First Stop 4 Home Loans

Did you hear about AIG being bailed out by the government?  Okay, this is really old news; but it reminds us of the “horrible” acronym tied to some conventional loans … PMI.  I’m hear to tell you that this three-letter word isn’t such a bad thing. 

Private Mortgage Insurance, known as PMI, is just that, insurance.  It’s not insurance you “choose” to purchase or shop around for and it isn’t coverage for you or for making payments on your mortgage in case you die.  It’s insurance for the lender/investor to protect their investment — your loan — in case you default.  On conventional loans, PMI is required, in most cases, if you have a down payment of less than 20%.  I say “most cases” because some lenders will do financing without PMI, but there is typically an interest rate premium paid for avoiding this.

For most, PMI respresents a portion of your PITI payment (Principal, Interest, Taxes and Insurance (both homeowner’s and PMI).  There are other options though, such as LPMI, which is Lender-Paid Mortgage Insurance.  The rate is usually  higher to cover the premium so you don’t have PMI in your payment.  There is also  BPMI  – Borrower-Paid Mortgage Insurance.  In this scenario, the borrower pays for the upfront amount at closing.  This is also done to avoid having PMI as part of the house payment.  Either way, PMI is being purchased to cover this loss.

And so you know, PMI doesn’t cover the whole loss.  Coverage requirements are dictated by your down payment amount.  According to Fannie Mae or Freddie Mac guidelines, if you had 15% down, the coverage would be around 12% of the loan.  Alternatively, if the down payment is less, like 5% down, the coverage requirement will increase to 25-30%.  For example, if the loan is $100,000 with 5% down, you would be required to have 25% coverage or $25,000.  In case of default, the PMI company pays the lender $25,000.  That’s a lot of money.  No wonder AIG took a fall, or a few.  They were one of the PMI companies that chose to insure higher risk loans — and I’m not talking about less down loans, but those that had other risks as well, such as lower credit scores or recent major derogatory items like bankruptcy.

But you’re a good risk, make your payments on time — why are you being penalized for the bad eggs?  Valid question, but it all plays into historical data.  And history shows that people with less down payment are more likely to default.  When you have “less skin in the game” and things go South, you’re more apt to walk away than try to salvage the equity you have.  I equate this to car insurance.  If you’re male and 21, you’re car insurance is higher than a 21-year old female.  Why?  They have more accidents, thus, a higher risk.  So, the premiums are higher.  And insurance is all about risk.

So why would PMI be a good thing?  I have a few reasons, kindly provided by MGIC, one of the PMI companies we use.  All of the companies that provide this type of insurance offer similar rates, but they may have different guidelines or requirements that make one better than the other.

• It’s affordable.  Okay, so why is this a good reason?  Recently, FHA  increased their monthly mortgage insurance premiums, making them 1 1/2-2x higher than conventional.  And, they charge an upfront premium that’s rolled into your loan.  This is not to say FHA isn’t a good loan.  More, it may make more sense to use conventinonal financing if you have the credit to do so.  Most people use FHA due to lower scores (doesn’t equate to “bad”) , like under 660.
• It’s not forever.  Not the best argument because FHA mortgage insurance isn’t either.  BUT, as long as you pay the PMI for two years, have on-time mortgage payments AND can show you have 20% equity via a new appraisal, you can discontinue it.  FHA, on the other hand, requires you to have the mortgage insurance for at least five years and you must have 22% equity of the ORIGINAL PURCHASE PRICE, which doesn’t take into account appreciation. 

Oh, and another way to avoid PMI altogether is to do a “piggy-back” loan or second loan.  You would put 10% down, get a second loan for your other 10%, which would make up your 20% down, thus avoiding the PMI.  Your payment would be a little less than having PMI, but there are other challenges getting the second loan.  Doable, but not for everyone.

Nutshell — PMI isn’t all bad.  If it weren’t for PMI, we couldn’t do 3% down — or less than 20% for that matter.  Do you have that much saved?  I don’t and that’s another blog for another day.

FHA is trying to re-build its reserves again.  Back in October 2010, FHA lowered their UFMIP (Up Front Mortgage Insurance Premium) from 2.25% to 1% to somewhat offset the increase in the monthly MIP (Mortgage Insurance Premium) from .5% to .9%.  This certainly didn’t help FHA buyers with their monthly payments.  It made it so a buyer couldn’t qualify for as much home.  And it took the argument away that FHA has a cheaper payment than conventional financing because the mortgage insurance is less.

So, why did they do it in the first place if it negatively impacted the borrower?  It was necessary.  FHA is required to keep reserves as a government program.  They have paid out, like many conventional PMI (Private Mortgage Insurance) companies, insurance claims to lenders when FHA insured homes go into default.  Unfortunately, they are still under the 2% reserves they are required to have and again, have to increase the MIP.

