New Excel Workbook Includes Multiple Home Loan Affordability Estimating Tools.

Independence Day (appropriately) marked the start of my 16th year of retirement; I started this blog the week after I retired and 3,500+ posts later here we are. 

I've noticed recent news stories that project how many potential homebuyers will be priced out of the market because of increasing interest rates. 

While rising interest rates clearly decrease the pool of eligible buyers there are a variety of  loan level and program specific adjustments that can be made that would increase home loan affordability. 

Down payments and variable rate loans are two examples, but the use of compensating factors (FHA) and residual income (VA) are two less than obvious variables that can impact affordability calculations. 

Figuring out the impact of those adjustments can be complex so I compiled a unique new Excel workbook HERE that allows users to estimate home loan affordability using a wide range of variables and loan programs. 

There are a total of 5 worksheets currently in this Loan Qualification Tools workbook. 

1. Side by Side Loan Estimator: 

This worksheet uses as defaults the variables used for the 2022 Harvard Joint Center for Housing Metro affordability map. A total of 5 side by side scenarios are available for the user.

Each scenario allows different variables for purchase price, interest rate, down payment, taxes and insurance, mortgage insurance rate and the side-by-side structure allows easy comparisons of qualifying income as individual variables are changed.

Graph (Pasted below)

The worksheet includes a graph showing Portland metro comparisons for all 5 scenarios. If you change the variable inputs you can relabel the scenario names and than also change the title text in the graph. (To also keep the Portland data simply make a copy of the original worksheet and make changes to the copied worksheet). 

Note that the default entries include a variable rate loan rate (4.5%) in Scenarios 3-5, a  20% down payment in Scenario 5, and a $200 monthly recurring debt in Scenario 2 and 4.  All of these variables impact the maximum loan amount and the borrower ability to qualify. 

2. FHA Loan Estimator, Includes "Compensating Factor" Analysis

This unique workbook shows that qualifying income for a given FHA purchase price can vary significantly based on FHA specific “compensating factors”. 

A total of four side by side scenarios with different compensating factors are shown. The underwriting ratios used for each scenario are locked as they represent ratios permissible with specific compensating factors. 

The base loan amount in the left column can be compared with the loan amount permitted via three different “compensating factor” scenarios. The worksheet includes not only the monthly mortgage insurance amount but also the up front mortgage insurance fees and adds it to the loan amount.

Unlike the Side by Side and VA Estimator the default down payment is 3.5% not 5%.

The qualifying income required for the monthly expense is calculated and also compared to the median family income for the Oregon county for 2022; the worksheet also incorporates the 2022 FHA mortgage limits by county. 

The results showing the income required to qualify using the front and back ratios are displayed in a graph below the table. 

3. VA Loan Estimator

This was the most challenging estimator to create because of multiple inputs required, including a complicated calculation of residual income that varies by home size and family size and an FICA cost input. 

This estimator is for 1st time users of VA loans, not for prior VA borrowers who still have some, but not complete access, to their VA loan entitlement). This estimator is also NOT for Oregon Department of Veterans Affairs loans--those require mortgage insurance and limit LTV to 95%. 

Unlike the other estimators there is no mortgage insurance variable since VA charges an upfront fee in lieu of on going mortgage insurance. This fee however is waived for veterans who receive disability compensation (10% or above) or those in service who have a purple heart. [The 5 year ACS 2020 (Table B21100) estimate is that 66,000+/25% of Oregon veterans have a 10% or higher disability rating]. 

The target back ratio for VA loans is 41%, not 43%. This may be exceeded with compensating factors but unlike FHA loans,  I have not located a matrix with specific factors that would justify a higher than 41% DTI. (When DTI>41% there is a higher requirement for residual income, and "high residual income" is one permissible compensating factor). 

While I have entered a default 5% down payment VA loans can be zero down  which would then increase the income required to qualify. 

Because this estimator focuses on one loan at a time it ALSO includes a unique loan equity/appreciation estimator that shows as of  the end of year 1 and year 5 the projected amount of home equity using user variable input of the estimated annual appreciation rate. 

For the default entries, assuming 1% annual price appreciation I calculate that total increase in equity at the end of year 5 would be $70,110,including $29,331 in home price appreciation. 

4. Input and Output Matrix 

This worksheet shows for each of the three estimators the inputs made and the calculations that result from those inputs. While there are the same inputs for multiple line items, there are also inputs and outputs unique to specific FHA and VA loan programs. 

5. Links

This worksheet lists a variety of reference sources I used to create these estimators.

It also includes an ACS table showing distribution of Oregon veterans receiving service related compensation by their rating level. 

Notes:

For the side by side and VA estimators, I've set as the default entry a $575,000 sales price, the May 2022 RMLS median sales price for the Portland metro area and a fixed interest rate of 5.7% and variable rate of 4.5% using the latest Freddie Mac primary mortgage survey rates as of June 30, 2022.  The FHA estimator uses a 3.5% down estimate but all other default entries are the same as the Side by Side estimator (This graph does not include a specific VA loan estimate).

I have added a note with the version number for each of the three estimators and have locked cells where appropriate to avoid inadvertent data entry. 

Originally created and posted on the Oregon Housing Blog. 

 

5 Portland Metro Examples: Down Payment and Interest Rate Differences Have Big Impact on Home Purchase Qualifying Income Requirements.

