Monthly Archives: June 2013

Five reasons why you might be a mortgage prisoner – and how to escape

 Whether you are self-employed, past retirement age or have an interest-only loan, there are several options to consider.

If you’ve had the same mortgage for a while, or are sitting happily on your lender’s standard variable rate (SVR), you could be oblivious to some of the changes that have taken place in the market over the past few years.

151336249Lenders have been busy altering criteria which, combined with house prices that have yet to recover to their 2007 peak, means you could struggle if you ever decided to move your loan to another bank or building society. Here are some reasons why you might be a mortgage prisoner, and what action you can take if you decide to switch.

You have an interest-only loan

A few years ago almost any lender would let you take out a mortgage on the basis you would pay off the interest each month, but only repay the original loan at the end of the 25-year term. They would ask that you had a plan to repay that debt – maybe an investment or expected inheritance – but tended not to make checks.

That has changed. After the Financial Services Authority suggested it would crack down on interest-only mortgages, lenders tightened their conditions. At the start of 2012 Santander said it would only offer interest-only deals up to 50% loan-to-value (LTV) and Lloyds TSB introduced restrictions on the repayment vehicles it would accept; now the Co-operative Bank and Nationwide building society are no longer offering interest-only mortgages, although both have said existing borrowers can switch to new deals.

“That has ramifications not only for those that have no repayment vehicle, but also for those that have been contributing to [one],” says David Hollingworth of mortgage brokers London & Country. Even if you have been putting money aside to cover the loan, you will find you can’t just remortgage to a new deal at Nationwide or Co-op without doing so on different terms.

To improve your chance of getting a new loan you might be able to cash in your investment and use the money to reduce the monthly repayments on a new repayment mortgage.

Alternatively, Mark Harris of Savills says: “Consider switching some of your mortgage onto repayment; this may make you more attractive to lenders and enable you to remortgage onto a better rate.”

You’ve aged

Obviously this has happened to everyone, but at the same time lenders have changed maximum age limits. “A number of lenders won’t lend to borrowers past retirement age, although some will lend up to 75, as long as the retirement income is enough to service the mortgage payments,” says Adrian Anderson, from mortgage broker Anderson Harris.

“We have definitely come across older borrowers finding they have run out of options,” Hollingworth says. As well as people who bought homes late in life, some of these may be parents who remortgaged their home to release equity for their children to buy a home. There are also some parents who took on joint mortgages with their children. “If they can no longer meet the lender requirements then that could limit the remortgage options and leave them stuck where they are until the child can reach the point that they take the mortgage on in their own right,” Hollingworth says.

If you can afford to, you could shorten the remaining term of your mortgage. This will increase your monthly repayments, but the loan will cost you less in the long run and you maximise your choice of lenders. Alternatively, you could seek out one of the more flexible lenders. Leeds building society will let you borrow up to the age of 80 as long as you are not older than 70 when you apply and the Mortgage Works ill lend until age 90.

Your house is worth less than when you bought it

Figures from Nationwide suggest that in many areas of the UK prices remain well below the peak they hit in 2007. So you could have aproperty worth less than you paid for it. If you didn’t have a big deposit when you bought it you could even be in negative equity.

In this instance remortgaging to a new lender is likely to be out of the question, but you may still be able to get a better deal from your existing bank or building society. “Some lenders will let existing clients remortgage on to fixed or tracker rates, and in some cases will even let you move house, so it is always worth asking the question,” Anderson says. “Otherwise, you may be stuck until the property price recovers – unless you have savings that can be used to pay down the mortgage and reduce the LTV.”

Even if you aren’t in negative equity you could find your options have shrunk. While in September 2007 you could choose between 986 mortgages if you had just 5% of equity in your home, in September 2012 there were just 69. The rates on these loans tend to be much higher than on those for people with bigger deposits. Again, you might choose to move savings to your mortgage to increase your choice.

You borrowed most of the cost of your house

This could put you in the same position as people who have seen the value of their home fall – compounded if that has also happened to you. A few years ago it was possible to borrow 125% of the value of your house on a mortgage – not many did, but it was not uncommon to borrow more than 90%. According to the CML, the average loan to value in 2007 was 90%.

