Adjustable Rate Mortgages generally are sold with an introductory period during which the interest rate remains fixed. Most commonly, these ARM mortgages have a fixed rate for 2 or 3 years (known in the mortgage industry as 2/28 and 3/27 respectively). This fixed rate period is known as a “teaser”, “intro” or “start” rate. Upon the expiration of the fixed rate period, Adjustable Rate Mortgages “go variable”, or begin to adjust along with the broader markets. Currently, the financial indexes which set rates for ARM loans are at their highest point in 6 or 7 years, in many cases two or three times as high as when 2 year and 3 year ARM mortgages were taken out. What this means is that for many borrowers, their Adjustable Rate Mortgage payment could as much as double.

Historically, fixed rate refinance loans were made available by the same lenders who sold borrowers on adjustable rate mortgages, and presented a nice profit center due to the higher pricing of a fixed refinance. In addition to extra fees, banks could charge borrowers higher interest rates on a fixed refinance.

But why is a fixed refinance traditionally more expensive than an ARM? The reason is simple: Risk. By allowing a fixed rate refinance, banks are taking the risk that for the next 30 or 40 years the rate at which they lend you money will not become lower than the market interest rate for any major period of time. So if they lend you money at 7% today, they need to be able to bet that on average the interest rates in the broader market will be lower than 7% over the next 30 years. If you think that’s a reasonable bet, you probably did not have a mortgage in the 1980s, when typical interest rates for many mortgages were over 12%. Because the bank is at risk of losing money if rates rise, they pass some of that risk on to the borrower in the form of a higher rate on their fixed refinance.

Higher rates on fixed refinance are fear of many borrowers, but the prospect of a fixed rate refinance seems even more daunting to those who are in Option ARM mortgages, or negative amortization mortgages. Due to the exceptionally low minimum payment options available on these mortgages and the month to month cash flow flexibility they afford, many borrowers dislike the idea of giving up their Option ARM to a fixed refinance. This is due to the fact that most believe there is no way to obtain a fixed rate refinance without sacrificing the payment options and flexibility of the negative amortization option ARM.

However, for borrowers interested in keeping the minimum payment option (which is often half of a normal mortgage payment) but also seeking a 30 year fixed rate mortgage, a new fixed refinance loan has been introduced by select mortgage companies to meet their needs. Called a 30 Year Fixed Cash Flow mortgage or 30 Year Fixed Rate Option loan, the program does as its name says:

1. It provides a Fixed Rate for 30 Years
2. It provide a 1.95% minimum payment option each month for up to 10 years
3. Interest Only, Fully Amortized, and 15 Year Equity Builder options are also available, and any one can be chosen on a month to month basis.

The 30 Year Fixed Rate and low Cash Flow Option allow borrowers to maintain the security of a long term fixed rate while also obtaining the tremendous month to month payment flexibility and extremely low payment options of an Option ARM. For many borrowers in adjustable rate mortgages, especially those in Option ARM negative amortization mortgages, there may be no excuse left to avoid that fixed rate refinance.

Mortgage refinancing, especially when you are going from an adjustable rate mortgage to a fixed rate mortgage in the current market, is very much about having a strong application. This means getting your credit scores up and saving as much money as possible to keep your bank balances high, so that when you apply for the mortgage a few weeks before your rate goes up, you not only have an approval for the refinance, but you are locked in a for the best rate possible. You can be approved for a mortgage well in advance, just ask for a longer rate “lock” period once you’ve been approved for the refinance. Lock periods are normally 15 to 30 days for most refinances, however 45, 60, 90 or even 120 day locks may be available depending on your personal situation, although longer locks sometimes require an upfront “lock fee”.

Improving your credit can consist of simply paying down the balance on cards which are used up to over half their limit, writing letters to have erroneous items on your report removed, or otherwise taking small, inexpensive actions which can greatly improve your credit score. In the mortgage industry, we employ proprietary systems which allow us to simulate several small actions and estimate how much your credit scores can be improved. For maximum effect, contact a mortgage company specializing in this type of computerized simulation 60 days before you want to refinance, so all the changes have enough time to reflect on your report by the time your application for refinancing is underwritten.

The reason I mention saving money is so that you can document a history of having strong liquid cash reserves, which makes qualifying for a loan so much easier than it would be otherwise. Liquid reserves are ideally Savings or Checking accounts, although CD’s, investment accounts, and in some case retirement accounts may be considered reserves for the purposes of refinancing. Cash reserves can make up for weaker credit, and in some cases can allow you to qualify for a much, much lower mortgage payment than you would otherwise receive.

If you are like millions of homeowner locked into ARM adjustable rate mortgages which adjust later this year or later on over the next few years, you may want to consider refinancing before your prepayment penalty expires rather than risk paying a much higher rate when it comes time to refinance at the end of the penalty period. In most cases, pre-payment penalties are considered mortgage interest, and can be tax deductible as such. If you have the equity available in your home to pay for the penalty, it may be worth refinancing today while programs are still flexible and rates are still low, to reduce the likelihood of not qualifying for a good rate, or not qualifying for a refinance at all when your pre-payment penalty period does expire in the future. We do want you to consult your CPA regarding any matters pertaining to your personal tax situation, as we do not give out tax advice. If you are going to refinance and pay your prepayment penalty, please be aware that I have not seen over the past year a single lender, in literally hundreds of refinances where borrowers had to pay penalties, actually honor a promise to discuss waiving a prepayment penalty for one of their valued customers. In today’s market, the lenders can’t afford not to collect the penalty amounts, even if you refinance with them, and will generally cite something to the effect of “You signed an agreement to pay the penalty as part of the terms of your mortgage, and it would be a federal offense (etc.) for us to waive it.” Not true, but as far as you’re concerned, don’t hold onto any illusions of beating the pre-payment penalty that easily.

Either way, you’ll want to have your application processed and underwritten at least 30 days before your pre-payment penalty period expires. Once approved, this gives you plenty of time to provide any supplemental documentation the lender may request. Once your loan is cleared for closing, you can schedule the closing so that your loan funds the day after your pre-payment penalty expires, which is generally safer than doing it the day of expiry.

