HUD-1 Going Away: Understand New Closing Forms, Procedures
The HUD-1 settlement statement and Good Faith Estimate forms are going away on August 1. The Truth in Lending Act disclosure is going away as well. In their place will be a new closing disclosure and a new loan estimate. There will be changes to the closing process as well, including a new rule requiring everything to be in place three days prior to closing. And last-minute changes face new hurdles. Learn about the changes in this walk-through.
There are also new rules for the closing procedure. One rule requires all forms to be ready three days prior to closing. NAR is recommending you actually get everything ready seven days prior to closing, so when you go into the three-day period, you don’t have to make any changes. Because making changes as the clock winds down comes with a cumbersome set of hurdles.
What this means is, you and the other settlement service providers, including the lender and title agent, are under the gun to get everything squared away earlier than you have to today. And the buyers and sellers have to be cooperative as well, because if last-minute changes are made, a new three-day waiting period kicks in, at least in some cases.
The good news is, you have until August 1 to get familiar with the new forms and learn about the new closing procedures, and NAR is hosting a series of webinars on the topic. To learn when the next one is, go to Realtor.org/respa.
The video above, with Ken Trepeta of NAR Government Affairs, provides a concise overview of what to expect and also shares some tips on how to decrease the likelihood of snags in this new environment.
The CFPB’s goal in making these changes is to increase transparency for consumers. Start your education process by accessing the 5-minute video.
Tell us a little bit about your experience, company history and the services you offer.
At CRESTICO, we pride ourselves on being the company that is changing the face of the real estate industry with our top notch service philosophy which focuses on meeting your needs as a consumer. Our Home Ownership Services Strategy includes affiliations with mortgage, title and closing services, home warranty and other services that are essential in the real estate transactions that are made available to customers like you. It’s our attempt at making the home buying or selling experience less stressful to you, presented as a one-stop shopping experience. CRESTICO is your one-stop shop for all your real estate and mortgage lending needs. We were created for the purpose of serving a homeowner with the highest quality service and providing all the services you could possibly need in connection with the purchase and/or sale of your home.
We will work for you to get you everything you need. We have great relationships and ties in the community and real estate professionals, and can get you the best pricing possible on loans as well! Sometimes the details of buying and selling real estate can be confusing, scary, emotional and nerve racking. We believe in researching the details and presenting them in common terms in order to put your mind at ease and take you through the process with no stress and frustration.
Can you briefly explain what a reverse mortgage is?
A reverse mortgage is loan available to homeowners who are over 62 years of age. It enables them to convert some of their home equity into cash. Generally, it is a means to help retirees with limited income use the accumulated wealth in their homes to cover basic monthly living expenses and pay for health care. The loan is called a reverse mortgage because the traditional mortgage payback stream is reversed. Instead of making monthly payments to a lender, as with a traditional mortgage, the lender makes payments to the borrower.
What are the most common circumstances when a homeowner would qualify for a reverse mortgage and want to consider applying for one?
There are several factors required for a reverse mortgage, first the age qualification, meaning that borrowers listed on title must be 62 years old. Next, there must be a primary lien, meaning that a reverse mortgage must be the primary lien on the home. Any existing mortgage must be paid off using the proceeds from the reverse mortgage. (Reverse mortgage proceeds can be used.) Third, there are occupancy requirements, which means that the property used as collateral for the reverse mortgage must be the primary residence. Vacation homes and investor properties do not qualify. Fourth, there are the taxes and insurance which must be kept in current status along with other mandatory obligations, including condominium fees, or the borrower may be susceptible to default. Finally, the property condition must be kept up and the borrower is responsible for completing mandatory repairs and maintaining the condition of the property.
How long does the process typically take?
From application to closing, it generally takes 20 to 30 days, as in most typical real estate transactions.
What are some of the biggest issues you’ve seen homeowners in Southern California face when it comes to a reverse mortgage?
Unfortunately, California was one of the hardest hit markets in the recent economic crisis. Many seniors bore the brunt of the misfortune. Sadly, some lenders tended to aggressively pitch loans to seniors who cannot afford the fees associated with them, not to mention the property taxes and maintenance. Others wooed seniors with promises that the loans are free money that can be used to finance long-coveted cruises, without clearly explaining the risks. Some widows faced eviction after they were pressured to keep their name off the deed without being told that they could be left facing foreclosure after their husbands died. Now, as baby boomer generation heads for retirement and more seniors grapple with dwindling savings, the newly minted Consumer Financial Protection Bureau is working on new rules that could mean better disclosure for consumers and stricter supervision of lenders. More than 775,000 of such loans are outstanding, according to the federal government.
What advice would you give to people in the Southern California area who need help with a home loan?
