8-17-18: We are retired, how do we qualify for a mortgage?

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Question of the week:  We are retired, how do we qualify for a mortgage?

 

 Answer:  It may be my client base is aging, or it may be that I am fortunate to have more retirees referred to me for assistance with their mortgages, it is probably both, but we are funding exponentially more mortgages for retirees every year. Qualifying income for loan approval is a bit more challenging for retirees than for a younger couple with both spouses working “regular,” salaried jobs. Back to our question, how do we qualify?

 

It is important to note that the vast majority of mortgages are “QRM” designated loan products. Qualified Residential Mortgages came about after the Dodd-Frank Act was signed into law in June 2010 by President Obama. The purpose of the QRM designation was to ensure that banks either funded mortgages for applicants that could prove the ability to make the monthly payments, i.e. show income that supports the mortgage payment. If lenders fund a loan that does not fit the QRM criteria the lender must retain at least 5% of the total non-QRM mortgages they fund, or in the parlance of the times, have skin in the game and face loss if mortgages default.

 

Simply put, a 30 year fixed rate mortgage through Fannie Mae, Freddie Mac or most jumbo loans, is a QRM designated product and as such applicants must prove they have the ability to make monthly payments.

 

Many retirees have multiple sources of income plus assets. Our objective when working with retirees purchasing a new home or refinancing an existing one is to put together a mortgage package that shows “ability to repay” under the guidelines for qualifying income as set for by Fannie/Freddie or the jumbo investors using the available income and assets.

 

Some income is easy to show, prove and qualify. First and foremost is social security income, which is easy to verify as recipients receive a letter detailing the benefit, almost all social security payments are made via automatic deposit into recipient’s checking account and finally the total benefit received and the taxable amount of the benefit are seen on tax returns. Constant, continuing and verifiable, social security income is as good as it gets for qualifying income for a mortgage.

 

Pension income from a prior employer or union is another excellent source of qualifiable income for retirees for the same reasons as social security: there is usually a benefits statement indicating the annual income, it is reported on tax returns and it shows on your bank statements. A few wrinkles for some lenders, are showing you have received the income for the prior six months and/or verifying it will continue for at least three years. It is rare, but there are some pension plans where recipients are paid only ten, fifteen, twenty, etc…years after retirement.

 

Another constant and continuing source of income for some retirees are monthly or payments from an annuity or life insurance policy. This income can be used by verifying the amount, that the income received will be a regular amount and that there is sufficient assets in the policy to ensure payments for at least three more years.

 

A primary source of income for retirees are drawing down of assets from retirement or investment accounts. The two different types of accounts are handled differently by different types of loan products and lenders.

 

The most common asset owned by retirees is some type of retirement account, generally an IRA that consists of funds accumulated while working and paid tax free into a 401(k) or other type of retirement account. One of the best parts of the U.S. tax code is the ability to make tax free contributions to a qualified retirement account while you are working, meaning the income you divert to the qualified account is not taxed as income. In addition, as your account grows through compound interest, dividend reinvestment and capital growth. Because the account grows with no taxes being paid, when you do withdraw funds from the account they are taxed as ordinary income. Also, because you have not paid taxes on the funds the government feels that at some point taxes should be paid so when you turn 70 ½ and have a qualified retirement account you must begin taking “Required Minimum Withdraws” (RMD) from the account. There is a formula that is used based on your age and account balance that determines the RMD you must take each year. These withdraws, or payments, from your retirement account are taxed. And they also can be used for qualifying income for mortgage purposes.

 

Some retirees only take the RMD from their retirement account(s), others set up a regular monthly, quarterly or annual payment that is greater than their RMD as their expenses exceed what they would receive by just withdrawing the required minimum. If you have a regular withdraw amount established that amount is what most lenders use as qualifying income provided you can prove the amount is constant and also that you have at least three years of withdraws in your retirement account using a formula.

 

One last potential source of income we will discuss in detail is if you have a large amount in cash or investment accounts that are not retirement accounts but money you saved, inherited or are the proceeds from the sale of other assets. In certain instances we can use a process called “asset depletion.” Asset depletion guidelines enable us to take a percentage of these assets and then divide by the total number of months in your applied for mortgage to obtain a monthly income amount. For instance if after going through the calculation process to determine how much of your account is eligible for qualifying income we arrive at  $360,000 of your investment account is eligible for income. You are applying for a 30 year mortgage, which is 360 months. We divide the $360,000 eligible amount by the 360 months of payments and credit you with $1000 per month for income for your mortgage application.

 

Some other sources of income for retirees are rental income, distributions from an inherited IRA or annuity or income from employment—perhaps some consulting work you do ten to fifteen hours a week or filling your time as a greeter at WalMart or working at the library.

 

Finally, if you want, or need, to sell your current home and purchase a new one or refinance your existing home and are not able to qualify for a traditional mortgage, I suggest you explore a reverse mortgage if you are eligible. This is a topic I have covered in the past and will revisit next week as I feel it is an excellent financial tool for many homeowners.

 

If you are retired, or someone you know is, and are wondering what options you may have regarding your current mortgage situation or perhaps downsizing to a new home, please contact me to review your financial information and determine how you can qualify for a new mortgage and how much that mortgage might be.

 

Have a question? Ask me!

 

Seventy percent. That is the estimated amount that consumer spending contributes to our nation’s economy. Based on retail sales numbers from July the third quarter could be another quarter of strong growth as spending increased 0.5% in July from June, which was 0.2% higher than May’s spending after being revised down from the original 0.5% estimate last month. Since consumer spending is the biggest factor in our economy strong retail sales mean a strong economy which means higher rates.

 

More for less. Another sector of the economy showed very strong growth in the 2nd quarter: productivity, which was up 2.9%, the biggest gain in more than three years. Not seeming to benefit from the increase were the workers creating the output as the amount of time workers worked increased just under 2%. Showing the biggest increase in four years was output, the goods and service produced, which jumped 4.8% in the quarter. Productivity is output (4.8%) less hours worked (1.9%) totaling the 2.9% growth. The lower rate of growth in hours worked compared to the growth in output is a result of the very tight labor markets, it is easier to increase the hours of existing workers than it is to hire new workers to increase output. This formula can only last for so long however as there is a limit to the amount of output a static set of workers can produce. The news is negative for interest rates.

 

Rates for Friday August 17, 2018: Rates hung on to last week’s dip this week. Shrugging off the positive economic news, investors are a bit concerned with some of the economic news from China and Turkey, and of course very cautious due to the tariff issue still hanging about.

 

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

30 year conforming                                            4.375%            Flat

30 year high-balance conforming                      4.50%               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 with 740 FICO score for purchase mortgages.

 

 

Big Friday night as many top high school programs kickoff their season tonight. With both the girls going to Long Beach Poly, and the older being in the marching band for four years, I have come to really enjoy the Friday night games and atmosphere. We are fortunate in Southern California to have so many great schools that have rich traditions in academics and athletics. If you are a high school sports fan, I hope your teams have great seasons with competitive contests, no injuries and growth for the young men and women participating.

 

Have a great weekend,

 

Dennis

8-10-18: It takes so much money to purchase a home, what are some ideas for saving money?

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Question of the week:  It takes so much money to purchase a home, what are some ideas for saving money?

 

 Answer:  Two of the hardest things to do are lose weight and save money. Both objectives require the same habits, or routines, to be successful. You need to be committed to your goal, dedicated to your plan to be successful; commitment plus dedication equals success. How disciplined you are with your behavior will determine the time frame for achieving your goal, which should be a very realistic part of your goal—not only what you want to achieve but when you want to achieve it.

 

Saving money is pretty simple, just like losing weight. To lose weight you need to be more active than you are now with the same diet, or eat less with the same amount of activity and ideally you are both, more active and eat less. As you begin to achieve success and enjoy the feeling you change your activity to be more physically challenging, and you change your diet to intake fewer calories and also better calories, i.e. more healthy foods and beverages.

 

When it comes to saving money you either need to earn more and spend the same, or spend less while earning the same amount. It is generally easier to control your spending than your income but with some willingness to push yourself you can find ways to do both—the weight loss equivalent of waking up at 5:00 a.m. to work out and stop feeding your cookie cravings.

 

Let’s tackle the harder discipline first: increasing income. Absent getting a new job in your current profession that pays more, which is always the best option if available, how can you increase your income?

 

The most obvious way without changing jobs is to look within your company to see if there is available overtime or other duties you can take on for more income. I have found many clients over the years who have told their employers they want to purchase a home and are willing to take on more duties, even if it means more time at work, to earn the funds needed for a down payment. It is not unusual for many employers to have some additional work available, it is cheaper to pay you more and expand your duties than to hire someone else. As you get closer to your goal keep them apprised of your status so they are invested in your success.

