Special Edition From Scottsdale, Arizona vacation location!
Question of the week: What are my options as a buyer if the appraisal for the home I am buying comes in low? If the appraisal comes in low can I get my appraisal fee back?
Answer: Between the large percentage of homes on the market that are either short-pays or foreclosures, soft prices in most areas still and the HVCC process forcing poor appraisers into the market place, appraised value is more of an issue than it was a few years ago. So what are the options available when an appraisal comes in low, or if an underwriter cuts the value of an appraisal, for a purchase transaction in escrow?
First, if an appraisal comes in low you are not entitled to a refund of any appraisal fees. Appraising is a fee for service industry, when an appraiser completes and appraisal he gets paid for his service regardless of the value returned.
Now onto the meat of the question: what are the options if the appraised value comes in under the sales price? For our discussion I will use a sales price of $500,000 and an appraisal of $487,500—a 2.5% reduction in value from the sales price.
As the options are considered a primary issue is that lenders use for value the lesser of sales price or appraised value. Therefore on this transaction if the borrower was putting 10% down, his 90% loan would be $450,000 of the sales price; now his $450,000 loan is a 92.3% loan to value transaction which changes the rate, the mortgage insurance and in many instances may not be able to secure financing.
Here are the Options, not in order of preference for either party:
Option 1: The seller lowers the price of the home to the appraised value and the transaction continues with a 90% loan based on the $487,500 sales price ($438,750 loan amount). Good for the buyer, bad for the seller.
Option 2: The buyer makes up the difference between the sale price and the appraised price in cash to reach the new 90% loan to value limit of $438,750; a total of $61,250 down payment; an increase of $11,250 in cash to close. Good for the seller, bad for the buyer.
Option 3: The buyer and seller agree to split the difference and agree to a sales price of $493,750; the seller gets less money and the buyer comes in with a down payment of $55,000 to meet the lenders loan limit of $438,750. Not as bad for the buyer, not as bad for the seller.
Option 4: Both parties agree to have the borrower change lenders and order a new appraisal. This is a very risky option depending on several factors, including the borrower’s rate lock and most importantly the risk that the next appraisal may be even lower than the first. Remember using the HVCC appraisal process has been a roll of the dice on who will appraise properties.
Option 5: An agreement cannot be reached and the transaction is cancelled. The buyer moves on to find another property and the seller puts the home back on the market hoping to get another buyer at $500,000 or greater and hoping the property will appraise at that amount, or if it does not the new buyer will agree to pay the difference between the appraised value and sales price.
Option 5 is, in my opinion, the worst case scenario and one that we do not see taken very often. Given the volatile market and uncertainty in appraisals most sellers, while strongly desiring Option 2 (buyers pays the difference) push for Option 3 (split the difference) or accept Option 1 (lower sales price). But each transaction is different because each individual buyer and seller is different with different motivations and needs.
If you have an appraisal issue keep an open mind and explore all option available to you.
I will keep this link on my “Question of the Week” section to assist new homeowners:
IRS Form 5405 for First Time Buyer Tax Credit for those eligible
Have a question for me? Ask me!
Another interesting week in the economy. Last week we saw Mortgage Backed Securities (MBS) bounce off the 25 day moving average and fall through the 200 day moving average. As this week progressed the averages met and crossed, with the 25 day moving average price drop below the 200 day moving average (hence the 25 day average interest rates moved above the 200 day average).
This week saw plenty of activity with the Treasury auctioning off over $100 billion in notes of various terms and the Federal Reserve Board of Governors (the Fed) meeting. Leading into the auctions and the Fed meeting rates remained flat just below the 200 day moving average. The auctions went better than expected, with significant foreign investment. The Fed announced no rate changes would be forth coming for a while and committed to continuing to purchase conventional MBS.
Combined with economic data and announcements the bond markets responded positively. The World Bank announced that the global recession would be more prolonged than earlier thought (good news for bonds), unemployment claims went up a bit higher than expected (good news for bonds) and wholesale prices came in under expectations (good news for bonds). As a result yesterday a big finish to the day saw the 200 and 25 day moving averages broken through by MBS and a strong close for rates. Stocks, after being positive Wednesday, did not fair as well, with investors moving their funds from stocks to bonds.
