Knowledge is, indeed, that which, next to virtue, truly and essentially raises one man above another – Joseph Addison

There is little doubt that purchasing a new home is one the biggest financial decision most people face but finding the right house that you can call home is becoming an increasingly difficult task.

Step one in the home ownership process is getting pre-qualified for a loan. When you get pre-qualified for a loan the lender works backwards to determine the biggest loan that you qualify for according to your income, credit and current outstanding debt.

How do they do it? Here is brief overview…

First off, you need to remember that only income that can be documented is considered income when it comes to determining how much you qualify for. If you can’t provide a lender with proper documentation of your income then they won’t used it.

For example, if you get paid by the hour and work little overtime or if you get paid on a salary then determining income is pretty easy. If you are paid monthly your income is multiplied by 12 and if you get paid every couple of weeks it’s multiplied by 26 and so on.

On the other hand, it gets more difficult if you work a fair amount of overtime or receive bonuses and commissions because that income varies. The normal process for borrowers that fall into this category is that the loan officer will simply use previous one or two years W2 income and combine that with the past few months actual wages from you pay stub and then average that total income to arrive at your current monthly income.

For self-employed or 1099 borrowers income is pretty much determined by what your net income indicates from you tax return. Even if you make $75,000 a year but due to expenses and write-offs your tax return shows that you make $30,000 then $30,000 is used to determine how big a loan you can afford or qualify for.

However, over the past few years lending institutions have becoming increasingly creative on how they approve borrowers for loans, especially those borrowers with a bad credit history. Many programs require less income documentation and in the case of a loan programs like “stated” or “no documentation” no income documentation is required.

In summary, with the rapid increase in home values over the past few years pricing many families out of the home market, the good news is that the resulting “easing” of lender requirements has helped offset this by making it much easier to qualify for a mortgage and get into the home of your dreams.

For options in finding the best mortgage, new or refinance, check out the links below.

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Following the recent US sub-prime issues and Global Capital Market events the flow on effects have placed increasing pressure on interest rates for Australian housing loans. The funds holders are nervous and are increasing the costs of funds to hedge their investment. So trying to understand where the Australian Capital Markets are going with interest rates is a bit of a mine field at the moment.

The Initial Problem…

It seems that many different but related factors came together to create this disaster. A US property boom which made home ownership difficult was made easier by sub-prime lenders freely extending substantial levels of credit to people who in reality had no capability of repaying the loans. These people may or may not have had a poor credit history but regardless did not have capacity to repay the large amounts at high LVR’s that they borrowed. These people were offered loans on low start up interest rates of 1 or 2% pa, ie. honeymoon rates, reverting to a standard rate after a couple of years. All of these loans were to revert to a rate around the 3 to 4% mark but the recent impacts of sixteen US interest rate rises taking current rates to about 7% pa substantially impacted on the borrowers ability to repay the loan and created the present default crisis.

The Flow on effects…

Why has it affected us in Australia when we don’t have a default problem? Without going into the complexities of the capital markets, global lenders to Australian banks or non-banks have been spooked by the issues in the US and as a consequence are either demanding greater “risk” premiums in the form of higher interest rates or indeed not lending at all. Essentially in an environment of fear and loss it is easier and safer to park money in cash or government bonds and wait.

What does this mean for interest rates in Australia and loan availability? Non bank lenders are more susceptible to market pressure due to sourcing funding from the US and Global market on a 90 day securitisation. Most non banks have been forced to raise their rates above the Reserve Bank rate rises by between 0.4% to 1% as their investors squeeze them.

Traditional banks have not been affected to the same degree but are not immune to the pressures and it is suspected that they will also increase rate above the recent reserve Bank rate increase.

As Investors and lenders become more nervous about the marketplace, credit policy has tightened in recent times and reductions on loan to value ratios and increased serviceability tests have been implemented to reduce risk and increase liquidity. Very few lenders will go outside policy now days, looking for vanilla lending, either fit the guidelines or ‘find another lender’ attitude is being display by most lenders.

