What's My Rate?

Why is my APR 5% when you said I was getting a 4.625% interest rate on my loan? this is one of the most common questions we get on a mortgage when folks review their Disclosure Forms. I want to shed some light on this situation for you. I came across this post on Activerain the other day and thought it would be helpful for you all. I'm not too proud to shared great work from other lenders around the country so please take a minute and read what George Souto has written on the topic. If you still have questions on the subject please leave a comment and we will open up a discussion here.

And keep in mind, if you are comparing several lenders the greater the difference between the APR and the interest rate, the more expensive your loan is. So don't just go out and pick a lender based on the quoted rate.

ORIGINAL CONTENT BY GEORGE SOUTO NMLS #65149

One of the most frequently asked questions I get from Borrowers when we go over the Truth In Lending Statement is Why Is The Annual Percentage Rate (APR) Higher Than The Interest Rate?  The (APR) is probably the most misunderstood and confusing elements in the loan process. 

The APR is not only confusing and misunderstood by Borrowers, it is also confusing and misunderstood by Loan Originators as well.  If you doubt that, just ask the next Loan Originator you speak to, to explain what the APR is, and what fees go into the APR calculation?  The odds are most Loan Originators are not going to be able to provide a good answer, or will most likely give a very vague one.  So if those who make a living originating loans have a difficult time explaining how the APR is arrived at, how can anyone expect a Borrower to understand it?

Let's first make one thing very clear, the APR is NOT an interest rate.  The interest rate is the rate which makes up the interest portion of a mortgage payment.  As oppose to the APR which is simply a calculation that is expressed as a percentage (%) which is suppose to reflects the Lender Fees in a loan.  The purpose of this figure (APR) is to give a Borrower a quick and easy way to determine which Lender has the higher fees.  So if two Lenders have the same interest rate for the same loan product, the Lender with the higher APR has the higher Lender Fees.

That in a nutshell is all the APR is meant to be.  If those reading this blog remember nothing else, please remember this:

• The APR is NOT an Interest Rate
• The APR IS is a percentage which reflects costs
• The intent of the APR is for Shopping Purposes

It is interesting how the APR percentage is arrived at.  The government takes the base loan amount and subtracts the fees which make up the APR from it.  So if the base loan amount is reduced, but the monthly principle and interest figure remains the same, the result in a higher percentage which reflects the Lender Fees.

The most common Fees that go into the APR are:

• Points
• Processing Fee
• Underwriting Fee
• Closing Fee
• Application Fee
• Appraisal Review Fee
• Lender Inspection Fee
• Wire Transfer Fee
• Flood Certification Fee
• Broker Fee

All these are not charged by all Lender, generally a combination of these fees are what is charged and they vary from Lender to Lender.  But these are among the fees most commonly charged which make up the APR.  The important thing to remember is that any fee which is Lender related is part of the APR.

Fees that are NOT part of the APR are:

• Title Fee
• Attorney Fee
• Recording Fee
• Credit Report Fee
• Appraisal Fee
• Notary Fee
• Home Inspection Fee
• Taxes
• Homeowners Insurance
• Re-Inspection Fees 

I hope the above explanation has made it easier to understand Why The Annual Percentage Rate (APR) Is Higher Than The Interest Rate?

Note:

One more thing, a Lender is required to state the APR every time the Lender quotes an interest verbally or in writing. 

- See more at: http://activerain.com/blogsview/4310538/why-is-the-annual-percentage-rate-apr-higher-than-the-interest-rate-#sthash.5B9eBkXL.dpuf

As always, please make comments below with any questions you may have on this topic or other lending and real estate related topics. Thanks for stopping by.

It's a new year...In case you hadn't noticed

To get this year kicked into high gear, we are putting on a special free event. You have plenty of time to get it on your calendar so please save the date now!

This is for our realtor partners around El Paso so if you aren't in real estate you can ignore this one.

Lunch is provided and a happy hour mixer after the presentation. Please let me know if you can make it and invite your real estate partners and associates.

Let's make 2014 the best sales year ever for you!

A huge thanks to our sponsoring partners: 

Christina Dominguez, First American Home Warranty
Vianey Martinez, Premier Insurance Services
Steve Raney, Texas Title

QM Rules Continued

As promised I am continuing to provide insights on the QM Rule changes that are coming next week. The good news is, it won't affect a lot of our clients who use Government backed loans such as VA or FHA.

In my research I found a really good, short and to the point post from another professional. I am going to share her post and give you a link to her site. I don't usually like to promote competitors sites but I think she did a really great job of simplifying the issue for us.

