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.
A recent mortgage industry headline surprised me, “Many Homeowners Still Missing Out.” The subheading read, “80% of owners have not refinanced.” Given that interest rates have reached historic lows, with less than 3.0% rates often available for 30 year mortgages, I’m really surprised that so many people have not refinanced.
The article provides the following statistics:
Almost 30% of mortgage holders do not know their current interest rate!!
Almost 20% of borrowers have refinanced in 2020.
Over 25% have considered refinancing but have not done it.
And over 50% have not even considered a refinance.
I am now doing refinances for customers whom I refinanced in 2019. Mortgage interest rates have continued dropping to the point that a second refinance now makes financial sense for some of my clients.
If you have a mortgage on a Georgia home, here are a couple of clues that you might want to talk with me about refinancing now:
Your interest rate is above 3.5%. The rate typically shows on your mortgage statement. Take a quick minute to look at it.
You obtained a FHA loan more than 2 years ago. With recent home appreciation, it’s worth exploring a conventional refinance in hopes that you can eliminate the FHA mortgage insurance.
The ultimate consideration is how much will the loan cost as compared to how much you can save monthly. Yesterday, I talked with a former purchase client. In 2016, she bought a house with a 3.5% down FHA loan at a 3.75% interest rate. That was a great deal for her….back then. Since she bought the house, it has appreciated over $100,000. With her increased equity, doing a refinance now would lower her interest rate almost a full percentage point, and she would eliminate the FHA mortgage insurance that costs her $155 every month. Her total monthly savings could be around $330. I estimate a refinance will pay for itself in just over a year.
What about you? Is your interest rate over 3.5%? Do you have a 2 year (or older) FHA loan? Do you want to give yourself a raise by lowering your monthly mortgage payment? If yes, give me a call. I can easily help you analyze your current situation to see if a refinance makes sense for you. Don’t wait too long. Who knows when interest rates will start rising.
For a self-employed person who wants to buy a home in 2021, now is the time to start planning. Mortgage underwriting for self-employed borrowers is very different than for W2 salary borrowers, and it’s all about what the borrower reports on tax returns. Before reviewing the steps a self-employed person should take now, let’s do a quick overview of mortgage underwriting for the self-employed.
First of all, what is a self-employed borrower? In the mortgage world, a borrower is self-employed if one owns 25% or more of the business. And even if paying oneself using a W2, if owning 25% or more of the business, the self-employed rules apply. No exceptions.
Secondly, underwriters calculate self-employed income using the net income reported on the borrower’s tax returns. We use the net, not the gross, because the net shows the amount of income left after the borrower runs the business. Only the income remaining after paying business expenses is truly available to pay the mortgage. In many cases, underwriters will calculate income based on a two-year average of reported net income. In some cases, underwriters will consider only the most recent year’s reported income. Discuss this with your loan officer.
So how should the self-employed prepare now for a 2021 home purchase:
Review current year P&L statements to understand the income situation.
Determine a reasonable budget for a home mortgage payment – based on the buyer’s home purchase criteria.
Work with a mortgage professional to determine what 2020 net income is needed to win underwriting approval of the payment. (Your lender may want to review prior year tax returns.)
Plan to report expense deductions that will allow for the needed net income.
Plan to have enough available cash to make the income tax payment.
In some cases, the self-employed buyer may want to explore other financing options. My current client started her business in October 2018. Her 2019 business return shows a loss, and 2020 is not complete, so she has not filed a return. But her business has grown rapidly and it is now profitable. She has also found the perfect house. We can obtain a mortgage using income calculated from the last 12 months of her business bank statements, which is strong. So we can help her buy that perfect house now, before she has two full years of positive tax returns. I can tell you that she is thrilled, as several other lenders have not been able to help her.
Are you self-employed and want to buy a house in 2021? Or do you know someone who fits this description? Connect with me now so we can plan for a successful underwriting experience in 2021. Waiting until after 2020 ends may be too late and your business expenses could hurt your home buying plans. It’s best to do some planning now.
Historically low mortgage interest rates have created a refinance “boom” in 2020. Millions of homeowners have realized significant monthly savings by lowering their interest rates. Current rates are still very low by historic standards, but refinancing is now getting more expensive.
Several weeks ago, mortgage giants Fannie Mae and Freddie Mac announced a new 0.5% “Adverse Market Refinance Fee,” applied to all mortgage refinances (not purchase mortgages). They announced this fee as a risk management step to address “loss forecasting precipitated by continued economic and market uncertainty.” In layman’s terms, Fannie and Freddie are collecting this new revenue to offset losses from expected foreclosures due to the pandemic and related economic stress.
Fannie and Freddie announced that the new fee would be effective for all loans they purchase starting on September 1, 2020. There was an immediate outcry from the mortgage industry. One mortgage association executive called this new fee an “ill-timed, misguided directive,” and urged its repeal. The same executive noted that the fee will raise interest rates on “families trying to make ends meet in these challenging times.” Fannie and Freddie relented, a bit, and delayed the implementation of the new fee until December 1.
