Conventional and FHA loans — Part 2

The series began by looking at credit scores and their impact on rates and loan programs. In part two of the Conventional versus FHA loan series, we will take a closer look at down payments and Private Mortgage Insurance (PMI).

Traditionally, a 20% down payment is the preferred amount for mortgage financing, and it puts the borrower in a position to secure the best rate possible. There are options available for borrowers with less than 20% down, and those options will involve Private Mortgage Insurance, known as PMI. While both Conventional and FHA loans use PMI (although on an FHA loan it is called MIP = Mortgage Insurance Premium), there are some differences. Let’s start with conventional loans.

Private Mortgage Insurance (PMI) allows a borrower to make a smaller down payment, but, in turn, will be required to make a monthly PMI payment with their mortgage payment. Loans programs with PMI require little or no down payment from the borrower. However, because most people prefer to not pay a monthly PMI premium lenders have come up with ways to side-step paying it in the traditional way.

– Upfront PMI: This is a one time upfront fee based on the amount of the down payment and the purchase price of the home. There is no monthly PMI premium and the upfront fee is paid for by the borrower.

– Lender Paid MI loans: A borrower agrees to a higher interest rate with a lender to buy their home. With the higher rate, the lender makes an upfront PMI payment for the borrower. The borrower will never make a monthly PMI payment. Even with the higher rate, the total monthly payment is typically lower using the lender paid MI loan program instead of getting a lower rate with a monthly PMI payment.

– Combo loan: This was the most popular way to avoid PMI. A borrower would take a second loan for 20% of the purchase price and use that money as the 20% down payment toward the first mortgage. Sadly, due to the current mortgage meltdown, combo loans have virtually disappeared.

FHA loans also require mortgage insurance, known as MIP. The basic principles of MIP are similar with FHA loans, but there are a few major distinctions:

– There is no way to get around MIP with an FHA loan (no lender paid MI programs or combo loans).

– There is an upfront MIP fee of 1.5% of the loan amount (in addition to the regular monthly MIP payment) to be paid by the borrower. For a $250,000 home, the upfront PMI fee is $3,750.

– The monthly premium is typically less with an FHA loan than a conventional loan.

– MIP is based on the purchase price of the home and not the appraisal value of the home. This difference is an entire post in itself and will be part 3 of the series.

Deciding between Conventional and FHA loans using down payment amounts alone isn’t too bad. Generally speaking, a 20% down payment would mean a better rate using a Conventional loan. If you need 100% financing, well, for now, there is no choice in the state of Georgia since 100% financing is currently unavailable with Conventional loans.

When deciding between Conventional and FHA loans with both credit scores (see part one), down payment amounts, and mortgage insurance, the waters get a bit murky. I began this series saying “I recommend speaking with a mortgage consultant to consider the pros and cons of each to ensure you get the right fit for your particular situation,” and here’s why – there is no clear answer.

For instance, what if you have a 680+ credit score with a 5% down payment? A Conventional loan rate would probably beat an FHA rate. But what if the down payment changed to 3%? Is a Conventional loan rate still better? The same? How about a 650 credit score with a 20% down payment? Having a mortgage professional review your situation is a huge asset to advise you through this crazy, mixed up mortgage world we live in today.

Part three of the series will go in-depth into the differences between PMI based on the purchase price versus the appraisal value of the home.

Clay Jeffreys is a Mortgage Consultant with Hillside Lending, LLC and writer for “Blog Pertaining to the Acquisition of a Mortgage to Purchase a Domicile.” Hillside Lending seeks to provide mortgage brokerage services with the highest standards of service, care, honesty, integrity and value; concentrating on owner-occupied, residential financing. For more information about available programs and interest rates, please visit www.hillsidelending.com.

Surprise, it’s back

Yes, inflation was back in the news today with the release of some key indicators the Feds use to monitor inflation. While all of these economic reports show inflation is rising, the figures were not as bad as predicted.

