THE USDA "0% DOWN" PROGRAM:
USDA offers an excellent mortgage program that, much like the programs outlined below, is offered to borrowers whose income falls within certain limits. These limits vary by county and the number of people in the household. The difference with this program is that the property also has to be deemed to be in a rural area by USDA. Rural is not a strict term for this program. There are very many properties in Massachusetts that have been deemed eligible. The program provides a 30 year fixed rate mortgage with excellent interest rates and 100% financing. It is only available for one unit properties that will serve as the borrower's primary residence.
Borrowers will pay PMI although it is called an "annual guarantee fee". This monthly fee is calculated by multiplying the loan amount by 0.35% and then dividing that number by 12. Borrowers will also pay an "upfront guarantee fee" to USDA equal to 1.0% of the loan amount. (The upfront guarantee fee is a one time fee charged to the borrower by USDA that is paid in full at the closing and is usually financed as part of the mortgage loan amount. In order to finance this fee the USDA program actually allows 102% financing. 100% for the purchase price + 1% for the upfront guarantee fee + another 1% for closing costs if the borrowers want it.) Both of these fees were significantly reduced in 2016 and these reductions will continue through September, 2024 making the USDA program a very viable option for borrowers who fall within the income limits and whose properties are eligible for USDA financing. Call us to find out more.
Note that the "annual guarantee fee" will be calculated based on the borrower(s) amortized principal schedule over the life of the loan. Therefore, as the borrower makes their monthly mortgage payments, the principal balance will go down according to schedule and therefore the annual fee will go down as well. It is important to remember that unlike PMI associated with conventional financing, the annual fee remains for the life of the loan and will not be cancelled once the borrower(s) reach 22% equity in their home (or upon the borrower's request when reaching 20% equity in their home.)
Neither borrower has to be a First Time Home Buyer. First Time Home Buying Counseling is not required. The minimum FICO score is 640. Other highlights and restrictions include:
• Purchases or Refinances of current USDA loans are allowed.
• Ownership of 1 other residential dwelling is allowed provided it is not local.
• Owner occupied 1 unit dwellings only. 2-4 unit properties are not eligible.
• Manufactured homes are not eligible.
• Family members can gift funds to be used for down payment and/or closing costs.
• Late Mortgage payments in your credit history may make you ineligible.
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THE "HOME POSSIBLE ADVANTAGE" PROGRAM:
Whether or not you are not a first time home buyer you can put as little as 3% down and take advantage of the Freddie Mac "Home Possible Advantage" program which offers 30 year fixed rate mortgages. Refinances are allowed. Income limits do apply based on the County where the home is located. At present, the Income Limit for homes purchased in Massachusetts Counties is as follows:
Barnstable: $99,440 Middlesex: $113,040
Bristol: $86,640 Plymouth: $113,040
Essex: $113,040 Suffolk: $113,040
Franklin: $75,680 Worcester: $92,480
Hampden: $75,680 Dukes: $104,000
Hampshire: $75,680 Nantucket: $109,040
Berkshire: $74,000
No minimum contribution from the borrower is required.
Neither borrower has to be a First Time Home Buyer. If both or all borrowers are First Time Home Buyers then First Time Home Buying Counseling is required. The minimum FICO score is 660. Other highlights and restrictions include:
• Purchases OR Refinances are allowed.
• Ownership of other residential dwellings is not allowed. This must be your only home.
• Owner occupied 1-4 unit dwellings only.
• Manufactured homes are not eligible.
• Late Mortgage payments in your credit history may make you ineligible.
• Non-Occupant Co-Borrowers are not allowed.
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THE "HOME READY" PROGRAM:
Whether or not you are not a first time home buyer you can put as little as 3% down and also take advantage of the Fannie Mae "Home Ready" program which offers 30 year fixed rate mortgages and reduced Mortgage Insurance rates. Refinances are allowed. Income limits do apply based on the County where the home is located. At present, the Income Limit for homes purchased in Massachusetts Counties is as follows:
Barnstable: $99,440 Middlesex: $113,040
Bristol: $86,640 Plymouth: $113,040
Essex: $113,040 Suffolk: $113,040
Franklin: $75,680 Worcester: $92,480
Hampden: $75,680 Dukes: $104,000
Hampshire: $75,680 Nantucket: $109,040
Berkshire: $74,000
No minimum contribution from the borrower(s) is required for 1 unit properties.
A 3% minimum contribution from the borrower(s) is required for 2 unit properties.
First time home buyers are eligible. For purchases, Home Ownership Counseling is required to be completed by at least one borrower prior to closing. The minimum FICO score is 620. Other highlights and restrictions include:
• Purchases OR Refinances are allowed.
• Ownership of other residential dwellings is allowed.
• Owner occupied 1-4 unit properties only.
• Manufactured homes are not eligible.
• Late Mortgage payments in your credit history may make you ineligible.
• Non-Occupant Co-Borrowers are allowed with a minimum 5% down payment.
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THE "FHA" PROGRAM:
Buyers can also can put as little as 3.5% down and take advantage of the FHA program. There are no income limits with this program and you do not need to be a first time home buyer. In this program, lenders are insured against loss by the Federal Housing Administration. Therefore, a borrower using the FHA program will only have to comply with the standard required by FHA underwriting guidelines.
