Bush Announces New and Easier FHA Loan Requirements and Credit Qualifications – Thousands Get Help

A new law passed recently will undoubtedly help struggling home-owners and the real estate market with it’s woes of record foreclosure numbers and struggling families unable to make their mortgage payments. If you continue reading this article, you will learn details of a new bill recently passed that has been designed to help families that face losing their homes due to high adjustable interest rates. The new and easier requirements and qualifications will be listed at the bottom of this article…

FHA Loan Requirements Relaxed

FHA Loan Requirements have been relaxed by the Recovery Act of 2008. The Housing and Economic Recovery Act of 2008 should provide relief of thousands of Americans that are facing foreclosure. Many homeowners with subprime loans are now able to refinance their subprime loan mortgages into more affordable fixed rate mortgages because of this new law.

FHA Credit Qualifications and FHA Loan Requirements have now been relaxed. A borrower can now find it easier to qualify with a low down payment, lower closing costs, easier credit qualifying, and straight-forward mortgage terms that are easy to understand and won’t cause a major burdon if rates go up in the future. If you are in the market of refinancing your home, and because of the FHA relaxing the requirements, now may be the best time in years to qualify for your new fixed rate mortgage.

FHA Comes to the Rescue

President Bush recently announced that the Housing and Urban Development’s Federal Housing Administration, or (FHA), will attempt to help over 200,000 plus families try to avoid foreclosure by offering an enhanced refinancing program that becomes effective immediately. The New Program and enhancements will be called the FHA Secure plan.

The FHA Secure Plan will qualify applicants based on more relaxed qualifications in order to help those families that do make payments, but due to the continued increases in the monthly payment, have been strained by the continuous increases in monthly payments. Homeowners who made regular payments before the loans were reset to newer and higher payments, will usually qualify for the new FHA Secure Plan.

Higher Insurance Premiums for Higher Risk Applicants

Also, FHA has initiated risk-based premiums that match the borrower’s overall credit profile to an insurance premium that is base on their score. Therefore, riskier borrowers will have to pay higher mortgage insurance premiums. This should allow many Americans whose families who were having trouble making their payments under the initial “teaser” terms of sub-prime loans make consistent loan payments that don’t go up unexpectedly. So far the response has been overwhelmingly favorable from homeowners desperately seeking alternatives and solutions to their rising mortgage payments.

With the combination of the FHA Secure program and risk-based insurance premiums, the FHA will soon be able to return to the role that it was originally designed to play, whish is, bringing stability to the real estate market by helping break the current cycle of foreclosures, price depreciation, and debt, by creating much needed liquidity in the now overly strained real estate mortgage market.

“FHA Secure” Loan Qualifications…

To qualify for FHA Secure, eligible homeowners must meet the following five criteria:

  • A history of on-time mortgage payments before the borrower’s teaser rates expired and loans reset;
  • Interest rates must have or will reset between June 2005 and December 2008
  • Three percent cash or equity in the home;A sustained history of employment
  • A sustained history of employment and,
  • Sufficient income to make the mortgage payment.

For more qualifications and details…

FHA Loans Can Still Provide Many Benefits

Many prospective homeowners and mortgage professionals have heard that the regulations for FHA loans are changing. After the sub-prime mortgage industry died down, the FHA home loan program became the scapegoat for any and all problems associated with the housing market. Critics believe that the FHA loan program is too lenient on its credit requirements. Because of this constant scrutiny and other outside criticisms, the FHA has decided to make some significant changes to its qualifying requirements for its home loan program.

In past years, the FHA home loan program did not require a specific credit score in order to qualify for their loans. Although most lenders required at least a 620, many critics of the FHA’s program believe that the lack of a credit score requirement has led to the large number of defaults after the housing market crash. In order to prevent this from happening in the future, the FHA’s new rules state that a borrower must have at least a 580 credit score in order to take advantage of their 3.5% down payment program. If an applicant has a credit score below 580, they must put at least 10% down on a new home.

A protection that has always existed on FHA loans is the required mortgage insurance. Mortgage insurance provides benefits for both the homeowner and the lender. This type of insurance helps the lender because it ensures that they will be paid in case of borrower default. Because the lender knows that the loan is insured by the federal government, they are more likely to offer favorable terms to the borrower.

A new change to the FHA’s mortgage insurance raises the up front premium by half a percent from 1.75% to 2.25% of the loan amount. This effort is a way to ensure the sustainability of the FHA loan program. The FHA is currently trying to obtain Congressional approval to increase the annual premium. If this approval is granted, the FHA would reduce the amount by which they increased the up front premium. Some FHA officials have discussed making the premiums risk based, which would mean that the premiums would vary depending on credit score and history.

The last protection which the Federal Housing Administration has decided to implement with these changes is a reduction in allowable seller concessions. When these new regulations go into effect, the seller will only be able to provide 3%, whereas before, the seller could provide up to 6% of the purchase price. These regulations are all set to take effect in April, 2010 and are an effort to increase the quality of FHA loans.

Only time will tell if these regulations will have the desired effect and increase the quality of the FHA home loans issued. Many homeowners are in agreement with the changes because they want the housing market to bounce back quickly and believe that the best way for this change to occur is to require more of prospective homebuyers. Other homeowners believe that, while encouraging people to improve their credit is beneficial, restricting home loan applicants does more to hinder the housing market rather than stimulate it. Hopefully, these new changes will have a positive effect and help the housing market grow and prosper.

A Few Hints For Shopping For Mortgage Loans

When you are buying a house there are two parts. One of them is rather easy and one of them tends to confuse a lot of people. Even if you have to tour a number of homes to find one that suits both your needs and income it is still the easy part (and also the fun part). The harder and confusing part is shopping for mortgage loans. It is a large investment for anyone so you need to make a wise choice. When dealing with such a large amount spread over such a long time even the smallest numbers will add up and change the overall cost of the loan. By knowing the terms used, watching the often overlooked fees, and knowing a few hints can make mortgage loans make a lot more sense.

