In May 2021, the median price for a home was $350,300. That reflected a 23% increase year-over-year, demonstrating that the housing marketing was bustling after the impact of the COVID-19 pandemic. But it’s not just a rise out of the pandemic that has created a competitive housing market in 2021 and beyond. The record high in May 2021 followed 111 months of year-over-year gains, starting in March 2012.
In 2021 and 2022, the housing marketing has been awash in demand. But there aren’t enough homes to go around, leading to bidding wars and other challenges for buyers. Looking at this landscape, you may wonder, can you buy a house with bad credit?
The Challenges of Buying a Home with Bad Credit
Mortgage lenders look at a lot of factors to determine if you qualify for a home loan. Of course, your annual income and debts are crucial, but your credit score is also a significant factor. Applicants with great credit scores—750 or higher—tend to have an easier time getting approved for a mortgage and getting the most competitive interest rates available. Applicants with credit scores below 650 may have a more difficult time getting approved for a mortgage or securing low interest rates.
For a mortgage lender, all applicants present some sort of calculated risk. Lenders perceive those with higher credit scores as being at lower risk of foreclosure or defaulting on their home loans. As a result, people with high scores can get a lower interest rate and more favorable terms on a loan. Unfortunately, those with bad credit scores are automatically perceived to be a higher risk and—if they can get a loan—may end up paying higher interest rates and having to agree to less appealing terms that come with a bad credit mortgage.
COVID-19’s Impact on Buying a Home
The pandemic had some impact on the mortgage-buying process. That’s true for individual buyers as well as the entire process.
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Homebuyers may have faced financial struggles during the pandemic, for example. Job or income loss could have led to difficulties paying bills or the need to take out loans to cover living expenses short-term. Those situations can impact credit and your ability to get a home loan.
At the same time, the Federal Reserve dropped interest rates in 2020 to help support the struggling pandemic economy. One result was that buying a house became very attractive, in part due to the lower overall cost of the loans.
Bad Credit in a Competitive Market
But now rates are increasing again—and may continue to rise throughout the year. Increasing rates may decrease competition between buyers, but they can make it more difficult for someone with less-than-great credit to buy a home for a number of reasons, including:
You may not be able to outbid others. Lenders may be willing to take a risk on someone with poor credit, but that risk is usually fairly limited. That means you may not be able to get approved over a certain amount, limiting how much you can pay for any home.
Your loan options may limit you. Buying a house with bad credit often means leveraging a government-backed loan, such as FHA or USDA loans. These loans must follow certain requirements about loan-to-value ratios, inspections and other steps to buying a home. In today’s housing market, having to stick to strict requirements can put you at a disadvantage.
Sellers may not choose your offer. Even if your offer is competitive, if you’re bidding with an FHA loan or other such financing, sellers may opt for a cash offer or one backed by a traditional commercial loan. Right or wrong, there’s some perception that cash or traditional loan offers are more likely to go through.
How to Buy a House with Bad Credit
It’s not all a lost cause, though. There are options for buying a home with poor or bad credit, such as Federal Housing Administration (FHA) loans. That’s true even in a competitive market.
FHA Loans
FHA loans have some of the most lenient qualification requirements. And they’re available to any homebuyer, not just first-time buyers.
To be eligible for an FHA loan, you need a credit score of at least 500. You’ll also have to meet other requirements, including appropriate debt-to-income ratios and not having certain types of open collection accounts in your credit history. Overall, you need to demonstrate to the lender that you’re reasonably able to pay the mortgage associated with the loan.
If you have a credit score between 500 and 579, the loan-to-value ratio is limited to a maximum of 90% on any FHA loan you might be approved for. That means you’ll need to come up with at least 10% of the purchase price as a down payment. For example, if you buy a home for $200,000, you’ll need at least $20,000 for the down payment.
If you have a credit score of 580 or above, you could be eligible for maximum financing. That means you may be able to get a loan with as little as 3.5% down.
VA Loans
Veterans Administration loans are available to military veterans and qualified spouses. The VA doesn’t set a specific credit score requirement for its programs, though it does state that borrowers will need to meet creditworthiness requirements. At the very least, the lender must determine that you have the means to pay the mortgage.
Some benefits of VA loans include:
They don’t necessarily require a down payment
No requirement for PMI, even if you don’t put down 20%
Competitive interest rates you might not be able to access elsewhere
USDA Loans
The United States Department of Agriculture offers mortgages to home buyers in eligible rural areas whose incomes fall in the low-to-average income range for their areas. The USDA doesn’t publish a minimum credit score requirement. It simply states that borrowers must have the willingness and ability to repay the loan, as demonstrated in part by their credit history. USDA lenders must look at three years of credit history.
Other Options
There are ways to increase your chances of getting approved for a mortgage with bad credit, even if you don’t want to go with one of the above government-backed options. Consider saving up for a larger down payment. A larger down payment reduces the amount you need to borrow and increases your likelihood of getting approved for a mortgage.
You may also be able to avoid the need for Private Mortgage Insurance with a higher down payment. Bypassing the need for PMI can easily save you $1,000 per year or more. It also frees up more money so you can pay down other debts, which can improve your credit.
Know Your Credit Score
If you’re thinking about trying to buy a home in the near future, the first step you should take is finding out where your credit stands. Begin by looking at your current credit reports and carefully reviewing them. Specifically, be on the lookout for any mistakes or errors on your report.
If you notice something incorrect on your report, you can file a dispute—most credit bureaus let you file a dispute online. You should also take the time to calculate how much of a mortgage you can reasonably afford before applying for one.
If you’re not sure what your credit score is, you can see your credit score for free on Credit.com. You also get a free credit report card that shows you ways to improve your credit score in each of the five areas that factor into how your score is calculated.
For even more information about where your credit stands, consider signing up for ExtraCredit®. You’ll get access to 28 of your FICO® scores, including the type of scores used by lenders to evaluate you as a mortgage borrower.
Once you know where you stand with your credit score and have done what you can to improve it, you can start shopping for mortgage rates and loans.
Friday, April 7, marked a day for celebration. After four years of Congress hiking Veterans Administration (VA) so-called “Bluewater Navy” mortgage loan fees as an offset to pay for other critical veterans’ benefits, Congress has finally let those excessive VA mortgage loan fees expire.
This good news for homebuyers comes on top of FHA action in late February to cut the annual premium on FHA loans by 30 basis points, from 0.85% to 0.55%, saving most families around $800 starting last March 20. And it follows actions over the last year by FHFA to cut Fannie Mae and Freddie Mac LLPA fees for certain first-time homebuyers.
What does the VA loan fee reduction mean for veterans and active-duty families using their no-down-payment mortgage, an “earned benefit” thanks to their uniformed service to the nation? It means that first-time buyers using VA loans will see guarantee fees fall 15 basis points, from 2.30% to 2.15%, and other buyers will see a 30-basis point improvement, from 3.60% to 3.30%. For these families, savings will range from $600 to $1,200 saved starting this week.
The expiration of the higher VA mortgage fees was not a sure thing and should not be taken for granted going forward. Last November, the Community Home Lenders of America (CHLA) wrote a Letter to top members of Congress asking Congress to let these fees expire.
Why was CHLA concerned? Because just one year earlier in November 2021, Congress, in their perpetual hunt for “offsets” to pay for other federal spending, hiked fees on Fannie Mae and Freddie Mac loans by $21 billion over 10 years to help pay for part of the cost of the totally unrelated $1 billion infrastructure bill. And technical budget offset concerns played a big role in delaying FHA’s action in cutting FHA premiums.
