisals are a relic of the past.

Having quantity and quality in all four categories ensures that a borrower will be approved and receive the best possible rates. That doesn’t mean that a borrower can’t get a loan if quality or quantity is slightly low in one or two categories, but the chances do go down. Evaluate your own borrowing strength using the chart below.

Criteria Quantity Quality
Income Lenders like to see that mortgage payments, interest, insurance, and taxes will not exceed 28% of a borrowers gross income (pre-tax) income. This is called your debt to income ratio. Income is the second most important criteria behind Appraisal value of the house. Consistent income over time. Steady employment and stable or rising income.
Assets Lenders like to see that homeowners have substantial assets. Ideally the value of the assets would cover the mortgage amount but this is not necessary. This ensures that lenders will continue to receive payments should the borrower lose their job and income. Increasing asset growth over time is better than lump sum increases from a gift, inheritance, etc.
Credit According to myFico, Credit scores over 760 help a borrower get the best rates. The myFico site shows that the difference between a 760 and 639 credit score is nearly $300 per month on the same $300,000 mortgage. A credit report that shows a history of being able to manage debt.
Appraisal A house that appraises for at least the amount of the mortgage. If not, the house is considered underwater and lenders will not approve the loan. This may be the single most important criteria. A reputable appraisal done by an independent company.

Mortgage Rates Rise Slightly In Past Week

Average 30 year mortgage rates rose slightly in the past week but still remain within the 4 - 4.20% band they have fluctuated in over the past five months. Average 15 year mortgage rates also remain very stable, fluctuating between 3.4% and 3.6%

Mortgage rates

Jim O' Malley, a senior loan office at Leader Bank told me that "rates have been very stable the last 6 months. They dipped a little due to the Greek crisis but remain mostly stable. Rates are supposed to trend a little higher due to the improvement in the economy and the jobs situation improving month over month." As the economy improves, rates should also move up. Recent data shows that employment and consumer confidence is on the rise. Still, almost no one expects strong economic growth which means that while rates may rise, the increase will be most in the medium term.

As rates rise, lending requirements continue to remain tight. Jim said that "lending requirements are very tough and banking has become forensic on many levels. The pre-approval market seems to be improving so it looks like the Spring may be a busy season for purchases."

By forensic, he means that banks are taking a deep look at a borrowers financials. Be prepared to show that you have the income and financial wherewithal to afford the mortgage you are seeking.

Jim O'Malley also thinks many homeowners will be disappointed at what their homes appraise for unless they live in select areas that have seen limited price declines.

Case-Shiller data shows that housing values continue to drop. So, if you are sitting on the fence regarding buying a home or refinancing, now might be a good time to act. The future may bring higher rates and lower appraisals.

Do You Really Have to Put 20 Percent Down when Buying a Home?

Putting a 20 percent down payment on a home purchase is often required by lenders to be approved for a purchase. But is 20 percent always necessary?

Buying a home these days is becoming more and more difficult with stricter credit guidelines and with banks being more picky about who they are going to loan money to. But it’s also getting more difficult with the uncertain economy and fewer people being able to save up the recommended 20 percent for a down payment on a new home. This begs the question: Is it really necessary to have a 20 percent down payment for your home? Here are some alternatives to consider if you can’t come up with a 20 percent down payment.

1. FHA Loans

With an FHA loan, you can get a mortgage loan for as low as 3.5 percent. These types of mortgages are typically available for people who have a low income and also for first-time home buyers. But since the subprime mortgage crisis in recent years, FHA loans have exploded in popularity. Recently, the loan limits for an FHA loan also increased to a maximum of $730,000 which has made it an even more viable option than it was before.

2. VA Loans

With a VA loan, you typically don’t need to have a 20 percent down payment to get a mortgage. In fact, many VA mortgages require very little or no money down as long as you have either served in the armed forces, are serving now or if you are the spouse of someone who has served. Your credit may determine the amount of your down payment, but these loans are typically more flexible than conventional loans.

3. Conventional Mortgages

If you have a great credit score, there is a good chance that you can get a mortgage loan with less than a 20 percent down payment. For the most part, a credit score of 700 or above is required for flexibility with the down payment, but some mortgage underwriters may take into consideration your more recent credit history if you have been paying your bills on time and paying off debts in the last six to 12 months. If you can prove that you are on your way to being more financially responsible, some mortgage underwriters may give you a chance for a mortgage with less than 20 percent down.

