Posted by Elizabeth Dennis on January 31, 2010 | No Comments
In a prior post, we talked about how FHA loans differ from conventional loans. One of the areas of comparison we looked at was the “maximum purchase price.” Let us take a look at how that maximum amount is determined and a major benefit of setting standards.
Who Sets the Limits?
Fannie Mae and Freddie Mac are responsible for setting the loan limits on conventional loans. Fannie Mae (The Federal National Mortgage Association – FNMA) and Freddie Mac (The Federal Home Loan Mortgage Corporation – FHLMC) do not provide loans directly to you; but act as “secondary lenders” which means they lend to the institutions that lend to you.
How and When are the Limits Set?
The calculation Fannie Mae and Freddie Mac uses to calculate loan limits is quite simple really. The limits are set every October. Fannie and Freddie first determine how much the average home price increased during the prior year. They take a look at the current average home price and compare it to the average home price from the prior October. A percentage increase is calculated with these two numbers.
For example: If the average price of homes in the United States is $150,000 in October and one year later the average home price jumps to $165,000 – we know the average home price has increased by 10%.
The following year’s loan limit will simply be the current year’s amount increased by that same percentage increase we saw in the average home prices. In our example, the following year’s limit will be ($165,000 + $16,500) or $181,500.
What are the Benefits of Conforming Loans?
When a loan follows (or “conforms”) to the guidelines set by Fannie Mae and Freddie Mac, it becomes a conforming loan. When loans are underwritten to the same standards, lenders end up selling essentially the same loan (with perhaps a slight variation). In Economics 101 we learned as more and more people sell the same thing; prices for that product eventually go down. In our case, standardizing loans translates into lower rates for borrowers.
Posted by Elizabeth Dennis on January 26, 2010 | 3 Comments
A New Sign in the Neighborhood
Let’s say you are just beginning the home buying process and have not yet hired a real estate agent to help you with your search. You drive by a house that you absolutely must see. You jot down the name and number of the real estate agent that is prominently displayed on the “for sale” sign. Hang on a second. Before you pick up the phone, read on.
An Agent’s Loyalties
Simply put, unless there is a written contact with the buyer, a real estate agent who lists a home works for the seller. To better understand why; try to imagine working for both parties with opposite interests? You can see how difficult and precarious a feat this is. Although this practice does exist (it is called dual-agency), it is uncommon and it is recommended that you do not become a party to it. The agent works for the buyer or the seller, not both.
Why You Might Not Want to See This Home Today
Back to the “for sale” sign. It may go without saying, but the name on the “for sale” sign is that of the seller’s agent, sometimes called a listing agent. This person’s primary goal is to sell the home for the owner while all along looking out for the seller’s best interests, not yours.
If you absolutely must see this house today and the listing agent agrees to show it to you, know that you will not get all the facts about the house during that first visit. The listing agent will not take the chance of revealing any information that can ultimately bring the seller a lower price for the home. There are a handful of things this agent knows but cannot tell you, including:
• The reason the property is being sold unless the seller specifically releases that information
• Any concessions the seller might be willing to make
• The substance of any conversations between the seller and the agent
• Any information that could give you, the buyer, an advantage; including a comparable market analysis
• Even if the agent knows the house is overpriced, she cannot tell you as much
Additionally, you must be very careful not to reveal too much information about your own situation to this agent. Though it may seem harmless to mention for what amount you are pre-approved or what you are willing to pay for a home (these things sneak out in conversations), the agent is obligated to pass this information on to the seller. Imagine making an offer, only to have your offer rejected because the seller knows that you are willing to pay more.
If You Must See This House Today
Ideally, you should hire your own agent, one that will represent only you, when seeing this or any other home. If you must look at it sooner, try to remain tight-lipped and know that the seller’s agent will not be telling you a complete story. Make the visit a quick one and know its purpose is only to learn if you want to pursue the home further; with your own agent of course.
Posted by Elizabeth Dennis on January 22, 2010 | No Comments
Perhaps you’ve heard the story from family, friends or colleagues; their unfortunate tales of unexpected costs and fees that surfaced in the days leading up to, or even on the day of their home closing. You may be wondering how did your friend’s closing costs end up being so much higher than originally presented by their lender. Will this happen to you? Fortunately, the answer is “no.”
As of January 1, 2010, The U.S. Department of Housing and Urban Development (HUD) has adopted new rules to which mortgage lenders must adhere. These rules were adopted to eliminate surprises at closing.
A Standardized Good Faith Estimate
Lenders have always been required to give borrowers a listing of all expected closing costs in the form of what is called a Good Faith Estimate (GFE). Before now, there was no consistency with the GFE forms. Each lender could use its own version; presenting different information in a different manner.
Now, lenders must use a standardized, three-page form. This form must be presented to you, at no charge, within 72 hours after you apply for a loan. The form is very well laid out and documented in easy-to-understand terms.
The highlight of the new GFE is that it clearly spells out:
- Charges That Cannot Increase
There are a handful of fees that lenders are now forbidden to change. These are the ones that they can control; such as origination fees and processing fees.
- Charges That in Total Cannot Increase More than 10%
Fees from third party services (selected by your lender) such as appraisals, surveys, and title insurance will not raise more than 10%. If for whatever reason, your lender exceeds these 10% tolerances, he must reimburse you.
- Charges That Can Change
Your initial escrow deposit, daily interest, homeowners insurance, and third party services chosen by you are not subject to the10% maximum as the lender does not have control over these factors.
The GFE must also include features of your loan that could drive up your mortgage costs at some point in the future. These might be an adjustable rate loan, balloon payments, pre-payment penalties, etc. The dollar amount of these changes must be disclosed to you.
Trading Upfront Costs for a Lower Interest Rate
Agreeing to pay additional points in exchange for a lower interest rates and vice versa is common practice. You will now be able to see a clear chart, called a tradeoff table, that details how this exchange will affect your monthly payments. See exactly what your loan will look like with lower settlement charges and what it will look like with a lower interest rate. It is all laid out right before you.
Take a look for yourself. See a sample of HUD’S Good Faith Estimate.
A Much Improved HUD-1 Settlement Form
A “HUD-1” is the common real estate settlement form used by closing agents. The HUD-1 form itemizes all charges imposed upon a borrower and the seller of the home. It gives both parties a complete list of their incoming and outgoing funds. The problem with HUD-1 forms was that they bore little resemblance to the costs originally presented on the GFE. To make things worse, these HUD-1 forms only need to be given one day before closing. You can imagine your panic if the numbers on the form are not what you expected.
Today’s HUD-1 form is a fantastic upgrade. A section titled “Comparison of Good Faith Estimate and HUD-1” is an extremely helpful feature. Just as the heading states, you are able to compare line-by-line the costs on your original GFE to those on the HUD-1. It couldn’t be clearer. This section is broken down by those costs that cannot increase, those that can increase by 10%, and those that may increase; just as we’ve seen on the GFE. Here is a sample of the HUD-1 form.
Mortgage Shopping Made Easier
Not only will these new guidelines and forms reduce shock on closing day but your Good Faith Estimate will serve as great tool for mortgage comparison shopping. You can now compare apples-to-apples as you will have in hand the total cost of all fees from each lender and each lender’s GFE will have the exact same information.
Whew. Don’t you feel better now?
Older Entries
In a prior post, we talked about how FHA loans differ from conventional loans. One of the areas of comparison we looked at was the “maximum purchase price.” Let us take a look at how that maximum amount is determined and a major benefit of setting standards.
