Although we are in housekeeping mode with tighter guidelines and requirements, the media likes to turn these much needed changes into wide spread panic. They would like you to believe that the mortgage markets are drying up and if you are not the most perfect borrower, that obtaining a loan is nearly impossible. This is simply not the case. I have loans approved everyday and I can tell you, perfect is not a word I would associate with any of the files that come across my desk.

If you go back to the CIA of lending series I wrote last month, you can get a feel of what lenders look for in a borrower. CIA stands for Credit, Income and Assets. All three of these come into play when applying for a mortgage. A Lender will look at all three of these as a whole to determine your credit worthiness. Although an extreme weakness in one of these areas could have the potential to disqualify you for a mortgage, strengths in an area could be used as a compensating factor to offset a weaker component.

I know we all strive to be perfect and in a perfect world, perfection may be attainable. However, in the real world, perfection is certainly not a commodity. Being perfect is not a requirement when applying for a mortgage. I look at loan applications everyday and I have yet seen a box to check for perfection. Every borrower and every transaction has its unique mix of obstacles. My job as a mortgage professional is to help you recognize and overcome these obstacles. In a greater sense, to help raise your own level of perfection to be perfect enough for loan eligibility. So, are you the perfect borrower to obtain a mortgage or are you just perfect enough?

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So we are all on the same page, conforming loans meet the standards set forth by Fannie Mae or Freddie Mac. Mortgages that conform to these guidelines are pooled together and sold to investors as mortgage backed securities, which is what keeps rates on 30 year fixed conforming loans lower than rates on non-conforming loans.

Currently in the Bay Area, the conforming loan limit is at $729,750 for a single family home. As of January 1st, 2009 we will be scaled back to $625,500. Although the lower loan limits may affect some Bay Area home buyers, we are still well over the 2007 limits of $417,000.

The 2009 Bay Area Conforming Loan Limits are:

• 1-unit properties : $625,500
  
• 2-unit properties : $800,775
  
• 3-unit properties : $967,950
  
• 4-unit properties : $1,202,925
  

If you are in the market to purchase a home with a loan between $625,500 and $729,750, you have about 50 days to take advantage of the current Bay Area loan limits which will expire December 31, 2008.

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Whether you are elated or deflated from the results of the election, I am sure we are all relieved that it is over. I can admit I have been slightly obsessed with the daily dramas of this political soap opera, but now it’s time to transition to action. So with the Dems awaiting to take control, what is expected for the next 30 days when it comes to mortgage rates?

Bankrate.com takes a a weekly survey of financial experts to gauge their feeling of where rates will be headed in the next 30 days. This survey is only on conforming loans and do not apply to Jumbos, FHA or VA loan programs.

Here is what the experts predict:

• 46% Predict Rates will Increase
  
• 38% Predict Rates will Decrease
  
• 16% Predict Rates will be Stable
  

So what does this tell you? Only that more than 80% feel there will be some sort of movement up or down with rates. I say, expect more of the same. Rates will still be volatile until we really have some true stabilization in the economy. I don’t see a huge swing in rates, but I think the roller coaster ride will continue. Just like the numbers above, these are only predictions of where rates may go in the next 30 days. Only you accompanied by some insight from your mortgage professional can determine if now is the time to lock your rate or let it float.

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Popping and Locking is a form of street dancing combining a combination of various movements and poses. Popping is quickly contracting and relaxing muscles to cause a jerk in a dancer’s body. Locking compliments the popping by following the fast body movements and locking in a certain positions.

How do the mortgage markets relate to this form of dancing? As we all know, the mortgage markets are in flux. Interest rates are the masters of popping. They can move up or down two to three times a day or, in dancing terms, quickly contracting and relaxing causing a jerk in your mortgage process.

During the mortgage process, you must decide whether to lock in your rate or let your rate float after you have an accepted contract on your property. Floating your rate plays into the volatility of the market or the popping of the market. Floating can add stress of the already daunting home buying process. Even though you have decided on which mortgage program meets your long and short term needs, you still have the uncertainty of your interest rate until you lock the rate. Some people are willing to take the gamble as they are waiting for the rates to fall, but with any gamble you have to weigh your risk. Because the mortgage markets are volatile and rising interest rates can potentially disqualify you as an approved borrower you run the risk of losing your financing altogether. If the rate were to jump up several points, you may not qualify for the same program you are currently considering.

As a mortgage professional my job is not to gamble with your money. As a break dancer (only in my dreams), I recommend less popping more locking. Locking your rate is a safe, but smart play. Once you have an accepted contract and you lock a rate that is acceptable to you, it doesn’t matter where rates move. First of all, you have alleviated the mind games you create for yourself that comes with floating. Second, when you lock in your rate, you always come out on top. Here’s why…

There are only three things that can happen when you lock your rate. Interest rates will stay flat, interest rates will rise, or interest rates will fall.

