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On July 30, 2008 President Bush signed H.R. 3221 into law. Here a few highlights that you should be aware of…

First-time homeowner tax credit

The law will extend a tax credit of up to $7,500 to first-time homebuyers (anyone who hasn’t owned a home in the last 3 years).

The tax credit is for 10 percent of the purchase price, up to $7,500, but phases out for higher-income homeowners. Homeowners are eligible for the tax credit if they bought between April 9 of this year and before June 30, 2009.

This is a tax credit, not a deduction. It reduces the homeowners' tax bill by up to $7,500 for the tax year in which the purchase was made. If you buy a house this year, you get the tax credit for the 2008 tax year -- the one with a filing deadline of April 15, 2009. If you buy a house next year by the end of June, you get the tax credit for the 2009 tax year. It's a one-time credit; you don't get to keep taking it year after year.

With the government, there is always a catch. That is that the money has to be repaid over 15 years, starting two years after you buy the house. That makes the tax credit an interest-free loan. If you take the full $7,500 tax credit, your income tax bill will increase by $500 a year for 15 years. If you sell the house before then, you'll have to pay the remaining balance.

Bottom line is, one way or another, Uncle Sam will get his full share.

Forgiveness to allow refinancing into FHA

A lot of people have fallen behind on their mortgage payments after the rates went up on their adjustable-rate mortgages, or ARMs. They can't refinance into fixed-rate loans because their homes have lost value, and they owe more than their houses are worth.

The housing rescue law was set up to help these people get out of trouble. It encourages lenders to forgive some of their debt so the borrowers can refinance at lower amounts into mortgages insured by the Federal Housing Administration (FHA).

It works like this: The lender has to forgive all the debt above 90 percent of the home's current appraised value. If that leaves you scratching your head, here is a hypothetical example, using round numbers:

Let’s say you have an adjustable rate mortgage with a balance of $110,000. Recently, housing prices dropped, and now your home is being appraised at $100,000. Meanwhile, the ARM's rate went up and you can't afford the full payment every month.

Obviously no lender is going to refinance your loan for more than your home is worth. However, under this law, the lender would forgive everything you owe above $90,000.

That allows you to find another lender who would underwrite a $90,000 mortgage to be insured by the FHA. That loan amount would include the upfront FHA insurance premium of roughly $2,700.

Again, there is a catch. If you take refuge in this program, you'll have to share your home-price appreciation with the FHA. If you refinance or sell less than a year after getting the FHA loan, the government gets 100 percent of the home price appreciation. If it's more than a year but less than two years, the FHA gets 90 percent. The FHA's cut then decreases by 10 percent until the five-year mark. Anytime after that, the FHA gets half of the appreciation, no matter how long you have the loan or own the house.

Down payment assistance soon to be a thing of the past

The new housing rescue law bans down payment assistance programs such as the ones offered by Nehemiah and AmeriDream. The ban goes into effect on October 1st.

Down payment assistance programs took advantage of a loophole in the way the FHA treats down payments. To get an FHA-insured mortgage, the homeowner has to make a down payment of at least 3 percent. Homeowners don't have to save even that much; the 3 percent can come as a gift from family members or nonprofit organizations.

Regulations don't allow the home seller to provide the down payment money.

That's where down payment assistance programs come in. They are nonprofits.

That allows the seller to give the 3 percent down payment money to Nehemiah or AmeriDream, and then Nehemiah or AmeriDream can turn around and "give" the down payment to the homebuyer as a "donation".

Fannie Mae and Freddie Mac don't allow sellers to indirectly give down payments to buyers. But the FHA has allowed this type of transaction for years. The FHA has long complained that down payment assistance programs artificially inflate house prices, and that loans using down payment assistance are more likely to default. But prominent congressional democrats have protected the down payment assistance programs on the grounds that they allow many minority families to become first-time homebuyers.

House Democrats wanted to keep the loophole open, and Senate leaders wanted to close it. With this law, the Senate won.

