The best ways to buy a home with a low down payment

Even with a low down payment or flawed credit, you might still be able to buy a home.

 

Are you an aspiring homeowner with bad credit or little savings? Well, that doesn't have to stop you from buying …

Let's say you've found the perfect house with a big backyard for your dog and a great patio for amazing summer barbecue parties. And you've managed to save a low down payment to help you buy it.

But what mortgage would be best for you at this point? Well, the answer has changed over the past few years. In the past, lenders probably would have pointed you toward a loan from the Federal Housing Administration (FHA), which is part of the government's Department of Housing and Development (HUD). In fact, the HUD website says FHA loans have been around since 1934 to help those with low down payments, low closing costs, and easy credit qualifying.

But that's just not the reality anymore, said Sonia Garrison, research manager at Evolution Finance, which launched the social network  last year to help people with personal finance issues.

Garrison authored the 2013 Mortgage Insurance Report for WalletHub and discovered that FHA mortgage insurance premiums have doubled since 2008, making an FHA loan hard to afford for many people, she says.

However, she explains that other types of loans offer a cheaper insurance option known as private mortgage insurance (PMI) for borrowers with a low down payment or less-than-ideal credit.

PMI, bought through a private insurance company, is required on every mortgage with less than a 20 percent down payment. On the other hand, FHA mortgage premium insurance is backed by the government. Both protect the lender in case the borrower defaults on the loan. So how's an aspiring homebuyer supposed to know which to go with? If you have less than 20 percent down saved, keep reading to find out which loan might be the best option for you.

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Why FHA Loans May No Longer Be Your Best Option

FHA loans used to be the most affordable mortgage choice, especially for first-time homebuyers or homebuyers with flawed credit history or not much money saved for a down payment,

But because FHA mortgage insurance jumped from .55 percent to 1.35 percent in 2013, he says that many people aren't able to afford the monthly mortgage and insurance.

For instance, on a $200,000 conventional loan, the private mortgage insurance would be about $103 per month. If that same mortgage was drawn up by FHA, the mortgage insurance would be $225 each month,

Why did FHA mortgage premium insurance jump so high, so quickly?
Two years ago,  70 percent of the loans he wrote were for government-backed loans, most of which were FHA loans.

"But FHA was never designed to be 70 percent of the market share. It was designed to help certain people. But it was serving all the people," he says. "By increasing the insurance, FHA has corrected and repositioned itself to be that 18 to 20 percent of the market that they meant to be in the first place. This is a good thing. There are still those who will fit preferably into the FHA bucket."

When Garrison began doing her study, she knew there was going to be a difference in what people paid for PMI and FHA insurance. But it was very surprising, she says, how quickly a large difference accumulated over a period of three to five years for a homeowner.

Take this example: With 5 percent down and a 659 credit score, someone can save $5,000 for five years or $1,000 a year by having a conventional loan with private mortgage insurance instead of an FHA loan, the study shows.

When you're looking for a mortgage, it's really easy to just focus on the interest rate of the mortgage itself, she says. But if you want the best deal, ask mortgage lenders to compare what you'd pay for FHA mortgage insurance and private mortgage insurance.

It's possible that one lender might go through some extra steps to get you approved with a conventional loan with less monthly mortgage insurance, Garrison explains.
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Who Should Still Look Into An FHA Loan?

Even with rising insurance premiums, are there still people who can benefit from an FHA loan?

Of course,  For example, those who only have down payment assistance from a gift might be better off with an FHA loan, because most conventional loans don't allow for 100 percent of the down payment to be a gift from a family member or friend, he explains. 

