Do all home buyers purchase PMI (private mortgage insurance)?

What is PMI? Do all buyers need it? 
PMI - Hundred dollar bills, shape of house and words PMI and your mortgage

PMI, or Private Mortgage Insurance, is used when buyers have less than 20% down and are obtaining just one mortgage.

Who needs PMI? Who doesn’t?

Not everyone needs Private Mortgage Insurance.

If you have 20% to put down (your down payment), and it’s a regular or conventional loan, you do not need to pay for this insurance product.

Put another way, if you are obtaining one mortgage and it has a higher than 80% loan to value ratio, such as an 85% or 90% mortgage, you will buy the mortgage insurance.

A 10% or 15% down mortgage with just one loan will require PMI.

A way to avoid paying for this fee is to get an 80% first loan and a smaller second loan. The first loan won’t require the insurance. The second loan will have a higher interest rate, though. The advantage to this approach is that when you pay off the second mortgage, you are done with the higher cost.

On the other hand, if you have Private Mortgage Insurance and you want to be freed from it when your home value rises,  you’ll need to pay for an appraisal and hope that it comes out favorably. It can be a hassle to break loose of it.

If you’re purchasing with FHA backed financing, there’s mortgage insurance built into the product. (It’s government backed, so it’s just MI rather than PMI.)

Who is protected with PMI?

This type of insurance does not protect the consumer. Instead, it protects lenders in case of a default by the borrower.

 

Related reading:

What is mortgage insurance and how does it work? (From the Consumer Financial Protection Bureau)

Seller concession (this site)

 

 

 

What can you learn when you lose out in multiple offers?

Target with keys to a house in the center - What can you learn when you lose out in multiple offers?If you lose out in multiple offers over and over, you’re not alone, but as prices rise, this isn’t a good pattern to be in. What can you learn from it?

Silicon Valley home buyers can have vastly different reasons for getting their offers rejected.

  • For many, the challenge is having a small down payment.
  • Others are very indecisive (and can’t decide fast enough, or cannot really commit enough to write a strong enough offer).
  • Some may have unrealistic expectations.
  • Some pride themselves on “being conservative” and routinely under price their offers.

Below we’ll go over the main issues, what you can learn from losing, and finally, a strategy to pull you out of multiple offers.

Small down payments and the competitive disadvantage

Having a less than 20% down payment may get an offer eliminated off the bat when there are multiple bids. The reasoning has to do with confidence that the bank will fund the loan and not get cold feet. The larger the down, the more secure the loan appears. When there’s more than 20% down available, the buyer appears more able to manage an appraisal shortfall, too.

FHA home buyers have the biggest challenge, for reasons explained previously. Those with 20% down payment have a really reasonable loan situation, but the trouble is that many other competitors do, too.  With rising prices, appraisals are often a problem – and 20% down usually won’t solve it.  So the more cash, the better, and cash is still king.

All cash offers

Having 30% or more will usually overcome appraisal hurdles.  But those ubiquitous “all cash offers”, which comprise about 15% of all Santa Clara County home sales right now, will usually trump any other bid IF the price is attractive.  Don’t be discouraged, though, as sometimes the all cash offers are the lowest offers with multiple bid situations in the San Jose area.

If you lose out in multiple offers for any other reason besides the down payment

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Working toward long term goal of home buying

First time home buyingHow long in advance should you be preparing to buy your first home?  There are a few common obstacles to purchasing property:

  1. Accumulating the down payment 
  2. Cleaning up or creating a good credit history
  3. Deciding your priorities
  4. Budgeting so that you can live within your means while saving and after buying your home

(1) For most people, accumulating the down payment means saving money.  This is very challenging, especially when people are accustomed to living on 100 – 105% of their income!  This is an extremely common phenomena.  It is always tempting to want to “reward” yourself with expensive dinners, lavish travel, luxury cars and other perks that make you feel like you have arrived. It is harder, but smarter, to see the reward as the fruit of discipline and to chart a goal and work toward it steadily.

How much do you need to save?  There are a lot of variables here.  Getting 20% down means saving a lot on the financing costs down the road.  But if you can purchase with a small down payment (really hard to do with multiple offer situations), you can get there faster and perhaps will pay less than if you wait until you have a bigger down.  A few years ago I met someone who saved diligently for more than 20 years to buy a home.  Think about what has happened to the cost of housing in that time!  Prices have about doubled since then.  So don’t spend too long saving, lest inflation eat away at any benefits you get from the larger down payment.

It should be noted that if you are able to buy with FHA backed financing, your down payment can also be gifted from family and friends.  That can speed up the time frame.  (My 20-something kids will find this of particular interest, I am sure!) (more…)

If it’s in the real estate contract, your lender will ask for it

Home Sweet HomeBuying a Silicon Valley home? Understand that unless you are buying “all cash“, you will need to show your real estate purchase agreement to your lender, and your lender may want to see inspections, reports or disclosures based on what you’ve written in that paperwork.  And then the bank, credit union or lending institution may ask for repairs prior to close of escrow, even in an “As Is” sale.

