Nadine Cius's Blog

What is the status of the SAFE Mortgage Licensing Act and owner financing in Texas?   In 2007, Texas enacted a statutory de minimis exemption under Finance Code 156.202 for seller financed properties.   As a seller you could finance up to 5 properties in any 12-consecutive months and did not have to be licensed as a loan officer. 

In 2008, The SAFE Mortgage Licensing Act became law.  The Act requires all Mortgage Loan Originators (MLOs) to register on the Nationwide Mortgage Licensing System (NMLS), complete pre-licensure education courses, pass state & federal written tests, be fingerprinted, pass a criminal background check, authorize a credit check and take annual continuing education courses.  The Act makes no reference to a de minimis exemption for owner financed properties.   Therein lies the problem. 

In June 2010, the chief regulator over the SAFE Act in Texas, Texas Savings & Mortgage Lending Commissioner Doug Foster took a major step to allow Texas property owners to continue to seller finance up to five transactions in a 12-month period.  He delayed the implementation of the SAFE Act requirement for licensure in seller-financed transactions in Texas until August 31.    This gave everyone time to work at the federal and state level  and to analyze the regulatory and legislative changes for an effective solution.

On August 17, 2010, Commissioner Doug Foster clarified a Notice he issued on August 12, 2010, that allows the continuation of the de minimis exemption until further action is taken by the Legislature.  Click here to view the Notice.  This means that a seller can once again finance up to five properties in a 12-month period without being licensed as a MLO.   This is a huge victory for sellers who offer owner financing in Texas

How will the new FHA MIP changes affect me as a buyer?  On August 4, 2010, the Federal Housing Administration (FHA) announced a key policy change to its mortgage insurance premium (MIP).  The announcement came after the passage of H.R. 5981, which grants the FHA the authority to adjust its mortgage insurance premium.  This will affect all buyers who secures a FHA mortgage with a loan to value (LTV) 80% or higher for a loan term greater than 15 years.  FHA said this change was necessary because its capital shortfall was well below the government mandated 2 percent minimum.  FHA now has the authority to adjust its annual MIP from the current cap of 0.55% to a new cap of 1.55%.  Potentially, this is a huge increase in annual mortgage insurance.

However, FHA says its initial intentions are to proceed with increasing the annual MIP to 0.85%-0.90% on amortization terms greater than 15 years and lowering its up-front MIP to 1% on all amortization terms.  Even with the lowered up-front MIP, your mortgage payment will still increase because of the higher monthly MIP.  Following are the approved changes:

Annual MIP increase:

LTV <= 95% MIP to increase to 0.85%

LTV > 95%  MIP to increase to 0.90%

Up-front MIP decrease to 1.00%

The effective date of these changes are set for October 4, 2010.  FHA Buyers will see an increase of about 2/3 in mortgage insurance. With this latest change in FHA, mortgage insurance is now more competitive.  As a home buyer, don't assume that FHA is the only loan product for you.   A conventional loan may be a better choice.  It is now even more important to get together with a knowledgeable loan professional to compare your options.

Are there any no down payment loans available?  The days of no down payment loans are not totally gone.  What is gone are the days of easy qualifying with no doc loans or messy credit.  There are still no down payments loans available, but only for people who are purchasing primary residence, have full documentation, strong credit and fall under certain categories:

1. First time home buyers - Down payment assistance are available from the State, County and City for first time home buyers with income at 80% or below the median  for their area.  Some programs will even help moderate income buyers with  income above 80% of the median.   Many of these programs offer thousands in down payment assistance and are ideal for a FHA loan.  You'll need a minimum of 620 credit score and you may have to purchase within a certain designated area.   Each entity will have its own requirements.  Check with a knowledgeable Realtor for the county and city you want to reside in and make sure there are still funds available since those programs are based on availability of funds. 

2. Veterans - If you have an eligible status with the VA, you can qualify for a no down payment loan with no PMI.  A veteran with full entitlement available may borrow up to the VA Limit for their county and VA will guarantee 25 percent of the loan amount.  If a veteran has previously used entitlement that has not been restored, the maximum guaranty amount available to that veteran will be reduced accordingly.  You will need a minimum of 620 credit score.

3. USDA (United States Department of Agriculture)Loans  - 100% financing with no mortgage insurance is available if you meet certain household income.  The property must be located in a designated rural area as selected by the RHS (Rural Housing Service) office.  A minimum credit score of 620 is needed.  To determine whether the property is located in a designated rural area,  click here to go to the Rural Development website.