Mortgage Insurance with FHA Loans: FHA requires 2 types of mortgage insurance. The amounts charged for both types are mandatory amounts set by FHA and will not vary with each lender. Unless you are able to put down 22% of the purchase price and your mortgage loan term is 15 years or less, you must pay the following 2 forms of mortgage insurance on every FHA loan:
1.) Up Front Mortgage Insurance Premium: Also called "UFMIP", this is a one time fee and is paid in one lump sum at the closing by the borrower. It is usually financed by just adding it to the mortgage loan. The total cost of UFMIP is currently 1.75% of the loan amount.
2.) Annual Mortgage Insurance: Like PMI, it is paid by the borrower each month. The amount is determined by adding 1/12th of the annual premium to the monthly mortgage payment. The amount or percentage charged for annual insurance under the FHA program will be affected by your down payment amount and whether your loan term is 15 or 30 years. Your credit score will have no effect on the amount of annual mortgage insurance you pay with the FHA mortgage program.
In 2023 FHA significantly reduced its' mortgage insurance premiums:
For loan amounts of $726,200 or lower and amortizations greater than 15 years (i.e. a typical 30 year fixed rate mortgage) your annual mortgage insurance will be .50% of your mortgage amount if you put down 5% or more. If you put down less than 5% then your annual mortgage insurance will be .55% of your mortgage amount. Previous to the 2023 changes the annual mortgage insurance would have been .80% and .85% respectively.
For loan amounts greater than $726,200 and amortizations greater than 15 years (i.e. a typical 30 year fixed rate mortgage) your annual mortgage insurance will be .70% of your mortgage amount if you put down 5% or more. If you put down less than 5% then your annual mortgage insurance will be .75% of your mortgage amount. Previous to the 2023 changes the annual mortgage insurance would have been 1.00% and 1.05% respectively.
See below for a more in depth discussion of FHA Mortgage Insurance.
Other program highlights:
• Purchases OR Refinances are allowed.
• Ownership of other residential dwellings is allowed.
• Owner occupied 1-4 unit properties only.
• First Time home buyers are eligible.
• Manufactured homes built after June 15, 1976 are eligible.
• Non-Occupant Co-Borrowers are allowed.
FHA offers excellent interest rates, flexible underwriting guidelines and requires only a 3.5% down payment. Gift funds from relatives can be used to make 100% of the down payment and to cover all of your closing costs while Sellers can contribute up to 6% of the purchase price towards the Buyer's closing costs.
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THE "VA" PROGRAM:
Buyers who are in active service in the military, honorably discharged veterans, those who have served in the National Guard or Selective Service for more than 6 years or Buyers whose active duty spouse died in the line of duty can put as little as 0% down and take advantage of the VA program. Active service in the military is defined as:
NOTE:
There are no income limits with this program and you do not need to be a first time home buyer. In this program, lenders are insured against loss by the US Dept. of Veterans Affairs. In order to determine your eligibility and the amount of your VA entitlement you will need to obtain a Certificate of Eligibility (a "COE"). You can apply to get a COE online through your E-Benefits portal. We can also help you obtain your COE.
Veterans do need to provide a DD Form 214, and active duty servicemembers need a signed statement of service. A statement of service should include:
Mortgage Insurance with VA Loans: Unlike the FHA program the VA program only requires 1 type of mortgage insurance. This is called the VA Funding Fee. The VA funding Fee is paid in full at the closing and is most often financed by adding it to your loan amount. Payment of PMI each month is not required.
The VA Funding Fee: The amount of the VA funding fee depends on the size of your VA loan down payment, and whether it’s your first-time use of the benefit as follows:
Down pmt 1st-time use Later use
0% 2.30% 3.60%
5% – 10% 1.65% 1.65%
10% or more 1.40% 1.40%
So, if you put 0% down and borrow $400,000 the first time you use your VA entitlement your Funding Fee will be $9,200. ($400,000 X 2.30%) But if you put down 5% then your Funding Fee drops to $6,600. ($400,000 X 1.65%) Therefore, while a down payment isn’t required with a VA loan, it can save you money to make a down payment. As noted above, the VA Funding Fee can be financed as part of your loan amount.
Other program highlights:
• Purchases OR Refinances are allowed.
• Ownership of other residential dwellings is allowed.
• Funding Fee reduced to 0.50% on streamline refinances. (Not Cash Out)
• First Time home buyers are eligible.
• Cash Out Refinances are allowed
• Owner occupied 1-4 family homes are allowed.
VA offers excellent interest rates, flexible underwriting guidelines and does not require monthly PMI payments. Gift funds from relatives can be used to make 100% of the down payment and to cover all of your closing costs while Sellers have more flexibility to contribute or pay for the Buyer's closing costs and VA Funding Fee.
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THE "CONVENTIONAL FIXED" PROGRAM:
If your income is above the limits for your county and you want to put as little as 3% down, you can take advantage of the "Conventional Fixed" program which offers 8 year through 30 year fixed rate mortgages. A 3% down, 30 year fixed rate mortgage with no mortgage insurance is also available. For purchases, at least one borrower must be a First Time Home Buyer. Refinances are allowed. No minimum contribution from the borrower is required.
The minimum FICO score is 640. Other restrictions and highlights include:
• Purchases OR Refinances are allowed.