If you did borrow 90% and your home has fallen in value you may find your options are limited. Again Anderson suggests you consider paying off some of the loan. However, he cautions: “[Use] savings that are earning next to nothing in the way of interest but make sure you keep some money back for emergencies, as money overpaid on the mortgage is practically impossible to get back again.”

You are self-employed

If you have recently changed jobs or become self-employed you may not have all the paperwork needed to get a loan. It used to be much easier, but the plethora of self-certification mortgages, which allowed you just to state your earnings is a thing of the past. Now lenders want more proof of your income. Many want at least three years’ accounts, although if you can supply that you will get the same kind of interest rate as an employed borrower.

“If you have less ‘evidence’ than this, you may be able to find a sympathetic lender who will consider only one year’s accounts plus satisfactory account projections,” says Harris. Andrew Montlake of mortgage brokers Coreco says Kent Reliance building society is one lender to try. It underwrites mortgages “from a blank sheet of paper”, he says, instead of asking a would-be borrower to fit into a mould, it will look carefully at one years’ accounts and projections.

Reverse mortgages get a reform

Most reverse mortgages, which allow homeowners 62 and older in need of money for retirement to tap the equity in their homes, are made through the Department of Housing and Urban Development, or HUD, and are guaranteed by the Federal Housing Administration, or FHA. These loans are based on the value of the home and the age of the borrower. The higher the value of the home and the older the borrower, the more the homeowner can take out. It doesn’t have to be repaid until the borrower moves or dies. Then the lender takes its share of the proceeds of the sale of the property, and the borrower or heirs get anything that is left. If the sale price isn’t enough to cover the loan, FHA takes the loss.

150337692Previously, there was no loan underwriting, and reverse mortgage borrowers didn’t have to prove that they were creditworthy. In the last few years, because of the economy, many holders of these reverse mortgages have been unable to pay their property taxes and keep their homes insured. As a result, last year FHA foreclosed on nearly 10 percent of properties with a reverse mortgage.

The bill, known as the Reverse Mortgage Stabilization Act, will change the rules. HUD Secretary Shaun Donavan says these are the key reforms:

New underwriting standards. The lender must perform financial assessments of potential borrowers to determine whether they are good candidates for a reverse mortgage. There will be different standards for each type of reverse mortgage.

Tax and insurance set-asides will be required. This will prevent borrowers — and FHA — from defaults due to nonpayment of taxes and insurance.

Limits on immediate funds. This prevents borrowers from taking the proceeds available to them all at once when they first get the reverse mortgage. This not only gives borrowers greater flexibility, it also helps guarantee there will be money left to cover increases in taxes and insurance.

Includes spouses — no matter their age — on the loan. This protects surviving spouses from losing their home.

Reverse mortgages can be a valuable retirement planning tool. Allowing HUD to keep these plans solvent is a wise move.

Securing Home Loans With Bad Credit Is Not So Difficult

The effects of the recession has hit some harder than others, but for everyone the challenge of securing a simple loan from a traditional lending institution has become that bit harder. But, what about when seeking funds to buy a home? As large as the resulting debt might be, it is possible to get home loans with bad credit.

137741994The reality of the financial world means that few of us make as much money as we think we do. The economic crises that have hit the world in recent years means inflation is higher and the value of the dollar for the working man is lower. In this climate, getting mortgage approval despite poor credit scores seems unlikely.

But there are options available, and if the right mortgage provider is approached, an affordable deal can be secured. Remember, lenders need to lend if they are to turn a profit – so home loans can be found.

Understanding Bad Credit Scores

There is a lot of fuss made over credit scores, but it is important that everyone understands what exactly they mean and how significant they are in any loan application. When it comes to applying for a home loan with bad credit, the score is not ignored, but other factors are more important.

Still, the debt created by a mortgage is often $200,000 or more, so lenders usually have strict policies when it comes to bad credit borrowers. For example, while getting mortgage approval despite poor credit scores is generally possible, applicants with extremely low scores are unlikely to be approved.

