Over the years I’ve noticed a fairly consistent, unnecessary, and sometimes harmful pattern with first time home buyers. Many first time buyers wait until they feel their finances look exactly like a loan officer would want them to look before they apply for a mortgage. They’re typically looking for a slight raise, a larger down payment, or some other milestone before they apply.
This might seem like a typical sales pitch, but those who have followed my blog long enough, know that is not my approach or philosophy. As a professional dealing with finances on a day-to-day basis, I commend those who make financial goals and see them through. However, there’s one scenario I see commonly that first-time-buyers are not considering when delaying – affordable housing programs.
Affordable housing programs are designed for homebuyers with limited income or down payment funds, often first-time-buyers. These programs can offer assistance in down payment funds, reduced interest rates, tax credits, or all three. Many of my first time buyers wait for one more raise before applying, not knowing the newer/higher income was just enough to disqualify them from an affordable housing program. I’ve had more than 10 clients this year disqualify for a Mortgage Credit Certificate (MCC) tax credit because they wanted to wait one more year, raising their income above the local MCC income limit.
You are ultimately responsible for reliably making your mortgage payments, so buy when you’re ready. Just be sure to explore all the special programs (I’ve tried to cover as many as possible on this blog) which may be available to you before you decide to wait longer.
This is a quick tip for homeowners who financed on a FHA loan the past few years.
Most people who obtain FHA loans needed FHA due to their reduced down payment requirement. The unfortunate cost is an expensive mortgage insurance premium that has increased several times over the last few years. Our market has provided a unique opportunity for those who are in rebounding real estate markets. Case Shiller reported last year that values were rebounding nationwide while interest rates are near the best levels of the year per Mortgagenewsdaily.com.
Homeowners who used FHA to buy in 2011 and later may have a unique opportunity to refinance to a conventional loan, obtain a lower interest rate while removing their monthly PMI. If a homeowner has enough equity to roll in new closing costs and an upfront PMI premium (5% equity total equity needed after closing costs), homeowners can save a substantial amount of money. This is assuming the homeowner has improved equity but not a full 20%.
These loan types have higher costs since they have closing costs plus an upfront PMI payment. That said, homeowners who have FHA loans at 4.5% may be able to reduce their rate by 1% and remove their monthly mortgage insurance, drastically reducing their monthly cost.
This may be a small window where homeowners can consider lower rate options while values are improving. Any consumer considering this should take into consideration the length of ownership to make sure the refinance makes sense.
Mortgages of all types have different credit guidelines, but one specific guideline is worth noting.
All mortgage loans have a “seasoning” period where they require buyers to wait after a major hardship has occurred. For foreclosures, all mortgage types require a minimum of 3 years. Government backed home loans, such as FHA, VA and USDA, all use the 3 year seasoning period.
Coincidentally, most local first-time-buyer programs define a first-time-buyer as someone who hasn’t occupied home they own in the last 3 years. These programs can include Down Payment Assistance programs, special interest rates, or tax credit such as the MCC (Mortgage Credit Certificate).
If you’ve been working hard to get into a home after a foreclosure, be sure to look into your city/county/state first-time-buyer programs. It could be well worth your time.
I wish Congress only knew what I know. I wish they could have the conversations I’ve had. I wish they could meet the people I’ve met. If they did, they would be proud. They would be proud to represent these people. They would be proud to call them Americans. They would stop the regulations and policies that treat homeowners like liars and crooks – and they would start trusting that the people who need assistance with their home will pay back their debts.
Time has filtered the less responsible homeowners out of the system. With national reports showing foreclosures at a record rate, anybody who felt they could put a price tag on their credit or their integrity has left their home. Today, the only underwater homeowners left have stayed true to their commitments and have chosen a higher road, even as they’ve watched their neighbors quit with seemingly little punishment.
