WHO CAN GIVE A GIFT?
WHO CAN’T GIVE THE GIFT
DOCUMENTING THE GIFT
THE GIFT FOR DOWN PAYMENT BOTTOM LINE
Minneapolis St Paul, MN: When taking out the largest loan most people will ever have in their life, a home loan, your Mortgage Loan Officer is going to ask a lot of questions, and request a lot of supporting documents, like pay stubs, W2’s, tax returns, and your recent bank statements.
Providing all this documentation really should be pretty easy for most people, yet it also causes a lot of frustration. Most people don’t get pay checks handed to them anymore, just as many people don’t get banks statements mailed to the home either. So here starts some of the annoyance issues right away for some people, while others quickly and easily access the documents online.
Your lender wants actual pay stubs, and actual bank statements, like what would be mailed to the home. Many people send simple screen shots, which simply doesn’t work. Most online accounts let you print real statements and real pay stubs, you just need to look around to find them.
Generally, most mortgage loan programs only require your two most recent bank statements. We also need ALL the statements pages too. If the statement says “Page 1 of 3”, and the last page is just advertising, we still need it.
When the mortgage company looks at your bank statements, the most obvious thing they are looking for is do you have the money in the bank to cover your down payment and closing costs, also known as ‘cash-to-close.” Do you have it all today? What is your average balances?
If your last two months bank statements show $500 balances, but you need $10,000 for down payment, where is it coming from?
Any large, obviously non-payroll deposit needs to be documented. What is it, where did it come from? Is is a loan that needs to be paid back? Is it a gift? Is it your tax refund?
Large deposits is one of the biggest headaches for both the lender and the applicant, and depending on the answer, can be no big deal, require a little bit of paperwork to prove where it came from, or can actually be a deal killer.
A common problem is many people have large sums of cash at home, then deposit in the bank. As weird as it sound, that cash deposit is NOT an acceptable source of money for your down payment, and needs to be in the bank account at least 60-days before it can be considered usable money for your down payment.
Most lenders consider a large deposit any non-payroll deposit that is more than 50% of a applicant(s) monthly income for conventional loans, and more that 1% of the purchase price of the home for an FHA loan.
Yes, we care if you are bouncing checks. It shows how you manage money.
Let’s say your current rent is $1,000 a month, and you consistently bounce checks. Your potential new house payment is $1,400 a month. You can’t manage your account with rent at $1,000 a month, how are you going to be able to handle a $400 increase in your housing costs?
On the loan application, you are supposed to disclose all recurring debt. The reality is mortgage lenders generally just merge in the debt showing on your credit report. But a sharp eyed Underwriter may catch something on the bank statement and ask a question.
We don’t care about ATM withdrawals at the casino, and we don’t care about your purchase at the liquor store or Victoria’s Secret. We pretty much don’t care anything about your purchases.
Busy bank statements is my personal term for people who transfer around money from their various multiple accounts on a regular basis. This can lead to a lot of headaches in documentation. I just had a client, where on her bank statement, there was a large deposit. When I asked her where it came from, she said her savings account. Great, now send me the savings account statement. Once I saw the savings account, there was a large deposit there too. She said that deposit was from a 401k loan. OK, prove that too.
While she was able to prove and document everything, she also became very annoyed. I understand, but those are the rules. So if you know you will be buying a home in the next few months, it may be easier to put all the money in one account now to avoid any potential issues with Underwriting.
Minneapolis / St Paul, MN: Can you really get a mortgage pre-approval online in 10 minutes? Yes. Should you? Probably not. It’s 2018 as I write this, advancements to our lives, along with instant gratification is everywhere. Why go to the store when you get better selection and two day shipping from Amazon. No need for old fashion video stores, everything is on Netflix, Amazon Prime video, or your HBO Go app. Twitter, Facebook, the internet, and of course Smartphones and iPads have replaced home computers for many people.
