Monday, February 22, 2010

The Official Down Payment Requirements

Here are the down payment requirements for the various types of loans:

Conventional (non-government) loans:
• For most conventional loans, the minimum down payment requirement is 5% for primary residences, 10% for second homes, and 15% for investment properties.
• If the property is a primary residence, there are special loan programs that only require 3% down, but the interest rates are higher than regular conventional loans.
• IMPORTANT NOTE: The mortgage insurance (MI) companies have stricter guidelines than the lenders do. If the loan is for more than 80% of the sales price, the MI guidelines must be followed. Typically, the MI companies require 5% down, unless the borrower is a first-time homebuyer (no ownership in the past 3 years). The MI companies also base the down payment requirement on the borrower’s credit score and whether they consider the house to be in a “restricted market”, meaning values are going down.
• Some foreclosed houses that are owned by Fannie Mae only require 3% down.
• The only way to tell for sure what the conventional down payment requirements are is to know the borrower’s financial information and the property address. If all that information is not available, then anyone telling you the down payment requirements is just making it up.

FHA loans:
• The minimum down payment is 3.5% of the purchase price.
• If the property is being sold by HUD (the house used to have an FHA loan, but is now in foreclosure), then it is possible to only need $100 down. There are restrictions to this program, primarily that the offer must be for the full listing price. If the offer is for more than the listing price, the borrower must pay the excess amount at the closing.
• FHA loans are insured by the federal government and there are no additional down payment requirements related to the mortgage insurance.

VA loans:
• There is no down payment requirement for properties up to $417,000. It is 100% financing.
• If the property is more than $417,000, then the borrower must bring 25% of the excess amount to the closing.
• VA loans are guaranteed (not insured) by the federal government, and no mortgage insurance is required.

Tuesday, February 16, 2010

Forget the Appraisal - You Don't Need One!

How about buying a house without an appraisal? Fannie Mae has a loan program called HomePath that does not require an appraisal. It’s for their REO (foreclosed) properties. Here are some of the highlights of the loans:

-- No appraisal required
-- Only 3% down payment
-- No mortgage insurance required

At the moment, they are having a special deal that includes the following:

-- The borrower can get up to 3.5% of the sales price towards new appliances. Fannie Mae buys them and delivers them to the house.
-- The borrower can get an additional 6% to pay for closing costs and pre-paids.
-- These deals must close and fund by April 30.

Here’s the web site to look at the properties:

We are an approved HomePath mortgage lender.

Thursday, February 4, 2010

Current Debt-to-Income Ratios (DTI)

We get a lot of questions about debt-to-income ratios these days. Here are the underwriting guidelines for the various types of loans:

Conventional (non-government) loans:

• If the loan is underwritten manually (by a person), the debt-to-income ratio (DTI) is 36%. If the borrower has strong compensation factors, the DTI can be as high as 45%. Compensating factors include such things as very high credit scores, large down payment, large amount of reserves (money in the bank), etc.
• If the loan is underwritten by the underwriting software that is available to some lenders, the DTI ratio is 45%, and it can go as high as 50% with strong compensating factors.
• IMPORTANT NOTE: Individual lenders are allowed to impose their own, more restrictive DTI guidelines on top of Fannie Mae’s, so make sure you are using a lender who does not do that.
• SUPER IMPORTANT NOTE: Private mortgage insurance companies impose their own, more restrictive DTI guidelines on top of the lender’s guidelines and Fannie Mae’s guidelines. At the moment, 41% is the maximum allowable DTI at most private mortgage insurance companies. Their guidelines change constantly, so this needs to be checked every time a loan is originated.
• In the old days, there were two DTI ratios for conventional loans – one for the housing expense ratio and one for the total expense ratio. Fannie Mae no longer uses two DTI ratios.

FHA loans:

• Unlike Fannie Mae, FHA uses two DTI ratios. The front-end DTI ratio (housing expenses) is 31% and the back-end DTI ratio (total expenses) is 43%. This only applies if the loan is manually underwritten.
• If the loan is underwritten by the software FHA provides to some lenders, then the ratios are not specified. It depends on credit scores, down payment, reserves, etc. We commonly get approvals from the software for ratios of 40-46% for the housing ratio and 50-55% for the total expense ratio.
• Lenders are allowed to add their own, more restrictive guidelines on top of FHA’s, so it is wise to use a lender who does not.
• Mortgage insurance is not an issue with FHA ratios because FHA insures the loan. There are no additional restrictions for mortgage insurance with FHA loans.
• If a borrower is using alternative credit (they have no credit scores and are using other trade lines to establish credit – rent, utilities, etc.), then they are restricted to the manual underwriting guidelines – 31% front-end and 43% back-end.

VA loans:

• VA only uses one, total expense ratio as well. It is 41% if the loan is underwritten manually.
• If the underwriting software that VA supplies to some lenders is used, then the DTI ratio is not specified. We typically see loans approved with DTI ratios in the 45% - 55% range. It all depends on credit scores, reserves, etc.
• Lenders are allowed to add their own, more restrictive guidelines on top of VA’s, so check with your lender before assuming VA’s guidelines can be used.
• There is no mortgage insurance with VA loans, so there are no additional restrictions related to mortgage insurance.