Sunday, January 31, 2016

Is A HomeReady Mortgage Worth It?

Welcome back!  There is a special type of feeling that comes when closing on your first home.  A mix of fear and accomplishment, obtaining a mortgage is very much like marrying the person you fell in love with.  Your partner after 30 years will have enriched your own life beyond what you could've experienced alone.  That's if you married the right person.  Your home after 30 years will have also enriched your life, but financially, if...

  • You bought it at the right price, and
  • You made changes to improve its value in the dollar for (almost) dollar zone, i.e., the kitchen, bathroom, extra bedroom, extra bathroom, e.g., and
  • You managed to pay off the entire loan balance.

Now if you didn't marry the right person, statistics will prevail and you will most likely end up divorcing.  The same goes with a home purchase.  If you paid too much and got the wrong type of financing, you will rue the day you signed the loan docs.

What I am trying to say is this:  Qualifying for a home loan is only half of the courtship.  The other half is finding the right partner.  Just because you can get married, doesn't mean you should, right?

I just finished reviewing the HomeReady Mortgage lender fact sheet.  Before I break it down, a little bit of background.  Fannie Mae, the quasi-government mortgage finance behemoth, let this dog loose in December.  Its goal is to get low- to moderate-income borrowers in a dwelling by allowing you to use everyone's money except your own for the down payment and closing costs.  Sounds pretty gravy, doesn't it?  Until you read the terms.

For starters, you still have to be credit worthy.  Isn't that the problem these days?  Most low- to moderate-income folks have poor credit because they rely on their credit cards to get by month to month.  Then there's Fannie's bold move to lure you into breaking real estate's cardinal slogan: Location, location, location.  The program insists you choose a home from the fine selection that exists in the hood.  That's slang for ghetto.  I grew up in San Jose's east side.  As a beginning (low-paid) teacher, the last thing I wanted to do was purchase a home anywhere near the neighborhoods I grew up in.

Fannie's trying to get good, hard working people to spruce up poor neighborhoods.  I get it.  But unless your city is on the up and up, I would not think with my heart here.  You can go elsewhere, meaning, buying in a better neighborhood is allowed provided your income isn't greater than 80% of the area's median income (AMI).  Say the neighborhood you want to buy in has a median income of $100K.  Your income can't exceed $80K.  Since your income is what it is, unless you get a raise, you're stuck with downgrading the target neighborhood to qualify.

HomeReady will finance up to 97% of the purchase price.  You know what comes with that?  Mortgage insurance!  But wait...they'll help a brother out by reducing your coverage requirement below industry standard.  Right now you'll pay between 0.5% to 1.0% of the entire loan amount a year so maybe Fannie will hook you up with a rate on the low end. Instead of paying $1,000 a year on a $100K loan, it'll be $500 or an extra $41.75 per month.

You know what this HomeReady program reminds me of?  An arranged marriage.  We see these being the most vile of hardships on the main character in Disney movies: Aladdin (Princess Jasmine being forced to marry a Prince by her country's laws), Cinderella (Prince Charming being presented with Lady after Lady of this House and that House), and so on.  That's not how it should be.  One should marry for love.  And one should buy a house with the goal of one day turning a liability into an asset.  For this reason, I give the HomeReady program an "A" for effort in trying to screw people with more financial engineering.

Stay clear of this program and don't buy a home unless you have a 20% down payment, great credit, and a stable well-paying job.  This has been another installment of CCM blog.

Gov. Rick Snyder for prison!

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