• The mortgage being refinanced must be owned by Fannie Mae.
• Owner occupied 1 unit dwellings only. 2-4 unit properties are not eligible.
• Manufactured homes are not eligible.
• Late Mortgage payments in your credit history may make you ineligible.
Mass Housing provides the 1st Time Homebuyer Program and the Workforce Advantage Program. The programs offer below market interest rates on 30 year fixed rate mortgages, Zero PMI, and Down Payment Assistance of up to $30,000 with 0% interest. The Mass Housing Program can be combined with other Down Payment Assistance or Grant Programs.
The Massachusetts Housing Partnership's One Mortgage Program offers below market interest rates on 30 year fixed mortgages and Zero PMI. A 3% down payment is required and 1.5% of the down payment must come from the borrower's own funds. Down Payment Assistance is also available.
The Equity Builder, Lift Up Homeownership, and Housing Our Workforce Programs offer unique paths to homeownership for a variety of prospective home buyers. Grants of up to $25,000 - $50,000 are available depending on which program(s) the homebuyer may qualify for.
The Chenoa Fund program provides the 3.5% down payment required for the FHA loan program. The Down Payment Assistance can be either a repayable 2nd mortgage or a forgivable 2nd mortgage. Gift Funds, Seller Credits, Grants, or other Down Payment Assistance can be used for closing costs.
While not technically a Down Payment Assistance program, The Neighborhood Assistance Corporation of America's program requires no down payment. However, Down Payment Assistance can still be used in conjunction with the NACA program. Volunteer work participating in 5 events a year plus a small annual membership fee of $36 is required.
In addition to the 5 major players covered here, prospective homebuyers may also be able to take advantage of Down Payment Assistance and Grant Programs offered by cities and towns. These are usually smaller Grants and Assistance but they can often be layered or stacked with other programs.
In order for a mortgage loan to be eligible for purchase by either Fannie Mae or Freddie Mac, the loan amount can not exceed the limit set by HUD. Provided the loan does not exceed that amount, lenders know they can sell it to Fannie Mae or Freddie Mac and therefore their risk is reduced. This results in a lower interest rate for borrowers who do not need to borrow more than the conforming loan limit in order to purchase or refinance their home. This limit is revised annually and is calculated based on the median home values of the county in which the property is located. Therefore, in order to qualify for the lower interest rates associated with Fannie/Freddie loans you can not borrow more than the maximum loan amount for the county in which your property is located. This amount is commonly referred to as the 'conventional' or 'conforming' loan limit.
The FHA Loan Program has similar limits applicable to its' program.
The 2025 loan limits for all of these programs broken down by county are shown in the chart below.
USDA offers an excellent mortgage program that is only offered on USDA eligible properties to borrowers whose income falls within certain limits. The program provides a 30 year fixed rate mortgage and 100% financing for one unit properties only. Borrowers will pay PMI although it is called an "annual guarantee fee". This monthly fee is calculated by multiplying the loan amount by 0.35% and then dividing that number by 12. Borrowers will also pay an "upfront guarantee fee" to USDA equal to 1.0% of the loan amount. (The upfront guarantee fee is a one time fee charged to the borrower by USDA that is paid in full at the closing and is usually financed as part of the mortgage loan amount.) Both of these fees were significantly reduced in 2016 making the USDA program a very viable option for borrowers who fall within the income limits and whose properties are eligible for USDA financing. Call us to find out more.
Note that the "annual guarantee fee" will be calculated based on the borrower(s) amortized principal schedule over the life of the loan. Therefore, as the borrower makes their monthly mortgage payments, the principal balance will go down according to schedule and therefore the annual fee will go down as well. It is important to remember that unlike PMI associated with conventional financing, the annual fee remains for the life of the loan and will not be cancelled once the borrower(s) reach 22% equity in their home (or upon the borrower's request when reaching 20% equity in their home.)
So Great! You studied. You graduated. You have a good job. The plan is working. Now, it's time to buy a house. How will your student loans affect your plans? Well ... it depends. There are 5 main (government backed) mortgage programs out there that all lenders use. Fannie Mae, Freddie Mac, The U.S. Dept. of Veterans Affairs (VA), the Federal Housing Administration (FHA), and the United States Dept. of Agriculture (USDA). All 5 treat your student loan debt a little different than the other.
In order to understand how these variations will impact your mortgage loan application it is important to understand what "Debt to Income Ratio" means and how it affects your eligibility. Let's take a look.
DEBT TO INCOME RATIO:
When determining a borrower's eligibility a mortgage lender is required to look at the following:
It is this last equation that is affected by your student loan debt. Ideally, you would like your Debt To Income Ratio to be in the 43% range. Some programs will allow a Debt To Income Ratio of up to 50% - but no more. Either way, your student loan debt will impact this ratio. Lenders will determine your debt to income ratio by looking at your revolving and installment debt on a monthly basis (i.e. credit card, car loans, and student loans but not monthly utility, phone, internet and cable bills) and dividing it by your monthly gross income.
