Thanksgiving is just around the corner and it’s time again for all of us to slow down a little bit and give thanks for what we have and the wonderful people around us. 

Throughout the last couple of years one of the “coined phrases” i have heard by many people is that “banks just don’t want to loan money anymore”.  I think it’s time to shed that negativity and start giving some thanks for what we do have…..which is a lot!  Let’s talk about some of them……

• We can still help you buy a home with no down payment!  There’s a few ways we can do this.  A customer who has served in the military can buy with no money down with a VA Loan.  There are a ton of properties slightly outside the city limits that can be purchased with a USDA loan.  The North Carolina Housing Finance committee may help you with up to $8000.00 in down payment assistance and they just raised the limits making that easier to get!
• If none of the above apply, you can still buy with only 3.5% down with a FHA loan with a 30yr interest rate that often times is BELOW 4%.  If you don’t have the money right now for the down payment, we can STILL get gift money from a family member and sometimes an employer!
• You can buy a Fannie Mae foreclosure right now without having to get an appraisal.  You can buy that property with VERY little down, no appraisal, no mortgage insurance, and often times STEAL them for a very good price!
• You can buy a home and fix it up all with one loan at a very good interest rate so you don’t have to come out-of-pocket later to make the improvements you need or want to make.
• You can still buy a home with a credit score as low as 600!
• There are HUD properties on the market being sold for only $100 down!

Interest rates are GREAT, home prices are LOW, and banks ARE lending money!  Let me know if i can help….

As always, we are constantly seeing a lot of change in the mortgage business.  This month, there are changes being made to virtually every mortgage product on the market.  Here are the changes that could affect your home purchase:

VA Loans – Loans for those that have served in our armed forces:

Recent changes to the law that go into effect on October 1st has mandated change with regard to the “funding fee” that is charged on a VA Loan.  The funding fee is the up-front fee that is rolled into a VA loan and put on top of the loan amount in order to have the ability to obtain a 100% Purchase loan.  This fee has been slightly over 2% of the loan amount.  The VA Fee has been dramatically reduced effective October 1.

USDA Loans- Rural Development

The next change that is happening is with Rural Development Loan….most people refer to these as “USDA Loans”.  This is a loan option that also offers 100% financing options with eligibility for this program mostly determined on where the property is.  USDA Loans have had a fee that is rolled into the loan that is slightly over 3% of the loan amount.  This up-front fee has been reduced to 2% of the loan amount.  However, to replace this reduction, USDA has initiated and annual fee of .30% of the loan amount that will be collected monthly.  This is calculated as follows:  $200,000 Loan Amount x .3% = $600.00.  $600/12 = $50/mth Rural Development Fee.  This is the first time I’ve seen Rural Development collect a monthly fee but please remember that this is still low compared to other products and still gives you the ability to get 100% Financing.

FHA Loan Limits are Changing

The limits on FHA loans are changing….in most cases, the limit is reducing.  This means that the size loan you can get with a FHA loan is going to be less.  In my home county (Wake County) that limit is being reduced from $298,000 to $271,050.  The limits are not changing in every county.  The following link will help you find what the limit is for your area.   FHA Loan Limits

There are also some changes that most people will not be effected by with regard Temporary Conventional Loan Limits.  These loan limits were raised in certain markets and are now set to expire October 1st.  Please contact me if you have any questions.  Have a great day!

One of my co-workers and I were talking today about how many loans we are doing that are conventional vs. FHA.  We used to do a ton of FHA loans…now…not so much.

The competition between the two arises on primary residences.  This is simply because you can’t do a FHA loan if you are buying an investment property or second home.  The FHA product can’t be used for these type purchases.

So, having said that, when is it best to proceed with a conventional loan and when is it best to do an FHA?  The key to this lies in two main factors…(1) Loan-to-Value (how much are you putting down) (2)credit score and (3) Loan Amount. There are others but these are the big ones.

Conventional loans typically cannot be offered for a customer at all if their credit score is below 620.  If a customer has a credit score between 620 and 660, the customer is almost always going to have to put 20% down.  The reason for this is that the mortgage insurance companies that insure the lender for the amount of the loan over 20% typically do not offer this insurance when a customer has a credit score below 660.  So, bottom line, it’s pretty safe to say that if a customer does not have a credit score of 660 or higher and cannot pay 20% down on the property, a conventional loan is not going to be the product for them.  The FHA loan is going to win this battle.

