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
A recent headline in California suggested that home purchases are slowing down and values are expected to crumble soon. You can read the article here. This quite simply is not true and while California has been a predictor for the housing markets in the past, there are new regulations and conditions which determine the strength of overall housing going into 2019.
A first-time Buyer considering a home purchase in 2019 might fear a recession in the next couple years. Given that most of these buyers were teenagers during the 2008 crisis, it’s expected there is hesitation. I can promise a recession at some point, but it won’t be because of housing. We must remember that the 2008 crisis was due in large part to predatory lending practices and inflated home values, much of which was not regulated.
Fast forward to our market today, housing remains strong with low inventory and a high demand. Check out 6 reasons to buy a home for additional insights. Remember that jobs, inflation, and consumer consumption drive the market and determine how the economy trends. Housing is predicated on these core areas and the data suggest a strong outlook in 2019.
Most people do not realize interest rates drive spending and the overall economy. If you can borrower money cheap, you have more opportunities for investing with a higher return. Borrow money at a higher than average rate, your margin is less. Interest rates for housing have gone up, but it is still less than the 30-year average at 7%. Check out the rates for home loans in 1985.
While home prices have increased since this time, so has the appreciation factor for owning a home. In the Phoenix market, appreciation is consistent at 4% – 6% a year. Can this slow down? Yes, and expect appreciation to stabilize to a normal level in 2019 to a 2% – 4% level. A home’s appreciation will depend on the kind of home purchased. Consider square footage, amenities, location, year built, renovations, livability, etc. All these factors influence a Homebuyer’s decision to buy a home. Less homes on the market means more opportunities to sell your home at a higher price. But why are there less homes on the market?
Remember that jobs influence a decision to own a home. What kind of stable jobs are out there in the economy and how are people spending their money? Consumers by nature want to save monthly on their expenses and plan for the unforeseen so they do not lose everything they worked for.
Homes bought over the last 10 years were purchased at super low rates (some at 3.25% on a 30-year fixed mortgage) and close-out prices. It’s tough to walk away from an 1,800 square foot home with a $800 a month mortgage payment.
Affordability has Changed
Inflation drives the price of goods and services. The recession of 2008 taught a lot of first-time and seasoned homebuyers not to overleverage themselves with debt or risky spending. Most people watch what they are spending and as prices go up, spending curbs and goes down. Owning a home fixes a lot of monthly expenses and creates stability therefore enabling consumers to afford the things and activities they like.
That’s where the affordability factor comes in. With home prices and interest rates going up, the cost to own is much higher. The P&I on a $200,000 30-year fixed loan at 3.875% in 2012 was $940.47. Today, the P&I on the same loan but at 4.875% is $1,058.42, over $100 higher per month. Factor that property taxes have increased 2% – 4% during that time, you can see how the differences add up.
The average home price in Maricopa County, AZ is $275,000 making the affordability income to qualify for a home loan at that price point almost $65,000 per year. Yet, the appreciation gain on this home is projected over $25,000 in the next 5 years. That’s roughly 3.4% appreciation per year compounding itself over 5 years. Even if there is a recession and home values slow or drop slightly, your appreciation gain now hedges you from going underwater.
When home sales seem to be falling, remember that inventory is low and affording a home requires more income than the last 10 years. We are in a stable and normal housing market compared to before the recession and after the recovery.
Source: MBS Highway
Should I sell my Home?
This is a question I get often when helping clients pre-qualify for a new mortgage loan. The answer really depends on your goals. Are you paying off debt? Do you want to be closer to town? Are you becoming an empty-nester? Do you need more space because the family grew? Do you just want to be in a new place? All are valid questions. The timing is ripe and the advantage to buying a home now or in the next year are still in your favor.
It seems like I am in favor of homebuying because my business is predicated on originating home loans. There is a bias there that I admit. However, the data is reasonable and observing the day-to-day activities in the market tell me we’ve entered a new era in housing that will last well into the next 10 years because the demand for owning housing holds in favor the weight of consumer spending, inflation and jobs. A lot of people are moving out of California because on the cost of living, creating a strong demand for housing in Arizona.
Given that the past 10 years, since the recession, we’ve been accustomed to a strong demand for housing with historically low rates, one can’t help but question home values and interest rates now that we’ve entered a Seller’s Market. Here are 6 reasons Homebuying still makes sense, especially for Millennials.
1) Lending guidelines have changed since 2008, creating a stable housing market (lengthy, but stay with me)
The main reason we had a housing bubble was because banks, in the years leading up to 2008, allowed consumers to borrower more than they could realistically afford and on loan terms considered today as predatory lending. The class of home loans issued to these consumers were sub-prime mortgage loans. This 4-mintue video by history.com helps explain. These loans allowed borrowers with poor credit, and nearly no down payment, to borrower loans by stating their income on the application and not being required to support it with documentation.
Fast forward to 2018, lending rules have changed to prevent these kinds of loans and practices ever happening again. You must show the ability-to-repay your mortgage loan to a bank where the Loan Officer and Underwriter assess your loan approval. Basically, the sub-prime days are over so that people can realistically afford their homes. See my recent post on Self-Employed Income and ways to qualify showing the ability-to-repay.
It’s important to note that home valuation practices have also been revised to ensure prices are not over inflated due to under-the-table handshakes and side deals. Appraisers were hit heavily with regulations to ensure home values are represented with integrity based on local market trends and sales data. Buying a home today and selling it tomorrow for 50% – 100% markup is behind us. You only see this now with homes that have undergone extensive remodeling or upgrading, and it’s considered an acceptable practice because the market demands a modern home.