So it is no surprise that many mortgage lenders are now advertising instant 10-minute mortgage loan pre-approvals while you stand in front of the house you just looked at. The biggest company pushing these is Quicken Loans ® “Rocket Mortgage”®.
Sounds cool, and their commercials are really funny… But wait a minute… This is the largest financial transaction of your adult life. Can it really be done on your cell phone?
The traditional process is you complete a loan application. You do that in person, over the phone, or by completing an online loan application. From there, a real live person reviews the information, pulls your credit report, talks to you about your situation, uses knowledge and expertise to explore all avenues, issues, and different loan options (all good ideas).
Assuming that all looks fine, your application is processed through one of the major AUS (automated underwriting system) of Fannie Mae, Freddie Mac, FHA, etc, to get your initial “looks good” answer.
This automated underwriting system process only takes a few seconds, and with the initial “looks good” answer to your loan application, you got a loan, right? NO, not even close. This is just AN INITIAL step.
Next, just because the AUS indicates ACCEPT (yes), there are still pages of information and requested items that need to be received and reviewed for accuracy BY ALL LENDERS. Common items are W2’s, pay stubs, bank statements, tax returns. Depending on your situation, you may need further items, like bankruptcy papers, divorce decrees, and more.
You generally need to gather all those documents and submit them to your lender for review to receive a proper Pre-Approval.
After you find the exact house and sign a purchase agreement, the lender orders the appraisal, title review, and everything else is sent to the underwriter for final review. Generally speaking, a proper professional pre-approval will equal a successful final approval by underwriting in the final stage of the process. A sloppy pre-approval, not properly review??? Scary stuff.
Your largest financial transaction of your life is too important to trust to just anyone, let alone a computer. You need the wisdom and input from a licensed, experienced, and professional Loan Officer.
The difference with their app, is that after taking the initial application information online (like thousands of other lenders), their app jumps right to running your information through the major automated underwriting system to get that initial pre-approval. Yes, that can take just 10 minutes.
Next, they attempt to gather some of your basic supporting documents electronically. Rocket Mortgage ® will ask you to link your financial accounts to their program. This allows them to check your financial statements online without you having to send them the physical copies of your banking information. Again, sounds cool, but in the day of cyber hacking, do you really want to give them access to your information electronically?
Next, a huge portion of applicants are not able to take advantage of instant document verification, and still need to submit many, if not all of their documents the traditional way – completely eliminating the cool factor.
You can also get instant rate quotes, cost quotes, and options like to buy discount points. Again, sound nifty, but…
I review a LOT of online mortgage applications. Rare is it that I don’t need to change or adjust any application data before running it though the computers. Data errors, missing data, and income that isn’t allowed to be used for qualifying are all too common.
For example, I recently had a client input $50,000 a year for his wife at a job she has been at for about 9 months. But, as I interviewed him, I discovered that her new job is 100% commission based. Standard underwriting rules for commission based income require the person to have two-years on the job, and that we average the two-years of income. Therefore her job qualifying income was ZERO. Oops… Now you are running around with a quick pre-approval looking at houses you will never actually get final approval to buy.
Another recent applicant answer the “Do you pay alimony or child support” question online NO. But when I physically reviewed his pay stub, it clearly showed the deduction for child support. This additional debt lowered the maximum house he could buy $50,000. Again, potentially someone running around with an invalid pre-approval letter.
For as cool as all this sounds, it has huge disadvantages.
First is not having the opportunity to talk to a human loan officer. Consumers may lose out by applying for a mortgage that isn’t necessarily the best choice for their situation. I get clients all the time who complete my online application for one loan type, but I end up switching them to something better suited for their situation. This is because most applicants usually have several mortgage options available to them. Since most consumers are not mortgage experts, this is clearly an area where a human loan officer could help steer their client in the right direction.
Your largest financial transaction of your life is too important to trust to just anyone, let alone a computer. You need the wisdom and input from a licensed, experienced, and professional Loan Officer.
