Family loans: great down payment option

The Federal Housing Administration (FHA) recently altered its guidelines as a result of the Economic and Housing Recovery Act of 2008. One significant change was the elimination of the seller-funded down payment assistance program. Often used by builders through non-profit organizations such as Nehemiah and Ameridream, this program enabled the seller of a property (either an individual or a builder) to “donate” an amount equal to the funds needed by a buyer for a down payment on a home when securing FHA financing.

As of Oct. 1 of this year, the FHA will no longer allow seller assisted down payments. Not only that, but the FHA actually increased the down payment requirement from 3 percent to 3.5 percent—a setback for those who want an FHA loan and are already having problems saving enough money to close on a home.

Fortunately, there is another financing option that can bring these folks a little closer to home: family loans. This feature is unique to FHA. And while it‘s not permissible for buyers to borrow the down payment from individuals when securing any other type of mortgage, FHA’s guidelines allow buyers to borrow from family members. But to obtain a family loan, borrowers must keep some specific requirements in mind:

  • The family member making the loan can be a parent, grandparent, son, daughter, stepson or stepdaughter, or a legally adopted child or foster child.
  • The term of the loan cannot be less than five years.
  • The FHA loan and family loan combined cannot be greater than 100 percent of the value of the home.
  • The scheduled loan payments, if any,must be factored into the buyer’s debt ratios.
  • Funds cannot be directly or indirectly associated with the seller, or anyone in the transaction who has a financial interest in the sale.

Now let’s combine the family loan with another advantage afforded by the Housing and Recovery Act of 2008: the $7,500 tax credit. If Grandpa is a likely candidate to supply a family loan, then he might want to know how he would get paid back. If the buyers are first timers and qualify for the tax credit, then Grandpa could get repaid come tax time.

Remember that lenders will want to verify the source of all funds to close the transaction, so be prepared to provide a copy of the loan agreement that spells out the terms and verifies that Grandpa has sufficient funds available to make the loan.

Sometimes when a window closes, another one opens, So while the recent Housing Recovery Act of 2008 has put the squeeze on the seller-funded down payment assistance program, a family loan can provide another avenue to closing on a home.
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Written by David Reed, Texas-based mortgage banker with more than 20 years experience

and author of Mortgages 101 and Mortgage Confidential.

2nd Qtr Existing Home Sales Off 18% Compared to 2007

The number of existing homes sold in the Triad fell 18 percent in the second quarter, to 2,271, compared with the 2,769 sold the in the same quarter of 2007

According to the Triad Housing Report released Wednesday by the Greensboro Regional Realtors Association, the quality adjusted average price declined 3.8 percent, to $176,704. Inventory, however, nudged up just 0.5 percent, leaving the area with 9,408 homes on the market, which, according to the report, would take about 10.2 months to exhaust.

The average time on the market increased 4 percent from the second quarter of last year.

High Point saw similar existing home sales numbers, which dropped 18.3 percent, to 366, compared with second quarter 2007, according to the High Point Housing report, also released by the Greensboro Regional Realtors Association.

The adjusted average price declined 5.8 percent, to $154,053.

While the average time on the market was up 11.6 percent, to 108.3 days, the inventory dropped 5.3 percent, to 1,416.

In Forsyth County, existing home sales were off almost 19.8 percent, to 713, from second quarter 2007, according to the Forsyth County Housing Report. Adjusted average prices also dropped, by 3.4 percent, to $194,172.

Time on the market decreased slightly, at 1.8 percent, to 102.7 days, while inventory of homes was up almost 4 percent, to 2,905.

(source: The Business Journal of the Greater Triad Area)

To Pay or Not to Pay

Numerous closing costs come with any mortgage. There’s a fee for an appraisal and a fee for a credit report… and the lender has its fees, too. And don’t forget about the attorney fee, title insurance and escrow charges. Closing costs can vary from state to state and province to province, but you really don’t have much choice of whether you want a survey or if title insurance is right for you. There will be a variety of services performed and records searched by different companies, and none of these come free of charge.

But there is one closing cost that you can control: discount points or, more simply, points.

A discount point reduces the interest rate on your mortgage. One point is equal to 1 percent of your loan amount, so on a $200,000 loan one point equals $2,000.

