What is my liability as a co-signer?

Question of the week: What is my liability as co-signer?

Answer: This week’s question is a continuation of last week’s question of the week (Can we put our college student on a mortgage?).

The short answer is, if you are a signer on a mortgage your are 100% responsible for 100% of the mortgage.

With rates higher than they were several months ago, many families are finding that they are just missing on being able to qualify for the homes they want to purchase. One solution for many is to add a co-signer to the mortgage.

When we are adding a co-signer, be it a parent, child, sibling, or other individual, I am asked the question, “what is my liability?”

When a lender approves and application package, they do not approve with 100% of the liability for re-payment for the “primary” applicants (those who are occupying the home) and a lower liability for any co-signer. They are approving and funding the mortgage with all individuals on the mortgage having equal responsibility and liability.

Co-liability is not just a factor for a family needing an income boost to qualify for their home, it is also a factor when couples purchase a home together, whether they are legally married or not.

When you purchase a home there are two legal documents that are recorded. The Grant Deed, which transfers ownership for the current owner to you. And, in California and most other states, a Deed of Trust is recorded, which is the document that creates the lien for your mortgage loan—i.e., the instrument by which a lender can foreclose if you default on your payments.

Someone can be on the deed, the ownership document, without being on the mortgage; in other words, they have ownership interest without having loan liability. However, lenders will not let someone be on the mortgage without having ownership.

Here is a scenario where we have a married couple with one spouse not on the mortgage, on the property, and we have a co-signer.

Christina and Adrian want to purchase a $750,000 home with 10% down. Their income and funds to close qualify them for the home, however Adrian’s credit score is very low due to fall-out from a divorce several years ago. Christina’s father, George, is willing to co-sign.

“You can’t co-sign credit,” is a axiom of lending. Interest rates and program qualifying are based on the lowest middle credit score of all borrowers. Because of this we work up the numbers by removing Adrian from the application and adding George.

Working up the income, debts, and funds for closing with both Christina and George we qualify for the mortgage. For debts, we count all obligations that are just Christina’s and just George’s, as well as all joint debt that Christina and Adrian have, as well as George and Patty, Christina’s step-mother. Not included are any obligations that are just Adrian’s and Patty’s.

With Adrian’s poor credit score removed, we are eligible for a lower interest rate, and lower mortgage insurance premium. We obtain loan approval and fund the loan with Christina and George on the mortgage, and both of them plus Adrian on the deed as owners of the property.

At closing the following deeds are recorded in this order:

  • Quick Claim Deed transferring the property from current owner to Christina and Adrian as husband and wife, George as married owning as sole and separate property, all as joint tenants.
  • Quick Claim Deed from Patty in which she declares she quits any claim on the property she would otherwise have as California is a community property state.
  • A Deed of Trust securing the property as collateral for the mortgage with Christina and George as the responsible parties.

Christina and Adrian move into the property. About three years later Christina recognizes that Adrian’s prior divorce and very bad credit were not as little his fault as he always led her to believe. They separate, Adrian moves out and quits contributing to the mortgage payment. Christina lets George know what is happening, and that she is unable to make the payment by herself.

George has a few options. If he chooses not to assist with the mortgage payment then the loan will go into default. This will adversely affect he and Christina, but not Adrian or Patty. Or he can assist with payments, retain good credit standing, with the understanding that any funds he pays to the mortgage will be reimbursed after the home is sold due to the divorce.

Because Christina, George, and Adrian are on the deed as equal owners, for any sale or transfer to go through all parties need to agree, or there must be a court order to force any recalcitrant party to sign any documents to transfer the property.

Depending on Adrian’s cooperation with the divorce filing and settlement, and subsequent transfer of the home and division of equity, either to an outside buyer or to Christina, or Christina and George, this issue can drag out for a prolonged period of time, increasing the funds George must contribute to keep the mortgage current.

In this case, we did a cashout refinance with Christina and George on the loan and title as owners, and extracted some equity to payout Adrian for the divorce settlement. Because of his history of not paying his obligations, we worked with the attorney to create a settlement that was much more in favor of Christina with the division of assets and eliminated spousal support payments she would likely have been due. Thankfully, Christina and Adrian did not have any children together. From separation to final settlement and removing Adrian from the property, a little over one year passed.

Co-signing complications come up more frequently for non-married couples than married couples as they are more likely to separate and go their separate ways. Without some of the legal protections for separation of assets and obligations of married couples, the situations of separation with join ownership of property can be a bit more complicated if one, or both, of the partners choose to make it so.

 Co-signing for a home, car payment, college loans, or any credit obligation, is no different than being the only signer on the obligation—you are 100% responsible for all payments whether you receive any benefits from the debt or not. Before co-signing for a debt for which you will be receiving no direct benefits, make sure you are fully aware of the risk and possible exit strategies available.

Finally, if you do co-sign, that obligation is reported on your credit report as if you are the “primary” borrower. The amount of the outstanding debt, the monthly obligation, and very importantly the payment history, impact your credit scores and ability to qualify for other loans and credit.

To close, if you have co-signed for someone to purchase a home, or car, standard mortgage underwriting guidelines are that if you can show that the other party(s) on the obligation have made the last twelve payments in a timely fashion, the obligation’s payment will not count against you for qualifying.

If you, or someone you know, is trying to purchase a home please contact me to go through options and scenarios.

Have a question? Ask me!

Surprise!! Last week we have surprise with the jobs report for July showing a lot more jobs created than expected, more than twice as many. This week the economic surprise was that the Consumer Price Index was flat in July—no increase in prices from June. This resulted in the annual rate of inflation decreasing from 9.1% in June to 8.5% in July.

As you have likely noticed, gasoline prices dropped in July, down 7.7%, which was the primary reason for overall prices remaining flat for the month. Keeping the overall rate to be negative was the 1.1% increase in foods prices in July from June, and are up 10.9% from July 2021.

Rates for Friday August 12, 2022:  Investors liked the CPI data as it possibly portends inflation peaking and perhaps starting to drop. If this is the case there is less pressure on the Fed to continue to increase interest rates. Last week’s news supported higher rates faster, this week’s news supports rates stabilizing or dipping. When in conflict, rates usually go up, or remain very sticky going down. This week we have the latter.

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

30-year conforming                              4.875%        Flat

30-year high-balance conforming        5.50%           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.

Following up on last week’s WR&MU, and this week’s question of the week, this morning a lot of stress and anxiety was relieved when we were notified that we have been approved, along with another family, for an apartment in Manhattan for a twelve-month lease. It is a four-bedroom apartment, with four young ladies moving in. The other family going through qualifying is that of one of our daughter’s good friends from high school who is attending a different college in the city. Her mother and myself are the co-guarantors for the lease. Which as you learned above, each of us is individually guaranteeing that if one, or all, of the tenants do not pay, we must.  #Parenthood

Further following up on last week’s WR&MU question of the week, even with our share of the rent through the full twelve months as opposed to paying for a dorm room for eight months, we are saving over $4000 in housing costs.

