- Sales of existing homes reached the highest annual pace in over 9 years at 5.29 million.
- Inventory remains below the 6-month norm and prices are still on the rise.
- Interest rates are at a historic low of 3.48%.
Since the 2008 recession, many changes have occurred in the home buying and mortgage industries, including requirements regarding down payments. All segments of the home mortgage industry have seen significant tightening of lending standards, and, in general, home buyers looking to use a conventional mortgage product can expect to need 10 to 25 percent of the home’s sale price as a down payment. Government loans can still be secured for significantly less money down than conventional loans. However, even down payment and credit history requirements for FHA and VA loans have been altered to the degree that it can impact how much money you can borrow, and at what rate.
Luckily for hopeful buyers, advocates in the home and lending industries, including the Center for Responsible Lending, have sought to even the playing field for credit-worthy buyers who may lack the cash necessary for 20 percent and 10 percent down payments.
Even as federal agencies are seeking to regulate against predatory lending, especially in the sub-prime categories that contributed to the massive economic collapse in 2008, the path to homeownership for most credit-worthy buyers is taking more firm shape.
National data shows that since October 2011, the U.S. housing market has, overall, shown modest and incremental gains. Prices have moved higher, and demand and consumer confidence have grown. With low mortgage rates, more buyers can now afford to own a home.
Few first-time buyers, however, have the cash on hand to make a down payment, and many homeowners who would like to trade their homes will not net the kind of equity to cover the cost of a 20 percent down payment on a new home. That makes the availability of government loans through the FHA and VA programs attractive options for many buyers.
Down payments for conventional mortgages typically require at least 20 percent down. That holds true for jumbo mortgages, too, which are loans that exceed $417,000.
First-time home buyers enjoy lower minimum down payment requirements. Many prospective new homeowners can get a mortgage with a 3.5 to 5 percent down payment. Prior to the real estate crash, more options existed for no-money-down loans, but most of these have become extinct. Still, a 3.5 percent mortgage down payment helps many more people afford homes.
According to FHA.gov:
“Your down payment can be as low as 3.5 percent of the purchase price, and most of your closing costs and fees can be included in the loan. Available on 1-4 unit properties.”
“Many borrowers find there are additional factors that affect the amount of the down payment. For example, those who do not qualify for the most competitive loan terms may not be able to get the lowest required down payment. Credit issues or other factors may affect the lender’s perception of your credit worthiness. That can affect the terms, rates and down payment you’re qualified for from that particular lender.”
The VA loan program is available to military borrowers and is insured by the U.S. Department of Veterans Affairs. This program is for active-duty and honorably discharged service personnel as well as those who have spent at least 6 years in the Reserves or National Guard. Spouses of service members killed in the line of duty are also eligible.
This loan program takes into consideration intermittent occupancy, which allows for deployment issues, and it does not automatically disqualify those who have filed for bankruptcy or had other credit issues. No mortgage insurance is required.
One reason that many who apply for conventional loans try to make the 20 percent down payment threshold is to avoid having to take out private mortgage insurance. PMI insures the lender for the amount of loan-to-value above 80 percent. Buyers putting down less than 20 percent pay a monthly PMI premium, which is added to their mortgage payment.
Unlike single-family homes, for which buyers can find mortgages that will require as little as 3 or 5 percent down, most condominium purchasers can expect to need at least 10 percent down to secure their loan. Because of the more complicated ownership factors associated with a condominium unit, mortgage lenders tend to perceive these properties as a higher risk than detached, single-family houses.
When it comes to obtaining a mortgage at the best interest rate, your credit rating, also known as credit score, may be the single-most important piece of financial information. In fact, your credit rating goes a long way toward determining what interest rate you qualify for from your lender.
Your credit rating is a number that is determined from information in your credit report. Credit ratings range from 300 to 850, depending on the credit scoring agency. The higher the number, the better your credit rating. So, before you start house hunting and getting pre-approved for a home loan, it’s a great idea to first check your credit report and get your credit rating.
What is a credit report? What is a FICO score? Is a credit report the same as a FICO score? No – they are two different things, but they are related.
Your credit report is exactly as it sounds – it’s a report of your credit history. It contains all kinds of personal financial information such as your credit accounts (mortgage, auto, department store, etc.), listing when they were opened, their current balances, credit limit and whether they were paid on time; any outstanding taxes or liens against you; late civil or child support payments; court judgments (parking tickets, etc.) and any city, county, state and federal liens for unpaid taxes and bankruptcies.
