Fed Cuts Rates for First Time in Nearly 10 Years And That’s Good News For You

Fed Cuts Rates for First Time in Nearly 10 Years And That’s Good News For You

In a surprising move, the Federal Open Market Committee, or FOMC, lowered the Federal Funds rate by 0.25%, from 2.25 to 2.00, reversing last December’s rate increase of 0.25%.

The Federal Funds rate is the rate that banks charge one another for overnight lending, and while it isn’t directly tied to your standard 30-year fixed mortgage, it does hint that the FOMC believes the economy is booming and will continue to do so several months down the road.

And what does a healthy economy mean? You guessed it—lower interest rates on home loans.

Now is the best time ever to apply for a mortgage loan. Are you ready to be a homeowner? Apply today.

New Law Allows You to Get a Bigger VA Home Loan Without a Down Payment

New Law Allows You to Get a Bigger VA Home Loan Without a Down Payment

VA home loans are one of the best benefits available to veterans. The program allows honorably discharged veterans to buy a house without a down payment. But now the program is about to get even better.

A new law expanding VA disability benefits to more veterans who were exposed to the herbicide Agent Orange during the Vietnam War will change home loan limits for all veterans.

The bulk of Public Law 116-23, the Blue Water Navy Vietnam Veterans Act of 2019, which became law on June 27, 2019, addresses the expansion of VA disability benefits for Agent Orange exposure to those who served in ships off the coast of Vietnam during the war. Previously, only those who served in-country or on inland waters were eligible for disability benefits.

So what does that have to do with VA home loans?

To pay for the expanded disability benefits for the approximately 90,000 veterans who may now be eligible, the VA is removing limits on VA home loans.

Currently, VA limits the price of a home you can buy without a down payment to $484,350 for most of the country. This amount is based on limits set by the Federal Housing Administration (FHA), and it changes every year.

If you want to buy a house that costs more than the FHA limit, you can’t use a VA home loan without having to pay a down payment, and that down payment usually has to be enough to bring the purchase price down to the FHA limit. That means if you buy a $500,000 house you have to come up with a cash down payment of $15,650 ($500,000 – $484,350).

New VA Home Loan Limits Coming Jan. 1, 2020

Starting Jan. 1, 2020, when the new law takes effect, the VA will not cap the size of a loan a veteran can get, paving the way for veterans to buy higher-value homes. Of course, the lender may still issue a cap and deny a large loan. But the denial won’t be due to VA home loan rules.

A VA home loan is not the VA lending you money. Instead, the Department of Veterans Affairs “guarantees” to a lender that you, as a veteran, are a good credit risk. That guarantee allows you to get a home loan without having to make a down payment.

The other change that comes with the new law will affect fees for some veterans. VA charges most veterans a “funding fee” when a VA loan is issued. Veterans receiving any VA disability benefits are exempt from the funding fee. The funding fee for an active-duty veteran purchasing a home will increase from 2.15% of the purchase price to 2.35% of the price on Jan. 1, 2021. (There are different funding fees depending on the kind of loan and the situation of the borrower.)

The VA and Congress hope the increased money coming in from a combination of the increased funding fee and the eliminated loan limits will be enough to cover the disability benefits of the Vietnam veterans and their children who suffer long-term health problems due to Agent Orange exposure. That remains to be seen. However, for many veterans looking to get a new home loan, especially those in high-cost areas, the process has become easier.

Ready to buy a new home? Click here to apply.

Gift of Equity Conventional Loan

Gift of Equity Conventional Loan

Most families will go above and beyond the call of duty to help each other out. But have you ever heard of a relative selling a home to another relative with no down payment? It happens; it happens all the time. The down payment comes in the form of a gift of equity, and it can be extremely beneficial to the buyer on a conventional loan.

Understanding the Gift of Equity

When a buyer owns a home that is worth a lot more than the mortgage balance, the difference is called equity. In the case of an retired person who has paid on a home since the Johnson administration, they may have only a few years left on their mortgage, thus they have a lot of equity on their home.

Example: if someone purchased a house 22 years ago with a 30-year mortgage, they would have only 8 years left on their home loan. If the home is currently worth $250,000 but the balance on the existing loan is only $62,000, then that would mean the owner has approximately $188,000 in equity. Not too shabby, eh?

But here’s where the gift of equity comes in: instead of asking a home buyer to come up with a 20% down payment, the owner could gift 20% of the home’s value to the buyer. This would allow the buyer to apply for a loan that is only 80% of the home’s value.

A Hypothetical

Here’s a hypothetical example:

John is 28-years-old and would like to buy a home. His parents have been paying on their home for 22 years. The balance of their mortgage is currently $62,000. The home is valued at $250,000. The parents would like to downsize and sell their home to John.

The parents offer to sell the home to John for $250,000. However, they also offer a gift of equity of $50,000. Therefore, John will need to contact his mortgage lender and apply for a loan of $200,000. This would allow his parents to receive a profit of $138,000 after giving away the equity to their dear, beloved son and paying off the old mortgage.

