Getting a Mortgage in 2016? Here’s What You Need to Know

As recently as two years ago, only 17 percent of all applications for a mortgage to buy a home were approved.[1]  Approval rates have improved greatly since then for two reasons.

First, borrowers are doing a much better job of getting their credit, debt, and documentation in order before they apply.  Second, lenders have slowly relaxed some of the standards they use to approve applications.

As you gear up to buy a house in 2016, here are a few things you should know about the mortgage industry.



More Easing of Credit Standards

Mortgage lenders expect to continue easing their standards in 2016, according to a fourth quarter survey of major lenders by Fannie Mae.[2]  The findings show that during the first quarter of the year, 16% of lenders expect to ease credit requirements for loans that conform to Fannie Mae’s and Freddie Mac’s underwriting standards and for government-backed loans like FHA and VA.

Meanwhile, the percentage expecting to tighten standards dropped to 2%.  However, for other loan types, such as conventional loans, fewer lenders said they would ease loans over the first quarter.

FHA and VA loans are already significantly easier to qualify for than conventional loans.  For example, the median FICO scores for purchase loans approved in December were 688 for FHA, 706 for VA and 754 for conventional—a huge difference.[3]  Based on the Fannie Mae survey, look for that difference to increase in the months ahead.

Rising interest rates

While standards slowly improve, interest rates are expected to slowly worsen for home buyers.  Most forecasts have rates ending the year between 4 and 5 percent on a 30-year fixed rate mortgage.

Ironically rates have actually fallen when most experts expected them to rise in the wake of the Federal Reserve’s decision in December to rates for the first time in nine years.  Though they will probably be higher a year from now than they are today, they will still be very low compared to historic rates.

Down Payments 

While easier lending standards and slowly rising rates don’t greatly increase the cost of buying a home, down payment requirements aren’t going to change much either.

The average down payment in the first quarter of last year was 14.8 percent of the purchase price, down from 15.5 percent a year ago to the lowest level since Q1 2012. However, the average down payment in dollars for 3.5 percent FHA purchase loans originated in the first quarter last year was $7,609 while the average down payment for conventional loans backed by Fannie Mae and Freddie Mac was $72,590.[4]

One of the reasons the average down payment declined last year was the popularity of low down payment loans.  Loans with 3 percent or lower down payments accounted for 27 percent of all purchase loans in the first quarter last year, up from 26 percent in the fourth quarter and also 26 percent a year ago to the highest share since Q2 2013. Low down payment loans accounted for 83 percent of FHA purchase loans originated in the first quarter, while 11 percent of conventional loans were low down payment loans.[5]

First-time buyers should check out the thousands of low or no down payment programs sponsored by state and local housing authorities.  Check out Down Payment Resource for more information.

Mortgage insurance in 2016

Fannie Mae and Freddie Mac both launched 3 percent down payment programs a year ago and these have been extended through 2016.  However, like FHA, they both require mortgage insurance, which adds to the monthly cost of homeownership.

To encourage first-time buyers, last year FHA announced a 50 percent reduction in the monthly mortgage insurance premium.  All three of these initiatives are being continued this year.  More good news: in the waning hours of 2015 Congress extended the deductibility of mortgage insurance payments; at least for 2016, you will be able to deduct your mortgage insurance premiums from your federal taxes, just like you mortgage interest.

This tax provision only has a one-year lifespan, but Congress has extended it for the past few years though there no guarantee it will continue in the future.


[1] Ellie Mae Origination Insights Report, January 2014

[2] http://fanniemae.com/portal/research-and-analysis/mortgage-lender-survey.html

[3] Ellie Mae Origination Insights Report, December 2015

[4] http://www.realtytrac.com/news/home-prices-and-sales/q1-2015-u-s-home-purchase-down-payment-report/

[5] Ibid

source: totalmortgage.com

Is a Second Mortgage a Good Idea?

