A recent National Association of Realtors (NAR) economist blog noted that 24% of first-time home buyers obtained FHA financing in January, while 59% obtained conventional mortgage financing. This is very interesting as it contrasts the picture painted in my blog post from September 2019. That post noted that 75% of Millennial home buyers obtained FHA financing. While not all first-time home buyers are Millennials, the recent data still appears to be a significant change from only about 18 months ago.
FHA mortgages once attracted many first time home buyers with a 3.5% minimum down payment. But beginning in 2014, home buyers could obtain conventional loans with only a 3% down payment. FHA loans also appeal to home buyers with lower qualifying credit scores. Conventional interest rate pricing charges higher interest rates for lower credit scores. Because FHA pricing places less emphasis on the borrower’s credit score than conventional loans, FHA pricing was often more attractive to buyers with credit scores less than 700, especially when those buyers could only make a small down payment.
Note that “standard” conventional loans with a 3% down payment require the borrower to pay a higher interest rate and mortgage insurance premium as compared to 5% (or more) down conventional loans. But conventional mortgage giants Fannie Mae and Freddie Mac began offering special loan programs (called Home Ready and Home Possible, respectively) to home buyers whose annual income falls below a threshold (currently about $65,000 in the Atlanta area) and with credit scores of 680+. With these programs, 3% down conventional loans become very competitive with FHA loans for buyers who qualify.
When a buyer qualifies for the Home Ready / Home Possible program discounts, they can save money in two ways as compared to FHA financing. First of all, conventional loans do not require up-front mortgage insurance. FHA loans require a 1.75% up front mortgage insurance premium that is typically rolled into the loan amount. Secondly, when the borrower’s equity reaches 20%, the conventional loan mortgage insurance can be cancelled, even when the borrower initially made only a 3% down payment. Borrowers who use FHA mortgages with less than a 10% down payment must pay monthly mortgage insurance premiums for as long as they own the mortgage. The monthly FHA insurance premium is 0.85 for all loans with less than 10% down payments. That is about $177 per month on at $250,000 mortgage. The fact that such a large insurance premium is permanent makes many buyers consider conventional loans more favorably.
Are you considering your first home purchase? Be sure to explore all the loan programs available to you, including conventional and FHA mortgages. Give me a call and I’ll help you compare your options to determine which will give you the lowest total payment, considering both the interest rate and the mortgage insurance components.
I am very excited about this news. A bipartisan group of Washington legislators has introduced the American Dream Down Payment Act of 2020. If enacted, this bill would create special tax-advantaged savings accounts for eligible housing costs. The goal is to create down payment savings accounts similar to the 529 college education savings accounts. As a parent of college-aged children, I can say from experience that the 529 accounts have been a real blessing for my family. I think the tax savings are a great incentive to get potential home buyers saving for a purchase.
Alabama Senator Doug Jones stated, “Down payments are the biggest barrier to homeownership for first-time homebuyers, especially among low-income and minority Americans, and make it harder to build generational wealth that is often tied to home-ownership. Our legislation would provide a new path to help make the dream of buying a home a reality by making it easier to save money for down payments and other housing-related costs.”
Colorado Senator Cory Gardner said, “A down payment on a home can be a significant barrier to becoming a homeowner. Inspired by the popular 529 education savings accounts, this bipartisan bill will make it easier for people to save for a down payment.”
The bill’s sponsors cite a survey of renters that shows two-thirds view a down payment as a significant barrier to home ownership. Saving for a down payment can be harder with rising rents and student loan debts. Under the American Dream Act, states would establish the accounts and manage them like they manage 529 accounts today. The bill would allow potential home buyers to save up to 20% of today’s housing cost to use for eligible down payments and other housing costs. The bill would also allow family and friends to contribute to the accounts, the earnings from which could be used tax-free when withdrawn for eligible housing expenses.
The National Association of Realtors, Habitat for Humanity and the National Association of Real Estate Brokers all support this legislation.