As I previously noted the Harvard Joint Center for Housing Studies 2022 State of the Nation's Housing report has an interactive map that allows users to see estimated qualifying income for metro areas using a standard interest rate and standard loan assumptions for down payment, property taxes, and mortgage insurance. 

Their calculations also use a standard 3.5% down payment which I find more representative of the market than the 20% down payment assumption I often see in examples of income qualification requirements. 

Starting with the Harvard assumptions I created 5 scenarios to show how qualifying income varies depending on interest rates and down payments. 

The two page PDF I created HERE  and embedded below starts with a graph of the results on page 1 and then page 2 has a table with all the inputs and those results.

The results from those 5 scenarios show that qualifying income ranges from $117K to $171K. 

• Scenario 5 has the lowest qualifying income ($117,096) because it uses a 20% down payment and a 5/1 ARM (Adjustable rate mortgage). This scenario eliminates the monthly $393 cost for mortgage insurance.  
• Scenario 4 has the second lowest qualifying income ($150,722) because while it has a 3.5% down payment it also has the 4.81 % ARM used in Scenario 5.
• Scenario 2 has the highest qualifying income ($171,815) because it assumes a 6% interest rate, slightly higher than the current Fannie Mae fixed rate of 5.81% found in scenario 3. 

NOTE: 

I used the May 2022 lower RMLS Portland metro median sales price ($575,000) instead of the Zillow derived price ($592,256) used in the initial Harvard Joint Center data. 

A Consumer Handbook on ARM's from the Consumer Financial Protection Bureau is HERE. 

The addition of condo fees and overall debt to income ratio limits can also further limit the maximum loan amount for a given income level. 

Originally created and posted on the Oregon Housing Blog. 

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Harvard Joint Center Annual Report Shows Metro Affordability Impacts of Increasing Mortgage Rates; I Show 20 Oregon Metro Impacts of 6% Loan Rate.

One of the infographics included in the just released Harvard Joint Center for Housing Studies State of the Nation's Housing 2022 report is a map that shows by metro area the income required to afford a medium priced home. 

The map uses a 3.5% down payment and some standard rate assumptions for mortgage interest, mortgage insurance, property insurance, property taxes and a 31% ratio of housing expense to income. 

Use of the 3.5% down payment is an improvement over other models that I’ve seen that use a 20% down payment which is not representative of the overall market. 

At the bottom of the map page the Harvard report helps users by listing their property tax , mortgage insurance, and property tax rate assumptions, so it is possible to replicate their calculations and modify them to see results with other assumptions. 

I did so and applied a change in interest rate to see what the impacts would be for the Oregon metro areas included in their report. (My calculations may vary slightly from the Harvard report because of the use of different rounding formulas). 

Building on the Harvard Report: My calculation of 20 Oregon metro area impacts of a boost in the mortgage rate to 6%.

I downloaded the data for 20 Oregon metropolitan [CBSA] areas and added three columns showing the increase in borrower income required if the mortgage rate went from the 4.98% rate used in the Harvard report to 6%.

RESULTS:

The 1 page PDF HERE and embedded below shows the results.

The income required would go up by a uniform 8.3%, but the dollar increase varies from $ 17,020 to $6,326.

The highest Oregon metro median price home in Bend at $712,359 would require an income of $212,903, up $17,021. HUD has the 4 person median family income for Bend/Deschutes county at $97,700 for FY 2022.

The lowest Oregon metro median priced home in La Grande at $264,786 would require an income of $79,137, up $6,327. HUD has the 4 person median family income for Union county at $70,300 for FY 2022

Originally created and posted on the Oregon Housing Blog. 

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In Oregon Counties, With or Without Compensating Factors, What Income Is Required to Purchase a Home with A FHA Loan?

I have constructed a new Excel estimator HERE and embedded below that shows the income required to qualify for an FHA loan, with and without compensating factors. (My prior post HERE explains more about compensating factors and FHA loans).

Included in the workbook is a worksheet that includes an inserted MS Word document with details about each of the compensating factors and a web link to access the entire HUD 4000.1 handbook in PDF format; the compensating factors section begins on PDF page 351. [Users likely will need MS Word or Word reader to view this worksheet].

The estimator starts with user inputs including

• The county in which the home is located
• The household size
• The purchase price
• The loan interest rate
• The down payment percentage
• The amount of reoccurring non-housing debt.
• Monthly Property taxes, insurance and homeowners association fees (as a percentage of the purchase price).

The estimator returns, for four different scenarios:

• The FHA mortgage limit for the county in which the applicant is purchasing the home (with an error message if the purchase price less down payment exceeds this limit).
• The monthly and upfront FHA insurance costs.
• The total mortgage amount with the annual FHA up front premium added.
• The monthly principal and interest,
• The tax and insurance amount, 
• The PITI amount,
• The monthly reoccurring debt amount,
• The total monthly debt amount,
• The income required to qualify for an FHA loan with or without compensating factors.
• The ratio of the income required compared to the household sized adjusted HUD median family income for the county in which the applicant is purchasing the home.
• The dollar difference between the income required for a FHA loan with NO compensating factors and the income required for each of the three compensating factor scenarios.
• The percentage difference between the income required for a FHA loan with NO compensating factors and the income required for each of the three compensating factor scenarios.
• NOTES: 1. You likely will need to scroll right to see all columns in the web browser; downloading the file may provide you with a better view of all columns. 2. Result cells are password protected to avoid inadvertent entries; input cells are not locked.

