Or, “Can I take a cash advance on my credit card to help with my down payment?”
The answer to both questions is no. Your down payment must be either your own money or gift money from family or grant money from an acceptable source. No part of your down payment can come from a loan, not even from your mom. No exceptions.
If a family member is providing cash toward your down payment, then they will need to sign a form letter stating it is a gift and no repayment is required. Usually, they also need to show the source of their gift money by providing a bank statement(s) or other document such as investment statement.
Why can’t you take a loan from your parents for a down payment? Because the lender thinks that if you get into financial trouble and have to make a choice between paying mom and dad or the mortgage bank, your family ties will be stronger and the bank will lose out. Therefore, it is an unacceptable risk to lending. The bank is not going to take “second position” behind your family.
Any other loan, such as a cash advance from a credit card, is also unacceptable. This would affect your debt ratio as well as put the bank at a higher risk for getting paid.
For a small down payment of only 3.5 percent of the purchase price, look at the FHA loan. FHA allows all of your down payment to be gift money from family.
If you are eligible for a VA loan, you may qualify for a zero down loan.
The no-down sub-prime loans of yesteryear are gone, and I think that’s a good thing. It takes time and discipline to save for a down payment and closing costs, and that’s not a bad thing either.
(FHFA was established by the White House after the mortgage meltdown. Their mission is to ensure a safe mortgage market by setting rules for government sponsored enterprises. Think Fannie Mae and Freddie Mac.)
There are two mortgage fees they said would increase in 2014:
1) The Guarantee Fee. This is a fee charged by Fannie Mae and Freddie Mac for bundling, servicing, and selling mortgage-backed securities to investors. More detail is here. This fee increase was going to be passed on to mortgage borrowers, home buyers.
2) Credit related fee increase. A fee for having a credit score below the top tier. In other words, a charge to offset the risk of lending to you if you don’t have “A” credit. Currently, top tier credit in the mortgage world is 740, but they have proposed raising that to 800.
After the announcement, the Mortgage Bankers Association sprung into action in protest. They are actively working with policy makers to prevent a pricing increase for home buyers that could hurt our fragile housing market.
Just because we have seen some recovery, it doesn’t mean the market is robust and can withstand a punch in the gut like a major fee increase. So the issue is being reviewed now. We’ll have to wait to see how it all plays out.
What is the Loan Limit in Your County?
In the meantime, some counties with higher median home prices than average have suffered a loan limit reduction. I blogged about this possibly happening earlier this year, as you might recall. In the highest-cost areas where the loan limit was $729,750, the limit has been reduced to $625,500. Here is the link to the look-up table for FHA loan limits by county.
You are invited to sign up to this blog to receive important information about mortgages and home buying in 2014. I blog once a week, usually on Tuesday, so you aren’t flooded with too much in your in-box.
As I wrote December 3rd, interest rates are trending upward, and that trend continues. Today, we’re seeing 4.625% to 4.75% for the conventional 30-year fixed rate. But in addition, fees are also increasing.
In the near future, I will dedicate a post to explaining the mortgage loan fee increase and what you need to do in order to pay the least possible in fees. For now, be forewarned that if you want to bring less cash to closing and get the lowest rate for the lowest monthly payment, the time to sign the contract and lock in your interest rate is now.
Remember, you cannot lock in your rate/fee without a purchase contract, because locks are tied to a specific property address.
You can have your real estate agent write the contract for you now, lock in your rate now, but write the closing date for the end of January when you have more time to pack and move. Waiting to choose could cost you financially.
Please feel free to pass on this information/blog link to folks who might be affected. You’ll be doing them a favor by helping them save significant money on their upcoming mortgage.
Will we reach the 4.75% that rates were at on September 18th? Will we go even higher, into the 5% range and beyond? One economist brave enough to forecast the future says yes. In fact, he expects mid-2014 to see 5.5%, at the least.
As we receive good news about the U.S. economy, rates continue to rise. Of course, the chart looks like a zigzag, because rates do not increase in a straight line upward. But looking at the overall trend, we do see an upward track.
