Tuesday, April 19, 2011
The Qualified Residential Mortgage
By Greg Parrish
The Federal government is in the process of changing the guidelines of purchasing residential real estate. The FHFA (Federal Housing Finance Authority) and a group of real estate industry organizations have produced white papers that speak to QRM. The Qualified Residential Mortgage has emerged from the Dodd-Frank Act like ketchup does when stepping on the packet. It’s all about “risk retention”. It will affect a broad range of asset types, but has gained the most notoriety by requiring mortgage lenders to have some “skin in the game” after the mortgage loan has closed and funded. The proposal would establish a definition for QRMs, which will incorporate such criteria as borrower credit history, payment terms, down payment for purchase mortgages, loan-to-value ratios, and debt to income ratios. All this is designed to ensure mortgage loans are of the high credit quality. QRM will affect the real estate industry in a big way. There are three aspects that warrant additional scrutiny.
1. It will require that lenders retain 5% of the purchase price if the borrower places less than 20% down
2. To obtain the best market interest rates, debt to income ratios will be kept at a mandatory cap of 28/36
3. To obtain the best market interest rates when refinancing you must have at least 25% equity in your property. If you want a cash/out refinance you must have 30% equity position.
The big exception is mortgage loans with a Federal guarantee as FHA, VA, and Fannie Mae & Freddie Mac (until they emerge from conservatorship). In today’s market, government guaranteed loans comprise virtually the entire mortgage market. So, the silver lining is that, right now, the effect will be minimal. But, when it does take effect, most likely sometime in 2012, it will impact your ability and the way you purchase real estate.
By requiring mortgage lenders to retain 5% of the loan amount after the loan closes and funds, interest rates will necessarily increase to off-set the “loss” of capital available to earn interest. Higher interest rates will make it more expensive to get a mortgage.
Capping the borrower’s debt-to-income ratios at 28/36 to obtain the best interest rate will have the effect of closing many potential homebuyers out of the market. While most would be homebuyers would love to have a debt-to-income ratio as prescribed, the reality is that most are somewhat higher. Forcing a higher interest rate on homebuyers with a debt-to-income ratio of say 29/39 is preposterous! These caps will needlessly increase the monthly mortgage costs of millions of homebuyers and make it more difficult to qualify for their mortgage, even if they had they requisite 20% down payment.
Considering just these two aspects of the Dodd/Frank Act (we haven’t even discussed how this affects refinancing or what is expected of a person’s credit report) would due such damage to our industry and the economy as a whole that to say it would screw tight the lid on coffin of the real estate industry, in my opinion, would be a massive understatement.
The conundrum is that the groups of borrowers who will be hit the hardest are the first time homebuyers and those with moderate incomes. These are precisely the groups that the Feds wanted to help purchase a home in the first place! The pendulum has swung about as far in the opposite direction as it can.
Public comments are being accepted by the Federal Reserve until June 10th, 2011.
Have you found that the value of your home has decreased—but your property taxes have not?
When property values increased, the assessor’s office was quick to raise your taxes, right?
So why are they reluctant to decrease your taxes? Because they need the money, too!
That’s why it’s not going to be easy. But there are usually laws in place when it comes to how property is valued and what steps you need to take to dispute the assessed value of your home and get your property taxes reduced.
1. Timing is Everything – After you receive your assessment notice OR tax bill, you have a certain length of time to appeal and state your case. If your taxes are paid thru your mortgage escrow account (and you don’t get a copy), call and ask for one.
2. Learn the Rules – Is there a “percentage or dollar” limit (set by law) that your tax assessor has to follow before you can appeal? What is the length of time, after you receive your notice, to dispute your taxes? What documentation do they require from you?
3. Check for Accurate Property Descriptions – Is the square footage correct? How about the number of bedrooms, baths or lot size? This alone will get your property taxes decreased.
4. Gather Information – Call your Realtor® and find out what homes have been selling for within the last 3 or 4 months. Get at least 5 comparable sales, the sales prices and when they sold. However, forget about including short sales or foreclosures—they’ll just ignore them when it comes time for your appeal. Check and see what your neighbors are paying for taxes! Yes, it’s public information.
5. Set up the Appointment—Most assessors require you to present your case in person—and will usually set up a date and time to meet. But, be prepared to WAIT for your turn to appeal.
6. Present Your Case – Practice what you’re going to say ahead of time—clearly mark the documents you are going to present. Circle the sales prices of the other sold properties. You may even want to create a separate comparison, listing all the info on one piece of paper, with the supporting documents attached.
Even if you lose, you can “appeal your appeal”! You can file a complaint with
your state’s property tax court. However, it’s easier and cheaper to find a
“Property Tax Consultant” (Google it with the name of your city or county).
They usually work on a “contingency” basis—where they will ask for ½ of your
property tax savings (for one year) if they win.
Hang in there: There is a story about a guy who had a 9pm appointment with
the local tax review board, but did not get to plead his case until 2 am.
He won a substantial decrease—because the assessor was just plain tired!
Albert Einstein has long been considered a genius by the masses. He was a theoretical physicist, philosopher, author, and is perhaps the most influential scientists to ever live.
Einstein has made great contributions to the scientific world, including the theory of relativity, the founding of relativistic cosmology, the prediction of the deflection of light by gravity, the quantum theory of atomic motion in solids, the zero-point energy concept, and the quantum theory of a monatomic gas which predicted Bose–Einstein condensation, to name a few of his scientific contributions.