Inflation rose 0.3% mainly due to the increase in cost of energy (gas) and food. The year-over-year inflation figures also rose to 2.4%. While the Feds preferred target number is 2.0%, this number isn’t too bad when you consider the number of Federal rate cuts since the summer of 2007. With these tamer than expected inflation figures, the Fed may interpret that as a green light to cut rates again at the end of the month.

However, even with today’s tame inflation figures, the bond market plummeted causing mortgage rates to increase by an .125% to .25% by the end of the day. Is this a taste of things to come? I hope not!

Previous posts describe the affects of a Federal rate cut on mortgage rates - a rise in inflation. I have also blogged about how long it takes for the affects of a rate cut to really impact the market - roughly 6 to 9 months. To date, the Federal Reserve has lowered the Fed funding rate by 3%. When you consider that only a third of the rate cuts (meaning 1% of the total 3%) took place in the 6 to 9 month ago time frame, inflation figures will likely get worse before they get better. We will know for sure this summer.

Clay Jeffreys is a Mortgage Consultant with Hillside Lending, LLC and writer for “Blog Pertaining to the Acquisition of a Mortgage to Purchase a Domicile.” Hillside Lending seeks to provide mortgage brokerage services with the highest standards of service, care, honesty, integrity and value; concentrating on owner-occupied, residential financing. For more information about available programs and interest rates, please visit www.hillsidelending.com.

A Fear Driven Society

Was Roosevelt right when he said “all we have to fear is fear itself?” You know, he just might have been. We have been conditioned to be afraid of almost anything. While there are many factors that contribute to this, the news media plays an important role in the process.

I graduated from college with a degree in broadcast/print journalism. After internships, speaking with members of the print and broadcast media, and looking for trends in the media, you notice a pattern. Fear sells. Fear gets people’s attention. Fear increases ratings!

The lead stories on the nightly news usually play on fear - crime, flu, bad weather, fire, war - and the negative aspects of our society. What about all of the good things that go on in our world - charitable donations, volunteer work, being a responsible citizen? Those stories just don’t sell as well and are mostly ignored.

Want some real world examples? There are plenty to choose from: “bird flu” never quite becoming the global catastrophe it was made out to be, SARS never made a comeback, and what about those “killer bees” taking over the entire United States?

My personal favorite is definitely the Summer of the Shark from 2001. It was wall-to-wall news coverage of shark attacks (even making the cover of Time magazine) yet there were actually fewer shark attacks in 2001 than in 2000. I saw one graph stating Miami was a “danger” zone because it had up to 30 attacks. If you didn’t look close enough, you would have missed the part saying attack figures were totaled from the 1882 to 2000. Yes, 30 attacks in 118 years.

I write all of that to simply say be careful what you believe when it comes to changes in the mortgage world. Yes, there have been changes in lender guidelines. Yes, the housing market is down. Yes, the economy may be in a recession. There is truth in all of those statements.

But remember one thing, fear sells. People will shout “the sky is falling” from rooftops in order to get on TV or have their story printed in a magazine. Just because you read it on the internet or hear it on TV does not make it entirely true. Call someone in the industry and ask questions about the changes taking place. Often the reality of a situation isn’t as bad as it sounded on TV. We can’t fear everything all the time, can we?

Clay Jeffreys is a Mortgage Consultant with Hillside Lending, LLC and writer for “Blog Pertaining to the Acquisition of a Mortgage to Purchase a Domicile.” Hillside Lending seeks to provide mortgage brokerage services with the highest standards of service, care, honesty, integrity and value; concentrating on owner-occupied, residential financing. For more information about available programs and interest rates, please visit www.hillsidelending.com.

Confusion now hath made its masterpiece!

The above quote from Shakespeare accurately describes the current state of the lending world as the non-stop changes in this credit sensitive market continue to make qualifying for a mortgage more confusing than ever. Lenders have been steadily increasing their credit standards and now private mortgage insurance companies are tightening their qualifications. This tightening has changed loan programs across the board (across the country). Here are some of the recent changes.

