Monday, December 23, 2013

Ho Ho Home! Gifting a Down Payment

On the first day of Christmas my true love gave to me …. a down payment for a new home.  As a lender we commonly see transactions where the home buyer is receiving a gift from a relative for the down payment.  Since it is the gifting season, we thought we should highlight some of the rules associated with gifting a down payment.

For primary residences, conforming and FHA rules allow the entire down payment to be in the form of a gift.  The donor must be a relative which is defined as a spouse, child or other dependent, or other individual who is related to the borrower by blood, marriage, adoption, or legal guardianship; or a fiancée, or domestic partner.  Neither Fannie Mae nor FHA mentions anything about a donor with a white beard, “broad face, and a little round belly, that shook when he laughed like a bowl full of jelly.”  The donor may not be affiliated with any other party to the transaction such as a builder, developer, or real estate agent.

Just as the home buyers’ own funds must be documented, gift funds also require documentation.  A letter signed by the donor, called a gift letter, must include the following information:

·         Dollar amount of the gift,

·         Date funds were transferred,

·         Statement that no repayment is expected; and

·         The donor’s name, address, phone number, and relationship to the home buyer.

The lender must also verify that sufficient funds to cover the gift are available in the donor’s account, or have been transferred to the home buyer.  Acceptable documentation for conforming loans includes:

·         Copy of the donor’s check and home buyer’s deposit slip,

·         Copy of the donor’s withdrawal slip and the home buyer’s deposit slip,

·         Copy of the donor’s check or wire to the closing agent, or

·         Copy of settlement statement showing receipt of the donor’s funds.

FHA has slightly different documentation requirements.  Either way, no gift wrapping is required.  Happy Holidays!

Wednesday, December 11, 2013

How Much Can Low Rates Save You on a Home?

This is an update of an earlier article posted on October 5, 2010.

How much does a lower interest rate on a mortgage reduce the cost of a home?  That sounds like a simple question. Of course a lower rate means a lower monthly payment. But how much of a difference does that really make?  I’ve heard people over-simplify the issue by saying that a 1% change in rate is roughly the same as a 10% change in price. Let’s look into this a little closer and see if it holds up.

We’ve all heard that interest rates today are at all-time lows. I think we take that for granted, so it helps to include this chart that goes back to 1971. It shows a 41-year trend of 30 year fixed mortgage rates.  As you can see by the graph, mortgage rates are near the lowest point that we have seen in our lifetimes.

According to Freddie Mac, average conforming 30 year fixed mortgage rates are around 4.5% .* If you were to purchase a home with a $350,000 home loan, the monthly principal and interest payment at that rate would be $1,773.

Now let’s see how raising the rate to the 2000 average of 8.05% affects the payment. That’s not all that long ago. The payment at same loan amount at the 2000 rate is $2,580. We increased the rate by 3.55% and that resulted in a 45% increase in payment! That seems worse than the 1% rate to 10% price ratio, but let’s look at it from a price perspective.

That increase in payment from $1,773 to $2,580 is the same as raising the loan amount from $350,000 to $509,268. That is also a 45% increase in loan amount. If the down payment is the same percentage for each example, then it also results in a 45% increase in sales price.

So for this example we discovered that a 3.55% increase in rate equals a 45% increase in price. It also means a 1% increase in rate is equivalent to a 13% increase in sales price.

Don’t think I chose a year with an exceptionally high rate. I could have used 1981 where rates were 16.63%. In fact, the average rate over the 36 years is 9%. I chose 2000 because it wasn’t that far back in history. The lesson here is that even though rates have risen over the past several months, we must recognize what an amazing opportunity we have to borrow money at this specific point in history. Years from now we can look at an updated version of this graph realize what a great deal there was in 2013.

Wednesday, November 20, 2013

CFPB Publishes Final Rule on New Mortgage Disclosures

Today the Consumer Financial Protection Bureau issued their Final Rule on integrating disclosures that are currently required by Regulation X (RESPA) and Regulation Z (TILA).  It was back on May 23, 2011 that I wrote an article about the CFPB's effort to remake the mortgage disclosures.  Their name for the campaign was "Know Before You Owe," and it was the first time in my career that I had seen a regulator reach out to the public and industry in such an expansive manor to obtain feedback.

The results of that campaign are in the rule which is available on the CFPB website.  There are some very readable summaries for those of us whose brain begins to ache when reading legal documents.  The CFPB's materials and communication on this issue are commendable. 

There are two new documents which will replace four existing documents.  First is the Loan Disclosure.  The Loan Disclosure will replace the Good Faith Estimate and the initial Truth in Lending Disclosure.  Like the current upfront disclosures, this document must be provided to an applicant within three business days of the loan application.

The other new document is the Closing Disclosure.  This document replaces the HUD-1 Settlement Statement and the Final Truth in Lending disclosure.  The Closing Disclosure must be provided to the applicant no less than three days prior to the loan closing.  There are some additional restrictions about what fees can change prior to closing.  None of the lender's fees, or fees for servicers that the borrower may not shop for can change.  Any increase in APR greater than .125% requires an new Closing Disclosure and another three day waiting period. 

Lenders will need have have a strong process for accurately disclosing in order to make sure that disclosure issues don't arise and cause delays for closing.  They will have plenty of time to prepare as the new rule doesn't go into effect until August 1, 2015.