To start with, you need to know what a premium rate is. There are two interest rates in mortgage loans and home financing. There is the market rate and the premium rate. The market rate is what the loan will cost the bank. The premium rate is what they are going to charge you. If the market rate, sometimes called the Par rate, is 5%, the bank only makes money on what it charges above 5%. In other words, you would not expect a 4% premium when the Par rate is 5%. That would mean the loan is costing the bank 1%.

Next there are the fees. Banks never get sick of thinking up new ones but they cover the administrative cost of giving you the loan. There are processing fees, underwriting fees and the list goes on. If they are not addressed as such you can be quite sure that they have worked their way into the offer somewhere.

Finally there are the Points we always hear about when discussing mortgage loans. Discount Points are easy to understand but most people do not know how to use them to their advantage. 1 Point is a fee equal to 1% of the loan and are the largest fee the borrower pays. Often a lender can offer an interest rate that is below the Par rate by the charging higher points. Don’t worry, you can still make them work in your favor.

When the bank makes you their offer on the loan it is a mix of all these factors. Every lender does it their own way and this is why shopping for mortgage loans is important.

The best way to look at it is the length of time you plan to be in that house and paying that mortgage. Interest rates are more critical to people who plan on staying in the house longer. Because of that, it is generally best to pay higher points for a lower interest rate. The opposite is then true for the people who plan only to stay a shorter time, perhaps 5-10 years. Yes, they will pay a higher rate but it is for a short time so it does not hurt them as badly and they saved a lot of money to move in. That money might be better spent else where. Paying off higher interest credit cards or auto loans might be a good choice.

Answers to All Your Questions Regarding Loan and Mortgage Protection Insurance

Loan and mortgage protection insurance is designed to help you, and your family keep up-to-date with your loan repayments, when life events happen unexpectedly and regardless of mitigating circumstances. Put simply, mortgages or loans are often long-term commitments, so it makes sense to protect them.

Do You Think About the Unexpected?

There are a number of reasons why even the most responsible money managers may get into financial difficulty. Any of the following reasons can strike at any time and will leave you struggling to make your loan repayments:

>> Change in health – due to sickness, injury or disease

>> Loss of income – due to involuntary unemployment, or

>> Death and Terminal illness – when cancer, stroke or heart attack, etc. may occur.

Loan and Mortgage Protection Insurance – The Benefits

There are a number of benefits you can get from having a loan and mortgage protection insurance plan in place, which include:

>> The premiums are fully tax-deductible

>> Financial protection (you will save your family the worry of lost income)

>> You will save at tax time (you will get more money back in your tax return, and this means more money in your pocket)

>> You can choose how long you would like to receive cover benefits if you are injured and unable to work

>> Benefit payouts for total and permanent disability

>> A benefit amount (e.g. hospital cash) can be calculated for each night you spend in hospital

>> Associated accident costs can be provided to cover incidental costs (e.g. counseling and rehabilitation).

Common Questions regarding Loan and Mortgage Protection Insurance

Is Lenders Mortgage Insurance (LMI) different to Loan and Mortgage Insurance?

>> LMI – is compulsory and covers the lenders/credit providers if they lend you 80% or more

>> Loan and Mortgage Protection Insurance – covers your mortgage repayments in the event of death, sickness, unemployment or disability

Does the Unemployment Benefit apply if I am Self-Employed?

Yes. You may make a claim if:

>> You have worked in your business (for an average of 20 hours per week) for 180 days immediately prior to becoming unemployed, or

>> Your business has permanently ceased trading

What Happens to my Policy if my Unemployment Claim is Successful?

Your cover continues for death or terminal illness after making a successful unemployment claim, and your premium and benefits will remain the same.

Who will be the Beneficiaries?

>> For a single life policy, the benefit will be paid to the policy owner or their estate, and

>> For a joint policy, the benefit payments are made to the policy owners jointly or to the surviving policy owner in the case of the death benefit

What happens if I need to make a Claim and I have Other Insurance Policies?

Upon acceptance of your claim, the loan or mortgage protection policy will payout a lump sum benefit directly to you or your estate and this will be in addition to any other payments you may receive from other insurance policies.

What if I am a Smoker now, will my Premium Change if I Stop Smoking?

>> Yes. Your premium can be changed to a non-smoker rate if you stop smoking for 12 consecutive months, and

>> You will need to make a declaration that you have not smoked any substance during this period

So, now that you are familiar with how “Loan and Mortgage Protection Insurance” can protect you and your family against any of life’s unexpected events, contact an insurance broker. He/she will understand your situation and suggest the best possible insurance policy for yourself.

Your Guide To The VA Home Loan

Consider this: a mortgage program offers certain Americans a home loan with a zero down payment and no private mortgage insurance requirement. In addition, closing costs are limited and if the home is newly constructed, the builder must supply the buyer with a one-year home warranty.

Despite the obvious perks of the program, only 10.5 percent of the nation’s nearly 22 million veterans take advantage of this aspect of their Veterans Administration benefit offerings. When asked why, 33 percent of those who responded said they were completely unaware of the benefit, another group said that they went with the FHA loan because they assumed it was “easier” to obtain.

Obviously, the VA could be doing a better job informing (especially young) members of the military, veterans and surviving unmarried spouses about the VA home loan and the mortgage industry could be doing a whole lot more to get the word out. So, today we’ll take a look at the program and learn why it may just be the best loan product on the market.

Remember, we aren’t VA, mortgage or financial experts, so consult with the appropriate professional should you have any questions regarding the VA home loan program and its benefits.

The basics of the VA home loan program

V.A. home loan

Like the Federal Housing Administration (FHA) program, the U.S. Department of Veterans Affairs doesn’t actually make loans, but offers lenders a guaranty, if the veteran defaults on the loan. Should this happen, the VA will pay from 40 to 50 percent of the balance of the loan (the percentage depends on the size of the loan).

As you can imagine, this promise enables lenders to relax when faced with a borrower who may have little or less-than-perfect credit and a lower-than-average income.

So, what can you do with the VA home loan program?

Buy a home (a condo, too, if it’s in a VA-approved community)
Build a home
Simultaneously buy and rehab a home
Buy a lot and/or manufactured home
Is the VA loan harder to qualify for than the FHA loan?