Today we see everyone taking a breather and while trading mostly negative early on (I write this at 8:00 a.m. Friday morning Pacific) with many investors selling to take profits from the last few days. Consumer sentiment has come in a bit better than expected which puts some downward pressure on the bond prices.
Looking ahead it is still a very volatile market for interest rates. We are experiencing big swings intra-day for rates, and day-to-day and week-to-week. Having just broken above the moving averages yesterday we need to see if the market can sustain levels this high—last week when MBS cracked the 200 day moving average it lasted about 4 hours in trading.
I counsel caution. If you are purchasing a home and the market is providing the rate you used to make your decision to purchase your new home I suggest locking through the close of your escrow period. Floating in this market may lead to some gains with a lower rate or costs, but it is risky and you can just as easily—more easily in my opinion—end up with a higher rate very quickly.
Rates down this week—With almost all of the drop in rates coming yesterday leading into this morning’s rates. Too early to tell if these rates will continue, market is volatile so plan accordingly. Follow me on Twitter (dcslb is my Tweet) if you want through the day mortgage market updates.
FIXED RATE MORTGAGES AT COST OF 1 POINT*
30 year conventional 5.125% Down .25%
30 year conforming-jumbo 5.5% Down .375%
30 year FHA 5.375% Down .125%
30 year FHA jumbo 5.875% Down .25%
Please note that these are base rates and adjustments may be added for condominiums, refinances, credit scores, loan to value, and period rate is locked (i.e 45 days instead of 30 days).
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.
We are about to wrap up our family vacation week in Scottsdale, hot temperatures, hopping across the pavement to the pool and plenty of time splashing around the pool with the girls. What a great way to start the summer with some much needed relaxation and family time for all of us. I hope you have on your schedule this summer both of these items: spend more than a couple of days just relaxing and being with your family.
Stay cool!
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.
Question of the week: I have a Home Equity Line with a high balance and a low interest rate, what advice do you have for me?
Answer: This week’s question applies to current homeowners, but future homeowners may want to read in case they find some information to assist them with debt management. Home Equity Lines of Credit, or HELOCs, are prevalent throughout the United States, and very prevalent through Southern California. First a brief history of why, if you are not interested in the history and just want the answer skip below to now the answer::
Around 2000 a major national lender rolled out a very attractive HELOC product that would go to 90% loan to value (refresher: loan to value, or LTV, total amount of loans as percentage of value of home; if 90% LTV on property worth $500,000 the mortgage(s) total on home equals $450,000). Prior to this product being introduced to the market and so accessible to home buyers anyone purchasing a home with 10% had to have mortgage insurance, or PMI (the “P” is for private, as opposed to the mortgage insurance on government insured loans such as VA or FHA); unless the seller of their future home was will to carry back a second trust deed of at least 10% of the purchase price—which very few sellers were, or are, willing to do. So the new product allowed us to have homebuyers purchase homes with “80-10-10” financing and avoid mortgage insurance; doing the math the total monthly payment was lower and the tax deduction was higher (this was before limited deductions for mortgage insurance became part of the tax code).
As the popularity of the HELOCs as tools for homebuyers became more popular other lenders jumped into the market with their own HELOC products. As the popularity grew and home values climbed, and pressure from Congress grew on Fannie Mae and Freddie Mac to increase homeownership opportunities, the combination expanded the use of HELOCs. Lenders began offering HELOCs to 95% LTV and as those were snapped up lenders began offering fixed rate second trust deeds and HELOCs to 100% LTV. Fannie and Freddie both had products for buyers to use “80/20” financing—essentially 100% financing—using HELOCs as part of the financing.
Outside of the purchase arena lenders were allowing HELOCs to be added to existing home owners debt structure, some lenders going as high as 100%, others capping at 90%. With the boom in home values many homeowners took advantage of their higher home values to access their equity with HELOCs. As a result of loosening credit guidelines from Fannie and Freddie on their mortgage products, and aggressive guidelines on many HELOC products, the number of homes with a HELOC recorded against them grew exponentially from 2003 through 2007.
