Real Property and Common Sense

At the end of March the Federal Reserve stopped making their purchases of mortgage backed securities in support of Fannie Mae and Freddie Mac.  Interest rates where expected to rise as a result but this did not seem to happen, perhaps because private investors made up the difference.  There are however, reasons to expect a rise in interest rates.  One is the recovery in our economy, as slow as it may seem.  There is an increase in consumer confidence and consumer spending.  The housing market is recovering.  The increased demand for financing would logically put upward pressure on interest rates.  The other, not so positive reason is our growing national deficit which could cause foreign investors to look elsewhere for investments.  That would require paying higher interest to retain them as investors in our economy. 

The increasing strength of the economy may improve our credibility with investors so to limit the increase in rates.  But, the prospective home buyer, looking to buy in the next few months might take this into consideration.  The more of your mortgage payment that is required for interest, the less the purchase price you can handle with the same monthly payment.  Sooner may be better than later.

The FHA, who insures about 30% of new mortgages and is the largest mortgage backer for first time buyers, is raising their fees to borrowers starting this spring. The fee for MIP will be 2.25% from 1.75% currently. This charge is upfront and paid at closing. Borrowers have been agreeable to paying this premium for an FHA mortgage because of the low down payment requirements. The FHA requires a downpayment of 3.5%. Conventional mortgages require a higher downpayment.  The increase in the up-front mortgage insurance premium would be in effect for FHA loans for which the case number is assigned on or after April 5, 2010.

There is also a change in the allowed “seller concessions”. Currently the FHA allows 6% “seller concessions”, but this will be changed to 3%. “Seller concessions” help buyers with little cash to shift some of their closing costs to the seller, usually in return for paying a higher purchase price to compensate. The reduction in allowable “seller concessions” will require buyers to come up with more of their closing expenses.

New borrowers will be required to have a minimum FICO score of 580 to qualify for the 3.5% downpayment. Borrowers who do not have a 580 FICO score will be required to make a 10% downpayment.

Home buyers who act quickly this year could benefit from low interest rates, as well as the $8000 tax credit ($6500 for existing homebuyers) for those who qualify and, additionally, take advantage of the current rate of up front mortgage insurance and possible 6% seller concessions on an FHA backed mortgage.

The New York State Mortgage Credit Certificate Program (MCC) allows first time home buyers to claim a significant credit on their Federal Income Tax. This is not a refundable credit so it takes some tax planning to take full advantage of it. Basically, this program allows eligible home buyers  to claim a credit equivalent to 20% of the annual mortgage interest that they pay on their home. (The remaining 80% can still be used as an itemized deduction.)  This credit can be claimed for the life of the mortgage so the benefit can be significant.  

The borrower needs to apply for the MCC at the time they apply for their mortgage. Go to www.nyhomes.org for a list of participating lenders and further details about eligibility requirements of the borrower and the property. This cannot be used with a SONYMA mortgage but similar eligibility requirements apply.

The Federal tax credit of $8000 (or 10% of purchase price) can still be claimed by first time home buyers who qualify in addition to the MCC.