With case numbers* dated on or after April 18th, be prepared to see your FHA payment rise if you’re in the buying market.  This monthly figure in your payment will go from .9% to 1.15%.  On a $150,000 loan, that makes a $30/month difference.  For some, this may halt a transaction in its tracks.  This isn’t what anyone wants.

Unfortunately, you can’t change when you get an offer accepted.  The advice I can give, especially if you’re tight for qualifying, is to find a home sooner than later and get your purchase agreement to your lender ASAP.  It doesn’t take much for them to order the case #, but it will be a huge bummer if it doesn’t happen.   And, believe it or not, conventional loans, if you qualify, may actually have a lower payment for mortgage insurance — making the argument now favor conventional financing.

Still, some buyers will HAVE to use FHA.  Why? 

• FHA is more lenient on credit scores and allows for “creating” alternative credit.  So, if you don’t have a credit score, you could get FHA financing combined with a first time buyer program.  As of now, the first time buyer programs only require 620 for the mid-score using FHA financing.  Conventional financing will require a higher figure — 680+, if not even 720 or higher. 

• FHA also allows non-occupant co-borrowers to help qualify for the loan.  Let’s say part of your income is salary and some is commission and that income started a year ago.  Though you know you can count on it, lenders won’t for qualifying.  Commission income requires a 2-year history to establish a pattern.  Other income of this nature would be tips, self-employment, bonus and overtime.  Without 2 years, you can’t use it to qualify.  However,  if you had a family member co-sign with you, your qualifying ability could increase.  Keep in mind, my assumption is your family WON”T be paying your house payment, so you still need to use your head and stay within a payment range in which you’re comfortable.

• Did you know FHA offers job-loss protection?  I bet many people, including financing professionals, don’t know this.  If you can’t make your payments due to a job loss, FHA could pay up to 12 months of your house payment to your lender so you don’t fall behind.  The amounts you get will be added to your loan on the end — FHA is nice, but not that nice! 

• Another reason people may choose/need FHA financing is for rehab.   A loan type, called the 203K loan, offers rehab assistance that is added to the purchase price.  You still pay a lower amount for the home, but we add the fees and repair bid to the purchase price.  Your 3.5% down is figured on that higher number.

Long and short — if you have to do FHA, I suggest getting a purchase agreenment prior to April 18th.  Otherwise, prepare to pay the price when the 18th rolls around.  So stop waiting for something  better to happen with the market.  It’s not going to happen.  Get pre-approved and get out there and look! 

*Case number — a number assigned to a loan and a property address.  Lenders enter the property information into the FHA system, which then generates this number.   It’s like a social security number for the house.  If the current borrower doesn’t buy the home, and another person does using FHA financing, the case number will still attach to the address.  This also means if an appraisal was done, the appraisal sticks too and is used by the new lender.

For a short time, we were fortunate to have a true zero-down payment loan thanks to MN Housing.  Well, last week, MN Housing chose to stop offering these loans.  Here is what they had to say in their enews note:  “Under the direction of its regulator, the Federal Housing Finance Agency (FHFA), Fannie Mae has discontinued the HFA Affordable Advantage initiative.”  So, this isn’t just MN Housing saying no-way to keeping this program alive; it’s Fannie Mae.

Was it too soon to bring back such a risky loan in our current mortgage atmosphere?  I think many people thought that zero-down loans were the cause of the fall and the start of the so-called “mortgage meltdown.”  I have opinions on this, but my assumption is these loans are not to blame.  The loans that didn’t perform were those that were made to risky and not-so-credit worthy buyers.  It’s true, many of these loans were zero-down payment loans, but they had the added risk of being an adjustable rate loan (ARM). 

How most people financed these loans was to do a first loan at 80% of the value of the home, avoiding private mortgage insurance (PMI), and adding a second loan for the 20% down, thus not having any “skin” into the deal.  Pretty sure their  loan officer said something like — work on your credit for the next two years, then you can refinance and get a fixed market rate.   Unfortunately, there was a double-whack that occurred when home prices dropped.  First, these people didn’t have equity in their homes to refinance and second, they were stuck in adjustable rate loans that adjusted to very unfavorable rates.  That was the risk and a primary part of our current mortgage state of the union.

Don’t feel left out in the cold.  It’s not all doom and gloom if you didn’t get to use the zero-down program.  There are plenty of programs available.  For most, we’ll  just go back to the way things were a few months ag0 — doing FHA financing with 3.5% down.  The seller can still pay up to  6% of the sale price toward closing costs, so maybe you only need the down payment.  Or, maybe you’re able to get first-time buyer assistance, which is still available and then you might only need $1000 of your own money. 

So put on your happy face and bundle up, ’cause there’s plenty of home buying opportunities and even more programs to take the chill out of needing down payment!

