Wednesday, October 27, 2010


Back to Fundamentals: How do I know how much mortgage payment I qualify for?

By: Evan Vanderwey
Michigan Mortgage

The answer to this question defines the “simple but not easy” category of mortgage education if ever there was such a category.

Simply put – you take your gross monthly income, multiply by around 40% (0.40), subtract from that number the amount of the minimum payments on all of your other debts, and the resulting number is the amount of your maximum house payment. Lastly, the house payment must include the principle and interest amount, property taxes, home owners insurance, and association dues if you are buying in a condominium complex.

Simple.

Except for one thing: What does the lender consider to be your gross monthly income?

Here’s a little help if you’re trying to calculate your gross monthly income. But if you are serious about putting in an offer on a home, there is no way a seller or your REALTOR® will trust your own calculations. In this market, if you’re using a mortgage, you will be required to talk with a lender who will sign off on your math ahead of time.

If you are employed and are paid a salary then you take your gross annual salary and divide by twelve. This is your monthly income.

If you are paid a bonus annually – you take the last two years’ amounts, add them together and divide by 24. Unless your most recent year’s bonus is less than the one you got two years ago – in that case, you take the last year’s amount and divide by 12.

If you earn overtime, consider ignoring it when it comes to setting your personal budget. But if you need to include it to qualify for the mortgage, then it must be increasing from year to year and then you take a 24-month average of the amount of overtime you earned.

Commission-type income must be taken as a 24-month average as well and can be used only if the income is increasing over the past two years. Under certain circumstances, declining income may be used, but only the lower of the two years is used in the calculation. Tax deductible expenses that are deducted on the person’s tax return (form 2106) must be removed before calculating the “gross taxable income.”

Self-employed borrowers must be able to show two years of income as well. We must see an increasing income pattern in most cases. Depreciation can be added back into this number. I cannot stress enough the importance of working with a knowledgeable loan originator if you are self employed. Your income must be calculated accurately up front or even the most well-qualified borrowers can find themselves with a difficult situation during the loan process.

For bonuses, overtime, commissions, and self-employment income, the borrower must have been in the same exact job for the past two years. You can’t move from GM to Fiat for example and average the last two years’ overtime over two separate employers.

Rental income from a tenant can be added in at 75% of the amount of the rent once there is 12 months of history of the tenant paying on time. We can also use the schedule E of a borrower’s tax return to verify rent – this takes the income from tenants and subtracts the expenses from that investment property. The net income on schedule E can be used after one year of having received the rent. Depreciation again is a non-cash expense and can be added back to net income.

Fixed income from settlements or awards, like child support and disability, pension or social security income, is all usable income. We use the full amount as gross monthly income so long as it can be proven that there are three years left for child or spousal support payments. There must be at least 12 months of proof that the payments have been received.

The above list is not meant to be exhaustive but instructive. Calculating income correctly for a lender is no easy task. Take this seriously and work with a qualified lender ahead of time.

Wednesday, October 20, 2010

Affordable Housing That's Green, Too



Green Building Goes on a Budget

Thanks to tax credits and cost cutting, more affordable housing projects are turning eco-friendly

By ROBBIE WHELAN
Wall Street Journal, 10/18/10

Casa Feliz, an apartment building that opened last year in San Jose, Calif., was built with modern finishes and the latest in trendy, environmentally friendly materials: bamboo floors; organic, linseed oil-based linoleum tiles; and ergonomic chairs in the lobby made from sustainably farmed wood.

But in what might come as a surprise to some, no Prius-driving, Dwell magazine-reading, upper-middle-class professionals reside there. The project was built for people who earn less than 35% of San Jose's median income of $103,500 for a family of four, or suffer from developmental disabilities.

Casa Feliz is one of a growing number of affordable-housing projects nationwide that have been built "green"—that is, with nontoxic materials, highly energy-efficient appliances, and features such as green roofs and solar panels. Thanks to tax credits designed to attract private capital and aggressive cost-cutting on other construction features, affordable-housing developers are embracing eco-friendly building features that were once the purview of high-minded designers and wealthy developers with money to spare.

A Better Deal

Dana Bourland, a vice president with Enterprise Community Partners Inc., a Columbia, Md.-based nonprofit that helps finance affordable-housing projects, predicts that the affordable-housing industry will be 100% green by 2020. Not only are green buildings better for the environment, but they make better financial sense, too, she says, because they come with lower water and energy bills and lower tenant-turnover rates.

As such, investors view them as safer investments than buildings without such features, she says.

"The underwriting is changing," she says. "I think there's a growing recognition that these are better deals."

Most affordable-housing projects, including green ones, rely on the federal Low Income Housing Tax Credit, a Reagan-era program that provides incentives for corporations to invest in housing for the poor. Corporations purchase the credits—which are administered through a state-by-state allocation—and use them to take a credit against corporate taxes on their profits. Big investors over the past decade have included banks, insurance companies and the government-supported mortgage giants Fannie Mae and Freddie Mac.