I will now reiterate a statement I made in a recent blog post, a 20% down payment is not required to buy a home. Many home buyers obtain conventional loans with only a 5% down payment – even 3% down if they are willing to pay a higher interest rate. And there are income-based conventional loan programs that offer discounted interest rates and mortgage insurance for a 3% down payment – for those buyers who qualify. Home buyers can obtain 3.5% down FHA loans. And military veterans can buy a home with a zero down VA loan. Many potential home buyers might be able to purchase a lot sooner than they think.
Do you know someone (a friend or family member) who wants to buy a Georgia home, but who is afraid she won’t qualify? Connect your friend or relative with me. I’ll help her understand where she stands regarding qualifying for a home purchase. And, if necessary, I will help her plan for a future home purchase when she is ready, perhaps using a new American Dream account.
Millennials are the largest generational group in US history. This year, the largest section of Millennials will turn age 30, entering what many consider to be “prime homeownership years.” So how is the pandemic impacting these potential home buyers? Two recent studies have addressed this topic.
The first, by First American economist Mark Fleming is more optimistic than the second. Fleming states that the pandemic has delayed, but not denied, homeownership for Millennials. He notes that household formation is a key driver of home demand, and that the Millennial generation is making lifestyle decisions that “will continue to support potential homeownership demand in the years ahead.” He further states that Millennials “may fuel a ‘roaring 20’s’ of homeownership demand.” As a loan officer, I love optimism in the housing market!
On a less optimistic note, a realtor.com report stated that pandemic-related unemployment could further delay Millennials’ homeownership dreams. It expresses concern that unemployed potential homebuyers will live from their savings. And it could take them years to recoup their savings once the go back to work. The article then references how a 10% down payment on a $320,000 home (the median list price of a US home in April), is $32,000. Ultimately, it can take people months, if not years to save tens of thousands of dollars for a down payment.Here’s the good news related to down payments – a 10% down payment is not required. Many home buyers obtain conventional loans with only a 5% down payment – even 3% down if they are willing to pay a higher interest rate. And there are income-based conventional loan programs that offer discounted interest rates and mortgage insurance for a 3% down payment – for those buyers who qualify. Home buyers can obtain 3.5% down FHA loans. And military veterans can buy a home with a zero down VA loan.
While obtaining a mortgage with a less than 20% down payment requires paying for mortgage insurance (except for VA loans), my opinion is that paying the mortgage insurance to buy a house sooner is often better than waiting and paying rent. As long as home prices continue appreciating, the homeowner will likely build wealth even if they have to pay the mortgage insurance. And in my opinion, growing wealth is superior to expense only home rental payments.
Are you or someone you know a Millennial wanting to buy a home in Georgia? I would love to help. We can explore low down payment and other options to help you buy a home (and start growing your wealth) sooner rather than later. Give me a call and let’s get started.
As a loan officer, I really like the Home Possible and Home Ready conventional loan programs. For eligible borrowers, these programs offer discounted interest rate pricing and discounted mortgage insurance premiums. To qualify, home buyers must make a down payment between 3% and 20% and complete an online homeownership class. Borrowers must also earn an income of 80% or less than the area median income for the census tract where they will buy a home.
I think these programs are such good deals that I have recommended (1) borrowers who planned to make a 20%+ down payment actually make less than a 20% down payment to qualify for the lower rate and (2) spouses or domestic partners put only one person on the loan application to keep income lower to qualify for the discounts (that’s perfectly legal and within guidelines, by the way!!) The discounts are especially powerful for people wanting to buy condominiums, as these programs allow the buyer to avoid the expensive “condominium price adjustment” in the interest rate calculation. The Mortgage Blog has covered these programs in the past.
So, what’s the good news? On July 12, Freddie Mac updated its Home Possible Eligibility Tool to reflect the new 2020 area median income limits issued by the Federal Housing Finance Agency (FIFA). Approximately 87% of counties will experience AMI increases in 2020. That means that more home buyers can now qualify for these great loan programs.
