I am going to pick up right where my colleague Rodney Shaffer left off with his recent blog post. Buyers do not need 20% down to purchase a home. Honestly, we should do a post on this topic monthly because we hear it monthly from clients who think they way more down than is necessary to purchase a home.
Rodney’s recent post focused on an article he came across saying “20% is best” when buying a home. What the article doesn’t detail is home appreciation is rapidly outpacing one’s ability to save. So a $300,000 home with 20% down won’t be the same home when the $60,000 is saved years from now.
I’m focusing on a recent study by the National Association of REALTORS stating almost half of would be home buyers believe they need a larger down payment than is actually required. About 35% of would be buyers believe the down payment needed is more than 15%. Another 10% of would be buyers believe the minimum down payment requirement is more than 20%.
You do not need 20% down in order to purchase a home:
Conventional loans require as little as 3% down. Meaning, a home at $600,000 could be purchased with as little as $18,000.
Ideally buyers put 5% down for conventional loans as the interest rate is better and the monthly PMI is lower. On the same $600,000 home, the down payment would be $30,000.
FHA loans only require 3.5% down. The max FHA loan limit in metro Atlanta is just over $470,000. Meaning, a purchase price just under $490,000 with 3.5% down (roughly $20,000) is all that is needed.
I know there is an aversion to paying monthly Private Mortgage Insurance (PMI). This is required when purchasing a home with less than 20% down. I get it, yet, PMI payments aren’t necessarily the end of the world. Let’s look at two recent clients:
One client purchased a home around $300,000 and had 15% to put down. Instead of waiting to save an additional $15,000, they put 15% down and will pay $26 per month in PMI for just a few years.
Another client purchased a home around $400,000 and put 10% down. Instead of waiting to save an additional $40,000, they are paying just over $40 per month in PMI for several years.
When you compare the monthly payments on PMI to continuing to rent, not getting appreciation for a home you own, locking in an interest rate now, trying to save more and more money… paying PMI isn’t as bad as it seems.
If you’ve made it this far into the post – thank you for reading! If you do not remember anything else from this post, please remember (and tell all your friends), buyers do not need 20% down to purchase a home!
Speaking of purchasing a home, if the purchase is in the state of Georgia, contact me today! I can get you well on your way to owning a home!
The 20% down payment myth is driven by the fact that borrowers must pay PMI when obtaining a conventional loan with less than 20% down. Many home buyers want to avoid the added monthly PMI cost. I personally think that PMI is an effective tool to help some people buy homes sooner. I recently had a friend refer his adult daughter to me. When I counseled her to make a 5% down payment and pay the monthly PMI, Dad challenged me. Here’s how I explained it to him.
His daughter wanted to buy a $200,000 house and had about $25,000 of savings. A 5% down payment was $10,000 and a 20% down payment was $40,000. Remember that a home buyer must pay closing costs and prepaid escrow at closing, in addition to the down payment. And I always recommend that buyers keep cash available in a bank account after closing, to provide a “reserve” should an emergency arise.
The $10,000 down payment left her with $15,000 for closing costs, prepaid escrow, and her “emergency fund.”
To avoid PMI, she would need to save another $25,000 or more for the 20% down payment. I asked Dad how long it would take her to save that and he said 5 to 10 years. I then told Dad that with Anna’s great credit score and 5% down payment, her PMI cost would be less than $60 per month.
She could stop paying rent and buy a house now in a rapidly appreciating home market. Paying PMI to buy now would enable her to build equity as home prices rise, rather than just continuing to save more and more to keep up with rising home prices while she rented and saved (not to mention that a $200,000 home today is no longer going to be a $200,000 home in the 5-10 year time frame it would take to save up 20%).
And current interest rates are near historic lows. There’s no way to predict now what future interest rates would be when she finally saved enough to pay 20% down.
When I explained the math, her dad agreed and she bought a home with a 5% down payment.
Note that PMI premiums are calculated based on the down payment amount and the borrower’s credit score. In general, the lower the down payment, the higher the PMI premium. And in general, the lower the borrower’s credit score, the higher the PMI premium. So not everyone will have such a clear choice as Anna did. But for borrowers with good to great credit scores, my opinion is that paying mortgage insurance is often better for building wealth than paying rent and waiting to save the full 20%.
