The 4-1-1 on Mortgages in Today’s Market

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Earlier this year, I interviewed Rhonda Porter (local mortgage expert from The Mortgage Porter, as well as regular contributor to the Rain City Guide) about home refinancing. I was lucky enough to catch up with her once again, only this time I asked Rhonda to simplify some home loan basics that prospective home buyers might be curious about, as well as what do if you are a current homeowner and your mortgage lender has been in the news lately. 

Katrina:  Can prospective buyers purchase a home without a 20% down payment?

Rhonda: Certainly!  FHA allows a minimum down payment of 3% with loan amounts up to $567,500 until December 31, 2008 (then the loan amounts will be reduced to $522,100).   In fact, many home buyers are opting for FHA even if they have 10% or 20% down depending on what their scenarios are and due to Fannie Mae and Freddie Mac (conforming) guidelines getting tougher.   Before selecting a Loan Originator, make sure the mortgage company is approved by HUD for FHA loans by doing a search on HUD’s site.

Katrina: In today’s economy, homebuyers need every penny they can save for a house down payment. How many points should a prospective buyer reasonably expect the mortgage broker to collect for completing the loan?

Rhonda: Many mortgages are priced with a 1% origination or discount fee.  This does not mean that it’s the right rate for you nor does it meant that the mortgage originator is charging a fair fee for the rate. Here are some strategies to consider if you’re short on savings for your down payment:

  1. Have your mortgage priced with zero origination/discount points.   Typically 1% in loan fee (origination fee or discount points as shown in lines 801, 802 or 808 of the GFE) equals 0.25% to interest rate. 
  2. Similar to having your mortgage priced with zero points, you can also have it priced with zero closing costs.  Again, increasing the rate will provide ‘rebate’ which the LO can use to pay your closing costs.
  3. Ask the seller to pay your closing costs.  Depending on what your down payment and loan program is, the seller can contribute towards your actual closing costs (not your down payment).   

Katrina:  Are buyers crazy to even consider an adjustable rate mortgage (ARM) given all the recent bad news with people defaulting on their home loans?

Rhonda: There are many factors to consider before selecting a mortgage product such as how long you plan on retaining the home and/or the mortgage loan.  What is the monthly savings with an ARM over a fixed rate?  Based on rates that I quoted at Mortgage Porter last Friday, the difference between the 30 year fixed and the 5/1 ARM w/a $400,000 loan amount was $129.33 per month.  If the mortgage is retained for 5 years, the savings is $7759.  If the ARM is allowed to adjust, the home owner really needs to understand the terms.  The ARM I quoted on Friday has caps of 2/2/6 so the most the rate could adjust at the 61st payment is up or down 2%.  If you’re considering a fixed period ARM, do check out the CAPS upfront.  A 2/2/6 cap will offer you more protection over the more common 5/2/5 cap.  

Borrowers should also consider their risk tolerance.  If having a fixed period ARM (I’m not a fan of anything less than a 5 year fixed) causes grief and worry, then don’t do it.  Stay with a more traditional product, such as the 30 year fixed rate. With that said, in our current market, I have been providing more 30 year fixed rates over fixed period ARMs (such as the 5 year ARM).  ARMs are not crazy as long as the borrower completely understands the term and if it fits their financial plans.       

Katrina: I keep hearing that buyers should only take out a mortgage that they can truly afford. Do you have a rule of thumb that buyers can use to estimate what size loan to consider?

Rhonda: Lenders can approve some borrowers (based on their financial picture) for some pretty large “debt to income ratios”.   What’s even more amazing is that DTI’s are based on “gross income” before taxes are factored out and not what the income that you use to live on is.   A typical DTI for loans today is 45%.   This means that if you take 45% of your monthly gross income and subtract your monthly debts, this is what a lender could qualify you for your total mortgage payment (including taxes and insurance). 

For example, if your monthly gross income (before taxes and insurance is withdrawn) is $4000 per month, 45% = $1800.  If you have $300 of monthly debts (car, credit cards, student loans, etc); the mortgage payment you may qualify for is around $1500 (including taxes and insurance).  

Just because a lender approves you for a certain payment does not mean that you have to borrower that much.  Ultimately, it’s your responsibility to make sure your payment suits your lifestyle and that you can meet your obligations.   When deciding how much mortgage payment you’re comfortable making, make sure you are factoring in maintaining various savings/asset building accounts too.

When meeting with a Loan Originator, you can tell them that you would like to be qualified based on seeing how much home you can buy using a payment of $X and what ever you’re planning for a down payment. 

Katrina: There are quite a few mortgage lenders in the news lately. What happens if the company who services a homeowner’s mortgage goes bankrupt? Do they still need to make payments?  

Rhonda: YES you must still make your payments–even if the mortgage company you make payments to goes bankrupt.   Your monthly mortgage payment is an asset which will be sold to another mortgage servicer should your existing company go bankrupt.  You should receive notice from your current servicer before your mortgage is transferred to another company (call your current servicer to verify).

Katrina: Thanks again, Rhonda, for sharing this great information with prospective home buyers out there–I hope to check back in with you soon! More information can be found on Rhonda’s website, The Mortgage Porter.

  • http://www.mortgageporter.com Rhonda Porter CMPS

    Katrina, thanks again. I enjoyed our chat today! If any of your readers have mortgage questions we didn’t address, I’m alway happy to help answer them.

  • http://mikemueller.suburban-renewal.com/ Mike Mueller

    Unsolicited comment:
    If you are looking to finance anywhere in the state of Washington you can do no better than Rhonda Porter! Stop shopping around right now and call Rhonda – plain and simple!

  • Gary

    I find a DTI of 45% to be insane. I am in the process of closing a deal on a condo, which has a $200+ HOA, my car payment, my credit card, a personal loan. All of that closes the 40% mark. At that point, I am at the very limit of my comfort zone.

    I basically went to my LO, and told him, look, I bring home this much, I have bills that are this much, I feel comfortable spending this much on mortgage and taxes (VA Loan, no PMI), how much house can I afford?

    Turns out it wasn’t that much, when I added in the HOA, but I’m getting a nice two bedroom condo in Kitsap county about half the distance from work that I travel now.

    My mortgage rate is not what I hoped it would be, but that’s life. I’m comfortable with my payment, and the appraisal just came in at about $15,000 above what I’m buying the property for, or, more than 10%.

    Mortgages are about being realistic in what you can afford. The LO or processor, or lender may tell you that you can afford more, but what does your gut tell you? When it comes right down to it, I’ve found out that’s my best ‘advisor.’ If you don’t feel comfortable, then it’s not right.

    Gary

  • http://www.mortgageporter.com Rhonda Porter CMPS

    Mike-you are too kind! Thank you. :)

    Gary,
    I agree with you 100%. A 45% DTI is pretty steep. Especially if you do not have any other income sources. Some folks do and it’s just not income that lenders can count (maybe it’s a bonus that’s recently been added to someone’s base, for example).

    Once you take 45% off of gross income, and then maybe 25% for taxes, etc…you’re left with 30% of your paycheck for food, expenses and let’s not forget savings/retirement.

    It is all about consumers making educated choices about their finances. Just because a preapproved credit card shows up in your mail box does not mean you should go use it or max it out…the same goes with how much one can be preapproved for with financing a home.