 

Do you have a skill that can be monetized? Are you crafty? Using your free time, you can make things to sell on-line or at local shops. Can you write well? Search for companies looking for content for their websites or blogs, for a few years during the market meltdown I wrote for a company that provided content for mortgage blogs and I was writing content for 3-4 mortgage websites. Are you able to work on weekends or evenings? Perhaps pick up some part-time work? I had one client who worked for three years as a night watchman at a manufacturing facility on Friday and Saturday nights and added 25% to his income—which he put right into savings. What time do you have and what skills do you have that can turn into part-time work to add to your savings account.

 

Reducing expenses and putting money into savings is not that hard, it is just a matter of what you are willing to do without. Just like losing weight, am I willing to do without a cookie or two after dinner, or a glass of wine or a beer after work every night, or pasta three to four times a week? If not my chances of success in reaching my weight goal are greatly reduced.

 

Where are you spending money that could be put into savings? Starbucks is one of the biggest drains on savings accounts in our country. Sure, there are other coffeeshops where a lot of money is spent but the ubiquitous white with green logo cups are seemingly in every third or fourth person walking into office buildings every morning. The average cost for most Starbucks coffee only orders is about $4, five mornings a week that is $20, fifty weeks a year that is $1000. Using a coffee maker or French press (easier to make single or two cup servings) costs about $0.20 per cup. I like to start people saving by challenging their “I have to have it…” Starbucks or morning coffeeshop purchase because once that habit is broken a lot of others are easy. Why? Because it completely changes your morning routine, and for most the routine is for the better as they can start their coffee making process while getting dressed or doing something else and save standing in line and waiting for an order in a retail outlet. Saving $1000 towards what is needed to purchase a home does not seem like a lot and it’s easy to say, “I’ll save somewhere else…” but if you can start here then it makes it easy to stop other expenses and convert them to savings.

 

What are you driving? Do you have a car payment? Is it more than two to three percent of your income? If so then you can save a lot of money by changing your car. I drive a 2006 Honda Pilot and have saved a lot of money in car payments over the years, Leslie drives a 2010 Honda Odyssey van, our daughter has a 2001 Infiniti i30. Obviously, we do not need the newest cars with the newest features, because of this we do not have large car payments. When we shuffle cars later this year when our oldest goes to college the plan is for our 16 year old to get my car, my wife to drive the Infinity and me to drive the van; sometime in 2019 we will get a car for Leslie, but a used car to save money and if we decide to finance do so at a lower loan amount.

 

That’s us, we are not car people. I get that there are car people out there who want the latest and greatest. My advice is to get the garage and then the car. Are you worried your friends or co-workers will make fun of you driving a six-year-old vehicle? Tell them you want to buy a house and aren’t willing to compromise saving to purchase something that sits for more than 90% of the day in a parking lot, garage or on the street. If you have a car with a high payment look at what options you have to trade it in and buy down. If you are near the end of the loan keep the car and do not get a new one. If you are leasing talk to the dealer about options to reduce your payments or purchasing a used car with a low loan amount. It is not uncommon for me to meet with clients who have two large car payments that are almost 10% of their gross income who are renting and are short of funds needed to purchase a home. Sell one or both of the cars and get into cheaper payments. Last year I went through the math with a couple and within two weeks sold their less than one year old cars and purchased used cars, they are saving almost $1000 a month in car payments and will be buying in the Spring. Like your morning coffee, your car may be a necessity but how you fill the need may be a luxury.

 

Another big expense item that many do not like to curb is entertainment. Concerts and sporting events are very costly, they can easily cost as much as ten to twenty weeks of Starbucks purchases. It can be tough to tell your friends, “hey we can’t afford to go we want to buy a home,” but good friends will understand, others will try to guilt you into breaking your commitment and dedication. Nights out at expensive restaurants, trips with large airfares and expensive hotels, also have the ability to take a lot out of or put a lot into your savings accounts. Part of your commitment is to forego many fun adventures for the bigger goal, owning your own home.

 

Success requires trade-offs, what are you willing to trade for success? Where are you spending money now that could be reduced or eliminated in order to put more money in your savings account? Most families have no idea where they are spending their money so do not know where they can cut back. Pull out your bank and credit card statements for the past several months—ideally for a year—and categorize all your spending into categories: necessities, which are only housing, food for home and utilities for now, transportation, dining, entertainment, travel, clothing (yes, it is a necessity but it depends on what you are buying and how often). Add up the totals you are spending and you may be surprised at not only how much but where you are spending your money. Then start making reductions and eliminations.

 

If you are married this process needs to be done with no judgment, one spouse may be a clothes horse and the other a car nut; or one buys a lot of very nice wine and the other plays a lot of really good golf courses.

 

Once you are in  your home you can determine if you can, or want to, start adding back some of the spending you have cut during your saving period.

 

It bears repeating: Success requires trade-offs what are you willing to trade to purchase your home?

 

Have a question? Ask me!

 

Spend more, borrow less. That is what consumers have been doing, at least less spending on credit cards. Credit use for revolving credit has been dropping while consumer spending has been growing, interestingly the personal savings rate has been increasing. So consumers are spending their some of their earnings for purchases that have been put on credit cards in the past, and are borrowing on long term loans for large expenditures like autos and college.  This is generally good news for the economy as it shows consumers have a positive outlook for their personal economic future. This is not a big mover for mortgage rates except as it feeds into the overall data on economic strength and outlook.

 

Prices won’t push rates, for now. Following June’s strong increase in the Producer Price Index (up 0.3%) wholesale prices cooled off to no increase, or decrease, in July. Following the increase in June for wholesalers it is little surprise that the Consumer Price Index increased from 0.1% growth in June the CPI increased 0.2% for July. The “core” price increase (no energy or food costs) was up 0.2% for the month and 2.4% year over year, the highest increase in the index since September 2008…the month before the real estate and mortgage market melt-downs. The news is not positive for interest rates, and pretty much cements the Fed increase rates in September—which means those with Home Equity Lines of Credit will see their rates increase by 0.25%, possible but not probably more.

 

Rates for Friday August 10, 2018: Rates improved from last week, primarily because the Treasury $78 billion in U.S. debt that was absorbed rather easily in the market, investors liked the market reaction and rates dipped strongly on Wednesday. The price data mentioned above was somewhat expected, therefore priced into the market, so did not negatively impact mortgage rates. Overall rates have reversed their increase from two weeks ago. The trade tension between the U.S. and trading partners may come to a head next week, causing rates to make a significant move one way or the other—keeping in mind rates generally go up like a rocket and down like a feather. Be cautious.

 

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

30 year conforming                                            4.375%            Flat

30 year high-balance conforming                      4.50%               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 with 740 FICO score for purchase mortgages.

 

 

Channeling Gene Rayburn and the original Match Game, I keep thinking this week, “It has been so hot lately. (Audience, “How hot is it?”) That Mildred’s BLANK melted off.” I have weird thoughts.

 

I have had some inquiries and I will admit to procrastination of a task I need to do but not looking forward to doing. When I had my website rebuilt earlier this year I had not yet learned how to effectively put my Weekly Rate & Market Updates on the site. As well there was a gap in the WR&MU from when they were migrated off my old site to when it went live. My objective this month is to reformat the updates, put a title on them referencing the Question of the Week, and loading up 2018 to date on the site with the new format. Your patience is appreciated and I think this will make the site and updates more useful for research on particular topics of interest for you, your friends, clients and family members.

 

Stay cool and have a great week,

 

Dennis

7-27-18: What is primary factor that could slow the housing market and cause a drop in prices?

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Question of the week:  What do you see as primary factor that could slow the housing market and cause a drop in prices?

 

Answer:  In addressing this question I will be using the Southern California market as the “housing market” since that is where the majority of the Weekly Rate & Market Update live.

 

The most basic principle of economics is that of supply and demand determine price. If supply is greater than demand prices drop, if demand is greater than supply prices rise.

 

The past several years we have seen demand greater than supply and as a result prices have risen. During this period the number of sales has also increased. With prices and transactions increasing we have seen increasing inventory hitting the market but demand increasing faster than the inventory available for sale.

 

The most recent data show home prices continuing to grow, but the number of transactions decreasing. Demand still is higher than supply, but supply is shrinking. Will this lead to even higher prices, or is it an indicator that the market will slow and the total number of sales and prices will decline? This is the multi-billion dollar question, literally.

 

Over the past several weeks I have been in several discussions with professionals in the real estate, mortgage, accounting, commercial lending and financial services industries with the primary topic being, what is the threat to housing markets, what will cause the market to slow and put downward pressure on rates.

 

Demand will remain high for some time, which puts a nice floor under the market to absorb supply. Supply will remain tight for some time absent some major economic event, such as very high unemployment. With these factors prices should be strong. So where is the threat.