Have a great week,

Dennis

Past Weekly Rate & Market Updates can be found on my blog page at my website www.DennisCSmith.com/my-blog

Can we put our college student child on a mortgage?

Question of the week: Can we put our college student child on a mortgage?

Answer: Yes.

This question has been covered in different ways in the past. It comes up this week as Leslie and I have been involved in housing for our own college student daughter, and I remember some clients from over the years.

Colleges and universities have some of the highest cost per square foot housing in the cities and regions where they are located. For instance, last semester our daughter in New York City was sharing about a 350-400 square foot room for a cost around $2000 per month.

There are several advantages, primarily safety, secondarily comradery living 24-7 with hundreds, in some cases thousands, of other young students transitioning into adulthood. Proximity to classrooms is another benefit for a cohort who typically like to sleep late and find it desirable to go from bed to chair in the lecture hall in under 15-20 minutes.

Over the years we have had many clients contact us regarding the costs and benefits of purchasing a house or condo unit near their child’s college or university. Depending on where the school is located, the financial benefit of purchasing outweighs the cost of a dorm room semester after semester.

This is where having your college student signing on the mortgage comes into play. If your student is attending Boise State and there is a 3-bedroom home near campus for $420,000 it may make financial sense to purchase the home and rent two rooms to other students. However, this only makes sense if you are able to get an owner-occupied mortgage.

If you purchase the property as an investment property the rate with 25% down payment ($105,000) is 6.125%. If you student is 18-years of age or older, they can sign loan documents, be on title and you now have an owner-occupied mortgage with a rate of 4.875% with only 10% down payment ($42,000).

Doing the math for a monthly payment for a $420,000 purchase price with 10% the estimated total monthly payment, including mortgage insurance, is about $2600 per month. Rents for similar size 3-bedroom homes is around $2200 per month, divided by three that comes to a little over $700 per month.

Looking at dorm costs for Boise State, for housing you must also purchase a food plan (experienced college parents know how much of this cost goes unused) for a total monthly payment during nine months for the school year is $1265 per month.

Disadvantages of the purchase the student housing are the costs do not stop when school is out of session, additional costs of utilities and maintenance, and of course being market risk for the future when you sell.

Advantages are your housing costs are fairly fixed, colleges typically raise costs every year, responsibility your student gains for being a homeowner and landlord, possibly appreciating asset, possibly retaining property after your student graduates to either continue to occupy if staying in the area, or as off-campus rental option for future students.

Your student also gains by having a mortgage on credit report, which creates stronger current and more importantly future credit ratings, and as mentioned “growing up” and being responsible.

We have had many clients over the years purchase student housing for their students after paying dorm costs for several semesters. I have yet to have negative feedback from these parents for post-graduation issues or regrets for having purchased a home with their student on the loan instead of renting from the college or university.

If this is an option you wish to discuss please do not hesitate to contact me.

Have a question? Ask me!

Surprise! This morning those who make estimates on Wall Street for economic data were very surprised, even shocked, at the Labor Department’s report on job creation in July. While the consensus on Wall Street was 258,000 new jobs were created in the month, the report showed 528,000 new jobs. If your estimate is off my more than double you tend to be a bit surprised or a lot shocked.

Industries across the spectrum gained jobs, led by Education and Health (+122,000), Leisure and Hospitality (+96,000) and Professional and Business (+89,000). The total number of workers employed equals the number earning paychecks in February 2020, the month before the pandemic. Companies are still having trouble finding workers, and the demand supply imbalance pushed wages up 0.5% in July and up 5.2% from last July.

The dark cloud around the silver lining is that more people have dropped out of the labor market. While there are as many employed as there was pre-pandemic, millions more are eligible for work due to coming of working age. As a result, the labor participation rate dropped to 62.1%, the lowest since late 2021. The increase in new jobs is interesting juxtaposed initial jobless claims filed, 260,000 last week continuing a weekly increase since March.

Investors are very skittish with conflicting data showing a shrinking economy on one hand and increased employment on the other. In between sits inflation which continues to grow at a greater rate than wages, creating uncertainty about consumer spending and expectations.

Rates for Friday August 5, 2022:  The Federal Reserve has been consistent in their stance that they are focused on labor markets when deciding their strategy regarding their benchmark interest rate. The very hot new jobs data puts another very large, 0.75%? 1.00%?, rate increase in play when they next meet. Investors reacted to this by wiping out last week’s rate decline, ending a three consecutive weeks of declining rates.

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

30-year conforming                              4.875%        Up 0.25%

30-year high-balance conforming        5.625%         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.

Our personal quest for student housing is taking place in New York City, more specifically Brooklyn, where we have been trying to herd potential roommates to get applications into an agent for an apartment.

Were I the winner of last week’s $1.3 billion lottery jackpot we would skip the rental and buy a building for our young student and friends.

Speaking of lotteries, interesting human behavior is when people won’t buy tickets until the jackpot exceeds $100 million, $500 million, $1 billion. Winning a measly $12 or $32 million is not worth the cost? My brother has always said that lotteries are a tax on those who are bad at math.

Have a great week,

Dennis

Past Weekly Rate & Market Updates can be found on my blog page at my website www.DennisCSmith.com/my-blog

What is your why?

Question of the week: What is your why?

Answer: This is a question that has come up a few times in past few weeks. Most recently it was posed by Rotarian Dan Ouweleen, who is the District Governor Rotary International District 5320; the district which includes the Rotary Club of Long Beach, of which I am a member.

Dan gave a short presentation titled, “What is My Why?” the purpose of which was to have each of us in the audience ask ourselves the same question. Listening to Dan and then pondering the question, on my way back from our meeting on Wednesday I thought, “I should have this be my question of the week.”

We have many roles in our life, and each role has its own “why.”

In January 2007 I wrote personal value, mission, and vision statements. My mission statement is, “My family, personal, work, and community commitments are in balance and congruent to allow me to bring happiness into the lives with whom I interact.”

This week I would like to share my “why” for being a mortgage professional. It took me quite a while to understand my why, but once I did my job satisfaction increased considerably.

I started in the mortgage industry in 1987 because a friend of mine was in the business and was making very good money. My motivation was that, making money. After several years I realized I was not very satisfied with what I was doing and thought about another career. The source of my dissatisfaction was I felt that I didn’t produce anything, at the end of the day, week, month…I couldn’t see tangible number of units that I produced.

Then in 1994 a few things happened to change my perspective. First, and most importantly, within nine months Leslie and I began dating, bought a home, got engaged and then married. I was a homeowner.

