DOWN PAYMENT-WHAT'S RIGHT FOR YOU

  Typically there is a sum of cash required for the down payment on a mortgage loan. The pressing question most people need an answer to is, how much cash?

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Oh- I wasn't talking about him- no one can have too much Johnny Cash-I was referring to:

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This kind of cash-the spending kind.

  There are a few no money down programs available-a very few. Chief among them are VA and USDA.  In some states there are down payment assistance programs that provide the funds for down payment on FHA loans.  A couple of things we need to keep in mind about those. (other than VA) These programs typically have income and or geographic restrictions- and in some cases higher credit requirements. So they solve the down payment issue for a few people. The vast majority of people do have to figure out how much down payment they will need and where it will come from.

 First how much-

  The lowest down payment loan available today is the FHA mortgage loan with a required investment of 3.5%.  When you stop and think about it, 3.5% isn't much to ask when one is talking about asking the lender to foot the bill for the rest of the loan. (And yes, there is money in it for them) Most people are able to come up with 3.5%. This money can be a gift from a family member, a withdrawal from a 401K or come from savings and checking.  My concern for folks who can't find 3.5% is that if there isn't money in the budget for a down payment, how will repairs to expensive items such as furnaces, roofs, etc. be done? I feel more comfortable when I am doing a 100% mortgage if there is some savings that the home owner can fall back on for repair items.

 Another option if someone has good credit scores and enough income to be able to set money back for a down payment is the 5% down conventional mortgage.  This loan is a bit more attractive than the FHA. While both offer 30 year fixed interest rates, the FHA actually being lower, the conventional mortgage has much  lower monthly mortgage insurance and no upfront mortgage insurance premium.  Typically even with the higher interest rate the total payment will be lower. The other new thing that is being offered on the 5% down conventional mortgages is that some lenders allow a 5% gift from a family member for down payment. We currently have two lenders that offer this benefit.  The credit score does need to be 720 or above if a gift from Mom and Dad is how the down payment will be funded.

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So where does this money come from-money doesn't grow on trees-

 Wouldn't you love to have one of these in your back yard? I would.  Anyway-where can money come from for down payment?

We already talked about gifts from family members and 401K's.

Many folks are able to put aside their tax return check or an annual bonus check to help seed the down payment. I have had some borrowers who have been able to sell boats, trucks, or other items of value for the money. If that is how you obtain the down payment be sure whatever you sell is well documented-checks copied, title copied etc or if it is cash-it will need to be in your bank account a full two months before it can be used as down payment. The same goes for money you may have under the mattress-it has to be in your bank account for two months before it can be used as down payment money.

  For those who are really good penny pinchers of course you can put down any amount of money over 5%-however, payment Nirvana is reached when a 20% down payment is possible on a conventional loan as the mortgage insurance is eliminated at that point. The same is not true of FHA-though the mortgage insurance is reduced depending on how large the down payment might be.

  Perhaps as time goes on we may see a few more 100% possibilities turn up-but it is never a bad thing to have a little money to put down on a home. As we move to more full employment we are hopeful. that most people will have a bit to put away so that home ownership can become a reality.

ALWAYS GET A SECOND OPINION

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  If you went to the doctor and he told you that you had two weeks to live you might decide you needed to get a second opinion. Likewise if a mechanic told you that your engine was shot when all you thought you needed was an oil change you would probably seek another opinion prior to replacing your engine or buying a new car-or at least I hope you would.

  In mortgage lending it is no less important to obtain a second opinion.  In many cases I represent the second opinion that people seek. Why? For people that don't know me or my company or our reputation, the most natural move when considering obtaining a mortgage loan is to stop by their local bank. Most folks have their bank accounts, credit cards, and auto loans from their bank. So it is not unreasonable for people to go there first. They need  to borrow money. Who has money to lend? Why the banks do.

  Many people also have the idea that the "best" lenders are banks. What comes to mind when one says "best" with regard to mortgage loans?  Low rates, an easy process because after all, they are your bank, they know you-at least that is what most folks think.

  I am not going to kick banks in the shins with this essay-but I am going to tell you that your bank may not be the "best" place for you to get your mortgage loan. It might be-but but then again, maybe not. Banks do other things besides mortgage loans. They have depository accounts, financial services, auto loans, credit card divisions, and many types of consumer lending products. A bank doesn't necessarily specialize in one thing-other than storing your money. (At a very low return, I might add.)