I get the privilege to talk to these homeowners on a daily basis. 2 years ago I would get a mix of homeowners. Many challenged with the idea of keeping their home, not seeing an end to the recession. Today’s homeowners who are underwater have seen the worst of the marketplace and are still fighting strong. Many of these homeowners have moved on to other homes, renting out their underwater mortgages to keep their debts on time, often losing money on the rent and covering the difference with their own earnings. Many of them have mortgage balances near 200% of their home’s value.
I’m honored to be able to talk to such an honest, responsible group of people on a regular basis. It’s no wonder these homeowners have found a way to keep their jobs during the recession. Their accountability is second to none and they’re probably too valuable to their companies to be laid off.
I don’t mean to put down those who lost their homes or jobs during the recession. Many hard-working Americans did all they could to stay afloat. I also understand how defeating it can be to work hard, only to see your money go to a home that is valued at half of your outstanding mortgage balance. Ultimately, I believe we have to tip our hats to those who found a way to stick it through, fight through adversity and have made it this far.
Home values are on the rise and the government is working to expand HARP to more homeowners. For all the policy makers out there, if there’s ever a time to give assistance to underwater homeowners, now is the time. They have fought through the worse of this recession and it’s time we recognize their contributions to our recovery.
HARP 3.0 (also known as The Responsible Homeowner Refinancing Act of 2013) has been revised and is being reintroduced to Congress.
The bill is relatively simple but would have a major impact to HARP if passed. The bill proposes simplicity in HARP, changing the guidelines for all lenders to match the guidelines exclusively given to the homeowner’s current loan servicer.
HARP was created with two sets of guidelines for each agency (Fannie Mae and Freddie Mac). One set of guidelines are exclusive to the current servicer/lender and the other is for all lenders. The program exclusive to the current servicer/lender has expanded guidelines which makes it easier for the homeowner to qualify compared to the second program available to the other lenders.
This update would improve HARP and fix several major issues:
- When a company has an exclusive product, they have the ability to charge a premium. For many homeowners, they’ll only qualify on the expanded guidelines offered by the current servicer. This gives the homeowner the ability to shop their loan with multiple lenders and guarantee a fair price quote.
- Lenders are given guidelines by Fannie Mae and Freddie Mac but for their own protection, may set extra guidelines. If a borrower needs the expanded guidelines and the servicer has too many overlays, they may lose their ability to refinance. Opening the guidelines to other lenders allows the homeowner to search for a lender who will provide less overlays and allow the homeowner to refinance.
- SERVICERS WHO ARE NOT LENDERS-
- This is probably the biggest problem that this bill would fix. When HARP was created and the expanded guidelines were offered to the current servicers, the policy makers overlooked the fact that some loan servicers are not mortgage lenders. Loan servicers are not the owners of the loan, they are the debt collectors. Similar to property management for rental properties, property managers have the responsibility of collecting the debt but may not be the owner of the property. Many lenders and banks act as servicers which would allow homeowners to refinance under the expanded guidelines but some companies (such as Seterus, Greentree, Ocwen and Cenlar) do not originate new loans. Homeowners who need the expanded guidelines of HARP to qualify but have their loan serviced by one of these companies are unable to refinance due to a technicality. They do not get to choose who their servicer is. What’s worse is the servicing can typically change at any time, even if the homeowner does not want the change. Many homeowners who waited for HARP 2.0 excitedly contacted the bank/lender who had their loan only to find out the servicing was transferred to another company that was not a lender. For example, Bank of America began transferring many of their mortgages to Greentree in the last couple of years. This business practice has been standardized and isn’t unethical but the guidelines for HARP damaged the homeowners ability to refinance due to this technicality. This isn’t to the fault of Bank of America or Greentree. The new bill, if passed, would fix this problem and allow these homeowners to qualify for refinancing.
Lost in the bill was the ability to refinance HARP loans that have been refinanced before. I will continue to keep everyone updated on any major changes coming down the pike for HARP loans.
Here’s a link to the recent bill changes for HARP 3.0: