The Regan Team - Petaluma Homes & Mortgage Blog - PetalumaLending.com: September 2010

Earlier this year private mortgage insurance (PMI) companies started to issue policies up to 95 LTV.  There was a push for buyers to look into a conventional MI loan instead of FHA financing.

The first question was always which one is better?  Like most things in life there isn’t a cut and dry answer.

To start we’ll use an example of a $417,000 purchase of a single family home. The borrower has 5% down and a 700 FICO.

Conventional MI has a 30yr fixed rate of 4.375 and a monthly mortgage insurance payment of $257.

$396,150 loan amount = $1978 principal & interest payment + $257 MI + $60 home owners insurance + $434 property taxes = $2729 total housing payment

FHA has a 30yr fixed rate of 4.25 with a $3,961 up front mortgage insurance premium + $300 monthly mortgage insurance.

$396,150 + $3,961 = $400,111 loan amount = $1968 principal & interest payment + $300 monthly mortgage insurance + $60 home owners insurance + $434 property taxes = $2762 total housing payment

The private MI is $33 a month cheaper. Seems like a better deal right? Well maybe…

-With conventional MI, 5% of the buyers down payment must come from their own funds, they can not be gifted that 5%; with FHA the entire down payment and closing costs can be gifted.

-PMI limits the property to 10 acres.

-Conventional MI has more restrictive debt to income limits between 41-45%, while FHA can go as high as 55% in some cases.

-No multi-unit properties are allowed with conventional PMI; with FHA there are increased loan limits for up to 4 units.

-PMI requires 2 months PITI cash reserves after close of escrow, FHA requires none.

-PMI requires 3 open trade lines with a 12 month history; with FHA if you get DU approval you’re good to go.   I’ve had borrowers with no traditional trade lines approved.

While private mortgage insurance is less expensive than FHA financing, it’s also more restrictive and many buyers will not qualify with conventional MI that will with FHA.  Cheaper isn’t always better.

(note these comparisons are based on today's (9/25/10) 30yr fixed rate and PMI's guidelines.  There are other mortgage insurance companies and their guidelines may differ)

After the tragic and frightening gas line explosion in San Bruno, CA many home owners around the country asked the question, how close is my home to a major gas line?

It’s not complicated to find out but it’s something that many didn’t even think to ask when they purchased their home. 

Moving forward do you think the National Association of Realtors and/or the California Association of Realtors are going to develop a new real estate disclosure addressing this issue?

If they do will it affect home values?

Will older neighborhoods that have old pipes be affected more than a brand new development where the pipes are new?

To find out if you live near a major gas line, go to the National Pipeline Mapping System site and enter your address.

Here is a map of Petaluma California from the NPMS; the blue lines represent significant gas transmission lines. 

With Government insured loans dominating the mortgage market the two most popular programs are FHA and VA. Here’s a basic overview of the two:

FHA:

-3.5% down

-most investors require a 620 FICO

-higher debt to income ratios, some investors up to 55%

-can use non-occupant co-borrowers in order to qualify

-up to 6% seller concessions allowed

-down payment and closing costs can be gifted

-FHA has an upfront mortgage insurance premium and a monthly mortgage insurance premium

-loan is assumable

-Click on this link for current FHA loan limits 

VA:

-zero down

-most investors require a 620 FICO

-41% debt to income but higher is possible for a strong borrower

-4% seller concessions allowed

-buyer can not pay more than 1% towards closing costs so getting a seller credit is strongly suggested

-VA has a funding fee but no monthly mortgage insurance

-loan is assumable

-Utilities must be counted in qualification ratios

-Requires pest report to be paid for by seller. All section 1 items must be addressed; buyer can pay for repairs if agreed to in writing

-Click this link for current VA loan limits

-Former Regular Military personnel that received their discharge must provide a copy of form DD214.  This form can be downloaded from the following site:  http://www.archives.gov

-need to provide certificate of eligibility

The City of Petaluma, CA is now offering a new program called Mulch Madness that provides home owners that replace their existing lawn with free mulch, compost, cardboard, irrigation supplies, and a discount coupon to a local native plant nursery. 

The city will also deliver the mulch, compost, and cardboard to the home owners house free of charge. 

For more information click HERE

With homes more affordable and interest rates at all time lows many first time buyers and move up buyers alike are looking for great deals.

I’ve even had current renters looking to purchase an investment property and have no interest in buying a home for themselves.

With all the great deals on single family residences many forget how profitable multi-unit properties can be.

Purchasing a multi-unit property has many advantages:

-you can live in the property and rent out the other units helping you to pay your mortgage and in some cases pay it for you.

-you can qualify for a larger loan; some loan programs such as FHA can use the projected income from the rental units to help the buyer qualify for the mortgage.

-higher loan limits with FHA/Fannie/Freddie and low 3.5% down payment through FHA.

-long term investment; once the loan is paid off you’ve got substantial cash flow to help you during retirement.

Click here for current FHA loan limits

So a home buyer could purchase a $1.2 million dollar property with only 3.5% down!

An example:

$1,200,000 purchase price on a 4-unit owner occupied property in San Rafael, CA.

FHA loan with 3.5% ($42,000) down = $1,158,000 base loan amount + $11,580 upfront mortgage insurance premium for a total loan of $1,169,580

Monthly payment on a 30yr fixed 4-unit FHA loan at 4.5% (yes this is actually the rate!) = $5,926 + $1,121 monthly mortgage insurance + $170 home owners insurance + $1250 property tax gives you a grand total of $8,467 a month.

Sounds like a lot but with 3 units to rent out at $2,000 a month, things get easier.

$8,467 total house payment - $6,000 in rental income equals $2,467 a month mortgage payment for the new home owner.

If a home buyer were to purchase a $1.2 million dollar property they would need to make about $17,000 a month with no other debt in order to qualify.

In this example with a FHA loan we could use 75% of the projected rents to qualify the borrower, so they would need to make $8,000 a month instead of $17,000; big difference.

Looking long term, if nothing changed at the end of the 30 years, the property is paid off and you have a positive $6,000+ a month cash flow. Not a bad retirement.

Obviously this is the extreme example but holds true for any price point.

These higher limits also apply to the FHA 203k loan, so if you find a multi-unit property in need of repairs, you have the ability to purchase it and rehab it all in one loan!

If you’re looking for the best deal you should consider purchasing a multi-unit property; it’s where true real estate wealth is built.