Bulls & Blogs

So, you're a potential homebuyer with good credit but not much cash in the bank. You ask a lender to pre-approve you for a low down payment loan. The knee-jerk reaction of most lenders is to prepare you for an FHA loan.

That may not be the best choice anymore. Now, there is a conventional loan that can beat FHA for the homebuyer with good credit. It has lower mortgage insurance, and it has a lower minimum down payment - 3% as opposed to 3.5% for FHA.

Sound too good to be true? Well, try it yourself on the loan comparison calculator on our Web site. (Go to www.LoneStarLending.com and click on the "Compare Options" button.) Click the "Add option" button to get two side-by-side loan options. Let's take a $150,000 home. For the first option, choose a conventional loan. For the second option, choose an FHA loan. Enter a 3.5% down payment for both options (so we're comparing apples against apples). Use today's interest rates, 5.0% for a 30-year, 97% conventional loan and 4.75% for a 30-year FHA loan.

Now, click the "Calc" button under each option. The most important number to look at is the "Effective APR" at the bottom of the results. This number takes into account your interest rate, the mortgage insurance, and your closing costs and amortizes them over the time you expect to spend in this home. If you're an average homeowner, you'll stay in this home less than 7 years. Notice that the conventional option is more than 0.2% lower than the FHA option. This is despite the fact that the interest rate on the conventional option is slightly higher.

The secret is the mortgage insurance. An FHA loan has both upfront mortgage insurance (1% due at closing) and monthly mortgage insurance (1.15% per year, paid as part of the mortgage payment). A conventional loan only has monthly mortgage insurance, and the annual premium is lower (0.88%) than for an FHA loan. Notice also that your monthly payment for the conventional loan is about $18 less than for the FHA loan.

Mortgage insurance is not your only savings with a conventional loan. Closing costs for conventional loans generally are a few hundred dollars cheaper than for FHA loans. (The calculator actually doesn't take this into account.)

This comparison applies for homebuyers with very good credit. Those with a few dings on their credit still will benefit from an FHA loan.

Spring is just around the corner, traditionally the busiest home buying season. But mortgage applications for home purchases remain subdued. The reasons are many, including concerns about falling home prices, continued high unemployment, and restrictive credit standards. The economy certainly continues to face headwinds, but if you're considering a home purchase, here are some reasons why now might be the best time to buy.

1. A recent study by Trulia (a real estate data network) concluded that buying is once again cheaper than renting in most Texas cities, including Austin, Houston, Dallas, and San Antonio.


2. Real estate markets are local. Recent talk about a "double-dip" in home prices are based on the entire US market. Texas statistics indicate that many areas of the state are approaching equilibrium between a buyer's and seller's market. In fact, the Austin area may see a housing shortage by 2012.


3. If you plan to use an FHA loan to purchase a home, the agency is planning to hike its mortgage insurance rates in mid-April by 0.25%. On a $150,000 mortgage, the increase is about $33/month.



4. Despite the fact that interest rates have risen since last fall, they still are amazingly low. Rates for a 30-year, fixed-rate mortgage are still below 5%. Before the financial collapse, we were excited about rates in the 6's. Going forward, I'm afraid the factors favoring higher rates are going to dominate. I have outlined a few of these factors below.

   - Japan is the second largest purchaser of US Treasury bonds (behind China). In light of the recent disaster, it seems likely that Japan's appetite for US bonds will diminish. Given that the US cannot change the quantity of bonds it needs to sell, the market may insist on higher interest rates to absorb the supply that Japan would have purchased.

   - The winding down of Fannie Mae and Freddie Mac will put upward pressure on rates. Fannie and Freddie purchase almost all mortgages not originated through government agencies (FHA, VA, USDA), and they currently have the explicit backing of the US government. Without that backing (or without Fannie and Freddie), estimates are that mortgage rates would be 0.5% higher.

   - A new rule by the Federal Reserve regulating loan originator compensation is expected to raise rates at least 0.25%. The rule is complex and poorly designed and is scheduled to go into effect on 4/1. Originators no longer will be able to compete with each other on closing costs nor will they be able to cover unforeseen fee changes, such as when a rate lock has to be extended. The rule is likely to penalize quality mortgage customers because they will pay a higher rate to provide lenders with a buffer for these unforeseen circumstances. Longer term, many financial pundits predict the rule will lead to a further consolidation of the industry in the hands of the largest banks. Less competition typically means higher prices, or in this case higher rates.

