Q&A

Q:

I am an honorably discharged veteran of the Iraq War and recently came home and wanted to buy a home. When I separated from the U.S. Army, they told me that I was eligible to buy a home for zero down. Now I have applied and they are telling me that my credit won't qualify even though I'm a veteran. How do I fix this?

A:

I too am a veteran and I remember when I was processing for separation, they said the exact same thing to me. Unfortunately, they don't explain that the veteran is eligible to apply for a home loan with zero down. The veteran still must qualify via income to debt ratios and credit history.

The Veterans Administration (VA) does provide 100% purchase and refinance financing for qualifying veterans. However, the lender is required to verify an acceptable credit history. This can be from normal sources such as credit cards, car loans, etc., but can also be built through a rental payment history as well as alternative credit ratings such as utilities, car insurance, etc. VA also requires that the veteran has had no excessive late payments, collections, etc., during the past 12 months.

In addition to this, the veteran must have a debt-to-income ratio that fits VA's guidelines. Typically this limit comes out to approximately 41%. This means that all of the veteran's monthly consumer debt, including any child support and the new house payment must amount to 41% or less of the veteran's gross monthly income. VA also requires that the veteran has specified amounts of "residual income". This is money that is basically left over after all of the monthly bills and an estimate for housing maintenance are paid. Please contact your local VA approved lender to determine whether your situation meets requirements.

Last, the lender must verify that the veteran is actually eligible. Basically a veteran that served in an armed conflict for at least 90 days will be eligible. Other than that, the veteran would be eligible if they had served 24 months in almost situations or 180 days at many other time periods.

VA loans are a huge benefit to the veteran. Nowhere else can a person qualify for 100% financing for either the purchase or the refinance (including cash-out) of real estate. However, they are a bit complicated. If you believe that you qualify for a VA loan, contact your local lender before you start looking for your new home. There are many pieces to the VA puzzle that can, with the help of an experience loan officer, be put in place ahead of time.

Q&A

Q:

I am self-employed and want to buy a home. Apparently I am not claiming enough income to qualify for a loan. What can I do to fix this situation?

A:

Loans for self-employed persons can be more difficult than for a normal wage-earner. In your situation, the lender will require two full years of federal tax returns to document your income.

This is where the problem arises. The only income they will count is what is being claimed to the Internal Revenue Service (IRS) as your Adjusted Gross Income (AGI). As almost all self-employed persons claim every possible deduction from their income to reduce their income tax burden, the AGI is typically not representative of the true income for any given year.

There are items that are typically claimed as deductions that can be added back to the AGI such as any depreciation that was claimed against real property, any mortgage interest paid on real property, and any property taxes paid and claimed as a deduction.

However, often these adjustments are simply not enough to qualify for the loan amount desired. In this situation, the only way to remedy it is to claim more income for the following year. In this case, the lender will be required to average the past two years to establish what they can consider "effective income".

Another problem that can arise for self-employed persons is if they have claimed less income this year than they did in the previous year (after all adjustments as outlined above). If the income has declined from one year to the next, most lenders will be forced to deny the application due to declining income for a self-employed borrower.

So the best approach to take should you find yourself in this situation is to speak with a mortgage lender prior to filing the current year's income tax return. There are often minor adjustments that can be made that will save you heartache when you decide to buy.

Q&A

Q: When I bought my house, they told me it was a modular home. Now that I want to sell it, they are telling me that it is not a modular, it is a manufactured home. How is this possible and what exactly is the difference?

A: This is a common situation. The confusion comes from the terminology. Many people in the real estate business use the terms manufactured and modular interchangeably. They are not the same thing.

The simplest way to know for sure whether you have a manufactured or a modular home is to look in the basement or crawl space and see if there is a steel frame under the home. If this frame is there, then it is a manufactured home.

Another way to look at is, "is your home two halves stuck together?" If so, it is a manufactured home. A modular home is essentially "stick built" which is the same as if a builder came in and framed it from the ground up.

