Mortgage Loans and Loan to Value
LTV, or loan to value, is only one of the factors mortgage lenders use to evaluate or underwrite a home loan. LTV is expressed as a percentage or ratio. The ratio is calculated by dividing the mortgage loan amount by the value of the property. An example of this ratio is if someone was obtaining a $200,000 mortgage loan for a property that is valued at $400,000, the LTV of this transaction is 50%. Mortgage lenders use the loan to value ratio as a significant measure of risk in making a mortgage loan decisions.
The LTV is a very important consideration for the mortgage lender and the mortgage applicant for several different reasons and its risk measure will change with the home loan type and request. As a simple tool to measure risk, the higher the loan to value on a home loan, the riskier the home loan is perceived to be. Loan to value is essentially measuring the amount of equity in a property. This equity is a result of either the down payment amount, a larger down payment would equal more equity, or a reduced balance on a existing mortgage loan for a refinance request or an increase in property value.
Loan to values therefore measure the amount of equity in a property. The greater the equity, whether it be with a large down payment or appreciation when you already own the property, the more committed to the property a borrower generally will be and the larger the cushion there is to absorb losses by the mortgage lender should a borrower default on their home loan. Not only our borrowers more committed when there is more equity in the property, but the lenders loan balance has a greater level of protection should a borrower default. Certainly, 100% loan to value home loan transactions are defaulting at a higher rate than lower loan to value home loan transactions are.
If you are applying for a mortgage to purchase a home, the loan to value is measure of how much money has to be placed as a down payment to buy the property. In order for the mortgage lender to determine the value aspect of the loan to value ratio they will look at the lower of the purchase price, or appraised value of a home, when you are purchasing a new house. If the home appraises for an amount greater than the purchase price, this may make the transaction more desirable for you the borrower, but the mortgage lender will now use the lower sales price figure to determine the mortgage loan underwriting evaluation. Because of this, the mortgage lender will not have to worry about lending more money than the actual property is worth or lending more than you would be willing to purchase the property for or got caught in an over inflated purchase transaction.
The importance of the amount down payment for the borrower can’t be disregarded either. An important item to remember, when a property is purchased, the total down payment you make will have to come from your source of money, borrowed funds are unacceptable. If your down payment is less than 20%, you will need private mortgage insurance (PMI). This is insurance you pay to protect the mortgage lender if you don’t repay your home loan in full. With mortgage insurance coverage an extra premium or fee is included within your monthly mortgage payments. The type of home loan you receive, the insurance company as well as the home’s LTV determines the exact premium amount for the private mortgage insurance. Higher loan to value loans or home loans with smaller down payments will have a higher mortgage insurance payment, adjustable rate mortgages will also have a larger mortgage insurance cost.
When an existing home owner is refinancing their home, the appraised value is what will be used to find the value part of the loan to value equation. The biggest component in calculating your home’s appraisal value is by analyzing past sales of comparable homes that are within one mile of your property and were sold within the past year. Houses for sales or listings do not count towards this amount because they are not finalized sales and their prices can either rise or drop.
Mortgage refinances fall into two categories, cash out refinances and rate and term refinances. A cash out mortgage refinance is when you take out funds with the new home loan for anything other than paying off the existing mortgage and closing costs. A rate and term refinance is for paying off just the mortgages and closing costs. In these cases, the new home loan is changing either with a new mortgage rate or a new loan term. When you have to combine a first and second mortgages within a mortgage refinance transaction, you will want to remember than the second mortgage loan needs to have been open for at least twelve months. If your second loan is not “seasoned” long enough, the mortgage lender will consider the consolidation of the two mortgages as cash out refinance loan, thus you are subject to all LTV guidelines and their associated mortgage rate adjustments.
With all mortgage refinance transaction, you will find that the ratio used with the loan amount to appraised value is will be a big determinant of the home loan approval. This is especially true if the borrower wishes to cash out within the transaction. The typical rule for cash out transaction is a maximum amount of 90% of the appraised value for the entire loan amount, which also includes any cash out. And a 90% cash out refinance is the absolute high end of the approval range, meaning the mortgage lender considers this loan the riskiest loan is less likely to approve such a request.