There are many ways to get a mortgage without putting down a 20 percent payment upfront.

When you start shopping for a home, it’s important to explore all of your options. Of course, if you do decide to put less than 20 percent down on your home, you can expect higher costs, such as higher interest rates and higher premiums for mortgage insurance. But in some cases, these extra costs are worth it for some buyers who are excited about buying their first home.

Compare mortgage rates where you want to live.

Three Things Homeowners Should Know about Completing Their Tax Returns

Tax time is approaching quickly. Do you know how to benefit the most from the deductions that are available to you as a homeowner?

Are you a procrastinator when it comes to getting your taxes done? Do you rush to the post office on the eve of April 15 to get your tax returns postmarked in time to avoid late penalties? If so, you are like many Americans. And if you own your own home, you probably have similar questions about the deductions you can take for your mortgage interest as well as other tax questions related to being a homeowner. If so, here are three things you should know if you still have to get your taxes done this year so you can make sure they get done correctly.

1. In order to claim your mortgage rate as a deduction, you have to itemize deductions on your tax returns. Nearly 40 percent of the homeowners in the United States miss out on taking advantage of the mortgage interest deduction because they do not itemize deductions on their taxes. While the standard deduction may be greater than the mortgage interest deduction, there are many times when homeowners simply take the standard deduction without crunching the numbers on an itemized deduction. The better tax software programs – and the better tax accountants if you are using one - will help you figure out which is greater so you can lower your tax bill or get a greater return, whichever applies to your financial situation.

2. If you are on the brink of a short sale, foreclosure or loan modification, this may be the last year that you can benefit on your taxes. Before 2007, the IRS would charge people taxes on any debt that was either cancelled or reduced. They refer to this as the Cancellation of Debt Income and the term says it all. The IRS typically considers any reduction or cancellation of debt as part of your income. But the Mortgage Debt Forgiveness Relief Act of 2007 suspended the attribution of income for cancelled mortgage debt for troubled homeowners through 2012. If you are debating taking one of these actions for your home, you should start the process now or it may be too late to take advantage of this deduction on your returns (unless the 2007 Mortgage Debt Foregiveness Relief Act or its applicable provisions are extended).

3. Closing costs are also tax deductible. Many homeowners are so focused on deducting their property taxes and their mortgage interest that they forget that they can deduct their closing costs. If you have any origination fees that you paid to your lender last year at closing, you can probably deduct those fees on your tax returns. In many cases, you can even deduct those fees if the closing costs were paid by the seller.

These are just a few of the things to keep in mind when preparing your tax returns this year. Of course, it is always best to check with a qualified CPA or tax return specialist to make sure you get all of the deductions that you are eligible for. But these tips will get you started and give you an idea of what you can do this year to start preparing for next year’s returns.

Compare the best mortgage rates where you live here.

Comprehensive List of Mortgage Assistance Programs

It seems like every week the government is announcing a new program to help homeowners. To make sense of all of these programs, we've pulled them together and listed them below. If you are having trouble with your mortgage, or can't refinance your house, hopefully one of the programs on the list will provide you with some assistance.

It seems like every week the government is announcing a new program to help homeowners. To make sense of all of these programs, we've pulled them together and listed them below. If you are having trouble with your mortgage, or can't refinance your house, hopefully one of the programs on the list will provide you with some assistance.

Home Affordable Modification Program (HAMP)

HAMP is designed for homeowners who are still employed but are struggling to make their monthly mortgage payments. The program can lower your monthly mortgage payments to 31 percent of your verified monthly gross pre-tax income. This can often save a homeowner hundreds of dollars per month. You are eligible if:

  • You occupy the house as your primary residence.
  • You obtained your mortgage on or before January 1, 2009.
  • You have a mortgage payment that is more than 31 percent of your monthly gross (pre-tax) income.
  • You owe up to $729,750 on your home.
  • You have a financial hardship and are either delinquent or in danger of falling behind.
  • You have sufficient, documented income to support the modified payment.
  • You must not have been convicted within the last 10 years of felony larceny, theft, fraud or forgery, money laundering or tax evasion, in connection with a mortgage or real estate transaction.

The program is offered through your mortgage servicer, so you'll need to contact them. If they do not provide the program, or don't feel you qualify, ask them what other options they have for you.

