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Sometimes lenders are asked about the “secondary” markets by borrowers. It is a legitimate question, especially as the existence of a secondary market for home loans leads to lower rates for borrowers, and also helps why Fannie Mae and Freddie Mac exist.

 

Let’s start with a simple example. Let’s say a person (“Joe”) has $1,000 in savings. Joe is approached by his brother who wants to borrow $1,000. They have a good relationship, the brother is a good credit risk, a deal is struck and the $1,000 is loaned out by Joe.

 

The following day Joe is approached by his sister, an equally good risk, who wants to borrow $500. In spite of wanting to help, and earn interest, Joe has no money to lend, so must say “no” to his sister, and in fact must say no to every other opportunity to lend money out until his brother pays him back. If someone approached Joe, however, and offered to “buy” the first loan from him, and pay him $1,001, two things would happen. First, Joe’s brother would start sending his payments to the buyer of the loan. But second, and more importantly, Joe would make $1 and have $1,000 to lend out to his sister or other good credit risks.

 

This is exactly what happens with many lenders: they make a loan, and then sell the loan to a buyer (who commences collecting the monthly payments), and turn around and make more loans to other good credit risks. In many cases the buyer of the loans are Freddie Mac or Fannie Mae, or large banks who then begin collecting the monthly payments from the borrower. And lenders have the ability to do what they do best: offer good financing rates to their clients.

 

One of the primary reasons Fannie & Freddie were created was to serve this function in the secondary markets, and it is one of the reasons that many lenders want them to continue to do business. 


Gifts are Allowed When Buying a Home

Jan 30
12:39
PM
2017
Category | General

There are plenty of people around with a lot of money in the bank. Unfortunately, many of them are older and already own houses whereas their kids don’t. There is a common myth that a parent cannot give their child a gift for the down payment for more than $14,000 without gift tax consequences, or that a gift must be spread out over several years.

 

Experienced originators know that this is not the case. Many first time homebuyers receive help from their families and many parents want to help their kids buy a home. Each parent can give their child $14,000, for example, each tax year for a total maximum of $28,000 per year from parents without having to pay a gift tax. This is helpful to know, because in some locations $14,000 may barely be enough to cover closing costs!

 

Lenders know that the IRS watches transactions like home purchases to make sure that all requirements of the tax code are met, but it does not require a donor (or the one receiving the gift) to pay a gift tax if the amount is over $14,000 in a tax year. It says that a gift tax return must be filed if more than $14,000 is given by any one parent to any one child in any one tax year but no tax is due. Unless the gifts given in a lifetime exceed $5.34 million, no gift tax is due. The one receiving the gift has no tax consequences. Be sure to consult your accountant for details.

 

But lenders have rules regarding gifts. In general, a borrower may receive a gift from a close relative to help him or her cover the down payment and closing costs. The gift amount is limitless when the down payment equals at least 20%. If the down payment is less than 20 percent, the borrower must have at least 5% of the sales price in his own money. An exception exists for FHA loans where all of the money needed to cover the down payment and closing costs may come as a gift from a close relative.

 

And gifts must be carefully documented, complete with a letter from the donor stating the gift does not have to be repaid and a paper trail of that gift to prove that the donor had the money to donate and that the borrower received the money from the relative.


Puzzled by Mortgage Rates and Price?

Jan 25
3:57
PM
2017
Category | General

Despite the government’s best efforts, borrowers still are occasionally puzzled by mortgage rates and pricing. They are not as simple as comparing the price of a gallon of regular unleaded gas. (But when gas companies advertise their additives for higher grades, things become more complicated.) But is there an easy way to discuss rates?

 

When a borrower shops for a home loan, they want to know about mortgage rates and should look at the “APR” or annual percentage rate. The APR includes both the annual interest rate as well as some — but maybe not all — non-interest charges paid at closing. The APR will be higher than the nominal interest rate because it includes additional costs. Most loan quotes include both the interest rate and discount points (the cost of doing the loan, often considered the up-front compensation to the lender). Points are paid up-front, in cash (or a higher loan amount) at closing. If the borrower expects to be a short-term owner then maybe the loan with a higher rate and fewer points is better; if the borrower expects to be a long-term owner then paying points and having a lower fixed-rate can be very attractive.

