Staying on my theme of credit this month. I’m building on a post from my colleague in late August about credit scores. Last week I gave some real world numbers of the impact credit scores can have on mortgage payments and mortgage insurance.
This time I want to focus on how to avoid the worst parts of lower credit. What I mean is this… Is there a way to avoid the worst impact of a higher rate and/or higher mortgage insurance? Can we reduce the increase of a payment due to higher rate and/or mortgage insurance?
There isn’t much that can be done to improve someone’s credit score if they have legitimate missed payments OR a thin credit profile. That said, there are some things people can do to reduce the impact on the rate and/or mortgage insurance premiums for those with lower credit scores.
Pay off credit card debt: Let’s say a borrower’s credit score is low because of high utilization of credit card debt (not multiple late payments on credit accounts). A maxed out credit card is a quick way to lower a score, and paying it down/off is a great way to make the score jump. I had a client decide to make a 10% down payment instead of a 20% down payment. He used part of his originally planned down payment to pay off all credit card debt, and his credit scores went from the 660s to the 740s (just like weight loss programs, “results can vary.”) Sure, he now pays mortgage insurance. With a credit score over 740 and 10% down, he paid about $70 per month and got a great interest rate. While paying mortgage insurance is a bummer, the amount he was paying each month on his credit cards was way more than $70 per month AND he saved tens of thousands of dollars over the life of the loan by getting a lower rate.
Avoid store based credit cards: I see buyers get in trouble all the time with this. Sure getting an extra 10% off a purchase is nice, but it could cost you. Most store credit cards come with a low limit. Why? Because in a pinch, the first credit cards that don’t get paid are the ones to Kohls, Best Buy, Macy’s etc. These stores do not want a high balances to get reached, so they keep the limit down. Let’s say I get a store credit card to an electronics store to purchase a laptop for my child going back to school. If I get a limit of $1500 on this store credit card and the laptop costs $1200, all of the sudden it looks like I am close to maxing out a credit card and credit scores go lower. Credit score models are not based on total limits versus total debt load. It looks at each credit card individually in terms of its utilization. Also, most people forget to pay store credit cards. It happens A LOT. A missed credit card payment is a missed payment whether it is a major credit card or a store credit card.
Make a larger down payment: It doens’t seem like much, but putting more than the minimum down payment can make a big difference on mortgage insurance and also the interest rate.
10% down versus 5%: while the rate is the same, the mortgage insurance payment drops by 40% in my examples from last week AND the borrower will not be required to even pay the mortgage insurance as long as it is for someone making the minimum down payment.
20% down: if paying off debt isn’t an option (meaning, legitimate late payments and/or collections), then this gets rid of mortgage insurance entirely. The rate will still be higher, but it avoids the double whammy of higher rates and higher mortgage insurance premiums.
40% down: yeah, that is a large down payment. Why am I pointing it out? When putting 40% down, a borrower gets the same rate whether they have a 660 credit score or an 800+ score. The rate is only slightly worse (say 0.250% higher) for credit scores in the 620-659 range.
15 year fixed loans: The rate for 15 year loans are the same whether a borrower has a 620 credit score or one over 800. Yes, you read that correctly. Maybe a large down payment isn’t possible. Perhaps paying down credit card debt isn’t an option. This could be. Also if making less than a 20% down payment, the difference in mortgage insurance is about $110 more per month for a 679 credit score versus a score over 760. Borrowers avoid a much higher rate, avoid the bigger brunt of the mortgage insurance increase AND get the benefit of paying off their home in half the time versus a 30 year loan.
Co-Borrower on the loan: this one sounds silly, but it’s true. Let’s say the borrower has a significant other they were not planning on being on the loan. Perhaps they are self employed and do not show a lot of income. Perhaps they are the primary caregiver for their children and earn no income outside of the home. The reason does not matter. If their credit score is the same (or better) than the primary borrowers, the mortgage insurance premiums each month drop by roughly 20% simply by having two people on the loan (the mortgage rate is still the same).
FHA loans: when all else fails, this is a great option. I’ve said FHA loans until now for two reasons. One is the up front mortgage insurance premium rolled into the loan amount (meaning borrowers do not pay this out of pocket at closing as it is added to the loan itself) and the mortgage insurance is permanent. The advantages of an FHA loan is the rate will be better for someone with a credit score under 680 (versus a conventional loan), and the mortgage insurance each month would be less. If this isn’t a “forever” home, then the word “permanent” isn’t as scary. We could do a compare/contrast to see if an FHA loan is beneficial to a borrower’s monthly cash flow.
VA loans: for those who qualify, there is no monthly mortgage insurance, and the rate isn’t as bad for those with lower credit scores compared to conventional loans.
