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Mortgage And Finance

Question: I am a little confused—some of the homes my wife and I are looking at require us to be pre-qualified. Other REALTORS® or builders have asked that we be pre-approved. What is the difference, and which should we try to achieve? How does the process differ for each?

Answer: This is an excellent question. The terms "pre-qualification" and "pre-approval" are often used interchangeably, but there is a major difference in what they really mean. Being pre-qualified or pre-approved before you begin looking at homes with your REALTOR® is always a good idea.

Pre-qualification can mean that a mortgage professional has made certain calculations based on unverified statements about your income, debts and assets available for down payment in order to estimate the amount of mortgage you can afford. There are even pre-qualification programs on many Web sites allowing buyers to input information themselves to become "pre-qualified."

A more valid pre-qualification involves verification of your income and asset information by providing paychecks, W-2s, bank account and investment statements. In addition, the mortgage professional can order an in-file credit report to determine whether or not you have obvious credit issues that must be addressed. However, in-file credit reports don't contain up-to-date information, so missing or incorrect data can affect your ability to obtain loan approval, or the best loan for your circumstances.

Pre-approval involves several additional steps, starting with completing an application. This can be done in person, by phone or fax, or online at many lenders' Web sites. A mortgage professional will review the application, order a detailed credit report and verify your income and assets using the documentation noted in the previous paragraph. Additional questions may be asked in order to fully understand your employment history, income and assets.

Next, loan programs will be discussed in order to select those that best fit your circumstances. Then, your application will be submitted to either an automated underwriting system, or to a human underwriter who has loan approval authority. The underwriting results will establish conditions that must be met for final approval. For example, you may have a home to sell or debts that must be paid off at closing.

Your mortgage professional should issue a letter stating the loan type and loan amount, or payment amount for which you have been pre-approved, a maximum interest rate for the approval to remain valid and the conditions that must be satisfied before closing. You should make certain the person issuing the pre-approval letter is authorized to do so. With a valid pre-approval letter in hand, the next step is finding a house in your price range, satisfying the conditions and closing your loan.

In both cases, make certain you receive a written good faith estimate of the closing costs and monthly payment so you won't be surprised later. If there is something you don't understand, this is the time to ask questions.

Larry Grubbs
Hearthside Mortgage

Question: I am purchasing my first home—a condo—and have been told I have to have project approval. What is this and who handles it?

Answer: Congratulations on your decision to purchase a home. Condominiums offer many of the same advantages of homeownership that a single-family residence does, plus the convenience of having the association handle much of the exterior and common area maintenance (paid by your condominium fee.)

When your lender seeks approval for a loan from Fannie Mae—the nation's largest provider of funds for home mortgages—certain guidelines must be met. Those guidelines are called project approval.

The primary requirements for project approval relate to unit occupancy, and there are two types. The first requirement is that 70 percent of the condo units must be owner-occupied as primary residences or as second homes. The second requirement is that not more than 10 percent of the units can be owned by a single person or ownership entity.

These guidelines limit the number of units in a given condominium community that can be rented, and also limit the number of units that can be owned by a single entity. These guidelines protect the value of the individual units and the community as a whole, hence protecting the investment you make in your new home.

Your lender is well acquainted with these guidelines or will have easy access to the information. They'll be happy to handle all the details.

Roger Howard
1st Home Realty

Question: I was downsized in 2000 and have been unemployed for the last two years. I recently got a great job with a high paying salary, and my wife and I have decided we want to buy our first home. Between my wife and my income, we definitely make enough to cover the house payments on the size of home we are looking for. But will this period of unemployment hurt our chances of getting a mortgage?

Answer: Congratulations on your new position. The economic downturn of the last several years and the loss of thousands of jobs that accompanied it left many people either unemployed or under employed. Highly skilled individuals were either unable to find employment in their field or accepted positions in other fields at a much lower pay level.

Employment history is an important part of qualifying for a mortgage, but there are other factors that must be considered as well. Some of these factors include credit history, debt to income ratios, money available for your down payment and closing costs, and finally, what monetary reserves will you have after you purchase your new home. No one factor can be looked at individually and to determine an underwriting decision.

You are back working and once again making a good income—but while you were unemployed did you have late pays, collections or repossessions? All of these items would affect your credit score and impact your ability to be approved for a mortgage. What is the relationship between your income, your new house payment and the total of all your obligations? Many mortgages require that your debt to income ratio be within certain guidelines. Do you have the funds to close on the purchase of your new home? Will you have any cash reserves after closing to cover any emergencies that might come up?

Three important things that you can do include: 1) be able to prove your unemployment status through evidence of unemployment insurance or the like, 2) document your previous earnings prior to being downsized, and 3) prove the length of time you had worked in that profession. You can do this is by collecting previous W-2s and pay stubs that would verify your earnings and time of employment and any documentation from your prior company showing your time of service and job loss.

In speaking with my regional underwriting manager, she said that if other mortgage qualifying factors were good—other than your recent employment history—you should be able to be approved for your mortgage.

Joel Epstein
Charter One Mortgage

Question: There seem to be so many financing options that all sound the same! What is the difference between a zero-point loan and a no-cost loan? Which is the better option?

Answer: This question demonstrates that "mortgage-speak" can be very confusing to borrowers. The "zero-points loan" and the "no-cost loan" aren't really types of loans—they are methods of using interest rates to offset cash requirements using various types of loans. These methods are the product of lenders trying to find ways to overcome the biggest obstacle to homeownership, especially for first-time buyers. That obstacle is cash for down payment and closing costs.

"Zero-points loans" appeared first and are more common than "no-cost loans." Until several years ago, it was standard for a borrower to pay an origination fee to cover the lender's costs of processing the loan. That origination fee was typically one "point" or one percent of the loan amount. Since one percent of a $100,000 loan equals $1,000, lenders began offering to close the borrower's loan at a slightly higher interest rate in exchange for not charging the one percent origination fee. "No-cost loans" operate on the same principle as "zero-points loans," but since the lender is covering more expenses, the interest rate will be proportionately higher.

A rule of thumb is one "point" equals .25 percent in interest rate. For example, on a 30-year fixed rate $100,000 loan with a one percent ($1,000.00) origination fee, the Principal and Interest (P&I) payment would be $615.71 at 6.25 percent. If the interest rate were increased to 6.50 percent to eliminate the origination fee, the P&I payment would be $632.07, or $16.35 more per month. That means you would have to make 61 payments (five years and one month) to offset the $1,000 origination fee. (Note: tax deductibility has not been factored into this example.)

A "zero points" or "no costs" loan can be a good idea if you don't have the cash to close or you don't plan to live in the home much longer than the "offset" period. This time period may be different on a "no-cost loan" depending on the increase in interest rate required to offset the costs being covered by the lender. Your required down payment normally cannot be funded using a "no-cost loan."

One bit of advice about "no cost" loans: Take the time to learn how much the typical closing costs should be for the basic type of loan you are seeking. Then do the math to make sure you aren't overpaying in interest rate to cover those costs. There are several ways to minimize the cash you need for down payment and closing costs, so ask about alternatives for comparison.

Larry Grubbs
Hearthside Mortgage

Question: What is a loan prepayment penalty? If the loan we have been offered has this feature, should it be a red flag to look elsewhere?

Answer: A prepayment penalty may be charged by the lender to recover part of the initial costs to originate the loan and some of the interest it planned to earn over the projected life of the mortgage. Today, mortgages typically have a life of five to eight years before they are paid off.

Prepayment penalties are most common on adjustable rate mortgages (ARM) because the interest rates offered are lower than on fixed rate mortgages. Most prepayment penalties are in effect for only one to three years. If you are offered a mortgage with a prepayment penalty that is in effect for more than three years, that could be a red flag.

Be sure to ask if the mortgage you are being offered has a prepayment penalty. If it does, get a written description of how it works. Some penalties are a percentage of the original balance of your mortgage, while others are based on the balance when you pay off the mortgage.

Prepayment penalties can be a fixed percentage for their term, or they may decrease each year. They may also be equal to six months of interest. The potential amount of the penalty can be calculated.

There are "hard" penalties and "soft" penalties. A "hard" penalty is charged no matter what happens. "Soft" penalties may allow you to pay down 20 percent of the balance each year without being charged a fee. That is a desirable feature if you plan to make large additional principal payments during the term of the penalty.

