Healthy Housing Market

Today’s housing market is healthier than it has been in previous years. The economy is recovering well from the recession and unemployment is at the lowest figures we’ve seen in a more than a decade. With a selection of low and no down payment mortgages on the market and many government assistance programs available to buyers who fall short of lender expectations, homeownership is attainable and very affordable. People who couldn’t afford a home even five or ten years ago due to large down payment requirements now have an opportunity to buy a home with little or no money down. Higher wages also allow earners to reserve more money to use toward a down payment, but if they choose to save their money for other expenses there are now loan programs that give buyers financially-savvy options.

Four of the most popular low-cost mortgages on the market are the Conventional 97, FHA, USDA, and VA programs. Each program has its own specific approval standards and the benefits vary for particular buyer scenarios. In today’s housing market, lacking assets and subpar credit aren’t necessarily disqualifying. Buyers today can afford a home loan even with past credit or financial baggage and even secure a low mortgage rate. There is a mortgage option for every buyer.

When buyers think about conventional mortgages, they usually associate them with large down payments. Although down payments between 5-20% were once the norm, today’s conventional loans require as little as 3% down. The Conventional 97 program is fairy new to the market, having just been launched within the previous 5 years. It is government-backed and offered only via Fannie Mae. Approval standards are similar to FHA and are aggressively less-restrictive than what we’ve seen from conventional mortgages in the past. Also, similar to FHA loans, the Conventional 97 mandatory 3% down payments can be gifted to the buyer from family members and approved organizations. This option is great for the buyer who hasn’t been able to save enough for a down payment or who wants to reserve their cash for future expenses. Conventional 97 mortgages are offered only at a fixed-rate and are restricted to primary residences.

In some ways, Conventional 97 mortgages can be more affordable than FHA. For example, a home with a purchase price of $200,000 will have a down payment of $6,000 with the Conventional 97 loan, but with FHA the down payment will be $7,000. Also, Conventional 97 loans don’t require upfront mortgage insurance like other loans. Buyers just have to pay the annual premium until 80% equity has been reached, after which the mortgage insurance can be dropped. Where Conventional 97 loans differ from comparable low-cost mortgages is the higher credit standards. The minimum credit score is 680 and buyers who are receiving a down payment gift must have a FICO score of at least 740. This is almost 100 points higher than FHA requires of buyers in the same scenario. But for qualified buyers, the Conventional 97 loan is a great low-cost mortgage. Buyers can save money with lower down payments and cheaper mortgage insurance.

The FHA mortgage was established in the 1930s when the country was recovering from the Great Depression and the majority of Americans were renting because it was too expensive to buy a home. Very few people could meet the aggressive low-term, high-down payment mortgage standards. When the FHA-backed loan hit the market, lenders were protected from bad loans because of the mortgage insurance premiums paid by owners. Today, these owner-paid premiums are still what keeps the FHA loan’s mortgage rates low. 1 in 4 new home sales are FHA-insured. Buyers are able to purchase homes with just 3.5% down and riskier applicants are even approved because lenders can loan money more securely without the fear of potential mortgage defaults. Although mortgage insurance is required on all FHA mortgages for the life of the loan, the costs don’t break the bank. Today's mortgage insurance is actually .50% lower than it was in 2014 at .85% upfront and 1.75% annually. FHA homeowners always have the option to eventually refinance into a conventional mortgage and drop the mortgage insurance after 20% equity is reached.

FHA requires FICO scores of at least 640, even for buyers receiving a down payment gift. FHA lenders look past individual credit events to consider the entire credit portfolio and they don’t disqualify applicants for prior bankruptcies, foreclosures, and short-sales. FHA mortgage loans offer fixed-rate or adjustable-rate terms and are valid on all property types—multi-unit, condos, manufactured homes, etc. A sub-program of FHA, the 203k project, offers construction loans for upgrades on existing or newly acquired homes. The FHA mortgage has been the popular alternative to high-down payment mortgages for nearly a century. 3.5% down is a great trade for low mortgage insurance, lenient approval standards, and below-market mortgage rates.

