Pages

South Bend Home Loan

Monday, September 29, 2014

My Take On My Home

IHCDA (Indiana Housing and Community Development Authority) introduced a new mortgage option called ‘My Home’ last June.  While I am typically a big fan of IHCDA’s products, I must admit that I’ve been lukewarm on this one.  Frankly, I wasn’t seeing the benefit.

Today I decided to put some math behind my first impression to see if this program really is beneficial to the homebuyer, and I thought I’d share what I found with you.  So...here you go!

The Advantages of My Home

My Home is a conventional loan option offered to both first and repeat home buyers that lets them buy with a reduced down payment (3%) at an attractive, at-market interest rate.  Typically, if a conventional mortgage has a down payment lower than 5%, the interest rate is higher in order to make up for the additional risk, so this at-market interest rate is a strong advantage.  Also, the My Home buyer gets a reduced private mortgage insurance (PMI) rate making the monthly PMI cost less than it would be with other 3% down options. 
The 3% down payment can come as a gift from a family member, which is also rare for conventional loans.  With the ability to get a conventional mortgage at a good interest rate with 3% down, reasonable PMI and an option to use gift funds for the purchase, many buyers would be attracted to the My Home program.

The Disadvantages of My Home

The biggest drawback to this program are the fees.  Like IHCDA’s Next Home product, the My Home loan typically has 2 points charged as a closing cost.  A point is a cost equal to 1% of the loan amount.  The seller can contribute towards these points but a conventional mortgage will only allow a seller to give a total  of 3% of the sales price towards the buyer’s costs so the seller’s contributions typically will not cover the 2 points, plus the additional closing costs/prepaid items related to the purchase.  This means the buyers will need to cover some of those costs themselves, along with their 3% down payment.
Additionally, the PMI is still slightly higher than it would be on a 5% down mortgage.  Yes, it is lower than many other 3% down loans out there, but putting 5% down puts a buyer into a lower PMI bracket.  Because of this, the cost of PMI for a regular 5% down mortgage is typically lower than the reduced 3% down PMI.

So Which Option Is Best?

Seeing that a buyer needs 3% down for My Home and then has to pay 2 points on top of that, my initial feeling was that they might as well just do a regular 5% down mortgage and get the lower PMI that goes with it.  They’re paying 5% either way, right?  And the PMI is cheaper?  So going with a regular 5% down loan is best, isn’t it?
For some buyers, it definitely is.  For some buyers, though, it isn’t.  Why is that, you ask?  It’s because of the credit score impact.
Let me explain.  The My Home program has just one interest rate for all buyers.  Today it is 4.5% for the 30-year fixed loan (this is the current rate and subject to change at any time).  A regular conventional loan’s interest rates will move slightly based on your credit score, though.  If you were buying a $125,000 home right now with 5% down and had a 720 or higher credit score, your interest rate would also be 4.5%.  If your credit score was 680-719 though, it would slide up to 4.625%. 
The PMI is also impacted by your credit score.  If you were buying a home with a 760 credit score right now with 3% down, the PMI would cost 0.57% per year.  If you were buying with 5% down, it would cost you 0.54% per year, which supports my original idea that 5% down is cheaper because the PMI costs less.
If your credit score was only 680 though, the benefit goes the opposite way.  A 5% down option would have PMI at 0.89% per year while the 3% down option would actually be less at 0.80% per year.

So What Does This Tell Us?

Based on this math, My Home very well might be a good option for some conventional buyers.  Buyers who want to use gift funds for their down payment and closing costs, or buyers who have a credit score under 720, should consider this. 
But how do YOU know if it’s right for YOU?  Simple.  You talk to me.  Together, we look at your specific situation and the exact numbers for you.  Based on that, you make the decision for which type of mortgage suits you best.
If you are considering a home purchase in Indiana or Michigan and have questions about the IHCDA My Home program or any other mortgage program, just give me a call!  I’d be happy to help you take your next step towards your new home.

Lori Hiscock is a Sr. Loan Officer at Ruoff Home Mortgage‘s South Bend office.  One of Michiana’s top mortgage loan officers, Lori started her lending career in 1995 after obtaining her bachelor’s degree in Finance from Western Michigan University.  You can connect with Lori Hiscock or apply online here. NMLS#404320.

