Question of the week: Can we really afford this?
Answer: With a growing purchase market we have more first time buyers we need to walk through the qualification and buying process—something I enjoy as much or more than any part of our business. The question of the week is not uncommon for many first time buyers used to paying rent, and not having a tax deduction for home owernship.
When answering this question I have a statement I use, and I have written about it before in the Weekly Rate & Market Update. I say, these numbers are based on my almost thirty years’ experience in the industry. That said keep in mind these three things: 1) I’m never going to live in the home you buy 2) I’m not using any of my savings for your down payment and 3) I’m not going to make any of your payments.
Essentially, while I think you can afford the monthly payment for your new home at the price and loan amount we are discussing, what matters is that you feel confident you can afford the payment we are discussing. Analyze the payment, the net savings from homeownership that should lead to increased take home pay, your current spending habits and what you conservatively project your future income and expenses to be.
When pre-qualifying buyers my first run through the numbers is usually below the industry accepted guidelines. With Fannie or Freddie we can sometimes approach a 50% total debt-to-income ratio depending on several factors (50% of your total gross income is used for your total new housing payment inclusive of taxes and insurance plus your monthly obligations from your credit report). For most buyers however I start their qualification at 40% of their gross income, and most often that fits in their comfort range or perhaps pushes it just a bit.
I do this for a few reasons, primarily because a not small percentage of clients after getting prequalified at say $450,000 find the home they love at say $485,000. Secondly because I personally feel that buying a home without very strong extenuating circumstances at 50% of your gross income being obligated for debt is too high for most buyers; especially first time buyers without the history and experience of managing a household budget for not only payments but repairs and maintenance.
With the regional rental market being very tight for the past several years and looking to continue being so into the future, rents have been rising and will continue to rise. By purchasing a home today at a payment that is affordable, though perhaps initially uncomfortable, means you are locking in your housing costs for up to 30 years. Waiting to buy until your income increases even 5% can see your housing costs increase through higher home prices and higher interest rates. So the house that today has a payment of 35% of your gross income could cost you 38% or more of your gross income in the not too distant future.
Can you really afford the payment I am giving you? If everything you told is correct and you have presented all your income and expenses, then yes you should be able to afford the payment. That said, you are the one making it not me so your input as to where you are comfortable is critical and we will work together to find the payment you are comfortable with, that can help you purchase a home you are comfortable with and for which you qualify.
Call me, let’s see what mortgage payment you can afford for your new home.
Have a question? Ask me!
Remember, with Dennis it’s not just a mortgage, it’s your complete financial picture.
A very light week on economic news. The biggest news was the existing home sales data which showed a strong increase in June, up 3.2% nationally—showing a market experiencing its largest gains since February 2007. Sales are up 9.6% from last June and the median price of $236,400 is a record high for the number. Driving up sales and prices are a lack of inventory and distressed sales. Not driving the sales are first time buyers who made up on 30% of buyers in June. If first time buyers enter the market in force then the sales will really gain momentum.
Is this activity “bubble-ish?” Some feel that it is since we have reached growth and price points of the month before the bubble burst in 2007. However the fundamentals of the current market are completely different. First, the buyers for the current homes are exceptionally well qualified over all for their home purchases, no speculative buying hoping to refinance lower, very few adjustable rate mortgages, so home buyers are purchasing homes they can afford and will be able to retain as long as their income continues to support payments. Second the growth has been much slower and steadier than the bubble run up which was very quick and sustained on non-qualifying loans for purchases and borrowers pulling out trillions in equity.
Rates for Friday July 24, 2015: Overall the home sale news should be pushing rates up. A healthy home resale market usually indicates a healthy economy and strong consumer sentiment. However that has not been the case the week as Mortgage Backed Securities continue their slow assent (lower rates). The assent has been slow and lenders are holding back a bit on rates anticipating a possible correction in the near term. Overall rates are flat from last Friday.