Property tax deductions for all homeowners

Under current law, you can deduct your property taxes from federal income tax -- but only if you itemize deductions on Schedule A. That leaves out people who don't have enough deductions to justify filling out Schedule A.  They have to take the standard deduction -- and that means they can't deduct their property taxes.

The housing law changes that. For homeowners who pay property taxes, it increases the standard deduction by $500 for single filers and $1,000 for couples filing jointly. This will be a benefit to people, such as retirees, who own their houses outright, and therefore don't pay any mortgage interest, so they can't itemize.

You can't increase the standard deduction by more than the property-tax bill. So if you're married filing jointly and you pay $800 in property taxes, you get an $800 deduction, not a $1,000 deduction.

Loan limits extended permanently

There are maximum amounts for loans that the FHA will insure, and that Fannie Mae and Freddie Mac will guarantee. Those limits were raised temporarily this year. The new law raises limits permanently.

For FHA-insured mortgages, the new limit will be 115 percent of the median home price in that area, up to $625,500. That provision will affect loan limits in higher-cost areas. In lower-cost areas, the current FHA limits won't decrease. However, FHA will also be requiring a minimum down payment of 3.5% versus the current 3% down payment.

For conforming mortgages -- those eligible to be bought by Fannie Mae and Freddie Mac -- the conforming limit will remain at least $417,000 for a single-family home. However, starting next year, the new limit is either $417,000 or 115 percent of the area's median home price, whichever is higher -- up to $625,500. In our area we are expecting the new conforming loan limit to be $625,500 starting January 1, 2009. Therefore, the $729,750 conforming-jumbo loan will be a thing of the past after December 31, 2008.

More regulations on reverse mortgages

A reverse mortgage is an advance against home equity. It's for homeowners age 62 or older, and the reverse mortgage doesn't have to be repaid until the borrowers die or move out.

Because reverse mortgages are for elderly borrowers, there is concern that dishonest lenders and brokers take advantage of borrowers. Borrowers are required to get counseling first, to learn the pros and cons of reverse mortgages. The law will result in strengthened qualifications for counselors.

The law bars insurance salesmen from originating reverse mortgages and prohibits originators from requiring homeowners to buy annuities or insurance products. (There's one big exception: The FHA insures reverse mortgages, and borrowers will buy that coverage.)

Finally, the law limits origination fees on reverse mortgages. They can't exceed 2 percent of a reverse mortgage of up to $200,000. For a reverse mortgage amount above that, the limit is $4,000, plus 1 percent of the loan amount above $200,000. Origination fees can't exceed $6,000 in any case. In future years, this upper limit is indexed to inflation.

Veterans

Service members returning from active duty abroad will be given breaks effective immediately now that the bill has been signed into law.

These protections apply to service members whose military obligations affect their ability to repay debts -- primarily, reservists and members of the National Guard who are called to active duty and have to leave their jobs and, in many cases, take pay cuts.

If a service member had a mortgage before entering active duty, a lender can't start foreclosure proceedings until nine months after the service member returns from active duty. Formerly, the protection period was 90 days.

Also, when someone with a mortgage is called up to active duty, the interest rates on all previously existing debt are capped at 6 percent. The 6 percent cap extends until one year after the service member returns from active duty.

To read all 694 pages of HR 3221 in its entirety, click on the link shown below:

http://www.house.gov/apps/list/press/financialsvcs_dem/hr3221_bill_text.pdf

For more in-depth information on the home loan process, read our new book!  “Mortgages Made Easy” provides answers to the questions everyone should ask in order to protect themselves when shopping for a home loan. This book discusses the different types of lenders and various loan options available, and it will help you determine which lender and loan is right for you. The information will help prepare you for making educated decisions in this ever-changing marketplace.

For a copy of “Mortgages Made Easy”, send your request to: Julie@sternmortgage.com

The Current State of the Mortgage Industry and What You Should Be Doing to Protect Yourself

Written September 6, 2007

You may be asking yourself, why are jumbo rates so much higher than conforming loan rates? Well, here’s the scoop on why.  After a lender has funded loans, they take several of those lose and bunch them together to sell to an investor. Lenders can always count on the government entities Fannie Mae (FNMA) and Freddie Mac (FHLMC) to purchase bundles of loans to restore the lender’s liquidity. However, those government entities can only purchase loans that fall within certain guidelines. One of the requirements is that the loan amount cannot exceed $417,000. Any loan above that amount is considered a “jumbo” loan. Lenders look to private investors to purchase their pools of jumbo loans. Naturally, these private investors are demanding a much higher “risk premium” for taking on these pools of loans as they see the rates of default climbing higher.