They typically don’t offer first time home buyer programs, and don’t offer down payment assistance programs. This is especially troublesome, as younger first time home buyers are the ones more inclined to think apply on your phone is cool.
When buying a home, your best move is to always work with a local lender the traditional way. The guy located in your geographic area, with a local reputation to protect. There is nothing anyone on the internet on the other side of the country can offer that you can’t get down the street. More often than not, it is just the opposite… Especially when it comes to down payment assistance programs for first time buyers. These programs are always only available from the local lender.
We lend for homes in MN, WI, and SD and would love to assist you
Minneapolis, MN: Student loan debt is at an all time high, and has been noted as a contributing factor to why may people have been unable to purchase a home, especially first time home buyers.
Recent changes to Fannie Mae and Freddie Mac guidelines have made it easier for some, but not all with student loan debt to still qualify for home mortgage loans.
Fannie Mae and Freddie Mac do not do home loans. Rather they buy loans from lenders after that fact. Both Fannie and Freddie have set underwriting guidelines that if lenders follow, makes the selling of loans to Fannie Mae and Freddie Mac much easier. While the number moves, at any given time, Fannie Mae and Freddie Mac control +/- about 60% of all home loans.
When buying a home, and getting a home loan, being approved or not all comes down to risk. If the mortgage company thinks you are a good risk, you get the loan. If you are too risky, you get denied. Pretty simple concept.
A good example of this concept is down payment size. If you put at least 20% down, you are considered a good risk. Put less than 20% down, you are high risk. Needless to say, not everyone can put 20% or more down payment.
To minimize the lenders risk on small down payment loans, but yet allow for these same small and more affordable down payments, a tool called mortgage insurance, commonly referred to as PMI, or private mortgage insurance is available.
The insurance policy you are required to obtain and pay for as part of your monthly mortgage payment essentially provides protection to the lender in case you default on the loan, and covers the lender for the amount between 20% down and what you actually put down.
The cost of the mortgage insurance depends on multiple factors, but primarily down payment size, credit scores, and loan type.
The smaller your down payment, the higher the mortgage insurance costs. The lower your credit score, the higher the costs. For example, A client with 10% down and an 800 credit score on a 30-yr fixed loan might pay about $30 a month per $100,000 loan amount for mortgage insurance. The same 10% down, but a client with just a 640 credit score might pay as much as $105 per month per $100,000 loan.
Contact your loan officer for exact monthly costs for your individual situation and down payment size, as this article covers basic and most common situations, but does not encompass every possible situation.
Typicaly standard PMI will automatically fall off your loan once you reach 78% of the original loan amount with no interaction from the homeowner. It is simply automatic.
You can request to have mortgage insurance removed from your loan once you believe you are at 80% of the original loan. The 80% mark can be based on a combination of paying down the loan, and today’s appraised value. For example, you put 5% down when you bought the house, you’ve paid down through payments another 5%, and the home has appreciated 14% since you bought it. That would put you ate 76% loan-to-value. So contact your lender on their proceedure to have mortgage insurance dropped.
Must Deal With Mortgage Insurance
If you are putting down less than 20%, you MUST deal with mortgage insurance somehow. Other than monthly mortgage insurance, lenders can also offer more creative options. The most popular is known as ‘lender paid mortgage insurance’, where the lender increases your interest rate, and uses the extra money to buy mortgage insurance. You still have it, but it doesn’t show as a monthly cost.
The next is known as ‘single premium’ insurance. Under this option, you pay a one time lump sum amount up-front at closing equal to 3-years of monthly mortgage insurance.
The last option, is getting two loans. An 80% first mortgage, and a second mortgage to cover the difference from what you have for down payment. This is a viable option primarily for high credit, low risk clients, and for jumbo loans over $424,100.
