The Lending Coach

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Category: Housing Market (Page 24 of 40)

Know Your Down Payment Options: From 0% to 20%+

October 5, 2019 /

Coming up with enough cash for a down payment when buying a house is the single biggest roadblock for many hopeful home buyers.

But how much do buyers really need?

What is a down payment?

In real estate, a down payment is the amount of cash you put towards the purchase of home.

It is deducted from the total amount of your mortgage and represents the beginning equity — your ownership stake — in a house and property.

Down Payment Options

Many borrowers still believe that 20% is the minimum…and that’s just not the case.  There are options from 0% to 20%+ that can work for many would-be buyers.

For today’s most widely-used purchase mortgage programs, down payment minimum requirements are:

  • FHA Loan: 3.5% down payment minimum
  • VA Loan: No down payment required
  • HomeReady/Home Possible Conventional Loan (with PMI): 3%
  • Conventional Loan (with PMI): 5%
  • Conventional Loan (without PMI): 20% minimum
  • USDA Loan: No Down Payment required
  • Jumbo Loan: 10% down

PMI is “private mortgage insurance…and you can find out more about that here…

Remember, though, that these requirements are just the minimum. As a mortgage borrower, it’s your right to put down as much on a home as you like and, in some cases, it can make sense to put down more.

Benefits of a larger down payment

Conventional loans without mortgage insurance require a 20% down payment. That’s $60,000 on a $300,000 home, for example. There are a number of benefits to bringing in 20%:

  • No mortgage insurance
  • Lower interest rate, in most cases
  • More equity in your home
  • A lower monthly payment

As a reminder, the down payment is not the only upfront money you have to deal with. There are loan closing costs (you can find out more about those here…) and earnest money to consider as well. Before the dramatic music returns, let’s explore some lower down payment options.

Benefits of a smaller down payment

From Dan Green at The Mortgage Reports:

“A large down payment helps you afford more house with the same payment. In the example below, the buyer wants to spend no more than $1,000 a month for principal, interest, and mortgage insurance (when required).

Here’s how much house this home buyer can purchase at a 4 percent mortgage rate. The home price varies with the amount the buyer puts down.”

Even though a large down payment can help you afford more, by no means should home buyers use their last dollar to stretch their down payment level.

A down payment will lower your rate of return

“The first reason why conservative investors should monitor their down payment size is that the down payment will limit your home’s return on investment.

Consider a home which appreciates at the national average of near 5 percent.

Today, your home is worth $400,000. In a year, it’s worth $420,000. Regardless of your down payment, the home is worth twenty-thousand dollars more.

That down payment affected your rate of return.

  • With 20% down on the home — $80,000 –your rate of return is 25%
  • With 3% down on the home — $12,000 — your rate of return is 167%

That’s a huge difference.

However! We must also consider the higher mortgage rate plus mandatory private mortgage insurance which accompanies a conventional 97% LTV loan like this. Low-down-payment loans can cost more each month.

Assuming a 175 basis point (1.75%) bump from rate and PMI combined, then, and ignoring the homeowner’s tax-deductibility, we find that a low-down-payment homeowner pays an extra $6,780 per year to live in its home.”

Once you make your down payment, it’s tougher to get that money back

More from Green: “when you’re buying a home, there are other down payment considerations, too.

Namely, once you make a down payment, you can’t get access to those monies without an effort.

This is because, at the time of purchase, whatever down payment you make on the home gets converted immediately from cash into a different type of asset known as home equity.

Home equity is the monetary difference between what your home is worth on paper, and what is owed on it to the bank.

Unlike cash, home equity is an “illiquid asset”, which means that it can’t be readily accessed or spent.

All things equal, it’s better to hold liquid assets as an investor as compared to illiquid assets. In case of an emergency, you can use your liquid assets to relieve some of the pressure.

It’s among the reasons why conservative investors prefer making as small of a down payment as possible.”

In Conclusion

As you can see, there are a wide variety of down payment options for buyers.  Please feel to contact me to go over those choices, as it would be my pleasure to help you in financing your next home.

Economic Turbulence on the Horizon – Recession, Rates, and Real Estate

September 7, 2019 /

It does look like most economists are pointing to a recession (although most do think it will be relatively mild by historical standards) in the next 12 months.