Pricipal Reduction Alternative ( PRA)

If you owe significantly more on your home than what it is now worth, PRA is designed to help you by encouraging mortgage servicers and investors to reduce the princpal you owe on the house.

You may be eligible if:

  • Your mortgage is not owned or guaranteed by Fannie Mae or Freddie Mac.
  • You owe more than your home is worth.
  • You occupy the house as your primary residence.
  • You obtained your mortgage on or before January 1, 2009.
  • Your mortgage payment is more than 31 percent of your gross (pre-tax) monthly income.
  • You owe up to $729,750 on your 1st mortgage.
  • You have a financial hardship and are either delinquent or in danger of falling behind.
  • You have sufficient, documented income to support the modified payment.
  • You must not have been convicted within the last 10 years of felony larceny, theft, fraud or forgery, money laundering or tax evasion, in connection with a mortgage or real estate transaction.

Note that the eligibility above is just a guideline. You will need to contact your individual servicer for more information. A list of participating servicers can be found here.

Second Lien Modification Program (2MP)

This program is designed for homeowners who had a first mortgage modified by HAMP and have a second mortgage. This second mortgage may also be eligible to be modified. The program works in tandem with HAMP to help homeowners who purchased a home using a first and second mortgage.

You may be eligible for 2MP if you meet all of the following criteria:

  • Your first mortgage was modified under HAMP.
  • You must not have been convicted within the last 10 years of felony larceny, theft, fraud or forgery, money laundering or tax evasion, in connection with a mortgage or real estate transaction.
  • You have not missed three consecutive monthly payments on your HAMP modification.

Servicers participating in 2MP are:

  1. Bank of America, NA
  2. BayviewLoan Servicing, LLC
  3. CitiMortgage, Inc.
  4. Community Credit Union of Florida
  5. GMAC Mortgage, LLC
  6. Green Tree Servicing LLC
  7. iServeResidential Lending, LLC
  8. iServeServicing, Inc.
  9. J.P.MorganChase Bank, NA
  10. NationstarMortgage LLC
  11. OneWestBank
  12. PennyMacLoan Services, LLC
  13. PNC Bank, National Association
  14. PNC Mortgage
  15. Residential Credit Solutions
  16. ServisOne Inc., dbaBSI Financial Services, Inc.
  17. Wells Fargo Bank, NA

Program ends December 31, 2012

FHA, VA, USDA Home Affordable Modification Program (FHA-VA-USDA-HAMP)

This program helps homeowners whose mortgages are insured by the FHA or the VA take advantage of the HAMP program. To find out more, contact the respective government agency.

Home Affordable Refinance Program (HARP)

If you are not behind on your mortgage but your house is underwater and you can't refinance, this program may be for you. HARP is designed to help you refinance your mortgage into a lower rate.

You may be eligible for HARP if you meet all of the following criteria:

  • The mortgage must be owned or guaranteed by Freddie Mac or Fannie Mae.
  • The mortgage must have been sold to Fannie Mae or Freddie Mac on or before May 31, 2009.
  • The mortgage cannot have been refinanced under HARP previously unless it is a Fannie Mae loan that was refinanced under HARP from March-May, 2009.
  • The current loan-to-value (LTV) ratio must be greater than 80%.
  • The borrower must be current on the mortgage at the time of the refinance, with a good payment history in the past 12 months.

Contact your mortgage servicer to see if they participate and if you qualify. You can also contact Fannie Mae or Freddie Mac to see if you qualify.

FHA Refinance for Borrowers with Negative Equity (FHA Short Refinance)

For those homeowners not behind on their mortgage but who owe more than their homes are worth, FHA Refinance is another program. FHA Short Refinance is designed to also help homeowners refinance into a lower rate, more stable mortgage. If the lender agrees to refinance your mortgage, they will be required to reduce the amount you owe on your mortgage to no more than 97.75 percent of your home's current value.

You may be eligible for FHA Short Refinance if you meet the following criteria:

  • Your mortgage is not owned or guaranteed by Fannie Mae, Freddie Mac, FHA, VA or USDA.
  • You owe more than your home is worth.
  • You are current on your mortgage payments.
  • You occupy the house as your primary residence.
  • You are eligible for the new loan under standard FHA underwriting requirements.
  • Your total debt does not exceed 55 percent of your monthly gross income.
  • You must not have been convicted within the last 10 years of felony larceny, theft, fraud, forgery, money laundering or tax evasion in connection with a mortgage or real estate transaction.