While these options may sound enticing, for most people, balancing up-front costs, long-term versus short-term costs, and overall benefits based on individual situations can become a mind numbing challenge. Suffice to say the vast majority of people go with standard monthly mortgage insurance for a reason.
FHA loans also have mortgage insurance, but this insurance is significantly different from conventional loan mortgage insurance.
Most people using FHA loans put the minimum down payment of 3.50%, and take a 30-yr fixed loan. Most FHA mortgage insurance is the same for everyone regardless of down payment size or credit score. For small down payments, this is roughly $85 per month per $100,000 loan amount.Next, FHA mortgage insurance for small down payments is called ‘Life of Loan’ insurance, which means regardless of future loan-to-value, appreciation, or what you’ve paid down, FHA mortgage insurance never goes away. The only way to remove it is to refinace the loan.
Another item with FHA loans, is that regardless of down payment size, ALL FHA loans will have insurance. So contact your loan officer for exact monthly costs for your individual FHA insurance, especially if you are putting more than 10% down or picking a 15-year loan.
Mortgage insurance often times gets confused with home owners insurance. PMI protects the lender from default, while home owners insurance protects the owner for items like fire, storm damage, theft, etc.
If you are active or former U.S. military, you have a great benefit in a VA Home Loan. Most people know VA loans generally do NOT require a down payment, they also have NO monthly mortgage insurance. This can be a huge monthly savings over other loans.
Author Joe Metzler is a Senior Mortgage Loan Officer for Minnesota based Mortgages Unlimited. He was named the 2014 Minnesota Loan Officer of the Year, and Top 300 Loan Officers in the Nation for 2010, 2015, 2016. He provides Home Mortgage Loans in MN, WI, and SD. He can be reached at (651) 552-3681. NMLS 274132.
Minneapolis, MN: Its only been two weeks, but clearly the new Trump Administration is driving a different road from the past administration. Only time will tell what this all means for real estate and home mortgage loans, but here are a few observations, most relating to a reduction in regulations.
After the housing collapse, legislators and regulators came down hard on the mortgage industry under the false belief that if you could fog a mirror, you automatically got a loan. While guidelines were looser, and third party verification of documents supplied by home buyer were lax, NO LENDER ‘knowingly‘ let the french fry guy at McDonald’s buy a million dollar home.
Were there a few bad players? Yes, But think of it more as it was easy to beat the system, as opposed to everyone in the mortgage world was a crook.
The Frank-Dodd financial reform laws, and the creation of the Consumer Financial Protection Bureau (CFPB) put the hammer down on many industries, not just mortgages. Of all the new regulations, only a few actually made a difference and make sense. The rest have cause home buyer costs to rise dramatically, added huge paperwork and delays to closing, and ultimately left many good people unable to buy homes because of unintended consequences.
It is expected that the Trump administration will go after many of the Frank-Dodd financial reform rules, and seek to reign in the CFPB, resulting in fewer rules, regulations, and paperwork. Meaning lower costs for home buyers, quicker closings, and less hassle to get a home mortgage loan.
A prime example is the CFPB designed a new ‘Loan Estimate‘, which replaced the ‘new’ Good Faith Estimate, which replaced the old Good Faith Estimate that existed since 1972. Today my clients are more confused than ever over the document and disclosures.
A second example is Loan Officers themselves. The rules put into place after the crash REQUIRE non-bank Loan Officers to go to school, pass difficult state and federal testing, and have mandatory continuing education. Sounds great, but Loan Officers at depository lenders (banks, credit unions, and lenders owned by banks or credit unions) DO NOT have to pass the same requirements of the S.A.F.E. Act. Don’t they all do the same thing? Why to bank Loan Officers not have to go to school, pass federal testing, or meet the same educational requirements?
Another example is that over the past 10-years, and especially the past 5-years, many lenders have pulled away from writing FHA loans. While not just for first time buyers, those are the people who primary use FHA loans. This was done because the Obama administration went after lenders from every angle under the False Claims Act for any minor error in FHA underwriting. Failing to cross even the most minor T, or dot the smallest I could have, and did, leave lenders with huge multi-million dollar settlements paid to the government.
