MortgageMinute with Art Alvarez 📱
In this episode of Mortgage Minute, Art Alvarez of MortgageWorks, joined by Jeff For Local Marketing, provides a comprehensive market update and deep‑dive into mortgage products for the Coachella Valley audience. The show opens with local festival and sports anecdotes before moving to a rate grid review: conforming 6% (no points), FHA 5.38%, VA 5.5%, 15‑year 5.38%, jumbo 6% fixed/5.78% 7‑yr ARM, and improved HELOC/second‑mortgage rates. Bond‑market commentary shows the 10‑year yield stabilising around 4.31% after a brief spike. Economic data highlights soft existing‑home sales (3.98 M in March), a cooler‑than‑expected PPI (0.5% MoM, core 0.2%), and low builder‑confidence (34). Art argues that despite these headlines, buyers have leverage and should consider a buyer’s market. The core of the program is a product spotlight on asset‑based lending (asset depletion). Art explains how net eligible liquid assets are divided by 240 months (Freddie Mac) or 360 months (Fannie Mae) to create imputed monthly income for qualifying, allowing high‑asset, low‑income borrowers to obtain conventional loans. He also outlines a retirement‑account distribution trick for borrowers 59½+ to generate qualifying income. The conversation then shifts to first‑time homebuyers. Art clarifies the industry definition (no home owned in the past 3 years) and discusses the limited rate advantage of first‑time status, emphasizing that most benefits come from down‑payment assistance (e.g., CalHFA) rather than lower rates. He compares loan types—conventional conforming, high‑balance, jumbo, FHA, VA, USDA—detailing down‑payment requirements (3% conventional, 3.5% FHA, 0% VA/USDA) and county‑specific loan limits. Credit‑score tiering is broken down in 20‑point bands, showing how a drop from 780 to the 620‑range can add 0.5–0.75 % to the rate, which on a $600k loan translates to $200–$300 higher monthly payment. For lower‑score borrowers, government‑backed loans (FHA, VA, USDA) usually offer better rates. Art also addresses common myths: the impact of extra down‑payment (≈$6/month saved per $1,000 extra), the use of seller concessions (up to 3% for conventional, 6% for FHA) and permanent buydowns. He stresses the importance of early pre‑qualification before house hunting and illustrates his process with a sample worksheet. The episode concludes with contact information and local event reminders.
Chapters
¡Hola! Good afternoon, everyone. Welcome to this week's Mortgage Minute. My name is Art Alvarez. I'm with MortgageWorks. Where we have the answers and they're on the house. Coming to you from Palm Springs and the greater Coachella Valley area. Speaking of Coachella, we're now in our second week of the Coachella Fest coming up tomorrow, and boy, you sure can't tell the difference when the festivals are in town. The whole valley is just, you know, very busy, lots of folks everywhere. Grocery stores are packed with people loading up for their supplies for the weekend at the at the festival. And of course, after this weekend concludes, we follow up the rest of the month. We got Stagecoach coming in for those country music fans. So it's a great month here in the Valley, and everyone I think is enjoying it and having a really good time, and that's what we want. Of course, we want everyone to have a good time out here and enjoy our Valley and do so in a safe and a fun way. So I always touch on sports. I want to give a shout out, congrats to Rory McIlroy, who won his second straight Masters Tournament. As I've told you, I'm not a golfer. I play 4 or 5 times a year, mostly in scramble tournaments, but I enjoy watching golf, particularly the major tournaments and the Masters in particular. And of course, you also know I'm a big baseball fan, and it got me thinking when I was watching McIlroy win the second Masters in a row. About golf and baseball. Both sports involve one of the most difficult things to do in sports, which is hitting a ball. Now, in the case of golf, at one extreme, you're hitting a ball that's not moving, which, you know, almost sounds laughable to suggest it would be hard to do. Then at the other extreme, hitting a baseball coming at you at 100 miles an hour plus. So isn't it interesting? You got two different, you know, ball sports, I'll call it, where again, the skill of hitting that ball is one of the most difficult things in sports. In golf, a ball that's not moving, and in baseball, a baseball coming at you at, you know, 100 miles an hour. That's quite the extremes and a very interesting thing that I just occurred to me while I was watching. McIlroy do it again. So, and talking about baseball, uh, Angels are hanging in there. In fact, just before we went live, I saw that the Angels, um, they had a day game today in New York, beat the Yankees 11-4. Mike Trout, who started strong and then kind of seemed to be dipping into a, uh, kind of a just a batting slump, now he's roaring back. I think he's at 4 or 5 home runs now in the last 4 or 5 games. He's his averages back up by 60, 70 points. So hopefully that is going to continue the balance of the year. I'd love to see him come back full strength for the entire year with no injuries. So we'll see what happens there. Let's go ahead and get into our program. First thing we like to do is bring you up to speed on mortgage rates by showing you the interest rate grid on our website that Jeff's going to pull up. And the good— you know, the news is pretty decent. I mean, yes, rates are still elevated from where they were before this Iran war situation. But nonetheless, they have settled down a little bit. As you can see there, conforming conventional loans were right at the 6% level with no points. FHA actually back down to 5.38%. That's a very good sign. VA still at 5.5%. The 15-year now is down to 5.38%. And again, the jumbo loan pretty much hanging in there stable at 6% for fixed and 5.78% for a 7-year arm. Also, we updated the equity loan rates at the bottom, the HELOC and the HE loans. And those rates are a little bit better than what we had been posting previously. And so for those of you looking at wanting to pull cash out and you don't want to touch that low-rate first mortgage, we've got some pretty good deals on equity loans. Again, both home equity lines of credit as well as fixed-rate seconds. So keep that in mind. So what's been going on with the bond market? We like to pull up the 5-year, 5-year, 5-day chart of the 10-year bond yield. Jeff just brought it up there. And you can see there, interestingly, last week, going back to last Friday, the yield was getting pretty elevated. Actually, the yield was about where it is now. Got a little bit worse going into Monday, but it's been sliding since. And of course, you can see yet again that favorite Wednesday dip that Jeff likes to see. Now we've kind of creeped up a little bit since then, but, you know, we're hovering right around, as you see there, about 4.31, almost 4.32. Earlier in the week, we were in the 4.28 range, 4.29. So by and large, I think the worst is over. At least it seems like when it comes to where bond yields have been, have been going. It was getting a little spooky there, you know, mid to late March when