Loan Changes and Updates for the New Year

Westcoe Realtors, Riverside California…With every new year, there are always changes within the financial markets as they relate to loan programs available for the purchase of real estate…and this year is no different.  The purpose of today’s blog is to bring you up to date with what loan programs are currently available for todays home buyer.

First, let’s talk FHA, and we will try not to bore you with the details.  An FHA loan is a government backed loan that is available to anyone who has a heartbeat.  You do not have to be anyone special, worked for the government, served in the military, grown a third arm, etc.  This is a loan program created by the government for your typical, everyday person.

Right now, as of 2009, the down payment required is 3.5% of your purchase price, and your maximum loan available is $349,000.   This maximum loan figure can rise to $355,350 with the addition of a mandated insurance policy required by the lender, but for your loan and purchase figures, stick with the $349,000 number.  The current interest rate for an FHA loan is around 5%, but this can vary by a little each day the same way all interest rates can change…but the 5% rate is fairly typical.  Of course, there are other fees associated with this loan, but they are the typical “garbage” (not a particularly professional word, but you get the point) fees associated with almost every loan.  We can give you the details if you want, but all lenders attach some additional fees to make the loan. 

In the end, the main advantage to an FHA loan is the 3.5% down payment required.  Since one of the main reasons we had all this “loan meltdown” is because of loans that were made with 0-5% as the down payment, no other loan program offers this combination of loan down payment and affordable rates.

Next, let us proceed to conventional loans…but specifically conventional loans that are called conforming loans…as opposed to “jumbo” loans.  A conforming loan is one that is $417,000 or less, and can be sold to FNMA and Freddie Mac.  A ”jumbo” loan is any loan amount above that, in which case it cannot be sold to FNMA or Freddie Mac.  Why is this important?

FNMA and Freddie Mac are now partially owned by the government (some of the original bail out money went here in exchange for government ownership), and it is their sole function to purchase real estate loans made by all the banks across our country.  Your local bank makes a loan with their funds, they sell it to Freddie or Fannie, and your local bank gets their money back to make a real estate loan to someone else.  As long as the loan is made to Freddie/Fannie guidelines, and is $417,000 or less, then the local bank can ship it off and get reimbursed.  Essentially, the local bank is making you the loan Freddie and Fannie’s money…AND THIS IS A VERY IMPORTANT POINT…because when they cannot sell the loan to Freddie/Fannie (as in a jumbo loan, since that loan amount is too high to sell to Freddie/Fannie) then the bank must use their own money…AND RIGHT NOW, THE BANKS DO NOT REALLY WANT TO PART WITH THEIR OWN MONEY.

So what does all this mean to you, the home buyer?  It means that the current interest rate on a 30 year, fixed rate conforming loan is 4.5%…and the jumbo rate is all over the place, but essentially somewhere between 6-7%.  In essence, when the bank is lending the governments money, they will lend it at the lower rate…when they choose to lend their own money, they want the higher rate.  Don’t shoot the messenger…we didn’t create this system, we only try to operate in it!

Next, there is the subject of the down payment.  Freddie and Fannie guidelines require a larger down payment than FHA.  Whereas FHA only requires the 3.5% we discussed above, a conventional loan prefers a 20% down payment, but can live with 10% on occasion.  Naturally, if you want the 10% down payment, you can expect to pay higher fees, and perhaps a slightly higher interest rate.  It varies, but you get the point.  The bottom line is that with the higher down payment, you are a lesser credit risk, so you get the absolutely lowest interest rate.  A smaller down payment costs you more in fees and rates.

To summarize all this, the majority of the loans being created today are FHA, since the down payment is low (3.5%) and the rate is attractive as well.  For those who are fortunate enough to have the 20% down required by Freddie/Fannie, then you can get the lowest rate of all.  And for the people who need jumbo loans…good luck.  This is the tightest part of our lending market, and you can expect to pay a lot more to use the banks own money.

Hopes this helps you navigate your way through our current financial maze…and of course, for all the details, just give us a call…we would be happy to help.