I checked the tool for some addresses in the Atlanta Metro Area. Before July 12, the Home Possible annual income limit in these areas was $63,360. Now the annual income limit is higher at $65,760. I also checked Fannie Mae’s Home Ready website and found the same adjustment. While the income increases are not huge, every little bit helps, right? Home buyers earning $64,000 to $65,000 now can take advantage of these great programs, whereas they could not before July 12.
I recently talked with a first-time home buyer. She said another lender suggested she get an FHA mortgage. I recommended that with her 740 credit score and qualifying income, the Home Ready / Home Possible programs would be much better for her. She could get a similar interest rate with a 3% down payment, and she could avoid the FHA up-front mortgage insurance, which would cost her over $4,500. She agreed with me.
Do you know someone who wants to buy their first home in Georgia? They need to find a mortgage lender who will explore all loan options to find the loan that best fits their own unique situation. Tell your friend or coworker to call me. I’ll make sure we structure the loan and their application to take advantage of the best loan program available.
It’s fascinating to see studies about how the pandemic could impact the future residential real estate market. The latest Mortgage Blog post noted that many city dwellers are now considering a move to the suburbs. Here’s another impact: A recent renters survey showed that 35.9% of all renters say they likely will not renew their lease, while another 38% are not sure or are somewhat likely to renew their lease. Most striking is that 41.6% of renters who pay $1,750 or more per month say they will likely not renew their lease. The article states that apartment fitness centers, pools, and clubhouses closed due to the pandemic contributed to this renter sentiment.
As someone who likes growing my net worth, I must say this survey makes sense to me. At today’s historically low interest rates, it is possible for someone in the Atlanta area to buy a $300,000 home with a 5% down payment, and have a mortgage payment of only about $1,750 per month. (This assumes a 3.5% interest rate.) With a monthly rent payment, the entire amount is an expense. Renters do not build wealth from their residence. But a home buyer begins building her net worth with her first mortgage payment. For the scenario mentioned here, the very first mortgage payment includes $448.53 of principal, or equity in the home. So only $1,302 is an expense. That seems like a better use of money to me.
And, given recent home price appreciation, it is reasonable to assume that an owner’s home will appreciate over time, building additional wealth. So home owners build wealth with appreciation over time and with each payment. My question is, “Why would someone pay $1,750 in monthly rent when they could own a $300,000 home instead?” I suppose I can understand if people love their apartment’s amenities or if they don’t want to deal with home maintenance issues.
But many people believe myths that make them think they cannot buy, when they actually can. One myth is that a buyer must make a 20% down payment. I have closed many mortgages where the home buyer made only a 3% down payment. And I’ve closed VA loans where the borrower paid $0 down. To fund 3% down payment a buyer can get a gift from a relative or perhaps borrow from a 401K account. Another myth people believe is that they must have “great” credit. Even in the pandemic world, we can close mortgages for people with a 620 credit score. And there are ways to improve a credit score over time.
Would you like to grow your wealth every month with homeownership in Georgia instead of making an expense-only rent payment? If yes, contact me today. We can start planning now to help you buy a home as soon as possible.
For the fourth consecutive year, the conforming loan limit is rising for 2020!
Historically, this is the normal trend of conforming loan limits as the maximum conventional loan amount increased almost every year from 1980 to 2006. Then 2007 arrived…
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%)
the new 2020 maximum conventional loan limit will be $510,400, which is just over a 5% increase from this year.
Since one only needs a 3% down payment to qualify for a conventional loan, this means buyers can purchase a $526,000 home with only a $16,000 down payment! With 2020 just around the corner, we can begin using the new limits.
With the conforming loan limit increase, we can also expect the maximum FHA loan limit to increase as well (currently at $379,500 for metro Atlanta). 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 2020? 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!
Now that everyone understands the basics of FHA and conventional loans, let’s do a buyer comparison. Both Jack and Diane want to purchase a $300,000 home. They both have $11,000 (3.7%) for the down payment and qualifying credit scores of 680 for Jack and 795 for Diane.
