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.
Fannie Mae has a great loan product called Home Ready. Potential home buyers can qualify even if not a first time home buyer. The blog covered the details of Home Ready in the past. Check out those posts:
One aspect to pay attention to is the income limit. To qualify for Home Ready, a potential buyer’s income can’t exceed 100% of the area median income (AMI) for the area. There are also some areas with no income limits. These areas are determined from the census track (where household income and people are counted in geographic areas).
Here is a handy website where one can look up a property to see about qualifying income limits:
Starting July 20, 2019, Fannie Mae will implement changes to the program. Gone are the no income limit areas. Another change is the qualifying income reduces from 100% of the AMI to 80%. What does this mean:
some metro Atlanta areas have no income limits, so a buyer could have an income of $200,000 and still use Home Ready. After July 20th, that will no longer be the case.
If an AMI is $80,000, the qualifying income will be now $64,000 (80% of the AMI) instead of the $80,000.
It seems Home Ready is narrowing the pool of potential buyers who can use the program. If you are looking to use Home Ready, talk to your loan officer to see if these changes could impact your home search.
Looking to buy in the state of Georgia, if so, contact me today. We can get you ready to make an offer on a new home in minutes, and see if Home Ready is a program you could take advantage of with your home purchase.
For the third year in a row, conforming loan limits are increasing.
In 2017, the limit increased from $417,000 to $424,100.
In 2018, the limit increased to $453,100.
In 2019, the new conforming loan limit will be $484,350.
Over three years, the max limit has increased by roughly 16%. This is quite a change as the limit stayed at 417,000 from 2006-2016. One thing though, I gotta say, what is the deal with no rounding up or down?!? I think it would be a lot easier to just say $453,000 or $484,000. Is the extra $350 going to make that big of a difference? Oh well…
Why the increase? Conforming loan limits are set by the Housing and Economic Recovery Act passed in 2008. This set the baseline loan limit of $417,000, and stated this baseline cannot increase until home prices return to pre-housing decline levels. With home prices still on the rise across the country, it is fitting the limit increased. Now a home buyer can purchase a $500,000 with roughly a 3% down payment. This opens up more homes for buyers who have stable jobs/strong income, but may be lacking in assets for a larger down payment. Congratulations!
We can also expect FHA mortgage limits to rise too. Currently for metro Atlanta, the limit is $359,950 (again, round up. Is $50 going to make that big of a difference :-). If we see a similar increase in 2019 as we did in 2018, expect the new FHA loan limit in metro Atlanta to be roughly $385,000. Expect a new blog post once FHA makes the official announcement.
Higher loan limits are great for consumers as housing prices continue to rise due to demand and low inventory levels. Looking to buy a new home in the new year? Is that home in Georgia? If yes, contact me today. I can get you prequalified in a matter of minutes and on your way to making an offer in no time!
Fannie Mae has brought back 3% down payments for some home buyers. As of the date of this post, Fannie Mae is allowing the change starting next week, and lenders are currently updating their systems to accommodate the change. Soon home buyers can qualify for a purchase with as little as 3% down.
What is the catch for buyers? The 3% minimum down payment is limited to first time home buyers purchasing a primary residence. A first time home buyer is defined here as either:
a buyer who has never owned a property
a buyer who has not owned property in the past 3 years
Refinances are also included in the change. Current home owners can refinance with as little as 3% equity to cover closing cost rolled into the new loan (5% equity is required if closing costs are not rolled into the new loan).
Are you a first time home buyer with little down looking to buy a home? Are you looking for the smallest down payment available without having to use an FHA loan and pay ridiculously high up front and monthly mortgage insurance payments?
If the answer is yes to either of those questions, and you are buying the home in the state of Georgia, I can help you get started! Contact me today, and I’ll get you prequalified and on your way to owning your first home.
Now that we’ve talked about the aspects of a mortgage payment, let’s focus on the mortgage options. There are so many mortgage options from which to choose – how do you decide which loan is best for you?
To contact any of us at Dunwoody Mortgage Services, click here!
Both Freddie Mac and Fannie Mae offer conventional loan products, but is one better than the other? In most ways, the loan products are similar. It’s like choosing the difference between chocolate cake and yellow cake… either way, you are still eating cake!
Even so, what if a specific situation made the decision for you? For instance, if you are allergic to chocolate, you probably don’t need to eat chocolate cake. There are certain situations that make Freddie Mac loans more appearing than Fannie Mae loans. Here are three of them.
Self-Employed Borrowers: Freddie Mac loans almost always only require one year of tax returns. Self employed borrowers can have a harder time qualifying for a conventional loan when two years of tax returns are needed… what if they had a down year two years ago?… what about declining income from last year to the current year? Either of those can cause problems. Both are eliminated when using a Freddie Mac conventional loan product since, in most cases, only one year of self employed income on the tax returns is required.
Income Exception: Let’s say my client just got a promotion, but the new income doesn’t begin for 60 days and the closing date on the new home is within 30 days. That will not be a problem using a Freddie Mac loan. As long as there is a 720+ credit score, the increased income begins within 90 days of closing, and the client has enough reserves to make mortgage payments until the new income begins, I can get someone approved for a loan using their increased income.