Meanwhile, Congress and the president are gearing up for a fight over spending cuts in connection with an increase in the debt limit. Any revenue source that has been used in the past could be a target. But at least for now, veteran homebuyers and homeowners are the clear winners.
Charging fees higher than needed for insurance purposes has prevented some qualified families on the margin from being able to escape rents that have been rising faster than incomes. Given that the VA (and FHA) loan programs serve a higher proportion-of first-time buyers and lower-FICO score buyers than conventional loans, reducing these costs helps redress wealth inequities over time.
To be clear: these loan fee reductions are not some giveaway to families that ought not buy a home — the reductions redress the issue of artificially high fees keeping qualifying families from buying a home. CHLA supports actuarially-based insurance fees to ensure programs remain solvent and proper insurance pricing that balances both risk and opportunity. Mortgage loan fees should not be higher than needed to safely run government-backed lending.
So, a thank you to FHA for making FHA mortgage loans more affordable, a thank you to FHFA for making GSE mortgage loans more affordable, and a thank you to Republicans and Democrats in Congress for making VA mortgage loans more affordable.
The year is yet young, but this mortgage news for young families has so far been positive. CHLA stands ready to work with Washington stakeholders to keep the good news coming.
Rob Zimmer is Director of External Affairs for the Community Home Lenders of America (CHLA).
This column does not necessarily reflect the opinion of HousingWire’s editorial department and its owners.
To contact the author of this story: Rob Zimmer at [email protected]
To contact the editor responsible for this story: Sarah Wheeler at [email protected]
Saving for a down payment is one of the biggest obstacles between first-time home buyers and home ownership.
Luckily, there are now ways to get a 0% down payment.
Thanks to options from FHA and more than 2000 state and local down payment programs accessible through Down Payment Resource, first-time buyers put down only 4 percent last year compared to 14 percent of repeat buyers.[1]
FHA loans, as well as many local down payment programs, are available to buyers regardless of income. However, it is also possible to get a mortgage without putting anything down if you have the right credentials.
Here are three programs that can still snag you a 0% down mortgage.
VA Loans
The Veterans Administration guarantees purchase mortgages with no required down payment for qualified veterans, active-duty service members and certain members of the National Guard and Reserves. Private lenders originate VA loans, which the VA guarantees. There is no mortgage insurance. The borrower pays a funding fee, which can be rolled into the loan amount.
For first-time purchasers making no down payment, the funding fee is 2.15% for members or veterans of the regulator military and 2.4% for those who qualify through service in the Reserves or National Guard.
Navy Federal Credit Union
Navy Federal Credit Union, the nation’s largest credit union in assets and membership, offers 100% percent financing to qualified members who buy primary homes. Navy Federal eligibility is restricted to members of the military, some civilian employees of the military and U.S. Department of Defense, and family members.
The credit union’s zero-down program is similar to the VA’s. One difference is cost: Navy Federal’s funding fee of 1.75% is less than the VA’s funding fees.
US Department of Agriculture
You don’t have to be a farmer to qualify for the USDA’s Rural Development mortgage guarantee program. You just have to live in a rural or semi-rural area and qualify as a low-to-moderate income homebuyer in your community.
USDA home loans have a maximum purchase price and may also cover home repairs and improvements. Another key benefit is that USDA mortgage rates are often lower than rates for comparable, low- or no-down-payment mortgages. Financing a home via the USDA can be the lowest cost means of homeownership.
Local and State Programs
Of course, there are plenty of low down payment options out there too. In addition to FHA, homebuyers, especially first time home buyers can qualify for low down payment loan programs sponsored by state or local housing authorities. Contact Down Payment Resource to find programs where you live.
United Wholesale Mortgage(UWM) announced on Wednesday that it would offer a 50 bps discount on all VA interest rate reduction refinance loans (IRRRL) through Veterans Day on Nov. 11.
The company, which is the nation’s largest wholesale lender and plans to go public at a $16.1 billion valuation later this year, said the new rate is effective on all locks between Wednesday, Sept. 30 and Veterans Day. The program is intended as a “thank you to those who have made great sacrifices for our country,” the company said in a statement.
With interest rates at historic lows, UWM has been offering a variety of loans under 3% to borrowers. In late June, UWM rolled out a new loan program that offered conventional 30-year fixed rates for veterans between 2.25% and 2.375%.
Last week, at the AIME virtual conference, UWM rolled out a new tech offering for brokers. Called UWM InTouch, the mobile app provides brokers access to their entire pipeline of UWM loans. The app allows brokers to handle everything from underwriting through to the close.
On Monday, HousingWire published a deep dive into UWM’s strategy as a public company, and what brokers and rival lenders think of the move.
Americans take today’s selection of mortgages for granted, but financing a home is a much different experience than it was a century ago
By
Matthew Wells
The furniture industry was booming in Greensboro, N.C., 100 years ago. A furniture craftsman making a solid, steady income might have wanted to buy a home and build up some equity. But the homebuying process then looked very little like it does today. To finance that purchase, the furniture maker first would need to scrape together as much as 40 percent for a down payment, even with good credit. He might then head to a local building and loan association (B&L), where he would hope to get a loan that he would be able to pay off in no more than a dozen years.
Today’s mortgage market, by contrast, would offer that furniture maker a wide range of more attractive options. Instead of going to the local B&L, the furniture maker could walk into a bank or connect with a mortgage broker who could be in town or on the other side of the country. No longer would such a large down payment be necessary; 20 percent would suffice, and it could be less with mortgage insurance — even zero dollars down if the furniture maker were also a veteran. Further, the repayment period would be set at either 15 or 30 years, and, depending on what worked best for the furniture maker, the interest rate could be fixed or fluctuate through the duration of the loan.
The modern mortgage in all its variations is the product of a complicated history. Local, state, national, and even international actors all competing for profits have existed alongside an increasingly active federal government that for almost a century has sought to make the benefits of homeownership accessible to more Americans, even through economic collapse and crises. Both despite and because of this history, over 65 percent of Americans — most of whom carry or carried a mortgage previously — now own the home where they live.
The Early Era of Private Financing
Prior to 1930, the government was not involved in the mortgage market, leaving only a few private options for aspiring homeowners looking for financing. While loans between individuals for homes were common, building and loan associations would become the dominant institutional mortgage financiers during this period.
B&Ls commonly used what was known as a “share accumulation” contract. Under this complicated mortgage structure, if a borrower needed a loan for $1,000, he would subscribe to the association for five shares at $200 maturity value each, and he would accumulate those shares by paying weekly or monthly installments into an account held at the association. These payments would pay for the shares along with the interest on the loan, and the B&L would also pay out dividends kept in the share account. The dividends determined the duration of the loan, but in good economic times, a borrower would expect it to take about 12 years to accumulate enough money through the dividends and deposits to repay the entire $1,000 loan all at once; he would then own the property outright.
An import from a rapidly industrializing Great Britain in the 1830s, B&Ls had been operating mainly in the Northeast and Midwest until the 1880s, when, coupled with a lack of competition and rapid urbanization around the country, their presence increased significantly. In 1893, for example, 5,600 B&Ls were in operation in every state and in more than 1,000 counties and 2,000 cities. Some 1.4 million Americans were members of B&Ls and about one in eight nonfarm owner-occupied homes was financed through them. These numbers would peak in 1927, with 11.3 million members (out of a total population of 119 million) belonging to 12,804 associations that held a total of $7.2 billion in assets.