Default settings

The default settings are for Multnomah county (Portland metro area) with a purchase price of $500,000, a 4 person household, a 3.5% down payment, a 3% interest rate, property taxes, insurance, and HOA at 1.5% of the purchase price ($625), and recurring non housing debt of $300 a month. All of these defaults can be changed by the user. 

Default results:

1. Without compensating factors the default applicant would need to have an income of $121% of the Portland metro household size adjusted median family income to qualify. That's $117,600.
2. Scenario 2 would allow a family at 102% of the household sized adjusted Portland metro HUD median family income qualify for an FHA loan. That's $98.500--- 16%/$19,100 below the income required for a applicant who can't use any of the available compensating factors. 
3. Scenarios 3 and 4 would allow a family at 94% of the household sized adjusted Portland metro HUD median family income qualify for an FHA loan. That's $91.100--- 23%/$26,500 below the income required for a applicant who can't use any of the available compensating factors. 

Caveats:

1. The compensating factors used are shown in the HUD handbook as manual factors. Automated underwriting systems likely use these and other factors in making the underwriting decision recommendation. 
2. These are permissible compensating factors. Lenders are free to NOT use these factors and to be more conservative in their underwriting decisions. 
3. IF the FHA loan is for the Oregon state bond program there are additional income and property purchase limits that may change these results. 

Originally created and posted on the Oregon Housing Blog

Portland Example: First Time Homebuyer Income Required to Qualify for a FHA Oregon Bond Loan Could Be Reduced by Up to 22% Using FHA Compensating Factors.

There are a wide variety of measures that are used to determine homeownership affordability. Those measures can include down payment assumptions, loan rate assumptions, home price assumptions, and allowable debt to income ratio assumptions. 

However I don't recall seeing any projections of the income required to purchase a home that use compensating factors as part of the debt to income analysis. Compensating factors allow applicants to qualify for larger loans than they would qualify for using standard housing debt and total debt to income ratios of 31% for housing expenses and 43% for all reoccurring expenses.

I'm most familiar with FHA lending so my examples will focus on FHA compensating factors. but  I'm sure that other loan programs also have their versions of compensating factors. 

Pre COVID 2019 HMDA Data Shows That the MAJORITY of Oregon FHA Home Purchase Borrowers Had Debt to Income Ratios of 44% or Higher.

In Oregon my review of 2019 HMDA data shows that 52% of FHA home purchase first lien loans originated had debt to income ratios of 44% or higher. (4,404 FHA home purchase first lien loans where DTI was reported at 44% or higher/7,922 total FHA first lien home purchase loans where DTI was known=52%). 

I also looked at Oregon 2019 HMDA data for FHA first lien home purchase loan originations to Hispanic, Black, and Asian borrowers. Their share of FHA first lien home purchase loans originated where DTI was 44% or higher was 66%, 67%, and 67% respectively.

[The link HERE will download the 2019 HMDA Oregon data for your review and further analysis]. 

FHA Compensating Factor Guidance

FHA's Single Family Policy Handbook 4000.1 includes a matrix of manual underwriting compensating factors that can be used to increase the percentage of income that can be used to qualify for an FHA loan.

The table pasted below (from handbook printed page 335) lists those factors that can be used to increase the amount of income used to qualify an applicant for an FHA loan:

A Portland  First Time Homebuyer Metro Example. 

I took the information from that table and applied it to an example I created for the Portland metro area for first time homebuyers. The PDF table I created is HERE and embedded below.

For the Portland metro area I created four scenarios shown in the PDF; a description of the compensating factors required for each scenario at at the top of each column:  

1. All scenarios assume a credit rating of 580 or more. This is, by itself, a compensating factor.
2. All use the current OHCS non targeted area Portland metro maximum purchase price of $453,000, the 2.25% current "cash advantage" interest rate for the Oregon Bond program, and a 3.5%/$15,855 down payment. All scenarios are fixed rate 30 year loans. Note that these terms are generally available only to first time home buyers. There are some exceptions for veterans and also for purchasers of property in targeted areas.  
3. The one time 1.75%/$7,650 FHA upfront mortgage insurance premium is included in the amount financed and the monthly MIP expense is .85%/$310.
4. Monthly property taxes and insurance and homeowners association expenses are estimated at 1.3%  of the purchase price divided by 12. ($491 per month).
5. Total monthly housing expense is $2,387.
6. Monthly non-housing reoccurring debt is assumed at $300 per month except for the 4th scenario where it is zero.
7. None of the scenarios factor in any boost for energy efficient homes, which could add 2% to the front and back ratios. My read is that these factors may only be available for scenarios 1 and 2.

Observations:

1. Using standard FHA underwriting ratios of 31%/43% in the first scenario the applicant would need $96,800 in annual income.
2. Scenario 2 requires only one compensating factor out of three possibilities and would decrease required income to $81,200 and increase allowable underwriting ratios to 37%/47%.
3. In scenario 3 there is an $75,100 income requirement but the applicant must meet at least two of these three compensating factors. The $75,100 income requirement is 22%/$21,700 less than in the first standard scenario. The underwriting ratios for this scenario are further increased to 40%/50%.
4. In scenario 4 (with only ONE required factor--no monthly recurring debt) the annual income required is also $75,100. using underwriting ratios of 40%/40%.
5. Using HUD's 4 person MFI for the Portland metro area of $96,900, 

Scenario 1 requires an income of $96,800---100% of MFI, 
Scenario 2 requires an income of $81,200--84% of HUD MFI, and 
Scenarios 3 and 4 require an income of $75,100--78% of HUD MFI.

