Millions of homebuyers in the U.S. are eligible to purchase a single-family or multifamily home with the help of a Federal Housing Administration (FHA) loan. These loans are especially popular with younger, first-time homebuyers since they allow for a lower down payment and have more generous approval criteria.

FHA loans aren’t issued by the agency itself. Instead, the FHA provides mortgage insurance on loans made by FHA-approved lenders. This insurance protects the lender in the event the borrower runs into payment difficulties and makes it easier for the lender to approve a loan.

How do you decide if an FHA loan is right for you? Here are some key points to help you decide:

Low Minimum Down Payment

While some people wait until they’ve saved enough to make a large down payment, you can  apply for an FHA loan with just 3.5 percent of the home’s purchase price. Buying now with a smaller down payment enables you to start building equity in a home sooner, which can give you a stronger financial base.

Mortgage Insurance Premiums

As you evaluate your budget for a home purchase using an FHA loan, keep in mind that part of your closing costs and your monthly payments will be made up of the FHA insurance premiums.

At closing, the FHA charges an upfront, one-time premium of 1.75 percent of the mortgage amount. This fee can amount to thousands of dollars ($1,750 for every $100,000 borrowed) added on top of typical closing costs.

Once you begin making mortgage payments, you will also have to account for an annual premium that is paid over the course of 12 monthly payments each year. This annual premium (0.85 percent of the mortgage amount on a 30-year loan with the minimum down payment) would amount to $850 per year for every $100,000 of the loan balance, adding just under $71 to each monthly payment.

Credit Score Leeway

Your overall pattern of dealing with credit responsibilities is the biggest factor in securing any mortgage. While it’s always good to know your credit score and to do everything you can to keep it strong, the more generous terms of an FHA loan allow you to apply even if your score is less than perfect.

Taking on a mortgage is a big step. We encourage you to speak with your Loan Officer to see if you’re financially ready and able to step into homeownership with the help of an FHA mortgage.

Coming up with enough for a down payment doesn’t have to be a reason to delay the purchase of a home. With over 2,200 down payment assistance programs available across the country—all with the intent of making homeownership more affordable to more buyers—you may be much closer than you think to making a purchase.

The Nature of Assistance

Assistance comes from numerous entities. These include state housing finance authorities, local municipalities and counties, and neighborhood groups and nonprofit organizations. Employers who are having difficulty recruiting talent to their locations, which are as likely to be rural as they are urban, may also offer help.

In fact, high-priced areas like Los Angeles, Miami, Denver, and New York City offer the most assistance. According to a joint study conducted by Realtor.com and Down Payment Resource titled, “10 Priciest Metros Where Buyers Can Score the Most Down Payment Help,” the average assistance can range from just over $12,000 to $40,000 in some areas.

That help can come in a variety of forms and, if you qualify for multiple programs, it can also be layered for greater affordability. These programs may include nonrepayable grants, forgivable loans, mortgage credit certificates of up to $2,000 in annual tax credits, deferred loans (often without interest), and low down payment mortgages.

Who Qualifies

While most of the programs are intended for first time buyers, many are also available to experienced homeowners. Typically, there are income and sales price limits, but these can be generous, depending on the program’s underlying incentive. Often, a needs-based criteria is a factor in order to help lower income families make the move to private ownership. However, this is not always the case. Among the audiences most targeted by these programs are law enforcement and municipal employees, health care workers (including nurses), teachers, firefighters, anyone with a military background, and disabled individuals.

In nearly every case the buyer will be required to be an owner-occupier in order to access these programs, not an absent landlord or occasional resident. Often, there is a minimum buyer investment and an education-counseling requirement that may need to be met. The biggest requirement is being able to qualify for a first mortgage based on your credit, current debt exposure, and income.

Finding Down Payment Gold

As you start to think about homeownership, it is a good idea to look into the programs that serve your area. Check with your state’s financing authority, then research the availability of other programs that may benefit your profession and the neighborhoods you are considering.

Your Real Estate Agent and Loan Officer are also good resources. Different lenders are involved in a variety of community initiatives, and most offer access to loans with low down payment options. These include Federal Housing Administration mortgages (which have 3.5% minimum down payment requirements), Fannie Mae’s new Conventional 97% mortgage, and Freddie Mac’s Home Possible mortgage. If you are a veteran, the U.S. Department of Veterans Affairs offers mortgages with no down payment requirement. Similarly, U.S. Department of Agriculture mortgages also offer a zero down payment option.

While having a down payment enables you to have equity in your home from the start, purchasing it with the help of a down payment assistance program can let you start building equity faster and in a more affordable way. With so much money available, it doesn’t hurt to see if you qualify to claim some for yourself.

Once you’ve obtained a preapproval or mortgage commitment letter, typically the lender approves your loan application based on conditions, which means you have to satisfy certain requirements before your loan is fully approved.  Usually, those conditions fall into two categories: “prior to documents” conditions and “prior to funding” conditions. These conditions may be standard or specific to your loan type. Either way, in order to continue on the path to final loan approval, you’ll have to comply with all of the loan conditions.

