I personally think 401K accounts are great tools for workers to save for retirement, especially if the employer matches some of the employee’s contributions. Many people don’t realize it, but a 401K account can also help a home buyer purchase a home.
Many, but not all, 401K fund managers permit the account holders to borrow from their 401K accounts to help fund a home purchase. If the fund manager allows this, home buyers can typically borrow up to 50% of their account balance or $50,000, whichever is less. Because this is technically a loan, the home buyer does not pay an IRS penalty to access the account funds prior to retirement and the home buyer must repay the loan based on a schedule set by the fund manager.
As is often stated on the Mortgage Blog, home buyers can buy homes using less than a 20% down payment. In many cases, buyers can obtain a conventional mortgage with only 5%, and sometimes even 3% down. With today’s high home prices, accessing the 3% or 5% required down payment can still be problematic for some buyers. But if those buyers have a 401K account with a substantial balance, borrowing against the 401K balance could make home ownership a reality.
From an underwriting standpoint, the borrower must provide documentation showing that the fund manager permits accessing the 401K funds for a home purchase and 401K account statements showing the balance before taking the loan along with documentation of the funds transfer from the account. Home buyers using 401K funds should plan to start the 401K loan early in their loan approval process. Waiting too long could delay closing as underwriters must review and sign off on the funds transfer. One more added benefit is that, although accessing 401K funds is a loan that must be repaid, underwriters do not include the 401K loan payments in the debt-to-income ratio calculation.
Here is an article giving one financial planner’s perspective on accessing 401K account funds. This planner endorses using 401K funds to buy appreciating assets like a home. But she points out that there are some drawbacks to a 401K loan, including (1) it is a loan that requires monthly payments, so adding the 401K loan payment and a new mortgage payment could “stretch” a buyer’s finances, (2) taking money out of the market could cause the buyer to miss market appreciation during an rising market, and (3) if the buyer changes jobs, the employer might require that the 401K loan be fully repaid shortly after the job change. Ultimately, the home buyer can evaluate her situation, and if she thinks using 401K funds to buy a home now is more valuable than these concerns, then borrowing from the account to buy a home can be a wise option.
Are you considering buying a home in Georgia but have limited available cash for a down payment? If you have been using a 401K account to save for retirement, you might be able to buy a house sooner than you think. Give me a call and let’s discuss your options.
The 20% down payment myth is driven by the fact that borrowers must pay PMI when obtaining a conventional loan with less than 20% down. Many home buyers want to avoid the added monthly PMI cost. I personally think that PMI is an effective tool to help some people buy homes sooner. I recently had a friend refer his adult daughter to me. When I counseled her to make a 5% down payment and pay the monthly PMI, Dad challenged me. Here’s how I explained it to him.
His daughter wanted to buy a $200,000 house and had about $25,000 of savings. A 5% down payment was $10,000 and a 20% down payment was $40,000. Remember that a home buyer must pay closing costs and prepaid escrow at closing, in addition to the down payment. And I always recommend that buyers keep cash available in a bank account after closing, to provide a “reserve” should an emergency arise.
The $10,000 down payment left her with $15,000 for closing costs, prepaid escrow, and her “emergency fund.”
To avoid PMI, she would need to save another $25,000 or more for the 20% down payment. I asked Dad how long it would take her to save that and he said 5 to 10 years. I then told Dad that with Anna’s great credit score and 5% down payment, her PMI cost would be less than $60 per month.
She could stop paying rent and buy a house now in a rapidly appreciating home market. Paying PMI to buy now would enable her to build equity as home prices rise, rather than just continuing to save more and more to keep up with rising home prices while she rented and saved (not to mention that a $200,000 home today is no longer going to be a $200,000 home in the 5-10 year time frame it would take to save up 20%).
And current interest rates are near historic lows. There’s no way to predict now what future interest rates would be when she finally saved enough to pay 20% down.
When I explained the math, her dad agreed and she bought a home with a 5% down payment.
