Coming Up with a Down Payment

By Daniel Duffield

Acceptable Sources for Mortgage Down Payment Funds

One of the most difficult steps toward home ownership as a first time home buyer is securing the funds necessary for a down payment. While many borrowers will save up the funds for years in order to put forth enough money to obtain a home purchase loan, down payment funds can come from various sources. However, borrowers should note that down payment requirements differ between loan programs.

In general, down payment funds can be acquired from the sources listed below. While some borrowers may be familiar with some of these down payment options, many of these options are not commonly known and can make the difference between purchasing a home now or later:

•  Checking or Savings Accounts
• 401k
• Stocks
• Bonds
• IRAs
• Keogh Plans
• Trust Accounts
• Cash Value of Life Insurance Policy
• Gifts (Restrictions apply)

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Down Payment Gift Restrictions

Gifts for down payments can only be accepted from relatives, close friends, employers, labor unions, charitable organizations, or government agencies/enterprises that provide home ownership aid. Essentially, the person or organization that assists in the down payment should not have an interest in the property sale. Therefore, any party that provides a down payment gift cannot stand to profit from the sale of the property.

Down Payment Regulations by Loan Type

Fannie Mae and FHA Down Payment Considerations

For home purchases of primary residences, FHA and Fannie Mae mortgage loans allow borrowers to receive gifts that amount to any and all necessary up-front fees when closing the loan. As a result, borrowers can purchase homes with these loans without any money out of pocket for down payment or closing costs.

FHA Down Payments

The majority of lenders will prohibit the use of saved cash at loan closing, as the source of this cash cannot be determined. However, in addition to any gift funds received from acceptable parties, the FHA permits that borrowers use any cash saved at home, provided that borrowers submit a letter of explanation that gives satisfactory information on how these savings were obtained. Accordingly, this savings amount must correlate to the borrower’s annual salary; for instance, a borrower making $30,000 annually will not be able to use $100,000 of saved funds without sufficient explanation of how more than double the borrower’s annual earnings were saved.

The FHA also permits borrowers to sell personal property in order to gather the necessary funds for closing costs or the down payment. In these cases, borrowers must provide an estimate of the value of the items sold, as well as evidence that said items were purchased by an outside party. It is advisable to speak with your mortgage lender prior to selling any items.

Freddie Mac Down Payment

For Freddie Mac home purchase loans, borrowers can purchase a primary residence using pooled funds as a down payment. Basically, pooled funds refer to funds collected by family members who live together and plan to continue residing together in the new property once purchased. While some additional regulations apply, these pooled funds are generally acceptable.

While this article has provided a fair list of down payment options, many more creative alternatives exist. Ask your mortgage professional what options may be available for your home purchase down payment.

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Reverse Mortgage Program Changes

By Daniel Duffield

Updates to the HECM Reverse Mortgage

 Considering a reverse mortgage? Changes being made to the Home Equity Conversion Mortgage (HECM), the most popular and effective reverse mortgage program, may make these loans less beneficial when considered against other alternatives.

According to Assistant Secretary for Housing Carol Galante, the Federal Housing Administration (FHA) is currently working to improve its financial sustainability after the difficulties faced by the agency following the downturn of the housing market several years ago.

Why Change the Reverse Mortgage Program?

 Galante revealed in a statement before the House Financial Services Committee on Wednesday that the estimated losses for the FHA reverse mortgage program reached $2.8 billion in 2012, necessitating some program adjustments.

As a result of this large deficit, the FHA plans to adjust the current reverse mortgage qualifications by applying some additional restrictions. Among the most significant changes to the program is that borrowers will now be limited in the amount that they will be able to secure up-front in a lump sum when cashing out the equity within their properties. Essentially, this functions as a result of the large fraction of these funds being allocated for annual property taxes and insurance premiums in the future.

These changes come in part as a result of the rising number of reverse mortgage borrowers in default. According to statistics for 2012, approximately one in 10 reverse mortgage loans are delinquent and at risk of foreclosure, largely due to borrowers spending their reverse mortgage funds prematurely and having no income to cover property taxes and homeowner’s insurance.

Approximately two-thirds of reverse mortgage borrowers opt to receive their funds in a lump sum, rather than as a line of credit, creating potential issues down the road when additional funds may be required.

To correct this program oversight, the FHA will adjust their terms such that they will both “protect FHA from losses and reduce the likelihood of borrower defaults due to nonpayment of property taxes and insurance,” Galante stated.

Additional Changes

 Other changes that may be implemented in the immediate future include:

• Incentivizing the inheritors of reverse mortgage estates to sell these properties rather than imparting them directly to the FHA.

• Providing potential borrowers with financial assessments that would determine whether a reverse mortgage would be feasible given their individual circumstances.

