How Much Home Can I Afford?

October 8, 2009 by 2 Comments

This is a common question from first time home buyers.  When working with home buyers who are just beginning the process, after discussing credit and other information, I like to ask in return:

  • What type of monthly mortgage payment would you be comfortable making?
  • How much money are you planning on using for a down payment and closing costs.

To me, it’s better to solve for your potential sales price rather than finding a home or getting your heart set on a certain sales price first before knowing what you actually qualify for.

For example, Seattle Sally has saved up $75,000 and would like to use $40,000 towards a home purchase.  She has been paying anywhere from $2,200 – $2,000 a month for rent and would like to keep her payment around $2000. 

NOTE: Rates quoted below are from October 2009 and are outdated. If you would like a current mortgage rate quote for your home located in Washington, please contact me.

Beginning with a conventional scenario, a payment of $2038 (principal, interest, estimated property taxes, estimated home owners insurance and private mortgage insurance) with about $40,000 for down payment and closing costs would produce a sales price of $325,000.  This is based on a 30 year fixed rate of 4.625%* (apr 4.790).

A sales price of $365,000 with a 10% down payment and the sellers contributing towards closing costs would produce a payment of about $2283.

The only issue I would have with the conventional financing is that private mortgage insurance is that these days, pmi underwriters are picking all mortgages to pieces.

FHA would provide a total payment of $2076 with about $40,000 for down payment and closing costs and a sales price of $325,000.  This is based on a rate of 4.875% (apr 5.400).

If we have the seller pay most of the closing costs and prepaids, a payment of $2287 would produce a sales price of $365,000 with Sally bringing in approx. $38,000 for down payment and closing.

One thing to consider, beyond more forgiving underwriting, with FHA is that your mortgage will be assumable.  Imagine having a rate of 4.875% a few years from now when rates will most likely be much higher.  If you are a seller competing with other similar home on the market, and you can offer an assumable mortgage at a tempting rate–this will be a serious advantage.   Once inflation happens, mortgage rates will be much higher.

If Seattle Sally’s credit score comes in lower than expected (this is all based on very preliminary information) FHA may become a better option as well.  

*rates quotes are as of 1:30pm on October 8, 2009 and are based on mid credit scores of 740 or higher.  Rates can and do change often.  Follow me on Twitter to see live rate quotes.

For your personal rate quote on a home located anywhere in Washington, click here.

Filed Under: Fannie, Freddie and FHFA, FHA, First Time Home Buyer, Mortgage Insurance, Residential Purchase Tagged With: , , , , ,

Reader Question about FHA Mortgage Insurance

August 24, 2009 by 2 Comments

I received this email this past week while I was on vacation.  Right now I am licensed for loans only in Washington State and I don’t always have enough time left in the day to answer the questions or request for advice that I receive from readers who are located outside of my current “lending boundaries”…although I do try.  Sometimes a question or email makes a good post because it may help others who read this mortgage blog. 

Hi Rhonda, I read your blog all the time and I’m in need of advice from someone who knows their stuff — unfortunately im not in WA anymore so I can’t use you and I can’t get a straight answer out of my broker.

I am going with an FHA loan but I expect to be able to pay 20% of the principal within five years. What is not clear to me is if MIP on FHA loans can be removed *without* refinancing — i.e. just based on having paid 20% of the loan amt. I read something on the FHA site that said that this can be done only if the upfront MIP is paid at closing — I am trying to figure out if that means cash as opposed to rolling it into the loan.

Every time I’ve attempted to get an answer from my brokers they keep talking about refinancing in a few years and house appreciation — I really want to know the deal in case I CAN’T refi (due to market tanking or rates climbing, for example)

Advice is very very much appreciated.

FHA insured loans have mortgage insurance regardless of down payment or equity until two qualifications are met:

From HUD’s Mortgagee Letter 00-46:

Regardless of the computed loan-to-value ratio, all but 15-year term mortgages will have annual premiums for the greater of five years or until the amortized loan-to-value reaches 78 percent; there is no annual premium on 15-year term mortgages with initial loan-to-value ratios less than 90 percent.  All other mortgages with terms greater than 15 years, regardless of the initial loan-to-value ratio will have annual premiums for the greater of five years or until the amortized loan-to-value reaches 78 percent.  If a computed loan-to-value ratio is not possible, due to missing data or previous refinancing without an appraisal, the new loan-to-value will default to 89.99 percent.