Ruoff Mortgage Company, Inc. is an Indiana corporation licensed by the Indiana Department of Financial Institutions (DFI) and operates with the following licenses:

Indiana-DFI First Lien Mortgage Lending License #10994;
IL Residential Mortgage Licensee #MB.6760734;
Michigan 1st Mortgage Broker/Lender License #FL0017496.

 
 
 
 
 
 

Wednesday, September 10, 2014

More Home for Less Payment

Mortgage preapproval letters can be a bit deceiving.  Your typical mortgage preapproval letter says that a buyer is preapproved up to a set price for their home purchase.  Truth be told though, buyers are not approved for a set PRICE of a home.  Buyers are preapproved for a set PAYMENT.

Isn't the price based off of the payment though?

Yes, the maximum price is based off of the maximum payment.  A lender will decide that a buyer can afford to pay a certain amount each month for a mortgage payment and then back into a home price based off of this figure.

The problem with this system is that the lender is making certain assumptions when they back into this price.  They are assuming a certain interest rate, a certain cost for home insurance, a certain cost for property taxes and a certain cost for mortgage insurance.  If these figures are higher or lower than what the lender assumed, the price of a home that the buyer qualifies for will also be higher or lower.

What else impacts this price/payment calculation?

One of the bigger things that impacts this price payment calculation is the loan type.  This often isn't discussed much though.  Lenders frequently decide on a type of loan that seems to fit a buyer and then shows them the numbers related to that one type of loan only.  That can cap them at a lower priced home than they would have qualified for though, if a different loan type was used.   

Hmmm.....Give me an example please....

Gladly!  Amy and Russ met with me this spring about buying their first home.  They had stable employment, little debt and solid credit, but no down payment.  They could get a gift from their parents for that piece though.

They qualified for a payment up to $1,150 per month.  Many lenders would have said "FHA Mortgage!" and gone with that.  FHA will allow the down payment to be gifted so it sounds like the right fit. 

FHA has its drawbacks though.  There is a FHA financed upfront fee of 1.75% of the loan amount and the monthly mortgage insurance is higher, making the amount they qualified for lower. 

The biggest drawback for Amy and Russ was that this $1,150 payment wouldn't let them buy the home they wanted.  They had fallen in love with a house and they wanted it and only it.  The FHA payment for their dream home was going to be $1,183, so above their $1,150 max.

Saving the Day With Creative Financing

Amy, Russ and I met to go over all of their options and determined that IHCDA's Next Home conventional mortgage was a better fit.  It only needed 3% down and that piece would be provided by IHCDA.  The seller could cover some of the closing costs but they would still need some money to cover the balance.  Their parent's gift could cover that though.

Because the conventional loan had lower monthly mortgage insurance, their payment with this option was only $1,134.  Not only was it almost $50 less per month, but their parents didn't have to gift them as much money with the Next Home option.  They only needed $3,495 from them versus $5,530 for the FHA option.

So...$49 less per month and $2,035 less upfront?  Plus the ability to buy the home they truly wanted rather than have to find a cheaper one to stay under their payment cap?

Yep, that's how the story ended.  Amy and Russ got more home for a lower payment with less money needed upfront thrown in for good measure. 

If you'd like to have this kind of analysis done for your home purchase to make sure you are getting the best terms possible on your Indiana or Michigan mortgage, drop me a line or give me a call today!  (lori.hiscock@ruoff.com email, (574) 234-5201 office).



Lori Hiscock is a Sr. Loan Officer at Ruoff Home Mortgage‘s South Bend office.  One of Michiana’s top mortgage loan officers, Lori started her lending career in 1995 after obtaining her bachelor’s degree in Finance from Western Michigan University.  You can connect with Lori Hiscock or apply online here. NMLS#404320.


Ruoff Mortgage Company, Inc. is an Indiana corporation licensed by the Indiana Department of Financial Institutions (DFI) and operates with the following licenses:

Indiana-DFI First Lien Mortgage Lending License #10994;
IL Residential Mortgage Licensee #MB.6760734;
Michigan 1st Mortgage Broker/Lender License #FL0017496.