There you have it. Some ways to mitigate the impact of lower credit scores when purchasing a home. I know this can all be overwhelming. If you are looking to buy a home in Georgia, need a mortgage, and have some credit problems, contact me today to get started. We can take a look at your situation and see what we can do to mitigate the impact on your home loan.
Last month my colleague Rodney Shaffer evaluated a recent Zillow study on credit scores. His post focused on what makes up a credit score. This post will focus more on the impacts of the credit score.
We all know a lower credit score leads to a higher interest rate. A real world example is a rate about 0.750% higher for someone with a 760 credit score versus someone with a score under 680. In the mortgage world, once a score is at/above 760, it doesn’t matter anymore. They get the same rate at 760 versus 800+.
When you factor the rate difference on a loan of $300,000, using today’s rates, the payment is roughly $140 more per month. Over 30 years, this is $50,000 more of interest paid for having the lower rate.
Sadly, it doesn’t stop there. If mortgage insurance is required, it’s even worse. Using the same $300,000 loan amount, someone with a 760 credit score with 5% down would pay about $60 per month. If the credit score dropped to 679, the mortgage insurance payment would increase to $260 per month… $200 more per month.
Combined a borrower with a 760 credit score would pay roughly $350 less per month if they got a loan at $300,000 with 5% down versus someone with a credit score just under 680.
There is a big difference in rates and mortgage insurance once someone goes below 680. With a credit score of 680, the rate difference is just 0.375% (payment difference on the loan is $80). Mortgage insurance is about $160 per month. So you can see the range of paying $180 more if the credit score is in the upper 600s versus $350 more per month once the credit score drops below 680 (and gets worse the closer a borrower gets to a 620 score).
It’s a lot and frustrating. These numbers are also why I recommend clients do an FHA loan once their credit scores fall below 680. Next time, I’ll focus more on ways to help your situation in the event of a lower credit score.
Wanting to talk credit and getting a loan in the state of Georgia, contact me today to get started!
I am going to pick up right where my colleague Rodney Shaffer left off with his recent blog post. Buyers do not need 20% down to purchase a home. Honestly, we should do a post on this topic monthly because we hear it monthly from clients who think they way more down than is necessary to purchase a home.
Rodney’s recent post focused on an article he came across saying “20% is best” when buying a home. What the article doesn’t detail is home appreciation is rapidly outpacing one’s ability to save. So a $300,000 home with 20% down won’t be the same home when the $60,000 is saved years from now.
I’m focusing on a recent study by the National Association of REALTORS stating almost half of would be home buyers believe they need a larger down payment than is actually required. About 35% of would be buyers believe the down payment needed is more than 15%. Another 10% of would be buyers believe the minimum down payment requirement is more than 20%.
You do not need 20% down in order to purchase a home:
Conventional loans require as little as 3% down. Meaning, a home at $600,000 could be purchased with as little as $18,000.
Ideally buyers put 5% down for conventional loans as the interest rate is better and the monthly PMI is lower. On the same $600,000 home, the down payment would be $30,000.
FHA loans only require 3.5% down. The max FHA loan limit in metro Atlanta is just over $470,000. Meaning, a purchase price just under $490,000 with 3.5% down (roughly $20,000) is all that is needed.
I know there is an aversion to paying monthly Private Mortgage Insurance (PMI). This is required when purchasing a home with less than 20% down. I get it, yet, PMI payments aren’t necessarily the end of the world. Let’s look at two recent clients:
One client purchased a home around $300,000 and had 15% to put down. Instead of waiting to save an additional $15,000, they put 15% down and will pay $26 per month in PMI for just a few years.
Another client purchased a home around $400,000 and put 10% down. Instead of waiting to save an additional $40,000, they are paying just over $40 per month in PMI for several years.
When you compare the monthly payments on PMI to continuing to rent, not getting appreciation for a home you own, locking in an interest rate now, trying to save more and more money… paying PMI isn’t as bad as it seems.
If you’ve made it this far into the post – thank you for reading! If you do not remember anything else from this post, please remember (and tell all your friends), buyers do not need 20% down to purchase a home!
Speaking of purchasing a home, if the purchase is in the state of Georgia, contact me today! I can get you well on your way to owning a home!
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.
A recent mortgage industry headline surprised me, “Many Homeowners Still Missing Out.” The subheading read, “80% of owners have not refinanced.” Given that interest rates have reached historic lows, with less than 3.0% rates often available for 30 year mortgages, I’m really surprised that so many people have not refinanced.
The article provides the following statistics:
Almost 30% of mortgage holders do not know their current interest rate!!
Almost 20% of borrowers have refinanced in 2020.
Over 25% have considered refinancing but have not done it.
And over 50% have not even considered a refinance.