I would encourage them to educate themselves on the options that they have when it comes to loan products and mortgage programs. At CRESTICO, we believe that the educated consumer always makes the best decision for himself and his family which ultimately results in a better society and economic environment for everyone.
What’s the best way for people to get in contact with you and your company?
Bad mortgage advice could cost you tons of money and time.
Are you thinking about buying or refinancing a home in the near future? If so, chances are you’re getting all kinds of advice from well-intentioned friends and family.
Just remember to keep this important piece of advice in mind: Don’t listen to everything you hear. According to industry professionals, some words of wisdom are not wise at all.
To help you separate the bad advice from the good, check out five common statements that should cause you to cover your ears immediately.
Bad Advice No. 1: “A 30-year fixed-rate mortgage is best for everyone.”
The common perception is that a 30-year fixed-rate mortgage is always the best option, because it typically offers lower monthly payments than other shorter-term mortgages. But the kicker is that interest payments over the course of the loan can be quite substantial when compared to mortgages with shorter terms and lower interest rates.
Consider this example based on rates from Freddie Mac, as of March 20, 2014:
A 30-year loan on a $200,000 property with a 4.32 percent interest rate has a monthly payment of $992 and interest payments totaling $157,153 over the life of the loan. On the other hand, a 15-year loan for the same property with a 3.32 percent rate has monthly payments of $1,412 and yields $54,187 in total interest paid. So by opting for the shorter mortgage, you could save more than $100,000 in interest, which is worth it if you can meet those higher monthly payments.
Whether or not a 30-year fixed mortgage is the right choice depends on the borrower’s goals and financial situation, says Houtan Hormozian, vice president of Crestico Funding, a Los Angeles-based mortgage brokerage firm.
For example, if you have cash saved up for job, family, or medical emergencies and you already have college and retirement funds set up, then a 15-year mortgage might be a better option. Without money saved up, losing a job or an expensive surgery could deal a hard blow to someone’s finances, including their ability to make mortgage payments.
Bad Advice No. 2: “Stay away from adjustable-rate mortgages.”
An adjustable-rate mortgage (ARM) is a loan with an interest rate that is fixed for a period of time then adjusts, causing the ARM payments to increase or decrease.
ARMs get a bad rap, because they’re seen as risky products that contributed to the housing bubble, easy credit, and ultimately, the subprime mortgage crisis.
“The 30-year fixed-rate mortgage is the most popular type, because everyone is afraid of adjustable [rates],” Hormozian says.
In fact, only 3 percent of homebuyers chose adjustable-rate mortgages in the first half of 2013, reports Freddie Mac. With that low figure it’s easy to get scared off, too. But the fear associated with ARMs is somewhat unjustified, according to Hormozian.
“Depending on the consumer, circumstances, and knowledge of their economic situation, there could be an ARM that fits them,” says Frank Percival, board president of the Washington Association of Mortgage Professionals.
One major benefit of an ARM is that it typically will have a lower interest rate than fixed-rate mortgages at the outset. For example, a 5/1 ARM will have an initial fixed rate for the first five years then adjusts afterward.
This is a great option for homeowners who plan on moving out of their house before the rate adjusts. However, this does carry some risk, since personal finances and the condition of the housing market may make moving difficult in a set amount of time.
So choosing an ARM may come down to your financial situation and your aversion to risk. Percival explains that if a homebuyer with a 5/1 ARM saves $200 a month in interest compared to a 30-year fixed mortgage, it may make sense to choose that type of loan. However, if someone wants to err on the side of caution, given the risks discussed, a 30-year fixed mortgage might be the more sensible choice.
Bad Advice No. 3: “If your home is underwater, consider a short sale.”
“When the housing market was bad a year or a year and a half ago and the values of homes were low, people were encouraged from realtors [and] buddies at work to walk away from their home,” says Percival. He calls this “one of the worst pieces of advice in recent history.”
If desperate homeowners took that advice, they would usually do a short sale on their home. What exactly is that? It’s a real estate transaction in which a lender agrees to let the borrower sell his or her property for less than – or “short” of – what is owed on the mortgage.
Even if your home is underwater, it’s a bad idea, asserts Percival. If homeowners can still afford to make their mortgage payments, then they shouldn’t do a short sale.
“People who didn’t have medical emergencies or lose their jobs were dropping their keys and leaving their homes,” Percival says. This is a dumb choice, he adds, since it’s possible that their home value could go have gone up.
Plus, if you do a short sale, you may have to wait several years to qualify for a home again, says Percival. The reason? Because a short sale usually lowers your credit score just as a foreclosure would, according to myFICO, the consumer division of FICO. Shortsellers may be able to qualify for a mortgage in as little as two years, but this may depend on a variety of factors, like how much you are able to put down.
