Buying a home when you’re short on cash

by Dan Krell ©2012
DanKrell.com

Buying a homeGiven how the lending industry has changed, it’s easy to understand that you might think you need perfect credit and a 20% down payment to buy a home. Although credit requirements have been tightened, buying a home with little or no money is still possible.

Yes, it’s true that the financial and housing crisis forced banks and mortgage lenders to re-think the idea of easy money. Sure minimum credit scores have been raised to qualify for a mortgage, and you better believe that increased underwriting scrutiny and due diligence is the rule (rather than the exception). But, that doesn’t mean that you can’t get a mortgage if you don’t have a lot of cash. Depending on your situation, you may find yourself comparing conventional loans to FHA and VA.

Conventional mortgages have been traditionally thought of as requiring a 20% down payment; however, you may obtain a conventional loan with as little as a 5% down payment. The misconception that a conventional mortgage requires such a high down payment may have stemmed from the fact that you need a 20% down payment to circumvent private mortgage insurance. Additional confusion about conventional mortgages arises from the distinct programs that Fannie Mae and Freddie Mac offer for specific home buyers. For example, Fannie Mae offers a mortgage for as little as a 3% down payment through their “HomePath” financing– but this is only available to purchase Fannie Mae owned foreclosures.

Conventional financing typically allows you to receive financial assistance in the form of a gift and/or seller closing cost assistance. The documented gift must be from a relative. Although gift guidelines for some conventional programs have recently become more lenient; generally, you may be required to have a “minimum borrower contribution” (from your own funds) as your down payment decreases. However, a minimum borrower contribution may not be required if your down payment is 20% or more. Seller closing cost assistance may be limited depending on your down payment.

Buy a homeAs conventional mortgage credit requirements became increasingly strict, more home buyers found that the FHA mortgage remained somewhat flexible. Certainly, buyers with credit dings found that FHA underwriting is more forgiving (provided borrowers provide substantiating documentation) than conventional; but another attraction to FHA financing is the low down payment. Although FHA increased the required minimum down payment- you may find that the current 3.5% down payment is still relatively low. Not having the 3.5% down payment does not have to deter you either; your down payment can be from a documented gift of funds. If you’re still short of funds, FHA allows the seller to assist with your closing costs (not to 6% of the sale price).

If you’re an eligible veteran or active duty service personnel, you may find that the VA offers a very good mortgage. As a benefit to your service, you could buy a home with no down payment (provided the purchase price does not exceed the VA appraisal of reasonable value and loan limits). Additionally, the VA allows the seller to pay your lender’s fees. Eligibility and other information can be checked on the VA website (www.benefits.va.gov/homeloans/veteran.asp).

Even though mortgage options exist, program guidelines change frequently- so check with your lender about qualifying. One final word: be prepared to document everything and follow your lender’s instructions.

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This article is not intended to provide nor should it be relied upon for legal and financial advice. This article was originally published in the Montgomery County Sentinel the week of March 5, 2012. Using this article without permission is a violation of copyright laws. Copyright © 2012 Dan Krell.

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The housing solution trap

When we’re feeling pain or anguish, immediate relief is often sought. So, it would make sense that, when we’re feeling pinched financially, a short term money fix might help. However, quick fixes don’t always address the underlying issues that precipitated or contribute to the problem.

According to recent reports, Americans are increasingly “feeling” the pain as the economy continues to stagger amid volatile financial markets and gloomy housing reports. The Misery Index, which can be construed as a quantitative measure of “pain” associated with an economy, was recently reported to have risen to its highest levels in 28 years. (Introduced in the 1960’s, the Misery Index is found by adding the unemployment rate to the rate of inflation. Obviously, the lower the index – the better.)

So it should come as no surprise that as the push for a jobs bill continues the focus has once again turned to the housing market. This week, the Federal Housing Finance Agency (FHFA.gov) announced that the Home Affordable Refinance Program (HARP) will be “enhanced” to accommodate more under-water home owners.

When the program was initiated in 2009, the intention was to assist the refinancing of home owners whose home values declined. It was estimated that it would assist millions of home owners. However, as has been widely reported recently, only about 900,000 home owners have been helped; and of those home owners, about 72,000 are under-water.

Seeking immediate relief for home owners, HARP’s eligibility requirements have become the center of attention. This week’s announcement to remove the “impediments” to refinancing is expected to increase the pool of home owners seeking refinancing of underwater mortgages.

HARP’s initial eligibility requirements included: having a mortgage guaranteed by Fannie Mar or Freddie Mac; the mortgage must not be an FHA, VA, or USDA loan; mortgage payments are current and payments must not have been more than 30 days late in the last year; the first mortgage amount must not exceed 125% of the home’s value; the refinance should improve the long-term affordability of the mortgage; and you’re able to make the new payments.

The new HARP guidelines announced by FHFA this week include lowering or eliminating certain borrower fees, removing the 125% loan to value ceiling, and extending the program to December 31, 2013.

In addition to helping already stressed home owners, it is expected that the money saved on mortgages will be pumped back into the economy. However, critics say that the revised guidelines will do little, if anything, to address the wider problem that exists in the housing market. Additionally, some critics point to the added burden on an already troubled Fannie Mae and Freddie Mac.

So, if the recent adjustment to HARP won’t do much for the housing market, as critics point out; what is the solution? Short term fixes may immediately reduce the pain. However, there should be little doubt that housing and employment are closely linked. Aside from monetary policy that might focus on flattening inflation; addressing long term sustainable economic growth, along with an expansion of permanent full time employment is the key to reviving the housing market.

Nothing feels better than taking pain away quickly and effortlessly. However, like many deep seated problems, the solution may very well lie in a long term plan that may require feeling some pain along the way.

by Dan Krell
© 2011

This article is not intended to provide nor should it be relied upon for legal and financial advice.  Using this article without permission is a violation of copyright laws.

