loan limits category archives

Government loans, such as those backed by Fannie Mae, Freddie Mac, and the FHA, are slated to get more expensive and harder to qualify for, assuming changes recommended by the Treasury are implemented.

The agency released their recommendations for a complete overhaul of the mortgage market today, essentially calling for less attractive government-backed mortgages to restore the largely absent private market.

Among the changes they’d like to see are higher down payment requirements for Fannie and Freddie backed loans (10% down) and costlier annual mortgage insurance premiums on FHA loans (up .25%).

That, along with higher guarantee fees on loans securitized by Fannie and Freddie, should get the private market for mortgages up and running again.

Additionally, Treasury has recommended that the conforming loan limit fall to $625,500 from the current elevated level of $729,750 in the most expensive regions of the country on October 1, 2011.

All of these measures are aimed at reducing the government’s share of the mortgage market, which could prove a burden to taxpayers if not dealt with.

But the move could push mortgage rates higher, which are already at 10-month highs, according to the latest release from Freddie Mac.

And the fear is that such changes could throw a wrench in a possible housing recovery later this year.

The report noted that more than nine out of every ten new mortgage are guaranteed or insured by the government.

(photo: thetruthabout)

Since FHA decreased the UFMIP (up front mortgage insurance) premium and increased the Monthly MI (mortgage insurance) premium, I have seen an uptick in the number of Homepath renovation loans I am originating and I thought I would share why.

Whenever you make a comparison between loan programs you have to start with some Assumptions or a scenario:

Purchase Price:                    $200,000

Cost of Renovation:            $30,000 (if the cost of Renovation exceeds $30,000 no need to compare Homepath is not an Option)

Fico Score:                              660 (if your Fico score is less than 660 no need to compare Homepath is not an Option)

Property Type:                     Single Family or Condo (If the condo is non-warrant-able and cannot be FHA Approved no need to Compare FHA is not an Option)

Max Financing:                     FHA 96.5% LTV and Homepath 97%

What is the Difference in the rates? 

Homepath:With the above scenario I would have to charge 5.25% with 2.125% in points.  The homepath program has a number of loan level price adjustments that total 5.375% in points which include: 1.25% for loan to value and FICO score, 3.625% for No MI, .50% for 97% Loan to Value.  Those adjustments can be paid in cash as additional closing costs or paid by the lender by charging a higher rate.  The highest rate on my rate sheet today is 5.25% and that will allow me to pay 3.25% of the 5.375% in LLPAs leaving 2.125% that will need to be charged as points.

FHA 203(K) Streamline: With the above scenario I would be charging a rate of 4.75% with 0 points.  FHA does require UFMIP of 1% that is typically added to your loan amount in addition to requiring an additional .5% down payment. 

So…The real difference is about .50% in a rate and .625% in  points!  the monthly payment is about $100 less per month with the Homepath loan than the 203K streamline.  Closing costs and paperwork between the two programs are pretty similar.

Take a look at this Total Cost Analysis that I prepared comparing the two programs.

For many, this is an irrelevant question. Most clients I meet with are able to qualify for much more than they want to afford, and they are placing budget limits on themselves rather than having the lender hold the limit over their head.

Yet, some are in a situation where the amount of home they can qualify to purchase just doesn’t meet enough of the items on the wish list, or even the must-have list for that matter. For them, patience is required, and maybe some good advice as well.

There are a few variables we’ve discussed in the last few posts that I can exploit to help folks in this situation increase their home-price approval amount.

First, it almost always works to pay off debt. If you have a car loan of $12,000 and your payment is $325 per month, work extra hard to pay off the loan early and then start putting that money aside for your next car purchase. If your qualification maxed out at a $150,000 home with the car loan, then you would be qualified to purchase a $200,000 home if you had no car payment. The same goes for credit cards, student loans, and any other kind of debt you have. Eliminating it before buying a home is not only fiscally responsible, but it will also give you more buying options.

The second idea is to save more money. The larger your down payment, the lower your monthly payment. For every $1000 you put down, your monthly payment goes down by around $6 per month. That doesn’t seem like a lot, but it adds up. There is also the benefit of being able to avoid paying mortgage insurance. If you can save an extra 5 or 10%, you may be able to not only save the $40 to $70 per month in the payment, but avoid a $100 PMI payment as well. This in turn can raise the amount of home you qualify for.

Look for a home that needs repairs or one offered at a deep discount. More home does not need to mean a more expensive home. Many homes in all kinds of neighborhoods need some work, but have a lot of square footage. Buying a home that is in short sale or that is owned by a bank can be very frustrating because of the waiting game required. But the payoff in the end can be huge.

I am assisting a client right now that I met last October when he made an offer on a home that was in short sale. He was strung along until May just to find out that the home was finally being foreclosed upon and that the bank would have to fully take it over before it could be sold. He waited another month and when it came on the market he made another offer. His offer was not taken, but another was. He still waited, though, because the accepted offer still needed to be approved. This offer was finally declined, and the house went back on the market again. Another offer made and this time it’s looking more promising. Meanwhile he paid off some debt and saved a little more money.

