About Government Refinance and Home Purchase Programs

In 2021-2023 several market factors combined to make things hard for first time homebuyers. First, constrained supply of homes on the market combined with low interest rates made home values skyrocket all over the country during the pandemic. Then mortgage interest rates shot higher in 2022 and that priced many first time homebuyers out of the market.

The good news is market conditions appear to be poised to make 2024 a good year for homebuyers. Here are some of the factors at play:

1. Supply of homes is increasing. With rates moving higher in 2022 and 2023 the number of home purchases dropped. That has allowed the supply of homes on the market to replenish to pre-pandemic levels in many markets
2. Bidding wars are mostly gone. In 2021 and 2022 homes were getting snapped up immediately, often over asking price. With more supply of homes on the market, the trend is now that buyers have the leverage and are often able to negotiate to have the seller pay closing costs or lower the purchase price.
3. Rates are off their peak. The average 30 yr fixed mortgage rate in the US was above 8% in the fall of 2023. Rates have dropped below those highs again, making it easier to afford mortgage payments on home purchases again.
4. Homebuyers are more in charge again. With more homes on the market, sellers are forced to be more aggressive to sell their homes. They are dropping asking prices and have been willing to give large concessions for closing costs in many cases.

All in all, 2024 is shaping up to be a good year to buy a home compared to recent years. Yes, rates are still well above the historic lows we saw in 2021 and 2022, but with home values dropping again and bidding wars mostly gone, homebuyers have a solid chance of negotiating an attractive purchase price and terms.

Fill in the contact form at our home purchase page to learn how much you could qualify for and perhaps start shopping for homes.

In our last post, we went into some detail on figuring out how big of a mortgage and home purchase price a homebuyer can afford. In this post we will share a simple rule of thumb to figure out the maximum loan size you have a shot at qualifying for. Here it is:

Quick Rule Of Thumb For Maximum Loan Amount To Expect

You normally should expect to qualify for no more than 4-5 times your family’s gross annual income. So if the gross annual income (before deductions) is $70k, the maximum mortgage loan amount you should expect would be in the $280-350k ballpark.

Please note that this is only a rule of thumb and it only works if other monthly debts are relatively low. The higher the other monthly debts payments for things like autos, student loans, credit cards, collections, etc, the more compressed the maximum loan amount figure will be. Plus things like lower credit scores can compress this number. But this method can be useful to folks hoping to get a rough feel for the loan amount they have a shot at looking for.

To find out if you can qualify for a mortgage and how much, fill in the contact form on our home purchase page here.

Home values have skyrocketed all across the US over the last 2-3 years. This has resulted in hundreds of thousands of dollars in additional equity for a large percentage of American homeowners. Tapping into that equity can be a great way to do things like:

– Pay off all other debts (credit cards, student loans, car payments, etc) so the mortgage payment(s) are the only monthly debt bill
– Pay for home improvements
– Get cash out to use for reserves/savings, or even for a long-needed vacation
– Take cash out for business or other investments

Here are the most common ways to tap into home equity when you have a lot of it:

Cash out refinances. A cash out refinance is a new, larger mortgage to replace your current mortgage. Basically, let’s say a borrower owes $200k on their home now and the value has jumped up to $400k. They could replace the current mortgage with a $300k mortgage and pocket the additional $100k (minus closing costs) after paying off the current $200k loan.

The main deterrent to cash out refinances right now is that rates have jumped significantly higher in 2022. A cash out refinance can make great sense if the mortgage interest rate stays in the same ballpark. But if it means a much higher rate, going with a HELOC or 2nd mortgage might make more sense. However, in cases where the credit isn’t strong, going with a cash out might be the only viable option.

HELOCs. A HELOC or home equity line of credit is just what it sounds like — it is a line of credit that borrows against the value of your home. In some ways, it is like a large, low interest rate credit card that uses your home as collateral. For instance, if someone were to get a $150k HELOC, that does not mean they have borrowed $150k. The $150k is the maximum they can borrow if they need it. Maybe they’ll only use $70k of that available line. And with a HELOC you normally only pay interest on what you’ve actually borrowed, as with a credit card. A HELOC is in 2nd lien position behind your first mortgage and the best rates are usually if the first mortgage and HELOC combined don’t exceed 90% of the home values. So as an example, if the home is worth $400k and the first mortgage is $200k, a $160k HELOC would put the two at 90% together.

