Are DPA programs an endangered species?

 Loan Programs, Residential Mortgage  Comments Off on Are DPA programs an endangered species?
Feb 232016
 

For more information, please contact me at (512) 261-1542 or steve@LoneStarLending.com.

By G. Steven Bray

The government is having fits of schizophrenia again. On the one hand, it’s easing loan standards to promote homeownership. On the other hand, it wants to eliminate a popular down payment assistance program.

A number of down payment assistance (DPA) programs, including the state’s My First Texas Home program, use so-called premium pricing to fund them, and the HUD Inspector General has raised concerns about it. The programs grant a homebuyer down payment funds in exchange for an above-market interest rate. The higher rate makes the loan more attractive to investors, and they pay a premium for it, and that premium is what is used to fund the grant.

For FHA loans, federal loan guidelines seem to prohibit such a practice. The IG’s office wrote, “The funds derived from a premium priced mortgage may never be used to pay any portion of the borrower’s down payment.” However, a recent memorandum by HUD’s General Counsel contradicts that saying HUD changed its standards in 2013 and no longer prohibits the practice.

At this point, HUD is studying the issue, leaving the programs in limbo. Many lenders are refusing to participate in the programs until HUD takes its meds.

FHA changes may hurt homebuyers with student loans

 Loan Guidelines, Loan Programs, Residential Mortgage  Comments Off on FHA changes may hurt homebuyers with student loans
Oct 082015
 

For more information, please contact me at (512) 261-1542 or steve@LoneStarLending.com.

By G. Steven Bray

New FHA loan guidelines may make it harder for you to qualify for a mortgage if you have student loans.

Previous to the new rules, FHA allowed us to ignore student loans that were deferred greater than 12 months. The new rules eliminate this exemption. All student loans must be considered as part of your monthly debt.

If your student loan servicer won’t report a monthly payment, the new rules say we must use 2% of the loan balance. Fortunately, loan servicers typically will provide an effective payment based on the loan’s current balance if you ask, and this payment typically is closer to 1% of the loan balance.

The change makes FHA more consistent with conventional loan programs. However, Fannie Mae allows us to use 1% of the balance if the servicer won’t report a payment.

FHA still provides one advantage over conventional loans. It allows the use of the actual payment for income-based student loan repayment plans. These plans often have payments that are less than 1% of the loan balance.

Fannie Mae wants to give you money

 Loan Programs, Residential Mortgage  Comments Off on Fannie Mae wants to give you money
Sep 182015
 

For more information, please contact me at (512) 261-1542 or steve@LoneStarLending.com.

By G. Steven Bray

If you’re a 1st-time homebuyer, Fannie Mae wants to give you money – that is, if you buy a HomePath home. Fannie uses its HomePath program to dispose of properties it has recovered through foreclosure. Fannie will give qualified 1st-time homebuyers up to 3% of the purchase price to pay for closing costs.

In order to qualify, homebuyers must not have owned a home in the last 3 years (which Fannie defines as a 1st-time homebuyer) and plan to live in the home. Additionally, homebuyers must complete on a homebuyer education course. The 4-1/2 hour course is completely online and covers the complexities and responsibilities of homeownership.

If you want to take advantage of the assistance, keep in mind you must complete the course before you make an offer on a HomePath home. The course costs $75, but Fannie will reimburse the fee at closing.

Click here for the course sign-up and additional program information.

The case against the 15y mortgage

 Loan Programs, Residential Mortgage  Comments Off on The case against the 15y mortgage
Sep 102015
 

For more information, please contact me at (512) 261-1542 or steve@LoneStarLending.com.

By G. Steven Bray

Very low interest rates have many people refinancing their 30y mortgages into 15y mortgages. The question is is this a good decision?

The argument in favor of the 15y mortgage is that it allows you to build up equity more quickly. For example, for a $250k mortgage, you would lower your principal balance by over $70k at the end of 5 years if you used a 15y loan. In that same period, you would have built only about $24k of equity with a 30y loan.

But is that equity beneficial? Do you risk being house rich and cash poor?

