We received a call from a potential customer, referred to us by a real estate agent we work with, who was looking to get qualified for a home price of about $400,000. He had just received a large inheritance and was debating on exactly how much to put down on the home. He had a figure in mind but wanted to run the numbers. Here is how the numbers played out at his figure of $250,000 down:

Pretty good payment for a $400,000 house!  Now that we know what it would look like based on the number in his mind, we started to play with the numbers a bit.

First let’s look at how much you can save for every $1,000 you put down.  Through a simple mortgage calculator you can calculate how much $1,000 over a 30 year loan, fixed at 5% will change your monthly payment.  It comes out to $5.37/mo.  What this means is that for every $1,000 you put down your principal and interest payment will decrease about $5.37/mo.  In this example, he is putting $250,000 down or $236,000 more than the minimum (minimum is 3.5% or $14,000).  That means that the monthly principal and interest savings is about $1,267.32 (236 X $5.37).  5% is a great rate and historically very low, so let’s look at some other examples based on average 30 year fixed mortgage rates from Freddie Mac:

• 2009 Average= 5.04% or $5.39/mo per $1,000 down
• 2000 – 2009 Average = 6.29% or $6.18/mo per $1,000 down
• 1972 – 2009 Average = 9.28% or $8.25/mo per $1,000 down

When people see these figures they are normally very surprised how little $1,000 down will impact their payment.  There are certainly other factors to consider though.  Probably the biggest factor to consider is mortgage insurance. Mortgage insurance protects your lender and is required when you put less than 20% down on a mortgage.  There are 2 main types of mortgage loans and the monthly mortgage insurance amounts vary for each:

• FHA – 1.75% Up-Front Mortgage Insurance Premium (Changing to 2.25% Apr 5)
  • .55% of loan amount divided by 12
• Conventional
  • 5.00 to 9.99% Down Payment = .94% of loan amount divided by 12
  • 10.00 to 14.99% Down Payment = .62% of loan amount divided by 12
  • 15.00 to 19.99% Down Payment = .38% of loan amount divided by 12

These mortgage insurance factors add a level of complexity to calculating the savings of putting more down.  Let’s look at the monthly payment of principal, interest and mortgage insurance at different amounts down:

Based on this table you can see that by putting down an additional 5%, or $10,000, you save more than just the $5.37/mo, calculated in the first example. The difference between Conventional 5% and Conventional 10% is $109.51 instead of the $5.37/mo per $1,000 down calculation of $53.70. This is because of the drop in the MI factor dropping from .94% to .62%.

Getting back to our example with this gained knowledge we know that a 20% down payment should be the least amount the customer should consider.  This will allow him to avoid paying mortgage insurance and provide him the biggest bang for his buck.  From there it became a decision of personal choice and calculating whether to put money down or invest with a better return on his money.

Rather than redo all the calculations on this question, I will direct you to check out Get Rich Slowly who wrote a post titled Ask the Readers: Is it Better to Invest or Prepay a Mortgage.  The great thing about this post is that it not only gives you great resources for making this decision but also gives you the calculations and opinion of others.

My customer decided that even though he may be able to get a better rate of return in the stock market or other investments he still wanted to put the full $250,000 down.  Ultimately you are the one that needs to determine what is best.  Mathematical calculations will likely show it is better to invest than to buy down the mortgage but the emotional side of having the security of a low monthly mortgage payment can weigh heavily on this decision.