Refinancing into a fixed rate used to mean giving up the low payments and flexibility of an adjustable rate mortgage. Not anymore. We now offer a product which was tailor made for borrowers who want to refinance into a secure 30 year fixed rate mortgage while preserving the options available under ARM type mortgage programs. For more information about refinancing an adjustable rate mortgage to convert to a fixed rate mortgage, visit us online or call us toll free.

Top Reasons to Refinance

1. Lower Your Monthly Payment:
Reduce your total monthly payments, including on credit cards, personal loans and other high interest debts. This is by far the most advertised purpose, however the effects may be limited if you focus on reducing mortgage payment alone. In today’s market, with rates higher across the board than they were over the past five years, lenders have devised creative methods to help you achieve this goal, often in combination with payment flexibility options and reducing other debts through consolidation.

2. Change the Terms of Your Loan:
Convert from Adjustable to Fixed Rate or vice versa, or add features which your loan currently does not have. Right now, due to a financial markets phenomenon called yield-curve inversion, customers can take out fixed rate loans for prices which are competitive with adjustable rate loans. Cash flow options now available on fixed rate mortgages (see http://FixedRate.RefinanceOne.net ) are allowing many people who would have otherwise been priced out of a fixed rate to get the payments they want over the short term while still locking in a fixed rate at a time when rates may be at their lowest point for the next several years.

3. Take Advantage of Growth in Home Equity:
This is fancy talk about taking advantage of still-high housing prices to cash in some equity at a low cost to pay off expenses, other liens, make home improvements or provide a cushion of cash for investment or emergency purposes. Because home equity is illiquid, providing a zero investment return until the sale of a property, refinancing can be a great time to tap into that equity and realize some return on your investment. This should not be abused however, and I personally recommend taking cash only when it may tangibly improve your situation, be it your lifestyle or your finances.

Another, almost completely unspoken of advantage of the growth in your home’s value and resultant increase in your own equity is the ability to reduce your “LTV” or Loan to Value on your mortgage. Because for most people their old mortgage may have been underwritten when they had less equity in the home, they received a higher payment mortgage. Refinancing now could substantially lower the Loan To Value ratio on your new loan, eliminating mortgage insurance, any high rate second mortgages or equity lines of credit, and allowing you to substantially reduce the amount of interest and housing expense you pay per month. If your home’s value has declined since you took out your old mortgage, the reverse may be true.

4. Take Advantage of Your Better Credit:
If your credit is substantially better than it was when you took out your existing mortgage, you may be eligible for better terms when you refinance. However, please note that credit score guidelines are much tighter in today’s market than they were just 6 months ago, and what might have been considered “good” credit then may only be “fair” now. There still are a handful of lenders, including our own, which offer “no credit scoring” for borrowers with good mortgage payment history and a reasonable amount of equity in their homes.

5. Build Equity Faster:
Many home owners have made the decision that the home they live in now is the home they will retire in, and paying it off before retirement can be a huge priority for them. While traditionally, the accepted way to pay of a house faster was to refinance into 15 year mortgage, the monthly payments are substantially higher. Many of the same effects can be had by taking advantage of the way loans are amortized, by enrolling in a true biweekly mortgage, which can pay off a 30 year mortgage in 22 and a half years without substantially changing your spending habits, or in as little as 16 years if you make an additional payment to principal each year. Most biweekly programs on the market are “simulated” biweekly programs and pose a variety of risks that we can’t go into in detail in this answer, but click on the link if you want more information about building equity

You may not have one reason, and there are many other reasons to refinance which merit discussion. One of the least mentioned is the need to refinance into a loan with a minimum payment option, so that in the event of downturn in business or loss of income, ever the more likely in this market, you won’t have to come up with that huge mortgage payment to avoid losing your house or ruining your credit. Another popular reason is to take profits while values are high, literally to “cash out” of a property and invest the money elsewhere before the value drops. We’ve seen a lot of reasons, but suffice it say that when you are considering refinancing, you must get a very honest list of your reasons together. Then read the second article in this series, about refinance costs, namely closing costs.

First, I’d like to debunk the notion of “No Closing Costs”, heavily advertised by national marketers and banks. Have you ever heard the expression “There’s no such thing as a Free Lunch?”. All things in this world have costs to produce, and if you know anything about the companies that produce “things”, you’ll agree that they do their darndest to make you pay for them. Here is a list of the bare minimum costs of refinancing or originating a mortgage:

1. Title Search & Title Insurance: An inescapable fact of life, these are the costs charged by a third party company whose job it is to find out whose names are recorded in relation to the property, establish a chain of title going back 24 to 60 months, to uncover any judgments, liens, zoning issues, etc. That’s the title search. Title work will also include name searches and “plat drawing”. Then, based on a variety of factors, including the level of risk that they perceive from the title search and the value of the property, they underwrite Title Insurance which covers the lender in case they did not find someone or something on title which make the loan uncollectible. Like taxes, there’s no way to escape this fee, however you may be able to minimize it if you can use the same company you used when you bought the house or last refinanced (look at the closing documents)

Title Search averages $300 nationally, with some markets coming in lower and some much higher

Title Insurance is Variable because there are so many factors in involved including the property’s value, but the national average is about $700, although it’s not unheard of for title insurance to cost as much as $3000 or more depending on the size and complexity of the property and the chain of title.

Settlement, the actual coordination of the loan closing, is often listed as an Attorney fee or Escrow Fee. This is necessary to ensure that all the paperwork is correct and that everyone who needs to get a check at closing, be it you, a service provider, your old lender, or any number of creditors you may be paying off. The average is $500, and varies again with the market.

Other title expenses may or may not be required at the discretion of the lender or title company to ensure the security of the property, including surveys, bankruptcy searches, etc. These fees again vary but you can expect your title bill to be the largest third party fees in connection with a loan.

2. Government Fees: Another one you can’t get around is the government’s fees which can be broken down into Taxes and Recording Fees, but can include more.

City/County/State Tax Stamps and Intangible or Mortgage Taxes vary so dramatically that I cannot even begin to address this issue here, but range from nothing at all to 3% or more of the property value. This is NOT the same thing as property tax.