Let’s continue the example. The principal and interest payment on a $250k 30y loan today would be $1194. For a 15y loan, the payment would be $1757, or $563 more each month. Money is cheap right now. Could you gain greater benefit by investing that $6756 each year in a retirement account?

A further consideration is that mortgage interest currently is tax deductible. During the first year, you’d pay $9920 in interest on the 30y mortgage and only $7930 on the 15y mortgage. The 30y mortgage will provide a larger deduction and one that will last longer into the future. Thus, depending on your tax situation, the IRS may refund you some of that extra interest you paid.

Is an adjustable rate mortgage (ARM) for you? – Part 2

 Loan Programs  Comments Off on Is an adjustable rate mortgage (ARM) for you? – Part 2
Sep 072015
 

For more information, please contact me at (512) 261-1542 or steve@LoneStarLending.com.

By G. Steven Bray

Last time, we examined the risk of payment shock with an adjustable rate mortgage, or ARM, and asked the question why would you consider an ARM?

The answer is to lower your total interest charges. Assuming the rate increases by the maximum amount each year, at the end of 7 years, you’d have paid $57k in interest and have a loan balance of almost $213k with the ARM. With a 30y fixed-rate loan, you’d have paid $70k in interest and have a loan balance of more than $216k. With the ARM, you’d have saved $13k in interest and have about $3500 more equity in your home. In fact, the ARM looks better until sometime in the 9th year.

Thus, the number one reason to use an ARM is you expect to pay off the loan while you’re in the money, by the 9th year in our example. And our example assumes that rates will rise by the maximum amount each year. If rates don’t rise that severely, the ARM will be in the money for a longer period of time.

However, it’s important to remember that even though you’re saving money, if the payment starts rising, it may crimp your style. You may have become accustomed to a lower payment, and your household budget may not allow for the 20% rise that could come with the first adjustment.

If you’re considering an ARM only because the lower payment will help you make ends meet, I encourage you to reassess. Even if the index rate doesn’t increase from today’s level, your payment would rise at the end of 5 years, and the risk of a substantial rise is very real.

Is an adjustable rate mortgage (ARM) right for you?

 Loan Programs  Comments Off on Is an adjustable rate mortgage (ARM) right for you?
Sep 032015
 

For more information, please contact me at (512) 261-1542 or steve@LoneStarLending.com.

By G. Steven Bray

Adjustable rate mortgages, or ARMs, can be attractive because the initial interest rate can be significantly lower than a 30y rate. For example, today’s 5y ARM rate is about 1% lower than the 30y rate. On a $250k mortgage, that lowers the monthly payment by about $150.

ARMs have several characteristics that determine how their rate adjusts. At the end of the fixed term, in this case 5 years, the rate will adjust to an index rate plus a margin. A typical index is the 1y London Interbank Offering Rate, which today was 0.856%. Using a 2.25% margin, if our rate adjusted today, it would adjust to 3.125%.

The number one risk with ARMs is that the interest rate can go up over time. ARMs typically cap the amount the rate can increase each year and how much it can increase over the life of the loan. If our initial rate is 2.75%, and our caps are 2% and 5%, our rate could increase to 7.75% in the 8th year. That would raise the monthly payment by $663.

Given that, why, then, would you even consider an ARM? We’ll search for an answer next time.

USDA making housing loan a bit more expensive

 Loan Guidelines, Loan Programs, Residential Mortgage  Comments Off on USDA making housing loan a bit more expensive
Aug 052015
 

For more information, please contact me at (512) 261-1542 or steve@LoneStarLending.com.

By G. Steven Bray

USDA is raising its guarantee fee for the Rural Development home loan program on Oct 1st. The Rural Development program is one of the few no-money-down loan programs. It’s only available in areas USDA considers rural in nature, but that definition includes a lot of exurbs of major TX cities.

The guarantee fee is up-front mortgage insurance due at loan closing. Most borrowers choose to roll the fee into the loan amount rather than pay it at closing.

The fee is rising from 2% to 2.75% of the initial loan amount. On a $150k home, that will raise the monthly payment by about $5.50 at today’s interest rate.

