I know shopping for a home today is hard work and very frustrating at times. Inventory is low, and demand is high – It may take many offers, and a few tension-filled bidding sessions, before you land that home. Buyers can quickly get discouraged and say, “I am tired of this. I am just going sign a new rental lease instead and try this again in 6 months to a year”.
Here’s the thing: you can take some time off, but the market isn’t taking time off, even with COVID. For example, in Sacramento County, the forecasted appreciation is 4.22% in just the next six months; let’s quantify that. A home worth $442,000 today would be worth $18,637 more in 6 months. Being careful with this prediction, even if we cut this estimate of appreciation in half to 2.4%, waiting would require you to get a bigger loan, and pay more every month, or put more money down.
I think the effects of COVID will continue to ripple through our economy in ways we can’t even imagine. If home prices do dip temporarily, the economic value to a person of owning their own home, and taking advantage of today’s super-low 30-year fixed rates, will put them in a much healthier long term financial position than choosing to rent for the next several years. The key is for people to buy homes that they enjoy living in, with a long term outlook. A short term paper loss is nothing compared to the long term economic benefits a homeowner would receive.
And what about interest rates? Should you wait until rates go down further? No, the monthly savings with a lower rate are nice but small compared to the missed appreciation and amortization. It could take longer for the incremental savings of a lower rate in the future to make up for the money lost by waiting. Should rates drop significantly, you can always refinance in the future. Stick with it, keep shopping, and you will find something!
And remember, there’s no guarantee that rates head even lower. It’s essential to weigh the individual options for you, and I’m here to help you do that.
It’s been almost three months since Governor Newsom’s order that all Californian’s shelter-in-place. It sure feels like more. I feel such empathy for those that live alone, are single parents or have lost their job, It’s simply awful. I am thankful every single day I get up and get ready for work.
Covid-19 has re-ordered virtually every industry in the world to figure out how to adapt,. Not only adapt, but improvise, and overcome this virus or otherwise fail. In California, mortgage lending and real estate are still thriving; all be it, with a whole new subset of issues to we have never faced before. Below are just a few tricks that might help you during your next purchase:
Did you know that in some cases, your lender will not require you to get an appraisal when buying a home? We have been doing this for years. Now, with Covid-19, and given the fact, sellers don’t want a stranger in their home, the appraisers can be just as uncomfortable entering a home. It’s lovely to know you have this option if you work with the right lender.
Fannie Mae and Freddie Mac traditionally offer an appraisal waiver for low loan-to-value refinance or if you put down at least 20% on a purchase. Also, in conjunction with new Fannie and Freddie Covid-19 updates, our underwriters are permitting exterior only appraisals under certain circumstances.
However, you may still want to get an appraisal done (~$525) to ensure you are not paying too much for the home. But if you and your agent have taken the time to look at comparables and feel the value is there, not needing an appraisal can not only save you money by not having to pay for the report, it can also help in other ways.
For example, I had a client facing multiple offers, and the only reason their offer was accepted is that they came in at asking price AND agreed to remove the appraisal contingency. Meaning, if for some reason, the appraisal came in lower, they would have to come out of pocket to make up the difference. These buyers didn’t have much in reserves after the down payment and closing costs, and what they did have left was their cushion for any future emergencies. With this appraisal waiver in place, they would not pay one extra dollar out of pocket – And not needing an appraisal was just what they needed – peace of mind.
CAN’T GET A JUMBO LOAN?
Jumbo loans have been walloped during this pandemic as mortgage servicers tighten their lending criteria. Many lenders have stopped issuing them altogether. Jumbos are loans that exceed the maximum you can borrow with a Fannie, Freddie, or FHA conforming loan. For example, let’s assume you are buying a home in Sacramento County, where the max Fannie/Freddie loan amount is $569,250. Thus, if your loan amount is higher – you fall in the Jumbo loan category.
Since Fannie and Freddie do not back jumbo loans, they are considered riskier and require higher credit scores, lower debt-to-income ratios, and may require a few months of cash reserves or even up to a year or more worth of mortgage payments. A little trick is to use a piggyback second mortgage to avoid taking out a Jumbo loan. Jumbo rates can be higher than those on conforming loans, so borrowers buying a high-value home may take out a conforming mortgage, then cover the rest with a piggyback loan and down payment.
Let’s assume you found your dream home for $850,000 in the perfect neighborhood. Now, throw in you were just told by your Jumbo lender that the loan for $680,000 you were qualified for, no longer exists. When the reserves required become higher, your rate just went up too. You could instead go with a conforming loan of $569,250 plus a piggyback loan of $110,750 and save the day.
Every day this pandemic throws new challenges our way. Because of that, we continue to adapt and improvise and overcome. This is why it is essential to work with people you trust. Lenders that have decades of experience will guide you through the steps of home-ownership and finance. Be safe, everyone.
“In this COVID-19 world, what questions should I ask the buyer’s lender before accepting an offer on my listings?”
When was the last time credit was pulled? Ideally the last week or so.
If an FHA/VA offer, can you fund with their FICO today? Many lenders have changed the minimum FICO requirements. If the buyer’s credit was pulled prior to that change, do they still qualify?
