When buying a home today, why is there so much paperwork mandated by the lenders for a mortgage loan application? It seems like they need to know everything about you. Furthermore, it requires three separate sources to validate each and every entry on the application form. Many buyers are being told by friends and family that the process was a hundred times easier when they bought their home ten to twenty years ago.
There are two very good reasons that the loan process is much more onerous on today’s buyer than perhaps any other time in history.
1. The government has set new guidelines that now demand that the bank proves beyond any doubt that you are indeed capable of paying the mortgage.
During the run-up to the housing crisis, many people ‘qualified’ for mortgages that they could never pay back. This led to millions of families losing their home. The government wants to make sure this can’t happen again.
2. The banks don’t want to be in the real estate business.
Over the last several years, banks were forced to take on the responsibility of liquidating millions of foreclosures and negotiating an additional million plus short sales. Just like the government, they don’t want more foreclosures. For that reason, they have to double (maybe even triple) check everything on the application.
The housing crash that mandated that banks be extremely strict on paperwork requirements also allowed you to get a low mortgage interest rate.
The friends and family who bought homes ten or twenty years ago experienced a simpler mortgage application process, but also paid a higher interest rate (the average 30-year fixed rate mortgage was 8.12% in the 1990s and 6.29% in the 2000s).
If you went to the bank and offered to pay 7% instead of around 4%, they would probably bend over backward to make the process much easier.
Instead of concentrating on the additional paperwork required, let’s be thankful that we are able to buy a home at historically low rates.
If you are in the market to buy a home this year, you may be confused about how much money you need to come up with for your down payment. Many people you talk to will tell you that you need to save 20% or you won’t be able to secure a mortgage.
The truth is that there are many programs available that let you put down as little as 3%. Those who have served our country could qualify for a Veterans Affairs Home Loan (VA) without needing a down payment.
These programs have cut the savings time that many families would need to compile a large down payment from five or more years down to a year or two. This allows them to start building family wealth sooner.
So then, why do so many people believe that they need a 20% down payment to buy a home? There has to be a reason! Today, we want to talk about four reasons why putting 20% down is a good plan, if you can afford it.
Putting down a 20% down payment vs. a 3-5% down payment shows your lender/bank that you are more financially stable, thus a good credit risk. The more confident your bank is in your credit score and your ability to pay your loan, the lower the rate they will be willing to give you.
The bigger your down payment, the lower your loan amount will be for your mortgage. If you are able to pay 20% of the cost of your new home at the start of the transaction, you will only pay interest on the remaining 80%. If you put down a 5% down payment, the extra 15% on your loan will accrue interest and end up costing you more in the long run!
In a market where many buyers are competing for the same home, sellers like to see offers come in with 20% or larger down payments. The seller gains the same confidence that the bank did above. You are seen as a stronger buyer whose financing is more likely to be approved. Therefore, the deal will be more likely to go through!
Simply put, PMI is “an insurance policy that protects the lender if you are unable to pay your mortgage. It’s a monthly fee, rolled into your mortgage payment, that is required for all conforming, conventional loans that have down payments less than 20%.”
As we mentioned earlier, when you put down less than 20% to buy a home, your lender/bank will see your loan as having more risk. PMI helps them recover their investment in you if you are unable to pay your loan. This insurance is not required if you are able to put down 20% or more.
Many times, home sellers looking to move up to a larger or more expensive home are able to take the equity they earn from the sale of their house to put down 20% on their next home.
If you are looking to buy your first home, you will have to weigh the benefits of saving a 20% down payment vs. the time and cost of continuing to rent while you save that amount.
If your plan for your future includes buying a home and you’re already saving for your down payment, let’s get together to help you decide what down payment size best fits with your long-term plan!
There are some people who have not purchased homes because they are uncomfortable taking on the obligation of a mortgage. Everyone should realize that, unless you are living with your parents rent-free, you are paying a mortgage - either yours or your landlord’s.
As Entrepreneur Magazine, a premier source for small business, explained this month in their article, “12 Practical Steps to Getting Rich”:
“While renting on a temporary basis isn't terrible, you should most certainly own the roof over your head if you're serious about your finances. It won't make you rich overnight, but by renting, you're paying someone else's mortgage. In effect, you're making someone else rich.”
Christina Boyle, Senior Vice President and head of the Single-Family Sales & Relationship Management organization at Freddie Mac, explains another benefit of securing a mortgage vs. paying rent:
“With a 30-year fixed rate mortgage, you’ll have the certainty & stability of knowing what your mortgage payment will be for the next 30 years – unlike rents which will continue to rise over the next three decades.”
As an owner, your mortgage payment is a form of ‘forced savings’ which allows you to build equity in your home that you can tap into later in life. As a renter, you guarantee the landlord is the person with that equity.
Interest rates are still at historic lows, making it one of the best times to secure a mortgage and make a move into your dream home. Freddie Mac’s latest report shows that rates across the country were at 4.23% last week.