 

Experts and those in the industry usually prefer “par pricing” – par is a price of 100.00 (nothing paid, and nothing to be paid). In this situation all loan quotes show the interest rate with zero points. Now it’s very easy to compare rates. An FHA mortgage at 4.4 percent and an FHA mortgage at 4.6 percent are the same financial product with different costs. Why would you pay more?

 

So borrowers should ask lenders for a mortgage quote at par; that is, an interest rate with no points. Par pricing remains the easiest way to compare similar loan products, say a conventional loan from ABC Mortgage versus a conventional loan from XYZ Mortgage. The loans are the same, so the only issue is which lender can offer a better price.


Shopping for a Mortgage Based on Price

Jan 5
4:23
PM
2017
Category | General

Despite the government’s best efforts, borrowers still are occasionally puzzled by mortgage rates and pricing. They are not as simple as comparing the price of a gallon of regular unleaded gas. (But when gas companies advertise their additives for higher grades, things become more complicated.) But is there an easy way to discuss rates?

 

When a borrower shops for a home loan, they want to know about mortgage rates and should look at the “APR” or annual percentage rate. The APR includes both the annual interest rate as well as some — but maybe not all — non-interest charges paid at closing. The APR will be higher than the nominal interest rate because it includes additional costs. Most loan quotes include both the interest rate and discount points (the cost of doing the loan, often considered the up-front compensation to the lender). Points are paid up-front, in cash (or a higher loan amount) at closing. If the borrower expects to be a short-term owner then maybe the loan with a higher rate and fewer points is better; if the borrower expects to be a long-term owner then paying points and having a lower fixed-rate can be very attractive.

 

Experts and those in the industry usually prefer “par pricing” – par is a price of 100.00 (nothing paid, and nothing to be paid). In this situation all loan quotes show the interest rate with zero points. Now it’s very easy to compare rates. An FHA mortgage at 4.4 percent and an FHA mortgage at 4.6 percent are the same financial product with different costs. Why would you pay more?

 

So borrowers should ask lenders for a mortgage quote at par; that is, an interest rate with no points. Par pricing remains the easiest way to compare similar loan products, say a conventional loan from ABC Mortgage versus a conventional loan from XYZ Mortgage. The loans are the same, so the only issue is which lender can offer a better price.


What is Title Insurance?

Jan 3
4:02
PM
2017
Category | General

With home buying comes a series of decisions, including where to buy, what kind of house, whether to obtain a loan and what are its terms, and so on. One issue that is often overlooked until the end of the transaction is, “Why do I need title insurance?”

 

Every buyer and seller in a real estate transaction sees charges for a title insurance policy, but few know what the purpose of the policy is, other than something gets insured. Title policies insure that things are what they are supposed to be: in a purchase the title policy is insuring that you are the rightful owner, that no one can come along later and claim ownership of your property. For lenders the title policy insures that their lien has a certain priority on title and that the only liens against title are documented and disclosed. Title insurance covers any title issues that occur up to the date deeds are recorded when the policy is in effect, it does not cover any issues that occur after the transaction.

 

Title insurance is not cheap, and claims are rare. But when title insurance companies do pay claims, they are usually very hefty, think tens or hundreds of thousands of dollars. Because of this most of the revenue title insurance companies collect do not go to paying claims, in fact the industry average is that only about 5% of premium revenue goes to claims compared with approximately 70% for auto insurance. Title insurance companies spend the bulk of their premium revenue on loss prevention (research).

 

Claims might be paid if the owner of your current home purchased the property eight years ago from a seller who had a lien against the property that was recorded improperly in the county records and that lender stepped forward to collect on your home and possibly force the sale. Forgeries on deeds, unpaid liens, easements improperly recorded or illegal confiscations of title on the property are problems; bank foreclosures and short-sales can complicate things, as can divorce settlements with a recalcitrant spouse, estate issues, easements, or a private party second from a prior seller.

 

Title policy premiums pay for all the work done by the title company prior to closing so they can insure the buyer/person refinancing obtains clear title. And if the owner discovers later that they do not have clear title, it is the title insurance company’s obligation to pay to correct any claims that may arise.


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