This happened to my buyers a few months back.  They were buying  their first home using an FHA backed loan.  In the offer, we indicated that we would be having a few inspections (home, pest, roof, pool). Because financing with FHA backed loans is a tougher road, the lender did, indeed, require certain work to be done prior to close of escrow.  It was supposed to be an As Is sale so the buyers ended up paying for work to be done in order to close (and the seller allowed us to reduce the price somewhat).  Luckily they were all improvements that my clients intended to make anyway – but it was inconvenient and stressful to have to rush to have the work done, and of course this did cause delays.  (We did discuss not having the inspections listed in the offer, but my clients very much wanted them in it.)

For this issue, does it matter which contract you use, PRDS or CAR?

If you are planning to purchase a Los Gatos, Saratoga or San Jose area home, most likely you and your real estate agent will use either the newest PRDS contract (Peninsula Regional Data Service, employed from Los Gatos to San Francisco) or the CAR contract (California Association of Realtors form which is used throughout the state of CA). (more…)

The Challenge of Being an FHA Home Buyer in a Seller’s Market

fha-home-buyer-woes2Being an FHA home buyer in Silicon Valley is a challenge right now, especially if you want what everyone else wants: a nicely updated and remodeled home in a good area with no “issues”.  (Issues meaning things like high voltage lines, busy roads, flood plains, or being too close to stores or spots not everyone wants to be near.)

How many FHA buyers are successful in purchasing a house right now?  The percentages are very small.  Just now I ran the MLS for sales of single family homes (houses and duet homes) in San Jose over the last 30 days.  Here are the figures:

All closed sales = 368

What kind of financing was used for these 386 closed sales?

Conventional financing = 268
All cash purchases = 77
FHA purchases = 10
Conventional 1st & 2nd loans = 6
VA Loan = 1
Owner financing = 0

The odds of success for FHA buyers is less than 3%.  Why is it so tough?  Condos are even more challenging than houses, so let’s look at those issues first.
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Is your lender keeping your offer from getting accepted?

Silicon Valley Home Seller Offer Elimination List It’s a red hot seller’s market in Silicon Valley right now, meaning that there are more buyers hunting for just the right property than there are listings available.  The end result is multiple offers, bidding wars, pre-emptive offers and rapidly escalating real estate prices in many areas and segments of the market.

When there are lots and lots of bids on a San Jose area home for sale, what do home sellers do?  Most of the time, sellers begin with an “elimination list”.  That is, they start by deciding what they do not want to deal with. The more offers there are, the more critical this becomes since sellers normally don’t love the idea of reading 10 or more stacks of offers.  (Remember, the confused mind says no!)

Sellers need to simplify their choices, and one of them is by eliminating the worst offers first.  A question for you to consider, if you’re a home buyer in Los Gatos, Saratoga, Campbell or anywhere in Silicon Valley is this: is your lender keeping your offer from getting accepted?  Does your lender make your offer worse to the seller? Sometimes that is exactly the case.

In some cases, certain banks or even credit unions are falling into the “elimination” list for some sellers as their agents may have advised them those lending institutions are slow or difficult.  Most of the time, these are the big banks – the ones that REO or short sale listing agents are demanding that consumers use for a pre-approval for submitting offers: (more…)

What is PMI? Who needs PMI?

Many Silicon Valley home buyers rely on PMI, or Private Mortgage Insurance, to purchase a house or condo. But what is it and who needs it?

Private mortgage insurance is usually required with loans in which the buyer has less than a 20% down payment.

PMI does not protect you, the residential real estate consumer. It protects your lender in case you default!

FHA loans don’t have PMI but instead there is a “government guarantee” and for that you pay a premium – so not called PMI but it works similarly. The cost may range from 1 – 2.5%.

FHA or Conventional with PMI?

If you have less than 5% down, FHA will be your only option. But between 5 and 20% down, you may choose.

If you are trying to decide between FHA and conventional loan products with PMI, talk to you mortgage broker or banker to see which one really costs more in the long run, factoring in the total package of interest rates, premium rate etc. (FHA loans may come at a lower interest rate but with other added costs – so don’t just compare interest rates.)  The result may depend on the loan to value of the property, your credit score, and other factors. There don’t seem to be any “easy answers” as to which one is necessarily better.  This decision will require a little research!

If you expect to be bidding in multiple offers, this is another consideration too – it can be very hard for home buyers in the South Bay to win out in multiples if they are using FHA financing (as opposed to conventional).

Finally, like HOA dues, PMI is not something you can usually deduct from your income taxes (unless the PMI cost was simply rolled into your interest rate).  Please talk to your lender and tax professional for more information on PMI and the tax ramifications.

Related reading:

Is your lender pushing you into an FHA loan?

The challenge of being an FHA home buyer in a seller’s market

First Time Home Buyer with FHA Financing? Make Sure That Your Offer is Well Drafted!

 

 

 

Is your lender pushing you into an FHA loan?

