Down payment insurance cuts your risk if your home value drops

By Jeff Lazerson

10/20/17

What’s up with mortgage rates? Jeff Lazerson of Mortgage Grader in Laguna Niguel gives us his take.

Rate news summary

From Freddie Mac’s weekly survey: The 30-year fixed rate averaged 3.88 percent, three basis points better than last week’s 3.91 percent. The 15-year fixed averaged 3.19 percent, two basis points better than last week’s 3.21 percent.

The Mortgage Bankers Association reported a 3.6 percent increase in loan application volume from the previous week.

Bottom line: Assuming a borrower gets the average 30-year fixed rate on a conforming $424,100 loan, last year’s rate of 3.52 percent and payment of $1,909 was $86 less than this week’s payment of $1,995.

What I see: Locally, well qualified borrowers can get the following fixed-rate mortgages at zero points: A 15-year at 3.125 percent, a 30-year at 3.75 percent, a 15-year agency high-balance ($424,100 to $636,150) at 3.25 percent, a 30-year agency high-balance at 4.0 percent, a 15-year jumbo (over $636,150) at 3.875 percent and a 30-year jumbo at 4.125 percent.

What I think: 

Just back from the annual National Association of Mortgage Brokers convention in Las Vegas, and I found a treasure trove of new home-financing tools that are must shares.

The most novel idea I’ve come across in recent memory is a sure prescription to calm the nerves of every would-be homebuyer worried about buying at the top of the market. Nobody wants to lose his or her hard-earned down payment when home prices eventually decline. After all, we are now in our sixth year of expanding home prices.

Down payment insurance will cover down payments of up to 20 percent or up to $200,000 if you sell within the first seven years of your purchase and suffer a loss due to lower property values.

This is for owner-occupied, single units and condos only. Second homes, investment properties and two to four units are not eligible.

For example: Let’s say you paid $500,000 for a home, putting $50,000 down and taking out a $450,000 mortgage.

Four years from now you have to sell because your income has dropped due to a slowing economy. Your home sells for $460,000, meaning you’ve lost $40,000 of your original down payment. Down payment insurance would cover that amount, and you are made whole.

The insurance adds anywhere from 0.125 percent to 0.625 percent to your mortgage rate, depending on the dollar amount of your down payment.

The insurance premium workaround (higher interest rate) would be to keep this loan for six months and do a no-cost refinance to knock your rate back down. The coverage stands for the seven years even if you refinance.

No claims are allowed for the first 24 months of ownership. Insurance will pay on short sales but not on foreclosures.

A federal home price index is also considered to protect against fraudsters. And, unlike mortgage insurance and mortgage unemployment insurance where the check goes to the lender, you get paid directly by the insurance company.

Do you remember the old NIVA loan? That’s no income, verified assets. With as little as 25 percent down and a 680 middle credit score, you can purchase an investment property. No cash reserves needed. Holy Toledo!

Or, how about a reverse mortgage that goes up to $3 million. You’ll need about a $6 million property value in that case. Federal Housing Administration reverse loans only go to $636,150.

As I was walking through the tradeshow floor, the most profound pitch was “just ask,” meaning that these non-prime lenders will go back to their private equity firms and hedge funds to see if they will bite on the onslaught of out-of-the-box borrower scenarios that mortgage brokers receive daily from consumers and Realtors.

At its low during the Great Recession, mortgage brokers arranged about 6 percent of home loans nationally. Today, it’s about 15 percent, according to Fred Kreger, NAMB President.

If you have questions or comments, please contact Jeff Lazerson by clicking here.