Sometimes, the penalty can be waived if you sell your home and the buyer assumes your existing mortgage or obtains a new mortgage from your lender. In some cases, the penalty can be waived or refunded if you buy a new home and obtain a new mortgage from your previous lender within six to 12 months.

Obviously, if you can find a mortgage with the interest rate, closing fees and features you want, then there is no reason to accept a mortgage with a prepayment penalty. However, if the right mortgage for you does come with a prepayment penalty, just make sure you understand how it works before you go to closing!

Larry Grubbs
Residential Mortgage Group

Question: I would like to start investing in some rental property. I have a mortgage on my own home—can I still get financing for rental properties? Is the process the same?

Answer: The procedure to be approved for buying a rental or non-owner occupied property is very similar to that of buying your primary residence. The basic information you will need still includes income, job stability, credit history, assets and the amount of downpayment.

However, a loan for a non-owner occupied property is a greater risk for a lender, so although the basics remain the same, your information is given much more scrutiny by an underwriter. What is your income, the source of that income and your job stability? Are you a salaried or hourly worker, or are you commissioned or self-employed? How long have you been on your job and in your current pay structure? These are all questions that you may be asked.

Credit scores are very important in the underwriting of any loan, but are even more important when buying an investment property. The amount of your assets is important because a greater down payment is required on an investment property. The amount of reserves or money left over after closing is looked at more closely because a lender wants to know if the property is empty or if your tenant does not pay you their rent will you still be able to make your payment.

There are an ever-increasing number of loan types that you may use to buy an investment property, but the selection is not as diverse as when you are buying your primary home. For example, you can't buy an investment property using a Veteran's Administration loan or a FHA loan. Many of the new interest only loans will not allow investment properties as an eligible property type. Most lenders will not allow secondary financing such as lines of credit to avoid private mortgage insurance when not making a 20 percent downpayment. The private mortgage insurance premiums are higher on a non-owner occupied property than owner occupied. You may not use downpayment assistance programs as a source of funds when buying a rental property. The amount of closing costs that may be paid by the seller is more restrictive than with a home you are going to occupy.

Owning investment property has traditionally been a good way to increase your net worth and gain some tax advantages at the same time. Almost all of us have heard about or seen the many books, tapes and seminars on the advantages of buying and owning property. Unfortunately, most of them overstate the advantages and downplay the problems and challenges, including getting a mortgage to buy the property. Again, the basic steps are the same but each of them takes on greater significance because the amount of risk to the lender is much greater. Underwriters may give you the benefit of the doubt on your personal residence, but watch the guidelines much more closely when you choose to buy an investment property.

Joel Epstein
Charter One Mortgage

Question: I keep hearing about buyers getting PMI, as well as hearing about homeowners trying to get rid of their PMI. What is it? We are in the market for a new home, and I don't know if PMI is something I should be looking for or trying to avoid.

Answer: Private mortgage insurance (PMI) reduces the risk of the lender. Private mortgage companies will insure up to forty percent of the loan amount for lenders, allowing the lenders to provide funds for loans with good assurance that the loan will be repaid, or that the investor will receive funds from the private mortgage insurer to prevent a major loss on the loan.

Borrowers who borrow more than 80 percent of the value of a home will typically be required to pay private mortgage insurance if either FNMA or FHLMC is purchasing the loan. The insurance is required to remain in force for an extended period of time to make certain that short periods of inflated home values do not mandate the removal of the investor's protection.

Per the Homeowner's Protection Act of 1998, the PMI must be automatically terminated either when the loan reaches its midpoint, or when the loan to value is reduced to 78 percent or the original value.

If the borrower requests the termination of the private mortgage insurance, the insurance must be terminated when the balance reaches 80 percent of the original value on loan sold to FNMA. If the loan was purchased by FHLMC, loan balance must be 75 percent or less if the loan is less than five years old. In either case, the there cannot be any mortgage loan payments more than thirty days past due in the last twelve months.

The most common way to pay PMI today is monthly. On most loans, the monthly factor will range from .12 percent of the loan amount if the downpayment is at least 15 percent, up to .96 percent of the loan is there is no downpayment. For example, with a sales price of $125,000, and a downpayment of 10 percent, the loan would be $112,500. With a monthly factor of .52 percent, the monthly premium would be $48.75.

PMI can be a complex issue, and the best way to find the best solution is to work with an experienced lender who will listen to the needs of the client, and structure their home loan to best meet their needs.

Darrel D. Thornton
Winterwood Mortgage Group

Question: I purchased a home four years ago. When we bought it appraised for more than what we paid for it, and has continued to appreciate. We put 10 percent down on the property based on the selling price. I have contacted the mortgage company to see about having the property re-appraised to show that we no longer need to carry private mortgage insurance. The mortgage company said the only way to remove the PMI was if we refinanced our mortgage, getting the property appraised was not sufficient to do away with the private mortgage insurance. Are they allowed to do that? We have a great interest rate and do not want to refinance.

Answer: Mortgage companies and the mortgage secondary market giants Fannie Mae and Freddie Mac usually require private mortgage insurance (PMI) whenever your loan to value is greater than 80 percent. When you purchased the home, its loan to value was based on the lesser of the purchase price or the homes' appraised value. The innovation of PMI was a great boon for consumers and the mortgage industry alike. With lower downpayments, many more people were able to purchase homes and the mortgage company was willing to accept a higher default risk. It was a win-win for both sides.

Today, many borrowers are utilizing a variety of second mortgages, or "piggyback" mortgages, to avoid the necessity of private mortgage insurance altogether. A typical example would be an 80 percent first mortgage and a 10 or 15 percent piggyback mortgage. Thus, you have a low downpayment with out the need for mortgage insurance.

Without knowing exactly what type of mortgage you took out four years ago and not being able to see your closing documents, I cannot give you a complete answer to your question. Under the following conditions, I see no reason why your mortgage company would continue to require you to have PMI. First would be that you have made all of your payments on time. Second would be that based on a new appraisal done by an appraiser approved by your mortgage company, that your loan to value was equal to or less than 80 percent. A third condition might be that you have not placed any additional liens or mortgages against the property that would jeopardize their position. A fourth would be that your debt to income ratio was still within the guidelines for your loan type. If you feel you meet these requirements, you must request in writing that your mortgage company drop your PMI.

The Home Owners Protection Act states that for most types of loans originated after the effective date of the act, when the amortized balance reaches 77 percent or less of the original appraised value, private mortgage insurance is no longer required. That date is normally identified in your closing documents. Prior to that date, your mortgage company is not required to drop your PMI. If your mortgage company does not want to drop your PMI, your only early way out just might be to refinance the loan.

Joel Epstein
Charter One

Question: My husband and I are a year into a Chapter 13 restructuring plan. Obviously, we don't have great credit, but are taking steps to rebuild it and make better decisions with our finances. We are expecting our second child this summer and very much want to be in a home of our own before or shortly after the baby arrives. Our combined income is over $60 K, and we are currently paying $750 a month in rent. Is a lease option a good choice for buyers like us? Can a REALTOR® help us find homes to purchase on a lease option? Can you get financing for a lease option purchase like a traditional mortgage?

Answer: In my opinion, a rent-to-buy, or lease option is rarely a good choice as a way to buy a home. It is basically owner financing, and therefore cannot be mortgaged by the buyer because the seller retains title to the property. The seller finances the home in exchange for a sizable, non-refundable down payment—higher than market purchase price—and a hefty monthly payment. The deposit is usually credited at closing, but very little, if any, of the rent paid during the option period is credited to the buyer towards the purchase price.

You are usually better off waiting the months, and sometimes years, that it may take for you to settle job history and/or credit issues that prevent you from getting a traditional mortgage. Most sellers use the lease option as a last resort to sell a distressed property. More often then not, these properties have been offered on the open market but have not sold either due to location, condition or price. Have a REALTOR® research the history and market value of the property to help you discover why it hasn't sold. Price is usually the culprit.

Unless a seller is desperate, lease option homes are usually sold using the projected value of the home at the end of the option period. This may not be a problem in areas where property values are steadily increasing, but if the market remains flat or loses value unexpectedly, the buyer may not be able to obtain a favorable appraisal at the end of the option period, and may be unable to secure a mortgage. In most cases, the seller would retain your non-refundable deposit and you will find yourself looking for a new place to live.

