A Conventional Loan with No Down Payment? BOOYAH!!

Finally finally FINALLY we have a decent no down payment option for buyers again. 

For the last several years we've had VA financing for our Veterans and USDA for our rural friends, but no good 0% down loan for the rest.  Last year brought some hope when IHCDA rolled out their Next Home Program.  It offered down payment money to a wide range of buyers but the buyer had to be getting a FHA mortgage to qualify.  Seeing FHA has crazy-high monthly mortgage insurance and that mortgage insurance now stays on the loan FOREVER (ugh), Next Home was a step in the right direction but it still fell short for many buyers.

Effective 9/3/13, however, things are changing.  IHCDA will now allow buyers to use their Next Home down payment money along with a conventional loan.  Let's talk about what this means to Realtors and buyers alike:

1. Down payment amount - starting in November, the minimum conventional mortgage down payment will be moving from 3% to 5%.  NOT WITH NEXT HOME THOUGH.  This one program will be allowed to keep the 3% down payment option (big win).
2. Down payment source - IHCDA will give the 3% needed for the down payment to the qualified buyer.  It is technically a second mortgage but if they stay in the home at least two years, the mortgage is forgiven and released.
3. Maximum Household Income - there are some requirements to qualify.  You can't make more than a certain amount (maximum set per county).  The chart is here: IHCDA Income Limits.  Use the two columns on the left hand side for 1 to 2 person or 3+ person households.  In St. Joseph County, a 1-2 person household can't currently make more than $59,400.  If they have 3+ people in the home, it jumps to $68,310.
4. Not First Time Buyers Only - you don't have to be a first time buyer to get this money.  You can't own another home at the time of use though.  If you own a home now, you have to sell it first.  Closing can be on the same day as the purchase of the new home though.
5. Liberal Credit Score Ranges - the credit score can be as low as 650.  The mortgage insurance will cost more at that score and it may be harder to get approved, but it is allowed. 
6. Lower Monthly Mortgage Insurance - Conventional loans have lower mortgage insurance than FHA loans anyhow, but this program offers a further discount.  That being said, the interest rate will be higher.
7. MCC Allowed - if the buyer is a first time buyer, they can use this program and the Mortgage Credit Certificate program at the same time.  This rocks big time.  To learn more about MCC, watch  this video:  MCC Education Video.

Negatives of Conventional Next Home

So what's not good about it?  A couple of things:

1. Interest rate - we don't know what the interest rate will be yet seeing they don't roll it out until next week, but we know that it will be higher than non-Next Home rate.
2. Higher Conventional Standards - the buyer has to qualify for a conventional loan and conventional loans are harder to qualify for than FHA loans.  For those who don't qualify though, they can still use Next Home money with FHA if desired. 
3. Limited Seller Concessions/Higher Fees - sellers can only contribute 3% toward closing costs and prepaid items with conventional loans.  Next Home loans have higher closing costs, so this 3% won't be enough.  The buyer will need to bring some money to the purchase for the difference.  This money can come from a gift from a family member or a loan against an asset if desired (car, 401k, etc.)  If they can't come up with the money needed, they can still use this with FHA which lets the seller give 6%.
4. Limited Sources - Most lenders are not approved through IHCDA to do these loans so the buyer can only work with a limited pool.  Luckily for me, I'm in that pool!  If your client wants to work with their 'home bank' though, they'll likely find out they can't get this assistance.

Bottom Line

So, bottom line?  This is a good option.  It's not perfect, but it's one of the best we've seen in awhile and will likely become very popular.  My team and I have done dozens and dozens of Next Home loans in the last year and we know how to navigate these smoothly and quickly.  Please call me with any questions you have on it.  I'm looking forward to helping many buyers buy now with this down payment assistance. 

BREAKING NEWS - 3% Convetional Going Away

Wouldn't you know it - as soon as I make a video blog talking about Fannie Mae's 3% down payment option, they send out a release saying they're taking it away.  Of all the luck!