Housing Leaders Cautious of Potential Strict Down Payment Requirements

By Daniel Duffield

Leaders in the real estate industry along with congressional lawmakers are cooperating in the attempt to adjust to new mortgage lending rules while avoiding the addition of strict down payment requirements on borrowers hoping to acquire home purchase mortgages.

Many bankers, real estate agents, home builders, and lawmakers received somewhat of a shock with President Obama’s State of the Union address emphasizing the idea that the new mortgage rules would primarily consider during qualification a borrower’s ability to repay the mortgage.

These professionals contend that flexibility is essential for mortgage lenders issuing loans that conform to the new qualified mortgage (QM) regulations, arguing that specific down payment requirements for the currently-being-developed qualified residential mortgage (QRM) would hinder many home purchases and exclude a great number of potential buyers.

According to Jerry Howard, president and CEO of the National Association of Home Builders (NAHB), a borrower’s ability to afford a mortgage should be evaluated by the whole, to which imposing down payment requirements is the “antithesis.”

Howard stated that, considering the tight lending environment within the mortgage market today, the president is sending the appropriate message. Any pending restrictions will inevitably start a “chill on the housing market,” and, “No matter what prevailing wind is seeming to blow at the back of the housing industry, regulators are in a position to key up the housing sector and play a huge role in the traditional spring season.”

Regulators aim to finalize the QRM policy sometime within 2013, though Howard and an increasing number of lawmakers are urging a faster solution that would potentially stabilize the housing market with a higher degree of certainty for real estate financing.

Bob Davis, executive vice president at the American Bankers Association (ABA), stated that the QM and the QRM should conform to identical borrower requirements, and that additional restrictions should not be imposed on the QRM policy.

Davis clarified that he also supports identical requirements for the mortgage rules due to the fact that the QM, which was completed in January, includes a wide range of consumer protections in addition to the added qualifications regarding borrowers’ ability to repay their loans.

For QM regulations, there is currently no rule for minimum down payments. Rather, according to Davis, lenders will assess the down payment amount based on a list of borrower qualification factors. Davis contends that a down payment requirement would harm those who would otherwise qualify but would not have sufficient up-front funds.

The issue involving this potential down payment requirement arose from a 2011 initial draft of the QRM rules that mandated a 20% down payment to be considered a QRM, with borrowers making less substantial down payments being classified as risky.

The authors of this preliminary QRM provision, Sens. Kay Hagan (D-N.C.), Mary Landrieu (D-La.), and Johnny Isakson (R-Ga.), have admitted that this provision represents a misinterpretation of the original intent of the law that could adversely affect the housing market recovery by excluding otherwise-qualified American borrowers.

Federal Reserve Board Governor Daniel Tarullo has expressed that his largest concern lies with the avoidance of restricting credit for borrowers within the middle and lower-middle classes by redundant down payment requirements for bad credit borrowers.

Mark Zandi, chief economist with Moody’s Analytics, also hopes that the QM and the QRM rules would be identical, which he believes would be a step toward “restarting the securitization market and an easing in credit standards.”

Refinance Pros and Cons

By Daniel Duffield

Determining Whether Refinancing Your Mortgage is Worth the Cost

The majority of homeowners obtain refinance loans at some point during the lifetime of their mortgages. These refinance loans can greatly reduce the overall cost of the mortgage in some cases and are frequently used in order to secure lower interest rates. However, home refinancing includes costs as well and may not always be the best option. To determine whether a refinance is right for your circumstances, this article will explore the pros and cons of refinance loans, including the benefits of refinancing as well as the costs and pitfalls.

Home Refinancing Advantages

1.       Lower Interest Rate.

With today’s low mortgage rates, the most significant benefit of home refinancing is currently the ability to obtain a lower interest rate and thereby reduce one’s monthly mortgage payments, as well as the overall cost of the loan. Over the lifetime of a loan, even small differences in rates can translate to thousands of dollars saved or spent. As such, borrowers with mortgages acquired prior to the drop in mortgage rates stand to benefit substantially by refinancing to a lower rate, although determining the profitability of a refinance will vary from case to case.

2.       Adjust Mortgage Term.

Another advantage of refinancing is that it allows borrowers to adjust their loan term to fit their circumstances. For instance, if a borrower obtained a 15-year fixed-rate mortgage (FRM) but cannot afford to keep up with payments, he or she can extend the loan term to a 30-year FRM with a higher rate but reduced monthly payments. Conversely, borrowers who have seen a growth in their income can lessen their loan term from a 30-year FRM to a 15-year FRM with higher monthly payments but at a significantly reduced interest rate with a substantially lower overall loan cost.