I’m all for slapping the hands of people doing blatantly wrong things. But lenders are not stupid. If the government is going to come after you for minor items, why bother. It isn’t worth it. Those still offering FHA loans charge higher rates than needed to new buyers to offset anticipated government lawsuits. Someone has to pay those lawsuits, and it has simply been pass on to the consumer.
It is expected the Trump administration will have the CFPB and the Justice Department back off of their overzealous pursuit of lenders.
A smart balance of less unnecessary regulation, less paperwork, and a positive attitude towards business should be good for mortgage loans, the financial markets, home owners, and the country in general. It is way too early to tell, but lets all pray the county goes in a good direction.
UPDATE to this UPDATE:
The reduction in FHA mortgage Insurance has been (at least) temporarily paused before ever actually going into effect.
The FHA mortgage insurance rate reduction came as a giant unanticipated surprise to all of us in the mortgage world. I guess I should have figured something was up, as it appears the reduction was part of Washington’s political games.
The outgoing Obama administration people made the surprise reduction announcement with only days remaining in office. As soon as the Trump administration was sworn in, they immediately put the reduction on hold, stating it was irresponsible, and needed to be evaluated. This allowed the former administration to run around claiming how horrible the new administration was. Errr….
Personally, I think it is a bunch of crap that these people play with home owners, the mortgage industry, and the real estate industry, regardless of what side of the political fence you stand.
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Minneapolis, MN: HUD/FHA has announced that the required monthly FHA mortgage insurance costs are dropping with any new FHA loan closing January 27, 2017 and after.
For most FHA home buyers, this will mean a drop from .85% monthly, to just .60% monthly.
On a $200,000 loan, that means a monthly savings of $41.00 a month!
How to calculate FHA monthly mortgage insurance:
Take the loan amount times the insurance factor, then divide by 12
Example: Loan amount X .0060 / 12 = $ Monthly MI
$200,000 X .0060 / 12 = $100 a month
Minneapolis, MN: Just 10-years ago, 30-year fixed rates were 6.125%, and the real estate market was hot. With rising interest rates, 2017 may be a bit more challenging for home buyers. But the biggest challenge for most people who wish to buy a home is down payment.
You do not need 20% down payment to buy a home! I repeat, you do not need 20%. This large down payment myth has been around forever, but it simply isn’t true for the vast majority of people buying their first primary residence. There are many program that allow for no down payment, or low down payment. Some jumbo loans buyers (loans over $424,100 in most parts of the county), as will people buying investment properties will usually need a large down payment. But for the rest of us, there are many low down payment, no down payment loan options for 2017.
The term first time home buyer program covers a wide net of potential programs and options. To be a first time home buyer, you simply must not have owned a home in the past three-years. If you owned a home in the past, but it has been longer than three-years, you are a first time home buyer again. Some options allow for lower rates, cheaper mortgage insurance, and even down payment assistance. Most come with additional strings attached, like household income requirements, lower debt to income requirements, and that you must take first time home buyer education classes.
FHA backed loans are very popular, and only require a small 3.50% down payment. The down payment can be your own money (checking/savings/retirement), a gift from a family member, or can come from a down payment assistance program. FHA loans are more forgiving than other loans, for example allowing just a two-year waiting period if you have a previous bankruptcy, and a three-year waiting period after a previous foreclosure. Maximum loan limits apply based on the medium income of the county the property will be located. Check FHA Loan Limits
Both Fannie Mae and Freddie Mac offer a 3% down payment program. The down payment can be your own money (checking/savings/retirement), or a gift from a family member. This is a great program, especially for those with higher credit scores, or homes that need a little TLC that might not pass FHA loan inspections.