FIXED RATE MORTGAGES AT COST OF 1.25 POINTS
30 year conforming 3.875% Flat
30 year high-balance conforming 4.00% Flat
30 year FHA 3.25% Flat
30 year FHA high-balance 3.5% Flat
Please note that these are base rates and adjustments may be added for condominiums, refinances, credit scores, loan to value, no impound account and period rate is locked. Rates are based on 20% down (3.5% for FHA) with 740 FICO score for purchase mortgages. ***FHA rates have no points and credit towards closing costs
Crazy weather last weekend as we had the most rain in July in decades. For home seekers it was a perfect opportunity to see if your potential new home has any leaks and if the property slopes in any manner to create pooling around your foundation. I have always said if you get the chance to shop for a home while it is raining in Southern California you should!
Last Sunday Leslie and I visited the Ronald Reagan Presidential Library in Simi Valley. If you have never been put it on your list. Beautiful location and the step back in history is fascinating. What made me chuckle was the “high-tech” equipment on the Air Force One at the time.
Have a great week,
Question of the week: Federal Reserve Chair Janet Yellen said this week the Fed will probably raise rates later this year, what impact will that have on mortgage rates?
Answer: As will all answers in the Weekly Rate & Market Update this is my opinion and not fact—though as pointed out in the movie “Inside Out” often people mix the two up and others accept the mix up.
If the Fed raises rates between now and December 31st the impact on mortgage rates should be nil, nothing, zip, zero. The primary reason is that there has been so much speculation as to when the Fed will increase the federal discount rate that investors in bonds and Mortgage Backed Securities (MBS) have already priced into the market an increase of 0.25% so when it actually occurs it will be met with a shrug.
What will impact mortgage rates is if immediately following the initial rate increase the Fed announces when and how much the next increase will occur—at which point the markets will begin to price that increase into their decisions to purchase MBS.
Here is a quick review of what the Fed controls and what determines our mortgage rates. First and foremost we must know that the Federal Reserve only directly controls one interest rate—the federal discount rate. Mortgage rates are not controlled by the Fed, they are determined by investors bidding on the purchase of Mortgage Backed Securities for most mortgages, and reactions to those markets for mortgages that are held by banks and lenders and not sold on the secondary markets such as Fannie Mae or Freddie Mac.
The federal discount rate is the rate that the Federal Reserve charges its member banks to borrow money from the Fed to meet their reserve requirements. Similar but different is the fed funds rate which is what member banks charge each other to borrow money overnight to meet their reserve requirements if one bank has a surplus and the other bank has a deficiency. The Fed sets the discount rate and the funds rate reacts to that rate.
By setting the discount rate the Fed starts a domino effect the ripples through the banking system as banks alter the rates they charge customers. First to change is the Prime Rate. While not standardized across the banking system most banks quickly align so their Prime Rate is in line with other banks. The Prime Rate is the rate provided to most qualified borrowers.
The Prime Rate is often the basis for many other loans made by banks, from lines of credit, commercial loans, auto loans and credit card rates all can increase or decrease depending on whether the Prime Rate is raised or lowered.
Outside of the banking system are the vast majority of residential mortgages. If you have a conventional, FHA or VA mortgage the rate and cost are primarily determined by the secondary markets where residential mortgages are sold to investors as Mortgage Backed Securities (MBS). The price investors are willing to pay for the MBS depends on where they predict interest rates will go in the future, if they believe rates will be higher then they will bid low for current mortgages that offer a rate lower than they investor might get by waiting a week, month or more. This behavior causes mortgage rates to increase.
Here is an example: You purchase a new home with a $400,000 30 year fixed rate mortgage at 4.00%. Your lender packages that loan with 50 other mortgages to get a “pool” of $25 million 30 year fixed rate mortgages and sells them to Fannie Mae for say $25.25 million. Fannie Mae then bundles the mortgages into bonds, labelled Mortgage Backed Securities, and sells them on the open market. Investors bid on the bonds and the price paid determines what price Fannie will purchase mortgages from lenders in the immediate future.
Our rates change daily depending on the pricing in the secondary markets for Mortgage Backed Securities. While the actions of the investors can be influenced by what the Fed may do, of greater influence is what is happening in the economy—domestic and foreign—as investors try to predict where rates will be in the future. The current MBS market has a Fed increase priced into what investors are willing to bid so when the Fed raises rates we should see little, if any, impact on mortgage rates—depending on the economic conditions at that time.
