Posts Tagged ‘changes in the mortgage industry’

Big VA Loan Changes for 2020!

December 12, 2019

Exciting new changes are coming for VA loans that close after January 1, 2020.  These two major changes will make it easier for military veterans to purchase a home.

The first change is that the threshold for VA jumbo loans will rise from $484,350 to $510,400.  This rise aligns with the increase in the conventional conforming loan limit.  This means that the higher VA jumbo interest rates will now apply only to loans exceeding $510,400.

The second change is expected to be 0% down payments on all VA loans.  The VA hasn’t officially released details on their max loans as of this post. Again, the expectation is no down payments will be required on VA loans in 2020.

Until now, veterans will full eligibility could obtain zero down loans on principal amounts only up to the VA jumbo threshold.  So the maximum zero down loan in 2019 is $484,350.  Loan amounts above this threshold have previously required down payments.  I won’t bore you with the complicated calculation now.  The key point is that veterans can now obtain 100% financing on homes priced up to $950,000.

This is a GREAT change for one of my current clients.  My client served for over 10 years, but the military doesn’t pay top dollar.  He and his wife were not able to save much money during his military days.  He recently started a very high paying job in Atlanta.  His credit score is over 800.  With his strong income, his debt to income ratio on a $750,000 home would fall well within VA underwriting guidelines.  He can make the monthly payments and he has a strong record of paying his bills on time.  He just has not been able to save for a significant down payment with his prior military pay.  Starting January 1, he will be able to buy that $750,000 home with zero down!  He is the “poster-child” for this VA loan change.

Do you know a military veteran here in Georgia?  Perhaps you see the Army, Navy, Air Force, or Marine Corps stickers on her car in the office parking lot.  When she complains about her commute, ask her how her life would change if she cut her commute by 30 minutes each way.  Then introduce her to me.  I’ll work to get her a great deal on a VA loan, taking advantages of the benefits she earned through her military service.  A new home closer to the office will make her life much better.

American Homebuying Power Grows

September 26, 2019

Overall economic circumstances keep improving for potential homebuyers.  First American’s Real House Price Index (RHPI) shows that Americans’ homebuying power increased consistently from January through July 2019.  The index tracks single-family home price changes adjusted for mortgage interest rate changes and personal income changes.

Mortgage interest rates trended downward during the first half of 2019, and they are even lower now compared to mid-year.  First American reported mortgage rates in January were 4.5%, and rates moved into the 3’s over the summer.  Average household income increased over the same time period.

Decreasing mortgage rates combined with increasing household incomes provide a double boost to Americans’ home buying power.  The Index’s “house-buying power” for consumers increased roughly 10% from January through July.  According to First American’s Chief Economist, Mark Fleming, “House-buying power is at the highest it’s been since we began tracking it in 1991.”

That means now is a great time to buy a home!  Even though home prices have been increasing, the decrease in mortgage rates coupled with household income growth make right now the best time to buy a home in almost 30 years, based on the RHPI measures.

Do you have a Georgia friend who complains about a landlord who won’t fix problems?  Let them know that their homebuying power is stronger than it has been in decades, and connect them with me.  I’ll help them obtain the best home mortgage for their unique situation as quickly as possible.  I’ll help your friend take advantage of today’s really low mortgage rates before they increase to 2018 levels or even higher.  Together, we will fire their unresponsive landlord!

Millennial Home Ownership Survey

September 19, 2019

There are some interesting facts and observations in an August article documenting survey results from Millennial home buyers.  Here’s a link to the full study from lendedu.com.  1,000 people aged 23 to 38 participated in the survey.  Here are some survey results:

  • 58% of respondents say they own their own home.
  • 83% of these home owners obtained a mortgage to buy their home.
  • 75% of these mortgage holders obtained a FHA loan.
  • 16% is the average down payment percentage for the survey respondents.

To me, it is very surprising to me that such a high percentage of these home buyers used the FHA program, especially given the relatively high down payment percentage reported.  What I also find surprising is how the author treats FHA loans vis a vis the private mortgage insurance component of conventional mortgages.

Let’s look at the basics of FHA mortgage insurance (“MI”) vs. conventional (private) mortgage insurance (“PMI”).  FHA charges a 1.75% up-front MI.  On a $300,000 loan, that charge is $5,250.  Assuming a Millennial average 16% down payment, FHA charges a 0.80% monthly MI premium, which equals $200 per month.  And for this loan, the borrower must pay the monthly MI for 11 years.

