Bulls & Blogs

Where to find down payment money

Residential Mortgage Comments Off

Jun 032019

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

By G. Steven Bray

Recent studies have shown that 30% to 40% of prospective homebuyers think they need a 20% down payment to buy a home. The prevalence of this myth makes the results of a recent Freddie Mac study even more interesting.

Freddie’s researchers looked at lender-reported data to the Consumer Financial Protection Bureau on homebuyers’ sources for down payment funds. The data covers a period from 2013 to 2016.

The results show homebuyers still overwhelming rely on their own money with 70% reportedly using savings, retirement funds, or inheritance money for their down payment. However, this is 9 points lower than in 2013.

Repeat buyers were more common in 2016 with 31% reporting they used proceeds from the sale of another property. This is 8 points higher than in 2013.

The share who used money from family or friends remained constant at 25%, but the share using grants or loans from non-profit or government agencies doubled to 10%. (Note that some homebuyers used multiple sources of funds, so the total percentage doesn’t add up to 100.)

One interesting result of the study was the percentage of homebuyers who used a co-borrower to purchase a home. Typically, a buyer uses a co-borrower to afford a more expensive home than the buyer could afford alone. The share for first-time homebuyers with co-borrowers rose from just over 1% before the Great Recession to over 4% in 2015 and 3.2% last year.

FHA crack down on down payment assistance

Loan Guidelines, Residential Mortgage Comments Off

Apr 292019

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

By G. Steven Bray

One of a myriad of causes of the housing collapse during the Great Recession was the absence of “skin-in-the-game.” Borrowers used no-money down loans to purchase homes, then walked away from those homes when the economy went sour. Given that they had put none of their savings into the homes, walking away was easier.

One way to achieve no-money down during that time was to use seller-provided down payment assistance with an FHA loan. The seller provided the necessary 3.5% down payment and usually boosted the home’s sale price a little to make up for it. Congress outlawed this practice in 2008, mandating that no party with a financial interest in the home sale – including the seller, the agents, and the lender – could provide the homebuyer’s down payment funds. However, the law allowed governmental programs to continue providing down payment assistance.

Well, where there’s a will, there’s a way, and an entrepreneurial fellow in UT partnered with the Paiutes tribal government to create a fund, the Chenoa Fund, that lenders could use for down payment assistance. Whereas government down payment programs target homebuyers in the governmental jurisdictions, the Chenoa Fund was available nationwide, and it made a profit on the transactions.

Borrowers in down payment assistance programs become delinquent about twice as often as those who use their own funds, and the Feds see these programs as an increasing risk to the FHA Mutual Mortgage Insurance Fund, which backstops FHA mortgages.

Last week, HUD published new guidelines that clarify which entities can provide down payment assistance. The guidelines seem to target the Chenoa Fund, and it will be interesting to see how it responds.

But that still leaves the bigger issue of higher default rates for down payment assisted loans unaddressed. Many of these programs offer the assistance in exchange for higher-than-market interest rates, which stretch a homebuyer’s ability to repay the mortgage. In addition, they perpetuate the problem Congress thought it had addressed in 2008 – homeowners with no skin in the game.

More low down payment options

Loan Programs, Residential Mortgage Comments Off

Aug 222018

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

By G. Steven Bray

Fannie Mae and Freddie Mac have 3% down conventional loan programs that target low-to-moderate income folks. We used to call these community lending programs because they’re designed to fulfill Fannie and Freddie’s mandate to provide assistance for mortgages to low and moderate income families and underserved areas. The programs go by the monikers HomeReady and HomePossible.

Unlike the programs we discussed yesterday, you don’t have to be a first-time homebuyer to qualify. However, if the buyers are first-timers, one of them must complete a homebuyer education course for the HomePossible program. For HomeReady, one must complete homebuyer education regardless of first-timer status.