I am now doing refinances for customers whom I refinanced in 2019. Mortgage interest rates have continued dropping to the point that a second refinance now makes financial sense for some of my clients.
If you have a mortgage on a Georgia home, here are a couple of clues that you might want to talk with me about refinancing now:
Your interest rate is above 3.5%. The rate typically shows on your mortgage statement. Take a quick minute to look at it.
You obtained a FHA loan more than 2 years ago. With recent home appreciation, it’s worth exploring a conventional refinance in hopes that you can eliminate the FHA mortgage insurance.
The ultimate consideration is how much will the loan cost as compared to how much you can save monthly. Yesterday, I talked with a former purchase client. In 2016, she bought a house with a 3.5% down FHA loan at a 3.75% interest rate. That was a great deal for her….back then. Since she bought the house, it has appreciated over $100,000. With her increased equity, doing a refinance now would lower her interest rate almost a full percentage point, and she would eliminate the FHA mortgage insurance that costs her $155 every month. Her total monthly savings could be around $330. I estimate a refinance will pay for itself in just over a year.
What about you? Is your interest rate over 3.5%? Do you have a 2 year (or older) FHA loan? Do you want to give yourself a raise by lowering your monthly mortgage payment? If yes, give me a call. I can easily help you analyze your current situation to see if a refinance makes sense for you. Don’t wait too long. Who knows when interest rates will start rising.
Millennials are the largest generational group in US history. This year, the largest section of Millennials will turn age 30, entering what many consider to be “prime homeownership years.” So how is the pandemic impacting these potential home buyers? Two recent studies have addressed this topic.
The first, by First American economist Mark Fleming is more optimistic than the second. Fleming states that the pandemic has delayed, but not denied, homeownership for Millennials. He notes that household formation is a key driver of home demand, and that the Millennial generation is making lifestyle decisions that “will continue to support potential homeownership demand in the years ahead.” He further states that Millennials “may fuel a ‘roaring 20’s’ of homeownership demand.” As a loan officer, I love optimism in the housing market!
On a less optimistic note, a realtor.com report stated that pandemic-related unemployment could further delay Millennials’ homeownership dreams. It expresses concern that unemployed potential homebuyers will live from their savings. And it could take them years to recoup their savings once the go back to work. The article then references how a 10% down payment on a $320,000 home (the median list price of a US home in April), is $32,000. Ultimately, it can take people months, if not years to save tens of thousands of dollars for a down payment.Here’s the good news related to down payments – a 10% down payment is not required. 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.
While obtaining a mortgage with a less than 20% down payment requires paying for mortgage insurance (except for VA loans), my opinion is that paying the mortgage insurance to buy a house sooner is often better than waiting and paying rent. As long as home prices continue appreciating, the homeowner will likely build wealth even if they have to pay the mortgage insurance. And in my opinion, growing wealth is superior to expense only home rental payments.
Are you or someone you know a Millennial wanting to buy a home in Georgia? I would love to help. We can explore low down payment and other options to help you buy a home (and start growing your wealth) sooner rather than later. Give me a call and let’s get started.
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.
Mortgage rates – already at near historic lows – continue to improve. Current interest rates are basically a full percentage point lower than this time last year. I’ve recently locked clients into rates lower than I’ve ever had the privilege of doing in my entire career as a loan officer.
What factors allow rates to continue improving? One key component is the continuing spread of Coronavirus and the fears related to this public health concern. In times of fear and uncertainty, investors typically move money to less-risky investments. Given the fear and uncertainty related to coronavirus, investors have recently been doing this very thing. Investors have been putting more money into US government bonds. This drives bond prices up and interest rates down. The US 10 Year bond trended upward from August 2019 until December. Since then, the interest rate on this bond has moved consistently downward.
Investors consider mortgage backed securities to have a risk profile similar to US government bonds, so mortgage interest rates have declined along with rates on government bonds. So mortgage rates now sit very close to historic lows.
How long will these low rates last? That requires a crystal ball and I don’t have one. If health officials can control the coronavirus spread and ease public concerns, perhaps rates will start moving higher again. But looming over the entire situation is the 2020 Presidential and Congressional elections, which could bring more uncertainty to offset any positive news on the coronavirus front.
The bottom line is this: Home owners who purchased or refinanced in 2017, 2018, or the first half of 2019 may have a great opportunity now to lower their interest rate by refinancing. And home owners with FHA loans a couple of years old may be able to refi to a conventional loan now and lower or eliminate their mortgage insurance premiums. Some of my clients have lowered their monthly payments by over $200 a month. One even lowered her payment by over $300 a month. Did I just describe you or a friend you know? If yes, call me (or tell your friend to call me) to discuss refinancing now, before rates start increasing. Don’t miss out on potentially large savings.
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.
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.
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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