Other Mortgage Considerations

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There are several new government programs that have been launched or are expected to launch to help prospective homeowners.

Stay in touch with federal, state, and local housing offices regularly. They offer many programs that come and go based on a changing economy and political administrations. Some city and county programs are available only in targeted neighborhoods where local leaders are trying to spark reinvestment or increase the homeownership rate.

The Federal Housing Administration (FHA) is an agency within the Department of Housing and Urban Development (HUD). Its main goal is to help provide housing opportunities for low- to moderate-income families. FHA has single-family and multi-family mortgage programs but does not generally provide mortgage funds. Instead, it insures home loans made by private lenders.

Meanwhile, the Veterans Administration (VA) guarantees home loans made available to veterans, reservists and military personnel, without any down payment. VA loans frequently offer lower interest rates than normally available with other kinds of loans, thereby making it easier for veterans to qualify for a home loan.

The maximum loan amount VA will insure varies by region. There is no restriction on the purchase price as long as the borrower has the cash to make up the difference between the loan amount and the purchase price.

A mortgage credit certificate, or MCC, makes it easier for eligible buyers to qualify for a mortgage loan. Offered by many city and county governments, they allow first-time buyers to take advantage of a special federal income tax write-off.

Under MCC programs, the lender can reduce the housing expense ratio-the percentage of gross monthly income applied toward housing expenses-by the amount of the tax savings. Normally, lenders reject loans if the housing expense ratio is too high.

Program requirements for MCCs vary, although most adhere to the following guidelines:
The buyer must live in the home being purchased with an MCC-assisted mortgage.
Total household income cannot exceed certain limits.
The buyer cannot have owned a principal residence within the past three years. This restriction may be waived if a property is purchased within a certain targeted area.
The purchase price must fall within an established limit.
More information is available by calling your local housing or redevelopment agency, or contacting your real estate agent.

Many builders offer financing incentives to help move more buyers into a project. In fact, major building companies often have their own mortgage brokerage subsidiaries, while many other builders routinely refer buyers to 'preferred' local lenders. If it is a buyer's market in your area, you can be sure developers will offer incentives such as low-down-payment financing or interest rate subsidies.

Lenders require private mortgage insurance (PMI) on most loans (VA being the exception) with less than a 20% down payment. They believe there is a correlation between borrower equity and default. They have found that the less money borrowers put down, the more likely they are to default on a loan. PMI guarantees the lender will not lose money if this happens and a foreclosure is necessary.

A growing number of private lenders, however, are loosening up their requirements for low-down payment loans. In fact, the Homeowners Protection Act states that PMI must be dropped on any loan originated after July 29, 1999. Borrowers can request that PMI be canceled when they pay down the principal balance on their mortgage loans to 80% of the purchase price. Lenders must automatically cancel PMI when the balance hits 78%.

According to the Millennial Housing Commission created by Congress, few lenders are willing to administer home improvement loans. Most prefer to make home equity loans or unsecured consumer loans because they are easier to manage. Home improvement loans usually require inspections and irregular draws on the loan amount as work is completed, which forces regional or national lenders to find local partners to provide oversight.

Financing repairs and improvements with home equity is okay for most homeowners, but is difficult for many first-time buyers. They have lower-incomes, smaller savings, and have made lower down payments on their homes than first-time buyers a decade ago. So they have little equity to borrow against. Unfortunately, it is often lower cost older homes purchased by first-time buyers that need the most work. 

Unless you have a cash reserve, you will have to shop around for the best borrowing terms. In addition to the options listed above, you can ask relatives for a loan. Borrow against your whole life insurance policy. Refinance your existing mortgage. Get a second mortgage. Contact the government about home improvement programs. And-only as a last resort-borrow from a finance agency, which generally tend to charge higher rates.

The interest rates on these loans are often higher than on secured loans and you generally will not be able to get a tax deduction for the interest paid. However, the costs to obtain an unsecured loan are usually lower. And the relative ease of getting this type of loan makes it popular for small projects costing $10,000 or less. The lender evaluates applications based on credit history and income.

You get to save thousands of dollars and shave years off the life of your loan because the additional payments made toward your monthly principal basically constitutes a partial prepayment of your mortgage. 

Each mortgage has specific terms describing how and when prepayment may occur. Some lenders impose a penalty if you repay the loan too soon.

The total savings potential also will depend on how long you plan to live in your home. If you expect to move in the near future, do not expect to reap savings as large as those gained by people who pay ahead of schedule until they own their home free and clear.

Lenders prefer that you do. But relax, you are not penalized in any way for receiving parental help. An estimated one-third of all first-time buyers purchase homes with a loan or a money gift from parents.

Lenders also will approve gifts, with the proper documentation, from relatives, friends, an employer, church, municipality, or nonprofit organization-although stricter restrictions may apply for gifts from friends and relatives other than parents.

Expect the lender to ask you to present a gift letter stating that a repayment of the 'gift' is not expected. The amount of the gift and the date it was given should be clearly stated in the letter, along with the donor's name, address, telephone number and relationship to you.

The lender also can ask to see a few bank statements to ascertain if the money was recently placed into the account. 

A gift may be more acceptable than an actual parental loan, particularly if the loan must be paid back immediately, which could contribute to an increase in your monthly debt - something a lender may frown on.