Recording fees are the costs your county recorders office charges to file your deed, is mandatory, and range from $75 to $250 dollars.

3. Other Third Party Fees:
a. Appraisal: National Average of $350 but can be much higher depending on property size and location.
b. Credit Report: Averages $30
c. Flood / Pest / Other Inspections: Averages $100

4. Basic Lender Costs:
(remember, there are significant regional variations for these fees, and bigger homes carry bigger fees)
a. Tax Service: $75 Average
b. Wire Transfer: $35 Average
c. Processing: $400 Average

5. Lender Discount Points:
These are the “Points” on a loan, used to lower the interest rate to help you qualify for the loan based on your income. 1 point is 1% of the loan amount, so one a $200,000 loan a point is $2,000. You usually don’t need to pay points if your debt to income ratio or DTI, the measure of all of your debt payments plus your monthly housing expenses under the new loan, are below 40%. DTI guidelines are much more stringent today than they were even 3 months ago, especially for borrowers who are stating their income to qualify for the refinance.

6. Fees & Profit:
Up until now, everything we have discussed has been around the hard costs of the loan. Now we get into the fee for service, where the lender or broker actually tries to make money, not unlike any other service provider such as an investment advisor, realtor or lawyer:
a. Origination Fees: Often charged as a percentage of the loan
b. Broker/Lender Fees: Again often charged as a Percentage of the loan

It’s important to remember that no one can do a loan for free, no matter how good of a customer you are, because each loan is a profit or loss to the lender by itself, and they have to assume that at one point or another the loan must be sold. Their time and their risk are valuable, just as your own or your lawyer’s or your realtor’s.

Closing costs vary not only by location, but depend heavily on what you qualify for, so your credit will affect the final numbers, especially with regard to Discount Points. Calculating your own closing costs can be best achieved by speaking with a mortgage company who can give you a Good Faith Estimate which outlines all of the above mentioned fees.

Now that you’ve seen everything laid out, do you believe anyone can offer a “No Closing Costs” refinance? These hard costs are always paid for one of two ways:
1. You are billed for each item and can choose to pay them in cash at closing or to roll the costs into the new refinance so that there is no money out of pocket to you.
2. You are charged a higher rate than you would normally qualify for over the life of the loan, which allows the lender to realize a premium, or a profit, which they can then credit toward your closing costs. So if the best rate you qualify for, with no discounts, is 6.00%, raising the rate slightly, to 6.375% or 6.625%, may provide you with a “rebate” which the lender can choose to apply to closing costs.

Sometimes these methods are used in combination. My recommendation is to compare the payments. Let’s look at two completely hypothetical examples:

Example 1: Roll Your Costs into the Loan Balance
$400,000 Refinance Loan Amount
$8,000 in Closing Costs
——————————————
$408,000 Financed
At 6.000% Interest over 30 Years
Has a Monthly Payment of $2446 for Principal & Interest
And a Monthly Payment of $2040 for Interest Only
A Typical Minimum Payment Option Would be About $1500

Example 2: Use a Higher Rate to Finance Closing Costs
$400,000 Refinance Loan Amount
“$0″ in Closing Costs (assuming the $8,000 in hard costs is advertised as Zero)
——————————————
$400,000 Financed
At 6.625% Interest over 30 Years
Has a Monthly Payment of $2561 for Principal & Interest
And a Monthly Payment of $2208 for Interest Only
A Typical Minimum Payment Option Would be About $1465

The reason I’ve included Interest Only payment option figures above is to show you how much more interest you pay each month if you choose a “Zero Closing Costs” option from any leading lender, versus rolling those costs into the loan. The final option is to pay for these costs out of pocket, which is not a very popular option today, but deserves treatment.

Example 3: Pay your own closing costs
$400,000 Refinance Loan Amount
$8,000 in Closing Costs Paid out of Pocket
——————————————
$400,000 Financed
At 6.000% Interest over 30 Years
Has a Monthly Payment of $2400 for Principal & Interest
And a Monthly Payment of $2000 for Interest Only
A Typical Minimum Payment Option Would be About $1465

Compared to rolling the closing costs into your loan, paying them out of pocket saves 46 dollars per month of principal and interest or 40 dollars of interest, a savings of about $500 a year or less. So unless you can’t get a return of more than $500 per year on your $8,000 investment (about 6.25%), there’s no strong argument to pay for the closing costs out of pocket. Online savings accounts and CDs already offer rates equivalent to this, and the S&P 500 has been returning about double this rate, so I personally would rather have access to my money and have it working for me. I won’t get into the fact that the extra $500 or so dollars of mortgage interest per year should be tax deductible as well (and please consult your CPA, we don’t give tax advice).

Please tune in to the final article in our series, where we now wrap all of this together to show you how to weigh the costs and benefits of refinancing your mortgage.

Hypothetically, let’s say that you want to refinance for the following Reasons: Lower Your Monthly Payment, Change Your Loan Terms to get a fixed rate, and Take Advantage of the Equity Growth in Your Home to pay off your personal loans and credit card bills, and to improve your home to increase your quality of life. You are not planning to retire in this home, and plan on selling it in 5 years, but like the idea of a secure, fixed rate just in case rates go up a lot over the next 5 years. With the way the economy is going, you also want to keep your mortgage payment as low as possible, so in case anything happens you have the option to pay less on your mortgage.

You have a current mortgage balance of $350,000 dollars on which you pay $2250 per month, and your home is worth $600,000 dollars today compared to the $425,000 it was worth when you bought it.

You have about $32,000 in debts, on which you pay minimum payments of about $1500 a month and would like to take an additional $18,000 to do the kitchen, which you believe would improve the value of your home by $30,000.

So your total monthly spending on mortgage + cards etc. is $3750

Let’s say your credit score is 620, very average for a person with your level of credit card and other unsecured debt, and you prefer to state your income.

