Dennis' Mortgage Blog

Question of the week:  We are interested in buying a foreclosure from a bank, but it has no cabinets in the kitchen and other problems; can we buy the house?  Answer:  Sure you can…but you better have cash or being private money for your mortgage to cover the purchase price.  When lenders approve a loan application package they are not only approving the credit ability of the borrower—credit report, income, assets—they are also approving the collateral—the home you are buying for value and condition.  Drive around your neighborhood and community and see if you can spot the homes that are in foreclosure or have already been through the process.  Many of them look like they need work, which means they look like a good value; and they can be, but not always depending on condition and the financing available to purchase them.  Most buyers are purchasing using 3.5% (FHA), 5%, 10% or even 20% down payments and require financing for the balance of the price; usually the down payment amount is dependent on how much money the borrower has available.  If the borrower is stretching their savings to buy the home, and the home has no kitchen cabinets, or toilets, or flooring is missing, how are they going to make the home inhabitable?  Credit cards? That adds to the debt consideration and the lender does not want to put someone into a home just to see them turn around and run up more debt.  As well, if the borrower is unable to repair the damage or bring the property up to a safe inhabitable standard and the bank gets the property back it will impact their ability to sell it.  Because of this many banks are now expending funds to bring some of their foreclosed properties to “normal” market conditions—i.e. sinks, cupboards, etc.  So, while you may think you can get a great deal on the property on the east side of town that has been stripped by the previous owner and it just needs some pre-fab cabinets and paint, you may get a deal on the price, but good luck on the financing.

If you have a question you would like me to answer send it to me!

After several steady weeks in mortgage and bond prices, we saw some erosion this week culminating in a big sell off today (Friday) in bonds as money flowed into stocks.  Early in the week the small slide in bond prices (which means corresponding increase in interest rates) was mostly caused by a move into cash for investors.  Selling in bonds and stocks was precipitated by political wrangling over the $350 Billion left from the $700 Billion bailout approved in October by Congress and President Bush. 

When it became apparent that Congress was releasing $350 Billion investors pulled out of the markets and accumulated cash, waiting to see where the money would be spent.  Once they know they can chase it with their investments and hope to profit from the taxpayer funded expenditures.  Several weeks ago we saw huge gains in mortgage rates after the Fed started buying mortgage backed securities, if more of the hundreds of billions floating around go into the mortgage sector we should see rates decline further, or at least stabilize below 5% for conforming rates where they have been for the past several weeks.

With no positive economic news apparent in the near future, with the exception of inflation having pretty much disappeared, the expectation is that there should be little to no upward pressure on interest rates.  With this prospect we should see rates settling into a range with today’s rates on the high side and the historic low rates of early December on the down side. 

With the sell off in bonds and mortgage backed securities today, rates see their biggest week-to-week increase since the half-percent increase from the first to second week of October, which as you recall was the first full week after the $700 Billion was originally passed (click here for my update that week).  When several hundred billion dollars is about to be dumped into the economy at one time the markets definitely take notice and react; usually by moving to cash.  Which is what happened this week.

FIXED RATE MORTGAGES AT COST OF 1 POINT*

30 year conventional at 1 point 5.25%            up 0.375%

30 year conforming-jumbo at 1 point 5.375%    up 0.375%

30 year FHA at 1 point 5.25%                            up 0.375%

Please note that rates quoted are based on average of several lenders for a purchase transaction with 20% down payment and a minimum FICO score of 740; APR is not quoted as it is dependent upon specific loan amounts, lenders and services selected.  Numbers provided are for comparative purposes only.

Next week when you read this update we will have our 44^th President, and our democracy will continue to exhibit to the world and history the will and power of the people in governance and self-determination.

Have a great weekend,

Dennis

Remember this update is posted weekly on My Blog at www.DennisCSmith.com ; feel free to forward the link to family and friends who may be interested in past commentaries.