Fannie Mae offers an additional 3% down loan called HomeReady for first time home buyers. You need to take a home buyer education class, but you’ll be rewarded with lower interest rates, and lower mortgage insurance than the standard 3% down conventional loan.
Both Fannie Mae and Freddie Mac offer a basic 5% down payment program. This is your everyday, plain vanilla mortgage loan available to everyone.
Available for active or retired U.S. Military personal, the VA loan is truly one of the best benefits this country offers for your service. The VA loan is a no down payment program, and also has no mortgage insurance whatsoever. This is a huge savings per month over any other low or no down payment loan. Closing costs can be rolled into the loan, making for a home purchase, that for most people, is about as close to zero money out of pocket to buy a home as you’ll ever get.
Available to those wishing to buy in more rural areas of the country, the USDA Rural Development loan does not require a down payment. While the loan does have mortgage insurance, the cost is very low compared to other loans. You need to meet household income, and property location requirements.
Down payment assistance comes in many different flavors from neighbors, city, county, and even state programs. Generally these are in the form of a loan that needs to eventually be paid back, but there are a very small number that are actually forgiven if you live in the home a set period (like 9-years or longer). The assistance loan can be combined with a standard loan, like an FHA loan, to be used for down payment. Household income, and property location are common requirements.
If want to own your own home, you have OK or better credit, a stable income, and at least a little money in the bank, by all means, you should apply for a home loan. Your Loan Officer will review your loan application, then go over the various program to see what programs you qualify for, how much house you can buy, what the payments might look like, and finally, how much cash you may, or may not need to put it all together.
Best case, you’ll be in your own home sooner than you thought. Worse case, your Loan Officer will go over what you need to do to be in position to buy a home in the near future. Either way, a win win for you.
Millennials can, and still want to buy homes.
While it is true the American dream of home ownership is harder to achieve than in the past, it isn’t impossible. Young adults, more than ever in the past may be delaying home ownership because of student loan debt, and fear of the stability of their young careers. But they are still buying homes, just a few years later in life than in the past.
According to data from Zillow, in the 1970’s, first time home buyers on average had rented for just 2.6 years prior to buying a home, and was about 30-years old. Today, the average first time home buyer has rented for 6-years prior to buying a home, and is three years older (33-years old).
The same data shows that in the early 1970’s, the average first time home buyer bought a home with a price 1.7 times their household income. Today, that first home costs 2.6 times their yearly income.
Clearly this data shows that it is tougher for first time buyers to save for down payment, and to afford a home. At the same time, this lines up with other delayed aspects of adulthood from years past, including getting married later in life, starting families later in life, and having fewer children.
Just like generations past, once people start having kids, they start looking for homes to raise those kids, especially if they feel secure in their young job careers. But things have changed, many people years ago could count on right out of high school having a job they could start and stay until retirement with good benefits. That just isn’t the case today. Another survey showed the average new buyer spent 4.5 years in their job field, and were at their current job for 3-years.
Most new home buyers still save their own money for down payment, which has become a bit harder with rising home prices, and high rents making it harder to save for a down payment, but the long held tradition of down payment help from Mom and Dad is still alive and well – and a very popular option.
Low mortgage rates, low down payment loans like the 3.50% down payment FHA loan, and the 3% down payment conventional loan, combined with down payment assistance programs significantly close the gap needed to buy a home.
The bottom line is there is a continued strong desire to buy among millennials. It is just that the timelines to buy that home appear to have been pushed back a few years from generations past.
If you feel you are ready to buy in MN, WI, or SD – we can help. Just click here to apply online.
The temporary waiver of FHA’s regulation that prohibits the use of new FHA financing to purchase single family properties that are being resold within 90 days of the previous acquisition expired on December 31, 2014.
So if you bought a home, fixed it up, and now want to sell it, understand that NO FHA buyer is able to enter into a purchase agreement until YOU have owned the house for at least 90-days.
