Appraisals for Conventional loans versus FHA loans - is there a difference?

When meeting with clients, it's important to remember that there is indeed a difference betwwen appraisal for Conventional loans versus appraisals for FHA loans. 

The appraisal that is required for a conventional loan, will be based primarily on the actual value of the home. This can be accomplished by either the cost method, the income method, or the comparable sales method, but is almost always done with the latter. The comparable sales method of course is basically self explanatory. The Appraiser takes as resent sales as possible, with as similiar features as possible, in as close proximity to the subject property as possible, and uses them to determine the value of the property being appraised.

An FHA appraisal on the other hand, will take into account all of those things of course, but will also make sure that the property meets the department of Housing and Urban Development’s ”Minimum Standards of Living.” Some of the things the property can’t have are broken windows, or broken stairs (and if more than 3 steps there has to be a hand rail), it can’t have holes in the walls or ceilings, and if there is a spot for a built in appliance than that appliance must be present in the spot. There also must be a safely working electrical system, and an operable heating and cooling system. Generally summed up, the property can’t be in bad repair, and must be, in the terms of the appraiser, “livable”.
The big thing that a buyer needs to remember about the differences in these appraisals, and also the loans that go along with them, is that if a property is in bad shape, or sometimes just even a little TLC, it may not be feasible for a property to be able to pass an FHA appraisal. By pass, I mean that the appraisal must come back with either no noted repairs, or repairs that a seller is willing to do prior to closing. When a property is in foreclosure or possibly being sold at an attempt at short sale, especially when there is obvious work that needs to be done to a property, the bank or seller is often times not going to be willing to do the work. Without the seller doing the work, the property can’t be sold under that appraisal. Which means that a buyer who doesn’t qualify for a conventional loan, may not be able to buy a property that needs work.

In summary, the thought process seems to be that if the buyer can qualify for conventional financing (which is generally more diffucult that to qualifying for an FHA loan), that borrower has more resources available to maintain a property in less than pristine condition.

Private Mortgage Insurance - How to Eliminate PMI

Private mortgage insurance, often referred to as PMI, is insurance that lenders require borrowers to pay for when they get a mortgage and don’t have enough equity in the home. Generally, this means coming up with a 20% down payment when buying a home just to avoid paying the PMI premium. Unfortunately, with the cost of housing and a tough economy it can be hard for new home buyers to come up with that kind of cash so there are few options to avoid paying PMI.

What is PMI?

While it may seem like just part of your mortgage payment it is actually a very important tool for lenders. This mortgage insurance protects the lenders in case you default on your loan. This allows the lender to recover their money even if the home is no longer worth enough to pay off the balance.
PMI is also useful for you as a borrower. Having PMI allows you to purchase a home without coming up with the full 20% down. It’s obviously a good idea to have money to put down on a new home, but it can also take years of saving just to get to that 20% number. So, thanks to PMI you’re able to put less money down and get into the home sooner.

Canceling PMI

If you are currently paying PMI there are two ways you can eliminate the payment. First, you have the right to request cancellation of PMI when you pay down your mortgage to the point that it equals 80 percent of the original purchase price or appraised value of your home at the time the loan was obtained, whichever is less.

The second option is automatic cancellation by the lender. But, there’s a catch. A lender won’t automatically stop PMI payments until you have 22% equity in the home rather than 20%. While you have the right to cancel PMI at the 20% mark a lender won’t automatically cancel it for another 2 percent meaning you’ll be wasting a little more money if you don’t cancel it after hitting the 20% mark.

The Cost of PMI

PMI varies slightly but you can generally expect to pay roughly $40-$50 each month per $100,000 borrowed. So, for a $200,000 loan you might pay nearly $100/month on PMI, or over $1,000 each year. When you think about it that really starts to add up. Obviously, the larger the mortgage the larger the PMI payment. If you end up having to pay PMI for many years it can literally cost you thousands of dollars so make sure you weigh that into your decision when determining how much house you can afford.

It's important to have an informed lender - please contact me at (504) 782-2203 or MortgageRay@hotmail.com with any questions.

