Loan Updates for 2009

The Big Three executives spent two consecutive days on Capitol Hill this past week pleading for as much as $34 billion in loans to help their industry survive.

The focus of the economy has shifted in the past few weeks. The list used to be topped by failing banks (but those are a dime a dozen) and the growing unemployment rates. Now, the the failing Big Three seems to be the most important thing to our politicians.

Side Note - when did we stop allowing companies to fail? I am so anti big government it is ridiculous. I am against any form of bailout. We have allowed these companies to make SO much money, now after a series of bad decisions (don't get me started on these) we are going to bail them out.

Having said that - mortgages really need to be on our radar too. There are some changes coming. Here is a cliff notes version of some of these changes:

FHA

* 3.5% minimum down
* 620 minimum FICO
* 580 FICO with compensating factors (if the other 2 are strong they may over look the lower FICO)
- FICO
- Income
- Down
* 6% maximum allowable concessions
* $355k maximum loan - Inland Empire

Conventional

These loans vary so much from one mortgage company to another. However, there are a couple of interesting items:

* $417k maximum loan - Inland Empire
* 10% minimum down
* 30 yr fixed 5.375% (currently) - possibly as low as 4.5% - more on this later!
* 5/1 ARM 5.875% I/O (currently)

Save or buy?

As we discuss the merits of buying a home now, my client leans over and asks, "Tim, should we buy now or save for a bigger downpayment?"

This is a very good question. A question that I would have hoped that they would have asked before we sat down on this particular day, but a good question nonetheless. As soon as my clients hear that I have a financial planning background, these are the questions that I get asked.

So, I decided to spend sometime looking at FHA rules (oh, if any of you are mortgage officers, please correct any mistakes that I may have made). I wanted to know if it is actually better to buy a home today with 3% down, or buy it AFTER saving for a downpayment.

Let me set the scenario.

Purchase Price $200,000
Downpayment $6,000 (3%)
Loan Amount $197,000
Interest Rate 6.5%
Tax Rate 1.1%

The purchase price is $197,000 because HUD charges the buyer a 1.5% premium to get an FHA loan.

PITI $1,503.50
PMI $147.75
Payment $1,651.25

Purchase Price $200,000
Downpayment $20,000 (10%)
Loan Amount $180,000
Interest Rate 6.5%
Tax Rate 1.1%

The lowest downpayment for a conventional loan is 10%, or put another way 90% is the highest loan to value of conventional loans.

PITI $1,396.05

The question really is, how long does it take to save the additional $14,000?

At $500 per month, you are looking at 28 months! If you invest the $500 and earn 10% interest your save time is down to 25 months. What is your opportunity risk???? There are 2 of them…

1. The prices of homes have corrected in just less than 2 years. The landscape of property values could adjust again and your $20,000 won’t enough to buy the home you want.
2. These loan programs exist today. With the looming problems with Fannie Mae and Freddie Mac. Who know what the lending world will look like in 6 months, let alone 2 years.

There are a few other calculations that I want to do with this scenario, but they will have to come in a different post.