USDA is not changing its monthly mortgage insurance rate, called the annual fee, which remains 0.5% of the loan balance.

Please note that USDA will apply the change based on the date it commits to the loan, not the date the borrower applies. In order to beat the change, you really need to find a home this month as it generally takes about 30 days from contract signing to USDA loan approval.

Interest-only mortgages make a comeback

 Loan Programs, Residential Mortgage  Comments Off on Interest-only mortgages make a comeback
Jun 262015
 

For more information, please contact me at (512) 261-1542 or steve@LoneStarLending.com.

By G. Steven Bray

One of the more notorious loan products back before the housing crisis was the interest-only loan. Homebuyers who wanted a larger home, but couldn’t qualify for a traditional mortgage, would use an interest-only program because of the lower initial payment, and some lenders were approving the loans based on that lower payment. When the interest-only period ended, borrowers would face a sharp payment increase when their payment started to include principal reduction.

But interest-only loans are not inherently dangerous. In fact, they can make sense in some cases. For example, the product could make sense to a starting doctor who is confident his income will rise in the future. At the end of the interest-only period, the payment shock wouldn’t be difficult for him to handle. Or consider the case of an investor who wants to allocate her money to higher earning assets. If her investment horizon is shorter than the interest-only period, she’ll never see the payment shock.

Today, the program is making a comeback, but unlike pre-crisis, today’s lenders require that the borrower qualify at the payment that would apply after the interest-only period ends. It’s a very conservative approach that will prevent many from using the product, but in today’s market, safety trumps utility.

HARP refinance program extended again

 Loan Programs, Residential Mortgage  Comments Off on HARP refinance program extended again
May 192015
 

For more information, please contact me at (512) 261-1542 or steve@LoneStarLending.com.

By G. Steven Bray

The Home Affordable Refinance Program or HARP has been a boon for homeowners wanting to refinance. The program targets underwater mortgages, but its reduced documentation requirements and favorable interest rates make it attractive to all homeowners.

The Federal Housing Finance Admin reports the program has helped 3.3 million homeowners refinance their mortgages since its inception in 2009, and it was scheduled to end at the end of this year. However, Mel Watt, Director of the FHFA recently announced a one year extension through 2016. Watt claims an additional 600,000 homeowners still could benefit from a HARP refinance.

Keep in mind the two most important restrictions of the program. To be eligible:

– Your mortgage must be owned by Fannie Mae or Freddie Mac. (Fannie and Freddie have a tool on their Web sites to help you determine that or give me a call for help.)

– And, your mortgage must have closed prior to June 1st, 2009.

If you still haven’t been able to refinance, you may want to give this program one more look. The expanded eligibility requirements might allow you to qualify even if you’ve run off the road a couple times in your financial past.

Act quickly if you want a reverse mortgage

 Loan Guidelines, Loan Programs, Residential Mortgage  Comments Off on Act quickly if you want a reverse mortgage
Apr 222015
 

For more information, please contact me at (512) 261-1542 or steve@LoneStarLending.com.

By G. Steven Bray

FHA-insured reverse mortgages have been a fairly painless way for seniors to tap into their home equity. FHA has not evaluated applicants’ income, credit, and assets under the assumption that because the borrowers are receiving money that their financial situation is unimportant.

But with the housing downturn, FHA took a bath on reverse mortgages, and it ran into problems with seniors failing to pay property taxes and insurance. As a result, FHA has decided that starting Apr 27th it will only offer the program to seniors who can demonstrate an ability to maintain their homes. FHA calls it a financial assessment, and the evaluation criteria mean that applying for a reverse mortgage will be a lot like applying for a standard forward mortgage. Prepare to provide tax returns, account statements, and other documentation of your financial situation. In addition, now the lender will review a credit report.

If the financial assessment indicates you may have difficulty paying your property taxes and insurance, you’ll be required to set aside part of the mortgage proceeds, similar to way borrowers escrow for taxes and insurance with a forward mortgage.

It appears the changes will disqualify weaker borrowers regardless of how much equity they have in their homes. And given the losses FHA incurred on the program, that probably was the plan. To beat the changes you need to apply before Apr 27th.