A long time ago, before I ever worked in mortgage finance, I
moved 5 times in one year between apartments and friends homes. I finally landed living with my Grandparents
so I could finish school and afford my bills.
I struggled financially and was truly grateful for my Grandparents
taking me in. I finished school and
later moved out shortly thereafter. But
all those moves taught me something valuable; renting and moving are expensive.
Granted, the average family is not moving 5 times in a
year. In fact, they may move once every
year or two. While my expenses added up
much faster, it occurred to me that even the one move or continuing the rent
cycle adds up overtime both in dollars actually spent and missed opportunity
with rising interest rates and home value appreciation.
Renting a home can be more convenient for a number a reasons;
A Landlord takes care of major repairs, you are not committed to living there permanently,
and sometimes it will be less expensive in the short term. Yet, the same considerations for renting can
translate into homeownership becoming a better option for convenience.
As a homeowner, you are your own Landlord. You will need to maintain your home. But YOU maintain your home to YOUR standards, not sub-standards to save a couple bucks. YOU control the level of work done with repairs and maintenance. I have heard countless stories of how Landlords fixed a broken water heater or dishwasher with a used one as the replacement for the appliance to just give out on them a month later. Another story involved a leaking roof that the landlord did not fix properly which later created black mold issues in the home. While you are responsible for your home, the quality of life can be much better.
Rental Rates on the rise
According to an Inman article with CoreLogic data, rental rates increased 6.9% in 2018 in Phoenix and 3.1% Nationally due to job creation and limited supply for housing. Phoenix is listed as one of the top markets for cost of living affordability and economic growth. This means owning a home and/or buying a home in 2019 will still help you take advantage of an appreciating market when values increase.
The housing demand is noticed locally in the Phoenix market with many new home projects underway. That’s because both single-family homes and rentals are in such high demand for new families, growing families, college graduates, divorcees, and retirees. Between rising rents, right-sizing and job growth, people are looking to fix their monthly expenses while leveraging wealth creation.
Looking at the Numbers
Let’s dig deeper at the numbers. Take a 3 bed 2 bath single-family home valued
at $250,000 in a neighborhood. Rent is
$1,600 per month. Below are additional expenses:
Security Deposit: $500
Pet Deposit: $300 (if applicable)
First Month’s rent: $1,600
Moving: $1,500 – $3,000
Total: $3,900 –
Cost of Waiting
Your total cost of entry is nearly 75% of the down payment
needed to purchase a home. And, you “skip”
a payment when the mortgage comes due.
When you try buying that home in a year or two, you will likely pay more
for the home which will increase your cost of entry and the monthly payment due
to rising rates and appreciation on the home’s value. Appreciation occurs when the supply is lower
than the demand. Homes in this price
point are hot in today’s market. See
The chart above depicts the historical appreciation in Maricopa
County. The conclusion to consider is
how much more you will pay for every year you decide to wait. The appreciation of home values makes the
cost of entry higher. If rental rates
are themselves expected to increase, why wouldn’t home values increase? Remember, there is a supply and demand
Amortization is a way of spreading out the cost of
something. For housing, it means
payments of money owned/borrowed (principle) and the cost of money (interest).
Looking at amortization (principle payments) and
appreciation combined, you start to see how owning a home creates wealth. The cart below depicts how overtime the money
you are paying into a home works for you.
After year one, you would gain $15k in ownership. This combines the money paid toward your
principle and the equity gained. In year
two, that number doubles to $30k. Paying
$1,600 per month towards rent ($19,200 over 12-months) goes toward zero.
As a lender, it is obvious I am a proponent of homeownership. Afterall, it’s my business. I am not opposed to why someone will continue renting and in some cases, I may recommend that setup. However, I wouldn’t be doing my job if I didn’t take the time to explore the numbers and overall breakdown of how and why homeownership is a better solution, even if the payment is a little higher than renting for the short term.
Ultimately, any decision requires some emotional and rational thought process. If you can afford a rent payment that equates to a mortgage payment, you are truly missing out on opportunity, even if it’s for the short term.
