Posts Tagged ‘mortgage advice’

Big VA Loan Changes for 2020!

December 12, 2019

Exciting new changes are coming for VA loans that close after January 1, 2020.  These two major changes will make it easier for military veterans to purchase a home.

The first change is that the threshold for VA jumbo loans will rise from $484,350 to $510,400.  This rise aligns with the increase in the conventional conforming loan limit.  This means that the higher VA jumbo interest rates will now apply only to loans exceeding $510,400.

The second change is expected to be 0% down payments on all VA loans.  The VA hasn’t officially released details on their max loans as of this post. Again, the expectation is no down payments will be required on VA loans in 2020.

Until now, veterans will full eligibility could obtain zero down loans on principal amounts only up to the VA jumbo threshold.  So the maximum zero down loan in 2019 is $484,350.  Loan amounts above this threshold have previously required down payments.  I won’t bore you with the complicated calculation now.  The key point is that veterans can now obtain 100% financing on homes priced up to $950,000.

This is a GREAT change for one of my current clients.  My client served for over 10 years, but the military doesn’t pay top dollar.  He and his wife were not able to save much money during his military days.  He recently started a very high paying job in Atlanta.  His credit score is over 800.  With his strong income, his debt to income ratio on a $750,000 home would fall well within VA underwriting guidelines.  He can make the monthly payments and he has a strong record of paying his bills on time.  He just has not been able to save for a significant down payment with his prior military pay.  Starting January 1, he will be able to buy that $750,000 home with zero down!  He is the “poster-child” for this VA loan change.

Do you know a military veteran here in Georgia?  Perhaps you see the Army, Navy, Air Force, or Marine Corps stickers on her car in the office parking lot.  When she complains about her commute, ask her how her life would change if she cut her commute by 30 minutes each way.  Then introduce her to me.  I’ll work to get her a great deal on a VA loan, taking advantages of the benefits she earned through her military service.  A new home closer to the office will make her life much better.

Owning Makes More Financial Sense than Renting

December 3, 2019

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.

Is a Housing Boom Coming?

November 19, 2019

Stephen McBride, a contributor for Forbes magazine, posted an October article titled, “The Biggest Housing Boom In History Has Just Begun.” McBride approaches the subject from an investor perspective, but as someone employed in the home finance world, the article is very relevant to my job.

One of McBride’s sources stated, “The most important driver of home prices is supply and demand.  And right now, there is a chronic undersupply of homes in America.”  Since the late 1950’s, the US has seen an average of 1.5 million homes built annually, according to Census Bureau data.  However, since the Great Recession started in 2008, new home construction has averaged only 900,000 units annually.  That’s a shortfall of 600,000 off the historical annual average for 10 years now.  So we have a cumulative undersupply of 6,000,000 homes relative to historical data.  The article goes on to state, “fewer homes were built in the last decade than any decade since the ’50’s.”

On the demand side, the focus is the Millennial cohort.  The Millennials are the largest generation in American history.  Now the median age of the Millennial cohort is 34.  This historical average age of people buying their first home is 33.  According to the National Association of Realtors, one-third of home buyers are now Millennials.  The article goes on to state that “Every year for the next decade, tens of millions of Millennials will hit home buying age.”

Put these two factors together and you have a tight housing supply coupled with increasing demand.  Supply and demand analysis therefore predicts that home prices will rise.  (This makes me want to buy another house or two!)

I earned my economics degree a long time ago, but the supply and demand basics have not changed.  This appears to be the perfect storm for rising home prices.  And that could mean significant wealth growth for home owners over the next several years.

Want to get into the market now while mortgage rates are near historic lows and before home values start rising quickly again?  Give me a call at Dunwoody Mortgage.  We will get you prequalified quickly and help you close with the best financing for your current situation.  You can buy a home with a minimum 3% to 3.5% down payment and a credit score of 620+.  Now could be the perfect time for you to buy a home.

