Haven't Applied for a Loan in a Few Years - You May Have Some Surprises

Services for Real Estate Pros with Liberty Mutual

I had an old neighbor email me today asking about her financing as she gets ready to buy a home. The answers I gave are pretty vanilla, but for her they are probably shocking because she hasn't applied for a loan in 3 years. She inquired about doing an 80/20 to avoid MI - clearly she hasn't been keeping up with guidelines :) How things have changed! Two years ago no one would have a loan with MI and now it really is the right way to do it for many borrowers.


"Things have changed a bit since the last time you got a loan. Rates for credit north of 700 with 20% down on a 30 Year Fixed are looking like 5.75 today with no points - fantastic. However, if you are looking for 100% financing you should be prepared to pay more, even if you have great credit - probably 6.5 or so for 100%. 80/20's are gone - 80/15/5 or 75/20/5 are now the way to avoid MI (that 5 means 5% down). However, that second is probably going to be well north of 9%.

So, one loan with MI isn't looking so bad! Keep this in mind, MI is now tax deductible - just like interest - provided that your household makes less than $110k. There is a phase out that begins at 101k (90% benefit) and at $110k you have 0 benefit.  If you can get 3% into the transaction (gift allowed) and your loan will below the area limit, I'd HIGHLY suggest you look at an FHA loan. They are at about 6% with no points today and the monthly MI is about 40% of conventional loans. Fees will be higher, but you'll try to have the seller pay those anyway.

The reason the 80/20 are gone is that with all the defaults going on, they had to limit the max loan to value on "piggy backs" to prevent further defaults. Keep in mind that the lender with the 80% has the security of the home - the guy with the 20% has no collateral and that's why rates on seconds have skyrocketed - compensating for their losses.  Now if you own a home with equity and want to tap into it, rates are great. But purchase money, not so much.

Also, you're hearing in the media that rates will go down - they are referring to the Fed Funds Rate and Prime Rate controlled by the Federal Reserve. This short term rate does not have a direct correlation to 30 year mortgage rates. Because mortgage rates are based on the sales of mortgage backed securities - bonds - traders anticipate changes in market conditions like the Fed rate cut. So today's rates already have the Fed's next cut considered. If the Fed cuts more than anticipated, rates will go down. If the Fed cuts less than anticipated - like their last cut - rates will actually go up! Try explaining that one to someone who has never taken an economics class.

Keep in mind that buyers are enjoying seller paid closing costs in many cases and the average interest rate over the last 30 years is still in the high 7's. Money is cheap and deals are being made - don't kill yourself searching for the perfect deal - you'll loose your mind trying. You want to own a home for the equity gain, tax advantages and family stability. For many, the monthly payment is just a means to that end. Nashville is still seeing reasonable growth - are you sure you don't want to leave Colorado?

First thing we should do is get your credit looked at to make sure everything is good. I'm sure you expect things to be OK, but I see SO MANY mistakes by creditors. Better to check a little early and allow time for any fixes needed than wait until you're under contract. No charge to do so, just let me know and I'll get the file to you.



Kevin Michelson, CMPS, MBA is one of the few mortgage originators in the state of Tennessee to hold the prestigious designation of Certified Mortgage Planning Specialist (CMPS). He is a Home Loan Consultant for Countrywide Home Loans in Brentwood, TN - Countrywide's #1 branch for purchase originations. Additionally, Kevin earned his Masters of Business Administration (MBA) from Nova Southeastern University bringing advanced concepts to his clients' mortgage plans and his referral partners marketing plans. He believes that if he puts others first, he'll never finish last. Kevin and his family are proud to call Williamson County, TN home.



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.... - Mauldin, SC
Yep Times they are a changing. It is important to point this out to buyers who may not have been in the market a while. Good post Kevin
Jan 11, 2008 04:14 PM #1
Larry Brewer - Benchmark Realty llc
Benchmark Realty LLc - Nashville, TN
Good information. I know the market is changing for the better, and it will be good to get back to what I call normal soon. My idea of normal is that 100 percent loans are rare and expensive. I think poeple are less likely to default if they have money in the house.
Jan 12, 2008 12:11 AM #2
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Kevin Michelson

MBA, Nashville Insurance
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