If you do decide to enter into a lease option, proceed with caution. A REALTOR® can help you with rent-to-buy properties, but they tend to be overpriced and hard to find. A buyer should make sure they can secure a mortgage in the time allotted. Some judgments against a buyer, such as child support, can only be rectified by payment. If filing bankruptcy on these judgments is not possible, and you are unable to pay them, you will be unable to obtain a mortgage at the end of your option period. Again, you will probably lose your deposit, and maybe even be evicted.

Always have a home inspection on a lease option home before signing contracts. Do not take a seller's verbal word on the condition of the home. Make the seller responsible for any major repairs, or you may find yourself paying for someone else's problems.

Most importantly, be leery of "investors" who purchase properties subject to existing mortgages and sell them as lease options. This is a growing problem in Indiana, and although some may be honest, others are not. These people convince sellers to sign over their property ownership rights to them without taking financial responsibility. Many of these dishonest investors hide behind an LLC, or Limited Liability Corporation, which limits your ability to collect or be reimbursed if a court finds that they wronged you. They hope to get rich quick by finding buyers that are unable to fulfill their lease option contracts. They keep their deposits and rents and move on to the next unsuspecting buyer, securing another non-refundable deposit.

I have also seen cases where these investors collect deposits and rent, but never actually make a mortgage payment. The bank may foreclose on the property before the buyer is able to secure financing, and the original owners of the property lose their home and have their credit ruined. A title search can show who owns the property and who holds the mortgage. Make sure these are one and the same, and that the mortgage is not more than your purchase price. If you have no way to verify that the mortgage payments are being made, steer clear of the property.

Finally, always have a REALTOR® or attorney look over the lease option contract before you sign!

Lori Choate
RE/MAX Connection

Question: Is now a good time to get into an ARM? We've had some credit problems in the past, and we aren't sure we will be eligible for FHA. I wasn't fully sure of the difference between the two, I just know that FHA is more favorable for first time buyers. Can you help explain the difference between the two financing options?

Answer: I understand your confusion. ARMs and FHA loans are like apples and oranges—let me explain. ARM stands for an adjustable rate mortgage and FHA stands for Federal Housing Administration. ARMs are a specific type of loan and FHA is a government agency that guarantees loans against default given to borrowers by mortgage companies.

ARMs come in many different varieties but they all have certain characteristics that are common to them. Every ARM has a margin, an index and periodic adjustment caps. The rate on an adjustable rate mortgage is made up of two components—the index and the margin. The index is the financial instrument that an ARMs rate is based on when calculating the interest rate. The most common indexes are the one-year US treasury, prime and the one-year LIBOR. The values of these common indexes may be readily found in most newspapers, business journals or on financial websites.

The margin is a fixed percentage over the index. For example, if the index is 3 percent and the margin on your loan is 2.25 percent, your interest rate would be 5.25 percent. When your interest rates gets recalculated, it is the change in the index that causes your interest to go up or down since your margin is a constant number. In the above example, if the index moves to 4 percent, your new interest rate would be 6.25 percent.

Another main feature of all ARMs is adjustment caps. The caps tell you how much the rate can go up or down on each change date and how high the rate may go over the initial start rate during the life of the loan. For example, an ARM with 2/5 caps means that on each change date the rate may go up or down no more than 2 percent at any one time, and cannot go up more than 5 percent over the start rate. An ARM usually gets its name from the amount of time the rate is initially fixed, and how often it changes after the first period. Thus, a 3/1 ARM would be a loan where the rate is fixed for the first three years and than changes yearly for the life of the loan.

The most common types of ARMs are 1/1 or 1 year ARMs, 3/1, 5/1 or 5 year, 7/1 (or 7 year) and 10/1 (or 10 year.) In each case, the first number tells you how long the rate is initially fixed for and the second tells you how often the rate may change thereafter. There are other types of adjustable rate loans available, but their basics are usually the same—an index, a margin and adjustment caps.

FHA borrowers must meet certain qualification guidelines as to credit, income, assets and down payment to have their loan approved. For someone with some past credit blemishes, an FHA loan might be an excellent choice. The underwriting guidelines on a FHA are a little more forgiving than on some conventional loans. FHA loans are very popular with first time buyers due to this underwriting flexibility, including not having to have any of your own personal funds in the transaction. The down payment and closing costs can be a gift from a family member or a grant from a non-profit organization. There are fixed rate FHA loans as well as adjustable rate FHA loans.

Two of the main questions you need to answer before deciding between an ARM or fixed rate mortgage is how long you plan on living in your home, and how willing you are to accept risk. If you plan on living in your house a short time, an ARM would be a good option because you will probably have moved on before your rate changes significantly. If you are willing to take the risk of what rates may be in the future, an ARM might also be a good option, as the initial rate on an ARM is usually lower than that of a fixed rate loan. If you plan on living in your house for a longer period of time, and you are not a big risk taker, fixed rates are still very attractive. All rates have been going up lately, but fixed rates have not been going up as fast as adjustable rate mortgages.

Joel Epstein
Charter One

Question: What is the difference between a conforming and non-conforming loan?

Answer: A conforming loan is a conventional loan that meets the guidelines of Fannie Mae or Freddie Mac, the nation's largest servicers of conventional loans. Consumers meeting approval guidelines can obtain a standard conventional loan up to $359,650, the current maximum loan amount.

A non-conforming loan could be a jumbo loan that exceeds these standard limits—these loans require a private investor or a bank that offers a portfolio of loan opportunities. Many lenders have the ability to place a jumbo loan, but often with a minimal increase in the rate. Additional fees may also be applicable, depending on the market and the investor.

A non-conforming loan can also be referred to as a sub-prime loan, or more commonly a "B C loan." These loans are used when consumers do not qualify for the standard conventional loan, because of credit, income or down payment requirements.

There are many new financing opportunities on the market, it is best to check with a mortgage banker or your personal banker to determine which loan type will best suit your financial needs. Consumers can also visit www.fanniemae.com for specific program information to help in obtaining homeownership.

Connie Dixon
National City Mortgage

Question: Is it possible to borrow 100 percent of the purchase price of a home? What programs can help me do this?

Answer: There are now more programs than ever before to help buyers purchase a home with zero money down. There are programs available for people with perfect credit and high incomes, people with "bruised" credit, programs for first time homebuyers with no traditional credit history and people who fall in the low to moderate income ranges. Private mortgage insurance, which is usually required when you do not have a down payment of twenty percent, may or may not be required depending on the loan program utilized. Some loans will allow you to finance 100 percent of the cost of the house in a single loan, while other times, you will utilize a combination of a first and second mortgage. There are even some cases where you may finance your closing costs into your loan amount as well.

For example, Fannie Mae offers a loan called Flex 100 that allows the borrower to purchase a home with no money down all in a single loan. They also offer a Flex 100 where the borrower has a primary mortgage for 80 percent of the cost of the new home, and the lender provides a second mortgage or piggy back for the remaining 20 percent of the home's cost. Fannie Mae also has a loan for low to moderate income borrowers called "My Community," which is zero down and only requires the borrower to have $500 of their own money in the total transaction.

Many lenders offer loans that are not sold to Fannie Mae or Freddie Mac—commonly called portfolio or "shelf" loans—which utilize either single loan or piggyback financing. These may be fixed rate or a wide array of adjustable rate loans. The secondary financing may also be a fixed rate or a variable rate line of credit or a combination of the two. Brokerage companies like Smith Barney and Merrill Lynch offer 100 percent financing to their customers with sizeable stock portfolios by "freezing" part of their stock account to serve as the collateral for the home loan.

A buyer is normally required to make a 3 percent investment when using a FHA loan to purchase their new home. FHA does not require any of these funds to be the borrower's own personal funds—they may be a qualified gift or grant. Over the years, there have been numerous down payment assistance programs such as Homebase, Neighborhood Gold, Ameridream and Nehemiah that have given FHA buyers a grant for the required 3 percent down, thus the buyer is in a sense getting 100 percent financing. Eligible veterans may even qualify for 100 percent financing from the Veteran's Administration.

A final example of 100 percent financing is a loan from the Indiana Housing Finance Authority used in combination with a traditional loan. As you can see, the types of loan programs that will allow you do buy a house with zero down are as varied as the people wanting them. Good luck.

Joel Epstein
Charter One

Question: We purchased a vacation home when we were first married, and have enjoyed it for the past eight years. But now that we have kids and an active home business, we just don't get to use it very much. I don't want to get rid of it, but I would like to start renting it out to recoup some of our investment and help pay for upkeep. We had also considered refinancing the property in the near future. Will using it as a rental, rather than strictly as a second home, make a difference in our financing options? Anything else we should be aware of?