For almost a year, we have been at historically low interest rates.  With 30-year fixed rates under 4.5% and 15-year rates under 4.25%, it’s no wonder people are refinancing their homes or buying new homes.  Though what is surprising is that there aren’t MORE people taking advantage of this. 

Rates are Grrrreat!

For the first-time buyer, the special programs have had LOWER-THAN-MARKET interest rates.  Not only do they offer these competitive rates, most have an option to get down-payment assistance.  The down-payment assistance, in most instances, is actually a second loan that is placed against the home.  The assistance is a zero-interest loan with no payments.  Because it’s a lien on the home, it must be paid when you either sell the home or refinance.  It will be due to a sale since there will be NO reason for you to refinance your loan, ever.  Rates are just too low.

So what about the first-time program rates?  Below is a listing of a few of the most popular programs and what their current interest rates are.  Please keep in mind, these rates are as of this post date and are subject to change at any time.  This is more to show you just how crazy-low rates are.  And yes, these are all 30-year fixed rates, no additional points being charged and no pre-payment penalties.

• Dakota County Bond:  for homes in the Dakota County area — 4.25% — FHA or VA loan
• City Living:  for homes in the city limits of St. Paul and Minneapolis — 4.25% with assistance or 3.99% with no assistance — FHA or VA
• MN Housing:  available in the 11-county metro area — 3.75% (FHA/VA) with no assistance up to 4.5% (conventional) with NO down payment and NO PMI (private mortgage insurance)

A few of these programs can also be used in combination with the FHA 203K rehab loans.  A great way to get into a home that may need some work or that may NOT meet FHA guidelines.  All of these programs have special requirements for owner-occupancy, household income limits and sales price limits.  Feel free to contact me with further questions or to see if you qualify for one of these great programs!

If you’re in the loan process right now, your head is probably spinning with all the new information.  Throw in there a lot of references to insurance — insurance for the home (aka hazard insurance), for the mortgage company (aka PMI or MI) and title insurance.  Oh, and to confuse the matter more, you can actually purchase mortgage insurance on your loan (in case something happens to you, the loan will be paid).  What the heck is the deal with all these insurances and what is really protecting you?

I am so glad you asked.  Let’s just start with some explanatory definitions, then I will get to the meat of this.  Homeowner’s Insurance is insurance that covers your home and the contents in case of a catastrophe or burglary.  As lenders, your house is our collateral.  If something should happen to it, we want to make sure you have enough coverage to replace your home.  This is a policy you purchase with your current insurance agent or one I could refer you to. 

If you were to buy a townhome or condo, you may not need this type of insurance.  In most instances the homeowner’s association covers that with the owner’s association dues.  There are some changes that have occurred with investors in regards to requiring a separate policy.  If the association’s insurance policy only covers “studs out”, then you would need to buy a special policy called a HO-6 — basically, this will cover the “studs in”, which means, all your personal belongings along with cupboards, fixtures and appliances.  If the association does have the extra coverage, it is still advisable for you to get the HO-6 policy (just won’t be as expensive) to cover your personal belongings.  In this instance, proof of this would NOT be required at closing.

How about the “dreaded” Private Mortgage Insurance (PMI) on conventional loans or Up-Front Mortgage Insurance (UFMIP) with FHA?  First of all, it’s not something to dread; it’s reality.  And in this day and time with all the private mortgage insurance companies that had to pay on claims due to foreclosure, it will never go away.  In a positive light, it allows you to do a minimum down program.  Anyway, the purpose for mortgage insurance is to insure the lender in case of default.  You remember AIG???  Who couldn’t forget the insurance  company that was bailed out … a few times, right?  They insured a lot of the high risk loans that were done in the past years.  No wonder it’s harder to get this type of insurance.  Only in the last few months have the PMI companies “let loose” a little to do 3% loans.  UFMIP is for FHA loans.  FHA is self-insured.  They have an up-front amount that is financed into your loan amount, as well as a monthly amount for insurance — which is lower than conventional insurance. 

