New Homes Today Magazine
Today's Home Loan Options
Navigating the Mortgage Process
By Christopher Nahill
"Where do we start?" It's an all-to-familiar question for many first-time home buyers who are faced with the prospect of a new-home mortgage. The process can be overwhelming, if not downright intimidating. But with the help of an experienced mortgage professional, the process can be reduced into more manageable, stress-free steps as he or she guides you through the labyrinth of underwriting guidelines, options and potential pitfalls.
The first step is to ask yourself a few questions about your motivation to buy a piece of the American Dream.An inventory of the minimum home features needed to satisfy your particular situation is in order.Be realistic in the number of bedrooms, bathrooms and overall square footage.Remember the old precept, "Location, location, location," and consider the proximity to schools, shopping, entertainment and work.Now you can add in the extra amenities you want such as stainless steel appliances, granite countertops, a pool and a location at the end of a cul-de-sac.
It's also important to consider how this particular real estate purchase relates to your short- and long-term goals.Nationally, the average of the length of time an individual homeowner stays at his or her property is five to seven years.In Arizona, it's three to five years.With those statistics in mind, there are important questions to ask yourself:
- Do you expect to be transferred to another state with your company within the next two years?
- Does your business and personal lifestyle include extensive travel to the point where you won't have time for typical yard maintenance?
- Is your family size increasing with the addition of a spouse or children?
- Do you expect to stay in the home for 10 or more years?
Today, our current economic environment presents some extraordinary opportunities in the real estate market.What was a seller's market just two short years ago has become a buyer's delight, with an abundance of inventory that's "on sale."However, for many first-time buyers, the once ample selection of zero down or down payment assistance programs and expanded income and credit guidelines has returned to a more realistic, common sense underwriting approach.
The seller paid down payment assistance programs (identified as Interested Party Contributions, IPC) that were discontinued as of 10/1/2008 are back in front of Congress. The new proposal has strong support from both the House and Senate as part to the latest housing market relief efforts. If, in fact, the bill is passed, we'll see a resurgence of sales to borrowers who may fit the debt to income guidelines but don't necessarily have the means for down payment.
Currently, however, there aren't any loan products that will allow for seller participation in the buyer's down payment.However, the seller can participate in contributing to the buyers recurring (pre-paid interest, hazard insurance and property tax) and non-recurring (appraisal, lender and title related fees) transaction costs.The only non-government sponsored loans available are "conventional conforming loans," whereas, VA, USDA, FHA and HUD Homes loans are government-insured programs.
Loan Programs
1. Conventional Conforming: This is a standard Fannie Mae or Freddie Mac loan requiring that 5 percent of the purchase price be the borrower's own funds. The borrower will also need to show reserves of two months' PITI (principle, interest, tax and insurance) payments. The seller is permitted to participate with up to 3 percent of the purchase price to be used for closing costs, pre-paid expenses or points to buy down the rate. Since this is a singular loan and not a first and second mortgage combination, mortgage insurance is required.
2. VA: The Veterans Administration product allows for 100 percent financing and seller contributions of up to 4 percent of the purchase price to cover transaction costs, including any points to buy down the interest rate. A VA funding fee is required and would be added to the loan amount. The funding fee is the Veterans Administration's version of an insurance policy premium that protects the sponsor lender in the event of default.There is also a residual income calculation based on the size of your family, and it may reduce the amount you would have otherwise qualified for.VA loans are only offered to qualified veterans.
3. USDA: USDA has an excellent program designed to provide funding to rural parts of the country. Only certain parts of Maricopa County are eligible for this program. The product doesn't require any down payment from the buyer and will allow up to 102 percent of the appraised value to be financed. You can even wrap your closing costs and pre-paid expense into the total loan amount if the appraised value is sufficiently higher than the purchase price. The debt to income calculation takes into consideration the number of family members that will be living in the home. As a result, the formula isn't a straight 41 percent of the household income.
4. FHA:The FHA minimum down payment requirements recently increased from 3 percent to 3.5 percent.Although a down payment is required, it may come to the buyer in the form of a gift from an immediate relative (parents, siblings, children, etc.) Additionally, the seller can contribute a maximum of 6 percent toward the buyer's transaction costs to help reduce the buyer's required funds to close.Although the FHA guidelines don't identify a minimum credit score, most of the sponsor investors/lenders have established minimum thresholds they will not go below.
5. HUD Homes: HUD owned homes are homes that previously had an FHA loan and were foreclosed; now HUD holds them until they are auctioned by way of closed biding. A HUD home can be purchased with as little as $100 down using an FHA loan. Aside from the down payment, standard FHA underwriting guidelines apply. Although FHA guidelines allow seller participation of up to 6 percent toward buyers transaction costs, don't expect HUD to contribute to your costs.
Minimum credit scores have gradually been moving up over the past 24 months.Today, it is difficult to find a lender that will close a loan for a borrower with less than a 620 mid-FICO score.Generally speaking, lenders have become increasingly sensitive to the letter of the underwriting guidelines in all aspects of collateral (property type, occupancy and buyer equity), borrower's ability to repay the loan (debt to income calculation) and the borrower's demonstrated willingness to repay the loan (credit history).
There are still excellent finance options available to first-time buyers. An experienced loan officer will help you custom-fit the mortgage that best satisfies your financial plan.You may be in a position to qualify for more than you think.To the real estate professionals you employ, this is the beginning of a long-term relationship as they serve as trusted advisors for years to come.
The builder community is highly aware of the economic conditions and restrictions facing so many of the buyers looking for appropriate financing solutions. Subsequently, the majority of the builders in our community are offering very aggressive incentives to assist potential buyers with virtually all aspects of their transactions, except down payments. Additionally, builders are offering aggressive incentives for various upgrades and options.
Christopher Nahill is a Senior Loan Officer for Core Mortgage Group, LLC.