If a borrower elects to make additional payments towards principal, they may request the monthly mortgage insurance payment be removed only after 60 payments have been made with no late payments in the last 12 months.

Those loans reaching the 78 percent loan to value threshold sooner than projected (but not sooner than five years from the date of origination except for 15-year term mortgages) due to advanced payments of principal will have the annual premium collections canceled upon the servicing lender submitting supporting information to FHA following the borrower’s request provided that the borrower has not been more than 30 days delinquent on the mortgage during the previous twelve months.

Whether or not you elect to pay your upfront mortgage insurance as a closing cost (cash) or finance it, is up to you.  It will not help expedite the removal of your monthly FHA mortgage insurance.

One of the present benefits with an FHA loan is the ability to refinance without an appraisal.  If the market tanks and homes continue to depreciate, as long as you can obtain a rate with a lower rate (the refinance must make sense), you can do an FHA streamline refinance.  I say “present” because we are in a climate where guidelines are changing….even for FHA.

Thanks for your question and for reading The Mortgage Porter.

EDITORS NOTE: FHA guidelines for mortgage insurance is changing in 2013. Please check current guidelines.

Filed Under: FHA, Mortgage Insurance Tagged With: ,

Private Mortgage Insurance Termination

June 2, 2009 by 2 Comments

Private mortgage insurance (pmi) is used when a borrower has less than 20% down or home equity in their property.  PMI insures the lender in the event of a borrower defaulting on a mortgage–it does not provide insurance to the home owner.

[Read more…]

Filed Under: Mortgage Insurance Tagged With: , , ,

FHA Mortgage Insurance Increasing October 1, 2008

August 27, 2008 by 3 Comments

This is another result of HR 3221, I mentioned in an earlier post that the ceiling was raised for how much could be charged for FHA upfront and monthly mortgage insurance…I recently learned the actual details.

Upfront mortgage insurance will increase from 1.5% to 1.75% for purchases and refinances (not FHA streamlined).  Streamlined refinances will be 1.5% and FHA Secure will be 3.0% (hopefully you refinance before you need FHA Secure).

Monthly mortgage insurance will be 0.55% for loans with less than 10% down (or over 90% loan to value) and 0.50% for loan to values equal or greater than 90%.

Currently we have risked based pricing in effect through the end of September 2008 which rewards down payments and better credit scores.

Based on a 90% loan to value and 680 mid score purchase with a loan amount of $400,000, here’s how now and October 1, 2008 compare (using rates I posted Monday for example sake only–this is NOT a rate quote):

FHA case numbers issued NOW through September 30, 2008:

Upfront MI = 1.25%. 400,000 x 1.25% = $5,000.  Adjusted loan amount (FHA upfront mortgage insurance may be financed) = $405,000 @ 6.5% for 30 years = principal and interest payment of $2559.88.

Montly mortgage insurance (referred to as annual MIP) is 0.50% = 400,000 x 0.50% = 2000.  2000 divided by 12 months = $166.67.

Total payment not including taxes and insurance = $2726.55

FHA case numbers issued October 1, 2008 and later (at least until the moritoriam is over on September 30, 2009):

Upfront MI = 1.75%. 400,000 x 1.75% = $7,000.  Adjusted loan amount = $407,000 @ 6.5% for 30 years = $2572.52.

Monthly mortgage insurance based on this example is the same 0.5% = $166.67 (monthly mortgage insurance is calculated off the base loan amount and not the adjusted loan amount).

Total payment not including taxes and insurance = $2739.19

$12.64 a month may not be enough to have you jump off the fence to buy a home or refinance if the above scenario resembles you.  I know that I would rather have the lower financed upfront mortgage insurance ($2000 lower based on this example).

I prefer the risk based pricing model.  It makes the most sense to me.  Reward more down payment and higher credit and compensate HUD for taking on loans with higher risk (lower down payments and lower credit scores).

FHA’s popularity continues to grow with convetional (Fannie/Freddie) guideines tightening and with the risk based pricing increasing.   Do make sure that your Mortgage Professioanal is qualified and approved to do FHA loans–not all originators are.