 

There is a difference between demand for a product and ability to purchase a product. Instead of demand we will say “desire.” There will remain a high desire to purchase homes by families, this becomes demand when their ability matches their desire.

 

There are two ways to purchase a home, with a loan or without a loan. Those able to purchase homes in Southern California without a loan are not overly prevalent, much more so in the very high end of the market, but those transactions have limited, if any, impact on the overall market. Therefore, the real estate market for the overwhelming majority of buyers and sellers is dependent on home buyers being able to obtain a mortgage for their purchase.

 

Qualifying for a mortgage has three main components, known as the three C’s: Credit, Capacity, and Cash. Credit is how much you owe, what your payments are and your history of making those payments. Capacity is your ability to repay the mortgage, i.e. income. Cash is how much money you have for down payment which determines the loan amount.

 

Every borrower is limited by one of these factors when determining the maximum sales price and mortgage for which they qualify.

 

While there are those who desire to purchase a home who have less than good credit, there are not enough of them to impact the housing market.

 

With increasing prices, which means higher loan amounts, and higher rates it takes more income today to qualify for the median priced home than it did last year, or the year before, or the year before, or… However, we have found that most of our clients have incomes sufficient to qualify for the home price they feel comfortable purchasing. While necessary income to qualify is a damper on the housing market due to prices and rates increasing, we have not seen it as a strong barrier for most families entering the market.

 

This brings us to cash. It is my feeling, and supported by many in my conversations, that cash for down payment is becoming the primary barrier to home ownership for many families. Further, part of this barrier is self-imposed.  What does that mean?

 

There has always been, and likely will always be, a very negative sentiment about mortgage insurance. For those not aware of mortgage insurance, it is a cost added to mortgages that are greater than 80% loan to value. As a result of this sentiment most families feel they need to have 20% of the purchase price to purchase a home. While they are working to save the 20% prices are increasing on homes they could have purchased with mortgage insurance.

 

Two families, the Bakers and the Fryerrs, each make $100,000 a year in 2016.  The median priced home in LA County is about $500,000 so $100,000 is needed for 20% down payment. Both families worked hard to save and both had saved $50,000. The Bakers decide they want to continue to save until they get to the 20% down number and figure by really cutting their expenses they could do this by June 2018.

 

The Fryers decides to purchase a home, and because they have only 10% down pay mortgage insurance. They purchase the median priced home for $500,000, get a $450,000 mortgage with an interest rate of 3.375% and pay $1990 for the mortgage $110 per month in mortgage insurance for a total of $2100.

 

Even with rising income and rising prices the Bakers meet their savings objective of 20% down payment and purchase the median priced home in June 2018. They pay $585,000 for the home put $117,000 down and get a $468,000 mortgage at 4.5% with a payment $2370 per month for their mortgage.

 

Due to the rising prices and their declining mortgage balance and that they have made twenty-four consecutive mortgage payments on time the Fryers are eligible to remove their mortgage insurance payment and lower their monthly payment by $110 per month to $1990.

 

By not waiting until they saved 20% for the down payment the Fryers have almost tripled their initial down payment in equity and have a house payment that is almost $400 per month lower than the Bakers and paying about $1000 less per year in property taxes.

 

So, what is the issue with mortgage insurance?

 

It takes a lot of money to purchase a home in California, especially in most Southern California areas. Even 10% down can be a very large percentage of your total gross income, 20% down may exceed your gross income. Because of this cash is the biggest barrier to homeownership in the region. However, those willing to pay some form of mortgage insurance can get in with as low as 3.5% down for FHA mortgages, or depending on the price 5% or 10% down for non-FHA mortgages (if you are a Vet you can purchase with zero down).

 

Those who have been waiting for to save higher down payments have lost tens, hundreds of thousands of dollars in equity while chasing higher prices.

 

While I see cash to close as the biggest barrier to home ownership, I know there are options to lower that barrier. As well, I do not see the housing market undergoing an extreme correction due to this barrier, but it could slow down the number of sales and cause home prices to slow or decline slightly in the medium to long term.

 

Do you, a family or friend have savings in your bank, investment or retirement accounts and want to purchase a home but feel you do not have enough money saved to do so? Call me to go through your options for purchasing your new home.

 

 

Have a question? Ask me!

 

It’s summer, it’s hot and so was the economy in the second quarter. Today the Gross Domestic Product for April through June was released and while it was lower than expectations it still showed 4.1% growth, almost double the 1st quarter growth. Leading the way was the consumer as spending jumped 4% in the quarter, mostly on services. Shrinking inventories kept the growth under 5%, however the low inventories are a positive for 3rd quarter growth as those inventories will need to be replaced causing economic activity. This is the first quarter with over 4% growth in the third quarter of 2014. In the report this morning was a 3% growth in the price index, which was above expectations. The report is negative for mortgage rates due to the combined strong economic growth and increase in prices. While the mortgage markets have built in rate hikes of 0.25% by the Federal Reserve in September and December, more reports showing economic growth and prices similar to today’s reports will push mortgage rates even higher.

 

Rates for Friday July 27, 2018:  While mortgage markets had no impact to today’s GDP numbers since they had been anticipated, the same cannot be said for Japanese credit markets. Earlier in the week speculation was out that the Japanese central bank was going to alter its policy and push up interest rates in Japan. If true this would impact U.S. credit markets and to get ahead of the actual news investors sold off American long term debt, like mortgages. The sell-off resulted in rates jumping on the speculation. The Japanese central bank meets on Monday and Tuesday and investors have held their position on long term debt to see what, if any, policy changes will be made. Should the speculation be true most of the impact has already been priced into our markets, if the announcement is no change we could see rates dip back down next week. For this Friday rates are up for the week, more so on the high-balance products than the conforming products, rates are at five week highs.

 

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

30 year conforming                                            4.50%                         Up 0.125%

30 year high-balance conforming                      4.75%               Up 0.25%

 

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 with 740 FICO score for purchase mortgages.

 

On Sunday we visited the King Tut exhibit at the California Science Center. I highly recommend the exhibit, especially if you are a bit of a history geek like I am (okay, I’m more than a bit). We went early and it was not very crowded, though it did become more so towards the end as Leslie and I read everything, much to the chagrin of the 18 year old, and those mostly walking through caught up to us. The detail and workmanship on many of the pieces from 3,000 years ago is fantastic. Another bonus is the air conditioning!

 

Making the day even better was a short drive to Phillipes, the Original in its 110th year for some French dipped beef sandwiches—they invented it you have to have it!

 

Have a great week,

 

Dennis

7-20-18: What is the process for our mortgage application when we purchase a home?

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Question of the week:  What is the process for our mortgage application when we purchase a home?

 

Answer:  Mortgage application packages are very deadline oriented. For a purchase this is because we have a closing date that is agreed upon by the buyer and seller, for a refinance the deadline is when the rate lock expires.

 

Here is a not so detailed look at the timeline on a purchase, much of it is the same as with a refinance.

 

Ideally the first step in your mortgage process when purchasing a home is we have detailed conversations and review your records to determine your ability to qualify for a mortgage to purchase at a certain price with a certain amount down. This is the pre-qualification, or pre-approval, stage. We review your income by looking at paystubs and tax documents. We obtain a credit report to see you credit score and confirm your balances and payments on outstanding credit. We look at your asset statements so we know how much we have in funds for down payment, closing costs and reserves if necessary. And we discuss your objective, long term plans and other factors that may influence the amount and type of mortgage that would be ideal for you and your family. This step can take an hour or several days depending on the complexity of your finances or issues we need to address. Next step: Look at houses and write offers.

 

You have your offer accepted and we begin the formal application process. At this stage we complete any information for the loan application so you can sign the application and disclosures. We collect necessary documents supporting income, credit, obligations, funds being used for closing and other items we discuss as necessary. Once we have the signed application and necessary items we lock in your loan rate for a specified period of time that matches your escrow time frame but in 15 day increments (i.e. lock for 30 or 45 days). As well, we communicate with both your agent and the seller’s agent to establish clear lines of communication, confirm who will be the person for the appraiser to contact to set up inspection of the property. We also initiate contact with the escrow officer to make sure s/he and our staff have each other’s contact information as they will be sending a lot of information and documents back and forth. Finally in this stage, we order the appraisal. This stage is generally one to two days depending on how quickly you get the required items to us. Next step: Processing.