Despite their popularity, B&Ls had a notable drawback: Their borrowers were exposed to significant credit risk. If a B&L’s loan portfolio suffered, dividend accrual could slow, extending the amount of time it would take for members to pay off their loans. In extreme cases, retained dividends could be taken away or the value of outstanding shares could be written down, taking borrowers further away from final repayment.
“Imagine you are in year 11 of what should be a 12-year repayment period and you’ve borrowed $2,000 and you’ve got $1,800 of it in your account,” says Kenneth Snowden, an economist at the University of North Carolina, Greensboro, “but then the B&L goes belly up. That would be a disaster.”
The industry downplayed the issue. While acknowledging that “It is possible in the event of failure under the regular [share accumulation] plan that … the borrower would still be liable for the total amount of his loan,” the authors of a 1925 industry publication still maintained, “It makes very little practical difference because of the small likelihood of failure.”
Aside from the B&Ls, there were few other institutional lending options for individuals looking for mortgage financing. The National Bank Act of 1864 barred commercial banks from writing mortgages, but life insurance companies and mutual savings banks were active lenders. They were, however, heavily regulated and often barred from lending across state lines or beyond certain distances from their location.
But the money to finance the building boom of the second half of the 19th century had to come from somewhere. Unconstrained by geographic boundaries or the law, mortgage companies and trusts sprouted up in the 1870s, filling this need through another innovation from Europe: the mortgage-backed security (MBS). One of the first such firms, the United States Mortgage Company, was founded in 1871. Boasting a New York board of directors that included the likes of J. Pierpont Morgan, the company wrote its own mortgages, and then issued bonds or securities that equaled the value of all the mortgages it held. It made money by charging interest on loans at a greater rate than what it paid out on its bonds. The company was vast: It established local lending boards throughout the country to handle loan origination, pricing, and credit quality, but it also had a European-based board comprised of counts and barons to manage the sale of those bonds on the continent.
Image : Library of Congress, Prints & Photographs Division, FSA/OWI collection [LC-DIG-FSA-8A02884]
A couple moves into a new home in Aberdeen Gardens in Newport News, Va., in 1937. Aberdeen Gardens was built as part of a New Deal housing program during the Great Depression.
New Competition From Depression-Era Reforms
When the Great Depression hit, the mortgage system ground to a halt, as the collapse of home prices and massive unemployment led to widespread foreclosures. This, in turn, led to a decline in homeownership and exposed the weaknesses in the existing mortgage finance system. In response, the Roosevelt administration pursued several strategies to restore the home mortgage market and encourage lending and borrowing. These efforts created a system of uneasy coexistence between a reformed private mortgage market and a new player — the federal government.
The Home Owners’ Loan Corporation (HOLC) was created in 1933 to assist people who could no longer afford to make payments on their homes from foreclosure. To do so, the HOLC took the drastic step of issuing bonds and then using the funds to purchase mortgages of homes, and then refinancing those loans. It could only purchase mortgages on homes under $20,000 in value, but between 1933 and 1936, the HOLC would write and hold approximately 1 million loans, representing around 10 percent of all nonfarm owner-occupied homes in the country. Around 200,000 borrowers would still ultimately end up in foreclosure, but over 800,000 people were able to successfully stay in their homes and repay their HOLC loans. (The HOLC is also widely associated with the practice of redlining, although scholars debate its lasting influence on lending.) At the same time, the HOLC standardized the 15-year fully amortized loan still in use today. In contrast to the complicated share accumulation loans used by the B&Ls, these loans were repaid on a fixed schedule in which monthly payments spread across a set time period went directly toward reducing the principal on the loan as well as the interest.
While the HOLC was responsible for keeping people in their homes, the Federal Housing Administration (FHA) was created as part of the National Housing Act of 1934 to give lenders, who had become risk averse since the Depression hit, the confidence to lend again. It did so through several innovations which, while intended to “prime the pump” in the short term, resulted in lasting reforms to the mortgage market. In particular, all FHA-backed mortgages were long term (that is, 20 to 30 years) fully amortized loans and required as little as a 10 percent down payment. Relative to the loans with short repayment periods, these terms were undoubtedly attractive to would-be borrowers, leading the other private institutional lenders to adopt similar mortgage structures to remain competitive.
During the 1930s, the building and loan associations began to evolve into savings and loan associations (S&L) and were granted federal charters. As a result, these associations had to adhere to certain regulatory requirements, including a mandate to make only fully amortized loans and caps on the amount of interest they could pay on deposits. They were also required to participate in the Federal Savings and Loan Insurance Corporation (FSLIC), which, in theory, meant that their members’ deposits were guaranteed and would no longer be subject to the risk that characterized the pre-Depression era.
The B&Ls and S&Ls vehemently opposed the creation of the FHA, as it both opened competition in the market and created a new bureaucracy that they argued was unnecessary. Their first concern was competition. If the FHA provided insurance to all institutional lenders, the associations believed they would no longer dominate the long-term mortgage loan market, as they had for almost a century. Despite intense lobbying in opposition to the creation of the FHA, the S&Ls lost that battle, and commercial banks, which had been able to make mortgage loans since 1913, ended up making by far the biggest share of FHA-insured loans, accounting for 70 percent of all FHA loans in 1935. The associations also were loath to follow all the regulations and bureaucracy that were required for the FHA to guarantee loans.
“The associations had been underwriting loans successfully for 60 years. FHA created a whole new bureaucracy of how to underwrite loans because they had a manual that was 500 pages long,” notes Snowden. “They don’t want all that red tape. They don’t want someone telling them how many inches apart their studs have to be. They had their own appraisers and underwriting program. So there really were competing networks.”
As a result of these two sources of opposition, only 789 out of almost 7,000 associations were using FHA insurance in 1940.
In 1938, the housing market was still lagging in its recovery relative to other sectors of the economy. To further open the flow of capital to homebuyers, the government chartered the Federal National Mortgage Association, or Fannie Mae. Known as a government sponsored-enterprise, or GSE, Fannie Mae purchased FHA-guaranteed loans from mortgage lenders and kept them in its own portfolio. (Much later, starting in the 1980s, it would sell them as MBS on the secondary market.)
The Postwar Homeownership Boom
In 1940, about 44 percent of Americans owned their home. Two decades later, that number had risen to 62 percent. Daniel Fetter, an economist at Stanford University, argued in a 2014 paper that this increase was driven by rising real incomes, favorable tax treatment of owner-occupied housing, and perhaps most importantly, the widespread adoption of the long-term, fully amortized, low-down-payment mortgage. In fact, he estimated that changes in home financing might explain about 40 percent of the overall increase in homeownership during this period.
One of the primary pathways for the expansion of homeownership during the postwar period was the veterans’ home loan program created under the 1944 Servicemen’s Readjustment Act. While the Veterans Administration (VA) did not make loans, if a veteran defaulted, it would pay up to 50 percent of the loan or up to $2,000. At a time when the average home price was about $8,600, the repayment window was 20 years. Also, interest rates for VA loans could not exceed 4 percent and often did not require a down payment. These loans were widely used: Between 1949 and 1953, they averaged 24 percent of the market and according to Fetter, accounted for roughly 7.4 percent of the overall increase in homeownership between 1940 and 1960. (See chart below.)