2) Build Equity, Growing your Money
This is probably my favorite reason to own a home because I’ve used my home’s equity to pay off debt and start a business. Equity is the additional value something gains after it’s purchased. Stock in a company builds and gains equity. Your home is similar. Waiting to buy means you lose the compound effect of your equity gain. You can see your cost of waiting by scrolling the page in the link. Be sure to complete the form.
While there are many uses for equity from your home, it’s a good idea to leverage that equity for the future. Please do not use your equity to buy a boat or an RV (unless selling your home to travel the country). Think of your equity as an aspect of your financial planning. You do not want to rely solely on your home’s equity, but it makes for a chuck of your potential savings or retirement in the future.
3) Don’t pay taxes on your equity gains
When you own a home as your primary residence and turn around to sell it later, you do not pay taxes on the equity gains from the sale up to $250,000 if filing single or $500,000 if filing a joint return – IRS Site. For this to work, the home must have been your primary residence and not have converted into a rental property.
4) Fix your monthly expenses
When you purchase a home with a fixed-rate mortgage, you lock your monthly principle and interest payments for a specified term of 15 or 30 years. Property taxes and homeowner’s insurance may fluctuate, but the bulk of your housing payment is fixed. Imagine when you want to renew your lease and the landlord charges an additional $200 to renew. Over several years, that increase adds up and will eventually force you to move, beginning the cycle all over again of moving.
Moving is a silent expense that you don’t realize until it’s too late. I’ve seen someone’s hard earned savings, that adds up to be a down payment on a home, get depleted when moving from one rental to another. Request a Rent vs Buy review by scrolling the page in the link. Be sure to complete the form.
5) Convert your home for cash flow
One objection I’ve heard a lot of lately is uncertainty about where someone wants to live. This may be because of lifestyle or employment opportunities. If you have a relatively stable income and don’t plan on moving for 3 years or so, buy a home. You will thank me later because you will have the option of selling it and taking that equity or converting the home into a rental property.
The demand for housing (rentals and purchases) is only getting stronger. You can have someone else pay the mortgage every month while you realize the equity gains. It’s like someone buying you stock every month in your home. See the chart below: Household Growth and Housing Completions.
6) A place to call home
Financial benefits aside, owning a home gives a sense of pride and fulfillment for our families. Watching our children grow up in a neighborhood and making friends or meeting new people and becoming active in a community are just some of the things that come with owning a home. Last year I helped run a charity picnic with a cornhole tournament. My family and I got to meet some great people and we supported a great cause. It was fun creating memories in the community we call home.
Owning a home is a responsibility and should be taken seriously. The reasons to buy a home in today’s market give consumers financial opportunities for the future. If you’re on the fence about buying a home, it’s worth a call to explore what it means for you. A good lender will give you all the options around the idea and help you decide if it’s a good fit.
Mortgage interest rates have gone up since last year and many people are wondering where to get the best deals. We’ve been accustomed to rates in the high 3’s and low 4’s for 10 years. It’s no wonder people are shopping everywhere for the best deal.
This list is not going to be a technical summary of the market. Instead, it will serve as a guide for understanding what you should expect and ask for when shopping for a mortgage lender.
1) Interest rates constantly change
Have you ever watched the stock market? It fluctuates daily by the hour and by the minute. People trade on these fluctuations and the new data entering the markets about consumer habits, government legislation, and many other factors that influence how the market performs.
The same is true for mortgage backed securities which determine interest rates on home loans. A company can quote a rate today, but tomorrow it may change. Don’t settle or focus on the rate quoted as your interest rate when shopping for a home. That rate is not “locked” until you go under contract to buy a home and complete a loan application.
Ask for a loan estimate (LE) and pay attention to the “rate lock” box detailing the expiration date for those terms. Be aware of bait and switch.
2) Pay attention to the lender fees
Clients sometimes shop around and hear a company offering a better deal on the interest rate. When we review the lender fees, almost always do we find the lender charging more for origination than we do. The lender is charging additional points or higher fees to give the client a lower rate to earn the business. You can put lipstick on a pig, but it’s still a pig.
3) Not every pre-qualification letter is equal
It’s a misconception to think your pre-qualification letter for a home loan will be good with another lender. Behind the scenes, lenders can have overlays, or their process can be detrimental to your qualifying circumstances.
It’s important that the loan officer handling your file understands the ins and outs of your pre-qualification. Before you commit to a switch, the lender should have all your qualifying documents in hand and reviewed your documents for a pre-qualification.
Be transparent about your goals and situation. Otherwise, you can run into problems prior to closing and potentially waste your time and money.
4) Choose your lender prior to finding a home
I’ve been on the receiving end of a client switching lenders in the middle of a transaction under contract. A purchase contract has a strict deadline for the buyer to perform on the sale of the home. The lender is tasked with closing and getting the funds to title on time, no exceptions.
A switch in the middle of the process can be very stressful to all parties involved including the Realtors and Sellers. Thankfully, we’ve followed through and gotten things done. But not having confidence in your lender could cost you the house you expected to spend your life in with your family.
It’s a lot of work to pre-qualify someone for a home loan. There are many moving pieces and organizing them is like getting all 3 of my kids to eat their vegetables at dinner with the result being they get a treat at the end. It’s exciting when it’s time to buy a house but, there is work involved on both ends.
These are just some things you should know when shopping for interest rates. Interview your prospective loan officer and find out who will work with you and take your best interest at heart as their own. That’s where the real value is in working with a mortgage company.
Need more information? Send me a message below