The programs are income-limited. By that I mean your total income cannot exceed a limit, which can differ even within a given county. For both programs, the limit typically is set to an area’s median income. However, the programs waive the limit in disaster areas and in certain areas Fannie and Freddie consider to be underserved. Call me if you want some help determining the income limit for your area.

So, given the programs we discussed yesterday, who cares that we have another 3% down program? Three reasons:

– Conventional low down-payment programs require mortgage insurance, which can bump up your housing payment quite a bit. HomeReady and HomePossible have lower mortgage insurance rates than the other low down payment programs.

– Second, the programs’ easier guidelines may make it easier for you to qualify.

– Finally, you don’t have to be a first-time homebuyer. For HomePossible, you can’t currently own other real estate, but Freddie carves out some exceptions to that in cases of divorce or inheritance.

The programs have other features and restrictions that may make one more appropriate for you than the other. Give me a call to see what’s the best fit for your situation.

Freddie adds another low down payment option

Loan Programs, Residential Mortgage Comments Off

Aug 202018

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

By G. Steven Bray

Freddie Mac recently joined Fannie Mae in offering a 3% down conventional loan program with no income limitations. Freddie calls its program HomeOne, and like Fannie’s program, it targets first-time homebuyers.

A lot of folks hear that, first-time homebuyers, and tune out, but you may be a first-time homebuyer and not realize it. Fannie and Freddie define a first-time homebuyer as someone who hasn’t owned real estate in the last 3 years. Freddie expands that definition to allow folks who owned a home with their ex-spouse to qualify.

If you’re buying a home with another person, only one of you has to be a first-time homebuyer. And if all of you are first-time homebuyers, one must complete a homebuyer education course prior to closing. The cost is minimal, and most folks complete the course online.

The programs are limited to single-family homes and condos and have a min credit score of 620. The 3% down payment may come from your own funds or from an acceptable gift source, such as a family member. It can’t come from the seller, but the seller can contribute up to 3% of the price towards your closing costs.

With this offering, Freddie and Fannie finally have comparable low down payment programs. The two have nuanced differences, so give me a call to see if one program is more appropriate for you than the other.

Next time, we’ll look at conventional low down payment options that specifically target low-to-moderate income folks.

Mortgage insurance companies tighten credit

Loan Guidelines, Residential Mortgage Comments Off

Feb 232018

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

By G. Steven Bray

As you’re probably aware, when buying a home, if your down payment is less than 20%, your mortgage payment will include mortgage insurance. This insurance is the lender’s way sharing some of the risk associated with more highly leveraged loans.

We call companies that specialize in this form of insurance mortgage insurance or MI companies – pretty clever, huh – and they often have special guidelines that apply to loans that require their product.

Recently, the MI companies expressed concern about Fannie Mae and Freddie Mac increasing the amount of debt they’re willing to accept for a borrower receiving a conventional loan. Both now accept loans for which the borrower’s debts equal up to 50% of the borrower’s gross income.

Four of the MI companies announced that starting next month, they will require a 700 credit score anytime the borrower’s debt exceeds 45% of gross income. One company further is requiring a min 5% down payment in such cases. (Recall that it’s possible to get a conventional loan with as little as 3% down.)

I don’t expect this will affect a huge number of borrowers as most folks having lower credit scores and making small down payments find it more advantageous to use the FHA program. However, it does represent the first tightening of credit standards I’ve seen in a while.

The death of down payment assistance?

Loan Guidelines, Residential Mortgage Comments Off

Nov 032017

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

By G. Steven Bray

Recent surveys indicate that saving for a down payment is one the biggest hurdles to homeownership. With rising home prices, that hurdle may seem like a moving target. Some homebuyers are turning to down payment assistance programs for help.

Well, Freddie Mac just threw cold water on one popular method of funding these programs. It’s called differential rate pricing or premium pricing. The lender provides assistance equal to 3 to 5% of the loan amount in exchange for a substantially higher interest rate. As Freddie correctly discerned, the result is a no down payment, higher-rate mortgage, which violates current conventional loan guidelines. As of 11/1, Freddie will disallow its use with low down payment loan programs.