NOTE: Use of a higher down payment would reduce monthly housing costs and reduce the income required to qualify in all scenarios, but poses a challenge for first time home buyers since it would also increase the cash required to close the loan.

Caveats:

1. The guidance cited above applies to manual loan underwriting. I do not know the extent to which these specific factors are modified or incorporated in the automated underwriting systems.  However given the large share of loans with DTI of 44% and higher it seems highly like that FHA approved automated credit scoring systems DO use credit scores and other factors in issuing loan approval decisions for loans with DTI at 44% and above. 
2. Lenders are free to adopt more restrictive standards than found in the handbook.  
3. I used the more restrictive income income limit of the two limits in each scenario rounded up to the next higher $100. 
4. The documentation required for each compensating factor can be found starting on PDF page 351 of the 40001.1 handbook.  
5. I used the latest version of the handbook, which is effective in August; I don't see any substantive changes in the compensating factors from those used in the current Handbook.

Originally created and posted on the Oregon Housing Blog.

Updated Excel Workbook for OHCS Federal VA Combo Loans Reflects VA Change that Eliminates VA Loan Limits.

Earlier this year I did a workbook HERE which illustrated the benefits of combining a no or low down payment federal VA guaranteed loan with the OHCS single family bond program.  

I also noted that veterans:

1. Do NOT need to be first time home buyers to use the OHCS bond program (so long as they have not used an OHCS or similar bond program in the past) 
2. With a 10% or higher VA disability rating do NOT pay a one time VA funding fee.
3. All VA home buyers have NO ongoing monthly mortgage insurance premium.
4. With VA loans also undergo a residual income test, which I have incorporated into the workbook.

Legislation has now changed the VA loan guarantee program, effective Jan 1, 2020 through Dec 31, 2021. Those changes

1. Eliminated the difference in funding fees between regular military veterans and Guard and Reserve veterans.
2. Slightly increased the VA funding fee for Regular Military and reduces VA funding fee for the Guard and Reserves.
3. Exempted current military members with a purple heart from paying the VA funding fee. 
4. Eliminated the VA loan limit (it had previously been set at the conforming limit).  Note that OHCS continues to have their own purchase price AND income limits and that has NOT changed with this update (but these limits could change mid 2020 once IRS completes their annual publication ). 

To incorporate these changes I created a new Excel workbook, embedded below and HERE, V2 CY 2020.  

This version includes a worksheet for first time use of a VA loan guarantee, a second worksheet showing affordability at different income levels, a third worksheet showing the former and future funding fees through 2021, and a fourth worksheet with links to related data sources. 

The first worksheet is password protected to avoid inadvertent data entries. The default entry is for a $400,000 purchase price home in Portland metro for a 3 person household; it would require an income of $80,793, below the current Portland metro HUD median family income of $87,900. (See below; after 5 years projected home equity increase with conservative appreciation would be $61,008).

1 Year and 5 Year Equity Increase Projections at Bottom of First Worksheet
At the bottom of the first worksheet I have added an estimate of home equity increase with and without a modest 1% annual home price appreciation; this does NOT include any value added from state OR federal mortgage interest or property tax deductions.

For a $400,000 priced home, total loan principal reduction at end of year 5 is $40,604 and price appreciation is $20,404, so combined loan principal reduction and price appreciation would total $61,008.


Originally created and posted on the Oregon Housing Blog.

New OHCS/VA Excel Home Loan Estimating Tool Answers Key Geographic and Household Specific Affordability and Eligibility Questions.

I previously posted HERE the good news for veterans that the Oregon Housing Bond program can be combined with the VA zero down loan program, even for non first time home buyers. I followed that up with a second post HERE comparing the benefits of a combo OHCS/VA loan with an ODVA home loan. 

To show the potential benefit for Oregon veterans and home ownership advocates I have created a first of its kind Excel workbook (Version 1) HERE that takes user variable inputs AND then answers 4 key geographic specific questions about 30 year combo OHCS/VA loans:

1. Is the purchase price below OHCS purchase price limits?
2. Is the borrowers income below OHCS income limits?
3. Is the borrowers income sufficient to qualify for the loan amount being sought?
4. Is the borrowers income sufficient to meet the VA loan requirements for residual income?

The first worksheet is only be used for a first time user of a VA loan and a user that has not previously had a bond financed loan or a mortgage credit certificate in Oregon or elsewhere.  

The second worksheet is for veterans who have successfully paid off a VA loan and wish to REUSE their VA benefit and have not previously had a bond financed loan or a mortgage credit certificate in Oregon or elsewhere (The VA financing fee increases for these veterans). Note, because of the higher reuse VA funding fee increase the default $89,000 income entered is NOT sufficient to qualify for $425,000 no down payment cash advantage OHCS loan--increasing borrower income by $1,000 however would qualify.  

In both worksheets the left side is for regular military veterans, and the right side is for Reserve or Guard veterans. (VA funding fees are different for the two categories).  

