QM? ATR? WTH?

Floating House

Despite all of the chatter around Qualified Mortgages (QM) and proving a mortgage borrower’s Ability to Repay (ATR), many local homebuyers will be UNAFFECTED by these recent Dodd-Frank changes effective January 10. Why? To begin with, all of the conforming, FHA and VA loans are given a temporary reprieve from these new provisions and are business as usual. Secondly, and frankly, these new rules are really Underwriting 101 for the most part since all fully-documented loans are underwritten to ensure that they are appropriate and affordable for the borrowers who receive them. Finally, all of the non-conforming (“jumbo”) options available today, like 40-year terms, interest-only payments, 100% financing, bridge loans, etc., will continue to be available to clients through mortgage advisors of reputable mortgage banks.

So what is a QM? In a nutshell, a QM:

• Is underwritten to ensure that a borrower has the ability to repay the mortgage
• Has a 30-year term
• Is absent of features like interest-only payments and negative amortization
• Has reasonable fees (for our area, total fees not to exceed 3% of the loan amount…)

What I find rather comical is the alleged “safe harbor” status that a QM provides to a lender, meaning that the lender can’t be sued if it issues a QM, yet the provision clearly states that a consumer can sue the lender if the consumer feels as though the lender did not properly follow the QM requirements.

One question that we’re all waiting an answer for is what the pricing impact with be on non-QM loans. While it’s certainly reasonable to presume that the rates will be slightly higher for non-QM loans, our prediction is that rates today will remain steady on non-QM loans and that QM loans will be slightly better priced in the future.

When you think about it, every loan is priced based on risk. As such, the higher the risk on a loan, the higher the price of that loan. And while QM loans may be considered as lowest risk, it’s hard to argue that a borrower who qualifies and desires a 15 year fixed mortgage is riskier than a 30 year fixed QM mortgage.

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Retiring with a No-Payment Mortgage

A recent trend in mortgages has been the re-emergence of the reverse mortgage.  Why?  One would think that it’s because of the incredible appreciation that we’ve seen in housing prices, which is true, but really the reverse mortgage has become a critical financial-planning tool for the Baby-boomer generation.   How?  Many Baby Boomers did their best to properly save for retirement/financial independence, but the financial markets of 2001 and 2008 had a serious impact on retirement saving accounts.  Now with home prices and the financial markets recovering dramatically well.., the home has become a significant source of equity and an ideal source of funds to cover expenses during retirement.   

As such, a mortgage that:

  • has NO payments,
  • allows extra capital for property improvements
  • potentially optimizes one’s tax strategies
  • allows for proper asset allocation and financial independence
  • has a loan allowance that actually grows over time
  • no prepayment penalties
  • will never cause the property to be underwater
  • is easy to qualify for those 62 years of age and older

seems to warrant serious consideration to anyone planning for retirement.  

“But what if I want to downsize..?  Can I use a reverse mortgage to purchase a home as well?”  Yes!  Many of us think that a reverse mortgage is more of a refinance mortgage, but the truth is that a reverse mortgage can be used by qualified candidates to purchase property as well.

For expert guidance on your mortgage situation, please contact any one of our Mortgage Advisors at Absolute Mortgage Banking.  We are also happy to refer clients to qualified financial planners as well.

10-Day Close? Sure!

“I saw your article on financing a cash sale within 90 days of closing for tax benefits…  Can you close in 10 days?”  Yes.

House Fast

Its one thing to close a deal in two weeks (which also happened this month), especially when the minimum amount of documentation required is 25 separate documents, but closing a deal in 10 calendar days, including a holiday and two Sundays in that equation, is pretty remarkable.  What’s funny is that most people think that a quick close is up to the lender when in fact it’s really the buyer/borrower who leads the pace of the close.  Then, the lender, agent, appraiser, escrow company and any other involved third party need to be in expedited lock sync to close timely.

So why was financing so important in this case?  For this scenario, had the buyers NOT financed the property, they would have given up a probable $15,000 tax deduction.  Further, they would have had a highly concentrated equity position in real estate, which was inconsistent with their financial-planning goals. 

Another question is, “Why did they have to finance the property BEFORE they closed?”  The buyers wanted a conforming loan (a loan that conforms to Fannie or Freddie); and conforming loans require a seasoning period of six months post close before the loan can fund.  As outlined in our last article, you must be within 90 days of close to qualify as a purchase-money mortgage.  So, the only loans applicable for funding post close within 90 days of purchase are non-conforming loans. 

For expert guidance on your mortgage situation, please contact any one of our Mortgage Advisors at Absolute Mortgage Banking.

Cash Sale. Purchase-Money Mortgage.

With the plethora of cash sales this year, we were surprised to learn that many cash buyers didn’t know that she/he could have obtained a purchase-money mortgage within 90 days of the closing date to preserve any tax advantages that a purchase-money mortgage would provide them. We also learned that many buyers were told that she/he can’t even refinance a property within 180 days of the closing date. Both of those myths are important to understand because the tax implications of obtaining a mortgage beyond 90 days of acquisition can be tremendous.*

Purchase Money

OK, big disclaimer here: Absolute Mortgage Banking and its employees are NOT qualified tax professionals. Please seek counsel for any tax situation with a qualified tax professional. This article is purely for discussion purposes only. Ok, on to the less boring stuff…

In essence, the interest on purchase-money mortgages secured by one’s primary residence can be tax deductible up to loan amounts totaling $1.1mm. That’s a pretty big deal, even with cheap money at 4.00%, since that’s $44,000 per year that may be deducted from one’s income for tax purposes. And when you think about it, the tax-adjusted rate in this case, presuming a 40% marginal tax rate, is really 2.4%! No wonder financial planners, CPA’s, etc. recommend leveraging real estate to a comfortable level since many alternative investments exist that yield returns greater than the 2.4% in this example.*

The bottom line is that you may qualify to finance the cash purchase of a property within 90 days of acquisition to preserve the tax benefits associated with a purchase money mortgage. Please consult with your favorite mortgage professional to explore what mortgage solution is ideal for your situation.

*Absolute Mortgage Banking and its employees are NOT qualified tax professionals. Please seek counsel for any tax situation with a qualified tax professional.

No Credit? No Problem!

No Credit 2

As follow-on to our last article on credit myths, another credit myth is that you can’t get a mortgage if you don’t have US credit.   NOT true – there are very aggressive loan programs available for those who have not yet established credit here in the States.  In fact many programs don’t require international credit either.  How is that possible?  Simple:

  1. Have a US job
  2. Make sufficient income
  3. Have sufficient down payment (or sufficient equity in the case of a refinance) and reserves

And if it weren’t amazing enough that such programs exist, these programs also allow loan amounts up to $3,000,000 and 80% loan to value up to $1,500,000!  Do keep in mind that these programs are currently limited to adjustable-rate programs (ARM loans), but the rates are quite attractive in the mid-four percent range on a “no-point” basis.  After a couple of years of having this type of loan, generally one becomes eligible for a refinance into a fixed-rate program, if that is desired.

Another item to note is that the borrower CAN be new on the job.  All that’s required is a recent paystub to verify income and the loan can fund…

For further details on these types of no-credit loans, contact your favorite mortgage advisor or anyone at AMB.