After the housing crash and the collapse of Fannie and Freddie, the market for these tax credits softened considerably, and affordable-housing developers were forced to offer investors higher yields. Some corporations paid as little as 60 cents on the dollar for the credits, which meant developers had less money to put toward energy-saving features that earn buildings green plaudits.

But builders and investors say the market is coming back. Jeff Oberdorfer, executive director of First Community Housing, the San Jose-based nonprofit developer that built Casa Feliz, says investors are paying about 75 cents for each dollar of tax shelter now, and they are eager to underwrite green buildings because of the energy cost savings.

Investors are "starting to become more sensitive to the lower costs, the higher cash flows from energy savings," Mr. Oberdorfer says.

MetLife Inc., the big New York-based insurance company, is one of those investors. Matt Sheedy, who invests funds from MetLife's $325 billiongeneral account, says MetLife and other large institutional investors are eager to invest in green affordable-housing projects because they have a safer risk profile than more traditional housing projects.

"Investors commonly accept moderately lower returns for lower risk profiles, and green features are more in demand," he says. "I don't think we're back to peak prices, [but] this year, investor demand has picked up."

MetLife bought $14.3 million in credits on First Community Housing's Fourth Street Apartments project, a 100-unit affordable-housing building going up in downtown San Jose, and has also invested in Bay Avenue, a 109-unit senior-housing project in Capitola, Calif. Both projects are green. All told, MetLife has invested more than $1billion in affordable tax-credit projects since 1995, many of them green, Mr. Sheedy says.

Freeing Up Funds

Developers are going full speed ahead on green affordable-housing projects elsewhere across the U.S.

Enterprise Community Partners, for example, has invested more than $500 million in green tax-credit projects and recently launched a $50 million investment fund geared toward renovating low-income projects with eco-friendly features. In Utah, Enterprise is close to a multimillion dollar deal with American Express Co. to invest in green affordable tax-credit deals, according to Ms. Bourland, the vice president. American Express didn't respond to requests for comment.

New York builder Jonathan Rose Cos., meanwhile, is building $750 million of green affordable-housing projects and manages about $1.3 billion in completed green projects. It opened its latest apartment building in September.

Castle Gardens, an energy-efficient rental-apartment complex for former inmates and other low-income tenants in New York's Harlem neighborhood, was financed in large part by $16 million in tax-credit equity from Capital One Bank N.A. and other investors. Still, Jonathan F.P. Rose, the builder's founder and director, says his company had to work hard to free up money to make the complex green.

Up on the Roof

Rose saved almost $100,000 by putting gas-fired hot-water boilers on the roof rather than in the basement of the building, as is typical. That allowed it to avoid building a pricey flue that would have had to run from the ground to the top of the structure to pump out exhaust fumes. In addition, the windows in each room have "trickle vents" that encourage airflow and cool the apartments in summer, but are cheaper than a central venting system. The money saved allowed the builder to add features that made Castle Gardens 30% more energy-efficient than other buildings of comparable size in Harlem.

"In the early to mid-1990s, as a few voices were beginning to emerge and push for the greening of affordable housing, the affordable housing community's response was, the need for affordable housing [is] so great that we cannot defer any money from the quantity of the units to the quality of the project," Mr. Rose says.

That was excellent discipline, he adds, because "the green affordable housing had to grow up with no money to spare."

Wednesday, October 13, 2010

Mortgage Rates Would Lose at Limbo - They're About as Low as They Can Go

Wall Street Journal, Oct. 12 2010
By PRABHA NATARAJAN

Mortgage rates have hit another record low—4.27% on average for 30-year fixed-rate loans, according to Freddie Mac—but analysts and others say home-loan rates are much higher than they should be.

Don't bet the house, however, that they will drop too much lower. Rates haven't fallen further, analysts and bankers said, because banks are unwilling to lower rates and lose profit margins, and because of uncertainty in the market that makes it difficult for them to predict the number of home buyers.

Instead of moving the rate lower to 4%, which banks might have done at "normal times" when bond yields are as low as they are, "illiquidity and unusual situations are causing originators to hold rates at this level rather than risk losing money on new loans they have difficulty hedging," said Paul Jacob, director of research at Banc of Manhattan Capital, in Manhattan Beach, Calif.

Based on the yields of mortgage-backed securities traded on secondary markets, David Cannon, head of mortgage trading at Royal Bank of Scotland Group PLC, says that the mortgages in Freddie Mac's weekly survey should come with interest rates between 3.75% to 4%.

At those lower rates, a homeowner could lower his monthly payments on a $200,000 loan by $30 to $60—saving nearly $22,000 over the full life of a 30-year mortgage.