Saves the Borrower from PMI

One of the best advantages of the gift of equity is avoiding private mortgage insurance (PMI). Since a conventional loan charges PMI any time the borrower gets a mortgage over 80% of the home’s value, the gift of equity avoids this charge. Over the course of the loan, the lack of PMI could save the buyer thousands and thousands of dollars.

Who Pays Closing Costs?

As with any conventional mortgage, there will be closing costs involved. The home appraisal, recording the deed at the local county registrar’s office, property taxes, and several other items will all need to be paid at the closing attorney’s office when the deal is closed. For a conventional loan, guidelines state that the seller may pay up to 3% of the sales price in concessions towards closing costs.

Going back to our example of John and his parents, this would mean the parents could provide $7,500 towards the closing costs, reducing the amount of profit they receive from the transaction, but still allow them to assist John with the purchase of the property.

Potential Tax Issues

Warning: if you have a phobia of the IRS (and who doesn’t?), a gift of equity may result in some tax issues. The Feds put a limit on the amount of cash or equity that a person can give to another. For example, for the year 2019, the maximum amount of money or equity that can be given to a person is $15,000. Any amount that exceeds this limit will result in the giver of the gift being required to fill out certain forms with their annual tax return. It is best to consult with a local accountant that is familiar with gift and estate taxes in order to get the correct answer about tax consequences with a gift of equity.

True Value of the Home

Your prospective home will need to be appraised by an independent rep in order to determine the home’s actual value. For instance, in the above example, if the parents were trying to sell the home for $250,000 but the appraiser calculated the home’s worth at only $190,000, then the lender would not allow the transaction to go through. The sales price would have to be lowered along with the size of the equity gift.

Only Allowed with Family Members

According to conventional loan guidelines, there are some restrictions on the gift of equity transaction. Specifically, the seller of the home must be directly related to the buyer. The lender will want to see a transaction between a parent and child, or a grandparent and grandchild or an Aunt/Uncle to a nephew or niece. It is not common for a 6th cousin twice removed on the mother’s side to sell to a distant relative.

Documenting the Gift of Equity

Lenders may want to see a letter from the giver to the recipient. In a nutshell, the letter will need to describe the relationship between the two people, the amount of the gift of equity along with a statement that this is truly a gift and there is no expectation that the amount will be repaid. Your local lender can provide a template of the letter for you to use in order to satisfy this requirement.

Summing Up Gift of Equity Conventional Loan

Completing a gift of equity transaction will take planning and negotiation between both sides, but at the end of the day, it can be a huge benefit to the buyer. This is one of the few ways of buying a home without the need for a large cash payment, and without having to purchase private mortgage insurance. It is also a commendable way for a person to significantly help out one of their relatives without giving them a huge chunk of cash, while still taking advantage of the equity in their home.

Ready to apply for a loan? Click here to get started!

The Cost of Waiting

The Cost of Waiting

This spreadsheet breaks down the cost of waiting for the perfect interest rate, with 20% down on a $350,000 property. Essentially, when all the variables are added up, waiting one year will cost you $25,321, while waiting two years will cost you $52,111.

So what are you waiting for? If you’re waiting to save enough to put 20% down, I got news for you: you may not need 20% down. There are plenty of loans available where you can put anywhere from 5% to 1% down. Click here to apply today.

Should You Buy a House Now or Wait?

Should You Buy a House Now or Wait?

Have you been on the fence about buying a home? Are you still running the numbers in your head to discover exactly when the right time will be? Here are a few things to consider if you’re just not ready to start shopping.

Interest rates are holding steady, but all eyes have been on the Fed over the past few months. Many analysts think an interest rate hike of 0.25% at the December FOMC meetings is likely. Mortgage rates overall have been in a relatively tight range so far this year, and the last time the Fed raised rates it was in December of last year.

Let’s look at a $350,000 purchase price with a 20% down payment and a loan amount of $280,000. An increase of just 0.25% on a 30 year loan would mean nearly $475 in higher interest charges in just the first year alone and $2,375 over five. No one is certain what the Fed will do in December, but we do know the impact of an interest rate hike of just 0.25%.

Okay, let’s say the Feds stay put. But what about property values? According to the Austin Board of Realtors, the median home price of homes in the greater Austin area rose by 7.5% just over the past year. That $350,000 home would then be closer to $376,000, or $26,000 more. The most recent data also shows the inventory of homes is at 2.7 months—still very much a seller’s market.

Now let’s look at what would happen by combining both a rate increase and a $376,000 price for the very same home. First, you would need $5,000 more for your 20% down payment. Second, the loan amount is $300,000 and the monthly payment for the next year is $1,549 more and around $7,750 over the next five years. The cost of waiting? It’s the higher down payment and higher monthly payments.

If you did buy that $350,000 home and financed today, not only would your payments be lower compared to an interest rate increase of 0.25%, but you also enjoy the increase in homeowner equity over the first year of $26,000.

We know these numbers are not set in stone, but based upon current data and industry expectations.

If you’d like to have us run some numbers for you, shoot us a message and we’ll put together a custom plan for you.

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