 

During the processing period our staff is collecting the necessary information to ensure underwriting will approve your loan as applied for. All your information will be reviewed and verified. During the review our staff will ask questions that may need additional information to support answers: what is this large deposit, there are some statements in the tax return that indicate another business or sources of income to verify. At this time they are also collecting necessary documents for the approval. The appraisal report will be completed and reviewed. We will obtain a copy of the preliminary title report on the property. Escrow will send us the escrow instructions which detail the agreement between you and the seller. We will communicate with your insurance company to ensure there will be sufficient coverage of the property to protect the lender should there be fire or other major damage. Any loose ends or issues that may arise as all this information is collected and reviewed are addressed and the necessary parties are contacted and additional information requested to cover the issue so underwriting will approve the file. The timing for this stage depends on the how quickly others respond to our request for items. If the listing agent puts off the appraisal inspection for a week or ten days that slows us down. If we request additional statements on an account, tax returns on a business entity, source of funds, this can slow us down if the information is not forthcoming. If everything is into us in a very timely manner this step should be about 10 business days. Next step: Underwriting.

 

The mortgage application package, at this point several inches thick (our record is over 1 foot high with clients who had multiple companies and properties resulting in about ten tax returns for various entities). All the documentation, disclosures, reports are then sent to the underwriting department. Once received it is assigned to an underwriter who reviews the file and issues an approval, usually “conditional” approval as the underwriter generally asks for items to complete the file, an updated paystub, a letter of explanation for some issue, clarification on the appraisal, support for continuing income from commissions, overtime or bonus, a myriad of items may come up. The underwriting period is generally two to three business days. Depending on the additional conditions requested the time frame from initial approval to final approval can be as short as 3 to 4 days or considerably longer depending on conditions requested and ability to provide them. Next step: Loan Docs.

 

Once we get the approval and are moving into the final stages of the transaction we will issue to you the Closing Disclosure (or CD). We usually like to issue this via DocuSign as when you acknowledge the CD will start a timer on when you can sign loan documents, which is three days not counting Sundays and holidays. So if we issue the CD on Friday and you open the link and “sign” on Sunday you cannot sign loan documents until Wednesday, if you had signed on Friday you could sign docs on Tuesday. Does one day make a difference? Next step: Funding.

 

The loan documents will be sent to escrow and available for you to sign the day you are eligible to sign after the CD rescission period is up. Escrow will contact you to set up a time to sign in their office, or if more convenient set up a mobile notary. At this time we will know the amount of funds needed to complete the closing of the transaction. Escrow does not take personal checks, the funds for closing need to be either via a cashier’s check or a wire (see important note below). After you sign loan docs and your funds are in escrow we fund the loan. If we have the loan docs in our office in the morning and all is in order we can fund the day we get the loan docs, the time from doc signing to funding can be as short as one day. Next step: Closing.

 

Closing occurs when the deeds are recorded by the title company at the county recorder where the property is located. The grant deed conveying title from the seller to you is recorded first, then the trust deed securing the property as collateral for the mortgage is recorded. Depending on what county you live in recording happens either the same day (Orange County is a same day recording county), or it occurs the next day (Los Angeles County will not allow funding and recording on the same day). This is where that one day difference on the CD can impact closing. Since we cannot fund and record on the same day in some counties we very rarely fund a loan in those counties on a Friday for many reasons, for one you are paying interest for two additional days on a property you do not own. Second, if something happens to the property, or the current owner, we have two loans on the property and two insurance policies (your policy must be in effect before we can fund). As you can imagine this creates several issues that need to be unwound. While something could happen to the property between funding on Wednesday and recording on Thursday, it is less likely than something happening between funding Friday and recording Monday. So the closing step is either same day or next day. Next step: Move In!

 

NOTE, VERY IMPORTANT! There has been a wire fraud scheme occurring with real estate closings. The scam works like this. You are in escrow to purchase a property and you receive an email from what looks like your escrow officer. It is instructing you to wire your funds for closing and provides the necessary information. The email has the escrow company’s email address, signature on the email looks the same and by all accounts is from the escrow company. This email will come near closing but before funds are usually asked for from escrow. What has occurred is that at some point your email was hacked, it could have been last month or last year or even longer ago. The hackers run your emails through their filters which are set to look for keywords in your emails, such as “escrow,” “mortgage,” “purchase home,” etc. When any keyword occurs the account is monitored to determine is you are engaging in a real estate transaction. The next step is to determine who is who in the communications and then spoof the email account for the closing agent, i.e. escrow, and send you the email requesting you wire the funds into the scammers account. Do not reply to the email, do not send the funds to the account listed in the email and do not call the number listed in the email as chances are it is not the escrow company you are using. Before sending funds call the escrow officer from the number printed on the escrow instructions you have, or by getting the number from us or your agent, and verify the amount of funds required and ask them to send you an email with the wire instructions, then call back to verify the information is correct.

 

As you can see the time frame for closing an escrow on a purchase can be 30 days or a little less, or longer depending on everyone having the information needed and requested and providing it in a very timely fashion. Closing times are dependent on many actors all performing together and when needed.

 

Have a question? Ask me!

 

Consumers appear to be happy. Retail sales for June were reported on Monday and showed a 0.5% increase from the prior month. This is good news, what was pretty incredible news was that May retail sales were revised upward 0.5% for a total increase of 1.3% from April, that is a very rare number to reach. Auto sales had strong months in May and June, up almost 1% each month, and restaurants also showed strong increases, up 1.5% in May and 2.6% in June. This news indicates consumers willing to increase their discretionary spending, what’s more discretionary than eating out instead of at home? The news is somewhat negative for rates as higher consumer spending supports stronger economic growth, which leads to higher interest rates.

 

Historic is the word to describe yesterday’s jobless claims report. Last week 207,000 initial jobless claims were filed, the lowest weekly amount since December 1969. Continuing jobless claims, as sign of length of unemployment, are at 1.738 million which is at a level last seen in the early 1970s. The news is interest rate unfriendly as a tight labor market can, should, lead to some wage inflation which will lead to higher interest rates.

 

Rates for Friday July 20, 2018:  The economic data suggests rates should be higher than they are, especially with the Fed selling off billions of dollars of mortgages and bonds every month. However investors, who ultimately control interest rates, do not look at just American economic data when making their decisions on what to buy and sell for long range profits, the also look at foreign economies, and as importantly domestic and international politics. It is the latter that has investors holding onto their fixed return investments (i.e. mortgages and bonds) as a hedge against some major event that could trigger a run on bonds and therefore lower rates. It is a strange set of market circumstances we have been experiencing. Thankfully we have benefited from flat rates for the past two months.

 

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

30 year conforming                                            4.375%            Flat

30 year high-balance conforming                      4.500%             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 with 740 FICO score for purchase mortgages.

 

We have been down to one kid in the house since early in the month as the younger one is spending her annual month in Minnesota at camp, unfortunately for the older one she is basically termed out this year and must spend the summer at home. It has been nice to have her home with us since she leaves in 4-5 weeks to Boston for college and then we will be a one kid home for a few years before the younger ones decides to leave as well. We are in that period when our oldest is still our daughter and little girl but our relationship is slowly transitioning to daughter and adult. Certainly a unique summer for our family, and one that we will fondly remember for years to come. I hope you and your family are having a great, and unique, summer as well!

 

Have a great week,

 

Dennis

7-13-18: How do inquiries impact my credit score?

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Question of the week:  How do inquiries impact my credit score?

 

Answer:  A lot or not at all.

 

Quite frequently we have new clients tell us, “don’t run a credit report because I don’t want it to hurt my score.”

 

My response is, “First I cannot give you a solid pre-qualification and absolutely no pre-approval without running my own report, and second it will not impact your score unless you have had several inquiries recently—have you been speaking with other mortgage professionals and have any of them run reports and if so when?”

 

Conventional wisdom is that credit inquiries push down your credit score, so when you need credit just by applying your score drops, which may mean a higher rate or credit denial.

 

Conventional wisdom is not always right, especially when it comes to credit reports. Let’s take a look at when credit inquiries do harm your score and when they do not.

 

If you are applying for several credit cards, department store cards or signature lines of credit the chances are your credit score will be negatively impacted. If you are applying for one such item of credit your score will most likely not be impacted at all. The credit score programs have in their algorithms risk factors and if they are told that you are making several inquiries to obtain revolving, easy to access credit that activity is a high credit risk—it is evident you are searching for funds from many sources. What if you apply for two department store cards and two credit cards within two weeks. You could very quickly have access to several thousand, tens of thousands, of dollars in credit. If you already have several open credit accounts with high balances compared to credit limits these inquiries will push your score down considerably.

 

If you have some open credit accounts and the balances are not very high compared to available credit and you apply for a new credit card, say one that will give you airline points so you can leverage your purchases for plane tickets to visit your kid at college, if this is the only revolving credit inquiry on your credit report then your score will not, should not, be impacted.