Demand for housing continued as baby boomers grew into adults in the 1970s and pursued homeownership just as their parents did. Congress realized, however, that the secondary market where MBS were traded lacked sufficient capital to finance the younger generation’s purchases. In response, Congress chartered a second GSE, the Federal Home Loan Mortgage Corporation, also known as Freddie Mac. Up until this point, Fannie had only been authorized to purchase FHA-backed loans, but with the hope of turning Fannie and Freddie into competitors on the secondary mortgage market, Congress privatized Fannie in 1968. In 1970, they were both also allowed to purchase conventional loans (that is, loans not backed by either the FHA or VA).
A Series of Crises
A decade later, the S&L industry that had existed for half a century would collapse. As interest rates rose in the late 1970s and early 1980s, the S&Ls, also known as “thrifts,” found themselves at a disadvantage, as the government-imposed limits on their interest rates meant depositors could find greater returns elsewhere. With inflation also increasing, the S&Ls’ portfolios, which were filled with fixed-rate mortgages, lost significant value as well. As a result, many S&Ls became insolvent.
Normally, this would have meant shutting the weak S&Ls down. But there was a further problem: In 1983, the cost of paying off what these firms owed depositors was estimated at about $25 billion, but FSLIC, the government entity that ensured those deposits, had only $6 billion in reserves. In the face of this shortfall, regulators decided to allow these insolvent thrifts, known as “zombies,” to remain open rather than figure out how to shut them down and repay what they owed. At the same time, legislators and regulators relaxed capital standards, allowing these firms to pay higher rates to attract funds and engage in ever-riskier projects with the hope that they would pay off in higher returns. Ultimately, when these high-risk ventures failed in the late 1980s, the cost to taxpayers, who had to cover these guaranteed deposits, was about $124 billion. But the S&Ls would not be the only actors in the mortgage industry to need a taxpayer bailout.
By the turn of the century, both Fannie and Freddie had converted to shareholder-owned, for-profit corporations, but regulations put in place by the Federal Housing Finance Agency authorized them to purchase from lenders only so-called conforming mortgages, that is, ones that satisfied certain standards with respect to the borrower’s debt-to-income ratio, the amount of the loan, and the size of the down payment. During the 1980s and 1990s, their status as GSEs fueled the perception that the government — the taxpayers — would bail them out if they ever ran into financial trouble.
Developments in the mortgage marketplace soon set the stage for exactly that trouble. The secondary mortgage market in the early 2000s saw increasing growth in private-label securities — meaning they were not issued by one of the GSEs. These securities were backed by mortgages that did not necessarily have to adhere to the same standards as those purchased by the GSEs.
Freddie and Fannie, as profit-seeking corporations, were then under pressure to increase returns for their shareholders, and while they were restricted in the securitizations that they could issue, they were not prevented from adding these riskier private-label MBS to their own investment portfolios.
At the same time, a series of technological innovations lowered the costs to the GSEs, as well as many of the lenders and secondary market participants, of assessing and pricing risk. Beginning back in 1992, Freddie had begun accessing computerized credit scores, but more extensive systems in subsequent years captured additional data on the borrowers and properties and fed that data into statistical models to produce underwriting recommendations. By early 2006, more than 90 percent of lenders were participating in an automated underwriting system, typically either Fannie’s Desktop Underwriter or Freddie’s Loan Prospector (now known as Loan Product Advisor).
Borys Grochulski of the Richmond Fed observes that these systems made a difference, as they allowed lenders to be creative in constructing mortgages for would-be homeowners who would otherwise be unable to qualify. “Many potential mortgage borrowers who didn’t have the right credit quality and were out of the mortgage market now could be brought on by these financial-information processing innovations,” he says.
Indeed, speaking in May 2007, before the full extent of the impending mortgage crisis — and Great Recession — was apparent, then-Fed Chair Ben Bernanke noted that the expansion of what was known as the subprime mortgage market was spurred mostly by these technological innovations. Subprime is just one of several categories of loan quality and risk; lenders used data to separate borrowers into risk categories, with riskier loans charged higher rates.
But Marc Gott, a former director of Fannie’s Loan Servicing Department said in a 2008 New York Times interview, “We didn’t really know what we were buying. This system was designed for plain vanilla loans, and we were trying to push chocolate sundaes through the gears.”
Nonetheless, some investors still wanted to diversify their portfolios with MBS with higher yields. And the government’s implicit backing of the GSEs gave market participants the confidence to continue securitizing, buying, and selling mortgages until the bubble finally popped in 2008. (The incentive for such risk taking in response to the expectation of insurance coverage or a bailout is known as “moral hazard.”)
According to research by the Treasury Department, 8 million homes were foreclosed, 8.8 million workers lost their jobs, and $7.4 trillion in stock market wealth and $19.2 trillion in household wealth was wiped away during the Great Recession that followed the mortgage crisis. As it became clear that the GSEs had purchased loans they knew were risky, they were placed under government conservatorship that is still in place, and they ultimately cost taxpayers $190 billion. In addition, to inject liquidity into the struggling mortgage market, the Fed began purchasing the GSEs’ MBS in late 2008 and would ultimately purchase over $1 trillion in those bonds up through late 2014.
The 2008 housing crisis and the Great Recession have made it harder for some aspiring homeowners to purchase a home, as no-money-down mortgages are no longer available for most borrowers, and banks are also less willing to lend to those with less-than-ideal credit. Also, traditional commercial banks, which also suffered tremendous losses, have stepped back from their involvement in mortgage origination and servicing. Filling the gap has been increased competition among smaller mortgage companies, many of whom, according to Grochulski, sell their mortgages to the GSEs, who still package them and sell them off to the private markets.
While the market seems to be functioning well now under this structure, stresses have been a persistent presence throughout its history. And while these crises have been painful and disruptive, they have fueled innovations that have given a wide range of Americans the chance to enjoy the benefits — and burdens — of homeownership.
READINGS
Brewer, H. Peers. “Eastern Money and Western Mortgages in the 1870s.” Business History Review, Autumn 1976, vol. 50, no. 3, pp. 356-380.
Fetter, Daniel K. “The Twentieth-Century Increase in U.S. Home Ownership: Facts and Hypotheses.” In Eugene N. White, Kenneth Snowden, and Price Fishback (eds.), Housing and Mortgage Markets in Historical Perspective. Chicago: University of Chicago Press, July 2014, pp. 329-350.
McDonald, Oonagh. Fannie Mae and Freddie Mac: Turning the American Dream into a Nightmare. New York, N.Y.: Bloomsbury Publishing, 2012.
Price, David A., and John R. Walter. “It’s a Wonderful Loan: A Short History of Building and Loan Associations,” Economic Brief No. 19-01, January 2019.
Romero, Jessie. “The House Is in the Mail.” Econ Focus, Federal Reserve Bank of Richmond, Second/Third Quarter 2019.
Rose, Jonathan D., and Kenneth A. Snowden. “The New Deal and the Origins of the Modern American Real Estate Contract.” Explorations in Economic History, October 2013, vol. 50, no. 4, pp. 548-566.
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Many seniors have misconceptions on the differences between Medicare and Medicaid eligibility benefits.
Throw in long term care insurance, and the water gets even more muddier. Even as a Certified Financial Planner, it’s tough trying to stay on top of all the issues concerning seniors.
To help clear some of the mental fog that comes along with these issues, I decided to bring in a subject matter expert to help out. Tiffanny Sievers, Attorney at Law and founder of SI Elder Law has been kind of enough to share her expertise on the differences between Medicare and Medicaid and how seniors can plan for their later years. Here’s what she had to say….