When I first started as a Loan Officer, Down Payment
Assistance (DPA) was all the rage. Many
prospective Home Buyer’s were coming out of the recession with great income and
decent credit, but lacked the assets for a down payment. In addition, home prices were so low that
just about everyone could afford the monthly payments and the terms associated
Fast-forward to 2019, changes in DPA programs have altered
it’s allure and now it’s important to consider how using a DPA will impact your
financial future when purchasing your home.
In this post, we explore the various DPA programs, their requirements,
the monthly payments, and future considerations. It’s a lot of information, but well worth the
read if you are considering a home purchase in the near future.
*Loan parameters are based on Rates and terms as of 2/1/2019. Conventional Financing terms based on a 720 FICO score and the Fannie Mae Homeready Program with 3% down payment. Program terms and rates consider coverage variations prescribed by Fannie Mae Homeready, HFA Preferred, Home In Five, and Home Plus. FHA Financing terms based on a 660 FICO score. NMLS# 1074188 All Borrowers subject to credit qualifications. Not all borrowers will qualify as certain restrictions apply on all programs. The information contained in this material is not a guarantee to extend credit or lend. Terms & conditions are subject to change without notice.
What is a DPA &
what types are offered?
The DPA programs mentioned here are offered in Maricopa
County Arizona. They grant certain
percentages of the purchase price on a home in the form of a silent second lien
towards the down payment needed. Home in
Five offers special incentives for Teachers, First Responders, Veterans,
Military, and Nurses. Home Plus allows
additional funds as a down payment towards your purchase. Below is a brief list:
Home in Five Program
Home Plus Program
Pathway 2 Purchase
Neighborhood Stabilization Program (NSP) –
Through a respective City
Matthew Hensen Program (tied to NSP)
Chicanas Por La Casa
For the sake of time and popularity, we will discuss only
the Home in Five and Home Plus programs.
Home in Five
The Home in Five will grant up to 4% assistance to cover the
down payment and/or closing costs on your new home. The 4% is the max allowed provided you meet
the requirements for credit and qualify for the special incentive. There is a maximum income limit allowed of
$99,169 unless you are using the Fannie Mae HFA Preferred portion of the program
which is $69,100. The maximum
debt-to-income ratio allowed is 45%.
That means your total obligation (including your proposed house payment)
cannot exceed 45% of your gross income used to qualify for a mortgage loan.
Your assistance is calculated off the BASE loan amount after
a down payment would be applied. For
example, Buying a home at $275,000 with FHA at 3.5% down using this program,
the BASE loan amount is $265,375. If
your max assistance is 3%, the grant will be 3% of $265,375 or $7,961.25 as
your grant. You would still need
$1,663.75 for the remaining down payment which can be a gift or come from your
The grant is now considered a forgivable silent second
mortgage loan or lien. There are no
payments due on this second lien for 36 months.
You will be required to pay back the pro-rated portion of the silent
second loan if you payoff the original first mortgage before 36 months; i.e. a
refinance, selling your home, etc. After
the 36 months, the silent second lien drops and you no longer owe those funds.
Finally, the interest rate for the Home in Five program is
pre-determined for you regardless of your FICO score. The program administrator and master servicer
set the terms for the rate. As of
2/1/2019, the rate was 5.625% for the FHA and 5.75% for Conventional & VA.
Home Plus is very similar to Home in Five except the
debt-to-income ratio allows up to 50% and the down payment grant can go from 0%
– 5%. However, the more you receive, the
higher the pre-determined interest rate.
In addition, the income limit is much lower, $66,100. Both programs do NOT require you to be a
first-time buyer and you are allowed to own other property. You must occupy the home you are purchasing
as your primary residence within 60 days when using either program.
You may be wondering (or
not in which case skip to the next section) what is HFA Preferred? House Finance Authority is a designated
department of a State government agency in charge of administering and managing
grants for homeownership. Fannie Mae
& Freddie Mac give a special discount on mortgage insurance when you
originate your loan through a HFA.