Non conforming borrowers have enjoyed a period of competitive interest rates but should expect further increases to rate that will reflect their current position. All loans will be affected but more pressure is being brought to bear on low doc home loans.

Settlements have also been slowed to ensure the lenders have sufficient funds to honour their approvals. Some lenders have restricted the number of brokers who can sell their products to offset the funds shortage.

Interesting times are ahead for the Australian Mortgage Market, so strap yourself in I think we are in for quite a ride.

© Rob Donald, Altrust Finance Group 20th November 2007

www.altrust.com.au

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There are a few things that make a mortgage acceleration loan different from a standard mortgage loan and the first one is that the total interest owed on the loan is calculated with regards to exactly how much you have remaining on the balance of the loan. His means that every time you make a payment on the loan you begin to save more money.

This will leave much more of your income available for payment on the actual principle. You will lose you tax deduction with an early pay off just like any other loan but it is always in your best interest to pay off an interest bearing loan, as you will receive greater savings. While it is an adjustable interest rate loan, if it is paid off accordingly any increases in the interest rate will be offset by the decrease that is cause by the amount of the principle that is paid down.

In other words the total interest is adjustable both ways and while the rate may go up the amount that you pay can decrease. The payment system is direct deposit and each month depending on what is paid off the accruing interest is added to the principal which is another thing that makes this loan so much different from other standard mortgage loans.

Not everyone will qualify for this type of loan as it is designed for the most dedicated of borrowers who are able to realize the fact that having their money parked against their mortgage balance will deliver them far greater benefits than keeping their money in a standard savings or checking account. This new type of loan is the best way for borrowers to finance their property or home in these financially uncertain times and is far better than a standard adjustable rate mortgage loan.

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If you are looking to get lower payments on a mortgage for a few years and still be able to secure a sizable mortgage loan a buy down mortgage may be a good choice for you. This type of loan comes in three different forms; a temporary buy down loan, a compressed buy down mortgage, and a permanent buy down mortgage.

The temporary buy down is the most basic of the three types and it is also the most commonly used. This type of loan starts with a lowered interest rate for somewhere from one to three years after which it will increase in fixed increments. Basically this means your interest rate will start out at something like four percent then after a year it will increase to five finally after another year it will increase to six. Most lenders will require you to make some kind of payment when you take out a loan of this kind.

The second type of this loan the compressed buy down is very similar except the increases come every six months rather than a year. The last type the permanent buy down mortgage will have this lower interest rate for the life of the loan, however a larger payment must be made when this type is taken out in order to offset the size of the discount you will be receiving on your interest rate.

These payments that you make are basically paying for any discount you would receive. The main reason that you would apply for one of these loans is not really to save money but to qualify for a larger down payment.

For more resources about refinancing or even about mortgage refinancing and especially about home equity loan refinancing, please review these links.

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Looking after an aging parent in their own home often seems to be a good solution to an awkward problem. However, depending on the type of financing on the property in question, things could get difficult.

It is certainly a solution that needs to be thoroughly investigated before it is set into place. Many parents have switched their once-paid-for properties to a reverse mortgage and this could complicate your joint lives.

A reverse mortgage is not really a mortgage at all, as there is no monthly payment to be made. It is more like a line of credit with the home used as collateral against the loan.

Credit payments can be made at any time to reduce the amount borrowed. Many older people use a reverse mortgage as a way of spending some of the capital from the value of their home, while leaving some capital in the estate for the children to inherit.

It seems a sensible and a viable proposition to live in the same house as an ailing parent. Many of us are living longer these days, and we are also having children later or having families for a second time as we re-marry. This is where we get the nickname the ’sandwich generation’.

Often as we try to assist aging parents we are still also trying to care for our own families. Living in the same home could make life easier. It takes away less of the carer’s personal time to be right on the premises.

This means you are giving up your independence in some ways, though being able to share the financial responsibility can often offset this feeling. However, it may also mean that you give up your own stake in the realty market.