Most HELOCs are interest-only adjustable rate loans. So as interest rates in the overall market change, the rate on the HELOC will change. This poses some risk to borrowers who could find their HELOC rate drifting higher over time. And the fact that HELOCs tend to be interest-only loans mean borrowers who only make the minimum payment don’t make any progress on paying the balance down. So managing a HELOC takes some discipline — again much like credit cards. HELOCs generally require good credit scores from the borrowers to make sense. Interest rates tend to be quite high for anyone with credit scores below 700.

Fixed rate 2nd mortgages A fixed rate second mortgage does not have the issue of rates adjusting with the markets. It is just like a first mortgage in most ways. Basically, a $100k 2nd mortgage would mean the borrower gets ~$100k in cash and pays the principal and interest payment on that 15-30 yr fixed loan every month in addition to paying their first mortgage. It is difficult to get a HELOC on an investment property so the fixed rate 2nd is a popular route for homeowners looking to take cash out of their rental properties.

All of these options can be very useful. Contact us in the sidebar today to learn more or to get an estimate.

People often come to us wondering “how much house” they can afford. This is a somewhat complicated question because there are many variables that contribute to that answer. In this post we’ll try to break those variables down and give some rule-of-thumb ballpark numbers.

Variables that go into equation:

Debt-to-income ratios: Normally borrowers should have all of their monthly debt payments be less than 50% of their gross monthly income. So if a family makes $4000/mo gross, all of their monthly debt payments should be less than $2000/mo. Therefore, in this example if the non-housing bills (car payments, credit card minimum payments, student loan payments, etc) add up to $800/mo then the total mortgage payment (including property taxes, homeowners insurance, PMI, and HOA fees) should be under $1200/mo.

Principal and interest payment: This is the easiest and least variable part of the equation. Any calculator that has time value of money (TVM) function can help you figure this out. For instance, a 30 year fixed $150,000 mortgage at 4.5% will always have a monthly principal and interest payment of $760.03/mo.

Escrow payment: Here’s where costs can vary widely between locations. The things that can be included in the escrow payment (and debt-to-income ratio requirements) are:

Property (and other) taxes: In many states this is a single annual tax divided by 12 for the escrow. However in some states and counties property taxes are divided into sections including things like “school taxes” etc. Whatever the annual total is on all taxes on the property is divided by 12 and added to the debt-to-income ratio calculation.

Homeowners (and flood) insurance: Again the cost of homeowners insurance can vary widely by region. For instance, in areas prone to hurricanes or tornadoes, homeowners insurance can be significantly higher than average. Also if the home is in a flood zone expect higher annual premiums. Again, divide the monthly insurance costs by 12 when calculating debt to income ratios.

Mortgage insurance (also known as PMI or MI): In most cases when you have less than a 20% down payment you will have to include mortgage insurance in your monthly payment. Mortgage insurance insures the lender against default on the loan. It is sometimes called “private mortgage insurance”, thus the popular PMI acronym. The amount of MI required depends on the loan type and on the size of the down payment. VA loans require no MI. USDA loans have something similar to MI rolled into the payments that is 0.35% of the loan amount spread out over 12 payments per year. FHA loans have MI that 0.85% of the loan amount spread over 12 payments per year. Conventional Fannie/Freddie loans have varying mortgage insurance amounts based on down payment amount and on credit scores.

Homeowners association (HOA) fees: These are not usually included in the actual mortgage payment but they are included in the debt-to-income ratio calculation. Most condos and townhouses will have HOA fees and some single family homes have them too, depending on the neighborhood.

 
Rough ballpark numbers to expect

Because there is so much variability in the escrow items it is impossible to nail down costs nationwide. But here are some rule-of-thumb ballparks that can help triangulate a number to expect up front:

Again, it is very important to look at all of the variables when determining how much you can qualify for when it comes to a house payment. The other thing to consider is how much you can comfortably afford to pay every month — just because you can make the ratios work on a larger loan on paper doesn’t mean you are comfortable with the higher monthly payments in practice.

 
Contact us for detailed analysis of your situation

Contact us today at our home purchase page and we can connect you with a lender that is authorized to administer government-backed mortgages. They can run all your numbers for you and help you figure out how much you can qualify for and what your best bet is in terms of available programs.
 
 

Market forces have converged in recent months to push mortgage interest rates to lows no seen since the fall of 2016. In addition, values of homes have been steadily rising all across the U.S. for the last several years. These lower rates and increased home values have made it an excellent time for many families to refinance a mortgage for several reasons: To lower rate and monthly payment, to remove mortgage insurance (PMI), to get cash out, or possibly to go to a 15 year fixed mortgage.

In addition, the low mortgage rates make monthly payments on home purchases somewhat more affordable.