Let's take a look at the following example of a borrower whose gross annual income is $84,000:
MONTHLY GROSS INCOME: $7,000
Monthly Credit Card Debt: $425
Monthly Car Loan Debt: $450
Principal and Interest Payment on the new Mortgage: $1,500
Property Taxes and Homeowner's Insurance on the new house: $575
TOTAL MONTHLY DEBT: $2,950
$2,950 Divided By $7,000 = 0.42%
This borrower is within the parameters necessary to qualify for their mortgage. But let's add their monthly $600 student loan payment to the equation:
$2,950 + $600 Divided By $7,000 = 0.51%
With a Debt To Income Ratio of 51 the borrower no longer qualifies for 4 of the 5 major (government backed) programs. This borrower MAY be able to qualify for a mortgage through the FHA program or via what is called a 'Non-QM' or 'Portfolio' mortgage loan. But ideally the borrower wants to be in one of the 5 main programs as that is where the best rate and terms are offered. Therefore, the calculation of their monthly student loan debt can be of paramount importance. So how does each program count student loan debt in your Debt To Income Ratio? First, let's take a look at student loans that are being repaid using an "IDR" Income Driven Repayment Plan.
THE INCOME DRIVEN REPAYMENT PLAN:
Today about 1/3 of student loan borrowers use an Income Driven Repayment Plan. The monthly payment for these plans is usually calculated at 10% of the borrower's income over and above 150% of the federal poverty level. If the borrower's income falls below this threshold then the monthly payment is $0. This payment is recalculated each year. When an Income Driven Repayment Plan is being used by the borrower the 5 main programs will treat the borrower's monthly student loan debt as follows:
How will lenders view your student loan debt if you are not using an Income Driven Repayment Plan?
Let's go down the list of programs starting with Freddie Mac:
FREDDIE MAC AND STUDENT LOANS:
Freddie Mac will allow lenders to exclude the monthly student loan payment from the debt to income ratio under the following circumstances:
The Mortgage application must contain documentation indicating that the Borrower is eligible or approved for the student loan forgiveness, cancellation, discharge or employment-contingent repayment program. Evidence of eligibility or approval must come from the student loan program or the employer, as applicable.
Otherwise, for student loans that are in a repayment plan, or are in deferment or forbearance Freddie Mac will apply the following calculations:
FANNIE MAE AND STUDENT LOANS:
Fannie Mae will allow lenders to exclude the monthly student loan payment from the debt to income ratio under the following circumstances:
For deferred loans or loans in forbearance, the lender may calculate:
FHA AND STUDENT LOANS:
FHA guidelines are more restrictive with student loan debt than either Fannie Mae or Freddie Mac. FHA will require borrowers to use the greater of the actual payment or 1% of the outstanding balance to calculate the payment no matter what type of payment plan, deferment or forbearance plan you are on unless your repayment plan is fully amortized. Therefore, if your monthly payment will pay off the student loan in full on a date certain and you can fully document it via the student loan payment agreement showing the monthly payment which matches the monthly payment shown on your credit report, then you can use that payment in the Debt To Income Calculation even if it is lower than 1% of the balance.
Let's take a look at some examples:
Total Balance on Credit Report: $50,000
Monthly Payment on Credit Report: $50.00
FHA Qualifying Monthly Payment: $500.00 (1% of Balance)
Total Balance on Credit Report: $50,000
Monthly Payment on Credit Report: $316.00
USDA AND STUDENT LOANS:
USDA is similar to FHA but more forgiving on the actual payment that must be used. USDA will require borrowers to use the greater of the actual payment or 0.5% of the outstanding balance to calculate the payment no matter what type of payment plan, deferment or forbearance plan you are on unless your repayment plan is fully amortized. Therefore, if you have a fixed rate and your monthly payment will pay off the student loan in full on a date certain and you can fully document it via the student loan payment agreement showing the monthly payment which matches the monthly payment shown on your credit report, then you can use that payment in the Debt To Income Calculation even if it is lower than 0.5% of the balance.
Let's take a look at some examples:
Total Balance on Credit Report: $50,000
Monthly Payment on Credit Report: $50.00
USDA Qualifying Monthly Payment: $250.00 (0.5% of Balance)
Total Balance on Credit Report: $50,000
Monthly Payment on Credit Report: $316.00
VA AND STUDENT LOANS:
The U.S. Dept. of Veterans Affairs is unique in the way it treats student loan debt for VA Mortgage Loans. For example, if you can provide written evidence that you do not need to start making payments on your student loan(s) for 12 months or more following the date of closing then your student loan payment is considered to be $0. Let's take a look at the VA rules for calculating student loan debt:
Let's take a look at some examples:
Monthly payments will begin 10 months after closing.
VA Qualifying Monthly Payment: $208.33 (5% of $50,000 Balance = $2,500/12 = $208.33 )
VA Qualifying Monthly Payment: $300 (5% of $50,000 Balance = $2,500/12 = $208.33
However, because the monthly payment shown on the credit report is higher then that
payment must be used.)
Qualifying Monthly Payment: $208.33 (5% of $50,000 Balance = $2,500/12 = $208.33 )
However, if the student loan servicer provides a statement dated within 60 days of the closing
date showing the actual loan terms and monthly payment of $125 then:
VA Qualifying Monthly Payment = $125.00
FHA requires borrowers to pay annual mortgage insurance that is paid to FHA on a monthly basis. This is similar to PMI on a conventional loan. The amount of the monthly payment is determined by multiplying the annual mortgage insurance premium by the loan amount and then dividing it by 12. In January, 2023 the annual mortgage insurance premium for mortgages greater than 15 years in length (i.e. 30 year fixed rate) was reduced to .50% for purchases with down payments of 5% or more. For purchases with down payments of less than 5% the annual mortgage insurance premium was reduced to .55%.