Arizona’s HFA is represented through the Industrial Development
Authority of Maricopa County. True
homebuyer grants must come through government entities. To learn more click
here to be directed.
That’s Nice: How do
these programs affect my payment?
I am so happy you asked!
In fact, thank you for staying with me to this point.
Most of my borrowers discover they will be paying more per
month on their mortgage payment using a DPA program than if they had the
capacity to fund their own down payment.
It’s important to be educated to know your options and work with a
Lender who takes your best interest as their own. Many lenders shy away from discussing the
differences for fear of losing you as a client and potentially their referral
Let’s review using a FHA loan with the Home in Five and Home
Plus programs compared to using your own funds or a gift as a down payment
source. The purchase price is $275,000
and the down payment requirement is 3.5% or $9,625. This scenario is based on a 660 FICO without
the special incentive. I did not use the
special incentive in this case because not everyone will qualify for that
advantage. If you do, you will simply
get an additional 1% in assistance. See
There’s no free lunch
Most lenders will tell you to refinance this loan
later. If you’re buying a home getting
instant equity at the purchase, then this is a good strategy because ultimately
you will build value much faster. But
what if you don’t get that instant equity?
You are stuck paying that additional $166 for the next 36 months. That adds up over time, $8,080 in interest
with less money going towards principle.
Go back to the beginning when I described your grant proceeds on
$275,000, the total was $7,961.25.
Essentially, you are still paying for your down payment over the course
of 3 years. It’s a borrowed grant.
Here is a look at a conventional loan scenario taking into
consideration the HFA Preferred mortgage insurance rates and the Homeready
program. This is the same purchase price
at 3% down.
In this scenario, you’re paying $7,990 in additional
interest over 3 years and less towards your principle during that time.
Starting out with
I had a client recently hit a Homerun out of the park using
a DPA. Their home apprised $40,000
higher than the contract purchase price.
Even though they have a forgivable silent second mortgage, we are going
to refinance them this summer and lower their payment. They will have to pay back the grant, but it
comes out of the equity they already have.
They will be saving substantially each month and over the life of their
However, for many borrowers using a DPA, they may not get
that kind of sweet. It’s rare for that
kind of value to come in and it takes a great Realtor to make something like
that happen. You need to be aware that
you will start out in a negative equity position when you use this program
because of the silent second lien.
If you refinance or sell your home, you need to pay off your
home for at least to total of your mortgage liens. For example, take the same $275,000 house
using FHA. The total lien amount will be
$277,980 when you purchased the home at $275,000. For conventional, the total lien amount will
be $274,752, which is a little better, but nearly 100% loan-to-value
(LTV). My point to this is your
appreciating value of your home will take longer to realize if you want to
consider a refinance or selling your home for the shorter future. You must have some equity for a refinance to
The down payment on a home is not limited to have a large
saving account or waiting years to buy a home with 20% down. In fact, many borrowers have been savings all
along and don’t realize they have the resources available to purchase a home.
Your 401k through your employer is a solution. Most 401k plans allow you to borrow against
your plan up to 50% of the vested balance for any purpose. The money is not taxed and is paid back
through payroll deductions. Some plans
even allow the interest you pay on the loan to go back into your 401k or the
payments are made pre-tax. You will need
to check with you plan provider.
An IRA can be leveraged if you are a First-Time Homebuyer
purchasing your primary residence. Up to
$10,000 can be withdrawn without the penalty if you are withdrawing before you
turn 59 ½. You will still pay taxes on
the $10,000 distribution (if a traditional IRA or Roth IRA when the $10,000
exceeds your initial contribution).
Immediate family can also gift you the down payment to
purchase a home. Many times borrowers
let their family know their plans and it comes up that they can help contribute
to their future.
I want to use the DPA
There is absolutely nothing wrong with using the DPA
programs described here. In fact, if
this is the only option for purchasing your home, it is a good solution because
ultimately, you still build wealth and fix your overall monthly expenses for
the future. It is just important to
understand the differences and how it can affect your overall monthly payment
IF you have the capacity to qualify for a home loan without using these
programs. We have not turned anyone away
wanting to use these programs and will always make sure to do our best giving
borrowers access to homeownership.