When your LTV is over 75%, you will usually experience a minimum .125%, or 1/8th of a point, increase within the mortgage rate for every 5% in the LTV. An example of this would be when a person takes 85% cash out mortgage loan; their mortgage rate would generally be .25%, or 1/4th of a point, higher than with a 75% cash out mortgage with established mortgage rates. The main reason for the mortgage rate increase is the increased risk factor on the home loan, there is now less equity in the property.
If you require more than 90% cash out rate, there are lenders that will supply this to you. However, the mortgage rates are generally significantly higher than standard rates with the exception of FHA loans. FHA loans allow 85% cash out LTVs without a significant impact on the mortgage rate.
The lower the ratio between the loan amount to the appraised value, the loan to value, the more likely a mortgage lender will accept the risk of the home loan. The risk considerations will be different in owner occupant versus non-owner or rental situations. Loan to values will be more significant in cash out transactions versus rate and term refinance loan requests. As you compare mortgage lender costs and qualification requirements you will see how loan to value can play a key role in the final outcome.
Mortgage calculators are a great tool to evaluate the loan to value on a home loan. www.selectcalculators.com offers a wide assortment of mortgage calculators to help determine LTV and evaluate home loan products and mortgage rates.
Tips for Avoiding Mortgage Fraud
Mortgage fraud continues to be a major problem for banks, mortgage lenders and consumers. Mortgage fraud is action that is not only investigated by local law enforcement but will be investigated by the Federal Bureau of Investigation as well. In fact, engaging in mortgage fraud can be punishable by up to 30 years in federal prison or $1,000,000 fine, or both. Mortgage fraud scams impact banks and mortgage lenders with loans that default as well the real estate profession, the economy and a significant number of individual homeowners.
Robert D. Grant, Special Agent-in-Charge of the Chicago Office of the FBI recently commented in a press release that, “We will not stand by while real estate professionals and others exploit the financial system for their personal gain. Mortgage fraud – and the foreclosures and boarded up houses that often follow from it – has a real and significant effect on neighborhoods and property values. The FBI is working tirelessly in every part of the country to protect communities and financial institutions from the effects of mortgage fraud.”
For those consumers that are buying a new home, refinancing an existing mortgage, or searching for help to reduce their home loan debt and other debts, they could be a target of mortgage fraud by individuals and mortgage professionals.
Mortgage fraud is defined as a material misstatement, misrepresentation, or omissions relied upon by an underwriter or lender to fund, purchase, or insure a loan. The FBI puts out notices that remind individuals that it is illegal for a person to make any false statement regarding income, assets, debt, or matters of identification, or to willfully overvalue any land or property, in a loan and credit application for the purpose of influencing in any way the action of a financial institution.
There are two general types of mortgage fraud, fraud used to acquire property and fraud used purely for profit. Mortgage fraud that is used to purchase a home or acquire property usually involves a borrower who is committing fraud on a single home loan transaction. Often, the individual committing fraud is buying the property to occupy it and fully intends to repay the home loan. Though the intentions may not sound bad, the borrower makes misrepresentations about their income or their debts, the value of the home or falsifies data about the down payment. At times mortgage and real estate professionals are involved in assisting the home loan borrower so that they qualify for the mortgage and can purchase or refinance the home.
Fraud that is committed for the motive of turning a profit will involve mortgage or real estate industry professionals. These cases of mortgage fraud generally involve several home loans and can often be for millions of dollars. Mortgage fraud cases with professionals can be much more complex and involve issues as wide spread and complicated as having straw buyers which involves a borrower that assumes the identity of another person, property value that are fraudulently inflated, scam down payments that do not exist or are borrowed and disguised as the borrowers own funds, as well as flagrant misrepresentations including: overstating income, overstating assets, overstating collateral, fictitious employment and other related untrue facts and figures.
Some tips for recognizing and avoiding being part of a mortgage fraud transaction include:
Make sure to read and understand everything you are signing. Speak to another mortgage professional or an attorney if you need something explained. Don’t sign anything you don’t understand at anytime in the purchase, mortgage application or closing process.
