Are you holding off buying a home because you don’t have 20% down payment saved?! Would you like to buy, but not sure if your credit score or income will limit what you can afford? Good news! There are many options available for you.
While having 20% down with a 800 credit score is very desirable, many people could qualify to buy their own homes. You just need to know your options and talk to the right lender to see what is possible for your situation! Here are the different type of loan options to consider when buying a home:
- 0% down
- No mortgage insurance
- No upfront fees
- Available to current or former military
- Subject to VA inspection/underwriting
- 3.5% down
- 1.5% Upfront mortgage insurance ( can be wrapped into loan)
- Available to most buyers with credit scores 579+
- Subject to FHA inspection/underwriting
USDA Home Purchase
- 0% down
- 1% Upfront mortgage insurance (can be wrapped into loan)
- Available to most buyers with credit scores 640+
- Subject to location and income requirements
- Home Buyer class required for loan approval
Home Ready/Home Possible
- 3% down
- 3% Upfront mortgage insurance ( can be wrapped into loan)
- Available to most buyers with credit scores 579+
- Subject to income requirements
- All the down payment and closing costs can come from a down payment gift.
- 3% down
- PMI required for loans with less than 20%
- 680+ credit scores with 75% LTV
- Not subject to income requirements
Low Downpayment Lenders
- 5% down
- PMI required for loans with less than 20%
- 680+ credit scores
- Not subject to income requirements
- Submit to conforming loan limits
Determining the best financing option also depends on your current market, the terms of your offer and strength of your lender! Using a local bank, versus a large corporation or internet lender will help your contract be competitive and also ensure that you will make it to settlement.
If you are curious about downpayment options and picking the best program and lender for you, contact us at email@example.com!
If you have 1% cash and can otherwise qualify for a FHA loan, you may be able to get a second loan for the amount of your down payment from VHDA Plus Loans program. The income and sales price limit on this VHDA funded, FHA insured second mortgage are slightly more generous than some other first time homebuyer programs. You can qualify if your household of 2 makes less than $122k a year and you are looking to buy a place that is under $500k. There are other qualifications, including having good credits (above 620) and taking a buyer education course, but this program can help bridge the cash gap to get your into your new home. Let us recommend a great lender who can help get you pre-qualified.
Big changes may be coming to FHA loans this year that may make FHA loans a far less attractive option for today’s buyers. Following a comment period, it’s expected that the following proposals will be enacted (read more here).
Changes to Mortgage Insurance Premiums
The annual mortgage insurance premium (MIP) for most new mortgages will increase by 0.10%, and premiums on jumbo mortgages ($625,500 or larger) will jump 0.05%, to the maximum authorized annual mortgage insurance premium. Perhaps more importantly, FHA will also require most FHA borrowers to continue paying annual premiums for the life of their mortgage loan. For years FHA cancelled MIP on loans that reached 22% equity (whether through pay downs of the loan or through market appreciation), but that will now change. MIP, which can easily add hundreds of dollars per month to a typical mortgage in our area, will continue throughout the life of the loan going forward.
Requiring Manual Underwriting on Loans with Credit Scores below 620 & Debt-to-Income Ratios over 43 Percent
If you have a score below 620 and a total debt-to-income (DTI) ratio greater than 43%, your loan must be manually underwritten and the lender must document compensating factors that would support an approval.
Raising Down Payment on Loans above $625,500
Perhaps the most significant change is that loans above $625,500 will now require a minimum down payment of 5% rather than the 3.5% required for loans below that limit (the FHA limit in our area is $729,750). With the return of 5% down conventional loans, it likely isn’t going to make sense for borrowers in our area to use FHA if they are borrowing above $625,500 because there will no longer be a down payment advantage, and the MIP (as noted above) will be higher and permanent.
With these big changes coming to FHA loans, it makes sense to ask your lender a lot of questions and to understand the loan product you’ll be getting!
Bad news for FHA home buyers: On April 1 your costs are going up, and that’s no joke.
As required by the Temporary Payroll Tax Cut Continuation Act of 2011, FHA will increase its annual mortgage insurance premium (MIP) by 0.10 percent for loans under $625,500 and by 0.35 percent for loans above that amount. (FHA has an upper limit of $729,750 in the metro DC area.) Additionally, upfront mortgage insurance premiums (UFMIP) will also increase by 0.75 percent beginning June 1, 2012. Currently the UFMIP is one percent. (NB: Loans that are assigned a case number prior to the effective dates will have the old rates.)