The problems surface when it comes time to finance the home. A modular home is treated in exactly the same way as any other home. Financing for a manufactured home has many more restrictions.

In the case of conventional loans, it has become very difficult to finance manufactured homes. They have increased down payment requirements and made the minimum credit score restrictions nearly unattainable.

On the other hand, FHA and VA will still approve financing on manufactured homes and treat them exactly the same as a stick-built home with the exception that the home must either have the original HUD tags affixed to the exterior or a Certificate of Origin must be obtained (normally from the originally dealer/builder if possible). A structural inspection must also be obtained to ensure that the builder secured the home to the foundation properly.

So if you wish to sell your manufactured home, you should plan ahead to make sure that the home meets FHA or VA standards, and check the exterior for those HUD tags.

As a last note, a mobile or manufactured home in a park will not qualify for either FHA or conventional financing. In order to finance these homes, you should check with the local mobile home park managers and ask who is being the most competitive on these programs.

Q&A

Q:

I have been shopping for a home and, after I finally found the one I want, I was told by my bank that I don't have enough credit to get a mortgage loan. I explained to them that I have a great job and that I have saved up a decent down payment, but I have always paid for what I needed with cash. I was told years ago by my parents that I should never get into debt, but I guess that's not true anymore. Is there any way around this?

A:

The short answer is "yes," but there is more to this question than just the credit issue.

This first thing that I would like to address is more for the benefit of any other hopeful home buyers out there who may be reading this.

Before you spend a great deal of time looking for a house to buy, you must check with a trustworthy local lender to make sure that you can get a loan to purchase the home you will eventually find. Getting a negative answer after you have already found a house you love will be disturbing at best.

Check the financing first. It can avoid a lot of unnecessary heartache later.

Second is the credit issue. While conventional (bank) loans will almost always require an established credit history as well as a pre-determined credit score requirement, this is not true of loans obtained through the Federal Housing Administration (FHA).

While a bad credit history will almost always cause you problems until you deal with it, if you are in a situation where you have no credit whatsoever, FHA will accept what are called "alternative credit references". These can consist of anything that has been paid in a timely manner for at least 12 months. It could be a utility bill, cable bill, phone bill, or even a monthly or quarterly payment for car insurance. FHA's requirement is that you provide a minimum of two of these bills.

In addition to this, in a "no-credit" situation, FHA will also require that you provide a timely housing payment history for a minimum of 12 months also.

So if you have not established any good (or bad) credit, then don't believe someone when they tell you that you are not in the game; you are. Just contact one of our many excellent FHA lenders here in Michigan City for assistance.

Ask Mike

Q:

I just spoke to my credit union about getting an FHA loan to buy a home and they told me that FHA is no longer available. Is this true?

A:

Absolutely not. FHA is going just as strong as ever. I cannot speak to why they may have said this unless they are unable to offer it at that credit union and did not want to turn away business. There are currently reports out stating that FHA will likely have the largest producing year in their history this year. There are several local lenders who are doing FHA loans every day; give one of us a call.

Q:

I am trying to refinance my home and the title company is telling me that I have a large judgment against me which is stopping the loan from going through. However, I filed a Chapter 7 Bankruptcy three years ago and the judgment was included. I gave them a copy of the bankruptcy papers to them to prove this. Why are they saying I still owe it?

A:

The problem appears to be that your attorney did not file a "Motion to Avoid Lien" with your bankruptcy filing. If that is the case, then unfortunately there is little that can be done. While the bankruptcy does take care of the judgment for most purposes, it does not remove the lien form the real estate you owned when you filed the bankruptcy. The only way to resolve this is to have your attorney re-open the bankruptcy and file the motion that should have been filed in the first place. However, because it has been several years, this may not be possible. I would highly recommend speaking with your attorney about this unfortunate situation. Also, anyone else who owns their home and is considering filing a bankruptcy should keep this in mind; the motion to avoid lien is one of the most important, and most overlooked, parts of the bankruptcy filing.

