Purchase or Refinance During a Chapter 13 Bankruptcy

Chapter 13 Plan

This post is written for folks currently in a Chapter 13 Plan. It is also helpful for those contemplating filing a Chapter 13 Bankruptcy Reorganization Plan. This post is also helpful for those recently Discharged from Chapter 13. A mortgage refinance or a home purchase, while still in a Chapter 13 bankruptcy, is possible; it is also a complicated financial and, legal transaction. To do this requires a highly specialized mortgage professional experienced with both FHA lending rules and Chapter 13 bankruptcy as well as local court rules.

The Chapter 13 Payment

One of the most important things to understand is the importance of on-time Chapter 13 Payments to the mortgage underwriting process. I strongly encourage you to read this: The Chapter 13 Payment. Your Chapter 13 Trustee payment is given the exact consideration as your housing (mortgage/rent) payment in underwriting. From the underwriting perspective, one thirty-day late payment of either the mortgage or Chapter 13 Trustee payment will sink your prospects of getting mortgage loan approval for at least a year. Mail your payment early or set your on-line bill pay or direct payment to the Trustee so that you always know your payment has had time to get to the Trustee’s office and be posted by the staff at that office. Too many times, on review of the Chapter 13 Payment history, we find a payment was posted on the 2nd day of the month. One day counts as a late payment. An experienced mortgage lender can help you check your Chapter 13 payment history in real time.

Mortgage Choices for Chapter 13 Debtors (purchase or refinance)

The only mortgages available, either for refinance or purchase, for those in a Chapter 13 Plan are those insured or guaranteed by the Federal government. These mortgages are either: insured by FHA, guaranteed by VA or the USDA. Each

Any mortgage so long as it’s FHA, VA or USDA.

of these home loans are underwritten with the same guidelines as set forth in the FHA Handbook. How does a bankruptcy affect a borrower’s eligibility for an FHA mortgage? From the FHA Handbook: “A Chapter 13 bankruptcy does not disqualify a borrower from obtaining an FHA mortgage provided the lender documents that one year of the payout period under the bankruptcy has elapsed and the borrower’s payment performance has been satisfactory (i.e., all required payments made on time). In addition, the borrower must receive permission from the court to enter into the mortgage transaction.*” Most underwriters will consider the Chapter 13 Trustee’s approval as permission from the court.

Application to Incur New Debt

To get underwriting approval for a Chapter 13 Debtor to refinance the Chapter 13 Trustee (in Colorado) or the Judge must approve your application to incur new debt. Contact your attorney to determine how and when to best proceed, or not. There are situations when it may not be in your best interest to purchase or refinance while in Chapter 13. This is a process which you can only do with the advise and assistance of your attorney. Your attorney must prepare the financial statements to submit to the Trustee in order for authority to be granted for a lender to offer new credit. Your mortgage loan originator should be able to assist your attorney in completing the Application to Incur New Debt.

Mortgage Refinance After Chapter 13 Discharge?

Yes. One may refinance or purchase within 2 years following the Discharge. BUT, it is easier to get approved for a mortgage while still in Chapter 13. This is because, following Discharge, a manual underwrite is mandated. Few lenders are willing to take the risk of not having the safe harbor provided by Automated Underwriting. Begin reestablishing good credit as soon as your Chapter 13 Plan is confirmed and continue this discipline while your case is still open so by the time your Discharge enters, you have solidly reestablished good credit.

Two years following Discharge, with reestablished credit, one may qualify for a conventional or Qualified Residential Mortgages (QRM) to purchase or refinance a home loan.

Preliminary Requirements for Purchase or Refinance While in Chapter 13

Twenty-four months of current housing payments with no 30-day late payments and, the likelihood of the income continuing for at least three years.
Two years IRS Returns showing your income is sufficient to pay the mortgage as well as your Chapter 13 payment and any debt not included in the bankruptcy payment.
Minimum middle FICO Score of 620 . Most will need to practice what I’ve previously posted as FICO 101a, 101b and 101c for several months prior to making a successful application for mortgage credit.
For anyone with a fear of having credit make time to read both Credit: Use It to Build It (Part 1) and Credit: Use It to Build It (Part 2).
Begin rebuilding your credit as soon as your Chapter 13 Plan is Confirmed/Court Approved; this is when your property has been revested to you.
The maximum limited-cash out loan to value on an FHA appraisal is presently 95% – Refinance.
The minimum down payment is 3.5% of the purchase contract or appraised value whichever is less. – Purchase
The maximum Debt to Income Ratio is 45%. This is pushing the envelope. While in Chapter 13, it is mandatory to have Court approval (in Colorado, the Trustee approval suffices) to obtain a mortgage.