Hypothetically (this is only meant to be illustrative), you receive a rate quote and Good Faith Estimate which outlines the following:

Quote 1: Conventional 30 Year Fixed
$400,000 Refinance Loan Amount
$8,000 in Closing Costs
——————————————
$408,000 Financed
At 7.250% Interest over 30 Years
Has a Monthly Payment of $2783 for Principal & Interest
A Savings of $967.00 a month

Quote 2: Interest Only 30 Year Fixed
$400,000 Refinance Loan Amount
$8,000 in Closing Costs
——————————————
$408,000 Financed
At 7.500% Interest over 30 Years
Has a Monthly Payment of $2550 for Interest Only
A Savings of $1200.00 a month

It seems like a no-brainer right? The interest only is much lower, however your basic housing expense has still gone up $300, even though you’ve paid off all the cards and saved almost 1200 there. With the credit cards, even if you experienced a loss of income due to circumstances outside of your control, at least you could have afforded to miss those payments and scratch together money to make your mortgage payment, because the credit card lates would not cause you to lose your house. But with this refinance, which meets most of your goals, now you have to come up with a larger mortgage payment. So you get one more quote for a mortgage which allows for deferred interest, or making a minimum payment when you want to:

Quote 3: 30 Year Fixed Rate Cash Flow option mortgage
$400,000 Refinance Loan Amount
$8,000 in Closing Costs
——————————————
$408,000 Financed
At 7.500% Interest over 30 Years
Has a Monthly Payment of $2550 for Interest Only
Has a Minimum Payment Option of $1497
A Savings of $1200.00 a month on Interest Only
Ability to Defer Interest and Reduce your current minimum payment by over $2250.00

This is a fixed rate loan with the ability to defer interest, or a negative amortization loan, which allows you to use your remaining equity like a home equity line of credit whenever you want, with no closing costs. When you want to make a lower payment so your monthly cash flow goes further, you can do so by making the minimum payment, which borrows from your home equity to cover the difference between the interest only payment and the minimum payment. While the adjustable rate version of these loans are too risky to achieve your particular goals, a truly fixed rate cash flow option might be the answer, fulfilling all of your reasons to refinance while giving you security and flexibility for when a lower payment might be helpful.

Conclusion:
All loans costs money to originate and refinance, even if it’s not always clear how you may be paying for them. As we have seen, if you aren’t taking out a fixed rate cash flow option mortgage with the intent of only paying the minimum payment, most of the time it’s better to roll your closing costs into your loan, so that there is no out of pocket expense to you. Always remember to see if the loan achieves your goals, and don’t put too much stock in the GFE’s you receive while shopping around, because people, whether broker or bank, are more than willing to lie to you to beat out their competition initially, so they can lock you into a process which you cannot easily reverse. My recommendation is to speak with as many people as you can, but evaluate them on the basis of trust. You may find that the person who gives you the highest quote may be the only one telling you the truth. This is not a simple subject to discuss, and while we have tried to treat the subject thoroughly, a consultation with a refinancing specialist would be the best way to get answers specific to your situation, and to kick off your own evaluation. After all, life isn’t hypothetical.

Ongoing upheaval in the mortgage industry may affect self-employed borrowers more than all other types of consumers, and many of them seem to know it already. The most frequently asked question we receive from business owners and independent contractors is “How am I going to Qualify to Refinance in Today’s Market?” There’s no easy answer, but we’re going to go over how business owners and other self-employed people can protect themselves from a possible mortgage nightmare by locking in fixed rates with flexible payments today and preparing themselves to meet the refinance documentation requirements of tomorrow.

Many of our self employed callers see the news about the mortgage market getting tough on sub-720 FICO credit scores and “Stated” or “No Documentation” mortgage programs which allowed millions of self-employed people to secure and refinance mortgages in the past, and are worried that they may not be able to refinance or purchase a new home, whether it be today or sometime down the road. In these ways, the self-employed look like they may become the most prominent “victims” of what many industry pundits are calling a “mortgage meltdown”, unable to qualify for mortgages which they are already in, which are for the most part adjustable. More than any other category of borrower, self employed people and business owners are likely to be in ARM Adjustable Rate Mortgages, especially option ARM negatively amortizing mortgages, further exposing them to the risks of the next few years of home prices leveling off or falling and interest rates likely to rise (to whom I say “Refinance now” and get a fixed rate loan with similar payment options before it’s too late).

While it is true that business owners and the self employed have had it pretty easy for the past 5 years, with loose lending standards enabling many of them (myself included) to qualify for loans which their banks would have rejected otherwise, for the most part self-employed borrowers enjoy stronger income than their wage-earning counterparts. So why do banks give self employed home owners such a hard time? One word: Documentation.

Self Employed people generally have a harder time producing the type of documentation which banks have traditionally required from mortgage applicants. This was because underwriting guidelines before 2002 were significantly more strict than the guidelines we’ve seen over the past few years. While it’s true that the mortgage business is beginning to shed programs for subprime (read:”credit scores below 720″) borrowers and may be losing a lot of its Stated Income, Stated Assets, No Income, No Assets and No Documentation programs (called “Alt-A” or “A-”), one must also keep in mind that so called “A-Paper” lenders who cater to “A” credit borrowers (720+ FICO), along with Fannie Mae itself have made progressive changes to their basic underwriting guidelines to accommodate business owners and the self employed which will not be easily undone.

Alternative documentation which may be available to business owners is a complex topic, and we can’t hope to cover it entirely within the scope of a single article, but there are certain documentation standards available now, and for the foreseeable future, which will enable self-employed borrowers to qualify for refinancingtoday and continue to refinance in the future. We can boil down the major issues to five key factors for self employed borrowers and business owners to qualify for mortgage refinances today and down the road:

1. Loan to Value
2. Credit Scores
3. Proof of Employment
4. Proof of Income
5. Proof of Assets

We go over these topics and more in the second half of this special report.

It’s a hot topic. Millions of self-employed borrowers who purchased or refinanced a home in the past 5 years under liberal “stated income” or “no documentation” mortgage programs are finding they cannot qualify to refinance their Adjustable Rate Mortgages in today’s market, and are at risk of losing their homes to foreclosure when the fixed rate or minimum payment period on their Adjustable Rate ARM Mortgages resets or recasts to a much higher adjustable payment. In some cases, particularly for borrowers with Option ARM minimum payment loans, the payment could as much as triple over the next 3 years. Tighter lending standards, higher interest rates, and a slowdown in housing prices are making a dangerous combination for self employed borrowers. But there is light at the end of the tunnel for those who are able to take advantage of special fixed rate lending programs to lock in historically low rates and flexible loan options now, and plan their finances around meeting the lending guidelines of tomorrow. We cover both of these topics in this, our Special Report on Self Employed Refinancing.

