FHA

Renovation loans can be a game-changer, when inventory is low or home prices for turnkey homes just aren’t affordable.

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Now that you’ve decided to start the home-buying process, it’s time to figure out which loan program is best for you. Since everybody’s situation is completely different, you’ll want to have a discussion with a mortgage professional help provide direction. After months of online browsing, it’s likely you’ve run into a jumble of curious letters, acronyms, and confusing names like FHA, VA, Fannie Mae, and Freddie Mac. What do they all mean and how do you know which one is right for you?

First off, lets look at the primary differences between an FHA loan and conventional loans, which includes Fannie, Freddie, and Jumbo loans. Even if it’s not your first time purchasing a home, it’s important to familiarize yourself once again since many historical differences between these types of loans have changed in recent years. The remaining differences have to do with mortgage insurance and a few underwriting guidelines.

Loan-Level Price Adjustments
Two very similar individuals with similar income might be better off on two completely different loan programs. One reason is because of Loan-Level Price Adjustments charged on conventional loans. These are risk-based fees assessed to mortgage borrowers using conventional financing. Since these fees are built into loan pricing (the premiums lenders earn by delivering your loan to Fannie Mae and Freddie Mac), the borrower typically doesn’t pay in the form of money but their interest rate gets adjusted. For example, an individual with an 800 credit score will have a better interest rate than somebody with a 660. Makes sense, right? Well, there are several other price adjustments. A condo or multi-unit property will likely have a higher interest rate than a single-family home. Your down payment percentage and whether or not you are buying a primary residence, second home or investment property can also impact your interest rate.

For a “vanilla” loan scenario where somebody has 5% down, a 780 credit score and purchasing an owner occupied single family detached home, this person would qualify for the best pricing possible. Their interest rate and monthly mortgage insurance would be the lowest available, keeping their monthly payment as low as possible with just 5% down payment. So, a conventional loan would be the best program for this particular borrower. However, FHA has far less pricing adjustments and is a bit more forgiving when it comes to your credit history and current credit scores. If the person in this above scenario had a 620 credit score, their interest rate and mortgage insurance would be substantially higher on a conventional loan due to the Loan-Level Price Adjustments. In this case FHA might be the better option since there total monthly payment would be lower.

Derogatory Seasoning, Credit Scores and & Debt Leniency
FHA has always been known as a “first-time homebuyer” program, even thought it’s not. People still label it this way because it caters to many individuals who have the some of the characteristics of a person who might be buying for the first time. Whether it’s a recent grad needing Mom and Dad to co-sign, somebody with very little savings or a person just starting to build up their credit, FHA can be very accommodating. However, there are many reasons why FHA might be the right program for move up buyers.

FHA has a much shorter seasoning period than conventional loans for people who are recovering from a bankruptcy, foreclosure or short-sale. FHA will allow for individuals with compensating factors to purchase with a credit score as low as 500, where as the minimum allowed by conventional is 620. FHA may also allow for debt-to-income ratios (the percentage of your gross monthly income allocated towards all your month debts) above 50% where conventional typically caps people around 45%.

Mortgage Insurance
The Federal Housing Authority (FHA) is a government agency created in 1934 to help more Americans own homes. Specifically, it provides mortgage insurance to the lender making the loan in case the borrower defaults (fails to pay) on the mortgage. The insurance premium is due no matter what size of a down payment the borrower makes.

FHA loans require a portion of the premium upfront (or at the time the mortgage is made) and monthly for the life of the loan (in most cases) and stays in place no matter how much equity accumulates in the property.

Conventional loans require mortgage insurance for the same purpose as an FHA mortgage (to protect the lender in case of a default on the mortgage), but only for loans with less than 20% down payment. The insurance is provided by private companies, which is where the term PMI comes from (private mortgage insurance.) PMI on a conventional loan only carries a monthly premium and no ‘upfront’ portion is due, and it can be removed based on the equity in the property. Through a combination of paying down the mortgage and property appreciation, borrowers can contact the lender when they have at least 22% equity and request the insurance cancelation.

Compared side by side, mortgage insurance on an FHA loan will end up costing the homebuyer more money over the life of the loan. The portion of the insurance premium that is due upfront on an FHA loan is typically added to the original loan balance, and the monthly payment is made on the total amount. While FHA interest rates generally are lower than rates for conventional loans (with less than 20% down payment), the payment on the FHA loan is likely to be higher for the same property.

