Contained in this legislation is the authority needed to raise the guarantee fee in the USDA Section 502 Guaranteed Rural Housing Program to an amount not to exceed 3.50% of the loan amount. This change in the guarantee fee has already been referenced on USDA Rural Development loan approvals (RD Form 1980-18) that were issued “subject to Congressional action.”

This legislation also increases the funding authorization level for the USDA Section 502 Guaranteed Program to an amount that is sufficient “to meet the remaining fiscal year 2010 demand.” Therefore, no additional funding shortfalls in the program are expected for the remainder of fiscal year 2010.

With the passage of this legislation that addresses the current funding lapse in the USDA Section 502 Guaranteed Program, USDA Rural Development will begin the implementation process; which will eventually lead to the elimination of the “subject to Congressional action” language on loan approvals that has been in effect since May 27^th . Following the completion of all of the Agency’s internal requirements, USDA Rural Development is then expected to announce the restoration of funding for the USDA Section 502 Guaranteed Program.

Related posts from Indiana's USDA Home Loan Expert:

1. The Ides of March: USDA Just About Out of Funds
2. The Benefits of a USDA Guaranteed Loan to Purchase
3. USDA Funding Update

You’ll see an interest rate and an Annual Percentage Rate (APR) for each mortgage loan you see advertised. The easy answer to “why” is that federal law requires the lender to tell you both.  By showing both this can lead to confusion, especially to those First Time Homebuyers.

The Federal Reserve wants the APR to be a tool for comparing different loans, which will include different interest rates but also different points, fees, and other terms. The APR is designed to represent the “true cost of a loan” to the borrower, expressed in the form of a yearly rate. The problem is that there are many costs associated with a loan, that are not considered in APR.

What Fees Are Included In The APR?

• Loan Origination Fee
• Loan Discount Fee
• Other Lender/Broker Fees (Application, Underwriting, Processing, Tax Service Fee, etc.) – Anything paid to the broker or lender or affiliate of the broker or lender
• Odd Days Interest
• Mortgage Insurance Premium
• Title Closing Fee

While APR was designed as an attempt to make it easier to compare loans, it’s sometimes confusing because the APR includes some, but not all, of the  costs associated with a mortgage. And since the federal law that requires lenders to disclose the APR does not specifically declare what goes into the calculation, APR’s can vary from lender to lender and loan to loan.

What Fees Are Not Included In The APR Calculation

• Escrow Setup
• Appraisal Fee
• Title Insurance

Let’s Throw Adjustable Rate Mortgages In The Mix

The APR on an Adjustable Rate Mortgage (ARM), a loan tied to a financial index, like a 5/1 ARM, assumes the index will never change. The interest rate on an ARM is composed of the index and margin.  Because of the underlying assumption that the index will not move over the life of the loan, the APR can be grossly under or over stated on an ARM depending upon if the index moves up or down over the life of the mortgage.  ARM’s loans were created because the Bank does not have to assume the interest rate risk of a Fixed 30 Year Mortgage, allowing the consumer to get a slightly lower rate, and assume the risk that rates will rise.  These financial indexes have always moved over the course of a 30 year mortgage thus making the APR a difficult tool to compare a fixed rate mortgage to an ARM.

So, APR’s are at best inexact. The lesson is that APR can be a guide, but you need a mortgage professional to help you find the truly best loan for you.

Show What Should You Do?

You as a consumer need to look at two things when considering a mortgage loan

• The front end costs associated with obtaining the loan, not just those deemed pre-paid finance charges, and thus included in the APR calculation
• The interest rate, and the total cost of the loan over time.

Here is a Comparison of two different mortgages, both 30 year fixed rate mortgage.

The first mortgage has an APR of 5.03%, and the 2nd has an APR of 5.25%.  So, if you were to choose a loan simply based on the APR the typical choice would be the 1st mortgage; however, if you will be staying in the home less than 90 months (most loans are only held for 60 months) then the best choice is Loan 2, because the total cost is cheaper.