Do you know someone in Georgia who fears they are “missing out” as they rent while home values rise rapidly? If yes, please connect them with me. I’ll work to help them buy sooner with a mortgage that best fits their need, with as small of a down payment as possible.
I know I posted this information about a year ago, but I hear this myth so often in the mortgage market, I will keep repeating this…..You do NOT need 20% down to buy a home!
According to recent National Association of REALTORS data, the average down payment made by recent home buyers is 12%. Younger buyers tend to put down less. Buyers between age 22 and 30 made an average 6% down payment. Recent home buyers between age 31 and 40 made an average 10% down payment. This ultimately follows common sense, as younger buyers have had less time in the work force to save for a down payment.
Veterans using VA mortgage financing can obtain loans with a 0% down. FHA mortgages have a 3.5% down payment requirement. And borrowers can obtain conventional mortgages with only 3% down.
The 20% down myth is driven by the fact that borrowers must pay PMI when obtaining a conventional loan with less than 20% down. Many home buyers want to avoid the added PMI cost in their monthly payment. But I personally think that PMI is an effective tool to help people buy homes and build wealth sooner. I recently had a friend refer his adult daughter to me. When I counseled her to make a 5% down payment and pay the monthly PMI, Dad challenged me. He did not want her to pay PMI. In my next blog post, I’ll explain my PMI response to Dad. Spoiler alert….the daughter did by a house with 5% down and paying PMI – it made very good financial sense.
Do you know a friend or family member who wants to buy a home in Georgia? Don’t let them by discouraged by the 20% down myth. Tell them that is only a myth and then connect them with me. It is very possible that I can help them finance a home purchase sooner, instead of waiting to save more money. We will work to make their home ownership dreams a reality – hopefully right now.
The Federal House Finance Agency announced a new refinance product, which should be available sometime this summer. This program focuses on low-income borrowers with single-family mortgages backed by Fannie Mae and Freddie Mac.
Under the new refinance program, lenders must ensure that the borrower saves at least $50 a month in their mortgage payments while simultaneously dropping their interest rate by at least 0.500%. The program also requires lenders provide a $500 credit for appraisals if the borrower is not eligible for an appraisal waiver.
The program will be called RefiNow, and will even include waiving the controversial adverse market refinance fee (introduced in the fall on 2020 by Fannie Mae/Freddie Mac) for borrowers with loan balances at or below $300,000.
At least a half a point drop in rate…. either no appraisal OR a credit to cover the appraisal… this all sounds great! How does one qualify?
To qualify for RefiNow, a borrower must:
have a loan backed bay Fannie Mae or Freddie Mac
have an income at or below 80% of the area’s median income
be current of their payments for the last six-months (with no more than one payment missed in the last 12)
the max loan to value of 97% (meaning, there must be 3% equity)
a credit score of 620+
What does 80% of the area’s median income mean?
In the metro Atlanta area, most of the median area income is $82,000. Meaning, to qualify the borrower’s income must be at/below 80% of this amount (roughly $65,000). This is not a refinance program for someone with a $500,000 loan making six figures. It is indeed targeted to lower income borrowers.
Fannie Mae has a lookup tool for their Home Ready loan program. I expect they will have something similar for the RefiNow program. To check out to see the median area income for your property, you can use the lookup tool:
Again, this is not the official “RefiNow” lookup tool. It should give someone an idea of what their max income can be and still qualify for this program.
RefiNow – Yet another exciting way for homeowners to take advantage of super low rates for a refinance coming soon to a Loan Officer near you.
For the fifth consecutive year, the conforming loan limit is rising! I know what you may be thinking… wasn’t there a post similar to this in 2019, and the year before that… and the year… You get the idea, and you would be correct.
Historically, conforming loan limits rise every year, but it isn’t always true. From 2007 to 2016, the conventional loan limit remained steady at $417,000. With the housing crash and slow recovery, FHFA held the maximum amount steady for a decade. We experienced a modest increase in 2017 followed by more substantial increases for the next few years.
2017 max limit was $424,100 (up from $417,000 for only about a 2% increase)
2018 max limit was $453,100 (about a 7% increase)
2019 max limit was $484,350 (another increase of about 7%)
2020 max limit was $510,400 (just over a 5% increase)
the new 2021 maximum conventional loan limit will be $548,250, which is just shy of a 8% increase from 2020. As tough as this year has been, we’ll take all the good news we can get!