What is a HELOC? It is a line of credit that operates very similarly to a credit card. A homeowner is given a maximum credit limit and may access up to that amount of money and pays interest on the outstanding balance; whatever is not accessed up to the maximum limit is available for future borrowing. Because the outstanding balance can go up and down as equity is accessed and then paid back the rate of interest on the HELOC is also adjustable, almost always adjusting with the Prime Rate. Homeowner Bob has a HELOC with $100,000 as the maximum limit and it has a rate of Prime + 0, Bob has pulled out $35,000 to remodel a bathroom in his home. Since Prime is currently 3.25% the interest Bob owes on the debt for the current month is (35,000 x 0.0325)/12 {Balance times rate divided by twelve for monthly payment) = $94.79 plus and principal he chooses to pay. Pretty cheap, eh?
Okay now what if Bob owes $235,000? The monthly payment is now $636.46 for the interest, still relatively cheap for having borrowed over one-quarter of a million dollars. Keep in mind on other factor, chances are pretty high that because of declining home prices Bob’s original HELOC probably had an available balance of $325,000 and the lender reduced the available balance to his current balance. So with the interest rate at 3.25% what should Bob do? That is the question I still have not answered.
Now The Answer! Bob, or anyone with a high balance on their HELOC, has a current interest rate of Prime, for some holders of HELOCs their rate is Prime Plus with a margin added to the rate, either way the interest rate is extremely low. Using Prime as the guide here is a chart showing the history of the Prime Rate from 1994 to present:
The red line indicates the approximate average rate for the past fourteen years. As you can see in the past eight years we have spent more time below the average than above—but just two years ago Prime was as high as 8.25%--so what are we to expect for the future? Let’s take a look at time below the line. Prime hit a high of 9.25% before being adjust down in May 2000. As the economy at that time began to slow and a recession set in following the economic growth and expansion that began in the middle of the Clinton Presidency, the Fed began to cut rates. As the recession continued into the beginning of the Bush Presidency the Fed was pretty steady in rate cuts, until 9/11 when it became more aggressive. Bottoming out in June of 2003 when it became apparent that economic growth was upon us, the Fed began consistent and incremental rate increases to allow for continued economic growth; as you can see the line going up is much flatter than the line going down before the increases started. Peaking at 8.25% in June 2006 the Fed, seeing a slowing of growth in the economy began to cut the Prime rate to sustain the growth as long as possible. As the credit crisis became apparent at the very end of 2007 the Fed went through some very aggressive rate cuts in early 2008 and eventually we landed where we are today in December 2008 at 3.25%.
Each of the rates cycles bottomed out when our economic recessions bottom out, each of our rate cycles cap out when our economic recovery and growth caps out and the next cycle begins. So with this knowledge, when will our current economic cycle bottom out? When it does bottom out and recovery and growth begin how fast will it occur? How long will it last? The answer to these questions will determine how high and how fast and how long the Prime Rate will climb.
Let’s go back to Bob with his $235,000 HELOC balance at Prime, currently paying $636.46 per month in interest. If Prime were at its fourteen year average, 6.8%, he would be paying $1331.67 per month, more than double his current payment; if Prime were at its most recent 36 month high of 8.25% Bob would be paying $1615.63 per month just in interest.
As we can see from the chart Prime is at a historic low, which means that it will have to rise. Knowing that the rate will rise, and therefore your payment on the HELOC you have, it is advisable to pay down as much principal as you can to lower the balance so when the Prime rate does increase your payment increases are lower than they will be if you just make minimum interest payments. Leverage your monthly debt payments to pay down as much debt as you can as fast as possible, rates are going to rise and the more you are able to pay down/off today before they do rise the better your financial future will be.
My suggestion is keep a list of your debt obligations and their monthly minimum payments and interest rates. Using this chart create a plan that will allow you to pay off one debt at a time until all your debt is paid off—saving your biggest debt, your mortgage for last since it is tax deductible. Include in the list aggressive pay down of your HELOC by using as the monthly payment not the minimum monthly payment but what the monthly payment would be if Prime was at its recent high of 8.25%, then as the Prime Rate increases your monthly budget is already adjusted for the increase. As you pay off one debt obligation transfer the payment to the next one until you are debt free and are able to concentrate all of your monthly debt budget on your HELOC. It takes discipline but if you are committed and dedicated you can create a plan that will rid you of your revolving debt obligations in a relatively short period of time.