  The bank may not in reality have the lowest interest rate. Lately this spring our company has been able to give quite a few of our clients lower rates, better closing costs, and a faster path to closing than the bank we were in competition with. But let's say that all things are equal-the rate, the closing costs, the speed with which the mortgage can be closed.  Even so we offer something banks don't- more flexibility. What that means to you as a consumer is more choices and more opportunity.  We specialize in mortgages.  That is all we do. We won't sell you another credit card, ask you to open a a Christmas account, try to refinance your car, or offer investment services. It's also true we won't give you a toaster or a savings bond if you do a mortgage with us-we have to draw the line somewhere 

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  Many people are savvy enough to know that their credit score is important when obtaining mortgage financing. The credit score impacts the interest rate, the loan program and whether or not you will ultimately be successful in being approved for your mortgage loan.  While not true across the board, it is often true that banks require higher credit scores to approve borrowers for a mortgage loan. This is especially true of FHA, USDA, and VA borrowers.

  So far this spring we have had a parade of clients who have been turned down by their bank because their credit score wasn't as high as the bank required-however, the score was perfectly fine for the mortgage program for which they applied. In this one way banks tend to be quite conservative-they are looking for examples of excellent credit.

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As we know all too well-there was a mortgage meltdown in 2008-caused by speculation in housing, the sale of worthless loans, and the subsequent economic crash that impacted a large segment of the population.  So it stands to reason that people who formerly had impeccable financial credentials have had some bumps and bruises on their financial profile. There are many examples of folks the banks turned away that we have been able to approve.

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  It's not that we can approve anyone-we can't. The lender, no matter if they are a bank, broker or mortgage banker has to have a reasonable expectation that the borrower has the habits and ability to repay the loan. So if someone has never paid a bill on time in their life-we probably can't help that person. But given that we have more than one source of money we are able to help more people than a bank. We choose our investors carefully so that we can cover as many niches in the market as possible-so what may not be possible at one of our lenders may be possible at another.

  So the moral to the story today is-get a second opinion-whether it is interest rate, closing costs or if you have been declined by another lender. I can't promise anyone that our rates will always be better or that we can approve your loan for sure-but all you have to lose is the time it takes to find out.

DECIDING-NEW CONSTRUCTIOIN OR EXISTING??

 

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Some folks know with certainty whether or not they want to build a new home or buy an existing property. But if you are one of the ones that can go either way let's go into some detail on what each involves. First we need to determine the pros and cons of either decision.

New Construction:

Pros:

- You get a brand new home with new warranties on mechanicals, appliances and a follow up program by the builder.  The prospect of having to replace a roof or windows is far in the future.

- You have control over design, paint color, cabinetry, and other extras that you might like in a home-the main factor affecting those decisions is your budget.

- You choose your builder and have the opportunity to research and speak with other clients of the builder to assess satisfaction with the product and the follow up.

-You may have a more energy efficient home with a new home than with an older pre-existing home.

-If you are someone who doesn't have the time to clean carpets, paint walls or make cosmetic changes to a home-new home construction may be the way to go.

Cons:

-You may have to move twice if you have an existing home to sell and it closes prior to your new home being ready

-building time frames are estimates and depending on the intangibles such as weather and acts of God you may not close exactly when you thought you would

-Additional Costs must be considered such as buying window blinds, errecting fences, landscaping, etc.

-If you are building outside of a subdivision costs such as site improvement, surveys, well and septic installation, and driveway expense take money out of the budget that you would prefer to go into the amenities of the home.

-The fact is that even though you may think you will control the process and the job will go exactly as planned-it doesn't. When I used to sell new construction I would tell people it is much like having a baby.  You know how you would like things to go-but there are often surprises along the way.

- Selling a home that is three to five years old that you build may be problematic in a development in which there is still new construction going on-competing with brand new homes for buyers can be difficult

Now for Existing Homes:

Pros: 

-Established yard, neighborhood, no ongoing mess from construction in the neighborhood

-Typically more value for the money.  Existing homes can often be purchased that offer more square feet at the same price as a smaller new home

-Generally speaking you have more control over the timing of your move

-Often existing homes include appliances and window treatments plus other amenities such as hot tubs, play sets, yards with mature trees, and fences.

