Posts Tagged ‘minimum down payment’

Types of Mortgages – Conventional

July 30, 2019

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

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

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

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

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

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

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

 

Types of Mortgages – FHA

July 23, 2019

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

So let’s talk about FHA loans!

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

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

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


Inventory levels still low

February 21, 2019

If you think you’ve heard this before… it is because you have. Inventory levels are still low across the country. Low inventory levels push home values up due to the simple application of supply-and-demand. This is one of the main reasons home values have jumped so much in the past couple of years. How did we get here? There are a couple of reasons:

  • During the Great Recession, very few homes were being built. After many years of very little new construction (coupled with more people wanting to buy homes), a squeeze on inventory occurred.
  • While unemployment was high during the Great Recession, many people put off buying a home until their financial situation was more stable. This creates a pent up demand on those wanting to buy homes. This increases competition for the few homes available on the market.
  • Homeowners are remaining in their homes longer. We are at the highest rate of owners keeping their homes in 18 years. The length of time is now up to 7 years, which is a 10% increase year over year.

There are many reasons why people may choose to remain in their homes longer (they have a low rate on their current home, fear of finding their new home, tighter loan qualifying guidelines), but one new factor are baby boomers choosing to live/age in place. As baby boomers remain in their current homes (instead of down sizing or moving into assisted living), it again tightens the amount of available inventory. Of course, this will not always be the case. Baby boomers (along with the silent generation) own over 50% of the homes in America. As they age, we may find ourselves in the exact opposite situation – too much inventory.

Until we get there, how can someone make their offer stand out? There are a couple of things to do.

  1. Make a non-contingent offer on the purchase. For those who own their current home, qualifying to carry two mortgages means an offer can be made without a contingency. A seller with multiple offers would find that more attractive. Homes are going fast, so it is not very likely one would carry both home loans for an extended period of time. For those who need equity from the current home for the down payment on the new home, there is always the method of recasting the loan after closing. A future post will cover recasting.
  2. Get pre-underwritten prior to making an offer. In this method, the buyer applies for the home loan with a “to be determined” property address. Once approved, the offer letter to a seller simply says the buyer is ready to close pending an appraisal and final underwriting approval. This is a quick close and the seller knows the buyer is legitimate. Rodney Shaffer covers this more in-depth with this post.
  3. For first time home buyers (and repeat buyers too), look to use Home Ready. This is a conventional loan requiring only a 3% down payment. Some sellers would prefer not accepting an FHA offer, so Home Ready allows for a smaller down payment than FHA (3% vs 3.5%), and is still a conventional loan. Couple this with the “pre-underwrite” option and have even more power behind potential offers. There are conventional loans with only 3% down that are not Home Ready loans, but Home Ready has some advantages over the “standard” 3% down conventional loan that buyers would want to take advantage of if they qualify. Here is a case study on a Home Ready loan.

Yes, it is a tight market when it comes to available homes to purchase. That doesn’t mean buyers should despair. There are ways to help make the offer more attractive to sellers. Looking to buy in the state of Georgia? If so, contact me today. We can start talking about any or all of these potential options.

 

Homebuyer Economic Analysis

February 20, 2019

Recent economic reports show interesting data and forecasts regarding home buyers.  A survey of 100 economists by Zillow and Pulsenomics, LLC reported that almost 60% believe that home values are more sensitive to changing interest rates than in prior years.  One economist noted that if mortgage rates rise to 5.5%, a home buyer would need a $35,000 lower home price to keep the same monthly payment.  Buyers on tight budgets would have a more limited available home inventory, and others might stretch their budgets rather than lowering their target price.

Even with interest rate uncertainty, a majority of economists surveyed expect increasing first-time buyer activity this year.  These economists forecast that the homeownership rate will climb above its historical average over the next five years.

What is the difference between first-time buyers who actually buy versus those who want to buy, but don’t?  The answer is about $30,000 of annual income.  A recent study by RealEstate.com showed that the first-time home buyers have a $72,500 median income.  Their income is significantly higher than those people who want to buy their first home but do not actually buy.  The latter group earns a $42,500 median income.


This higher income helps buyers in two ways.  Firstly, they can afford larger monthly payments based on underwriting debt to income guidelines.  Secondly, the higher incomes allow these buyers to save more money which they use for down payments and closing costs.  A recent Zillow study reports that first-time buyers make a median 14.5% down payment.