No-one quite understands why so many current members of the military and veterans assume that the FHA loan is easier to obtain. Although there are additional steps you’ll need to take when pursuing a VA loan, they are quick and somewhat easy (if you have the right lender).

To qualify, you’ll need to say “yes” to at least one of the following questions:

1. Were you on active duty for at least 90 consecutive days during wartime?
2. Have you served at least 181 days of active duty during peacetime?
3. Have you served in the National Guard or Reserves for more than 6 years?
4. Are you a widower or widow of a military service member who died either in the line of duty or as the result of an active-duty service-related injury or disability?

The biggest advantages of the VA loan

As previously mentioned, the biggest advantage of the VA home loan is that you won’t have to put any money down. Now any conventional or FHA-backed loan for which a borrower submits a less-than 20 percent down payment will require the purchase of mortgage insurance (the Mortgage Insurance Premium in the FHA loan and private mortgage insurance, or P.M.I., with a conventional loan).

These policies cover the lender in the event the borrower defaults on the loan. This insurance, which benefits the lender should the borrower default on the loan, can add quite a chunk to your monthly mortgage payment. For instance, FHA’s annual mortgage insurance premium for a 30-year fixed-rate mortgage with 3.5 percent down payment is 0.85 percent annually.

The VA home loan has no monthly mortgage insurance premiums, closing costs are limited and there is no prepayment penalty. With no monthly mortgage insurance premium, the veteran’s house payment each month will be less than if he or she had obtained an FHA loan.

The VA home loan process

Yes, there are a few more hoops to jump through when dealing with the VA. Eligibility requirements, however, are much like those for FHA and conventional loans:

– “Suitable credit.” The VA doesn’t really explain what they mean by “suitable.”
– You should be able to prove that you have the income to cover all your bills and the house payment.
– You must live in the home (you can’t rent it out).
– You must present a VA Certificate of Eligibility (C.O.E.). Most VA-approved lenders can access your COE online or you can access your C.O.E. on the eBenefits.com page of the VA website.

The biggest hurdle for vets is that these loans are provided by lenders and they all have their own guidelines. Shop around until you find one that you feel you can work with.

Erika Bentley
Bentley Realty Group
Keeping Real Estate Simple!

Mortgage Loan Closing Costs for Refinance Loans and Home Purchase

If you are going to obtain a mortgage loan, for whatever purpose (home purchase or refinance) you are going to pay closing costs…period. Let me clarify regarding a purchase of a home…the seller may pay some or even all the closing costs in a transaction, but it essentially works out to just lowering the purchase price of the home and reduces or eliminates the need for the buyer to come up with the cash or finance the closing costs.

While many mortgage lenders, brokers, bankers, advisors, or whoever may tell you that you can get a zero closing cost loan, the fact is, they simply don’t exist. One way or another you are going to pay/incurr closing costs.

That said, there are many ways to pay those closing costs:

  1. On a purchase, the seller may agree to pay some or all of the closing costs which reduces your cash outlay for closing costs
  2. In most cases, you may opt to take a higher interest rate in order to reduce or eliminate closing costs
  3. You can pay the closing costs in cash, at the closing table, eliminating the need to pay finance charges on the closing costs
  4. You can normally opt to have the closing costs included or rolled into the loan itself, reducing your cash outlay at closing

The above list does not cover all the possible options, however, it covers the basic options. The other options will simply be some variation of those listed above.

Estimating the closing costs
Items that are part of, or considered closing costs include:

  • Loan origination fee
  • Lenders fee – if using a mortgage broker
  • Credit report fee
  • Appraisal Fee
  • Processing Fee
  • Wire transfer Fee
  • Underwriting Fee
  • Survey
  • Title insurance
  • Closing or Escrow fee
  • Filing Fees
  • Attorney Fees
  • Pest inspection
  • Recording and/or transfer fees
  • Document Preparation
  • Notary Fee
  • Mailing or courier

Those are the major items that can be included as closing costs. Some are required, some are not. Some may be negotiable, others are not. Some will vary from lender to lender, lender to broker, broker to broker, or title company to title company, others will not.

Some items that are NOT considered closing costs, but need to be taken into consideration when trying to estimate any cash out of pocket or you loan size, include the followng:

  • Pre-paid interest
  • Mortgage Insurance Premium
  • Hazard insurance (homeowners insurance premiums
  • Reserves for payment of future property taxes, homeowners insurance, and mortgage insurance premiums
  • Flood insurance premiums
  • Property taxes that are due at the time of closing

Important Facts

  • Title insurance is regulated by the state insurance commission, varies from state to state, and is not negotiable
  • Flood insurance, if required (this is determined by the location of the propety, if it is in a flood zone) is not negotiable as to whether or not you need it, however, premiums are determined by whoever you choose as an insurance provider
  • The fees which are charged by the title company you close with include, but are not limited to; recording fees, fed-ex or mailing fees, closing or escrow fees, document preparation, and attorney fees (where required), do vary from title company to title company.
  • You have the right to choose the title company you close with – however, in a purchase transaction, in most cases, the seller has already established or set up preliminary escrow with a title company. That does not mean you can’t demand that it be changed. Just keep in mind that the seller may not be willing to change the title company and your sales contract may/should state where the closing will take place. That still does not mean that you can’t choose to change it, just expect some resistance
  • In most cases, an appraisal is required – the only exceptions to this are normally small home equity lines of credit and/or very low Loan to Value loans. In either case, the lender will make the final determination if an appraisal is required
  • It is a requirement that you be given a Good Faith Estimate of settlement charges within 3 days of applying for a mortgage loan – if you don’t get one, automatically, make sure you ask for one
  • You may only be charged the exact cost for the credit report and the appraisal

This article is simply trying to explain what closing costs are along with some specific facts about some general closing costs. It is just intended to give you an idea of what may be included as closing costs so you have a basic idea as to what to expect.

I would always suggest that you do some shopping around before deciding on a lender or broker to handle your mortgage transaction.