1. What steps can one make to prepare for dealing with elder issues?
In order to properly prepare for elder issues a individual first needs to have a good foundation of good planning documents. This means having a Power of Attorney for Property and a Power of Attorney for Health Care. These documents allow someone you pick to make property and health care decisions for you when you are unable to do so yourself. Second they need to be prepared for an untimely death. It is better to plan when you are healthy than when you are sick.
Of course, meet with an attorney and that attorney can help you decide what documents you will need to make sure that your wishes are carried out after your death, such as a last will and testament or trust. Third, meet with your financial advisor to determine what investments will give your beneficiaries the best tax benefits and make sure that you have enough Life Insurance to pay for your burial expenses.
Finally, you need to make sure that you have enough assets to avoid running out of money. Once you run out of money, you run out of options. One needs to meet with an elder law attorney, like myself, to make sure that your assets are properly placed to avoid running out of money if you need long term care either at home or in a nursing home.
2. How long will Medicare cover nursing home costs?
In a nursing home, Medicare will cover the first 20 days 100% and then the next 80 days at 80% if you continue to improve medically. After the first 100 days no matter how much improvement you make, Medicare will stop paying and you must either move out or find some other way to pay.
3. What is the difference between Medicare and Medicaid? Common misconceptions?
Medicaid
Almost everyone over the age of 65 is on Medicare and it doesn’t matter what your assets are. However, you must qualify for Medicaid, Medically and financially. Medicaid will only pay if you have limited assets. This means that after Medicare stops paying you have to spend down your assets until you are just about broke before you qualify for Medicaid.
4. How much does it cost to be in nursing home?
Nursing homes in Southern Illinois cost between $2200 and $5500 a month. In Chicago, one month is $7,500 and up. Assisted Living Ranges from $1,500 to $4,500 a month. Private caregivers in your home range between $3000 and $12,000 a month depending on how much care is needed.
5. What are the ways to pay for nursing home costs?
In my opinion, there are five ways to pay for nursing home costs:
1. Private Pay – with good old fashion cash. 2. Long Term Care Insurance – If you have bought “nursing home insurance” the policy will pay a certain amount of money per day for your stay in a nursing facility. You must have bought a policy before you needed nursing home care. 3. Veterans Benefits – The Veterans Administration offers a VA Pension benefits for Veterans or Widows of Veterans if you meet three criteria:
1. Served at least 90 days of active duty
2. One of those days was during a period of war
3. Were something other than dishonorably discharged from the military.
4. Medicare – as discussed above will only pay for part of the first 100 day stay in a Skilled Care Facility 5. Medicaid – Medicaid pays for your entire stay at a nursing home or supportive living facility. It does not pay for care at home.
Medicaid, unlike Veterans benefits, does not pay a cash benefit but only pays directly for services. In fact, you will never receive any cash from Medicaid. Medicaid has no limit, it will pay for any kind of care that you need. For example, Medicaid will pay for the removal of a splinter or for open heart surgery, no matter the cost.
In order to qualify for Medicaid there are asset and income limitations. If you are married, the community spouse cannot have more than $109, 560 plus a house in assets. If you are married, the community spouse will get to keep about $2700 a month of the couple’s combined income. Whatever income the couple has over the $2700 the nursing home will be awarded.
If you are single, you must have less than $2000 in assets and all of your income will go to the nursing home less $30 a month. What SI Elder Law does, is help protect assets so that you can be on Medicaid and not be completely broke. In most cases, SI Elder Law can save half of your assets once you are in a nursing home and you will receive Medicaid benefits. The sooner that you call SI Elder Law the more money that we can save.
6. What hope, if any, is there for those that didn’t plan?
With the current laws right now in Illinois, if you haven’t done any planning and are already in a nursing home, I can save half of your assets. The sooner you get to me the more money that I can protect. For some of my clients, I am able to protect everything.
7. Anything else?
Remember, that any transfer of assets, if not done the correct way can give you a big penalty period and that might have been avoidable. It is best to talk with an Elder Law attorney before moving any assets so that you get the shortest penalty period possible or avoid a penalty period at all.
If anyone is already facing the possibility of nursing home care, I offer a free consultation in my office to see if there is anything that I can do to help.
The volume of mortgage applications fell during the last week of June as compared to the prior week which had contained an adjustment to account for the Juneteenth holiday. The Mortgage Bankers Association (MBA) reported a decline of 4.4 percent in its seasonally adjusted Market Composite Index. The change ended a three-week streak of volume gains. On an unadjusted basis, however, that index did move 6.0 percent higher.
The Refinance Index decreased 4 percent from the previous week and was 30 percent lower than the same week one year ago. The refinance share of applications ticked up to 27.4 percent from 27.2 percent.
The seasonally adjusted Purchase Index declined 5.0 percent but was 6.0 percent higher before adjustment. Applications were down 22 percent from the same week in 2022.
“Mortgage applications fell to their lowest level in a month last week as rates for most loan types increased. As mortgage-Treasury spreads remained wide, the 30-year fixed rate increased to 6.85 percent, the highest rate since the end of May,” according to Joel Kan, MBA’s Vice President and Deputy Chief Economist. “Purchase applications decreased for the first time in a month, as homebuyers remained sensitive to rate changes. Rates are still over a percentage point higher than a year ago, and housing affordability is still a challenge in many parts of the country. However, the average loan size for a purchase application declined to $423,500 – its lowest level since January 2023. This was likely driven by reduced purchase activity in some high-price markets and more activity in some of the lower price tiers as buyers searched for more affordable options.”
The recent low of $423,500 cited by Kan for purchase loans was about $4,500 below the average a week earlier. Overall loan sizes declined from $384,200 to $378,800. The last time loan sizes rose was in mid-May.
Other Highlights from MBA/s Weekly Mortgage Applications Survey
The FHA share of total applications increased to 13.0 percent from 12.9 percent and the Veterans Administration’s share decreased to 11.7 percent from 12.2 percent. USDA applications were unchanged from the prior week at a 0.4 percent share.
The 6.85 percent average contract interest rate for conforming 30-year fixed-rate mortgages (FRM) represented a 10-basis point increase from the prior week. Points rose to 0.65 from 0.64.
The rate for jumbo 30-year FRM increased to 6.95 percent from 6.91 percent,with points slipping to 0.64 from 0.69.
FHA-backed 30-year FRM had a rate of 6.68 percent with 0.98 point. The prior week the rate was 6.63 percent with 1.08 points.
Fifteen-year FRM rates averaged 6.30 percent, up 7 basis points. Points increased to 0.91 from 0.69.
The average contract interest rate for 5/1 adjustable-rate mortgages (ARMs) dropped to 6.00 percent from 6.28 percent,with points increasing to 1.23 from 1.02.
The ARM share of activity increased to 6.2 percent from 6.1 percent.
The volume of mortgage applications fell during the last week of June as compared to the prior week which had contained an adjustment to account for the Juneteenth holiday. The Mortgage Bankers Association (MBA) reported a decline of 4.4 percent in its seasonally adjusted Market Composite Index. The change ended a three-week streak of volume gains. On an unadjusted basis, however, that index did move 6.0 percent higher.
The Refinance Index decreased 4 percent from the previous week and was 30 percent lower than the same week one year ago. The refinance share of applications ticked up to 27.4 percent from 27.2 percent.
The seasonally adjusted Purchase Index declined 5.0 percent but was 6.0 percent higher before adjustment. Applications were down 22 percent from the same week in 2022.
