Posted by Elizabeth Dennis on January 31, 2010 | No Comments
In a prior post, we talked about how FHA loans differ from conventional loans. One of the areas of comparison we looked at was the “maximum purchase price.” Let us take a look at how that maximum amount is determined and a major benefit of setting standards.
Who Sets the Limits?
Fannie Mae and Freddie Mac are responsible for setting the loan limits on conventional loans. Fannie Mae (The Federal National Mortgage Association – FNMA) and Freddie Mac (The Federal Home Loan Mortgage Corporation – FHLMC) do not provide loans directly to you; but act as “secondary lenders” which means they lend to the institutions that lend to you.
How and When are the Limits Set?
The calculation Fannie Mae and Freddie Mac uses to calculate loan limits is quite simple really. The limits are set every October. Fannie and Freddie first determine how much the average home price increased during the prior year. They take a look at the current average home price and compare it to the average home price from the prior October. A percentage increase is calculated with these two numbers.
For example: If the average price of homes in the United States is $150,000 in October and one year later the average home price jumps to $165,000 – we know the average home price has increased by 10%.
The following year’s loan limit will simply be the current year’s amount increased by that same percentage increase we saw in the average home prices. In our example, the following year’s limit will be ($165,000 + $16,500) or $181,500.
What are the Benefits of Conforming Loans?
When a loan follows (or “conforms”) to the guidelines set by Fannie Mae and Freddie Mac, it becomes a conforming loan. When loans are underwritten to the same standards, lenders end up selling essentially the same loan (with perhaps a slight variation). In Economics 101 we learned as more and more people sell the same thing; prices for that product eventually go down. In our case, standardizing loans translates into lower rates for borrowers.
Posted by Elizabeth Dennis on January 22, 2010 | No Comments
Perhaps you’ve heard the story from family, friends or colleagues; their unfortunate tales of unexpected costs and fees that surfaced in the days leading up to, or even on the day of their home closing. You may be wondering how did your friend’s closing costs end up being so much higher than originally presented by their lender. Will this happen to you? Fortunately, the answer is “no.”
As of January 1, 2010, The U.S. Department of Housing and Urban Development (HUD) has adopted new rules to which mortgage lenders must adhere. These rules were adopted to eliminate surprises at closing.
A Standardized Good Faith Estimate
Lenders have always been required to give borrowers a listing of all expected closing costs in the form of what is called a Good Faith Estimate (GFE). Before now, there was no consistency with the GFE forms. Each lender could use its own version; presenting different information in a different manner.
Now, lenders must use a standardized, three-page form. This form must be presented to you, at no charge, within 72 hours after you apply for a loan. The form is very well laid out and documented in easy-to-understand terms.
The highlight of the new GFE is that it clearly spells out:
- Charges That Cannot Increase
There are a handful of fees that lenders are now forbidden to change. These are the ones that they can control; such as origination fees and processing fees.
- Charges That in Total Cannot Increase More than 10%
Fees from third party services (selected by your lender) such as appraisals, surveys, and title insurance will not raise more than 10%. If for whatever reason, your lender exceeds these 10% tolerances, he must reimburse you.
- Charges That Can Change
Your initial escrow deposit, daily interest, homeowners insurance, and third party services chosen by you are not subject to the10% maximum as the lender does not have control over these factors.
The GFE must also include features of your loan that could drive up your mortgage costs at some point in the future. These might be an adjustable rate loan, balloon payments, pre-payment penalties, etc. The dollar amount of these changes must be disclosed to you.
Trading Upfront Costs for a Lower Interest Rate
Agreeing to pay additional points in exchange for a lower interest rates and vice versa is common practice. You will now be able to see a clear chart, called a tradeoff table, that details how this exchange will affect your monthly payments. See exactly what your loan will look like with lower settlement charges and what it will look like with a lower interest rate. It is all laid out right before you.
Take a look for yourself. See a sample of HUD’S Good Faith Estimate.