To many home buyers the idea of taking out two mortgages on the same house sounds frightening. However, a second mortgage—also known as a second trust junior lien—makes good sense in the right circumstances and can actually save you money.

A second mortgage is simply a loan secured against your property as collateral. The term “second” indicates that the loan does not have priority on your home in case you default. Should that happen, your first mortgage has priority and that loan would be paid off before any funds go towards the second mortgage.

As a result, second mortgages come with higher interest rates than first mortgages. Second loans require fees and closing costs, just like first mortgages. You may also be required to pay points (one point is equal to one percent of the loan value) which could make the loan less attractive. You’ll need a good credit score and documentation for enough income to make the payments.

Three popular ways buyers and homeowners save money with second mortgages:

Avoiding private mortgage insurance. Buyers lacking a large down payment can use a second mortgage to qualify for their first mortgage without having to pay expensive private mortgage insurance.

Staying within GSE loan limits. With prices rising in the nation’s more expensive markets, buyers can buy a home that exceeds the limits for a loan to be bought by Fannie Mae, Freddie Mac or Ginnie Mae without incurring the higher interest rates of a jumbo loan. That translates into a significantly lower rate of interest on the primary loan.

Consolidating high interest consumer debt. Some homeowners pay off high interest short term debt like credit cards with lower interest, long term debt through a second mortgage.

Additionally, taxpayers in higher tax brackets get to deduct the interest they pay on both mortgages on their federal and state returns.


However, second mortgages have their risks:

• By taking out a second mortgage, you are adding to your overall debt burden. Anytime you add on to your overall debt burden, you make yourself more vulnerable in case you then experience financial difficulties that affect your ability to repay your debts.
• If you cannot repay, you could potentially lose your home because you are using the equity in your home as collateral.
• If you are consolidating debt, it’s not wise to substitute short term debt for long term debt if you end up paying more over the life of the second mortgage.

 source: totalmortgage.com

What is an FHA loan?

In 1934, the long road to recovery began for the U.S. economy. For the housing market, this meant the creation of the Federal Housing Administration (FHA) loan.

The loans issued under this program are insured by the federal government, decreasing the risk of loss for lenders. With its less stringent rules, more borrowers were able to qualify, which gave a boost to the housing market.

Much has changed since 1934, but the FHA loan has basically remained the same. Here are eight things to know about this government-backed mortgage.

1. Down payment as low as 3.5%

Unlike most conventional mortgages, which require 5-20% down*, the FHA loan can have a down payment requirement as low as 3.5%. This makes it much easier for lower income borrowers to purchase a home. There are even government-assisted programs available that offer grants for down-payments.

*Fannie Mae and Freddie Mac now offer a conventional mortgage program that requires 3% down.

2. Perfect credit isn’t needed

When making any large purchase, your credit score is an important number. When it comes to FHA loans, a credit score of 580 or higher will get you a down payment around 3.5%.

If you have a credit score between 500 and 579, you’ll have to put at least 10% down. For those with credit scores under 500, unless you qualify for “nontraditional credit history or insufficient credit”, you will probably not qualify for an FHA loan.

Also, if you have ever made an appearance on the governments’s Credit Alert Interactive Verification Reporting System (CAIVRS), you will have to clear your name to become eligible for an FHA loan.

3. Financial relief is possible

If the borrower is struggling to make their mortgage payments due to a legitimate financial hardship, the lender can choose to offer a temporary period of forbearance, a loan modification, or a deferral of part of the loan balance.

4. Lender must be FHA-approved

While the FHA does insure the loans, they don’t lend them, so borrowers must find an FHA-approved lender. Just like with conventional loans, lenders will offer different interest rates and fees on identical loan types.

5. Two-part mortgage insurance is required

All FHA loans require two mortgage insurance premiums. There’s an upfront premium, paid once the borrower receives the loan, which is 1.75% of the total loan amount.