With 2021 just around the corner, we can begin using the new limits today.
This is great news for home buyers. Home prices increased substantially in 2020. Having a larger conventional loan limit helps when navigating the housing market.
As always, with the conforming loan limit increase, we can also expect the maximum FHA loan limit to increase as well. Once FHA makes their formal announcement, The Mortgage Blog will update you on it too!
Ready to get a jump on the spring market for 2021? The spring market is already starting! If you are looking to purchase in the state of Georgia, contact me today. I can get you prequalified and ready to make an offer on your new home in minutes!
More Covid related news… this week a large nation wide bank stated they were changing conventional loan requirements for buyers. Instead of using Fannie Mae and Freddie Mac guidelines, now buyers will need at least 20% down and a 700 (or higher) credit score.
Is this a growing trend in the mortgage industry? Is this bank acting alone?
The real question is “what are Fannie Mae and Freddie Mac saying?” Fannie and Freddie have made no changes to their guidelines in terms of existing credit scores or minimum down payments.
3% is still the minimum required down payment for conventional loans
620 is the minimum required credit score
While there have been changes to credit score requirements on government loans, increasing the down payment and credit score on conventional loans is not in play. Until Fannie Mae or Freddie Mac change their guidelines, this is an isolated event and not a trend.
Wanting to purchase a home in the spring market? Needing to buy a home with below average credit or a small down payment? Those loans still exist! If you are looking to buy in the state of Georgia, contact me today. I can get you prequalified in a few minutes, and we can have a talk about the landscape of the mortgage industry in the time of Covid.
Why stop there?!? We will keep it going for a conventional loan programs with small down payments. I’ll touch base on the new guideline compared to the previous requirements.
NEW: When making less than a 5% down payment on a conventional loan, if all borrower’s on the loan are first time home buyers, one of the borrowers must complete a homeownership education course.
Previously there was no education requirement for those putting less than 5% down to purchase a home. Note if one of the buyers has previously owned a home, then there is no education requirement regardless of the down payment amount.
For those keeping score at home, a “first time home buyer” is defined as anyone who has never owned a home OR has not owned a home in the past three years. If the last home you owned was more than three years ago, then you are now a first time home buyer.
NEW: Home Ready loans no longer require the homeownership education course if one of the occupying buyers has previously owned a home (again, means has owned a home in the past 3 years).
Prior to the change, one borrower had to complete the education course even if they had previously owned a home.
NEW: The homeowner education course is free if the borrower’s use this link – https://educate.frameworkhomeownership.org . Note if using another accepted education course, there may be a non-refundable fee of $75.
Prior to this change, the cost of the course was $75 to everyone regardless of where the course was completed.
New years… new changes… a lot to keep up with… your head spinning? Don’t worry! It is my job to keep up with the changes.
The Spring Market is upon us. If you are ready to get out and purchase a home in 2020, contact me today. If the property is in Georgia, I can get you ready to make an offer in just a few minutes. You can be well on your way to owning a new home faster than you’d ever expect!
In early December, I mentioned the maximum loan amount for conventional loans will increase from $484,350 to $510,400 in 2020. FHA followed suit and increase their maximum loan amounts.
One thing to remember about the maximum FHA loan amount is the amount varies from county to county. The max loan is based on the average home values in each market. The loan amount range across the US goes from $331,760 to $765,600.
To find your area, you can use the search tool created by HUD. Be sure to change the Limit Year from “CY2019” to “CY2020” in order to see the new maximum amounts.
For the Atlanta metro area, the new maximum FHA loan amount will be $401,350. This is about a 5% increase over the current limit of $379,500. With these increases, a buyer can now purchase a home in metro Atlanta:
$415,000 purchase price with 3.5% down using an FHA loan.
As we celebrate the new year, it is also time to celebrate more buying power in the housing market!
Are you thinking about buying a home in 2020? Want to get a head start? I’m already working with clients who are ready to purchase home. The spring market has started! If you are buying a home in the state of Georgia, contact me today. You can be ready to make an offer on a home in no time at all.