In the beginning of the year, I received a letter from a client who had been somewhat gruff, and frankly challenging to communicate with through our transaction. In his letter, he thanked me for helping he and his wife purchase their first home. He did not realize how important it was until before Christmas as they purchased a home with a fireplace. His young daughter kept saying how now that they had a fireplace Santa would be sure to find them and bring presents. He did not realize how quickly having their own home would change their family, knowing that they would raise their children in the home, removing some anxiety that he always had about where would they be living in a year, two years, or more at the whim of a landlord.

Being a new homeowner, without yet having children, and reading his letter really opened my eyes as to how important my work is to ensure homeownership. Yes, I realized before this time that homeownership is important, but I did not fully understand the depth of importance it has.

My “why” started to come more into focus. It became crystal clear a few years later after we had purchased a bigger home and started our family.  

Growing up we moved around. A lot. My mom was married to my dad for twenty-four years before she passed away and, in that time, they shared around twenty addresses as he moved around in the petroleum industry. Some addresses were a hotel in some small oil town for seven to eight months, others were home for longer as he rose in the industry and stayed in one place longer. Of those many addresses, by the time I graduated high school I lived in six of them. Home to me was a temporary place with new friends who would become old friends when we moved again.

In March 2004 Leslie and I had lived in our home for five years and seven months, equally the longest I had ever lived in the same home. We had two young daughters, who I knew would live in this home through their childhood. By then I got it. I got that importance of homeownership, the security, the stability, the comfort, that everyone has knowing we would be in this home as long as we wanted to be in it.

My why is to do all I can to help other families attain homeownership and enjoy the same security, stability, and comfort. My why is to provide education and information to prospective homeowners so they can purchase the best home they can afford in such a way they that they can own that home as long as they like.

We started losing business before the real estate and mortgage market meltdowns that started in 2008. We lost business because our philosophy is that we are helping you buy a home not a get-rich-quick investment. Because of this we stressed 30-year fixed rate mortgages. We had the opportunity to use stated-income, or no qualifying mortgages to help families purchase more expensive homes; but doing the math on their payments and their incomes we could not in good conscience put people in mortgages that they could not afford and would lead to trouble down the road. Our goal was to support and enable homeownership that would last as long as the family wanted to keep that home, not to get into a home and figure out to pay for it later.

My why is to enable and support homeownership by working with individuals and families and presenting them options to purchase their home within their financial capabilities.

Our business is generated completely from referrals. We get referrals because we care about the families we work with and listening to them about their wants and needs and then showing their capabilities.

The most important purchase of your life needs more assistance and guidance that purchasing a car, or an appliance. We provide that assistance and guidance.

If you, or someone you know, are in the market for a new home, or considering a mortgage for other non-purchase, contact me.

Have a question? Ask me!

A lot of economic data this week that impact rates. On Wednesday data was released showing consumer confidence dropped for the third month in a row. This is somewhat good news for rates as lower consumer confidence can lead to less consumer spending, which can lead to lower inflation as economy slows due to less spending (consumer spending is about 70% of our economy).

Unrelated to the consumer confidence data, but also announced Wednesday, was the Federal Reserve announcing it was increasing its benchmark interest rate by 0.75% for the second month in a row. This was met very positively by the markets and resulted in a rally in mortgage markets pushing rates down.

Yesterday data was released that created much debate. Like many issues these days, the 2nd quarter Gross Domestic Product data enabled pundits, politicians, average Joe’s and Jane’s to become economic experts. Our GDP shrank by 0.9% in the 2nd quarter, this follows a 1.5% contraction in the 1st quarter. The debate is “are we in a recession.” When I was getting my economics degree in the early 1980’s a recession was defined as two consecutive quarters of negative GDP, and that remains the technical definition. The argument, that is centered around politics, surprisingly…, is that while that is the technical definition, in the United States the official determination of whether the economy is (was) in a recession comes from the National Bureau of Economic Research. The NBER looks at several factors beyond GDP to determine whether there has been a recession, so some are saying we don’t know yet if we are in a recession or not. I use past tense because it can take months before the NBER makes its determination.

In my view, if it looks like a duck, whether a mallard, a canvasback, or a white-faced whistling, it is still a duck. Having two consecutive quarters of negative GDP has us in a recession, a shallow one at this time but in one, nonetheless. This is positive news for mortgage rates as it portends slower economic activity, therefore a drag on inflation and the return of lower rates in the future. How long into the future? It depends on how slow inflation is to respond to a slowing economy.

Today we received news on inflation, spending and income. The personal-consumption price index (PCE—why not PCP I don’t know unless the government doesn’t what people to think they are giving prices for illicit drugs) spiked by 1% in June, pushed by fuel prices. The “core” rate (fuel and food taken out) was up 0.6% for the month. Year over year the PCE increased 6.8%, 4.8% for the core rate. The somewhat good news is that with a large part of the increase being higher gas and oil costs in June, with those costs dropping in July we should see a tamer inflation number. The PCE is used by the Fed when gauging inflation as it takes into account how consumers change their spending habits due by buying cheaper goods.

Finally, we round out the week with spending and income data. Both increased in June, before inflation is considered. Consumer spending increased 1% in June, accounting for inflation the increase was only 0.1% above spending in May. Personal incomes continue to grow, up 0.6% in June, but as can be seen if inflation was 1% and your income increased 0.6%, you are making more not enough to keep up with your expenses due to inflation.

Rates for Friday July 29, 2022:  The result of all the data this week was that rates dropped for the third straight Friday, with the conforming rate down 0.75% since the first Friday of the month.

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

30-year conforming                              4.625%        Down 0.375%

30-year high-balance conforming        5.375%        Down 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.

I hope you don’t mind that I used the Question the Week for what usually goes into this part of the WR&MU, personal information and not mortgage or real estate related. One thing Dan said on Wednesday when talking about his “why” was that he realized it didn’t mean anything unless he let others know. Following Dan’s example, I feel I need to let others, you, know my why for being in the mortgage industry. Thank you for reading and understanding!

Have a great week,

Dennis

Past Weekly Rate & Market Updates can be found on my blog page at my website www.DennisCSmith.com/my-blog

Are rates historically high?

Question of the week: Are rates historically high?

Answer: It depends on how we define “high” and “historically.”

For purposes of answering our question, historically will be January 2006. Why? Because I have consistent data with rates from the Weekly Rate & Market Updates that have used the same criteria each Friday for the conforming mortgage rate (see fine print below under the chart weekly rate chart).

Speaking of charts, this week we have a bonus chart:

Since January 2006 the median interest rate (the middle of all the rates listed, the median of 6, 5, 4, 3, 2 is 4; there are two numbers above 4 and two numbers below) is 4.00%. During the period the highest rate was 6.625% in June 2006, the lowest was 2.375% a few times between November 2020 and January 2021.

The average price of rates (add up all the rates and divide by 862 weeks) for every Friday from January 2006 to last Friday is 4.228%, about one-quarter of one-percent above the median. Because the average is higher than the median, this means that the conforming rate was over 4% by higher values for more weeks than under 4%.