In Part 1 of this article, we gave an overview of the state of the lending industry and the key factors which will enable self employed borrowers, businesspeople and independent contractors to cope with the changing financial climate. Let’s reiterate for a moment:

Refinancing for the self employed has gotten significantly easier over the last few years, due primarily to ready availability of stated income and no income verification loans. These are loans for which there is little to no documentation required from you to substantiate your income for the purposes of qualifying for a refinance. Over the past few quarters, especially during the current quarter, credit score requirements for these types of mortgages have increased substantially. So while a credit score of 620 was definitely considered “good” by mortgage companies as recently as December 2006, most limited documentation loans require a minimum of 720 credit scores today. Even though certain specialty lenders may still be able to refinance a borrower with stated income below a 720 FICO credit score today, you will not be able to borrow quite as much against the old homestead as you could have previously either. And when you refinance again in the future, or purchase your next home, you will probably be asked to document your income. So how can a self employed person or a business owner navigate a complex and changing lending environment? With today’s progressive conventional lending guidelines it’s actually relatively simple: Go back to basics, because the basics will survive.

There are five major factors (and dozens of little ones) to keep in mind when a self employed person refinances:

1. Loan to Value (or LTV): This is the Balance of your loan divided by the market value of your property at the time you refinance. Loan to Value ratios below 80% ( for example if you owe $640K on a home currently worth $800K) have historically been significantly easier to finance than LTVs over 80%.

2. Credit Scores: Business owners’ credit tends to take a beating in the first several years of starting a business, primarily because a lot of new debt is incurred on credit cards, lines of credit, new personal loans and personally guaranteed business loans, and the hundreds of credit apps that you may file with suppliers, vendors and even some of your pickier customers. If you are refinancing today, you may not have time to improve your credit too much, but consulting with a mortgage specialist regarding your credit profile in detail may provide you with the tools to boost your scores enough to qualify. If you are planning on refinancing in the future, first consider whether you can refinance today and take advantage of the flexible programs and low payments still available. If you have to wait, you should be trying to increase your credit scores to 720 or better. Smart use of personal credit cards (always get them to increase your limits, and never carry a balance of more than 50% of the limit on a single card) and timely monthly payments have the potential to significantly increase your credit scores.

3. Proof of Self Employment: Just like a normal wage-earning person would have to his employer verify employment for the past 2 years, the self employed person must be able to prove he’s been in business, even if he’s stating his income. This means more than just incorporation. Be prepared to provide a business license which has been issued in your name or the name of the business for 2 or more years, or in lieu of a business license a letter from your CPA saying that for the past two years he has been preparing your tax returns, that you are self employed, and preferably that you file Schedule C or the appropriate schedules for your filing category. If you are in business which requires a license in your area, you must be able to provide an explanation of why you don’t have one, and even that may not suffice.

4. Proof of Income: There’s an old saying that goes: “You can beat the Tax Man, or you can beat the Bank, but you can’t beat them both”. You may wish to write off tremendous amounts of expenses directly from the business and pay yourself a dollar, thereby minimizing tax liabilities, but in that case you would not be able to qualify for a prime loan unless your credit score was sufficiently high, and your LTV sufficiently low enough to state your income or ignore it entirely (”No Ratio” or “No Income Verification”). The normal, and most acceptable form of documentation of income, which will give you the best pricing and allow you to borrow the most money, is tax returns. If the applicants are the only owners holding any equity in the business, you may be able to use your business tax returns to prove income, but this type of documentation is not accepted by every lender. If tax returns are not going to be an option, get those credit scores up and be prepared to state your income at a “reasonable” level!
NOTE - To answer another frequently question: Bank Statements, whether personal or from the business, are generally unacceptable as proof of income for “prime” loans, and as you may have heard in the news, there’s not much “sub-prime” lending still going on, so prime is what you want to shoot for.

5. Proof of Sufficient Assets: Most industry experts who deal in the mortgage secondary market, where closed loans are bought and sold by banks and investors in mortgage backed securities, believe that we are seeing the end of truly “stated” and “no doc” lending, and that at least over the next few years that applying for a mortgage will require borrowers to be able to verify either income or assets at the least. So if you state income, you should be able to prove that you have money in the bank which is commensurate with the income level you have stated and the monthly housing expenses you claim on your loan application. By this logic, a person stating they make $6,000 a month and have been doing so for 2 years, with total monthly expenses of $3000 a month, should have at a bare minimum $6000 to $9000 in the bank to pass a “reasonableness test”. By assets we generally mean liquid assets, cash in the bank, stocks, bonds, and to certain extent retirement accounts. Certain personal assets which can be appraised and are generally appreciative or accretive in value by nature, for example fine art, may be included provided a professional appraisal is conducted and insurance is taken out in at least the amount claimed. If you can’t refinance and lock in a rate today, then 2 months before you refinance, plan on keeping your liquid assets as high as possible, be it in savings or investments etc., until you close the refinance. This covers all of your bases. Business bank statements can generally be used to substantiate assets, but only if your CPA provides a letter stating that you have full access to 100% of those funds and that withdrawing them will cause no material harm to the business.

In summary, if you are self employed and planning on future mortgage refinances:

Make sure your business is properly licensed and that your CPA is doing your books and taxes from the very beginning. Keep your credit scores up, and try to improve them wherever possible by increasing your credit limits and paying down your balances. Never, no matter how tight things get, miss a mortgage payment, or pay more than 14 days late. Decide now how you are going to account for your income. Being able to document your income through tax returns is something you really should consider, whether it’s personal or, if you’re the only owner, then possibly through the business returns. Finally, contact a mortgage company who really specializes in refinancing the self employed about 2 months ahead of the time you want to refinance, so you can plan the process and be prepared with everything you need to get the job done properly. Don’t assume that your current lender or servicer will give you anywhere close to the best deal when you refinance, because the nature of the business is that they can make more money the second time around, and are more than likely to try it! My final tip? Hold on to the name of your title company and your appraiser, it may save you some time and money when it comes time to refinance again.