Prior to Documents

The “prior to documents” condition refers to the standards you have to meet before the lender will issue your loan documents. Since the Underwriter reviews your application to verify its accuracy and to make sure you qualify for the loan, the underwriting department will typically require you to provide supporting documents. For instance, the Underwriter may request that you supply a certified copy of your child support agreement to prove you’re entitled to a specific monthly income, proof you paid off an auto loan or credit card to decrease your debt-to-income ratio, or explanation of a sizeable banking transaction. While these are specific to a borrower’s financial situation, there are other conditions that are more standard across the board such as employment verification, an appraisal that exceeds the value of the home, or proof of mortgage insurance. Meeting these conditions is the first of two important steps you have to complete in order to turn your conditionally approved loan into a fully funded loan because an Underwriter will not order loan documents until all of the required loan conditions are satisfied. 

Prior to Funding

Typically before the lender releases funds to the escrow company, there are another set of documents the borrower has to provide the lender. Most of the “prior to funding” conditions are usually easy for the borrower to meet and at times will deal with procedural matters that the escrow or Loan Officer will handle such as the Closing Disclosure form. However, bear in mind that most lenders typically still check your credit score and other financial documents prior to closing. Therefore, it’s important to make sure you save all of your new pay stubs and banking statements as you may be required to produce those documents. Also, for borrowers who are already homeowners, the lender usually requires proof that your current home has sold before they will fund a new loan.

Signing Documents

Once the Underwriter approves your paperwork, the Loan Officer will order your loan documents and deliver them to the escrow officer, who will compile them into their final form with pertinent information such as payoff amount, taxes, and prepaid interest. After the final loan documents are prepared, there will be a date set for closing your loan. It is important to remember that even though you sign your home loan, everything isn’t necessarily final.  You should verify with your closing agent that there aren’t any outstanding conditions that still haven’t been addressed. To avoid any last-minute changes, determine exactly what documentation is needed, the date it must be submitted, and how it should be submitted. Otherwise, it’s possible for a loan approval to expire, while conditions are waiting to be fulfilled.

Funding Your Loan

The sooner all conditions are met, the sooner you can obtain funding approval. Since every borrower is different, every lending scenario and timeframe is different too. Therefore, you may encounter some or none of these conditions on your path to homeownership. However, once the lender issues a final approval, the funding department will transfer the payment to the escrow company and the loan process is finally complete.

The US Presidential election is on November 8^th.  There are two more FOMC meetings this year, November 2^nd and December 14^th.   Raising in December, after the election but before the inauguration is probably dumb.  Raising interest rates before the election is certainly dumber.   Last week’s Fed meeting confirmed our beliefs that there would be no change to the benchmark interest rate.   What you might have missed was that three Fed officials dissented; that is to say they did not agree with the committee’s decision.   All three members, Kansas City President Esther George, Cleveland President Loretta Mester and Boston President Eric Rosengren voted to raise interest rates 25bps.  The Rosengren dissent was the surprise.  He has dissented before but it was going the other direction on rates.  He pointed out a potential bubble in commercial real estate well before the world saw the meltdown unfold.  The three dissents are also the first time in 2 years that more than two Fed officials have dissented.   Has the mood of the Fed shifted and is Rosengren right again?

 

Since the September Fed meeting last week the odds of a November hike have dropped to 17% and December sits at 49%.  In fact rates have dropped every day since the Fed meeting.  So much for the three dissents....  Does the market know something the Fed doesn’t?

 

The market generally favors a Clinton presidency under the premise that less change is less disruption.  It is generally believed that her presidency would mean a continuation of the last 8 years under President Obama.  Putting personal opinions aside on each of the candidates, it is important to understand the impact to the market that each candidate will have.   What Trump will do as President is still largely unknown and that perception could cause some disruption to the markets.  He certainly fuels that speculation by specifically targeting Janet Yellen and the Fed’s current interest rate policies. 

 

On a lighter note, the 10yr is down to 1.56 today after closing above 1.70 last week and it appears we are retracing back into the 1.50-1.60 range after the pre-FOMC meeting blip.  Look for continued dialogue and arguments over the December FOMC meeting.   It is a wild card and if Clinton is elected I wouldn’t be surprised if the Fed moves right after.  They openly and repeatedly state they aren’t political but I believe that if they feel confident in the continuation of the last several years they will forge forward.  We should not forget that they want to raise interest rates, they just need enough reason.

 

For a little color, check out the graph below.  The orange line is the 10yr Treasury which shows that generally long term rates have come down this year.  The blue line shows the 2yr Treasury which indicates that shorter term rates are relatively flat.  If the Fed is raising rates very soon as they have indicated, I would expect that shorter term rates would have moved up.  Long term rates coming down also suggests that such moves, if they happen, will be very limited.  At least according to the market.