For mortgages up to 15 years in length the annual mortgage insurance premium was reduced to .40% for purchases with down payments of less than 10% and .15% for purchases with down payments of 10% or more.
For mortgage terms greater than 15 years with loan amounts exceeding $726,200 the annual mortgage insurance premium was also decreased as of January 26, 2023. Purchases with down payments of 5% or more saw the premium reduced from 1.00% to .70%. Purchases with down payments of less than 5% had their premiums decreased from 1.05% to .75%. For loan amounts exceeding $726,200 with mortgage terms of 15 years or less, mortgage insurance premiums were reduced to .15% with a down payment of 22% or more and .40% with a down payment of less than 10% - 21.99% and .65% with a down payment of less than 10%
These premium reductions are current as of January 1, 2025.
Like the USDA program, the FHA mortgage program also requires borrowers to pay an 'Up Front' Mortgage Insurance Premium. The Up Front Mortgage Insurance Premium is a one time premium that is paid in full at the closing and is usually financed by adding it to the mortgage loan amount. Effective April 9, 2012 this premium was set at 1.75% of the loan amount and will remain at that rate.
Another major change to the FHA annual mortgage premiums took place on June 3, 2013. This policy has not been revised. Therefore, applicants for an FHA loan who obtained their FHA case numbers on or after June 3, 2013 are no longer be able to cancel their annual FHA mortgage insurance premium unless they put down at least a deposit of 10% of the purchase price and borrowed only the remaining 90%. Most FHA applicants opt for an FHA loan because they are unable to put down as much as 10% when buying a home. Therefore, the majority of FHA loan applicants have been affected by this change.
The FHA premium revisions have been a welcome change. But home buyers should still do some comparison shopping between an FHA mortgage loan and a conventional mortgage loan. They will most often be better served by opting for a conventional loan product - if they can qualify. It is important to note that FHA still offers excellent interest rates, requires only a 3.5% down payment and maintains flexible underwriting standards. Therefore, FHA may still be the best deal for prospective homeowners who cannot come up with the 20% down payment that will allow them to avoid mortgage insurance altogether. However, if the prospective homeowner can qualify for conventional financing with private mortgage insurance (i.e. PMI) - a comparison with the monthly FHA mortgage payment is a must.
Remember, the downside to a conventional loan with PMI is that PMI qualification guidelines are often more stringent than FHA and more money down (5%-10%) can be required. But there is no Up Front Mortgage Insurance Premium. Therefore, the bottom line for conventional financing with monthly PMI may be more attractive to the homeowner who can opt for it.
Another piece of good news for FHA borrowers is that mortgage loan servicers can no longer charge borrowers interest for the entire month that the loan is paid off. For FHA loans that close on or after January 21, 2015, servicers of these new FHA loans will have to follow the same rule as loan servicers of conventional loan programs. This will require that the amount of interest charged to borrowers be calculated to the day payment in full is received and no more. Note that this new rule applies only to loans that actually closed on or after January 21, 2015. It does not apply to FHA loans that are merely being paid off on or after January 21, 2015.
In order to be eligible for conventional financing through Fannie Mae or Freddie Mac lenders, condomimiums with 2-4 units will need to meet the following requirements:
Remember, 2-4 unit condominiums are now eligible for FHA financing. The condominium will need to be approved by FHA. FHA Condominium approval applications can be submitted by FHA approved lenders, the Condominium Association, or by an attorney on behalf of the Condominium Association.
Homeowners in Massachusetts are now entitled to homestead protection on their primary residence without having to file a Declaration of Homestead at the Registry of Deeds. However, the protection will be limited to $125,000. For homeowners who do file a Declaration of Homestead the protection has been increased to $500,000. If you already have a Declaration of Homestead filed at the appropriate Registry of Deeds for your primary residence you will not have to file another one in order to receive the increased protection. You are entitled to the $500,000 protection automatically.
Additonal changes to the Homestead Law include:
- New Declarations of Homestead will not have to be drafted and refiled every time you
refinance. Your homestead will remain in effect and is automatically subordinated to the new mortgage.
- Homesteads can be filed on homes held in Trust.
- Homesteads can be filed on 1-4 family residences.
- Homeowners over the age of 62 and the legally disabled can now file their own
Declaration of Homestead individually so that the aggregate protection increases to
$1 million.
- The Homestead protection now extends to certain pre-existing debts. (A homestead
will not protect you against debt for which a lien was filed against your home prior to
your recording of the Declaration of Homestead.)
- The Homestead protection will now automatically cover a new spouse where the
unmarried homeowner had previously filed a Declaration of Homestead and then gets
married.
Consult with your attorney for further details.
All condominiums should have a capital reserve account which acts as a sort of emergency fund for major common area expenses and repairs to structural items such as roofs, air conditioning and heating systems. If the Buyers of your condominium unit are putting down less than 10% - 20% of the purchase price (like most buyers) it is now likely that the lender will scrutinize the
condominium's annual operating budget to be sure the association has set aside 10% of that budget into the capital reserve account. Thus, if the annual operating budget is $250,000 then the annual operating budget should show $25,000 going into the capital reserve account.
