Fannie Mae Announces Big Change on Student Debt
With outstanding balances of over $1.4 trillion, student debt is on the rise and is the second leading form of debt in the United States behind mortgage debt. From a balance of around $480 billion in 2006, student debt has almost tripled over the last 10 years. So how does this affect someone trying to finance a home purchase?
Student loans are debt and need to be considered in a borrower’s debt to income ratio when applying for a mortgage loan. Up until late April this year, Fannie Mae required that on a conventional mortgage loan the borrower’s monthly payment needed to be calculated to reflect at least 1% of the outstanding balance of the debt, regardless of what payment was reporting on a credit report. Now, for conventional mortgage loans, they are allowing payments which are reporting on education loans to be used for debt to income purposes even if the monthly payment is less than 1% of the outstanding balance.
Imagine someone that is just starting out in the medical industry that has $200,000 of student debt and the credit report is reporting a $1,000 monthly payment. The old guidelines would require the monthly payment to be calculated at $2,000 even though the bureaus were reporting $1,000. Now, for conventional loans, lenders can use the lower payment which is reporting on a borrower’s credit report. In the above example, that would reduce the borrower’s monthly debt obligations by $1,000, potentially increasing that borrower’s price range by over $150,000! This is a substantial change for the real estate industry as it will lead to increased affordability for borrowers with high student loan balances and low monthly payments.
Federal Funds Rate Raised for Second Time in Three Months
The Federal Open Market Committee (FOMC) is a committee within the Federal Reserve System and is in charge of making decisions which influence interest rates and growth within the United States. On March 15, the FOMC’s most recent meeting, the federal funds target interest rate was raised for the second time in three months to a new level of 1.0%. Three months prior, In December 2016, the FOMC raised the federal funds target interest rate from .50% to .75%. Since December 2008 the federal funds target interest rate has only been changed four times, and for seven years of those years (12/2008 – 12/2015) the interest rate was at an all-time low of .25%.
Wait, that’s all I need to buy a home???
Our world is evolving, advancing and surging forward at a rapid pace. Are mortgage loans the same as they used to be? Believe it or not, many buyers today still believe they need 20% down to purchase a home, but as our world evolves so do loans. Today, there is an arsenal of loan programs with down payment options less than 20%! For instance, if you’re serving, or served in the military, it’s possible you can get into a home with 0% down (VA Loan). If you’re a first-time home buyer, it’s possible you can get conventional financing with as low as 3% down (conventional loan) and if you’re a repeat buyer you can buy a home with as little as 3.5% down using an FHA loan or 5% down with a conventional mortgage loan!
There are two main categories which impact how much cash a buyer needs for closing: down payment and closing costs. How much are closing costs? Generally, a good rule of thumb for estimating closing costs is between 3 – 3.5% of the purchase price. If you’re a repeat buyer and are going with a down payment option of 3.5%, you’ll need to add roughly another 3.5% for closing costs bringing the total to 7% of the purchase price.
However, if there is something nice about closing costs, it’s that the buyer doesn’t necessarily have to pay for them. It’s possible for a buyer to negotiate in an offer that the seller will pay for all, or a portion of closing costs. On an FHA loan, the seller can pay for up to 6% of closing costs and on a conventional loan with less than a 10% down payment, the seller can pay up to 3% of closing costs.
So, what is the minimum amount of money you need to purchase a $150,000 home with an FHA Loan? The answer is $5,250. The seller can cover all the closing costs for the buyer, which means the buyer would only have to cover the minimum 3.5% down payment!
What if a buyer doesn’t have money for a down payment, but a family member will give them the money? This would be considered a gift and is potentially an acceptable source of a down payment.
Call today for more information on mortgage loan programs with low down payments!!
Breaking News: FHA Suspends Plan to Lower Mortgage Insurance Premiums
The United States Department of Housing and Urban Development (HUD) announced today, January 20, 2017, that they have suspended the plan to lower the mortgage insurance premiums on loans insured by the Federal Housing Administration (FHA). This reversal came immediately after President Donald Trump’s inauguration; an explanation as to why has not yet been provided. The Federal Housing Administration announced on January 9th, 2017 that they would reduce the annual mortgage insurance by a quarter percent for all loans closing on or after January 27, 2017 saving the average borrower approximately $500 per year.
FHA Lowers Mortgage Insurance Premiums
The United States Department of Housing and Urban Development (HUD) announced Monday that the mortgage insurance premiums on loans insured by the Federal Housing Administration (FHA) will be reduced by 25 basis points for loans closing on or after January 27, 2017. The most popular down payment for an FHA mortgage loan is 3.50%, which currently carries MIP of .85% annually. With the new change, MIP will be reduced to .60%, saving someone with a $200,000 mortgage approximately $500 annually. This will result in huge savings for FHA borrowers and will also help lower debt-to-income ratios, ultimately leading to higher affordability for FHA borrowers.