Home Affordability at its Highest Point in Years

November 1, 2019

According to a recent report by Black Knight, Inc., home affordability reached its best level in years in August 2019.  This follows a consistent decline in home affordability from late 2016 through late 2018.  Home affordability hit a nine-year low in November 2018, as mortgage rates rose to the 5% range.  At that time, the national home payment to income ratio rose to 23.7%.  According to Black Rock, this led to an extended slow down in home price growth.

Since November 2018, mortgage rate declines plus this slower home appreciation has greatly improved home affordability.  The national payment to income ratio has dropped to 20.7%.  This ratio means that the monthly principal and interest (P&I) payment on an average-priced home now requires only 20.7% of the national median income.

Put another way, interest rate declines between November 2018 and August 2019 has increased home buying power by about $46,000. In August 2019, a home buyer would pay the same P&I amount on a $246,000 home mortgage as she would have paid on a $200,000 home mortgage in November 2018.

On the other hand, I found websites and recent articles showing that Atlanta-area rents have risen around 4% in the preceding 12 months.  In short, owning a home in Atlanta has gotten more affordable while renting has gotten more expensive.

Do you rent your home in Georgia?  Has your rent increased making money tight?  Give me a call and let’s talk about mortgage affordability.  You don’t need perfect credit to buy a home, and you will need only a minimum 3% to 3.5% for your down payment.  (Military veterans can obtain VA loans with a 0% down payment.)  With the current low mortgage rates, you might be able to buy more home than you thought you could, for a lower monthly payment than you thought you would have to make.  And with buying a home, you will get the equity / wealth benefits from potential home appreciation.  It’s a GREAT time to buy a home in Georgia!!

Is It Time to Refinance An FHA Mortgage?

October 11, 2019

As discussed previously, using an FHA loan to buy a home makes sense for home buyers with relatively low credit scores and limited down payment funds. FHA loans offer very attractive pricing for these home buyers.

Interest rates have now fallen to their lowest level in three years, so it may be time for current FHA mortgage holders to consider a conventional mortgage refinance. The interest rate savings may not be huge, but changing from FHA mortgage insurance to private mortgage insurance could bring significant financial benefits.

I’m working with a couple now (we’ll call them Jack and Diane) who bought their home in 2017.  At that time, their qualifying credit score was in the mid-600’s and they had just enough cash for the FHA minimum down payment.  This was an ideal scenario for an FHA mortgage.

Fast forward to 2019 – their credit scores have increased and home appreciation in their neighborhood has given them more equity.  A conventional loan now makes sense for their updated situation.  They can refinance to a new interest rate that is just 0.25% less than their current rate.  Normally such a small monthly savings, by itself, does not justify the cost of refinancing.

In addition to the interest rate savings, they will also save money every month with lower mortgage insurance payments.  Switching from their FHA loan to a conventional loan will lower the mortgage insurance monthly premiums by about $120.  Their total monthly savings equal $160, and their refinance has a break-even point of just over two years.  Considering the interest rate savings plus the mortgage insurance savings makes their refinance worthwhile.

An added benefit is that their new private mortgage insurance will cancel in a few years (unlike the FHA insurance which is permanent), increasing their monthly savings to about $200. So, Jack and Diane will realize this bonus savings in just a few years.

Ultimately, home buyers who used an FHA loan two or three years ago may reap big rewards from a conventional refinance now, assuming their property value has increased.

Ron moved into your neighborhood in the last three years or so. At the neighborhood Halloween party, ask Ron if he has heard of an FHA mortgage. If he replies, “Yes, that’s the type of loan I have,” ask him if he would like to lower his monthly payment.  Then connect Ron with me.  We will quickly determine whether moving to a conventional mortgage can help Ron financially.

American Homebuying Power Grows

September 26, 2019

Overall economic circumstances keep improving for potential homebuyers.  First American’s Real House Price Index (RHPI) shows that Americans’ homebuying power increased consistently from January through July 2019.  The index tracks single-family home price changes adjusted for mortgage interest rate changes and personal income changes.

Mortgage interest rates trended downward during the first half of 2019, and they are even lower now compared to mid-year.  First American reported mortgage rates in January were 4.5%, and rates moved into the 3’s over the summer.  Average household income increased over the same time period.

Decreasing mortgage rates combined with increasing household incomes provide a double boost to Americans’ home buying power.  The Index’s “house-buying power” for consumers increased roughly 10% from January through July.  According to First American’s Chief Economist, Mark Fleming, “House-buying power is at the highest it’s been since we began tracking it in 1991.”

That means now is a great time to buy a home!  Even though home prices have been increasing, the decrease in mortgage rates coupled with household income growth make right now the best time to buy a home in almost 30 years, based on the RHPI measures.

Do you have a Georgia friend who complains about a landlord who won’t fix problems?  Let them know that their homebuying power is stronger than it has been in decades, and connect them with me.  I’ll help them obtain the best home mortgage for their unique situation as quickly as possible.  I’ll help your friend take advantage of today’s really low mortgage rates before they increase to 2018 levels or even higher.  Together, we will fire their unresponsive landlord!

Millennial Home Ownership Survey

September 19, 2019

There are some interesting facts and observations in an August article documenting survey results from Millennial home buyers.  Here’s a link to the full study from lendedu.com.  1,000 people aged 23 to 38 participated in the survey.  Here are some survey results:

  • 58% of respondents say they own their own home.
  • 83% of these home owners obtained a mortgage to buy their home.
  • 75% of these mortgage holders obtained a FHA loan.
  • 16% is the average down payment percentage for the survey respondents.

To me, it is very surprising to me that such a high percentage of these home buyers used the FHA program, especially given the relatively high down payment percentage reported.  What I also find surprising is how the author treats FHA loans vis a vis the private mortgage insurance component of conventional mortgages.

Let’s look at the basics of FHA mortgage insurance (“MI”) vs. conventional (private) mortgage insurance (“PMI”).  FHA charges a 1.75% up-front MI.  On a $300,000 loan, that charge is $5,250.  Assuming a Millennial average 16% down payment, FHA charges a 0.80% monthly MI premium, which equals $200 per month.  And for this loan, the borrower must pay the monthly MI for 11 years.

For PMI on conventional loans, there is no up-front fee.  So our $300,000 mortgage holder is better off by $5,250 to start.  The PMI premium is based on the combination of down payment and the borrower’s credit score.  Let’s assume that a Millennial buyer (we’ll call her “Anna”) has a 680 credit score.  I calculate Anna’s monthly PMI premium at 0.26% or $65 per month.  In addition, the conventional loan PMI will cancel sooner than FHA MI, so Anna will pay conventional loan PMI for less than half the time she would pay FHA loan MI.

Summarizing this example, Anna with a 680 credit score would reap the following mortgage insurance benefits of choosing a conventional loan vs. FHA: (1) Anna saves $5,250 by not having the up-front FHA MI premium rolled into the loan amount; (2) Anna saves $135 per month with the lower PMI rate vs. the FHA MI rate; and (3) Anna stops making mortgage insurance payments way sooner.  And Anna’s PMI payment will be even lower if her credit score is in the 700’s.  From a mortgage insurance perspective, the conventional loan seems like a much better deal.

The author praises the use of FHA mortgages, then later makes the following statements about private mortgage insurance:

  • PMI should be avoided as it will usually cost the homeowner between 0.5% to 1% of the full mortgage amount….”
  • “…it is not great that so many are also paying for PMI as a result of less-than-optimal down payments…”

Such blanket negative statements about PMI concern me.  In our example, and many examples where the borrower has a strong credit score and can make a 10% or more down payment, the numbers often favor conventional loans.  FHA loans are often better when the borrower’s credit score is low or the borrower can only make a down payment of 10% or less.

The key lesson here is to consult a professional mortgage lender (I suggest that this guy for Georgia home buyers) to run the numbers for both FHA and conventional loans.  Then choose the best option given your circumstances.

Which Type of Mortgage To Use – Scenario 2

August 23, 2019

Now let’s change our buyer scenario. Both Jack and Diane want to make offers on a home, but this time they have 10% to put down. (Curious about a smaller down payment?  Take a look at the prior scenario with a 3.5% down payment.)  They still have the same qualifying credit scores of 680 for Jack and 795 for Diane.

With Jack’s 680 credit score, his monthly payment for a conventional loan (principal, interest, and mortgage insurance “MI”) would be $1,514.30. For a FHA loan, his payment would be $1,452.29. Given Jack’s credit score – even with the 10% down payment – FHA still delivers a better price, even though FHA loans have the draw backs of the up-front MI and the permanent monthly MI (assuming Congress does not change the law).

In this scenario with Jack’s 10% down payment, the mortgage insurance falls off after 11 years (even if Congress doesn’t act). Meaning, the FHA loan becomes even more attractive now and into the future.

With Diane’s 795 credit score, her monthly payment for a conventional loan would only be $1,391.24. Her FHA loan payment would be $1,452.29. (Note that it is the same as Jack’s payment, even though Diane’s credit score is over 100 points better.) In this case, Diane can now save money by using the conventional loan. The conventional loan has the best pricing from the beginning, and it provides the PMI cancellation benefits mentioned in the previous post.

With this example, one can definitely see how FHA loans do not have the same impact when it comes to the interest rate, mortgage insurance, and monthly payment versus conventional loans. Even with such a large gap between the credit scores (680 versus 795), the payment on the FHA loan is the same.

Ultimately, every client situation is unique. For some borrower circumstances (e.g., self-employed, buying a condo, high debt to income ratio, etc.), we may recommend one loan option because the buyer has a better chance to win approval, even if the payment winds up being slightly higher.

Do you know someone planning to buy a home in Georgia?  If they have questions, connect them with me.  I love helping people understand their mortgage options and helping them determine the best approach to financing a home purchase.

Which Type of Mortgage To Use – Scenario 1

August 13, 2019

Now that everyone understands the basics of FHA and conventional loans, let’s do a buyer comparison. Both Jack and Diane want to purchase a $300,000 home. They both have $11,000 (3.7%) for the down payment and qualifying credit scores of 680 for Jack and 795 for Diane.

With Jack’s 680 credit score, his monthly payment for a conventional loan (principal, interest, and mortgage insurance “MI”) would be $1,820.82.  For a FHA loan, his payment would be $1,563.19. There’s no comparison. For Jack, the better deal is the FHA mortgage, even though it has the draw backs of the up-front mortgage insurance and the permanent monthly mortgage insurance payment.

With Diane’s 795 credit score, her monthly payment for a conventional loan would only be $1,582.61. Her FHA loan payment would be $1,542.47.  In this case, Diane is also better off, at least initially, with the FHA loan. One thing to keep in mind is the MI premium. If Diane chooses the FHA loan, that premium is permanent (assuming Congress does not change the law). If she chooses the conventional loan, the insurance will eventually be cancelled, dropping her payment to $1,442. The key question for Diane is, “How long will you stay in the home?” If less than 5 years, Diane’s best bet is the FHA loan. If longer than 5 years, Diane may want to consider the conventional loan.

Notice the FHA payments for these examples. They differ by only about $21 even though the credit scores are drastically different (680 versus 795). This shows why FHA is better for those making a purchase with lower credit scores. The buyer doesn’t see as steep of an increase in their payment.

In the next blog post, we will make the same comparison with a 10% down payment.

Does your friend Scott talk about buying a house?  Does he understand which loan program is best for him?  If not, have Scott contact me. We Dunwoody Mortgage professionals understand the details of these mortgage programs, and we coach our buyers to make the best decision given their circumstances.  Often, with a slight change to their home purchase situation (change of down payment, paying down a credit card balance, etc.), we can help our clients save money with a better interest rate or a lower mortgage insurance cost.  Home buyers should consider all options before buying, and Dunwoody Mortgage offers the service and knowledge to help home buyers make the best decision possible.

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.