Monday, May 24, 2010

Choosing a Government Loan Option in 2010

As interest rates continue to flirt with record lows, homebuyers turn to government-backed loans to finance their mortgages. With three major programs in place—VA loans, USDA loans and FHA loans—several demographics are given a helping hand to buy a place to call home.

Qualifying for government-backed loans tends to be easier than doing so for conventional loans. Credit requirements are less stringent, and borrowers usually don’t need huge financial reserves. Debt-to-income ratios are even more flexible.

VA Loans
In 1944, Congress created the Veterans Affairs Home Loan Guaranty program exclusively for our nation’s military service members. Still popular today, the program offers lower monthly payments thanks to competitive interest rates and the elimination of private monthly mortgage insurance. Borrowers qualifying for mortgage guidelines can even purchase a home with no money down, which is cited by borrowers as the program’s greatest strength.

For active-duty military members, VA loans come with interest rate caps. When borrowers close a deal with a VA loan, sellers may cover up to 6 percent of closing costs.
If VA loan borrowers want to make prepayments on the loan, they can do so without any penalty. Before borrowers default on a loan, the VA offers counseling and several options to avoid foreclosure.

With all of these benefits, it’s no wonder why VA loan volume surged 80 percent last year.
USDA Loans
Despite its temporary hiatus, the Rural Development program is designed to help low- and middle-income families in rural communities purchase homes. When the USDA designed the program in 1987, few lenders operated in rural areas, and now the program is too popular for its own good.

These loans are the only other no-money-down options. When borrowers need to pay money down, USDA loans allow family and non-profit organizations to pitch in. Just like VA loans, there is no mortgage insurance and interest rates are often lower than conventional financing options, and borrowers can finance 100 percent of the appraised value of a home. In 2009, the USDA insured more than 115,000 loans, which was more than double the 2008 figure.
FHA Loans
The oldest of the government-backed loans, FHA loans still draw plenty of prospective homebuyers. Interest rates for FHA loans don’t differ more than 0.125 percent from conventional loans. Unlike the other two government loans, FHA loans include a mortgage insurance, but one that is less expensive than a private insurance. The fee is included in monthly payments.

In some instances, borrowers can combine FHA loans with other loans, resulting in 0 percent down. Even with imperfect credit, borrowers can expect smaller down payments than those of conventional loans, as low as 3 percent. Much like USDA loans, borrowers can get down payment assistance from relatives and non profits.

Given the breadth of financial upsides built into government-backed loans, prospective homebuyers everywhere should consider one of these options. Check with a lender to help determine your eligibility for any government program.

Wednesday, May 19, 2010

Jumbo Loan Borrowers: How to Think About Buying Your Dream Home.

The enormous social pressure and the expectations that come with it lead to misunderstandings and confusion. Here's my advice to someone in the market:
  • In an era where house prices rise reliably (which was 1963 to 2007), it was almost impossible to overpay for a house. It was an efficient market, and rising prices cover many mistakes. Investing in houses in the USA was a no-brainer. More leverage and more at stake just paid off more in the end. In 2006 many subprime and ALT-A lenders would allow nothing down up to a 1m jumbo loan with a 720 FICO score. Needless to say these loans defaulted at a 40%+ rate as people walked away when values dropped. The old mantra of buying as much house as possible with as little down payment as you could doesn’t work if values fall in the future.
  • A house is not just an investment, it's a place to live. This is the only significant financial investment that has two functions.
  • The psychology of down markets is irrational. Rising house prices might be efficient (many bidders for a single item lead to higher prices), but when there aren't so many bidders, irrational sellers (see #2) don't lower their prices accordingly. So, inventories get longer and it's easy for the prospective buyer to think that a certain price is the 'right' price because so many people are offering houses at that price. Just because someone offers a price, though, doesn't mean it's fair in a given market.
  • Along the same lines, anchoring has a huge impact on housing prices. If someone offers a house for $1.7m and you think it's worth $1.2m, you don't offer that. No, of course not. The price is a mental and emotional anchor, and you're likely to offer far more because you are falling in love with a view, a certain floor plan or a special neighborhood.
  • The social power of a luxury home is huge. When you buy a luxury home or a country estate, you are making a statement to your in-laws, your family, your neighbors and your business/social contacts. Nothing wrong with that, but the question you must ask yourself is, "how big a statement can I afford?" How much are you willing to spend on personal marketing and temporary self-esteem? This is a big social pressure faced by newly-wed couples, lawyers and doctors as they come out of school landing that deep six figure position.
  • If buying a bigger house (or even a house with an extra living room or a 4 car garage) is going to keep you in stuck in the office 90 hours a week till the end of time, is it really worth it?
  • By the time you buy a house, you probably have a family or have plans to bring some little owns into your life. Which means that this is a joint decision, a group decision, a decision made under stress by at least two people, probably people that don't have a lot of practice talking rationally about significant financial decisions that also have emotional and social underpinnings.
  • If you have a steady career, matching your mortgage to your income isn't dumb. Given the recent environment with bonus money being cut and profit sharing taking a dip having a jumbo mortgage payment that is less than ¼ to 1/3 of take home pay can bring about a lot of piece of mind.
  • Real estate brokers, by law, work for the seller (unless otherwise noted). And yet buyers often try to please the broker. You'll never see her again, don't worry about it. [Let me be really clear about what I wrote here, just in case you'd like to misinterpret it: When a prospect sees an ad or goes to an open house, she is about to interact with a broker. That broker, in almost every case, is hired by the seller and has a fiduciary responsibility to the seller to get the very best price for the house. There are exceptions, like buyer's brokers, but those brokers, as I said, note that they are representing the buyer--how can you represent someone without telling them? Many brokers like to pretend to themselves that they are representing both sides, and while that's a nice concept, that's not the law.
  • You're probably not going to be able to flip your house in two years for a big profit. Maybe not even ten years. So revisit #2 and imagine that there is no financial investment, just a house you love. And spend accordingly.
    I'm optimistic about the power of a house to change your finances, increase your net worth, to provide a foundation for a family and our communities. I'm just not sure you should buy more house than you can COMFORTABLY afford merely because houses have such good marketing.

    And above all please get a jumbo loan that makes sense for your short and long term financial plans. As always, have a prosperous day.