Do You Have 20% or 30% Down To Buy A Home?

Do You Have 20% To Put Down On A Home?

Do you have 20% down payment laying around to buy a home?  How about 30%?

Perhaps you have heard the term  "QRM" or "Qualified Residential Mortgage" being bantered around the news media over the last few years.

After the last Real Estate crisis, in 2010 a new regulation called the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act) was proposed. And included in the ACT is something that relates to Lenders who make Home Loans available to consumers.  In an effort to eliminate the kind of crazy financing schemes that fueled the last housing crisis, part of the Act sought to make sure the banks would have a bigger stake in the mortgage process.

The ORIGINAL language of the proposed (Dodd-Frank Act) in part was going to require that banks keep a 5% interest in the mortgages that they bundled into securities for investors. Which on the surface sounds like a good thing.  But it also provided for "exemptions" for asset-backed securities that are collateralized exclusively by residential mortgages that qualify as “qualified residential mortgages". 

So, for a lender to be exempt from having to retain 5% of the mortgages they sell off,  they would be required to make sure that the mortgages they did make meet the proposed QRM rule.

The Qualified Residential Mortgage (QRM) was initially defined as those mortgages with at least a 20% percent down payment and no more than a 36 percent debt-to-income ratio. The rule was intended to prevent unqualified borrowers from taking out a mortgage they can't handle.  But think about this? What percentage of Americans have 20% to put down on a mortgage?  In reality this requirement would be a serious blow to average consumers and could very well serve a serious blow to the real estate market in general. 

Well...... there may be a change coming and none to soon as this is scheduled to go into effect in January of 2014.   In several news publications today there were reports that a NEW proposal  is under consideration that may change this QRM rule and the 20% requirement.  What I'm reading in the various articles indicates that the new proposal, would align the Qualified Residential Mortgage rule with a similarly named guidance governing risky home lending: The Qualified Mortgage, or QM, rule. That regulation, issued by the Consumer Financial Protection Bureau (CFPB) in January, contains no down payment requirement and offers legal protections to banks for loans to borrowers who must provide income documentation that they can repay the loan, and that their debt-to-income ratio does not exceed 43 percent.  

Everyone is excited about these proposed changes, but there was little mention of the fact that the  New Proposal also includes an additional approach that would utilize the CFPB's QM standards, but add a 30 percent down payment requirement as well.  Say What?   Let's just look at the cost of getting into a home with current lending guidelines that allow for 3% down payment compared to even 20% down let alone 30%.

Using Portsmouth, NH as an example. According to the Northern New England Real Estate Network, on September 3, 2013 there were  77 homes on the market priced from $183,000 - $7,600,000 with a median price of $429,000. 

Using the lowest priced Single Family home which is $183,000 (a circa 1972 Split Entry home with 1,138 SF of living space, 6 rooms, 3 bedrooms and 1 bath):  The cost to a buyer with 3% down payment + closing costs (which can run between 3% & 5% of the loan) would require an estimated total of  $10,980.00 in available funds from the buyer in order to close on their new home.   That same house with 20% down comes out to an estimated  $42,090.00 (3% down + estimated 3% closing costs)  substantial difference wouldn't you agree. 

Now, let's look at that Median Price Home at $429,000 (A circa 2013 Bungalow style with 1,836 SF of living space, 6 Rooms, 3 Bedrooms, 2.5 Baths).   At 3% down we're looking at an estimated cost to close of $25,740.00.   And, at 20% down that same house would cost that buyer $98,670.00 (both factoring in estimated 3% closing costs).  

Even with Seller contributions to buyer closing costs which in this market is not unreasonable, the cost to own would be out of reach for many and you can quickly see that this would lead to a great many homes unsaleable with few buyers able to afford this type of down payment.

If you are adventurous read the New Proposal for yourself.  This proposal is open to comments through the end of October. And what they end up with at the end of the day, could very well impact you or someone you know who has been thinking about buying or selling a home. 

So, if you have the savings ability, and some savings currently put aside, you might want to take a good look at buying your first home before what ever proposal ends up on the books.  

According to  James Swartzbaugh /Merrimack Mortgage New Hampshire and Maine Licensed Loan Originator - NMLS #255001 and one of our local lenders here on the Seacoast,  "most lenders (including Merrimack Mortgage), can work with 3% down or higher,with some loans still available at 100% financing as in USDA Rural Development. At this point in time, Lending is still very alive and well".  

Stay tuned.  Here are a couple of links from today's readings.   BLOOMBERG   or  MONEYWATCH

Click Here for the New Proposal 

When It Comes To Credit Score, Maybe You Want A Credit Card.

Check Your Credit At Least 1x Year

I sat down the other day with one of our local lenders* and we were chatting about Credit Scores. This lender said something to me that I think is worth sharing.  He said that a person who has say an installment loan only and no credit cards (or revolving credit), even though that person makes his/her payments on time, the credit score will tend to stay at the same level as they are not charging and paying things off.  While the installment loan is good and they are paying it on time, a good credit report is going to show activity, and that if you don't have a credit card or some kind of revolving credit, you might want to get one and use it once in awhile (and of course pay it off as well).  Doing so demonstrates (through your credit score moving) that you are buying things on credit and you are paying for them in a responsible manner thereby helping your credit score move up. 

"Optimally, for the best scores, you want to see 5 credit cards with less than say 25 % of the balance used, an installment loan/s, and all paid on time for at least 18 months.  A credit score of 640 plus works for Government purchase loans FHA etc, and larger down payment conventional loans.  But a score of 680 opens more doors, and a credit score of  720 + opens all the doors.  Higher the score, lower the rate."

Then he shared an interesting article that I want to pass on to you.  The following link is to a very good CNN article that talks about Credit Score Killers -  If you or anyone you know is trying to improve their credit or may be looking at a large purchase (such as a home) coming up, you want to ensure that your Credit Score in on track.  
http://money.cnn.com/2013/08/19/pf/credit-score-killers/index.html .

You probably already know that you can request a copy of your credit report from each of the Reporting Agency's for free every 12 months. They 3 Big Reporting Agency's are: TransUnion - Experian and Equifax -  you can contact them directly or you can go MYFICO.com and request a copy. There are other "Free" credit report  ".com" places you can go, but keep in mind if they charge you a $1.00, you'll be signed up for a free trial for a credit tracking membership - just make sure if you don't want this membership that after you get a copy of your report that you call and cancel that trial membership.

Improving your credit or maintaining a good credit rating really isn't that difficult, it just requires diligence and taking responsibility for what you buy. Talk to your Local Lender or Mortgage person for more information.

*The local lender I reference above is James Swartzbaugh /Merrimack Mortgage
New Hampshire and Maine Licensed Loan Originator - NMLS #255001