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.
In an interesting development (more on that later), President-Elect Biden floated the idea of a $15,000 homebuyer tax credit. In theory, this would work similarly to the tax credits started during the Bush administration and continued into the Obama administration.
I say “in theory” because as of now, no one has any idea exactly how it would work.
Will this need to be paid back (like with Bush’s) over a set number of years?
Will the debt be forgiven (like with Obama’s)?
When will the homebuyer receive it? For Bush/Obama, it was when federal income taxes were filed. Biden wants the credit to be made available at the time of closing.
Biden’s proposal, as explained on his website, is to: “Help families buy their first homes and build wealth by creating a new refundable, advanceable tax credit of up to $15,000. Biden’s new First Downpayment Tax Credit will help families offset the costs of home buying and help millions of families lay down roots for the first time.”
As firmer details emerge, The Mortgage Blog will cover them!
Now back to the “interesting development” comment from earlier. When Bush/Obama pushed forth the tax credit plans, it was to get the housing market going again. Coming off of the 2008 crash, the housing market was lackluster (and that is putting it mildly). Today, the housing market is booming. Throwing a home buyer tax credit on top of a heated market could make things even hotter and push housing prices even higher.
On the flip side, the down payment is one of the major factors preventing home ownership. Depending on how the credit is structured, this could be a way, as Biden says on his website, to help families offset some of the cost of home buying.
It will be exciting to see all of the details AND to see how things progress as the plan moves through Congress and the Senate. 2021 is going to be an interesting year for many, many reasons. Hopefully, more to come!
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.
I heard potential a home buyer say something like, “I can’t get a home loan. I have too much student loan debt.” Often, the opposite is true. Many buyers are able to qualify for the home they want even with student loans. Lending guidelines do not focus on the total amount of student loan (or other type of) debt. The focus is on the borrower’s monthly payments relative to their income. We calculate a debt to income ratio. As long as that ratio falls within our guidelines, the borrower should qualify from an income and debt perspective, even if the outstanding debt balance is very large.
In 2018, I helped a young woman purchase her first home. She had earned two graduate degrees. In the process, she accumulated over $350,000 in student loan debt. Many people would have simply rented, thinking that their student loan debt was too high to win mortgage approval. But my client’s income was high, and it more than offset the monthly loan payments. We closed her home purchase and she was thrilled.
Some home buyers have deferred student loans. They may hope that we do not have to consider deferred student loans in the debt to income ratio, but that is not an option. If a student loan is in deferment, we can often qualify the buyer using 0.5% of the student loan balance. If the buyer is on an income-based repayment plan, even if the payment is $0, then we can use the plan-specified payment. We use these calculated amounts in our debt to income analysis. Loan originators must be careful to follow the correct guidelines so that borrowers do not encounter unpleasant surprises during underwriting.
One caveat here is an FHA mortgage. FHA loans require using 1% of the current loan balance or an amortizing monthly payment schedule. FHA loans do not allow an income-based repayment plan if the monthly payment is not an amortized payment. In short, it’s often a better option to use a conventional loan instead of FHA when it comes to student debt.
Do you want to buy a Georgia home but fear that your student loans put home ownership out of reach? Don’t let your fears hold you back. Give me a call and let’s explore your options. You might be able to buy a home sooner than you think. I’ll help you find the best loan program to get you into a home as soon as possible. If that’s not right now, I’ll coach you to prepare for a home purchase as soon as possible.
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.
Historically, the quality of the local school district has had a significant impact on home values. The National Association of Realtors (NAR) reported over a quarter of 2019 home buyers considered school quality as an important factor when buying a new home, and also reported that over one half of home buyers with children move based on school districts alone.
Is Covid causing any new trends? Well, according to a recent HousingWire article, virtual learning in our pandemic world could significantly reduce the impact of school quality on a home’s value. According to the article, home buyers now give greater weight to other non-school factors due to COVID-19. As mentioned in a previous post, 2020 home buyers focus more on outdoor space and home office space. We will have to see how permanent this trend becomes, but right now given virtual school and virtual work, proximity to school and work is no longer as important as before.
One San Francisco Realtor noted that school quality was a consideration in 100% of 2019 home purchase transactions. To repeat, school was important in every transaction regardless of the buyer’s age and stage in life. That same Realtor says that now, school quality is not coming up anymore. “Like zero. People aren’t even talking about schools.”
A Massachusetts Realtor reported that now, his clients are focusing on suburbs and homes with yards. He reported that with a focus on yards and home offices, home buyers are willing to compromise regarding the area schools. The trend, for now, is a focus on space, not school district.