Lending A Hand

Scott Wynn

The Wynn Team

• Long term mortgage rates are at 20-30 year lows
  • According to Freddie Mac, in a press release yesterday, the average rate on a 30-year fixed mortgage was 5.01% this week, up from 4.98% last week.  Last year at this time, the average rate for a 30 year fixed mortgage was 5.25%.  Rates fell to a record low of 4.71% average in early December
• FHA allows 6% seller concessions (may decrease to 3% this summer)
• FHA up front mortgage insurance is currently only 1.75% (set to increase to 2.25% on April 5)
• FHA 90 day flipping rule waiver is in effect until February 1, 2011
• CHFA (Colorado Housing and Finance Authority) has financing for buyers with credit scores as low as 580
• CHFA has down payment assistance programs available
• CHFA can offer loans with market interest rates and down payment assistance with the FirstStep Program
• CHFA MCC (Mortgage Credit Certificates) are available
• Fannie Mae is offering 3.5% incentive to buyers purchasing Fannie Mae owned properties
• HomePath financing is available for Fannie Mae owned properties
• The First Time Home Buyer Tax Credit is available
• Move Up Buyers receive a $6,500 tax credit
• Home values expected to increase from November 2009-2010

If you were on the fence before reading this, we hope this spurs you into action and clears up any confusion or questions about the benefits of purchasing now.  If you have any questions, please contact us.

Lending A Hand

Marla Wynn

The Wynn Team

• 90 Day Flipping Rule Waiver (Feb 1)
• Up-front Mortgage Insurance Premium Increase from 1.75% to 2.25% (Apr 5)
• 10% Down Payment Required for Credit Scores < 580 (Summer)
• Max Seller Contributions Decreased from 6% to 3% (Summer)

Here are the details on each of these changes:

90 Day Flipping Rule Waiver (Feb 1)

Posted on Lending a Hand on January 15, the 90 Day Flipping Waiver allows sellers who have owned the home for less than 90 days to sell to qualified FHA buyers.  Prior to this waiver the seller was required to own the property for 90 days before selling to an FHA buyer.

Up-front Mortgage Insurance Premium Increase from 1.75% to 2.25% (Apr 5)

As a part of HUD’s interest in eliminating risk on their FHA mortgage loan product, they have increased the up-front mortgage insurance premium from 1.75% to 2.25%.  This was merely the first step in changing the mortgage insurance premiums.  The next step will be to take legislative action to increase the maximum monthly mortgage insurance premium which will allow a reduction of the up-front premium.  We will have to wait and see what happens on this.

To the average customer this means that instead of paying an additional, one time fee (paid at closing or financed over the term of your loan) of 1.75%, the fee will now be 2.25%.  In terms of numbers let’s look at an example.  On a $200,000 FHA mortgage that means the cost now (1.75%) would be $3,500.  With the change to 2.25% the new cost would be $4,500 or $1,000 more in this example.  For most FHA buyers, this will increase their payment about $5-7/mo since most opt to finance this cost into their mortgage.  Not a huge impact, but still an extra $1,000 on the loan that isn’t there now.

10% Down Payment Required for Credit Scores < 580 (Summer)

Although not yet passed, this is likely to go into effect early Summer after the required process completed by HUD.  The change will require any customer with a credit score less than 580 to put 10% down on FHA loans instead of the normal 3.5%.  Currently there are very few, if any, FHA lenders willing to approve a customer with a credit score below 580 so very few potential customers will be impacted by this change.  What may happen, however, is that more FHA lenders will allow for lower than 580 score since they will be putting 10% down.  Another one we will have to wait and see what happens.

Max Seller Contributions Decreased from 6% to 3% (Summer)

The same process required on the 10% down change must occur before this change can go into effect.  Currently sellers can contribute as much as 6% towards closing costs, prepaids and up-front mortgage insurance premiums on FHA mortgages.  This change will reduce that to 3%.  Conventional mortgage loans have been capped at 3% so this isn’t something that will likely impact most people.  Those that this will impact is the lower purchase price buyer.  Let me show you why in two examples:

FHA Mortgage, 30 Year Fixed, 5% Rate, $100,000 Purchase Price with 3.5% Minimum Down

• 1% Origination Fee = $965
• Typical Closing Costs (excluding origination fee) = $1,300
• Typical Prepaid Expenses = $1,000
• Typical 3rd Party Fees = $850
• TOTAL = $4,115 (4.12%)

FHA Mortgage, 30 Year Fixed, 5% Rate, $300,000 Purchase Price with 3.5% Minimum Down