Now if that all sounds like a lot of work, well it is. The best option for many self employed borrowers and business owners is to refinance now and pay off credit-damaging debts, especially if you are in an Adjustable Rate Mortgage, or ARM. If you’re like most business owners in America today, you are probably in a payment cap or pay option ARM, an adjustable rate mortgage with a 1% or lower start rate and multiple payment options each month. It’s no secret why these are popular, they’re relatively amazing loans, but the problem is that they are adjustable, if not today then at some point in the future. What’s this all mean? Rates are rising rapidly, which means the amount of interest you defer is getting higher each month. And home values are flat to declining in almost very major market in the country, meaning that the negative amortization you incur when selecting the minimum payment, while not a bad thing in and of itself, may put you in a situation where you cannot refinance because your loan goes “upside down”, with the balance growing larger than the value of the home. Unless you have a very specific purpose in mind, I don’t recommend keeping one of these option ARM mortgages if you need to refinance it within the next 3 or 4 years, as almost every economic outlook points to higher rates to curb core inflation over that timeframe. If you want the flexibility of a minimum payment option to defer interest and make the lowest housing payment possible as desired, you may qualify for a fixed rate mortgage which has the same payment options as the option ARM. The best one of these loans is the 30 year fixed variety, which is not very common, but is probably the brightest spot in the entire mortgage business at the moment with a fixed rate for 30 years and minimum payment of under 2% for the first 10 years. The best part is that this 30 Year Fixed Cash Flow refinance mortgage allows for no income verification if you are borrowing less than 75% of the value of the property, and you don’t have to have high credit score just as long as you haven’t missed any mortgage payments. Even if you have a pre-payment penalty, talk to your accountant and see if like most people you qualify to deduct the penalty amount as pre-paid interest on your taxes, because locking in a rate now is a very smart thing to do, and who knows when you’ll be able to do it again?

R1 has pioneered the 30 Year Fixed Cash Flow Mortgage, which offers the security of a fixed rate with the flexibility of an option ARM, and there’s no better product in the market for the majority of self-employed people. For a limited time, upfront appraisal & lock fees are waived on this program, so there is no out of pocket cost to self employed people, business owners, and qualified W2 employees to apply. Cash is available for borrowers who wish to pay off credit card bills or need working capital for their business or personal needs. Foreign Nationals who do not hold a US Passport may qualify as well. To redeem this offer, please mention the promotional code 30CASH to your R1 Financing Specialist, or click here to find out if you are qualified.

Already in Foreclosure? Click Here to Know Instantly How Much You Qualify For

The Foreclosure Process

Foreclosures don’t happen overnight, they are the end result of a series of late payments, fear, denial and finally shame. Because many homeowners never imagine the prospect of foreclosure in their wildest dreams, let’s walk through the process leading up to foreclosure:

1. A 30 Day Late Mortgage Payment
When you miss a mortgage payment deadline by more than 30 days you are considered 30 days late and marked as such on your credit report. You will often have to pay late fees above and beyond your regular mortgage payment, and you will continue to be marked 30 days late for each subsequent month you do not make the payment you missed. This means you need to make two payments the following month to get back up to current status. 30 Day lates hurt your credit score and lock you out of the best mortgage programs automatically for at least 1 to 2 years, but unless you have recently been released from a Chapter 13 bankruptcy or other payment agreement with your lender, being 30 days late will not immediately result in foreclosure. If you do not believe you can make your next payment, this is the last opportunity you will have to qualify for a good mortgage. One of the most popular refinancing options which allows for a single 30 day late is our Zero Interest & Zero Payments for 90 Days Mortgage Refinance because it provides 3 to 4 months of breathing room with no payments, but you need to act immediately after you’ve missed your payment in order to benefit from it. Once you are marked 30 days late for a second month in a row, you are no longer eligible. For this excellent loan, or many other options which still allow for decent rates and loan amounts.

2. The 60 Day Late
If you are unable to catch up on your mortgage by clearing your 30 day late, and miss a subsequent payment (even if it is months later and you’ve paid all the payments in between) you will be marked 60 days late and will now be significantly restricted, but you can still find a regular, albeit more expensive mortgage with a 60 day late. This is your last chance to refinance before things get really complicated. If you do have a special payment plan or are out of a Chapter 13 bankruptcy which included the loan, 60 days is as late as some lenders will allow you to be without foreclosing upon the property, but otherwise you do have one or two more chance for redemption.

3. 90 Days Late, the Edge
This is really the edge of a cliff, if you miss 3 mortgage payments without bringing your account current, even if they are not back to back, you will be considered 90 days late and you basically will have 15 days from the date you receive this notice to refinance and pay in full before you are knocked out of the market permanently. Your lender may offer to put you into a payment plan at this juncture, often referred to as a forbearance agreement, which you may want to do to buy yourself some time to refinance. 90 day lates have a tremendous negative impact on your credit report, but you should still be able to refinance if you act quickly and work with a lender who specializes in these situations, however don’t expect to get more than 90% of the value of your home loaned to you at this point.

4. 120 Days Late, the Effective Foreclosure
Once you are marked 120 days late, you are for all intents and purposes eliminated from eligibility for 99% of all conventional mortgage financing. This is because the grand majority of lenders, including so called “bad credit” lenders, cannot lend to a borrower who is reporting 120 days late because their underwriting systems and guidelines consider this a de facto foreclosure. If you are 120 days late, stop reading this and skip down to the part of the article where we explain how much financing you can expect inside of a foreclosure.

5. Notice of Default (NOD)
This is the point of no return. Once you have been 120 days late, within a matter of days you will receive a notice of default on your loan, which will be recorded at your county courthouse and entered on your credit report as a foreclosure. This will ruin your credit in ways you will only believe once you have experienced it. We recommend avoiding this situation by acting as early as possible, because once a default has been recorded, your situation will be escalated to a legal matter. While many states’ homestead provisions allow for extensive legal battling, if you are truly in default you can expect to lose your home within 15 to 180 days of service of the NOD.

