Mortgage Rates Lowest in Over 50 Years

The VA way to finance a home

Picture a mortgage program that seems to defy many of the lessons of the housing bust:

-- 91 percent of its borrowers make zero down payments.
-- Loan amounts go well into the jumbo range -- to $1 million and sometimes above, even with little or nothing down.
-- Credit standards are flexible and generous. Underwriting rules encourage loan officers to look for ways to approve applications rather than to reject them.
-- Mortgage originations are up -- almost triple what they were just three years ago and are on track this year to exceed 2010's volume. The rest of the loan industry, by contrast, is down by anywhere from 25 percent to 30 percent.

You might assume that any home loan program with come-ons like these must be swimming in bad mortgages, loaded down with serious delinquencies and foreclosures. Yet this one, which gets relatively little attention in the media, has better mortgage performance than the Federal Housing Administration and is comparable with some "prime" loan operations that have far more stringent credit rules.

Can you name this financing phenom? It's the Department of Veterans Affairs' home loan guaranty program. At a time when federal regulators are considering imposing a 20 percent minimum down payment requirement for most conventional mortgages, the VA program, which is restricted to veterans, offers important insights on how to get families into homes with little cash upfront, and to keep them out of foreclosure, even in tough economic times.

What's in the special recipe at the VA? Tops on the list: a combination of loan features that are by far the most attractive available in the current market. While the FHA program also offers minimal down payments -- 3.5 percent -- the VA goes to zero even if you need a jumbo-sized loan.

Unlike low-down-payment loans you can get from Fannie Mae and Freddie Mac and FHA, there are no monthly mortgage insurance premiums. VA loans do have an upfront "funding fee" that varies according to the down payment and other criteria. Currently this fee ranges from 2.15 percent for zero-down borrowers to 1.25 percent for applicants putting down 10 percent. Most applicants opt to roll the fee into the loan amount and finance it over time.

The VA imposes no credit score minimums. Its average FICO score is 708, compared with the 750 to 770 scores typical for Fannie Mae- and Freddie Mac-backed conventional mortgages at the best interest rates. It does, however, require underwriters to look closely at credit bureau reports and documented income to ensure that borrowers have the ability to repay their loans.

The agency is exceptionally flexible on seller contributions to help buyers pay closing costs, escrows and loan origination charges -- more lenient, in fact, than any other national program. That, in turn, can significantly lower the net cash outlays needed from borrowers at closing.

The VA also stretches debt-ratio norms when needed to help creditworthy, income-strapped borrowers get into a home. Though the official "back end" ratio of total household monthly debt to household income is 41 percent, lenders say VA will let them push this higher, even to 55 percent, on a case-by-case basis.

With all these accommodations to borrowers, how is it that VA's 90-day delinquency rate in the latest study by the Mortgage Bankers Association is 2.2 percent while FHA's is 4.8 percent? Or its total seriously delinquent plus in-foreclosure rate for borrowers is 4.5 percent against FHA's 8.04 percent and the conventional prime market (Fannie and Freddie) at 4.3 percent?

Michael Fratantoni, the Mortgage Bankers Association's vice president for research, said that the VA's record "is remarkably good, given that they're allowing first-time buyers to get in with no down payments," which is traditionally linked to high defaults and foreclosures.

Michael Frueh, the VA program's acting director, said the key to the agency's quiet success is its nearly paternalistic emphasis on servicing its 1.5 million borrowers -- moving early and quickly to intervene at the slightest hint of payment problems.

"At the end of the day we are veterans' advocates," he said in an interview. "We exist solely to help them," not only to afford to finance their homes but to remain in them. In the past three years, the VA has instituted industry-leading techniques such as requiring lenders to establish "single point of contact" servicing systems, where customers deal with one person about their mortgage issues, rather than anonymous multitudes.

Could this mindset -- intensive "advocacy" servicing as a borrower benefit built into the loan itself -- be duplicated in other segments of the mortgage market?

Ken Harney is a syndicated real estate columnist.

     The FHA is insuring a greater percentage of loans than during any time in recent history. In 2006, it insured roughly 5 percent of the purchase mortgage market. Today, it insures one-quarter. "Going FHA" is more common than ever before - but is it better?

     The answer - like most things in mortgage - depends on your circumstance.

     Like its conforming counterpart, an FHA-insured mortgage is available as a fixed-rate loan and as an adjustable-rate one. Payments are made monthly and come without prepayment penalties.

     That's where the similarities end, however, and decision-making begins. For homeowners and buyers , FHA mortgages carry a different set rules as compared to conforming loans through Fannie Mae or Freddie Mac that can render them more - or less - attractive for financing.

For example:

• FHA mortgages can be assumed by a subsequent buyer. Conforming loans may not.
• FHA mortgages require mortgage insurance, regardless of downpayment. Conforming loans do not.
• FHA mortgages do not have loan-level pricing adjustment. Conforming loans do.

     FHA mortgages also require smaller downpayment requirements versus a comparable conforming mortgage. FHA calls for a minimum downpayment of 3.5%. Conforming mortgages often require 5 percent or more.

     And, lastly, FHA mortgages are priced differently from conforming ones. Since 2005, the average FHA mortgage rate has been below the average conforming mortgage rate more than 50% of the time, meaning that an FHA mortgage's principal + interest payment is lower than a comparable Fannie/Freddie loan.

     Today, conforming mortgage rates are lower.

     So, which is better - FHA loans or conforming ones? Like most things in mortgage, it depends. FHA-insured loans can be big money-savers or money-wasters. To find out which is best for you, ask your loan officer for today's market interest rates and study the results.

     With less than 20% equity, the answer is often clear.

30-year fixed conforming mortgage rates improved last week, falling to levels just north the product's all-time low set in November 2010.

5-year ARMs improved last week, too. The benchmark adjustable-rate mortgage's average national rate is now tied with its all-time low, also set last November.

This week, the direction of mortgage rates depends on two events:

1. The resolution of the U.S. debt ceiling debate, due Tuesday
2. The July Non-Farm Payrolls report, due Friday

Mortgage rates will be volatile as markets grapple with the expectations for the above events, and their eventual outcomes. 

Sunday evening, for example, congressional leaders reached an agreement to raise the U.S. debt ceiling by $2.1 trillion, and to introduce $2.5 trillion in budget cuts within 10 years. The deal must pass Congress, however, and until it does, speculation will push mortgage rates around.

Friday's jobs report should swing mortgage rates, too. 

After starting the year strong, the 2011 jobs market has faded. Net new jobs have dropped 5 months in the row and the national Unemployment Rate is climbing. Weak job growth portends weak consumer spending and a weak economy - typically two outcomes that are good for mortgage rates. 

Because of doubt cast by the debt ceiling debate, though, it's too soon to know how Wall Street will react to the jobs data - strong or weak.

For now, mortgage rates remain low. They may fall further, or they may not. The "safe bet" is to lock.