Then there is the annual premium, whose title is somewhat deceiving as it’s paid on a monthly basis. The length of the loan, the amount borrowed, and the initial loan-to-value ratio (LTV) all affect how much a borrower will have to pay.

6. Funds for a fixer-upper are available 

The FHA’s 203k loan is geared specifically toward buyers who plan to purchase and renovate their home. Structural alterations, modernization and improvements to the home’s function, a roof replacement, and septic system repair are all eligible projects, along with many others.

7. No closing costs are possible

Closing costs are another upfront fee that can be challenging for some borrowers to pay. Recognizing this fact, the FHA permits sellers/builders/lenders to offer deals around closing costs.

8. Loan could be assumable

FHA loans can be assumable, meaning a buyer will purchase the home and take on the mortgage of the current owner. Everything is the same: the rate, the repayment period, the principal balance.

In the right circumstances, this process can be simpler and less costly than getting a new mortgage. It’s particularly attractive when rates are rising.

If an FHA loan sounds like the option for you, click here and get started today.

source: totalmortgage.com

6 Ways to Lower Your Interest Rate

If you’re in the market to buy a house, you probably see dozens of advertisements from lenders trumpeting interest rates that seem impossibly low.

Actually those are real rates—but they are reserved for a very elite few borrowers with the best credit, the largest down payments, and the ability to qualify for pretty much any loan amount. The rest of us never see those kinds of rates.

Many factors determine the rates lenders charge. These include their cost of money, which is a function of a long list of factors ranging from the prime rate that the Federal Reserve charges banks to the cost of money in the global economy. The amount they want to make on the loan, the risk each borrower presents, and even the lender’s location all impact the actual rate that the lender will quote you when you apply for a loan.

You can’t do much about these factors, which is why it is wise to shop around widely for a lender. After all, you are about to take out the biggest loan of your life. However, there are a number of factors that determine your interest rate that you CAN do something about.

Knowing what they are and know how to influence them can save you hundreds of thousands over the life of your mortgage.

1. Credit score

Your credit score helps lenders predict how reliable you’ll be in paying off your loan. Your credit score is calculated from your credit report, which shows your payment history on loans and debt over the past seven years.

Other factors, such as the amount of credit you can access and recent requests for credit reports from lenders, also impact your credit score. In general, if you have a higher credit score, you’ll be able to get a lower interest rate.

Before you begin shopping for a home, review your credit report carefully. Clean up errors. Make sure you pay every bill promptly and don’t take out credit cards or lines of credit that you don’t need. If you have too much credit, pay off some of your cards and close the accounts. Avoid applying for new credit until after you close on your home.

Only apply for your mortgage with lenders you have researched and are serious about; every time your credit history is pulled, even if you never do business with the lender who makes the inquiry, it hurts your credit rating

2. Loan amount

Typically, you’ll pay a higher interest rate if you’re taking out a particularly small or particularly large loan. If your loan exceeds the loan limits for FHA, Fannie Mae and Freddie Mac, you will have to take out a jumbo loan, which could raise your rate by several points.

In 2015, the loan limits for single family homes range from $417,000 to $625,000, depending on location. Just because you are pre-approved by a lender to borrow a large amount, be prepared to pay a higher rate if you decide to borrow the maximum.

As a general rule, it is not wise to end up with a mortgage at the upper limits of your pre-qualified or pre-approved ceiling. You are taking more risk in a depressed market, like the one that hit in 2007, you could find yourself “house poor” and under-equitied, leaving yourself vulnerable to foreclosure.

3. Down Payment

The amount of your down payment affects your interest rate because larger down payments lower the amount of the loan and, therefore, lower the risk that the lender incurs.

Lenders will reward larger down payments with better rates; they want borrowers who are willing to put a larger personal stake in the property. So if you can put 20 percent or more down, do it—you’ll usually get a lower interest rate. You will also pay less interest over the life of the mortgage.