• Rates stay flat - You win because you just saved yourself time and effort.
  
• Rates rise - You obviously win, as you have a below market interest rate at the time of your closing
  
• Rates fall - You still win because most lenders will allow you to float down your locked-in rate to a lower rate if rates drop before your closing date. Most will do this for free because they don’t want you to move your loan to another lender over fractions of a percentage point.
  

Deciding to err on the side of caution may not win you Dancing with the Stars but you will win when it comes to the mortgage game. When it comes to popping and locking, I am definitely not the expert you are seeking. However, when it comes protecting your interest, I will be the first to join you on the dance floor.

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Wall Street predicts The Fed will cut rates once again today. The prediction is that the Fed Funds rate will be lower to 1%. This will be the lowest it has been since 2004 (currently we are a 1.5%). Some are even predicting an even bigger cut, lowering the rate to 0.5% - 0.75% which would be a historic low.

What Does This Mean?

Cutting interest rates are meant to restore stability to the financial markets and offset recession by stimulating the economy.

How Does This Stimulate the Economy?

The Fed Funds Rate is a determining component of the Prime Rate (Prime Rate is the Fed Funds Rate plus 3). The Prime rate is the rate which home equity lines of credit, construction loans, car loans and credit cards are based. Cutting the Fed Funds Rate lowers the Prime Rate meaning lower interest charges to you. The thought is, with more dollars in your pocket the greater likelihood you will put these dollars back into the economy by doing what we do best, Blowing Our Wad!

What Does This Do to Mortgage Interest Rates?

Very little and if it does have an affect, the trend is that it will push Mortgage Interest Rates higher. Again, cutting the Fed Funds Rate is used to stimulate the economy, fight off recession and can push us more towards inflation which is the enemy of Mortgage Interest Rates. So remember, the trend is that positivity for the economy means higher Mortgage Interest Rates.

I would be glad to answer any specific questions or go into greater detail. I am here as a resource for you, so keep the questions and the comments coming.

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Refinancing into a lower rate is a great option for many home owners, but in today’s lending world of tighter guidelines, it may not always be possible. If the home owner doesn’t have enough equity in their home or has credit issues or recently experienced a hardship like the loss of a job, the lender may not refinance the current loan.

Another reason a homeowner may not refinance to a lower rate are due to the costs related to refinancing, which can range from 2-3% of your loan amount. You have to determine how long it will take you to recoup your money and if the new program aligns with your financial goals before you consider refinancing your current loan.

For example, if you currently have a 30 year fixed rate mortgage with a $700,000 loan amount and a 7% interest rate, you are paying $4,657 for principal and interest per month. If your current loan balance is $660,000 and you refinance at to 6.5% interest rate, you will be paying $4,171. This is a monthly savings of $486 per month. If the closing costs are 2% or $13,200, it will take you 27 months to recoup your money. For home owners planning on staying in their home for three or more years, it may make sense to refinance. It is also possible to include the closing costs in your new mortgage to alleviate the upfront costs, but again, you still have to determine the time to recoup this money and if the benefits are aligned with your overall financial plan.

I hope I was able to clear a few things up for Tyler and you as well. If you have additional questions about refinancing or wondering if it’s time for you to refinance, send me an email or take a look at The Mortgage Adoption Center. In the meantime, I have a great audio CD that I would love to share with you called Home Equity Myths with Douglas Andrew, the author of the popular book Missed Fortune: Dispel the Money Myth-Conceptions – Isn’t it Time You Became Wealthy? In this CD, Douglas dispels many common myths about managing your home’s equity. If you would like a copy, send me an email and I will get the CD out to you.

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The other day I received a question from Tyler who was wondering why consumers are concerned about refinancing into lower interest rates when they don’t have to pay mortgage interest. Tyler explained that he thought all mortgage interest was tax deductible and reduced the amount of taxes you paid.

Unfortunately, the reality of tax deductions is they reduce your taxable income, or the amount of income subject to income taxes, not the amount of taxes you actually pay to Uncle Sam. Let’s say you make $100,000 annually and you paid $20,000 in mortgage interest. Because of the $20,000 you paid in mortgage interest, you can reduce your taxable income to $80,000. If you are in the 28% tax bracket, you will see approximately $5,600 in tax savings (28% of $20,000 = $5,600), not the entire $20,000.

Unfortunately, the reality of tax deductions is they reduce your taxable income, or the amount of income subject to income taxes, not the amount of taxes you actually pay to Uncle Sam. Let’s say you make $100,000 annually and you paid $20,000 in mortgage interest. Because of the $20,000 you paid in mortgage interest, you can reduce your taxable income to $80,000. If you are in the 28% tax bracket, you will see approximately $5,600 in tax savings (28% of $20,000 = $5,600), not the entire $20,000.