Whether you are looking for a primary residence for the first time or are considering a vacation home on the shore, now may be the time to buy.
17 Frequently Asked Questions on FHA Loans
Below are answers to the most common questions about home loans backed by the Federal Housing Administration, also referred to as FHA Loans.
1. What are Federal Housing Administration Home Loans?
They are mortgages best suited for borrowers with steady income, but without 20-percent down payments, including first-time buyers, those trying to conserve cash, early-career borrowers, or those with adverse credit history.
2. Do I get my loan directly from FHA?
No. The FHA guarantees your loan but doesn’t lend money. An FHA-approved lender approves and funds your loan, and the FHA guarantees the loan for the lender.
3. Do FHA loans benefit lenders or borrowers?
Both. If you miss payments due to short-term hardship, the FHA can help (ask your FHA lender how). If you eventually go into foreclosure, the FHA can cover lender losses. Because of this reduced risk, lenders can offer very attractive FHA rates and down payments.
4. What’s the catch? How can the FHA guarantee these loans?
All FHA borrowers pay Mortgage Insurance Premiums (MIP). Currently (as of January 2015), FHA loans have 1.75-percent upfront MIP and 0.45-percent to 1.05-percent monthly mortgage insurance. The monthly percentages change based on loan amount, down payment, and whether your loan term is greater than or less than 15 years. The FHA’s MIP fund is used to help borrowers and lenders.
5. Are MIP fees permanent?
The duration of monthly MIP varies depending on loan amount, down payment, loan term greater than or less than 15 years, and when you put your loan in place.
You can also eliminate monthly MIP if you gain enough equity in your home to eventually refinance into a non-FHA mortgage (ask your lender for details). The upfront MIP can be financed, paid in cash, or covered by a seller credit. It can be refunded on a prorated basis if you refinance into a new FHA loan within 36 months.
6. What kinds of FHA loans are available?
The most common FHA terms are 30-year and 15-year fixed, but there are also adjustable rate options. These loans have no prepayment penalties and are assumable by any qualified future buyer of the property.
7. How do FHA rates compare to conventional rates?
FHA rates are the same and often lower than Conventional Conforming loans. Your lender can do rate comparisons based on your profile.
8. Can I buy an investment property or second home with an FHA loan?
No. FHA loans are for owner-occupied property only. You must move into the property within 60 days of closing a purchase, and must occupy the property for at least one year. After that, you can change how you use the property.
9. What are the basic qualifying rules for FHA loans?
You can have a credit score as low as 580. Your total monthly housing obligation (mortgage payment, taxes, HOA/insurance, mortgage insurance) plus all other debt (credit cards, student loans, car loans, etc.) shouldn’t be more than 43 percent of your income, but your lender can advise on any flexibility they might have on this “debt-to-income” ratio.
10. Do I need money left over after I close?
There are no reserve requirements for FHA loans, though you should strongly consider your reserves in relation to your monthly obligation and income.
11. Are gift funds allowed?
Yes. Gift funds for some or all of cash-to-close are allowed from family members or — in select cases — friends that can be proven as long-term relationships. The gift donor will be subject to federal gift tax rules.
12. Are co-signers allowed?
Yes. Co-signers are also allowed, and the co-signer doesn’t have to live in the property. Your profile is combined with their profile to qualify. The full loan amount and payment will show up on the co-signer’s credit report.
13. Are seller credits allowed?
Yes. A seller can credit up to 6 percent of the sale price toward cash-to-close (which includes but cannot exceed: closing costs, prepaid items, and mortgage insurance).
14. Are there special FHA qualifications for single family homes?
Not really. Single family home approvals for FHA loans are similar to conventional loans. If the purchase contract or appraisal calls for pest work or deferred maintenance, this work will need to be cured prior to the loan funding.
15. Are there special FHA qualifications for condos?
Yes. A condo project must be approved by your lender or by HUD (FHA’s regulator) prior to any unit in the condo project being eligible for FHA financing. They review all the condo legal documentation, budget, unit mix (residential versus commercial), occupancy mix (owner-occupied versus rental ratio), and a number of other factors. Ask your lender if a condo project you like is approved already. If not, these approvals can take weeks, so plan accordingly with your lender and your real estate agent.
16. Are FHA loans relevant for higher-priced markets?
Yes. The national FHA loan limit is $417,000, but limits go up to $625,500 in high-priced markets. With a 3.5-percent down payment in an FHA-designated high-priced market, you could buy a home priced up to $648,000. And you could get up to a $695,000 price with a 10-percent down payment. It’s easy to look up FHA loan limits for your area.
17. What should I do if I want an FHA loan?
You should find a lender to talk to about FHA loans before looking at properties. Before you write an offer on any specific property, ask your lender to review the property for FHA eligibility. Also make sure your real estate agent and lender know if you’re seeking seller credits before you write your contract.