– Most people know by now that 100% financing succumbed to the current state of the lending world at the end of March effectively making 97% financing the “new 100% financing.” Now, PMI companies are making it more difficult for borrowers to qualify to buy a home with only a 3% down payment.

– A+ credit isn’t what is used to be! Once upon a time, borrowers with a 680+ credit score received the same rate as a borrower with an 800 score. That is definitely not the case today. There are now a few new categories for rate adjustments: 680-699, 700-719, and some lenders even have 720-739!

– Lenders are making it increasingly difficult to qualify for investment properties. Clients looking to buy an investment property should expect at best a 10% down payment and now need to have an above average credit score. **UPDTATE as of June 2008 — minimum down payment amount for purchasing a condo as an investment property is 20%**

Don’t worry. If you are confused, you are not alone!

So what is the best way to prepare yourself if you plan to move into this mortgage madness?? Back to the basics . . .

– talk to a professional (like me) and get pre-qualified before you begin looking at homes

– make a quick phone call to double-check available rates, monthly payments and loan qualifications the day you make an offer on house.

– remember that before a bank or other lending institution will loan you hundreds of thousands of dollars, you should be prepared to invest a little in the process (a down payment of at least 3%), be able to prove you can meet your credit obligations (a good credit score), be able to prove you can afford the monthly payments (capacity and document-able income) and know that all the rules change if the collateral isn’t worth what the sales contract hopes it’s worth (meaning the appraisal does not support the purchase price).

Clay Jeffreys is a Mortgage Consultant with Hillside Lending, LLC and writer for “Blog Pertaining to the Acquisition of a Mortgage to Purchase a Domicile.” Hillside Lending seeks to provide mortgage brokerage services with the highest standards of service, care, honesty, integrity and value; concentrating on owner-occupied, residential financing. For more information about available programs and interest rates, please visit www.hillsidelending.com.

Conventional and FHA loans — Part 1

Today is the first post in a series comparing the pros and cons of Conventional loans (otherwise known as Prime loans) to FHA loans. Both options are great programs, and to determine which option is best will involve looking at a complete picture of the borrower including income, assets, credit scores, etc. I recommend speaking with a mortgage consultant to consider the pros and cons of each to ensure you get the right fit for your particular situation.

The series will focus on these major factors including private mortgage insurance, down payment amounts, credit scores, down payment assistance programs, upfront fees, etc. While no one should be the single determining factor, this series will focus on one at the time in order to go in-depth into the pros and cons of each. Let’s begin the series by looking at credit scores.

A borrower’s credit score has always played an important role in qualifying borrowers for loans as well as determining their rate. Before 2007, any credit score above 680 would typically receive the same rate on a conventional loan. Some lenders cutoff point was 700, but the point is there was a larger range of scores that did not require a rate adjustment.

For borrowers with lower credit scores, adjustments were made to the rate for conventional loans, FHA loans were out there and offered fewer restrictions on credit scores, and there was a large and profitable subprime market that was flourishing.

The credit crunch and bursting of the housing bubble in 2007 changed all of this. On conventional loans, credit scores as high as 719 now require rate adjustments. This doesn’t even include the fact that it is really hard to get a loan with a credit score below 620. As before, FHA loans are more flexible with credit scores.

Here are some general points to consider when looking solely at a credit score to determine whether to use a Conventional or FHA loan.

– Credit scores of 700+ will qualify for a lower rate using a conventional loan.

– Credit scores ranging from 680-699 would typically qualify for a lower rate by using a conventional loan.

– Credit scores in the 640-679 range could go either way.

– Credit scores in the 620-639 range would typically qualify for a lower rate by using a FHA loan.

– Credit scores below 620 should definitely go FHA because of the difficulty being approved for a conventional loan with a credit score below 620. Even if a borrower qualifies for a conventional loan with a score below 620, the rate is significantly higher than going with an FHA program.