There is more detail to this process than can reasonably be discussed herein but this is the essence of purchasing or refinancing while in Chapter 13.

*Reference: FHA Handbook 4000.1 II.A. 5.a.iii (H)(2)(3).

Disclaimer: This article does not represent that any of the information provided is approved by HUD or FHA or any US Government Agency.

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Notice: The information on this blog is opinion and information. While I have made every effort to link accurate and complete information, I cannot guarantee it is correct. Please seek legal assistance to make certain your legal interpretation and decisions are correct. This information is not legal advice and is for guidance only. You may use this information in whole and not in part providing you give full attribution to James Spray.

Preparing for The Appraisal – Selling or Refinancing

Oct11

Make a good first impression, it helps.

This post is written primarily for the benefit of the seller and the listing agent as well as the refinance applicant.

For most homeowners, the real estate appraisal is a key component to selling a home. It allows the business transaction to occur between the seller and buyer, as well as the Realtor or real estate agent and the mortgage lender.
A state licensed appraiser is responsible for preparing the appraisal for a mortgage loan. The appraiser works for or is contracted by an Appraisal Management Company (AMC) which must also be state licensed.
To facilitate the appraisal process, it’s beneficial to have the following documents, as applicable and if available, ready for the appraiser:
- Prepare a list major home improvements (for example, the addition of central air conditioning or updated kitchen) and upgrades including the date and cost of installation as well as permit confirmation where permitting is required by the local government.
- List any recent property maintenance items such as roof repair/replacement, a new hot water heater, new paint, carpeting, etc. As well as obtain and provide permit documentation when and where a permit is required.
- Have a copy of a survey or Improvement Location Certificate of the house and land. Again if applicable and readily available. Such may only be required on rural properties.
- Provide any written property agreements, such as a maintenance agreement for a shared driveway or a common wall agreement(s), etc.
- List personal property which is to be sold with the home.
- Provide a copy of the Purchase Agreement on a pending sale.
- Your Realtor should offer to provide a Comparable Market Analysis (CMA) so you may provide the appraiser with comparable properties and values. Most appraisers value this help. Offer the CMA, do not try to force it on the appraiser.
- There is nothing in law prohibiting you or your Realtor from presenting a CMA for the appraiser.
Once the appraiser arrives at the property, there is no need to accompany s/he on the entire site inspection; it is appropriate to be available to answer questions. Feel free to point out any home improvements and provide the supporting documentation of the cost.
On pets, not everyone loves our furry family members as we do.
- Four-legged friends should be unobtrusive and well-mannered. Dog bites are to be avoided.
- Feline friends should have recently cleaned litter boxes as well as neatened dining areas.
- Spray the carpets, bed coverings and cloth furniture with Fabreze an hour before the appraiser arrives.

Other Considerations

Accessibility: Make sure that all areas of the home are accessible. Especially make sure access to the attic and crawl space are readily entered. With a locked room, you’ll wish to be certain to provide access for the appraiser so as not to create doubt. Doubt is not helpful for an appraisal.
Housekeeping: Appraisers see scores of homes a year and will look past most clutter, but they’re human beings too! A good impression can translate into a higher home value. Make up the beds; clean up the kitchen, etc. We found this article to be most helpful in preparing for showings as well as the appraisal. 24 THINGS YOU CAN DO IN 10 MINUTES OR LESS TO MAKE YOUR HOUSE MORE SALEABLE
Pre-Appraisal/PreListing Infographic
FHA Financing Eligibility: In the event you wish to have your property eligible for FHA financing, you may wish to: Install smoke detectors on all levels (especially near bedrooms); install handrails on all stairways; remove peeling paint and repaint the affected area.
Maintenance: Repair minor things like leaky faucets, missing door handles and trim.
Regulations: Some states, Colorado among them, require that carbon monoxide detectors are installed as a matter of law.
Sensitivity: Remove sensitive pictures or religious symbols that could prevent an appraiser from taking the required photographs for the report due to privacy concerns.