4. Loan Terms

Shorter term loans have lower interest rates and lower overall costs but higher monthly payments. Interest rates come in two basic types: fixed and adjustable.

Fixed interest rates don’t change over time but adjustable rates have an initial period—usually five to seven years–that is lower than a fixed rate. At the end of the initial period, they “reset” and fluctuate based on market factors.

5. Loan Type
You may have wider variety of loans from which to choose than you realize and these may have different interest rates. If you are a veteran, you may qualify for a VA loan. An FHA loan will get you a lower down payment than a conventional loan because the government is taking on most of the risk.

Many state and municipal housing authorities offer loans similar to FHA loans at lower down payments and rates than commercial lenders. Most have income limits and some down payment assistance programs are limited to first-time home buyers.

6. Timing and Locking

In mortgages, timing is everything. Mortgage rates can change quickly and missing a “bottom” as interest rates change can cost you a lot over the life of a mortgage. Follow the financial news carefully. Try to time your house search to correspond with changes in rates. If you think rates are going to rise, act quickly. If they are falling, take hour time until you think they won’t fall further.

When your loan application is approved, lenders are obligated to offer you an agreed-upon rate regardless of whether mortgage rates have changed between the time of the loan approval and the closing date.

However, many lenders will let your rate continue to float until you close so that you can lock in the best rate during the lock-in period. A rate lock is a guarantee from a mortgage lender that they will give a mortgage loan applicant a certain interest rate, at a certain price, for a specific time period.

The price for a mortgage loan is typically expressed as “points” paid to obtain a specific interest rate. (Points are basically prepaid interest, so the more points you pay, the lower the interest rate; 1 point equals 1 percent of the loan amount.) Locked in rates are good for 30, 45 or 60 days and can be extended if closing takes longer.

source: totalmortgage.com

Mortgages are Getting More Affordable for First-Time Buyers

Thanks to a series of recent decisions, authorities are opening up the mortgage marketplace to more first-time and low-income homeowners.

Last month, Fannie Mae and Freddie Mac announced that they will begin backing fixed-rate mortgages with down payments as low as 3%. Then, last Thursday, the President announced a 0.5 percent cut to the mortgage insurance premiums the Federal Housing Administration requires—making the already easier-to-qualify-for FHA loan even more affordable.

This comes at a time when lawmakers are looking for ways to jumpstart a slow-moving housing recovery. The theory is that tight lending is keeping thousands of buyers out of the game, and that relaxing certain requirements could be enough to coax the market back to its pre-2006 vigor.

However, this loosening trend has also sparked worries that lax lending may lead us to another housing bust. Fannie Mae and Freddie Mac have attempted to allay fears by explaining that borrowers will still have to meet strict criteria. They must have a credit score of at least 620, buy private mortgage insurance, and receive home ownership counselling.

Meanwhile, the projections for the president’s insurance premium cuts are impressive. The White House expects these cuts to allow up to 250,000 new people to take advantage of the FHA loan program, and the FHA’s reserve fund are projected to grow by 7 to 10 billion dollars this year with the cut—vital, as the FHA has needed hefty federal bailouts in recent years.

Wondering where we stand in all this? Take a look at our interest rates.

What does all this mean for you?

 

That depends on your needs. Because these cuts are aimed at attracting new buyers, those are the same people they benefit the most.

If you’re already considering going with an FHA loan for its low down payment option, the Fannie Mae/Freddie Mac down payment cuts gives you another choice to consider. FHA loans give you the option to put as little as 3.5% down, but they require borrowers to pay private mortgage insurance for the life of the loan. The Fannie and Freddie programs, meanwhile, will allow you to cancel your insurance once the mortgage balance drops below 80% of your home’s value, saving you money.

The Fannie Mae and Freddie Mac cuts take (or took) effect December 13^th and March 23^rd, respectively, and currently apply to just fixed-rate loans.