“Mortgage applications fell to their lowest level in a month last week as rates for most loan types increased. As mortgage-Treasury spreads remained wide, the 30-year fixed rate increased to 6.85 percent, the highest rate since the end of May,” according to Joel Kan, MBA’s Vice President and Deputy Chief Economist. “Purchase applications decreased for the first time in a month, as homebuyers remained sensitive to rate changes. Rates are still over a percentage point higher than a year ago, and housing affordability is still a challenge in many parts of the country. However, the average loan size for a purchase application declined to $423,500 – its lowest level since January 2023. This was likely driven by reduced purchase activity in some high-price markets and more activity in some of the lower price tiers as buyers searched for more affordable options.”
The recent low of $423,500 cited by Kan for purchase loans was about $4,500 below the average a week earlier. Overall loan sizes declined from $384,200 to $378,800. The last time loan sizes rose was in mid-May.
Other Highlights from MBA/s Weekly Mortgage Applications Survey
The FHA share of total applications increased to 13.0 percent from 12.9 percent and the Veterans Administration’s share decreased to 11.7 percent from 12.2 percent. USDA applications were unchanged from the prior week at a 0.4 percent share.
The 6.85 percent average contract interest rate for conforming 30-year fixed-rate mortgages (FRM) represented a 10-basis point increase from the prior week. Points rose to 0.65 from 0.64.
The rate for jumbo 30-year FRM increased to 6.95 percent from 6.91 percent,with points slipping to 0.64 from 0.69.
FHA-backed 30-year FRM had a rate of 6.68 percent with 0.98 point. The prior week the rate was 6.63 percent with 1.08 points.
Fifteen-year FRM rates averaged 6.30 percent, up 7 basis points. Points increased to 0.91 from 0.69.
The average contract interest rate for 5/1 adjustable-rate mortgages (ARMs) dropped to 6.00 percent from 6.28 percent,with points increasing to 1.23 from 1.02.
The ARM share of activity increased to 6.2 percent from 6.1 percent.
On this Memorial Day Weekend, we honor the men and women of
the United States who put everything on the line to protect our country and the
freedom we hold. In 1944, President Franklin D. Roosevelt signed the VA loan
into law helping Veterans achieve the American dream. In 1970, under President
Nixon, the VA loan landscape changed with the Veterans Housing Act of 1970. There
was no longer a time limit on loan eligibility, and veterans now had the option
to refinance into another VA loan. Today, the VA loan has guaranteed more than
24 million homes across the United States.
VA Home Loan Military and Service Requirements:
With a VA loan, there are service requirements that need to be
met in order to qualify. These are based on the time period during which you
served, and the number of days active duty. For example, if you are currently
active duty, you would have had to of served 90 continuous days to meet the
requirements. For a further breakdown, those who served during:
WWII – a total of 90 days, or less than 90 days if you were discharged for a service-connected disability
Post-WWII – 181 continuous days or less than 181 days if you were discharged for a service-connected disability
Korean War – a total of 90 days, or less than 90 days if you were discharged for a service-connected disability
Post-Korean War – 181 continuous days or less than 181 days if you were discharged for a service-connected disability
Vietnam War – a total of 90 days, or less than 90 days if you were discharged for a service-connected disability
Post-Vietnam War – 181 continuous days or less than 181 days if you were discharged for a service-connected disability
1980-1990 – 24 continuous month or 181 days that you were called into active duty
Gulf War – 24 continuous months or 90 days in active duty, at least 90 days if you were discharged for a hardship, a reduction in force, or convenience of the government or less than 90 days if you were discharged for service-connected disability
If you separated from service after September 7, 1980 – 24 continuous months, 181 days of active duty or less if discharged for hardship, a reduction in force, convenience of the government or a service-connected disability
On Memorial Day, we honor those who have given their lives for
our freedom. For those who have a spouse serving or who has served, you may be
able to qualify for a VA loan through a Certificate of Eligibility. However,
there are requirements that you will need to meet as well. Most, COE’s are
given to those surviving spouses of a Veteran or the spouse of a Veteran who is
missing in action (MIA) or being held as a prisoner of war (POW).
However, you meet these requirements, be sure to talk to your Total Mortgage Loan Officer about
your options to be able to receive a Certificate of Eligibility (COE).
Credit Score Requirements for VA Home Loans:
VA loan credit score requirements are similar to USDA
credit score requirements. The Veterans Administration or the VA
doesn’t set a minimum credit score requirement, however, the lender is able to
set a benchmark. Typically, the benchmark for a VA loan is set at a 620 FICO
score. This does not mean that you will not be approved with a lower score.
Your credit score eligibility will be determined once a credit report and
analysis are complete. No matter your credit score, there is always room for
improvement.
VA Home Loan Down Payment Requirements:
Another advantage of a VA loan is the down payment, or lack
thereof. Once again, similar to USDA loans, VA loans don’t require a down
payment from borrowers. In fact, about 90% of VA loan holders borrow the loan
without a down payment placed on the loan, although when a down payment is
made, the VA Funding Fee decreases.
A VA Funding Fee on a first-time VA borrower is typically 2.3%
of the loan when no down payment is made. When a down payment of 5% is made by
the borrower, the fee drops to 1.65% of the loan. As the down payment amount
increases, the VA Funding Fee decreases.
The down payment on a VA loan does not have to come from your
accounts. It is acceptable for a down payment gift to be given on a VA loan. If
the down payment is a gift, a letter is required and needs to have the donor’s
information, relationship to the borrower, details about the gift, and legal
phrasing that states that the payment does not need to be repaid.
What are my options:
Depending on your credit score and where you would like to
live, you have more options available to you. Here are some of the most
noteworthy loan options:
VA Loans – Are serving and meet the requirements? Is your spouse a Veteran or MIA or POW?
Benefits:
No down payment requirement
No credit score requirement, lender may set one
USDA Loan – Are looking to live in a rural or suburban area?
Benefits:
No down payment requirement
No credit score requirement, lender may set one
FHA Loan – Are a first-time home buyer with a credit score that is in repair?
Benefits:
3.5% down payment minimum, PMI for the life of the
loan
Lower credit score requirements set by lenders
Conventional 97 Loan – Are you a first-time home buyer who has a good to excellent credit score?
Benefits:
3% down payment minimum, 20% down payment without
PMI on the loan
Summary:
Mortgages are
not a “one size fits all” financial decision. VA loans offer Veterans a great
option to achieve the American Dream with no down payment required and no
credit score requirement set by the VA. However, to find the best loan for you
and your financial situation, contact a Total Mortgage Loan Officer or visit
our
mortgage builder today!
Carter Wessman is originally from the charming town of Norfolk, Massachusetts. When he isn’t busy writing about mortgage related topics, you can find him playing table tennis, or jamming on his bass guitar.
Many people want to buy investment properties because of the fantastic returns they can provide. However, many people do not have the 20 percent down payment (or more) that most banks require. There are ways to buy an investment property with little money down. The easiest way to buy an investment property with less than 20 percent down is to buy as an owner-occupant and later rent out the house, but there are many other options for investors as well. Using a line of credit, refinancing your home, house hacking, the BRRRR method, or even credit cards can provide ways to buy investment properties for less money. Seller financing is a great way to put less money down on a rental property if you can find sellers who are willing. A more advanced technique is to use hard-money financing that you can refinance into a conventional loan. Whatever way you choose to buy a rental property, research the method to make sure that it is legal in your state, your lender approves it, and that you are not stretching your finances too thin.