If you made it this far, I thank you whole-heartedly. I have these conversations daily and wanted
to make a post about DPA’s for a while to help educate and explain the
basics. The decision to buy a home is
not something to take lightly and should be treated with attention to
detail. Fortunately, working with our
team, we will manage the details for you so all you need to think about it
which home you like best. Happy House
We run into a lot of interesting scenarios in the mortgage industry to help people get home loans. After a while, they blend together because trends come and go. However, this scenario was unique and challenging. We recently closed a mortgage loan for a high income earning client saving them from writing a $200k check to their ex-spouse.
Before we continue, I must point out that our client is not avoiding any due payments but instead following the advice of their financial adviser in the timing of payments. Without too much detail, a large sum had been paid out prior to this $280k described later on. We simply were attempting to help lesson the financial hit all at once with saving the borrower the $200k upfront. The borrower is fulfilling their roll as we speak.
Learning from the Past
This wasn’t our first rodeo with our borrower. A year earlier we worked together helping them purchase an investment property with 30% down. The credit score was 620 and to top it off, there were several late payments on their existing mortgage loan. You might ask, “why would a high income earning professional be late and have a low score?”. The answer: It was not their fault.
Life happens, and the borrower was in the middle of separating from their spouse, who was living in the home with the late mortgage payments. They made an agreement that the spouse would pay the mortgage. However, payments were missed, and it adversely affected our client’s credit in a big way, dropping his FICO score to 620. Our client of course brought the mortgage current and managed the payments moving forward.
We finalized the loan on the investment property but spent a lot of time sorting out details and collecting all the necessary paperwork for their loan. Some loan approvals can be messy, but they were approved and now have a great income producing property!
Fast forward to 2018, our client was interested in purchasing a new home. From our last experience, we both knew everything had to be right this time around. We are in a seller’s market and the last thing we needed was to waste time and lose money.
It’s always serious business when buying a home. In this case, we were preparing for a purchase of $920k and working to make the payments affordable while building a loan application around guidelines favorable to the client for an approval.
We collected our client’s financials, reviewed their credit and discussed our strategy. For everything to work, the divorce had to be finalized. Last year, the couple was in mediation working out the details. They had just filed their petition with the court around the time we began the pre-qualification for the new home.
In addition, there was a lingering item on credit holding back our client. He had a high FICO of 780, but his mid-score was showing 650. We referred him to our credit expert and for $100, the negative item was removed, and his score jumped to 750. Beautiful! It should be noted the negative item was not his and he had proof to show it. We just helped him remove it faster.
So far, we are moving smoothly recalling last year and the issues we struggled with. Our homework was paying off and we were ready to start shopping for homes. We were moving along so well; our client went under contract and we agreed to push for closing before the actual close of escrow (COE). This is not something we promise in scenarios as complex as this, but we felt confident in the opportunity.
Understanding how loan guidelines work, it’s important to have your plan for getting an approval defined from the start. You should also maintain a back up plan if the first one doesn’t work. We had a plan B and used it.
Our client’s jumbo loan was not going well because the investor had a pass/fail approach to their credit. Remember those mortgage late payments from last year? Well, the investor didn’t like the fact that they occurred within the last 24 months. The kicker was, we provided over 2 years of financial reserves and accounted for their requirements that the reserves be 70% of the balance to account for time and the vesting style of those funds. In addition, our debt-to-income ratios were well within limits.
Plan B was to split the mortgage into a first and second. Our first mortgage needed to be $453,100 to conform to Fannie Mae loan limits (for 2018) and we financed a portion of the down payment in the form of a second mortgage at $236,900. Our client came in with $230,000, 25% of $920k, their original commitment. The “plan A” mortgage payment was roughly $120 less then the plan B solution, but the second mortgage could be paid off sooner with no penalty effectively lowering their housing expense without refinancing. For borrowers with high incomes, this solution can be favorable as a low maintenance solution.