With a realty market that almost doubles every ten years, you may want to consider keeping your stake, perhaps by renting out your own property. Often, in these days of longevity, we are the ‘old’ looking after the ‘older’ and it is difficult to predict if our own health will always allow us to stay in this situation.

There can be many reasons why you or your spouse may not be able to stay in the home of the aging parent. Arthritis may make the stairs unmanageable, there may be breathing problems develop, you may want to move to be near a specialized hospital for yourself, one of you may have to enter a nursing home that is not close by. It sounds morbid, but the list is endless and real.

By living with your parent you have limited your own choices, especially if your parent has a reverse mortgage. This could mean that if you are forced to move for health reasons the parent may not be able to move with you; often as soon as the parent wants to move out of the house, the loan must be paid in full.

This will cause no problem unless you are in a down market where the selling price may not be as high as anticipated. You cannot rent the property as it is not allowed in the rules. Meanwhile you are dealing with some type of health problem!

It is noble and desirable to look after an old parent, but do check the small print as they say. It should not be at a large cost or disruption to your own financial well being or health.

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Residential Mortgage Backed Securities (whether Agency or Non-Agency) are also called RMBS or simply MBS. MBS are a type of “security” called a “bond” whose coupon and principal payments are paid for by the cash flows of a pool of individual mortgages. The individual mortgages “back” (or “support”) the payments on the bonds therefore they are called “Mortgage Backed Securities”.

Mortgages and the MBS related to them are graded as to quality in a variety of ways. For example, “Prime”, “AltA” (short for “Alternative A”) and “Sub-Prime” (this last category has been in the press a lot recently).

The person’s “FICO score” is one primary method of trying to work out how much of a credit risk any given individual is. The world “FICO” comes from the names of two men (an engineer, Bill Fair and a mathematician, Earl Isaac) who teamed up and created a “Corporation”. These guys developed a system for coming up with a “credit score” for borrowers, which incorporates a wide variety of financial information about an individual’s income and expenses resulting in the individual’s “FICO” score. This score is widely used in the industry to assist in determining any individual’s “credit-worthiness” and this assists the lender in knowing what interest rate to charge the borrower. In general, the lower your FICO score, the higher the interest rate the lender will charge you to offset the perceived credit risk of lending to you. After all, the lower the FICO score, the greater is the risk that you may not be able to pay back the lender.

FICO scores range from 300 to 850. A score of 660 and above categorizes a person as prime quality. The “Prime Rate” is defined as the interest rate banks charge their best customers.

From 620 – 659 is “Sub-Prime” – if you are a sub-prime borrower you will have to pay higher than the prime rate by some negotiated amount.

The word “credit” means “belief in a person’s ability to repay principal and interest.” Determining a person’s “credit-worthiness” is a key goal when deciding whether or not to give them a loan – whether it’s for a car, a mortgage, whatever – any kind of loan.

Another way of roughly grading mortgages is basically “A” (Prime); AltA (a variation of or alternative to “A”) and “B/C” (Sub-prime). Down at the very bottom of the barrel is the lowest grade “D” – this can also be called “Scratch and Dent” (S&D).

Recently we’ve been doing extensive work for a major Wall Street client in their Scratch and Dent area. Basically, these loans are normally in a “distressed state” – meaning the borrowers are, to a greater or lesser degree, delinquent on their payments. For example, if the client can purchase those delinquent loans from another for really cheap and then turn the borrower around so that they are no longer delinquent, the client can themselves then sell those loans at a much higher price than they originally bought them. THETICA has used it’s software components to create versatile software that assists the client to capture information relating to Scratch and Dent loans, price them and then analyse the performance of pools of these loans across time.

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Financial institutions are wary to extend loans now more than ever before. The stability of the economy plays an important role in whether one would even be considered for a mortgage approval. Another role is the financial situation of the institution itself. In uncertain times banks are apt to be more cautious as the level of risk they are willing to take on. In better financial times, lenders frequently sell mortgages to one another in order to offset risk or if there own reserve is in question. That could be beneficial to the borrower, but is not an option when the whole market is in crisis.

