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The Federal Housing Administration (FHA) recently altered its guidelines as a result of the Economic and Housing Recovery Act of 2008. One significant change was the elimination of the seller-funded down payment assistance program. Often used by builders through non-profit organizations such as Nehemiah and Ameridream, this program enabled the seller of a property (either an individual or a builder) to “donate” an amount equal to the funds needed by a buyer for a down payment on a home when securing FHA financing.

As of Oct. 1 of this year, the FHA will no longer allow seller assisted down payments. Not only that, but the FHA actually increased the down payment requirement from 3 percent to 3.5 percent—a setback for those who want an FHA loan and are already having problems saving enough money to close on a home.

 

Fortunately, there is another financing option that can bring these folks a little closer to home: family loans. This feature is unique to  FHA. And while it‘s not permissible for buyers to borrow the down payment from individuals when securing any other type of mortgage, FHA’s guidelines allow buyers to borrow from family members. But to obtain a family loan, borrowers must keep some specific requirements in mind: 

  • The family member making the loan can be a parent, grandparent, son, daughter, stepson or stepdaughter, or a legally adopted child or foster child.
  • The term of the loan cannot be less than five years.
  • The FHA loan and family loan combined cannot be greater than 100 percent of the value of the home.
  • The scheduled loan payments, if any,must be factored into the buyer’s debt ratios.
  • Funds cannot be directly or indirectly associated with the seller, or anyone in the transaction who has a financial interest in the sale.

Now let’s combine the family loan with another advantage afforded by the Housing and Recovery Act of 2008: the $7,500 tax credit. If Grandpa is a likely candidate to supply a family loan, then he might want to know how he would get paid back. If the buyers are first timers and qualify for the tax credit, then Grandpa could get repaid come tax time.

Remember that lenders will want to verify the source of all funds to close the transaction, so be prepared to provide a copy of the loan agreement that spells out the terms and verifies that Grandpa has sufficient funds available to make the loan.

Sometimes when a window closes, another one opens, So while the recent Housing Recovery Act of 2008 has put the squeeze on the seller-funded down payment assistance program, a family loan can provide another avenue to closing on a home.

The Housing and Economic Recovery Act of 2008, the most sweeping housing legislation since the Depression era, was passed by the U.S. Senate and House of Representatives at the end of last month and was signed into law by President Bush. The new law addresses various aspects of the housing downturn, including assistance for homeowners who are behind on their mortgages, federal oversight of Fannie Mae and Freddie Mac, and funding for cities to buy and fix up foreclosed properties. Many of the provisions of the new law go into effect October 1, 2008 but for first-time home buyers who bought, or will buy, their home between April 9th of this year and July 1, 2009, there's an immediate bonus a tax credit of up to 10 percent of the sales price, up to $7,500. Note that this is a tax credit, not a tax deduction. A deduction is an item that is subtracted from your annual income before income taxes are calculated. A tax credit is subtracted from the amount of taxes you owe.

First-time home buyer is specifically defined in the new law, and includes those who may have owned a home in the past, but not within the last three years. To qualify, be prepared to show your last three years? worth of income tax returns to prove that you did not pay mortgage interest during that period. There are also income limitations on the tax credit - $75,000 per year if you're single and $150,000 if filing a joint return to qualify for the full credit, but the credit does phase out beyond those amounts up to $95,000 for singles and $170,000 for joint filers.

By the way, the tax credit isn't a gift - you have to pay it back. Nevertheless, it provides an initial reprieve, as repayment doesn't begin until two years after purchase, and is payable over a 15 year period. If you sell the property before the tax credit has been fully repaid, any remaining amounts owed are due to the IRS upon closing.

Applying for the tax credit isn't mandatory, but for many, it will make home ownership feasible in the coming year and that's exactly what the tax credit is intended to accomplish.

Getting a gift in the form of cold, hard cash to buy real estate is a wonderful thing. Gift funds are a common way parents help their kids buy a home, but there are certain requirements to follow to ensure the gift transfer goes smoothly.

