Weekly Rate & Market Update 7-7-17

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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: Now that we are about seven to eight years away from the bottom of the real estate market his is a question that has become more frequent, especially from those living in the first home they purchased and from first time refinancers. With a low mortgage balance on their home, money saved for a down payment on a new home and ability to qualify, many families are wondering if they can retain their current primary residence and convert it to a rental property and purchase a new home for their residence. The question is whether in doing so they are violating their original loan contract, the note, in which they agreed to occupy the home as their primary residence.

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 wording is your pledge 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 refinance from your current mortgage into 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 scenarios 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 more 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.

If you are considering converting your current property to a rental and purchase a new primary residence please give me a call to discuss not only your purchasing and financing options for your new home but the logistics and scenarios of maximizing the financial opportunities that present themselves.

Have a question? Ask me!

Remember, with Dennis it’s not just a mortgage, it’s your complete financial picture.

We found out what members of the Fed whispered about last month when the minutes from the Federal Reserve Open Market Committee (FOMC) meeting were released. The FOMC are the members of the Federal Reserve Board of Governors who set the Fed’s interest rates and policy. The minutes of the FOMC meetings are important as they give some insight as to what may happen next, enabling investors to plan ahead and not be caught by surprise if the Fed makes a move with interest rates or their buying or selling of assets. The minutes from June indicate that the FOMC members are not overly concerned with the lack of inflation in the economy, feeling that a strengthening labor market will lead to increased consumer spending and demand. And the split on the discussion as to when to start selling off the $4.5 trillion in United States Treasury bonds and mortgages from Fannie Mae and Freddie Mac that were purchased starting at the end of 2008 to stabilize the economy and push interest rates down. The purchasing continued well until late 2014 under a policy called “quantitative easing.” Now the Fed is going to undergo a sale of these assets, not all at once as that could crash our economy, but slowly over the next several years. The questions are when and how much should the reverse easing occur and the minutes from the FOMC show more members are wanting to start sooner than later.

What happens? When the Fed begins to sell the bonds and mortgages the impact should be for long term rates to increase—just as they decreased when the Fed bought the assets rates should go the opposite way when they sell them. How much rates are impacted will depend on the overall state of the economy when the assets are sold and how much are sold at various periods. Put too many assets on the market at once and prices tank causing rates to jump creating unstable environment for labor markets and inflation, put too few on the market and they may not be purchased among other competing investments and the Fed does not fulfill its desire to rid itself of the bonds and mortgages. As the year progresses this future sale by the Fed is an underlying issue for investors and the economy. Overall the news and whispers of the unwinding by the Fed is negative for interest rates.

Today is Labor Department Day as it on the First Friday of every month when data for the prior month’s employment markets are released. Very mixed news in the June jobs report as on the one hand it was positive with 222,000 new jobs were created, and prior month’s data on new hires were revised upward by 47,000 to reverse what had been slow hire months to strong hire months. Also positive was the incremental increase in the labor participation rate after a dip in the prior two months. Somewhat positive is an slight increase in the unemployment rate to 4.4% as more people left the sidelines to look for work due to the increase in hiring by employers. On the negative side is that wages and salaries are not showing any significant growth despite the increase in hiring. Essentially employers are able to fill positions without increasing wages to attract workers. Wages increased only 0.2% in June and are up 2.5% from a year ago, barely ahead of inflation. In a strong economy if wages are stagnant then hours worked will increase to show employers paying for more hours to increase productivity from current workers before hiring new workers. That is not the case as the average hours worked has remained steady at around 34.5 hours per week for several months. Over all I see the report as positive for rates as it does not suggest a real strong labor market, more people are working but there is not a significant strength in earnings which would translate into spending.

Rates for Friday July 7, 2017: Well the rates have broken their flatness, but to the upside. Following the FOMC minutes release investors sold off bonds causing rates to bump up, after six Fridays in a row of flat rates we are up 0.125% this Friday from last. I feel the sell off was somewhat technical and then not wanting to be caught and investors should come back to market pressuring rates back down sometime in the next week to two weeks. “Should” being the critical word in the sentence.

FIXED RATE MORTGAGES AT COST OF 1.25 POINTS LOCKED FOR 45 DAYS:

30 year conforming                                            3.875%           Up 0.125%

30 year high-balance conforming                        4.0%               Up 0.125%

30 year FHA                                                      3.375%           Up 0.125%

30 year FHA high-balance                                  3.875%           Up 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 on 20% down (3.5% for FHA) with 740 FICO score for purchase mortgages.

I hope everyone had a fun celebratory day on Tuesday, we were pretty low key most of the day and went to friend’s home in the evening as they have very good view of fireworks from local country club—I have always loved fireworks, probably because my mom went to the hospital not long after a fireworks display at the club in Tulsa to deliver her third child and second son the next day, Wednesday marked my fifty-fifth trip around the big fireball and I am looking forward to the fifty-sixth trip!

Have a great week,

Dennis

This evening we will be having our Annual Flag Collection and Retirement Ceremony in Bixby Knolls as part of the monthly First Friday event. If you have a flag that needs retiring please bring it and we will collect and give to the Boy Scouts for proper disposal. We will be at Georgie’s Place, 3850 Atlantic Avenue, Long Beach at 6:00 and at 7:30 the Boy Scouts will conduct an official retirement ceremony of a flag. A great event if you have never witnessed a retirement ceremony.

 

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