For PMI on conventional loans, there is no up-front fee.  So our $300,000 mortgage holder is better off by $5,250 to start.  The PMI premium is based on the combination of down payment and the borrower’s credit score.  Let’s assume that a Millennial buyer (we’ll call her “Anna”) has a 680 credit score.  I calculate Anna’s monthly PMI premium at 0.26% or $65 per month.  In addition, the conventional loan PMI will cancel sooner than FHA MI, so Anna will pay conventional loan PMI for less than half the time she would pay FHA loan MI.

Summarizing this example, Anna with a 680 credit score would reap the following mortgage insurance benefits of choosing a conventional loan vs. FHA: (1) Anna saves $5,250 by not having the up-front FHA MI premium rolled into the loan amount; (2) Anna saves $135 per month with the lower PMI rate vs. the FHA MI rate; and (3) Anna stops making mortgage insurance payments way sooner.  And Anna’s PMI payment will be even lower if her credit score is in the 700’s.  From a mortgage insurance perspective, the conventional loan seems like a much better deal.

The author praises the use of FHA mortgages, then later makes the following statements about private mortgage insurance:

  • PMI should be avoided as it will usually cost the homeowner between 0.5% to 1% of the full mortgage amount….”
  • “…it is not great that so many are also paying for PMI as a result of less-than-optimal down payments…”

Such blanket negative statements about PMI concern me.  In our example, and many examples where the borrower has a strong credit score and can make a 10% or more down payment, the numbers often favor conventional loans.  FHA loans are often better when the borrower’s credit score is low or the borrower can only make a down payment of 10% or less.

The key lesson here is to consult a professional mortgage lender (I suggest that this guy for Georgia home buyers) to run the numbers for both FHA and conventional loans.  Then choose the best option given your circumstances.

Types of Mortgages – Conventional

July 30, 2019

Now let’s take a look at conventional mortgage details.  (Click here to review FHA loan details.  And here is a link to the Home Ready program changes.)

In general, conventional loans are less forgiving of credit issues than are FHA loans.  Conventional loans require longer wait times after derogatory credit events like foreclosure or bankruptcy.  And the borrower’s credit score has a much greater impact on conventional loan pricing versus FHA loans.  The lower one’s credit score, the higher the interest rate.  In some cases, a credit score 100 points lower could cause the borrower’s interest rate to increase by almost one percentage point.

Ultimately, this makes conventional mortgages less attractive to borrowers with lower credit scores and more attractive to those with higher credit scores.

Conventional loans do not require up-front mortgage insurance, but private mortgage insurance (“PMI”) is required for down payments less than 20%.  PMI rates vary based on the borrower’s credit score and down payment.  For the same loan amount, the monthly PMI will be dramatically different for a 690 credit score borrower making a 5% down payment vs. a 780 credit score borrower making a 15% down payment.  PMI is not permanent.  It automatically terminates when the borrower’s loan balance reaches 78% of the original contract price or appraised value (whichever is lower).  And, in certain circumstances, the borrower can request PMI cancellation prior to reaching the 78% threshold.

Borrowers can obtain a conventional loan with a minimum 3% down payment.  This often only makes sense when the borrower’s credit score is 720 or higher.  With a lower score, the PMI cost for a 3% down loan can get pretty expensive.  We often recommend that conventional buyers make a 5% or more down payment to keep PMI costs lower.

Another advantage of conventional loans is the maximum loan amount.  While FHA caps out at a purchase price of around $390,000 using the minimum down payment, conventional loans can go higher.  How much higher?  How about a $500,000 purchase price with a 3% down payment.  That is about 25% higher than the FHA maximum.

In the next posts, we will compare some hypothetical home buyer scenarios to determine which loan is best – conventional or FHA.  Do you know someone who wants to buy a Georgia home?  Please refer them to me.   We Dunwoody Mortgage professionals ask important questions to determine if we can help our clients make slight changes (down payment amount, paying down a credit card balance, etc.) that help them save money with a better interest rate and / or lower PMI premium.  We work hard to deliver excellent service and pricing to our customers, and our consistently positive reviews show our clients are pleased with our work.

 

Types of Mortgages – FHA

July 23, 2019

Given recent mortgage program changes, now is a good time to review the pros and cons of the major loan programs and when borrower circumstances favor one specific loan program.  In the last few years, many of our clients have used the conventional Home Ready program.   Without Home Ready, many of these buyers would have used FHA loans.  Given the Home Ready changes, we expect more future buyers to use FHA loans.