 

What about purchasing a home? We routinely see credit inquiries on our clients’ credit reports from other mortgage lenders, usually over the past month or so, and these inquiries do not generally impact the credit score. I say generally because if there are more than five or six there could be an impact but not necessarily. As a rule three or four, or fewer, inquiries for home loans will not impact your credit.

 

The reason for this is that it is not unusual for someone looking to obtain a mortgage, either for home purchase or refinance, to call more than one lender (unless they call Stratis Financial which is usually the last call needed). This behavior is programmed into the credit score software, so if there are multiple inquiries from mortgage companies in a somewhat short time frame, about 4 weeks or so, your credit score is not impacted.

 

The same is true about auto loans. Many people speak to many car dealers, who run reports themselves or through different banks, looking for auto loans and these inquiries are treated similarly to mortgage inquiries.

 

If you have multiple inquiries for long term debt obligations, like home or auto loans, you credit score will likely not be impacted, if you have multiple inquiries for revolving credit your credit score will likely be impacted negatively.

 

Have a question? Ask me!

 

Pressure, no pressure, was the impact on interest rates with the price data released this week. On Wednesday the Producer Price Index for June was released and the data put pressure on rates to increase as wholesale prices increased 0.3% for the month and were up 3.4% from last June (2.8% when food and energy are stripped from the data, called the “core” rate). This strong data for prices caused great anticipation for the Consumer Price Index data release the following day. Would the stronger PPI figures show inflation for consumers beyond what the Federal Reserve would prefer? No, the CPI data did not show a significant increase in prices in June, putting Fed interest rate decision makers at ease. Month over month prices rose a scant 0.1% for you across the economy’s basket of goods and services and the generic American consumer paid 2.9% more than in June 2016 (2.3% using the core rate). This data was met with a bit of a sigh, and a shrug. Looking ahead, will the June wholesale price increase bleed into July for consumers resulting in higher rates? We will on August 10th when that data is released.

 

Rates for Friday July 13, 2018:  A tame week in the rate markets with not a lot of movement, so little that rates are the same as last Friday. We like a flat market!

 

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

30 year conforming                                            4.375%            Flat

30 year high-balance conforming                      4.500%             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 with 740 FICO score for purchase mortgages.

 

 

While we have had some significant summer heat early in July, we are still a week away from the Dog Days of Summer, which officially begin on Sunday, July 22nd and end on Thursday, August 23rd. Wait, there are official Dog Days of Summer? Yup. Based on ancient Roman and Greek astronomy, the time when the star Sirius (the star that is the nose of the constellation Canis Major) rises in the morning before the sun. This year Sirius will rise before the sun starting next Sunday and ending on August 24th (the sunrise after August 23rd).

 

In those times the period of the dog days were not looked forward to as it was during this period when sickness, war and catastrophes would occur—perhaps coincidence, perhaps not!

 

Have a great week,

 

Dennis

7-6-18: When should we have our credit report pulled when exploring the purchase of a new home?

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Question of the week:  When should we have our credit report pulled when exploring the purchase of a new home?

 

Answer: “We got a copy of our credit report on-line, can you just use that?” This is usually the question that precipitates our question of the week.

 

When should you have a credit report pulled? Our most common answer to the Question of the Week is, “that depends…” and it applies in this case as well.

 

Many people are fearful of having credit reports run because they are concerned the inquiry will hurt their credit score. As a result, when we ask them somewhat generically, how is your credit history, they often reply that they recently obtained a report on-line and would like us to use that for their pre-qualification and approval.

 

If we are in the very preliminary stages of the qualification process, using a generic report from one of the free on-line services can be helpful, but we will not issue a pre-approval or a strong prequalification recommendation unless we are able to obtain our own report.

 

Why?

 

Because. (I’m a dad so I get to answer “why” questions with “because.”

 

We need our own report for several reasons. First and foremost, our reports are what are known as “tri-merge” reports, meaning they include the data from the three main credit reporting bureaus, Equifax, TransUnion and Experian. This will provide us with a very complete credit history and with credit scores from the three bureaus so we know which score will be used for qualifying and rate pricing (we use the middle score, if two or more borrowers we use the lowest middle score).

 

Second, not all credit companies report to all bureaus. We have seen many “clean” reports over the years provided by one credit bureau and then when we pull our tri-merge items appear that were reported to one of the other bureaus. For instance, you obtain a report from Equifax and it shows your car and student loans, credit card balance and history with a late payment from Macys in 2013. That is pretty good. However, when we pull our report there is a collection from a medical bill in 2013 that showing unpaid that reported to both TransUnion and Experian. Suddenly we have an issue to deal with we did not know about. As well, the collection will give you a lower score on the bureaus reporting it than the one that did not, how much lower? Does it knock us out of the program we want to use? Does it change the rate significantly?

 

Back to our question of the week, when should we have the tri-merge report pulled?

 

It depends on where you are in the process. Are you just starting the process of purchasing your new home? You have really looked yet but have been talking about it and want to see where to begin, how to begin, what needs to be done to begin? If that is the case you are likely going to be some time away from actively engaging in the process, in which case we will probably speak in generalities, broad strokes, and begin prepping for the full on assault on the housing market.

 

 

If in our initial conversation you make some statements or provide some answers that leads me to believe we might have some issues creep onto the credit report I would suggest we pull a report to get a starting point and see if we have any work to do. What might come up that would lead us to want to pull a report? You are divorced—how did the credit separation go? Are you still linked to your ex-spouse on any open accounts? You mention you had a medical issue in the past that took some time to resolve—did any accounts go to collection? You are self-employed and had to change tax preparers as you were not satisfied with his/her performance—were there unpaid taxes that became a lien? There are several variables that thirty years’ experience can hear and suggest a credit report.

 

One thing we consider when strategizing the credit report is that after sixty days lenders will want a new report to make sure nothing has changed. If we pulled a report May 5th, and you are still looking for a home today, do we pull a new report them?

 

Probably not. Once we pull our initial report we tend to stick with that for as long as we can. In the current market it can, and does, take some buyers several months to find the home they want, and can, buy and have their offer accepted. If we did pull a report in May, or even April, and you write an offer this weekend, as part of my pre-approval package I would include the information form that May, or April, report and advise that we do not want to pull reports every sixty days to reduce inquiries with your credit bureaus and one of the conditions of the seller’s acceptance of your offer can be my providing updated information on your credit scores and ability to qualify within 24-48 hours using a fresh report.

 

On the one hand we do like to limit the number of reports we pull. On the other hand we have to have the tri-merge report to know exactly what we are going to be dealing with for qualifying and approval.

 

When is the best time to have your credit report pulled? Just before we are in “go mode” for a home purchase and will be writing offers, or if you think there may be some issue from the past that could have an impact or be an issue we need to deal with.

 

Next week we look at credit inquiries and their impact on your credit score.

 

Have a question? Ask me!

 

 

Words and numbers impact rates. Words released by the Federal Reserve Open Market Committee (FOMC) from their last meeting in June when it raised rates by 0.25% indicate Fed members see labor markets continuing to tighten and inflation should retain its 2% level in the near future. Concerns about the future were expressed as short-term rates are approaching long term rates, what is known as a flattening yield curve. This rate behavior often coincides with a recession—is the Fed predicting one? Not exactly but keeping an eye on data that often does. The minutes gave some relief to investors anticipating higher rates in the short term as the minutes were somewhat rate friendly.

 

The data supported the Fed’s assessment.  Our monthly First Friday Labor Department release of employment data happened this morning and most of the data supports the Fed’s course of two more rate increases this year. The economy added 213,000 jobs in June, over 202,000 in the private sector. As well the labor force grew by 601,000 in June. This increase in the job force caused the headline unemployment rate to increase for the first time in a long time from 3.8% in May to 4.0% in June. The increase is result of the growing work force, i.e. more people seeking employment, and the labor participation rate (percentage of individuals eligible for work who are working, or participating in the workforce) increasing from 62.7% to 62.9%. This news is rate neutral to the extent most people who follow this sort of thing anticipated numbers close to what was released. The number that caused some pause was the earnings portion of the report as wages grew 0.2% for the month and are up 2.7% from last June. This relative slack increase in earnings as employment grows indicates more workers are seeking work enabling employers to hold wages steady. This removes some concerns about inflation being driven by wages, and is rate friendly.

 

Rates for Friday July 8, 2018:  Our last recession ended in June 2009, it would certainly seem a course correction for the economy is long over-due as we start our tenth year of economic growth. That is just back drop for the political and economic issues that are impacting domestic and international economies that have more and more economists and investors starting to look at the horizon for signs of an economic downturn. When economies slow down or go into recession interest rates either lead in anticipation, or follow. The possibility now being brought up more and more of not whether but when the next recession will occur puts a bit of a parachute on rates trying to climb.

 

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

30 year conforming                                            4.375%            Flat

30 year high-balance conforming                      4.500%             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 on 20% down with 740 FICO score for purchase mortgages.

