Sometimes lenders are asked about the “secondary” markets by borrowers. It is a legitimate question, especially as the existence of a secondary market for home loans leads to lower rates for borrowers, and also helps why Fannie Mae and Freddie Mac exist.
Let’s start with a simple example. Let’s say a person (“Joe”) has $1,000 in savings. Joe is approached by his brother who wants to borrow $1,000. They have a good relationship, the brother is a good credit risk, a deal is struck and the $1,000 is loaned out by Joe.
The following day Joe is approached by his sister, an equally good risk, who wants to borrow $500. In spite of wanting to help, and earn interest, Joe has no money to lend, so must say “no” to his sister, and in fact must say no to every other opportunity to lend money out until his brother pays him back. If someone approached Joe, however, and offered to “buy” the first loan from him, and pay him $1,001, two things would happen. First, Joe’s brother would start sending his payments to the buyer of the loan. But second, and more importantly, Joe would make $1 and have $1,000 to lend out to his sister or other good credit risks.
This is exactly what happens with many lenders: they make a loan, and then sell the loan to a buyer (who commences collecting the monthly payments), and turn around and make more loans to other good credit risks. In many cases the buyer of the loans are Freddie Mac or Fannie Mae, or large banks who then begin collecting the monthly payments from the borrower. And lenders have the ability to do what they do best: offer good financing rates to their clients.
Often lenders are asked by buyers, “How much should my down payment be?” There are two sides to the question, with the buyer usually wanting as little as possible and the lender wanting as much as possible. Generally the two meet in the middle, and with good reasons.
Many buyers are limited as to how much down payment they need for a transaction due to the limit on how much money they have. Other buyers have more flexibility with down payment from the minimum required for the mortgage program for which they are applying to putting 30% or more into the purchase. The more money that is put into the down payment, the lower the mortgage rate. An aversion to debt, to monthly payments, to paying interest is not uncommon-especially following the mortgage and housing market collapses several years ago.
But “cash is king” and getting cash out of a bank account, or many different types of investment accounts, is a lot easier and cheaper than converting home equity into cash at a later date. To access equity from a home the owner either needs to obtain a second mortgage or HELOC that has transaction fees and a either a higher fixed rate or an adjustable rate, fund a cash out refinance of the primary mortgage which has transaction fees and possibly a higher rate than what a rate would be in today's market or sell the home.
There are plenty of other questions to answer. Does the borrower have a definite need for a large sum of cash in the near or medium future? Children attending college? Planned major remodeling project on the new home after moving in? Opportunity to buy into ownership or partnership at one’s business? With the new housing payment and expenses what will be the buyer’s ability to put aside money for savings, investments, retirement? Will this ability be severely impacted by a higher mortgage payment and retaining a large sum of money in those accounts you currently have? How long does the borrower intend to be in the property?
It is important to consider all of the "what-ifs" and do the math on those what-if propositions. Maximizing your down payment may be the best option for the borrower and their family, but it may not be depending on goals and objectives in the future.
There are plenty of people around with a lot of money in the bank. Unfortunately, many of them are older and already own houses whereas their kids don’t. There is a common myth that a parent cannot give their child a gift for the down payment for more than $14,000 without gift tax consequences, or that a gift must be spread out over several years.
Experienced originators know that this is not the case. Many first time homebuyers receive help from their families and many parents want to help their kids buy a home. Each parent can give their child $14,000, for example, each tax year for a total maximum of $28,000 per year from parents without having to pay a gift tax. This is helpful to know, because in some locations $14,000 may barely be enough to cover closing costs!
Lenders know that the IRS watches transactions like home purchases to make sure that all requirements of the tax code are met, but it does not require a donor (or the one receiving the gift) to pay a gift tax if the amount is over $14,000 in a tax year. It says that a gift tax return must be filed if more than $14,000 is given by any one parent to any one child in any one tax year but no tax is due. Unless the gifts given in a lifetime exceed $5.34 million, no gift tax is due. The one receiving the gift has no tax consequences. Be sure to consult your accountant for details.