Answer: Second homes or vacation homes have become more common in the past few years. Occasionally renting out a second home does not automatically classify it as a rental property for lending purposes, assuming you use it personally during the year.

Terms for refinancing a second home are usually more favorable than those for refinancing an investment property. Second home loan programs usually offer better interest rates, higher loan-to-value ratios, less documentation and sometimes lower fees.

If you don't plan to use the second home at all, or if you need to count the rental income to qualify for the refinance loan, it will be considered an investment property. There are many programs available for investment properties, and interest only loans have become increasingly popular when the project is still appreciating in value.

Do you just want to lower your monthly payment, or do you want to cash out some of your equity in the second home? A cash out refinance is sometimes worth considering, if you have a specific use for the money such as other investments or refurbishing the property.

Before renting out your second home, check to see if there are any restrictions imposed by the owner's association or by local housing codes. Short-term rentals (daily or weekly) may not be allowed, and sometimes you may be prohibiting from renting the property for any period of time.

If your second home is located in a "condotel," financing will be more difficult. Condotels are usually larger projects that offer hotel-type services like a front desk that handles reservations, daily rentals and maid service. Often you are required to list your unit in a rental pool that is professionally managed.

Larry Grubbs
Residential Mortgage Group

Question: How many percentage points difference should I require before considering a re-fi? For example, if my mortgage interest rate is 7 1/4 percent fixed now, what would it need to be to see a substantial reduction in my monthly payment?

Answer: The old rule of thumb was that rates had to drop by at least 1 to 2 percent before considering a refinance. But that is a too simplistic answer. There are numerous other variables to consider, like the amount of your loan, type of loan you currently have, how long you plan on living in your house and how many years you have left on your current loan.

The larger the amount of your loan, the less rates have to go down to make a significant difference in the monthly payment. For example, on a $300,000 30-year fixed-rate loan at 7.25 percent, the monthly P&I would be $2,046.53. At 6.25 percent, the monthly P&I would be $1,847.15, a reduction of about $200 per month.

Compare that to the same changes on a $50,000 loan. At 7.25 percent, the monthly P&I would be $341.09, and at 6.25 percent, the P&I would be $307.86—a change of only $34 per month. The closing costs on either loan would be about the same—$1,400 to $1,500, as most closing costs are flat fees and not based on the size of the loan. Your payback on the $300,000 loan is approximately seven months, and on the $50,000 loan it is 41 months! If you take into account that you normally do not have a payment the month after you close, on the $300,000 loan—with your closing costs being less than the monthly payment—you would have made your break-even, and payback is immediate.

The type of loan you currently have and what you want to change to is also an important consideration. If you currently have an adjustable rate mortgage and you are afraid of rates going up too high in the future, you may consider refinancing to a fixed rate at a rate close to what your adjustable rate loan is currently. The security of having a fixed P&I payment might outweigh the need for a larger rate drop.

If you are only going to live in your house for a short time, it might not pay to refinance your home. When you consider the cost of refinancing and your breakeven point, it could cost you more to refinance than you will have saved.

Joel Epstein
Charter One Mortgage

Question: We are preparing to purchase a home. How do we determine if an ARM is the right type of mortgage loan for us? —Suzanne and David McCarty, Greenwood

Answer: The question about determining whether or not to select an adjustable rate loan or a fixed rate is really just simple math. The most important question to consider is the length of time they intend to keep the loan.

Since the interest rates are usually lower for adjustable rate loans than fixed rate loans, the monthly payments will be lower. For example, a 30 year fixed rate P&I payment would be $738.86 for a $120,000 loan with an interest rate of 6.25 percent. On a 5-1 ARM, the interest rate would drop to 5.875 percent, and the P&I payment would only be$709.85 per month. In the event the event the home is sold within the five-year period, our clients would have saved $29.01 every month they had the loan. In the sixth year, the rate could increase to 10.875 percent, and the P&I payment could go up to $1,131.47 per month! In this case, the monthly savings for the first five years would soon be given back.

While no one knows what the future interest rates will be, it should be noted that most adjustable rate loans start with artificially low rates. After the initial term (such as five years), the rate will be determined by adding a fixed margin, which ranges from 2.25 percent to 2.75 percent, to the "index", which is the changing factor. The current index on the above referenced example is 4.716 percent, and the margin is 2.375 percent. If the index after five years was the same, the interest rate would still increase from 5.875 percent to 7.09 percent (which would be rounded up to 7.125 percent.)

Some lenders may encourage clients to consider an ARM loan with the understanding that they can refinance if the rate goes up. The fallacy to that strategy is the fact that the fixed rates are nearly always higher than the ARM rates.

There are times when an ARM loan is the best way to finance a home, but every client need to seek a competent lender to show them all of the details, and to assist them in finding the best home loan to meet their needs.

Darrel D. Thornton
Winterwood Mortgage Group

Question: I just built a new home. I know that property tax reassessment will raise my monthly mortgage payments, but when does this happen? How much, on average, can I expect my payments to increase?

Answer: The real estate tax portion of the mortgage payment on your newly constructed home will go up depending on where your home is located, when your home was completed, how soon it got assessed and added to the tax rolls, how much it was assessed for, and finally, when your mortgage company does its annual escrow analysis. Your tax rate is based upon the budgets of all the various governmental units in your area. These include your city, county and township taxes, as well as school, library, fire, solid waste and parks department, just to name a few. A person in Center Township would pay a different amount in taxes than a person who lives in Washington or Pike Township with a house of the same value. The same would hold true for two similarly valued houses in Carmel or Greenwood. I recommend you contact your local assessor's office, tell them where you live and the approximate value of your home and they can give you a good idea of what your taxes will be once your house is fully assessed.

Real estate taxes in Indiana are paid one year in arrears, so the taxes you pay in 2006 are for the year 2005. If your house was built in 2005, it would be 2007 before you pay your first full tax bill. This fact leads to a lot of people having mortgage payment shock when their payment gets adjusted for the full tax amount. Initially, your tax payment and consequently your escrow account are based just on the land value, or maybe a partially completed house. Now, the full bill goes to your mortgage company for payment out of your escrow account, and since your monthly escrow amount was based on the lower value, your account usually has a big shortage. Mortgage companies are required to perform an annual review of your escrow account to ensure there is enough money being collected to pay your taxes and insurance when due, as well as making sure too much money is not being collected. It is during this process that your monthly escrow amount will be adjusted, as well as being billed for any possible shortages in your escrow account.

Joel Epstein
Charter One Bank

Question: Typically, how long do you have to live in a home before you can refinance? We purchased a new home less than a year ago, but have hit some hard financial times and wanted to know if our home equity was a resource available to us.

Answer: There really are no time constraints on most loans. In fact, there is nothing to prevent people from refinancing the day after they close! In the event that they closed on a "sub-prime" loan, however, there may be a pre-payment penalty for up to five years. This penalty typically ranges from 1 percent to 3 percent of the loan balance.

Your question indicated that you are experiencing some "hard financial times." If your credit scores have dipped, you may not be able to refinance to a conventional loan with the best interest rates. A sub-prime loan may increase your monthly payment, but may prove to be a good short-term solution.

The appraised value of the home is yet another area to consider. Unless you made considerable improvements to the home and increased the market value, the amount you can borrow may be limited to the current loan balance, unless you made a substantial down payment.

The closing costs for refinancing also need to be considered. While these costs can be rolled into the new loan if you have sufficient equity, the costs are real, and need to be considered.

Talk to a professional loan consultant to discuss your options. I recommend a mortgage loan broker, because they can offer some loan opportunities that most banks do not offer.

Darrel D. Thornton
Winterwood Mortgage Group

Question: My sister was recently widowed and cannot afford the projected $1,000/month mortgage on her home, currently under construction. Since her family financial situation has changed, is she still bound to purchase the home? Or does she have to close and try to immediately sell it before she can find a more modest home?

Answer: As is often the case, the answer is, "It depends." Your sister has several options to consider in her attempt to cancel the contract. If she and her late husband were working with a REALTOR®, he can assist in the communication with the builder, and can use his expertise help reach a satisfactory resolution.

If no REALTOR® was involved, she should immediately contact the builder to explain the situation and ask to be released from the contract. I would like to think that the builder would be understanding and would agree to a cancellation. In fact, I called several builders and asked them what they would do, and they all said that they would release the buyer from the contract under your sister's circumstances.