Here is what she posted on December 18th.

Qualified Mortgage Rule Changes – What You Need to Know

By: Selene Garcia

There has been a lot of news surrounding the latest mortgage rules (often referred to as “Qualified Mortgages” or “QM,”) which will be implemented January 10, 2014. These new rules, instituted by the Consumer Financial Protection Bureau (CFPB), are designed to protect you and hold lenders legally responsible for the loans they approve.

As a bit of background, the CFPB was established in 2010 as part of the Dodd-Frank Act; the financial reform bill passed and signed into law in the wake of the financial crisis. The Act itself protects consumers from deceptive practices in the financial and banking industries, including excessive fees and bait and switch tactics.

The CFPB’s job is to ensure federal consumer-related financial laws are executed. Some of the CFPB’s responsibilities include: drafting rules; overseeing financial institutions; sanctioning federal consumer protection laws; observing financial markets for inequitable consumer risks; bolstering consumer financial education; and examining consumer trends.

The most recent CFPB provisions governing mortgages, the Ability to Repay (ATR) and Qualified Mortgage (QM) rules, ensure that:

• Consumers are able to repay the loan for which they’ve applied:  If you’ve applied for a mortgage any time after 2008, you’ve likely noticed the increase in paperwork requested by your lender. Thefinancial documents requested are part of the “Ability to Repay” rule which states that every lender must take steps to confirm that consumers can reasonably repay the loan.

• Consumers will be qualified using 43 percent gross income versus 45 percent for non-agency and non-government loans: Debt-to-income ratios are used to qualify consumers for a mortgage – this percentage tells the lender whether or not you can afford the loan. The new requirement of 43 percent is a small change and equates to a minimal monthly payment difference. Let’s look at the math: using pre-tax monthly income of $50,000 per year and assuming no other major monthly debts, the maximum monthly mortgage payment (including taxes, insurance, assessments, and mortgage insurance) allowed under the qualified mortgage rules will drop from $1,874 to $1,791, or $83 per month. For most buyers, this means the total size of the loan they will qualify for under the new rules will be reduced by several thousand dollars.  

• Consumers are not being offered risky loans:  While there aren’t as many risky loan programs available today as in the past, the CFPB classifies some mortgages that include features such as: balloon-payments, interest-only, negative-amortization, and loan terms of more than 30 years amortization as “risky.”

• Consumers are not charged exorbitant fees:  The CFPB considers fees exorbitant when they exceed 3 percent of the loan amount for any loan over $100,000. For loans under $100,000 the percentage threshold is adjusted, as reasonable loan fees may surpass the 3 percent requirement for smaller loan amounts.

Moving forward, lenders will carry greater legal liability for those loans closed outside of the ATR/QM rules. Additionally, those loans which fall outside of the QM guidelines may become difficult to sell on the secondary market to lenders such as Fannie Mae and Freddie Mac. Ultimately, the new rules hold lenders legally responsible for ensuring consumers can afford their purchase and as a consequence, mitigating the risk of default.

Loans which fall outside of the QM requirements such as jumbo loans or loans which offer risky features like negative amortization or interest only options are not backed by Fannie Mae or Freddie Mac, and thus will need to be held in a lender’s portfolio.

There are several real estate-related loan types that will not be subject to the new ATR/QM rules, including:

• Second mortgages;
• Time share plans;
• Reverse mortgages;
• Bridge loans with less than 12 month terms; and
• Credit transactions secured by vacant land.

Some home buyers have expressed concern that the new rules will limit the ability to buy a house or choose a lender, but chances are you won’t notice the difference. Most of the loans made today—indeed, most loans made since the financial crisis—have not fallen far beyond the current QM rules. Some lenders will still continue to offer loans that do not meet the QM guidelines; however, it will likely require more documentation on the part of the buyer, since the lender will be taking on additional legal responsibility.

If you are currently shopping for a mortgage, or plan on purchasing a home in the near future, contact a mortgage professional to discuss the impact of the recent rules and how they might affect you.  

More information is available on the Consumer Financial Protection Bureau website. 

There is a ton of information on this subject and I will continue to look for simple explanations to help bring clarity to the matter.

Success Stories

Over the past few years there has been a lot of buzz about how difficult it is to get financing for a home. Well, I am going to feed a different buzz here for the next few posts.

Just this month, we have helped some clients with some very difficult and interesting situations. Here's a quick recap of a few of them.