Einstein received the 1921 Nobel Prize in Physics “for his services to Theoretical Physics, and especially for his discovery of the law of the photoelectric effect.”
He’s published more than 300 scientific works and over 150 non-scientific works. Einstein is considered the father of modern physics and is probably the most successful scientist there ever was.
10 Amazing Lessons from Albert Einstein:
1. Follow Your Curiosity
“I have no special talent. I am only passionately curious.”
What piques your curiosity? I am curious as to what causes one person to succeed while another person fails; this is why I’ve spent years studying success. What are you most curious about? The pursuit of your curiosity is the secret to your success.
2. Perseverance is Priceless
“It's not that I'm so smart; it's just that I stay with problems longer.”
Through perseverance the turtle reached the ark. Are you willing to persevere until you get to your intended destination? They say the entire value of the postage stamp consist in its ability to stick to something until it gets there. Be like the postage stamp; finish the race that you’ve started!
3. Focus on the Present
“Any man who can drive safely while kissing a pretty girl is simply not giving the kiss the attention it deserves.”
My father always says you cannot ride two horses at the same time. I like to say, you can do anything, but not everything. Learn to be present where you are; give your all to whatever you’re currently doing.
Focused energy is power, and it’s the difference between success and failure.
4. The Imagination is Powerful
“Imagination is everything. It is the preview of life's coming attractions. Imagination is more important than knowledge.”
Are you using your imagination daily? Einstein said the imagination is more important than knowledge! Your imagination pre-plays your future. Einstein went on to say, “The true sign of intelligence is not knowledge, but imagination.” Are you exercising your “imagination muscles” daily, don’t let something as powerful as your imagination lie dormant.
5. Make Mistakes
“A person who never made a mistake never tried anything new.”
Never be afraid of making a mistake. A mistake is not a failure. Mistakes can make you better, smarter and faster, if you utilize them properly. Discover the power of making mistakes. I’ve said this before, and I’ll say it again, if you want to succeed, triple the amount of mistakes that you make.
6. Live in the Moment
“I never think of the future - it comes soon enough.”
The only way to properly address your future is to be as present as possible “in the present.”
You cannot “presently” change yesterday or tomorrow, so it’s of supreme importance that you dedicate all of your efforts to “right now.” It’s the only time that matters, it’s the only time there is.
7. Create Value
“Strive not to be a success, but rather to be of value."
Don’t waste your time trying to be successful, spend your time creating value. If you’re valuable, then you will attract success.
Discover the talents and gifts that you possess, learn how to offer those talents and gifts in a way that most benefits others.
Labor to be valuable and success will chase you down.
8. Don’t Expect Different Results
“Insanity: doing the same thing over and over again and expecting different results.”
You can’t keep doing the same thing everyday and expect different results. In other words, you can’t keep doing the same workout routine and expect to look differently. In order for your life to change, you must change, to the degree that you change your actions and your thinking is to the degree that your life will change.
9. Knowledge Comes From Experience
“Information is not knowledge. The only source of knowledge is experience.”
Knowledge comes from experience. You can discuss a task, but discussion will only give you a philosophical understanding of it; you must experience the task first hand to “know it.” What’s the lesson? Get experience! Don’t spend your time hiding behind speculative information, go out there and do it, and you will have gained priceless knowledge.
10. Learn the Rules and Then Play Better
“You have to learn the rules of the game. And then you have to play better than anyone else.”
To put it all in simple terms, there are two things that you must do. The first thing you must do is to learn the rules of the game that you’re playing. It doesn’t sound exciting, but it’s vital.
Secondly, you must commit to play the game better than anyone else. If you can do these two things, success will be yours!
When purchasing or refinancing, getting the lowest interest rate is one important piece of the puzzle. There are three main elements that go into quoting an interest rate. 1. Your credit score. 2. Your Loan-to-Value. 3. Your Debt-to-Income Ratio. This is not a one size fits all deal. Each person has their own unique financial profile. Working with a qualified mortgage loan officer, you’ll be able to determine how each aspect impacts what interest rate you’re able to get.
Credit Score - Most borrowers have three credit scores. Equifax, Experian, and Trans Union (FICO). When your credit report is pulled, mortgage lenders will use the middle score of these three to assign your “file” credit score. If there will be a co-borrowers on the application, the same rule applies to them. The lender will compare the two middle credit scores, taking the lower of the two as your “file” credit score. The higher your credit score the better.
Loan-to-Value – This ratio is expressed as a percentage. It is determined by how much money you place as a down payment. For example: With a purchase price of $100,000 if you put $25,000 as a down payment, the Loan-to-Value would be 75%. The lower your LTV is the better.
Debt-to-Income Ratio – This ratio is also expressed as a percentage. It identifies the amount of consumer debt you carry each month as compared to your gross income. For example: If your income is $3,000 per month, and the monthly payments for your credit cards, auto loans or leases, alimony/child support total $1,000 per month, your Debt-to-Income Ratio would be read as 33%. All things being equal, a Debt-to-Income Ratio of 36% is considered average. For mortgage loan approvals, Debt-to-Income Ratio’s can as high as 55% depending on other factors of your financial profile. The lower the Debt-to-Income Ratio, the better.