If the builder is not willing to cancel the contract, there may be another remedy. Can she still qualify for the mortgage without her husband's income? Her contract probably has a contingency clause that would allow for cancellation without penalty if the buyer cannot get appropriate financing, and this clause might allow her to cancel the contract.

How far along is the construction? The earlier in the process, the more likely the builder is to be cooperative, because he will have time to sell the home to another buyer before it is completed. If, however, the home is nearly completed and your sister and her late husband had a lot of unusual features included in the home, it might be more difficult for the builder to sell to someone else.

How much of a deposit has your sister paid to date? Canceling the contract could cause her to forfeit that money, and it's possible that she could incur additional penalties for a cancellation. Her contract with the builder probably has a section addressing cancellation.

I would not suggest that she close and try to re-sell the house immediately. Re-selling a home in a neighborhood that is still being built is not easy, and the expenses she would incur along the way would not make it a cost-effective move.

If the builder is unwilling to allow the cancellation, the advice of an attorney familiar with contract law could be invaluable.

Dave Goff
Carpenter, REALTORS®

Question: Can you negotiate the price of a bank-owned home?

Answer: When it comes to negotiating for a bank-owned home, each situation is different. Traditionally, there is a listing agent involved to represent the bank. As a prospective buyer, you make an offer on the home, and the listing agent presents it to the bank. If the offer constitutes a short sale—meaning the bank will have to take less than is owed on the home—the bank decides how much of a loss they are willing to take. This determines the sale price. It is very important to have a REALTOR® represent you in the purchase, as there can be several pitfalls to watch out for. For example, if a bank representative has not signed your offer, the bank can accept another offer at any time during negotiations. You can't rely on verbal acceptance. It also generally takes longer to get an answer on offers. Negotiating with a bank is often is not as smooth of a process as most normal transactions, but if you get a good buy and have patience, it can be worth it.

Anne Elsbury
Century 21 Realty Group Elsbury

Question: "Two years ago, my wife and I declared bankruptcy. Since that time, we have been very careful with our spending and have gotten our finances under control. I have been at my job for less than a year, but my wife has been at hers for over a year. With a baby on the way this summer, we would like to purchase our first home. With our bad credit history and the bankruptcy over our heads, is there any chance? What can we do to make ourselves better candidates for approval?"

Answer: Even with the bankruptcy, yes. Most insurers of Federal Housing Administration (FHA), Veterans Affairs (VA), and Fannie Mae (FNMA) loans require the borrower be at least two years from the actual discharge date of the bankruptcy. However, there are many other related issues that could keep you from obtaining a home loan. First, most lenders will require you to have established a good credit history after the bankruptcy. That may not be the case in your situation, since the bankruptcy is only two years old. Any car payments, credit card payments, rent, utilities, etc. would be looked at to establish a good credit pattern.

If no outside credit pattern can be determined, the lender would look at buy here/pay here purchases, auto insurance, or perhaps a cell phone payment record. There are many ways to obtain that credit pattern, but that credit pattern will need to be clean. The lender will want an explanation of your reason for filing bankruptcy, and possibly supporting documentation. It's likely you will need to look at an FHA Loan, as the guidelines are more flexible. My suggestion is to call a mortgage banking institution and get pre-approved—then you will be able to look for the home of your choice. In any situation, the key to homeownership is to be pre-approved before you go house hunting—it will keep you from wasting your time or being disappointed if you cannot qualify for the home of your choice.

Connie Dixon
National City Mortgage

Question: "We are building our first home, and are confused about the financing options available. The salesperson we have been working with advised we go with a buy-down, because we can write it off on taxes and it will make our payments lower. Can you explain a buy-down? Is it a good option?"

Answer: First, any type of mortgage loan will allow you the opportunity to write off the interest from your mortgage as a federal tax deduction. That is the benefit of homeownership, along with the joys of having your own home for your family.

The buy-down program is a very popular program among the building community. It allows the consumer to start out with a lower payment, therefore allowing them to qualify for a larger home for their family. Or, just have the advantages of a lower payment for the first two or three years. Many lenders offer what is referred to as a 2-1 or 2-3 buy-down.

For instance, if the current 30-year fixed rate market is at 6 percent, you could obtain a buy-down of 4 percent at year one, 5 percent at year two, then 6 percent for the remainder of the term of the loan. There is a fee associated with the buy-down, but the builder or seller would typically pay that for the buyer. That fee is then disbursed from an escrow account that subsidizes the monthly payment for years one and two, to equal the required rate of 6 percent.

It is important to understand that during the payment increases in the buy-down program, the consumer will also have increases in escrow as a result of the assessment of property taxes. Therefore, they will incur a two-fold increase at some point. In some cases, they could see their payment increase $200 to $300 a month.

A buy-down could also be a permanent buy-down, where an up-front fee is paid to buy the rate down from the beginning of the loan to a permanent fixed rate. It could also be used on an adjustable rate program. It just depends upon the consumer needs and qualifications.

Connie Dixon
National City Mortgage

Question: My fiancé and I will be graduating from high school in May and marrying in July. After the wedding, we want to buy a home. We don't have bad credit—we have no credit. Neither of us have ever had a credit card, and we both still live at home. We both have worked part-time during school for two years, and full-time during the summer for three summers. I've had the same job all that time, but my fiancé has had a couple of different jobs. We both have full-time work lined up after graduation. Is there any way we might be able to buy a house? We don't want an apartment, we want a place of our own.

Answer: It is admirable that young people recognize the benefits of home ownership, and want to purchase a home right away. According to common underwriting practice for home loans, past credit performance serves as the most useful guide in determining the attitude toward credit obligations that will govern the borrower's future actions. Borrowers who have made payments on previous or current credit obligations in a timely manner are more likely to be a reduced risk for home loans.

Without a credit payment history, such as rent, auto loans, revolving debt, utilities, monthly insurance payments, child care providers, or any other types of credit which can be documented, it is very difficult for lenders to know if potential home loan borrowers have the willingness or the ability to make home payments in a timely manner.

The U.S. Department of Housing and Urban Development (HUD) underwriting criteria has provisions for allowing the verification of "non-traditional" credit sources to help determine the credit worthiness of potential borrowers, and they further state that the lack of credit history may not be used as a basis for rejecting a loan. While this is good news for young people who have not established any credit, it needs to be noted that other factors need to be very good to offset the lack of credit. If the employment stability is good, the debt to income ratios are low, and the down payment is more than the minimum required, the loan will be easier to justify.

One avenue that will help enable borrowers with no credit history to obtain a home loan is to have a creditworthy co-signer. In many cases parents are asked to sign with their children to obtain their first home. The primary responsibility to make the payments belongs to the young borrowers, but the parents have contingent liability in the event the payments are not made in a timely manner. In the case of FHA loans, there are provisions to enable the parents to be released from liability once the young people have established a good credit history.

Darrel D. Thornton
Winterwood Mortgage Group

Question: "We are building our first home, and have run into a problem with our credit. Our projected closing date has been delayed by six months so the finance company can monitor our spending and see if we make improvements on our credit. I didn't think we had bad credit, although we do have some debt. What should we do during this probation period to make sure we still get our house? What exactly are they looking for?"

Answer: This is difficult to answer based on the minimal amount of information regarding your current credit standing supplied in your question. However, something has occurred since you were originally approved that has made the lender nervous. Either you have been 30 days or more late with payments, or you have accumulated even more debt than you had originally. What the lender will be looking for during this "probation period" is to see that all payments are made on time, with no exceptions, and that you are making a conscious effort to pay down debt, not add more.

Wayne Dimmock
Stockyard Banks

Question: "Is it possible to use a gift for 100 percent of the down payment for a home? My grandparents have offered to give us 20 percent of the purchase price as a wedding present."

Answer: You are truly fortunate to have such generous grandparents! Since you will have a down payment of 20 percent of the sales price, you will not be required to invest any of your own money for the down payment. If the total down payment required is less than 20 percent of the sales price, you will be required to show that at least 5 percent of the sales price is being made with your own funds, and not a gift or a loan.

For proper documentation, you will need a gift letter noting the following:

The funds are being given by a relative (specify the relationship),
Repayment is not expected or required,
Identification of the property being purchased,
The amount of the gift,
The donor's mailing address.

While a large down payment is a great start, you will still need to demonstrate the ability to repay the loan and show a good credit rating in order to qualify for a great low interest rate.