 

How messed up is your internal calendar? Mine was out of whack all through June for whatever reason, I’m blaming school being let out and my routine being thrown off. Now starting the month with a holiday smack in the middle of the week has me really thrown off. Did we get two Mondays and two Fridays this week? I need a Tuesday and/or Thursday thrown in once in a while—but that does not mean I advocate for our Independence Day celebration and holiday to become a mandated Monday holiday with different dates every year a la Labor and Memorial Days.

 

I hope you enjoyed your celebrations on the 4th, our family did.

 

Have a great week,

 

Dennis

6-29-18: Why have I received a lot of solicitations for mortgages recently?

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Question of the week:  Why have I received a lot of solicitations for mortgages recently?

 

Answer: Because the credit companies sell your information to credit companies.

 

Data mining and selling has been in the news a lot in the past year, mostly centered on Facebook and other social media companies. But selling data is not new. It is a huge, and often sole, revenue source for many companies that do business on the internet. The major credit agencies are no different and have contracts with credit providers for many types of credit, mortgages, auto loans, credit cards, student loans, to provide the credit information for consumers who have credit reports run by companies within their industry. If you apply for a credit card from a department store you can expect to get credit card offers in the mail. If you apply for an auto loan you can expect to get offers for auto loans.

 

If you apply for a mortgage…here is what happens in our case.

 

When we run credit reports we use a company, Funding Suite, that provides us a detailed report with data from the three major agencies, Equifax, Experian and TransUnion. When these companies see that there was an inquiry on your account from a mortgage company processing an application for a residential mortgage that triggers their algorithms. Sifting through the data on location, balances, payments and most importantly your credit score, the agency sends you information to mortgage companies that have paid them for data that meets certain parameters.

 

The mortgage company purchasing the data processes the information and sends contact information to their marketing department and contact is initiated.

 

We have learned a loophole that works some, not all but some, of the time by masking your application on the initial inquiry as for a non-residential mortgage, but that dodge is being figured out by the programmers and data is still being sold.

 

There is good news. You can stop the solicitations by opting out of receiving offers from credit providers. Click on this link. At this site, OptOutPrescreen.com, you can choose to opt out of receiving offers for five years, or permanently, or if you want to receive offers for credit cards, auto loans, etc you can choose to opt-in to receive offers. As the site shows, there are some advantages to receiving offers that you may want to consider before opting out of all offers.

 

When you receive any type of unsolicited credit offer please keep in mind the primary purpose of the solicitation is to get you to reply, then it is a numbers game for the credit company to convert a certain percentage of responses into applications and then a percentage of those into new accounts. Because of this the initial marketing message is *certain conditions apply; meaning the rate/terms on the offer are usually not what will be offered.

 

Next week we will discuss when you should have a credit report pulled when exploring the purchase of a new home.

 

 

Have a question? Ask me!

 

 

There is no shortage of news that impacts mortgage rates. Consumer spending is approximately 60-70% of our economy, so data on consumer confidence impacts interest rates. In May the Consumer Confidence Index dipped slightly, mostly on the expectations component of the index (how consumers expect their future economic well-being to be), likely due to concern over how the tariff impositions around the globe in reaction to President Trump’s initiate new tariffs for products imported to the United States, most notably steel. The dip was very small so no impact on mortgage rates, but a warning that future confidence could slip further which would be positive for rates.

 

The third and final revision to 1st Quarter GDP revised economic growth from January through March was down from 2.2% to 2.0%. This news on its own would be positive for rates, however with the revision to economic growth was a revision to price data, i.e. inflation. The core price index (prices less food and energy) showed an increase from 1.9% to 2.2%. With prices increasing more than 2% the expectation is for rates to increase as well.

 

This morning we had what I consider the most important economic data release for the week: Personal Income and Spending. As mentioned above consumer behavior is by far the most important factor in our national economy, ergo what consumers earn and spend is vital information for investors and planners. In May wages increased 0.4%, a strong increase that was in line with expectations. With the increase in earnings it is no surprise that spending increased as well, which it did with consumers spending 0.2% more in May than in April. The increase in spending was modest, especially in light of the earning increase. With earnings growth outpacing spending growth it is follows that personal spending should increase and it did rise 0.2% to a rate of 3.2%. Are consumers spending for future large purchases or for future rainy day?

 

The number in the income and spending data that is very rate related was the price index in the report, showing core prices are up 2.0% in May, right at the Federal Reserve’s price target. It is a major moment for the Fed as it has been chasing 2% inflation for a decade and now it appears it has been reached. If this inflation rate holds it means the Fed does not need to worry about stimulating the economy but instead turns to focus on inflation and keeping it in check. This means higher interest rates.

 

Rates for Friday June 29, 2018: While economics and political science are two different fields they are intimately connected. Does government policy shape economic activity or does economic activity shape policy? The answer is yes. Each influences the other in the short, medium and long term. We are seeing this in our current markets as the economic data should lead to higher interest rates for consumers, but public policy has led to rates experiencing a slight dip in the past month and prevented rates from increasing. So despite positive economic news that should put upward pressure on rates, despite billions of dollars of U.S. Treasury debt on the market plus billions more being sold by the Fed from its Treasury and mortgage holdings we have seen rates behaving contrary to what fundamental economic principles dictate. Investors concerned with global economic slowing have been selling stocks and purchasing long term fixed rate investments, i.e. bonds and mortgages, which has countered current economic data. In this environment there is little stability for the future of rates and the advise remains to lock when you can. If public policy on tariffs changes rates will increase suddenly, and as we have seen in the past year and a half policy can change quickly and unexpectedly.

 

 

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

30 year conforming                                            4.375%            Flat

30 year high-balance conforming                      4.625%             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 with 740 FICO score for purchase mortgages.

 

Throughout our nation’s history there have been deep disagreements on policy, which means solutions to problems. The arguments between factions when the Declaration of Independence was being written and voted upon by the Second Continental Congress were very personal and filled with rhetoric—these men were debating if they should vote to be considered traitors. After the Revolution there were intense debates, very nasty attacks via anonymous writings in pamphlets and papers centered on the Constitution and how, or whether, the states would come together with a federal government. Throughout our history there have been issues that have created deep philosophical and ideological differences, that these disagreements continue today should not be a surprise to anyone, and in fact are somewhat healthy for our Republic.

 

Next week is Independence Day and as I do every year I encourage everyone to read the Declaration of Independence. Most Americans know, or should know, the beginning of the document, “When in the course of human events…” and the most famous line, “We hold these truths to be self-evident, that all men are created equal, that they are endowed by their Creator with certain unalienable Rights, that among those are Life, Liberty and the pursuit of Happiness.” The latter is, in my opinion, perhaps the most important sentences every put forward for a vote by a governing body for it is the foundation of a nation and its laws.

 

Much less known, but very important is the final sentence in the Declaration, for it cemented the commitment of those in the Congress to not only the Declaration, but also each other. It is, again in my opinion, the same sentiments under which millions of Americans have volunteered to serve in our armed services to enable our nation to exist and continue to evolve with ever growing liberty and freedom.

 

Celebrate our nation’s founding next week, as well celebrate the differences that have and will continue to have that make our nation the greatest in human history.

 

Have a great week,

 

Dennis

6-22-18: We are thinking about buying a vacation home, what should we know?

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Question of the week:  We are thinking about buying a vacation home, what should we know?

 

Answer: With summer upon us and families travelling many may be considering purchasing a vacation home where they like to spend…well their vacations! Between June and September it is not unusual for us to get a few inquiries from clients considering purchasing a vacation home, some with different motivations that others.

 

In mortgage industry parlance a vacation home is known as a second home, which also follows the tax policies of the federal government and the states. As you can imagine there are sections of the tax code that deal with second homes and how you can, or must, treat them when filing taxes.

 

Traditionally a family would purchase a second home in the mountains, at the lake, by the ocean, wherever they enjoyed vacationing. Often the family vacation home would be passed down a generation or two. In more recent years second homes are typically still near traditional vacation or resort areas but not infrequently may be condominiums as well as detached dwellings.

 

The basic lending rules for second homes are similar to the rules for primary residences. You can purchase a second home with only 10% down, the cost of the loan in terms of rates and fees is the same as with a primary residence.

 

There are some factors to consider when getting a mortgage for a second home. First, since it is to be used as a residence you must be able to qualify for the total housing payment for your current residence plus the second home you are purchasing. Second, the second home must be “geographically distant” from your primary residence. If you live in a neighborhood on the eastside of Long Beach and want to purchase a condo in downtown Long Beach as a second home you will have a hard time finding a lender that would approve the transaction as a second home.

