Friday, February 22, 2008

Mortgage Limits Increase Provide Buyers Opportunity

By M. Anthony Carr

Congress has spoken on the economic stimulus package and that means most of us are going to get a nice little check in the bank – complements of yourself (it’s your money anyway, right?) Included in the package is a section that will increase the loan limits for conforming home mortgages. Without getting all financialezey on you, it means that higher loan amounts will come with lower interest rates. That will help more people to purchase in high-priced areas like here.

Where the loan limit used to be $417,000 for the Washington, D.C. metro area, it looks like it will move upwards to $562,500. (They will go into effect March 14, 2008.) Any mortgage below this amount is called a “conforming” loan – it conforms to established guidelines so that the mortgage can be sold on the secondary market (usually on Wall Street). Loan amounts above the $562,500 will now be considered “jumbo” loans, which are subject to more stringent underwriting guidelines and potentially higher interest rates. By raising this limit, loan amounts that were previously jumbo now come under the more affordable guidelines, making it easier for buyers purchasing in high-cost areas such as Northern Virginia.

When you’re talking interest rates of under 6%, you’re talking a lot of savings for many, many buyers. The catch is (and there’s always a catch!) you must apply for the new mortgage BEFORE December 31, 2008.

So what? What does that mean to you? Three things:

1) if you’re considering a move up or refinance, you MUST have your application signed, sealed and submitted before the end of the year.

2) If you need to sell your house first, before taking advantage of these new features in the market, now is the time to fix it up and prepare for the selling process. And,

3) government-backed programs (FHA and VA) are also following these new loan limits.


BTW: MILITARY RESIDENTS: Are you or a colleague preparing for your next PCS? Weichert Financial can get you VA financing up to $700,000 for qualified buyers. Call me for help alleviate the stress of the pre-listing/pre-purchasing process.

Thursday, February 07, 2008

Multi-Layered Loans Lower Down Payment, PMI

by M. Anthony Carr

If you're in the market to buy a home but have little down and want to avoid private mortgage insurance, you might want to look at the multi-layered financing options which have become increasingly available.

With these programs, there's a first loan equal to 80 percent of the purchase price, and a second loan for 10 or 15 percent of the remaining costs. The remaining money, 10 percent or 5 percent, is the buyer's down payment.

Described as "80/10/10" and "80/15/5" financing, buying with multiple loans allows purchasers to avoid the up-front costs and monthly expenses associated with private mortgage insurance (PMI).

Private mortgage insurance is a policy taken out by borrowers who lack big downpayments. Statistics show that buyers who purchase with less than 20 percent down have a higher risk of default than those who purchase with a downpayment of 20 percent or more.
If you buy with less than 20 percent down, lenders will generally require that you purchase with PMI when financing with a conventional loan. In the event of default, the policy kicks in to protect the lender.

(It's also possible to buy without PMI. In these cases, the lender self-insures -- you don't pay PMI, but you do pay a somewhat higher interest rate.)

Insurance coverage requirements for government programs such as VA and FHA loans are somewhat different.

With FHA, there is a "mortgage insurance premium" or MIP. FHA loans have a 1.5 percent up-front fee plus a monthly premium equal to .5 percent of the outstanding loan balance. FHA programs generally allow homes to be purchased with 3 percent down. The up-front fee can be financed as an addition to the loan amount.

First-time VA borrowers do not pay a monthly premium, however they do face an up-front "funding fee" equal to 2 percent of the loan amount in most cases. Many VA loans are for more than 100 percent of the value of the house, since Uncle Sam allows military veterans to finance closing costs.

Multi-layered loans are for people who want to buy with conventional financing, don't have 20 percent down, don't want to pay PMI, and don't want to wait for years to acquire a massive downpayment. In such cases they obtain a first mortgage equal to 80 percent of the purchase price. There is no PMI requirement here because there is a 20 percent gap between the amount borrowed and the purchase price.

The borrowers then obtain a second loan equal to 10 to 15 percent of the purchase price. Combine the 80 percent first loan with financing equal to another 10 to 15 percent of the purchase price, and the borrower must now bring 5 to 10 percent of the purchase price to closing as a downpayment. If you're looking at purchasing a house with a second trust, there are a couple of nuances about a second mortgage of which you should be aware.

The interest rate for the second loan is going to seem a bit higher than what you will be quoted for a regular mortgage. For instance, if you're paying 7 percent on the first trust, don't be surprised if interest on the second mortgage is considerably higher. Shop and compare rates for both loans, and look at your total monthly costs.

The interest rate for the second loan is going to run higher because the loan has more risk to the lender. In case of a default, the first trust holder may foreclose to receive payment on the loan while the second mortgage holder doesn't get a cent until the first-trust holder is paid completely. In addition, the amount of the loan is so small that the lender/investor must charge a higher interest rate to receive ample compensation.

Second trusts typically last for 5 to 15 years. Because they have a short term, they require big monthly payments to be quickly re-paid -- or they have low monthly payments and at the end of the loan term the borrower faces a big single payoff, a so-called "balloon" payment. If you can't pay or refinance the balloon payment, the property can be foreclosed.

The mortgage insurance industry argues that multi-layed loans, so-called "piggyback" financing, may be less attractive than the combination of a bigger first loan plus PMI. (See this calculator here from to see if it makes sense for you.)

But whether you prefer multi-layered financing or a big loan plus PMI, the fact is that both options allow you to buy with little down, both have costs, and both have risks. Each option should be reviewed with care to see which works best for you.