A single woman with limited income (as in under $1,100 per month income) wanted to buy a Fannie Mae Repo home. The cool thing about these homes is the the Fannie Mae Home Path loan program. It allows a buyer to put down only 5% and purchase a home with no Mortgage Insurance. Another side benefit is there is no appraisal required. So, we were able to qualify her for this program and get her loan closed well before the contract date. Our professional staff is totally dedicated to making loans to people who are qualified, regardless of how much effort it takes to make it happen.

We had a client who went to three lenders in town and each one only qualified the buyer for $100,000 in financing because of how they calculated income. Our dedicated team would not accept this, we put our skills to work and took the time to calculate the income correctly and helped our client buy a home. The final loan amount was nearly $160,000 and they are thrilled!

Another client had been turned down by one of the biggest lenders in town simply because they had three jobs in 12 months. This was easily overcome because we look at the whole picture with each borrower. We don't give up just because it's not easy!

Big news coming to El Paso soon. We will have our own underwriter and closer right here in our local office. This will allow us to offer even better, faster service to our clients. Come grow with us, we are the premier lender in town. Let us prove it!

Attention Realtors---Must Read Post

Attention Texas Real Estate Agents! This post is for you and I would encourage you to become familiar with the changes coming up that will affect your business. You can count on Security National Mortgage to continue to educate you about the changes as they take affect in 2014 and as they are modified in the months to come.

What is the general ATR (Ability To Repay)

standard?

Under the general ATR standard, you must make a reasonable, good-faith determination before 

or when you consummate a covered mortgage loan that the consumer has a reasonable ability to 

repay the loan. 

What are the eight ATR 

underwriting factors I must 

consider and verify under the 

rule?

A reasonable, good-faith ATR evaluation must include eight ATR underwriting factors: 

1. Current or reasonably expected income or assets (other than the value of the property that secures the loan) that the consumer will rely on to repay the loan 

2. Current employment status (if you rely on employment income when assessing the consumer’s ability to repay) 

3. Monthly mortgage payment for this loan. You calculate this using the introductory or fully-indexed rate, whichever is higher, and monthly, fully-amortizing payments that are substantially equal.

4. Monthly payment on any simultaneous loans secured by the same property 

5. Monthly payments for property taxes and insurance that you require the consumer to buy, and certain other costs related to the property such as homeowners association fees or ground rent.

6. Debts, alimony & child support payments. 

7. Monthly debt-to-income ratio or residual income, that you calculated using the total of all of the mortgage and non-mortgage obligations listed above, as a ratio of gross monthly income 

8. Credit history, the rule does not preclude you from considering additional factors, but you must consider at least these eight factors. 

How do I determine ATR?

Our organization is responsible for developing and applying its own underwriting standards and 

making changes to those standards over time in response to empirical information and changing economicand other conditions. Implementation Tip: When determining ATR, you have to verify only the income or assets used to qualify the consumer for the loan. Implementation Tip: When the consumers’ applications list debt that does not show up on their credit reports, you must consider that debt in assessing either the consumers’ 

debt-to-income ratios or residual income, but you do not need to independently verify that debt.  17 

To help your organization incorporate the ATR concepts into its operations, the Bureau has prepared some examples that illustrate how your internal policies can influence your ATR determinations. 

The list below is not a comprehensive list of all the ways your underwriting guidelines might measure ATR. 

Each of you must look at the issue of ATR in the context of the facts and circumstances relevant to your market, your organization, and your individual consumers. Given those caveats, here are some of the types of factors that may show that your ATR determination was reasonable and in good faith: 

 Underwriting standards: You used standards to underwrite the transaction that have 

historically resulted in comparatively low rates of delinquency and default during adverse 

economic conditions. 

 Payment history: The consumer paid on time for a significant time after origination or reset of an adjustable-rate mortgage. Among the types of factors that may show that your ATR determination was not reasonable and in good faith: 

 Underwriting standards: You ignored evidence that your underwriting standards are not effective at determining consumers’ repayment ability. 

 Inconsistency: You applied underwriting standards inconsistently or used underwriting 

standards different from those you used for similar loans without having a reasonable justification. 

 Payment history: The consumer defaults early in the loan, or shortly after the loan resets, 

without having experienced a significant financial challenge or life-altering event. 

The reasonableness and good faith of your determination of ATR depends on the facts and 

circumstances relevant to the particular loan. For example, a particular ATR determination may 

be reasonable and in good faith even though the consumer defaulted shortly after consummation 

if, for example, the consumer experienced a sudden and unexpected loss of income. 

If the records you review indicate there will be a change in the consumers’ repayment ability after 

consummation (for example, they plan to retire and not obtain new employment, or they plan to 

transition from full-time to part-time work) you must consider that information. 