Thanks again Tyler for your question. As always, the forum is open to all questions and comments. Feel free to use me as a financial resource.

Thursday’s post will answer the refinance portion of Tyler’s question. We will discuss why a person may choose not to refinance and a few reasons people do not have the ability to refinance.

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Assets can make all of the difference in qualifying for a home loan. Your assets can be the ultimate compensating factor to offset your income and/or lower credit scores. This can also be the biggest obstacle to overcome as this is where your down payment and closing cost will come from. Also, depending on which program and lender you go with, 2 months up to 12 months of asset reserves may be required to close the loan. This means a lender would like to see 2 to 12 months of your principal, interest, taxes and insurance in some sort of account (checking, savings, stocks, bonds, 401k or other investment accounts) or source (car, antiques or something else of value that can be sold for a profit).

As I explained in my last few posts, the CIA of Lending Series, all is not lost if the A segment of your total CIA is lacking. There are other viable alternatives and sources to compensate for your assets, such as:

1. Gift funds from a friend or family member to use for down payment
   
2. Seller paying a portion or all of your closing costs
   
3. FHA financing allowing just a 3% down payment
   
4. First time homebuyer programs with 100% financing
   
5. Payment and interest deferred 2nd loans to cover down payment and or closing costs
   
6. Selling or refinancing existing assets such as a car or boat
   
7. Non-occupying co-borrowers
   
8. Borrowing against a 401K or IRA
   
9. Pledged Asset Mortgages (borrowing against stock, bonds or CD’s without liquidating them)
   

As you can see, you do have options, but note that some of these alternatives may have tax ramifications as well, so you may want to get your tax advisor and financial advisor into the mix before making any final decisions.

I hope my series on the CIA of Lending has been helpful. If you want to see how far your personal CIA will take you in a home purchase, don’t hesitate to contact me. I am always available to provide you with additional insight on your financial matters.

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Continuing our discussion of the aspects of the CIA of lending, we turn our attention to income. As you would figure, income dictates exactly how much home you can afford. A lender uses two ratios to determine this.

FRONT END RATIO – HOUSING EXPENSE

The first ratio is your housing expense. A lender will total your principal mortgage payment, interest payment, taxes, insurance, mortgage insurance (if applicable) and home owner association fees (if applicable) and calculate the percentage of your Monthly Housing Expense compared to your Gross Monthly Income. This will make up your front end ratio. The Fannie Mae standard is 28% for your front end ratio.

BACK END RATIO – HOUSING EXPENSE + MONTHLY DEBT

The other ratio, which carries more weight than the front end ratio, is your back end ratio. The back end ratio consists of the housing expenses mentioned above plus all of your monthly debt (credit cards, student loans, car loans, alimony or other monthly financial obligations). This ratio should be equivalent to 36% or less of your monthly gross income.

IDEAL SCENARIO

Here is what an ideal scenario may look like:

Yearly Gross Income: $100,000
Monthly Gross Income: $8,333
Monthly Credit Card Debt: $110
Monthly Car Payment: $364.72
Monthly Boat Payment: $200

Purchase Price: $375,000
20% Down Payment: $75,000
Loan Amount: $300,000
Loan Program: 30 Year Fixed at 6%

Monthly Principal and Interest: $1,847.15
Monthly Taxes: $390.63
Monthly Hazard Insurance: $87.50
Total Monthly Housing Expense: $2,325.28
Front End Housing Ratio: $2325.28/$8333 = 28%
Back End Housing Liability Ratio: $3000/$8333=36%

OK………I know what you are thinking, this is the Bay Area, what can you buy for $375,000? But, given the recent market events, there are quite a few properties for less than $375,000 (1746 listings in just San Mateo and Santa Clara County today…want a list? Send me an email.)

BUT WAIT….COMPENSATING FACTORS COUNT

The above ratios are just the industry guidelines and not necessarily the end all be all. With compensating factors, (i.e.…excellent credit score and/or assets) these ratios can be extended. For an FHA loan, for example, the back-end ratio is set at 45% and I have seen this pushed as far as 50%. With conventional financing, I have seen the back end pushed to 60%.

If you are curious as to how much of a home you could qualify for, contact me for a no obligation meeting to determine how far your personal CIA will carry you. What do you have to lose?

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Since my last post, I received a numerous requests about how to receive a free credit report? Here are a couple of sites to check out:

• www.FreeCreditReport.com
  
• www.AnnualCreditReport.com
  

These are great places to receive a credit report, but you need a credit report that will actually give you scores. Most companies will charge extra to show you scores. So the best site that I have found is www.Credit.com. This is one place that will send you a credit report and send you credit scores for free. However, you have to remember to cancel your memberships within their 30-day period, and you only receive one of the three bureau’s report. Not the perfect solution, but it’s free and it will give you an idea of where you stand.

I hope this helps!

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