Last, at least the last I intend to address, is Title Insurance.  This is the CHEAPEST insurance you will ever purchase.  There are two types of title insurance — lender’s and owner’s.  The lender’s policy is required to be purchased to insure the lender that they are in first lien position.  One of the title company’s jobs is to search public records at the county to check for any liens.  The title company can only find what is correctly recorded.  You have the  option to purchase a  policy for yourself, called an owner’s policy.  This protects YOU in the event any liens were to appear against the property that you didn’t incur.  For instance, let’s say that a few owners ago, a new roof was put on the home and the owners didn’t pay the contractor.  In order for the contractor to make sure he gets paid, he placed a lien against the home YOU’RE purchasing.  If recorded correctly, the title company will find this and require the seller to pay it off to give you free and clear title.  If, however, someone made a mistake at the county, then it may not show up.  Bummer deal is liens follow the address, NOT the person who incurred them.  Five years later you decide to sell and wah-la, a $5000 lien appears.  Hmmm — what to do?  You have a few options — pay it (cheerfully I’m sure :-D ), go to court to fight it or … drum roll please … at closing when you purchased your home, you purchased owner’s title insurance.  With this insurance, you pay ONCE, at closing, and it covers you for the ENTIRE time you own your home.  This insurance depends on the loan amount and sale price, but for first time buyers, it won’t be much more than $200 or so.  Paying just $200 to save $4000.  No brainer.  The two real estate attorneys I trust would NEVER let their clients close without it.  They spend way too much time fighting in court for other clients that don’t have the insurance.  Unpaid work is just an example of a type of lien, but there are more “opportunities” to have to use it — heirs to a property, divorce situation, many things that may put a  person in title to the home YOU own. 

The long and short — there are many types of insurance during this process.  The only one you have the CHOICE to purchase is the owner’s title insurance.  It’s a necessary, but cheap, evil and well worth the investment.  Just do it!

Let’s get on our horse and ride out of here before all you-know-what breaks loose with the coming FHA changes.  Okay, that’s a little dramatic … more like a lot dramatic.  Let’s get a grip on reality.  First of all, if you don’t know it, FHA is known for minimum down payment loans.  Right now, and with no change in sight, their down payment requirement is 3.5%.  Being that FHA is federally backed, they have lots of rules and stipulations to follow.

How about we get the “bad” news out of the way first. Please note the quotes. Any FHA loan requires something called Up Front Mortgage Insurance Premiums (UFMIP). FHA is self-insured which means they don’t use private mortgage insurance companies (PMI) to cover a portion of their risk if the loan defaults. This UFMIP is financed into the loan size which is currently equal to 1.75% of the loan amount. The change?? Starting April 5th, they will be increasing that to 2.25%. Why the increase? FHA has had to take a lot of losses due to the high foreclosure rates. They are supposed to keep 2% in their funds for this insurance — they are down to 1/2% — ouch. Hence the increase. So what does this mean to you? Not a lot. It’s about a $5/mo difference in your payment, depending on your loan amount. Calculate that out. $5/mo over year is $60/year and let’s say you live there 5 years — so $300. Doesn’t that seem so piddly? Imagine though that most loans that have been originated in the past 2 years have been FHA. That adds up fast!

This next change is so lame because it will neither help or hurt anyone. Why they have it is beyond me. Currently, FHA doesn’t have a minimum required credit score. The new rule requires buyers with a 580 score or less to put 10% down. OMG, 10% down. Bet you’re questioning what I said regarding a 3.5% down payment from my earlier comment. Reality — it’s a mute point. No investor buying an FHA loan will take a buyer with a score under 620 and some investors are moving toward 640. So, can you say lame with me???

Here’s the doozie that WILL affect you — we just don’t know when. They are predicting Spring/Summer. As of right now, FHA allows the seller to pay up to 6% of the sale price toward your closing costs and pre-paid expenses. Hitting us like a brick in the head, they will be reducing this to 3%! This is huge. Typically, asking the seller to pay 4-4.5% of the sale price gets you what you need. Though the lower the sale price, the higher the seller paids percentage needs to be due to the fixed closing costs that aren’t tied to the loan size. In real terms, instead of just needing 3.5% down payment, you will need to up your investment to about 4.5-5%. Yup, this is really going to hurt in the pocketbooks and savings of the buyers. It’s putting FHA on par with conventional financing which has always limited seller paid costs to 3% (with less than 10% down). FHA does allow gifts for down payment and closing costs.

And, not all changes are bad! Here is the good news — phew!  Of course only 25% of the changes are positive.  Well, that is a bummer.  We just have to deal.  For instance, this change has been effective since Feb. 1.  FHA has temporarily suspended the anti-flipping rule. The term “flipping” has quite a bad rap.  It’s really due to people buying a house at less than market value and turning it to sell for more when the buyer did NOTHING to it to warrant the additional increase in price.  This term gets tossed around like a salad — “I want to buy foreclosed homes and ‘flip’ them” — Whether it’s from friends, the media or even those programs on TLC, almost everyone gets the concept.   The rule, which is suspended for ONE year, said that a purchase agreement on a home HAD to be 90 days away from the date the title transferred to the seller. Whoopie, right? Why is this even important to you?   It’s opened the door to many more homes that you, as an FHA buyer, can actually put in the running. 

That’s about it in a lengthy nutshell! To recap, the two major changes you need to be excited/concerned about is the removal of the anti-flipping rule which is in effect now and the change in seller paid costs with an effective date in Spring.  Just stay tuned for more updates as they come.  And let’s get off our horses and actually enjoy what has changed for the better and sweat about the projected changes when they come.