Other Budget Items The Lender Will Look For:
• The budget must be consistent with the nature of the Condominium project.
• The budget must provide adequate funding for insurance deductible amounts.
• The Condominium must have $1 million in business liability coverage with the
Condominium Association named as the insured.
• Fidelity Coverage: Condominiums with more than 20 units must have Fidelity insurance
coverage equal to at least 3 months of Condominium Association income. The
Condominium Association must be named as the insured.
• Hazard Coverage: Generally, the master policy must cover all perils by a standard
extension coverage endorsement. The coverage must be for 100% replacment cost of
the condominium improvements.
Because of the increases to FHA's annual and up front mortgage insurance premiums, many home owners who purchased their homes with FHA financing have been unable to take advantage of the low interest rates available today. This is because a borrower attempting to refinance an FHA mortgage dated before the premium increases took effect would find themselves with a lower interest rate on their new mortgage but a much higher monthly mortgage insurance premium than the one they had on the FHA mortgage they just refinanced - thereby cancelling out any benefit obtained with the lower interest rate. As of April 9, 2012, this borrower would also have to pay an up front premium of 1.75% to FHA. Although the premium can be financed as part of the new mortgage, the borrower would still be adding $4,812.50 to their mortgage balance on a $275,000 loan amount. ($275,000 X 1.75% = $4,812.50)
Beginning June 11, 2012 homeowners with FHA mortgages 'endorsed' by FHA on or before May 31, 2009 will only be required to pay an annual mortgage insurance premium of .55% and an up front mortgage insurance premium of 0.01% (i.e. $27.50 as opposed to $4,812.50 for a $275,000 loan amount.) These are very significant savings and will give many homeowners with existing FHA mortgages the opportunity to refinance and finally access historic low interest rates.
The reverse mortgage program was supposed to be a long term financial planning tool that allowed seniors to stay in their home and live comfortably by tapping into the surplus of equity in their home. However, in recent years more and more seniors have been opting to take all the cash equity
available to them under the fixed rate reverse mortgage program via one nice, big check handed to them at the closing table. Unfortunately, it seems all of this cash in the hands of the senior borrower has led to some unsound (if not unscrupulous) financial planning. This has resulted in cash strapped senior homeowners who suddenly find themselves with no equity left in their home and therefore no money to pay things like property taxes, homeowners insurance and flood insurance.
Consumer advocates have been sounding the warning bells on 100% cash payouts to seniors for years. Nobody listened. Defaults and numerous payouts from HUD's mortgage insurance fund have changed that.
Therefore, the following changes are now in effect:
• The amount available as a lump sum or cash draw over the first 12 months is reduced to 60% of the Principal Limit available to the borrower. This limit can be increased if needed to pay off the existing mortgage, to pay closing costs, and to pay off 'mandatory obligations' such as liens on the property. An additional 10% can also be made available as a cash disbursement to the borrower.
• The unused portion of the reverse mortgage credit line does continue to increase each month based on the Note rate but the increased amount is not available to the borrower until after the first 12 months.
Beginning October 2, 2017 the following changes took effect:
• The Up Front Mortgage Insurance Premiums due at closing increased from 0.50% to 2.00% of the Maximum Claim Amount ($765,600 until December 31,2020) or the appraised value of their home - whichever is less. NOTE: This Premium is now fixed and will no longer will go up to 2.5% for seniors who opt to go over the 60% Principal Limit.
• The Annual Mortgage Insurance Premium has been reduced from 1.25% to 0.50% of the loan balance.
Beginning March 2, 2015 the following changes took effect:
• All lenders must complete a "financial assessment" of reverse mortgage applicants. The financial assessment is not used to determine a minimum credit score or minimum debt to income ratio as in a traditional forward Mortgage. However, it's purpose is to stem the tide of increasing reverse mortgage defaults. Therefore, the lender must assess if the reverse mortgage applicant has the capacity to meet their reverse mortgage obligations (i.e. paying their property taxes and insurance premiums.) and is also able to meet their living expenses such as other debt, utility bills and maintenance expenses. (Ability to pay utility and maintenance expenses is factored in based on a monthly cost of 14 cents/month per square foot of living space.) As a result, credit reports will be pulled and examined for derogatory histories that may indicate an incapacity on the part of the applicant to meet their reverse mortgage obligations. Lenders will also be looking for any delinquent federal debt. Delinquent federal debt will not, in and of itself, disqualify the applicant but it must be paid off at the closing.
• The financial assessment will also look at the applicants income and include the positive impact reverse mortgage proceeds will have on the applicant's ability to meet their reverse mortgage obligations and other living expenses. This is mandated by HUD which states: "The extent to which the HECM may resolve financial difficulties must be taken into account during the financial assessment."
• Based on the financial assessment the lender may determine that an amount sufficient to pay property taxes and insurance will be set aside each month just like in a traditional forward mortgage. The applicant can also opt for this voluntarily.
• After the financial assessment the lender may also require a "Lifetime Expectancy Set Aside" for payment of property taxes and homeowner's insurance. This can greatly reduce or even eliminate funds available to the senior.
• Beginning January 1, 2020 the lending limit for HECM reverse mortgages has been increased to $765,600.