What exactly is a cash gift? Technically, it is a transfer of funds from one party to another without any expectation of being paid back. This non-repayment factor is a key element because lenders can’t accurately calculate debt ratios if the gift is in fact a loan. How do lenders determine this? The “givers” are required to sign an affidavit stating that the funds being given are a gift with no repayment expectations.

Who can give a gift? Gifts can come from family members (parents, siblings or grandparents), non-profit agencies, local or state agencies, churches, domestic partners and trade unions. 

The party that furnishes the gift must show an “ability to give”, which means they have the money available in an account they own. This is documented by providing account statements showing the funds are available. Finally, it must also be documented that the gift funds were transferred from one party to the next and the lucky recipients (and future home buyers) must provide a bank statement showing the gift was received.

While the need for documentation might sound heavy-handed, the truth is lenders need to take every precaution to make sure that the “gift” isn’t a “loan.” So if you know what the lender expects ahead of time, the gift transfer can be seamless. Just remember, financial gifts over a certain limit may have income tax implications, so be sure and consult with an accountant or tax specialist before getting the mortgage process underway.

One final note to consider. Conventional loans differ from FHA programs in their requirements for reporting gifts to be used toward the purchase of a home. Buyers using conventional financing need to prove that they have at least 5 percent of their own funds in the purchase transaction. However, that requirement is waived if the gift represents more than 20 percent of the purchase price. The FHA loan, on the other hand, merely requires the buyers have at least $500 of their own money at closing, regardless of the amount of the gift.

Five Year Increments by David Reed

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Which is better, a 30-year or a 15-year fixed rate mortgage?  A common and important question which, when answered, affects both the monthly payment and the amount of interest paid on a mortgage loan. While paying less interest over a shorter timeframe seems to be the obvious answer, the difference in monthly payment is surprising to some.

For instance, on a $300,000 note at 6.25 percent over 30 years, the principal and interest payment is $1,847 per month. Whereas on that same loan amount over 15 years at 6 percent, the payment jumps to $2,531! It’s easy to understand why most choose a 30-year loan over a 15-year loan; not only is the payment lower but it takes less income to qualify.

On the other hand, more money goes to interest on a 30-year loan compared to a 15-year loan. Using those same figures, the 30-year note yields $364,920 of interest, most of it in the first 10 years of the loan, while the 15-year loan only requires $155,580. That's less than half the interest that a 30-year loan produces!

So, which is better? Maybe neither.

While few lenders advertise this, there’s a compromise available to you. Loan payment periods can actually be acquired in five year increments. You don’t have to choose between a 30 and a 15-year loan! You can select a 10, 15, 20, 25 or 30 year mortgage. Some lenders even offer 40-year loans. Now it’s possible to both keep monthly payments manageable and save on interest charges.

Here are the payments for these additional amortization periods on $300,000:
Term(yr) Rate  Payment
10 6.00% $3,330
20  6.25% $2,132
25 6.25% $1,979

                                            

Since these five year increments aren’t advertised you’ll typically have to ask your loan officer for a quote. Don’t be shy, you’ll find out that you just might be able to have the best of both worlds: lower payments with reduced interest charges!

Numerous closing costs come with any mortgage. There's a fee for an appraisal and a fee for a credit report... and the lender has its fees, too. And don't forget about the attorney fee, title insurance and escrow charges. Closing costs can vary from state to state and province to province, but you really don't have much choice of whether you want a survey or if title insurance is right for you. There will be a variety of services performed and records searched by different companies, and none of these come free of charge.

But there is one closing cost that you can control: discount points or, more simply, points.

A discount point reduces the interest rate on your mortgage. One point is equal to 1 percent of your loan amount, so on a $200,000 loan one point equals $2,000.

Why do some lenders charge points? In reality, all lenders pretty much have the same rates; it's just that sometimes a lender will advertise a rate with a point or a rate without a point. But the decision to pay a point is yours alone.

A point will typically reduce your interest rate by a quarter of a percent on a 30-year mortgage. If your lender offers a 6.5 percent rate with no points, then you may also get 6.25 percent with one point. So how do you decide?

It's simple. Just take the difference in monthly savings gained with the lower rate and divide that into the point. The result equals how many months it will take to "recover" the amount

you paid in points. Let's look at an example.