Doing the math, that means that a buyer of a $400,000 home, with a loan of 96.5% of that amount (typical for FHA) will pay almost $2900 more at settlement for the upfront MIP, and an extra $386/year in annual premiums. Ouch. With closing costs typically around 2-3% in our area, that is a very significant cost at closing. Buyers will still have the option to finance that ‘upfront’ portion by rolling it into the loan balance BUT total contribution from seller is limited to 3%, down from the current 6%.
This is the latest in a string of rising premiums for FHA loans as they try to rebuild their capital reserves. There were also large increases in October 2010 and April 2011. FHA loans are a very popular choice for today’s buyers because they require significantly smaller down payments (3.5%) than private loan options, which range from 5-20%, require. Credit requirements are also less stringent.
More Resources: HUD Press Release
Good news for our area: FHA is on its way to increasing their loan limit from $625,500 to $729,750 (its ‘temporary’ level prior to October 1, 2011). The measure would be in place through 2013.
According to Reuters, a bipartisan panel of Congress agreed on a measure yesterday that would increase the limit. The increase would apply only to FHA, NOT to loans backed by Fannie and Freddie. It still has to pass the House & Senate, but indications of passing are good.
This is important for our local market, which is considered high priced. When loan limits dropped to $625,500, it meant less purchasing power for buyers trying to borrow more. This primarily affected homes in the $750-900k price range, which, after the drop meant that even with 20% down, in order to get the very best rates buyers were limited to homes under $750k (unless they came up with more cash.) At the new $729k limit, buyers can purchase up to about $875k with 20% down and still get extremely competitive (historical lows, actually) interest rates.
Stay tuned to see if the measure passes.
The administration has released a white paper saying it intends to wind down Fannie Mae and Freddie Mac and severely cut back FHA’s role in mortgage funding. Though the plan could take up to seven years to execute, it would mean a dramatically privatized mortgage market and very likely higher rates. The report offers three options, including creating a new government agency that would continue to insure mortgages or a new agency that would step in only during times of crisis. The most drastic option would end government backing for home loans beyond the FHA. This could prove to be disastrous for condo financing, which has long been problematic when it comes to FHA. (Read more about how changes in condo financing impacted sales in this post.)
This report comes on the heels of another direct hit on buyers: FHA’s recently announced increase in the monthly mortgage insurance premium of .25% beginning with case numbers assigned on or after April 18, 2011. FHA Commissioner David Stevens said “After careful consideration and analysis, we determined it was necessary to increase the annual mortgage insurance premium at this time in order to bolster the FHA’s capital reserves and help private capital return to the housing market,” said Stevens. “This quarter point increase in the annual MIP is a responsible step towards meeting the Congressionally mandated two percent reserve threshold, while allowing FHA to remain the most cost effective mortgage insurance option for borrowers with lower incomes and lower down payments.” This means that FHA buyers who have a ratified contract AFTER that date will have a higher monthly payment, so plan accordingly and get those offers in during EARLY April! On a $400,000 loan it translates into an extra $83 in your monthly payment.
Interest rates have a huge impact on affordability, especially for first time buyers who typically have lower down payments than 2nd or 3rd time buyers who are rolling equity over from a previous home.
As announced earlier this year, FHA has now made official its plan to increase mortgage insurance premiums for case numbers after October 4, 2010. For loans with a loan-to-value (LTV) of over 95% (which is most first time buyers, in my experience), the monthly fee increases from .55 bps to a whopping .90 bps.
How does this translate for the typical borrower with FHA’s minimum 3.5% down payment? On a $275,000 loan, the monthly payment is about to become $70 higher per month! This makes payments less affordable for many first time buyers, and adds ‘insult to injury’ following the expiration of the first time home buyer credit.
If you’re on the fence about making an offer on a home, I’d suggest pulling the trigger before the end of September so that you can get the loan’s case number assigned prior to this hefty increase in fees.
If you’re ready to start your Northern Virginia or DC area home search, please contact us – we’d love to help!