If you are interested in getting an estimate for a refinance please fill in the refinance contact form in the sidebar here. Or to research pre-qualifying to purchase a home see our home purchase page here.

On occasion consumers will ask us “what is the optimal down payment amount for a home purchase?” The answer to that question depends on the circumstances of the borrower, but the following are some rules of thumb to follow:

25% down or more:

In some cases, such as when a borrower is selling a current home and buying a new home, borrowers will have more than 25% down. There are several advantages to having a larger down payment like this:

– Lower loan amount means a lower monthly payment
– Putting more than 20% down means no private mortgage insurance (PMI) required
– At 25%+ down the interest rates tend to be the lower than with smaller down payments

20% down:

The benefits of 20% down mostly match the 25% down but rates tend to be a little higher with the 20% down option

10% down:

With 10% down borrowers normally are required to include PMI in the monthly payment (except with VA loans). The rates tend to be pretty similar or even sometimes slightly better than the 20% down option because the PMI reduces the risk to the loan investors. The other advantage of 10% down is buyers are allowed to get up to 6% seller concessions with Fannie Mae and Freddie Mac conventional loans. With less than 10% down the maximum seller concession amount for Fannie/Freddie loans is 3%.

5% down:

With 5% down all of the government-backed loan programs are still available (assuming a primary residence purchase). PMI is required and the lower the down payment on Fannie/Freddie loans, the higher PMI rate. But this is a good option for many families

3.5% down:

The FHA requires a 3.5% down payment. The FHA program remains the most popular loan program for first time home buyers due in part to its lower down payment requirement, and in part due to its leniency with credit issue. FHA tends to have marginally lower rates than conventional loans too. The primary drawbacks of the FHA programs (compared to a 5% down Fannie/Freddie loan) are that the FHA requires a non-trivial up front fee that is rolled into the loan and the monthly PMI on an FHA loan lasts all 30 years rather than dropping off when you get to 20% equity as with Fannie/Freddie loans.

0% down:

For borrowers who want to do zero down payment the options become more limited and more costly. The USDA and VA programs allow for no money down but both come with restrictions and caveats that exclude a large portion of borrowers (see here for more on that). You’ll often see advertisements from lenders for no money down programs but these “down payment assistance programs” programs are usually just FHA loans with assistance with the 3.5% down and they invariably come at a cost — usually in the form of much higher interest rates and higher fees. The problem with that is they can cost you much more in the long term.

What’s the best bet for those struggling with a down payment?

For borrowers struggling to come up with a down payment, and who are not good candidates for the USDA or VA mortgage programs, the best bet is normally to figure out a way to come up with at least 3.5% down on their own — either through their own savings or from family member help. By coming up with 3.5% to 5% down on your own you get the benefits of an FHA or Fannie/Freddie loan without having the burdensome extra costs and significantly higher interest rates that are associated with these so-called “grant programs” or other down payment assistance.

For more information contact us today on our home purchase page.

After the general election in November of 2016 mortgage interest rates spiked significantly higher than they had been the weeks and months prior to the election. Since then rates have not returned back to the low levels we saw in the summer of 2016 but they have eased back a bit from the peaks we got in December of 2016. While rates are not currently at all time lows, mortgage interest rates remain at least near 50 year lows compared to long term averages. And with housing values rising steadily in most parts of the country, buying a home is looking like a wise financial decision for more and more American families. The summer housing rush is coming to an end soon but there are often excellent housing deals to be had in the fall months. Contact us today to see about getting pre-qualified for a government-backed mortgage.

While the USDA and VA mortgage programs require zero down payment when purchasing a home, the two most popular government-backed mortgage programs, FHA and Fannie Mae/Freddie Mac, do require down payments. The minimum FHA down payment amount is 3.5% of the purchase price and in most cases you need 5% of the purchase price as a down payment for Fannie/Freddie loans. Because many families have trouble saving up 3.5-5.0% of the purchase prices, there are down payment assistance (DPA) programs that have popped up all over the country.

Not Federal Programs

There is no DPA program sponsored by the federal government that works throughout the country. Rather all current government-backed DPA programs are sponsored by either city, county, or state governments. Because of this, there are no uniform rules when it comes to DPA programs — the availability and terms of DPA programs depend on the city, county, or state you live in.

DPA programs are usually not free

In the vast majority of cases, DPA programs are not “free money”. Rather, it is common for the programs to pay for themselves by charging significantly higher interest rates than the rates one would get by coming up with a down payment on one’s own (through savings or help from family). The problem with significantly higher interest rates is it could cost a borrower vastly more in interest paid over the life of the loan than the DPA money they are getting up front. In addition to higher interest rates, some DPA programs also charge up front fees that roll into the new loan. In addition, some DPA programs are just additional loans that need to be paid back rather than forgivable grants.