This is not to discount the importance on the Fed in our mortgage markets. Our economy is impacted by decisions made by the Fed governors, however the impact on mortgage rates is generally as a result of the ripples rather than a direct correlation since the Fed does not control mortgage rates.
Now that Greece is settled, for this year at least….we look to domestic economic news that impacts our mortgage rates, and we had some very important pieces of data this week. Tuesday Retail Sales for June were released and the data was a big surprise—to the downside. Total retail sales dropped 0.3% and May’s sales data were adjusted down to only 1% growth. Retail sales are a direct reflection of consumer confidence and a major impact on our economy since consumer spending is 65-70% of our economy. Belying consumer confidence polls that have shown stronger confidence the retail sales show that while the average consumer may have more confidence in the economy s/he is not willing to spend more hard earned income. One strong gauge that usually ties confidence to spending is restaurant sales, which dropped 0.2% for June, a month that typically has large sales due to graduations, father’s day and weddings. The news is very friendly for lower interest rates.
Both Producer and Consumer Price Indices showed increases in June, with PPI up 0.4% and PPI increasing 0.3%. Both of these figures beat expectations and raised year over year prices from May’s (producer prices are now down 0.7% from June 2014 and consumer prices are up 0.1%). Consumer price increases were driven by gasoline and egg prices going up in the month. The news is mortgage rate unfriendly, but the markets seemed to have shrugged off the numbers this week.
Rates for Friday July 17, 2015: Mortgage Backed Securities spent most of the week climbing (lower rates) despite the deal made with Greece and its creditors and the positive numbers for prices. Of stronger influence are the clouds forming around China’s economy and recession that could become global and the retail sales figures outweighing the other domestic news. Net result is that rates are down after being flat Friday to Friday for the past 3 weeks.
30 year conforming 3.875% Down 0.125%
30 year high-balance conforming 4.00% Down 0.125%
30 year FHA 3.25% Down 0.25%
30 year FHA high-balance 3.5% Down 0.125%
Please note that these are base rates and adjustments may be added for condominiums, refinances, credit scores, loan to value, no impound account and period rate is locked. Rates are based oeln 20% down (3.5% for FHA) with 740 FICO score for purchase mortgages. ***FHA rates have no points and credit towards closing costs
It’s that time of year when Leslie and I are empty nesters as the girls are at Camp Birchwood for the next four weeks. While the house is quieter and we get to pick the television shows we want to watch, we are glad for the quietness as we know the girls are having a great time and will come home a bit more mature, knowledgeable and filled with memories for a lifetime. It’s like practice for when they go away to college!
Question of the week: I have an owner-occupied loan, can I rent my house out later or do I have to get a new loan for investors when/if I want to do that?
Answer: This is a frequent question, especially from first time buyers or first time refinancers. When you sign loan documents for your primary residence there is a certification of occupancy form whereby you affirm that the property will be your primary residence. It includes rather strong language regarding loan fraud, loan may be called due and payable, etc, if you affirm your intention to occupy and do not occupy the property. The key is that it is your intent to occupy.
If you have lived in your home for several years then you have fulfilled the intent to occupy the home and yes, you can move out of your home at a later time and use it as a rental/income property and you do not need to get a new non-owner occupied loan.
If you are refinancing your current residence and fully intend to purchase a new home in the near future then it is strongly advised that your refinance be with a non-owner occupied loan. We have had applicants who wish to refinance their current property and make application for an owner occupied loan. While the refinance is going they present us with an offer to purchase a new property that will be their primary residence. We cannot have two owner occupied loans going simultaneously, or one on top of the other, with the same client—obviously one is an investment property and must be declared as such. The only exception to this would be if it is evident and a case can be made the new home will be a second or vacation home (in vacation destination location such as desert or mountains or geographically distant).
We have had scenario where a client is declaring their current residence will become a rental and are purchasing a new home that will be their primary residence and underwriters have denied the occupancy of the new property and required non-owner occupied financing be used. Typically this scenario arises if the new home is considerably smaller than the current home, the new home is geographically distant from the current home and the clients’ employment or if new home is extremely similar to current home and in same neighborhood or area. Often we can overturn this if we can make a very good case for the occupancy.