As you mentioned, the highest rate in our time frame was 6.625% in June 2006. From June 2006 until the real estate and mortgage market meltdowns that pulled the country (world) into the Great Recession, rates bounced from about 5.5% to 6.5%.

In 2006 the median home price in Los Angeles County was $585,400, and the conforming loan limit was $417,000. To purchase the median home in June 2006 with 20% down, a homebuyer would need a jumbo loan, with a rate of 6.75%. For a $468,320 30-year fixed rate mortgage at 6.75%, the June 2006 monthly mortgage payment would be $3,038 per month.

In June 2022 the median LA County home price was $860,000. I will make an assumption that the median price is the same for this exercise. Purchasing the median price with 20% down would require a loan amount of $688,000—above our maximum conforming limit of $647,200; the high-balance rate, which as you can see below is 5.625%. The payment for 30-year fixed rate $647,200 mortgage at 5.625% is $3725 per month.

From the highest rate in 2006 to today’s rate, the median home value has increased 47% and the payment for the median home has increased 23%.

Using an inflation calculator, I put in purchasing an item for $3038 in 2006 (the monthly mortgage payment) what the item would cost today due to inflation over the past sixteen years. The result was $4465, or it would cost 47% more—the same rate the median home in LA County increased in value.

At the lowest rate during this period, we will use November 2020, of 2.375% the median home price was $664,160 in Los Angeles County. Putting 20% down results in a $531,325 mortgage, above the $510,000 conforming loan limit. The high-balance rate for the third week of November 2020 was 2.625%. The payment for a $531,325 30-year fixed rate mortgage at 2.625% is $2134 per month.

The payment for the median home in LA County when rates were at their lowest in the past sixteen years was 75% lower than the monthly payment for the median home price today and the median priced home increased 29%.

Historically over the past sixteen years, rates today are higher than the average and median rates during the period. However, calculating purchasing a new home over the historical period, the current rates produce a payment that is in-line, or better, than adjustments for inflation. Rates have climbed less than inflation over the past decade.

One other point. Purchasing a home today does not mean you are always going to have that rate. If, when, rates drop after your purchase you can refinance and lower your payment, while benefiting from increasing home values over time. Someone who purchased their home in June 2006 at the highest rate and refinanced several times over the years as rates dropped, would be paying about one-third of their original payment today, or if they kept making the same payment every month would be close to paying off their home.

Yes, rates are higher than a year ago, and so are property prices. Waiting for either to drop creates the risk that neither will, and one, the other, or both, may go up in the near and medium future. How long will you wait to buy? How will you know when the time is right if, when, prices increase, even if rates do decline? If you are considering purchasing a new home, give me a call and we can run through your options and “what-ifs” for different values and rates.

Have a question? Ask me!

Rates for Friday July 22, 2022:  Not a lot of economic news impacting markets this week. The Fed is expected to push its benchmark rate up another 0.75% next week, which is priced into the market. Investors are feeling less bearish on fixed rate assets, like mortgages, evidenced by rates dropping for the second week in a row, and third Friday of the last four.

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

30-year conforming                              5.00%          Down 0.125%

30-year high-balance conforming        5.625%        Down 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.

I love baseball. In the morning I will look at the schedule and hope that there is a day game on the East Coast so I can put the radio broadcast of the game on my computer as background while I work. I don’t care what teams are playing, I just enjoy listening to baseball radio broadcasts.

When I mention this to others, some look at me a bit sideways wondering what kind of person listens to games instead of music. For that matter, who listens to baseball games on the radio? Older guys like me, I guess.

Have a great week,

Dennis

Past Weekly Rate & Market Updates can be found on my blog page at my website www.DennisCSmith.com/my-blog

I am self-employed and do not have a W2 salary, what are my mortgage options?

Question of the week: I am self-employed and do not have a W2 salary, what are my mortgage options?

Answer: In February, the WR&MU covered if it was easier for self-employed income earners to get a mortgage. The response was within guidelines for conventional mortgages, broadly Fannie Mae, Freddie Mac, and other mortgage products whose underwriting guidelines align closely with Fannie and Freddie.

But what if you cannot qualify for the mortgage you want using the Fannie/Freddie guidelines?

Self-employed and W2 salaried borrowers, in general, have had more challenges qualifying for credit than salaried borrowers. This is due to expenses from their employment being deducted from their gross income when filing their taxes. Auto and travel, entertainment, office supplies, office space, marketing, legal and accounting, employees, are just some of the expenses that are deducted to arrive at taxable, or adjusted gross income (AGI).

Adjusted gross income is what is used for qualifying for the vast majority of mortgage products.

For some, many?, self-employed workers their deducted expenses decrease their AGI to the point that they are unable to qualify for a mortgage to purchase a home they can afford based on their monthly and annual cash-flow.

Many WR&MU readers are aware of the mortgages available before the real estate and mortgage market meltdowns in 2007 and 2008 that did not verify income, nor in some cases assets, which enabled many self-employed home buyers obtain mortgages. As part of the fallout from the Great Recession, the Dodd-Frank Act was passed which put significant restrictions on how income was qualify for mortgages; essentially income had to be verified as a constant and continuing nature.

For self-employed borrowers this shut down the opportunities to qualify for mortgages for some time as lenders adjusted to create products that would enable this segment of the mortgage market to qualify for home loans.

Over the past year we have seen a dramatic increase in the amount of mortgage products from several different lenders that are geared for self-employed borrowers; opening up opportunities for home ownership and refinances.

These products use different methods for calculating income, but one thing they all have in common is side-stepping reviewing federal income taxes for the prior year(s).

The two most popular programs are:

  • For someone receiving a 1099, requesting just the most recent year, or two years 1099 form(s) and deducting a percentage of the gross income on the form as expenses.
  • If you own a business requesting bank statements for a period of time (differs on program but most common is one year) and adding up the deposits to calculate income, and then using formula for determining expenses.

Note that almost every program that is does not use tax returns to verify income will require recent bank statements, up to three or six months depending on program, that support the income being used for qualifying. So if the beginning of your year was really good, but the last few months were not, you may have a qualifying issue—though if a case can be made that your income is seasonal, and that can be verified, you can likely qualify.

It is very important to note that if you are going off the conventional guidelines underwriting platforms that you should not expect conventional type interest rates and costs. As well, the underwriting at times can get a bit more clunky with additional requests and changes to the program as the lender reviews the information provided.

As with every borrower, especially those purchasing a home, your transaction will be a lot easier if you begin the process before you start looking for a new home, providing us with all your forms and statements so we can determine the best program for your situation and have it vetted by underwriting before you starting finding your new home.

If you, or someone you know, has non-W2 income and is interested in a mortgage to either purchase a home or refinance, please contact me for more information and options.

