Most of you know that purchasing a home requires a down payment. In the old days, a down payment could be zero. The Federal Housing Administration (FHA) still has a program that allows a down payment of as little as 3%…and you can even borrow that from friends or family… basically making it a true zero down for you! There has been talk that the government is going to wake up at some point and say, ‘Wow. This program has a few more defaults than we thought it would. Maybe we should ask for a few more percentages in the down payment." The rumor is that the FHA will change to a 5% down in the near future. Although I do not do FHA loans, I do try and stay current with their latest thinking.
The majority of my clients recognize that the best way to bring their interest rate down is to increase the size of their down payment, say to 20%. If that is not possible, there is a combo loan which enables you to pick up a 5%, 10% or even a 15% second loan. Doing it that way avoids paying the lender the fee for mortgage insurance. Mortgage insurance has nothing to do with the loan. It allows the lender to build a reserve fund to protect them should the home go to foreclosure. That reserve of cash would allow the lender to sell the home at a reduced price without losing too much money.When you do an 80-15 or an 80-10 you show the lender that you have 20% down, even though you are getting the small second. You are still committing to a minimum of 5% down. My advice is always that you should bring at least 10% down. Typically, you are going to pay a realtor 6% to sell your house, and you want to add in 1% or even 2% for state fees, title fees, insurance, etc. If you had to sell your house in a soft market and you only put 5% or 3% into it, you now are going to have to come out of pocket to sell your home. If you bring 10% down and
the market softens or stays the same you might be able to walk away with a small profit.
Let’s get back to 20% down. In the old days (six months ago!) 20% was the best way to secure the very best interest rate providing you have good credit, a job with income, etc. Well that has changed, 25% is the new 20%. It didn’t change by much, but when we talk about what is called yield spread, you are being penalized .25% in yield if you do not bring a full 25% down on your purchase or refinance.
So, why did it change? Why are the lenders now charging you with an interest rate bump if you don’t bring 25% down?
My guess is because they can. There is a great deal of legislation currently in the works. One went into effect last Friday, the financial reform. It changes many things including how mortgage brokers and bankers are paid, how loans are priced, how the SRP or the YSP (an amount of money the lenders pay to the loan officers on the back) is handled. Instead of loan officers charging 1%, they want them to charge a flat fee for loans. This is no big deal for me because I’ve been a flat fee broker for the last two years and I give back the yield spread that the lenders offer me back to the client. The new financial reform had no impact for me. Friday was just another day.
The problem is that it’s going to make consumers pay a little more down the line. And I believe that is why the lenders changed with 25% down for their comfort level. Everyone’s trying to have you invest a little bit more into the loan so that they can feel more comfortable in case of a walk away.
Thanks for reading.
Honored as one of the Best Mortgage Brokers in Dallas! for D Magazine, 2011 & 2010. Ranked 24th in 2010 in the category Largest North Texas Residential Mortgage Lenders, according to the Dallas Business Journal!
Geoffrey is the “Frisco Mortgage Guy”!
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