Question of the week: What happens if my appraisal comes in low?Answer: This is a topic that has been covered before but needs revisiting from time to time, especially in the current environment where many homes are selling over their list price with multiple offers. (If you missed last Friday’s Weekly Rate & Market Update I covered what price you should offer, link here)If an appraisal comes in below the value required our first action is to see if we have comparable sold properties we can use to appeal the value in the report. Most often for an appeal to be successful we will need to use comparables that the appraiser did not use and justify why the comparables we want to use are better than the comparables the appraiser did use. On rare occasions we have been successful in appealing the adjustments an appraiser made to the comparables in the report for condition, size, etc—but the adjustments the appraiser used must be very apparently wrong. If our appeal is denied and the value stands, what are the options available?If your transaction is a refinance with a low appraisal there can be many ramifications due to loan to value and available programs, mortgage insurance, pricing changes or inability to complete your transaction. Because there is no price point or other party to negotiate with your options are pretty much dictated by the program guidelines for the mortgage you are using. In other words your options are limited to the nature of the refinance and program requirements.If your transaction is a purchase transaction and the appraisal comes in low you have four basic options. We will assume you have a purchase price of $425,000 and your appraisal comes in at $400,000, and our appeal was denied or there was insufficient data for an appeal.One of the primary guidelines for pricing is the loan to value, what percentage of the value is the loan amount. For lending purposes the loan to value is based on the lower of the purchase price or the appraised value. In the instance above the loan to value will be based on $400,000 not $425,000. This means if you were putting down 20% on $425,000 you wrote your offer to purchase the property with a loan of $340,000.When your appraisal comes back with a value of $400,000 you have gone from a loan to value (LTV) of 80% to a LTV of 85% if you retain the loan amount of $340,000.Option 1: You agree to pay $425,000. If you retain your loan amount of $340,000 you will have the same down payment, $85,000; however you will now have a loan that requires mortgage insurance since it is greater than 80% LTV. This will add to your monthly payment, how much depends on the type of mortgage insurance you choose (next week our question of the week is about mortgage insurance). Or if you choose you can increase your down payment by $20,000 to $105,000; this will bring your loan amount down to $320,000 and 80% of the value of the appraisal. Note: If you were putting 25% down or more originally you would not have to worry about additional down payment in order to avoid the mortgage insurance as your loan to value would still be under 80%.Option 2: Seller agrees to lower the price to the appraised value of $400,000, you put 20% down on the $400,000 ($80,000) and we adjust our loan amount to $320,000 and we move on with the transaction.Option 3: You and the seller meet somewhere between the appraised value of $400,000 and the original sales price of $425,000. This option may require you to make some additional down payment to avoid mortgage insurance as your loan to value based on the appraisal would still be over 80%, or you would have mortgage insurance since the loan to value of your original loan amount of $340,000 is more than 80% of the appraised value. Option 4: You refuse to pay more than the appraised price and the seller refuses to take less than the original sales price. Transaction is off, seller puts the property back on the market and you start looking at property again.When the market is rising, there are multiple offers bidding prices over list price and a scarcity of comparable sales, i.e. the current market in many areas, appraisals values can lag the market. With sales setting new market highs in a neighborhood it is challenging for an appraiser to find comparables and be able to make the necessary adjustments from prior sold properties to the recently sold property being appraised. As a result low appraisals may be an issue on some transactions, if it becomes an issue on yours these are your options.Have a question? Ask me! Remember, with Dennis it’s not just a mortgage, it’s your complete financial picture.One of the more active weeks for important economic data, little of which mattered since the Fed raised the Discount Rate on Wednesday. The rate increase was priced into mortgage rates and when the announcement was made Mortgage Backed Securities (MBS) staged a strong rally (lower rates). With the guess work finished, the rate going up 0.25% instead of 0.50% investors bought bonds and stopped the upward pressure on mortgage rates.The other data that would normally be rate movers but had minimal impact this week in the shadow of the Fed announcement would normally push rates higher—strongly. Prices for producers and consumers climbed in February, with