“Having your house clean does make a difference, even though in theory it should not,” says Mark Ferguson, a real estate professional and property investor in Greeley, Colo. “Appraisers are people, and they are swayed by smells and how a house feels, even if they aren’t conscious of it.” For the complete article, read Do Ultra-Clean Homes Appraise Higher?

Related Information – From a Realtor’s perspective on preparing for a Buyer’s Inspection.

A Division of Real Estate Consumer Advisory: Understanding Appraisals and Appraisers

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Financially Speaking™ James Spray, MLO, CNE, FICO Pro

CO LMO 100008715 | NMLS 257365 |October 11, 2014| March 10, 2018

Notice: The information on this blog is opinion and information. While I have made every effort to link accurate and complete information, I cannot guarantee it is correct. Please seek legal assistance to make certain your legal interpretation and decisions are correct. This information is not legal advice and is for guidance only. You may use this information in whole and not in part providing you give full attribution to James Spray.

The QRM Rule: Residential Mortgage Rules

Oct4

Official Device For Proving Future Income

Official Device To Prove Future Income

2014 > Qualified Mortgage (QM) or Qualified Residential Mortgage (QRM) Lending Documentation Requirements and,

Ability To Repay (ATR) Documentation Requirements:

Verified minimum of previous 24 months wage earner employment or,

Confirmed previous 24 months self-employed (no blending of self-employed with wage earner); we’ll call this the Bernake syndrome. The former Federal Reserve chairman, speaking in Chicago told the moderator: “just between the two of us, I recently tried to refinance my mortgage and I was unsuccessful in doing so.”The lender must establish the likelihood of continued employment/income for the next 36 months.

The QM/QRM rule became effective on January 10, 2014. Residential mortgages subject to Reg. Z (1-4 unit owner-occupied homes) require the borrower’s income/assets are to be fully documented and verified.

Two months of the most recent year to date (YTD) pay advice.
Wage-earner income must be verified with Federal and State filed 1040’s + all schedules + W-2(s) + 1098(s) + 1099(s).
Self-employed: Copies of last two years Personal and Business returns including all Schedules, 1099’s, Form 1065 plus K-1, Limited Partner K-1 Forms, sub-chapter S Corporation 1120S plus K-1 Forms, Corporation form 1120 and year to date P&L Statement plus Balance Sheet.
If income taxes are e-Filed, the entire e-Filed digital filing is required.
Must be able to reasonably project borrower’s income and debts over the next three years.

Asset and Other Income Documentation

Previous two months bank statements – all banks, all accounts with all pages including blank pages.
Current statements of all investment accounts with all pages including blank pages.
Current statements of all retirement accounts with all pages including blank pages.
Current leases to prove leasehold income.
Other documents as may be required to prove income.

Standards

Payment to income ratio (PTI) – Conventional – 28%
Debt to income ratio (DTI) – Conventional – 43%
PTI – Government (FHA, VA, USDA) – 38%
DTI – Government – 44%
FICO® Scores 640+*

In the present regulatory climate many lenders impose underwriting rules (referred to as “overlays”) that are more restrictive than required by law or regulation. One set of overlays: bankruptcy, foreclosure, short-sale and deed-in-lieu of foreclosure prevent entry or reentry to the mortgage market for certain time periods as displayed here. Points and fees which may charged to borrowers are defined and limited. For the details, click here.

Exceptions to QRM and ATR

Investment properties are exempt. These are provably non-owner occupied residential properties. The proof is provided with 1040’s and schedules as well as the income shown with bank statements and an accompanying lease agreement. Credit Unions and banks serving underserved communities also have certain exemptions. As well, there are non-QM loans which do not feature low down-payment options or highly favorable rates and terms.

Media outtakes/observations from the industry biased view:

“…lenders are imposing higher than usual credit scores and other tough standards on people applying for government-backed mortgages. The lenders say they’re exceeding the government’s own criteria in a bid to insulate themselves from more financial penalties and lawsuits. And several analyses suggest that millions of potential home buyers are getting shut out as a result.” The Washington Post recently published: Why the next pick for U.S. Attorney General has huge implications for the housing industry.