What does that mean now if you want to refinance? It may be too late to avoid the fee. Many lenders are now pricing this fee into their published interest rates. Why so early? It can take a lender 30 – 60 days to package closed loans and sell them to Fannie and Freddie. Since lenders will pay this fee beginning December 1, loans locked for 30 to 45 days in late September may not be sold to the mortgage giants until after the December 1 fee date. The lenders don’t want to pay the fee themselves, so many are now passing the fee along to their customers.
What does this mean for new mortgage customers? Well first, if you want to buy a home, the fee does not apply and you can still take advantage of the lowest interest rates in history. Call me to get prequalified and then you can start your home search. Secondly, if you bought a home in 2017, 2018, and early 2019, it might still make good financial sense to refinance now, even if you have to pay the fee. Call me and we can evaluate your current mortgage versus a new mortgage. I can calculate your monthly savings, your loan costs, and determine a “return on investment” period for you. I often hear investment advisors recommend, “Don’t try to time the market.” I think that applies to a refinance. If the numbers make good financial sense now, don’t wait for rates to fall further, because they could go up instead. Let’s talk and evaluate what’s the best move for you now.
An August 5 study released by Ellie Mae shows that Millennial purchase activity is increasing. The study showed that, in the Second Quarter 2020, Millennials closed more purchase loans than any other generation cohort. Ellie Mae’s COO, Joe Tyrrell stated, “Millennials are emerging as a dominant force relative to driving the purchase market forward in the next few years.” Tyrrell continued by saying that the Millennial home purchase boom is just beginning, and that as more Millennials reach home buying age, this age group will drive purchase volume in 2021, 22, and 23.
US Census data shows that over 4 million Millennials will reach the 29 – 30 age level every year for the next several years. That 29 – 30 age range is the average age when Millennials enter the home purchase market.
The report continued by stressing that online loan applications, automatic updates and eClosing capabilities give Millennials the seamless digital experience they want while “freeing up time for the human interaction necessary to answer questions or concerns they may have as they navigate the home buying process for the first time.” That point is key, and it emphasizes the importance of obtaining wise counsel from a mortgage professional.
Other recent studies have noted that while young people show enthusiasm for home ownership, they recognize the challenges they face such as increasing home prices, saving for a down payment, and unstable jobs or job changes. They also note student loan debt as another challenge.
A large percentage of young people report that they are not confident in their mortgage knowledge. Of these, almost three fourths said they would consult a parent to learn more about mortgages, while less than half said they would consult a mortgage professional. I literally just spoke with a fifty-something parent of three adult children. He’s buying a house and he does not understand mortgages at all. Mortgage guidelines and pricing are changing rapidly, especially in our pandemic-crazed world. Only we mortgage professionals understand all the details and can give complete and up to date mortgage advice.
So parents of adult children, don’t “guess” at your kids’ mortgage questions or tell them about how things worked when you got your loan 10 years ago. Have them call me. I can counsel them now on the best interest rates and the critical COVID employment verification requirements. And I know all the right questions to ask them – to avoid surprises coming up after they have a house under contract. I will make sure they are truly prepared to buy and I will coach them all the way through to closing, helping them avoid potential unpleasant surprises along the way.
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.
In late April, the Mortgage Blog reported on mortgage forbearance impacts to home owners. But policies change quickly in our 2020 pandemic world, so it is now time for a forbearance policy update.
The Federal Housing Finance Agency (FHFA), which regulates Fannie Mae and Freddie Mac, recently announced that borrowers who have opted for forbearance can now refinance or buy a new home much sooner than previously thought. On May 19, FHFA stated that borrowers can obtain a new conventional mortgage after making three straight months of payments following the end of their forbearance period. Before this announcement, the policy was unclear and many experts thought that homeowners would not be able to obtain a new conventional loan for 12 months after exiting forbearance.
Fannie Mae clarified two other policy details:
Borrowers who missed payments due to a COVID-19 financial hardship but have repaid the full amount of the missed payments will have no waiting period to obtain a new mortgage.
Borrowers who requested forbearance but did not actually miss a payment will also have no waiting period.
FHFA Director Mark Calabria said, “Today’s action allows homeowners to access record low mortgage rates and keeps the mortgage market functioning as efficiently as possible.”
Ultimately, these announcements are positive for the industry, but they do not make me change my recommendations from the prior forbearance post. Those are: (1) If a borrower cannot make a mortgage payment, forbearance is a better option than a late payment or default, and (2) Forbearance is not a wise move for someone who still earns enough to make timely mortgage payments. Using forbearance to skip payments to save for something else such as a down payment on an investment property will still cause the borrower to wait before obtaining a new mortgage. Only now, the wait will not be as long as previously thought.
Do you have a friend who keeps talking about the current historically low interest rates but hasn’t taken action yet? Connect your friend with me and I’ll help them navigate our pandemic-minded guidelines to close a new mortgage and realize potentially great monthly savings with a low rate.
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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