So let’s talk about FHA loans!

  • In the metro-Atlanta area, buyers can purchase homes up to about $390,000 using a minimum down payment (3.5%) FHA loan.  That is a lot of home!
  • Relative to conventional mortgages, FHA loans are generally more forgiving of credit “issues.”  This means lower credit score borrowers will most likely get a better FHA interest rate versus a conventional loan.
  • FHA allows for lower credit scores and shorter wait times following derogatory credit events, such as foreclosure or bankruptcy.  Borrowers typically need a 620 score to qualify.  Depending on other borrower details, Dunwoody Mortgage may be able to close loans where the borrower’s credit score is as low as 580.

Both FHA and conventional loans require monthly mortgage insurance “MI” for down payments less than 20%.  For FHA, the monthly premium is a flat 0.85% of the loan amount.  Conventional loans determine the premium based on the borrower’s credit score and down payment.  FHA loans also have an up-front mortgage insurance premium.  FHA monthly MI is permanent if the down payment is less than 10%.  Note that Congress is now considering a bill to automatically cancel FHA MI similar to how conventional loans cancel the insurance.  More to come on this story.

In the next post, we will review conventional loan details.  For now, if you know someone looking to buy a Georgia home, please refer them to me.  We Dunwoody Mortgage professionals understand the key loan program details and we coach our buyers to make the best decision given their circumstances.  We can help our clients find ways to lower interest and mortgage insurance costs.  We have a strong record full of very positive customer reviews.


Should I Refinance Now?

June 20, 2019

As recently reported in The Mortgage Blog, mortgage interest rates have dropped to their lowest level in over two years.  The last time rates were consistently this low was just before the 2016 Presidential election.  For people who purchased homes since then, it may make sense to refinance now.  So how do you decide if a refinance is right for you?

I read one article from a major think tank stating you should refinance for a rate that is a specific amount lower than your current rate.  I believe that is a bit simplistic and you should crunch numbers in more detail.  I recommend comparing the financial benefits against the cost of refinancing – the total amount you can save each month versus the refinance cost.

With a rate / term refi, you will save by lowering your monthly interest payments and, possibly, by lowering or eliminating private mortgage insurance (PMI) payments.  I recommend you focus on the dollar savings.  A 0.5% interest rate change on a $100,000 loan will save you much less per month than the same interest rate change on a $400,000 mortgage.  Eliminating or reducing PMI payments can provide significantly lower monthly payments.  To eliminate PMI, you must must have 20% equity.  Perhaps your home’s value has increased since you bought it.  You can capture this higher value as equity in the new loan using a new appraisal value.  If the appraisal shows you have greater equity, even if it’s less than 20%, you may see your PMI payment reduced, perhaps substantially.

How do I analyze the savings?  I estimate a new monthly payment based on the lower interest rate and potential PMI changes and compare this rate versus their current payment.  Then I divide the refi closing cost by the monthly savings to get a “break even” point.  If the monthly savings break even on the closing costs in three years or less, I typically recommend that the client pursue the refinance.  Why three years?  It seems most people have a general idea of their plans for the next three years or so.  Anything further than that becomes a little murkier.  I’m currently working with a client who has a $335,000 loan.  I estimate a refinance will save her $150 per month and will “break even” in about 22 months.  That seems like a wise financial move to me.

 

Another option to consider is a cash out refinance.  Is there a home project you want to do?  Perhaps a kitchen or bathroom renovation?  I have clients using their home equity and lower interest rates to take cash out for a project, and still have the same payment (or even a better payment) than they have now.

Do you know someone who bought a Georgia home in 2017 or 2018?  Ask them what they would do with an extra $100 per month.  Then refer them to me.  I’ll run the numbers to determine whether refinancing is a wise move.

 

The Impact of Student Loans on Home Purchases

March 20, 2019


Homeownership among people aged 24 through 32 declined 9% between 2005 and 2014.  There are many factors contributing to this trend.  One, obviously, was the Great Recession.  With higher unemployment, people underemployed, and people laid off, those in the 24 – 32 age bracket (just coming out of college) found a difficult labor market.  This caused them to delay their home buying plans.  On top of this, the Federal Reserve recently reported that increasing student loan debt has also lowered home ownership in this age group.