In the next post of the series, we will take a closer look at down payment amounts for both FHA and Conventional loans, how that affects rates, and looking at both credit scores and down payments when considering between the two programs.

Clay Jeffreys is a Mortgage Consultant with Hillside Lending, LLC and writer for “Blog Pertaining to the Acquisition of a Mortgage to Purchase a Domicile.” Hillside Lending seeks to provide mortgage brokerage services with the highest standards of service, care, honesty, integrity and value; concentrating on owner-occupied, residential financing. For more information about available programs and interest rates, please visit www.hillsidelending.com.

Didn’t see that coming!

There are times when you just know something is going to happen. An example, how about Hillary Clinton being a legitimate candidate for the Democratic nomination? We all knew she wanted to run for president and would have a lot of support toward winning the nomination.

What did we not see coming? Who knew that not only would Barack Obama be a serious challenger to Clinton, but that he would be ahead in delegates at this point in the race!

The same can be said for events in the lending world. Two years ago, 100% financing was very common and all lenders were using these loan programs. The most popular program was a combo loan allowing borrowers to avoid private mortgage insurance (PMI). If a borrower couldn’t qualify for a combo loan, they most likely could still qualify for 100% financing with PMI.

Lenders dropped combo loans in 2007, and now 100% financing with PMI is gone for the state of Georgia. I originally blogged about this being a possibility in early March when the largest PMI company, United Guaranty, announced it would no longer support 100% financing for Georgia. Through the month of March, other PMI companies followed suit. Now, the new maximum loan amount for Georgia is 97% of the purchase price (95% with some lenders).

Even more surprising is rate adjustments for a borrower’s credit score. We all know a lower the credit score means a higher interest rate. Why? A lower credit score indicates a higher risk loan for the lender. Higher risk = higher rate. Typically, the cut off for the adjustment was 680, meaning, that any score above 680 received the same rate.

I mentioned this potential change back in January, and it is becoming more common on lender’s rate sheets. Instead of 680 or even 700, the new cut off point is 720. Even as high as 740 with one lender I use from time to time!

With all the uncertainty in the economy, credit crunch, and lenders being bailed out of trouble by the government, things are not likely to change back any time soon. At some point, 100% financing with PMI will return. We will also likely see credit score adjustments drop back down to 700, but don’t expect any of it to occur until housing and lending markets get out of their current slumps.

Clay Jeffreys is a Mortgage Consultant with Hillside Lending, LLC and writer for “Blog Pertaining to the Acquisition of a Mortgage to Purchase a Domicile.” Hillside Lending seeks to provide mortgage brokerage services with the highest standards of service, care, honesty, integrity and value; concentrating on owner-occupied, residential financing. For more information about available programs and interest rates, please visit www.hillsidelending.com.

Bernanke strikes again

The Federal Reserve reduced the federal funding rate by 0.75% this afternoon. The last few rate cuts initially caused bonds and stocks to both post solid gains on the day of the cut. That trend stopped today. The Dow shot up 420 points — it’s fourth biggest gain in its history. Sadly for bonds, their value dropped almost 100 points causing interest rates to increase about 0.25% on the day.

Why the change in the trend? Eventually rate cuts produce inflation. Even with the tame inflation numbers from this month, inflation is becomming a much bigger story and may wind up dominating the mortgage backed security bond market in the coming months.

Rates could even get worse over the next coming days. Take a look at the chart below of the bond market the last time the fed rate was cut — Jan 30, 2008.

The bond market continued to plummet for weeks after the cut before finally fighting back. This pushed mortgage rates up 0.75% of a point during the first few weeks of February.

What does this all mean for rates now? Well, if history is any indication, rates are more likely to get worse before they get better. Anyone waiting for a good day to lock in a rate for a purchase or a refinance — today is your day!