Ok that is enough for today! I will be posting pieces of the rule between now and the end of the year. I don't expect you to remember all of this so you can refer to http://files.consumerfinance.gov/f/201310_cfpb_atr-qm-small-entity_compliance-guide.pdf for the complete rule. As ammendments come out I will try to stay on top of those here as well. 

You can expect some lenders to get even more picky and careful about accepting income verification and making exceptions on Debt Ratios. It will be wise to prepare your clients to document everything, especially if they are self employed.

NMLS #3116

Thanksgiving--The following is something to ponder . . .

• If you woke up this morning with more health than illness . . . you are more blessed than the million who will not survive this week.
• If you have never experienced the danger of battle, the loneliness of imprisonment, the agony of torture, or the pangs of starvation . . . you are ahead of 500 million people in the world.
• If you can attend a church meeting without fear of harassment, arrest, torture, or death . . . you are more blessed than three billion people in the world.
• If you have food in the refrigerator, clothes on your back, a roof overhead and a place to sleep . . . you are richer than 75% of this world.
• If you have money in the bank, in your wallet, and spare change in a dish someplace . . . you are among the top 8% of the world’s wealthy.
• If you hold up your head with a smile on your face and are truly thankful . . . you are blessed because the majority can, but most do not.
• If you can hold someone’s hand, hug them or even touch them on the
• shoulder . . . you are blessed because you can offer healing touch.
• If you can read this message, you just received a double blessing in that someone was thinking of you, and furthermore, you are more blessed than over two billion people in the world that cannot read at all.
• Have a good day, count your blessings, and pass this along
• to remind everyone else how blessed we all are.

Provided to us by  Bill Sparkman "The Coach"

Ever Changing Lending Guidelines

I want to touch on a few things regarding FHA loans. These are important to address because I have seen them come up with our local clients several times just this month.

From FHA.com website, not a governemnt sponsored site but there is a lot of good information.

"FHA Loan Facts and Fiction About Credit

Here’s a common question we get about FHA loan credit requirements--a variation on a theme that goes something like this:

“My spouse and I are looking to apply for an FHA loan. We just recently got married. He is more than qualified to apply on his own, with a good credit score and great income. I, unfortunately, have terrible credit and unresolved debts. Is it possible for him to apply on his own without factoring in my debt? We were told I had have my credit checked and my debt would also be factored into the debt to income ratio, but not my income. Is this true?”

Unfortunately there is no one single answer to questions like these due to state law, which may affect how an FHA loan application is reviewed depending on whether the state is a “community property” state--one where the law requires both borrower and spouse to be equally obligated on major financial transactions such as a home loan.

FHA loan instructions to the lender in HUD 4155.1 Chapter Four, Section A say:

“Except for obligations specifically excluded by state law, the debts of the non-purchasing spouse must be included in the borrower’s qualifying ratios, if the

• borrower resides in a community property state, or


• property being insured is located in a community property state.”

FHA loan rules add, “The non-purchasing spouse’s credit history is not considered a reason to deny a loan application. However, the non-purchasing spouse’s obligations must be considered in the debt-to-income (DTI) ratio unless excluded by state law. A credit report that complies with the requirements of HUD 4155.1 4.C.2 must be provided for the non-purchasing spouse in order to determine the debts that must be counted in the DTI ratio.

Note: This requirement is applicable if the subject property or the borrower’s principal residence is located in a community property state.”

FHA loan rules DO NOT override state or federal law, so it’s crucial to check the laws of your state to see what might apply in such cases. For more information on this issue, borrowers can also check with a legal expert or real estate expert who can advise on state law as applicable.

Some borrowers may not be affected by community property laws for the simple reason that not all states have such laws, but anyone who does live in community property states will need to carefully examine both the spouse and non-purchasing spouse’s credit during the preparation time leading up to the loan application."

It is important to begin the application process in Texas with both individuals debts calculated in the monthly payments and considered in the overall Debt Ratios. It can save all of us some headaches when it pops up late in the financing game.

Leasing out current property and buying as new home with FHA financing.

Client owns a home, they want to keep the home they own and buy a new home with an FHA loan. They intend to rent the existing home and use some of that income to qualify for the new purchase. 
Beware of a couple key things: 

1. We have to prove 25% or greater equity in the existing home before we can count any of that rental income.

2. We must have a signed lease with proof of deposit and money changing hands. It has to be a legitmate lease or we must calculate full principle, interest, taxes and insurance from this property against the total debt ratio.

I will continue this discussion and would love to hear from you about other situations that you have encountered that might be helpful for folks getting ready to apply for FHA financing.