But lenders have rules regarding gifts. In general, a borrower may receive a gift from a close relative to help him or her cover the down payment and closing costs. The gift amount is limitless when the down payment equals at least 20%. If the down payment is less than 20 percent, the borrower must have at least 5% of the sales price in his own money. An exception exists for FHA loans where all of the money needed to cover the down payment and closing costs may come as a gift from a close relative.
And gifts must be carefully documented, complete with a letter from the donor stating the gift does not have to be repaid and a paper trail of that gift to prove that the donor had the money to donate and that the borrower received the money from the relative.
Despite the government’s best efforts, borrowers still are occasionally puzzled by mortgage rates and pricing. They are not as simple as comparing the price of a gallon of regular unleaded gas. (But when gas companies advertise their additives for higher grades, things become more complicated.) But is there an easy way to discuss rates?
When a borrower shops for a home loan, they want to know about mortgage rates and should look at the “APR” or annual percentage rate. The APR includes both the annual interest rate as well as some — but maybe not all — non-interest charges paid at closing. The APR will be higher than the nominal interest rate because it includes additional costs. Most loan quotes include both the interest rate and discount points (the cost of doing the loan, often considered the up-front compensation to the lender). Points are paid up-front, in cash (or a higher loan amount) at closing. If the borrower expects to be a short-term owner then maybe the loan with a higher rate and fewer points is better; if the borrower expects to be a long-term owner then paying points and having a lower fixed-rate can be very attractive.
Experts and those in the industry usually prefer “par pricing” – par is a price of 100.00 (nothing paid, and nothing to be paid). In this situation all loan quotes show the interest rate with zero points. Now it’s very easy to compare rates. An FHA mortgage at 4.4 percent and an FHA mortgage at 4.6 percent are the same financial product with different costs. Why would you pay more?
So borrowers should ask lenders for a mortgage quote at par; that is, an interest rate with no points. Par pricing remains the easiest way to compare similar loan products, say a conventional loan from ABC Mortgage versus a conventional loan from XYZ Mortgage. The loans are the same, so the only issue is which lender can offer a better price.
On Wednesday January 11, 2017 The Kentucky Housing Corporation (KHC) has just announced their new Hardest Hit Fund Down Payment Assistance Program (HHF DAP) . This program will allow qualified borrowers up to $10,000 in down payment assistance towards the purchase of a new home in the State of Kentucky.
The program offers up to $10,000 at a 0 percent interest rate, which is a forgivable second mortgage loan with a 5 year term. The property must be located in Christian, Hardin, Jefferson, or Kenton County. The program does not allow for new construction properties, meaning the property must have previously been occupied.
Borrowers looking to utilize this program must be first-time home buyers (no ownership interest in the last three years). You will be required to provide the last 3 years of federal tax returns or tax transcript’s to prove eligibility. Borrowers will also need to complete pre-purchase home buyer education and also complete the Dodd-Frank Certification.
Offical Guidelines from KHC:
HHF DAP Program Guidelines:
- $10,000, 0 percent interest, forgivable second mortgage loan with a 5 year term.
- Not required to be at maximum LTV first mortgage amount.
- No less than 81 percent LTV with conventional loans.
- Property must be located in one of the four counties:
- New construction properties are not allowed.
- Property has to have been previously occupied.
- Secondary Market Purchase Price and Income Limits apply.
- Borrower must be a first-time home buyer (no ownership interest in the last three years).
- Most recent three year federal tax returns or tax transcripts required.
- Pre-purchase home buyer education required for all borrowers.
- Dodd-Frank Certification must be completed.
- Terms and Conditions form (prints with the HUD-1, Note, and Mortgage).
- This form highlights a few of the program requirements, such as occupancy/ownership status and forgiveness period.
The HHF DAP will utilize a GFE, TIL, and HUD-1, since it does not meet TRID regulations. These documents will be provided through KHC's Loan Reservation System. These loans will close in KHC's name and be funded by the lender. KHC's system will provide a Note and Mortgage in KHC's name. The lender is responsible to deliver all disclosures to the borrower(s) at time of origination and closing. All KHC Program Guides have been updated to reflect the new HHF DAP.
American Mortgage has been the #1 Lender for Kentucky Housing Corporation for over 10 years. This is a very popular program and the funds will not last. If you would like more information on this loan program please contact us or click Apply Now.
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