Have a question? Ask me!

This week we had data that was positive and negative for markets. Early in the week the Consumer Price Index for June was released showing inflation at its highest, 9.1%, since November 1981*. For the month consumer prices increased 1.3%. This is not very good news for interest rates. However, there was some good news in the “core” CPI data. (Core CPI strips out food, and oil and gas as they are very volatile.) Core CPI has been moving down, while up .7% in June and up 5.9% from a year ago, the core number was 6.5% in March. With food up 1% for the month (and over 12% for the past twelve months), and gasoline up 7.5% (half the increase in CPI) it is evident that, while both are necessities, prices on other goods and services purchased by consumers are seeing price increases slow. With oil prices dropping the last few weeks there is optimism that we will see CPI drop in coming months—this is positive for markets. While glimmers of positivity in the report, overall, the news was negative supporting a big rate hike by the Fed later this month.

*Economic history sidebar for those interested. In November 1981 CPI was dropping from a recent high of 10.95% in September 1981 and on its was to a cycle low of 2.58% in June 1983. It took almost two years for inflation, once it started dropping, to come close to the Fed’s current target rate of 2% inflation. It should also be noted that in September 1981 the Fed’s benchmark rate was 16.42%, in November it was 13.8% and in June 1983 it was 8.75%. The current Fed funds rate is 1.58%. End sidebar.

Very positive for markets and the economy was the retail sales report released today. Consumers, whose spending is approximately 70% of our economy, continue to buy goods and services despite rising costs. They are getting less for their spending, but that are spending. Retail sales rose 1% in June, with the increases coming across a broad range of sectors. While spending at building supply and home furnishing retailers declined, restaurants continue to see growing sales. Markets reacted very positively to the news today as it signals that perhaps the series of large rate increases from the Fed to cool inflation may result in a “soft landing” for the economy and not in a significant recession. “Perhaps” is the operative word that moved markets in a positive direction.

Rates for Friday July 15, 2022:  After edging up early in the week, rates took a turn down today on the retail sales number and perhaps a lessening chance of a “hard landing” as inflation is brought down. As can be seen on the chart, rates have been choppy, but until a few weeks ago trending up (for conforming), since with one hiccup the conforming rate is trending down. A long term trend? I’m not betting yes or no but merely a very short-term observation.

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

30-year conforming                                        5.125%                Down 0.375%

30-year high-balance conforming                   5.875%               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.

In May we flew back to Boston to witness and celebrate our oldest daughter’s graduation from Boston University. On Monday I texted her “Enjoy your first day on the job!” Her job in a lab at Massachusetts General was lined up before graduation, but boss and worker mutually agreed that she would start this past Monday so she could take a trip to Paris with Leslie and then fly out for her old man’s old man 60th birthday.

Mission accomplished, through school, for now, and gainfully employed with no support from mom and dad.

One down, one to go!

Have a great week,

Dennis

Past Weekly Rate & Market Updates can be found on my blog page at my website www.DennisCSmith.com/my-blog

How do inflation and employment affect mortgage rates?

Question of the week: How do inflation and employment impact interest rates?

Answer: Thorough readers of the WR&MU have received some education in macroeconomics (study of the whole economy) and the tie in between rates and economic data. However, after many years of feedback I know that readers of the WR&MU are like kids at a children’s birthday party.

When our oldest was about 7 years old I made the observation that there are four types of kids when it comes to cake and ice cream: Kids who eat only the ice cream, kids who eat only the cake, kids who eat only the icing, kids who eat all of it (I am the latter).

For the WR&MU we have readers who read only the Question of the Week, those who read only the economic update and rates, those who read only the personal section at the end (by far the largest group), and those who read the entire update (by far the smallest group!).

This week hopefully we will catch a broad readership for the top section.

First and foremost, mortgage rates are not controlled by the Federal Reserve or any specific entity. The vast majority of mortgages are bundled by lenders and sold to Fannie Mae or Freddie Mac. Fannie and Freddie then create bigger bundles, called Mortgage-Backed Securities (MBS), and sell those on the open market. The price investors will pay for MBS determines mortgage rates, the higher price they will pay the lower rates will be, the lower price they pay the higher rates will be. Fannie and Freddie determine their purchase price for mortgages from lenders based on the price they get when re-selling to investors.

For mortgages that are not sold to Fannie or Freddie, the pricing is based on the prices Fannie and Freddie are getting and then adjusted for risk and demand.

Investors make their decisions on what they will pay for 15- or 30-year fixed rate mortgages based on information they receive on economic activity, geopolitical news, and most importantly expectations as to what the economy will be like in the future.

A basic rule for interest rates is the relationship between interest rates and economic strength. Strong economic times have higher rates, slow or weak economic times have lower rates.

Above we wrote that the Federal Reserve does not control mortgage rates. This is true in the sense that they do not raise or lower the rates directly. However, they do control, to a large extent, the rates for investments that will compete with MBS for investors.

For instance, when the Fed increases its benchmark rate by 0.25%, banks will increase their prime rate by 0.25% because it costs them more to borrow from the Fed and other banks. There are many credit instruments, such as credit cards, auto loans, lines of credit, education loans, that use the prime rate as their primary determinant for rates. If the prime rate goes up 0.25%, we can expect rates for consumer, and commercial, credit to go up as well.

This is the current rate environment, the Fed has been, and will continue, to raise rates through the end of the year, and possibly into 2023.

However, since January the Fed has increased its rate from near zero in January to 1.5% after its most recent rate increase. During this time, we have seen mortgage rates climb from 2.875% to 5.375% (down from recent high of 5.625%); significantly more of an increase than the Fed rate increase.

The primary reason for this is investors anticipating higher rates from the Fed and the need for a higher return on their investments because of inflation.

Back to our question on how inflation and employment impact mortgage rates.

Inflation is caused by too much money chasing too few goods and services, demand exceeds supply. This can be a result of lack of supply, or an abundance of money.

The pandemic created a reduction in supply of many goods used by consumers and manufacturers, the “supply chain” issue we have been reading and hearing about for almost a year. Manufacturing shutdowns, or slowdowns, due to lack of workers either due to government mandates, or employees out with the virus, or employees leaving work to receive government benefits, reduced supplies needed to produce consumer goods. As a result, prices began to climb. Automobiles were the most noticeable sector to see large increase in prices as supplies were low due to a lack of computer chips being manufactured. Another noticeable sector with sharp price increases was durable consumer goods, think appliances, consumer electronics, home furnishings.

The early increases were attributed to work-at-home investments as families created home offices, or spending so much time at home resulted in remodeling and repairs. As we came out of the pandemic and employment grew, more people getting paychecks entered the marketplace to purchase goods and services.

Fueling the purchasing power of the consumer was several trillion dollars being sent to Americans from federal and state governments to stimulate the economy and keep it from crashing.