Three major reporting bureaus (Equifax, TransUnion, and Experian) who furnish credit reports and they also furnish your credit rating or credit score. This rating or score can also be referred to as your FICO score. FICO stands for Fair Isaac Corporation, a company that was the first to create a credit score in the 1980s. Now simply known as FICO score, it is a number derived from your credit reports and is considered the standard. About 70 to 80 percent of mortgage lenders use the FICO score. Since there are three credit-reporting bureaus, you have three FICO scores.
Here’s what a FICO score is based on:
The FICO scores range from 350 to 850, with an 850 as the Holy Grail of credit scores and 723 serving the median score in the U.S. You can expect good mortgage interest rates starting at the 720 level.
While you may not know your exact FICO score before you request it, you may have an idea where you stand. For instance, you’re probably in good credit standing if you’re receiving a lot of zero- percent credit card offers, or if you are being offered lines of credit for zero or very low interest rates.
Not everyone has to have reached the Holy Grail! Home buyers who pursue an FHA loan, one of the most common loan types for first-time purchasers, can usually secure a loan if their credit is 630 or higher.
If you are applying for a no-income-verification loan, whereby you forgo providing income documents to the lender because your income is not consistent or you are in a crunch for time, the lender will be looking for a minimum FICO score of 680 or higher. Banks don’t like to assume all the risk, so your good credit history is key, although other types of lenders may have more flexibility in determining your mortgage interest rate. In any case, credit reports are critical in these kinds of transactions, as lenders have tightened their standards since 2008.
The Federal Regulation
The Fair Credit Reporting Act (FCRA) requires each of the nationwide consumer reporting companies — Equifax, Experian and TransUnion — to provide you with a free copy of your credit report, at your request, once every 12 months. The Federal Trade Commission (FTC), the nation’s consumer protection agency, has prepared a brochure, Your Access to Free Credit Reports, explaining your rights under the FCRA and how to order a free annual credit report.
If your credit reports or FICO score make you want to hide under the covers, resist! You can take concrete steps to turn things around. Many financial experts suggest the same common sense strategies to turn your credit report around:
If bad credit continues to dog you, the FHA loan programs may be your ideal option. New lending standards instituted by the Federal Housing Administration in 2012 for its loan programs require new borrowers to have a minimum FICO score of 580 to qualify for the FHA’s 3.5 percent down payment program. New borrowers with less than a 580 FICO score will be required to put down at least 10 percent.
Buying a home is exciting, and it’s often the biggest financial transaction many people will ever make in their entire lives. That’s why when it’s time to consider purchasing your own home, the best first step is to take some of the emotion out of the equation. And speaking of equations, when it comes to figuring things out, the best place to start is with the numbers.
It depends on the cost of the home, the type of loan you get and the amount of your down payment. From the moment you write an offer on a house and it is accepted by the seller, you will need something called earnest money. This is the first check a buyer will need to write to accompany the offer to buy a home. Then there’s the cash needed to pay for a home inspection as well as upfront fees for credit reports and an appraisal.
Next comes the down payment, which is the amount of cash required by the lending institution securing your loan. Based on your credit score, debt-to-income ratio and available cash, lenders will advise which loan products, if any, are available and whether a down payment will be necessary. A down payment is separate from earnest money, and depending on the lender, it can be money gifted from parents or other sources.
In some instances, if you qualify as a first-time home buyer, you can receive down payment assistance and closing cost monies from the county you choose to live in. You can also qualify for below market value fixed interest rate loans.
The next consideration when buying is closing costs. These fees are not part of the financed amount of a purchase and can add 3-5 percent on top of the sale price of the home. While there are Veterans Affairs loans and some conventional loan products that offer “100 percent financing,” closing costs are still additional costs that can’t be completely wrapped up in the loan. (Note: Some fees, such as the VA funding fee, may be wrapped up in the loan.)
In some instances, closing costs can be part of the home purchase negotiations. Depending on market conditions, some sellers may consider paying for a buyer’s closing costs out of their proceeds. In fact, buyers can discuss with their real estate agents or whoever is representing them in the transaction whether to ask the sellers to cover the cost of a home warranty, HOA fees or other expenditures.
Yes, there are many reasons why you should not buy a home:
One of the best places to start analyzing whether you can afford to buy a house is with a detailed expense breakdown. Go over your budget by looking at how much you make and spend each month. This will serve as a reality check about what are fixed expenditures and where there’s wiggle room in your budget to accommodate the expenses associated with home ownership.