In a third worksheet I included a chart that shows how qualifying purchase prices change as income increases (with zero down payment required). 

Finally a fourth worksheet includes links to OHCS, VA, and ODVA reference materials and data.

The estimating tool allows variable inputs for
Family size (Default: 3 or more)
County location (Default: Clackamas, Multnomah, Washington)
Targeted area indicator (Default: Non Targeted)
Purchase price (Default: $425,000)
Down payment % (Default: ZERO). 
Loan rate ( Default: 4.25% [3.25% is lowest current OHCS rate].
Veteran's Disability status (Default: NON Disabled)
Income (Default: $89,000)
Reoccurring debt (Default: $500)
Debt to Income ratio used to determine affordability(Default: 43%)
Property taxes (Default: 1,2%)
Insurance (Default: .3%)
For residual income calculation (used for VA underwriting)
Square footage of home used to calculate utility cost (Default: 1,500 sq, ft.)
Fed Income Taxes (Default: 15% rate)
State Income Tax Rate Default: (5% rate)
Other pension contribution (Default: $0)

The estimating tool returns
Loan amount.
VA funding fee and loan amount with funding fee.
PITI.
Income required.
Closing cost projection @3%. 
Projected Utility cost (used for residual income calculation).
Residual income vs required residual income (used for VA loan underwriting).
Answers to the 4 key questions referenced previously.

To illustrate I am posting a 2 page PDF HERE , and embedded below, using the default examples in the 1st worksheet. With these default entries:

A 3 person regular military veteran using a VA loan for the first time, and with an income of $89,000 could qualify to purchase a Portland metro home with an 4.25% OHCS Cash Advantage loan at $425,000, with ZERO down, AND receive $12,750 to be used for closing costs.  [ Note: Most recent RMLS Market Action report had the Portland metro median sales price in June at $420,000].



IMPORTANT NOTE: This workbook is for ILLUSTRATION ONLY; it should NOT be used to determine actual loan amounts or closing costs or to determine eligibility for OHCS and or VA loans. Lenders and these agencies make those determinations. 

Combo OHCS VA Loan Offers An Expanded Home Loan Choice for Oregon Veterans.

The OHCS/VA combo loan that I recently posted about HERE provides an alternative to the Oregon Department of Veterans Affairs home loan program. [The post notes that a veteran does NOT have to be a first time home buyer to use the OHCS bond loan program, so long they have not previously used a bond loan program or Mortgage Credit certificate program in Oregon or elsewhere].

The downside to the ODVA loan program is the 5% minimum down payment, which then triggers the need for private mortgage insurance. Also, condos, townhouses, and manufactured homes all require a minimum 20% down payment for the ODVA loan program.  [ODVA's loan origination guide is HERE].

ODVA's lowest note rate of 3.125% IS below the lowest 3.25% OHCS note rate but that rate is only available to veterans whose loan reservation occurs within 25 years of discharge. The ODVA lowest rate for all veterans is 3.875%, higher than the OCHS/VA combo rate. 

The VA loan program also waives the federal funding fee for veterans with more than 10% disability; the ODVA program has no similar cost savings for disabled veterans.

The first table here shows my comparison of ODVA and OHCS/VA combo loan features. 

The second table below shows that for a $425.000 purchase price the OHCS/VA combo loan would actually have a $18 lower monthly loan payment (before taxes and insurance) by avoiding the $178 monthly mortgage insurance expense the ODVA loan program requires. This is despite a higher total loan amount ($434,138 vs $403,750) and even when the lowest ODVA loan rate (not available to all veterans) is used.  

While the lower monthly expense using the combo OHCS/VA loan provides a benefit, the bigger benefit is that a veteran using a combo OHCS /VA loan would not have to make a $21,250 minimum down payment required by ODVA program.

To summarize:

The OHCS/VA Combo loan may be the better choice IF

• The veteran does not have the funds available for 5% minimum down payment OR
• Discharge is greater than 25 years from fund reservation OR
• Veteran has service-connected disability of 10% or more OR
• Veteran is purchasing a condo, townhome, or manufactured home OR
• Veteran wants to avoid monthly mortgage insurance cost.

The ODVA loan may be a better choice IF

• The veteran has at least 5% of the purchase price available for a down payment AND
• Discharge is within 25 years of fund reservation OR
• Income or purchase price is above 0HCS limits.

Originally created and posted on the Oregon Housing Blog. 

OHCS Confirms VA Loans Can be Combined with OHCS Bond Program, Even if Vet is Not a First Time Homebuyer.

Good news for Oregon veterans.

OHCS staff recently confirmed with me that IRS rules allow non first time homebuyer veterans to use the OHCS bond program, so long as they have not previously purchased a home using ANY state (including Oregon's) home loan bond program or mortgage credit certificate. 

This can combine the best of both programs: VA NO downpayment loans (with NO on going mortgage insurance expense) AND OHCS low rates: currently 3.25% "Rate Advantage" OR 4.25% (with 3% available for closing costs) "Cash Advantage".  

While VA loans include a funding fee (which varies by loan to value and whether veteran was regular military or in national guard/reserves) that one time fee can be included in the mortgage amount AND is waived for veterans with a VA disability rating of 10% or more. 

If a veteran has previously paid off a VA guaranteed loan they CAN get another VA home purchase loan--the VA funding fee is increased slightly for loans with less than 5% down.