How much money down do most banks require?
An investor will have to put down at least 20 percent to buy a property from a typical bank. If you own more than four properties, that figure can increase to 25 percent down, providing that they are even willing to finance more than four properties. On top of the down payment, an investor will have to pay closing costs, which can range from two to four percent of the loan amount. It is very expensive to buy an investment property using financing from a typical bank. I have found a great portfolio lender who will finance as many properties as I want with 20 percent down, but they are not easy to find. Once you factor in repairs, carrying costs, down payment, and closing costs it can cost as much as $30,000 to buy a $100,000 rental property.
The video below goes over ways to buy with little money down as well:
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How to buy as an owner-occupant
The easiest way to buy an investment property with little money down is to buy as an owner-occupant, satisfy your loan requirements, rent out the property, and keep it as an investment. Most owner-occupant loans require the buyer to occupy the home for at least a year. Once that year is up, you can rent out the house and turn it into an investment property. There are many owner-occupied loans available, with down payments ranging from 0 to 5 percent down. You can put as much money down as you want if you want to put 20 percent down or even 50 percent down. USDA and VA have great no-money-down programs and little to no mortgage insurance, which will save an investor a lot of money each month. You will have more costs with little money down loans because mortgage insurance is required. Mortgage insurance can add hundreds of dollars to your house payment and eat away at your cash flow. The process of buying as an owner-occupant and then turning the house into an investment property is as follows:
1. Buy a house as an owner occupant, which will cash flow when you rent it out.
2. Move into the house and live there for at least a year.
After the year is up, find another house that will cash flow and purchase that home as an owner-occupant.
4. Move out of the first house and keep it as a rental. Move into the new house and repeat the process every year!
Eventually, you will be building up equity and extra cash flow, which will enable you to buy properties with a 20 percent down payment. Repeating this process 10 times would be an excellent way to get started, but no one wants to move ten times in ten years. It can also be tough to convince your family to live in a home that would be a great rental.
Low down payment owner occupant loans
If you are going the owner-occupant route there are many loans available that have from very little to nothing down required.
FHA loan
FHA loans are government-insured loans that can be obtained with as little as 3.5 percent down. You can only have one FHA loan at a time unless you have extenuating circumstances like a job relocation. You do have to pay mortgage insurance on FHA loans, which I will discuss later in this article. There are limits to the amount an FHA mortgage can be, which varies by state and even city.
USDA loan
USDA is a loan that can be used in rural areas and small towns. The loan can’t be used in medium-sized towns or large towns/metro areas. The loan is a fantastic loan for those that qualify and want to buy a home in the designated areas. USDA loans can be had with no money down, but do have mortgage insurance as well.
VA loans
VA loans are run through the United States Veterans Administration. You have to be a veteran to qualify for the loan, but they also can be had with no money down and no mortgage insurance! VA is a great option for those that qualify because the costs are so much less without mortgage insurance.
Down payment assistance programs
Many states have down payment assistance programs. In Colorado, we have a program called CHFA. The program helps buyers get into owner-occupied homes with very little money down. CHFA actually uses an FHA loan but allows for less than a 3.5 percent down payment. Check with lenders on your state to see if you have any programs that help with down payment assistance.
Conventional mortgages
Even conventional mortgages have low down payment loans available for owner-occupants. For owner-occupants, conventional loans have down payments as low as 3 percent. You will most certainly have to pay mortgage insurance with any conventional loan that has less than 20 percent down. Unlike some of the other loan options available, you can have as many conventional mortgages in your name as you want as an owner occupant.
FHA 203K Rehab loan
An FHA 203K rehab loan allows the borrower to finance the house they are buying and repairs they would like to complete after closing. This is a great loan for homes that need work, but the buyer has limited funds to repair a home. There are more costs associated with this loan upfront because two appraisals are needed and lenders have higher fees for 203K loans.
NACA Loans
NACA is a non-profit program with:
No down payment
No closing costs
No points or fees
No credit score consideration
Below market 30-year and 15-year fixed-rate loans
This sounds like it is too good to be true, and it is a great program. However, you do not simply apply for the loan and hope the lender approves you. You must take classes, and even host classes when in the loan program.
More details are on the NACA site.
What loan costs does a buyer need to consider besides the down payment?
On almost any loan you will have more costs than just the down payment. The lender will charge an origination fee, appraisal fee, prepaid interest, prepaid insurance and possibly prepaid mortgage insurance. Plus you may have more costs the title company charges like a closing fee, recording fees, and possibly title insurance. In most cases, the seller pays for title insurance, but with HUD and VA foreclosures the buyer has to pay for title insurance. These costs can add up to another 3.5 percent of the mortgage amount or sometimes more. When you talk to a lender they can give you an estimate of exactly how much these costs will be before you get your loan.
Can you ask the seller to pay closing costs?
Even though the lenders and title company will charge you more fees than just the down payment, that does not mean you have to pay that upfront. You can ask the seller to pay closing costs for you. If you can get the seller to pay your closing costs for you, loans like VA and USDA may be obtained with no out-of-pocket cash. You may still have to put down an earnest money deposit, but that can be refunded at closing in some cases. When you ask the seller to pay closing costs, it reduces the amount of money they are getting from the sale so you might actually be paying more for the home than if you didn’t ask for closing costs. But in my mind paying a little more for the house and financing those costs to save cash is better than paying more money out-of-pocket for a little cheaper home.
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House Hacking
House hacking is when you buy as an owner-occupant but you buy a multifamily property instead of a house. By purchasing a multifamily property you can live in one unit while you rent out the other units. This strategy allows you to rent the property faster, which may mean the bank will be more willing to give you a new loan as soon as you are ready to move out. You will also have help from the other tenants to pay your mortgage. In some cases, you may be able to live for free while you own the house because the other rent covers your costs.
Virtual real estate
Yes, you can now buy virtual real estate! This is land in the metaverse that only exists digitally. Some pieces of virtual real estate have sold for millions of dollars and others can be bought for almost nothing. Here is some more information on getting started!
BRRRR Method
BRRRR stands for buy, repair, rent, refinance, and repeat. It is a great way to get into rentals with less money down. You will need to get an awesome deal to make this strategy work, but you may be able to get all of your money back. You buy a house that is an amazing deal, fix it up, rent the property, and then refinance it. Once the refinance is done you repeat over and over! The key to making this strategy work is getting an awesome deal with plenty of equity. You also need to be prepared if things do not go perfectly. Appraisals can come in low, the banks may not want to finance you, you may not get the property rented or repaired as fast as hoped, etc.
Hard money loans
Using hard money can save you a ton of cash in the short-term, but it is more expensive in the end. Fannie Mae lending guidelines, allow you to refinance a home with no seasoning period, which means you do not have to wait six months or a year after you purchase a home, to refinance at a higher value than what you bought it for. Fannie Mae guidelines base the refinance amount on a new appraisal, and they will allow a 75 percent loan-to-value ratio. Fannie Mae guidelines do not allow a cash-out refinance, but they do allow the refinance to pay off any existing loans. Many hard money lenders will allow a buyer to borrow up to 100 percent of the purchase price and to finance repairs as well.
Since Fannie Mae guidelines allow a 75 percent loan-to-value refinance, theoretically an investor could buy a home for $100,000 and get a loan with a hard money lender for $100,000 plus $30,000 in repairs for a total loan amount of $130,000. The investor could refinance the home for as much as 75 percent of a new appraisal. If the appraisal came in at $180,000, then 75 percent loan-to-value would allow a refinance of $135,000. Fannie will not allow a cash-out refinance, but the investor could refinance the full $130,000 loan amount. This strategy can be costly due to hard money fees, but it allows the investor to refinance the entire purchase price and repairs!