To find out if you can use this program, contact your mortgage servicer and find out if the participate in the program.

The Responsible Homeowner Reward Program

This private program is designed to reward homeowners who stay, or become current on their mortgage. In place of reducing the principal on a mortgage, servicers that participate in this program will provide cash bonuses if a homeowner meets certain agreed-to milestones. While each mortgage company determines the terms and conditions of their programs, below is the general outline:

  • The homeowner is awarded an initial RH Reward amount.
  • The homeowner makes full and timely mortgage payments, keeping their RH Reward status active.
  • For a period of time following registration, an additional amount of money will be added to the initial RH Reward amount for each month the homeowner maintains active status.
  • Once the mortgage balance is paid in full – either by selling the home, refinancing, or by paying off the mortgage – the homeowner is paid the entire RH Reward.
  • Going forward, if the homeowner becomes delinquent more than once in any 12 month period, they risk forfeiting their entire RH Reward.

From a servicer perspective, the goal is to reward good behavior (paying off a mortgage), and discouraging bad (strategic default). To do this, the servicers reduce the amount of the loan but instead of taking it off the mortgage, pay it out as an incentive.

To find out if you can take advantage of this program, contact your lender.

Learn More.

$25 Billion Landmark Mortgage Settlement

This agreement between the Federal Government, 49 of the States' Attorney Generals, and five of the biggest mortgage lenders (Bank of America, Ally Bank, JP Morgan Chase, Citicorp, and Wells Fargo), provided a mechanism for these banks to provide foreclosure relief. The settlement is intended to benefit homeowners who are underwater with their mortgages or having difficulty making payments. While the terms are still being worked out, three classes of homeowners stand to benefit in the future. They are:

  • Homeowners needing loan modifications now, including first and second lien principal reduction. The servicers are required to work off up to $17 billion in principal reduction and other forms of loan modification relief nationwide.State attorneys general anticipate the settlement’s requirement for principal reduction will show other lenders that principal reduction is one effective tool in combating foreclosure and that it will not lead to widespread defaults by borrowers who really can afford to pay.
  • Borrowers who are current, but underwater. Borrowers will be able to refinance at today’s historically low interest rates. Servicers will have to provide up to $3 billion in refinancing relief nationwide.
  • Borrowers who lost their homes to foreclosure with no requirement to prove financial harm and without having to release private claims against the servicers or the right to participate in the OCC review process. $1.5 billion will be distributed nationwide to some 750,000 borrowers.

Unfortunately, it's still not clear who will benefit from this settlment as the details are still being determined. We'll post more information as it becomes available. Visit the settlement webpage.

If you know of any other helpful programs for homeowners, please tell us and we'll be sure to add them to the list.

Do You Qualify for a Responsible Homeowner Reward Program?

You have probably heard people talk about how there is only financial help for homeowners who have defaulted on their mortgage payments. That has been true ... until now.

With all of the bailouts and financial programs designed to help homeowners who have fallen behind on their mortgage payments, there are many people asking: “Where’s my help?” For years, the government has been focusing on helping people who are several months behind on their mortgage loan payments while many responsible homeowners - also struggling financially - continue to make their payments on time. If you are one of the ones asking where your financial help is, there is some good news.

The Responsible Homeowner Reward program is a new concept in the area of mortgage relief help. According to Time Magazine, it was one of the top innovations in 2010 and it is gaining widespread popularity among homeowners who have made their mortgage payments on time every month regardless of the sacrifices they have to make. While only a small group of mortgage companies are offering reward programs, they are expected by many experts to become more widespread and to eventually affect approximately 20,000 homeowners. Each mortgage company that offers a reward program can design the guidelines and standards based on their individual recommendations. The mortgage companies who are currently participating in this program include GMAC Mortgage and the PMI Group.

According to Frank Pallotta, the managing partner of the Rumson Loan Value Group based in New Jersey, the amount of money given to each responsible homeowner will vary. And they only get the cash reward at an agreed upon time. In most cases, a homeowner will receive a cash payment if they decide to refinance or sell their home. This is one of the ways that some mortgage companies are trying to prevent people from doing a “strategic default,” which occurs when a homeowner decides it is no longer financially feasible to continue making mortgage payments on an underwater home (a home that is now worth much less than the mortgage).