PPI up .3% for the month and 2.2% from last February, while CPI rose 0.1% for the month and 2.7% over the past year. The price increases are at the upper limit of the Fed’s desired inflation target, supporting not only the rate increase on Wednesday but also the projected two more Fed rate increases later this year. Rates for Friday March 17, 2017: As mentioned the MBS market jumped after the Fed rate increase on Wednesday breaking the downward trend of the past few weeks. With the change in direction we look to see if this is a temporary correction or a trend that could provide slightly lower rates, or no movement for the near future. With a sudden break in direction the market has some instability—which is always a reason to lock in when you can.FIXED RATE MORTGAGES AT COST OF 1.25 POINTS LOCKED FOR 45 DAYS:30 year conforming 4.125% Down 0.125%30 year high-balance conforming 4.25% Down 0.125%30 year FHA 3.50% Flat 30 year FHA high-balance 4.00% FlatPlease 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. For many years this update would be coming to you from Las Vegas where my friends and I spent the first days of the NCAA basketball tournament. While the same group is still in the same pool (I think we started it around 1984 my senior year in college), the annual pilgrimage to Vegas has been replaced by work, family and inability to handle three to four nights in Las Vegas—at least for me. Thankfully technology has evolved for NetHeads like myself so we can stream games live on at our desks while looking like we are productive (the official NCAA streaming site has a “Boss Button” in the corner of the screen one can hit to take the game down and put up an innocuous page that looks like you are working). I have Duke over North Carolina in the final, when there are a lot of teams that can win I default to teams that know how to win it all. Whoever wins I know we will have many exciting games and great stories the next few weeks.Thank you to everyone for the kind words following last week’s update.Happy St. Patrick’s Day and have a great week.,Dennis
Question of the week: What price should we offer?Answer: Ask any real estate agent what is the hardest question they are asked and this will be the answer. You have looked at several homes and found the one you want to buy, how much do you offer the seller?My quick answer, what it will take to get the home within your ability to qualify.We are conditioned to want to find a bargain, to get something for less than its value or what a seller is asking for their product or service. Our first big purchase is usually a car—who has every paid sticker price for a new car? We expect to get “a deal” and negotiate for a lower price. Buying an appliance? How often has the salesperson said, “if you buy today we can knock down the price….”We go to CostCo, Target, Walmart, Marshall’s to save a few bucks. We purchase three packs of chicken thighs because they are on sale for 30% less than they were the week before. Planning a vacation we go on-line to websites that offer lower airfares, hotels and rental cars. We purchase books, clothes, laptops, shoes, on-line for the convenience and to save a few more bucks. We want to see our favorite sports team and go to a site that sells tickets in the secondary market looking for a discount.We shop, we look for what we feel are bargains. We love to tell people how much we paid for something---less than market value or what they paid for the same thing.When we look at purchasing the most expensive product we have ever purchased, our home, we have ingrained in us to get the best deal.Back to our question, how much should you offer for the home you want to buy?On the one hand you would like to get a bargain, why pay the seller what they are asking?On the other hand you want to get the home, it is what you have been looking for, but how much is “too much.”This question is easier for an agent to answer in a buyers’ market—the seller does not have many offers and is probably willing to negotiate. It is a little harder to answer when the market is balanced with a decent amount of inventory and active buyers in the market. The question becomes harder in a sellers’ market when many (most?) listings have multiple offers. Which is the market in Southern California for the past year or so.It seems if you offer list price you may be over-bid by another buyer and you are back looking again. If you over-bid and the seller takes your offer you feel as if you could have purchased it for less—or you worry that the home will not appraise for the sales price you and the seller have agreed upon. More to the point, it is psychologically very difficult for us to pay more for something than the asking sales price.Back to my answer: pay what will get you the home you desire within your ability to qualify.I have seen clients lose homes that they felt was perfect for them because they wanted to try to save three, four, five thousand dollars on a sales price. That home today is probably worth 30-40% of what it sold for several years ago. I have clients still in the market after having starting to look last year because they want “a deal.” With prices climbing over 5-6% over much of Southern California their “deal” was buying a home last year.There