Will mortgage loan-limits increase?

by Dan Krell

Are you planning to buy a home this year? If you are planning to purchase a home that is priced more than $417,000, you could get a lower interest rate-if Congress raises conforming loan limits.

First, a very basic primer in mortgage jargon: “Conforming” refers to mortgages that correspond to Government Sponsored Enterprises (GSE) guidelines. GSE refers to those quasi-government enterprises that include (among others) Fannie Mae and Freddie Mac. Conforming guidelines include underwriting criteria that lenders use so they can sell the loans to Fannie Mae and Freddie Mac. The guidelines have strict borrower criteria as well as loan limits. The loan limit is set annually as a reflection of changes to the national average single family home price as determined by the Federal Housing Finance Board’s Monthly Interest Rate Survey. A “jumbo loan” is a mortgage that exceeds conforming loan limits; and usually has higher interest rates because of the higher risk involved.

Two large associations advocating for higher loan limits include the National Association of Realtors (NAR) and the National Association of Home Builders (NAHB). Both the NAR and NAHB argue that increasing conforming loan limits would solve liquidity problems in the jumbo loan market, which would make lending for loans up to $625,000 easier for home buyers who are looking to purchase a home over the current loan limit of $417,000. The NAHB suggest that loan limits be raised temporarily while secondary markets normalize, and be re-evaluated after a two year increase. The NAR cites the need for stimulation of the housing market and the lowering of interest payments to those obtaining loans over the $417,000 limit.

The issue of raising GSE loan limits is not as simple as stimulating a sluggish housing market; as Federal Reserve Board Chairman, Ben Bernanke, made clear to Congress in September 2007. His statement to Congress implied that any increase in loan limits could provide false security to investors on the secondary market – increasing risk to those investors, their companies, and the government. Additionally, Dr. Bernanke implied that if Congress is inclined to increase the loan limits that it should be done quickly, temporarily, and ensures that any increase will function as intended.

What’s the risk? A recent report from the Office of Federal Housing Enterprise Oversight (OFHEO.gov) (the government entity whose mission is to ensure the safety and soundness of Fannie Mae and Freddie Mac) entitled “Potential Implications of Increasing the Conforming Loan Limit in High-Cost Areas” reports that any loan limit increase would only help those in high cost areas as most jumbo loans tend to be geographically centered (California had almost forty-nine percent of the jumbo loans originated in 2007). One unintended consequence from raising loan limits to lower mortgage interest payments may be that home prices will increase to make high-cost areas actually cost more. Additionally, anticipated savings benefit may not be achieved as Fannie Mae and Freddie Mac have to charge for taking any increased risk.

As for now, it appears that loan limits for 2008 will remain the same as 2007. It is clear that although there are benefits, there may also be too many questions left unanswered before Congress can act quickly to raise GSE loan limits.

This article is not intended to provide nor should it be relied upon for legal and financial advice. This article was originally published in the Montgomery County Sentinel the week of January 21, 2008. Copyright © 2008 Dan Krell.

Mortgage Guidelines Get Tougher

by Dan Krell
Google+

Like bears awakening from their hibernation, home buyers are slowly emerging from the holiday season and begin to look for a home to purchase. Many home buyers will find that that the challenge of buying a home this year will be more than finding the perfect home, but finding financing. Many home buyers expecting the mortgage process to be quick and painless may find that it is neither quick nor painless; others, expecting to be approved with a sub-prime mortgage, will be turned down. In the recent past, most home buyers found a way to obtain financing; this year may be different as the mortgage crisis fallout has changed the way lenders underwrite their programs.

Ask anyone in the mortgage industry and they will tell you that the entire mortgage landscape has changed. Some popular mortgage programs are no longer available, while other programs have been significantly changed. It may be a challenge for home buyers to locate a lender that offers a reduced documentation mortgage. These programs still exist, but have more restrictive guidelines; reduced documentation mortgages are requiring more verifications, higher credit scores and larger down payments.

Self employed home buyers will find that the popular “No Doc” is no longer available. The “No Doc” loan required no documentation or verifications from the borrower, hence the name. Although the program typically required a higher credit score, the “No Doc” loan was popular with self employed borrowers because employment, income, or asset verifications were not required.

Home buyers who need a low or no doc loan will have to look hard for alternatives. Most “liar loans” are no longer offered, or are offered with some type of verification. If you come across a stated income mortgage program, be prepared to sign an IRS form 4506 that will allow the mortgage company to verify the stated income. You should also expect a higher down payment and a higher than average interest rate.

As a way to assist home buyers with less than perfect credit, Fannie Mae and Freddie Mac created their expanded criteria programs in the mid to late 1990’s. These programs offered these home buyers a mortgage with minimal down payment and a reasonable interest rate; however the interest rate varied on the borrower’s credit score. However, like other mortgage programs, these expanded programs have also changed their requirements which include, among other items, increasing credit score requirements.

As the sub-prime mortgage industry has all but dried up, the FHA mortgage (HUD.gov) has picked up the pace. But even the venerable FHA loan is changing; FHA approved lenders are also tightening up their lending guidelines (in anticipation of new FHA guidelines). Some of the changes include credit score driven approvals as well as variable loan pricing (the interest rate will vary based on the borrower’s credit score).

For home buyers considering purchasing a home this spring (or any other time), talking to a lender should be their first priority. The mortgage crisis has changed the way mortgage lenders operate, including how lenders view borrowers. Home buyers should be prepared to provide more documentation and information to their lenders, as well as a possible higher down payment.

This article is not intended to provide nor should it be relied upon for legal and financial advice. This article was originally published in the Montgomery County Sentinel the week of January 14, 2008. Copyright © 2008 Dan Krell.