New Tax on Mortgage Refinances

I’ve got some good news, and I’ve got some bad news. Here’s the bad news first.

Last week, the Federal Housing Finance Agency (FHFA) announced a surprise fee on all new refinance transactions sold to Fannie Mae and Freddie Mac, making up approximately two-thirds of all loans. The cost was assessed regardless of the bank or mortgage company you choose to work with and will increase the interest rate that you had been expecting and had been available.  

This sudden move came as a surprise both in the imposition of the fee and in making the fee effective almost immediately. Historically, they allowed 60-90 days before the new pricing went into effect, to enable lenders reasonable time to close their rate lock pipelines.

Why are they introducing a new fee?

Two reasons. First, both Fannie and Freddie are concerned about the uncertainty surrounding future mortgage defaults and the increased costs they incur. Secondly, they are worried about how quickly their current mortgages are prepaying due to the unprecedented wave of refinances. When a loan refinances, the prior loan comes out of the security, which creates losses to the investor who owns that mortgage, so by raising the cost to refinance will slow down how past loans are paying off.

Although Fannie nor Freddie outwardly stated this, many in the industry think that a third reason drove this announcement. The “refinance tax” will allow both enterprises to build up a capital base for their future release from conservatorship and back to becoming private entities – This is pure capitalism ladies and gentleman. 

 What is the impact to borrowers?

  1. Across the country, lenders are adding these new refinance fees into rate sheets effective immediately for all conventional conforming refinances.
  2. These fees are on top of all other fees already charged by Fannie and Freddie.

What happens next?

The mortgage industry is united in its disappointment with the announcements, specifically with the break from all past precedent of providing a reasonable advance notice of the effective date. The probability of FHFA, Fannie Mae or Freddie Mac revising their announcements with a different effective date is probably low.  

Now for some good news… 

Interest Rates are still at extraordinarily low levels, and refinancing may be a smart financial move, which can save you money every month or reduce the number of years remaining on your mortgage. You may also be able to consolidate your debts to save even more money.

DOES LEASING A CAR AFFECT A BUYER’S ABILITY TO BUY A HOME?

As a mortgage professional for almost 20 years, I know just about every gotcha that can cause an underwriter to deny your loan. We look at monthly minimum obligations you pay on your debts. We take those minimum payments, including your proposed total mortgage payment (principal, interest, taxes, insurance, and private mortgage insurance), and then divide this by your gross income. This debt-to-income ratio is the barometer we use to determine your ability to repay the mortgage.

My wife, a college professor, texted me:

“My friend, who is a business/finance professor and contract attorney is insisting that leasing a car will not affect buying a home because it’s not debt… He says he also teaches Mortgage people this stuff.”

WIFE: “Can I tell him he’s wrong?”

ME: “Yes, he’s wrong. It’s debt!” 

WIFE: “LOL, I knew it! He is generally full of crap, but when he said that’s what he teaches in his classes, it made me pause.”

Imagine you have a $375/month car payment, which is nearly equivalent to $75,000 in spending power when buying a home. Or imagine you are a 2-car family spending $750/month on car loans. This reduces your buying power by $150,000. So instead of affording that charming $500,000 home, you have had your eye on, your max is only $350,000. As my clients know too well, this could hinder getting into that perfect neighborhood with the right schools and the short commute you so desperately want.

And here is the rub – a leased vehicle is even worse. Are you listening, Mr. Professor? Most of us know that when your lease period expires; you either lease again, or keep the leased vehicle with a large buyout (this could be money you need for your down payment or closing costs for a new home). Whereas with a conventional car loan, when you make your last scheduled payment, you own the car free and clear (aka no debt).

Also, in some circumstances, if you are a few months shy of paying off your auto loan, an underwriter will not hit you with the monthly auto debt and will not hold it against your ratios. You can see why the hair on the back of my neck jump to attention hearing this professor tell his many students that a car lease is not debt and will not affect their ability to buy a home. Rubbish!

This one financial decision can be the reason you miss that opportunity to get into your dream home. When something sounds too good to be true, it genuinely is too good to be true. My best advice is to sit down with a trusted mortgage professional before paying off any debt, or restructuring those credit card balances, and work through your debt-to-income ratios with someone who does this every day.

3 ‘Must Know’ Pieces of Advice for First-time Home Buyers

3 'Must Know' Pieces of Advice for First-time Home BuyersWhen delving into the realities of homeownership in Sacramento, there can be many factors involved that make it difficult to determine what you need to know and what can wait until later. If you happen to be a first-time buyer who’s looking for the best tips for purchasing a home, look no further than the following three-pointers to set you on the right path.

Get Familiar With Your Credit Score

If you haven’t looked at your credit report for a long time, it can be a daunting task to request this information. Fortunately, your credit report is free from AnnualCreditReport.com and it will prepare you for what lenders are going to see. By taking this important step, you will be able to determine any delinquent accounts or balances owing that have gone to collections, and hopefully have these cleaned up before they can become a problem for your mortgage.

Determine The Price You Can Pay

While you may have a price in mind for what you’re willing to pay for a home, it’s important to determine your debt-to-income ratio before putting in an offer. Your DTI ratio can be determined by taking your total monthly costs, adding it to what you would be paying for a home and dividing it by your monthly gross income.

Organize Your Housing History

If you have a good history as a tenant, the next step will probably be the easiest of all, but it’s very important in order to prove you’re a responsible candidate for homeownership. Once you’ve acquired a Verification of Rent from any applicable landlord in the previous year, you’ll want to ensure that you have money in the bank. But don’t assume you need 20% down to get into your first home. Unfortunately, many first time homebuyers think they need this large down payment to qualify and that is just not true.

There are a lot of things to know when it comes to buying a home, but if you’re a first-time buyer the most important thing is to ensure that your finances are organized and that you’re not diving into more house than you can afford. By taking the time to determine your debt-to-income ratio and looking into your credit, you can ensure a positive first-time buying experience. If you’re wondering about homes for sale in your area, you may want to contact your trusted real estate professionals for more information.

3 Reasons To Attend Your Own Home Inspection

Be present for your home inspectionAs a home buyer in Sacramento, you can get a feel for whether a home’s systems and appliances are in working order. However, you won’t know for certain until after the home’s been inspected.

This is why real estate agents recommend that buyers hire a licensed home inspectors immediately after going into contract. It’s the best way to really know the home which you’re buying.  Continue reading “3 Reasons To Attend Your Own Home Inspection”

What Do I Do? The Home Didn’t Appraise At Its Purchase Price

We are experiencing somewhat of a seller’s market in Sacramento, and a changing climate, as value’s are starting to rise across the country. With this added demand, comes multiple offers which can drive up the purchase price of a home – sometimes artificially. We know that too many buyers are chasing too few sellers, and reaching a sales agreement can be just the start of the negotiation process. One particular negotiation point which can present difficulties for both buyers and sellers is when a home’s appraised value falls short of its contracted sales price.

Home appraisal remedies for home sellersSometimes, this happens because the home’s price was inflated. Other times, it’s the result of a faulty appraisal. Or, everyone knows the home won’t appraise, but the market is heating up and the seller feels they deserve what “the market will bear”, and don’t care what the appraisal says. Continue reading “What Do I Do? The Home Didn’t Appraise At Its Purchase Price”