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Home Loan Toolkit

Consumer Financial Protection Bureau has published a valuable guide, Your home loan toolkit: A step-by-step guide, to help homebuyers navigate the complexities of home buying process. We at STEM Lending are committed to help demystify the home buying process for first time mortgage seekers.

A few excerpts from the toolkit (Full Home Loan Toolkit referenced below) follow:

Choosing the best mortgage for you:

1. Define what affordable means to you

Only you can decide how much you are comfortable paying for your housing each month. In most cases, your lender can consider only if you are able to repay your mortgage, not whether you will be comfortable repaying your loan. Based on your whole financial picture, think about whether you want to take on the mortgage payment plus the other costs of homeownership such as appliances, repairs, and maintenance.

2. Understand your credit

Your credit, your credit scores, and how wisely you shop for a loan that best fits your needs have a significant impact on your mortgage interest rate and the fees you pay. To improve your credit and your chances of getting a better mortgage, get current on your payments and stay current. About 35% of your credit scores are based on whether or not you pay your bills on time. About 30% of your credit scores are based on how much debt you owe. That’s why you may want to consider paying down some of your debts.

3. Pick the mortgage type—fixed or adjustable—that works for you

With a fixed-rate mortgage, your principal and interest payment stays the same for as long as you have your loan.

  • Consider a fixed-rate mortgage if you want a predictable payment.
  • You may be able to refinance later if interest rates fall or your credit or financial situation improves.

With an adjustable-rate mortgage (ARM), your payment often starts out lower than with a fixed-rate loan, but your rate and payment could increase quickly. It is important to understand the trade-offs if you decide on an ARM.

  • Your payment could increase a lot, often by hundreds of dollars a month.
  • Make sure you are confident you know what your maximum payment could be and that you can afford it.

Planning to sell your home within a short period of time? That’s one reason some people consider an ARM. But, you probably shouldn’t count on being able to sell or refinance. Your financial situation could change. Home values may go down or interest rates may go up.

4. Choose the right down payment for you

A down payment is the amount you pay toward the home yourself. You put a percentage of the home’s value down and borrow the rest through your mortgage loan.

5. Understand the trade-off between points and interest rate

Points are a percentage of a loan amount. For example, when a loan officer talks about one point on a $100,000 loan, the loan officer is talking about one percent of the loan, which equals $1,000. Lenders offer different interest rates on loans with different points. There are three main choices you can make about points. You can decide you don’t want to pay or receive points at all. This is called a zero point loan. You can pay points at closing to receive a lower interest rate. Or you can choose to have points paid to you (also called lender credits) and use them to cover some of your closing costs. The example below shows the trade-off between points as part of your closing costs and interest rates. In the example, you borrow $180,000 and qualify for a 30-year fixed-rate loan at an interest rate of 5.0% with zero points. Rates currently available may be different than what is shown in this example.

6. Shop with several lenders

You’ve figured out what affordable means for you. You’ve reviewed your credit and the kind of mortgage and down payment that best fits your situation. Now is the time to start shopping seriously for a loan. The work you do here could save you thousands of dollars over the life of your mortgage.

Explore Options

Reference: CFPB Home Loan Toolkit

Perspectives

Demystifying the Mortgage Down Payment

When you’re thinking about buying a house, the amount of your down payment plays a critical role in the process.

Your down payment is a percentage of your home’s purchase price that is paid upfront by you, in cash, when you close on your Home Loan.

Whether you’re getting your loan from a bank or a non-bank mortgage company, lenders will look at this down payment amount as your equity investment in the home, and that amount (%) plays a vital role in determining not only how much you’ll need to borrower, but also:

Which type of loan is best suited to you  a Fixed Rate Mortgage or an Adjustable Rate Mortgage.

Whether your lender will require you to pay for private mortgage insurance (often referred to as “PMI”). This typically happens if you put down less than 20% of the home’s purchase price.

Your interest rate. Because your down payment represents your investment in the home, your lender will often offer you a lower rate if you can make a higher down payment.

So, do you absolutely need to have 20% to buy a home? No.

Among Millennials especially, there is a lot of confusion about the minimum down payment needed to buy a home, and we at STEM Lending are here to make that clear.

An outlook study conducted by United Wholesale Mortgage (UWM) along with Michigan State University found that 67% of millennials thought the 20% down was indeed necessary, while only 7% were aware that a down payment can be 5% or less.

As a Millennial homebuyer, you should know that there options available to you to purchase a home with less than 20% down payment.

Additionally, you should be aware of the potential consequences of having a down payment lower than 20%, and we’ll spell that out below:

Private mortgage insurance (PMI)

For conventional financing, if your down payment is lower than 20%, your loan-to-value ratio will be higher than 80%. In that case, your lender may require you to pay private mortgage insurance, because they are lending you more money to purchase the home and increasing their potential risk of loss if the loan should go into default.

With PMI, a homebuyer can put down less than 20% of a home’s purchase price and still qualify for a conventional mortgage loan. But a homebuyer will have to make larger monthly mortgage payments (since they’ll have to pay PMI).

As a prospective homebuyer, it is essential that you think about your lender’s requirements and what a higher or a lower down payment will mean for your monthly cashflow and your ability to repay the loan. Ultimately, you have to determine if it is worth it to pay PMI each month in order to receive the other benefits of homeownership vs. saving for a larger down payment of 20% or more and avoiding PMI, even if that means waiting longer to buy a home?

Programs That Allow for Less Than 20% Down

Freddie Mac has long allowed for 5 percent down, and their Home Possible AdvantageSM mortgage is available to qualified borrowers with as little as 3 percent down, which can even be raised by a gift from a family member or employer or a grant from a government agency.

Fannie Mae announced in 2015 the “Home Ready” Buyer program, under which qualifying first-time homebuyers can have down payments as low as 3%. Both first-time or repeat home buyers are eligible. In late 2015, this program replaced Fannie Mae’s ‘MyCommunityMortgage’ program.

To receive the 3% rebate, homebuyers must complete an online homebuyer education course. Fannie Mae said that it is partnering with Framework, a nonprofit created by the Housing Partnership Network and the Minnesota Homeownership Center, to create the homebuyer education course, which is 100% online.

Down Payment Assistance Programs

Down Payment Assistance Programs can be run by your direct lender, a non-profit organization, or local and state housing authorities where you live. As a NeighborWorks Housing Survey showed in 2014: “70% of U.S. Adults are unaware of down payment assistance programs available for homebuyers,” and that’s why our STEM Lending Blog is helping to make you aware. These programs are an important tool you may be able to leverage towards homeownership, provided you qualify.

The three main types of down payment assistance are grants, second mortgage loans, and tax credits.

Grants – Grants are funds that you do not have to pay back as long as you own and occupy your home for a certain period of time.

Second mortgage loans – The most common down payment source, many second mortgage loans offered by state and local governments have low or zero interest rates, and the payments are deferred over a specified time span and, in many cases, the loan is completely forgiven over time.

Tax credits – Certain states and local governments, including housing finance agencies, issue mortgage credit certificates, which reduce the amount of federal income tax you pay. This makes more money available upfront for your down payment or closing costs.

The U.S. Department of Housing and Urban Development (HUD) provides grants to state and local organizations through the HOME Investment Partnerships Program and the Community Development Block Grant Program.

To find the programs in your state, go to HUD’s on-line listing or the handy new tool from Down Payment Resource.