Or if you have a credit score under 660 or have a high debt-to-income ratio (DTI), you're more likely to get approved for an FHA loan than a conventional loan,  He explains that FHA loans are a little more flexible when it comes to those qualifications.
According to the HUD website, you don't have to have a perfect credit score to qualify for an FHA mortgage. In fact, even if you've had credit issues, such as a bankruptcy, it's easier for you to qualify for an FHA loan than a conventional loan.
Also, homeowners might choose to take out an FHA loan if they already own one home and want to buy another one, says  Conventional loans require six months of mortgage payments reserved for their current home, and a two months reserve for the new house they are buying. This is an added security measure in case the homeowner defaults on either one of the loans they are carrying. Alternatively, an FHA loan doesn't require any reserves.
For example, if you have a monthly mortgage payment of $1,000 on your current home and a payment of $1,500 on your second home, the bank issuing the second conventional loan would want to see $6,000 in a savings account for the first house and $3,000 more for the second. That's $9,000 in reserves before they would even consider giving you a conventional loan,

Other Loans Available With A Low Down Payment

The traditional down payment of 20 percent of the purchase price seems impossible to many folks. That would mean saving $40,000 for the down payment on a $200,000 home. That could be a tall order, especially for first-time home buyers, those who have gone through some financial burden like a divorce, or young college graduates who have high student loans, .
And now that FHA loans have become quite expensive with their increased mortgage insurance, lenders have to be quite creative to help borrowers who don't have that magical 20 percent, Garrison says.
So check out some loan options that might be the perfect fit for your financial situation:
Conventional Loan: You will need a credit score of 700 or more and at least a 10 percent down payment saved up, . Comparatively, an FHA loan only requires a bare minimum of 3.5 percent down. "If you have a 660 credit score, it will be a coin toss of what loan will suit you best - an FHA or a conventional. The pricing in terms of monthly payments will probably be the same,"
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The Veterans Administration (VA) Loan: This can provide an amazing mortgage loan to military veterans and their families with low or zero down payment, Neef says. The government gives 100 percent of the financing, although there's a .4 percent mortgage insurance that is added on.
USDA Loan: Another government-backed loan is the USDA loan, which, like the VA loan, offers 100 percent financing, Neef says. Plus, the mortgage insurance premium called a "guarantee fee" is lower than that of FHA mortgage insurance or PMI. However, USDA loans do have stricter requirements, such as falling below a certain level of income. "For instance, in my Portland, Oregon area, if you have five people in your household, you cannot earn more than $100,000," he says.
State-Sponsored Loan Programs: On a state-by-state level, there are some programs to encourage first-time homebuyers to buy in areas that were hit hard by foreclosures. You could try calling several loan officers to see if any of those special lending programs are available where you want to buy a home, suggests Bill Redfern, CEO and founder of A Buyer's Choice Home Inspections in Pompano Beach, Florida. These state-sponsored programs enable some borrowers to take out a conventional loan and get down payment assistance. For instance, New York State's Homes and Community Renewal program offers a conventional loan with options of 3 to 5 percent down, plus competitive fixed interest rates for 30 years.

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5 reasons to buy a house in the next 5 months

           

       

A combination of market factors may make you think you're getting priced out of the home market. But one observer believes first-time homebuyers might want to consider making a move.
"I know it's hard to face rising interest rates and rising home prices at the same time," says Glink "The good news is there's still plenty of runway if you want to buy a house this year."
 believes first-time homebuyers should consider these five good reasons to buy a house before the end of the year:
Ty Laffoon
Pre Qualify Now ... http://pbsd.primemortgageloans.net
Home prices are still off their highs
Yes, home prices are rising from the lows seen during the housing crash of 2008, but they're still nearly 20% off their mid-2006 peak. According to the S&P/Case-Shiller Home Price Index, average U.S. home prices are currently at summer 2004 levels. In markets that are still recovering, first-time homebuyers could see significant appreciation over the next few years, if they buy now. Ty Laffoon


Interest rates are expected to keep rising
Interest rates are slowly climbing, and as the Federal Reserve concludes its economic stimulus plan, rates are expected to continue to rise. Some experts believe mortgage interest rates could hit 5% by the end of 2014 or the first quarter of 2015, according to Glink. And even a small bump in interest rates can mean a significant jump in your monthly note.
"If you're offered a 4.2% interest rate on a $400,000 mortgage, for example, your monthly payment will be $1,961, and you'll pay more than $300,000 in interest over the loan's 30-year term," Glink says. "If your interest rate were 4.9%, your monthly payment would jump to $2,115, and the total interest paid over the life of the loan would exceed $360,000."