Non Occupant Co-Borrower: For the longest time, conventional loans would not allow non-occupant-co-borrowers* to co-sign on a loan. Freddie Mac will allow someone who is not going to live in the home co-sign onto someone else’s mortgage. I would be able to use the co-signer’s income and assets when qualifying the person who will live in the home as their primary residence. Whether or not this is a good idea to co-sign is a conversation the co-signer should have with the loan officer and their financial adviser. That said, if they are willing to co-sign, we can make it happen!
Fannie Mae and Freddie Mac loans offer similar loan products at similar interest rates. There really isn’t much difference between the two. That said, there are certain scenarios that make Freddie Mac loans better for the loan applicant. This is why you need to work with a mortgage lender who will ask the detailed questions that might lead to one of these scenarios. I can’t tell you how many times I have spoken with someone who started the conversation saying “I can’t qualify for a loan,” but they actually could qualify. You never know until you ask, so at least ask the question.
If you are buying a home in the state of Georgia, I can help you get started. Contact me today and we’ll get the prequalification process underway.
* a non-occupant-co-borrower is someone who will co-signing on a mortgage for someone else, but they will not live in the property being purchased.
There has been a lot of news coverage lately on Qualified Mortgages now that the rule has taken hold in the mortgage industry. What is a Qualified Mortgage and how does it impact the mortgage industry?
It is a great question and one that has been hotly debated as of late. Instead of getting into all of the minutia, let’s peer through the matrix and simplify the term Qualified Mortgage.
In short, a Qualified Mortgage is a mortgage that does not have excessive upfront points and fees, no “toxic” loan features (such as interest only, negative amortization, prepayment penalties, and balloon payments), and a capped debt to income ratio of 43%.
What does that mean? Let’s look at each part:
1. There is now a cap on all lender fees to keep customers from being charged with excessive fees.
2. Over the past several years, negative amortization loans, prepayment penalties, and balloon payments have essentially disappeared from the mortgage industry. Interest only loans did exist, but a buyer needs at least a 30% down payment in order to use an interest only product. In other words, these “toxic” loan features are, for now, already out of the mortgage industry.
3. While the debt to income ratio cannot exceed 43%, there is a temporary exception in place until January 2021 for all loans that are eligible to be sold to Fannie Mae, Freddie Mac, FHA and VA. If the loan being used to buy a home is eligible to be sold to Fannie Mae, Freddie Mac, FHA or the VA, then the debt to income ratio can exceed 43% just as it was allowed prior to Qualified Mortgage rule taking over the mortgage industry. Given the amount of changes in the mortgage industry over the past few years, a 7 year exception might as well be a 700 year exception. By the time 2021 rolls around, odds are there will be another set of rules that has replaced or modified the Qualified Mortgage rule.
How does this impact those looking to buy a home? In all honesty, it really doesn’t. The part most people are concerned about is the cap of 43% on the debt to income ratio, but doesn’t come in to play unless the loan isn’t eligible to be sold to Fannie Mae, Freddie Mac, FHA or the VA. Considering there are VERY few loans available that are not eligible to be sold to these institutions, the 43% cap on the debt to income ratio won’t impact many home buyers in the near future.
When you are out looking to buy a home this year, don’t worry about any of the “the end is near” stories you are hearing about Qualified Mortgages preventing you from buying a home. Work with a professional who is up to speed on the changes and can guide you through the loan process into your new home. If you are buying a home in the state of Georgia, contact me. I can help you get prequalified and start the home buying process today.
In a recent post, I mentioned about conventional loans lowering the minimum credit score requirements and raising the debt to income ratio limit as signs that loan guidelines are easing. Another sign is the reintroduction of asset based loan programs.
These programs were more readily available during the housing bubble from a few years back. With the downturn in the housing market, asset based loans disappeared. In order to qualify buying or refinancing a home using retirement assets, the borrower would need to document a history of receiving retirement income. The borrower also needs to document at least a three year continuance of receiving the same level of income from retirement savings. Not anymore.
To qualify, add up all retirement assets (IRA, 401k, SEP or Keogh) to get a lump sum. As long as the borrower can take money from these accounts without penalty, they can be used. Then take 70% of the balance of those combined accounts. Then divide that number by 360. For example:
– borrower has a total of $600,000 in qualifying retirement assets
– 70% of the $600,000 balance is $420,000
– Divide $420,000 by 360 and the monthly income is $1,167
You now have a monthly income for qualifying purposes without the need to document currently receiving the income or a three year continuance. The asset based income can be combined with social security and other qualifying income for the loan. Borrowers also need a 620+ credit score and a minimum of a 30% down payment/equity.
This is a great program for a soon to be retiree who has the assets, but has yet to begin drawing from the retirement accounts. If this is you and buying a home in the state of Georgia, I’d be happy to help you get started.
Since the housing market crashed in 2008, the government has gone back and forth over whether or not to close down Fannie Mae and Freddie Mac. The argument is this – why should the government pay (which really means tax payers pay) to bail out Fannie and Freddie in the future if something like this were to happen again?