it looked like the 10-year bond yield was going to maybe start screaming back to 4.5 or higher. But thankfully, that seems to have subsided. So that's good news from that perspective. So again, I'll say that rates aren't the problem, it's more about the home price. So in this, in terms of economic data points this week, what's been happening to make the markets move? Not a whole lot actually. This week consisted of primarily existing home sales were released, the wholesale inflation number, and then I call it Fed speak. We had lots of Fed governors speaking at various events and speeches and interviews all week this week. So that seems to have dominated the calendar for the most part. Not a, not a heavy week in terms of economic data points. The first thing, though, is existing home sales. Not a surprise they came in a little soft, under 4 million, 3.98 to be exact. That was in March. That's a drop from 4.1 in February. Probably has a little something to do with the start of the Iran war, both in terms of creating some anxiety, maybe causing some transactions to cancel. That may have been open escrows, and/or rates creeped up, as you know, since mid-February to now. And that could have had some impact on potential buyers who maybe felt like they couldn't tolerate those— that increase in rates that occurred. So again, even at $4 million, that's soft historically from what we normally would like to see, which would be closer to a $6 million than numbers. So, you know, the real estate sales, existing home sales continued to be on the weak end of the spectrum. And then in terms of wholesale inflation, this week it was the PPI, that's the Producer Price Index. And on that particular item, it was released and released at 0.5% in March. It was forecast to be 1.1%. So much lower than forecast. And then it was 0.5% the previous month in February. So in that respect, this was a good number. This was a good news type of a situation. The PPI came in cooler than expected and by a wide margin. Now, if you peel out food and energy, the volatile components of this index, the core PPI, 0.2% in March. Again, 0.4 was forecast, so only half of what was forecast, and much lower than what it was in February at 0.5. That's interesting considering the Iran war, the increase in oil prices, and so forth, that the PPI came in cooler than expected. And then the core PPI year over year, the annual number, was pretty muted as well. 3.6 in March, uh, 1 tick higher than February at 3.5. So all in all, this was a really good number in terms of the Producer Price Index, the wholesale inflation number. And that's why you saw these bond yields drop, you know, where they were up elevated higher on Monday, dropped midweek when this report came out. Now again, yes, has creeped up a little bit today. Then the only other thing I would want to comment on, just because I think it's a good indicator, the Homebuilder Confidence Index. Pretty weak, 34 in March. That's a drop from 37 that was forecast and the previous month, 38 in February. Optimal is considered over 40 or I'm sorry, over 50. So what does that tell you? The homebuilders are bumming out about the current environment. And of course, remember what they do that I'd like to see more on the resale, the existing home sales side do. They do what they have to to provide incentives. Concessions to homebuyers to get their product moved, credits for buydowns, for closing costs, for both. And so, you know, that's why their confidence is maybe a little bit weakened, is that they're having to do more of that in order to get their inventory sold, which of course does compress their margins. So again, that's just another example of where I think these conditions, when you put it all together, you know, existing home sales have fallen, builder confidence is low, For buyers who have been on the sidelines waiting for the right time, you really ought to go against the flow, go against the headlines, and consider that now actually is a good time to get out there and take a look. I think you've got some leverage as a buyer. It has, I think, in my opinion, become a buyer's market, but I think we need more buyers to take advantage of that and not be so timid and get distracted and discouraged by the headlines, because quite often those headlines are maybe not as accurate as at least I think they should be. So with that, I want to go ahead and touch on a, you know, on our product spotlight, what I'm going to touch on is, I guess you could call it a loan product. What it is, and I want to bring this up because I think it's a good reminder, and I've got a transaction in process right now where we're using this approach, so I thought it might be a good idea to share it with you. You know, there's a concept in the mortgage industry about asset-based lending. We also call it asset depletion. And you see this type of lending in, in particular in the non-QM sector of the mortgage industry. That's the non-qualified mortgage product. Now, those products, uh, are not loans that are sold to Fannie Mae and Freddie Mac. Instead, these programs, these non-QM programs, rely on lower documentation, and then part of that includes, you know, asset depletion. So let's, let's define the term asset depletion. And what I want to do is point out that you can use this not just in the non-QM side where interest rates are a little bit higher, down payment requirements are higher, but you can also use it on a Fannie Mae/Freddie Mac conforming loan. So the way the asset depletion works is what we do is we determine what we call your net eligible assets. So we do a calculation to determine what your net eligible assets are. And those assets, I'll touch on in a minute what they are, but we're basically talking about liquid assets. And then depending on which agency the mortgage will be sold to, we can take that net eligible asset amount and divide it by a certain number of months. In the case of Freddie Mac, we can take your net eligible assets and divide it by 240 months. And then the result of that calculation is your assumed or imputed monthly income that we use for qualifying in calculating your debt ratio. Now Fannie Mae is not as generous. That agency will take your net eligible assets and divide it by 360 months. So if you get the idea here, Freddie Mac will take how much money you have in accounts, checking, savings, investment accounts, retirement if you're over 59 and a half, and they'll divide it over a 240-month term like a 20-year loan. So the idea is by doing that, the resulting number is considered assumed monthly income that helps you meet the debt ratio. Same with Fannie Mae, except they do it over 360 months or 30 years. So there's that connection, 20-year or 30-year. Now, what are net eligible assets or how they're— how are they determined? Well, what we do is we take all of your documented assets. And again, we're talking liquid assets. And then what we're doing is we're subtracting the amount of funds that we've determined you'll need to complete your purchase transaction, your down payment, your closing costs. So and then after we subtract the money needed for the purchase, we also cannot use any certain other types of assets like gifts