Millennials now carry a collective $1.5 trillion in student loan debt.  A recent Bankrate.com study reports that 31% of millennials (aged 23 – 38) have delayed buying a home because of student loan debt.  According to the study, almost 75% of the survey respondents stated that they have delayed major life financial milestones such as getting married, having children, saving for retirement, creating an emergency fund, and buying a car.

Reading studies like this makes it sound as though student loans are preventing people from qualifying for a home loan  Don’t confuse the ability to qualify for a home purchase versus simply putting off buying a home.  They are not the same.  I’ve helped people purchase a home that suits their budget even with student loan debt hitting six figures.  A potential home buyer will make a housing payment.  If they plan to live in one area for several years and have a good job, why not make a mortgage payment and build wealth instead of paying rent?  Again, they will have a housing payment of some kind.


Here are some loan options that may allow people with student loan debt to buy a home now rather than waiting:

  • 3% down Home Ready and Home Possible mortgages.
  • 3.5% down FHA mortgages.
  • 0% down VA mortgages for military veterans.
  • 3% down conventional mortgages.

To me, the report’s most eye-opening statement is this:  77% of millennials with student loan debt would approach college differently if they could go back and change it.  The respondents stated that they would apply for more scholarships or enroll in less expensive universities or colleges.

Do you have a friend or family member who thinks they cannot buy a home due to their student loan debt?  If so, refer them to me.  I will analyze their income and debts relative to all loan programs and help them chart the fastest course to home ownership.  With the many loan programs available, they might be able to buy now.


Low Down Payment / Credit Score Mortgage Options

January 16, 2019


Joe Tyrrell, an executive with mortgage software company Ellie Mae, recently stated, “People still have the misunderstanding that they need a FICO score above 720 and more cash for a down payment, so they don’t apply for loans because they assume they’ll be denied.”  These would be borrowers are self-selecting themselves out of the home buying market based on false assumptions.  So let’s clear up some mortgage myths.

Firstly, borrowers do not a need “great” credit score to win mortgage approval.  Conventional loan guidelines allow credit scores down to 620.  FHA loan guidelines allow credit scores down to 580.  And now non-traditional loans exist that can approve borrowers with scores down to 500 and derogatory credit events (e.g., bankruptcy or foreclosure) in the last two years.  Note that the lower one’s credit score, the higher the interest rate the borrower will face.  But FHA interest rates for lower credit score borrowers are not ridiculously high relative to rates for higher credit score home buyers.


Secondly, winning loan approval does not require home buyers to break their proverbial piggy bank and make a large down payment.  Home buyers can obtain FHA loans with a minimum 3.5% down payment, and they can win conventional loan approval with a 3% down payment.  And if the home buyer qualifies, he / she could obtain a low-interest Home Ready or Home Possible loan with a 3% down payment.  Qualifying military veterans can secure 0% down payment VA loans.  Buyers in rural areas can receive 0% down USDA loans in approved counties.

What may confuse potential home buyers about down payments is the fact that conventional loans require a 20% down payment to avoid mortgage insurance.  But as long as the buyer can win loan approval with the added monthly mortgage insurance expense, the buyer can get their mortgage with a down payment of only 3%.  This 20% down payment myth  requirement is widely held.  Even some financial journalists hold this incorrect notion, as shown by this statement in a recent Wall Street Journal article, “While conventional mortgages can require buyers to put down as much as 20% of the purchase price up front, FHA buyers can pay as little as 3.5%.”  Regardless of what some journalists write, I can help home buyers win conventional loan approval with a down payment as low as 3%!!

Home buyers should remember that they will have to pay closing costs and prepaid escrow in addition to the down payment.  So buyers should plan to invest more cash than just the down payment at closing.  But buyers have options to help with their cash to close needs.  We will explore those options in the next post.

For now, do you have a friend or co-worker who wants to buy a house but is concerned about the down payment or credit score requirements?  Connect them with me and I will help them obtain the best mortgage for their financial situation and home needs.

VA Mortgage Volume Grows (Again)

December 28, 2018

For the seventh straight year, the number of homes purchased using VA mortgages has increased.  VA home purchase loan volume has increased dramatically in the last five years – up 59%.  610,000 VA home loans have been closed in the current fiscal year, generating $161 billion in loan volume.  According to Chris Birk, director of education at Veterans United, “More Veterans have used this $0 down loan in the last five years than in the prior dozen years combined.”  VA loans now comprise about 10% of the residential mortgage market.