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Rental rates are rising
There is always an argument to be made regarding whether to buy or rent. It's all a matter of your particular situation – as well as the status of your local housing market. If you need to be mobile -- prepared for job transfers or out-of-state promotions -- or are continuing to search for "the perfect place," renting is probably right for you.
However, if you would like to put down some roots, and rents are high in your hometown – it might be cheaper to buy.
"Divide the list price of the home you're interested in by the annual rental rate of a comparable property to determine the price-rent ratio," Glink advises. "If it's below 20, chances are it's a good time to buy."
Of course, buying a home means more than a mortgage. Remember to consider the other built-in expenses: maintenance, insurance, taxes and utilities.
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Consider your buying power
Americans have been steadily reducing their debt load. Maybe you have, too. The lower your debt, the higher your buying power. Creditors will consider your debt-to-income ratio – how much debt you have, compared to your gross (before-tax) income.
"Experts generally agree that you can spend between 28% and 36% of your gross income in total debt service -- that's your housing expenses plus your other debt payments," says Glink.
With lower debt comes a higher score
As you pay off student loans, credit cards and consumer debt, your credit scorewill improve. And that's one of the biggest factors mortgage lenders consider when determining the interest rate and terms of your loan.
"You should definitely consider buying this year, because it's unlikely the housing market will look much rosier next year, when interest rates and home prices could be even higher," Glink says.

More from MainStreet:

Why Your Job Matters When Buying a Home

 

Did you recently change jobs or receive a promotion? Despite what you might have heard, it is still possible to qualify for a mortgage to buy or refinance a home using your new income. The lending atmosphere is rife with misconceptions about job gaps, job changes and occupational changes within the course of an employment time frame. You can get a mortgage if you switched jobs or even changed industries , you just have to approach it the right way to seal the deal.

When determining your ability to pay (and therefore determining how much house you can afford), a lender will calculate your average income based on your pay from the past 24 months. It’s pretty straightforward if you’ve had the same job and same income and pay structure, but if any of those things changed in the past two years — or will change soon, you may face challenges when trying to get a mortgage.
In the past, lenders were ready to strike down loan applications in which there was a job or an industry change. Even real estate professionals will tell you not to change jobs before applying for a home loan. While that very well may be the case for most situations, it is not necessarily so black-and-white.Ty Laffoon
If you have had a job change, no matter what, a lender is going to need the following things from you — and your employer — in order to close on a mortgage: an offer letter, a role change letter if you have a title change and commensurate compensation package change, and the most recent pay stub and verification of employment. Ty Laffoon

How Lenders View Hourly Employees
Hourly employees are under the tightest microscope when it comes to getting a mortgage. Why? An hourly employee may have a set full-time schedule, which is ideal for lending purposes. However, if you work slightly less than a full-time schedule, with hours that fluctuate from week to week, this can muddy the waters. They will use a Verification of Employment that will state the average work week.

Here’s what you’ll need from your employer: a current pay sub and a Verification of Employment. These items could get you an exception due to relocation or an alternative circumstance. In either capacity, a most recent verification of employment can bridge the gap between how many hours worked in the year to date, supporting the new federal ability-to-repay requirements.