Critique: For a well thought critical observation of potential serious failures of the discussed reforms, read QRM’s Missed Opportunities for Financial Stability and Servicing Reform by Alan Levitin. Mr. Levitin states in part that “… QRM was (a) missed chance to fix servicing for both investors and consumers.”

*On FICO® Scores, the best rates at the lowest cost are available for borrower with a minimum 740 middle score based on the FICO® models used by lenders which are also used by Fannie Mae and Freddie Mac. With lower scores one may expect a higher rate with additional underwriting overlays such as lower DTI and LTV, more liquid assets and higher down payments among other overlays.

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Financially Speaking™ – James Spray, RMLO, CNE, FICO Pro

CO LMO 100008715 | NMLS 257365 | ~~October 4, 2014~~ November 22, 2016

FICO 9 and Mortgages

Sep23

For this post, we are simply quoting from other media sources to help our readers understand the new FICO 9 credit scoring model. In spite of what you may have read, the FICO 9 credit scoring model will not help significantly, if at all, with home mortgages. At least not anytime soon. FICO 9 will be utilized sooner by vehicle and credit card lenders.

On August 23, 2014, The Motley Fool published Why New FICO Score Rules Could Be a ‘Game-Changer’ In Helping You Obtain a Loan stating, in part, the following: “According to FICO, the median FICO score for consumers whose only major derogatory references are unpaid medical debts is expected to increase by 25 points.

FICO’s new more lenient model should also benefit collection agencies. Consumers with unpaid medical debts now have an incentive to settle, knowing that FICO will stop including in its calculations any record of a consumer failing to pay a bill, if the bill has been paid or settled with a collection agency.

Auto and Credit Card Lenders Will Be First to use FICO 9

“This is great news for collection agencies,” Rood said. “It provides laggards with an incentive to pay up. Before these changes, you were incentivized not to pay off your debt. The last thing you wanted to do was trigger a new ‘date of last activity’ report for an old debt, say, a debt from 2008. Again, you were just better off not paying it because older debts weighed less heavily against you on your credit report than new debt. The new scoring model will likely be implemented by credit card and auto lenders first. Mortgages typically lag in adopting new scoring models.”

Mortgage Lenders Will Be Last to use FICO 9

The New York Times in their article of August 7, 2014 titled: Credit Scores Could Rise With FICO’s New Model explained it very well. “For consumers to see any benefit, however, lenders have to adopt the new scoring techniques. FICO last introduced a new model, called FICO 8, in 2008. Since then, FICO said that about half of its customers had started using that model.

Mortgage lenders have been slower to adopt new scores, and most are using even older versions, experts said, because Fannie Mae and Freddie Mac are still using them in their own underwriting software. Fannie and Freddie did not say whether they had plans to switch to the updated FICO score that weighs medical collections less heavily. But they both said they were confident in the tools they use.”

Finally, law professor and author James Kwak, states the facts very simply: “…the financial district of the Western societies, Wall Street, and outdated software may very well be the norm not an exception.”

The Take Away

The take away on all this, according to Ted Rood of the Mortgage News Daily is that “(home and mortgage) buyers should keep paying those medical bills and avoid collections to ensure their loan approvals!” This statement was excerpted from the article titled: New Credit Score Model Would be Great for Housing! Too Bad it Won’t be Used.

Final Word

Our regular readers already know of our thoughts on FAKO credit scores and the release of FICO 9 adds yet a new dimension. Consumers purchasing their scores from the myFICO site will get real FICO scores but they are likely not going to be the scores which mortgage lenders use. So what can you do? You can write or call elected officials and ask that they help Fannie Mae and Freddie Mac catch up with the times.

More on FICO 9 from the FICO Blog.

UPDATE: 09/22/15 | GSEs Struggle to Update Credit Scoring Models

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Financially Speaking™ James Spray, RMLO, CNE, FICO Pro

CO LMO 100008715 | NMLS 257365 |September 23, 2014 | Updated September 22, 2015

Credit: Use It to Build It (Part 2)

Sep21

As discussed in Credit: Use It To Build It -Part 1, it is essential to qualify for and properly use credit in order to have credit. A thin credit file does little good to help one build or rebuild credit. Thin credit is described as a file lacking in length and depth of credit history. Thin is not a good thing in the credit sense.