rarely a correct answer as to what your initial offer can be. If you do not offer enough and do not get the home you want then you are upset because you missed the opportunity. If you make an offer and it is accepted you may feel like you left “dollars on the table.” Don’t. Don’t think you left anything on the table. Be glad that you were able to reach an agreement with the seller so you can purchase a home for you and your family to enjoy for years and years to come. Ask any happy homeowner if they feel they overpaid for their home, and most will tell you they did not—even if they felt like they did at the time.You are buying a home. Not a plane ticket, not headphones, not five pounds of onions, not a car. A home. So buy it.Have a question? Ask me! Remember, with Dennis it’s not just a mortgage, it’s your complete financial picture.Plenty of positive economic news this week, which means negative news for lower interest rates. The week started with the Gallup US Spending measure in which consumers self-report their daily spending. February’s daily spending, $101 per day, was the highest for February since 2008. A sign of positive consumer sentiment, since consumer spending is 65-70% of our Gross Domestic Product, the news was interest rate negative.Even more negative and causing a big drop in Mortgage Backed Securities prices (lower MBS prices means higher rates) Wednesday morning as the ADP payroll report showed an increase of 298,000 private jobs in February. This was the largest single month increase since October 2015 and one of the largest gains for this report since the recession ended in June 2009. The news solidified the Fed raising rates next week and started some speculation that perhaps instead of the standard 0.25% increase the Fed Discount rate may be increased 0.50%. The bond markets (which includes mortgages) opened significantly lower on Wednesday following the report.It is not uncommon for the Department of Labor monthly report to be at odds with the ADP report, it does not happen all the time but often enough so that when it does it is not a surprise. The DOL report this morning however reinforced the ADP report showing an increase of 235,000 jobs throughout the economy and a drop in the unemployment rate to 4.7%. Within the good news of the report for job seekers was more good news. The decrease in unemployment was not directly related to a decrease in those seeking work, the participation rate increased and hourly wages showed an increase as well. All the news double-solidified the Fed rate increase next week.Rates for Friday March 10, 2017: After several weeks of stable rates we see them increase for the second week in a row. Is this trend that will continue or is the market finished pricing in next week’s Fed rate increase and starting to price in the next one? There is upward pressure on rates and unless they hit some resistance at the current level we can see a bit more upward drift. Those who have been floating waiting for lower rates are getting further behind. I maintain my advice: lock your rate when you are able through your escrow period.FIXED RATE MORTGAGES AT COST OF 1.25 POINTS LOCKED FOR 45 DAYS:30 year conforming 4.25% Up 0.125%30 year high-balance conforming 4.375% Up 0.125%30 year FHA 3.50% Flat 30 year FHA high-balance 4.00% FlatPlease 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.
Regular readers of the Weekly Rate & Market Update know that I always include a personal note to conclude the report. This morning I was intending to comment on our split family weekend as Leslie takes off to the desert with her friends from high school—a very well deserved few days away from me and the girls to relax and have fun with her friends getting some much needed Leslie-time. I guess I just commented on that.I thought about leaving it at that but we had a sudden event last night that has made our day rather rough. Around midnight we were awoken by our dog having some issues and we heard him fall in the bathroom. Leslie and I got up and found him lying on the floor in distress. As we patted and loved on him he quickly passed away. We suspect a heart attack or stroke that may have been a result of his lupus that we thought was in remission. Harrison was a wonderful dog. All who had met him always commented on his handsome looks, which we know he heard and relished, his calm demeanor and how sweet he was. Our home our hearts are emptier without our big dog. It was a perfect relationship between dog and family—we were so lucky to have him and he was lucky to have us.Back to our question of the week, this is our home, I don’t care that several people told us we probably overpaid for it almost twenty years ago, our children, pets, family, friends, visitors do not care what price we paid they, and us, are just grateful we have this home to fill with love and wonderful memories.If you have a dog take an extra walk with him or her this weekend for me and Harrison.This one is for Harry,Dennis