Obviously, the best source of good information is from friends and/or family members regarding someone or a company that they have used in the past. A referral to a good company or individual from someone you know and trust is normally the best place to start.

Ok, back to closing costs. It is imperative that when you are comparing costs from one company to another that you have all the facts and information straight from all companies that you are comparing. The Good Faith Estimate, in what you will normally utilize to compare costs. You simply need to make sure you are comparing “apples to apples”.

This is often easier said then done.

The most important area of comparison when comparing lender to lender or broker to lender, or broker to broker, is the top portion of the Good Faith Estimate. The origination fee and below in the “Items payable in connection with loan” is the heading of the section – it is numbered as 800.

This is really the only section where the company you are dealing with has any real control over. Unfortunately, the confusion normally begins with the lower sections of the Good Faith Estimate and here’s why;

1) Some companies will underestimate the Title Fees and recording fees

2) Some companies will try their best to give you accurate numbers for these other sections

Why do they do that?

Well, some will underestimate the costs simply to try to get your business. The unfortunate part about this, other than the outright lying, is that you will typically not find out about it until you are at the closing table. This is exactly what they are hoping for, taking the chance that you will figure it is too late to do anything about it and simply sign the documents.

Why can’t they give you exact numbers?

For some items they can, while other fees are strictly dependent upon a third party and they simply have no control over those costs. However, any mortgage broker or lender that has been in this business for any length of time, can certainly do a good job of getting you very close in your estimates of closing costs.

Let’s look at an example:

I am in Texas. Although I do some loans outside of Texas, I am most familiar with Texas and the corresponding fees so I will use Texas as an example.

Being in Texas, I know, based on the size of your loan, how to estimate your title insurance policy and escrow fees (the title company charges). Since, as stated in my last post on closing costs, title insurance is state regulated and the very same amount at every single title company based on your loan size, I can tell you with good certainty what your title insurance costs will be. Additionally, I can give you a very close estimate on the title company closing costs. So, with that information, there is no excuse while I can’t give you a very close approximation of all the fees associated with the title company.

Although the insurance and property taxes are not considered closing costs, they are still a very important part of the real estate transaction. And, again, the consumer is very concerned about their total cash outlay at closing, be it closing costs or pre-paid items. Therefore, I feel that it is essential that you get good information about these items as well on your Good Faith Estimate.

Getting back to the Texas example…I know, being in Texas, approximately what your homeowners insurance is going to cost and how many months of reserves are going to be required at closing. It is the same with property taxes. In Texas, for example, property taxes are always due in December (actually, they are not considered late until the end of January). So, for example, if you are refinancing your mortgage, in Texas, during the month of say, March and your first payment is not due until May 1st, then it will be required that the reserves for the taxes will be 5 months. The tax rates are published and are available, and besides that, I can estimate within a few hundred dollars, the actual property taxes on the property without knowing the exact caluclation for the city that the property resides in. If you simply use one of the higher tax rates in Texas for the estimate, then your estimate will be very close if not actually a little higher than the actual cost at closing. The other charges of the appraisal and a survey (if needed) are also costs that can be easily estimated very closely.

The bottom line is that any lender/broker should be able to give you very close estimates. As a matter of factly, there is no reason why the Good Faith Estimate should not be within a few hundred dollars of the actual costs and, hopefully, it is over-estimated so that the situation I spoke of earlier (coming to closing and finding out your costs are actually substanially higher) does not occur.

Unfortunately, there is nothing out there, as far as the law is concerned, that states that any Good Faith Estimate has to be within a certain dollar amount of the actual costs. At this time, you are having to rely on the person you are dealing with to give you good numbers. It has always been my practice to get my Good Faith Estimates as close as possible, and even over-estimating in cases where some costs are not known perhaps due to some unusual circumstances or not knowing, at this point in the process, if an item such as a survey will be required or not.

There is simply nothing to gain by under-estimating closing costs on the Good Faith Estimate. It tells the customer up-front, how much cash they are going to need, and saves any unnessessary aggrevation for the customer later, so why not get the numbers as close as possible?

On the other side of that issue, you are depending on someone to estimate the fees of a third party. As I hope I have made clear, while it is clearly not possible to get the exact numbers of the third party fees, it is surely very possible to get very close to the actual numbers. It simply takes some experience and a little bit of time. If you happen to get a loan officer, whether they work for a lender or a broker does not really matter, that is relatively new to the business, then they may not have the experience to get close to the actual numbers on their own. This is not an excuse at all, as there is surely someone there, who they work for, that has the experience to get the numbers close for you.

As of this writing, the best thing that you can do is gather the Good Faith Estimates of the companies that you have been talking to and do your best to make the comparisons accurate. With the information above, you should be able to work through the costs associated with the loan and discount those that you know will be very close, if not exactly the same, no matter who you decide to go with, and compare the remaining costs.

Once you have eliminated the essential “fixed costs” you can narrow your comparison down to the “variable costs” (for lack of a better term) for each companies Good Faith Estimate. One last note that is critical to comparison shopping is making a comparison regarding the rate and term of the loan along with the Good Faith Estimate to make your final decision. As stated in an earlier post, one company may offer you a better rate, but higher closing costs, while another is offering lower closing costs but a higher interest rate. That portion of the comparison is for another discussion and will be included in another post, however, the gist of that comes down to what situation works best for you.

Just remember that in all cases, you have the right to choose the title company, and, in most cases, even the appraiser (albeit with some limitations). If a company tries to tell you that you “must” use their title company to close the loan, you can choose to push the issue as there is no such requirement. To the contrary it is not lawful for anyone to force you to utilize any particular third party service. However, do keep in mind, that if you are buying a house, while you still have the same options of choosing the title company, a lot of times it is simply easier to use the title company that has been designated either by the seller or the builder. That is not to say that you should not comparison shop other title companies if you feel strongly about it, all I am saying that in a purchase transaction it is typically easier to use the designated company (especially if buying a new home from a builder) as chances are they are already familiar with the property and have already obtained a preliminary title report on the property itself.