After the recent amendments passed by Congress many homeowners will be able to weather the storm known as the Biggert-Waters Act which 'inadvertently' caused their Flood Insurance premiums to increase by as much as tenfold almost overnight. Now, a hopefully much milder storm may be on the horizon.
The updated Federal Emergency Management Agency (FEMA) Flood Insurance Rate Maps (FIRM) which identify areas likely to be inundated by a '100 year flood' are being issued for Massachusetts counties. These maps will place some homeowners in a Special Flood Hazard Area (SFHA) for the first time and will place others already in a SFHA into a higher risk SFHA. A Special Flood Hazard Area is also known as the '100 year Flood Plain' and is designated on the FIRM as an "A" or a "V" zone. On their FAQ Page FEMA defines this as the area "associated with a flood that has a 1-percent-annual chance of being equaled or exceeded in any given year. Therefore, the SFHA is not a flood event that happens once in a hundred years, rather it is a flood event that has a one percent chance of occurring every year." Most Federal and State agencies and the National Flood Insurance Program now use the term, "1-percent-annual-chance flood" to describe the 100 year flood plain.
LOOK AT THE MAP BEFORE BUYING OR SELLING:
With FEMA's issuance of the new FIRMs, homeowners whose properties have been newly designated as being located in a SFHA may receive a notice from their mortgage lender that they are now required to purchase flood insurance. Although there are limits on how much flood insurance homeowners are required to purchase, it can still be quite expensive.
Homeowners who receive these notices should be aware that FEMA is not the entity requiring them to purchase flood insurance. FEMA merely identifies higher risk areas on the FIRM and gives them the SFHA designation. When a property has been newly designated on the FIRM as being located in a SFHA, it is the bank/mortgage lender who can, and often must, require the homeowner to purchase a flood insurance policy to protect the security of their mortgage loan. (The federal agency backing the mortgage loan such as Fannie Mae, Freddie Mac or FHA require a flood insurance policy for all properties located in a SFHA.) Therefore, Sellers, Buyers and Realtors should confirm if the new FIRM affecting the subject property has been issued and if so, whether the property has been designated to be in a SFHA.
YOU CAN DISPUTE THE FLOOD DESIGNATION:Homeowners who want to dispute their property's SFHA designation on the new FIRM have several options:
1.) Letter of Determination Review (LODR): Within 45 days of notice from your lender that your property is in a SFHA you and your lender can jointly request that FEMA review the SFHA determination. Here, FEMA is not considering the elevation of your home. It is only considering the location of your home relative to the SFHA boundaries shown on the FIRM. Therefore, FEMA will be looking at the same information your lender used to determine that your home is located in a SFHA. For a fee ($80 as of December 2014) FEMA will review this information and issue an LODR.
2.) Letter of Map Amendment (LOMA): FEMA will consider elevation data for your property under this option which is "typically the elevation of the lowest adjacent grade of the structure in question". Adjacent grade is defined as the elevation of the ground, sidewalk, patio slab, or deck support immediately next to the building. FEMA will look at the difference between the elevation of the Lowest Adjacent Grade of a structure and the elevation of the 1-percent-annual-chance flood. This latter elevation is referred to as the Base Flood Elevation (BFE) (i.e. the elevation to which floodwater is anticipated to rise during the flood). Therefore, the lowest ground, sidewalk, patio slab, or deck support touching the structure must be higher or equal to the BFE. If you can show that your home's lowest adjacent grade is at or above the BFE then you may have the SFHA designation removed. In order to confirm your home's lowest adjacent grade, an Elevation Certificate will need to be provided. If one does not exist, the homeowner will have to hire a Licensed Land Surveyor to provide the Elevation Certificate. The cost for the certificate can range from $500 to $1,500 or more. (NOTE: A prior owner may already have a certificate or one may be on record in the town's building dept.) Once a completed application and necessary data is received by FEMA it will usually take 30 - 60 days to issue a determination. If successful, FEMA will issue a letter stating that the FIRM will be amended to remove the SFHA designation from the property. There is no fee charged by FEMA for a LOMA.
NOTE: When determining your flood insurance premium rates your agent will look at the difference between the elevation of the lowest floor (including the basement) of a structure and the elevation of the 1-percent-annual-chance flood or BFE.
3.) Letter of Map Revision Based on Fill (LOMR-F): In order to receive a LOMR-F the homeowner must satisfy 2 requirements:
a.) Your home has been elevated by the placement of fill or was built on fill which places the lowest adjacent grade of your home at or above the BFE. "Fill is defined as material from any source placed to raise the ground to or above the BFE. The common construction practice of removing unsuitable existing material (topsoil) and back-filling with select structural material is not considered the placement of fill if the practice does not alter the existing (natural grade or ground) elevation, which is at or above the BFE. Fill that is placed before the date of the first NFIP map showing the area in an SFHA is considered natural grade." Again, an Elevation Certificate will be necessary to satisfy this requirement. If you want to remove your entire lot from the SFHA then you will also need to show that the lowest point on the lot is at or above the BFE.
b.) The participating community must also determine that the land and any existing or proposed structures to be removed from the SFHA are "reasonably safe from flooding." If the community determines that your property is not reasonably safe from flooding then it will require you to take actions to mitigate the potential for flood damage. FEMA describes 'reasonably safe' as meaning 'base flood waters will not inundate the land or damage structures to be removed from the SFHA and that any subsurface waters related to the base flood will not damage existing or proposed buildings.' This may require certification from a professional engineer, professional geologist, professional soil scientist, or other design professional qualified to make such evaluations. Check with your local building department or community official to determine what they will need from you in order to satisfy this requirement.