• 1% Origination Fee = $2,895
• Typical Closing Costs (excluding origination fee) = $1,300
• Typical Prepaid Expenses = $2,960
• Typical 3rd Party Fees = $850
• TOTAL = $8,005 (2.67%)

In these two examples, one at a low price and the other at a higher price, the percentage of total closing costs is much higher on the lower purchase price (4.12%) compared to the higher purchase price (2.67%).  The reason this happens is because most closing costs stay the same.  The only things that change are the origination fee (because it is a percentage of the loan amount) and the prepaids (because it varies based on the value of the home).  Under this new rule, if you were the $100,000 buyer and wanted to ask the seller to pay for all of your closing costs and prepaids you would be limited to 3% or $3,000 leaving $1,115 left for you to pay.  If you were, however, the $300,000 buyer you could ask for the full 3% and have money left over (which, by the way, is not allowed on FHA).

Those are the changes that are already approved to go into effect or will likely be changed later on in 2010.

Lending a Hand

Scott Wynn

The Wynn Team

Effective January 1, 2010

The idea behind the new good faith estimate (GFE) is that it will more easily allow consumers to shop for mortgage loans.  To do this the new GFE combines certain fees into buckets.  One of those buckets, bucket #1, is “Origination Charge”.  Unlike the old GFE which broke out all the fees for the consumer to review the new GFE just lumps a bunch of fees into these buckets.  The new “Origination Charge” bucket includes everything that is charged by the lender for originating the loan.  On the old GFE these fees may have included, but were not limited to:

• Origination Fee
• Processing Fee
• Underwriting Fee
• Doc Prep Fee
• Funding Fee
• Tax Service Fee
• Admin Fee

Depending on the lender you selected, the state you live in and the structure of your fees/rates these “origination charges” could easily exceed 1% of the mortgage loan amount.  With the old GFE the maximum “Origination FEE” was 1%.  Until this new announcement was made the new “Origination CHARGE“, to include all of the fees listed above, was still at 1%.  FHA realized that their rules were no longer suitable given the changes to the way in which lenders are now required to disclose the fees to the consumers.

How Does this Impact You?

At first glance this may seem a bad thing for consumers with FHA eliminating their maximum 1% “origination fee”.  But upon further investigation and understanding of this change, knowing it is in direct response to the new GFE and HUD which are are meant to better protect and inform consumers when obtaining a mortgage loan.  In addition, HUD further stated in their recent statement about removing the 1% max, that “FHA expects that lenders will continue to charge fair and reasonable fees for all origination services and the agency will continue to monitor to ensure that FHA borrowers are not overcharged”.

The new HUD and GFE are meant to be simplified by lumping fees into these buckets so that you may easily obtain several GFE’s from competing lenders and just look at the overall cost of the buckets to see who comes out better.  If you are familiar with the creation of the Truth in Lending Act, its enactment was also meant to help consumers better understand the financing they are apply for and enable better comparison from one lender to another.  What it did create was one of the most misunderstood disclosures used on the mortgage financing package due to the APR shown on that disclosure.  For a better understanding of what APR is review my previous post on the topic.

All of these changes, although made with good intentions, will, in my opinion, just complicate the process by providing less transparency from the lender to the consumer.  Instead of allowing consumers to see a break-down of all the fees they are now only going to see the buckets these fees fall in.  I believe that consumers are smart enough to be able to see the fees and do the comparison on their own, but HUD doesn’t seem to think so.  When everything surrounding this issue has settled down, I believe there will be very minimal impact to the mortgage industry and to consumers.  Ultimately, it comes down to trust.  Do you trust the lender you are working with to provide you with a great mortgage loan, protect your interests and provide great service while doing so?  If not, I would suggest finding another lender.  If so, then an extra $250 in fees probably isn’t going to make that big of a difference, considering you will have a lot less stress and actually close that loan when you are ready to close on your home purchase.