Find the Best Mortgage Insurance Premium Plan for You

A mortgage insurance premium plan is required to be made in order to get a loan from various companies. It is for the bank’s own protection. It markets the risk of mortgage insurance quotes between the lending company and the plan provider. Mortgage expenses may be deductible. In order to be eligible, the plan cover must be for house purchase debts on a first or second house. Home purchase debts are loans in the case of which profits are used to build or buy and improve your residence. Thus house loan plans on cash-out refinanced and help-home equity loans won’t be eligible for the reduction.

Mortgage insurance premium expenses paid during the year are reported on specific forms which are sent out by the lender. Prepaid expenses can be designated over the term of the loan or 84 months (whichever period is shorter) under a judgment from the IRS (Notice 2008-15). Home loan expenses are itemized tax reduction type of costs and are revealed on Routine a Line 13. This is a separate short-term tax. It is efficient for mortgage plans released on or after Jan 1, 2007. Home loan insurance is a protection plan type of cover that reimburses lenders due to different types of loans obtained by them. It is a financial guaranty for the lender. When you are purchasing a home with less than 20% down or refinancing to 80% more than your home value, you have to choose a property type of insurance. It makes the lender’s money safe.

Many individuals think that a mortgage insurance premium plan is needless. But it allows individuals to buy their first house this way. Highest possible individuals cannot provide the whole price of their house by themselves. Mortgage insurance quotes help them get the money from various loan companies. Generally, if you make a big down transaction and have a plan to pay down your mortgage quickly, you will be able to decrease the amount of money that you owe. Generally, house mortgage interest is in fact any interest you pay on a loan that you have decided to secure with your house (main house or a second home). The loan may be a home loan used to buy a house, a second home loan, a line of credit or a house loan. You can deduct the house mortgage’s interest if certain conditions are met. You need to become familiar with such various conditions and make sure you follow the necessary steps to make the plans according to them.

What is Premium Financing for Life Insurance?

Premium Financing for Life Insurance can allow you to have what amounts to basically free Life Insurance. Just how does this work?

The basic idea behind premium financing for Life Insurance is that a loan is made by a bank or other financial entity and the proceeds from the loan are used to pay the premiums on a Life Insurance Policy. The loan is repaid with the proceeds from the death benefit. The loan can be collateralized or not although the cost of the loan will be considerably lower if it is.

Most financial advisors view premium financing as be a good option for individuals who have a large amount of non-capital assets such as real estate. The non-capital property can be used as collateral for the loan. The loan can be used to purchase a large amount of insurance without the need for the client to use any capital for the payment of premiums. This is a good way to get assets that may not normally be available for investment purposes to produce a better return.

Premium financing is considered to be a better deal when bank interest rates are low. This is because what is actually happening is another type of wager on performance. The borrower is wagering that the performance of the Life Insurance Policy will exceed the interest rate of the loan. During periods of low interest this wager has a much better chance of succeeding.

Another factor that makes premium financing more attractive is a shorter expected lifetime. The shorter the term of the loan, the less the interest payments will be. It would not be as wise to use premium financing to purchase a policy for a 21 year old man with the idea of paying off the loan with the death benefit. The life expectancy of the young man would be 50 or 60 years and the interest would have to be paid for this entire period. On the other hand, it would make more sense to do it in the case of a 65 year old man.

There are quite a few different methods of premium financing. It would be impossible to discuss them all here. The basic idea remains the same from plan to plan. It is to borrow the money to pay the premium with the idea of repaying the loan with the proceeds of the Insurance. If you have a large amount of collateral that is not being fully utilized, you might be a good candidate for such a plan.

Loan Protection Insurance Guide

When it comes to loan protection insurance, there are a few things you should understand before deciding if it is right for you. You need to understand both how it works and what this type of coverage costs.

How Loan Protection Insurance Works

Loan Protection Insurance is a type of optional insurance. It will make a monthly payment for you, if you are unable to make your monthly payment on a loan due to a predetermined set of circumstances. These circumstances may include unemployment, sickness, or an accident that causes a temporary disability. In most cases, you must be employed for at least six months when you purchase this insurance coverage.

Loan Protection Insurance can be used on a car loan, a personal loan, credit cards, or another type of financial loan. There are many choices available, so shop around to find your best price. You do not have to purchase loan protection insurance from the same place you got your loan. It can be purchased as a separate policy.

Time Frame and Waiting Periods for Loan Protection Insurance

If you do lose your job, become ill, or are involved in an accident, your monthly payment will be made for you for a specified amount of time. Some policies will make your payments for 12 months, others for 24 months. This is all predetermined before you sign your policy papers.

For most insurers, there is a waiting period before the payments will start. Some companies require 30 days of continuous unemployment before they pay. Other companies will require you to wait 60-90 days after an accident or illness before they pay. This is all part of the terms and conditions of the policy and will affect your premium payment depending on the coverage you want.

The Cost of Loan Protection Insurance

The cost of this very specific type of coverage will depend on many factors. Some of these factors are:

-Your age
-The state you live in
-What type of policy you purchase
-What type of coverage you would like
-Your credit history

When getting quotes for Loan Protection Insurance, you will typically be asked if you would like an age-related policy or a standard policy. Age related policies usually have a lower monthly premium the younger you are and a higher premium the older you are. A standard policy is the same no matter what your age.

Most policies will charge a certain amount of cents per $100 of the loan. For example, if your loan is for $8,000 and the insurance company charges .15 cents per $100, your monthly premium would be $12.00 per month. Other policies will take a certain percentage of your loan amount and determine your monthly premium that way. The higher the loan payment is the higher the premium.

Your credit history and credit score may also have a bearing on your monthly premium. If you have had trouble making loan payments in the past or you have a low credit score, you monthly premium may be higher.

Other more flexible policies will offer a straight cash benefit paid directly to the policy holder to be used for any purpose they choose if they should become unemployed. This type of mortgage protection insurance is becoming increasingly popular as a way to safeguard against the possibility of an unforeseen lay off.

Loan Insurance – All You Need to Know

Most people are required to take a loan of some sort or the other, at various points of time in their lives. Most of them are also plagued with the fear of being unable to pay their monthly loan repayments due to some financial crunch. But now they don’t have to feel scared because they can make use of the loan insurance concept that is slowly catching up all over the globe.