There is a lot that determines whether a financial institution will be approved for a mortgage or what the interest rate might be. These factors include the stability of the borrower’s employment history, current monthly debt and whether that debt is paid on time versus total monthly income, amount of money in a savings account if there is one available, and the value of the property that is being purchased. The amount of the down payment will have an affect on whether a loan application is approved or denied.

Most lenders exhaust all possibilities towards getting a loan approved. Credit rating is a decisive reason why an application could be denied. Credit reports are the most important piece of information that is offered to mortgage lenders and are updated regularly, reflecting the latest financial details. It is important for the borrower to handle lenders appropriately by preparing to answer questions regarding the cause of their credit score and about their credit history. When approaching a financial institution with bad credit it is vital to be open and discuss any financial problems that may be present, to ease the lender. If the credit score is high and all monthly debt is paid without any late payments or collection accounts there is less of a risk to the lender. In an insecure market, lenders are seeking borrowers with the least possible chance of default.

Whether the credit rating is good or bad it is wise to get various quotes from different lenders to see who can extend the maximum loan with the best interest rate. Borrowers need to be aware of what their budget limit is, taken their current financial situation into consideration. Borrower prudency to allow for a tighter budget while still maintaining the mortgage payment every month will prevent the market from affecting their monthly debt, putting themselves at risk. This is especially the case regarding credit card and other interest rate variables.

Purchasing a home is a sound investment. Depending on the state of the property market and the intention of refinancing to remodel the house or the property surrounding it in the future will secure a profit if in the event the house is ever put up for sale. Luxury additions such as patios, decks, and swimming pools will also help to increase the value of the home, but also raise the annual property taxes.

For more information on mortgages, visit http://www.calculatorcommercialmortgage.com/

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Choose your broker

Selecting a broker is much more than just using the Yellow Pages and finding a mortgage broker.  When you are going for a home mortgage refinance, you should look for a broker or lender who specializes in this type of loan. In addition, your broker should be willing to work with you in order to obtain the best fit for your financial situation and future plans for the loan proceeds. For example, a loan that is intended to clean up several old debts with little cash changing hands will be handled differently than a refinance that is intended to renovate your house.

Clean up your credit history

Reviewing and upgrading the entries on your credit file will often result in a home mortgage refinance that can cost you thousands less in interest fees. Even the structure of the loan can be different when your credit score ranks in the top level of borrowers in the United States. Check with each of the major credit bureaus and remove any inaccurate information by working through procedures available in many places on the internet. This is work that you can do for yourself. It does not have to be done by an attorney or credit clean-up specialist.

Borrow only what you need

Unless you are an unusual consumer, once you make up your mind to obtain a home mortgage refinance, you will likely be tempted to add a few thousand dollars here and there to the amount you need, just in case. You may even inflate the figures so as to get a little spending money. The problem with this process is that you are inflating the amount that you are borrowing and paying interest on without a clear plan in the beginning what your plan is. It is much too easy to see five or ten thousand dollars just trickle away without a clear understanding of where it was spent.

Ensure repayment

If you are not absolutely certain you will be able to make the monthly payments on your home mortgage refinance, you would be better not to borrow the funds against your home. If you default on a mortgage loan, you run the risk of losing your property through foreclosure or sheriff’s sale. Structure your payment amounts at a level that you can afford and at a time of the month when you can readily make the payment. Then consistently pay what’s due in full and on time.

Buy wisely

Once you receive the cash from your home mortgage refinance, you should be wise in the spending of the funds you have received. Don’t give into the temptation to buy something a little more expensive just because the cash is there. You will end up with not enough money to finish the remodeling project if you keep adding in extra items without realizing savings in other items to offset the increases. You are likely to have some unexpected costs in any large project anyway, so you have to plan ahead for those items.