The guidelines of Responsible Homeowner Reward programs do not affect any part of the mortgage, the principal balance or the payments. However, it is a good financial move on the part of the lenders participating in the program because the homeowners have more of an incentive to stay in their home rather than walk away. Those that have taken advantage of the program have been able to refinance their mortgage at a lower rate and they did not need to bring as much money to the table to pay down the original loan amount to qualify for the refinancing.

Since the program is not widespread yet, only a small percentage of borrowers who are underwater on their homes have been invited to participate. In Maryland, for instance, there are more than 300,000 homeowners who are underwater on their mortgages and only about 500 of them have been invited to participate in the program. Pallotta says that part of the reason for the low participation is that borrowers are not aware of the program. As such, he suggests calling your loan servicer to see if they are participating in this program.

Being a responsible homeowner is a tough job so it is important to get any help with your payments whenever possible. If you are current on your mortgage payments but you are struggling to make those payments on time each month, contact your loan servicer to see if they have any options like the Responsible Homeowner Reward program that they can make available to you.

Considering remortgaging? Check out rates here.

Five Advantages of Choosing a 15-Year Fixed Rate Mortgage Over a 30-Year Mortgage

A 15-year fixed rate mortgage is preferred by many mortgage advisors and home buyers. What are some of the benefits of this type of mortgage and why is it becoming more and more popular for today's home buyer?

With all of the options available to you as a home buyer, choosing the right type of mortgage may seem overwhelming. You can choose from fixed rate mortgages, adjustable rate mortgages, mortgages in which you only pay interest for several years, and several other options. So how do you decide which one to choose? If you are trying to decide, here are some advantages of choosing a 15-year fixed rate mortgage to help you with your decision.

1. A 15-year fixed rate mortgage means paying less interest over the course of the loan.

When you pay your monthly mortgage payment, there is always going to be a significant amount of your money that goes to pay the interest. The longer your mortgage term is, the more interest you are going to pay over the life of the loan. Assuming a straightline amortization schedule and the same loan amount, you will pay less than half of the overall interest over the life of a 15-year fixed rate mortgage than on a 30-year fixed rate mortgage.

2. A 15-year fixed rate mortgage means getting out of debt faster.

Many financial experts suggest doing a 15-year fixed rate mortgage because it will help you get out of debt faster. Experts like Dave Ramsey suggest that you put at least 20 percent down on the home and he also says that your mortgage payment should be no more than 25 percent of your take home pay each month. While the monthly mortgage payments on a 15-year fixed rate loan would be a little higher than on a 30-year mortgage loan, that increase is due to faster amortization (i.e., faster pay down of the loan amount) and you will be out from underneath your mortgage debt in half the time which can be liberating, both financially and psychologically.

3. Rates on a 15 Year Fixed Rate Mortgage are ordinarily Lower than on a 30 Year Fixed Rate Mortgage

While rates on 30 year fixed rate mortgages are at historically low levels, in most parts of the country rates of 15 year fixed rate mortgages are as much as 50 basis points lower.

4. You Are Unlikely to Live in Your Home More than 15 Years

Many home buyers believe that it makes sense to lock in to today’s historically low rates for the longest period possible and therefore believe that they should choose the longest term possible. Such a strategy ignores the reality that very few home buyers will live in their home more than 15 years. When you sell your home, you will be paying off your mortgage.

5. A 15-year fixed rate mortgage loan instills discipline.

You might be asking yourself, “Why can’t I just get a 30-year fixed rate mortgage loan and pay it off in 15 years?” That might sound like a good idea, but the fact is that more than 97 percent of home buyers lack the discipline that it takes to do that and they never make any extra payments after the first few months of their mortgage. When something comes up during the month, it’s very easy to simply forego the extra payment for the mortgage and put the money towards something else. But signing up for a 15-year fixed rate mortgage forces you to discipline yourself and budget your money accordingly so you actually pay off your house in 15 years instead of 30. Besides, even if you sign up for a 30-year fixed rate mortgage and you pay it off in 15 years, you might be paying a higher rate than if you had just signed up for the 15-year fixed rate mortgage (see point 3 above).

A 15-year fixed rate mortgage has both financial and psychological benefits over a 30-year fixed rate mortgage. If it is a possibility for your budget and your financial situation, it may be your best option. Crunch some numbers and work with a qualified financial consultant to make sure a 15-year fixed rate mortgage is ideal for you.

Have a look at 15 year fixed rate mortgage rates where you live here.