Note that PMI premiums are calculated based on the down payment amount and the borrower’s credit score. In general, the lower the down payment, the higher the PMI premium. And in general, the lower the borrower’s credit score, the higher the PMI premium. So not everyone will have such a clear choice as Anna did. But for borrowers with good to great credit scores, my opinion is that paying mortgage insurance is often better for building wealth than paying rent and waiting to save the full 20%.
Do you know someone in Georgia who fears they are “missing out” as they rent while home values rise rapidly? If yes, please connect them with me. I’ll work to help them buy sooner with a mortgage that best fits their need, with as small of a down payment as possible.
I know I posted this information about a year ago, but I hear this myth so often in the mortgage market, I will keep repeating this…..You do NOT need 20% down to buy a home!
According to recent National Association of REALTORS data, the average down payment made by recent home buyers is 12%. Younger buyers tend to put down less. Buyers between age 22 and 30 made an average 6% down payment. Recent home buyers between age 31 and 40 made an average 10% down payment. This ultimately follows common sense, as younger buyers have had less time in the work force to save for a down payment.
Veterans using VA mortgage financing can obtain loans with a 0% down. FHA mortgages have a 3.5% down payment requirement. And borrowers can obtain conventional mortgages with only 3% down.
The 20% down myth is driven by the fact that borrowers must pay PMI when obtaining a conventional loan with less than 20% down. Many home buyers want to avoid the added PMI cost in their monthly payment. But I personally think that PMI is an effective tool to help people buy homes and build wealth sooner. I recently had a friend refer his adult daughter to me. When I counseled her to make a 5% down payment and pay the monthly PMI, Dad challenged me. He did not want her to pay PMI. In my next blog post, I’ll explain my PMI response to Dad. Spoiler alert….the daughter did by a house with 5% down and paying PMI – it made very good financial sense.
Do you know a friend or family member who wants to buy a home in Georgia? Don’t let them by discouraged by the 20% down myth. Tell them that is only a myth and then connect them with me. It is very possible that I can help them finance a home purchase sooner, instead of waiting to save more money. We will work to make their home ownership dreams a reality – hopefully right now.
A recent National Association of Realtors (NAR) economist blog noted that 24% of first-time home buyers obtained FHA financing in January, while 59% obtained conventional mortgage financing. This is very interesting as it contrasts the picture painted in my blog post from September 2019. That post noted that 75% of Millennial home buyers obtained FHA financing. While not all first-time home buyers are Millennials, the recent data still appears to be a significant change from only about 18 months ago.
FHA mortgages once attracted many first time home buyers with a 3.5% minimum down payment. But beginning in 2014, home buyers could obtain conventional loans with only a 3% down payment. FHA loans also appeal to home buyers with lower qualifying credit scores. Conventional interest rate pricing charges higher interest rates for lower credit scores. Because FHA pricing places less emphasis on the borrower’s credit score than conventional loans, FHA pricing was often more attractive to buyers with credit scores less than 700, especially when those buyers could only make a small down payment.
Note that “standard” conventional loans with a 3% down payment require the borrower to pay a higher interest rate and mortgage insurance premium as compared to 5% (or more) down conventional loans. But conventional mortgage giants Fannie Mae and Freddie Mac began offering special loan programs (called Home Ready and Home Possible, respectively) to home buyers whose annual income falls below a threshold (currently about $65,000 in the Atlanta area) and with credit scores of 680+. With these programs, 3% down conventional loans become very competitive with FHA loans for buyers who qualify.
When a buyer qualifies for the Home Ready / Home Possible program discounts, they can save money in two ways as compared to FHA financing. First of all, conventional loans do not require up-front mortgage insurance. FHA loans require a 1.75% up front mortgage insurance premium that is typically rolled into the loan amount. Secondly, when the borrower’s equity reaches 20%, the conventional loan mortgage insurance can be cancelled, even when the borrower initially made only a 3% down payment. Borrowers who use FHA mortgages with less than a 10% down payment must pay monthly mortgage insurance premiums for as long as they own the mortgage. The monthly FHA insurance premium is 0.85 for all loans with less than 10% down payments. That is about $177 per month on at $250,000 mortgage. The fact that such a large insurance premium is permanent makes many buyers consider conventional loans more favorably.