Moving toward the theoretically lower rate isn't a simple matter, however. There is a convoluted scenario at work that goes at the heart of how mortgages are bundled together and packaged into securities that are sold to investors.

Typically, local and regional banks lend to homeowners, then sell those loans to larger banks or aggregators, such as Citigroup Inc., Bank of America Corp., Wells Fargo & Co. and J.P. Morgan Chase & Co. These firms pool loans from across the U.S. into mortgage securities.

Normally, small banks would push rates as low as they could go in order to make more loans and thus make more money. But they have found that while lower rates may bring in more home buyers, there is little guarantee that many of these consumers will qualify for a loan under today's austere borrowing standards.

Further, these originators make money from the rates at which they can sell these loans to aggregators. Lower rates mean narrower margins for them, while the aggregators who buy these loans at lower rates stand to gain from selling them at higher rates in the secondary market.

Because there are so few new mortgages and so many investors eager to buy them, "the system now allows large aggregators to control the price on a loan and an interest rate the borrower gets," said Mike Delehanty, president of Apex Analytics in Wildomar, Calif., which advises banks on selling their loans to larger mortgage-finance companies.

Mortgage rates usually are based on the yield investors are paid for the risk of purchasing securities backed by home loans, and the premium that the lender charges to service the loan.

Currently, the yield on government-guaranteed mortgage security is 3.206%, and the primary mortgage rate is 1.064 percentage points higher. Historically, the difference is in the range of 0.50 to 0.70 percentage point, according to Amherst Securities Group.

That unusually wide gap indicates that banks continue to make it tough for consumers to get really low rates on loans, as they fiercely protect their gains.Representatives of the country's largest mortgage lenders, including Citigroup, Bank of America, Wells Fargo and J.P. Morgan Chase, declined to comment or didn't return phone calls seeking their views.

Mortgage rates aren't likely to drop significantly even if the interest rate on the 10-year Treasury bond and corresponding yield on mortgage securities drop further.

"Even if interest rate drops to 2%, mortgage rates are going to stay right here," said Paul Norris, a portfolio manager at Dwight Asset Management in Burlington, Vt. "Originators don't expect mortgage supply to be robust and will want to keep rates in the 4.25% to 4.625% range for the next few months."

Thursday, October 7, 2010

Should You Pay Off Your Mortgage? The Answer May Surprise You

The following article from the WSJ reveals that it may make sense for you to pay off your mortgage. Here's one reason why: With today's volatile stock market, you can't necessarily guarantee that any funds you have invested will outperform the interest rate you're paying on your mortgage.

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Should I Pay off the Mortgage?

By June Fletcher
WSJ, Oct. 5th 2010

Q: We have a mortgage worth $177,000 on a house that we've owned for 21 years. We've refinanced our loan twice, and now have a 30-year mortgage at 6.48% that we took out in 2002.

My husband and I are now six years from retirement, and we are trying to figure out the best use of our money. We have enough to pay off the mortgage without dipping into our IRAs, and we'd sleep better if we didn't have a mortgage hanging over our heads. Is this a good idea?

—Washington, D.C.

Given the economy's continuing weakness, the fact that you have cash that's not tied up in IRAs and how close you both are to retirement, I think it's a fine idea to pay off your mortgage.

Here's why: You should always try to get the best return possible on your money. So you shouldn't keep the loan unless you can find another investment that, before taxes, can reliably earn more than the 6.48% that you're currently paying on it. With the stock market still volatile and certificates of deposit and other relatively safe investments paying less than the rate of inflation, I wouldn't count on that.

What's more, paying off a mortgage loan is risk-free—no matter what happens to the general economy, you'll be left with an asset that you can live in or rent out.

A downside is that you'll lose the mortgage interest tax deduction if you pay off your loan. But as a new report from the National Association of Home Builders points out, those benefits largely go to those buyers who are younger than 45, who typically have the largest mortgages and the most itemized expenses.

Meanwhile, if you pay off the loan, you'll have plenty of company. According to the latest American Community Survey released by the U.S. Census, there are approximately 50.7 million owner-occupied homes with a mortgage in 2009, compared to about 51.6 million in 2008. Folks are paying off second mortgages and home equity lines of credit, too. Those have dropped to about 12.1 million in 2009 from roughly 13.3 million the year before.

Of course, you do have other options. You can refinance your relatively expensive current loan to today's lower interest rates—but doing so will incur thousands of dollars in closing costs. Or, while you are both still working, you could simply add extra principal payments to your current mortgage and pay it off more quickly.

But if you pay off your mortgage completely, you'll not only sleep soundly, you'll be in a position to get a reverse mortgage should you need to tap into your home's equity at a later date. The way reverse mortgages are structured, the older you are when you take out a reverse mortgage, the more you'll be able to withdraw while still remaining in your home, since your life expectancy declines with each passing year. That's a good fallback should you outlive the funds you manage to put away before retirement.