Clay Jeffreys is a Mortgage Consultant with Hillside Lending, LLC and writer for “Blog Pertaining to the Acquisition of a Mortgage to Purchase a Domicile.” Hillside Lending seeks to provide mortgage brokerage services with the highest standards of service, care, honesty, integrity and value; concentrating on owner-occupied, residential financing. For more information about available programs and interest rates, please visit www.hillsidelending.com.

Can I still get 100% financing?

“Tear up page one and run this headline”

“100% Financing is Disappearing – Fact or Fiction?”

I recently blogged about a potential change involving 100% financing. As we all know from last year, using 1^st and 2^nd mortgages for 100% financing has all but disappeared. We could be seeing the end (at least temporarily) of 100% financing for loan programs using mortgage insurance.

Why? Some mortgage insurance companies updated their guidelines for Georgia, and will now only insure mortgages up to 95% loan to value (LTV) – effectively eliminating 100% financing. Lenders will respond tot his decision by discontinuing their 100% financing programs.

In fact, last week some investors have already “unofficially” declared Georgia as a declining value market and have reduced loan guideline LTV’s by 5%. This effectively makes 100% financing, 95% financing. This change has not taken hold with all lenders, but be aware that this is a real possibility.

Given a situation like the one mentioned in this post, this is another advantage to being a broker with access to multiple loan programs and funding sources. Even though one of the lenders we use discontinued their 100% financing loans, we work with several other lenders who still offer 100% financing.

And on that note, anyone currently looking to buy a home using 100% financing does not need to delay as this loan program could be entirely gone sometime in the near future.

More to come as this story develops…

Clay Jeffreys is a Mortgage Consultant with Hillside Lending, LLC and writer for “Blog Pertaining to the Acquisition of a Mortgage to Purchase a Domicile.” Hillside Lending seeks to provide mortgage brokerage services with the highest standards of service, care, honesty, integrity and value; concentrating on owner-occupied, residential financing. For more information about available programs and interest rates, please visit www.hillsidelending.com.

The changes of Spring are coming

Even though parts of the country are still being battered by winter storms, the spring season is approaching. Spring time brings a lot of changes… flowers bloom, animals come out of hibernation, rates change, and lender guidelines are modified. (well, OK, so the last two change on a regular basis, but I needed a theme for the post … Let’s take a quick look at rates and guidelines.

Believe it or not, the current trend at the end of last week had mortgage rates going down. How long?… How low? Honestly, I have no idea. No one knows exactly what is going to happen, but we can look at the current trends to get an idea of what is likely to occur.

Rates have been nothing but volatile since the last Fed rate cuts from the end of January. Today has been no different as the market has dropped over 30 points and rebounded to be only down 10 points, and by the time I write this post, the market is down 25 points. ALL OF THIS is taking place in the first two hours of trading today (Monday).

Aside from mortgage rates continuing to be volatile, there are a few things to know about changes in lender guidelines along with a couple of other points.

1 — Jumbo loan limits are soon to increase. The economic stimulus package has been passed and will now go to HUD for review and to determine the exact loan amount. The new loan amounts should go in to affect on July 1, 2008. This will likely raise the conforming loan limit to somewhere around $650,000.

2 — 100% financing guidelines continue to become stricter (and may temporarily disappear entirely). Some investors have already “unofficially” declared Georgia as a declining value market and have reduced their max Loan-to-Value by 5%, effectively making 100% financing, 95% financing. If you are working with a client OR personally looking for 100% financing (no matter what their credit score) — if you are under contract, you should lock-in and protect your rate (and loan program) immediately. First it was the 80/20 disappearing; now it is 100% MI. More on this as things develop.

3 — Anyone in an ARM should consider refinancing into a fixed rate mortgage. With rates still near historic lows, this is a great time to get into a fixed rate loan. As inflation continues to become a bigger story in 2008, mortgage rates become more likely to rise.