The good news is that we have a little time.  Right now, Fannie Mae will allow buyers to put as little as 3% down on the purchase of a primary residence.  Effective November 16th, that will go away and the minimum down payment will increase to 5%.

What to do

Time moves fast, so talk to all of your conventional buyers now.  Tell them that the 3% option is going away so, if they want to use it, they need to get serious about their home shopping.  If the lender they are currently working with doesn't offer the 3% option, connect them with me.  As long as their file is started by that November 16th date, we can still use that lower down payment option. 

The Down Payment Dilemma

Hey Realtor friends, if you ever work with buyers who are eager to buy a home but can't figure out the down payment piece, then this video blog post is for you.  Enjoy!

*****IMPORTANT NOTE*****

After filming and posting this blog, Fannie Mae announced that it would be stopping its 3% down option after November 16th, 2013.  There's still time though!  Act quickly to take advantage of this lower down payment option. 

FHA Shrinks Post-Foreclosure Waiting Periods

In a surprising Mortgagee Letter, FHA announced last week that it will reduce it's two year bankruptcy waiting period and three year foreclosure waiting period to one year for buyers if the cause of the bankruptcy/foreclosure was a job loss.  Stating that buyers shouldn't be penalized for "Economic Events" beyond their control, FHA will consider buyers for financing we can document that:

• certain credit impairments (foreclosures, short sale, bankruptcy, deed-in-lieu, etc.) were the result of a loss of employment or a significant loss of household income beyond the borrower's control;
• the borrower has demonstrated full recovery from the event including at least 12 months of satisfactory credit; and
• the borrower completes housing counseling.

 Calling it the "Back To Work - Extenuating Circumstances" program, this change will allow home purchases now for many individuals who were impacted by the high unemployment rates of the past few years.

There are some additional requirements to be aware of.  The borrower will have to show that:

• they had satisfactory credit before the economic event;
• the derogatory credit occurred after the economic event started;
• they have re-established satisfactory credit for a minimum of 12 months. 

 They also will have to show that the job loss created at least a 20% drop in income for a 6+ month period.  If they can do this, though, and if they meet the rest of the normal FHA loan guidelines, they will be considered for FHA financing. 

THIS IS BIG FOR MICHIANA.  Unemployment hit us hard, and many in our community have been waiting for time to pass to be able to buy a home again.  If it's been at least a year and their payment history has been clean during that time, their wait may be over. 

Spread the news (and my phone number)!  FHA is back in the game. 

No Down Payment? No Problem!

We’ve all worked with buyers like this.  They have a good job.  They cover their bills easily.  They’re stable and ready to buy a home.  HOWEVER – they can’t seem to save up the down payment. 

Even with conventional financing needing

as little as 3% and FHA as little as 3.5%,

some buyers don't buy because they have no money to put down.

 

Well fear not!  Help is on the way.  Thanks to Indiana Housing and Community Development Authority’s Next Home program, many buyers don’t need a down payment. 

WHY I LOVE THIS PROGRAM

• 4% assistance –buyers using this program gets 4% of the home’s price in down payment assistance.  This covers all of the 3.5% down payment while leaving a touch more to go toward closing costs.
• Many qualify – the bar to qualify is within reach for many buyers.  The biggest hurdle is an income limit.  A two person household in St. Joseph County can’t have an annual household income of more than $59,400.  If there are 3+ members in the household, it jumps to $68,310 (current limits, can change at any time).  If they make less than this per year though, they’re good.
• Not limited to first time buyers – gotta love this one.  Even if your client has owned a home before or owns one now that they are selling, they can still use this program.   
• No delay  – If your buyer uses this program, it doesn’t slow the process down like some other 100% options do.  USDA offers 100% financing but the state is so backed up that you need 60 days to close one.  Not so with IHCDA - Next Home closes in the regular 30-45 days.