4. Professional Home Loans - Doctors, Dentist, Attorneys, CPAs CEOs, CFOs, CIOs, COOs or executives in direct report to the CEO or Chairman of publicly traded companies and officers reporting to CEO's at Fortune 500 Companies are eligible for a zero down payment loan (100% financing with no PMI).  These loans are typically offered by a few small private banks to professionals in those categories because they are known to have a low risk of foreclosure. You will need a credit score of least 660.  

Do I have to repay the $8000 tax credit if I sell my home?  If you purchased the home in 2009 or 2010 and sell it within a 36 month period from the date of purchase, then you must repay the credit.   You must also repay the credit if you convert the home to a business or rental property or the lender forecloses on the home.  The credit is repaid by including the amount of the credit as additional tax on the tax return for the year in which the repayment event occurs.  If the home was purchased in 2008, a different rule will apply.  First time homebuyers who purchased new homes in 2008, were eligible for a maximum credit of $7,500.  The credit must be repaid over a 15-year period unlike those who purchase in 2009 or 2010.  Click here for more information. 

Following are the exceptions to the repayment rule:

• If the homeowner dies, any remaining annual installments are not due. In the event a joint return was filed, your surviving spouse would be required to repay his or her half of the remaining repayment amount.
• If you stop using the home as your main home, all remaining annual installments become due on the return for the year that happens. This includes situations where the main home becomes a vacation home or is converted to business or rental property. There are special rules for involuntary conversions. Taxpayers are urged to consult a professional to determine the tax consequences of an involuntary conversion.
• If you sell your home, all remaining annual installments become due on the return for the year of sale. The repayment is limited to the amount of gain on the sale, if the home is sold to an unrelated taxpayer. If there is no gain or if there is a loss on the sale, the remaining annual installments may be reduced or even eliminated. Taxpayers are urged to consult a professional to determine the tax consequences of a sale.
• If you transfer your home to your spouse, or, as part of a divorce settlement, to your former spouse, that person is responsible for making all subsequent installment payments. Click here for more information.

You should consult a tax professional with your specific situation.

Do I need approval from a HomePath Lender in order to purchase a HomePath property?  You can use any lender to finance a HomePath property.  However, if you want the HomePath financing incentive, then you must use a HomePath lender.  The benefits of HomePath financing are:

1.      Down payment (at least 3 percent) can be funded by your own savings; a gift; a grant; or a loan from a nonprofit organization, state or local government, or employer

2.      No mortgage insurance

3.      No appraisal fees

4.      Eligible for HomePath Renovation Mortgage (Financing to fund both purchase and light renovations).

Should you decide to use a non HomePath lender, then you will not get above financing incentives.   Nonetheless, keep in mind that depending on your circumstances, you may not qualify for HomePath if your credit score is less than 660.   Further, you may not need HomePath:

1.      If you are putting 20% or more down payment (then there would be no mortgage insurance for a regular conventional loan)

2.      If you do not need to finance any light renovations.

 

Under above circumstances the no appraisal fee on its own would not be enough incentives to go with HomePath, since rates are typically a little higher than regular conventional or FHA.

 

Why are my credit scores different among the credit bureaus?   Credit scoring is calculating the risk of repayment the consumer represents to the Lender based on his or her payment history and debt usage.   A company called FICO (Fair Isaac Corporation) developed the most widely used scoring model.  FICO scores typically range from 350 to 850.  The FICO scores you get from credit bureaus can differ because there may be slight differences in the credit reports each bureau has for you.  Additionally, FICO develops a specific formula for each credit bureau.  In most cases, the differences shouldn't amount to more than a few points, but can be in the double digits and at times might even be in the triple digits. This is why it is critical to review your credit report on a regular basis.  Make sure that all derrogatory information are accurate and dispute those that are not.

Typical credit scoring breakdown:

1. 35% payment History – This is the highest weight of the score.  This is why it is crutial to pay bills in a timely manner. It includes information from public records on bankruptcies, foreclosures, tax liens, etc.  Examines number of months since most recent derogatory public record was filed.  

2. 30% Amount Owed - Your outstanding debt and percentage owed (How much you owe in comparison to your credit limit.).  Keep your proportion of balances to credit limit low.   For example.  If you credit limit is $1,000.00 your balance should be no more than  $400.00.

3. 15% Length of credit history - The lenght of time the account has been established will affect your score.  Do not close older accounts with good  history.

4. 10% is new credit - Credit inquiries in the last 12 months will impact the score. 