More Differences Between FHA and Conventional Mortgage
FHA used to stand out as the best option for buyers with less cash available for a down payment because it allowed a down payment of a minimum of 3.5% of the purchase price. Now, however, Fannie Mae and Freddie Mac have programs that will enable borrowers to make a down payment as low as 3% of the purchase price.

While both FHA and conventional both have monthly PMI for low down payment loans, conventional loans allow the borrower to pay for the monthly mortgage insurance by increasing their interest rate above the lowest prevailing rate. This is called ‘lender paid mortgage insurance.’ Typically, a slight increase in the rate of one eighth to a quarter percent eliminates the need to pay a separate MI premium monthly. Since mortgage insurance premiums are tax deductible at lower income levels, some borrowers may find that paying a higher interest rate (mortgage interest to deduct) is preferable to a lower rate and the MI payment. Talk to your tax advisor to find out if this might be a beneficial option for you.

While all mortgages require a property appraisal, FHA appraisals were traditionally more detailed as the appraiser was required to note any “health and safety issues” they saw while inspecting the property. After 2010, however, the requirements for all appraisals have been unified. If the property condition poses a health or safety issue, as noted by the appraiser, an FHA loan will require correction or repair before the loan closing. Conventional loans need the same; however, there may be a small amount of flexibility.

What’s Best For You?
It’s hard to imagine choosing an FHA loan after reading all of this, but it may be the best option for some borrowers. In general, the underwriting guidelines for an FHA loan are more lenient than those for conventional loans. Specifically, FHA may allow a higher debt-to-income ratio than a conventional loan. Credit guidelines are also more flexible both with past delinquencies and more serious derogatory credit events, as well as the depth of a borrower’s credit history.

With property values increasing across the country, along with interest rates, waiting for a credit score to improve or a delinquent record to drop off your report may not be attractive. FHA loans will allow some borrowers to buy a home sooner than they may otherwise have been able to with conventional financing options. If interest rates drop in the future, you can refinance using the FHA streamline, which reduces the usual process and won’t require a new appraisal. Conventional loans can only be refinanced by starting over at square one and going through the full loan qualifying and process again.

The more you know going into the home buying process, the better questions you can ask and the better decisions you can make. But nothing replaces the benefit of working with an experienced lender to fully evaluate your situation and give you the options that will work best for you. There’s so much more to it than the interest rate.

Written By: Chris Ulrich – United Home Loans
NMLS# 215735

So you want to have work done to your house. Maybe you want a simple update, rehab your kitchen & bath, or maybe you want to put a full addition on the house. Where do you start and what program is best for you?

It starts with having to know a few things.

• Get a rough estimate in costs needed for the work (labor, materials, repairs, permits and architect/engineer if applicable). It’s a good idea to get a quote from a general contractor & architect up front.
• Speak to an agent to get an idea of what your home may be valued at once the work is completed.
• Know your current home loan balance.

Knowing the answers to these questions will help us determine your program options.

Construction Loans or Construction-to-Perm loans
These typically are used for big jobs, additions and knock down/rebuilds. These loans require a bit of equity and/or additional funds out of pocket. Construction loans may require 20%-30% equity in your future home value. For example, if you have a $300,000 loan on your home and the future value after construction is $500,000, a construction lender that will finance up to 80% means your total loan can’t exceed $400,000 (80% of $500,000). The construction loan will pay off your existing $300,000, leaving you $100,000 for the work to be completed. However, if the work costs $125,000, you will have to put the additional $25,000 into the project.

Construction loans are typically short term. They have higher than market interest rates and are typically variable rate loans. As your home is being built or renovated, the lender will pay the contractor directly after each interval or phase of the build is completed. This can require multiple inspections and title updates/fees.

Once the work is completed and/or you obtain a certificate of occupancy, you’ll want a permanent or fixed loan. This is usually done by refinancing yourself out of the construction loan and into a fixed rate mortgage.

If you don’t have that much equity in the home or the future appraised value (based on comparable home sales in the area prior to the build), you can expect to have quite a bit of skin in the game.

Cash Out loans
This is the easiest way to get financing but will require the most equity because the future value of the home is NOT taken into consideration. We will look at your current appraised value and can lend up to 80% of it. For example, your home is worth $300,000 but valued at $400,000. We can only lend to $320,000. So your existing loan gets paid off with the refinance and you are left with an additional $20,000 cash. This might be perfectly fine if you just want to do a small job, update your kitchen cabinets or a bathroom.

Unlike a construction loan, you are given the money directly. This is nice because if gives you the flexibility to do some work yourself and purchase items that normally wouldn’t be included in a construction quote i.e. furniture, home theater or the catering for your house warming party.