Learn More: Attend a free first time home buyer class
Bill HR 2981 was passed by both the House and Senate, paving the way for higher charges for FHA borrowers. The majority of FHA loans are 30 year mortgages with a loan-to-value of at least 96.5%, which will see an increase in the monthly fee from 55 bps to a whopping 90bp, but on the flip side will see a reduction in the upfront mortgage insurance premium (UFMIP) from 225 basis points down to 100 basis points.
So in other words, the up front fees (this amount is often rolled into the loan balance) will go down, but the monthly charge goes up, hampering the monthly affordability for many borrowers.
The change is due to go into effect September 7, 2010.
Senate Majority Leader Harry Reid has co-authored a proposal to extend the June 30 settlement deadline for the first time buyer credit until September 30 to give lenders more time to process the incredible volume of contracts trying to close. The surge in loan volume has created delays around home appraisals and the usual delays associated with short sales are also creating headaches for buyers hoping to take advantage of the credit. Of course, savvy buyers know that many short sales will NEVER close, so the extension may not help them at all. Read more about why short sales never close here.
The House also passed legislation this week granting the Federal Housing Administration (FHA) the authority to raise the annual fees it charges borrowers to help shore up the agency’s dwindling cash reserves. The fee is currently capped at 0.55 percent of the value of the loan. The bill raises the cap to 1.5 percent. FHA Commissioner David H. Stevens said it wants to raise the fee for new borrowers to 0.9% next year to help raise capital and also make the fees more consistent with private mortgage insurers. FHA has certainly been a good deal for buyers recently, with very competitive rates and low insurance charges, which resulted in FHA’s share of purchase loan market from 3% in 2006 to 30% recently. As the agency raises those fees, it plans to somewhat lower the upfront fees it charges borrowers.
Buyers: FHA is still a great option in 2010–low rates and fees, and only 3.5% down. If you’re interested in starting your Northern Virginia home search, contact us.
More: Attend a free first time homebuyer class in Arlington.
Search: See homes for sale in Northern Virginia and Washington, DC.
Within the next few months, it’s going to get a little tougher for FHA buyers. Starting sometime this summer, FHA will make official its announced policy of limiting the seller contribution to buyer’s closing costs (aka “seller subsidy”) to 3% of the purchase price, down from 6%.
What fees make up the buyer’s closing costs?
The fees vary by jurisdiction, broker, and settlement attorney, but a good way to categorize them would be:
- Prepaids – These are generally required by the lender, and may include prepaid insurance, prepaid property taxes, and prepaid interest. Another common prepaid item is condo/HOA fees. These vary based on the day of the month that you close, since they are pro-rated between buyer and seller.
- Points – A point represents 1% of the loan balance and are charged by lenders. This, along with the fees, can easily amount to thousands and thousands of dollars, so it’s important to discuss this with your agent and your lender.
- Fees – These are fees charged by real estate brokers, settlement attorneys, and lenders, and are the toughest to judge for “reasonableness” without experience. These vary widely, particularly among lenders. Some real estate agents will pay their broker’s fee on your behalf—be sure to ask them. For lenders, whose fees can be substantial, it’s important to know early in the process what they’ll charge. Broker’s and attorney’s fees are scattered throughout the closing statement sections.
- Title Insurance – This is paid by the buyer and, depending on the policy, can amount to thousands of dollars. It’s a one time charge that covers you in the event of a problem with the chain of ownership. See my post on how to save some money with title insurance here. This is in the 1100 section.
- Government and Transfer Charges – Paid to the local jurisdiction. These can be quite substantial—for example, in the District of Columbia, the transfer (paid by the seller) and recording taxes (paid by the buyer) are 1.1% each. Northern Virginia sellers just had big increase (from $1 per $1000 in value to $5 per $1000) in their transfer taxes.
In our local DC and Northern Virginia area, traditionally closing costs have run about 3% anyway, so the impact will likely be minimal for most buyers in our area. But for those buyers who are struggling to come up with cash for the down payment AND closing costs, this reduction could put a last minute wrench in their purchase. Plan accordingly.
Read More: Buyer’s Closing Costs
Learn More: Attend a free first time home buyer class.
Read More: Will new FHA rules kill condo sales?
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