from relatives, funds that are borrowed, like secured borrowed funds, or, and again, pledge your encumbered assets. That's what secured borrowed funds is, so we can't use that either. So again, net eligible assets, subtract the money you need to complete the purchase, plus those other types of assets that are listed there. Now eligible assets can include savings accounts, checking accounts, brokerage accounts, and retirement funds, again, if you're 59 and a half. And so this is a very simple and very effective way to get buyers qualified who are what we like to say, uh, low in terms of monthly income but very strong, very high liquid assets. So this is a way to take someone who otherwise doesn't appear to have much monthly income, be able to borrow maybe a substantial loan amount if they have substantial liquid assets that are going to still remain after they complete the transaction. And by using one of these formulas, we can you can still get them a conforming conventional loan where you're going to get a much better rate, certainly much better than you would get on the non-QM side of the product spectrum. And then the last thing in terms of, and again, I'm doing one of these right now for a borrower who is, you know, got a, you know, multimillion dollars in her accounts. She's got limited monthly income, Social Security and a survivor's VA pension or a VA survivor's benefit. Income benefit, but those two combined are pretty modest. Well, because she has a substantial amount of 7-figure liquid assets, we're able to use this approach. We're using the Freddie Mac approach and are able to therefore use an assumed monthly income that's substantially much, much higher than what she's actually receiving from Social Security and the VA, and this is going to allow her, is allowing her to easily qualify for the loan. Now, the other one other thing I want to point out as it relates to asset-based lending in general, another little trick of the trade I want to touch on. If you're a borrower who is of a retirement age, 59 and a half or more, and if you have, let's say, a significant IRA account, and we again, you're running into a problem where your recurring monthly income is a little light to meet a debt ratio in order to get a conforming loan where you're going to get the best rate. Well, what we can do is we look at your IRA account, we can calculate how much you're going to need in terms of additional qualifying income to meet the debt ratio and be able to qualify to get the loan. I do that calculation, I do it all the time, it's pretty simple. So I'll determine the amount that has to be withdrawn from your IRA every month. We have to look at your IRA balance, make sure that the balance will support a recurring distribution of that monthly amount for at least 36 months. And if the balance does support covering for that period of time, then all we have to do is get basically a copy of your request form or application to set up the recurring monthly distribution. It's got to indicate what account it's going to be pulled from, what the monthly amount is going to be, and the gross amount, not the net, in case there's withholding. It's a gross amount. And what is the date that the first distribution is going to occur? So we can get the loan approved just with that. Then the only other thing we have to do is confirm receipt of the first distribution into your account. Once we verify that, we can clear the loan to close. You close your purchase, and after that, it's up to you if you want to continue that monthly distribution. You may want to do that for a while. After all, you're going to have a new monthly payment from the new mortgage, right? But maybe you determine after a short period of time you don't need to keep withdrawing that amount of money. You can stop it at any time. Once your loans are closed, you're basically— it's up to you what you want to do. So this is a very convenient and a very good little trick of the trade that we use for more senior homebuyers who, again, are heavy on liquid assets but light on monthly income. This is a great way to solve that problem. And we always do several of these every year as the situations present themselves. So I just wanted to go over that since that's something that we are dealing with with one of our customers right now. And I— so again, if you know anyone, whether it's somebody in your family or a friend, a family member, family members, as you said, or is it like what I like to say, friend, family member, coworker, or maybe even your best customer. If you know somebody in this kind of situation, and they're having some trouble getting qualified for a purchase mortgage, have them call me and I can walk them through it and help them get to their finish line in a pretty easy fashion. So with that, we're going to bring Jeff back on because we're going to do a little bit of discussion about first-time homebuyers, what they need to know, and actually what our first-time homebuyers— we'll probably start with that.
Hey, Art, how you doing?
Hey, Jeff, good. How are you?
Good. You got my attention when you start talking about golf. You know, I'm a former golfer and You know, I remember a few years ago when Rory teed it up on the 10th hole on Sunday and he had a big lead and he snipe-hooked it into the left rough. And we really never saw much of Rory when he was a 6-shot lead. I'm like, oh man, I had memories of that. And it was, it was not an easy win, you know? So it was a lot of fun to watch. So I'm glad you mentioned that. Yeah.
Yeah.
The other thing is, you know, you mentioned about the Coachella and I'm out on the, on that east side of the, the desert. And, uh, you know, it's a lot of fun seeing those people come out and do their thing and, and the impact it has positively on our desert. But, you know, something I thought that was really interesting is, uh, I think it was in the news, they said that I think there's 125,000 people a weekend out there. And they— yeah, that's a lot. And, um, they said that there was 100 arrests made. And I'm thinking, you know, this— I guess under those conditions, 100 arrests over 125,000, really not too bad.
Well, yeah, when you said 100, I was going to— first thing that hit my head is that's a surprising number. I would have expected it to be higher.
Yeah. Yeah. Because it's—
I mean, did it used to be more of a problem? I don't really know. I don't.
Well, I think every year they kind of report, you know, how many arrests, like it's a big deal. You know, I think they feel like that's a service to the community to let them know how many people get arrested. And some of these things are just are pretty minor, like Okay, there were arrests or there were fines given because they went past a 10:30 deadline. You know, they still played music at that. I mean, it's a festival, for goodness sakes. It's live music. And so anyway, but yeah, it's all good. And, uh, we're in week 2, and you know, the weather has been pretty magnificent. Uh, you know, I can remember, I can remember Coachellas where the weather was like either A, it was too freaking windy, or B, it was it was really hot and, you know, we had a little wind last weekend, but this weekend is spectacular.