Q:

I purchased my home 2 years ago here in Michigan City for $92,000. I just recently applied for a refinance with a local lender, and they informed me that my house is currently worth only $81,000. How is this possible? Doesn't what I paid for the house make a difference?

A:

Unfortunately, we are experiencing some of the downturn here in Michigan City also.

After some further research, it appears that we have a 4.5% decrease in values as an average.

The problem we are experiencing is not necessarily that homes are worth substantially less over the long-term. What we are seeing is that, due to the increased sales of foreclosed homes, and the typically lower sales prices, the comparable sold properties in many neighborhoods are justifying lower appraisal values than normal.

In the past, a foreclosed property or a property sold in conjunction with a "short sale" agreement with the existing lender, could be overlooked as it was considered a "distress sale" and was therefore not representative of true values. However, when the sales of foreclosed properties become a larger percentage of the sale activity they can no longer be considered an exception and be overlooked in a valuation analysis.

My personal opinion is that this is a short-term situation. As the market rebounds more normal sales will generate comparable sold properties at the level at which we have been for the past few years. The truly unusual situation in which we find ourselves can change in as little as a few months, so don't let it get to you. As soon as a few homes sell in your area that are not "distress sales," the values can rebound quickly.

So hang in there; your home is still your best investment but must be looked at as a long-term bet. In time we should all be back on track with real estate values.

The News Dispatch is pleased to announce a new weekly feature. Michael Gowan of Hallmark Home Mortgage here in Michigan City will be here to answer your mortgage and real estate related questions.

Ask Mike

Mike,

I recently went through a nasty divorce and, as part of the property settlement, our joint debts were divided up between us. Afterward, I applied for a mortgage and was denied when they pulled my credit because my score was too low. I asked why this was; I always pay my bills on time. They informed me that I had many late payments on my report. They gave me a copy of the report and all of the late payments were on the debts that had been awarded to my ex-husband. When I informed them of this, they said that it didn't really help because the accounts were still affecting my credit score. How do I fix this?

J. in Trail Creek

Dear J.,

You are, unfortunately, in a not uncommon situation. The problem is, when a couple goes through a divorce, and the attorneys split up the marital debts, and then, eventually, a judge signed the property settlement agreement, everyone involved leaves the proceedings believing that the issues have been resolved.

However, no one throughout this process ever seems to remember to mention that not one of the creditors on any of the joint debts has been consulted, nor are they bound in any way by the decision rendered by the court.

What this boils down to is that, even though some of the debts were awarded to your ex-partner, you are still just as liable for the repayment of those debts as you were the day you signed for them. Also, the credit bureaus to which the creditors are reporting have no way of knowing that there has been any change unless the creditor supplies that information to them.

This is clearly a flaw in the system, both in practice and, primarily, in the disclosure requirements for the legal practitioners involved.

My recommendation is that you contact the creditors involved and either attempt to negotiate a settlement to retire (pay off) the debt, or re-negotiate the entire debt (or a determined portion of the debt) in your name only and begin to repay that portion in a timely manner. However, no matter which of these paths you choose, it is extremely important that you get all agreements in writing and that you follow up with the appropriate credit bureau(s) to ensure that the account is being reported correctly.

Please send your mortgage related questions directly to Mike at
mgowan@hallmarkhomemortgage.com.

Anatomy of the FHA Purchase

In this, the last of these articles over-viewing the opportunities presented by FHA financing, I would like to address the various aspects of purchasing a new home (or at least new to you) through FHA.

As stated previously, purchase money mortgages are available with as little as 3.5% down, and as low as a 580 middle credit score. Also, non-traditional credit references are permitted for those with no credit scores.

In La Porte County, you can purchase up to a maximum base mortgage (after down-payment) of $271,050.00. This roughly equates to a purchase price of $280,000.00. This amount is adequate to cover over 90% of the homes sold in Michigan City and surrounding areas in any given year.