It is a great point considering how much money was poured into Fannie Mae and Freddie Mac. Instead of considering whether or not to close Fannie and Freddie, this should really be evaluated from the point of view of what happens if there isn’t a Fannie Mae or Freddie Mac.
To get an idea of exactly what Fannie Mae and Freddie Mac does for the housing market, you have to go back to when these two entities originated. Ironically, these two institutions were born out of the Great Depression.
During the Great Depression, private lending all but dried up. The government created Fannie Mae and Freddie Mac in order to purchase loans from banks. This freed up capital for the banks to turn around and make the next loan. This helped the housing market to recover and was one of the factors that helped the country get out of the Great Depression – again, the irony.
What happened?
During the housing boom, Wall Street was making a lot of money off of non-conforming loans. “Non-confirming” is another way of saying a loan doesn’t meet Fannie Mae and Freddie Mac guidelines. Not wanting to miss out on the action, Fannie and Freddie (with government oversight) lowered their guidelines to take on these risky loans. They were exposed when the bubble burst.
Now the call is to get rid of them entirely to avoid a future bailout. What happens if Fannie Mae and Freddie Mac do go away:
1. There would have to be some entity out there to keep money available for banks to lend. If there isn’t a place to sell mortgages on the secondary market to free up more money to lend, the county winds up with another liquidity crisis. We’d be back into another slowed housing market.
2. Private lending would need to be re-introduced to the market to compensate for the loss of Fannie Mae and Freddie Mac. As of this moment, there isn’t an infrastructure from private lending that would be able to handle the scope of the US housing market.
3. Mortgages would be more expensive. As previous posts on this blog describe, interest rates are based on market movements. In order for private lending to begin again, investors would have to feel the risk of losing money is less than the amount of money they can make by lending it out… in other words, gone are the days of historically low interest rates based on market conditions. Interest rates would now be based on levels of risk investors are willing to take.
Back to some more irony. While Fannie Mae and Freddie Mac were part of the system that helped push the U.S. into the Great Recession, they are now aiding in the recovery. Money stopped going from the government into Fannie Mae and Freddie Mac back in 2011. With the housing market recovering, money is flowing the other way. Freddie Mac just posted its second largest quarterly profit ever. Would we even want to change anything at this particular moment? If there were a change, at least initially, you’d see a slowing in the housing market, which will hurt the country’s economic recovery.
Since Congressional representatives are elected every two years (with an election year just over a year away), it is doubtful anyone would want to attach their name to a piece of legislation that could hurt the economic recovery. For now, like it or not, it seems Fannie Mae and Freddie Mac will be continuing to do what they were designed to do originally – keeping liquidity available for banks to lend and the housing market moving along.
I’m sure everyone at some point read or heard about the debate over whether or not to extend the payroll tax reduction. It was yet another point of contention in D.C. (isn’t everything these days?… I digress…). In late December, the government came to an agreement to extend the payroll tax reduction. This keeps some extra money in the pockets of every working American and is a help for small business owners too.
Whether or not you agree with the decision, the interesting thing this time was HOW the lost money from the reduction will be covered. The money has to come from somewhere. In this case, the money to compensate for the reduction in payroll tax is being covered through new mortgages.
That’s right… people looking to buy homes OR current home owners looking to refinance will foot the bill. Here’s how:
The government proposed to pay for the estimated $33 billion cost caused by the reduction through new mortgages. This will affect both conventional and FHA loans.
For conventional loans (Fannie Mae/Freddie Mac), the new mandatory loan fees will be worked into the interest rates. Look for interest rates to rise by 0.125% to cover these mandatory fees until the $33 billion is covered. While this isn’t the end of the world, it will still cause rates to rise.
For FHA loans, the monthly mortgage insurance premium is going up (again) by another 10 basis points. This is the 5th increase to the monthly mortgage insurance premium on FHA loans in the last 5 years!
How is this going to impact those looking for a new mortgage? If buying a home, it is what it is. Someone looking to buy can’t control interest rates, and can’t really do anything until they are ready to buy. I wouldn’t rush out the door and buy the first home just because of this.
The more interesting impact will be those current home owners looking to refinance. With mortgage rates for conventional and FHA loans currently in the 3’s, homeowners who are still hoping to squeeze out another 0.125% before beginning the refinance process need to think about moving forward now. We are already at historic lows. Once this extra 0.125% kicks in, it will make it tougher to improve on where rates stand as of this posting.
Also, homeowners with FHA loans thinking about doing a streamline refinance need to get started now. In order to qualify for an FHA streamline refinance, the new mortgage payment + the monthly mortgage insurance payment must be 5% less than what they are currently paying. For homeowners who bought their home with an FHA loan prior to the monthly mortgage insurance premium doubling in 2010 are already having a tough time in some cases qualifying for the streamline refinance. When you add another 10 basis points to the monthly mortgage insurance premium on FHA loans, thousands of FHA mortgages will be ineligible for a streamline refinance with rates at their current levels.
Thinking about refinancing? Now is the time to start. If you are in the state of Georgia, I can help get the ball rolling. Contact me and we’ll take it from there!
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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