The length of a credit history is a matter of time. A short credit history may have accounts that have been open for a matter of months or one or two years. A long credit history may span decades because open, active accounts remain indefinitely.

The depth of a credit report is an issue of the number and types of accounts you have. A credit history with only one or two accounts will likely be considered thin, even if it spans many years. A “thick” file would have several accounts of different types. For example a credit history could include credit cards, installment loans and a mortgage.

The Basics

Let’s start with the basics, understand the mechanics of the FICO Pie Chart as well as the art and science of Rebuilding Your Scores. Credit scores are not a big mystery; they are simply a measure of the information reported to the credit reporting agencies by your creditors. Learn about your credit reports control that which you can as to what is reported and your credit scores will follow.

Credit Score Facts

On credit scores, how do they work? What you can do to raise your scores is discussed in this blog. It is necessary to understand there is a difference in the credit scores one may obtain for free via the Internet. These are not the scores used by lenders. They may not even be close to those used by lenders. In this blog we discuss the difference between what we call FICO or FAKO Scores?

Join a Credit Union

Not just any credit union will do. Some credit unions are so large they act more like a bank than a credit union. To learn a little more about credit unions and to find one you can join, read our blog titled: Credit Union Power. This is a key step to reestablishing your credit. Once you’ve become a member, ask for help to set up a $500 secured installment loan. Next, utilizing some of your savings, as much as possible, set up a secured credit card account and use it properly.

Beginning Anew or New?

Whether beginning from scratch as a young person with no credit or whether starting again, the tasks are quite similar. Read through both Part 1 and Part 2 of these blogs to learn more of what to do and not do as you begin this new journey. If you have a family member with excellent credit, read and share this blog on this which we call inherited credit. You have the opportunity to learn about how it works and how it doesn’t work.

Credit Utilization

Anyone who uses credit cards could have high utilization, particularly those which pay off their balances in full each month. This is because balances are often reported to the credit bureaus mid-billing cycle. So if you have a $5,000 limit and you charge $4,000 in a month, you could be reportedly utilizing 80% of your available credit. The result is most often dramatically reduced FICO™ Scores.

We wish you success!

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Financially Speaking™ James Spray, MLO, CNE, FICO Pro

CO LMO 100008715 | NMLS 257365 | September 21, 2014

Credit: Use It to Build It (Part 1)

Sep19

Embarrassed: Believes No One Will Grant Credit

My very good friend, we’ll call him Ramsey (not David), does not use credit. Mind you, he’s not just a simple follower of some nameless cult leader advocating that no one should ever use credit. Ramsey’s a regular fellow, professional, married with grown children and grandchildren, too. Ramsey simply does not use credit and has not used credit in the past 8+ years. The only credit he’s had in the past several years is bad credit due to medical bills. These are the type of medical bills CFPB studied and recently discussed. These are the medical bills which have ruined credit for so many for so long. This is compounded if one is not offsetting the bad credit with good credit. And he wonders why he has such poor credit scores. One must use credit to get credit for using credit.

Fear of Credit

Tips for overcoming credit phobia – Although you intellectually understand that using a credit card is beneficial, you might still have emotional concerns. Perhaps you misused or didn’t understand how to use and not use credit when you were younger. Perhaps you had a bad experience. Start over and don’t make the same mistakes, you’ve learned what not to do.

The good news is that you can take steps to get more confident about the proper use of credit.

Check your attitude and thinking – One reason people overspend with credit cards is they are thinking incorrectly. Internalize the idea that credit cards provide short-term loans. When you swipe your card, you’re borrowing money – and you’ll have to pay it back. Plastic isn’t free money or additional income. And it does not replace income.

Confront your fear – Ignorance breeds fear, so the best way to overcome a fear of credit cards is to become more educated about them. The Board of Governors of the Federal Reserve System put together this wonderful guide to help you learn more about credit cards.

Make a budget – The best way to keep your spending under control is to make a plan for how you’ll use your funds. Be realistic about your budget and stick to it. You can use this budget form from Google for free. TIP: The most restrictive budgets usually fail.