4 — Speaking of inflation, all of the economic indicators have inflation above the Fed’s target range of 2%. These figures will most likely only get worse as the impact of the Fed rate cuts take hold. Most economists feel it takes about 6 months to see the impact of rate cuts. Currently, we are seeing the results of the first rate cut from the summer of 2007. What is going to happen once the big January cuts have an affect? (see my previous posts here and here for more details)

5 — Which way are rates going? The shorter answer — it appears the new trading range of mortgage rates is going to be 5.5% to 6.5%. Anything in the 5’s would be worth locking-in for anyone looking to refinance OR any buyer under contract to close in 30 days.

As always, check back with the Blog Pertaining to the Acquisition of a Mortgage to Purchase a Domicile for updates on rate trends, guideline changes, and more in the coming weeks and months!

Clay Jeffreys is a Mortgage Consultant with Hillside Lending, LLC and writer for “Blog Pertaining to the Acquisition of a Mortgage to Purchase a Domicile.” Hillside Lending seeks to provide mortgage brokerage services with the highest standards of service, care, honesty, integrity and value; concentrating on owner-occupied, residential financing. For more information about available programs and interest rates, please visit www.hillsidelending.com.

And isn’t it ironic… don’t you think?

In the words of a great theologian of our time, Alanis Morissette, said:

And isn’t it ironic… don’t you think
It’s like rain on your wedding day
It’s a free ride when you’ve already paid
It’s the good advice that you just didn’t take
Who would’ve thought… it figures

I have been posting for weeks now about inflation figures eventually increasing and causing problems for bond prices – and eventually mortgage rates. Well, half of that prediction happened yesterday.

On a day when inflation figures come in higher than expected, which is normally terrible news for bonds, the market actually picks up over 50 points on the day! The main reason for this unexpected result due to the losses bonds endured over the previous nine days of trading. Bonds prices fell almost 300 points — an average of over 30 points every day — for the previous 9 days of trading – making a rebound eminent. During this time, we have seen mortgage rates increase on average of 0.500% across the board on conforming mortgages.

The biggest surprise was the year-over-year Core PCE (the figure the Fed’s watch closer than anything else to gauge the rate of inflation) is now at an eyebrow raising 2.5%, significantly higher than the Fed’s 2% upside tolerance level. So, why do the Fed’s target 2% (or less) for the year-over-year Core CPI? For an example, let’s look at the cost of a new Toyota Corolla today to see how a slight increase in inflation can make a significant difference.

In 2008, you can get a new Corolla for the MSRP price of $16,500. Assuming inflation rates stay at the Fed’s target of a 2% for the next 30 years, in 2038, a new Corolla will cost $29,887. If the current figure of 2.5% holds, that same Corolla would cost $34,610. Finally, what happens if inflation figures get as high as 5%+ as they were in the early 1990’s? Under that scenario, a Corolla is going to cost you a whopping $71,312 in 2038!

That is why Bernanke and the Feds are keeping a close eye on inflation. I mean, who wants to pay over $70,000 for a Corolla?!? Also, considering that most economists feel it takes up to 6 months before we see the effects of Fed rate cut, inflation figures may only get worse. Remember that 6 months ago the Feds began their initial cuts. What happens 6 months from now when the 1.25% drop in the month of January alone takes affect?

Getting back to mortgage rates, with bond prices enjoying a little bit of a rebound yesterday and today (Thursday), anyone looking to lock in a rate for a refinance or purchase should be watching the market closely. While the rebound of the market is a good thing, the current trend direction shows mortgage rates continuing to increase. The best strategy would be to cautiously wait to see how much of a rebound bonds get before locking in your rate.

Clay Jeffreys is a Mortgage Consultant with Hillside Lending, LLC and writer for “Blog Pertaining to the Acquisition of a Mortgage to Purchase a Domicile.” Hillside Lending seeks to provide mortgage brokerage services with the highest standards of service, care, honesty, integrity and value; concentrating on owner-occupied, residential financing. For more information about available programs and interest rates, please visit www.hillsidelending.com.