3.       Change Repayment Type.

In addition to being able to change the mortgage term, homeowners can refinance their existing mortgages in order to change the repayment plan of the mortgage, switching from an adjustable-rate mortgage (ARM) to a fixed-rate mortgage, or vice versa. While adjustable-rate mortgages typically carry lower mortgage rates, they inherently involve more uncertainty and risk for borrowers, and a refinance can be an effective way to remove this risk to opt for a more stable monthly mortgage payment that won’t potentially increase. By contrast, borrowers who would prefer to assume some risk can switch from an FRM to an ARM for reduced mortgage rates.

Home Refinance Drawbacks

1.       Closing Costs and Fees.

As with standard home loans, refinance loans include closing costs that can detract from the benefits of refinancing. With application fees, loan origination fees, appraisal fees, and other expenses, borrowers may have to wait a while before breaking even with the reduced mortgage rates. Furthermore, borrowers with mortgages that include prepayment penalties must pay the entire sum of the remaining interest on the loan when obtaining a refinance loan, making it considerably less worth the cost.

2.       Less Beneficial in Short Term.

Homeowners considering a move within the near future will benefit significantly less from a home refinance than borrowers hoping to continue living in the home for the full duration of the loan. Essentially, this is because the savings of a home refinance will only be received after the loan “breaks even,” or when the cost of obtaining the refinance loan is exceeded by the benefits of the lowered interest rates and reduced mortgage payments. As such, refinancing is not advisable for borrowers who intend to move sometime soon thereafter.

3.       Difficult to Qualify.

As a result of the turbulence of both the real estate and mortgage markets at the turn of the last decade and the ongoing housing recovery, lenders have become much stricter about refinance qualifications and approval. With the exception of the FHA Streamline Refinance, refinance applications typically involve a large amount of documentation and verification, comparable to a home purchase mortgage application. Moreover, borrowers who have seen a credit score decline may end up being offered a higher mortgage rate, defeating the purpose of the refinance. Not only that, but some homeowners may find themselves unable to refinance if their property value has declined, in which case a HARP refinance may be the only answer.

The Return of 100% Financing? Not Exactly

By Daniel Duffield

Numerous wealthier home buyers have been able to successfully purchase homes with no down payment, a phenomenon not seen since the collapse of the subprime mortgage market and the economic downturn.
Essentially, these mortgages finance 100% of the purchase price, a strategy that led to a wave of foreclosures during the housing market bust. However, this time around banks claim that these loans are much safer, due to solely being offered to borrowers with notable assets and often requiring two separate forms of collateral, including the house and a part of the borrower’s investment portfolio.

In the majority of instances, borrowers only need to put forth one monthly mortgage payment. Depending on the unique lender requirements, borrowers may be allowed to fund 60% to 80% of the mortgage through equity collateral with the remaining 20% to 40% funded from investment collateral. For example, a borrower making a home purchase can obtain a $2 million mortgage with the pledge of collateral to replace what could be a down payment of approximately $500,000. These investments used as collateral can continue to function as well, earning returns and remaining undisturbed from standard operation.

While these loans only comprise a fraction of each bank’s lending transactions, the demand for these programs has risen considerably, up to 10% for some lenders.

Benefits of 100% Financing for Investors

• Earnings and Interest Remain Intact

As a result, affluent borrowers can obtain mortgage loans without having to remove cash or equity from investments that would otherwise continue to gather interest. This especially benefits borrowers with investments that might pay off more than the rate of their mortgage, with which the interest rates can be as low as 2.5%. However, some lenders will only offer adjustable-rate mortgages for these loan programs, making the loan much more risky with the possibility of higher interest and monthly mortgage payments. Furthermore, these loans generally will only be offered by the lending institution that holds the investment account.

• Tax Benefits

These unique loans with 100% financing additionally benefit borrowers with certain tax benefits. Since borrowers can obtain loan financing without having to liquidate their investment assets, they do not fall under the burden of the capital-gains tax. Furthermore, borrowers can sometimes utilize these loans to take advantage of mortgage-interest deduction, by deducting their interest payments on mortgage debts up to $1 million.

Considerations before Application

•  Portfolio restrictions – The amount that borrowers can obtain against the collateral of their investments is contingent on the contents of the portfolio, with borrowers typically having access to 95% if cash, 80% if bonds, and 50% to 75% for stocks. Note that withdrawing funds pledged as collateral is prohibited under most circumstances while the mortgage debt is still outstanding.

• Relationship pricing – To secure the lowest mortgage rates, borrowers with substantial assets at a particular bank should apply with that lender for 100% mortgage financing.

• Underwriting requirements – In order to qualify for one of these specialized mortgages, borrowers must still satisfy standard underwriting requirements, including credit, DTI, and income criteria, which varies from lender to lender.