Does the pandemic make you want a nice yard to entertain friends (social distancing of course), or do you need a home with more room for a home office and virtual learning? If you answered “Yes,” and you live in Georgia, give me a call. Interest rates are at historic lows, so now is a GREAT time to buy a home. I will work with you and your Realtor to give you the best possible mortgage experience, getting you into a pandemic-friendly home as soon as possible.
A recent Census Bureau report showed that construction began for 11,000 single-family built-for-rent houses in the second quarter of 2019. Mind you, these are not apartments, but single-family homes built specifically to rent. A recent National Association of Home Builders blog post stated that renting by choice is gaining popularity among millennials.
The CEO of a build-for-rent developer stated, “What we were shocked to find out was it was people that had great credit, they had money for down payments, they had great incomes but they just didn’t want to own a home.” So their renter clientelle does not consist of people experiencing job loss, credit challenges, etc. They could buy a home, but they choose to rent instead. It’s a lifestyle decision.
Here’s a negative consequence of this choice. William Wheaton, a MIT housing economist, recently made said to NPR, “Owning still makes much more sense. If prices continue to rise, buying will be a money tree.” Even home price appreciation occurs at low levels, that growth serves to build personal wealth for the home owner. So home price appreciation builds homeowner equity. In addition, the principal component of every mortgage payment also builds homeowner equity. A tenant’s monthly rent checks are expense only – there’s no wealth building when it comes to paying rent.
From a long-term wealth perspective, owning builds wealth better than renting (especially with today’s low interest rates and strong home affordability). If you are renting in Georgia now and wonder if owning would benefit you financially, give me a call. We’ll run some numbers and see if home ownership is better for you financially.
The trend continues – especially in Atlanta – it is cheaper to own than rent.
With the latest housing push over the past few years, homebuyers have fared better than those who continue to rent. In the recent CoreLogic report:
On average, renters tend to be more cost-burdened than homeowners
Across the US, monthly rents continue to rise.
Home loan payments and associated home ownership costs are lower.
Another stat from the study shows the rental index is up 36% from during the during the housing boom through today, yet home loan payments are down just shy of 5% over the same time period. The study looked at twelve metro areas. On average the rent increases ranged from 20-60% while reporting a drop in the home loan payments anywhere from 3-24%. Lastly, these are sound loans being issued today. With a combination of income growth during the economic recovery, home values appreciating, and sound underwriting guidelines, delinquency rates are lower than they’ve been in decades.
So what is preventing potential buyers from purchasing a home? Often it is misinformation. Too many people feel you must have 20% down to purchase a home (one can buy with as little as 3% down), perfect credit (loan approval can be obtained with a score as low as 620), and no debt (debt to income ratios can be as high as 50% for conventional loans and 55% on FHA loans). This is simply not true. Owing a home with a small down payment, below average credit, and other debt is easier than most imagine.
Contact me today. If the home you are looking to buy a home in the state of Georgia, you can be ready to purchase in as little as a 10 minute phone call. We can also start the process online. It can be that easy!
It is definitely spring, and the housing market is heating up. It is time to take advantage of new homes on the market. What am I seeing this year that is different from last year:
Mortgage rates are lower this year than they were last year at this time. Right now, they are lower by roughly a half point!
The rise in home values has slowed each month for the past 10 months. The combination of slowing home values and a drop in mortgage rates gives buyers roughly 6% more buying power today than they had this time last year.
I am seeing sellers begin to give money toward closing costs. Don’t read this statement as sellers are paying ALL closing costs again. What I mean is instead of every purchase contract I see where the seller is giving $0 to the buyer for closing costs, now I am seeing contracts with the seller giving a few thousand to the buyer.
Homes sitting on the market for sale for too long are now getting price reductions. Last year, homes weren’t sitting that long and few were getting price reductions.
What to make of all this information? While still a seller’s market, the market is softening and buyers have more purchasing power. Now is the time to act!
I know what you may be thinking…
I don’t have enough money to put 20% down… Not a problem. Did you know a $500,000 home can be purchased with about a 3% down payment. While one’s target may not be $500,000, 3% is all it takes to get into a home.
My credit isn’t perfect… Again, not a problem. You don’t need perfect credit to purchase a home. Conventional and FHA loans allow for credit scores down to 620, which is below average credit.
I just started a new job, so I can’t buy a home… Not necessarily. A new job doesn’t mean someone lost their chance at buying a home. Being able to qualify for a home depends more on how they are paid (W2, hourly, salary, 1099) versus how much they are paid.
Don’t let what you’ve read on the internet get you down. Just because you read it online, or someone in the office break room told you something doesn’t make it true. It is easier to buy a home than many people think. If you are looking to buy a home in Georgia, contact me today. Let’s get the process started. In just a few minutes, we’ll be well on our way to getting you into a new home.
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.
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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