In light of all that has happened, many people are wondering why the Fed didn’t just lower the Fed Funds Rate to ease the situation. There are two main reasons they have refrained from doing so. The first being that the Fed is not yet convinced that the economy needs to be stimulated, as they are still concerned about keeping inflation in check. Secondly, the Fed doesn’t want to bail out investors who made risky decisions just to provide an easy way out. However, if the economy suffers a sharp enough slowdown, the Fed will most likely cut short-term interest rates at the Federal Open Market Committee meeting on September 18^th. Another possible stabilizer would be if the White House and Congress allow Fannie Mae and Freddie Mac to provide more assistance in the secondary mortgage market by increasing the conforming loan limit. This would enable them to purchase loans up to $625,500 which is the current conforming limit for Alaska, Hawaii, Guam, and the U.S. Virgin Islands. But all these policy-makers are stuck between a rock and a hard place, with trying to stave off a recession on one side, and not wanting to liberate the careless risk-taker investors on the other.

Even though you may not be able to change the economy yourself, here are a couple of things you can do to protect yourself. Whether you are in the market for a home loan or not, you want to make sure your credit is in order and your score is as high as possible. With no immediate need for a loan, time is on your side and you can take the necessary steps to ensure impeccable credit. There seems to be some cosmic force that makes it take twice as long to repair your credit when you are in a hurry and in need of a loan.

If you are in the market for a loan, keep in mind, now is NOT the time to shop around until you find someone who promises to give you an unbelievably low rate or claims they can save you a few hundred dollars in closing costs. Your home financing is just too important to be messing around with people who may be inexperienced or unprofessional.

Lastly, if you receive a notice in the mail stating that your loan has been sold and you are now to send your payments somewhere else, be SURE that it is legitimate before sending your hard earned dollars anywhere. Call the 800 number on your most recent statement to verify that the information is correct.

As always, your safest bet for getting the right loan at the right price is by finding an ethical expert mortgage broker who can guide you through the process. Seeking the advice of an industry professional is more important than ever given the volatility of the market and the rapidly changing lending guidelines. Your mortgage is most likely the largest single investment you will ever make. Be sure you invest wisely.

10 Tips on How to Avoid Mortgage Scams

You get home and find your mailbox overflowing with mail, only to find it is not because you are particularly popular, but because every mortgage company in the nation is soliciting your business. It’s everywhere you go – advertisements on the radio, billboards, your TV – non-stop advertisements claiming they can save you thousands if you just refinance with them. You may ask yourself, now that rates have gone up, why haven’t these ads gone away? Well here are a few tips to help you spot the “catch” in these so-called deals and opportunities.

1) When you are offered a rate that seems to great to pass up, you may want to take a second look at the type of loan they are offering. Many of the lenders out there are promoting an Option ARM, which is a monthly adjustable mortgage that gives the borrower several options when it comes to making payments. One of those options is to pay a minimum payment that carries a negative amortization. A negative amortization (“Neg-Am”) is when the minimum payment doesn’t cover the interest charged, thereby increasing the balance of your loan every month. This great rate you are getting offered, is what is known as a “teaser” rate. It is all you are required to pay, but not how much you are being charged.

2) Beware of the ads offering you an exceptionally low payment for a high loan amount. Again, this is usually possible by way of the “Neg-Am” loan. You are paying very little out of your pocket every month, but you are being charged more than that payment. It’s similar to your credit cards. If you pay the minimum say $20 payment, you are still getting charged the 18% interest on the balance, and next month, your balance will be that much higher.