Filed Under: FHA, Legislation, Mortgage Insurance

FHA Mortgage Insurance Premiums to Increase October 1, 2008

August 19, 2008 by 1 Comment

Yep…another bi-product of HR 3221, The Housing and Economic Recovery Act of 2008.  We don’t have the final figures yet…this should be coming out any time from HUD.  The ceiling for FHA’s upfront mortgage insurance will increase after October 1, 2008 from 2.25% to 3% for 30 year fixed programs. 

Currently FHA’s mortgage insurance is risk based (tiered based on credit score and loan to value).  This will be put on hold beginning October 1, 2008 through September 30, 2009.  During this time, FHA’s mortgage insurance will be a flat fee.

I will update you as soon as information becomes available.  HUD should be issuing a Mortgagee Letter with the final rules in the next 30 days.

Other posts regarding HR 3221:

FHA Minimum Down Payment Payment Increasing January 1, 2009

Down Payment Assistance Programs Days Are Numbered

First Time Home Buyer Tax Credit

Conforming/FHA Jumbo Loan Limits to Decrease January 1, 2009

Filed Under: FHA, Mortgage Insurance

New Risk Based Pricing for FHA Mortgage Insurance

July 16, 2008 by Leave a Comment

Update: the passage of HR 3221, The Housing and Economic Recovery Act of 2008, placed a 1 year moratorium on risked base pricing for FHA mortgage insurance.  This will not go into effect until October 1, 2008.

Effective July 14, 2008, FHA has implemented risked based pricing for monthly and upfront mortgage insurance.  Previously, upfront mortgage insurance on FHA insured loans was always 1.5% of the loan amount and the monthly mortgage insurance was 0.5% of the base loan amount.   Now, depending on the borrowers down payment and credit score, the amount of upfront and monthly mortgage insurance required for FHA loans is staggered.   

Here is a quick breakdown of the new formula for FHA mortgages with 30 year terms (includes FHA ARMs):

Loan to value of 90% or less (minimum 10% down payment)

600 or better mid credit score = 1.25% upfront mortgage insurance (MI) and 0.50% monthly MI.

599 – 560 mid credit score and non-traditional credit = 1.50% upfront MI and 0.50% monthly MI.

559 – 500 mid credit score = 1.75% upfront MI and 0.50% monthly MI.

Loan to value of 90.01% – 95% (5% – 9.99% down)

640 or better mid credit score = 1.25% upfront MI and 0.50% monthly MI.

639 – 600 mid credit score = 1.50% upfront MI and 0.50% monthly MI.

599 – 560 mid credit score and non-traditional credit = 1.75% upfront MI and 0.50% monthly MI.

599 – 500 mid credit score = 2.00% upfront MI and 0.50% monthly MI.

Loan to value greater than 95% (less than 5% down)

850 – 680 mid credit score = 1.25% upfront MI and 0.55% monthly MI.

679 – 640 mid credit score = 1.50% upfront MI and 0.55% monthly MI.

639 – 600 mid credit score = 1.75% upfront MI and 0.55% monthly MI.

599 – 560 mid credit score and non-traditional credit = 2.00% upfront MI and 0.55% monthly MI.

559 – 500 mid credit score = 2.25% upfront MI (may be reduced to 2.00% upfront MI if it’s a first time home buyer who participates with HUD-approved counseling) and 0.55% monthly MI.

Credit scores are determined by the middle of three credit scores when three scores are available.  If a borrower only has two scores, then the lower of the two scores will be used.  When there are more than one borrower, the lowest "mid score" of all borrowers will be used to determine the required amount of mortgage insurance.  For information on non-traditional credit (weak credit history), click here.

NOTE: although FHA is offering mortgage insurance on lower credit scores, most lenders have their own price adjustments on FHA mortgage loans with credit scores under 600 and will not provide a FHA mortgage when a mid score is under 580.

All FHA insured loans have private mortgage insurance–even if the borrower is putting 50% down and will remain on the mortgage for a minimum of 5 years AND 78% of the original loan balance.

Check out the article I wrote at Rain City Guide on these changes which has examples of how this impacts a mortgage loan payment. 

Filed Under: FHA, Mortgage Insurance

Canceled PMI…Reinstated?

