First-Time Homebuyers Get a Break With Lower Mortgage Rates

We’re talking about some real money here for homebuyers. Take a $200,000 mortgage. The mortgage payment for principal and interest would drop by about $120 a month if your rate is 4.1 percent instead of 5.1 percent on a 30-year mortgage, according to Greg McBride, chief financial analyst for Bankrate.com.

For the mortgage alone, the payment would be about $966 month at the 4.1 percent rate. It’s sort of like getting more than one month free each year. For a homebuyer who was priced out of the market last spring, the lower rates could help get them back in the game. Being able to lock in a 30-year fixed rate near, or even below, 4 percent helps put some “wind in the sails of homebuyers from an affordability standpoint,” McBride says.

The 30-year fixed rate mortgage remains the dominant loan for middle-class borrowers, particularly first-time homebuyers. “This is a very attractive rate, which will lift the key spring home selling season,” says Mark Zandi, chief economist for Moody’s Analytics.
How attractive? Well, it’s just a notch above the record low of 3.5 percent in late 2012. And if you go back 30 years, homebuyers were looking at an average 30-year rate of 11.13 percent in early April 1989, according to Bankrate.com’s data.

Lower interest rates would make payments more affordable and offset some high prices. But the drop in mortgage rates won’t solve all problems. “It is not going to take a first-time buyer from a small home to a big home, but it does definitely have a small effect on purchasing power,” says Tim Gilson, associate broker for Keller Williams Domain and the Gilson Home Group in Birmingham, Mich.
Here are some points to consider if you’re shopping for a mortgage.

Research First-Time Buyer Programs
Virtually all banks (and some non-banks) have some form of first-time homebuyer programs. You might be able to get some sort of subsidy on a down payment, perhaps a reduction on closing costs or maybe some lenders offer a mortgage to first-homebuyers through a relaxed credit score or some more wiggle room relating to how much debt you’re carrying relative to your income.
An FHA loan is a favorite of first-time homebuyers, as the U.S. Department of Housing and Urban Development does not use risk-based pricing. In some cases, first-time buyers can find programs that offer a mortgage with down payments for 3 percent or 3.5 percent of the purchase price.

Consumers need to understand that many different homebuyer programs exist and will vary by bank and non-bank, as well as by state. Look into options for locking in a low rate, too, in case interest rates shoot up unexpectedly.

Expect a Few More Hurdles
The Federal Housing Administration is toughening up its standards for mortgages made to homebuyers with small down payments, low credit scores and high levels of debt. More than 28 percent of mortgage approvals made in the first quarter of 2019 had a credit score of less than 640.

Lenders expect that there will be some tightening of credit, particularly for buyers at the margin who may be taking on riskier loans. Nearly 83 percent of FHA home-purchase loans made in January went to first-time homebuyers, according to FHA.
The tighter standards would impact those who have the weakest financial profiles—FICO scores under 640 with debt-to-income ratios above 50 percent.

To be fair, a low credit score and high levels of debt going in significantly increases the risk of a loan failure. Consumers don’t want to end up dealing with the “emotionally difficult loss-of-home foreclosure process,” either, he says.
The financial crisis—and housing market crash in 2008—led to greater disclosures for consumers and more scrutiny.
While there are a number of low-down payment, and even some no-down payment, loan options in the marketplace, do not confuse this with the wild, wild West days of 2004-2006 when exotic and creative mortgage products got mainstream homebuyers into trouble.

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