Make sure you are dealing with a mortgage professional that doesn’t just throw rates and fees at you over the phone. I’ll take the time to prepare a total cost illustration and determine that the loan you select meets your long term objective.

Related posts from Indiana's USDA Home Loan Expert:

1. The Good Faith Guarantee – What You Need to Know as a Borrower and a Realtor
2. Regulation Z Proposed Rule Would Mean More Cash to Close
3. Mortgage Tuneup

While this modification sounds great each of these programs to help, has garnered little support, and been able to help very few people.  The reason that each program has failed is because the guidelines for the customer to qualify are still too stringent.

The program has been modified to attempt to help those that have been effected by the economy through no fault of there own.  There is increased incentives for mortgage services to help unemployed homeowners, and for those that owe more than their home is worth.  This is still in an effort to help stabilize the housing market.

Eligible homeowners must live in an owner-occupied home, have a mortgage balance less than $729,750, owe monthly mortgage payments that are not affordable (greater than 31% of gross income), and demonstrate some sort of financial hardship.

Today is an important step forward for homeowners, who will now have more options to retain homeownership.  The use of principal write down as an additional tool in the Home Affordable Modification Program (HAMP) will offer expanded opportunities in the case of negative equity.

Faith Schwartz
Executive Director
Hope NOW

For more information on HAMP 2.0:

Making Home Affordable FAQ

FHA Refinance Fact Sheet for Underwater Homeowners

HAMP Examples

HAMP Improvements Fact Sheet

Here is a video from CNBC that goes over the new developments for HAMP:

If you cannot view the above video on HAMP Updates Click Here.

USDA still needs additional funding for the Guaranteed Rural Housing Program

One item that was completely ignored was increased funding for a program that is already working, USDA Home Loans.  A USDA Home Loan is one of the best loans available, it also has the lowest foreclosure rate of any other product available, 1.72%.  The Wall Street Journal had an excellent piece talking about USDA Home Loan and the need for Congress to authorize additional funding.

I urge everyone to contact your elected officials immediately and voice your concerns; Authorize additional funds for USDA Home Loans.

Related posts from Indiana's USDA Home Loan Expert:

1. The Ides of March: USDA Just About Out of Funds
2. What Went Wrong in the Mortgage Market
3. USDA Funding Update

Here is Lewis’ “60 Minutes” interview from Sunday’s episode, in two parts:

Watch CBS News Videos Online

Part II:

Watch CBS News Videos Online

Related posts from Indiana's USDA Home Loan Expert:

1. Increase Your Credit Score in 30 Days
2. Who’s Your Accomplice on Your Path to Homeownership?
3. Relieve the Stress of a Home Purchase

Flickr photo by David Reece

The Department of Housing and Urban Development (HUD) under RESPA revised the Good Faith Estimate, HUD-1, and HUD-1A through regulation adopted in 2008 which became effective January 01, 2010. The Real Estate Settlement Procedures Act (RESPA) is a consumer protection statute, passed in 1974. The purpose of the act is to help consumers become better shoppers for settlement services and to eliminate kickbacks and referral fees that unnecessarily increase the costs of certain settlement services. RESPA covers loans secured with a mortgage placed on a one-to-four family residential property.These include most purchase loans, assumptions, refinances, property improvement loans, and equity lines of credit. RESPA requires borrowers to receive disclosures at various times.  A Good Faith Estimate is required to be delivered within three (3) days of giving six required items:

1. Name
2. Social Security Number
3. Monthly Income
4. Property Address
5. Property Value (Estimate)
6. Loan Amount

Fees disclosed on the new Good Faith Estimate are grouped into three categories:

• Fees that cannot increase from the initial estimate to closing
• Fees that may vary as much as 10 percent from the initial estimate to closing
• Fees that may increase without limit, because the lender has no control over them or may be difficult to predict in advance.

Fees in the no tolerance group:  lender fees, mortgage broker fees, processing, underwriting, and discount points.