Many experts consider the VA loan to be the “most powerful home loan on the market.”  One key reason – low interest rates.  Industry researchers report that VA loans have consistently had the lowest interest rates for 53 straight months.  A second key reason – veterans can obtain a loan with a zero down payment.  That enables many veterans to buy now instead of waiting several years while saving money for another loan program’s minimum down payment.  A third reason – VA loans require no monthly mortgage insurance payment.  Combining these three factors can make a home purchase much more affordable for American military veterans.

 

 

Given the many VA loan benefits, any veteran considering a home purchase should investigate the VA loan option.  The first question a veteran should ask is, “Do I qualify for a VA loan.”  A prior Mortgage Blog post from 2016 addresses this question in detail.  See the post, VA Loans:  How to Qualify, by Clay Jeffreys.  The key update to this post is that the 2019 VA loan limit will be $484,350, as opposed to the $417,000 amount valid in 2016.  A quick summary is that VA loans are available to the following people:

  • People who were on active duty for 90+ days during wartime.
  • People who were on active duty for 181+ days during peacetime.
  • People who served 6+ years in the National Guard or Reserves.
  • Spouse of a service person who died in combat OR resulting from a service related disability.
  • Some people who have served as public health officers or in the Coast Guard.

To qualify, veterans must submit service related documents to the VA, which then provides a Certificate of Eligibility (“COE”) to the mortgage lender.  For example, active duty personnel submit the military form DD-214 to obtain the COE.  The VA requires different documents for National Guard and Reserves personnel.

Instead of standard monthly mortgage insurance, the VA charges a funding fee, based on the home buyer’s service record and down payment percentage.  The lender simply adds the funding fee to the loan balance.  See the post, VA Loans:  Funding Fee, by Clay Jeffreys for a more detailed funding fee explanation.

Do you know a veteran considering a Georgia home purchase?  We at Dunwoody Mortgage love helping veterans buy homes.  We deliver these great VA loan benefits with the excellence service all Dunwoody Mortgage customers receive.  Tell veterans you know to call me.  We will treat them with the honor, respect, and excellence they deserve.


Self-Employed Home Buyers – Helpful Loan Options

November 21, 2018


When obtaining a mortgage, self-employed home buyers face more detailed underwriting scrutiny regarding their income.  Conventional loans require analysis of the borrower’s net income as shown on their tax returns.  This can cause two challenges to self-employed buyers.

Firstly, underwriters compare year to year tax returns.  An income decline can cause loan denial.  As an example, one of my clients flips houses.  He wanted to buy a house in early 2016.  His 2014 tax return showed strong income.  He planned to sell two flipped homes in December 2015, but they were delayed about 3 weeks – until January 2016.  The income from those home sales did not appear on his 2015 income tax return.  Therefore, his income declined from 2014 to 2015, and he could not win conventional loan approval at that time.  He had to wait 12 months.  Then we won loan approval using a strong 2016 tax return.

Secondly, underwriters use the net income after business expenses to qualify a self-employed buyer.  Smart business owners expense as much as possible to lower their tax payments.  But the greater their expenses, the lower their net income, making it harder to qualify for a higher priced home loan.  Conventional loan underwriting guidelines work directly opposite to smart business tax strategy.  That can make it hard to qualify for the desired home.     

We can solve these problems by using a non-traditional mortgage that defines income using bank statements.  The underwriters determine income based on the statement deposit history.  The underwriters can specify income using 12 months of personal bank statements or 24 months of business bank statements.  Only 100% company owners can use business bank statements.  Qualifying for this loan requires that the borrower has been self-employed for at least 2 years.

So what’s the catch?  First of all, these loans typically require a 10% down payment – no 3% or 5% down loans.  Also, these non-traditional loans carry higher interest rates than traditional loans.  The borrower must decide if the higher interest payment is worth buying the house now.  For someone with significant tax write-offs, it may make sense to continue saving tens of thousands in tax payments in exchange for spending a little extra per year on mortgage interest. 

Do you know a self-employed friend or family member who wants to buy a home?  If you do, please connect them with me.  I will evaluate their ability to qualify for a traditional mortgage, and we will go that route if possible.  If tax savings or declining income becomes an obstacle, I can work to put them into a home sooner rather than later using a non-traditional loan.  With home prices and traditional mortgage rates rising, it may make financial sense to go ahead and buy now.