June 23, 2008 by Leave a Comment

I was recently contacted by someone who was told by his credit union, BECU, that his private mortgage insurance was going to be canceled.  He even received new payment coupons with the reduced mortgage payment without the private mortgage insurance.   But just before he was getting ready to make that new mortgage payment, he received a letter dated June 9, 2008 from BECU that states:

Dear Customer:

A recent audit of your account revealed that the private mortgage insurance (PMI) was removed in error.  The loan to value (LTV) of your loan is currently 85.3% and PMI is required.

The PMI coverage has been reinstated and will continue without interruption.  Your monthly mortgage payment amount will be adjusted effective with the July 1, 2008 payment. 

We apologize for any inconvenience this error may have caused.  Please do not hesitate to contact us if you have any questions.

Sincerely,

MIP/PMI Administrator

Ouch!  Not only did they re-instate PMI after saying it was canceled, they didn't even bother to use the customer's name in the letter. 

The property is located in Pierce County.  My best guess is that the lender (BECU) decided it was in a declining market and at the very last minute, re-evaluated the loan to value based on that.    Generally, it is up to the servicer (the lender) whether or not the private mortgage insurance can be canceled.   This is the first time I've heard of PM being canceled and then reinstated.

Filed Under: Mortgage Insurance

Now is the time to buy a Seattle home

June 8, 2008 by Leave a Comment

Or at least haggle according to Aubrey Cohen’s front page article in Friday’s Seattle P-I.  Would I buy a home right now in Seattle if I were in the market?  Quite possibly…especially if it’s a home that I desire and if it’s priced fairly.   The article states these factors for reasons home buyers interested in Seattle (I would include Bellevue/Redmond as well) should get into the market now:

  • Gas Prices.  Homes located near where jobs are will have stronger values.  Fewer people are going to want to commute thanks to how much it is to fill the tank.   
  • Mortgage interest rates are rising.   Glenn Crellin, director of the Washington Center for Real Estate Research at WSU states "waiting for the prices to get to their absolute lowest point while interest rates are rising doesn’t mean that the purchasers are going to be saving much of anything on the monthly payments". 
  • High inventory.  There are a lot of homes to chose from at lower prices.

According to this article, home prices in Seattle are only down 2.7% from a year ago; King County is down 6.2%.  The further away from "the city" you look for homes, the more the values have been impacted.   

Here are some additional reasons (not in the article) to consider "getting into the market" as a home buyer. 

  • The Conforming-Jumbo and FHA jumbo loan limits are only effective through the end of this year.   On January 1, 2009, the conforming limit will roll back to $417,000 and FHA (for King County) will be $362,950.  (Unless Congress passes an extension to the loan limits, which they may do at a reduced amount.  The fact is, at this time, we only know that the current loan limits are valid until December 31, 2008).   If you want a "non-jumbo" rate and your loan amount is $417,001-$567,500…your time is limited.
  • Underwriting guidelines continue to get tougher with lenders and private mortgage insurance companies.   Plus, the possibility of having your area declared a declining market will make financing even more challenging.
  • If you’re sitting on the fence, you are not alone.  There are many home buyers who are getting preapproved waiting for prices to reach their "price point".  As prices lower, more and more will be hopping off the fence and jumping into the market which will also prevent in-city home prices from declining as much as other areas.
  • Sellers are contributing towards closing costs.  I’m seeing more offers with sellers contributing towards closing costs for the buyer.  Buyers can use the funds to buy down their rate are reduce their closing costs.

If you are considering buying a home within the next 6 months, I strongly encourage you to begin the preapproval process now.  The more time you have to prepare, the better position you’ll be in to make an offer.   Plus, I’ve heard that some in-city homes, when priced right, are having multiple offers–buyers should be armed with a preapproval letter to present a stronger offer. 

It’s also very important to work with an experienced real estate agent who will look out for your best interest (I do not recommend going directly to the listing agent for any home you wish to buy…they represent the sellers interest–not yours).   If you need a referral to a real estate agent in King, Pierce or Snohomish counties, contact me, I’m happy to help.

PS:  I help Washington State home buyers with preapprovals and mortgage planning, too!  (My husband thinks I should remind my readers of this point more often…and I like to keep him happy).

Just for grins, here is a lesson in how to haggle (if you work with a professional real estate agent, you can leave the haggling to them), compliments of Monty Python, The Life of Brian.

Filed Under: First Time Home Buyer, Mortgage Insurance, Residential Purchase
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