Yeah, so far this weekend is— you're right. I mean, the wind's like next to nothing and, you know, we don't have a 100-degree situation, at least not yet. And so I was thinking about that this morning just coming into the office is like, wow, it's pretty good weather, you know, waiting for, you know, the second half of Coachella Fest.
Yeah, yeah.
I'm surprised you're just damn good weather.
So yeah, I'm surprised you're not wearing your Justin Bieber hoodie or something there.
No.
All right. Well, let's get into today's topic. We're talking about— we're talking about first-time homebuyers. And as you said, let's start off because I think right away people think, oh, first-time homebuyer, like I've never bought a home before. But in the world of mortgages, it's a little different, is it? So what's a first-time homebuyer?
Yeah. And just for the benefit of everyone watching, The reason we're talking about this is I mentioned to Jeff that I had some folks referred to me to find out more about the mortgage process. They're contemplating buying a home and they're first-time homebuyers. And so we scheduled a call and, you know, they asked a lot of questions and I ended up spending, I think, 30 or 40 minutes on the phone with them and covering basically the whole aspect of, you know, being a first-time homebuyer, what the process is like and so forth. And so that's why I thought it'd be good to talk about it today just for the sake of everyone, even those who've a mortgage before, sometimes this is, you know, a good reminder, a good refresher as to the whole, you know, process at a, you know, higher level. But yeah, first-time homebuyer, let me comment on that because, you know, there's— I think there's some kind of— it's a little murky, maybe a little bit of confusion just what that means. You know, the inclination would be to think, well, if I'm a first-time homebuyer, that means I've never owned a home. Well, well, that's true, but in the mortgage world, that's not what we mean. In the mortgage world, for in most cases, uh, and this is true whether we're talking, you know, conventional loans, even the, you know, government-assured guaranteed loans, um, the first-time home buyer is someone who simply has not owned a home in the last 3 years. So you could have owned a home 10 years ago and maybe you sold it 5 years ago. And for whatever reason, you're renting now. You can go out and buy a home now and finance it and you would be considered and treated as a first-time homebuyer.
So, so let me ask you a question, Art. So, so you're saying, let's hypothetically, let's say, for instance, I got married at a young age and we bought a home, and then for unknown reasons, you know, we got a divorce. And in that divorce, we both became renters. And then 3 years later, I get remarried. And now if I go to qualify for a loan, if my new spouse is not already a homeowner, we're a home— we're a first-time homebuyer.
Yeah.
Wow. That's really— it's interesting. And what's the thought? What's the theory behind that?
Well, I can't say that I know because I wasn't around, I wasn't part of the discussion to establish that. But, you know, I think that is a definition that I think was formulated by the two agencies. I always like to say quasi-federal agencies, Fannie Mae, Freddie Mac, as well as state agencies who offer certain programs like here in California, the California Housing Finance Agency. So that has evolved into being the standard definition for a first-time homebuyer. And then of course, the— that once we established that, and I think part of the reason that these folks that I talked to yesterday, we ended up talking about this in particular, was, you know, basically the idea of, okay, I'm happy to know I'm a first-time homebuyer, so what do I get? You know, in other words, doesn't this entitle me? Am I not entitled for some additional benefits as a home buyer and as someone who needs to borrow money for a mortgage? Do I get some benefit from being in that particular status?
Is it kind of like being a VIP and you get to sit up front or you get, you know, lower legroom on the plane? Is it this kind of the same thought process when it comes to I'm a first-time home buyer?
Well, in a sense, um, you know, because there can be some advantages in a particular situation. One of the things I like to tell people, and as I told these folks yesterday, first-time homebuyer status doesn't always— in fact, I would argue in a majority of cases does not mean because you're a first-time homebuyer you're going to get a better rate. I think there's a tendency for you know, consumers who've never bought a home and never gotten a mortgage to think that there's a— that special classification is going to give me something better rate-wise than any other borrower. And that's somewhat true in a pretty limited extent, if at all, when it comes to conforming conventional loans. If you're a first-time homebuyer, And if your monthly income that's going to be used to qualify you is within a certain level, um, what it will do is allow your, your interest rate to be calculated slightly better. Because it— what happens is, I don't want to get too technical here, there's different price adds that are levied depending on your financial profile, what your credit score is, what your down payment is, the property type that you're purchasing. And so if you're a first-time home buyer and your income is within, you know, county limits, like the average median income in a county, then you would have some of those price adds would be waived. And so you might get a slightly better rate, but all that really means is you might get an eighth, maybe a quarter off the rate than you otherwise would. It's not a substantial benefit in terms of you're going to get a half or 1% lower lower just because I'm a first-time homebuyer. It doesn't really work that way. Most first-time homebuyer programs designed for this profile, this buyer profile, are predominantly about down payment assistance rather than you get a better rate. And, you know, one of the most common ones, again, here in California, we have a state agency, California Housing Finance Agency, we call it CalHFA. and they're in existence to provide down payment assistance to first-time homebuyers. And they use the 3-year definition, although for their particular special Dream for All program, there's 2— there's 3 years or 7 years, but we won't get into that for this purpose. But for the most part, it's 3 years, and you also have to be income within certain limit by county. And so if you meet that criteria, they offer a variety of down payment assistance options. But what folks don't realize is, you know, you're still going to get a mortgage that's going to be coupled with that down payment assistance, and it can be a conventional conforming or an FHA. But generally, and I see this all the time, the rate you're going to get is likely going to be a little bit higher than what you would get if you just came to us and said, I want a Fannie Mae loan with 3% down, what's my rate? And we calculate what it is. I could probably offer you a better rate than what you're going to get if you are going through and getting a CalHFA down payment assistance coupled with that 97% first mortgage. The rate's going to be a little bit higher. So there's the trade-off. You're going to get down payment assistance. You don't have the down payment, you need the 3% help. All right, CalHFA will make that happen for you, but the rate you're going to get on that first mortgage is going to be a little bit higher. Uh, the other thing is it's actually more difficult to qualify for in most cases because again, CalHFA will say, all right, you want this down payment assistance, you're going to get a conventional loan, requires a 3% down payment, we're going to provide that 3% through our down payment assistance program. But in qualifying you, you have to meet a debt ratio that doesn't exceed 45%. Whereas if I have someone come to me directly and they want a Fannie Mae loan with 3% down, I can probably get that loan approved as long as the debt-to-income ratio is 50 or lower. Oh, so it's easier to qualify for. And of course, when you consider that the down payment assistance is going to have that higher interest rate a lower debt-to-income ratio max. Well, the higher interest rate puts more pressure on that debt-to-income ratio, right?