Home buyers continue to make assumptions (most of which are bad) when it comes to buying a home. Meaning, the options for education for buying a home are not as good as they should be.
That is why you have The Mortgage Blog!
This misinformation is undoubtedly holding some back from even looking to try and purchase a home. Let’s take a look at a recent survey by Fannie Mae to see some of the false assumptions buyers have about purchasing a home:
most buyers assume the minimum credit score is higher than what is actually required to qualify
most buyers assume the down payment is higher than what is actually required as a minimum down payment
few home buyers are aware of low down payment programs such as Fannie Mae Home Ready requiring only 3% down
Under these assumptions, many potential buyers assume home ownership isn’t even an option and therefor do not do any further investigating into possibilities of buying a home.
The Mortgage Blog has covered all of these topics and more:
The Mortgage Blog has your back! Reading over these, one will learn a large down payment is not needed to buy a home (as little as 3% down on a conventional loan and 3.5% on an FHA loan), perfect credit is not required (down to 620 on FHA and conventional and sometimes as low as 580 on FHA), and there are programs out there for first time home buyers.
Been wanting to own a home but confused at all of the misinformation out there? Just want a straight answer or two? Contact me! I will be happy to answer your questions about home ownership. If you are looking to buy in the state of Georgia, I can get you prequalified and on your way to owning a home!
If you think you’ve heard this before… it is because you have. Inventory levels are still low across the country. Low inventory levels push home values up due to the simple application of supply-and-demand. This is one of the main reasons home values have jumped so much in the past couple of years. How did we get here? There are a couple of reasons:
During the Great Recession, very few homes were being built. After many years of very little new construction (coupled with more people wanting to buy homes), a squeeze on inventory occurred.
While unemployment was high during the Great Recession, many people put off buying a home until their financial situation was more stable. This creates a pent up demand on those wanting to buy homes. This increases competition for the few homes available on the market.
Homeowners are remaining in their homes longer. We are at the highest rate of owners keeping their homes in 18 years. The length of time is now up to 7 years, which is a 10% increase year over year.
There are many reasons why people may choose to remain in their homes longer (they have a low rate on their current home, fear of finding their new home, tighter loan qualifying guidelines), but one new factor are baby boomers choosing to live/age in place. As baby boomers remain in their current homes (instead of down sizing or moving into assisted living), it again tightens the amount of available inventory. Of course, this will not always be the case. Baby boomers (along with the silent generation) own over 50% of the homes in America. As they age, we may find ourselves in the exact opposite situation – too much inventory.
Until we get there, how can someone make their offer stand out? There are a couple of things to do.
Make a non-contingent offer on the purchase. For those who own their current home, qualifying to carry two mortgages means an offer can be made without a contingency. A seller with multiple offers would find that more attractive. Homes are going fast, so it is not very likely one would carry both home loans for an extended period of time. For those who need equity from the current home for the down payment on the new home, there is always the method of recasting the loan after closing. A future post will cover recasting.
Get pre-underwritten prior to making an offer. In this method, the buyer applies for the home loan with a “to be determined” property address. Once approved, the offer letter to a seller simply says the buyer is ready to close pending an appraisal and final underwriting approval. This is a quick close and the seller knows the buyer is legitimate. Rodney Shaffer covers this more in-depth with this post.
For first time home buyers (and repeat buyers too), look to use Home Ready. This is a conventional loan requiring only a 3% down payment. Some sellers would prefer not accepting an FHA offer, so Home Ready allows for a smaller down payment than FHA (3% vs 3.5%), and is still a conventional loan. Couple this with the “pre-underwrite” option and have even more power behind potential offers. There are conventional loans with only 3% down that are not Home Ready loans, but Home Ready has some advantages over the “standard” 3% down conventional loan that buyers would want to take advantage of if they qualify. Here is a case study on a Home Ready loan.
Yes, it is a tight market when it comes to available homes to purchase. That doesn’t mean buyers should despair. There are ways to help make the offer more attractive to sellers. Looking to buy in the state of Georgia? If so, contact me today. We can start talking about any or all of these potential options.
Clay Jeffreys is a Mortgage Consultant with Dunwoody Mortgage Services and a writer for “the Mortgage Blog.” If you would like to be a guest writer for "the Mortgage Blog" please contact Clay for details.
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