Are you considering your first home purchase? Be sure to explore all the loan programs available to you, including conventional and FHA mortgages. Give me a call and I’ll help you compare your options to determine which will give you the lowest total payment, considering both the interest rate and the mortgage insurance components.
I am very excited about this news. A bipartisan group of Washington legislators has introduced the American Dream Down Payment Act of 2020. If enacted, this bill would create special tax-advantaged savings accounts for eligible housing costs. The goal is to create down payment savings accounts similar to the 529 college education savings accounts. As a parent of college-aged children, I can say from experience that the 529 accounts have been a real blessing for my family. I think the tax savings are a great incentive to get potential home buyers saving for a purchase.
Alabama Senator Doug Jones stated, “Down payments are the biggest barrier to homeownership for first-time homebuyers, especially among low-income and minority Americans, and make it harder to build generational wealth that is often tied to home-ownership. Our legislation would provide a new path to help make the dream of buying a home a reality by making it easier to save money for down payments and other housing-related costs.”
Colorado Senator Cory Gardner said, “A down payment on a home can be a significant barrier to becoming a homeowner. Inspired by the popular 529 education savings accounts, this bipartisan bill will make it easier for people to save for a down payment.”
The bill’s sponsors cite a survey of renters that shows two-thirds view a down payment as a significant barrier to home ownership. Saving for a down payment can be harder with rising rents and student loan debts. Under the American Dream Act, states would establish the accounts and manage them like they manage 529 accounts today. The bill would allow potential home buyers to save up to 20% of today’s housing cost to use for eligible down payments and other housing costs. The bill would also allow family and friends to contribute to the accounts, the earnings from which could be used tax-free when withdrawn for eligible housing expenses.
The National Association of Realtors, Habitat for Humanity and the National Association of Real Estate Brokers all support this legislation.
I will now reiterate a statement I made in a recent blog post, a 20% down payment is not required to buy a home. Many home buyers obtain conventional loans with only a 5% down payment – even 3% down if they are willing to pay a higher interest rate. And there are income-based conventional loan programs that offer discounted interest rates and mortgage insurance for a 3% down payment – for those buyers who qualify. Home buyers can obtain 3.5% down FHA loans. And military veterans can buy a home with a zero down VA loan. Many potential home buyers might be able to purchase a lot sooner than they think.
Do you know someone (a friend or family member) who wants to buy a Georgia home, but who is afraid she won’t qualify? Connect your friend or relative with me. I’ll help her understand where she stands regarding qualifying for a home purchase. And, if necessary, I will help her plan for a future home purchase when she is ready, perhaps using a new American Dream account.
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.
A recent survey of 1,045 adults found that 77% of the Gen Z and Millennial cohorts expect their parents’ financial assistance when purchasing their first home. Of the young people surveyed, 38% expected help funding a down payment, 31% expected parents to co-sign on their mortgage, and 24% percent expected help covering closing costs. From the lender’s perspective, this is all very doable as long as the needed documentation is delivered and all other lending criteria (e.g., credit scores and debt to income ratios) are carefully met. Documenting financial assistance from relatives can be challenging if the borrower does not plan in advance, so here are some suggested “best practices” for home buyers who expect this help.
The “gifts of cash” concept covers help covering both down payments and closing costs, as mentioned in the survey. Parents and other relatives can give cash to cover all aspects of the buyer’s cash to close – down payment, closing costs, and prepaid escrow. To be approved, such gifts need to come from documented relatives, which includes parents, grandparents, siblings, and even aunts and uncles, along with spouses, domestic partners, and fiancés. From experience, I can report that underwriters will likely not approve gifts from nieces or nephews and not from ex-spouses, as the relationship has been legally terminated.