Lending A Hand

Scott Wynn

The Wynn Team

Photo provided by Sarah McClain on Flickr

We received a couple of calls in the past few days for potential home buyers looking to get qualified for a mortgage and both of them had questions about how Mom and Dad could help them qualify. Here are their situations:

#1 – Can a Co-Signer Help a Borrower with Low Credit?
Bert (fictitious name to preserve anonymity) emailed us looking to get qualified for his first home purchase. The email went something like this:

I’m looking to buy an inexpensive, first home and I know I need to get qualified for a mortgage.  I know my credit isn’t great but I do have some money for down payment.  Can you help?  Call me XXX-XXX-XXXX.

After receiving this email I picked up the phone and called Bert to see how I could help him out.  We started talking about what he was looking for.  We talked about the type of houses he was interested in and the problems he felt might stand in his way from getting qualified for a mortgage – credit.  He stated that his credit was horrible with late payments and probably some collections.  He wasn’t quite sure of his score but knew it wasn’t good.  He shared he was employed with a good income and enough money for down payment.  He also shared that his Mom would be willing to co-sign.

Can I qualify?

When it comes to qualifying for a mortgage credit is the one area that all borrowers must qualify independently.  The reason is because of the mortgage guidelines for credit.  The guidelines specifically state:

the representative credit score for a borrower is the middle of the 3 scores, lower of the 2 scores or the only credit score provided from a tri-merge credit report

AND

the representative score for a mortgage loan is the lowest of the borrowers’ representative scores

Let’s look at a hypothetical example:

Borrower #1

• Experian = 650
• Equifax = 672
• TransUnion = 665

Borrower #2

• Experian = 708
• Equifax = 719
• TransUnion = 703

In this example, Borrower #1’s representative score is the middle of the 3 scores (650, 672, 665) or 665.  Borrower #2’s representative score is 708.  To determine the representative score for the mortgage loan we take the lowest of all the borrowers’ representative scores (665, 708) or 665.

Based on this example and an understanding of the representative scores, you can see how one borrower with a low score can impact the qualifying of a mortgage negatively.  Getting back to our customer and to answer his question about whether a co-signer would help his situation – the answer is no.  If the minimum credit score for a mortgage loan today is, say, 580 and he has a 450 but the co-signer has an 850, the representative score would be 450, not allowing him to qualify for a mortgage even with a co-signer.  So, what solution do we have in a situation like this?  Mom could buy the home as an investment property (meeting all of the down payment, credit score, income and asset requirements for such a loan) and then rent the property to her son.  What about a higher down payment? Although the typical A-Paper mortgage options (FHA, VA and Conventional mortgages) other mortgage options may exist for such a situation, but since that is not my area of expertise I can not comment.

#2 – Mom and Dad are Willing to Help Me Anyway they Can…

The next customer, let’s call him Ernie, was also looking to make his first home purchase but he didn’t have a problem with credit, but just about everything else.  He had a credit score sufficient for qualifying, a part-time job with a little income, and a checking account with a small amount of assets.  Putting all of this together he would qualify for a mortgage but not within the price range he was hoping for.  He mentioned that Dad was willing to co-sign, gift down payment or anything necessary to assist him with making a home purchase and wanted to know how Mom could help.

Here is how Mom, Dad or any other person willing to co-sign impacts the qualifying on a mortgage loan:

Credit

As previously mentioned, all borrowers must qualify independently.

Income

All income, for all borrowers (including co-signers), is added together for qualifying purposes.

Debt

All debt, like income, is added together when calculating qualifying ratios (percentage of income used for house payment and debt).

Assets

All assets, for all borrowers, are added together when determining cash at the time of closing.

All Together?

As long as each borrower qualifies with their credit then the income, debts and assets are all combined when making a decision on the ability to approve the mortgage loan.  In this example, Dad could co-sign with her son and help him qualify.  Each mortgage type has different rules and guidelines related to co-signers.  Make sure to talk with a knowledgeable mortgage lender who can assist you with determining your qualifications.

To slightly modify Thomas Palmer’s famous phrase, “If at first you don’t qualify, try, try a co-signer”.

Lending A Hand

Scott Wynn

The Wynn Team