After making your monthly car, rent, and student loan payments, then spending what you need for essentials, saving money can be tough. If what you are trying to save for is a home, the prospect of putting away enough for a down payment may seem daunting, but it’s not impossible.

Here are four ways to squeeze a few extra dollars out of your budget each week by leveraging your expenses to create added savings.

#1 Round Up

Back in the day, this low-tech strategy involved putting all the change you collected during the day in a “spare change” jar. If you really wanted to boost your saving efforts, you would add every five-dollar bill left in your wallet at day’s end to the jar as well. This tactic remains a simplistic but effective way of saving money without missing it…if you pay in cash.

Fortunately, in today’s world of mobile, debit, and credit card-based transactions, there is an app that recreates this strategy. Acorns will round up and electronically slough off your spare change for you. Not only does the app collect your dollars and cents in a virtual spare change jar, it automatically invests that money for you in exchange traded funds (ETFs). Acorns is not a substitute for saving, but the program can chip in to help you get to your goal faster.

#2 Get Rewarded

Whether you make purchases with a credit card that you pay in full each month or a with debit card, you should be receiving cash-back rewards, preferably with no annual fees or limits. Using a rewards card in general—whether you get cash back or points for gift cards—makes every purchase a little more tolerable since this benefit puts you that much closer to your goal.

Loyalty programs—whether they deliver points or special discounts—can also shave dollars off purchases you planned to make anyway. When this happens, try to keep the amount you saved in an account, rather than buying more.

#3 Clip Virtual Savings

Another way to nickel and dime into additional savings is by using a coupon app like Ibotta After a trip to one of the stores covered by this program—which includes most large grocery and drug stores, as well as several big-box and national clothing retailers—you can electronically clip coupons for what you actually bought. You then provide proof of purchase by scanning the bar codes and sending a photo of your store receipt. This can all be done from the comfort of your home and away from the glaring eyes of the people behind you in line.

The cash you accumulate is credited to an electronic account and paid to you through your PayPal or Venmo accounts or via gift cards. Consumers who favor big brands, buy liquor, or purchase disposable diapers regularly will find the app more lucrative than other types of shoppers.

#4 Save on the Dips

Digit is a savings app that uses an algorithm to determine whether or not you have excess cash in your checking account. Digit essentially removes the need to make a decision about what and how much to put aside each week. It quietly works in the background sweeping the excess change in your checking account into savings. 

These shortcuts can complement your regular savings and get you into down payment territory faster. None require much sacrifice in terms of your time or spending, and they can help you chip away at your savings goals, on transaction at a time.

The Federal Reserve announced no changes to the benchmark rate with only one member casting a dissenting vote.  Household spending “has been growing strongly” although business investment “has been soft” and the Fed has reiterated that they expect inflation to rise to the 2 percent target.  Lastly, the committee expects “economic conditions will evolve in a manner that will warrant only a gradual increase in the federal funds rate”.

Here we stand seven months since the last time the Fed raised interest rates.  The economy is supposedly on strong ground, the job market has consistently improved, inflation isn’t ideal but positive and yet the Fed, who has threatened to raise rates four times this year hasn’t moved them at all and odds point to December once again.    It’s become pretty clear that they only plan one raise for 2016.  So why not now?  Why wait for right before the election or right after?   Why wait until Q4 when arguably, economic activity slows down?  What would a 25 basis point raise by the Fed do to the economy?   

In all likelihood 25bps does next to nothing in terms of affecting the economy.  Is the Fed afraid of tightening credit markets, shrinking liquidity, cataclysmic shifts in investment and an overall major disruption to financial and world markets?   Are they concerned about Taper Tantrum 2.0?  If you recall Taper Tantrum refers to Ben Bernanke’s comments on May 2013 that the Fed would begin tapering back it’s $70B a month in bond and mortgage-backed securities purchase program.  That comment sent bond yields skyrocketing and crushed liquidity of riskier assets.  It is possible that this could happen again; although in the case of Taper Tantrum, Ben Bernanke caught the market off-guard and today the market is almost daring the Fed to raise rates.  It’s certainly has been talked about enough and a very different situation than 2013.   

My opinion is that if the market sees strong job figures for July and August then the Fed should raise rates in September.  What happens in the rest of the world could throw a wrench in that and certainly we face front-page risk with respect to terrorists attacks, etc.  The Fed is running out of time for 2016 and I believe they face greater repercussions if they don’t raise rates in 2016.  As far as long term rates (or mortgage rates for that matter), they could still fall.  If you recall between December of last year when the Fed raised rates and the post Brexit market earlier this month, the 10yr yield has dropped over 80bps.  80 basis point drop in rates since the last Fed raise.  Today the 10yr trades at 1.52% with no current signs of breaking out of the 1.40-1.60 range.

FOMC Calendar

September 21, 2016

November 2, 2016

December 14, 2016

February 1, 2017

March 15, 2017

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