Darrel D. Thornton
Winterwood Mortgage Group

Question: My house recently went into escrow that was supposed to last 60 days. One week before closing, the agent notified us that the house did not appraise for the amount agreed upon in the sales contract. The buyers are refusing to obtain another mortgage company or another appraisal at my cost. Do they forfeit their $2,500.00 that is in escrow to me, or is it a technicality and they get their money back?

Answer: It depends on how the offer to purchase was written. If the purchase agreement involved FHA financing, there is an addendum to the sale stating that if the home does not appraise for the purchase price or greater, the buyers are not bound to purchase the property. In this case, the buyers should receive their earnest money back.

The purchase agreement should address the type of financing the purchaser was pursuing, and should be contingent upon their ability to obtain it. If the purchase was written subject to obtaining a percentage of loan to value, or subject to an appraisal of equal to higher in value of the purchase price, the buyers do not have to pursue the purchase without an adequate appraised price and should receive their earnest money back.

You should consult your REALTOR® about the appraisal that was received and decide if it is worth appealing the appraisal, or obtaining another appraisal at your cost to proceed with the closing.

Kathy Hall
Century 21 Realty Group Elsbury

Question: "I've heard there is something called an EZ Doc loan that can save me a lot of paperwork. What is it, and how can I qualify?"

Answer: I'm not exactly sure what you're referring to by an EZ Doc loan. However, there are a number of programs designed to streamline the loan process. Most of them involve the borrower providing "alternative documents" to the lender. This means the borrower can provide pay stubs, W-2's and bank statements as a substitute for the lender having to send out verifications to creditors, employers, and banks. It speeds up the process—there is no need to wait for those verifications to be returned to the lender. Most lenders now accept these alternative documents.

Taking it one step further, some programs will streamline the process even more depending on the borrower's credit score. If your credit score is high enough, the lender may not require verification at all—not even proof of income. It is all done by warrants on the part of the consumer. This really helps the self-employed borrower, whose income structure can be confusing as a result of the tax laws.

Wayne Dimmock
Stockyard Banks

Question: "My wife and I are buying our first home. Should we lock our interest rate at loan application, or float the rate until closing? Would the lender require a fee to lock in the interest rate, if that is the best course of action? We aren't sure what to do."

Answer: This is a very easy question to answer—if you can check your crystal ball. Only someone who knows the future can tell whether or not it is wise to lock in to an interest rate when they apply for a home loan.

Most lenders will allow clients to lock in their rate on a home for thirty days with no fee charged. This allows all parties time to ensure a smooth closing. If there are circumstances that may delay the closing, the rate can be locked for up to sixty days without an upfront fee. The interest rate will probably be slightly higher for the additional time on the lock.

There are programs that allow clients to guarantee the rate for up to one year. For this guarantee, there is a non-refundable fee due at the time the rate is locked in. This may prove to be an excellent investment if the rates go up dramatically before closing, but it is a waste of funds if the rates drop or do not change.

A plan that is increasingly attractive for homes being built is a rate cap program. Lenders are willing to guarantee that the rate will not increase by more than 1 percent over the current rate if you are able to close within one year.

There will be a fee charged for this guarantee of the rate. In some cases, the fee will be returned provided you close within the agreed upon time period. This is excellent insurance against rates increasing by a significant amount—which may make it difficult to make the new house payment.

If the interest rate at time of application will provide an acceptable monthly payment, and you can close the transaction within the lock-in time frame, you can alleviate the stress of monitoring interest rates while your loan is being processed.

Darrel D. Thornton
Winterwood Mortgage Group

Question: I've heard taking homebuying classes can help us in our mortgage process. How does that work?

Answer: Homeownership training is structured to ensure that buyers understand the homebuying process. Often, this type of education program is required as a part of a federal mortgage program, commonly geared toward first-time homebuyers. The training covers topics that provide an overview of each step in the homebuying process, including budgeting, finding a home, buying a home, and maintaining a home. Other topics include credit counseling, money management, qualifying for a mortgage, home inspections, property taxes, homeowner's insurance, and more. Many homebuyer assistance programs require homeowner education, designed to help people understand the homebuying process. One example is the Homebuyer Education Learning Program (HELP) for Federal Housing Authority (FHA) loans. Under this program, it is possible that you could be eligible for an initial reduction in FHA mortgage insurance. Homebuying education is offered by a variety of sources, including the local government and housing counseling agencies. Locally, the Indianapolis Neighborhood Housing Partnership – www.inhp.org – provides educational courses. To maximize benefits, you should know if the training class is endorsed. Fannie Mae, Freddie Mac, Nehemiah, and FHA all offer mortgage programs that require homebuyer education—make sure any class you sign up for satisfies their requirements.

David B. Cain, MAI, CCIM
West Clay Realty

Question: I've just started a new job, and we are trying to buy a house. How much of a role does my job history play in getting a mortgage?

Answer: Most mortgages require the verification of a two-year work history—but the two years do not have to be with the same employer. Length of employment is only one of the factors at play when trying to qualify for a mortgage. More important is your type of compensation. Are you salaried, hourly, commissioned or self-employed? If you are newly self-employed or have taken a commission-only job for the first time, it will be much harder for you to qualify for a mortgage. In both of these cases, we would typically base your income off a two-year average of your net income as reported on your federal tax return. If you are an hourly or salaried employee, a pay stub, W-2 and verbal verification of employment are all that will be normally required. A newly employed graduate does not even have to have a two-year work history, because their time in school will count as prior work history. The main thing an underwriter will look for is the stability and likely continuance of your income.

Joel Epstein
Charter One Mortgage

Question: "What is a loan prepayment penalty, and is it generally advisable to get a loan that has one?"

Answer: A prepayment penalty on a loan allows the lender to charge a borrower additional interest when a loan is repaid during the penalty period. If a loan does have a prepayment penalty, this is clearly stated within the mortgage disclosures, mortgage note, or prepayment penalty rider to the note.

It is not advisable to take out a loan that has a prepayment penalty. There is enough competition out there for almost anyone to qualify without having to endure a penalty for early payoff. Generally, prepayment penalties will be in effect from one to five years. They can cost an individual between 1 percent and 5 percent of the loan balance at the time of payoff. Therefore, it usually will make no financial sense to do it.

It would obviously be a high price to pay to get out from under a loan obligation unless you had no other choice. The best way to avoid such a problem is to obtain financing from a lender who does not charge a prepayment penalty.

Wayne Dimmock
Stockyard Banks

Question: Is it possible to get financing for a sheriff sale property? If so, how is the process different?

Answer: I have done a little research, and I do not have good news. According to the Marion County division, buyers at sheriff sales must have evidence of the funds that are bid at the time the bid is submitted. This makes conventional financing impossible since you need the money before you close on the transaction.

If you are able to pay for the property with cash, through refinancing or a home equity loan on another property, you may be able to refinance the home purchased through the sheriff sale after you own it. There are limitations here however, because most lenders will determine the value of the property to be the lower of the appraised value or the price you pay to the sheriff.

Most of the time, properties purchased through sheriff sales are purchased by people who already have funds available.

Darrel D. Thornton
Winterwood Mortgage Group

Question: We don't have a lot of money saved for a down payment on our home, and a colleague said we should check to see if we could get any sweat equity on the house. What does this mean, and how can we qualify for it?

Answer: Sweat equity is an option in very limited situations. Conventional conforming loans require a borrower to have 5 percent of their own funds as vested interest in the property, and do not allow sweat equity as a substitute for any of those necessary funds. Government or Federal Housing Administration (FHA) loans do allow for sweat equity on new construction—on a limited basis. The builder must get approval from HUD on a schedule of allowable amounts of sweat equity to be credited to a borrower for specific tasks that they may do in the building process. The most common example is probably painting. In this example, the borrower could paint the interior of the home for a predetermined and approved credit toward their needed funds to close in the transaction.

Even though it is a possibility, most builders are cautious and hesitant when it comes to the question of sweat equity. The unknown abilities of the borrower and potential problems with scheduling the sweat equity tasks with the building schedule of other contractors in the building process can lead to problems.

So, while sweat equity is an option, it is a very limited one.

Ben Wills
Countrywide Home Loans

Question: I just purchased my first home. Are any of the closing costs associated with the purchase tax-deductible?