The 100% USDA mortgage is the ideal loan for a buyer who doesn’t want to put any money down and whose credit score is average or even below-average. The USDA loan is popular among first-time homebuyers because of the lenient underwriting standards. Credit scores as low as 620 are accepted and, like FHA loans, past blemishes such as bankruptcies can be overlooked. With USDA loans, lengthy credit histories aren’t required. As long as the buyer has two years of positive credit history with no new collection accounts reported within the previous twelve months, they may qualify. If a buyer qualifies otherwise, but doesn’t have the necessary credit, alternate trade lines such as utility bills may be considered for approval.

The USDA home loan was introduced in the 1990s and is backed by the U.S. Department of Agriculture. It’s also known as a Section 502 loan, referring to section 502(h) of the Housing Act of 1949, and as the Rural Development loan. The loan was created in an effort to provide affordable, 100% financing to rural buyers with below-average income. By stimulating the housing market in more historically disenfranchised rural areas, the USDA aims to boost the economy by growing those small populations and creating jobs and a generally better quality of life. Because of these goals, the USDA loan enforces maximum income limits for all applicants. Although the limits are skewed in favor of lower-income earners, many moderate earners’ incomes also qualify, especially since the limits are affected by the number of people in a household and are based on the region where the home is located. Additionally, staying true to its alternate title, the USDA loan is only valid on homes in USDA-defined rural areas. Rural areas are traditionally categorized as undeveloped open land, but for USDA purposes these rural areas also include many small towns and suburbs. USDA has a search feature online that indicates all eligible land nationwide. Unless the home resides in a largely populated area, there is a good chance it will qualify as an estimated 97% of U.S. terrain is USDA-eligible.

Because the USDA mortgage requires no money down, mortgage insurance is mandatory for all loans. But instead of charging traditional mortgage insurance, USDA loans have a guarantee fee that keeps mortgage rates low. Similar to FHA, the guarantee fee is broken into two parts: an upfront fee and an annual fee. However, USDA’s guarantee fee is much cheaper than FHA. The upfront guarantee fee is 1.00% and the annual fee is .35%. USDA loans permit the upfront fee to be rolled into the total mortgage amount, so nothing is due from the buyer out-of-pocket. Even buyers who meet income eligibility and have enough reserves for a 3.5% down payment choose USDA over FHA because payments are often less due to the lower guarantee fee and mortgage rates.

The other 100% financing mortgage on the market today is the VA loan. It is backed by the U.S. Department of Veterans Affairs and is only available to U.S. military veterans, active duty members, and surviving spouses. Like USDA, VA loans require no down payments and feature below-market mortgage rates. Despite being 100% financing, VA loans don't require any mortgage insurance, but lenders are guaranteed repayment by the U.S. Department of Veterans Affairs.

The VA loan was conceived as a cash bonus alternative almost a century ago and was meant to alleviate the problems of post-war Americans by helping veterans establish credit and buy their own homes. Today, the VA loan is still one of the best benefits for veterans and guarantees around 300,000 homes a year. Mortgage rates are typically below-average which, in combination with the lack of mortgage insurance, means low mortgage payments—even lower than other comparable loan programs with the same purchase price. In fact, VA loans are often the cheapest on the market.

To be eligible for the VA loan, an applicant must be an honorably discharged or retired U.S. military veteran, active personnel, or a surviving spouse. VA loans also extend to members of the Reserves, National Guard, Air Force, Coast Guard, and additional branches. Applicants must show appropriate documentation proving their VA eligibility and they are subject to income and credit verification. Underwriting standards are easy for VA loans. Credit scores of 600 and up are accepted and debt-to-income ratios up to 50% are approved in some cases. In comparison, USDA debt-to-income is capped at 41% and FHA is 45%. The VA loan can save eligible military personnel a substantial amount of money in mortgage payments.

Conventional 97, FHA, USDA, and VA are a few well-known mortgages out of the many options on the market today. No two buyers are alike and, therefore, no mortgage programs are exactly alike. Various loan features will appeal to different buyers. Those with lower credit scores and fewer assets may find the USDA loan best fits their needs. Conversely, buyers with good credit and substantial assets they want to reserve might like what the Conventional 97 option offers. Since not all mortgage programs are offered by all lenders, buyers will likely need to shop around, do research, and speak to qualified mortgage professionals to see which loan program best suits their particular scenario. With these many affordable loan programs and historically low mortgage rates, homeownership is now more affordable and appealing than ever