The Solution & Result
The jumbo loan idea was scrapped to give us a chance of closing before the intended COE. We turned around a loan approval for the first mortgage at $453,100 within 24 hours and submitted for the second mortgage approval in that same time. After another 24 hours, we received the second mortgage approval with some conditions.
One of the conditions for the final approval, issued by the second mortgage firm, required proof that our borrower completed the lump sum alimony payment to his ex-spouse as described in the divorce decree. What made this condition problematic was the divorce decree did not describe how or by when the payment needed to be completed. It was one sentence with no clear direction.
a. (Client) shall pay to (ex-spouse) the sum of Two Hundred Eighty Thousand Dollars ($280,000) as a non-taxable equalization payment for the division of property.
Our underwriting team (first mortgage at All Western Mortgage) did not require this to be paid prior to the loan approval. In most cases, alimony payments & child support are added to a borrower’s monthly debt obligations because there is a clearly defined payment and date for the payment to be received. However, this kind of payment is treated as a contingent liability and is NOT required to count in the borrower’s recurring debt obligations per Fannie Mae guidelines. See below:
Writing a check for the remaining $200k he owned, upfront, was something he was not prepared for, especially since the funds were tied up in specific stocks which had penalties if liquidated too soon.
Fortunately, our client already paid out $80k towards this balance owed ($280k) in the last 45 days. They were clearly paying to chip away at this total. Anytime a liability is less than 10 months away from being paid off, the lender can choose to omit the debt/liability from the application if the debt does not adversely affect the borrower’s ability to make their mortgage payment.
Based on our client’s assets, their payments towards the $280k owed to their ex-spouse, and their reserves, we presented the case that the remaining $200k will be paid off in less than 10 months, given the rate the borrower paid thus far and other factors. Our client was approved with the clear-to-close on the second mortgage because of this presentation.
The client was grateful and happy that everything worked out. They were phenomenal despite our challenges. Not to say it wasn’t stressful. It’s worthy to note that our client’s Realtor, Liz Lovett, was fantastic and amazing to work with and my Processor played a huge roll in the approval.
Most lenders want the quick and easy loan to close. Despite the difficulty and challenges, I am grateful for the opportunity for growth it presented. But most importantly, I am humbly appreciative of the Client, their Realtor, and my Processing team for trusting & helping us through this file.
Local Business Owner? Looking for Sponsorship Opportunities?
Here is my story co-sponsoring last year’s Charity Cornhole Tournament
All Western Mortgage and I are once again proud to be sponsors in the annual Charity Picnic that follows the Daisy Mountain Veteran’s parade in Anthem, AZ. Last year, I was privileged to both sponsor and announce the tournament play during the picnic.
For the past 5 years, Anthem Young Professionals (AYP) has hosted a charity picnic event to raise money and awareness for a charitable cause in the community. Every year, it’s been a cornhole tournament with 2018 no exception. This year, AYP is sponsoring Youth 4 Troops and collaborating with Daisy Mountain Veterans to help a Veteran in need. Follow the links to learn more about each organization. Both are non-profit 501(c)3 organizations.
This year, as a member of AYP, I will be announcing the tournament and Chairing the event itself. It’s a lot of work juggling my own work and this event, but I’m excited for this opportunity. Here are the highlights from last year and what to expect this year.
Last November the weather was warm but not triple digit warm. Fortunately, we had all the elements of keeping as cool as we could with sunny skies covered by clouds and a light breeze. Everyone stayed well hydrated and enjoyed themselves.
During the parade, there were unique floats with the highlight being a war bird flyover. Later, a B-52 flew over several times.
There were 44 teams and 18 sponsors of the charity picnic after the parade. In all over 500 people attended the picnic and watched the tournament play on. Live music, beverages, great food from local restaurants, and bounce houses added to the atmosphere. Businesses from all over Anthem and North Phoenix participated for the title “Champion” in 2017. It was a nail biter to the end and everyone was proud to participate.
