While headlines remind us daily of the nation's economic difficulties and the steady rise in mortgage delinquencies and home foreclosures, a more positive message deserves more attention. It's a good time for first-time buyers and other low down payment borrowers to buy a home. And credit unions can help them make a smart mortgage choice.
The National Association of Realtors reports that existing-home sales, through July, were up four months in a row for the first time in five years, with price declines increasing affordability in most metro areas. The combination of low interest rates and improved affordability suggests that increased sales may well be sustainable. Providing additional incentive to first-time buyers is a tax credit of up to $8,000 for those who close on their homes by the end of November.
To take advantage of this changing environment, homebuyers are taking a new look at the mortgage options available to them. They've read about the consequences of choosing the wrong loan, and now, more than ever, they want safe, secure mortgages that are affordable and sustainable over time. That's especially true for first-time buyers, many of whom are making low down payments.
Today, those buyers and others unable to make a 20% down payment essentially have two options from which to choose: loans insured by the Federal Housing Administration and loans insured by private mortgage insurers. Premiums for each are tax deductible, and both programs are safer than the combo, or “piggyback,” loans no longer in favor. Each, however, has its own individual characteristics. It's important for mortgage lenders to help their customers determine which is right for them.
Loans through the FHA may seem more alluring to some buyers since the monthly payment rates can be attractive and the down payment requirements are often more lax. However, a careful comparison can reveal that loans with private mortgage insurance are better fit for many low down payment borrowers.
Consumers need choices. With PMI, qualified borrowers can choose from a variety of available loans, as opposed to a single FHA loan option. PMI may be cancelled and insurance payments cease once the homeowner builds 20% equity either through payments or home appreciation. With an FHA mortgage, part of the insurance cost is rolled into the mortgage and remains in place even after the insurance is cancelled. In addition, PMI-backed mortgages don't have an added layer of government bureaucracy, making them are faster and more flexible than FHA loans.
While it's true that FHA loans can require a lower down payment than those with PMI, additional consumer-friendly features make loans with PMI especially attractive in the current environment. Since job loss is a major cause of foreclosure, the prospect of unemployment rates rising above 10% has potential buyers worried about the possibility of losing both their jobs and their homes. The job-loss protection benefit offered by mortgage insurers allows those buyers to walk away from the closing table with the added peace of mind that comes from having a financial cushion in case they lose their jobs.
With the Genworth and other programs available through credit unions, their mortgage payment (principal, interest, taxes and insurance) is covered for up to $2,000 a month for up to six months. Benefits are paid directly to the mortgage company just as if the borrower had made the payment.
Yet despite such programs, more than 3 million home foreclosures are expected by the end of the year, with an additional 2.5 million in 2010. Mortgage insurers are responding with proactive efforts to keep people in the homes during these times of financial adversity.
It's important that lenders help today's buyers learn from the excesses of the past and carefully consider their mortgage options before choosing which is right for them. If the market is to recover, it will be important for consumers and lenders alike to understand the need for mortgage loans that are both affordable and sustainable by the borrowers. Getting into a home sooner is only better if it is also safer and smarter. Consumers need to able to buy homes with confidence that they will be able to stay in them over the long term. While there are still difficult days ahead, the mortgage landscape is changing. The safe, secure mortgage choices now available to consumers suggest there's every reason to believe the changes will be for the better.