For a look at how rates are connected to economic cycles and inflation see my post “Money” at my “other” blog site.
What a crazy week. After positive gains in Mortgage Backed Securities (MBS) on Thursday and Friday of last week we started this week very positive as well. Keeping in mind “higher” and “climbing” are good news as I am referring to bond prices, which means rates dropping since mortgage/bond rates drop when the prices on the securities and bonds rise. Climbing through the 200 day moving average on Monday, climbing even higher on Tuesday, Fannie MBS broke through the 25 day moving average early Wednesday morning Pacific. Then as quick as they climbed on Wednesday the dropped, and dropped quickly. Sliding through the afternoon we closed below the closing price on Tuesday. Thursday opened negative and never saw positive territory racing to and then through the 200 day moving average. Today bond holders to a break from selling and about mid-morning began buying again. As a result we end the day and the week where we closed last Friday—no change.
Most of the trading was influenced by economic news, no surprise, which caused some of the positive gains. What led to the very fast sell off Wednesday and through Thursday was the news that the Treasury will be auctioning off $150 billion in Treasury notes next week. Creating that much more supply depressed prices on all the bond markets leading to the drop in prices and climb in rates.
One factor I am keeping my eye on. Earlier this year the Fed committed to buying huge amounts (that is a very technical term that those of us with degrees in economics like to throw around, “huge amounts”) of Fannie/Freddie mortgage backed securities. And for much of the year, as can be seen by the chart, their efforts kept rates relatively flat and stable. So flat and stable in fact that towards from March to---let’s see if we can find a date….looks like our bottom is currently May 15—from March to May 15th rates attracted a very large number of applications in the mortgage industry. So many that April saw the most applications taken since July 2003. The volume was so great that it outpaced the ability of the Fed to purchase MBS thereby allowing prices to drop below what the Fed desired—over supply always drops prices.
Now applications have simmered back down to more manageable levels; levels that can be purchased adequately by the Fed commitment. Because of this leveling of supply that is more in line with the Fed’s purchasing power we may (I am tempted to say should but am not ready yet), we may see rates stabilizing near current levels. We shall see.
Rates flat this week—With the exception of an adjustment in the FHA-Jumbo rates we are flat from last Friday.
30 year conventional 5.375% FLAT
30 year conforming-jumbo 5.875% FLAT
30 year FHA 5.5% FLAT
30 year FHA jumbo 6.125% DOWN .125%
Yesterday I attended a high school graduation for the first time since my own in 1980. What a treat to hear the young speakers encouraging their classmates and the enthusiasm of the families as their kids were announced. Their hopes and dreams do not seem to differ much more than my own when I was at that awkward period of my life between childhood and independent adult. To the special graduates in our lives, for Leslie and I specifically Jacqueline, Tori, Tim and Chad, congratulations! As you move into the next four years of your lives know that you will be challenged and doubted and encouraged and at times deflated. Know that your parents were as well and what served them best is timeless and will serve you best as well: act with integrity, value yourself and your values, require of your friends what you require of yourself and remember the character you display now will follow you so have character and show it. And know that whether you need it or not, a call home to check in once a week or so will keep your compass pointed in the proper direction…and make Mom really happy.
Once last personal note. Thanks Dad, I love you, Happy Father’s Day
Have a great weekend everyone, Happy Dad’s Day to all the Dad’s (and the Mom’s who frequently fill part of the role for us!),
Follow me on Twitter, my tweet: dcslb
Question of the week: I’m thinking of buying a condo instead of a house, what are some of the differences in financing I need to know?
Answer: There are several different issues that arise for condo buyers versus those looking to purchase what we label as a Single Family Residence, or SFR. First and foremost, the Home Owners Association (HOA) will be examined as part of the approval process. Before funding a loan the lender wants assurance the HOA is in good financial shape. As part of the HOA examination the number of owner occupied units will also be a factor, at least 51% of the units in the complex must be owner occupied; note that units that are bank owned are not considered owner occupied and can create an occupancy issue. As well no single owner may own more than 10% of the units in the complex. For new developments or condo conversions this last point can create an issue since the developer or conversion owner stills holds title to the units; in this type of situation the other units need also be in escrow and the closings are coordinated to occur at the same time—or close to it.