As far as the president’s proposed mortgage insurance cuts go, they too will have the most impact for those looking at low down payment (or low credit rate) options, namely FHA loans. The White house expects the typical first-time homebuyer to save $900 a year on mortgage payments. The insurance cuts will affect buyers with FHA case numbers issued January 26^th or after, though at the moment, lenders will be allowed to cancel numbers issued before the 26^th.

If you’ve just closed an FHA, you may not be entirely out of luck. You will have to wait 210 days (or make 6 mortgage payments) before you’re eligible for a Streamline Refinance, but you will be able to get the insurance cut eventually.

Want to take advantage of these new requirements? Apply now for a personalized quote.

source: totalmortgage.com

FHFA Policy Changes May Loosen Lending Requirements

Many prospective homeowners believe saving money for a down payment and filing out the requisite paperwork is all they need to become a homeowner. Unfortunately, some have learned that tough lending requirements stand in their way to achieve this dream.

But this could soon change thanks to new rules proposed by the Federal Housing Finance Agency (FHFA), the regulator who manages Fannie Mae and Freddie Mac. The FHFA is considering policy changes that aim to make credit more available to potential home buyers. This will encompass many of those who have been have been excluded from the housing market due to harsh lending requirements implemented after the housing crash.

For prospective owners ready to jump into the housing market, what will they find with the new rules?

Lower down-payment requirements
FHFA is currently reviewing guidelines that will decide whether Fannie Mae and Freddie Mac will cut down-payment requirements from the current five percent to three percent. According to Mel Watt, FHFA director, the two mortgage companies will, for some loans, guarantee down payments at three percent in an effort to help those homeowners who are underwater.

The regulator is expected to release its guidelines by the end of November. The changes are likely to open credit for those prospective homeowners who are first-time buyers, self-employed, borrowers who have recently switched jobs and those who have endured financial challenges in the recession, according to a press release.

Ease lending standards

Along with homeowners benefiting from the changes, the lenders may also be affected as the FHFA is considering potential changes that will have lenders bring down their standards.

But it isn’t well received so far.

This comes as Fannie Mae and Freddie had required the industry to buy back loans in billions of dollars after the housing crash. Lenders then placed tough demands of homeowners, asking for high credit scores and other high standards in an effort to protect themselves from possible financial penalties. Lenders have said they won’t relax them amid the potential easing. And w

Whether Fannie and Freddie can and will take action for this is unclear–something the FHFA will have to address.

Look for new doors to open for this group. Mark Zandi, chief economist at Moody’s Analytics, said of the possible new rules, “Creditworthy borrowers who have been locked out of the housing market will finally have an opportunity to become homeowners.”



Make a careful decision

For lenders and homeowners, these proposed changes may create a challenging environment as people who couldn’t afford loans in the past will now come out and try to borrow.

How will this work out? Probably not well, as $51,900 is the median household income in the U.S. and the U.S. median home price sits $188,000. This could pose challenges for the average homeowner, placing themselves in a situation that could have them spending beyond their means. However, with the market still attracting cash buyers, there’s still competition for properties from buyers who will outspend regular people for them.

But don’t fear prospective homeowners, there will be opportunities as the FHFA will promote more lending, which will then result in credit to those who had been previously denied.

If you feel the potentially lower three percent may open refinance doors for you, don’t quickly jump. Be sure to review your financial picture before placing yourself in a situation that could possibly put you underwater.

source: totalmortgage.com

Percentage of First-Time Home Buyers Drops

Numbers released recently by the National Association of Realtors show that only 33% of home purchases in 2014 will be made by first-time buyers. That may not sound terrible on paper, but it means a drop of 5% from last year, and the lowest rate in almost three decades.

But why is this happening, when talk of economic improvement and a steadying housing market is so common? The reason is three-fold. Most first time home buyers are in their twenties and thirties, the same age range most crippled by ballooning student loan debt, rising housing costs, and stagnating salaries. Combined, these factors create a generation hard-pressed to save up for down payments.