Loan insurance is a kind of a protection insurance that you can undertake to safeguard yourself against inability to make monthly loan repayments. It is a form of payment protection insurance that you can undertake to help cover you when you are unable to make your loan repayment due to some kind of an illness or an accident. In most cases, this insurance is taken up to cover home loans, personal loans or even car loans.

Advantages

In case of a personal problem or tragedy, you can be sure that your loan payments will be made, thanks to the insurance on loan coverage you have. People who suffer from sickness, loss of job, accident, death or any other kind of disability, leading to inability to pay the EMI’s on loans taken will benefit greatly from this kind of insurance. With your insurance taking care of your loan monthly repayment, you no longer have to be worried about the pressure being put on your family.

There is an option to undertake joint loan insurance by those who have taken up a joint loan application, giving you and your partner coverage at the same time. This scheme is very effective for partners as there is a constant reassurance that if either of the partner is taken ill or is involved in an accident or passes away, the repayments on the loan will be made on that person’s behalf.

Now the question arises on the types of loans that are covered under the loan insurance. In most cases, an insurance on loan is usually provided for borrowers of home loans. But certain banks are known to provide the insurance on auto loans as well as other personal loans.

Insurance Premium

Like any other kind of insurance, premiums are required to be paid in the case of this type of insurance as well. The amount of premium charged will differ from bank to bank. Very few banks even allow the insurance to be taken without the requirement of a premium to be paid.

The amounts of premiums that are charged on insurance for loans depend upon certain factors such as the age of the insurance holder, the amount of loan being insured, the medical record of the person taking the loan etc. The higher the person’s age, the higher will be the premium. Similarly, a higher loan amount being insured will lead to higher premiums being charged. Also, if the person’ medical records show a good status, a lower premium will be charged on the insurance. A serious ailment or a poor physical record will automatically rise up the premium amount.

FHA Mortgage Insurance Premium

FHA home loans are just that because you pay an FHA Mortgage Insurance Premium (MIP) to the Federal Housing Authority to insure the lender against loses they would take in the event that you defaulted on your promise to pay the loan back as dictated in the promissory note.

As of October 4th, 2010 changes are taken place regarding the FHA mortgage insurance premium and it will affect your monthly payment.

First lets start with a little education. If it were not for private mortgage insurance, VA or FHA, all traditional type of loans would require a minimum down payment of 20%. There are essentially four criteria a lender will look at in order to make a decision on whether or not to loan you money.

1. Your ability to pay – This is why they check your income sources and the likelihood of a continued stream of income.
2. Your willingness to pay – This is why they check your credit, to see if you pay your obligation on time and as agreed.
3. The collateral – This is why a lender will request an appraisal and in some cases an external home inspection. They want to ensure that they are basing their loan amount on the proper true value of the property.
4. The risk – How much risk do you burden and now much risk does the lender carry. This is where the down payment comes into play.

Let’s discuss the risk factor. The assumption is that the more “skin you have in the game” or, the more of your own money that is tied up in this property the more likely you are to do whatever it takes to make the payment so that the lender does not foreclose on the property.

This makes sense. Its one thing to have your life and all your belongings tied up in the house you live in but you add a whole new element if you have put $40,000 of your own money into the purchase of the home.

This is also why down payment requirements and interest rates are much higher for investment properties. If you were to lose your income and were faced with a decision, make my home payment or make my renters house payment it would probably take you a nanosecond to come to the right decision.

Not too long ago a 50% down payment was the going rate. With a strong US economy lenders slowly gravitated to a 20% down payment requirement. Simply put, lenders were comfortable knowing you would do whatever you needed to do to save your house and money.

However, the US Government has a strong initiative to prop up the housing industry and encourage home ownership. On top of that, simple statistics came into play and smart entrepreneurs put the numbers together to come up with yet another profitable insurance opportunity.

They figured, by spreading the risk among many, they could cover the down payment requirements, take the hit on the few, and make a nice profit.

Of course, the insurance companies did not want to have to come up with the 20% down payment, they would rather continue to have their money working and earning interest. The proposal was simple; if the lenders were willing to loan up to 95% the insurance company would cover the 15% if the lender were forced to repo the home (foreclosure).

This seemed like a win-win for the lenders, they could surely sell the home quickly at 80% of its value to remove it from the books. The insurance companies would win knowing that the foreclosure rate would be somewhere around 3%, the many would cover the few through monthly premiums.

And thus, Private Mortgage Insurance was born (PMI).

That is a very simple overview of how it works. If you were to apply for a traditional home loan (conventional financing) and put only 5% down you would be required to pay PMI to cover the lenders risk.

Because this is private the rates vary but you could expect to pay.85% annually of the loan amount prorated monthly. For example; on a $200,000 loan you would add about $141 to your monthly payment.

The more money you put down the lower this monthly rate would be. And, if your property appreciated in value, coupled with loan principal reduction, you could ask the premium to be lowered (of course you would have to pay for an appraisal to lower this monthly payment slightly, not worth it most of the time).

When using conventional financing there is no upfront payment only monthly.

Now, seeing this business model as one that would work, the Government saw a great opportunity to jump in and spring the home ownership initiative in fast forward.

So essentially, FHA home loans were born. They work in the much of the same manner as the private sector.

There are two major exceptions:

1. Because FHA is taking most of the risk they get to dictate the guidelines in which a borrower can be approved.
2. FHA charges an Up Front premium as well as a monthly premium. AND, the upfront portion can be financed into the loan amount.

So here is the skinny. In my opinion FHA home loans are the absolute best option for most first time home buyers. But it comes with a price (as all loans do).

As of October 4th, 2010 to borrow money from a lender insured by the FHA you will be required to pay…

A 1% Up Front mortgage insurance premium that can be added to the loan amount.

.9% or 90 basis points annually prorated for a monthly premium.

Example: The home you want to make an offer on has been negotiated to cost you $200,000. You are using FHA so you can keep your down payment requirement to the low 3.5% (10% if your credit score is between 500 – 570. Good luck getting any conventional financing with those scores).