OHCS loans do have income limits and OHCS maximum purchase prices MAY be below the $484,350 Oregon conforming loan limit that is used to determine the maximum zero down VA loan limit. 

I have pasted a chart below that shows the qualifying income required for different purchase prices ranging from $275,000 to $475,000.  Assumptions used are at the bottom of the chart. 

Note that VA or OHCS loan limits by county may not permit the purchase prices shown or the income required could be above the OHCS county income limit. 

For the Portland metro area the OHCS non targeted purchase price limit is $427,462 while the conforming limit of $484,350 statewide would prevent a VA zero down loan above that limit in any county. (For targeted areas the Portland metro OHCS purchase price limit is $522,554). 

The Portland metro 1-2 person  OHCS income limit for non targeted areas and 1-2 persons is $102,783 which is above the $97,136 required for a $475,000 home purchase. 

One example from the chart. A Portland metro veteran with an income of $88,526 (in red in the chart), and $500 in monthly reoccurring debts could use a 4.25% OHCS Cash Advantage loan to purchase a home at $425,000. That purchase would require NO downpayment AND provide $12,750 to help pay for buyer closing costs. 

Notes: 

1.  HMDA data shows 5,571 VA home purchase loans were made in Oregon in 2017; 1,661 loans were in the Portland metro area. (OHCS reports fewer than 10 veteran loans in last year). The 2017 Portland (Oregon) metro VA home buyer had a median income of $83,000. 
2. According to a recent ApartmentList report the home ownership rate for Post 9/11 veterans in Oregon was only 46% (vs a 62% overall Oregon homeownership rate).
3. The most recent ACS data shows more than 291,000 veterans in Oregon, with more than 57,000 with VA disability ratings of 10% or more. [The VA funding fee is waived for veterans with a service connected disability of 10% or more].
4. OHCS purchase price limits may be lower (or higher) than VA guarantee loan limits (map). The lower of the two limits would apply.  
5. VA loans have no income limits but downpayment requirements increase for loans above $484,350. OHCS recently published updated their 2019 income limits HERE. 
6. The City of Portland Mortgage Credit Certificate program uses the same IRS rules as OHCS, so the City of Portland MCC could also be used to help veterans buy homes in Portland, even if the veteran is NOT a first time hone buyer. (The MCC cannot be used in conjunction with the OHCS bond program, so the interest rate will be higher and any cash for closing costs would have to come from other sources). Portland has also yet to update their income limits, which could match those recently adopted by OHCS. 
7. VA loan underwriting includes a consideration of residual income not used by other loan programs. This insures the veteran has enough income remaining after paying for debt service, property and income taxes, reoccurring payments (car loans, student debt, etc), and housing related energy costs. DTI income ratios above 41% may require additional residual income above standard calculations. With more than 5,500 home purchase VA loans made in Oregon in 2017, many lenders are familiar with this VA loan underwriting requirement. 

Originally created and posted on the Oregon Housing Blog. 

New Excel Tool Shows Condo Affordability at Different HOA Levels, Down Payments, and Other Variables.

I did a recent blog post HERE with a PDF file that showed how condo affordability is impacted by different HOA fee levels, using a standard 20% down payment. 

I have created a new Excel workbook HERE, and embedded below, that builds on that earlier post:

1. It adds a variables for mortgage insurance that allow calculations of affordability for down payment levels below 20%. (Default mortgage insurance fees shown are for FHA loans with a loan to value of 95% or more). 
2. It includes differing fees for home insurance for a single-family property that has no HOA fees vs home insurance fees for condos. (Generally, condo home insurance is less than for comparable single-family properties since part of the HOA fee covers insurance on the common elements).
3. It includes an additional section that shows how the Portland mortgage credit certificate (MCC) program could further increase condo affordability.  The Portland MCC program offers an annual 20% federal income tax credit of the amount of home interest paid for first time home buyers. Details on the Portland MCC program can be found HERE. The MCC can be particularly useful for median family and above households without children who have significant federal tax liability (and cannot benefit from federal child tax credits).  

Observations: [With default purchase and loan assumptions.  $269,000 sales price, 3.5% down, 4.5% interest rate, FHA mortgage insurance premiums, property tax and insurance assumptions as shown, and a 43% debt to Income limit]. 

The two person HUD 2019 100% median income in the Portland metro area is $70,320.

Without a Mortgage Credit Certificate:

IF the home purchased does NOT have a condo fee, the income required to qualify is $64,655   [But the universe of single family homes at that price point is smaller than for condos].

IF the home purchased has a $400 monthly HOA/condo fee, the income required to qualify is $75,067, 16% more than required for a single family home purchase (with NO HOA/condo fee].

WITH a Mortgage Credit Certificate
If the home purchased does NOT have a condo fee, and IF the purchaser is a first time home buyer who is otherwise eligible, the purchaser would only need an income of $59,167 to qualify if they can use a City of Portland MCC. That is 8.5% less than required if NO MCC is used. 

If the home purchased has a $400 HOA/condo fee and IF the purchaser is a first time home buyer and are otherwise eligible they would only need an income of $69,579 to qualify if they can use a City of Portland MCC (with a condo fee of $400). That is 7.3% less than required if NO MCC is used AND note that income level is below the Portland metro 2 person MFI of $70,320.