United Home Loans Mortgage Makeover & FHA 203k
These programs are perfect for those people that have very little equity in their home. It is very similar to a construction loan but caters to individuals that just don’t have the funds saved to do the work. You’ll still need a licensed contractor, a quote for labor, materials, repairs and permits, and the contractor gets paid in phases throughout the process. The lending is also based on the future value of the home, but unlike the construction loans these are FIXED RATE loans and they have loan limits. Typically these products are used for renovations but NOT major additions. Do you have 5%-10% equity in your house and need $20,000 – $50,000 for updates? This is likely the perfect product for you.

Home Equity Line Of Credit
Think of this as a credit card with a lien (mortgage) on your house. You only make a payment based on the loan balance. Payments are interest only and can adjust with the Prime Rate. Anytime you hear about the Fed raising or lowering rates, you’re rate will be affected. Lenders are becoming a bit more flexible with credit lines up to 90% or 95% of your home value, but variable high interest rates make this product less desirable. The upside of the line of credit is your ability to draw on it, pay it off, then draw again and again as long as you leave the equity line open.

Whether it’s a minor update or major facelift, there are programs designed for your situation. Call or message me to discuss which option best fits your needs.

Written By: Chris Ulrich – United Home Loans
NMLS# 215735

I’d like to preface things by saying that every market, state, county and city is different. More so than that, different price points come with different types of buyers. So while you might be living in a town with several million dollar home listings, I’d like to focus on the types of homes that the largest share of home buyers are in need of. According to the National Association of Realtors, 34% of buyers are 36 years old and younger and of these individuals, 66% of them are first-time buyers. The next biggest share of homebuyers are ages 37 to 51, making up 28% of buyers.

Historically, persistently weak participation of first-time buyers would suppress home purchase activity. So much so that the government even introduced a first-time homebuyer tax credit from 2008 to 2010 to spur growth and help battle the economic crisis, but the demand was restrained by high unemployment and declining income. However, as the labor market continues to heal and young-adult incomes have begun to recover, participation is no longer an issue. The inventory of “starter homes” is the issue. [A starter home is one that falls at the lower end of the home price distribution and typically less than 2,000 square feet. Prior to the housing bubble, 71% of homes owned by first-time home buyers were less than 2,000 square feet. – Fannie Mae]

So why is inventory an issue?

Many starter homes have shifted from owner occupancy to rentals. In part, this is a product of existing homebuyers losing some equity during the housing collapse and while they are ready to move up to their next home, they aren’t ready to sell until some of that lost equity returns. We’ve also seen the cost of renting go up. With the economic downturn and foreclosure crisis, many people who damaged their credit are not yet able to purchase a home. With heightened rental demand and higher rents collected, there is more of an incentive for move-up buyers to lease out their property in lieu of selling. Fannie Mae reports that between 2005 and 2013 (the most recent year for which data are available) the inventory for owner-occupied starter homes has declined by more than 1 million units, whereas the inventory of renter-occupied starter homes rose by 2 million. In addition, analysis finds that home builders have moved away from building new starter homes, dropping from 40% to 32% over that same time span.

In turn, the tight starter home supply and associated rapid price gains in the lower tiers of the home sales market are reducing first-time homebuyer affordability. This leaves a very specific home at a very specific price point for the largest share of people in the market for purchasing. So what can you do as a first-time homebuyer? Be prepared. Get your pre-approval lined up. Go over your options with your lender. Work with your lender and your realtor to put a home buying plan in place so you are ready to make an offer when the right home that’s the right fit for you comes to market.

Written By: Chris Ulrich – United Home Loans
NMLS# 215735

When it comes to buying a home or refinancing your existing mortgage, there are many loan options and many factors that help determine what’s right for you. Not only should you consider goals as a home owner today, but also look to the future. Where do you see yourself in the next five, ten and fifteen years? How about your job? Are you in a salary position or on a commission structure? Do you have children? Do you see your family growing in the short and long term? Have you started saving for your children’s college education? These are just a few things to consider and talk to your mortgage consultant about.

The most typical loan product is the 30 Year Fixed mortgage. With this product your interest rate is fixed for the full 360 month term. While your mortgage payment doesn’t change, the amount of interest and principal does each month. Since you only pay interest on the loan balance, the interest portion of your payment goes down and the portion of your mortgage payment allocated towards principal goes up. This is called amortization; the cost of the loan spread over the loan term. Since the 30 Year Fixed allows you to repay the loan over 30 years, it will have a lower monthly payment than say a 15 or 20 Year Fixed. This keeps your payment down in comparison, but you will be paying much more interest over the life of loan compared to a shorter term mortgage. Even if you can afford a 15 Year Fixed payment, you need to ask yourself what’s more important, expedite paying down your mortgage while building equity or a higher cash flow with the lower mortgage payment.