-Many existing homes are newer and have many of the same features as brand new homes

-Existing homes and their neighborhoods may have more character than in a brand new development such as a park, sidewalks, streetlights, etc.

- A seller may be more negotiable than a builder 

Cons:

- updates and unanticipated repairs may cost more than you had originally considered

-You may be in for more work than you had bargained for as home improvement projects are never as simple as you think they will be

-Cosmetically the home may not be decorated in your style which means you will have to paint and redo

 

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 In the end it is about personal preference, budget, and timing.  This is a very personal decison-I would not go out on a limb and declare one choice better than another-both have their merits.  Normally I would say if the thought of repainting, carpeting and personalizing a home is not something that you wish to contemplate you probably would be better off purchasing a new home. However, new home construction is an emotional experience and I have talked to many new home buyers who have said, "If I had it to do all over again I would..." Neither is perfect and each buyer must do the research and decide which is the best route to take.

USDA-NOT JUST A WAY TO EVALUATE MEAT

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  Who knew the United States Department of Agriculture was in the mortgage loan business? Strange but true. The Department of Agriculture does have a division whose mission is the development of residential housing in rural areas. The following are the key components of the loan:

-100% financing

-Restricted to properties in smaller communities and rural areas of lower population density

-Income limitations based upon family size as the loan is designed for borrowers of moderate means

- Credit is also assessed along the lines of the FHA and VA loans. It is a bigger box than what is allowed with conventional lending. Most lenders will allow scores down to 620 on the USDA loan. We have one lender that allows 640 and above and one that allows 580 and above-but you can expect that the underwriting is much tougher for credit scores lower than 640.

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 That's it in a nutshell-which is why this is one of the most attractive and popular loans in the State of Indiana and surrounding rural states. In many respects this loan is a hybrid of the VA loan and the FHA loan. It has an upfront funding fee of 2% which rolls into the mortgage like VA. It also has a monthly mortgage insurance premium for the life of the loan similar to FHA. It has no down payment requirement like VA, but there is no mortgage limit as there is in both FHA and VA.

  For young families who need their savings for other emergencies this is a perfect method of buying a home.

  The USDA loan is underwritten by two entities-the lender who provides the money for the loan and USDA that oversees each loan file to ensure that the home and borrowers meet USDA specifications.  Ultimately, USDA is underwritten to HUD guidelines in a fashion quite similar to FHA.

  In addition, even though the loan is specific to rural areas it is not a loan that can be used to finance farms or farmettes.  Acreage that is in use as tillable acreage makes a property ineligible for the loan. Similarly any barns that can be used to for machine storage or to house livestock are deducted from the value of the property.

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 The other consideration with USDA is the processing time.  If you are looking for a quick closing, USDA is not the best choice.  In Indiana due to cuts at the Federal Budget level the number of USDA underwriters are few.  During the height of the buying season USDA can take up to 50 business days to process-that is almost three months in calendar time.

  In order to increase your likelihood of getting a USDA offer accepted by a seller who is in a hurry to move we highly recommend that you take advantage of our pre-purchase underwriting approval process.  Your loan can be underwritten by the lender prior to you having a property under contract so that portion of the process is all but done by the time you select your perfect home in the country!

VA FINANCING-UNQUESTIONABLY THE BEST LOAN FOR THE VET

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  I'm back. Aren't you glad?  After taking a couple days off to rest and regroup in Nashville, Tennessee I have returned to the spring housing rush. As I had anticipated, the moment the snow went away the phones began ringing.  Today's topic is the VA loan- a product that is shamefully underused as many lenders talk veterans into other loan products, erroneously thinking that the VA loan is in some way difficult to close or they simply don't have or understand the product.

  I will state here and now, that other than in a very few specific circumstances, there is no better loan for a veteran than a VA loan.  The VA loan offers the following benefits to the vet:

- No down payment required

-The seller can pay all closing costs

-A Gift can be used for any closing costs the veteran elects to pay

-The veteran can refinance the loan without requalifying

-Credit requirements aren't as stringent as many loans

-A disabled veteran is exempt from the upfront funding fee

-No monthly mortgage insurance is required

  I have had veterans call who mistakenly think that the only qualification is being a veteran-but that isn't true. As with any loan the borrower must show ability to repay the loan by being employed.  They also must show that they are able to handle credit so there are credit score requirements that very from lender to lender -typically 620 is the lowest eligible credit score for VA loans.