Answer: In the purchase of a personal residence, deductible settlement costs include loan origination fees, or "points," and real estate taxes. Some portions of the interest paid—including prepaid interest and allocated interest—can also be deductible. Settlement costs associated with the closing, such as a credit report, appraisal, mortgage insurance, Veterans Affairs (VA) funding fee, loan processing fee, refinancing costs, etc., are not deductible. Costs associated with commissions, title insurance, survey, and deed, increase your basis in the property, but are not deductible. An accountant or other tax professional should be consulted to assure your deductions are maximized and accurately reported.

David B. Cain, MAI, CCIM
West Clay Realty

Question: Just like most of my neighbors, my property taxes increased with the reassessment. Do I have to pay the difference all at once, or is there a payment plan available?

Answer: Many people have questions at this time. Consumers should check with their current lender about the procedures that apply. Each homeowner's escrow situation and each lender's policies will vary. Generally speaking however, most lenders will advance the payment to the appropriate taxing authority and then reanalyze the escrow account. The lender will provide a new analysis of the escrow, adjust the payment accordingly, and allow the borrower to pay over a 12-month period—or, if preferred, the homeowner can pay it in one lump sum and then readjust the payment. In the case of new construction homes, taxes are assessed on land only at the time of purchase and the full property taxes are collected in arrears. This state-mandated method of tax collection coupled with reassessment could mean big adjustments—consumers should discuss the details with their lender.

The escrow payment will increase to offset new taxes over a 12-month period, but the new tax will be adjusted in their payment as well. When the shortage is paid, the payment will readjust.

If by chance consumers are not escrowing with their lender and are paying the Treasurer direct, then they will owe the money.

Connie Dixon
National City Mortgage

Question: In January, I received a letter from a mortgage company, similar to those we receive nearly every day. This particular lender was affiliated with HUD, so I called them. In talking with the agent, she said 6.75 percent was a good rate and she couldn't do much better, but as we had now lived in our newly built home for seven years, we could get rid of the PMI insurance. We have been late in our payments before, but never 30 days. So, I contacted our mortgage holder, who just picked up our mortgage loan from a previous holder in November. Their escrow dept. said we had to carry this insurance the entire 30 years on an FHA loan. The only way that we could get rid of it is if we refinanced with someone else. Who is right? I could use the extra $25 a month.

Answer: If your FHA loan opened prior to 2001 and you put less than 10 percent down, you are required to pay the monthly mortgage insurance for the entire 30 years of the loan. On January 1, 2001, HUD changed the rules regarding monthly mortgage insurance to be more in alignment with conventional financing. Loans opened after this date only require monthly mortgage insurance until the loan balance has reached 78 percent of the original purchase price. This usually occurs between the twelfth and thirteenth year of the loan. Conventional loans work the same way, except the borrower may request removal of the monthly mortgage insurance at any time by providing an appraisal that puts the loan balance at 80 percent of the current appraised value. HUD has no such option at this time. In your case, the only way to remove the monthly mortgage insurance is to refinance.

Most mortgage holders that service loans do not have the capacity to handle refinance requests. Since you've been in your home for seven years and you are paying 6.75 percent with monthly mortgage insurance, you should think about refinancing. Current fixed rates are below 6.00 percent. It's likely that after seven years, you owe 80 percent or less than the current value of your home.

The lower rate combined with the elimination of the monthly mortgage insurance should make refinancing worthwhile. Contact a local mortgage professional that you trust to learn more or to get the process started.

Keith Bergfeld
Peak Financial Services, Inc.

Question: My husband and I are newlyweds, and are planning the purchase of our first home. We have a combined annual income of $60,000, but we are both new to our careers—I have been at my job a little over a year, and my husband has been employed for only a few months. We do have some debt—about $20,000 in school loans and credit cards—and we are financing one vehicle. We had some problems with late payments and forbearances in the past, and are trying to improve our credit rating. We have been in a debt-consolidation program for over a year and are making monthly payments that should have the credit card debt paid off within 12 months. However, we don't have a large down payment saved up, either. In your opinion, what can we do to increase our chances of being able to buy a home in the next 12-24 months? In our situation, is it even possible?

Answer: Yes, you and your husband have a good chance of achieving homeownership. The first step is to contact a mortgage banker or lender, and schedule a time to sit down with a loan officer to develop a plan. The loan officer will assess your current income and debt structure, evaluate where you will be in a year, and devise a plan to help get you into a home within your timeframe. The key to achieving this goal is to adhere to the plan and trust the information provided. Most importantly, you and your husband must determine how much of a home you can afford and still be comfortable. Take a look at your current income, living expenses and debt, put together a budget, and explore what you both feel comfortable with. There are many down-payment assistance and other financial programs available to help you get into the "American Dream."

Your participation in a debt-consolidation program is not a problem—as long as the payments have consistently been made in a timely manner. Most lenders will look at payment history over a one-year period of time. Nor should either of your job histories pose a problem—any lender you select will be able to discuss this and the other details of your application with you.

Connie Dixon
National City Mortgage

Question: Currently, my husband and I are saving for a 20K down payment on our first home, which we plan to purchase in 12 months. We are hoping to buy a home for about 150-160K. Our only debt is 7K in credit cards. In our current cash-flow plan, we pay $1,000 each month towards this credit card debt and will have it paid off by December 2002. However, we are now trying to decide whether we should apply that 7K towards the house down payment. We would then have 27K to put down versus 20K, resulting in a lower monthly house payment. We would have to make minimum payments on our credit cards for another year—after that, we would pay $359 a month towards the credit cards for two years and pay them off completely. I'm concerned, because within five years we also plan to begin a family and will need to purchase two cars (our current and only car has a few years left in it). Any unexpected, major house repairs, along with another two years of credit card payments makes me very nervous. Our combined income is 84-90K a year. We appreciate any advice you can give us.

Answer: I will try to answer this question, but there are so many choices that depend on each individual case. In general, it doesn't matter—if a purchaser has good credit, there are a number of programs that will help secure a good loan. I would advise you to keep the credit card debt and put as much down as possible to maintain a low house payment. Some loans that are based on 80 percent financing have no mortgage insurance on them. If a borrower does not have 20 percent to put down, they get an 80-10-10, 80-15-5, or an 85 percent loan, none of which have private mortgage insurance. Other types of loans are insured and add to the payment. An 80-10-10 or 80-15-5 loan uses 80 percent financing, applying an equity line for the balance. The interest is deductible, and you can it use to pay off the credit card, purchase an automobile and keep decent interest rates (presently 6 3/4 percent to 7 1/4 percent for this type of financing).

My question is, why wait? A year from now there may be different programs, but not necessarily better programs. Interest rates have nowhere to go but up. My suggestion would be to begin working with a REALTOR® now. Most REALTOR® have lenders they can suggest to help their clients get pre-approved and find the best program for their needs. Then, you can start using that equity to your advantage to get a home, car, or fund any unexpected housing expenses that may come up.

Anne Elsbury
Century 21 Realty Group Elsbury

Question: What are Federal Housing Administration (FHA) loan requirements, and who is eligible for this type of loan?

Answer: The basic requirements to obtain a loan insured by the FHA are fairly simple. The FHA typically requires an investment from the borrower of at least 3 percent of the sales price. These funds can come in the form of a gift from a variety of sources.

The home must pass standards that assure that the subject property is in good condition, free from defects, and must appraise for at least the sales price.

FHA borrowers are required to have a decent credit history, but their requirements are not as stringent as conventional loans.

Stable income is another area of consideration for FHA loans. FHA underwriting has guidelines concerning the length of time clients are employed in the same line of work, but many factors can be considered to compensate for a short time on the job.

The ratios of house payment to monthly income, and total monthly debt, including installment payments, revolving payments, lease payments, and the new home payment, to stable monthly household income are set at 29 percent and 41 percent, but there are circumstances which can extend these numbers.

In Indiana, the maximum amount of a loan that the FHA will insure is by each individual county. In Marion and surrounding Counties, the FHA loan limit has been increased to $200,160. It should also be noted that FHA now allows home owners to refinance their homes with FHA loan up to 95% of the market value. This is a great opportunity for people who do not have a great deal of equity due to a combination of a good first mortgage, and a second mortgage home equity loan based on the prime rate of interest!

Everyone is eligible to apply for FHA loans. The FHA does not actually make loans, they simply insure that if the loan ever goes into default, the FHA will pay the lender up to 25 percent of the loan or will purchase the home.