Must you live in your home for the duration of your owner-occupied mortgage? No. Must you intend and fulfill the intent to live in your home with an owner-occupied mortgage? Yes.
For how long? There is no exact answer to that question other than, lenders, Fannie Mae and Freddie Mac have become very diligent in post-closing audits and investigation of loan files to ensure accuracy of all documentation and guidelines are followed. This includes occupancy. If you have moved out of your primary residence with a recently funded owner-occupied mortgage you must be able to show you fulfilled the occupancy intent to the strictest aspect of the definition to prove yourself innocent—generally speaking staying for a few months after closing would be a hard case to present for intent to occupy being satisfied.
Another week when our economic news is dominated by overseas happenings. As you no doubt heard the Greek voters decided they did not want to follow the bailout plan presented by their creditors. The reaction of investors was to bail out themselves from equities and buy American bonds—very favorable for our mortgage rates. It appears the Greek government had some second thoughts on the offer rejected earlier and submitted a proposal that in some ways is more austere than the plan that they rejected. The plan looks acceptable at this point to creditors and markets have rebounded some on the news; i.e. rates push back up .
Not to be overshadowed by the Greeks, China elbowed its way onto the front pages with a huge drop in its stock market—one-third drop in prices in less than a month. The speculation and apprehension spread and once again our bond markets benefited. Chinese government officials scrambled to halt the drop, banning some investors from selling and ordering other investors to buy, bans on short-selling and putting cash into the market. The somewhat heavy handed influence of the government seems to have worked as stocks in China rebounded yesterday and today. By the one despite the 30% loss the market in China is at March trading levels and still up about 75% from last year. As the Chinese market rebounded so did U.S. interest rates rising on the better news from across the Atlantic and Pacific.
There was some news at home this week, just not as exciting or impactful on mortgage rates. Most important was the release of the Federal Reserve Open Market Committee meeting minutes from June. Despite some members of the FOMC being ready to raise the short term Federal Funds rate (the only rate the Fed directly controls) no rate hike was made due to other members wanting to see better improvement in economic growth and inflation. The news was met with a shrug by bond traders, perhaps because a Fed rate hike seems to already be priced into rates.
Rates for Friday July 10, 2015: Borrowers who locked in early to mid-week faired pretty well as after dipping into Wednesday rates reversed on Thursday and Friday. The market is somewhat volatile day-to-day but stable week to week. My advice remains to lock in your rate and terms through your escrow period as soon as you are able.
30 year conforming 4.00% Flat
30 year high-balance conforming 4.125% Flat
30 year FHA 3.50% Flat
30 year FHA high-balance 3.75% Flat
I hope everyone had an enjoyable three day holiday and Independence Day. Our 5th Annual Flag Collection and Retirement Ceremony was once again a great success and I thank everyone who came out.
Question of the week: Greece?
Answer: To quote Yogi Berra (the Yankee catcher, not Yogi Bear the cartoon character), “It’s like déjà vu all over again.” Once again we are dependent on Greece for our interest rates. This past week they missed a payment to the International Monetary Fund after prolonged negotiations between Greece and its creditors collapsed. To over simplify the divide, creditors want Greece to continue austerity programs and tighten down further on spending and internal obligations, the Greek government wants to get off of austerity and be able increase spending.
As one person put it this week, Greece is akin to the homeowner who took out loans he could not afford, then having trouble paying the loans wants not only forgiveness from the bank for payments due but more money from the lender.
In the very large macroeconomic realm Greece is a small blip on the world wide economy and a somewhat minor blip on the European Economy. The impact of the Greece financial situation is more meaningful for what it represents, a crack in the European Union and Greece potentially leaving the EU and its standard currency, the Euro. Yes there is a lot of money at stake and if Greece completely defaults on its obligations many private investors and some nations will be harmed, but the overall economic damage is less than the news and interest the situation has garnered—mainly because of the long term ramifications if Greece does default and lose its status as a member of the EU.
