Given that rates are at all time lows, many buyer’s have asked me whether first time home buyer’s can qualify for these rates. So today I want to help buyer’s understand the various programs that are available, what rates might be offered, what down payments they may need and whether mortgage insurance would be required.
I will lay out comparisons for the following widely available programs: Conventional, FHA, and USDA 30 year fixed rate mortgages. These are 3 major programs that are offered, however, additional programs such as Mass Housing 0r combining a first and second mortgage to avoid private mortgage insurance may be offered.
| Conventional | FHA | USDA | |
| Minimum FICO (typical) | 640 | 640 | 640 |
| Best Rate FICO | 740 | 700 | 720 |
| Minimum Down Payment | 3% | 3.50% | 0% |
| Typical Min Down Payment | 5% | 3.50% | 0% |
| Down Payment from Gift? | Borrower must have 5% of own funds to get a gift | Yes | N/A |
| Guarantee Fee Required | NO | 1% | 2% |
| Fee Added to Loan | NA | YES | YES |
| Mortgage Insurance | YES, unless a 2nd mortgage | YES | YES |
| Mortgage Insurance Rate | Varies by Debt, FICO and Property Type | 1.15% Annually | .3% Annually |
| MI Removal | Home Equity reaches 80% | 5 years and Equity reaches 78% | Life of Loan |
| Seller Contributions | 3% of Purchase Price | 3% of Purchase Price | Unlimted, subject to Appraised Value |
| Property Location Eligibility | NA | NA | YES |
| Income Limit Eligibility | NA | NA | YES |
| Housing Ratio % (typical) | 40% | 45% | 29% |
| Debt Ratio % (typical) | 45% | 55% | 41% |
The chart below shows examples of Conventional, FHA and USDA loans and payments that might be available for a purchase of a $250,000 single family home, assuming a 740 credit score. A score of 740 will typically get the borrower the best rates.
| Convetional v. FHA v. USDA | Conventional | FHA | USDA |
| Rate Example | 4.125% | 3.750% | 3.875% |
| Appraised Value | $260,000 | $260,000 | $260,000 |
| Purchase Price | $250,000 | $250,000 | $250,000 |
| Down Payment % | 5% | 3.5% | 0% |
| Upfront Fee % | 0% | 1.0% | 2.0% |
| Upfront Fee $ Added to Base Loan amount | $0 | $2,500 | $5,000 |
| Down Payment $ | $12,500 | $8,750 | $0 |
| Loan Size | $237,500 | $241,250 | $250,000 |
| Principal and Interest Payment 30 year amortization | $1,151 | $1,117 | $1,176 |
| Annual Mortgage Insurance % | 0.59% | 1.15% | 0.30% |
| Monthly Mortgage Insurance $ | $116.77 | $231.20 | $62.50 |
| Total P, I, MI Payment | $1,267.81 | $1,348.46 | $1,238.09 |
| Allowable Seller Contributions | $7,500 | $7,500 | $10,000 |
| APR Estimate | 5.011% | 5.494% | 4.524% |
| *Assumes 740 FICO Score, Single Familly Residence. Used as example, Closing Costs additional and APR will vary by program. No points in these examples. | |||
So why the big difference in programs you might ask?
Traditionally, these programs were designed to help different types of borrowers. Fannie/Freddie loans were designed for most borrowers, who traditionally had at least 10% down payment, many with 20% down and with good credit. As home prices increased, this left a larger portion of homebuyers, who did not have enough of a down payment. That is where FHA came in. FHA and USDA are government backed programs. USDA was designed to help more rural borrowers that were underserved by Fannie and Freddie. Now that Fannie and Freddie are backed by the government against losses, more than 50% of all mortgages originated in the US market are government backed.
With the credit crisis and the mortgage meltdown, the lines between these programs have become blurred, as Fannie and Freddie are requiring very high FICO scores to get the best rate and the difference in rate between best FICO and lowest acceptable FICO is startling. By contrast, FHA and USDA offer only a slight difference in rates between 740 FICOs and 640 scores.
As you can see, each program has benefits and restricitions/costs that make them more advantageous depending on your particular situation. I would be happy to help you determine which program may be best for your needs.
To determine if you and your property will qualify for USDA loan, please click this link to the USDA: http://eligibility.sc.egov.usda.gov/eligibility/welcomeAction.do
You can reach me at dgaffin@greenparkmortgage.com or my cell at 508-254-2645.
2012 Massachusetts Housing Outlook
With 2011 now behind us, real estate agents and others related to the housing industry are hoping that 2012 will bring a significant improvement to the number of units sold and at least stabilization, if not an increase in the median sales price.
2011 ended with a nice up-tick in sales according to the National Association of Realtors. However sales remain depressed, as are several of the realtors I spoke with in the Metrowest and Central Mass areas. Central Mass, in particular, seems to have borne the brunt of the home sales price reductions and sales lag. Unit sales within the 128 belt have held up nicely, although many homes have experienced a 5-10% appraised value drop, year over year.
Interest rates have held steady at near record lows.
While this is good news for first-time homebuyers and relocating workers, as home affordability is better than at any time in recent memory, many sellers are frustrated.
As home prices continue to drop, more sellers are finding themselves with little or no equity in their homes. This not only makes them reluctant to price their home to market and sell quickly, for many of them, current rules on Loan to Value are making them unable to take advantage of today’s low interest rates and refinance.
So what will 2012 bring? A slight improvement in unit sales, and perhaps a bottom in home prices (I hope!). Here are my reasons for this conclusion:
There are a few other reasons for optimism including an increase in household formation, as well as talk of programs to rent REO properties, which may help reduce vacant homes and stabilize prices.
For all of us in the housing industry, let’s hope 2012 is an improvement on 2011. Should you have any questions regarding loan programs or qualifying, please contact me at dgaffin@greenparkmortgage.com. www.massmortgageblog.com http://www.greenparkmortgage.com/davidgaffin or can reach me on my cell at 508-254-2645.