The fight really begins at a 660 score or higher.  I’ve found that a lot of people aren’t aware of this, but a conventional mortgage can be offered with only 5% down.  The reason most people aren’t aware of this is because it used to be that the Mortgage Insurance that was required on a Conventional loan with only 5% down was astronomical compared to a FHA loan.  This is no longer the case.  HUD has increased the amount of MI required on FHA loans a few times over the last couple years, and now, more times than not, the amount of MI on a FHA loan is HIGHER than the amount of MI on a Conventional loan even when the customer isn’t putting much down.  Even further, FHA is going to have an up-front insurance premium that increases the loan amount where Conventional loans do not.

The only thing that can offset this difference in MI (with FHA often times being higher) is that Conventional Interest Rates may be slightly higher than FHA.  This can vary day-to-day and also depends on the customer’s credit score and the lender’s pricing model. It’s important to put the two options side-by-side at this point and also consider how long you estimate you will be in the property.

The limits on how big an FHA loan can be is determined by geographic area.  Consult your loan officer for what those limits are as your loan may be to big for an FHA loan.  Typically, Conventional loans can be offered for loan amounts up to $417,000.

Now, the last thing is that a FHA loan can still be done with only 3.5% down.  This is slightly lower than Conventional loans, so if you want to save as much cash up-front, the FHA will win this one.

In short, make sure to compare both options when your credit score is 660 or higher and you are willing to put at least 5% down.  Consider how long you plan to stay in the property and compare total payments on each option for that time period.  Contact me if you have questions.

I get a lot of questions and concerns every day about “PMI” or whether or not we (as customer’s) have to pay mortgage insurance.  Many customer’s have told me in the past that they simply will not have a mortgage with “PMI” because they do not believe in it and that’s all there is to it.  I think it’s important to understand what it is, why it was created, what it does for you, and when you should have it and when you shouldn’t.  I’m going to try to answer some of the basic questions now. 

What is Mortgage Insurance?

Let’s start by talking about what it is not.  It is not “Hazard Insurance or Homeowner’s Insurance”.  These insurances are required to get a mortgage, but they also protect you in case there was something that damaged your home.  Mortgage insurance is a premium that is paid each month to your mortgage company to insure them in case you were to stop paying.  Essentially, you are paying this monthly premium so that your lender is protected.  Most times, the insurance will stay on for five years or when the loan reaches 78% of the appraised value.

On the surface, this sounds ridiculous.  Why would i pay an insurance premium so that someone else is protected.  The theory is that, without this insurance, the ability to get a mortgage without a ton of money down and without paying exorbitant interest rates would be slim.  Mortgage lenders simply would not offer the kinds of loans that would be needed to get your average consumer into a home.  That point can be debated but is best left for another post.  For now, that is the current theory.

What kinds of loans have Mortgage Insurance.

There are two types of loans that have premiums on them that are referenced as mortgage insurance premiums.  There are other loans on the market that have fees associated with them that could be arguably construed as insurance premiums but we will leave those out for purposes of keeping this post fairly short.  The two types of loans that i will be talking about are Conventional and FHA.

Let us start with Conventional Loans.  Conventional Loans are loans that are not insured or guaranteed by the government.  The two types of conventional loans are conforming and non-conforming.  The type of conventional loan that is going to have mortgage insurance is a conforming conventional loan.  In a nutshell, if you are going to do a conventional loan and do not plan on putting at least 20% down, you are going to have mortgage insurance on the loan that will be paid monthly in addition to what you pay in principal and interest. The amount of this insurance ranges and is based on how much money you are putting down, your credit score, and whether or not the loan you are doing is a fixed or adjustable rate.  If you are putting 20% or more down, you will not have mortgage insurance on a conventional loan.

The second type of loan with mortgage insurance is an FHA loan.  The amount of insurance required will vary, however FHA loans will always have some sort of mortgage insurance on them.  FHA loans will have insurance in two places.  The first part is an up-front insurance.  This is not something you pay out-of-pocket for as a customer but will be rolled into the loan amount.  Currently, that up-front premium is 1% of the loan amount.  This up-front insurance is the same on every FHA Loan.  The second part is the monthly premium.  The amount of the required monthly insurance varies and is tied to the term of the loan.

 Should i be ok with Mortgage Insurance?