A recession occurs when there are two or more consecutive quarters of negative economic growth, meaning GDP growth contracts during a recession.

When an economy is facing recession, business sales and revenues decrease, which cause businesses to stop expanding.

How do the economists know this?  And what does this mean for interest rates and real estate values?  Read on for more…

Recessionary Indicators

The Yield Curve

One of the major indicators for an upcoming recession is the spread between the 10-year US treasury yield and the 2-year US treasury yield.

While various economic or market commentators may focus on different parts of the yield curve, any inversion of the yield curve tells the story – an expectation of weaker growth in the future.

What does this inverted yield curve look like?  Here’s a good depiction:

Why does inversion matter?  Well, the yield curve inversion is a classic signal of a looming recession. 

The U.S. curve has inverted before each recession in the past 50 years. It offered a false signal just once in that time. 

When short-term yields climb above longer-dated ones, it signals short-term borrowing costs are more expensive than longer-term loan costs. 

Under these circumstances, companies often find it more expensive to fund their operations, and executives tend to temper or shelve investments.

Consumer borrowing costs also rise and consumer spending, which accounts for more than two-thirds of U.S. economic activity, slows.

Unemployment

Unemployment is a recessionary factor, too – as economic growth slows, companies generate less revenue and lay off workers to cut costs.

A rapid increase in the overall unemployment levels—even if relatively small—has been an accurate indication that a recession is underway.

Here’s a chart that shows what happens when unemployment starts to trend upward – and notice that recessions follow shortly thereafter:

As you can see, when things in the economy starts to slow down, one of the first things business do is to reduce their labor force.  The curve is flatting now, and unemployment might be ticking up soon.

Mortgage Rates During Recession

When a recession hits, the Federal Reserve prefers rates to be low. The prevailing logic is low-interest rates encourage borrowing and spending, which stimulates the economy.

During a recession, the demand for credit actually declines, so the price of credit falls to entice borrowing activity. 

Here’s a quick snapshot of what mortgage rates have done during recessionary periods:

Obtaining a mortgage during a recession might actually be a good opportunity. As mentioned, when the economy is sluggish, interest rates tend to drop.

Refinancing or purchasing a new home could be a great way to get in at the bottom of the market and make a healthy profit down the road. A borrower should be market- and financially savvy when considering large real estate purchases in a recession

Real Estate During Recession

Believe it or not, outside of the “great recession” of 2007 (which was caused, in part, to a housing crisis), home values and real estate actually appreciate historically during times of recession.

That seems counter intuitive…but because interest rates generally drop during recessionary periods, homes become MORE affordable to potential buyers (even though property values are higher), due to the lower payments provided by those lower rates.

When more people can qualify for homes, the demand for housing increases – and so do home prices.

In Closing

Although no one likes to see recession, you can observe that it actually can be beneficial for homeowners and would-be purchasers to refinance or purchase during these periods.

If you have more questions and or would like to strategize about purchasing or refinancing, don’t hesitate to contact me, as it would be my pleasure to help you!

A True Mortgage Approval Before a Purchase – The “TBD” Underwrite

August 14, 2019 /

In today’s competitive real estate market, potential home-buyers need every advantage they can get.

One way to differentiate your offer from the myriad of others is a true “TBD underwritten” loan approval. 

I’m not talking about the typical pre-qualification letter that is a cursory overview of a borrower’s ability to gain an approval, but a fully underwritten approval that is only waiting for a contract.

This process is for the home-buyer who wants a solid, iron clad pre-approval that has been fully underwritten and signed off by mortgage underwriters. 

How does that work?

Well, it works very similarly to a full-fledged underwrite – except the address is left blank – or “TBD” (to be determined).  The underwriter analyzes the file as if it was a true loan – and provides the actual loan conditions that the borrower must meet.

What’s the downside?

The only real downside is time.  This process could take as long as a few weeks, because all documentation needs to be gathered (tax returns, W2s, pay stubs, bank statements, etc.) and then analyzed by the underwriter.

What’s the advantage?

There are a multitude of advantages.  First and foremost, the borrower will know the exact size of the mortgage that they will be able to qualify for.  They will have a very good idea of the monthly payment and be assured that the loan will go through.