He’s glad he waited. Patience in this case will win this buyer a very nice home that was sold in 2006 for over $600,000. He will get it for around $250,000.

Patience is the key here. Pay off debt. Work to understand the market and find a good deal. Save more money. All of these things require patience, potentially the one key ingredient missing in the past few years.

Image Use: (gemb1 per this)

If you have ever used Excel spreadsheet, which I do daily in calculating mortgage and investment solutions, the answer to the question in the title of this post requires a circular calculation.

Here’s what I mean. As you are solving for the amount of home that translates into the amount of payment you want to have, changes in one box, necessitates changes in another, which in turn changes the payment which requires a change in one or more of the inputs.

Excel does this for you, but you can do it too.

You take a simple mortgage calculator and plug in a few variables. Let’s say rates are 5%, you are choosing a 30-year fixed mortgage—so 30 years or 360 payments—then you put in an amount of the loan you will be borrowing, and you solve for the principle and interest payment.

Add a monthly amount for property taxes – Summer and winter amounts added together and divided by 12.

Add an amount for home insurance. For an estimate, take the sale price and multiply it by 0.0035 (or .35%). Divide that by 12. Then, if you have mortgage insurance (which you would for an FHA loan or a conventional loan with less than 20% down), you need to calculate and add that in. For most deals, you’ll get close enough (a little to the high side) if you use an amount that is 0.0075 (or .75%) time the loan amount. Divide that by twelve and add it in as well.

Once this is all added together, you can see where you’re at and start to move upward or downward in the price of the home (moving taxes, insurance, and mortgage insurance up or down as well).

Let’s say you are after a $1500 payment, and you want to put 10% down on a conventional loan. Without checking first, we start with a particular home that has a sale price of $200,000. You have $20,000 to put down, that’s 10%. The seller is going to pay all of your closing costs.

Your loan amount is $180,000. At 5%, 30-year fixed, the principle and interest payment is $966.28. Tuck that away.

The taxes on this particular home are listed to be $4260 per year. That makes $355 per month.

A good estimate for home insurance is 0.0035 times the sale price. $700, more or less – round up to $720 and you have $60 per month for this.

Mortgage insurance is next. Take the $180,000 loan amount and multiply by 0.0075. That comes to $1350. Divide that by 12 and you have $112.50

Your payment for this particular home would be $1493.78 per month, all included.

(If you are buying a condo, you can usually eliminate the home insurance and add in the association dues. The rest would be about the same.)

Not bad for your first try!

Image Use: (L. Marie per this)

Good news for the housing market. Both the House and the Senate passed H.R. 3081 the other day. This extension allows Fannie, Freddie, and FHA to loan in High Cost areas without charging extremely high rates, formerly known as jumbo or super jumbo mortgages.

What this means is that the normal conforming loan limits for Fannie, Freddie, and FHA remain at $417,000. Loans over $417,000 would fall into the next category, which many just call Jumbo loans. With this new extension, loans can still be sold on the secondary market up to $729,750 with the loan guarantee and insurance programs to continue backing these loans in markets with the highest cost of living. Without the extension, these loan amounts would fall under such terms as true non-conforming loan limits which in recent years have come with a much higher cost to the borrower. The conforming loan amount of $417,000 would also have reverted back to the 2009 limits. The impact of that would mean a $400,000 loan would have been more expensive and sometimes not allowed by FHA depending on the state and the county limits.

Conclusion: In a struggling economy, this opens up borrower access to affordable long term fixed rates. This cap of $729,750 is extended to September 30th, 2011. Without going through, it would have expired at the end of this year, and resulted in increased interest rates. How much of an increase?

Example : Right now, on a FHA loan, you are looking at about an extra 1.5 points more for any loan over $417,950 to $729,750. If you didn’t want to pay the extra 1.5 points, the rate would be about another 1/2 percent higher. In many cases, the higher the loan amount, the more points or rates would drop. Why? It’s called “profit margin”. If we were to keep the playing field leveled, the same profit for each loan, then as mentioned, the cost of the rate should decrease some.

Without the extension, rates could climb through the roof and the guidelines could become additionally strict. I base this opinion from 2007 when we didn’t have these loan limits extended. It was a much larger risk on the secondary market for private investors. Another impact was the fact that there was no funding from the government to back such risks and higher loan limits. In 2007 and 2008, the rates on such loan amounts in these higher rate ranges were about 1.25% to 1.75% higher. This could have definitely made the process of home ownership more cumbersome for the average person living in high cost areas such as New York City, San Francisco, and similar markets.

For such loan limits, here are some links:

• FHA maximum mortgage loan limits
• Loan limits for Fannie and Freddie