  The loan does have some property condition requirements-but those are requirements that most borrowers would want in their home anyway. The include 100 amp electrical service, 5 years life in the roof, a furnace and air conditoner that work when turned on, no standing water in the crawl space or basement, no broker window-normal items.  The VA loan allows you to have a barn on the property or up to 10 acres of land.  You can also build a new home using VA as the end loan. In general the interest rate on the VA loan is lower than its conventional counter parts. The

 The loan is open to all active duty members, honorably discharged veterans, members of the reserves and the national guard.
  Do not let someone talk you out of this one-check it out before you consider any other type of financing.

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CUTTING RED TAPE-FHA...A GOVERNEMENT PROGRAM THAT REALY WORKS

  Lately it is in vogue to criticize the Federal Government as being too big, too bloated and full of too many do-nothing people to be effective. No doubt there are examples to support that theory but let's talk about a government program that works extremely well...the FHA mortgage loan.  This loan has great interest rates, is insured by the Federal Government and works like a well oiled clock. If you want to see government red tape cut-this is the program.

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  For a borrower that may not have the credit scores to qualify for a conventional loan or have saved enough down payment money for a conventional mortgage this loan may be the ticket to home ownership.  Let's reveiew the characteristics of the FHA loan:

-Credit scores may be significantly lower with the FHA loan. The sweet spot for FHA is 640-679 but there are lenders that will accept FHA loans down to 580.  At a 580 there have to be compensatory factors such as a larger down payment, excellent job history, a history of savings etc. but suffice it to say, FHA is a bigger box credit wise.

-Down payment requirements are lower than conventional lending. FHA requires a 3.5% investment.  This down payment may be gift funds from a family member-so the borrower can get help from mom and dad if necessary.

-Job time is less stringent that a conventional mortgage. While FHA requires employment history, if a borrower has changed jobs or just obtained a new job after being unemployed for a period of time, FHA will close on a mortgage after 30 days on the new job assuming all probationary periods have been met. Keep in mind there will need to be previous employment or education history required.

-Interest rates are usually lower than conventional rates-sometimes as much as half a percent.

-Loan terms come in the 30 and 15 year fixed rate variety as well as adjustable rate products.

 What are the down sides of this loan you ask?

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 There must be some, right? This loan is administrated by a government agency. The down sides aren't the kind that you would think of when dealing with a bureaucracy. For instance-the loan closes in about the same time frame as any other loan.  There is no sign off by a government agency.  HUD has decided that mortgage lenders are perfectly capable of underwriting to HUD standards.  So if you want to consider downsides let's try these on for size:

-Higher mortgage insurance.  FHA took quite a hit during the housing downturn. And in order to survive, mortgage insurance on FHA loans increased significantly.  FHA has always had a mortgage insurance up-front factor that rolled into the total loan amount-it still does-1.75% of the loan amount.  FHA also has a monthly factor of 1.350% which is roughly double the mortgage insurance on a conventional loan.  But the real kicker is that the mortgage insurance never drops off the loan unless a 10% down payment is used. So that is one thing to consider. But-if you need the lower down payment and your credit scores put you squarely in FHA land, it is still a great loan.

-Condition of the property. I don't really consider this a negative. Property condition is being scrutinized by every type of loan. With FHA there is a HUD checklist that is used by the appraiser to determine whether or not the property meets minimum condition standards. Such things as roof life, 100 AMP electrical service, no plumbing leaks etc. are considered and noted to be repaired prior to a loan being closed if satisfactory conditions are not present. These are all items that most buyers would want in working order to purchase a home anyway, so I don't think this is cause for rejecting the use of the loan.

  A couple other things about FHA that are worth noting:  FHA does have several rehabilitation products if one uses the loan to purchase a home that is in disrepair.  Keep in mind that not every lender has these products and the loan products themselves have their own set of rules. But if you have the stomach for repair and upgrading and want instant equity you might look into the 203K streamline, or the $5000 limited repair loan. If you do have a taste for regulation you can try the full blown 203K loan that allows up to $50,000 for repairs.

  And HUD offers buyers who wish to live in a property first choice on the purchase of their repossessions-in specific instances HUD offers a $100 down program. That $100 down loan program can be used with the FHA 203K streamline repair loan to get into a primary residence for very little cost and repair the property as well. Can't beat that-even with a big stick.