How Does This Happen?
The reason people miss payments is so simple you’ll laugh. They don’t have the money. It’s true everywhere, no matter what we say about reasoning and motivation, there is no more basic reason. What they do after they miss a payment is what separates the people who keep their homes and get back on the right track with a clean slate from those who spiral into an auction of their home.

Denial, Fear & Shame are the reasons why people don’t act in time to save their situations. Upon missing their first payment, they ignore the calls from the lender, stop answering the phone and not opening mail, and often become paralyzed by the situation. By the time they grasp the urgency of the matter, it’s too late and nothing can be done. After all, we can feel very powerless when we don’t have the money to make ends meet, and our responsibilities to our families are so large that we never want to think that we could be letting them down. S0 the 30 day late becomes a 60 day late, which drops credit scores and reduces mortgage quality, and then a 90 day late occurs, and suddenly credit scores have fallen through the floor and it becomes almost impossible to qualify for a good refinance, and now it’s too late, 120 days late and foreclosure. But when times are hard, it is extremely important to get help, professional help.

The people who stay out of foreclosure are those who act as early as possible in the chain of lateness that we illustrated earlier. The sooner you refinance, the more you can borrow, the lower your rate, and the greater the possibility you can qualify for a minimum payment option loan which would slash your minimum obligations in half and ensure that you can make payments. In fact, the best time to refinance is when you know you can’t make next month’s payment, even if you think it’s a possibility, it’s time to get a cheaper mortgage at any cost. Failure to do so could cost you the whole house, but the earlier you act the better your chances of avoiding foreclosure.

OK But I’m Already 120 Days Late or More
In many cases, it may already be too late, and you will find that no one you talk to can close your loan. It is important to realize two things. 99% of mortgage professionals don’t know the first thing about handling foreclosures, we haven’t had very many in the US for the past 10 years, until very recently. So don’t accept a flimsy pre-approval as some sort of promise to save you, the real foreclosure bailout process takes time, energy and effort from you and your lender to successfully complete. Ten years ago, or even 5 years ago, you had no options at all if you were 90 or more days late on your mortgage. Even today, there are only a handful of specialists in the USA who are able to efficiently deliver loans to borrowers with open 120 day lates or foreclosures, and even fewer who can lend to those with scores below 500 FICO. It is a very difficult situation, but help is available to save your home from the bank. If your broker doesn’t know who or what about this industry, find a new broker.

Here are some rough guidelines to the types of specialty finance which companies such as ours have rolled out to help homeowners save their properties, their lifestyles, and their dignity from the foreclosure process: Firstly, most lending decisions in these scenarios are not based on your credit, but instead on the value of your home. As a rule of thumb, you will be limited to borrowing a maximum of 70% to 75% of the true market value of your home. So if you have a home which has a real market value of $200,000 and you currently owe $120,000 on a first mortgage, you would be limited to borrowing $140,000 to $150,000 maximum. If you have a current second mortgage, you should be able to keep it in most cases. In this case, if both your new first and second mortgages add pu to more than 95% of the value of your home, you may not be eligible. In most cases, you will not be able to borrow less than $100,000 or more than $2 Million. Debt consolidation is available to make it easier to pay the bills, and ask your lender if they will allow stated income to help you qualify regardless of the source of your income.

While the foreclosure process can be complex and difficult, if you act quickly you may be able to save your greatest asset and your quality of life. The longer you wait, the tougher it gets, but even when things seem impossible, check with a specialist, you may have more options than you think! As always, our phone lines and email are open to your enquiries.

Already in Foreclosure? Click Here to Know Instantly How Much You Qualify For

Click Here to Find Out How Much You Qualify For with Below 500 Credit

First, you may be wondering why the number 500 is such a big deal. A FICO credit score is a number from 300 to 850 which is meant to represent your reliability as a borrower, and takes into account how much credit has been extended to you, how much money you owe and whether or not you pay it on time. Banks like to tell us that 99% of people in the US have credit scores of 500 or higher, and use this as an excuse not to even bother lending to people with credit scores under the magic 500 FICO score. As far as they’re concerned, since only 1% of the population has a FICO below 500, they simply don’t have the time to design programs to help these people buy or refinance homes.

We’ve worked with dozens of people who have come to us with FICO scores below 500 over the years, and every one of them says the same thing. “I just need help right now, and everyone I talk to keeps saying NO”. This is because until very recently, it was extremely difficult to get a loan if your credit score was 499 or less, and even today, only a few mortgage lenders, whether they’re banks or brokers, have the time or attention required to focus on the needs of what they think are a few unfortunate people. So until very recently, if your credit score was under 500, you had almost no options to refinance your home.

Many people have touted the benefits of credit repair services to prospective borrowers with scores under 500. The proposal often reads like this, first, give them a thousand dollars out of your pocket to fix your credit, which they will accomplish in six months, and then once your scores are over 500, they get a loan done for you. Of course never mind that $1,000 is a lot of money for most people with 700 credit scores, and very often a heck of a lot for an individual seeking a mortgage / refinance to consolidate debts. Add to that the fact that conventional credit repair takes too long for most people to wait without the extra cash to pay off bills that you get with a refinance, and you can see that credit repair by itself is not a very efficient proposition if what you really need is a refinance loan today. That’s not to say credit repair doesn’t work, it’s just that it doesn’t work very well for most people who are under 500 FICO seeking a debt consolidation, refinance or home purchase loan.

Over the years we’ve taken a harder look at the numbers, and it turns out that the banks and credit reporting agencies may have drastically underestimated the number of people in this country whose credit ratings are actually under 500 FICO. There are literally millions of people nationwide who fit into this category, and we have spoken with our share. What do we know? That most people with credit scores below 500 are hardworking, honest people whose credit is suffering from the realities of living and working in America today. As tight as our budgets are stretched in this country today, it only takes a very short term disability or unemployment to severely damage our credit scores. And some of us might have gotten in a little over our heads when we were younger, but in the years since we’ve been trying to get back on the road to good credit, and we’re sick of getting charged sky high interest rates every time we get a new credit card, apply for a car loan, or get denied for a bank loan and wind up calling on the aforementioned hard money / private mortgage lenders. We knew the banks had missed something. Our friends below 500 were not only more numerous than they had previously estimated, they were also more than some credit score, they were good people.