As inflation began to grow, many investors saw the amount of money in the economy from the Federal Reserve and federal and state governments, increasing employment as workers returned to their jobs, most notably the very large leisure and hospitality sector, and continuing lack of necessary supply to keep prices in check.

While the Fed was calling the increase in prices in the early stages of our current inflationary era “transitional,” investors and many economic analysts were rebuking the label and calling for the Fed to change its stance from boosting economic activity to stifling it but increasing rates.

Not being able to control what the Fed does, investors voted with their dollars and went cold on U.S. Treasuries, MBS, and other fixed rate investments, causing rates to climb.

High inflation with a strong labor market creates a spiral that is hard to break. Employers must pay higher wages to attract workers, are paying more for the goods they sell to consumers, and must therefore charge consumers more for the goods they sell. Consumers, paying more for their goods and services, demand higher paying jobs to afford their standard of living.

Underlying all of the price increases for consumers and businesses, is the price of energy needed to run equipment, transportation, and to heat and cool buildings.

The spiral is broken when prices and/or employment slow their growth, or decline. It is rare that once prices increase that they drop, even more so drop to the levels before an inflation cycle. What is not so rare is that employment shrinks, unemployment rises, as an economy cools.

When investors buying rate based investments, such as mortgages, see economic data showing inflation is slowing, that employment growth is slowing, or that one and/or the other is shrinking, they will react by purchasing those investments to lock in higher rates of return before rates fall once again.

Nothing is in concrete in economics, except the relationship between supply and demand. Reading the data that represents supply and demand in our economy as seen by inflation and employment, investors will determine if rates should be going up, or going down. They will act on their determination, thereby causing rates to go up, or down.

The target for inflation that is acceptable to enable steady, but not too robust, economic growth and stable employment markets is around 2%; this is also the target for stable interest rates. In May the Consumer Price Index showed an annual rate of inflation of 8.6%. It will take quite a bit of work to slow price growth more than 75% of the current rate of inflation.

Have a question? Ask me!

Labor markets are still strong. That is the message in data released today by the Department of Labor with June’s employment report. The economy added 372,000 new jobs in the month, bringing total employment back to over 95% of pre-pandemic levels—total employment is about 500,000 short of February 2020. The increase was a surprise to most analysts who thought job growth would be slowing due to higher wages and prices. Wages increased 0.3% for the month, showing a slowing in wage increases from 5.6% in April, 5.3% in May, to 5.1% in June. The data supports large rate hikes from the Fed as a strong labor market makes a recession, a deep and long recession, less likely.

Rates for Friday July 8, 2022: After dropping the most from week to week since 2008 last week, rates this week spiked back up to where they were the week before. As mentioned above, the strong jobs data reduces recession concerns, increasing the likeliness of large rate hikes from the Fed who will feel they can spike rates to slow inflation without pushing the nation into a deep recession. Investors reacted to the news by pushing mortgage rates back to, or near, recent market highs.

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

30-year conforming                                        5.375%                Up 0.375%

30-year high-balance conforming                   6.00%               Up 0.375%

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.

A milestone week for yours truly this week as I completed my 60th tour around the sun. The only time I don’t feel like I’m still in my early 30’s is when I look in the mirror. In a diva type move, I am considering removing all the mirrors in our home.

Reading about how Medicare is fully funded to 2028 (66 years old) and social security to 2037 (75), I’m conflicted as to whether I should be older to take advantage of these programs I have been funding for over 40-years, or should be much (much) younger to have been better about putting away funds for retirement when I was much (much) younger, or be this age and know I’ll be part of the employment force for much (much) longer.

Have a great weekend, I’ll be researching who has the best “senior” discounts!

Dennis

Past Weekly Rate & Market Updates can be found on my blog page at my website www.DennisCSmith.com/my-blog

Why would we pay a higher price for our new home?

Question of the week:  Why would we offer a higher price for our new home?

Answer: To save money.

Huh? How can paying more save money?

Frequent readers of the WR&MU may recall the May 13th update, “How can we qualify for a higher sales price?” It dealt with buying down the interest rate to qualify for a higher loan amount, in the answer I mentioned ask the seller to credit funds to buy down your mortgage’s interest rate.

With the real estate market softening in some areas as the amount of inventory on the market increases, the market appears to be in transition away from a sellers’ market—note “in transition away from” does not mean we are in a buyers’ market. Yet.

With more inventory on the market longer some sellers may be willing to negotiate on their listing price in order to sell their home and open escrow.

But instead of offering a lower sales price, what if you offered the asking price? What if you offered the asking price and asked the seller to credit you funds for closing costs through closing equal to how much they may lower their asking price?

Huh?

Abel and Deanna have their home listed for $900,000. Alex and Hannah are in the market and want to make an offer on Abel and Deanna’s home. Going through comparable properties on the market they feel an offer of $825,000 has a good chance of being accepted. After speaking to them to put together their pre-approval package, they decided to offer full asking price for the home, and ask for a seller credit of $25,000 towards closing costs.

Why? To save money. Here is how:

Traditional Option: Offer lower sales price with no seller credit

Sales price = $875,000

Loan amount = $700,000

With 20% down payment and interest rate of 5.75% at a cost of 1.25 points here is how the transaction breaks down financially for Alex and Hannah:

Down Payment = $175,000

Costs for closing, prorated payments for interest, taxes, insurance estimated to be $19,000*

Total cash to close approximately $194000

The monthly payment for their $700,000 is approximately $4085 per month.

Higher price with seller credit option

Sales price = $900,000

Loan amount = $720,000

Down payment = $180,000

The same interest rate of 5.75% at a cost of 1.25 points, the approximate closing costs are still about $19,000. Because the credit from the seller is $25,000 this allows for an extra $6000 to be applied to points to buy down the interest rate, approximately 0.875 points, or if you add some money from your funds, you pay an extra 1 point to buy-down the rate, which costs you approximately $1000.

Now, instead of a rate of 5.75% your rate is 5.5%.

Total cash to close is:

          Down payment      $180,000

          Closing costs         $26,000

          Seller credit            -25,000       

          Total cash             $181,000

The payment on $72,000 at 5.5% is about $4088 per month.

By having the seller give you a credit for closing costs instead selling for a lower price, for the same monthly payment you save $13,000 in cash, which may come in handy to pay for moving costs, immediate costs for the new home such as bath mats, waste baskets, area rugs, plants and other expenses that seem to appear when we move to a new home.

*Closing costs are estimated based on area market for escrow, title, lender fees, property taxes, and home owners’ insurance; actual closing costs will vary depending on transaction.

There are some restrictions on seller credits, the primary being that, for most programs, the amount of the credit cannot exceed 3% of the sales price.

Have a question? Ask me!

