THE TIME HAS COME TO PAY FOR THAT PAYROLL TAX CUT

The 2% cut in payroll taxes for employees equates to about $30 per week for a household making $80,000 per year.  Well, it’s time to pay the piper.  When Congress extended the payroll tax cut through the end of February they elected to pay for it via an indirect “tax “on conventional mortgages.

It’s difficult to measure the exact impact of this “tax” but according to THIS ARTICLE borrowers who take out a new conventional mortgage will accept an additional .125% to their interest rate or pay an additional .30%-.40% of the loan amount in closing costs.  Lenders are not publicly announcing when the increases will take effect but as of today many lenders we deal with have yet to implement the increase.  Although we can’t be certain of the future direction of mortgage rates it doesn’t seem like a bad idea to lock in ahead of this change.

Background: Prior to this home-buyers were not eligible to apply for a cash-out refinance inside the first 6 months of owning a home.  This was often problematic for home-buyers who were in the position to buy a home using all cash because the IRS  requires that “Acquisition Indebtedness“, which is basically the amount of mortgage for which a home-owner can deduct the interest on, be set up within the first 90 days of owning the home.  Therefore, a home-buyer had to weigh the option of a) buying a home with cash and subsequently negotiating a better deal on the property versus b) taking out a mortgage so that they could deduct the interest and not positioning themselves as a cash-buyer.

Solution: In 2011, Fannie Mae tweaked the guidelines regarding cash-out refinance eligibility to allow home-owners who buy a home using all cash to conduct a cash-out refinance as soon as they own the home.  There are a few details that home-buyers should take into consideration:

• The program is available on homes that are used for primary residence (up to 85% loan-to-value), second home (up to 75% loan-to-value), or investment property (up to 75% loan-to-value).
• The home purchase must have been an arms length transaction.
• The home purchase must have been made with all cash.  NO MORTGAGE OR SELLER-CARRIED CONTRACT CAN SHOW UP ON THE FINAL HUD-1 SETTLEMENT STATEMENT.
• The underwriter will require that the applicant provide proof of purchase funds to make sure the applicant did not borrow the money from another source.
• Keep in mind that the new loan will be a “cash-out” refinance and not a “purchase” transaction so depending on the occupancy and loan-to-value the rates will likely be .125%-.375% higher.

Who can benefit?: Anyone who has enough liquid cash to buy a home with cash stands to benefit from this new flexibility.  I believe this new provision is especially attractive for real estate investors who are in a position to buy property with cash.  This allows them to negotiate the lowest possible price on a home, replenish their cash so that they can position themselves to buy another property, and get the benefit of deducting the mortgage interest against  rental income.

Baby boomers who are close to retirement may also stand to benefit.  Many have significant retirement nest eggs saved up and are viewing the current housing market as an opportunity to relocate into their dream home where they’ll spend their golden years.

Those interested in pursuing this program are encouraged to contact their mortgage professional BEFORE buying a home so they can be pre-approved for the cash-out refinance prior to closing.

• DU Refi Plus (AKA “HARP”) extension: “…lenders will now be able to originate Refi Plus and DU Refi Plus mortgage loans provided the note date is on or before December 31, 2013.“
• No more 105%/ 125% loan-to-value (LTV) limit for fixed rate mortgages: “Fannie Mae is removing the maximum LTV ratio limit for Refi Plus mortgage loans secured by fixed-rate mortgages with terms up to 30 years.“
• LTV expansion not available until March 2012: “The changes to the LTV ratio limits described above will be implemented in DU (DU is Fannie Mae’ underwriting engine) in March 2012.“
• Pricing on mortgage rates for HARP should be improved, especially for 15yr fixed rates: “Fannie Mae is significantly reducing the maximum amount of loan-level price adjustments (LLPAs) that apply to “HARP” mortgage loans – loans secured by principal residences with LTV ratios greater than 80%.“

There was no mention of extending this program to homeowner’s who took advantage of this program once already when rates were higher.  We’ll have to see if lenders create “overlays” or if they roll this program out per the notes above.  I anticipate we’ll know more in the next couple weeks.

*”The overhaul will, among other things, let borrowers refinance regardless of how far their homes have fallen in value, eliminating previous limits.” (previous limits were 125% loan-to-value)

*”The plan will streamline the refinance process by eliminating appraisals and extensive underwriting requirements for most borrowers, as long as homeowners are current on their mortgage payments…”

*”The changes being prepared by federal officials should boost refinancing because they will let banks avoid the risk of any “buy-back” on a HARP mortgage as long as borrowers have made their last six mortgage payments and they prove that they have a job or another source of passive income. They are also set to reduce loan fees that Fannie and Freddie charge. The fees will be waived on borrowers that refinance into loans with shorter terms, such as a 15-year mortgage.”

*”Pricing details won’t be published until mid-November, and lenders could begin refinancing loans under the retooled program as soon as Dec. 1, according to federal officials. Loans that exceed the current limit of 125% of the property’s value won’t be able to participate until early next year. The program’s expiration date, originally next June, will be extended through 2013. HARP is only open to loans that Fannie and Freddie guaranteed as of June 2009.“

We have not received any details from our investors yet but hopefully we’ll have more specific details in the coming weeks.

“Shop For Loan Agents, Not Rates

Every consumer shops for mortgages and they should. But this is the critical distinction: you should be shopping for the best mortgage advisor. If you have that, you’ll get the best rate.

Here’s what happens when shoppers focused only on rate get quoted by a good loan agent: Loan agent quotes a rate only after they’ve analyzed the client’s entire financial profile and analyzed their home’s value and condition—also known as pre-approving them. The client will either tire of the pre-approval analytics or be unhappy with the rate and go somewhere else. Then 80% of those cases come back to that loan agent because the competing rate quote was revealed to be incorrect when the other lender actually completed the client’s profile, or the home’s value/condition made the loan ineligible.

Mortgages are extremely competitive so rates and fees are generally the same with most (established, credible) lending firms.  What’s not the same lender to lender is the loan agent’s ability to: (1) advise properly, (2) analyze borrower and property profiles, and (3) close with no surprises. So shop to find the lender and loan agent you feel most confident can perform on these three things. Then work with that loan agent to pick a rate target you can’t or won’t go above, and give them a standing order to lock when they see it.

These guidelines are for refinancers. For homebuyers, you can’t lock a rate until you’re in contract to buy a home, but once you’re in contract, the same approach applies.“