The news media has been talking lately about how difficult it is to get home loans approved these days. I think there may be some misconceptions about available loans, down payments, etc. In the ‘old days’ – last year! – lenders were offering 0 % home loans. Some would even allow you to receive 3% of the sale price as a concession. In other words, you could come to the table with very little of your own money. Several lenders offered that product on investment properties as well. It is great for a market that continues to have appreciation and home values continue to go up but we found that when home values drop and people become upside down in their mortgages it is much, much easier to just walk away from those properties.
Years ago when the only down payment option was 40 or 50% down, the Federal Housing Association came into existence. They offered a product that enabled folks to buy their own homes – a 3% down loan insured by the government with insurance added to it. Some people call it PMI (Private Mortgage Insurance); some call it MIP (Mortgage Insurance Premium). The reason it was there was insurance in case you foreclosed on the property. Should that occur, the lender then had an amount of money to help offset foreclosure expenses. The FHA is a good loan but I think we will find that the qualifications for an FHA loan will become even more strict. An FHA style loan by design is not a risk base on your credit score like a conventional loan. In other words, you can have a lower credit score and a fair amount of bumps and bruises and still be approved for an FHA loan. Well, that was true until the credit crunch. Then many guidelines came out and now some lenders have placed a minimum credit score on an FHA-style loan. About 8 months ago they began with a 580 credit score – if you had a 580 or above credit score and met all the other criteria, you could be approved for an FHA loan. Then lenders began to change the numbers – 580 became 620 then a 640 – so it is clear that several lenders are recognizing that those with lower credit scores have a higher risk of defaulting on their loans. The lenders are trying to control or lessen their losses by structuring things credit score driven which goes against the principle of how the FHA loan program came about. There has been talk that the FHA will make a change to a 5% down payment in the future instead of 3%.
Although I do not sell FHA loans, I can run a spread sheet that will show the difference between an FHA loan with 3% down, a conventional loan with 5% down and mortgage insurance and a stacked loan called 80/15/5. That means the buyer gets a first loan from a lender for 80% of the cost, a loan for 15% of the cost from the second lender and provides 5% down. Those loans still exist today.
So the down payments available today are 3% for an FHA and 5% for the conventional. The difference between the conventional at 5% and the 80/15/5 is the cost of the mortgage insurance. Not everyone will be approved for the 80/15/5. Lenders today like to start the credit score at 700 and work their way up. If they approve a client with a score below 700, the interest rates begin to climb so the loan may be less attractive to the buyer. When looking at the three different types of loans I still think that the 80/15/5 will work out to be the best because you make more payments toward the reduction of your principal. You are not paying anyone for private mortgage insurance. It comes down to recognizing that there are still loans available for as little as 3% or 5% down.
Again, a down payment not only benefits the lender. It also benefits the buyer when you decide to sell that home. Here in Texas you can take the fees for selling your home (title company cost, state, realtor, lender which can total 7 to 8%) and multiply that figure by the sales price of your home and you will see how much selling your home will cost. Some people try selling their home themselves in order to lower the selling costs; some just decide to walk away and give the keys back to the bank.
Many years ago Congress, recognizing that those men and women who served in our country’s military had not had the opportunity to put aside enough money for a down payment on a home, structured a loan program for both active and retired military personnel who meet the qualification guidelines. Known as a VA Loan, it is the only loan available today for zero money out of pocket. The best part of the loan is that it does not carry mortgage insurance.
Over the next couple of weeks I will be talking about ways to increase your credit score as that will be key in securing the right mortgage for you.
Thanks for reading,
Davis Family Lending, LLC
Geoffrey is the “Frisco Mortgage Guy”!