All eyes will be on the Employment Situation Report to be released later this week. If you have a loan in progress that is not locked in yet, you are taking a big gamble, because the trend is not your friend at the moment.
How Locking In Your Rate Works
Locking in your rate secures a specific rate and protects you if rates go up. To lock in your rate, you must have a fully executed purchase contract, because a rate lock is tied to a specific address. If you are still house shopping, you cannot lock, unless your lender offers the rare “lock and shop” program.
Get It in Writing
When you ask your loan officer to lock in your rate, you must also ask for a written confirmation of the lock. An email confirmation is sufficient. Keep this confirmation! Too many home buyers have been burned when a lock officer failed to honor their rate lock request.
Verbal promises mean nothing in the land of mortgage loans. Only what is it writing stands. So make sure you receive confirmation of your rate lock, the expiration date, and any points (dollar amount) you’re paying. If you’re getting a no-point loan, the lock should state a zero fee.
If you have friends or colleagues who are interested in buying a house or refinancing, please feel free to refer them to this blog information.
This post is not a prediction of interest rates, only a commentary on the apparent trend. It is not advice to lock or float. You and only you are in charge of deciding what interest rate you want to accept and lock.
1) Interest rates are still very attractive at 4.375% to 4.5% for the 30-year fixed rate and 3.5% for the 5/1 ARM.
(The 5/1 ARM is fixed for the first five years, then adjusts every year thereafter. It is a make-sense choice for people who plan to keep the property for six years or less.)
2) The housing market has been improving for the past year, giving home owners more equity, and giving more sellers the ability to sell which gives buyers more inventory to choose from.
3) Buyer’s agents are free to home buyers. They are paid by the seller. Your buyer’s agent is required by law to get you the best price, best terms, and look out for your best interests in every aspect of the real estate purchase.
It is my opinion that making an offer between Thanksgiving and New Year’s Day is a good strategy for getting the best price. Typically, the market slows down during the holidays, so there is not as much competition. Sellers aren’t receiving offers or even lookers, so this is the time for you to pick up a good deal. Furthermore, the market tends to pick up in January when renters make New Year resolutions to become home owners.
Some years back, I bought a condominium for a great price in December. My agent told me later that the home owner was so angry when he saw my purchase offer that he threw the papers across the room. (Thankfully, I didn’t have to see it, because I had a buyer’s agent representing me.) But then his wife said, “Honey, let’s just make a counter-offer.”
The counter-offer was not bad. I countered again, per my agent’s suggestion, and I got a lovely home at an attractive price. I lived there for five years and made a nice profit when I sold.
The first thing you should do is have your real estate agent show the appraisal report to the seller’s agent and ask them to lower the price to match the appraised value. If they agree, then that is your best option. The purchase agreement is amended to the new price, you send that page to your loan officer, and then the loan officer adjusts your down payment and loan accordingly.
If the seller does not agree to lower the price, then you have two choices. You can either make up the difference with cash out of your own pocket, or you can walk away from the deal.
To Make Up the Difference in Cash
Let’s say the sales price is $200,000 and the appraised value is $190,000. In this case, you would have to kick in an extra $10,000 out-of-pocket if the seller will not lower the price. This is because lenders will not go higher than the appraised value for their loan. I suggest you think do a thorough market analysis and put your emotions in check before you take this option. Why would you want to pay more than the property is worth? You’d want to have a very compelling reason to make such a financial decision.
To Walk Away
The seller might disagree with the appraised value and think that a different buyer with a different lender will get a different appraised value; therefore, they might not agree to lower the price. You should have a contingency clause in your purchase contract that allows you to walk away and get all of your earnest money refunded if this happens. A good buyer’s agent always makes sure you have such a clause, and this is one mistake do-it-yourselfers who are not represented by an agent sometimes make. I once witnessed a terrible fight break out between a For Sale By Owner seller and a buyer who went straight to the seller without agent representation. Believe me, it was quite a spectacle when the yelling turned into threats to “take it out onto the street.”