Track spending by keeping receipts – After setting up a budget, keep tabs on how you’re doing by tracking your spending. You can use online banking or any other method you’re comfortable with, just do it.

Sign up for alerts – Most credit card issuers give you the option to set up text or email alerts to be reminded of billing due dates, your current balance, etc. Even though you’re keeping track on your own, setting up an alert adds an extra layer of protection against overspending or not timely paying.

Learn the facts –. Do not let your in-use credit be more than 20% of the available credit, ever. Better is to have no more than 10% of your credit limit in use as you are building or rebuilding your credit reputation. To learn more click and read this and then this.

Next, we heartily suggest you read: Credit: Use It to Build It – Part 2

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Financially Speaking™ James Spray, MLO, CNE, FICO Pro

CO LMO 100008715 | NMLS 257365 | September 19, 2014 | Revised March 31, 2018

Credit: Use It or Lose It!

Aug22

Credit Atrophy

In neither of the below situations had either credit user been reckless or irresponsible. Neither had run up large balances and there were no late payments. The problem with each was that they simply hadn’t been using credit and had allowed open accounts to age-out from lack of use and be closed by the credit provider.

She Quit Using Credit

In December, my mortgage client’s co-signer’s FICO Scores were all over 830 and given that 850 is the ceiling, we call these great scores! In February, when my client was ready to set a closing, her co-signer had no reported FICO Scores. This means they had fallen below the mortgage score floor of 350.

His Credit Cards Expired

In the early Summer of 2013, my son-in-law began shopping for a home in their new town. His scores were all in the early 800s. By the time it came to schedule a closing in late Summer, his scores had all dropped into the 740 range. What happened? His unused credit lines were closed by the providers. The result was that his usage of available credit increased such that his scores dropped. Rather than having less than 20% of his available credit in use, he now had more than 45% of his available credit in use. He had not increased the amount of credit he was using. He lost open unused credit, which had a negative impact on his overall score as it appeared he was overusing credit.

Retired Credit

“FICO has the primary scoring model for mortgages and most other lending decisions. Its model require an [creditor] update to a credit report within the last 6 months. Your credit file is usually updated monthly for active accounts…” Source.

What to Do?

The card issuers have models which track your usage or lack thereof. The credit provider also incurs ongoing costs such as credit reporting, accounting and audit controls. Be Aware: If you are not using the credit card every six months, or so, the creditor may simply close the account. If the account is not being reported, it cannot be scored. If nothing else, charge something you need to purchase regularly, perhaps a pair of socks. Pay the invoice when due and never pay interest.

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Financially Speaking™ James Spray, MLO, CNE, FICO Pro

CO LMO 100008715 | NMLS 257365 | August 22, 2014 | May 14, 2018

FNMA Updated Bankruptcy, Foreclosure, and Short Sale Policies

Aug10

Fannie Mae updated its policies regarding significant derogatory credit events, which in some cases allows more borrowers to reenter the housing market. These updates are reflected in the embedded chart: How long after bankruptcy or foreclosure must you wait to get a mortgage?

Waiting Period for Mortgage Debt Discharged Through Bankruptcy

The borrower is now held to the bankruptcy waiting period (4 years) and not the foreclosure waiting period (7 years). This is true even if a foreclosure action is subsequently completed to reclaim the property in satisfaction of the debt. This is a significant and favorable change. From the FNMA underwriting guidelines [B3-5.3-07, Significant Derogatory Credit Events — Waiting Periods and Re-establishing Credit (08/07/2019)]: “Foreclosure and Bankruptcy on the Same Mortgage If a mortgage debt was discharged through a bankruptcy, the bankruptcy waiting periods may be applied if the lender obtains the appropriate documentation to verify that the mortgage obligation was discharged in the bankruptcy. Otherwise, the greater of the applicable bankruptcy or foreclosure waiting periods must be applied.”

[At this time FHA/VA/USDA require a two year waiting period following discharge and a three year period post-foreclosure.]

Short Sale or Deed-in-Lieu Waiting Period

The waiting periods are being updated to establish a standard four year waiting period, with a two year waiting period permitted providing a borrower has extenuating circumstances*.