A bad credit applicant has scores below 680. However, approval is possible between 550 and 680, while applicants with scores of less than 550 will find it very difficult to get home loan approval. This is where alternative sources, like the FHA, become worthwhile options.

The FHA Option

While mortgage lenders may be willing to take a leap of faith in approving a home loan with bad credit, there is usually a price to pay. The interest rates charged are higher and often there is a condition that a larger down payment is made.

But by going through the FHA, a more affordable solution can be found. The FHA does not issue loans, but they do guarantee a certain percentage of mortgages issued by commercial lenders. It is their backing that can make mortgage approval despite poor credit scores possible.

With the FHA, there is no requirement for a down payment – thus saving the borrower tens of thousands of dollars – and ensures a lower interest rate is charged. However, these home loans are restricted to applicants with scores no lower than 560.

Qualifying For an FHA Mortgage

If the FHA option does look like the best on offer, then it is important to know what is required to qualify for one. As has already been mentioned, only applicants seeking a home loan with bad credit scores of 560 or above can qualify, so it is not available to everyone.

Additional conditions are that applicants must have a property rental or mortgage history behind them, and have a credit history of at least 12 months. Applicants must also have at least 3 types of debt, to provide their credit history.

Getting mortgage approval despite poor credit scores comes down to proving affordability and trustworthiness, which is why applicants must be full-time employed and have no bankruptcy or county court judgments over their heads. When all of these conditions are satisfied, then a home loan comes within reach.

An FHA Loan After Foreclosure

One of the worst things that you could have on your credit is a foreclosure if you have any hopes of buying a home in the future. There is no way of getting around this black mark on your credit if you have been through foreclosure in the past, but this being said, it is possible to own a home again. Years ago when people had their home taken from them because they were unable to pay their hopes of owning a home again were often dashed. The fact is that the FHA loan has been around for more than 70 years, but there is so much misinformation out there that many people simply assumed that their days of home ownership were gone. While it can be difficult to reestablish yourself after a foreclosure, it is possible to own a home again.

An FHA Loan Makes Home Ownership Possible

137741988While you may have had a foreclosure in your past you could own a home again. Sound too good to be true? It isn’t, for the pure and simple fact that the government believes that some people truly do fall on hard times and are unable to pay on their home, but they are still worthy of home ownership. These people can often rebound and turn their finances around in relatively little time and they are again worthy of owning a home again. An FHA loan is the way that many people are able to own again, even if they have had a foreclosure experience in the past.

If you were foreclosed on six months ago you will find that there is not any way, short of paying in cash for the full price of the home that you will be able to get into a home again with your name on the loan. There is not a lender out there that wants to take this risk, but you can often obtain an FHA loan in as little as 24 months from the date of your foreclosure. This is not to say that everyone who experiences foreclosure will qualify for one of these loans, but if you have worked on your finances and your credit in the 24 or more months since then you will find that it is possible to get into a home again.

All that the Federal Housing Administration needs to see when they consider you for one of their insured loans is that you have learned from your foreclosure experience. The way that you do this is by maintaining a better credit standing by paying all of your bills on time and perhaps paying more than the minimum balances on things. While your FICO score is not considered for one of these loans, the lender will look at your ability to take out credit and use it accordingly. If you have maintained good to excellent credit since your foreclosure you will find that it is simple to get into a home again.

Foreclosure is not something that most of us ever plan on, but it happens to some of the best of us. There are often circumstances beyond our control that lead us to be unable to pay for our homes. While this is unfortunate, the FHA insured loans are the second chance that many people need to do things right this time around. If you are serious about home ownership, it may be time for you to look into this option.

FHA Quality Control Plan Guidelines – Become FHA Approved

Before your organization can become FHA approved, HUD requires that you submit a quality control plan in writing. This quality control plan must be fully functioning from the date of your initial FHA approval. You can find basic requirements for a quality control plan in chapter 7 of the HUD Mortgagee Approval Handbook 4060.1, if you choose to write the plan yourself. Alternatively, you can purchase a quality control plan from a third party. The third party should ask some basic questions to make sure the quality control plan they create is tailored to your specific circumstances.