Because of these things, it is extremely important for borrowers to ask a lot of questions before diving into a local DPA program.

Alternatives to DPA programs

First, there are the USDA and VA mortgage programs to check out. Second, in many cases borrowers who are looking at FHA or Fannie/Freddie loans would be better off saving up a little longer or getting gift funds from family/friends to cover the down payment rather than use the local DPA program. Gifts from family are acceptable sources of down payment money (even if one intends to pay the gifter back eventually). If avoiding a DPA program means getting a significantly lower interest rate, the extra effort often pays off in the long run.

Contact us on our home purchase page to learn more or to get directed to a lender who could help you get pre-qualified for a home purchase loan.

As we discuss on our home purchase page, there are several government-backed home purchase programs available. The main categories of programs are Fannie/Freddie loans, FHA loans, VA loans, and USDA rural housing loans. Each has advantages and disadvantages. Below is a list of some pluses and minuses of each program.

Fannie/Freddie loans

+ No up front fees
+ No PMI when you have more than 20% equity

– Requires at least 5% down payment
– Normally requires good credit scores and history

FHA loans

+ Only requires 3.5% down payment
+ Much more lenient on credit scores and past credit problems

– Has a 1.75% up front fee that rolls into loan
– Requires monthly PMI fee for the life of the loan

VA loans

+ Zero down payment required
+ No PMI

– Must have military experience to be VA eligible
– Charges up front fee of at least 2.25% of loan (unless borrower has disabled status)

USDA Rural Housing loans

+ Zero down payment required
+ Much smaller upfront fee and ongoing pmi-like fee than FHA

– Only applicable in areas deemed “rural” by USDA
– Requires good credit scores and history
– Has upper income limits — borrowers who make too much not eligible

All of these programs are excellent overall. It’s mostly a matter of which program fits best. Contact us today at our home purchase page to learn more about which program fits best for you and to get pre-qualified for a home purchase loan.

The USDA Rural Development home purchase program just announced plans to significantly reduce fees starting this fall. Here is what the USDA said in a recent email announcement:

Upfront Guarantee Fee and Annual Fee Reduction for Fiscal Year (FY) 2017

This message provides advance notice of the upfront guarantee fee and annual fee structure that will be effective for Single Family Housing Guaranteed Loan Program (SFHGLP) loans in fiscal year (FY) 2017, which begins October 1, 2016 and ends at the close of business on September 30, 2017. The upfront guarantee fee will change from 2.75% to 1.0% of the loan amount. The annual fee will change from 0.50% to 0.35% of the average scheduled unpaid principal balance for the life of the loan.

Please refer to the unnumbered letter (UL), “Upfront Guarantee Fee and Annual Fee for Fiscal Year 2017,” for additional details.

The USDA RD program helps home buyers purchase homes with no money down, provided the the home is located in a designated rural area. See our home purchase page for more details on the program. This reduction in fees will make the USDA RD program an even more attractive option for home buyers.

In a conference call with reporters Wednesday, Julian Castro, secretary of the Department of Housing and Urban Development, said that President Obama plans to announce a reduction in the monthly mortgage insurance fees for FHA loans. The FHA currently charges 1.35% per year in mortgage insurance fees. The new rate will reportedly be 0.85% per year, a full 0.5% reduction. This will be the equivalent of a 0.5% reduction in interest rates for FHA mortgage holders and could mean savings of up to thousands of dollars per year.

The announcement is expected to come from the President in a speech in Phoenix on Thursday. Many of the details of the pending change are still unknown, like if current FHA loan holders will need to refinance through the FHA streamline program to get the new lower mortgage insurance rate. But there is no doubt that this will be a boon to FHA loan holders and to potential home buyers.

We’ll keep you updated with more information as it comes out.

To learn more or to get started on a government-backed mortgage, contact us today.

Until this week, borrowers needed at least a 5% down payment to purchase a home through a Fannie Mae or Freddie Mac conventional loan program. As of this week a new 3% down program is rolling out. The new program will only apply to single family, primary residences, and as with all Fannie/Freddie loans, qualifying will require solid credit and income. Borrowers with credit troubles will probably still be best served by the FHA or VA purchase programs.

As with any new mortgage program, there will probably be some growing pains in the initial weeks of the launch. But the good news for home buyers is qualifying for a Fannie/Freddie loan will now require less money up front.

If you are interested in purchasing a home, contact us today on our home purchase page.