The impact of Greece on our mortgage rates has been mainly positive. A default by a nation state debtor has investors looking for quality, lower risk investments; a role filled by United States Treasury debt, and Mortgage Backed Securities—which are currently backed by the Treasury. This flight to quality pushes those prices up, and interest rates down.
At breakfast yesterday morning with some friends from Rotary where we had a brief discussion about Greece I wondered aloud, what is the comparison to the Greek debt in risk of default and the amount of General Motors bond debt that was wiped out by it government sponsored and approved bankruptcy. My research on that led to some other comparisons. Here are the numbers I found interesting:
GM bond default from government approved bankruptcy was $27 billion; currently Greece’s debt is estimated at $271 billion.
Puerto Rico is in the news as it may default on its debt, which totals $72 billion.
Greece’s population is 11.12 million. So their debt is $24,370 per person—that is debt not budget.
Currently California’s debt is $427 billion, which is $11,143 per citizen (lower of course if non-citizens counted).
U.S. debt is $18.3 trillion, which is $57,000 per citizen. So from a per citizen debt stand point the United States is worse off than Greece.
The United States borrowed $10 million during the Revolutionary War from France, the Netherlands and Spain; which would be approximately $225 million today—pretty cheap the initial cost of liberty!
Domestic economic news matters too. This week the biggest economic news was the labor situation for June. Usually released on the first Friday of the month we had an early release today due to federal offices being closed today. The news was somewhat mixed. The positive numbers were not that positive—223,000 jobs added to economy, headline employment rate dropped to 5.3% from 5.5%. The jobs added were below expectations and below May’s new jobs—which were revised downward by almost 10% from their initial release. The unemployment rate dropped primarily due to a decline in the labor participation rate to 62.6%.
Those who are working are not much better off. Wages continue to stagnate. Hourly wages were flat from May to June and the increase of wages from April to May were revised downward to 0.2% growth. More hours are not increasing over all pay as the average number of hours worked also remained constant from May to June. Year over year hourly wages are up 2%, which is over the latest Consumer Price Index release which showed no growth in prices from May 2014 to 2015. Over all the labor news was friendly for lower rates.
Rates for Friday July 3, 2015: Markets are closed today for Independence Day so rates today reflect yesterday’s close. Mortgage markets whip-sawed the four days of trading this week, opening either significantly higher or lower than the prior day’s close. The result is lenders kept rates level week over week after we hit forty week highs last week.
As I do every year on the Friday before Independence Day I provide you with a link to the Declaration of Independence with the encouragement that you read it annually. Our nation has undergone many changes since July 1776, but the underlying principles of the Declaration of Independence remain the same.
Have a great Independence Day celebration, go forth and pursue happiness!
It’s that time of year, our 5th Annual Flag Collection and Retirement will take place on Friday July 3rd!
For those of you who have American flags that need to be replaced bring your old flag to our flag collection on July 3rd as part of First Friday’s in Bixby Knolls. Our location is still waiting to be confirmed, but the collection will start at 6:00 pm and the retirement ceremony will occur sometime after 7:30.
Question of the week: On vacation, no question this week.
Rates for Friday June 26, 2015: Rates up on the week on some mixed economic news. First Quarter GDP was revised upward to -0.2% growth (i.e. shrinking) from original number of -0.7%. Personal income and spending both increased in May which is good news for the economy. Conforming rate hits 4.00% for first time since October.
While we have strong momentum to lower rates, the markets have shown us how fickle they can be and I still advise caution and securing your rate as soon as you are able.
30 year conforming 4.00% Up 0.188%
30 year high-balance conforming 4.125% Up 0.202%
30 year FHA 3.50% Up 0.125%
30 year FHA high-balance 3.75% Up 0.125%
We have been in Scottsdale all week enjoying the triple-digit temperatures, but even more so enjoying each other’s company, playing games, laughing and just relaxing. Hope your week as been a good one. Back in the office on Monday.
Have a great week,
Dennis C. Smith, California Bureau of Real Estate Broker #00966315; NMLS #296660
Stratis Financial Corporation, California Dept. of Real Estate Broker #01269597; NMLS #238166