With Jack’s 680 credit score, his monthly payment for a conventional loan (principal, interest, and mortgage insurance “MI”) would be $1,820.82. For a FHA loan, his payment would be $1,563.19. There’s no comparison. For Jack, the better deal is the FHA mortgage, even though it has the draw backs of the up-front mortgage insurance and the permanent monthly mortgage insurance payment.
With Diane’s 795 credit score, her monthly payment for a conventional loan would only be $1,582.61. Her FHA loan payment would be $1,542.47. In this case, Diane is also better off, at least initially, with the FHA loan. One thing to keep in mind is the MI premium. If Diane chooses the FHA loan, that premium is permanent (assuming Congress does not change the law). If she chooses the conventional loan, the insurance will eventually be cancelled, dropping her payment to $1,442. The key question for Diane is, “How long will you stay in the home?” If less than 5 years, Diane’s best bet is the FHA loan. If longer than 5 years, Diane may want to consider the conventional loan.
Notice the FHA payments for these examples. They differ by only about $21 even though the credit scores are drastically different (680 versus 795). This shows why FHA is better for those making a purchase with lower credit scores. The buyer doesn’t see as steep of an increase in their payment.
In the next blog post, we will make the same comparison with a 10% down payment.
Does your friend Scott talk about buying a house? Does he understand which loan program is best for him? If not, have Scott contact me. We Dunwoody Mortgage professionals understand the details of these mortgage programs, and we coach our buyers to make the best decision given their circumstances. Often, with a slight change to their home purchase situation (change of down payment, paying down a credit card balance, etc.), we can help our clients save money with a better interest rate or a lower mortgage insurance cost. Home buyers should consider all options before buying, and Dunwoody Mortgage offers the service and knowledge to help home buyers make the best decision possible.
Restating the main theme from the prior post, people who want to buy homes do not need “great” credit scores or large down payments. Home buyers can obtain mortgages with as little as 3.0% down. What about those people who have not saved enough for the low down payment plus closing costs plus prepaid escrow? Do they have any options to help cover their required cash to close? The answer is, “YES!” Here are some options for cash-strapped buyers:
Request that the seller contribute cash at closing to help cover the closing costs and prepaid escrow. Mortgage guidelines allow the seller to contribute specific percentages of the home sale price to cover transaction costs and escrow, but not the down payment. If the buyer’s agent can negotiate that the seller helps cover these items, then it can be done within the guidelines. The greater the down payment, the more the seller can contribute.
Borrow from an employer-sponsored retirement account. In many cases, home buyers with 401K or other retirement accounts may be able to borrow against the account balance to help purchase a home. These are loans – the home buyer signs paperwork agreeing to repay the retirement account. Different retirement plan managers have different rules, so home buyers should check with their HR departments and retirement plan managers to determine their eligibility. Buyers can use retirement funds to cover down payment, escrow and loan costs.
Obtain a cash gift from a blood relative. Parents, grandparents, siblings, and other blood relatives are allowed to give cash to help home buyers. “Give” is the key word because all parties must sign documents stating the funds are a gift and not a loan, so no repayment is expected. A recent Wall Street Journal article notes that now more first time buyers obtain relative gifts to help buy their homes. Buyers can use gift funds to cover down payment, escrow and loan costs.
Government down payment assistance programs. These programs are available from many state, county, and city governments. They often require home ownership education classes and other commitments from home buyers. These assistance programs may have income requirements.
The good news here is that cash-strapped home buyers can obtain low down payment loans and many can use one of these options to help close their loan. Do you know someone who wants to buy a Georgia home but has limited cash? Connect them with me. We at Dunwoody Mortgage will help them explore all available options to buy a home sooner rather than later.
In the last post, we debunked the myth that home buyers must make a 20% down payment to buy their home. There are many programs enabling buyers to close with 5%, 3.5%, or even 3% down payments. But there is one other factor to consider regarding the cash you have available to buy a home…your “cash to close.”