This strategy can also be very risky because you are depending on a high appraisal to get your money out. Most hard money loans are only one year and you must pay off the loan after that year. Refinance appraisals are not always as high as we would like them to be. Make sure you have an exit strategy if the appraisal comes in lower than you expect.
Private money loans
One legitimate way to buy real estate with no money down is to use private money. Private money is from a private investor, friend, or family member. The private investor will give you money at a certain interest rate to buy a flip or rental property. Private money rates can vary from very cheap to very expensive depending on the relationship, investment, and terms of the loan. I use private money from my sister for my fix and flips. She charges me six percent interest. It is a great way to reduce the amount of cash I have into the properties.
I have used private money to buy commercial rentals and then refinance into a long-term loan with a local bank.
Can being a real estate agent help?
There are many advantages to having your real estate license, but the biggest benefit is you can keep your commission on almost every house you buy. On a $100,000 house, your commission could be $3,000 dollars or more. Here is an article that details why it is an advantage to become a real estate agent if you are an investor. Being a real estate agent also gives me an advantage in finding and purchasing great deals. I detail how hard it is to get your real estate license here. I saved more than $270,000 a year on commissions by being a real estate agent. That does not include the money I made on deals that I got because I was an agent.
Turnkey rentals
A new trend in the US is buying turnkey rental properties that are purchased, repaired, rented, and managed by a turnkey provider. Turnkey properties are a great opportunity for investors to buy rental properties out-of-state when homes are too expensive in their area. There are turnkey providers who offer as little as 5 percent down for investors, but they tend to have very high-interest rates. Here is a great article about turnkey providers or send me a request here for turnkey providers I know of. I bought a turnkey rental in Cleveland a few years ago.
Line of credit
I have had many lines of credit in my career. I have had lines of credit against my personal house (the house I live in) and my investment properties. It is much easier to get a line of credit against your personal house and some banks will not even offer lines of credit on investment properties. A line of credit is basically a loan against a home, but you do not have to use the money all the time. If you do not need the money you can pay it back to the bank and not be charged interest on it. When you need the money again, you can borrow it very quickly as long as the line is open.
Off-market properties
Off-market properties are purchased through direct marketing or by word of mouth. Buying off-market usually means less expensive properties and in some cases, owners with flexible terms such as owner financing. Many investors wholesale off-market properties, which you can purchase with no down payment. Wholesaling is a process of buying and selling properties very quickly. The properties must be very good deals and are usually found by direct marketing for properties. Many investors make a great living by only wholesaling properties to other investors.
Seller financing
Some sellers may be willing to finance the house they are selling or finance a second loan on a home that allows a buyer to put less than 20 percent down. If your bank is willing to offer 80 percent loan-to-value, the seller may offer to loan the other 20 percent, which would amount to no money down for the buyer. The seller may also offer a number of other loan-to-value percentages to help a buyer get into a home for less than 20 percent down.
Finding seller-financed properties is the tricky part. Most sellers are not looking to finance a loan when they sell. To find seller financed listings, look for homes that have no loans against them or an MLS listing description that say seller financing is available. The seller’s terms can vary greatly depending on how desperate they are to sell and what exactly they are looking to get out of the deal. Do not expect to pay four percent interest on a seller-financed loan; they will want a premium on any money they lend. It is also harder to find great deals with seller financing, which is key to my strategy.
There are many new restrictions on financing thanks to the recent Dodd-Frank Act.
Refinance
In most areas of the country, home values are rising and interest rates are at record lows. You may be able to refinance your home and get enough money to buy an investment property. Once you are able to buy an investment property, you can refinance it in one year (sometimes less with the right bank). With rates as low as they are, if you bought the home below market value, you should be able to take out as much as you put into the house and still cash flow. I use this refinance technique all the time. Getting lenders to do a refinance is tricky when you own multiple investment properties. I use a portfolio lender who has allowed me to use a cash-out refinance on as many properties as I want.
Below is a property I refinanced:
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Move in ready Houses
A move-in ready property means all the repairs are completed and it is ready to rent as soon as you buy the home. There can be many advantages to buying a nice home. The biggest advantage is you do not have to pay for repairs. You also do not have to spend time waiting for repairs to be done, which saves money on mortgage payments, utilities, and other carrying costs. The downside of a move-in ready property is that it is usually more expensive and provides less cash flow than a home that needs work.
Credit cards
A few other ways to get quick cash can be very expensive and are usually reserved for people looking to do a quick flip. If you have a killer deal you cannot pass up, you may want to consider these options, but I do not recommend using them unless it is necessary. The easiest way to get quick cash is with credit cards. You can get a cash advance or pay for repairs using your credit card. If you use a credit card to finance your down payment or repairs and cannot pay it off right away, do not pay the 17 percent interest rate. Do your best to get another card that will allow a balance transfer. Many times, you can transfer all of your balance and pay little to no interest for up to a year. That may give you enough time to pay off the card and not to be stuck with a high-interest rate eating all of your profits. I also suggest using a rewards card for repairs on your investment properties. If you pay the balance off every month, this is a great way to make a little extra money.
Self-directed IRA
If you have money invested in an IRA, you are not limited to investing in stocks or mutual funds. There are special self-directed IRAs that you can use to purchase an investment property. You can use your IRA for down payments and repairs and then collect rent in the IRA.
401K
Some 401ks allow an investor to take out a loan against them. You usually have to pay back the loan relatively quickly and pay interest on the loan. You have to be very careful when borrowing from a 401k because the money you borrow is no longer earning interest or growing in your retirement fund. If you lose your job, you also may be required to pay back the loan within 60 days or pay a 10 percent penalty and income tax on the loan.
Subject to loans
With a subject to loan, you buy a house without paying off the previous owner’s mortgage. This is another tricky situation; investors must be very careful with it. Most bank mortgages are not assumable; when the homeowner sells the house, they have to pay the loan in full. The bank most likely will have a due-on-sale clause that says the loans must be paid in full, once the property transfers ownership. With subject to loans the new investor buys a house subject to an old mortgage and does not pay off the loan. There is a chance that the bank will require the loan to be paid off if they find out that the home has been sold.
Investors buy homes subject to a mortgage so that they do not have to get a new loan. It may be hard for the investor to qualify for a mortgage or they may be maxed out on being able to get new loans. If you buy a home for $80,000 that has a $75,000 mortgage in place, the investor would only need $5,000 to buy the house instead of the normal 20 percent or more.
Fannie Mae Homepath program
The Fannie Mae Homepath program on their REO properties allows investors to put only 10 percent down and allows up to 20 financed loans in one person’s name, which is also a huge bonus. It is very difficult for many investors to get loans on more than four properties.
This program has been discontinued.
Conclusion
Rental properties can be expensive, but there are ways to purchase them with less than 20 percent down. If you are short on cash, buying properties with little money down can accelerate the purchasing schedule and increase your returns. However, you will most likely make less money on each property, because borrowing that last 20 percent can be much more expensive than the first 80 percent.
My book Build a Rental Property Empire, goes over how to buy investment properties with little money down. It also covers how to find deals, finance rentals, manage them, and much more! It is available as a paperback and ebook on Amazon or as an audiobook on Audible.