NOTES: 
You likely will have to scroll to right to see all columns in the Excel workbook, download to avoid this issue. 

In the Excel workbook grey shaded cells are where data can be entered, other cells are protected to avoid inadvertent data entry. A second worksheet includes links to a comparison of FHA and private mortgage insurance fees, a FHA loan calculator, and the City of Portland median income and related income and rent limits.  

Portland's current 2 person MCC income limit is $87,900, substantially below the Oregon Housing Bond program limit of $97,680 for Multnomah county, even though both programs are subject to the same IRS limits. (IRS will likely soon publish new 2019 income data and this provides a new opportunity to increase the Portland MCC income limit).  

Originally created and posted on the Oregon Housing Blog. 

Income Required to Qualify for Condo Loan Increases as HOA Fees Increase: A Graph and Table Illustrate the Impacts.

There has been a recent pick up in interest in condominiums as an affordable home ownership alternative to single-family detached housing. (See recent Oregonian story HERE). 

[Full disclosure, I have lived in condos for 40+ years]. 

One of the unique features of underwriting a condominium loan is the inclusion of homeownership association fees as part of a borrower’s fixed monthly obligations. This  reduces the maximum loan that would otherwise be available compared to a single-family detached home but only if both were at the same price point (and generally condo prices are lower than detached SF housing).

To illustrate the underwriting impacts of varying HOA fee levels, I have constructed an example in the PDF HERE and embedded below.

Assumptions: 

• $375,000 sales price. 
• 20% down payment (NO mortgage insurance required).
• $300,000 loan amount.
• 4.5% loan interest rate.
• 1.1% property tax rate.
• 0.50% insurance rate.
• 41% maximum debt to income ratio.
• $500 in additional fixed monthly obligations for car/student loan etc.
• Variable condo fee from $0 to $1,000.

Results:

1. With NO homeowners association fee a buyer (with assumptions above) could qualify for a $300,000 loan with an income of $73,758.
2. With a HOA of $300 qualifying income increases by 12% to $82,538.
3. With a HOA of $500 qualifying income increases by 20% to $88,392.
4. With a HOA of $1,000 qualifying income increases by 40% to $103,026.

Originally created and posted on the Oregon Housing Blog, 

Even W Proposed $15k MID Limit New Excel Tool W Graphs Shows Substantial Benefits of Home Ownership.

The current efforts to reform the Oregon mortgage interest deduction (MID) have often focused on how much home buyers might lose if the MID was limited to $15,000. 

A new Excel tool I constructed offers a comprehensive view of the financial benefits of homeownership and demonstrates, with 3 graphs, that the proposed Oregon $15,000 limit on mortgage interest deductibility on state income tax returns: 

1. Would have a tiny impact in comparison to the full range of financial benefits that homeowners get (and that are not available to ANY renter).
2. Would keep in place substantial state MID subsidies and 100% of state property tax deductions/subsidies and 100% of federal MID and property tax deductions/subsidies.

[Because the Excel workbook is copy protected, I can't embed it in this post, but you can download it HERE. While you may be able to view the workbook in your browser I recommend downloading and using in Excel for full functionality ].

The workbook estimates ALL homeownership financial benefits: MID subsidies at both the state and federal level, accrued equity as loan principal is reduced yearly, additional equity accrued through home price appreciation, and savings from state and federal property tax income tax deductions.

There are eight variables that you may choose to enter/change at the top of the worksheet. The inputs populate the table in the worksheet AND three graphs to the bottom and to the right of the data entry section. 

• Graph 1 shows for the first year how much the MONTHLY benefit is for each component and the total combined benefit
• Graph 2 shows, for the first ten years, the MONTHLY total benefit vs any loss of MID because of the proposed $15k MID limit. 
• Graph 1 shows the cumulative total benefit vs any loss of MID benefit because of the proposed $15k annual MID limit, and provides a comparison to the down payment. 

These are the default entries in the workbook. (They are all variable except the property insurance rate):

• Borrowers are a married couple with income of $99,950. This is 170% of the 2016 2 person Portland metro HUD median family income of $58,640.
• The home is located in Multnomah County (Average property tax rates vary by county and are based on 2015-2016 Oregon Department of Revenue data).
• The home has a sales price of $381,147, which is affordable to the homebuyer with this income, using a 30% of income underwriting ratio (see "Affordability" below for more discussion about underwriting ratios)  That sales price is $31,000+ MORE than the Feb 2017 RMLS reported Portland metro median sales price of $350,000.
• Loan has a 5% down payment, 
• 4.5% interest rate 30 year loan. This rate is 1.25 % higher than the Oregon Bond home loan program rate of 3.25% for first time home buyers.
• 9% state income tax rate, 
• 20% federal income tax rate. [A conservative estimate, 2017 taxable income brackets are HERE]. 
• And a conservative annual home price appreciation of 2%. (The average Oregon home price index annual increase from 2017-2026 in the latest Oregon Economic forecast is much higher at 4.6%)
• A .0025% insurance rate. [Standard for all scenarios].
• Inflation of the proposed $15k MID limit by the average annual CPI of 2.6% found in the Oregon Economic Forecast for 2017-2026.