Appraisals become a factor in condo transactions, I know they are a factor in all transactions, however in a condo transaction there are comparable sales and listings within the complex that must be used—if the complex is large enough to support that much market activity. There are multiple challenges with condo appraisals. First is the issue of comparable sales, underwriters will want to see comps from inside the complex, both closed sales and active listings. If a complex has had several units go into foreclosure or through short sales they will depress the values in the complex. Second, the data on the appraisal must match and be consistent with the information provided by the title company and the HOA—this sounds basic but it is surprising how many times we get back appraisals with data that is incorrect, more so as we are forced into the HVCC process.
Both FHA and conventional underwriting guidelines have specific policies for condos. First, with conventional loans there is a premium added to the pricing for all loans that have a loan to value greater the 75%; i.e. if you are putting less than 25% down then you are paying a premium for the loan compared to purchasing a single family residence. Second, mortgage insurance companies have stopped issuing insurance in our region for loan to values greater then 90%, i.e. if you are buying a condo with conventional financing you will need at least 10% down. As well MI companies have pushed down the debt to income ratios (DTI) that are acceptable to Fannie and Freddie on condos to 41%; i.e. if you are buying a condo with 10% down then the combined total of your new housing payment (principal, interest, taxes, insurance, HOA dues, mortgage insurance) plus your revolving debt from car payment, credit cards, etc. cannot exceed 41% of your gross income. This DTI limit is a roll back to the underwriting standards before the use of automated underwriting by Fannie and Freddie through their web-based software engines. In a nutshell with conforming financing: at least 10% down, if less than 20% down MI will require tighter DTI ratios, if less than 25% down there is a pricing premium.
For FHA the most basic policy is that the complex must be “Approved” or have no status with FHA—in which case what is known as a “spot approval” becomes part of the loan process. On the HUD website is a page for checking condo approvals. Plugging in the tract number of the condo in the “ID” section and changing the “status” to “All” brokers and buyers can see if a complex is approved, withdrawn, rejected or has no status. If “withdrawn” or “rejected” the complex is unable to have any new FHA financing. If the complex is “Approved” then we can proceed with an FHA transaction. If there is no status then we may proceed, cautiously. For complexes that have no status with FHA there is the possibility of obtaining a “spot approval” for individual units. As part of the processing package we must submit a complete financial package for the HOA and other documentation, the underwriter will then underwrite the complex as s/he is underwriting the borrower. We proceed cautiously because HUD only allows 10% of the units in a complex to have spot approvals. With the explosion in FHA mortgages the past twelve months, particularly in condo financing, many condo buyers have obtained spot approvals for FHA mortgages. The volume has resulted in many complexes being maxed out on having any more spot approvals for FHA.
It is important to note that many properties that appear to be condominiums are actually Planned Urban Developments, or PUDs. PUDs are actually single family residences and as such are not subject to the same guidelines as condominiums. There is no legal definition of a “townhome”, that is a style of architecture, but there are legal definitions for condos and PUDs that separate them due to what the owner of the unit actually owns. In a condo the structure is owned by the HOA and the owner has a shared interest, in a PUD the owner owns the structure and has a non-shared interest in his/her unit.
If a complex is approved an FHA mortgage on a condo is pretty much the same as on a single family residence, with the exception of the 51% or more owner occupancy. The rate and mortgage insurance on the FHA loan is the same as on an SFR, as are the debt to income ratios and other guidelines.
One more item to note on condos is that lenders are now requiring what is called “contents” insurance on condo transactions. Also known as “renters’ insurance” the policy covers the interior of a condo unit against damage from fire, water, etc. and is required unless the master insurance policy of the HOA has specific coverage for each unit—which almost none do. The purpose of the policy is to cover drywall, cabinets, counters, fixtures inside the unit that may become damaged and are the responsibility of the unit owner to repair or replace.
Condos are great way for many individuals and families to become homeowners. Our current market is very active with first time homebuyers and many are purchasing condos. Because of the differences in HOA dues, owner-occupancy, down payment requirements, interest rate costs, etc. it is important that those looking to purchase a condominium or PUD unit stay in close communication with their lender and agent as they preview property and write offers to ensure when they do enter escrow they will have an efficient and smooth closing.