And that may not be all. According to The Wall Street Journal:

    “Beyond the issues of affordability, some renters might be putting off home purchases because of the damage they saw housing do to the last generation of buyers, said Doug Duncan, chief economist of mortgage-finance company Fannie Mae.” 

To adapt, many are instead renting with roommates or moving in with family, which creates another curious situation. According to a Zillow study, there are 5.4 million fewer households than there would be if the economy was completely recovered.


So how does all this affect you?

Unless home-ownership eludes you for the reasons outlined above, it doesn’t, at least not directly. But in all probability, this is only a symptom of a greater ill. With some worrying about a student debt bubble and others whispering about forgiving student debt, the underlying problem isn’t likely to disappear on its own, and may mean some more turbulence before the economy evens out completely.

source: totalmortgage.com

Refinancing the Mortgage With HARP

A few years back we refinanced our mortgage to get a lower interest rate.  At the time, we were absolutely thrilled to get a 4.875% mortgage.  I never thought I’d see rates that low.  The only drawback was that we’d stretch the loan back out to another 30 year term.  We decided to mitigate that by paying extra all year long.  We did that by signing up for the free biweekly payment program at our credit union and also added another $300 a month on top of that.  That got us back on track to pay our mortgage off much sooner than the 30 year term.

I recently started receiving offers in the mail to refinance our house because our mortgage was backed by Fannie Mae and was eligible to participate in the HARP program (if needed).  As soon as I opened each letter, I put it right in to the shredder though because I don’t trust mailings like that.  It wasn’t until I got a letter from my credit union saying that my loan was backed by Fannie Mae and I might be eligible for a lower interest rate that I really started thinking about it.  When I looked in to the current rates at my credit union, I was disappointed to see that they were significantly higher than other rates I’d seen.  Instead of going through the credit union, I remembered that I’d read about Costco aggressively offering mortgage services through a select group of banks and institutions so I gave them a try.  It turns out that Costco has, once again, squeezed many of the fees out of the process.  In order to work with Costco, banks had to agree to a $600 cap on loan costs for executive members and a $750 cap for regular members.  Normally most banks would charge a 1% loan origination fee so this saved us a nice chunk of money.  Because HARP is involved, I was also happy to hear that I didn’t have to pay for an appraisal.  This saved us another $400.  All in all, it was very cheap to go through the process.  It was also very painless.  All the interaction happened through email and they are going to come to my house to handle the signing of the documents.  The best part about all of this is that we got a 3.625% interest rate on the new mortgage.

While I’ve been really pleased with the whole process, I was kind of shocked at the amount of detail they wanted us to provide.  We both have credit scores over 800, flawless credit, no debt other than the mortgage, and have really good salaries.  Based on the amount of information we had to provide, you’d never believe we were a good credit risk.

In order to process the loan, here’s what we had to provide:

• 3 pay stubs for each of us
• 2010 tax return
• 2011 tax return
• Proof of insurance on primary home
• Proof of insurance on vacation home
• Latest bank statement
• Proof that home equity loan has a zero balance
• Homeowners Association Bill
• W2 for 2010 for each of us
• W2 for 2011 for each of us
• Settlement statement from last refinance a few years ago

Like I said, you’d think we had bad credit or something.  Things have definitely changed since the high flying days of 2008.  If they are doing this much due diligence with us, I’m sure there are a LOT of people that are out of luck when it comes to getting a mortgage.

Anyway, we are glad we’re doing it.  The 3.625% rate is unbelievable.  Between the rate and putting an extra $20,000 in cash to pay down the balance even further, we’re going to see our payment drop by $400 a month.  We’ll actually be paying more than that because we want to pay the house off much earlier than 30 years but it’s nice to know that if we ever lost our jobs or fell on hard times, we’d have a much lower mortgage payment to deal with.

source: everybodylovesyourmoney.com