They can not even sign a purchase agreement until day 91 of YOUR ownership.This isn’t a big deal in many cases, as it take a good 3-months to turn around many fixer-uppers, but just be aware of the rule.
In a recent announcement (FHA Mortgagee Letter 2013-25) , HUD said that while they will continue with their basic rule that most unpaid collection accounts DO NOT need to be paid off in order to obtain an FHA loan, they now WILL require that lenders consider how a creditor’s efforts to collect the account can impact the borrower’s ability to repay the loan.
When ANY ONE, OR COMBINATION of unpaid collection accounts equal $2,000 or more, the lender now needs to factor in monthly payments of 5 percent (5%) of the outstanding balance for the account into the debt-to-income ratio. If payment arrangements were made with the creditor, then that payment must be used. This is going to be a major deal breaker for many applicants.
Collection accounts for non-purchasing spouses need to also be considered in community property states (like Wisconsin). Nothing needs to be done if the aggregate balance is under $2,000.
This additional debt-to-income requirement is sure to hurt many applicants.
Any medical accounts many be excluded from the requirement.
Impacted loans are those that have case numbers assigned on or after Oct. 15, 2013.
On disputed accounts, manual underwriting is required when the total is at least $1,000. Lenders must analyze whether collection accounts or judgments were a result of disregard for financial obligations, an inability to manage debt or extenuating circumstances.
In any event, the borrower needs to write an explanation and provide supporting documentation for each account.
All of this is just more reason to make sure you are working with an experience LICENSED Loan Officer, not an unlicensed bank application clerk.
Recently FHA announced in mortgage letter 2013-26 the ability to FOREGO the current three year waiting period for previous Foreclosures and Short Sales before you can qualify for an FHA Loan if the borrower had an ECONOMIC EVENT that created a hardship.
It has been brought to my attention that many real estate agents are now advertising this, WITHOUT GIVING THE FULL STORY.
Borrowers MUST MEET VERY STRINGENT guidelines in order to qualify for this EXTENUATING CIRCUMSTANCE.
Here is the link to the actual Mortgagee letter for your reference. Please read the FHA foreclosure guidelines so you understand what is required.
But there is more… Just because FHA indicates they may insure a loan meeting these guidelines, you need to understand that FHA DOES NOT DO LOANS. Lenders do loans, and you will still need to find a lender willing to offer loans under these new guidelines.
My experience tells me that very few lenders will jump on board to offer this product, so be sure to cross your T’s and dot your I’s before you get too excited about suddenly being about to get an FHA Home Loan with a recent foreclosure or short-sale.
Many folks are confused when it comes to loan options. What type of loan, FHA Loan, VA Loan, or maybe a Conforming Conventional loan? What about fixed rates versus adjustable loans?
1. FHA charges a 1.75% upfront fee known as MIP (Mortgage Insurance Premium) (which is added to your loan balance)
2. FHA charges Monthly Mortgage Insurance of 1.35% annual (divided by 12 monthly payments) on a 30-yr loan with less than 10% down. To calculate it, take your loan amount times 1.35%, then divide by 12. This number is what is added to your loan payment
3. FHA Mortgage insurance can never be removed from the loan if you put down less than 10%. This is change from the old rules as of 2013
4. FHA technically allows a credit score down to 580 with just 3.5% down, but most lender will require at least a 620 or higher score
5. With FHA, there is no real difference in the interest rate from borrowers with a low 640 score to borrowers with a 800 score.
6. While rates can change, currently FHA rates are usually a little lower than conforming mortgage rates.
Consider Conforming Conventional:
1. No upfront Mortgage Insurance Premium charge
2. Monthly PMI is lower than FHA PMI. The cost does vary by credit score and down payment. The more down payment, the cheaper the PMI.
3. PMI can be avoided when the borrower puts 20% or more as down payment
4. Conventional PMI can be asked to be removed at 80% loan-to-value. This can be a combination of paying down the loan, or increased value. PMI will automatically go away once your reach 78% loan-to-value though payments alone. You must have made at least 24 mortgage payments before this can happen.