Anyone interested in a primer on inflation and current economic conditions may wish to check out post I wrote on Wednesday at my “other” blog site title “Money”. For those waiting for rates to drop later this year before entering the market I suggest you read this post before waiting.
Lots of highs this week for mortgage rates, and today’s rates are actually the low for the week following a very positive trading session yesterday for Mortgage Backed Securities that continues into today. Using my Friday Rates as a guide:
Conforming rates have climbed four straight weeks following the low on May 15th, today they are their highest since November 28th—when rates were in the midst of a seven week drop that saw rates decline 1.5% during that period. Since the 5/15/09 low conforming rates have climbed 0.75% (three-quarters of one percent); the highest four week increase since one year ago when the conforming rate went through similar climb from 5/16-6/13/09 (capping at 6.375%). The good news here is that the rate is still 1% below last year’s level.
Conforming-Jumbo, or Fannie Hi-Balance, rates have experienced a similar climb and currently sit at high last reached in late January. The Conforming Jumbo has been much more volatile than the regular conforming rate due to the Fed buying of conventional mortgage backed securities in much greater numbers than the high balance securities creating a bit of a falsely lower rate for the conforming.
FHA rates have risen less than the conforming products, up only 0.50% (one-half of one percent in rate) during the past four weeks, partly because of the spread that was created by the Fed buying conforming MBS during the past several weeks generating a greater spread because of the lower conforming rates. Now that the market has been flooded with MBS due to the huge number of refinances put into the market in March, April and May the rates have climbed on conforming to narrow the spread with the FHA mortgages.
As you can see the chart is up the past four weeks and has broken from the relative stability we have seen the past thirteen to fourteen weeks. Listening to the chatter out there it is as if the market has come to a crashing end with our rates climbing, take a breath and look at the chart for the past year. Yes, we are in an up rate environment. Yes, I have been forecasting higher rates, and I think we have some more room to roam upwards. Yes, I think that there is an excellent chance we have seen the bottom on rates. All that said I, we are still in an excellent market for purchasing a new home. Prices in some areas are firming up and rates are still really, really low—heck we are 1% below a year ago.
Taking a look back through my Friday rate charts from 2005 – 2008, here are the annual high rates and dates. Please note that I have always used the same criteria for my Friday rates so we are always comparing apples to apples. Highest conforming rates:
2005: November 6.125%
2006: July 6.5%
2007: August 6.375%
2008: June: 6.375%
2009: Today: 5.375%
Keep in mind that in 2005-2007 there were more lenders, more programs and more options for borrowers which should have led to lower relative rates.
I do think we will reach the highs shown in the past several years, my prediction is that we will reach these rates sometime at the end of 2009 or early 2010—after the economic recovery has begun in the Fall sometime and becomes more widely reported. As for our current up-rate cycle, it is my feeling we will start to stabilize between today’s rate of 5.375% and 5.75% in the next couple of weeks and that will be our range through summer. I could be wrong, I might be wrong, but that is what I am predicting.
Rates up again this week—Always hard to quote rates early in the day as trading is still going on and we may see rate changes today for the better, but as of 10:30 PST:
30 year conventional 5.375% UP 0.125%
30 year conforming-jumbo 5.875% UP 0.125%
30 year FHA jumbo 6.25% UP 0.25%
First day of summer vacation today! Our no longer a first grader Jenna is the one I have to practically drag out of bed Monday to Friday from September to June when it is time to get up at 7:00. This morning I came back from my morning walk with Harrison just before 7:00 and she was already up! No sense sleeping in and wasting all that nothin’ to do on vacation!
Have a great weekend,
Question of the week: Is it true that HUD announced again that the First Time Buyer (FTB) tax credit can now be used for down payment and closing costs?
Answer: Three weeks ago I wrote about HUD Secretary Shaun Donovan announcing that HUD would allow FHA loan applicants to borrow against the FTB tax credit of up to $8000 to use for down payment and closing costs on their FHA transaction. Two weeks ago I wrote about the announcement being “pulled” when someone in HUD alerted the Secretary that FHA guidelines do not allow down payment to be borrowed. Ta-da! HUD has revised the accessibility of the FTB tax credit so some homebuyers can use the funds for their down payment and/or closing costs. It is a little confusing so I will try to make it less so.