WHAT I COULD LIVE WITHOUT

• FHA loans only – this program has to be used with FHA financing.  If you read my posts regularly, you might remember one from June where I broke up with FHA (FHA - I'm Dumping You).  I’m not a huge FHA fan right now.  That being said, it does the job and might well be worth it for the right buyer.
• Higher Interest rate – the interest rate for Next Home is higher than the regular FHA interest rate.  It varies day to day, but on average it seems to run about 0.5% higher.  On a $100,000 price home, that would work out to about $30 more that the buyer pays each month.  They would get $4,000 in down payment assistance though, so the extra $30 per month might well be worth it.
• Points Charged – this program charges 2 points upfront.  This can be covered with seller concessions but that means we’re likely asking for 5-6% in concessions instead of the usual 3-4%.  That also means that the lower priced home (<$70,000) might still need some buyer investment seeing 6% in concessions likely wouldn’t cover the existing closing costs/prepaid items and these 2 additional points.

BOTTOM LINE

If your buyer is ready to buy a home but is unable or unwilling to wait until they can save a 3%-3.5% down payment, Next Home might fix their problem.  To learn more about it, check out my educational video (YouTube Video) or give me a call (574-234-5201).

 

 

How Appraisal Data Verification Can Stop Your Sale

If you're a Realtor, you've had a sale or two before where you were nervous about how your client's home would appraise.  You likely didn't stop worrying about it until you got the mortgage lender's call telling you the report was in and the value was fine.  Once you got that call though, you probably crossed the appraisal off of your list of things to worry about, believing all was good with it. 

THINK AGAIN!  What Realtors don’t realize is that most loan underwriters conduct a data verification process after an appraisal is received that could take that nice, clean appraisal and make it a deal breaker in the financing of the home.

What is Data Verification?

Banks rely heavily on the value showing in the appraisal report, but that value is only as good as the appraiser who put the report together.  Sometimes appraisers have off days.  Sometimes they miss things.  Sometimes they even deliberately try to make a value work, thinking they’re helping the buyer out.  For whatever reason, the value they put on the appraisal report is not always right.

How will a lender know that though?  They’ll know because they run the appraisal through an online data verification system.  These online systems have been created to do fast value assessments based on MLS data and property tax records.  Companies like DataVerify, Collateral DNA and Corelogic are all extensively used by the mortgage industry to provide a quick ‘second look’ at the appraised value of a home.

How does this impact the loan?

Most of the time, this doesn’t impact the loan.  The data check comes back close to the appraised value and everything moves forward.  Sometimes, though, the data check value is significantly lower than the appraised value.  The lender may then try running it through a second or third data check system, hoping to find one that supports the value.  If none do though, they have a problem.

How is the problem fixed?

A failed data check does not automatically cancel out the original appraisal.  Lenders understand that a lower automated value could be wrong.  The lender doesn’t want to waste the buyer’s time or money, so they will verify the accuracy of the information though assessor records to ensure the sales indicated are actually legitimate sales before taking the next step. 

If there is still concern after that, though, another appraiser is hired to do a desk review of the original report.  They will review it along with the MLS data to say whether they feel that the original appraiser was accurate on value or whether they agree with the computers and think he was stretching.

If the second appraiser says the value is ok, all is good.  The bank can proceed.  If he does not, they get the value that the second appraiser feels is accurate and, assuming it works with the data check figures, they proceed with that lower value.

What should a Realtor do then?

Well, first, if your lender says that a desk review of your appraisal is needed, don’t freak out.  There’s a good chance that the second appraiser will support the first appraiser’s findings. 

They may not, though, so you’ll want to start talking to your buyer about how you will proceed if the appraisal is cut.  Just like with other cut appraisals, the home buyer can request that it be disputed.  Just like with other cut appraisals, though, those disputes are hard to win.  Recent comparable sales in the subject property’s immediate marketing area (PUD/subdivision/neighborhood) carry the most weight and should be the area of focus in any value dispute. 

You also have to be open to the reality that the current value of the home might be lower than the price.  If it is and if the seller won’t drop the price, maybe this isn’t the right home for your buyer to purchase.   Lenders are protecting themselves when they verify the value of a home, but they’re protecting the buyer too.  We’ve all seen homeowners who have suffered from owing more on their home then it’s worth.  Keeping them from over paying upfront is one way to help avoid that for your client in the future.