How Lenders View Salaried Employees
Lenders love salaried employees the most because a set salary streamlines the income calculation in the qualifying process. If you’re changing from one salaried role to another salaried role, despite a job gap, this should be no problem for qualifying for a mortgage so long as you can explain any gaps in the most recent 24 months.
Each job you’ve held in the past 24 months — even if you’ve held multiple jobs — all have to be detailed and itemized with dates so there is no gap in employment. If there is a gap in employment, the lender will need a written explanation detailing the transition. If you have changed jobs from one salaried role to another salaried role, with a different title and a different position — even within a different industry — that still should be fine for your lender as long as you are paid the same way — a flat salaried income.
What If You’re Salaried With Overtime, Commissions or Bonuses?
Have a new job? Or a new salaried role with big commissions, overtime or bonuses? If you do not have a history of this additional add-on income, it cannot be counted for use when qualifying for a new loan.
Here’s an example of a transition that a lender will find acceptable when calculating average income: A police officer has earned overtime plus salary for the past 24 months, and decides to change jobs to become firefighter with overtime potential. In this case, the overtime will be included in the 24-month average. The overtime, bonuses or commissions must be consistent during that time period for that type of income to be included in the average. A borrower can’t have a history of overtime, then change jobs and now have add-on commission income and expect the lender to include the add-on income in the 24-month average when there is no prior history of it.
Changing From Salary to Hourly Pay
If you are moving from a salary role to an hourly role, the lender is going to have to use your hourly income supported with a pay stub and verification of employment. As long as the change is within the same field and your title and role are similar, you should be in the clear.
Future Promotion or Raise On Deck
Congratulations, you’ve been offered a promotion! But first: Has it actually occurred yet? If not, you will be hard-pressed to get the lender to use the projected income, even if it is guaranteed.
If you cannot provide a pay stub with year-to-date income (usually a 30-day pay stub depending on your specific lender requirement), along with a letter detailing the change, you won’t get approved for the loan. Let’s say, for example, you are searching for the house and you know in the next four months your income is going to increase to $6,000 per month because you’ll have a new role within your company. In order for that $6,000 per month income to be used in the calculation, you’d have to get the details of the raise, including the role change letter and at least one pay stub.
So if you are thinking about getting a mortgage, even if it is further down the road, consider opening a dialogue with a lender now so you can be guided through any income bumps the past or future may hold. It is especially critical for you to get pre approved  with a lender upfront prior to house-hunting. This process includes allowing a lender to review your credit, debt, income and assets to assess your ability to qualify.
This is also a good time to start looking over your credit reports and checking your credit scores so you can address any problems in advance of applying for a mortgage.

Ty Laffoon
Prime Mortgage Loans

The Minutes from Federal Reserve meeting to give clues on when we will see a hike in the rates

 

Can you spare a minute of your time this afternoon for the release of the minutes of last month’s Federal Reserve meeting? It will likely be time well spent — especially if you’re wondering what Fed members were saying behind closed doors at the June 17-18 meeting about when they’ll start to hike short-term interest rates.

The minutes will be released at 2 p.m. ET. Ahead of the open on Wall Street, stock futures were pointing to a slightly higher open, after two days of losses. The Dow Jones industrial average is up 0.1% in pre-market trading.

The timing of interest rate increases is a hot topic on Wall Street, as low rates have been a major propellant of stock prices since the bull market began in March 2009. The start of the next Fed “tightening” cycle is viewed by many investors as an eventual headwind for a market that, many skeptics say, has become addicted to the Fed’s easy-money policies.

“Wall Street will be looking for clues to a timeline for when the Fed could potentially raise interest rates,”

Since the Fed’s last meeting, which included a dovish, or market-friendly, rate outlook from Fed Chair Janet Yellen, financial markets have been reacting to a June jobs report that was a lot stronger than anticipated. The 288,000 new jobs, well above the 215,000 economists’ forecast, and the drop in the unemployment rate to 6.1%, has intensified the rate-hike debate.

After the strong jobs report, a number of Wall Street firms have revised their forecasts for the Fed’s first rate hike, pushing the initial increase forward to the first quarter of 2015, sooner than the prior midyear 2015 prediction. Markets will be seeking clues signaling a sooner-rather-than-later Fed hike. “We will be looking for any signs of a more hawkish tilt.

Ty Laffoon
Business Development Manager
Prime Mortgage Loans