   - Another proposed rule may have an even more devastating effect. The financial regulatory bill passed last summer contained a provision that lenders must retain a 5% interest in any mortgage they sell unless it is a "qualified residential mortgage" (QRM). The bill left it to regulators to define QRM, and the proposed definition states that conventional mortgages with less than 20% down will not qualify. Estimates are that a non-QRM loans will have an interest rate 2% higher than QRMs. The senators who drafted the bill recently wrote the regulators to explain they didn't intend for a large down payment requirement, but so far the regulators don't seem to be listening.

For these reasons, now may be the best time to buy for the next decade. If you're considering a home purchase, check out the calculators on our Web site. (Go to www.LoneStarLending.com and click on the "Calculate Payment" button.) You can estimate the maximum home price you can afford, among other calculations. You also can compare various loan options without the threat of spam emails or solicitation calls. (Click on the "Compare Options" button.)

You probably are aware that last week FHA extended its waiver of the property flip rule, eliminating the "seasoning" requirement for sellers. You may not be aware that some lenders also have reduced the seasoning period for conventional loans to as little as 30 days.

As we said before, this is a huge deal for property investors because it means they can purchase a foreclosure at auction and almost immediately market the property for sale at an elevated price.

The FHA property flip rule prohibited the use of FHA financing for properties that had been owned for less than 90 days. The FHA announcement last week extended the waiver through the end of 2011. Most lenders now are applying the FHA waiver as intended, meaning the waiver applies even to properties for sale by individuals and corporations.

For conventional loans, the seller must be on title for 30 days prior to signing the contract for sale. The rule applies to all sellers, including individuals or corporations.

It is now cheaper to buy than rent in 72% of the major metros in the US, according to Trulia, a real estate data network. Several Texas cities made the list, including Arlington, San Antonio, El Paso, Dallas, Houston, and Austin.

According to Pete Flint, Trulia's CEO, it's simple supply and demand economics at work. "Since the start of the 'Great Recession,’ many former homeowners have flooded the rental market. Following the principles of supply and demand, renting has become relatively more expensive than buying in most markets."

Stricter underwriting standards are forcing many potential homebuyers to remain renters. Additional rental demand comes from those forced out of their homes due to foreclosure. Trulia's findings also reflect the fact that home affordability is rising due to declining home prices and low interest rates.

The Trulia index divides the median list price for two-bedroom homes by the median rent on two bedroom apartments, condos, and town homes listed on Trulia.com. If the index is less than 15, owning a home is much less expensive than renting. The index considers the total cost of homeownership, including property taxes, insurance, homeowner's fees, and closing costs, and the total cost of renting, including renter's insurance.

Arlington topped the list of Texas cities with an index of 6. San Antonio and El Paso had an index of 11, followed by Dallas (12), Houston (13), and Austin (15). Only one Texas city, Ft. Worth (19) had an index greater than 15, but Trulia suggests that at this level buying still may make financial sense depending on the situation. No Texas cities had an index of 21 or higher, the level at which Trulia suggests that renting is much less expensive than buying a home.

Have you ever tried to get a loan for a fixer-upper? Most lenders won't approve loans to purchase homes that need major renovation. What about getting a loan to remodel your existing home or rental property? You could try a home improvement loan, but second lien interest rates can make that option unattractive, and second lien lenders will not touch investment properties.

The solution may be the Fannie Mae Homestyle Renovation program. The program allows you to combine the purchase or refinance of a home with the costs to renovate or extensively remodel the property. Soft costs, such as architectural services and engineering and permit fees, may be included in the loan.

This is a conventional loan program with conventional interest rates. Rates are about 1/2% higher than standard conventional rates.

For your primary residence, you may borrow up to 95% of the property value. For a home purchase, the property value is the lesser of the "as-completed" appraised value and the sum of the purchase price and total renovation costs. For a refinance, replace the purchase price with the payoff of your existing liens. You may borrow up to 80% for a second home and up to 75% for a rental property.

Total renovation costs included in the loan, including any contingency reserve, eligible soft costs, and payment reserve, cannot exceed 50% of the estimated "as-completed" value of the home. Soft costs are limited to 3% of loan amount or $5,000. A payment reserve is allowed only if the home will be uninhabitable during renovation.

The program can be attractive for remodeling an existing home even if you're satisfied with your current mortgage. Interest rates are historically low, and it's unlikely you can find a home improvement loan that will result in a lower combined payment than the payment from refinancing using the Homestyle Renovation program. (Use our "Compare Options" calculator on our Web site to check the numbers yourself.)

The program does have one significant restriction. A licensed contractor must perform the work. You cannot use a renovation loan to do your own remodeling. If you want to do it yourself, you need to consider a home improvement loan or a Texas equity (cash-out refinance) loan. Renovation must be completed in 6 months, and you cannot use the program to complete a previously started renovation project.

You can find more information about the program on our Web site under the "Loan Programs" menu.