Do not sign any home loan documents that contain inaccurate information, such as inflated or inaccurate income, sources of the down payment, incorrect sales price, type and length of your employment, your intent to occupy the property as your primary residence, existing debts, etc.
Don’t sign any mortgage loan documents with information left blank. Blank spaces can be filled in later by other parties to the transaction yet still has your original signature.
Know and understand the terms of the home mortgage. Check your information against the information in the home loan documents to ensure they are accurate and complete.
Do not agree to a price above your asking price. If there are any unusual circumstances regarding the purchase price, take a second look at the transaction and ask for assistance if the arrangement seems unusual. This may be particularly important if you are asked to refund the difference after the closing or if the extra money is to be used for repairs or improvements that you know are unnecessary.
Do not let someone else use your name or social security number to buy a property, especially if he or she offers to pay you for using it.
Deal directly with the mortgage lender or the mortgage broker. Do not let a third party arrange your mortgage loan.
Make sure to get a complete set of the mortgage loan and related closing documents at the time of settlement.
Review the title history to determine if the property has been sold multiple times within a short period. It could mean that this property has been flipped or bought and sold recently and the value can possibly be falsely inflated.
It is always sound advice to get referrals for real estate and mortgage professionals before filling out the mortgage loan application or signing a contract. Check the licenses of the real estate professionals and mortgage lenders involved in the transaction with the local licensing authorities.
Shopping and comparing mortgage loans and mortgage rates involves some work, don’t skimp on the process since the long term costs of a mistake can be significant.
Are Your Ready to Buy a Condo?
When you think you’ve found the perfect unit, you have your down payment ready, your going to call the mortgage lender and you’re ready sign on the dotted line, hold off for a moment. Are you sure you are completely prepared to buy into a community property? Do you know everything there is to know about your future home? Are you really ready to buy a condo?
Documented Problems
One of the best places to look for hidden dirt on your future home is in the minutes of the condo association board meetings. Anyone with complaints will likely come before the board and if you notice several of the same complaints, you may be buying into a lemon or simply a property that is poorly managed. You don’t want to be part of either one.
Delinquencies
Has there been a history of missing payments from your future neighbors? You should be able to find the delinquency records for the building. High rates of delinquency, or even moderate ones, are a sign of bad things to come. One problem is that the condo owners are having financial trouble which can lead to more distressed sales that bring down prices. In addition, when the condo owners are delinquent less money is paid into the project for common area maintenance and expenses.
Repair/Reserve Fund
Owners pay into a repair and reserve fund. Research the fund to see how much it contains. Older properties should have as much as 50% of the estimated costs of refurbishing the building and grounds in the fund for planned improvements, new fixtures or roofing, and emergencies. Newer buildings should have at least 10-25%. Make sure to carefully review the condition of the property, not just the unit you intend to buy but the exterior of the building and the common areas as well.
Insurance
Make extra sure you take a look at the insurance on the property. Find out if replacement costs and costs of rebuilding are correct and find out if the property has a building ordinance clause. This pays for improvements to the building to bring it up to date as ordinances change. You should also be sure you know how much of your unit and personal property is covered by the building insurance policy and be sure to make up the difference with your own insurance.
Legalities
Utilize the services of a real estate lawyer to work through all the paperwork and bylaws of the association to be sure everything is up to snuff. The laws should not only make sense for the units, they should also be in line with state and local laws as well. Your lawyer can also head over to the local courthouse to check and see if any suits have been brought against the property.
Renters
You need to know how friendly your condo is to renters. You don’t want too many renters as they can change the attractiveness of the units to other buyers, but you also want to know if you are able to rent your own unit to others. Would you need to find and screen those renters or is that taken care of by the management company? Also be aware that bylaws affecting renting can change at any time. If a fair number of owners rent, however, that is considerably less likely to happen. The number of renters may also present a problem when it comes time to obtain a home loan for to purchase the property. Mortgage lenders consider is a greater risk if the condo project has a large quantity of renters and may not approve a mortgage loan on a heavily rented project.