Fees in the 10% variance group:  appraisal, recording fees, credit report, flood certification, tax service, mortgage insurance, and guarantee fee.  Title closing and title insurance are included in this group when selected from a provided list by the borrower.  Any single fee could vary by more than 10%, the combined total of the fees in this group may not increase by more than 10%.

Fees in the unlimited increase group:  homeowner’s insurance, per diem interest, and setting up the initial escrow account.  Title closing, and title insurance are included in this group when they are not selected from a list provided by the lender.

The New Good Faith Estimate – The Positive:

As a customer you have a minimum of 10 days to shop for various settlement services.  The Good Faith Estimate is now lo longer an “Estimate” but an Etched in Granite Guarantee of Fees charged by the Mortgage Broker and Lender.   This very fact will eliminate any companies still that would attempt to bait and switch consumers by offering low fees, and then increasing at closing.  The format of the new Good Faith Estimate may not be modified from the version prescribed by HUD, this will make it easier for consumers to compare GFE’s from one lender to another.

The New Good Faith Estimate – The Neutral Items:

The overall costs for closing a loan have not decreased, and none of the items have went away, and no new items have been added because of the new Good Faith Estimate.  The borrower will be asked to provide a commitment to the loan and to moving forward prior to locking in the rate and terms.  If the borrower does not provide their commitment to moving forward with the loan by the end of the shopping term, minimum 10 days, then the lender no longer has to honor the terms.  If the terms do happen to change during the process then this will trigger another 10 day grace period.A very important part for the customer to pay attention to is how long the interest rate being offered is good through.  Because of MDIA (Mortgage Disclosure Improvement Act of 2009) the APR at closing cannot be off by more than 1/8%, if it is it must be re-disclosed and have a 3 day waiting period.  So, the interest rate will need to be locked in at least 5 days prior to closing with most investors requiring 10 days.  Interest rates are very fluid so guaranteeing an interest rate for any lenght of time is very difficult, since the interest rate could change.

The New Good Faith Estimate – The Stuff that was forgotten:

The Lender and Broker are responsible for the accuracy of fees that are typically paid for by the seller, ie. Owners Title Policy.  A seller’s closing cost concession is not shown on the new Good Faith Estimate.  The proration of taxes is not shown.  Proration of taxes is a credit given to the buyer, when taxes are paid one year after assessment, since the new buyer’s first bill would be for a time period when they were not living in the property.

The two most important pieces information everyone wants to know when purchasing a home:

• What is my total monthly payment.  The Principal, Interest and Mortgage Insurance is included, but not the Taxes and Insurance.  Sure everyone can just add the cost, but wouldn’t it make more sense to just include the total payment, it was on the old Good Faith Estimate.  With a USDA Home Loan you don’t have to worry about the added expense of mortgage insurance.
• How much money will I need to close.  If your using a USDA Home Loan this doesn’t become as much of an issue, but still something you want to know.

Related posts from Indiana's USDA Home Loan Expert:

1. What Goes On At Loan Closing
2. There’s an Escrow for That
3. The Tax Man Cometh: As A Homeowner You Can Give A Lot Less

Layout of the Settlement Booklet:

There is a detailed explanation of the new Good Faith Estimate (also required on or after January 01, 2010) and the revised HUD-1 form. The booklet is divided into 13 parts, obviously HUD isn’t superstitious.

Some of the important topics covered:

• A list of milestones on the path to closing your purchase loan.
• A description of the purpose of the booklet.
• Contact Information for HUD as well as other important contacts, a glossary, a consumer bill of rights via a “Do” and “Don’t List”
• The Roles of various entities involved in the mortgage process:  Loan Originator, Real Estate Agent, Attorney, Builders.
• A short section, with a worksheet to help determine what you can afford.
• Shopping for the best loan and shopping for other services outside of origination “Other Settlement Services”
• Types of Loans and Programs
• Explanation of the new Good Faith Estimate, and the new HUD-1.