137741960To help mortgage lenders and brokers understand HUD’s quality control plan requirements, below is a summary of some of HUD’s requirements (mostly in the context of Single Family production). (For full guidelines, see HUD Handbook 4060.1.)

Goals of Quality Control

HUD requires that quality control programs meet the following goals:

  • “Assure compliance with FHA’s and the mortgagee’s own origination or servicing requirements throughout its operations;
  • Protect the mortgagee and FHA from unacceptable risk;
  • Guard against errors, omissions and fraud; and
  • Assure swift and appropriate corrective action.”

Independence

Your quality control functions may be performed by in-house staff, but only if those employees are properly trained and do not have part in the origination or servicing. They cannot be involved in the day-to-day processes they are reviewing. This means that if you choose to do your quality control file audits in-house, you need to set up a unit that is dedicated solely to quality control.

As an alternative, you can outsource your quality control function to a third party. If you choose to outsource, HUD requires a written agreement between the third party and your organization. HUD also states that you are responsible for making sure that the third party is meeting HUD’s requirements.

Timeliness

You are also required to perform quality control reviews (audits) on a regular and timely basis. If your organization closes more than 15 loans in a month, your audits need to be performed at least monthly. If you close 15 or fewer loans monthly, you can perform your audits quarterly. To meet HUD’s deadline, the quality control file audits need to be completed within 90 days of closing.

Sampling

As part of your quality control plan, the loans you review should be a representative sample, to evaluate accuracy and adequacy. The general rule is that you should audit 10% of your FHA loans. In addition to that 10%, you must also audit 100% of the loans in early payment default. These are defined as loans going into default within the first six payments. Furthermore, you need to make sure that you are reviewing all aspects of operation, including auditing loans from all branch offices, loan processors, loan officers, underwriters, etc. If you do a significant amount of work with certain appraisers, real estate companies, and builders, you should also review their work.

Documentation and Verification

For each loan being audited, HUD requires that certain documents be reviewed and confirmed.

a. New Credit Report – HUD requires that you order a new credit report for each borrower whose loan is under review, unless the loan is a streamline refinance or was processed with an FHA approved automated underwriting system.

b. Re-verifying Documents – you need to re-verify certain items of documentation, such as the borrower’s employment or funds to close.

c. Appraisal Desk Review – except on streamline refinances and HUD Real Estate Owned sales, a desk review of the property appraisal must be performed for every audited loan. Furthermore, HUD expects field reviews to be performed on 10% of the loans you audit. Generally, select loans for field review if there are any issues with the desk review, such as discrepancies or items of suspect.

d. Occupancy Re-Verification – If the occupancy of the subject property is suspect, try to verify that the borrower is actually occupying the property. If the owner is not occupying the property, you need to report this in writing to HUD.

Site Review

All offices that originate or service FHA loans must be reviewed to make sure they are in compliance with FHA requirements. These offices include traditional or nontraditional branches and direct lending offices. For offices with certain higher risk criteria, annual visits are mandatory. For other sites, you can determine how often is appropriate for you to visit.

During the visits, items to be reviewed include such things as making sure the office is properly registered with FHA, the address is current, the office is professional and business-like, walk-in customers can clearly identify the office, you offer toll free lines or accept collect calls from borrowers, each office is sufficiently staffed with trained employees, the office procedures are appropriately revised to reflect changes in HUD policies, and so on. Furthermore, you must check at least semi-annually that no employees are debarred, suspended, or under Limited Denial of Participation.

Reporting and Corrective Action

Once the quality control file audits are complete, management must be notified of any findings within one month. Management should then create a report which contains any actions being taken based on the findings, a timetable for their completion, and any necessary follow-up actions. You do not need to report insignificant findings to HUD. Submit your findings to HUD (in writing) only if there are findings of fraud or other significant violations. Such findings need to be reported to HUD within 60 days of their initial discovery.

File Retention

Keep your quality control review report and the follow up on file for two years. This includes findings from the audit, actions taken, and procedural information.