So we developed a strategy which we are sharing in the hopes that other borrowers under 500 can reap some of the benefits that our own clients have. We’ve helped borrowers with no money in the bank, $50,000 of bad debt, and sky high monthly payments driving them into the poor house get out of debt, get some money in their pockets and eventually achieve major financial improvement in a very short amount of time.

And how does it work? First, there are a few major, institutional lenders which have programs that allow us to arrange and refinance real mortgage loans at competitive interest rates for borrowers with credit scores under 500. These are real, federally and state regulated lenders. Ask your mortgage broker about these programs, and if he doesn’t know what you’re talking about, get a new broker.

The typical strategy is a credit improvement strategy, where the goal is to take enough cash out of your home to pay off as many of your past due, high interest, or high payment debts as possible. We recommend taking a little extra cash from closing if possible, or to use some of the savings from your lower overall payments so that you can enter stage two of the strategy, which is third party credit repair. A good quality credit repair agency should cost less than 300 dollars overall and can clean up your credit and remove a lot of delinquencies and other items which are negatively impacting your credit. Combined with all the truly harmful items which you’ve paid off with your debt consolidation refinance, you should be able to improve your credit score by 50, 100 points or even more. I have seen a client go from a 485 FICO and $65K in combined credit card and auto loan debt and a total monthly payment of over $2800 to a 610 credit score and a payment of $1900 per month in less than 4 months. How did that payment get so low? Once their credit score went over 600, we were able to qualify them for a new mortgage at a low interest rate, because now our friends had “good credit”, and paid off the few remaining debts which they had by consolidating through refinance. Before the process, their average interest rate across all debts including home, cards and cars was nearly 22%, and afterwards, the average rate was under 9%.

There are some important limitations. If your credit score is under 500, you are generally limited to borrowing a maximum of 70% of the real market value of your home. This means if your house is worth $200,000 then you would be limited to a new loan of $140,000 or less. This limitation only applies to your first mortgage, so you if you currently have both a first and a second mortgage, and your first mortgage is less than 70% of the true market value of your home, you can still refinance and keep your existing second mortgage. Generally, you will need to have a first mortgage of at least $100,000 to qualify. It may be possible to borrow more than 70% of the value of your home but only if your current mortgage is not reporting on your credit report. Many programs will even allow you to use stated income to qualify!

We hope you find this information useful in reshaping your own financial future, and hope that you tune in for the next in this series of articles.

Click Here to Find Out How Much You Qualify For with Below 500 Credit

Introducing Hybrid ARMs
For the rest of us, an innovative class of new loans has been recently introduced for homeowners who want the security of a Fixed Rate mortgage, with the flexibility and exceptionally low payments of an Option Arm. These home loans go by many names, including Hybrid Option & Fixed Option Arms, but they have one thing in common: A fixed payment for several years. Some of these mortgages have fixed interest rates, some of them have fixed minimum payments which don’t go up, and some of them have both!

So what are the key benefits of Hybrid ARMs?
- Fixed Minimum Payments for 1, 3, 5 or 7 years
- Fixed Interest Rates for the Full Term on Many Programs
- Minimum Payment is typically 55% lower than a Regular Loan
- Increased Cash Flow, Decreased Risk Makes Housing Affordable & Secure
- Interest Only Payment Option Continues Even After Recast
- Greatly Reduces the Sticker Shock of a Fixed Mortgage
- Greatly Reduces the Payment Shock of an Adjustable Mortgage
- Greatly Reduces Negative Amortization
- Retains Flexibility of an Option ARM

Like an Option ARM, Your Payment Coupon Has 4 Options on it
1. Minimum Payment
2. Interest Only Payment
3. 15 Year Fixed Amortized Payment
4. 30 or 40 Year Amortized Payment

A Real World Example
Your Minimum Payment is generally 55% of what a regular fixed rate mortgage would cost. Let’s take a look at a hypothetical scenario. Jane has a house in California which has been appraised for $400,000 and has a traditional fixed rate mortgage on the property of $200,000 on which she pays $1467.00 per month before taxes & insurance. If Jane were to refinance this mortgage into a Fixed Option ARM, her minimum monthly payment would be about $800 dollars, about 55% of the cost she was paying previously. And both rate and minimum payment would still be fixed for 3, 5 or even 7 years. In fact Jane could take out $100,000 in cash out when she refinanced and she would still have a minimum payment of $1200 per month, and both rate and payment would remain fixed for 3, 5, or 7 years.

Update: Since this article was originally written, a variety of hybrid fixed rate option loans have been rolled out with 1% to 5% start rates, and fixed period of 30 years. These minimum payments can be based on full principal & interest amortization or interest only payment structures. Contact us today for more information on how to choose the loan which is best for your minimum payment option loan refinance.

But Do I Qualify?
Because of the very low effective rate of this financing and the very generous terms, these types of loans are generally available only to borrowers with credit scores of 620 or more. If you don’t know your credit score, you should call your loan officer and find out. Other things to look out for are any late payments on your mortgage in the past 1 to 2 years, and of course any serious delinquencies like liens or judgments on your credit report. Also, you will usually be limited to borrowing no more than 80% to 95% of the value of your home. And if you talk to your loan officer and they haven’t done a lot of Hybrid ARMs, get a new mortgage company, because there are a lot of ways they can steer you wrong simply out of ignorance (which we cover in a few of our other articles on the subject). These Hybrid loans are very new, very powerful financial tools and are best handled by those with extensive experience with the product.

But Wait There’s More!
We’ve had so many questions from consumers and success stories from our customers who have used this loan, that we have decided to publish a series of articles to inform our readers about this new category of products, and will be covering a variety of topics including some of the most common and some of the most creative uses of this financing, as well as a detailed look at the benefits and risks of this type of mortgage as compared to traditional fixed mortgages and Option ARMs.