Conventional vs. FHA Loans: Benefits and Drawbacks

A conventional loan and an FHA loan can both be great tools when you are in the market for a house. FHA loans can be a great source of savings for you as well as offering several other benefits. A conventional loan also has its advantages. The decision of whether to use an FHA loan or a conventional loan can sometimes be difficult. Here are a few benefits and drawbacks of each.

Conventional Loan Benefits
The big advantage of conventional loans is that they often do not come with the amount of stipulations that FHA loans do. For example, with FHA loans, if you refinance or sell your house, you will lose all of the money that you saved by going into it in the first place. Through prepayment penalties and other costs, it may actually cost you more. The rules and regulations are far less strict with conventional loans in many cases.

Conventional Loan Drawbacks
There are many things that would qualify as a drawback of a conventional loan. For one thing, it is much more difficult to qualify for a conventional loan. The bank is basing everything on your personal credit and guarantee. With an FHA loan, the government is standing behind the loan, so you are more likely to be approved. With conventional loans, you will be forced to qualify on your own merit.

FHA Loan Benefits
FHA loans have many benefits over conventional loans. For one thing, the down payment on the house will be much lower. The down payments are low enough that almost anyone can qualify. With conventional loans, you may need a lot of money in savings in order to make the down payment to get the house.

Another advantage of FHA loans is that you can secure a lower interest rate. Since the government is backing the loan for you, they will also provide you with a lower rate. Anytime you can secure a low interest rate, it is definitely to your advantage. You can save thousands of dollars over the life of your mortgage.

The approval process is also different for this type of loan. The FHA will approve more applications than a traditional lender. If you have questionable credit, you may be approved by the FHA when you would not be approved by a regular lender.

FHA loans also has more flexible repayment terms available. You can get a loan with a number of different repayment options and payment plans. Whether you want a 30-year fixed rate mortgage or a reverse mortgage, the FHA has options for you.

FHA Loan Drawbacks
The FHA is a government program and anytime you deal with government programs, you know that there will be some problems. You will have to go by their guidelines and regulations throughout the whole process. You will be saddled with prepayment penalties and other hassles that you may not be used to with a conventional mortgage lender.

It's important to have an informed lender - please contact me at (504) 782-2203 or MortgageRay@hotmail.com with any questions.

YOUR CREDIT REPORT - how it works

Your credit report is a running tally (if you will) of any open or paid accounts that are currently open under your social security number.   Your credit score is determined by the following:

Payment History (approximately 35% of your score)
whether you’ve paid past credit accounts on time.

Amounts Owed (approximately 30%)
Owing a lot of money on numerous accounts can suggest that you are financially overextended

Length of Credit History (approximately 15%)
In general, a longer credit history will increase your credit score because it shows that you can responsibly manage your available credit over time.

New Credit (approximately 10%)
Opening several credit accounts in a short period of time can represent greater risk

Types of Credit in Use (approximately 10%)
Your credit mix usually won’t be a key factor in determining your score, but it will be more important if your credit report doesn’t have much other information on which to base a score.

*NOTE* You are entitled to one free "tri-merge" report per year.  It's good idea to review your report to check for errors and omissions so that when you're ready to purchase a home you can be confident that you are ready.

ALSO - there are ways to improve your score - and if you check with a lender, often they can assist you free of charge.

For questions - contact me @ MortgageRay@hotmail.com

Getting started - Prequalification VS Preapproval

Are you looking to purchase a home?  Are you a homeowner looking to refinance and take advantage of today's low interest rates?  It's important to be prepared when shopping for a mortgage.  Gone are the days when you can call a lender with an estimate of your personal financial information and receive a prequalification.  In order to be truly confident that your application will be approved you should be ready to give your lender the following information - and be exact on the numbers - so that your loan can be preapproved. 

1. Name, date of birth and social security number of all borrowers
2. Address for the past two years for all borrowers
3. Employer - with address, contact number and monthly salary - for the past two years for all borrowers
4. List of all checking, savings, investment and retirement accounts - with institution name, account numbers and balance
5. List of all properties (if any) currently owned - with estimated value, mortgage balance owed, monthly mortgage payment and insurance/tax escrows

With this information, your lender can  submit your application for preapproval and you can be confident that once you locate your dream home you will be ready to proceed.

For questions, contact me @ mortgageray@hotmail.com.