Management
Finally, understand exactly who is managing the property. Are the owners managing the building or is it under the control of a management company? Buildings managed by the owners can be fraught with hassles, even if the overall management is done effectively. If you are looking at a building with a property management company, find out all you can about that company and be sure to interview the day-to-day manager directly. You want to be sure your property is in excellent hands at all times.
Condo Mortgage Loans
A final caution is to be fully aware of the home loan guidelines on condos. Many mortgage lenders, during times of tight mortgage credit, restrict their home loans on condos. Mortgage lenders will often require a slighter larger mortgage down payment and may increase the mortgage rate. The reason behind the restrictions is that condos will generally not appreciate as fast as single family homes and when they have to be foreclosed on and sold in times of distress, it is more common that the sale price will not be enough to cover the mortgage loan balance. Also, condos have historical had a higher mortgage delinquency rate during economic contractions. Therefore, mortgage lenders like to reduce their risk exposure to these types of mortgage loans.
While new buyers may not be overly concerned about refinancing the home loan, since condos will appreciate at a slower rate than single family homes in general, refinancing in the future may be slightly more difficult than it would be on a single family detached home. Increased equity by appreciation or mortgage loan balance reduction makes mortgage refinances easier especially when the mortgage holder is not requesting cash out. Since the condo may not increase in value as fast that little benefit of increased home equity in the home is not a strong on a condo as it is in a single family detached home.
Top Five Mistakes When Refinancing
There are many reasons borrowers make mistakes when they refinance their homes. Poor decisions in a refinance can be a costly error, it can mean paying fees, incurring unwanted debt and excessive interest when a less expensive home loan alternative was available. In light of how much information is available on mortgage programs, the availability of mortgage calculators for payment assistance and self help resources it’s startling the number of unfortunate judgments that are executed regarding someone’s home and mortgage loan. The wrong mortgage rate is not the number one mistake in home loan refinancing.
1.) The number one mistake is not understanding all of the terms of the new mortgage loan. Most consumers stuck with adjustable rate loans with high interest rates rushed into the home loan and failed to understand the mortgage terms. Make sure you fully understand the cost, mortgage rate, length of the loan and any penalties for early payment. Understand the terms of the new home loan and do the math on what the new payments will be, the loan amount and how long it will be to pay it off.
2.) The second most common error is to choose a refinance for the wrong reasons. If you are getting a refinance for cash back understand why you are taking out the cash. If you extract equity in your home for normal consumption perhaps the problem is your own personal budget. A refinance generally involves a longer term or greater loan amount then you presently have. If the funds of this refinance are not used prudently you are only going further into debt without much benefit. Perhaps it is possible to repair your credit situation and budget without the mortgage refinance.
3.) Not shopping smart is the number three problem. If a potential mortgage loan applicant obtains the bulk of their information in writing, this problem can often be ameliorated. Comparing the good faith estimates of the mortgage lender is a good starting point. Compare truth in lending notices. Talk to more than one source for your home loan request. Though this mistake sounds repetitive, the issue here is, a borrower taking a refinance that may very well be a good mortgage loan product but the borrower is saddled with a higher than market mortgage rate and high costs by not thoroughly shopping.
4.) Not considering the other options available. The most frequent problem here is getting cash back for short term needs. Though this may be a necessity consider other options such as budgeting, personal loans, or a home equity loan.
5.) Lastly, getting a refinance to solve a budget problem not a mortgage problem. Seeking a reduced mortgage loan payment without understanding you may be taking a negative amortization adjustable rate mortgage is simply postponing some financial housekeeping. Mortgage debt is harder to repay, don’t solve lifestyle problem by placing more debt on your home.
Always, research the terms, benefits, and costs of any mortgage transaction. Never rush into a home loan. If you are not completely happy with your choices or the information you are getting; breathe, wait and start the research process all over again. A mortgage company is in the service business. Make them serve you. Shop smart and revive the best mortgage rates and terms to fit your needs.