Let’s look at the 15 Year Fixed compared to a 30 Year Fixed. Using a $300,000 loan amount and a 4.000% interest rate on a 30 Year Fixed mortgage, the principal and interest payment is $1,432 per month. A 15 Year Fixed rate of 3.5000% – Yes, rates are typically lower on the shorter term product – with the same loan amount of $300,000 equates to principal and interest payment of $2,144 per month. That’s a $712 swing in monthly payment. While that sounds like a substantial difference in payment, the interest paid over the life of the 30 Year Fixed is $215,607 and just $80,036 on the 15 Year Fixed. That is savings of more than $135,000. However, not everyone can afford the 15 Year Fixed, especially when you add in your property taxes and homeowners insurance premium. Even if you can afford it, you may have certain expenses coming up that need to be considered. Do you anticipate a new car payment, a job change, or are of your children going to have a school expense? Maybe you simply want the peace of mind that if something unexpected comes up, you’ll have a more comfortable mortgage payment. Whatever your reasons are, everybody’s life situation is different.

What about the Adjustable Rate Mortgages (ARMs) that received a lot of bad press in recent years? How does it work and is it a risky product? Typically an ARM product has a fixed term and then can adjust at a future date. For example, a 5 Year ARM is fixed for 5 Years and then can adjust at the start of year 6. Just like the 30 Year Fixed, it is amortized over 360 months but the interest rates are usually lower than the 30 Year Fixed. Therefore you pay less interest and have a long term loan to provide an overall lower monthly payment. The interest rate can adjust to a margin plus an index and has a cap of how much it can adjust annually and over the life of the loan. Typical ARM products are 5, 7 and 10 Year ARMs. This is where you ask yourself where you see yourself living in the next 5, 7 or 10 years. Hypothetically, let’s say you and your partner are buying condo in the city and plan to start a family in the next 5 years. You’ve discussed your life goals and decide that you want to save up for long term home in the suburbs. The 7 Year Arm might be a great option for you. Your rate will not adjust over the time frame you own and live in the condo, minimizing your risk of a rate adjustment, and with a lower interest rate than that of a 30 Year Fixed, you will maximize your savings. The ARM products received a bad reputation years ago as many loans began to adjust upward with the “collapse” of the housing market. Due to the deteriorating market, people didn’t have the equity in their homes to refinance out of their ARM. Layered with unconventional, subprime and low documentation loans, many people struggled making their mortgage payments. However, as the housing market continues to normalize, added regulation and a more conservative approach to qualifying individuals, this is still an attractive program for qualified home buyers.

Finally, let’s look at Federal Housing Administration (FHA) and Veteran Affairs (VA) loans. Both are government sponsored and have their quirks. FHA allows for a 3.5% down payment, lower than most conventional 5% down products. They are more forgiving as it pertains to credit scores, debt-to-income ratios and interested party contributions, i.e. seller credits. Many have referred to this as a first time homebuyer program, but because of its leniency on credit scores and debt ratios, it may be the right choice for any homebuyer. The interest rates are also typically lower than that of a conventional loan. The downside is that Private Mortgage Insurance (PMI) is required to be paid for a minimum 11 years for those putting 10% or more down payment and for the life of the loan for those putting less money down. FHA also collects a mortgage insurance premium up-front when acquiring the loan. VA helps current military service members, Veterans, and eligible surviving spouses become homeowners. Since VA guarantees a portion of the loan, it enables the lender to provide favorable terms. Depending on county loan limits, most VA loans will not require a down payment. For example, in Cook County, Illinois, you can purchase a home for $424,100 and finance the entire amount. There is no PMI and the interest rate is typically lower than that of a conventional loan. The only down side of a VA loan is that you may be required to pay a funding fee at closing. This fee is rolled into your loan balance and the amount of the fee is dependent upon your down payment and the number of times you’ve received VA financing.

There are an abundance of loan programs and several ways to structure your mortgage. Since everyone’s credit score, income, down payment and debt-to-income are different, it’s important to speak to a seasoned mortgage professional that will not only walk you through your options but help guide you to what best fits you based on your current and future life goals.

Written By: Chris Ulrich – United Home Loans
NMLS# 215735