Equally important, the offer you submit will essentially be like a cash offer.  The real estate agent presenting the offer will share with the seller’s agent that the mortgage approval is actually confirmed – not pre-qualified.  This will make your offer much more attractive to the sellers, as they don’t have to be concerned about mortgage approval.

Finally, the closing can take place more quickly than standard financed transactions.  Essentially all that’s needed is an appraisal to confirm the value of the property.  Instead of a 30 to 45 day close, these can be done in less than 20!

In Conclusion

If you know that you will be purchasing a home in the near future, ask your mortgage lender about a “TBD approval” to see if that’s an option.  If so, I highly recommend that you go through the process early – and in that way you will be miles ahead of your buying competition!

Please do reach out to me for more information, as I can absolutely help you with a “TBD” underwrite!

Using Gift Money for Your Down Payment

July 27, 2019 /

Saving for a down payment can be one of the most important and most challenging facets of buying a home. The larger the down payment, the lower your loan amount – and that results in a lower monthly payment, a lower interest rate in many cases, and it could help you to avoid mortgage insurance. 

But, there are some out there that can get around bringing in a large down payment. Many have family members or others who are willing to help them out – and that’s when “gifting” comes into play.

The Gift Letter

Borrowers can get help from parents or other people that care about them, but they will need to get a signed statement from that giver that the money is, in fact, a gift and not a third-party loan.

The mortgage gift letter must include the giver’s name, address and contact information, as well as the banking information of that particular account, as well as the recipient’s name and relationships to the giver and the dollar amount.

In most cases the lender will have a template letter that will help you with this step.

A Key Piece – Documenting the Gift

When putting together the gift letter, the giver needs to include documentation of where that gift is coming from – this is extremely important

For instance, the lender will most likely need to see a bank statement or other form of proof verifying that the donor has the money to provide that gift and/or paperwork showing an electronic transfer between the donor’s account and yours.

If the person gifting the funds is selling shares of stock or other investments to provide the cash for a down payment, the giver will need a statement from their brokerage account showing that transaction.

Most importantly, as a borrower, you don’t want to add the gift funds with any of your other finances. Doing so could complicate the paper trail and cause the lender to reject the gift altogether. 

It’s easiest to have the giver wire the money straight to escrow at closing – that way there are no issues with documenting the gift.

Rules and Limits On Gifts

You might assume that you can just use whatever financial gifts your loved ones give you for a down payment, but using gift money is not as simple as you might think. The source of the funds in your bank account, and the givers, will matter just as much as how much money you actually have.

Secondly, the amount of down payment funds that can be gifted depends on the type of mortgage loan involved. If you’re getting an FHA loan with a 3.5% down payment, for instance, the entire down payment can be a gift.

On the other hand, if you’re using a conventional Fannie Mae or Freddie Mac loan, the entire down payment can only be a gift if you’re putting down 20% or more of the home’s purchase price. If your down payment is less than 20%, some of the money has to come from the borrower. 

These rules are subject to change based on lending regulations, so check with your mortgage lender to make sure that you transaction qualifies for the use of gift funds.

Primary Residences

If a borrower is purchasing a primary residence, they can use gift funds for their down payment. These following regulations apply:

  • If it’s a single-family home, you can use gift funds without having to contribute any of your own money to your down payment.
  • If it’s a multi-family home, you can get a home without having to contribute to the down payment as long as the down payment is 20% or more. If the down payment is 20% or less on a multi-unit home, you have to contribute at least 5% of your own funds to your down payment.

Second Homes

For a second home purchase, the following regulations apply regarding gifts and gift limits:

  • If you’re making a down payment of 20% or more, all funding for the down payment can come from the gift.
  • If it’s less than 20%, then 5% of your down payment must come from your own funds.

Investment Properties

Gift funds cannot be used toward the down payment on any investment property.

Who Can Gift a Down Payment?

Depending on the type of loan, there are different regulations on who may give a down payment gift.

