There have been a lot of changes in the mortgage industry lately. Some of the most recent changes have been in the Mortgage Insurance (MI) industry. Private mortgage insurance is a type of insurance used by lenders to help limit losses in the event of loss or foreclosure of a loan. Lenders typically require MI for loans in which there is less than a 20% down payment (for purchases) or equity (for refinances). The mortgage insurance company will absorb losses up to a certain percentage of the value of the loan.
For example, if someone wants to buy a house and has a 10% down payment, a lender will provide a loan of up to 90% of the value of the home. Because there is less than a 20% down payment, the lender will require MI to cover losses equivalent to 25% of the loan amount. This insurance for the lender is a fee that borrowers pay monthly with their loan payment.
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2009 is sneaking upon us very quickly. In the mortgage business that means new loan limits. Hooray! Traditionally, this means that the OFHEO (Office of Federal Housing Enterprise Oversight) releases their Housing Price Index data, which results in higher loan limits for FHA, VA and Conforming (Fannie Mae & Freddie Mac guaranteed) types of loans. This year’s data doesn’t warrant an increase in the loan limits, but thanks to decisive action by our fearless leaders, we have new rules that expand the available loan amount limits by examining home prices at a more regional level. For many counties across the contiguous United States, the loan limits will stay the same, but for High Priced Counties, the loan limits are now adjusted according to the cost of an average home in the county. Here in Hawaii, each island has its own limit, but they all exceed the prior limit of $625,500 that had been in effect for the past two years.
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Having little to no money in the bank can be one of the main deterrents to homeownership. In this case, the logical option would be to rent since it would be less cost upfront, right? Well, if you are eligible for a VA Loan, this may not be necessarily true. Let’s do the math!
Meet Cindy, Joe & Mark
Cindy & Joe are both looking to buy a $500,000 property. Joe is eligible to finance the purchase through a VA Loan. Cindy on the other hand is not VA eligible, and will purchase via a conventional mortgage.
Now Mark is eligible for a VA Loan but feels like he can’t afford the upfront costs of buying a home right now, so he’s looking to rent. He’s looking to rent a home for about $2500, which is comparable to the $500,000 property that Cindy & Joe want to purchase (see rentometer.com).
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The last 5 years or so, finding financing to purchase a home with no down payment was relatively easy – granted you had a decent credit score. There were an abundance of 2nd mortgage products available so you can do an 80/20 loan (80% first mortgage and 20% 2nd mortgage) and avoid paying Private Mortgage Insurance (PMI).
Now if you didn’t want to pay the higher rate with the 2nd mortgage – you could just do one loan and pay the PMI. The PMI would add a few hundred dollars to your monthly mortgage bill, but at least you didn’t have to place a hefty down payment to buy the property.
Well things have drastically changed over the last 6-8 months. The lax mortgage lending guidelines that were in place during the recent real estate boom we’ve experienced has finally caught up with many lenders. Even with Hawaii’s real estate market not seeing the same dramatic drop in values as the case with most cities in the continental US – we are still affecting by this.
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3 Minute Thursdays: 3 Options When Your Appraised Value is Low
VA Funding Fee Changes – Or Not!