Ultimately, financing a home purchase is challenging for many buyers.  These buyers need a mortgage professional to structure the best loan possible.  The loan structure will determine the interest rate, mortgage insurance, and the amount of home the buyer can purchase.  And special programs exist that offer discounted interest rates with a minimum 3% down payment for home buyers who qualify.  Getting into the best loan program, a slight down payment change, or paying off another debt at closing can help the home buyer save thousands over the loan’s lifetime.  That is a key reason why selecting the right mortgage professional is so important. 

Do you have a friend or relative who wants to buy a home in Georgia?  Refer them to me at Dunwoody Mortgage.  I will help them structure the best loan for their financial situation.


Help With Down Payments

January 23, 2019


Restating the main theme from the prior post, people who want to buy homes do not need “great” credit scores or large down payments.  Home buyers can obtain mortgages with as little as 3.0% down.  What about those people who have not saved enough for the low down payment plus closing costs plus prepaid escrow?  Do they have any options to help cover their required cash to close?  The answer is, “YES!” Here are some options for cash-strapped buyers:

  • Request that the seller contribute cash at closing to help cover the closing costs and prepaid escrow.  Mortgage guidelines allow the seller to contribute specific percentages of the home sale price to cover transaction costs and escrow, but not the down payment.  If the buyer’s agent can negotiate that the seller helps cover these items, then it can be done within the guidelines.  The greater the down payment, the more the seller can contribute.
  • Borrow from an employer-sponsored retirement account.  In many cases, home buyers with 401K or other retirement accounts may be able to borrow against the account balance to help purchase a home.  These are loans – the home buyer signs paperwork agreeing to repay the retirement account.  Different retirement plan managers have different rules, so home buyers should check with their HR departments and retirement plan managers to determine their eligibility.  Buyers can use retirement funds to cover down payment, escrow and loan costs.

  • Obtain a cash gift from a blood relative.  Parents, grandparents, siblings, and other blood relatives are allowed to give cash to help home buyers.  “Give” is the key word because all parties must sign documents stating the funds are a gift and not a loan, so no repayment is expected.  A recent Wall Street Journal article notes that now more first time buyers obtain relative gifts to help buy their homes.  Buyers can use gift funds to cover down payment, escrow and loan costs.
  • Government down payment assistance programs.  These programs are available from many state, county, and city governments.  They often require home ownership education classes and other commitments from home buyers.  These assistance programs may have income requirements.

The good news here is that cash-strapped home buyers can obtain low down payment loans and many can use one of these options to help close their loan.  Do you know someone who wants to buy a Georgia home but has limited cash?  Connect them with me.  We at Dunwoody Mortgage will help them explore all available options to buy a home sooner rather than later.


Low Down Payment / Credit Score Mortgage Options

January 16, 2019


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

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


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

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

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

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

VA Mortgage Volume Grows (Again)

December 28, 2018

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

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

 

 

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

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

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

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

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


Beyond the Down Payment…Cash to Close

August 30, 2017

In the last post, we debunked the myth that home buyers must make a 20% down payment to buy their home.  There are many programs enabling buyers to close with 5%, 3.5%, or even 3% down payments.  But there is one other factor to consider regarding the cash you have available to buy a home…your “cash to close.”

Cash to close includes your down payment, PLUS the closing costs and prepaid escrow.  In short, you need more cash than just the down payment to close the purchase.  Here is a quick description of the other items:

  • Closing costs are the actual costs of transferring title and obtaining a mortgage loan.  Closing costs include items such as appraisal fees, transfer taxes, intangible tax, attorney fees, title insurance, etc.  Some of these costs are fixed while others increase with the home purchase price or loan amount.
  • Prepaid escrow represents the cash needed to pay the first year of homeowners insurance and to prefund your escrow account to pay future property taxes and homeowners insurance premiums.  These typically increase as the home price increases.

So what options does a buyer have when he has scraped together that 3.5% down payment, but does not have enough cash to cover the remaining cash to close?  Here’s where a proactive lender, working as a consultant to help the buyer, can make a huge difference.  Typically, the buyer has 4 options, and the lender should explore them all with the buyer:

  1. The seller can agree to contribute cash towards the closing as part of the purchase contract.  There are limits regarding how much the seller can contribute based on the loan type and down payment percentage, but a seller contribution can be a huge help.  Note that the seller contribution cannot be applied to the down payment.
  2. The buyer can choose a “no closing cost” loan.  Many buyers choose not to use this option because it involves a higher interest rate and monthly payment, but it can be a good option for some buyers who have limited available cash.
  3. The buyer can receive a gift from a relative.  We must carefully document the gift, but this is a great way for parents and grandparents to help a young adult get started building equity.  The gift can be applied to the down payment.
  4. We can combine the 3 options above to resolve a cash shortfall.