[FHA/VA/USDA require a three year waiting period following Short Sale or Deed-In-Lieu.]

Mortgage Debt

As a new policy, charge-offs of mortgage accounts now require a four year waiting period following this derogatory credit (two years if the borrower can demonstrate extenuating circumstances*).

Number one became effective July 29, 2014; two and three are effective for mortgage loans with applications dated on and after August 16, 2014.

How do you know if Fannie Mae owns/owned your mortgage? Click on FNMA Loan Lookup.

Based on past experience, it will take time for the mortgage origination industry to catch up with these new policies. Further, it is likely that some will not accept these policies within their own underwriting guidelines.

*Given the reliance on automated underwriting for compliance purposes, few lenders will delve into the perceived risk of manually underwriting extenuating circumstances for fear of losing the QRM safe harbor. QRM standards were implemented on January 10, 2014. The vast majority of lenders are staying squarely inside the New Rules box, so to speak.

Reference: Fannie Mae Selling Guide Announcement SEL-2014-10

Image Credit: Reuters/Jonathan Ernst

Financially Speaking™ James Spray, MLO, CNE, FICO Pro

CO LMO 100008715 | NMLS 257365 |August 10, 2014 | Updated September 5, 2020

Reverse Mortgages and the Under-Age 62 Spouse

Aug2

New Rule on Reverse Mortgages

A new rule has been issued which allows that a reverse mortgage (HECM) shall protect borrowers even when one spouse is younger than 62. Both the purchase or traditional reverse mortgage amount will be based on the younger spouse’s age. Given the number of variables, and the complexity with how these new factors work please contact your trusted reverse mortgage loan originator.

For all FHA case numbers issued on or after August 4, 2014 this revolutionary new rule becomes effective. This rule will allow younger spouses of borrowers that no longer live in their home to stay in their home without the threat of foreclosure. In a nutshell, the requirements are this:

They must have been married when the mortgage was taken,
Have remained married,
The surviving spouse shall continue to pay taxes, insurance, and HOA fees (if applicable).

Prior to August 4, 2014, the full repayment of the reverse mortgage was due and payable following the death of the borrower, leaving the surviving spouse whose name was not on the mortgage in the lurch for the debt or forced to sell the home. This change defers that settlement until after the surviving spouse’s death.

This new rule comes at a cost. Lenders factor in the age of the younger spouse when calculating the reverse mortgage payout; in a nutshell, the younger the spouse the longer the loan will be outstanding resulting in the lesser payout.

Reference: FHA Mortgagee Letter: ML 2014-07

Readers of this blog may also wish to read: What Is A Purchase Reverse Mortgage? as well as The New Reverse Mortgage.

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Notice: The information provided is not intended to be an indication of loan approval or a commitment to lend. Additional program guidelines may apply. Information is subject to change without notice.

DISCLAIMER – This post does not represent that any of the information provided herein is approved by HUD or FHA or any US Government Agency or Department.