* Down Payment – $7,000
* Loan Amount – $193,000
* Upfront MIP – $1,930
* New Loan Amount – $194,930
* Annual MIP – $1,754.37
* Prorated monthly – $146.20

The figure above that is most important to you is the $146.20 added to your payment each month. So when qualifying for a loan this must be added but you cannot add it until you know the loan amount (the chicken or the egg).

Yes, mortgage insurance can be expensive and is more expensive with FHA financing but look at the trade-offs. The big one is your low down payment requirement with FHA home loans. This allows you to keep more money in your pocket to help with moving expenses, furnishings or better yet, letting that money continue to earn interest.

Does “Partial Recourse” Premium Finance Give A Senior Any Real Financial Exposure?

In order to determine whether or not partial recourse premium financing gives a senior any real exposure, there are some terms that you need to become familiar with. The first term, of course, is “partial recourse.” Partial recourse is a clause that is included in the sales contract between the lender and the senior (the borrower) that stipulates that if the borrower defaults on the loan, the borrower is responsible for the repayment of a percentage amount, usually 25% of the loan immediately, including the cost incurred by any problems between the buyer or investor who may be in current possession of the loan. You see, lenders commonly sell loans to investors. The lender wants to be sure that a default on the loan does not leave them or their investors without the money that was lent, so they include this clause that compensates them with an agreed-upon portion of the losses. In short, partial recourse is the course of action taken against the borrower if the borrower somehow defaults on the loan. In this case that would be the loan that they are using for their premium finance life insurance policy, and the risk of default is close to zero.

The second term to be familiar with is “financial exposure.” Financial exposure is the amount of money that you leave yourself exposed to loss. Seniors looking to get life insurance want to minimize the financial exposure that their loved ones will be faced with at the time of death. Insurance minimizes the negative effects of financial exposure by taking away a percentage of that exposure in the form of reimbursing funds through the payout of insurance policies. Your financial exposure describes the amount that you stand to lose in the case of an unpredictable event. Ideally, people are looking for as much coverage for their financial exposure as possible with as small of a deductible and premium payment as possible. Generally speaking however, the more exposure you protect yourself against, the more you will have to pay in premiums or deductibles.

Now that the terms have been explained it is easier to answer the question of “Does partial recourse give a senior any real financial exposure?” The answer in almost all cases is: “No.” If a senior dies during the first two years of the policy, the proceeds from the policy go first to pay back the loan, and then the bulk of the policy is distributed to beneficiaries.

At the two-year point, the senior can choose to keep the policy by repaying the loan. If the senior’s health has deteriorated to the point that he or she could not qualify for a replacement policy, this may be an attractive option. However, whether or not the funds are available depends on the individual financial circumstances of the borrower of the loan. If the borrower has the funds to pay back a loan in full and then make the regular premium payments, there is no need to worry about partial recourse because the likelihood of default on the loan is low. If there are no defaults on the loan than there is no financial exposure to the negative effects that can result from borrowing what cannot be repaid. Furthermore, those who are applying for premium finance life insurance must have at least two million dollars in insurable assets to apply for the minimum two million dollar policy. If they have their finances in order, not only will they have obtained a loan with terms that they can live with, but they will also have the funds to pay off the loan if there was some reason to keep the policy, or in the unlikely event that the partial recourse clause of the agreement were to take effect.

Seniors without the financial ability to repay the premium finance loan can sell their policy in the secondary market for enough money to pay back the loan and generate a substantial sum for themselves or their beneficiaries.

So the real financial exposure risk in partial recourse financing is very small. If the senior borrowing can liquidate or come up with the assets that would be required in order to pay the loan for the premium policy back in full, it is zero. If the policy is sold to repay the loan, the real financial exposure also is zero. Only in the case of a senior who wants to keep the policy, but does not have the means to repay the loan, would there be a problem. But rather than let the loan default, the senior would give up their desire to keep the policy and sell it.

Understanding Life Insurance Premium Financing

Life insurance premium financing is a complex concept of life insurance formed to let affluent people acquire enormous amounts of policy while settling some of the costs of the policy at the same time. Premium financing will be possible if there will be collaboration of at least two financial institutions. The policy holder must be old enough for the premium financing agreement to be fit for this sort of arrangement. This arrangement usually requires that the individual should be older than age 70 but younger than age 84. In addition, the insured should be in good health to get a life insurance and must also have a net worth of at least $5 million.

The Loan

Premium financing entails pulling out a loan to obtain life insurance. These sorts of loans can be considered as special loans with small interest rates that are merely obtainable through premium financing. They can also be a non-recourse loans that are protected by the insurance policy itself. When we say non-recourse loan, it means that the loan is secured by the death benefit of the insurance policy. Even if the policy holder fails to make payments for the loan, the bank is assured to get its money back.

The Life Insurance Policy

An insurance policy is an element of a premium financing arrangement. The insurance policy acquired is typically utilized as a component of a charitable gift but can be employed for variety of purposes. The cash values of the policy are generally not accessible on hand to the policy holder since it is secured by the premium finance loan.

Advantages

The primary advantage of engaging in premium finance arrangement is that a wealthy individual can hand down millions of dollars to its beneficiaries while reducing the cost incurred from the premiums. On the contrary, the loan payments can be obtained from the interest of the present investments. Given that payments do not depend mainly on age or health and the loan is guarded by the insurance policy, the bank is able to charge minimal interest rates to make it become more affordable than premium payments would cost.

Other Concerns
When acquiring a premium financed life insurance policy you need to consider the fact that you are getting a loan to obtain an insurance policy. Always remember that even if you are not making premium payments, you should still make loan payments. Therefore, it is necessary that you can afford to pay your loans from the bank. Moreover, banks usually offer these types of loans to people with high net worth because they have the needed assets that are required to substantiate such large amount of loans and have collateral to protect the interest of the bank.

 

Life Insurance Premium Financing

Life insurance premium financing is used by wealthy individuals to pay their life insurance premiums. By financing your premiums, it allows you to free up the funds that might have otherwise been used to pay your premium. Many wealthy people require a substantial amount of life insurance for business planning, estate planning, or for income replacement.