Question of the week: Why do you think mortgage insurance is good?Answer: We have had a lot of conversations lately with buyers, and current homeowners who are refinancing, about mortgage insurance. A good part of the conversation is communicating that mortgage insurance is not a bad thing, in fact it is very good because it is an enabler.Why is spending money on an insurance policy that does not protect you a good thing? Because that insurance policy enables you to accomplish your objective.Client wants to purchase a home for $500,000, has terrific income, low debt but not a lot of funds for down payment and closing cost---has about $30,000. To avoid mortgage insurance the client either needs $50,500 down and can purchase with a “Piggy-Back” second trust deed which will either have a high or adjustable interest rate, or will need $100,000 to have no second mortgage nor mortgage insurance. Either option will require more time to save money as home prices and rates presumably increase during the period it will take to increase savings.Or….the client can purchase with a mortgage product that has mortgage insurance, either a high-balance conventional mortgage with 5% down or FHA with 3.5% down payment. Because the client will not have enough money to cover down payment and closing costs if using a high-balance conforming mortgage s/he will either have to have the seller participate in paying closings costs or take a higher interest rate for the lender to pay the costs.To compare the two:The high balance option would have a payment for the principal and interest on the loan and mortgage insurance of approximately $2790 per month and would spend $25,000 in cash.The FHA client would have a payment for principal interest on the loan and mortgage insurance of approximately $2766 and would spend approximately $20,000.Is mortgage insurance bad? Not for this client as it enables the client to purchase a home they would not otherwise be able to buy for lack of funds. Similar examples can be seen for homeowners who wish to refinance out of adjustable rate mortgages, pay off an outstanding debt or consolidate their primary and second mortgages in front of rising rates on equity lines. Perhaps they do not have the necessary 20% equity to avoid mortgage insurance, but when examining the numbers for payments with the mortgage insurance we find it is advantageous for them to refinance with a new mortgage and mortgage insurance.If you goal is to purchase a new home, or to refinance your existing home to improve your financial position today or in the future, and you do not have the funds or equity sufficient to avoid mortgage insurance you have to options: not purchase or refinance your home, or embrace mortgage insurance for what it enables you to do.Never hesitate to call me, or have your friends or family call, to run numbers on “what if…” scenarios. You may not think you have enough money or equity to accomplish your objective, but perhaps with mortgage insurance we discover you can accomplish it.Have a question? Ask me! Remember, with Dennis it’s not just a mortgage, it’s your complete financial picture.A lot of data this week. Durable goods, GDP, Personal Income and Outlays, Fed governors speaking…all impacted rates this week and the impact was to push Mortgage Backed Securities prices lower, which means rates go higher. The biggest factors were increase in Personal Income and the Price Index which gave very strong support to the Fed increasing the Fed Discount Rate later this month. Further supporting this increase were comments from members of the Federal Reserve board indicating that a rate increase is all but done.Rates for Friday March 3, 2017: With conforming rates increasing for the first time in five weeks, we have a rising rate environment, not only from the economic data and comments from the Fed but the markets’ reactions to President Trump’s State of the Union speech. Investors have been taking money out of bonds (higher interest rates) and putting them into the equity markets, causing the Dow do bust through 21,000 for the first time. The environment is volatile but the momentum is to higher rates. Lock your rate when you can through your escrow period—and perhaps a little beyond to prevent a potentially costly rate extension should something happen to delay closing. FIXED RATE MORTGAGES AT COST OF 1.25 POINTS30 year conforming 4.125% Up 0.125%30 year high-balance conforming 4.25% Up 0.125%30 year FHA 3.50% Flat 30 year FHA high-balance 4.00% FlatPlease 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. No more predictions…though I did call the Super Bowl, I missed wildly on the Oscar for Best Movie even after the gaffe announcement. I was thinking we would have a sunny and rain-free weekend but it looks like we will get some showers in Southern California this weekend. I need to crawl around my gardens for several hours to pull the abundance of weeds that have thrived in our winter weather and apparently I need to do this Saturday with more rain possibly coming Sunday.If it is raining Sunday and you are thinking of buying a new home—go house hunting Sunday! Take advantage of all this wet weather to see if your potential new home has any leaks, if water pools where it shouldn’t on the property, and how the property in general handles rain. It may help you make a decision. Have a great week,Dennis
Dennis C. Smith, California Bureau of Real Estate Broker #00966315; NMLS #296660
Stratis Financial Corporation, California Dept. of Real Estate Broker #01269597; NMLS #238166