5. 10% types of credit in use - Different classis FICO scoring models have been developed for specific industry users (Auto, installment loans, credit cards, & consumer credit).  Analyses the number of bank cards, retail cards and finance company accounts being used.

Your credit bureau score is your credit profile at a particular point in time.  It can and does vary.  Join a credit monitoring service, where you will be able to monitor your credit, run what if scenarios and keep up with you credit scores.

What offer price should I submit? As a buyer you want to purchase the home at the best price possible.  However, making  low ball offers without the facts may end up offending the seller and getting you nowhere.   On the other hand, letting your love for the property or emotions take over could make you overpay for the home.

An offer  should not be based off the top of your head or emotions, but on the history of the home, market demand, condition of the home, the seller and comparable sales.  To make an informed decision, you need to work with a knowledgeable Realtor who can help you with his or her experience and negotiation skills.   

The price you pay for a property should be specific to  each property and the neighborhood.  Look at the history of the home(How long has the home been on the market? How much did the seller pay for the home?  How much does the seller owe on the home?).    Consider the condition of the home (Is this a turnkey property or does the property need remodeling?).  Consider the type of seller (Is it a bank owned home?  Is this a short sale?  Is the seller motivated?).  Consider market demand (Are there other similar properties for sale in the neighborhood?  Are there  likely to be multiple offers?).   Most importantly, look at comparable homes that have sold recently, with similar condition and features.

Getting answers to above questions along with your agent’s counsel should give you a clear answer to the offer you should submit.  

I do owner financing, does the SAFE Mortgage Licensing Act apply to me?  The SAFE Mortgage Licensing Act (“SAFE Act”),  the federal law which passed  July 30, 2008, applies to you if you are owner financing any property other than your current residence or not financing for a family member (defined as a spouse, child, sibling, parent, grandparent, or grandchild). 

Under the federal SAFE Act, you must be licensed to originate a loan application.  The Act requires RMLOs(Residential Mortgage Loan Originators) to complete pre-licensure education courses,  pass a written federal and state qualified test and take annual continuing education courses. If you are originating in Texas, you must apply for licensing by May 31, 2010.  Click here for more information.  Additionally, you need to register with the NMLS(National Mortgage Licensing System), take 20 hours of education, pass the federal and state test, complete a background check, do a finger print check and grant NMLS permission to access your credit report.  Furthermore, you must decide if you want to operate as a Financial Services Company, Mortgage Banker or Mortgage Broker.  You must pick one of those three entities because you cannot originate without selecting.  

Texas passed its own SAFE licensing Act in 2009.  The Texas Department of Savings & Mortgage Lending (SML) is the enforcement agency.   SML is authorize to deny, suspend, revoke, condition, or decline to renew a license; order restitution; issue cease and desist orders and/or impose an administrative penalty up to $25,000 for violation of the Act.  Therefore, I would not recommend originating a loan application without the required license.

The only way to avoid getting a license if you are owner financing properties and do not fall within the two exemptions mentioned above, is to refer all loans to a RMLO.  This of course means higher cost for you and/or the borrower.  One idea might be to work out a set fee agreement with a RMLO for all of your owner financed deals.  Consult with an attorney if you decide to pursue this route or need legal advice.

Update – on 6/18/2010, Texas Department of Savings & Mortgage Lending Commissioner, Douglas Foster extended the deadline for seller - financers to become licensed as Mortgage Company Residential Mortgage Loan Originators and be in compliance with the SAFE Act until August 31, 2010.  

 

Can a borrower be removed from a mortgage?   A borrower can be removed from a mortgage by refinancing the mortgage.    However, keep in mind that refinancing involves closing costs.    Also, make sure that your debt to income is sufficient to cover the new loan on your own.  Consult with a knowledgeable Loan Officer to confirm that you qualify and that the loan is feasible.   

Removing a borrower from a mortgage is now less difficult.  In the past, Fannie Mae required all borrowers on the existing mortgage to remain the same as all borrowers on the new mortgage except in cases of death or divorces.    However, Fannie Mae has now expanded their guidelines to allow borrower removal for any reason, not just due to death or divorce.  

The following requirements must be met:

1. Underwriter must verify and document the remaining borrower(s) have been making payments from their own funds for at least the most recent 12 months.  If a borrower is removed from mortgage due to death, a 12-month payment history is not required. 

2. Borrower being removed from mortgage must also be removed from the deed (or provide evidence of death, if applicable). 

Seek the advice of a real estate attorney on your legal options and the impact this can have on your situation if refinancing is not possible.