FHA better for lenderRecently I was speaking with a neighbor of mine in Los Gatos who’s a high powered lender with decades of experience all over Santa Clara County.  In the last year or two she’s been doing many more FHA backed loans, rather than conventional ones, as smart home buyers, especially first time home buyers, try to get into a house while both home prices and interest rates are at record lows.  This makes a lot of sense as it can take a long time to save 20% or more and in that time, both interest rates and real estate prices in Silicon Valley could go through the roof.  (If my kids were out of college and working, I’d be encouraging them to buy a home using FHA backed financing too.)

FHA backed mortgages do require a lot more work, though, so I extended my sympathy that she’s having to jump through so many hoops and that they are for much smaller sales prices (many areas of San Jose have dropped 35 – 40% since the market collapse).  Mortgage brokers often make about 1% of the value of the loan as their compensation, so I imagined this great loan officer spending twice as much time with FHA paperwork as on a normal loan, on a smaller priced property, resulting in “half the pay for twice the work”.

Apparently that’s not the case with FHA loans!

“It’s better for me when the buyer uses FHA”, she assured me.  Really?  “Instead of getting 1 point, we are often paid 2.5 points when we close an FHA loan.”   That didn’t seem unfair to me since there’s a lot more paperwork involved.  But consumers probably don’t realize that their banker or mortgage broker will be paid much more if the loan is FHA backed rather than conventional.

If you have saved enough money for a conventional loan product but your lender is pushing FHA, be doubly careful before deciding what to do. There are pros and cons to each loan product you buy (you are “buying” or “paying for” a loan).  Make sure that you aren’t getting FHA financing only because it is more profitable for your lender.

 

 

Rapid Appreciation in Silicon Valley Homes for Sale Creates Appraisal Challenges

Although Zillow is predicting that the San Jose real estate market will experience a “double dip” (second price drop) in 2010, you wouldn’t know it was even an item for discussion in much of Silicon Valley.  Right now, in many strata and locations, the problem is that prices are rising fast.

Inventory is very low in many parts of Santa Clara County. In January 2010, there were 1801 houses for sale in the county; a year prior to that, the number was 4492.    The best homes (well priced, beautifully remodeled) are getting scooped up quickly and with multiple offers.  As a result,  frequently there are overbids and prices are rising beyond recent sales of similar homes.  (Sometimes the problem is compounded by appraisers who aren’t knowledgeable or experienced but are hired because lenders are no longer free to pick whom they want to have do the appraisal, so it’s luck of the draw there.)  When this happens, unless there is a very large downpayment, the bank may insist that the buyer put more cash (and less loan) into escrow to close the deal. Alternatively, the seller may be pressured to reduce the sales price to insure that the transaction closes.

For this reason, cash is king – now more than ever.  “Regular” buyers who have 20% down or less are frequently finding themselves at a strategic disadvantage against those putting down 40% or more cash.  It is almost impossible for FHA borrowers with just 3% down to be successful when it comes to multiple offers because they don’t have that cash buffer that may end up being necessary.

What to do if you really want to buy a home right now?  Understand that multiple offers will make it very challenging for those who have 20% down or less.  If you are an FHA buyer with a very small downpayment, you will probably want to avoid multiple offers altogether.  More success is likely if you target the homes which have been on the market 45 days or more.   And if you do have a lot of cash on hand, realize that if you “win” in multiple offers, you may have to use more of your cash to secure the deal.

 

 

 

First Time Home Buyer with FHA Financing? Make Sure That Your Offer is Well Drafted!

Recently I have been involved with multiple offer situations, both on the listing (seller) side and on the buyer side. All of the multiple offer bidding events have involved first time homebuyers and in every case, at least one or some of the offers were presented with FHA backed financing.

Sometimes agents rush when they write up the purchase contract, and the offer is not well done; we call that “sloppy” and it’s not helpful to your position as a would-be homebuyer.  As a buyer, you won’t know which box needs to be checked or which blank filled in, but there are big areas that you can double check to make sure that your offer is “clean”, which will present you in a more favorable light and increase the odds that your offer will be the one the seller and the listing agent will want to work with.

  1. If your offer is an FHA offer, make sure that the box on page 1 says so (there are boxes for FHA and VA offers on page one of the California Association of Realtors contract)
  2. Make sure that the numbers all add up – the initial deposit, the increase of deposit (if any), the loan amount and balance of cash downpayment should all be listed and should add up to the correct number for your total purchase price.
  3. The “loan terms” are supposed to be specified too. What’s the interest rate? Are there any points being paid – and if so, by whom? Blanks in that area are a problem because you have a finance contingency which relies upon everyone knowing those terms. Be specific.
  4. It is doubly important – no, triply important – that your offer comes with a solid pre-approval letter.
  5. Make sure that you give your agent a check, or a photocopy of the check you’ll use if your offer is accepted.

Once the offer is drafted, your agent should go through it with you so that you understand all the clauses and terms.  Ask your agent to double check everything; it’s better to take a little longer and make sure it’s right than to get it off fast but sloppy.

Recently I’ve seen a few FHA offers from agents who’d rushed and many or all of the items listed above were off. In one case, the agent didn’t even include the loan amount.  In two offers recently, the real estate licensee hadn’t checked the FHA box when the contract was dependent upon it going through as FHA.

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