One More Option
Occasionally, there is an appraiser who royally messes up the value. The report that comes in is nothing short of idiotic. The comparable properties are totally inappropriate with better comps in the neighborhood ignored. Not only that, but special features that increase the property value have been ignored. When this happens, the seller probably won’t lower the price. If you want to continue to fight for this house, you can ask your mortgage broker to go to a different wholesale lender for the money and thus start fresh with a new appraiser.
This works because your loan file goes to a whole different company with a different underwriter who never saw the bogus appraisal. Of course, you will need to pay for another appraisal.
If your lender is a direct lender or a bank and does not have the option to shop wholesale lenders for you, then this choice is not available. Once an underwriter has seen an appraisal, she (or he) will not consider a different appraisal, even if the second one is more accurate. Only if the original appraiser will change the report will the underwriter accept a different value. (Getting underwriters to change their reports, even when they are dead wrong, is impossible 99% of the time.) So in this case, you would have to withdraw your application from the bank and shop for a mortgage broker yourself in a super speedy manner. Depending on the closing date, this could be problematic.
No matter which option you choose, you need to discuss the situation with your real estate agent and your loan officer. With the three of you working together, you should be able to select the best choice and protect your earnest deposit.
In neighborhoods where the median price of homes is higher than the national average, loan limits are higher as well. This enables buyers to purchase a home in a higher priced area of the country (such as coastal cities) without having to take a high priced jumbo loan.
The current limit for a high cost area is a loan of $729,750. However, that is set to end December 31, 2013.
The loan limit would then lower to $625,500.
Will Congress act to extend the high loan limits?
Since there are no crystal balls for mortgage, no one knows for sure. What we do know is that December 31 is not that far away, so if you’d like to purchase a home with a loan in the higher range, you might want to act now just to be safe. Contact your local Realtor who will act as your buyer’s agent to preview homes and negotiate a contract for you.
When taking a large loan, it’s more important than ever to get the best rate and terms. Recently, I helped a home buyer save over $2,000 in upfront fees when he used my Review and Coaching Service. For information on how you can have me review your cost estimate or Good Faith Estimate with a telephone consultation, click on the page above that says “Review My Estimate.” Because I do not do loans myself, I am an unbiased expert source, working on your behalf.
Even though any loan officer can pre-qualify you for a loan amount, ultimately, it is your responsibility to decide how much house you can afford. I once heard a mortgage sales manager tell his staff of loan officers to qualify their people for a higher mortgage than what they’d originally asked for.
He said, “If they buy a more expensive house, they will be happier.” Of course, his real motivation was for bringing in larger loans, not for their happiness.
But here’s the thing. Even if the home buyers were happier at first with their larger, fancier houses, how happy were they later when they discovered that their house payment was preventing them from going out to dinner and a movie? It’s not fun being a slave to your mortgage.
A good loan officer who is your advocate will never push you to get a bigger loan than what you’re comfortable with.
Unfortunately, just as often it is the home buyer who is pushing the loan officer to get them qualified for more than they should. This happens after they tour dream houses that are slightly above their price range. They fall in love with a house and think there must be a way to get into it.
This is partly why the mortgage industry created bad loans, such as the 2/28 teaser loan that had a low payment for the first two years and then went up, and negative amortization “pick a payment” loan that turned toxic for so many. A large number of these loans became unaffordable, causing the people to go into foreclosure. And we all know how that affected the U.S. economy!
Even though printed guidelines say your debt-to-income ratio should be 28% for the mortgage and 38% for both mortgage and other credit obligations, in reality, most lenders do not follow those rules. It is common for debt ratios to be pushed to 45% and some will go to 49.99%.
If your debt ratio on paper is 49%, but your real debt ratio is much lower because you have income that the lender won’t include, then taking the higher payment might be justified. For example, some people have a side business selling on eBay, at swap meets, or other venue. The lender might not include that business income for various reasons, so the lender’s calculated debt ratio might be higher than your reality.