Lenders use this ratio to see what kind of mortgage payment you can qualify for. It is good to note that what you qualify for may NOT BE the mortgage payment you are comfortable making. Many buyers have grown wisely cautious about making sure they are not locked into payments that cut too close to their bottom line.
For example, if you can comfortably afford your existing $1,600 rent payment (or existing mortgage if you are trading up), chances are you’ll qualify for a mortgage in the same range, or even higher. Lenders will determine how much loan you can afford by using debt-to-income ratios — basically what’s left in your budget after your monthly bills are paid. These include credit card payments, car payments, child support, etc.
Debt-to-income ratio standards differ from lender to lender and vary based on the loan program, but most lenders will give more weight to your credit history when determining your particular situation. Here is typical ratio for a first-time buyer:
|Monthly gross household income||$5,700|
|Mortgage debt ratio: 28 percent||$1,596|
|Expenses and overall debt: 36 percent||$2,052|
The mortgage debt of $1,596 is right in line with the current monthly rent payment in the example above. As long as the monthly debt obligations and household expenses are no higher than $2,000-2,300, this borrower should have no problem qualifying.
If your credit is stellar, you will be rewarded. Lenders may stretch these ratios to 38/45, allowing you to purchase more home and take advantage of more lending programs. And if you are a first-time home buyer applying for an FHA or VA loan, you may also be able to qualify with a higher back-end ratio — up to 41 percent of your monthly gross income — and get approved for these federally-insured loans.
So, back to the question: How much home can I afford?
Keeping in mind the variables on debt-to-income ratios and the many lending programs available, here are sample breakdowns for a mid-range home and a lower price-range home, both purchased with the same loan terms and interest rate.
You can research mortgage interest rates and property tax rates (usually by county) on the Web to find averages for your area, and make the table more accurate for your situation.
|Monthly gross household income (pre-tax)||$7,000|
|Mortgage debt ratio: 28 percent||$1,960|
|20 percent down payment||$70,000|
|Interest rate on 30-year mortgage||3.25%|
|Mortgage payment (principal and interest)||$1,219|
|Monthly gross household income (pre-tax)||$3,600|
|Mortgage debt ratio: 28 percent||$1,008|
|10 percent down payment||$15,000|
|Interest rate on 30-year mortgage||3.25%|
|Mortgage payment (principal and interest)||$588|
In addition to the monthly mortgage payment, remember to factor in the added costs of home purchase and ownership. If you don’t put 20 percent down, you will need to add private mortgage insurance, also known as PMI, to your monthly payment.
You’ll also need to tack on homeowners’ taxes, insurance and condo/homeowner’s association fees (if applicable).
Many buyers invest every cent they have into their new purchase, but it’s a good idea to keep some emergency cash, or “leaky faucet money,” aside in the event of emergency repairs or a job loss. With home ownership, it’s best to expect the unexpected.
You will find that being an informed individual about the home buying process is empowering for you. Lucky for you that you came to the right place. So let’s get started buying your first home!
Click on a topic below to help guide you through your homebuying process, from searching for a home to the final closing.
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Buying a home in order to build equity is one of the main financial reasons prospective buyers jump into the market. At least that was a major factor prior to the financial crisis of 2008, when the U.S. housing market suffered widespread losses. Homeowners and prospective homeowners may now look more closely at the costs and benefits of such a large transaction. [Read more…]
CalHFA Down Payment Assistance
CalHFA does not accept applications directly. A CalHFA approved Lender will qualify you for a home loan, so you will need to apply with one of our Preferred Loan Officers or approved Lenders. Each loan program that CalHFA offers to homebuyers can have different criteria for income limits, minimum credit scores, citizenship etc.
To learn about specific requirements and benefits for each program, review the program descriptions on the Loan Programs tab.
Visit our Mortgage & Eligibility Calculators section to assist you in estimating your monthly payments, how much you can afford, and which CalHFA programs you may be eligible for. [Read more…]
What Is an FHA Loan?
An FHA loan is a mortgage loan that is insured by the Federal Housing Administration (FHA). Essentially, the federal government insures loans for FHA-approved lenders in order to reduce their risk of loss if a borrower defaults on their mortgage payments.
The FHA program was created in response to the rash of foreclosures and defaults that happened in 1930s; to provide mortgage lenders with adequate insurance; and to help stimulate the housing market by making loans accessible and affordable. Nowadays, FHA loans are very popular, especially with first-time home buyers. [Read more…]
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