While FHA does have property standards to which we all must adhere, they are primarily based on health and safety concerns. The electrical system must be 100 amp service, there can be no peeling paint or broken windows, handrails must be installed for any staircase in excess of three steps, there must be GFI outlets installed near any sinks, and every home must have adequate smoke detectors to protect the residents.

My general rule is that everyone purchasing a home should invest in a home inspection and spend some time reviewing it and making sure they understand every section of it. FHA also highly recommends home inspections and it is important to understand that FHA and FHA approved lenders do not provide any form of warranty for the condition of the home.

Last, there is a little known program available through FHA for the purchase of insurable HUD repossessed homes. Under this program's guidelines, one of these homes can be purchased by anyone intending to use it as their primary residence with only $100.00 down payment and HUD will even pay up to $2,500.00 towards the buyer's closing costs.

So to wrap this series up, I just want everyone to keep FHA in mind when they are considering any form of mortgage financing. When the situation fits, it's unbeatable.

Refinancing Opportunities through FHA

In this, the second in a series of three of an overview of what FHA can provide, I will address the various ways that FHA financing can be used to your benefit in refinancing.

First, FHA interest rates are generally comparable with conventional/bank rates. In addition, you can qualify for an FHA refinance with as little as a 580 middle credit score.

On a refinance intended to reduce either the interest rate or the term on your current mortgage, i.e., no "cash back" at the settlement, you are permitted to finance up to 97.75% of the appraised value of your home. If you would like to consolidate your debt, or even take "cash-out" to fund some improvements on your home, or actually for any purpose, you can qualify for a refinance amount equal to a maximum of 85% of the appraised value. In both of these programs FHA is, far and above, the most aggressive loan program available.

FHA also offers a program called a "Streamline Refinance". This program is for customers who currently have an FHA mortgage who would like to improve the terms of their loan. Under the guidelines for this program a current FHA customer may refinance to a lower rate or shorter term with no credit qualifying, no income qualifying, and no appraisal.

This means that, if you have made your monthly mortgage payment in a timely manner, you can be approved to improve your terms regardless of your other credit. No income qualification is required, therefore the only necessity is that your lender verbally verify with your employer that you work there. Last, there is no requirement for a new appraisal; not only does this save the added expense of a new appraisal, it eliminates any worries regarding possible value decreases or property condition problems.

So any time you are considering refinancing your current mortgage, remember to keep FHA in your thinking; it can really come in handy.

Call any of your excellent local FHA lenders for assistance or to answer your questions.

FHA – What is it?

The national media is still announcing that, if you want to finance a home, you need a 20% down payment (or 20% equity) and a 700 credit score. Everyone must understand that this is not true.

Through FHA (Federal Housing Administration) financing, a borrower can qualify with as little as a 580 middle credit score and only 3.5% down-payment.

FHA exists to provide mortgage insurance on loans made by approved lenders. Simply put, mortgage insurance insures the lender in case of a loss due to default by the borrower, which results in a claim being paid by FHA to the lender. It is the only government agency that operates solely from self generated income and is the largest provider of mortgage insurance in the world, having insured over 34 million loans since 1934 when created by an act of Congress.

Before FHA was created a home buyer was typically required to put 50% down and the loan was required to be repaid over a 3-5 year period. This resulted in very few home owners and many renters; only 4 of 10 citizens owned their own home.

FHA loans can be used to purchase or refinance 1 to 4 unit owner-occupied homes and are not limited only to first-time home buyers as is widely believed.

As stated above, the minimum credit score to qualify for an FHA loan is only 580, so it is by far the most aggressive program in this regard. In addition, if a borrower has NO score, they can still qualify by providing non-traditional credit in the form of a good 12-month rent rating and two other satisfactory references from utility companies, insurers, telephone providers, etc.

FHA does have debt to income ratio limits (the ratio of your total monthly debt divided by your gross monthly income is typically limited to 43%), but these guidelines can be exceeded when accompanied by compensating factors such as higher than required credit score, assets in reserve after closing, etc.