Yeah.
So that's why in some cases, if you can scrape up that 3% down, it can be a better option, uh, than going through one of these down payment assistance options, because you get what you pay for. You need help with down payment? Sure, here you go. But we're going to be a little tighter on getting you qualified because you're not putting any money in the deal. So you're more risky and we're going to probably have a little bit higher rate on the loan to take into account that risk as well. So you just need to understand the tradeoffs. In a lot of cases, you know, with a first-time homebuyer, what that gets you with a regular conventional conforming loan is the ability to go 3% down. So forget about this idea, I need 20% down to get a mortgage. You don't. If you're a first-time homebuyer and you've got sufficient income, you only need 3%. And a lot of folks don't realize that.
Well, it's interesting, you know, I hear what you're saying. I'm like, okay, well, the good thing is, and those of you who've got a really nice group here live, is be aware that just because you're— you could qualify for the first-time homebuyer program or considered a first-time homebuyer, speaking to someone like Art, he may give you a different option. It actually will save you money in the long run. But isn't the first-time homebuyer program really designed to help those people who maybe don't— like you said, they're helping with the down payment assistance to get them started in homeownership because we talked about this before. You start buying a home now, we know that your net worth is 40 times that of a renter. So to start as early as you can, even if you don't have that full percent down, you get the assistance to get into— isn't that what it is? And yeah, there's a trade-off. You can have a little higher rate and lower debt-to-income ratio, but isn't that what it's designed to do? It's like, hey, we're going to take a risk on you.
Exactly right. Yeah. And yeah, don't get me wrong, uh, we can— we do CalHFA loans. I mean, I can, I can offer that, and I do. The point is, is that I want to make sure as I get into that conversation, like with the folks yesterday, what we try to do is give them a full picture. Like, you need down payment help? Okay, here's what the terms are going to be. And part of my job is to make sure you're going to conform to and qualify for those terms. But here's what can happen if you can get that down payment money some other way. You might get slightly better terms, and here they are. So what I do is, you know, kind of interview them and help them come to a realization of, well, which option is really realistic. If they certainly just do not have that down payment available through any acceptable source at all, The down payment assistance programs like CalHFA are very useful and very effective, and we put people in those loans quite often. So it's not that they're bad. I just think that just realize that when you go that direction, you're going to get that benefit, but that benefit comes with a cost, which in some cases I can help you decide, is that cost worth it or not?
Yeah.
And the point is I can then by going through that process, I can give them more than one option to consider.
You bet. Yeah, I definitely want to stress that again, is, you know, have someone like Art who looks out for the best route for you and at least gives you the options that you can actually— that you can actually— hold on— make that decision. And, you know, one thing you mentioned, something I thought that was very interesting, and maybe as a first-time homebuyer, let me think of like, okay, I'm a homebuyer. And I don't know exactly what these terms are. What did you mention? Something about conforming and FHA loans. Can you tell me kind of what the difference is between a conventional loan and an FHA loan, per se?
Yeah, because— and again, and this happens quite often when I'm talking to folks, especially the first time, oftentimes it's by phone. And, you know, one of the issues with the mortgage business, I think, is that we throw a lot we throw out a lot of terms that for the average consumer, they just, they're like, what the heck does conventional conforming mean? You know, what does that mean? So I try to explain that as simple as I can in plain language. And the idea here is that conventional conforming, first of all, a conventional loan is a loan that is not insured or guaranteed by the federal government. Okay, so then you go, well, what does that mean? Uh, what's federal government, what isn't? And confusion can exist there because we have two agencies— again, I always try to say quasi-governmental agencies— Fannie Mae and Freddie Mac. Now, those two terms are a a version of the initials of each organization. Fannie Mae is the Federal National Mortgage Association, FNMA, ergo Fannie Mae. Well, Federal National Mortgage Association sure sounds like a government agency, right? It's not. Freddie Mac, Federal Home Loan Mortgage Corp. Freddie Mac. Again, Federal Home Loan Mortgage Corp. That's a federal agency. No, it's not. Both agencies were created by government charter, but they're private companies. You can buy stock in them. Now, they have the implicit guarantee of the federal government because they issue mortgage-backed securities that are, whose collateral are pools of mortgages that are put together and serve as collateral for these bonds, these mortgage-backed securities. And because they're issued by Fannie Mae and Freddie Mac, there's the implied guarantee that if Fannie and Freddie ever had problems, the government's going to swoop in and, you know, protect them, save them. And that's why you get a better rate on conventional conforming loans is because of that. Fannie Mae, Freddie Mac is buying them from lenders. And then it's got that implicit guarantee, even though technically there's no outright guarantee from the feds because they're not federal agencies. Now, conforming simply means the loan amounts that can be sold to Fannie Mae and Freddie Mac. Each year they announce what's the maximum loan amount they'll purchase from a lender. And each year that number will change based on what's happened with median home prices over the previous year. Higher or lower, by the way. This year, the Fannie Freddie conforming limit is $832,750. So any mortgage made under that amount is considered a conforming conventional loan. Conforming because it conforms to their maximum loan amounts. Conventional because the loans are not insured or guaranteed by the federal government. FHA, Federal Housing Administration, is a federal agency. It's part of HUD. FHA was created in the '30s, and the idea at the time was brilliant. Mired in the Great Recession, how do we get more employment? We need to build more homes. How do we get more homes built and purchased? We got to make lending terms much more friendly to the borrowers. Back then, before then, you had to put 50% down, 5-year term. You couldn't afford the terms.
