30 Year Fixed Mortgage Archives - Preferred Residential

Buying a home with no down payment and competitive interest rates is the hallmark of the USDA mortgage.

What is the biggest obstacle preventing the majority of hard working Americans from buying a home? The answer is quite simple; a sufficient down payment. Most loan programs require at least 3.5% -5% and as high as 20% for a down payment. However, the United States Department of Agriculture (USDA) instituted a home loan program long ago to enable home buyers the chance to purchase a home without giving over a large chunk of their savings. Here are the general guidelines of the program.

First: Is the property located in an approved area?

In order to qualify for the USDA funding a home must be within the limits of a particular area designated as rural. However, this is not a bad thing. There are numerous areas throughout Oregon that fall within the USDA rural areas. According to the USDA website, www.rurdev.usda.gov here is a list of the areas that are NOT allowed to use USDA financing for a home purchase:

Obviously the more populous areas, such as Portland and Beaverton, do not meet the criteria. But there are entire counties like Douglas and Polk where people can purchase a home using this wonderful mortgage program. If you have your eye on a home within a particular city and it is NOT in the above list then it should be eligible for the USDA mortgage. The un-shaded areas on this USDA loan eligibility map are eligible for the loan program. (When the page loads click “Single Family Homes” in the left column under “Property Eligibility”)

Second: Does your income meet the eligibility guidelines?

This mortgage is aimed at people with moderate to lower incomes. However, there are two rules about the income limit that are important to understand.

The income limit is based on the number of people that will live within the home.
The total income for all people cannot be higher than 115% of the median income base for your area.

Your mortgage broker can provide you with the income range for your area. Allowing people to use all of the people in the home to qualify can sometimes help since the allowable income is higher as the number in the household increases.

Along with meeting the income rules potential borrowers will also have to meet the debt to income ratio rules. Usually, the mortgage cannot be higher than 29% of the monthly household incomes before taxes are deducted and the total of all debts, including mortgage, cannot be more than 41%.

Third: Is the home the right type of property?

USDA mortgage loans can be used to buy an existing single family home. The borrower must intend to live in the home as their main residence. The home may be a new construction property. However, multiple family properties such as a duplex are not allowed. A condo may be approved if the building has been approved by the VA or FHA or if the structure is compliant with Freddie Mac or Fannie Mae rules. Mobile homes or manufactured homes are not allowed.

Fourth: What is the price of the home in relation to the appraised value?

We saved the best for last. If the sales price on the home is equal to or below the appraised value of the home, there is no requirement for a down payment. In fact, it is possible for the seller to pay 6% of the sales price towards closing costs and prepaid items. This will have to be negotiated with the seller and the real estate agents involved.

If you are one of the thousands of Oregon residents wishing they could take advantage of the historically low mortgage rates to buy a home, this is a wonderful way to become a home owner without the burden of paying a lot of money up front.

In a speech last week President Obama endorsed reducing the role that the United States government plays in the housing sector. One way he proposed to do that is by closing the doors of Fannie Mae (Federal National Mortgage Association, FNMA) and Freddie Mac (Federal Home Loan Mortgage Corporation, FHLMC).

“They’re not really government but not really private sector; they’re known as Freddie Mac and Fannie Mae,” Obama said. “For too long, these companies were allowed to make huge profits buying mortgages knowing that if their bets went bad taxpayers would be left holding the bag.”

For decades, Fannie Mae since 1938 and Freedie Mac since 1970, these two entities have bought mortgages from lenders that conformed to a set of lending guidelines essentially guaranteeing those mortgages and allowing banks to take the proceeds from the sale and lend the money again. If lenders were to lose the “guarantee” that they could sell their conforming mortgages to FNMA and FHLMC many fear we could see a rise in interest rates and the disappearance of the 30 year mortgage.

Higher interest rates appear to be unavoidable in any scenario where Fannie Mae and Freddie Mac cease to exist. Mark Zandi, Moody Analytics chief economist was quoted was quoted by the Associated Press as having said, “It will mean higher mortgage rates. The question is, how much higher.” At this early point in the discussion many economists believe mortgage rates would be one half of a percentage point higher without the government sponsored enterprises.

A lack of government guarantees could also make 30-year fixed-rate mortgages much harder to find. Banks would be less willing to offer those products without government support because the conventional mortgage as we know it is not a “money maker” for financial institutions. Just take a look at the terms offered for commercial mortgages (which are not backed by a government sponsored entitiy) to see what mortgages could look like without Fannie Mae and Freddie Mac. Commercial mortgages are most often amortized over shorter periods (20 – 25 years) with the interest rate only fixed for 5 years at a time.

For his part, Obama said he wants to preserve borrowers’ access “to safe and simple mortgage products like the 30-year, fixed-rate mortgage.” That would mean that the U. S. government can’t totally wash it’s hands of the mortgage finance system. President Obama seems to favor a solution along the lines of a bill introduced to the U. S. Senate in June.

Senators Bob Corker and Mark Warner’s bill proposes Fannie Mae and Freddie Mac be replaced by a Federal Mortgage Insurance Corp. that would continue efforts to build a common securitization platform to help small lenders issue securities. It also would continue the two companies’ existing guarantees. Under the bill private lenders (banks) would be required to hold 10% of the amount of the loan in equity capital to cover any first loss of the loans.

The Federal Mortgage Insurance Corp would be modeled after the Federal Deposit Insurance Corp. It would collect insurance premiums from the industry and maintain an insurance fund. The FMIC’s insurance would kick in only after a “substantial amount” of private capital is exhausted to “bring in credit investors who bear the risk of default while maintaining liquidity for the housing finance system.”

The House of Representatives is reportedly also working on a bill to reform housing finance but as of this writing details of the bill were not available.

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