With default entries the results, including 3 graphs, are in PDF HERE and embedded below:

BENEFITS 
FIRST YEAR Benefits: Graph 1
The MONTHLY average benefits (WITH the $15,000 State MID limit).: 
$1,606 Total

• $488 equity increase because of principal reduction.
• $637 home price appreciation.
• $338 in continuing federal income tax subsidies+
• $144 in continuing state income tax subsidies=
• $481 a month in continuing state and federal income tax subsidies.

The average monthly loss of state MID is $9. (Because MI was greater than $15,000)

The federal MID will fully remain, and write off of property taxes without limits will remain for both state and federal income taxes. 

Average MONTHLY Total Benefits for Each of the First Ten Years: Graph 2

• The second graph, covering the first 10 years, shows that average MONTHLY average for the total benefits, vs the MONTHLY total average of MID lost (if any). 
• With the default entries, the total MONTHLY average benefit GROW every year, while the MONTHLY average MID loss (if any) DECLINES each year. In year 1 the MONTHLY total benefits are $1,606, but in year 10 they grow to $1,934; 
• MID loss because of the $15k limit (inflated ) averages $9 a MONTH in year 1, but drops to $4 a month in year 2 and ZERO in year3.

Average CUMULATIVE Benefits for Each of the First Ten Years: Graph 3. 

• The 3rd graph, covering the first 10 years, shows that cumulative benefits grow from $19,273 at the end of the first year to $211,884 at the end of year 10. 
• NOTE that with the default entries the first year financial benefits EXCEED the 5% down payment of $19,107 (The down payment amount is also shown on this graph).
• The MID loss in the first year totals $110, and the total MID loss is only $50 more in year 2 ($160 total) AND there is NO further loss after year 2. (Interest declines each year as a greater share of the monthly payment goes toward principal and the initial $15k MID limit increases as it is adjusted to inflation).

Any owner with more than $15,000 in eligible home interest (inflation adjusted) will continue to get $113 a month in state MID subsidy if their state income tax rate is 9%, and more if they state income tax rate is higher.

The federal MID will fully remain, and write off of property taxes without limits will remain for both state and federal income taxes. 

Affordability
In addition to showing the financial benefits of home ownership completion of the inputs for the 8 data entry cells (shaded in grey) will produce an estimate of the income required to buy the home with the inputs made. Because these assumptions vary from reality for each property, borrower, and lender the affordability level shown should be viewed ONLY as an estimate.  

The worksheet uses inputs of principal and interest, interest rates, property tax, insurance costs, mortgage insurance estimates AND the underwriting ratio [share of income assumed to be available to pay housing costs).   

The default underwriting ratio used is 30% of income (the same share of income that renters are expected to pay for housing). "Qualified mortgage" under CFPB rules however allow families to qualify for a loan if their total reoccurring debt does not exceed 43% of their gross income. 

This means that income based affordability determinations can span a wide range of loan values, depending on the specific financial details of each transaction. (including credit scores, reoccurring financial obligations, mortgage insurance rates, AND the down payment percentage). 

To illustrate the wide range of potential qualifying incomes, using the default data, here are qualifying incomes at different underwriting ratios to a Multnomah county home with a sales price of $382,147 and loan of $363,040:

30% of income (my default entry):  $99,950                         
36% of income (DTI max ratio for Fannie/Freddie :$83,292
43% of income (CFPB qualifying loan max DTI ratio): $69,733        
[Given the wide range of potential qualifying incomes for the default loan there is no graph associated with the affordability estimate]. 

Excel Notes:
In addition to changing the values in the 8 variable cells, use of the "Goal Seek" function in Excel allows a wide range of customization of results. For example you can use goal seek and change either of the two qualifying income cells to a specific value by having the goal seek function change the purchase price. 

The table of data below the first graph is copy protected and outside the designated print area for that sheet.

However, you can copy and paste the values [not formulas] from that worksheet into another worksheet and then format and print that table.



Originally created and posted on the Oregon Housing Blog. 

New Treasury/HUD MF Cooperation on Risk Sharing Program; Enough to Activate Suspended OHCS Program?

This from Treasury PR:

Under the new partnership with HUD, the FFB will provide financing for multifamily loans insured under FHA’s risk sharing programs. The new partnership between the Treasury Department and HUD will help create and preserve more decent rental housing by significantly reducing the interest rate for affordable multi-family apartment buildings compared to the cost of tax-exempt bonds under current market conditions.

The New York City Housing Development Corporation (NYC-HDC) has worked extensively with HUD/FHA Risk Sharing, Treasury’s New Issue Bond Program, tax-exempt bonds, and other multifamily housing financing structures. HUD through FHA would provide mortgage insurance pursuant to a risk sharing agreement with NYC-HDC and the FFB would fund NYC-HDC mortgage loans for multifamily projects.

The FFB is authorized to fund any obligation that is fully guaranteed by another Federal agency. The Risk Sharing program meets this requirement because FFB would purchase certificates or securities evidencing undivided beneficial ownership interests in 100 percent HUD/FHA-insured mortgages and HUD/FHA would cover 100% of the outstanding principal balance plus 100% of accrued interest in the event of a mortgage claim.

Washington Post story is  HERE. 

Oregon Housing and Community Services has a had FHA MF risk sharing program but their web site currently says it is suspended. Not clear whether new Treasury involvement would warrant lifting the suspension,  what would be required to allow agency to participate, and whether benefits would be worth any additional costs. 

Originally created and posted on the Oregon Housing Blog.