Wow.
Didn't have the down payment, you didn't have the monthly payment because of the short loan term. Franklin or Roosevelt administration comes up with this great idea: let's provide mortgage insurance, insuring the lender against default by the buyer, the borrower, and that way the lender will be induced to allow a lower down payment and spread out the loan term from 5 to 10 years to 30 get the payments down, knowing that they had the security of if that borrower goes bad, they can submit a claim to HUD and get reimbursed for their foreclosure loss. Ah, so that's the difference. VA doesn't work quite the same. They don't insure the loan, they guarantee the loan on behalf of the veteran. USDA, they have a guarantee fee as well as an annual, essentially, mortgage premium as well. So those agencies— FHA, VA, USDA— those are government-insured or guaranteed loans, and that's the distinction between those loans and then the conventional conforming that are not in any way actually technically part of the federal government.
So, so in this situation, Art, if, if you have someone who is getting a loan on a property that then is beyond that conforming amount that naturally would then you would move them to a different loan instrument. Nothing that would be a conforming conventional because it doesn't qualify. Is that correct?
Well, kind of. In other words, if it's over $832,750, what that loan would be considered depends on what county you're in. Oh, okay. In Riverside County, we have no— see, back at coming out of the Great Recession of '08, there was a new category that Fannie Mae and Freddy Mac developed called high balance. Because right after the Great Recession, the jumbo conventional mortgage market in the US collapsed. It was totally illiquid. So Fannie and Freddie stepped in and said, hey folks, hey lenders, we'll buy bigger loans than our conforming limit. We'll put them in a high balance category, we'll call it. Now the yield on those, the pricing on those is going to be a little bit higher, but we'll buy them from you. And that created some liquidity in the market to get us out of that Great Recession. And so what that higher amount is varies by county. And in some counties, unfortunately, like Riverside County, San Bernardino County, Imperial County down south, there is no high balance category from Fannie Freddie. Oh, over $832,750, that loan is still a conventional loan because it's not insured or guaranteed by the government, but it's considered a jumbo conventional loan. And jumbo loans generally will have a little bit higher rate than a conforming conventional loan because of the Fannie Mae/Freddie Mac thing. So, so that's basically the distinction. Whereas if you're in Orange County, you know, the high balance Fannie/Freddie limit isn't $832,750. It's like $1.1 million. Oh, and so it's only after you go above that high balance conforming limit that in Orange County would it be considered a traditional jumbo conventional loan.
Wow. Okay. Yeah, yeah, yeah. That's it. Hey, well, you know, you talked about as a first-time homebuyer, really, it's a, it's a process where it's a down payment assistance program. But are there other, better benefits? I mean, what are the down payment requirements then if there's an assistance going on?
Well, I think the, the thing I would say is, besides the down payment assistance programs, is, as I touched on a couple of times earlier, just understand what the true minimum down payment options are there without getting down payment assistance.
Oh, okay.
If you're a first-time home buyer, again, Fannie and Freddie, only 3% down is required. And if your income is below a certain limit for that county, you get a little bit better rate as well. So that's important to understand because again, and we've talked about this on the show before, Jeff, many times, there's still this notion that you need to save up 20% to buy a home. It's just, I cannot figure out a way to get rid of that out of everybody's head 'cause that still is out there. So just understand that you only need 3%. Now 3% can still be very daunting, You know, gift from your family members. If you've got, if you've been smart enough and a good job for a few years and you set up a 401(k) plan, you can borrow against that 401(k) plan for your down payment. Or some actually offer the ability to take some money out without a consequence if it's for purchase of a home. Or if you have some other secured asset that you can borrow against, that can be okay. Secured borrowed funds are okay. You know, FHA, only 3.5% down. Now, everybody, there's a notion that FHA is a first-time homebuyer program. It is not. It never has been. You do not have to be a first-time homebuyer to get an FHA loan with 3.5% down. You know, we like to say that if Warren Buffett wanted to, he could put an FHA loan on his— that little house in Nebraska that he still owns, built in the '50s. He could do that because he doesn't have to be a first-time homebuyer. He has to live in the property, but that's the only requirement. And then the other thing I pointed out to these folks I talked to yesterday, and it's pretty common out here in the Valley, Coachella Valley, is USDA. Now, USDA, yes, that's a program through the U.S. Department of Agriculture. Sounds odd, right?
Yeah, it does.
I like to— I like to joke that if you get a USDA loan, At closing, you get, you get a box of government cheese to go with it. But, you know, a USDA loan, also called rural housing. And so for properties located in certain low-density census tracts, and we can plug in the address and find out immediately if it's eligible for USDA, you can buy a home with no down payment at all.
Oh, wow.
So if I'm in like Twentynine Palms or Yucca Valley, I'm just going to say, okay, Here in the Coachella Valley, pretty much the entire city of Desert Hot Springs is USDA eligible.
No kidding.
Okay. Yucca Valley, go further up, higher desert, Yucca Valley, Twentynine Palms, which is where these folks were from when I talked to you yesterday. Yeah, those areas are eligible for USDA financing. Wow.
Okay. So they can get into the house for no money down. Correct.
Wow. Okay. They, in negotiating their offer, can submit an offer where they ask for seller concession in a credit. They can use that to pay their closing costs so they can literally get into the home with no money out of their pocket. Wow. Or nearly so. And of course, there's a VA— I think everyone's pretty dialed into VA. If you're an honorable veteran discharge and you've got a VA entitlement for a home loan, you can go zero down. So the point is there are pretty darn good minimal payment down payment options already available. They've been around for years. So it's not like if you can come up with just that little bit of money, you may not have to rely on those down payment assistance programs. And then as well, you'll get maybe a little bit better rate on the, on the loan if you can come up with those minimum amounts.
