Down Payments and Budgeting

A recent study found that a majority of people under 40 believe that in order to buy a home you need to put 20% down.  I find this shocking.  I’ve been in the mortgage industry for over 25 years.  Even back when I started, there were always programs available with little or no down payment required.  In the first part of today’s newsletter, let’s explore your options for buying a home with less than 20% down.  In the second section I'll discuss budgeting.

 

 

The 20% Down Payment Myth

 

USDA Rural Housing Loans:

You might wonder why the Dept. of Agriculture is in the mortgage business, and to be honest, I have no idea why either, but it has nothing to do with farm loans.  This is a completely different program.  This USDA program is for rural housing that allows for 100% financing – 0% down.

 

The program is designed to help those in rural communities with moderate income (I’ll explain more below) get into homes – and that’s the catch.  The home has to be located in a rural community.  For most part, 99% of the neighbor islands are considered rural.  The only areas outside Oahu that you cannot a USDA loan are the area in and around Hilo and the area in and around Kahului.  All of Kauai, all of Molokai, all of Lanai, and the remaining areas on Maui and Hawaii island qualify.

 

Oahu is a little trickier.  Any home located in an area where the zip code starts with 968 is designated as metropolitan Honolulu and is excluded from the program.  This map shows in brown the areas on Oahu you can’t use a USDA loan.  If you want a more detailed map – all the way down to a specific address, use this link:  https://eligibility.sc.egov.usda.gov/eligibility/welcomeAction.do?pageAction=sfp

 

 

Here’s the one drawback to USDA loans over any other mortgage loan program: Because the program allows for 100% financing, it is the most conversative in calculating the maximum loan amount.  In simple English, you’ll qualify for less using USDA over any other loan program.

 

There’s one other quirk to this program – moderate income.  The USDA program was created to serve people with moderate incomes in rural areas.  There’s a table for each county in the country that shows the maximum amount of income a family can earn.  The amount goes up with the number of people in the home.

 

 

Fannie Mae – HomeReady / Freddie Mac – Home Possible:

Both of these affordable lending programs are the same but called different names by the giant mortgage enterprises.  These programs allow for 97% financing – 3% down payments.  These programs are designed for those with lower incomes.  Specifically, your income cannot exceed 80% of the Area Median Income.  The “area” is a section community where the home is located.  For the state of Hawaii, each island is considered one area.

 

If you want to see if your income qualifies, here’s a link to check your income against an area, or specific address:  https://sf.freddiemac.com/working-with-us/affordable-lending/area-median-income-and-property-eligibility-tool?utm_source=eloqua&utm_medium=email&utm_campaign=2023-02-24_AFFORDABLE_Announcement

 

 

FHA:

FHA will provide a maximum of 96.5% financing – 3.5% down.  There are no income limits or geographic restrictions.  And here’s another bonus: FHA is the most lenient with income qualification.  That means they will allow for higher loan amounts than either USDA or Fannie or Freddie.

 

 

Conventional Loans:

Conventional Loans are those that aren’t part of any special program.  These are your Fannie/Freddie loans with as little as 5% down with 95% financing.  If you put more down 10%, 15%, or 20% and more, you’ll still likely get a conventional loan.

 

 

VA:

VA loans are for active duty and retired military only.  VA loans allow for 100% financing.  VA loans don’t have geographic restrictions.  VA loans don’t have income caps.  VA loans are the best mortgage loan program available – period.  And rightfully so.  Sign a contract to give your life up in defense of our country.  You should get some pretty good benefits.

 

 

 

Budgeting Perplexities

 

If you think this section is on how to budget once you get your new home, you’d be wrong.  Let’s talk about budgeting where you are in life right now and why you don’t have any money for a down payment.  Sorry if I sound like your parents…

 

I understand living is expensive, especially here in Hawaii.  I also know that in almost every circumstance, buying a home will increase our expenses – as owning is usually more expensive than renting.  But this is where the math doesn’t work.  If you are currently renting and have no money saved, even by buying a home with no down payment or closing costs, how are you going to afford the extra expenses?  After all, if you have zero left over every month while renting, where’s the additional money going to come from?