Shopping For Your Home Loan booklet provides consumers with tools they need to make an informed decision about the costs incurred during a mortgage transaction.

*Post updated 02-03-2010 to embed the updated Settlement Cost Booklet that was updated by HUD on 01-06-2010 with corrections for minor detail.

**Post updated 08-19-2010 to embed the updated Settlement Cost Booklet that was updated by HUD on 08-17-2010, HUD did not mention what they have revised.

Related posts from Indiana's USDA Home Loan Expert:

1. The Good Faith Guarantee – What You Need to Know as a Borrower and a Realtor
2. Home Buying Process for a First Time Homebuyer
3. Regulation Z Proposed Rule Would Mean More Cash to Close

The proposed rule revising Regulation Z, specifically Docket Number R-1366, by the Federal Reserve Board would increase the amount of money consumers would need to bring to closing. This increase in cash to close comes from the elimination of Yield Spread Premium, which has long been used to help cover consumers closings costs, or offset the origination fee.  The new Good Faith Estimate going into effect January 01, 2010 requires that all Yield Spread Premium be given as a credit to the consumers origination costs.

The comment period for the Proposed Rule is available until December 24, 2009.  It is urgent that your voice be heard.  You can read the 191 pages describing the proposed rule in the Federal Register at: http://edocket.access.gpo.gov/2009/pdf/E9-18119.pdf

• Eliminates No-Cost Loans. Consumers who already own a home will no longer be able to do No cost or no fee loans.  This is significant because many consumers do not have adequate equity in their house, or cash for closing costs.  This will prevent consumers from realizing the savings from lower interest rates.
• Less Flexibility.  Yield Spread Premium allows for loans to be structured in the best way to benefit the consumer.
• More Cash Will be Needed. Consumers will no longer be able to have a portion of their closing costs paid on purchase through the use of Yield Spread Premium.  Thus more consumers will need to wait longer, or forgo altogether, the dream of homeownership, simply from not having enough money for the down payment and closing costs.  For those eligible a USDA Home Loan could potentially solve both the down payment and closing cost problem.
• Eliminates Competition. The proposed rule will cause a damage to mortgage brokers, and likely result in a further reduction in the number of mortgage brokers, which would ultimately lead to higher costs through less competition.

How your Voice can be heard on the Proposed Rule revising Regulation Z:

› Web Site: http://www.federalreserve.gov/generalinfo/foia/ProposedRegs.cfm Scroll down to Regulation Z – Truth in Lending – Closed-end Mortgage [R-1366], click on Submit comment on this proposal

› Federal eRulemaking Portal: Change the Select Document Type to Proposed Rule, enter keyword “R-1366″, click Search, Click on the Submit a comment balloon on far right hand side of results, the ID is:  FRS-2009-0240-0001

› E-mail: regs.comments@federalreserve.gov Include the docket number:  ”Docket Number R-1366″ in the subject line of the message.

› Fax: 202-452-3819 or 202-452-3102

› Mail: Jennifer J. Johnson, Secretary, Board of Governors of the Federal Reserve System, and Constitution Avenue, N.W., Washington, DC 20551

The Easiest way to comment online: http://www.federalreserve.gov/generalinfo/foia/ElectronicCommentForm.cfm?doc_id=R-1366&doc_ver=1&name=Regulation%20Z%20-%20Truth%20in%20Lending%20-%20Closed-end%20Mortgages&date=20090723a

All public comments are available at the Boards web site at:  http://www.federalreserve.gov/generalinfo/foia/index.cfm?doc_id=R-1366&doc_ver=1 as submitted, unless modified for technical reasons.  This means that the information you submit, including identifying information and contact information will be visible.

I sent in my comments and a proposal. Will you do the same?

Related posts from Indiana's USDA Home Loan Expert:

1. The Good Faith Guarantee – What You Need to Know as a Borrower and a Realtor
2. HUD Settlement Costs Booklet – Revised for 2010
3. What Goes On At Loan Closing