Beyond your own finances, short sales have a far-reaching effect, according to Percival.
“Every short sale or foreclosure reduces the value of every home in the neighborhood,” he says. “If folks would have waited for the recovery to kick in and housing prices to go up, they could have sold it at a profit. People just wanted to walk away from debt.”
Bad Advice No. 4: “An FHA loan is your only option.”
First-time homebuyers are particularly susceptible to bad advice. For example, homeowners who can’t afford a large down payment may hear that a government-backed FHA loan is their only option, since the down payment requirement can be as low as 3.5 percent of a house’s purchase price. But that’s not necessarily the case.
Some homeowners might be surprised that getting a conventional loan might be better suited – and easier – for them than an FHA loan, says Aaron Vantrojen, president of the Arizona Association of Mortgage Professionals, says.
The standards to qualify for an FHA loan have tightened, says Vantrojen. Plus, the FHA loan has become more expensive in recent years due to its rising mortgage insurance premium (MIP).
According to the U.S. Department of Housing and Urban Development, the mortgage insurance on an FHA loan must be carried for the life of the loan. On the other hand, the private mortgage insurance (PMI) on conventional home loans can be dropped when equity in the home reaches 20 percent, Vantrojen says.
As a result of dropping the insurance premium, homeowners can save thousands of dollars in the long run. “The annual mortgage insurance for FHA loans is so high, we are trying to get people into conventional loans if they qualify,” Vantrojen says.
The biggest advantage FHA loans have over conventional loans is the low down payment requirement. But conventional loans, with a 5 percent down-payment required, might be a better deal when you factor in the mortgage insurance payments, says Vantrojen.
“I will always look at options for conventional loans [for homebuyers],” says Vantrojen, president of Geneva Financial, a mortgage banking firm based in Tempe, Arizona. “The guidelines for conventional loans are changing, and a person who couldn’t qualify for one a month ago might be able to qualify now.”
Bad Advice No. 5: “Trust me, I know what I’m talking about.”
If you’re in the market for purchasing a home loan and in need of a little guidance, you might want to think twice about listening to someone who tells you: “Trust me, I know what I’m talking about.”
“One of the most common mistakes is not getting advice from a mortgage investment advisor,” says Hormozian. “Any time you don’t seek advice from a professional, you could be in trouble.”
But not all mortgage professionals are created equal, which is why Hormozian says homebuyers should make an effort to consult and get the opinions of established mortgage advisors, licensed mortgage companies, and reputable professionals when they are ready to purchase a loan.
“At the end of the day, my job is to make sure my client will have a comfortable life and a sound investment,” Hormozian says. “If I feel they are going to have a hard time making a payment or living up to that liability, I have to advise against it.”
For example, if someone tells you it’s a great idea to buy investment property as a source of instant income, you better consider the source. Instead of talking to real estate agents, homebuyers should talk to unbiased resources, who could help them avoid potential mortgage heartaches, says Vantrojen.
“Do your due diligence, talk to industry professionals – people who have been real estate investors and [who] can tell you the highs and lows of owning real estate,” he explains.
If owning a new home for you and your family is a main objective, Percival says it might be a good idea to check whether you are dealing with licensed mortgage professionals. He suggests verifying mortgage loan originators (MLOs) and their MLO license numbers through the National Mortgage Licensing System (NMLS), which performs this service for free.
Some banks show an uptick, but often, the loans are harder to get.
Seeking money for a pressing need or unexpected expense? A TV commercial airing these days from U.S. Bank suggests a solution: A home equity line of credit.
The spot may be reminiscent of the housing bubble for some, but it also represents a sign of the recovery.
“A small fraction of banks are actually reporting they’re seeing stronger demands for home equity lines of credit over the last 3 months,’’ says Keith Leggett, vice president and senior economist at the American Bankers Association.
“The lenders are still going to be cautious, but the fact that you are seeing lenders actually tip toe back into that water is an indication that the housing market has probably stabilized and is actually beginning to recover,” he says. “Lenders would not be going into this market if they viewed (that) housing prices were scheduled to drop further.”
ComericA bank says it’s seen an increase in home equity lines of credit in Orange County. The bank had a 55 percent rise in applications for them as of mid-October this year compared with the full year 2011, and a 36 percent increase in money taken out by borrowers, bank spokeswoman Nancy Tovar Huxen said. There was a 74 percent jump in home equity credit applications in September year to date over the same period ending September 2011, and a 68 percent increase in money taken out.
BOOM VS. BUST
During the housing bubble, many homeowners used their home like ATMs. Income documentation and a healthy amount of collateral often were not deemed necessary. Home prices were soaring.
But since the crash, the rules for such credit, as with other types of loans, have tightened significantly.