 

The answer could go either way.  Either you currently have more expenses, but those expenses are going away, or your level of income will rise.  Maybe you’re just about done paying off college debt or are near the final payment on your lifted Toyota Tacoma.  Maybe you recently got a huge raise or just got married, and now with a combined income, you and your spouse can afford a higher shelter expense.

 

If you are tapped out each month and have nothing saved, unless your circumstances will change, buying may not make sense for you.  Sadly, in this world not everyone is ready for homeownership.  But, if you are willing to make the changes to take advantage of the best opportunity to gain wealth in your life, Hawaii real estate is great way to accomplish that.  You think home prices in Hawaii are high now, where do you think they’ll be 20 years from now?

 

 

 

 

 

And now the week’s economic news…….

 

Inflation Eases

Mortgage markets were pulled in opposite directions this week.  A flareup in tensions in the Middle East caused oil prices to climb, raising concerns about the outlook for future inflation.  At the same time, the latest economic data revealed that current inflation levels are significantly lower than expected.  While these offsetting influences created some market volatility, mortgage rates finished the week with little overall change.

 

The Consumer Price Index (CPI), one of the most closely watched inflation indicators, showed that prices fell 0.4% in May from the previous month, more than expected and the largest monthly decline since April 2020.  The annual rate was 3.5% higher than a year ago, down substantially from 4.2% last month to the lowest level since March.

 

To reduce short-term volatility and get a clearer picture of underlying inflation trends, investors look at core CPI, which excludes food and energy.  In June, Core CPI was 2.6% higher than a year ago, also down sharply from last month.  Shelter (housing) costs were up 3.3% on an annual basis and continue to be a primary reason why bringing inflation down to the 2% target of the Fed remains challenging.

 

A different inflation report released this week, which measures wholesale costs for producers, also contained positive news for mortgage markets.  The June Producer Price Index (PPI) was 4.7% higher than a year ago, down from the prior month and far below expectations.  Its impact was relatively minor, however, as investors tend to place a lot more weight each month on the Consumer Price Index report, which better reflects overall inflation levels in the economy.

 

Consumer spending also showed signs of moderating.  With the added firepower from larger than usual tax refunds winding down, retail sales in June rose a modest 0.2% from May, matching expectations, but far below the results for the last several months.  Spending continued to be driven by higher-income households, supported by continued strength in the stock market.  Sectors with the strongest gains included appliances, auto dealerships, and non-store retailers (helped by the Amazon Prime Day event).

 

Overall, the latest data suggests that inflation continues to cool while the economy remains resilient.  Investors will continue to watch this combination closely as they look for clues about the Federal Reserve's next moves and the future direction of mortgage rates.

 

 

 

 

Next Week

Looking ahead, attention will remain on the conflict in the Middle East and the proposed deal to ease tensions.  Investors also will monitor comments from U.S. Fed officials about future monetary policy.  The next European Central Bank meeting will take place on Thursday.  It will be a light week for economic reports.  New Home Sales will be released on Friday.

 

 

Until next week….

 

*** Please note that Freddie Mac publishes their weekly rate report on Wednesday mornings from data received Monday and Tuesday. 

The graph above is intended to shown rate trends, and not “today’s current rate”. ***

 

 

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Here’s the link:      https://www.hawaiimortgage.net/todays-rates/

 

 

Do you think all lenders are the same?

There is a difference when you use Hawaii Mortgage Company for your financing.  Here’s a short video telling you why:

 

https://youtu.be/c7AKQ5wa2_U

 

 

 

Broker vs. Banker?

Click the link below to get a quick lesson on why working with a Mortgage Broker will benefit you on your next transaction.

 

https://youtu.be/iH3igW5v2jE