The best part of the event was the band playing the National Anthem with an electric guitar when the finals commenced. Everyone stood silent and sang along. It was moving to say the least.
2018 Goals & Plans – Steppin’ it up!
This year we expect both the parade and cornhole tournament to double in attendance all while setting the bar high for raising money for the charities. This year our goal is to raise $10,000. That means double the players and double the sponsors.
The parade will feature a fly over from Luke Air Force base, eye catching parade floats, and a Mardi Gras-style candy and prize toss to the crowd.
Enhancements to the sponsorships for the charity picnic and cornhole tournament were made to help create a stadium-like atmosphere for game play. We are working on a hot-air balloon, will host food trucks serving food for purchase, and will have a video game trailer for the older kids at no cost. Bounce houses will also be available for the kids.
The goal is to continue the fan fair of the parade into an “after-party” family environment so we can continue honoring the Veteran community and raise money for causes around Veterans and their families.
Want to Play and/or Sponsor?
We want you to play and sponsor in this year’s tournament! You will be supporting a great cause and helping the local Veteran and Armed Forces community. You can visit aypaz.com/events to register your team or become a sponsor.
The Parade and tournament will be November 3rd, with the parade beginning at 10am and the Tournament kicking off at 11:30am. Registration for teams is required in advance and will include lunch. Prizes will be announced at a later date.
I know Youth 4 Troops and Daisy Mountain Veterans would love to see your there. The venue is a great fellowship and networking event. I had a blast getting to know everyone and growing my presence in the community.
For sponsorship information, call or email Chris at email@example.com or 480-442-4494.
If my kids grow up saying they want to be a Loan Officer, it wouldn’t surprise me. But if I told my parents that growing up, they would have said, “get a real job”. Truth is, it’s definitely a real job in today’s market. The days of predatory lending are behind us since regulations caught up with much of the shenanigans. Loan Officers must be innovative in their businesses. An entrepreneur mindset is required because there is no handbook for how to do this job. But, it offers the potential for a great income and exceptional lifestyle to support my family.
I didn’t wake up one day saying I wanted to be a Loan Officer. It was 2012, and I was fed up with my 8-6 corporate job and the meager salary. For a lot of people, this is the American Dream, but for me, it felt like a prison. I was constantly being told what to do and despite my service and sales numbers being exceptional, it was never good enough. I didn’t feel fulfilled or like I was making any sort of impact that my family could appreciate. That’s when I had had enough and spoke to a former co-worker about the mortgage business.
Admittedly, I feared the commission only world where truly everything is on you to perform and provide for your family. I didn’t want to fail and walk away with my tail between my legs. My wife and I wanted to start a family and we agreed a change in careers then was much better than doing it with kids when she was not working. It was a tough decision to leave that security of a pay check. The question that I asked myself, which motivated me to make the move was, “Will I regret this decision in 3 years”? The answer was a firm yes.
My “yes” answer came with optimism for what my wife and I wanted our future to look like. We both knew we wanted more freedom from work to raise our family. This meant having the ability to work my own hours, take time off when needed for school functions, doctor appointments, and vacations without having to get “approval” from anyone. It also meant choosing who I wanted to work with and how I could generate new business.
Working in the mortgage industry is having a business within a business. Some companies allow you to be autonomous while others stick to a strict routine. What I soon learned was I worked twice the hours and sometimes went without a paycheck for up to 3 months. That was tough. But, it was worth it looking back. Growth is never easy.
Fast forward to 2018, and I am happily still in the mortgage business working as a loan officer. I’ve developed some close friendships and grown a lot closer to my faith in God and my wife. It honestly couldn’t have been done without prayer and support during the tough times. We sold our house, early on, to keep our ambitions alive.
My daughter is almost 5 years old now and this year was this first time I experienced what it was like to say, “I need to leave early because my Daughter is picking pumpkins at school”. It was surreal in that moment to remember why I made the decision to get into this business. Ultimately, I can only hope my family and kids realize why I do what I do. It’s for them.
Facebook: Chris Gonzalez – Your Neighborhood Lender