6. Most conventional lenders require a 660 minimum credit score., and a few will go to as low as a 620 score
7. Conforming conventional loan interest rates vary greatly by credit score in 20 point increments. Someone with a 660 credit score could be paying as much as 1/2% higher interest rate than someone with a 760 credit score.
Although this quick summary shows some of the key differences between FHA and Conventional financing, there could be other considerations which will make one loan product more beneficial to you than the other..
It can be overwhelming. That is why is is so important to deal with an experienced, and licensed mortgage professional – not just the unlicensed application taker at the bank or credit union. Sadly, around 80% of “Loan Officers” are mere application takers, with little to no qualifications to consult or properly advise a potential first time home buyer. Be sure to only work with an actual licensed loan officer.
If you answered anything higher than ZERO, your answer is wrong!
Would it surprise you to learn that most people can get a mortgage with a great rate with just 3.5% down, and in some cases, zero down? For most people, it is about the same amount of money you would spend on the first month, last month, and damage deposit on a rental property… but now, it is your home.
For some strange reason, the myth you need a huge down payment persists. It simply isn’t true, yet I hear it all the time. I think it is because we hear it on TV. I know I have. This is mostly from the talking heads on either coast. Many of those areas are what is known as “high cost” locations. Anytime you go over $417,000 – you are now a jumbo loan, and jumbo loans are typically 20% down. But for the rest of us… Heck no, just 3.5% down!
Don’t let misinformation derail your dream of home ownership. Contact a local licensed mortgage professional to get pre-approved today. Once approved, contact a great Real Estate Agent to find your dream home!
Minneapolis, MN: If you are a first-time home buyer, you may already be leaning towards an FHA-backed mortgage to finance your Minnesota or Wisconsin home. Recently, the Federal Housing Administration announced changes to their mortgage guidelines, which are being made to stem the losses from all the foreclosures the past few years.
FHA does not provide loans, rather FHA is a government entity that insures mortgage loans made by banks and non bank lenders. Needless to say, if a lender can get an FHA guarantee on a portion of a loan, they are much more willing to provide a loan to someone.
Without the FHA, home buying would be a bit tougher for many home buyers buyers who cannot meet the slightly higher down payment and credit score requirements of a conventional loan. After the collapse of subprime lending in 2008, and the tightening of credit that followed, FHA-backed mortgages became the only game in town for many first-time home buyers.
FHA guidelines are a little more forgiving when it comes to credit history, making it the only practical option for some home buyers who had a prior bankruptcy, foreclosure, or short sale in the past few years.
Here are 3 major FHA rule changes slated for 2013, and how they may affect you:
1. All FHA loans initially require mortgage insurance. Just like conventional loans, mortgage insurance could be dropped below 80% loan-to-value. After June 3rd 2013, this is no longer the case. Mortgage insurance on FHA loans will be on your mortgage payments for the life of the loan.
2. The cost of monthly mortgage premiums is going up slightly on April1, 2013. While it is a relatively small amount; it would add an extra $20 a month to a $200,000 mortgage. This will only effect new loans.
3. Few lenders allow for score below 640, but for those lender who do offer very poor credit score FHA loans (580-620 range) home buyers will face stricter debt-to-income ratios in 2013. In other words, the less debt you have, the better.
The good news is, these changes shouldn’t derail anyone’s plans to buy a home in MN, WI, or the rest of the country. Even with the new changes in 2013, FHA-backed mortgages remain attractive for many at least for the first 10-years or so of home ownership.
Finally, if you are buying a home, remember to get pre-approved by a local Minnesota or Wisconsin mortgage lender first… You need to know what loan programs you qualify for, down payment options, FHA mortgage interest rates and how they will effect you, and an acceptable price search range to be looking at BEFORE you spend any time with a Realtor.