I have not heard if Fannie Mae is planning a similar prohibition, but given that both agencies are owned by the government, one has to wonder. FHA officials have been squabbling among themselves for over a year about the legality of premium priced programs. For now, they are permitted.

If you’re struggling to find the funds for a down payment, I suggest you check out my Can I Qualify with limited savings videos for ideas. You also may want to check with your city or county for down payment assistance that doesn’t use premium pricing. Keep in mind that most of these programs have income and purchase price limits, and you may have to repay some or all of the assistance if you don’t stay in the home for 5 to 10 years.

Fannie sweetens HomeReady mortgage program

Loan Programs, Residential Mortgage Comments Off

Mar 272017

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

By G. Steven Bray

In an effort to encourage homeownership for lower-income consumers, Fannie Mae has expanded its HomeReady loan program. The program allows as little as 3% down payment and sweetens the interest rate for those who qualify.

The program has income limits in most areas, and until recently the limit was 80% of median income in many areas. Fannie raised the limit to 100% of an area’s median income, and in special low-income census tracts, the program has no income limit.

Fannie also changed the program to allow borrowers to own another home. This may be appealing for those who currently own a home and don’t want to wait for it to sell before closing on their new home.

The program is attractive for a couple reasons:

– First, the program allows for a higher debt ratio, up to 50% of a borrower’s income. In addition, the income of a roommate or significant other can be considered for qualifying even if that person is not on the loan.

– Second, Fannie absorbs some of the risk premium usually associated with low down payment loans. Fannie requires a lower mortgage insurance rate and allows a lower interest rate than is usually associated with these loans.

HomeReady borrowers are required to complete a homebuyer education course, and one naturally wonders whether that compensates for the lower risk premium assigned by Fannie. Time will tell whether the default rate on these loans justifies the favorable treatment.

Are DPA programs an endangered species?

Loan Programs, Residential Mortgage Comments Off

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.

USDA makes qualifying for a mortgage a little easier

Loan Guidelines, Owner-occupied, Residential Mortgage Comments Off

Feb 202016

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

By G. Steven Bray

USDA offers one of the few no-money-down loans, but its credit restrictions have disqualified some first-time homebuyers who don’t have established credit histories. USDA required a loan applicant to have at least 3 credit accounts with a 12 month or longer payment history.

That changed last week. USDA dropped the number of required accounts to 2, which makes it a little easier.

For homebuyers who don’t use traditional credit that appears on a credit report, USDA still allows the use of non-traditional credit accounts to achieve the required 2. Non-traditional credit includes rent, utility, and insurance payments.

However, good payment histories on non-traditional accounts cannot be used to replace accounts that appears on your credit report. In other words, if your credit score is low because of negative items on your credit report, USDA won’t ignore these items just because you have good payment history for rent and utilities.

Tapping your retirement to buy a home

Homebuyer Tips Comments Off

Aug 272015

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

By G. Steven Bray

While current mortgage guidelines require only a 3% to 3.5% down payment to purchase a home, even that’s a hurdle for some folks. If this sounds familiar, I may have a solution if you have retirement savings. The approach depends on the type of retirement plan you have.

If you have a 401k, you may be able to borrow against the account balance, if your plan permits it. Typically, the loan is limited to the lesser of $50k or 50% of the balance. Note that if you’re not using the loan to purchase your primary residence, the loan typically must be repaid within 5 years.

For those folks who have an IRA, you cannot technically borrow from the account. However, if you’re buying or building your first home, you can take out up to $10k without the distribution being subject to the standard 10% penalty. Note that if your IRA contributions are with pre-tax income, you’ll owe income tax on the money you take out.

Before you exercise either of these options, I suggest you talk to your financial advisor about how tapping your retirement account will affect your retirement plans.

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