What To Do Now That the Mortgage Rate Has Adjusted
When home prices appeared to be appreciated without an end in sight and interest rates seemed as though they were headed to zero, many homeowners jumped on adjustable rate mortgages. These mortgage loans offered low initial payments enabling borrowers to afford the ever rising home prices and were also used to help homeowners who had tight budgets on their existing house payments refinance into a more manageable payment structure. Some of these adjustable rate mortgages were sold to unsophisticated consumers with the assurance not to worry about future mortgage rates since you can just refinance. Well, for some borrowers, refinancing is not a possibility, particularly when many of these home loans had prepayment penalties. With housing now in a down cycle, expected appreciation has vaporized leaving little to no equity in the property, compounding the difficulty to refinance. Those that didn’t refinance are finding the new adjusted mortgage payment a difficult and often painful part of the household budget.
If the interest rate on your adjustable rate mortgage has not adjusted yet, study the paperwork from the mortgage loan closing to determine when and at approximately what mortgage rate it will adjust to. If it has not adjusted, the mortgage rate will be an approximation since you can not predict where the index your adjustable rate mortgage is based on will be in the future.
Keep in mind that the initial mortgage rate on an adjustable rate mortgage has little to do with the future rate changes; this rate was simply a start rate that was in fact a teaser rate. The adjustable rate mortgage interest rate is tied to an index plus a margin to get the interest rate the payment is based on. When you sign for the mortgage loan, you can calculate what this rate would be at that time. The introductory rate is almost always much lower than this mortgage interest rate. Therefore, when the first adjustment time comes, unless the index the loan is based on goes down, you are almost guaranteed the rate your loan is based on is going up. When your first adjustment rolls around, many loans allow a higher increase than for subsequent adjustments. Some adjustable rate mortgages loans can jump to the maximum cap rate, which could be as much as another 5 to 6 percent.
Let’s say you borrowed $300,000 at an initial rate of 4.75%, the current principal and interest payment would be $1,564.94 per month. If the home loan terms contained a cap of 2% per year and the new index plus margin hits the maximum change, the new rate will be 6.75%. At this mortgage rate, your payment would increase to $1,945.79 or about $381 more a month. If your rate adjusted the maximum amount at the following cycle or adjustment period the rate goes to 8.75%, and the payment would be $2,360.10, or a difference of an additional $415 a month. With property taxes increasing, utility bills swelling and the general cost of living going up, short of taking on a second or third job, not many borrowers can afford such extreme jumps in monthly payments.
Some of the options that are available include selling your home, talking to your mortgage lender to arrange payment relief, refinance into a fixed rate mortgage or refinance into another adjustable rate mortgage.
If you are planning on moving, refinancing is most likely not worth the time and costs. If you intend to sell, keep in mind some of the costs you may incur in selling the home. Listing your house for sale with a real estate agent, providing you have enough equity to pay commissions and costs of sale will typically absorb 5 to 10 percent of sales price. You can try and sell your house without representation, providing you can afford advertising and marketing expenses, including the advice of a real estate lawyer.
Refinancing to a fixed rate mortgage is a great option; you will of course have to qualify for the home loan. Mortgage refinance transactions are generally easier to qualify for than a purchase and the paperwork is slightly less rigorous. This option is feasible if you have enough equity and can afford higher monthly mortgage payments. Mortgage qualification will be based on the loan to value or amount of the mortgage loan divided into the property value, your credit history and your debt ratios. It is easier to qualify if you do the refinance as a rate and term refinance. A rate and term mortgage refinance is where there is no new funds are added on to the payoff of your existing mortgage loan other than closing costs, the opposite would be a cash out refinance. The mortgage calculator is a useful tool to measure the mortgage rates, costs and terms to see how your loan may qualify for the best mortgage loan available for refinancing.
If theses options are not practical, talk to your mortgage lender or bank. In most cases, your mortgage lender will be willing to cooperate with you and help you catch up if you have trouble making the payments after the home loan adjusts. Often, lenders are not interested in foreclosing your house except as a last resort because of the costs and time involved in the process. If you believe that you situation is untenable, speak to the lender to see if you can arrange to make lower payments, deferring unpaid interest and penalties even if it will increase your mortgage loan balance. You may also persuade the mortgage lender to come to an agreement on forbearance or postponing your mortgage payment increases based on ability to pay at a future date.
The worst thing a homeowner can do is ignore the coming mortgage rate changes and payment shock and do nothing.