In order to qualify for life insurance premium financing most insurance companies require you have a minimum of $2.5 million in net worth and at least a $200,000.00 a year income. In addition, you must be bankrupt remote entity, such as a Limited Liability Corporation, or an Irrevocable Life Insurance Trust.

In a normal premium financing arrangement, you would apply for a policy at the same time you apply for a loan. The loan is usually arranged by the insurance company you are working with although there are many different companies that handle only the financing and do not deal with the actual insurance policy. While you are being medically underwritten for the life insurance policy, your loan is being processed. Assuming you pass the medical exam and qualify for the loan, the policy and financing are put into place at the same time.

The benefits of a premium financing arrangement is that it frees up business and personal money to be used more efficiently in other investment arenas. In addition, life insurance premium financing may minimize gift taxes, and can provide a greater rate of return on the death benefit paid through regular non-financed methods.

Life insurance premium financing loans may be repaid either by paying a monthly payment while you are alive, pay from the policy itself, or at the time of your death, proceeds from the policy will pay off the loan.

Interest on the life insurance premium financing loan is considered to be personal interest, and therefore, not tax deductible.

If you are considering a premium financing loan for estate planning, there are some tax issues you may want to consider. The life insurance proceeds will be included in your estate if you own the policy. If the life insurance policy is owned by an irrevocable life insurance trust, estate taxes on the death benefits may be avoided.

Before you consider financing your life insurance premiums you should be aware that the life insurance policy will have to earn returns of between 150 to 300 basis points over the interest rate of the loan.

In addition, you should ask what the loan commitment fee is, as well as knowing whether the life insurance premium financing loan is renewable, how long the term of the loan is, and if the loan extends well beyond your life expectancy.

You may want to find out if the loan requires a personal guarantee, or if the loan is guaranteed by the life insurance policy.

Also, you want to know how if the program is designed on your IRS calculated life expectancy or is it conventional. If the loan is based on your life expectancy, and you live beyond that, the loan amount will exceed the cash value and the whole program will come apart.

Before entering into a financing agreement you may want to consult a trusted attorney, your financial advisor, and/or your Certified Public Accountant.

You will also want to shop around and compare insurance companies, their individual plans, the premium amounts, and the different types and amount of life insurance available to you.

Is an FHA Loan Right For Me?

Government sponsored loan programs, such as FHA loans, have been getting a lot of press lately. But, how does an FHA loan differ from a conventional loan? What are the advantages of each?

FHA

The Federal Housing Authority (FHA) was created in 1934 to help potential homeowners gain access to money to boost homeownership rates throughout the United States. FHA loan programs require very little money down on a new purchase (usually only 3% of the purchase price) and will lend up to 95% of the value of a home on a cash out refinance. This high loan-to-value ratio is the primary appeal of an FHA transaction.

The FHA is not a lender and does not actually make or guarantee home loans. They insure the loans an online mortgage lender can assist you in obtaining.

FHA currently only offers three loan programs:

30 year fixed

15 year fixed

5 year fixed ARM

FHA Mortgage Insurance Premiums (MIP)

Every FHA loan requires Mortgage Insurance Premiums (MIP) regardless of the down payment amount or loan to value. In addition, FHA loans require Up-front Mortgage Insurance Premiums (UFMIP). The UFMIP can be financed into the loan.

Up-front Mortgage Insurance Premium (UFMIP)

UFMIP is calculated at 1.50% of the base loan amount on all loans, regardless of the down payment amount. This insurance protects the lender against losses in the event that the borrower defaults on the loan.

**The entire amount of the UFMIP can be financed into the loan amount!**

For example:

If the FHA loan amount is $100,000 (base loan amount)
The mortgage insurance premium would be $1,500 ($100,000 x 1.50%)
The mortgage amount including MIP would be $101,500 ($100,000 + $1,500)

What really happens during an FHA mortgage transaction is that the borrower owes FHA a lump sum mortgage insurance premium. The lender making the FHA loan will actually lend the money for the premium to the borrower and send the money to FHA so that the mortgage will be insured.

Monthly Mortgage Insurance Premium

In addition to the UFMIP, there may be a monthly premium due as well. The monthly premium is .50% of the base loan amount.

On a 30 year fixed loan, the monthly payment would be calculated as follows:

$100,000 x .50% = $500.00 / 12 months = $41.67 per month

Maximum Loan Amount

FHA also has maximum loan amount restrictions that differ from county to county. Go to entp.hud.gov/idapp/html/hicostlook.cfm to view the maximum loan amount in your area.

Conventional loans

There are two types of conventional loans: conforming and jumbo.

Conforming loans

A conforming loan requires a loan amount of $417,000 or less. Conforming loans offer a larger variety of loan programs than FHA with a wide array of lending options. A conforming loan generally requires a larger down payment for a purchase (usually at least 5%) and has more restrictive guidelines on getting cash out of the property for a refinance.

The big advantage of conforming loans is that they do not require Private Mortgage Insurance (PMI) if the loan amount of the new first mortgage is 80% or less of the value of the home. The elimination of PMI can offer a significant savings over the life of the loan.

Additionally, conforming loans offer interest only options. FHA currently does not allow interest only payments.

The Economic Stimulus Act of 2008 temporarily expanded the conforming loan limits through 12/31/2008 to as high as $729,750 in an attempt to shore up the slumping housing market. The new conforming loan limits are based on 125% of a city’s median home price. Go to entp.hud.gov/idapp/html/hicostlook.cfm to find the temporary conforming loan limit in your area.

Jumbo loans

A jumbo loan is any loan amount over $417,000. Jumbo loans generally have slightly tighter lending standards and may require an additional down payment of at least 10% of the purchase price. Jumbo loan programs are as diverse as conforming loan programs and also do not require PMI if the loan amount is less than 80% of the value of the home.

Summary

So, to summarize, it is really all about loan-to-value. If you plan on putting down a small down payment, than an FHA loan is most likely your best bet. But, if you are putting down a larger down payment, a conventional loan may be the way to go.

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