Why do some lenders charge points? In reality, all lenders pretty much have the same rates; it’s just that sometimes a lender will advertise a rate with a point or a rate without a point. But the decision to pay a point is yours alone.

A point will typically reduce your interest rate by a quarter of a percent on a 30-year mortgage. If your lender offers a 6.5 percent rate with no points, then you may also get 6.25 percent with one point. So how do you decide?

It’s simple. Just take the difference in monthly savings gained with the lower rate and divide that into the point. The result equals how many months it will take to “recover” the amount you paid in points. Let’s look at an example.

A 30-year fixed-rate mortgage of $200,000 at a 6.5 percent interest rate would mean a monthly principal and interest payment of $1,264.14. By paying an additional $2,000 in the form of a point, your rate would drop to 6.25 percent and the resulting payment would drop to $1,231.43; saving you $32.71 each month. When you divide that $32.71 monthly savings into $2,000 you get 61.14, or about 61 months. Your recovery period is slightly over five years. That’s a little long in my opinion and I’ve never been a big fan of paying points. Instead, I’d encourage you to take that same amount and pay down your principal.

Remember: The quarter percent difference in interest rates when paying a point is an imprecise, general mortgage rule of thumb. Whichever rate you get, be sure to divide the savings into the points paid to see how long it will take to recoup the difference.

David Reed(courtesy of David Reed of CD Reed Mortgage Bankers)

 

Gas Prices May Encourage More Walking

If you’re moving into a new neighborhood the ability to walk to destinations might be a determining factor when deciding where to live. Especially when you take into consideration the cost just to drive to the grocery store and back. A new Web site promises to help you figure out how walkable your neighborhood really is by rating how far you have to go on foot to do your errands and have a good time.

The Web site, Walk Score, sizes up the stores, restaurants, schools, parks and other destinations within walking distance of a given property and uses that information to calculate a walkability score between zero and 100.

Walk Score looks at the distance to walkable locations near an address, calculates a score for each location, and combines all of the scores into a single measurement. Walkscore creator, Matt Lerner said research shows that the average person is willing to walk less than a quarter mile to destinations they visit frequently, such as a grocery store.


The left column shows the closest location in each category, but is expandable to show all locations within walking distance. You can compare Walk Scores between neighborhoods to help determine an optimal place to live for your exercise needs.

As you can see above, the 810 W Fourth St condos in downtown Winston-Salem have a Walk Score of 77. But what does that mean? The web site provides this guide to help you interpret the numbers:

90 – 100: Walkers’ Paradise. Most errands can be accomplished on foot and many people get by without owning a car.
70 – 90: Very Walkable. It’s possible to get by without owning a car.
50 – 70: Some Walkable Locations. Some stores and amenities are within walking distance, but many everyday trips still require a bike, public transportation, or car.
25 – 50: Not Walkable. Only a few destinations are within easy walking range. For most errands, driving or public transportation is a must.
0 – 25: Driving Only. Virtually no neighborhood destinations within walking range. You can walk from your house to your car!

Rate increase could mean more competition for homes

A recent survey and a rate increase could mean more competition for homes

Recent indication is that first time home buyers are getting tired of sitting on the sidelines. According to a recent online poll taken by the National Apartment Association, 17 percent of renters plan to make the jump to home ownership in the next year; 41 percent of the 2,041 respondents planned to be home owners within two years. Only 31 percent planned to still be paying rent five years from now.

Another factor that could very soon contribute to an increase in home buying could be rising mortgage costs. Fixed-rate mortgage rates rose to 6.32 percent, the highest it has been since October. After months of aggressively dropping interest rates, many lenders are worried that the Fed will be forced to raise rates back up. As interest rates rise, so do mortgage rates. According to a press release on freddiemac.com, Frank Nothaft, Freddie Mac vice president and chief economist said that, “Mortgage rates jumped this week after a number of Federal Reserve officials, most notably Chairman [Ben] Bernanke and Vice Chair [Donald] Kohn, expressed concern over a threat of inflation.” We may very well be seeing the beginning of the end of the super-low mortgage and potential buyers may realize that with rising rates, now may be the time to jump in. Nothaft added, “Moreover, pending home sales for April unexpectedly rose by 6.3% and mortgage applications for home purchases … were also up last week.”

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