A 30-year fixed-rate mortgage of $200,000 at a 6.5 percent interest rate would mean a monthly principal and interest payment of $1,264.14. By paying an additional $2,000 in the

form of a point, your rate would drop to 6.25 percent and the resulting payment would drop to $1,231.43; saving you $32.71 each month. When you divide that $32.71 monthly savings into $2,000 you get 61.14, or about 61 months. Your recovery

period is slightly over five years. That's a little long in my opinion and I've never been a big fan of paying points. Instead, I'd encourage you to take that same amount and pay down your principal.

Remember: The quarter percent difference in interest rates when paying a point is an imprecise, general mortgage rule of thumb. Whichever rate you get, be sure to divide the savings into the points paid to see how long it will take to recoup the difference.

“What do you think about rates … should I lock in now or wait to see if they fall further?” Think I’ve been asked that a time or two over the past 18 years? You better believe it.  It’s a good question—one that goes through every single buyer’s head at some stage. 

A quoted interest rate is no good unless you’ve confirmed, in writing, that your loan is indeed “locked,” or guaranteed for a designated period of time. You need to be proactive with your locked rate as well and don’t assume that your loan officer already locked you in. In fact, your loan officer shouldn’t lock in your rate without your specific instructions. If it was locked in and rates went down you’d be pretty mad, wouldn’t you?

While neither real estate agents nor loan officers are in the business of predicting the future, it’s still possible to make a prudent choice in the face of uncertainty. Would you rather lock in your rate and watch rates fall or not lock in your rate and see rates go up?

If you decided to lock and rates go down, you’ve secured the market rate that you were happy with. But if rates went up and you didn’t lock, you’d be paying for that mistake for the rest of the loan.

There is an even worse possible scenario: After not locking in your rate, rates shoot up and you no longer qualify for the loan. So it’s important to ask yourself:  “Which way would I rather be wrong?”

If you are comfortable with the rate you’ve been quoted, talk to your real estate agent about the possible consequences of waiting to lock it in.

Written by David Reed, author of Mortgage 101 and Mortgage Confidential.

Taming the Jumbo Mortgage

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Everyone knows the jumbo loan market has been out of whack for nearly 18 months. “jumbo” loans, those amounting to more than $417,000, took it on the chin when mortgage investors stopped buying subprime and alternative loans. For that reason, jumbo rates can be as much as 1.50 percent higher than conforming rates. Historically, jumbo rates were only about a quarter of a percent higher than a conforming rate, but this new spread has kept many out of the housing market: especially those that I call, “just jumbo.”

So what exactly is “just jumbo?” It’s a loan amount that just exceeds the conforming limit of $417,000 and typically reflects a sales price in the $500,000­­–$600,000 range. Many local markets offer homes in this price category, but the marked difference in rate from conforming to jumbo is slowing down sales. What is the difference in payment between a conforming loan at 6 percent and a jumbo loan at 7.50 percent? On a $500,000 jumbo loan, mortgage payments jump from $2,997 to $3,496 a month. That’s almost $500 more!

Fortunately, with some changes in strategy, we can put a major dent in that increase in payment by buying a property with two loans — a first mortgage and a second. With the first mortgage at or below the conforming limit, the second mortgage then eliminates the need for private mortgage insurance, or PMI. And still, with only 10 percent down on a $500,000 sale.

For example, let’s say we have a sales price of $500,000 and you put 10 percent down. With a jumbo loan at 7.50 percent, the monthly payment on a 30-year note is $3,146 plus a PMI payment of about $188, for a total of $3,334. Using a 40 percent debt ratio means that you need to make about $9,700 per month to qualify.

Now, let’s make the first mortgage for $400,000 at 6 percent (conforming) with a second mortgage at 7 percent on a $50,000, 30-year note. The mortgage payments would be $2,398 and $332 respectively, for a combined total of $2,730. That’s a savings of over $600 per month, and now the income to qualify is almost $1,500 less at $8,200 per month! Do you think that has an impact on affordabilty? I do.

Here's another idea: sellers can carry back that second note to provide some additional income, providing an even better second rate for the buyer!

Written by David Reed, author of Mortgage 101 and Mortgage Confidential.

Displaying blog entries 1-7 of 7