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Galway, Ireland, October 13th 2008: With the most difficult budget in decades facing us today, it will be interesting to say the least to see what will happen with mortgages in Ireland.

While the recent half of one percent cut in mortgage interest rates was very welcome, the likely increase in personal income taxes along with predicted increases in a range of other taxes is likely to offset any benefit in reduced interest rates.

Both the residential and commercial property markets continue to fall dramatically, and there continues to be substantial reductions in the growth of mortgages in Ireland.

Only a year ago Brian Cowen was bringing us the following welcome news:

”In the Programme for Government, we signalled that the first time buyer – and recent purchasers – would benefit from further increases in the ceiling on mortgage interest relief.

”Today, I will honour the Government’s pledge by increasing the ceiling on mortgage interest relief for first time buyers by ?2,000 for a single person and ?4,000 for a married couple or widowed person to ?10,000 and ?20,000 respectively.

”This will increase the maximum monthly relief available by about ?33 and ?66 respectively, bringing it to ?166 per month for a single person and ?333 per month for a married couple or widowed person.

”These moves are appropriate in ensuring additional support for a hard pressed segment of the housing market and should provide the necessary direction and certainty.”

These decisions were made in the boom times of the Celtic Tiger and while many expected an economic crash or at the very least a “soft-landing”, few could have expected the sort of disastrous ecomomic perfect storm that has engulfed not jus the Irish economy, but the entire world economy.

One thing is certain, the news will be very different today, and few can see a substantial increase in the number of mortgages in Ireland being taken out in the near future. Indeed, the general trends show that lending for mortgages in Ireland will continue to decrease over at least the short term, and could even continue to decrease for another 12 months, with many viewing it as an even longer range problem.

It will be interesting to see how the Minister decides to treat the different parties involved in the property and mortgage markets. While the general populace resents the amount of money made by property developers during the boom times and would be against giving them any further opportunties to make their fortunes, there must also be a realisation that the construction industry needs to get going again in order to minimise any further destruction to the number of those employed in Ireland.

Similarly, first time buyers will need to be encouraged to come back to the market. However, at a time when unemployment is on the increase, property prices are still falling, stock markets are in roller coaster mode, and taxes are being increased it will take a significant amount of work to encourage the first time buyers back into the market.

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Interest rates can affect the type of mortgage you choose and dictate when it’s wise to make a change. Here are a few of the factors that can be affected by a swing in interest rates:

Choosing a mortgage

When interest rates are rising, a fixed-rate mortgage is usually a good choice, since it locks in the current rate and protects you from the higher rates to come. When rates are falling, an adjustable-rate mortgage (ARM) becomes more attractive, as its interest rate changes periodically (usually every one, three, or five years), allowing you to benefit from the new, lower rates.

Some people choose an ARM even when rates are rising. This is because the interest rate on an ARM is substantially lower — as much as two percentage points lower than that of a 30-year fixed-rate mortgage. That means you’ll pay less until mortgage rates have increased a full two percentage points. After that, you’ll pay more than a fixed rate.

There are also hybrid ARMs, which have a fixed rate for a certain time period — typically three to 10 years — and then become adjustable. (A 5/1 ARM, for example, has a fixed rate for five years, after which the interest rate is adjusted annually.) Hybrid ARMs can be the right choice if rates are likely to rise in the short-term but then flatten or fall. However, these long-term trends can be difficult to predict.

Refinancing

A change in the interest rate trend can make it worthwhile to switch to a different type of mortgage. When rates are falling, you can save money by moving from a fixed-rate to an adjustable-rate mortgage, so you can benefit from the lower rates. If interest rates appear set for a sustained rise, switching from an ARM to a fixed-rate mortgage can lock in a lower rate and protect you from higher payments. However, you should make sure that any closing costs don’t offset the benefits of refinancing.

For more information on mortgages and interest rates, visit http://www.lendingtree.com/cec/yourhome/yourmortgage/interest-rate-trends.asp?

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