Are you able to lock loans prior to final approval or appraisal? You want a “yes” – if rates go up after application, it could hurt their pre-approval or scare the buyer away from an increased payment. Many lenders are not allowing this. If that’s the case, can they withstand, and are they prepared for a rate increase?
What happens if the loan program is suspended during the loan process? Once you are locked you are “mostly” safe from program changes or program suspensions.
Could you force a lock date, per the contract, to protect your seller from suspended or canceled loan programs? Write it into additional provisions. Some lenders are not allowing loan to be locked until loan is approved and, in some cases, once all prior to doc conditions are met. Guild can lock day 1
Have you verified the Borrower’s full-time employment within the last 24 hours? Employment is tenuous today. It can change at any moment.
What are your current underwriting turn times? It longer than 3-4 days, a 30-day, or less, COE will be challenging.
Will you be requiring employment verification at the Funding/Closing Table? If they want verification done on or the day before the closing date, it could be a challenge to close on-time if the employer is not responsive or available.
What is your company’s policy on appraisals currently? Do they allow drive-by or desk reviews?
What are your appraisal turn times? If longer than 10 days, a 30-day close will be challenging.
Can the lender honestly close in 30 days? What % of the time do they experience that today?
Does the buyer currently own a home and if so, have they requested payment forbearance? If any mortgage loan is currently in forbearance, the buyer cannot likely get a new loan.
Is the lender allowing e-closings? If not, how long is the current process from CD to funding?
Does the lender allow for early closing if everything is done?
If you have questions on any of these, please do not hesitate to ask.
As a mortgage professional for almost two decades, I have been through many wild rides, but nothing compares to what we are experiencing right now with this coronavirus; or what I am calling our alternative universe. Just over a week ago, the fear of COVID-19 sent stocks tumbling, and mortgage rates lower – according to Mortgage News Daily, the average rate for the popular 30-year fixed mortgage fell to 3.23%, an 8-year low.
Rates had been dropping for weeks as “breaking news” seemed to ping our phones by the minute, and fear began to manifest in real-time, as we watched the stock market cradle. In times of economic uncertainty, mortgage rates are typically the beneficiary of bad news, and rates go down as dollars move from the risky stock market and into the “usually” safe haven of mortgage-backed securities (aka mortgage debt) – and rates go lower.
As news of the virus drove interest rates down, homeowners rushed to apply for mortgages not seen in over a decade. According to the Mortgage Bankers Association, during the first week of March, refinancing applications reached their highest levels in over 11 years and jumped 79% week over week. We all went from being plain old busy to our hair catching on fire. That’s when the damn broke, almost at once, as Banks quickly began to increase rates to stem the demand. More factors contributed to mortgage rates spiking, and I will cover those in future blogs — no need to get too far in the weeds here.
In what seemed like a matter of hours, those attractive low-interest rates vanished in a poof of air, and rates shot up – and fast! According to Mortgage News Daily, that average rate is now over 4%, and we don’t know how high it may go.
The Fed Didn’t Drop Rates?
Most had not heard the news that rates had jumped when the Fed made a dramatic announcement that they were going to lower the Fed funds rate to almost zero. Within minutes my cell phone exploded with calls and text messages from clients “Dan, did you hear the news? The Fed is lowering rates to zero, and I want it!“ Unfortunately, I had to tell them it doesn’t work that way.
The Fed Funds Rate is the overnight rate at which banks borrow money from each other; it is not, however, the mortgage rate. Mortgage rates are influenced by the U.S. and global economies and the demand (or lack thereof) of mortgage-backed securities (MBS) that are bought and sold on Wall Street. In short, MBS represents the prices investors are willing to pay for these low risk, low rate, fixed investments. More demand drives interest rates lower, and less demand drives them higher.
So to be clear, the Fed can’t just announce they are lowering mortgage rates by dropping the federal funds rate. But, by making these incremental moves, they can help influence mortgage rates to drop – or in this case not to go too much higher!
What is Quantitative Easing, and why do we want it?
Now that we all know Fed rate cuts don’t always lead to lower rates, there are a few other tricks the Fed has up her sleeve to help us. One method that paid huge dividends during the crash of 2008 is Quantitative Easing (QE), which is “the introduction of new money into the money supply by a central bank.
In laymen’s terms, if the guys on Wall Street and investors won’t purchase Mortgage bonds or treasuries, the government can step in and fill that void. Thus, keeping the demand for MBS going, which in turn keeps mortgage rates low. And if rates stay low, it will promote consumer spending (and borrowing) and keep our economy humming. The Fed’s goal to push rates down using QE may work again, as it did when they purchased billions in bonds and securities over many years following The Great Recession.
What is happening today reminds me of just how fragile and reversible progress can be. And unfortunately, as a society, we sometimes have this terrible habit of repeating mistakes we made years ago. This is why it is so essential to work with people you trust and who have the experience to guide you through the steps of homeownership and finance. I am hopeful this move by the Fed will pay dividends, just as it did before, and we can all continue to realize the dream of homeownership. Be safe, everyone.
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.