  FHA also allows a non occupying co-borrower loan for parents who want to assist their children in their first home purchase if the child doesn't yet have the income to afford the mortgage on their own.Or it can work in reverse-a child can assist a parent who is on limited income buy that way as well.

  And finally-if you have ever wanted to be a landlord FHA will allow the purchase of up to a four unit property as long as the home owner lives in one of the units. So a buyer can purchase a property that will pay the mortgage. 

  In many, many ways, the FHA mortgage loan is a great loan product with an enormous amount of flexibility.  It is a government program at its finest.

CONVENTIONAL LENDING - THE GOOD, THE BAD, AND THE UGLY

   That got your attention, didn't it? But when we are talking about conventional lending we are speaking of the basic, the standard, vanilla lending-

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White bread if you will.  Conventional lending may or may not be the best loan for any particular individual, but it is the loan that most folks aspire to.  Here are the characteristics of a conventional loan:

-Credit Score of 680 or above (the score can be lower-I will go into that in a minute)
-Down payment requirement of 5%
-In addition to the 5% down, many times the loan requires two months of mortgage payments in assets
Lower mortgage insurance requirements than FHA, and no upfront  mortgage insurance requirement as opposed to the government loans, all of which have an upfront mortgage insurance or a funding fee that rolls into the loan.
-No specific credit line requirements in most cases (i.e. number of credit account open and in use)
-Monthly mortgage insurance falls off the loan automatically at a 78% equity position-normally about 11 years into the loan. FHA and USDA monthly mortgage insurance are in place for the lifetime of the loan.

 Interestingly enough, interest rates on conventional financing are higher than the government counterparts. (Unless someone is interested in an adjustable rate mortgage.  I haven't had too many hands in the air to take on one of those lately.) But if payments are compared-the conventional with the higher rate will beat out the FHA with the monthly mortgage insurance most of the time. VA mortgage payments often beat out a conventional as  VA has no monthly mortgage insurance.

Let's look at an example:

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Let's assume a mortgage loan of $150,000
The conventional loan has an interest rate of 4.5%, the FHA and VA loans have a rate of   3.875%-here are the payments plus Mortgage insurance:

Conventional with 5% down - $841.16
FHA with 3.5% down            $886.45
VA-no monthly MI                 $720.52

 Tell me again why conventional lending is better for a veteran? This is what many of my competitors who are either unfamiliar with or do not have the VA product are telling vets.

 In any event, most people who are not eligible for VA would prefer a conventional mortgage. So the question is-what if one's credit scores are below 680? 

 One solution is putting 20% down. It is the mortgage insurance companies that dictate what credit score they will insure if less than 20% is put down. Some will go down to 660, but the interest rate will increase accordingly. At 640 even with 20% down the rate will be significantly higher too-but having a lower credit score will not necessarily bump a borrower out of conventional financing. They will just pay more for the loan. Mortgage lending is all about risk, remember. Lenders want a reasonable assurance that they will get their money back and as credit scores decrease the risk of foreclosure goes up-hence the much higher mortgage insurance on FHA as FHA lends money with lower score requirements.

 Down payment requirements is another reason why some borrowers turn to a government loan rather than conventional.  FHA only requires 3.5% down and the money can be a gift from a family member.  USDA and VA have no down payment requirements. Typically, conventional lending requires 5% down and the 5% has to be the borrower's own money.  There are exceptions-we have a lender that will allow the full 5% to be a gift from a family member. However the credit score requirement in that situation goes up to 720.  Once again risk is involved-statistics bear out that the less money a borrower has in a transaction the likelihood of foreclosure increases. And I think it can be mentioned that many folks who need low or no down payments may not have the cash reserves to weather an economic downturn.

 For the most part, conventional loans are a bit easier to process and close. But don't think for a minute that a conventional loan is the answer to a house that does not meet minimum condition standards.  Mortgage lenders learned a lot in 2008 when the housing market crashed. One of the things they learned was that they were sitting on a lot of foreclosed homes that were condition disasters because there had been no condition standards for conventional lending previous to that time. So appraiser are the lender's eyes and will note any substandard conditions and a lender can and will refuse to loan on those properties.

  In days to come, in preparation for the spring buying season I will talk about the government loans as well-the good the bad and the ugly.  All in all I try to match the right loan to the right borrower so that as many people as possible can achieve the dream of home ownership.