Well, what would you, what would you tell somebody out there, whether they're a first-time home buyer because again, we have a lot of people online today. What would you tell those people out there that one of the biggest myths when it comes to down payment, that they should just discard that? I know you said 20% down, but really, is there anything else that they need to be aware of when it comes to the down payment that has been a false thought? You know, well, this for 4 and a half decades.
Yeah. One of the things I do notice is, and this comes up always when we maybe are starting the process and we're pre-qualifying a buyer. And, uh, you know, it's not unusual that I'll make a determination that a particular borrower may easily qualify for a price level and loan amount higher than they want to go. And so I'll put together some numbers, I'll send them a worksheet and illustrate it all for them on one piece of paper, break down the closing costs, the monthly payment, and so And, and again, I'm doing that after I've made the determination that at least on paper, the numbers suggest these terms should be fine for them. They should be able to easily accommodate these terms. But I'll get folks who look at that and say, whoa, wow, yeah, okay, yeah, we can afford it, but we don't really want to live for our mortgage payment. What can we do to get the payment down? What if I put more money down? And probably the most common question will be, what if I put $10,000 more down? And they're thinking in their mind that that extra $10,000 might lower their payment a couple hundred bucks a month. And there, when I show them what it actually does, they're disappointed. And the reason is, I tell this all the time, think of it this way. Each $1,000 more down payment is worth about $6 a month in your monthly payment.
That's it.
Yeah. So $10,000 more down might save you $60 a month.
Probably not worth it.
Well, that's where you get into the, you know, that's where you get into the analysis of maybe you have enough money for the minimum down and maybe you have a little bit more than that. Like the folks I talked to yesterday actually had a pretty good chunk of cash. But they're still thinking minimal down. That's where you start thinking, well, I'm tempted to put the $10,000 more down anyway, even to save $60 a month. But then don't forget, $10,000 divided by $60. How many months does it take to get your $10,000 back from that $60 a month savings? It's going to take you several years.
Yeah.
Well, that's the case. And if you can otherwise tolerate the higher payment without the extra $10,000 down, you're probably better off go with the higher leverage scenario. Don't put that extra $10,000 down and get into that homeownership to start building the wealth and keep that $10,000 in your pocket and use it constructively in some other way.
Yeah, good idea. You know, the whole time we've been talking about first-time homebuyers, we really haven't spoken about anything about interest rates. I mean, or excuse me, with their credit scores, I mean, Are there any other terms when it comes to that, you know, for first-time homebuyers that said, okay, because you're a first-time homebuyer, your credit scores, there's some leniency or there's some guidelines. Tell us about that.
Well, again, very good question. And particularly as we talk about the down payment assistance programs and otherwise, first of all, as to credit scores, I always ask folks what they think their credit score is. They'll have some idea. First thing I'd want you to know is, as a consumer, any credit score numbers that you're seeing, uh, if they're from your credit card company, from the credit bureaus, maybe your bank, uh, not likely to be the same kind of scores we're going to get if you start a mortgage application.
Why is that?
This— well, because the scores you get from the credit bureaus, your credit card companies, your banks, almost always those are going to be scores based on a consumer lender— I'm sorry, consumer lending credit score model. A mortgage app, a mortgage report uses a different scoring model than consumer lending. And so there can be some differences. And I just tell folks that just so they're not totally shocked when they tell me I'm at 850 and I pull their credit report, and on my mortgage credit report they're at 805. And of course, what happens in that scenario, even though 805 is like the best of the best for a mortgage. Yeah. They're disappointed because it's not 850 like they saw from Citibank. And I have to explain to them, no, no, no, no, you're fine. You're fine. It's a different scoring model. It's a wider range. Don't worry about it. So understand that first. Second thing is when we get your credit report, we're going to get 3 scores, one from each bureau— Experian, Equifax, TransUnion. And if there's two of you, we're going to do that for both of you. And then we have to use the lowest middle score between the two of you, or if it's just yourself, the, the middle score. If there's two of you, the lowest middle score, that's what's used for being eligible for the loan program if it has a minimum credit score requirement, as well as how well your loan is going to be priced. Conventional, understand that for conventional conforming loans, the best rates are at 780 or higher. Oh, and then the credit score goes in 20-point increments down to 620. So 780 is the best tier, 760 to 779 the second best, 740 to 759 the third best. 720 to 739, the fourth best, and so on. Okay, well, with Freddie, Freddie Fannie loans, as you slide down that 20-point increment tiers, the pricing on your loan gets progressively worse. Oh, and if you get into the 6s, even, you know, high 6s, and then particularly if you get a mid to low 6s, it gets a, you know, pretty much a lot worse. Like, you could easily be looking at a half to even 5/8, 3/4 of a percent higher rate if you're at 6.25 instead of 7.80.
No, let me stop there for a second. That doesn't sound like a whole lot, like a half a percent or 3. But what do we— I mean, on an average loan in the Coachella Valley, I mean, what are we talking about there?
Well, that could end up, you know, because, you know, our median pricing here in Coachella Valley is You know, it's low by Orange County, LA County type standards, but it's, it's in the range of $600,000, $650,000. Wow. If you're putting a minimal down payment, you're talking about over a half million dollar loan. So a half or three quarters in rate could easily be $200 or $300 a month.
Oh, geez. Okay. All right.