A Much Improved HUD-1 Settlement Form
A “HUD-1” is the common real estate settlement form used by closing agents. The HUD-1 form itemizes all charges imposed upon a borrower and the seller of the home. It gives both parties a complete list of their incoming and outgoing funds. The problem with HUD-1 forms was that they bore little resemblance to the costs originally presented on the GFE. To make things worse, these HUD-1 forms only need to be given one day before closing. You can imagine your panic if the numbers on the form are not what you expected.
Today’s HUD-1 form is a fantastic upgrade. A section titled “Comparison of Good Faith Estimate and HUD-1” is an extremely helpful feature. Just as the heading states, you are able to compare line-by-line the costs on your original GFE to those on the HUD-1. It couldn’t be clearer. This section is broken down by those costs that cannot increase, those that can increase by 10%, and those that may increase; just as we’ve seen on the GFE. Here is a sample of the HUD-1 form.
Mortgage Shopping Made Easier
Not only will these new guidelines and forms reduce shock on closing day but your Good Faith Estimate will serve as great tool for mortgage comparison shopping. You can now compare apples-to-apples as you will have in hand the total cost of all fees from each lender and each lender’s GFE will have the exact same information.
Whew. Don’t you feel better now?
Posted by Elizabeth Dennis on January 20, 2010 | No Comments
Maximum Purchase Price
At the time of this writing, the maximum purchase price for conforming conventional loan ranges from $417,000 to $729,000. This amount is updated yearly and is dependent upon the county in which the home is located. Any loan above that amount is considered a jumbo or non-comforming conventional loan.
The maximum purchase price varies from state-to-state for an FHA loan. At the time of this writing, the range is $271,050 – $729,750 (again, depending on the home’s location). Typically, FHA loan limits are approximately half of what can be found in the conventional loan market.
Minimum Down Payment
Down payments range from 0 to 20% for conventional loans. The larger your down payment, the lower your interest rate and mortgage insurance costs. Higher credit scores and larger cash reserves are required for lower down payments.
FHA loans are quite flexible with regards to down payments. Generally, the minimum amount down is 3% of the home’s sale price. This 3% is made up of 2.25% down payment and .75% paid toward FHA allowable closing costs. This 3% investment can be in the form of a gift from your family, church, or government agency.
Co-Borrowers
Conventional loans require that the owner/occupant of the home qualify on their own without help from a non-occupant. FHA loans allow for the income of non-occupants to be used when qualifying for the loan.
Debt-to-Income Ratio
For a conventional loan, your PITI (mortgage payment) should not exceed 33% of your gross monthly income. Combined debts (PITI and other recurring debt) should not exceed 41%. View our previous post about PITI.
Your PITI (your mortgage payment) on a FHA loan should not exceed 29% of your gross monthly income. Combined debts should not exceed 41%. View our detailed information about debt-to-income ratios and how to calculate your own.
Mortgage Insurance
“Private Mortgage Insurance” (PMI) is mortgage insurance for conventional loans. The rates vary and mostly depend on the amount of your down payment. If you pay 20% down or more down, you are not required to carry PMI.
Mortgage insurance for FHA loans is called “Mortgage Insurance Premium” (MIP). Much like the conventional loan, your down payment amount will determine your required mortgage insurance. MIP is required for all FHA loans though MIP rates are typically lower than PMI rates for conventional loans with a similar 3% down payment.
Credit Score and Credit Rating
A conventional loan generally requires a higher credit score than an FHA loan. The minimum score will vary depending on your down payment, income and cash reserves. For a conventional loan, it is best to have a credit score of at least 620. View Newbuyer’s advice on how to view your credit rating and score.
There are no stated minimums for FHA loans, but in most cases lenders will require a credit score of greater than 600 to get an FHA loan. The higher your score; the lower your interest rate.
Older Entries
In a prior post, we talked about how FHA loans differ from conventional loans. One of the areas of comparison we looked at was the “maximum purchase price.” Let us take a look at how that maximum amount is determined and a major benefit of setting standards.