Financially Speaking™ James Spray, MLO, CNE, FICO Pro

CO LMO 100008715 / NMLS 257365 | August 2, 2014

Eliminating Mortgage Insurance

Jul20

Is it Necessary to Refinance to Eliminate Private Mortgage Insurance?
In short, the value of the property must exceed the loan balance by 20% due to additional payments made such that the principal balance has been reduced to 80% and the request has been made in writing to eliminate the Private Mortgage Insurance (PMI).
The answer depends on a few factors. If the loan type is a conventional mortgage and had a greater than 80% loan to value and was closed on or after, July 29, 1999 the following applies per the Homeowner Protection Act as discussed by the Consumer Finance Protection Bureau (CFPB):
“The Homeowners Protection Act gives you the right to request that your lender cancel PMI when you have reached the date when the principal balance of your mortgage is scheduled to fall to 80 percent of the original value of your home. This date should have been given to you in writing on a PMI disclosure form when you received your mortgage. If you can’t find the disclosure form, contact your lender. You can also make this request earlier if you have made additional payments to reduce the principal balance of your mortgage to 80 percent of the original value of your home.”
The payment history must be good and the payments current.
Your request must be in writing to the proper address in an acceptable format such as the RESPA letter.
The lender/servicer may require you to provide an appraisal to prove the value of the property has not declined below value when the loan was funded. Note: This is not to prove that your home value has appreciated.
The lender/servicer may require you certify that there are no junior liens (second mortgage, HELOC, judgment or tax liens).
Send a QRM your servicer if you are unable to locate the PMI disclosure form you received at closing.
If you do not contact your servicer to eliminate the PMI, the PMI is to automatically drop off once the loan has been paid down to 78% of the funded loan.
Click here for the CFPB link on eliminating PMI.
Click here for the August 4, 2015 CFPB update for mortgage servicers.
If you have Lender Paid Mortgage Insurance (LPMI) the only way to eliminate LMPI without selling the property is to refinance. As always, this is a business decision. How much will you save in what period of time by eliminating the LPMI. It’s worth noting that LPMI may be tax deductible (check with your tax advisor to make sure).
Is it Necessary to Refinance to Eliminate FHA Mortgage Insurance Premium?
If the loan is an FHA Insured mortgage it has Mortgage Insurance Premium (MIP). For mortgages with an FHA case number assignment date on or after June 3, 2013, the FHA monthly mortgage insurance can only be terminated by the servicer or holder if the mortgage is paid in full before the maturity date. The exception to this rule is the FHA Streamline Refinance.
Again generally speaking, providing accelerated payments were made such that the unpaid principal balance is 78% or less of the original loan balance, the MIP can be eliminated prior to the originally scheduled cancellation date. For several years prior to the change implemented on June 3, 2013 the mandatory time for the MIP was 84 months.
In short, if you wish to eliminate the MIP prior to the termination date of the MIP, as explained by the CFPB, you’ll find it necessary to refinance.
Can You Refinance to Eliminate Mortgage Insurance?
Providing the property has sufficient equity to eliminate PMI or MIP (20% equity) and there are no junior liens (above discussed), the mortgage loan may be refinanced into a conventional loan eliminating the PMI or MIP. As always, this is a business decision. How much will you save over what period of time by eliminating the PMI or MIP. Next calculate your costs in purchasing another first mortgage. Remember, there is no such thing as a free lunch.
If You Are Being Solicited to Refinance Here’s a Suggestion:
Before investing the time and expense of applying for a refinance, make sure the solicitor is in fact both an NMLS Registered Loan Originator as well as Licensed by the CO Division of Real Estate or, the state in which you reside; if they are, obtain their NMLS Number and their CO License Number as well as their contact information. If they are neither, they are merely a lead generator and get paid only by the number of leads they generate. This doesn’t mean that which they are selling can’t be done; it just means you may wish to be extra vigilant as they may not have your best interests at heart.
A licensed mortgage loan originator has a much higher level of interest in helping to protect your interests. Therefore, you may wish to avoid the lead generator altogether. Discuss your refinance possibility with your State Licensed, NMLS registered loan originator.
The Bottom Line: Before You Pay For an Appraisal
Make sure you are dealing with someone licensed and make sure it makes business sense prior to shelling out several hundred dollars for an appraisal. With the refinance there will also be many more hundreds or perhaps several thousand dollars in new costs to purchase a new mortgage. Not insignificant is how many more months or years the refinance will add to your total cost. Consider as well how long you really will keep the house on which you are contemplating the refinance.
Image credit: Google Images
Financially Speaking™ James Spray, RMLO, CNE, FICO Pro |CO LMO 100008715 / NMLS 257365 | August 8, 2015

Notice: The information on this blog is opinion and information. While I have made every effort to link accurate and complete information, I cannot guarantee it is correct. Please seek legal assistance to make certain your legal interpretation and decisions are correct. This information is not legal advice and is for guidance only. You may use this information in whole and not in part providing you give full attribution to James Spray.

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Notice: The information provided is not intended to be an indication of loan approval or a commitment to lend. Additional program guidelines may apply. Information is subject to change without notice.

DISCLAIMER – This post does not represent that any of the information provided herein is approved by HUD or FHA or any US Government Agency or Department.

Eliminating Mortgage Insurance

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Notice: The information provided is not intended to be an indication of loan approval or a commitment to lend. Additional program guidelines may apply. Information is subject to change without notice.

DISCLAIMER – This post does not represent that any of the information provided herein is approved by HUD or FHA or any US Government Agency or Department.

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