FHA applicants eligible for a FTB tax credit can monetize the tax credit for use as down payment through state housing authorities or FHA approved non-profit agencies. The other option for borrowers, that may be more available to average homebuyers, is FHA is allowing lenders and non-profits to monetize the tax credit to cover down payment above the FHA minimum of 3.5% or cover closing costs.
Dennis what does “monetize” mean? Monetize means to turn the tax credit into cash that a buyer may use for the transaction. To monetize the tax credit those eligible must either go through a state housing authority or approved non-profit and complete their process which will result in the tax credit being pledged to them in exchange for the funds being sent to escrow. Option two is for a bridge loan, also secured by the pending tax credit, through the lender. At this time I have seen no communication from any lender willing to set up a program to make $8000 secured loans and am not anticipating a rush of such loans in the near future.
With the ability to apply for the tax credit immediately following the close of escrow and not having to wait to file tax returns for 2009, eligible home owners will see a check in their mailbox with in weeks of closing. Keep in mind that FHA allows gift funds from relatives for down payment and closing. Keep in the mind the difficulties and challenges that will apply to the processes above to monetize the pending tax credit. Keep in mind as well that FHA allows gift funds for down payment and closing costs from relatives. Keep in mind the tax credit should be paid out to eligible homebuyers shortly after closing and the form (below) is completed. Got it?
PLEASE NOTE!! The first time buyer tax credit is not just for FHA applicants. Any individual or couple who is eligible may receive the credit, whether they get FHA financing, Fannie Mae financing, or no financing.
HUD Website News Release
HUD Mortgagee Letter Detailing use of tax credits
IRS Form 5405 for First Time Buyer Tax Credit
This was a bad week for rates. Early in the week we saw Monday reversing last Friday’s gains in the Mortgage Backed Securities markets (which you know from last week’s update are the basis for our rates), while Tuesday and Wednesday were positive days Thursday saw bond prices fall steadily all day off news that productivity was up in May and unemployment claims grew less than expected.
This morning presented us with some good news for the economy and bad news for bonds and mortgage rates. Around 5:30 the Labor Department announced that the unemployment rate has climbed to 9.4%, above the anticipated number of 9.2%, and the highest number in about two decades. This bad news on the economy was released at the same time that layoffs in May totaled 345,000 Americans—a large number but significantly lower than expected and about half the number of layoffs averaged over the previous six months.
This means that while Americans are still losing jobs they are losing them at a slower rate—employers are laying off fewer workers. Before we can see no job losses we have to slow down the rate of job losses and May’s numbers might be signifying the start of that process. If this is the start of the end of the recession then bond investors, as we learned last week, are looking to the future and are investing accordingly. They see inflation at the end of the recession and if that end is coming sooner than previously anticipated they are scrambling to cover their bets…I mean investments. They are selling off on MBS and buying stocks; interest rates and 401(k) values are rising.
Rates spike this week—As you can see from the chart we are up on rates four Fridays in a row, up 0.625% on conforming loans since our 52 week low on May 15th. We may be looking at May 15th in a month or two and saying, “that was the bottom of the rate market.” Rates are volatile to the high side, again as indicated by the chart.
30 year conventional 5.25% UP 0.25%
30 year conforming-jumbo 5.75% UP 0.25%
30 year FHA 5.125% UP 0.125%
30 year FHA jumbo 6.00% Flat
Busy weekend starting for me today as I am off soon to play in the Community Classic Golf Tournament benefiting the Community Hospital of Long Beach Foundation.
Tomorrow we are hosting the Smith Family for the afternoon and then watching the girls perform in “The Beauty and the Beast” ballet with the Long Beach Ballet (we have one bird and one teacup in the performance).
A fun filled few days with friends and family, I hope your weekend is enjoyable as well!
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Dennis C. Smith, California Dept. of Real Estate Broker #00966315 Stratis Financial Corporation, California Dept. of Real Estate Broker #01269597
Dennis C. Smith, California Dept. of Real Estate Broker #00966315
Stratis Financial Corporation, California Dept. of Real Estate Broker #01269597
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