So FHA does have guidelines that must be followed but they are by far the most lenient of the loan programs and exceptions to these rules are granted on a daily basis. Contact any local FHA lender for help you with the specifics of your transaction.

All is Not Lost for Troubled Homeowners

Many of our fellow citizens are finding themselves recently in this unenviable position: some financial trouble surfaced, the bills started falling behind, and the mortgage, typically the largest of the monthly bills, ended up being the hardest one to meet in a timely manner. Once this snowball begins its downhill run it can be extremely difficult to stop or even slow its prgressively increasing momentum.

Once your mortgage payment is past thirty days overdue, then most mortgage servicers will refuse to accept any payment less than the full amount due including any late fees. Here is where the miscommunication usually begins.

The mortgage company does NOT want to foreclose on your home! Though every piece of correspondence you receive from them may seem like further proof that they are “after your property”, it is actually the furthest thing from the truth. It is in everyones’ best interest, and most especially the mortgage servicer’s, that you get back on track and continue sending them their monthly payment. This payment is how they make their money.

Foreclosing on any property is an absolute loss for any mortgage company and the last action they want to take.

However, our laws are written in such a way that, once a mortgage note is past thirty days overdue, it is only at that point that the mortgage servicer can legally begin "pre-foreclosure" proceedings. It is very important to a mortgage servicer that, should a foreclosure become unavoidable, they have every option to expedite the long, drawn out process.

Again though, in accordance with the law of the land, should they accept less than a payment of less than the full amount due, then the “clock” stops and this can seriously delay the proceedings in the future which will result in even more cost to the investors.

So any discussion of the the nerve wracking situation of being behind on one’s mortgage must begin from this understanding.

So now what? The first, and most important thing to keep in mind is communication. The mortgage company does not want to take your home and you want to keep your home; you are on the same side.

However, if the payments are not being made, and the mortage company is not hearing from you, (sometimes peoples make the mistake of not even taking the mortgage company’s calls) then they have to assume that you no longer intend to make the payments or keep the home.

It is of the utmost importance that you speak with your servicer to let them know that this is not the case. Once they are aware that you have run into some problems but are making an effort to get back on track, then they will, in all likelihood, do their best to assist you.

One last note for this column and that is that you will probably be speaking with the collection or foreclosure department of the mortgage company. The employees that work in these departments are harrangued and screamed at for, let’s say, seven out of the eight hours of their work day.

You have to approach these individuals from this standpoint. They are not your enemy. Keep in mind that the person on the other end of the line could have just ended a telephonically communicated drubbing that would give many of us nightmares immediately prior to picking up your call.

So make sure that they understand right up front that you are not going to add to their stress, but maybe even give them a bright note in their day and try to work with them. You will be amazed at how just this little amount of effort to empathize with the person on the other end of the phone line can change the entire tone of your dealings with your mortgage servicer.

However, should you end up with one of those people who seem to come to work to take out their aggressions on the world, (we all know they’re out there) remain calm and politely ask to speak to their supervisor. You’ll get much farther by approaching it in this manner.

In my next column, I’ll start outlining the list of options that are available once you find yourself in this position. There are more than you may think.

This is an article I wrote a while back for the News Dispatch.....

A Bold Step Towards the Future For Our School System

On May 19th we will be voting on a referendum on whether to allow the Michigan City Areas Schools to finance the proposed Career Center adjacent to the Michigan City High School.

This presents an opportunity to make the clear statement that we will no longer accept a school system that is sub-standard; that we understand that our most precious resource is our children and we fully intend to make their success our top priority.

Model Career Centers across the nation have resulted in decreased dropout rates and behavior problems, increased graduation rates and have given students a clear view of their possibilities by working with them hand in hand to prepare them for their chosen path.

Through partnerships with Purdue North Central, Ivy Tech, Michigan City Chamber of Commerce, and local businesses, we can show these students that there is a reason to continue their education; that there is a good future awaiting them after graduation, and that they have support in the schools and the business community to help them achieve their goals.