NOTE: The NFIP prohibits the use of structural fill for support of buildings constructed in SFHA's designated Zone V, VE, or V1-V30 on the FIRM. Buildings constructed in a V zone must be constructed on an open foundation consisting of piles, piers, or posts and must be elevated so that the bottom of the lowest horizontal structural member is at or above the BFE.
WHAT OPTIONS ARE AVAILABLE IF YOU CANNOT DISPUTE THE FLOOD DESIGNATION?
THE HOMEOWNERS FLOOD INSURANCE AFFORDABILITY ACT
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With the enactment of the Homeowners Flood Insurance Affordability Act (HFIAA) in March of 2014 homeowners who are unable to have their property removed from a SFHA have retained several options:
1.) Preferred Risk Policy (PRP): If you are currently not in a SFHA and the new FIRM has not been issued or gone into effect for your area but you think you will be in a SFHA when the FIRM is issued then you may want to consider obtaining a Preferred Risk PolicyBEFORE the FIRM is issued or becomes effective. This policy offers fixed combinations of building/contents coverage or contents-only coverage at modest, fixed premiums. The PRP is available for properties located in B, C, and X zones in Regular Program communities that meet eligibility requirements based on the property's flood loss history - which allow only 1 claim or disaster relief payment of $1,000 or more or 2 losses of any amount. But if you do qualify and have a PRP in place when the new FIRM comes out designating your property to be in a SFHA, the HFIAA allows you to qualify for a "Preferred Risk Premium" when your PRP comes up for renewal. This will give you another year of PRP based rates. In the following year you could seek to have your policy rating grandfathered based on your property's designation that was in effect when you obtained your PRP. (i.e. before the new FIRM was issued) If you do not qualify for the PRP then you should obtain a flood policy at standard rates BEFORE the FIRM is issued or becomes effective so that you may still take advantage of the grandfathering provisions.
2.) Preferred Risk Policy Extension (PRP Extension): If you find yourself in a SFHA for the first time and you do not have a PRP in place HFIAA provides that policies effective on or after April 1, 2015 will be eligible for the "Preferred Risk Premium" during the first year after which you will be subject to premium increases of no more than 18% a year. (25% for certain high risk properties)
3.) Grandfathering: With the passage of HFIAA a homeowner can once again seek to have their policy premiums 'grandfathered' and seek the lower cost flood insurance ratings pursuant to NFIP Guidelines. These ratings are available to homeowners who have their flood policies in effect when the new flood maps become effective and then maintain continuous coverage OR Have "built in compliance with the FIRM in effect at the time of construction." FEMA defines Grandfathering as an "exemption based on circumstances previously existing. Under the NFIP, buildings located in Emergency Program communities and Pre-Flood Insurance Rate Map buildings in the Regular Program are eligible for subsidized flood insurance rates. Post-Flood Insurance Rate Map buildings in the Regular Program built in compliance with the floodplain management regulations in effect at the start of constructionwill continue to have favorable rate treatment even though higher base flood elevations or more restrictive, greater risk zone designations result from Flood Insurance Rate Map revisions."
Note that homes built on or before December 31, 1974 or the issuance of the first FIRM affecting the property ("Pre-FIRM Buildings") are grandfathered in that they are subject only to the BFE standards then in effect when determining their insurance premium ratesand therefore an Elevation Certificate will not be necessary. However, an Elevation Certificate can be used for "Pre-FIRM" homes in order to show that the home is at or above current BFE standards and thereby qualify for "Post-FIRM" rates which are often more favorable than "Pre-FIRM" rates.
The NFIP's Grandfathering Fact Sheet states: "When a map change is approaching, it is important to remember that most Pre-FIRM structures have only one opportunity to lock in the current flood zone for future rating¹ - before the new FIRMs take effect. The policy must then be renewed each year. The benefits of the grandfathered zone can be transferred to the new owner if the building is sold. Post-FIRM buildings have two chances to lock in the BFE and/or flood zone¹— before the maps become effective or after the effective date, but with the proper documentation. Continuous coverage is not required. If, however, a building is substantially damaged or improved, grandfathering of previous zones or BFE's can no longer be applied."
Substantial Improvement is defined as "any reconstruction, rehabilitation, addition, or other improvement of a structure, the cost of which equals or exceeds 50% of the market value of the structure before the start of construction of the improvement. This term includes structures which have incurred Substantial Damage, regardless of the actual repair work performed."
1 For buildings newly mapped into an SFHA and qualifying for PRPs, the building should be rated using the PRP EligibilityExtension option.
Remember, if you are in a moderate-low risk zone - flood insurance is not required. (These zones are designated as "B", "C" or "X" zones.) Nonetheless, Flood Insurance can still protect you from hazards which are otherwise excluded in the standard homeowner's insurance policy such as damage caused by a natural flood or a flood caused by a broken water main. And because you are in a moderate-low risk zone, the flood insurance will be quite reasonable.
April 2015 Program Change Fact Sheet
Search FEMA Flood Map