The key here is to remember (1) more cash than just the down payment is needed to close a mortgage and (2) there are creative ways we can solve a cash shortfall.

If you know a renter with a good job but not much cash, refer them to me at Dunwoody Mortgage Services.  We will work closely with your referral and his / her Realtor to structure a mortgage that best meets their financial situation.

The Truth About Down Payments…

August 25, 2017

Many young adults and other potential home buyers mistakenly assume that they cannot buy a house.  Why?  Because they believe the myth that a home buyer must make a 20% down payment to buy a home.  A recent study by the National Association of Realtors® (NAR) shows that the average down payment for 60% of first time buyers is 6% or less.  However, their research indicates that just 13% of adults age 34 and younger understand that they can buy a home with as little as 5% down, or less.  Their analysis shows that, over the last 5 years, more than 70% of non-cash, first time buyers, along with 54% of all home buyers, made down payments of less than 20%.

So why do so many Americans not understand this home buying truth?  Perhaps it is because 20% is the down payment benchmark most often quoted by “experts” in print and other news media.  And perhaps it is because that to avoid mortgage insurance on a conventional loan, you must make at least a 20% down payment.

Whatever the reason, it is time for us to spread the truth about down payments.  That truth is, the majority of home buyers make down payments of less than 20%.  Here are some quick options for folks who want to buy, but don’t have a lot of cash saved for a purchase:

  • Active duty military, National Guard, Reserves, or military veterans may qualify for a 0% down VA loan.
  • FHA loans offer minimum down payments of 3.5% with low interest rates.
  • Buyer who qualify can obtain a Home Ready conventional loan for 3% down, with competitive interest rates and discounted mortgage insurance premiums.
  • Buyers who do not qualify for Home Ready may still qualify for a 3% down payment, but possibly with a higher interest rate.  In this case, the buyer will likely receive a lower interest rate if she makes a 5% down payment.

Bottom line, many home buying options exist for folks who can afford less than a 20% down payment.  These home buyers need a mortgage expert to coach them to the best option for their financial situation.  That is the type of individualized service we deliver at Dunwoody Mortgage.  We work closely with our clients to help them obtain the mortgage solution that best meets their needs.

If you know a young adult in Georgia who has a good job, who is renting and doesn’t think she can buy her own home, suggest that she call me at Dunwoody Mortgage.  She just might be able to fire her landlord, buy her own place, and start building equity.  Don’t let her believe the down payment myths.

 

Geographic Income Limits for Home Ready Program

May 1, 2017


One potentially limiting aspect of the Home Ready program is that income limits are specified by census tract.  (Notice I said “potentially.”  We will get back to that point very soon.)  To qualify for the program, the borrower’s income must be less than or equal to the income limit set for the geographic area of the subject property.  Fannie Mae specifies and publishes the geographic income limits as part of the program.  Many areas in Metro Atlanta have an annual income cap of $67,200, but there are many other areas that do not have an income limit.  Now back to the word “potentially.”  If the home you want to buy lies in a no-income-limit area, you could make a million dollars per year or even per month and still qualify for a Home Ready loan for that house.

Two key points to remember here:  First of all, the income limits are based the subject property’s location, so you can have varying income limits in different parts of the same county.  In fact, the eligibility maps go down to the street level, which means that houses on one side of a street could carry a $67,200 income limit and houses on the other side of the same street could have no income limit.  Secondly, the income limits apply only to borrowers on the loan.  If two employed people plan to live in the home, but only one of you is on the loan, then the other occupant’s income does not count toward the income limit.  Of course that means that the sole borrower must qualify for the loan using his or her income only.   

So how can you determine whether you qualify for the Home Ready program’s low down payment / low-interest rate / low mortgage insurance benefits?  You can call me at Dunwoody Mortgage!!  We will first discuss your income and the geographic area where you want to buy.  I can look up the area online and determine whether your income qualifies for Home Ready in that area.  If you meet the geographic income limits, we will complete your loan application, pull your credit report, and run your application through our Automated Underwriting System (“AUS”).  The AUS findings will then determine if you do qualify for Home Ready’s great benefits. 

Buying a house in Georgia and curious whether you can obtain a Home Ready loan?  Give me a call and we will review Home Ready and your other loan options.  Don’t think you will qualify?  We at Dunwoody Mortgage have secured loans for many customers who initially thought they would not qualify.  Don’t assume you cannot win loan approval!  Call me and let’s discuss your situation.  We might just surprise you!!