The Best Mortgage Loan You've Never Heard Of

Back in the early 2000's it seemed like the mortgage industry was coming out with new loan types all the time.  No Income Loans.  No Asset Loans.  No Income AND No Asset Loans.  If You Have A Pulse You Can Buy A House Loans (OK, maybe not that one).  It was nuts.

Somewhere around 2007, though, things changed.  We found ourselves in a recession and those crazy flexible loan types were given much of the blame.  The mortgage industry clamped down, taking away a lot of the fluff and leaving us with the tried-and-true mortgage products of yore (5% Down Conventional, FHA, USDA and VA).

In the past year or two, though, we've begun to see a thawing.  Underwriting requirements have loosened a bit.  PMI companies have lowered their rates and requirements. The best thing in my opinion, however, has been the addition of some new lower down payment options for conventional buyers.

Let's go over what's out there today...

Fannie 97

 The first to show back up on the scene in early 2015 was Fannie Mae's Fannie 97.  The Fannie 97 is a conventional loan that only requires a 3% down payment.  

The advantage of a conventional loan over a FHA loan is that the private mortgage insurance (PMI) eventually stops being charged in the payment.  The upfront fees are lower with conventional financing too (no 1.75% financed mortgage insurance like with FHA).  The property requirements also aren't as strict as with FHA, which is VERY appreciated here in Indiana where exterior peeling paint is pretty common due to our extreme seasons.

Fannie 97 does require the buyer to be a first time buyer.  A first time buyer is viewed as someone who hasn't owned a home in over 3 years.  Other than that, though, there are minimal extra requirements. Thankfully, there is no maximum income cap that you must be under to qualify unlike the other programs discussed below.

The downside of Fannie 97 is twofold.  First, the PMI companies charge more for their monthly coverage because the down payment is lower.  This makes the monthly payment higher for the buyer.

The second disadvantage of the Fannie 97 is that, like with most conventional loans, the interest rate goes up as your credit score goes down.  FHA loans don't see as much of a rate increase with 'less than perfect' scores, but conventional loans often see a rate increase at every 20 point increment when the score slides below 740.

Home Possible Advantage

Not to be left out of the game, Freddie Mac jumped in later in 2015 with their Home Possible Advantage loan.  Home Possible is also a 3% down loan and it's not only for first time home buyers.  There is a maximum income limit for the buyer, though (100% of the area median income).  In St. Joseph County, Indiana, that median income is currently $57,300.

One nice thing is that Freddie only counts the income of the borrower, not of everybody in the household. Many special programs are based on 'household income' regardless of who is on the loan. Not with Home Possible though.  If there is a two person household and together they make above that $57,300 but one or the other makes under $57,300 and can qualify for the loan on that income only, they could likely use this program.

Another REALLY nice thing about Home Possible is that the PMI rates are much cheaper than with the Fannie 97.  As of right now, the savings with the cheaper Home Possible PMI is equal to about 0.5% in interest rate (NICE!).

Hellooooooo HomeReady

Not to be outdone by Freddie Mac, Fannie Mae recently threw a second hat in the ring.  This winter we've seen the addition of Fannie's Home Ready Mortgage.

Like the two above, this is a 3% down program.  You do not need to be a first time buyer.  You do (maybe) need to earn below a 'maximum allowed' income limit.

Why 'maybe'?  Well, with HomeReady, the income limit is by census track - not by county. Many census tracks in our county have no income limit under this program at all.  Some have that $57,300 and some have $45,840 (current limits - subject to change).  Again, though, they only count the borrower's income, not the whole household income.

HomeReady brings a middle ground on the PMI rates.  It's not as cheap as Home Possible but it's cheaper than Fannie 97.  What potentially makes HomeReady REALLY attractive though is that it doesn't do that whole 'higher interest rate for lower credit scores' thing that the other two 3% down programs do.  With HomeReady, the interest rates are the same when your score is 680 or higher (NICE!).

SHOW ME IN PICTURES PLEASE!

Whew!  After all those words and pros and cons, I bet your mind is just BEGGING for a picture :). While it's still kind of number-nerdy, this graph does what words can't do easily - it compares the effective cost on all three options as of today.  By 'Effective Cost' I'm meaning the interest rate plus the annual PMI charge.  This is then broken down by credit score to see which is better at each point.

Well, here's one.

So...which is better?  As of today's interest rates and PMI pricing, the HomeReady option is beating the other two options if the credit score is 680-720.  At that point, Freddie's Home Possible gets a slight advantage.