Creating more headlines that usual, the Conference Board released the results of its consumer confidence survey. The reason for the broader coverage was the survey showed a very large drop in the confidence consumers have in the economy. The five-point drop was the largest month to month since November to December 2020. The survey is important since approximately 70% of our nation’s economy is based on consumer spending. Lower confidence in the economy, and their confidence in the economy and their personal circumstances in the next six months, typically results in a drop in consumer spending, constricting economic growth. The confidence numbers are being propped up due to the strong labor market, while increasingly pessimistic about the economy, most consumers have a more confident feeling about their income.

The decline in confidence was heard, or not heard, at cash registers as consumer spending in May declined 0.2%. Of interest, perhaps the most discretionary of spending, dining out, declined in May for the first time in four months. Further hurting some of the confidence was the decline in “real income.” Nominal disposable income, the actual amount of a paycheck was up in dollars by 0.5% in May; however factoring inflation into the equation and real disposable income is down 3.3% from last May.

Portending potential erosion in future confidence surveys, Federal Reserve Chairman Jerome Powell this week at a conference with European Central Bank leaders stated that there is no guarantee the Fed’s efforts to stem inflation will give the economy a “soft landing.” Meaning, no guarantee their spiking their benchmark interest will not put the economy into a recession. Powell said that the Fed thinks it can get inflation to decline towards its 2% target rate with economy retaining a strong labor market; “thinks” is the key word. Following that with the phrase, “no guarantee” put markets on edge. Finally, he feels price stability is the focus, which means jobs are not. Many are taking his comments to mean that the Fed is willing to sacrifice jobs to slow and reverse inflation. Confidence is impacted by many factors, what we pay for necessary goods and services, and the income to pay for those goods and services, are the two primary factors.  

Rates for Friday Ju 2022: Going through past weekly rate charts, using the same parameters which are use this and every week, the last time the 30-year conforming rate dropped 0.375% (three-eighths of one percent) from Friday to Friday was in December 2008 when it dropped from 5.125% to 4.75%, it has happened again this week. As mentioned last week, investors appear to have priced in future rate hikes into the bond and mortgage markets, and now are leaving stocks for rate bearing investments over fears of a recession sooner than later. Also pushing rates down is the long weekend as investors “flee to safety.”

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

30-year conforming                                        5.00%                Down 0.375%

30-year high-balance conforming                   5.625%               Down 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.

Our nation has faults, but I feel fewer than any other. This weekend we celebrate the beginning of the United States when volunteers representing thirteen colonies bravely declared independence from the most powerful nation on earth. The declaration separated families and friends and resulted in more over seven years of armed conflict. Following the successful, for the colonies, conclusion of the Revolutionary War, Articles of Confederation bound the now free colonies, or states, together.

After four years, the states sent representatives to the Constitutional Convention that lasted from May to September 1787. During this period, and following as each state debate whether to vote to ratify the Constitution there was incredible rancor, vitriol, allegations, and derision across the major divide of those wishing for a weak, loose Federal government and more power with each state, and those who desired a very strong central government that would have more control over the states. Each side made compromises, more than the extremists from each side desired.

In the end, as you know, a less than perfect document, but the most perfect document in history that is the basis of governance, was accepted. For me, the beauty of both the Declaration of Independence and the Constitution are the simplicity and brevity of each. Imagine the tens of thousands of pages such documents would be if written today.

We have division, rancor, vitriol, allegations, and derision the major divide in our nation as represented by the two major parties; as we have had since our founding. Most of the negativity is from the edges of the sides towards the edges of the other, the rest of us get caught in the cross-fire.

As we celebrate our nation’s independence, my hope is that all take a moment to take joy in living in the greatest nation in world history, while flawed, it is less flawed than any other. America could realistically be seven, eight, nine, ten, different countries given the cultural and physical differences, but we are one. E Pluribus Unum, out of many one, as a result of our Declaration of Independence and our Constitution.

Happy Independence Day,

Dennis

Past Weekly Rate & Market Updates can be found on my blog page at my website www.DennisCSmith.com/my-blog

No question: On Vacation

Question of the week:  Where are you?

Answer: The Weekly Rate & Market Update is abbreviated this week as Leslie and I are in Chattanooga, Tennessee this morning. We left Long Beach last Saturday for Nashville, the next day we drove to Asheville, North Carolina. Our purpose was a biannual family reunion for Leslie’s cousins, and we stayed in Asheville until Wednesday. That morning we left on a sojourn of the Southeast.

Wednesday, we drove to Charleston, South Carolina, we walked around and had lunch then onto Savannah, Georgia. We met friends who moved to Savannah from Long Beach last year for drinks and dinner.

Yesterday we drove to Chattanooga, stopping in downtown Macon, Georgia for lunch. Macon has some beautiful mansions and neat old downtown area that is a bit reminiscent of a Grisham novel.

Today we head to Memphis for the night, plan is to go by Graceland and then dinner and blues on Beale Street. Tomorrow back to Nashville for our flight home.

Have a question? Ask me!

Rates for Friday June 24, 2022: Markets are reacting favorably to all the speeches and testimonies by member of the Fed. The sense is the large rate moves to quell inflation is a sound plan. It feels like investors think future rate increases may already be priced into our current rates. This would be good news and add stability to the market. Which means rates not dropping but not climbing. Rates down from last Friday.

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

30-year conforming                                        5.375%                Down 0.25%

30-year high-balance conforming                   5.875%               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.

The challenge on this trip, with all the great food and beverages, is not to slip back into the Pandemic Pants size…

Have a great week,

Dennis

Past Weekly Rate & Market Updates can be found on my blog page at my website www.DennisCSmith.com/my-blog

Can we refinance later?

Question of the week:  Can we refinance later?

Answer: With our new higher rate environment we are getting this question fairly frequently from new clients.

The answer is yes.

Buyers looking to purchase are asking two questions, more prevalent, “can we refinance later,” next is often, “is this a 30-year fixed rate?”

The first question alludes somewhat to whether there is a pre-payment penalty on their potential new mortgage if they payoff the loan, either through sale or refinance, in the future. The second question is asking if the loan rate may adjust in the future.

While becoming a somewhat smaller part of the mortgage market, conventional loans, i.e. Fannie Mae and Freddie Mac programs, are still by far the most funded mortgages despite rates climbing since the start of the year. The programs have no prepayment penalties, you could win the lottery the day after your first mortgage payment and payoff the mortgage and only owe the balance of the loan and accumulated interest.

This means if you fund a mortgage today at 5.625% and in February the rate is 4.625%, you can refinance with no additional costs beyond the transaction fees.

As to the second question, this is due in large part to the amount of advertising on radio, television, and social media for adjustable-rate mortgages (ARMs).

While Fannie and Freddie do have15-year fixed, and hybrid-ARM products, the overwhelming number of mortgages funded are 30-year fixed. New mortgage applicants want to know that their rate will not change in the future, unless they refinance.