There are a lot of times in my profession that i can easily get caught up in crossing the line between being a mortgage advisor and an overall financial advisor.  I am very careful not to overstep here.  However, with that said, the best thing i can advise on is to know what your goals for the property are and understand the market.  If your goal is to be in the home for a very short amount of time, i would advise strongly to consider the implications of dropping a whole bunch of cash into a property to simply avoid an insurance premium when your goal is to not stay there very long anyway.  The risk vs. reward equation in that scenario needs to be evaluated.  Personally, i would consider holding on to my cash.  On the other hand, if this property is the one that you plan on staying in for a long time, the cash infusion may be worth it to reduce the total cost of financing on the home and get rid of the insurance.  This can all be evaluated very easily be looking at the estimated time in the property and comparing it to an amortization schedule.

How do you “get out” of paying mortgage insurance?

Lastly, i want to talk a little about some of the ways you can “avoid” paying mortgage insurance.  I put “avoid” in quotes because, at the end of the day, if you are doing an FHA loan or a Conventional Loan over 80%, you are going to incur additional cost. 

The first and most popular way to avoid mortgage insurance is to do what’s called a piggyback loan.  This is when you buy a home using two mortgages at the same time….a first mortgage and a second mortgage.  The most common type nowadays is what’s called an 80/10/10.  This is where the mortgage company does a first mortgage (conventional) at 80%, the customer puts down 10%, and a second mortgage is simultaneously taken out at closing for the last 10%.  In this case, the first mortgage would not have MI.  However, there are two drawback to this scenario. 

The first one is that the lender who does this loan simultaneously with the second mortgage often times prices the 80% loan a little higher than normal because they see additional risk with the customer taking out a second mortgage at the same time as their first.  For example, instead of you getting a 4.25% rate, you get a 4.5% rate.  Yeah, you don’t have MI on that 4.5%, but the long-term cost of that loan probably just went higher than if you had mortgage insurance.

The second drawback is that now you have a second mortgage on the property.  This doesn’t sound like a big deal since you would have owed that money anyway.  However, these second mortgages that are used in 80/10/10 scenarious are most often interest only equity lines with variable rates. If you are not careful, you can end up with an equity line that doesn’t seem to ever go away with regard to the balance and the rate can go up on you.

The two other ways that you can avoid paying for mortgage insurance (other than just putting 20% down) is to go with a non-conforming loan or to elect “lender paid” insurance.  The first option, a non-conforming loan, is when you take out a loan that is not eligible to be sold to Fannie Mae or Freddie Mac.  These would typically be done with a lender that holds all of their loans and does not plan to sell them.  Here’s the deal….these lenders are not stupid.  They understand that doing a loan without 20% down is risky just like Fannie Mae and Freddie Mac do.  Most times, you will see that the interest rates with these companies are a quarter to 1/2% higher…..there goes your savings.  The other option, which often times customer’s do not know about, is for the lender to pay it.  This is called “lender paid insurance”.  All that is happening in this scenario is the lender is increasing the interest rate offered to make more money and pay the insurance on behalf of the customer.  To this day, i have not seen an instance where this makes sense in the long run.

To summarize, the key is to know your plans for the property and to compare amortization for the time you plan on spending their.  Please contact me with any questions on this.

I get alot of questions on whether or not a customer can use money that someone gave to them for their down payment.  This is called “gift-funds” and it’s perfectly acceptable.  There are a few things that you have to be aware of……

First thing is where are you getting it from.  You can receive gift money from either a relative (by blood, adoption, or legal guardianship) or from a fiance’ or domestic partner.  Finally, it is acceptable in most cases that an employer (on an FHA loan) also be a donor. The donor cannot, however, be affiliated with a builder, agent, or any other interested party in the transaction.

Gifts can be used on a primary residence or a second home (second home gifts are only for conventional loans).  Here is what is allowed:

Conventional Loans:

On a one to four unit property (principle residence or second home), all required funds for down payment can come from a gift. 

On a principle residence over 80% loan-to-value, all required funds for down payment can come from a gift on a conventional loan.

On a two to four unit dwelling or second home over 80% loan to value, the borrower must make a 5% contribution from his/her own funds and the rest can come from a gift

FHA Loans

Gift funds are slightly more leniant on FHA Loans.  You cannot have a second home, FHA loan so this does not apply.  FHA is only for primary residences. There is some documentation that is needed, but overall, FHA does not have a limit on the amount of gift funds a customer can receive and use.   Also, FHA loans do allow in some cases for friends, charitable organizations, and labor unions and employers to be donor’s where conventional loans are stricter on that.

There is some documentation that is required for this including a “gift letter affidavit”.  Overall, the bottom line is that the donor has to show that they’ve had the money and has to sign the affidavit to give the money to the new borrower. 

Contact me if you have any questions.