Last, as anyone in the real estate and business communities knows, the reputation of our school system is the primary reason for families choosing not to re-locate to our community. By making a bold statement that we are addressing the failings of our schools we can make progress toward changing that perception, and the clearest way to demonstrate that is to overwhelmingly support this referendum.

Don't Believe It

This column was first published (accurately and prudently edited) by the Michigan City News Dispatch a few months back...

Don’t Believe It!

The national media has been repeatedly reporting recently that “no-one can get a mortgage to buy a home unless they have perfect credit and at least 20% down payment”.

This is patently untrue.

Mortgages for primary residences are still readily available with as little as 3.5% down through the Federal Housing Administration (FHA).

In Northwest, Indiana, for instance, the maximum loan amount equates to $280,000 for a single family home intended as your primary residence. As our average purchase price is nowhere near that high, this financing meets over 90% of our needs locally.

At last count there were over 1,000 single family residences on the market here in La Porte County. This presents problems as well as opportunities. The primary problem this presents is that there is simply too much supply. Of course, according to the laws of economics, too much supply results in lower prices.

The media continually reporting that no-one can purchase a home without perfect credit and a large down payment is further reducing demand. These two items, coupled with the disastrous economic news with which we are being deluged on a daily basis, is creating what is a “perfect storm” of effects which can only result in lower property values, less purchase activity and the resulting slowdown in activity for all of our local merchants.

We, the business leaders of La Porte County, have to make a point of spreading the word to everyone we know that the news we are hearing nationally is simply not true locally. Now is actually a very good time to purchase a home!

Interest rates are still low. Through FHA, purchase money mortgages are readily available to those with good credit as well as those with imperfect credit (as low as a 580 credit score can still qualify), and the home prices are reasonable.

It is understandable how the news came to be presented in this light. Nationally, home prices have dropped drastically. Also, in many markets, “jumbo” loans (in excess of $421,000.00) are the norm. In some of these markets, what they are saying is absolutely accurate. However, I have been in the mortgage business in Northwest Indiana for over 17 years and have yet to write a “jumbo” loan.

Our area has been, is now, and will in all likelihood continue to be a “bread & butter”, "working class" area (insert your term here).

In addition to this, many of the problems with the mortgage market and home values nationally are due to regionally limited areas in which values rose exorbitantly over the past several years, many times with no underlying justification other than inflated demand. When these areas returned to what are actual values, it appeared they had depreciated.

However, in my opinion (for what it’s worth) in reality, they were never really worth the higher values, but were “trading” daily for those amounts never the less. Does any of this sound familiar given what we are hearing from the stock market every day?

Here is the upside, and it is a major, in my mind the primary, fact in our situation: we never had our property values here in Northwest Indiana “bubble”.

Ask yourself, did my home appreciate in value in the past several years by 50, 75, 100%? In almost all cases, the answer will be no. Because much of the country enjoyed the “profit” of the “increase” in value, it seems to me that we in Northwest Indiana should not have to share in the cost of the resulting fiasco.

But, the media is telling us every day that we are in trouble.

This not universally true.

We need to get it through our heads, and through the heads of our families, friends, co-workers, employers, employees, community leaders, and local media, that the entire country is not Phoenix, or Las Vegas, or Miami. The housing market in many areas of the country is fine. We will all be impacted by this mess in many ways; it is unavoidable.

However, we do not have to let ourselves be impacted inaccurately and for no reason.

We have great people here (the fundamentals of our local economy are strong). We have an abundance of available homes. We have readily available financing through all of our local FHA lenders with as little as 3.5% down which will be sufficient for many of the available homes.

It seems to me that we’re in pretty good shape. But you won’t hear that on TV.


Michael R. Gowan
Northwest Indiana Sales Manager
Hallmark Home Mortgage
219-874-1088 (work)
219-221-1893 (cell)
mgowan@hallmarkhomemortgage.com

So it's a touch later than when I first wrote this - it doesn't make it any less true!)