Cash to close includes your down payment, PLUS the closing costs and prepaid escrow. In short, you need more cash than just the down payment to close the purchase. Here is a quick description of the other items:
Closing costs are the actual costs of transferring title and obtaining a mortgage loan. Closing costs include items such as appraisal fees, transfer taxes, intangible tax, attorney fees, title insurance, etc. Some of these costs are fixed while others increase with the home purchase price or loan amount.
Prepaid escrow represents the cash needed to pay the first year of homeowners insurance and to prefund your escrow account to pay future property taxes and homeowners insurance premiums. These typically increase as the home price increases.
So what options does a buyer have when he has scraped together that 3.5% down payment, but does not have enough cash to cover the remaining cash to close? Here’s where a proactive lender, working as a consultant to help the buyer, can make a huge difference. Typically, the buyer has 4 options, and the lender should explore them all with the buyer:
The seller can agree to contribute cash towards the closing as part of the purchase contract. There are limits regarding how much the seller can contribute based on the loan type and down payment percentage, but a seller contribution can be a huge help. Note that the seller contribution cannot be applied to the down payment.
The buyer can choose a “no closing cost” loan. Many buyers choose not to use this option because it involves a higher interest rate and monthly payment, but it can be a good option for some buyers who have limited available cash.
The buyer can receive a gift from a relative. We must carefully document the gift, but this is a great way for parents and grandparents to help a young adult get started building equity. The gift can be applied to the down payment.
We can combine the 3 options above to resolve a cash shortfall.
The key here is to remember (1) more cash than just the down payment is needed to close a mortgage and (2) there are creative ways we can solve a cash shortfall.
If you know a renter with a good job but not much cash, refer them to me at Dunwoody Mortgage Services. We will work closely with your referral and his / her Realtor to structure a mortgage that best meets their financial situation.
Many young adults and other potential home buyers mistakenly assume that they cannot buy a house. Why? Because they believe the myth that a home buyer must make a 20% down payment to buy a home. A recent study by the National Association of Realtors® (NAR) shows that the average down payment for 60% of first time buyers is 6% or less. However, their research indicates that just 13% of adults age 34 and younger understand that they can buy a home with as little as 5% down, or less. Their analysis shows that, over the last 5 years, more than 70% of non-cash, first time buyers, along with 54% of all home buyers, made down payments of less than 20%.
So why do so many Americans not understand this home buying truth? Perhaps it is because 20% is the down payment benchmark most often quoted by “experts” in print and other news media. And perhaps it is because that to avoid mortgage insurance on a conventional loan, you must make at least a 20% down payment.
Whatever the reason, it is time for us to spread the truth about down payments. That truth is, the majority of home buyers make down payments of less than 20%. Here are some quick options for folks who want to buy, but don’t have a lot of cash saved for a purchase:
Active duty military, National Guard, Reserves, or military veterans may qualify for a 0% down VA loan.
FHA loans offer minimum down payments of 3.5% with low interest rates.
Buyer who qualify can obtain a Home Ready conventional loan for 3% down, with competitive interest rates and discounted mortgage insurance premiums.
Buyers who do not qualify for Home Ready may still qualify for a 3% down payment, but possibly with a higher interest rate. In this case, the buyer will likely receive a lower interest rate if she makes a 5% down payment.
Bottom line, many home buying options exist for folks who can afford less than a 20% down payment. These home buyers need a mortgage expert to coach them to the best option for their financial situation. That is the type of individualized service we deliver at Dunwoody Mortgage. We work closely with our clients to help them obtain the mortgage solution that best meets their needs.
If you know a young adult in Georgia who has a good job, who is renting and doesn’t think she can buy her own home, suggest that she call me at Dunwoody Mortgage. She just might be able to fire her landlord, buy her own place, and start building equity. Don’t let her believe the down payment myths.
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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