 

Some lenders require second homes to be traditional resort or vacation areas, for instance Mammoth would be such an area, Fresno would not. However, we often approve second home transactions for clients who have a very strong reason for the second home in a non-vacation region. For instance, a client whose primary home in in Ontario but works in Long Beach and purchases a small condo in Long Beach near his job for use during the week. Or the professor at Cal Poly San Luis Obispo whose wife and children live in Northern California. To qualify as a second home it has to be very obvious as to the intent, if you find yourself trying to stretch into a viable explanation then chances are the underwriters will have a difficult believe the property will be used as a residence and not a rental or investment property.

 

Regarding rentals, we see an increasing number of second home owners using various services to provide revenue when they are not using the property via short-term rentals—aka AirBnB or VRBO for example. If you are approved for a second home mortgage  there is a rider to the deed (mortgage) that you will sign that has several clauses:

 

  • Must be located a reasonable distance away from the borrower’s principal residence
  • Must be occupied by the borrower for some portion of the year
  • Is restricted to 1-unit dwellings • Must be suitable for year-round occupancy
  • The borrower must have exclusive control over the property
  • Must not be rental property or a timeshare arrangement
  • Cannot be subject to any agreements that give a management firm control over the occupancy of the property
  • When a property is classified as a second home, rental income may not be used to qualify the borrower

 

Like with your primary residence, you can convert a second home to an investment property in the future, as long as you have fulfilled the intent to occupy that you have agreed to as part of your application process and by signing the Trust Deed. Should the lender be able to determine that you never intended to use the property as a residence they can issue a Notice of Default and demand the mortgage be paid in full.

 

For those nearing retirement, purchasing a second home where you are considering living in retirement can be a very good financial decision. We have had many clients over the years purchase a second home while they are still working. The advantages are the ability to qualify for a mortgage and leverage the purchase while you are still working, probably a lower price on the property than it may cost you in five, ten, fifteen years when you will retire, and the ability to enjoy the property and determine if it is the right place for you to spend your years in retirement. If you discover the property or location is not just right you have time to sell, or rent, the property and look for a better property and/or location for retirement.

 

When the time comes to retire you may decide to sell your current primary residence, possibly using the proceeds of the sale to pay off your retirement home and enter retirement without the number cost for retirees: housing.

 

If you, or someone you know, have been considering purchasing a second home please contact me to run the numbers and options for you and your family.

 

Have a question? Ask me!

 

 

Rates for Friday June 22, 2018:  Not a lot of economic news this week impacting mortgage rates. The conforming rate edged up for the first time in six weeks as investors have been a bit schizophrenic trying to determine their best course of action with global trade issues and markets. Meanwhile the high-balance rate edged down a touch after last week’s rise. These are interesting times which means the most prudent course of action is to lock in your interest rate through your closing period as soon as you are able.

 

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

30 year conforming                                            4.50%                         Up 0.125%

30 year high-balance conforming                      4.625%             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 on 20% down with 740 FICO score for purchase mortgages.

 

I think one of the toughest weeks for parents is that first week of summer vacation for your kids when you still have your weekday morning routine culminating with leaving for work and your kids have no routine, except possibly stay in bed while you go about your routine. I am very routine oriented so any changes in routine, for me or the house, tends to throw my rhythm off for a while. At least my nightly routine is not affected since I have been going to bed before the kids and Leslie since they were in middle school—we have three night owls and one early bird in the house.

 

I hope your routines and summer rhythms are in sync and enable you to enjoy the summer of 2018 to the fullest.

 

Have a great week,

 

Dennis

6-15-18: We have plenty of money in our accounts and a ton of equity, why is my income so important?

/in /by

 

 

Question of the week:  We have plenty of money in our accounts and a ton of equity, why is my income so important?

 

Answer: Because it is not 2007 anymore and in 2010 the Dodd-Frank Act was passed by Congress and signed into law.

 

Some history. After the mortgage and housing market melt downs Congress behaved as politicians usually behave, they felt the need to “do something” as a reaction. The “something” was the Dodd-Frank Act which ran 2300 pages with the intention of reforming the American financial system and preventing future market collapses.

 

One of the many facets of the Act was mortgage reform that required any lender that wanted to avoid risk retention rules to follow the guidelines set forth by six different government agencies for underwriting what are termed Qualified Residential Mortgages, or QRM’s. If a lender wants to have more leeway in its underwriting guidelines it can choose to not follow the QRM guidelines but must retain at least 5% of the mortgages it funds and then securitizes—i.e. they have some “skin in the game.”

 

All conventional, FHA and VA mortgages are underwritten to the QRM standards, as are most Jumbo loans and the vast majority funded by individual banks and lending institutions. Those loan that are not QRM qualified are typically have higher rates and often are some type of hybrid ARM (fixed for 3, 5, 7 years then rate is adjustable).

 

The primary principle of the Qualified Residential Mortgage guidelines is Ability to Repay. Lenders funding a QRM mortgage must document the borrower’s ability to repay the mortgage under the terms of the note on a consistent and regular basis. In layman’s terms, you have to show proof of income that will support the monthly mortgage payment of principal and interest on the loan.

 

Income is defined as money received on a constant and consistent basis as demonstrated almost always on tax returns (some exemptions may be regular distributions from a Roth IRA or annuity, or starting in 2019 for divorce agreements made prior to December 31, 2018 alimony received).

 

What is not income?

 

The equity in your home is an asset, not income. If you have a home worth $600,000 and owe $200,000 you have $400,000 in equity and a loan to value of only 33%. That is great, but it does not help qualify your mortgage as a QRM for the lender.

 

The funds in your investment account are an asset, not income.* +  If you have an account with a brokerage that has $500,000 invested in various mutual funds, stocks, bonds and some cash, for most mortgage products the account balance is not able to provide assistance for the income needed for mortgage qualifying. That said, one of the factors for qualifying income is constant and consistent. Presumably the account generates interest, dividend and some capital gains income that you report on your tax returns. If you can prove the constant and continuing nature of the income (i.e. two years tax returns showing you paid taxes on interest, dividend and capital gains income) that income can be used for qualifying.

 

*If you have investment accounts that are retirement accounts, 401k, IRA’s, etc and you are over 59 ½ and eligible to take withdrawals without penalty and a regular payment from the account(s) has been established that payment can be used for qualifying income.

 

+Some loans will allow “asset depletion” guidelines on very large accounts where by a formula is used to convert the asset account to income. Not every loan program allows the asset depletion and those that due make it a bit challenging for most to have it qualify for income.

 

Here is an example that seems contrary to common sense (not uncommon it seems in our industry).

 

Couple have a home worth $2,000,000 and owe $300,000 on their current mortgage. They wish to remodel the home and to do so want to obtain a new mortgage in the amount of $800,000. After the loan funds they will have a loan that is only 40% of the value of the property.

 

The couple have an investment account with $1.2 million invested in various funds. The funds were mostly inherited in 2017 so they only have one year with substantial income reported on their tax returns from interest, dividends and capital gains.

 

Both couples work and have annual income of about $130,000 per year with two car payments and small credit card balances.

 

Can they qualify for the $800,000 refinance mortgage? With many lenders the answer is no, they will not qualify based on the lack of history of receiving income from their investment account. Some lenders may qualify them using asset depletion, but since the money was inherited and it was recently most lenders’ guidelines would not allow the asset depletion guideline until there is more seasoning on the funds.

 

With 60% equity in the property and one and a half times the amount of the applied for mortgage available in somewhat liquid assets common sense indicates the couple will make payments on the mortgage. But as we have seen only a decade ago, if the economy turns very sour, their housing value drops as does the balance in their investment account and they struggle to make the payment on the home with their salaries will they continue to make payments? Will they take what may be left in their investment account and pay it off or dip further into it to make payments?

 

Lenders are not in business because they make loans based on if the borrower does not make payments they can foreclose, sell the home and get their money back. That is a losing business premise due to the very high costs to foreclose and unknown future market conditions. If this was the case most loans would be what they were before the creation of the Federal Housing Administration as part of Roosevelt’s Alphabet Agencies created during the New Deal—50% down, short term mortgages.

 

This couple can get a loan, but it could well be a non-QRM product that will have a higher interest rate and possibly not a 30 year fixed rate.

 

When a future market downturn occurs, and it will, there will be significantly fewer foreclosures, which will dampen the impact of the market downturn, in large part because of the Qualified Residential Mortgage guidelines requiring the overwhelming majority of mortgages on homes across the nation have borrowers who were able to prove they have the income to support their mortgage payments.

It is great to have money in the bank and investment plus a lot of equity, but when it comes to qualifying for a mortgage those factors are not as important as your qualifying income.

 

 

Have a question? Ask me!