How to Calculate Debt Ratio
To calculating your debt-to-income ratio (dti), use your gross income, before any deductions. Include the new, proposed mortgage payment, including property taxes, insurance, and mortgage insurance (if applicable) along with auto loans, student loans, credit card payment minimums, and anything else that shows up on your credit report. In general, the max dti for all expenses should not exceed about 35% to 40%. Stay on the lower end if you have children to support or if you like to spend a lot of money on entertainment, shopping, etc. and need a higher disposable income available after your mortgage payment.
If you’re not sure how to do this, any loan officer can help you with this calculation.
Just when some lenders and real estate agents are saying underwriting is getting better, six Federal agencies are working to get tougher, stricter requirements for becoming a home owner passed into law. Here are three things they want:
1) Bigger down payment. They want you to make 30% down payment to get the best interest rate and best terms. Ouch! How many first-time home buyers have that kind of cash? This would force tens of thousands of borrowers to take a higher rate, even if they have great credit.
2) Stricter credit requirements. Even with the sub-prime loans far in the rear view mirror, they want even higher standards for credit. This will decrease home sales and home ownership, which is counter-productive to growing our economy.
3) Ban combo loans. They want to ban getting a second mortgage in combination with a first mortgage to avoid paying the monthly private mortgage insurance (PMI). So the strategy of putting 10% down, taking an 80% first mortgage with a 10% second mortgage to save money would become illegal. I have to ask, why are they trying to force everyone who doesn’t have 20% down into paying PMI?
The six agencies asking for this are the following:
1) The Federal Reserve
2) The Federal Deposit Insurance Corp.
3) The Federal Housing Finance Agency
4) The Dept. of Housing and Urban Development
5) The Office of the Comptroller of the Currency
6) The Securities and Exchange Commission
Who Does NOT Want Stricter Home Ownership Requirements:
1) The National Association of Realtors
2) The Mortgage Brokers Association
4) Mortgage Bankers Association
5) Private U.S. citizens
David H. Stevens, CEO of the Mortgage Bankers Association and a member of the coalition opposing the plan says, “We plan to be very clear and very vocal” in fighting this. I say, “You go, Mr. Stevens, and go strong!”
If you don’t want to see this 505-page proposal become law, please make your voice heard by contacting your state representation and saying you are against “QRM-Plus.” And please make others aware of this via Twitter, Facebook, email, and other means, because home ownership affects us all.
Heads up! Lenders are jacking up the interest rate or raising points–even after it is locked in. If you have a loan in progress, you need to know what’s going on so you can prevent it happening to you.
Today I received this email from T. Smith:
“I have a GFE (Good Faith Estimate) dated 13 September. Trying to close this week and they say our credit report has expired and want to increase the cost of our points. Is that legal?”
Yes, credit reports have a limited life; but moreover, a lender has the right to re-pull a credit report at any time, regardless of the date of the original report. Now more than ever before, lenders are re-pulling credit right at the end of the process in order to make sure no new negative information has popped. “Negative information” could include a new line of credit or an increase to a credit card balance.
If you purchased a car, opened a new line of credit for appliances or furniture for your new home, opened a new credit card, or increased the balance-to-limit ratio on a current card, then any one of those things could easily lower your credit score. And a lower score could place you smack dab in the middle of a higher risk category as a borrower.
Additionally, a new late payment would lower your score.
If a lender discovers that a borrower has a lower score than what they were previously approved at, then yes, they do have the right to raise your interest rate or increase your points in order to compensate for the higher risk they perceive you to be. (Increasing points is another way of charging more in interest. Points are interest paid up front in the form of a fee.)
This is why I have been warning people not to make any changes whatsoever–and not to purchase anything on credit at all–during the loan process. Patience is the name of the game while you have a loan in process. There will be plenty of time to shop after your new mortgage is funded and closed.
If you know someone who is refinancing or buying a house, please pass on this timely warning to them.