Underwriters expect gifts to be carefully documented. This includes a gift letter signed by both giver and buyer. The letter states that the money given is a gift, and not a loan. Loans to help buyers are prohibited. If the giver makes the gift using a check, the underwriter will want to see a copy of the check. And if the gift occurs before closing, the underwriter will want to see bank statements from the giver and the buyer showing the funds coming out of the giver’s account and into the buyer’s account. For some loan types, the giver may have to show proof of funds and document the source of any “large deposits” into the giving account. My preference for conventional loans is to have the giver wire the funds directly to the closing attorney’s escrow account. When this is done for a conventional loan, the only documentation typically required for the buyer and giver is the gift letter itself. It’s much simpler and less time consuming, so I recommend this approach when possible.
Relatives and even friends can co-sign mortgages along with the home buyer. (Yes, friends can co-sign…I recently verified this for a potential client.) To do this, we combine loan files for the buyer and the co-signer. As long as the combined file meets all underwriting criteria (credit scores, available cash to close, and combined debt to income ratio), underwriting will approve mortgages including the “non-occupant co-borrower.”
Do you know a young person who wants to end her expense-only monthly rental cost? Ask her if she is expecting an income tax refund this year. Then connect her with me. I’ll help her explore how best to fund a home purchase with that refund and assistance from family, if necessary.
Why stop there?!? We will keep it going for a conventional loan programs with small down payments. I’ll touch base on the new guideline compared to the previous requirements.
NEW: When making less than a 5% down payment on a conventional loan, if all borrower’s on the loan are first time home buyers, one of the borrowers must complete a homeownership education course.
Previously there was no education requirement for those putting less than 5% down to purchase a home. Note if one of the buyers has previously owned a home, then there is no education requirement regardless of the down payment amount.
For those keeping score at home, a “first time home buyer” is defined as anyone who has never owned a home OR has not owned a home in the past three years. If the last home you owned was more than three years ago, then you are now a first time home buyer.
NEW: Home Ready loans no longer require the homeownership education course if one of the occupying buyers has previously owned a home (again, means has owned a home in the past 3 years).
Prior to the change, one borrower had to complete the education course even if they had previously owned a home.
NEW: The homeowner education course is free if the borrower’s use this link – https://educate.frameworkhomeownership.org . Note if using another accepted education course, there may be a non-refundable fee of $75.
Prior to this change, the cost of the course was $75 to everyone regardless of where the course was completed.
New years… new changes… a lot to keep up with… your head spinning? Don’t worry! It is my job to keep up with the changes.
The Spring Market is upon us. If you are ready to get out and purchase a home in 2020, contact me today. If the property is in Georgia, I can get you ready to make an offer in just a few minutes. You can be well on your way to owning a new home faster than you’d ever expect!
In early December, I mentioned the maximum loan amount for conventional loans will increase from $484,350 to $510,400 in 2020. FHA followed suit and increase their maximum loan amounts.
One thing to remember about the maximum FHA loan amount is the amount varies from county to county. The max loan is based on the average home values in each market. The loan amount range across the US goes from $331,760 to $765,600.
To find your area, you can use the search tool created by HUD. Be sure to change the Limit Year from “CY2019” to “CY2020” in order to see the new maximum amounts.
For the Atlanta metro area, the new maximum FHA loan amount will be $401,350. This is about a 5% increase over the current limit of $379,500. With these increases, a buyer can now purchase a home in metro Atlanta:
$415,000 purchase price with 3.5% down using an FHA loan.
As we celebrate the new year, it is also time to celebrate more buying power in the housing market!
Are you thinking about buying a home in 2020? Want to get a head start? I’m already working with clients who are ready to purchase home. The spring market has started! If you are buying a home in the state of Georgia, contact me today. You can be ready to make an offer on a home in no time at all.
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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