Conventional Loans (Fannie Mae/Freddie Mac)

A conventional loan through Fannie Mae or Freddie Mac means the gift must to come from a family member. Per their regulations, family is defined as:

  • Spouse
  • Parent (including step and foster)
  • Grandparent (including great, step and foster)
  • Aunt/uncle (including great and step)
  • Niece/nephew (including step)
  • Cousin (including step and adopted)
  • In-laws (including parents, grandparents, aunt/uncle, brother- and sister-in-law)
  • Child (including step, foster and adopted)
  • Sibling (including step, foster and adopted)
  • Domestic partner
  • Fiancé

FHA Loans

With FHA loans, the list is nearly identical to the conventional rules, including future in-laws. But, some restrictions do apply – so do check with your lender for details.

While cousins, nieces and nephews aren’t able to give your gift under normal family guidelines with an FHA loan, the FHA does allow for gifts from close friends who have a clear interest in your life. This can include extended family like cousins, nieces and nephews and even former spouses.

In addition to the ‘close friend’ guideline, the FHA also allows for gifts from the following:

  • Employer
  • Labor union
  • Charitable organization

Finally, you can receive funds from a government agency or public entity that provides homeownership assistance to low-to-moderate income or first-time home buyers.

In Conclusion

Please reach out to me for more information on gifts and mortgage qualification, as it would be my pleasure to help you!

Can I Purchase a House with No Closing Costs?

July 13, 2019 /

Let’s get this straight and right up front: every real estate transaction will have closing costs – title fees, origination fees for a loan (if you need to finance the property), and recording fees, just to name a few.

So, how can a buyer purchase a house without actually paying those closing costs? Well, read on for more!

What this really means is that the closing charges are folded into the loan balance — if the house can appraise for the selling price plus the closing costs.

And there are pros and cons to doing this, as will be highlight later.

It’s also likely that not every single closing cost can be rolled into your loan. The buyer will most likely still be required to pay some fees at the settlement table. Those specifics will vary by lender.

I’m linking to a fantastic article by Hal Bundrick at Nerdwallet – he’s a personal finance writer as well as a certified financial planner.  You can find the entire article here…but I’ve highlighted a few excerpts:

What Are Closing Costs?

 “Closing costs” is a collective term for the various fees and charges you’ll encounter when buying a home. Some of these fees come from the lender and others come from third parties that are involved in the transaction, like home appraisers, homeowner associations (HOAs), and title companies.

How much are closing costs usually?

On average, homebuyers pay closing costs ranging from 2% to 5% of the purchase price. Unfortunately, this is only a ballpark figure, as there are many variables in each individual transaction. You can find out more specifics on closing costs here…

Many lenders will require that you apply for a loan prior to receiving a more precise estimate of closing costs; however, some lenders are more transparent with their available options and will do the necessary legwork to provide you a better idea of those costs.

Can you buy a house with no closing costs?

The reality is that closing costs have to be paid one way or the other – and by some or all parties in the transaction. Your decision will be whether you pay them with cash when you sign your loan, or as an added expense in each monthly mortgage payment.

How a no closing cost purchase works – it’s all in the financing

Per Bundrick in his article: “lenders can structure no closing cost loans in two ways. The differences between them are subtle, yet the result is the same.”

  1. You finance the closing costs. In this case, the lender will add your closing costs to your total loan balance. Your monthly payments will be slightly higher, and you’ll be paying these closing costs, with interest, for the full term of your loan — so, for example, over a period of 15 or 30 years.
  • The lender will absorb the closing costs in exchange for a higher interest rate. Again, you’ll pay a bit more each month, and your total interest cost will be greater over the life of the loan.

Either way, your monthly payment rises slightly. You’ll pay less at the closing table, but more over the long term.

Is a no closing cost mortgage a good idea?

The answer is….it depends!

If you are a little low on cash and have found your dream home, then yes – rolling $4,000 to $8,000 into your mortgage is a good idea.  It won’t increase your monthly payment by much and generally doesn’t impact qualification.

Also, if you plan on moving, selling, or refinancing in the short term, wrapping your closing costs into the balance can be a good strategy.

However, if you’re going to live in your new home for the long-term, you will pay more over the life of the loan by financing your closing costs or accepting a higher interest rate.

So if this is your forever home and you plan on keeping the mortgage for 7+ years, it’s probably best to pay the closing costs up front.

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