I get it. Maybe a little bit more. Yeah. Now compare that to, and this is why I say if you're, again, especially if you're a first time home buyer and you're putting minimal down. And let's say you are a little bit credit score challenged. You're on that lower end of the spectrum. You're below 700. You're maybe going down to the mid-600s, low 600s. You are almost always, 99.9% of the time, better off going with a government loan, i.e., FHA. Uh, now the only watch out for is FHA has maximum loan limits and it's lower than conventional. Riverside County, it's only $690,000. But the point is, FHA— and true with VA and even USDA— those agencies are much more kind, I call it, to borrowers with lower credit scores. You don't see your pricing on your loan get as progressively worse as conventional conforming. So if you're at a 675 score, you're, um, you're going to be much better off in terms of rate going with FHA, because FHA, even if you're at 675, I'm going to get you a 30-year fixed probably in the range of 5.75%.
Oh, really?
Okay. If you're at 675 on a conventional loan, you're probably looking at 6.75%.
Wow.
And so that makes— starts to make a big difference. That's why I always say, unless you are like very close to the top tier or nearly so, and you're putting 3%, even 5% down, you really ought— and you really ought to look at FHA. It's a better option almost always if the max FHA loan amount in your county supports your transaction in terms of what you need. Almost always better off to go that way. You're going to get a much better deal than going conventional. Again, for those lower credit score borrowers, you know, Art, this is—
this has really been a master class for, for first-time homebuyers to understand and all buyers, quite frankly, to understand, you know, hey, what is in the deal for them? But to me, it seems like there's, there's one of those things that before you make any decisions, you should probably have a discussion with you before I even start going out and look at homes. Should I, should, should you come in? Like you said, these people that came and talked to you yesterday, were they speaking to you before they ever actually went out and started looking at houses, kicking the tires, if you will. Would you recommend that?
Correct. And to the extent they've kicked the tires, I think this is a lot how a lot of families are doing that, doing this these days. It's not like they haven't looked at all, but it's been online. So, you know, they've done some cursory looking online, getting a general idea of where they want to be price-wise and maybe location-wise. They have retained an agent because they were referred to me by an agent. Okay. And so have they actually gone out and started looking around and getting their shoes dusty? No, not yet. But that's part of why the agent urged them to talk to me as a first step, get a much better idea about the financing side of the transaction before they go out there and start getting really serious about looking at property. And then And kind of the funny thing about it, I guess, if nothing else, after my many years in this business, you develop some instincts. You know, they live up in the higher desert. And I talked a little bit about a price range that I thought I would start with and they liked it. I said $300,000. And so I found an active listing and I used that for a worksheet that I emailed them after we talked. And I showed them a conventional conforming loan with 3% down and a USDA. And one of the things they commented on when they got it, they loved the fact that I sent them the numbers. But it turns out the listing I selected is on their shortlist.
Oh, no kidding.
Because they found online that they do want to go take a look at. So, and you just, you just threw a dart on a dartboard and— well, I came across this, I looked at a few and I came across this one. I was like, you know what, this looks like something that that Elena and Dickie would like. That's her name. I think they might like this one. So I'm going to use this because at least illustrate the kind of numbers we're talking about. Well, who knows? It would be funny if they ended up taking a run at it and getting it into escrow. That'd be, that'd be kind of fun.
So now I have one, one quick closing question and hopefully it doesn't, it doesn't open a can of worms. But if I'm a first-time homebuyer, I'm doing this, can I still use, ask for concessions from the buyer to get a rate buydown, or is that off the table?
No, you still can. And it depends on your loan, your loan type. Conventional conforming, you can ask for 3%.
Okay.
3% of the purchase price of the home. Okay. If you put 10% down or more, conventional conforming, 6%.
Okay.
Now FHA, again, this is a good example of where FHA, especially if you're putting 3, 3.5% down is all you got. And maybe your credit score count— Challenger at 650, uh, FHA, even with 3.5% down, you can ask for a 6% concession.
Oh wow, that's a big difference.
So that way I can take somebody who at 650 might be FHA with no points hovering close to 6, 5.75, 5.78. You ask for a concession of 6%, or maybe you think that's too much, you ask for 4 or 5, that's acceptable. Unlike conventional conforming, and with 4 or 5% of the purchase price as a concession, I can probably get them a 30-year fixed FHA loan even with that credit score under 500. Wow.
So you do a permanent buydown, not a temporary?
Well, we'll show them both. Yeah, we'll show them both. But the point is you can do so much with that, especially for that lower credit score borrower who's going to get shell-shocked when they look at the conventional conforming rate. Due to their score, and yet realize FHA, you only need 3.5% down, and we can do so much with a concession of that level to improve their loan terms and make this thing so much more affordable that they're going to feel really good about getting into that homeownership path now and starting to build their wealth.
Well, I tell you what, it's a, again, master class, uh, Art. Thank you so much. And I think, I think for those people watching at live or watching the recording of this, share it with somebody if it's not you, because, you know, we've talked about this in the past, Art has, about home affordability is only getting better. The rates are down. You know, we've got a lot of factors. Last week you talked about this, the factors that make home affordability, and especially for an edge, if you will, for buyers right now is really in your favor. So I've got Art's phone number on there on the screen, 760-969-5023. Make sure to get ahold of him. And tell him you saw today's show and that you really loved it, especially the section with me on. No, I'm just kidding. And let him know you need his help and have him work some up numbers for you. Art, thank you so much. I'm going to turn it back over to you.
Okay. Thanks, Jeff. Thanks everyone for watching and listening to this week's Mortgage Minute. My name's Art Alvarez with MortgageWorks, where we have the answers and they're on the house. Enjoy the weekend. For those of you here locally, enjoy that Coachella Fest. And then of course, after that, we'll be having the Stagecoach crowd coming in. So that's going to be a fun rest of the month. As for me this weekend, sorry, Coachella Fest. I'll be heading over the hill to Long Beach. I'm also an auto racing fan, so I'll be at the Long Beach Grand Prix all weekend. So whatever you're doing, again, enjoy the weekend, and then I'll see you next week on the next edition of the Mortgage Minute. So long, take care. ¡Gracias!