“They’re being very careful about who they’re giving that loan to,’’ says Houtan Hormozian of the Orange County Association of Mortgage Professionals. “Banks definitely don’t give them out like they used to.’’
Now homeowners typically need a 720 FICO score, at least 20 percent equity in the home, and documentation of income and mortgage payment stability, mortgage brokers say. And home equity lines of credit don’t come cheap: Average fixed interest rates were 6.68 percent as of Oct. 5, down from 7.06 percent a year ago, according to HSH Associates, which collects data on the mortgage market.
So who qualifies for a HELOC nowadays?
U.S. Bank officials say though the bank’s commercial is airing now, their careful lending practices haven’t significantly changed, and that the bank continued to give out home equity lines of credit even after the housing crash.
“It’s really for the crème de la crème,’’ says Dave Haub, president of CMC Lending in Garden Grove, of typical guidelines for the loans. “There’s not a lot of people who have the equity. It’s almost for the people who really don’t need it.”
PAYING IT BACK
But borrowers who took out home equity lines of credit in the past could face trouble ahead. In a couple of years, more than half of these loans will begin amortizing.
In past decades, many people have been trained to think that a 30-year fixed-rate mortgage is the only way to go when it comes to getting a mortgage. They look negatively on adjustable rate mortgages because they fear the adjustable part. But there are advantages to having an ARM and times where a long-term fixed-rate mortgage doesn’t really make as much sense.
Lower Rates and Payments
An ARM, or adjustable rate mortgage, is similar to a 30-year fixed-rate mortgage in that it is also amortized over a 30-year period. But it’s usually for shorter-term situations and generally carries a lower interest rate than fixed-rate mortgages. So if you’re trying to keep your interest rate and payment low, an adjustable can be a sensible choice. And since it’s a short-term mortgage, it’s useful to have a lower rate and payment if you know you’re only going to be in your home for less than 10 years–especially when most American families generally move within nine years or less.
Some adjustable rate mortgages give you even more financial flexibility if they are available with interest-only payments. During the interest-only period, you decide if you want to pay interest plus principal or just interest alone. The rest of your money can go elsewhere, say, toward other bills or just extra spending money.
A Closer Look at ARMs
Many people tend to shy away from ARMs for the fact that the rate is adjustable. However, there are a few caveats to this:
While ARMs do have an adjustable rate, the rate is fixed for six months, one, three, five, seven, and sometimes even nine years, depending on which term you choose. The rate doesn’t begin to adjust until after the fixed-rate period.
Although the rate can adjust up, don’t forget that it can also adjust down as well.
Most people who have an adjustable rate mortgage usually refinance it when it’s time for the rate to adjust. That way, they have some control over their interest rate.
Caps and ARMs
If you have an adjustable rate mortgage and can’t or don’t want to refinance when it’s time for the rate to adjust, it’s important to understand what happens to the rate after the fixed-rate period.
When the rate on an ARM adjusts, there are limitations on how much it can increase or decrease. These limitations, called “caps” include the “initial cap”, the “periodic cap”, and the “lifetime cap”. The initial cap is the limit on how much the rate can adjust the first time it adjusts. The periodic cap is the limit on how much the rate can adjust after the first adjustment. The lifetime cap is the limit on how much the rate can adjust over the life of the loan. Different ARMs carry different caps, depending on the program.
Let’s say your ARM has caps of 5/2/5. The first five is the initial cap; the second number is the periodic cap; and the third number is the lifetime cap. If your rate is 6.5 percent, then the initial cap says the first adjustment is your rate plus or minus five percent–so it can go as high 11.5 percent or as low as 1.5 percent (though it’s pretty unlikely that rates would change that significantly). The periodic cap says the second and subsequent adjustments are your rate (6.5 percent) plus or minus two percent–so no higher than 8.5 percent and no lower than 4.5 percent. The lifetime cap says the rate can never go higher or lower than your rate (6.5 percent) plus or minus five percent.
There are times when you’d want to refinance and times when you don’t. So why would you not refinance your ARM when it’s going to adjust? Well, as we said, rates can go down as well as up. There are some people who are not afraid of risk and are willing to gamble that their rate could go down. To be somewhat savvy, it’s wise to follow what’s happening in the market to know whether short-term rates will go up or down. The Federal Reserve is usually the entity that affects short-term adjustable rates. They meet eight times a year and decide whether to increase, decrease or maintain short-term rates as a control measure over inflation.
Deciding whether you should get an ARM and/or whether to refinance it is really your own decision. But if you can answer a few questions–whether or not you want a lower rate and payment; whether or not you’re only going to be in your home for less than 10 years, and whether you can stand a little risk in terms of the interest rate–then, you’ll be closer to making the right decision. Either way, you should confer with an experienced mortgage expert to be sure you’re making the right decision.