3) Low-cost and no-cost loans make people think they are getting something for nothing. Sorry to burst your bubble, but lenders are not truly waiving those fees. Instead they will give you a slightly higher rate so that they get what is called a Yield Spread Premium (YSP), which is like a kickback. That slightly higher interest rate could end up costing you thousands more over the long run than if you just paid the fees up front. Everyone who works on your loan is going to get paid one of three ways…either by you in upfront fees, by the lender YSP created by charging you a higher interest rate, or a combination of the two.

4) Look at the APR. The Annual Percentage Rate (APR) is supposed to be the overall interest with any closing costs associated with obtaining the loan factored in. The higher the APR is over the loan’s interest rate, the higher the fees are for doing that loan. The APR will almost always be higher than your interest rate, but if there is a huge discrepancy, you are really paying a lot more than you bargained for. Read the fine print!

5) A monthly payment can also be lowered by having a longer amortization period. The amortization period is the amount of time you have to pay off the loan. Now lenders are offering 40 and even 50 year amortization periods. To give you an idea of how much this affects your payment, if you have a $300,000 loan amount with a 6.5% interest rate, the payment would be $1,896 on a 30 year loan. If your loan was extended to 40 years, your payment would be $1,756. If the same loan were amortized over 50 years, your payment would only be $1691. As you can see, the payments seem more attractive, when really you are just spreading your payments out over a longer period of time, which also means you are paying interest for a lot longer – more money for the lender.

6) Quotes without questions. If you call up a lender, and ask them what their rate is, if they quote you a rate without asking you a lot of questions, that quote is completely useless. There are so many factors that affect what rate a lender can offer you, it would be like a doctor trying to diagnose you without even asking what your symptoms are. The low quote that is thrown out there with no questions asked is a quote based on the perfect conditions. If you fit neatly into their tiny little box of requirements, then sure, that rate is available. However, mortgage lending is not a “one size fits all” type of service. But just to give you an idea, some of the things that will determine the actual rate you can get include: the size of your loan, the type of documentation you can provide, if you are taking cash out, what your credit score is, the loan-to-value of the home, if it’s a primary residence or investment property, if there is a second loan on the home, if it is a single family residence, condo, or multiple units, if there is a prepayment penalty, and the list goes on.

7) Rate lock period. Some lenders can rope you in by quoting a low rate that is only good for 7 or 12 days. Well, if you aren’t closing your loan for 3 weeks, that lock in period is of no use to you. The last thing you want is to be half way through the loan process and find out that your rate expired. There are hefty fees for getting a rate lock extension, so be sure to ask how long the rate they are quoting is good for.

8) Prepayment penalty. This is one of the most common traps people fall prey to. They get a great rate, but when it comes time to refinance for some reason, or when rates go down, they are stuck in the loan. Imagine if rates drop significantly and everyone is enjoying all the money saving benefits of the changing market, but it would cost you $20,000 just to get out of your current loan. Or perhaps your spouse unexpectedly gets relocated and you have to sell your house. Guess what? The lender gets rich off penalizing you for getting out early.

9) Many lenders are offering a “mortgage rate reduction” which implies you would be getting a reduced interest rate. Many times this “reduction program” is referring to reducing your monthly payment. Again, this lower payment does not always equate to a better deal. Refer back to “Neg-Am” on number 1.

10) Online rates that are too enticing to pass up are sometimes the most misleading offers out there. Anyone can throw up a website and quote rates that are below market. The problem is, the person quoting could be working out of Nebraska with about 3 months of experience. Closing costs vary from state to state, and out of state lenders are not always aware of local and state requirements. The online lenders you see on TV, radio, and billboards, have a very high advertising expense – an expense that is passed on to you.

So the next time you hear “1.25% fixed”, or “Bad credit? No credit? No problem”, just remember, lenders are all fishing out of the same pond and working with the same economic conditions. If something sounds too good to be true, it probably is. Cross check any offers you get with the items listed above, and take a written offer or Good Faith Estimate to someone for a second opinion. Hopefully this has armed you to protect yourself from false, incomplete, or misleading advertising. Also, keep in mind it is really just a few bad apples that are giving the entire industry a bad reputation. For the most part, the vast majority is compliant.