 

A lot of data this week on the economy. Prices continue to increase with the Consumer Price Index in May up 0.2% for the month and 2.2% from last May. Wholesale prices also rose, up 0.3% for the month and 2.4% year over year. The steady price increases are positive for the economy and consumer prices are over the Fed target of 2.% inflation, overall the news is somewhat unfriendly for mortgage rates. Also unfriendly is the unemployment claims data which shows the four week moving average of continuing claims at their lowest since December 1973—that is an amazing statistic given the size and breadth of the labor markets today compared to 45 years ago. Throwing more pressure on rates was a very positive month for retails sales which were 0.8% higher in May than April, despite being held back by slower auto sales.

 

The Federal Reserve Open Market Committee had a surprise. On Tuesday the FOMC announced a 0.25% increase in its discount rate, that was no surprise as the stated intention from the Fed last year was for three rate increases this year, and this was long slated to be the second increase. What was a surprise was the report that accompanied the rate announcement. One surprise was an omission from prior reports, taken out of the statement was that rates will remain low for some time. The other surprise was the Fed indicating there will more than likely be two more rate increases this year instead of one. With the announcements the immediate impact is on homeowners with Home Equity Lines of Credit as your underlying rate, the prime rate, increased this week to 5%, the announcement of two more increases indicates the prime rate will likely be 5.5% by New Year’s Day 2019 and likely 6.25-6.5% by 2020.

 

Rates for Friday June 15, 2018:  There is a lot of conflicting factors impacting interest rates. Positive economic news at home putting upward pressure on rates, economic and financial challenges in Europe putting downward pressure, international trade conflicts over tariffs putting downward pressure on rates and investors trying to figure this all out have reacted by moving money back and forth between stocks and bonds. The result for the mortgage applicant is a steady week for conforming rates and a bit of a bump for high-balance rates from last week. The mortgage market remains somewhat unstable and the advice is not to try to guess when rates will drop but to lock in your rate when you are able.

 

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

30 year conforming                                            4.375%      Flat

30 year high-balance conforming                      4.75%        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 with 740 FICO score for purchase mortgages.

 

What a week being the parent of high school kids. Those who read last week’s very brief WR&MU know I was in Boston with the oldest going through orientation—it was a very good but tiring trip (starting off on a red-eye has that impact on me). Getting a chance to take a tour of Fenway Park and then to see a game there with a buddy of mine from high school was one of the highlights. Then we came home to family in town for the Baccalaureate at Poly High School on Sunday followed by graduation on Wednesday. Phew, time for a little down time—perhaps a weekend watching the U.S. Open will restore my energy….

 

Happy Father’s Day to all the dads out there!

 

Have a great week,

 

Dennis

6-1-18: Our loan is going to start adjusting in 2019, should we refinance and fix the rate now or wait?

/in /by

 

 

Question of the week:  Our loan is going to start adjusting in 2019, should we refinance and fix the rate now or wait?

 

Answer: Many families purchased or refinanced their homes several years ago with intermediate adjustable rate mortgages, or intermediate ARMs. The type of ARMs have a period where the rate is fixed and at the end of that period enter a period where the rate adjusts, usually annually. If you have a 5/1 ARM the rate is fixed for five years and then adjusts annually for the remaining 25 years; if your loan is a 7/1 it is fixed for seven years and then adjusts for the remaining 23 years.

 

Why would anyone get an adjustable rate mortgage after all the issues with ARMs leading into the housing crisis and meltdown of the mortgage industry? Everyone has different motivations and objectives with their homes and therefore different mortgages are attractive and beneficial to different property owners. The primary reason for most who choose an ARM for their mortgage is they often have lower interest rates than a 30-year fixed rate mortgage. The lower rate for a period of time is attractive to those who need the lower rate to qualify, or have reasonable certainty that they will be out of the loan before it adjusts.

 

Not an insignificant number of borrowers who get intermediate ARMs are still in those mortgages when the fixed rate period is ending, either the plans to pay-off the balance did not come to fruition, or their plan was to stay in the property and deal with the issue of an adjustable mortgage later. And later is today or in the near future.

 

Back to our question, if you have an intermediate ARM on your property and are approaching the end of the fixed rate period should you retain the ARM or refinance to a fixed rate mortgage?

 

As with almost all questions regarding mortgages and finances there is not one answer that fits everyone. The answer to the question differs depending on individual circumstances and comfort levels of risk. Factors to consider when deciding if you should refinance from your current ARM mortgage or stick with it:

 

What is your loan balance?

 

What is the current fixed interest rate on the loan?

 

What is the index and margin on the mortgage that will take effect when it becomes adjustable?

 

Realistically, how long do you think you will remain in the property?

 

With the answers to these questions we can help you determine if it makes sense for you to refinance or retain your current mortgage.

 

With recent dip in rates we are seeing many homeowners able to refinance to lower rates than the rate it appears their intermediate ARM will be after the initial adjustment. If you have a loan that is going to adjust in the future call me to run through the numbers with you to see if it makes sense to refinance and fix your rate and avoid future rate increases.

 

 

Have a question? Ask me!

 

Mille grazie! That was the message from borrowers this week who were able to lock in rates that dipped this week thanks to another political fiasco in Italy. This past week the Italian President rejected the Prime Minister and Finance Minister submitted by a coalition of far-right and far-left parties that together represent a majority of seats in Parliament after elections in March. This veto by the President spooked markets and investors. As unlikely as it seems for a far-right and a far-left part to come together to form a ruling coalition, it seems less likely when the primary issue for both parties was throwing out the parties that have ruled Italy for decades, desire to leave the European Union and enact reforms to grow employment and the economy. Essentially, both the left and right appealed to the populist majority using the same issues.

 

How does this affect mortgage rates? A basic principle in investing is “flight to safety.” Italy has created a flight to safety environment with its political instability. With the President vetoing new leadership for Parliament and the nation he has also vetoed the will of the majority of voters in Italy. This has, not surprisingly, upset the populist politicians and leaves the country in limbo. Italy has had financial issues for more than a decade—long-time WR&MU readers will recall the series of posts over the years on Italy, Greece and Spain and the financial challenges they have put on the European Union and other nations as they faced defaulting on their loan payments. The turmoil has created a very uncertain economic environment, for Italy, the European Union (think Brexit) and possibly spilling over into other economies in Asia and North America. When there is uncertainty investors sell riskier investments, i.e. stocks, and purchase safe investments with fixed rates of return, which are bonds and mortgages. When there is uncertainty and risk the flight to safety causes the prices of fixed rate investments to rise and therefore rates to drop.

 

While foreign politics impacted rates this week, domestically there was some important data on the economy released this weekend. Midweek the second estimate of Gross Domestic Product growth for the first quarter was released and total growth was revised slightly downward to 2.2% growth from initial 2.3% estimate. Also, slightly downgraded were the price index, from 2.0% inflation to 1.9%, and consumer spending for the quarter from 1.1% to 1.0% increase for the quarter. Overall the news was expected and had no impact on mortgage rates.

 

Coming it at expectations, personal income and spending data for April released on Thursday showed not a lot of strength or weakness in either category. Income was up 0.3% for the month and consumer spending rose 0.6%, mostly due to rising gas prices. With spending outpacing in come for the second month in a row the signs are there for second quarter GDP growth to be stronger than the first quarter. The data alone is mortgage rate neutral, the long-term look regarding prices and economic growth is somewhat rate unfriendly.

 

Historic data this morning from the Labor Department as the headline unemployment number for May came in at 3.8%, tying the lowest unemployment rate for the past 46 years (2000). The economy added 223,000 jobs in the month, with 218,000 being in the private sector. The gains in jobs lowered the participation rate to 62.7%, matching a low hit several times since 2015. With increased employment and hours worked stagnant it is not surprising that average hourly earnings increased a respectable 0.3% for the month and 2.7% from May 2017—outpacing inflation annualized at 1.9%. The news is mortgage rate unfriendly.

 

Rates for Friday June 1, 2018:  Thanks to the Italian, and possible European, political and economic turmoil this week rates dropped for the second Friday in a row—the last time we had back to back rate drops reflected in the Weekly Rate & Market Update was March 31s to April 14th 2017. The dip is a surprise to many, including myself. My suggestion is to take advantage of the dip.

 

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

30 year conforming                                            4.375%     Down 0.125%

30 year high-balance conforming                      4.625%      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 on 20% down with 740 FICO score for purchase mortgages.

 

According to the meteorologists in the house, and what teenagers with iPhones are not constantly in touch with local weather, it appears as if our spring weather is slowly leaving and much warmer summer weather is approaching. They are excited, I have told them don’t get in too much of a hurry for the hot weather, once it comes we will have it until October.

 

Me, I’m very content with high 60’s, low 70’s, slight breezes and some clouds.

 

Have a great week,

 

Dennis