If you have specific questions about qualifications for obtaining a loan that is insured by the FHA, I recommend you find a reputable lender who has access to an FHA underwriter.

Darrel D. Thornton
Winterwood Mortgage Group

Question: With so many companies offering financing or refinancing at such low rates, what do you need to know about the finance company you choose? Other than knowing all the costs, what other dangers could you run into by picking an unknown company? Does it really make any difference what company provides the mortgage, or would it be okay to just pick the company with the lowest rate?

Answer: When financing your home, you certainly want to deal with a reputable company. Some of the best sources to help you find one include friends, family, or co-workers who have had a good experience and can recommend a lender to help you. Other good sources include the Better Business Bureau or the Chamber of Commerce.

Some problems borrowers typically encounter include higher interest rates at closing and additional closing costs. When applying for a mortgage, be certain that you are provided a written good-faith estimate of closing costs and a truth-in-lending statement. These documents provide a list of anticipated closing costs and the total cost of financing over the life of the loan, including any origination fees or discount points.

Keep in mind these documents are estimates, but barring any unusual circumstances, they should provide a fairly accurate picture of the cost to finance your home. If you don't understand any of the charges, make sure the lender explains them to your satisfaction.

The value of good service from a trusted mortgage professional should not be underestimated. As with any major purchase, cheapest is not always best. You should work with a lender who will listen to your needs and can provide options that best fit your individual situation.

After talking with the lender, you should feel confident in your decision to use them for your financing. If you have doubts, it's best to look elsewhere before making your final choice.

Jeanette Denton
Vice President, Mortgage Loans
First National Bank & Trust

Question: "What is the difference between getting financing for a rental property versus a mortgage for a primary residence?"

Answer: Obtaining financing on a rental property can be a little more cumbersome than on a primary residence. First of all, not all lenders will finance investment property—you may have to do some homework. Secondly, many lenders use only adjustable program types on rental properties, as opposed to allowing fixed rates. They may also be unwilling to finance them for longer than 15-20 years, as opposed to the more standard 30-year mortgage. If they will allow fixed rate financing, they may charge a higher rate than the one offered for owner-occupied dwellings. Lastly, the documentation and down payment requirements may be more substantial. It's pretty standard to require a minimum of 20 percent down. Copies of your tax returns, as well as copies of any leases that are in place, will be required, because lenders will want to analyze the cash flow of the investment property.

Wayne Dimmock
Stockyard Banks

Question: Does my job history play a role in getting a mortgage? Also, how does my existing debt affect my ability to get a mortgage?

Answer: Because of a current industry trend of lenders moving from collateral to credit-based lending, both of your questions have answers that can vary greatly. Certainly, lenders will want to know what you've done in the last two years, as well as where you have lived. Most lenders like to see borrowers at least in the same field if they have changed jobs, and many prefer a two-year history at the same job. However, employment changes over the last two years can be offset. Adequate reserves [assets that can be turned into cash quickly, like your 401(K)], a solid credit score, and a strong down payment or equity position are all ways to offset a patchy employment history. Computer underwriting has greatly changed the mortgage business and many loan approvals today are approved, even though they may have been denied several years ago.

Like your two-year employment history, existing debts are always considered. Acceptable debt-load ratios vary. Private mortgage insurance companies were some of the first to identify uniform underwriting criteria. These criteria include ratios—for instance, 28 percent of your gross monthly income cannot exceed your mortgage payment with escrow for taxes and insurance. These ratios still exist as basic lending parameters, but the ratios can vary greatly. Again, other offsetting factors such as your credit score, reserves, and down payment can cause variations. Review your situation with a loan representative. Remember, like a doctor or mechanic, opinions can vary. Consider a second opinion when looking into loan opportunities.

David B. Cain, MAI, CCIM
West Clay Realty

Question: My lender mentioned PMI insurance. What is it, and why do I need it?

Answer: Lenders typically feel comfortable loaning 80 percent of the value of the house you are purchasing. When you borrow more than 80 percent—loans of 90 percent to 95 percent are common—the lender incurs a greater risk and they ask you, the buyer, to insure that risk with a third party. This risk is insured with Private Mortgage Insurance. If you default on your loan, the insurance company will cover the bank's loss up to the 10 percent to 15 percent of the value they are insuring.

Private Mortgage Insurance allows you to purchase a home with less money down. However, you pay for that advantage in monthly insurance payments called PMI. When your equity increases or the value of your home increases, you can apply to have the PMI cancelled. This usually requires an additional appraisal and a good payment history, but is often granted.

PMI is an additional expense, but it also enables many to become homeowners three to five years earlier than if they had to save the 20 percent down payment prior to purchasing.

John T. Creamer
Century 21 At the Crossing

Question: I am a little confused—some of the homes my wife and I are looking at require us to be pre-qualified. Other REALTOR® or builders have asked that we be pre-approved. What is the difference, and which should we try to achieve? How does the process differ for each?

Answer: When REALTOR® are asked to present an offer to their seller, they have the added responsibility of learning whether or not the buyers can secure the necessary financing for the home. Some REALTOR® and builders are willing to allow a prospective buyer to simply be "pre-qualified." Typically, this is an easy process—the buyers tell their agent or mortgage lender about their income, their debts, their liquid assets, and whether or not they have good credit. Based on this verbal information, an opinion whether or not they will be able to secure the necessary financing for the new home can be ventured. Regrettably though, if the information cannot be properly documented, they may not be able to obtain a home loan.

In order to be "pre-approved," prospective buyers must document their income and assets. Lenders will check credit, and will be able to provide written approval for the buyers based on the verified information. Today, most lenders have access to electronic approval processes that enable them to provide pre-approval very quickly. However, it is important to note that if a lender does not ask to see any documentation verifying income or assets, the "pre-approval" may have conditions which cannot be met.

Darrel D. Thornton
Winterwood Mortgage Group

Question: When is a good time to refinance my home?

Answer: Refinancing considerations should be determined by how long you plan to stay in the home and keep the mortgage, as well as the current rate you have on your home mortgage. The old rule of thumb said a 2 percent rate change was a good gage to make the cost of refinancing worthwhile. But with today's rising mortgage amounts and the cost of other debt interest, a 1 percent rate change is now the general rule.

In some individual cases, it may be worth refinancing for a drop of 1/2 percent rate difference—or, if you can drop the PMI or MIP mortgage insurance from your mortgage. Appreciating markets and increasing values also help determine your decision. If you've been in your home three to five years or more and the surrounding market has had a favorable market appreciation, you may be wise to refinance. Any time you can remove the mortgage insurance from your payment; it's worth refinancing—especially if you're planning on living in your home for a while.

Homeowners considering refinancing should contact their REALTOR® to determine the market value of their home and have them discuss their own unique situation. Always consider the cost of the refinance in your calculations, as well as length of stay in the home and mortgage, the mortgage amount, and whether mortgage insurance is included in the mortgage payment. You should also see if there is a pre-payment penalty on the current mortgage, and consider whether it is worth having to pay that amount to refinance.

Current interest rates are historically low; it may be a great time to save some money and reduce your monthly debt. You may also want to consider shortening the length of the mortgage and the amount of interest you pay on the life of the loan. It is a personal choice regarding your long-term financial situation. But remember, considering all the options and making the best use of your money is always a good idea.

Kathy Hall
Century 21 Realty Group Elsbury

Question: What is the difference between a zero point loan and a no-cost loan? Which is the better loan option?

Answer: Points are upfront fees to obtain a lower rate of interest—one point is usually referred to as on 1 percent of the loan amount. Therefore, if you were paying one point on a $100,000 loan, it would be $1,000; 2 points would be 2 percent, or $2,000. Many consumers believe that by paying one point, the rate will be brought down by a full percent—that is incorrect. Zero points means just that—the borrower is not paying any points to buy down the rate.

On the other hand, a "no-cost loan" could have many variations. It depends on the lender, and what the loan is referring to. A no-cost loan could mean having no points, no closing costs, no out-of-pocket expense to the consumer—many variables could apply. In many situations, it means at no cost to the buyer, or out-of-pocket cost to the borrower.

Lenders will build the cost of the loan into the rate, resulting in a slightly higher interest rate for the consumer. In the refinance boom we are experiencing in today's market, the costs would typically be rolled into the balance of the current mortgage, and the consumer would not incur any out-of-pocket expense.

Again, clarification from your lender would provide the most accurate answer to your question and how it relates to your specific situation.

Connie Dixon
National City Mortgage