For the borrower who wouldn't qualify for HomeReady (maybe buying in one of the lower max income areas and they make too much), Freddie's Home Possible is a decent option even at the lower credit scores.  If the buyer's income is just too high for either of those but they are a first time buyer, there is always Freddie 97 available.

So does this have you more confused than when you started?  It very well might with all the facts and figures.  Don't worry though - that's why I'm here!  The important thing to know is there ARE 3% down conventional options out there.  Just give me a call or drop me an e-mail (574-234-5201/lori.hiscock@ruoff.com) and I will gladly help you figure out which one is the best fit for you.

To learn more about the products covered here or any other aspects of home financing, contact Lori Hiscock at lori.hiscock@ruoff.com.  

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.

Ohio Mortgage Broker Act License #MBMB.850220.000

The Florida Office of Financial Regulation License #MLD1182

What Would The Mortgage Lender Do?

It happens all the time.  I'm sitting with a prospective home buyer, going through mortgage options together, and they ask me "What would you do if you were me?"

I love that question.  It shows that they trust my knowledge and experience and they consider my advice valuable.  So...I answer them!

That answer's not always the same either.  There isn't one 'right loan' solution.  Things like the size of their savings, the stability of their income and the likelihood of them staying in the house long-term are just a few of the factors that could make that answer different.

There are two things that I personally would ALWAYS do when buying a house, though.  Let me take a minute to share them.

Have Emergency Savings

Many people who are looking to buy a house are living paycheck to paycheck.  They don't see that as something to worry about because, hey, it's worked for them so far, right?  Many times their mortgage payment will even be lower than their rent so...why not?

Here's why not.  When you own the house, you are responsible for the house.  Things break, it is part of life, and as the homeowner you have to pay for fixing those things.

Purchasing a home warranty can protect against some of this risk but there are always things that are not covered.  I can't tell you how many times I've had a client call me after their home closing to say "Oh no, the water heater/furnace/sump pump/refrigerator broke!  I don't have the kind of money needed to fix it.  What can I do?"

My answer always breaks their heart.  "The seller isn't going to cover this and neither is the home inspector.  It's your house now.  You need to find a way."

So...what would I do?  I would always, ALWAYS, have at least $1,000 in a savings account earmarked just for potential home repairs prior to ever becoming a home owner.  $2,000 would be better...or maybe $2,500.  At a minimum though, I'd have $1,000.

Leave Room For Change

When you're buying a house, it's so easy to look short term.  This house is just right for us right now!  We can totally afford the monthly payment!  It's perfect!

It probably is perfect...now.  But will it be perfect 3, 5, 7 years from now?  While you can sell a house down the road if it is no longer 'perfect' then, there are costs involved in selling a house. Realtor commission, title company fees and property transfer costs will all have to be covered.  Home buyers frequently find that, once they want to become the home sellers, they can't.  There is not enough equity in their house to cover the costs so they can't sell.

Knowing that, I always look at a house not only in terms of "Does it fit my life now?" but also "Will it fit my life 5 years from now?"  If the answer is "Maybe not", then maybe this is not the right house for me.

That same long term approach needs to be taken on the monthly payment.  People often want to buy right up to the maximum they can qualify for.  Why not?  Who wouldn't want the best house they can get?

Here's why not - life changes.  You may need to buy a new car, a new furnace, or pay unexpected medical bills.  Your work scenario may change because of things beyond your control, or maybe it will change because you WANT it to.  You may choose to change careers or cut your hours or open a business of your own.  If you're tied to the maximum mortgage payment you could qualify for though, you're trapped.  You can't handle the things you don't want and you don't have the freedom to pursue the ones you do.

So...what would I do?  I would leave some wiggle room between my budget and that payment.  Actually, I'd leave ALOT of wiggle room.  If life brings me something bad or (hopefully) something really really good, I want to be able to take it.

There are more things I'd do, and maybe sometime I'll write a 'Chapter 2' to share those. For now, though, I'd ask all prospective home buyers to trust the advice of this wise old mortgage lender who has bought alot of houses personally and financed a WHOLE lot more for others.  Save some money and leave some wiggle room to prepare yourself for the good and the bad.  

And...when you're ready to take that step into home buying, call me :).  

To learn more about the products covered here or any other aspects of home financing, contact Lori Hiscock at lori.hiscock@ruoff.com.  

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.

Ohio Mortgage Broker Act License #MBMB.850220.000

The Florida Office of Financial Regulation License #MLD1182