Above I mentioned that conforming loans are becoming a smaller portion of the market, taking up more of the market are “Non-QM” mortgages that are used mostly for self-employed borrowers, borrowers whose incomes are not steady salary, have ownership in a LLC or corporation, or other circumstances that do not fit the Fannie/Freddie cookie cutters.

These types of loan typically have a prepayment penalty option for a lower interest rate, and have ARM products available for applicants.

For a look at the different types of mortgages available, click here for the WR&MU update from January 25, 2019, “What are the different types of loans available?”.

Have a question? Ask me!

Data starting to show inflation is impacting consumers. For the first time in five months retail sales dropped, coming in down 0.3% in May from April. While sales adjusted for inflation have dropped in recent months, this is the first month this year non-adjusted sales have dropped. Accounting for inflation sales were down 1.3%. The primary drag on sales was the 4.0% drop in auto sales and parts; taking this sector out of the report and sales increased 0.5% (-0.5% adjusted). Dragging the number higher, gas stations saw a 4% increase in sales due to the higher cost of petroleum; this is not a positive way for higher sales as for most consumers purchasing gasoline is a necessity, not a luxury like dining out, buying appliances or home goods.

The direction of consumer dollars is shifting. During the pandemic there was a spike in consumer goods such as appliances, computers, phones, home office furnishings for their work Zooming. Travel and entertainment have seen an increase in sales in recent months, and with school out the numbers should climb. Hotels and travel are not included in the retail sales report, but bars and restaurants are and the sector saw a 0.7% increase.

November 1994 was the last time the Fed increased its benchmark interest rate by 0.75%. At the time the Fed was trying to get ahead of inflation, slow the economy and avoid a recession. The November 1994 hike was part of seven rate increases over thirteen months. The strategy was, for the most part, successful. In June 2022, the Fed is behind inflation and trying to catch up.

Part of the catching up strategy occurred earlier this week when the Fed bumped its benchmark rate 0.75%, to 1.50-1.75%. Looking ahead, Fed Chair Powell indicated another 0.75% hike could occur at its scheduled meeting in late July. In a statement released with the news of the rate increase, the Fed is predicting its rate will be around 3.4% by the end of 2021 and 3.8% at the end of 2023. Looking forward, the Fed is predicting 1.7% growth this year and 1.9% next year—noticeably discounting a recession in the time period. As for inflation, it is expected to continue to be high through the year and fall down to near its 2% target rate by the end of 2024. Note that is 30-months away. It appears our current inflation cycle is most definitely not “transitory” as labelled late in 2021 and earlier this year.

Rates for Friday June 17, 2022: Long time readers of the WR&MU know that mortgage rates are set by investors who buy or sell depending on their outlook for the future. Traders in rate-based investments are predicting that the Consumer Price Index will be around 9% at least through September. This outlook has them making investment decisions based on higher rates in the future. Expectations determine actions, the traders are telling us do not expect a decline in rates in the near, or medium, future. Conforming rate is up from last Friday, but down after a large spike on Monday and Tuesday ahead of the Fed announcement. The large rate increase by the Fed was welcomed by investors.

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

30-year conforming                                        5.625%              Up 0.250%

30-year high-balance conforming                   6.00%               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.

Happy Father’s Day to the dads. I find in interesting that the U.S. Open concludes on Father’s Day. How many dads who love golf can sit around for several hours, or even the last one or two, and watch the tournament’s conclusion without upsetting children, and/or spouses, who have other plans? Since our school district’s last day of school was always the week before Father’s Day, I had several where I was catching up on who was leading on airport televisions as we started a summer vacation that day.

Enjoy an adult beverage or two, cooking your dinner on the barbecue, and your family dads!

Have a great week,

Dennis

Past Weekly Rate & Market Updates can be found on my blog page at my website www.DennisCSmith.com/my-blog

Can my parents payoff some of my debt so we qualify?

Question of the week:  Can my parents payoff some of my debt so we qualify?

Answer: With higher rates many homebuyers are looking to maximize their qualifying ratios to buy their new home.

Dennis, what are qualifying ratios?

Qualifying ratios, or debt-to-income ratio, or DIT, is your monthly house payment plus monthly credit payments divided by your gross income.

For example, if you make $10,000 per month, your proposed new housing payment will be $3500 (this is mortgage principal and interest, property taxes, property insurance, PITI), you have a $450 auto loan, $150 per month for minimum credit card payments, and pay $325 for student loans.

Your housing payment plus credit payments total $4425 per month. Divide the $4425 by your gross income of $10,000 and the result is 44.25%. This is your debt-to-income ratio.

Depending on the loan program the maximum DTI you may have can be from 43% to 49% (unless you are using VA eligibility). In the case above, you would likely qualify for many mortgage products.

Consider the same income scenario, but your proposed new housing payment PITI is $4300 per month. Adding in your auto, credit card, and student loan payments total $925, for total payments of $5225 per month. Your DTI is 52.25%, you do not qualify.

Most loan programs allow you to pay down debt to qualify. In this instance your auto loan balance is $7800, your credit cards total $7500, and your student loan balances are $27,500. The loan program you are using allows your DTI to go up to 49% since you have a very strong credit score and significant reserves after closing due to your 401(k)-retirement account.

To put more money down to lower the loan amount, and therefore the payment, is not possible as you are using almost all your available cash for down payment and closing costs.

However, if you payoff your credit cards and auto loan*, your DTI drops to 46.25% with just the new house payment and your student loans. If you do this and the underwriter has seen a credit report with the higher balances, and then we present a report with those accounts paid off they underwriter will require proof of funds used to pay off the accounts.

One option to do this is to borrow the $15,300 needed to payoff these account from your 401(k) to payoff the accounts. Because the repayment of the 401(k) loan is through your paycheck the payment will not count as part of your DTI. Presenting documentation for the 401(k) loan, terms of repayment, and verification the funds left your retirement account and were deposited into your bank account will be required.

Another option is that your parents have offered to help with some cash if needed to help you if needed. So instead of getting the funds from your 401(k) your parents make payments to your auto lender and credit card companies to payoff the accounts.

Question of the week: Can your parent’s payoff your debt so you can qualify?

Yes.

But.

Any funds coming into the transaction that are not your own need to be verified as to their source to ensure that the funds are not borrowed and come from an acceptable source. In this case your parents are an acceptable source.

Because they already made the payments to the creditors the verification process to enable the funds to be eligible to the underwriter is a bit more onerous than if they had simply transferred the funds to you directly and you paid off the accounts. In this case the documentation would be to show the funds in your parents account, verification they paid the funds to the creditors with copies of cancelled checks, or bank statement showing ACH transfers. As well, a gift letter would be required in which your parents attest the funds are a gift and are not expected to be repaid.

If the funds are directly transferred to you, the requirement for the funds to be accepted would be bank statement showing your parents had the funds, proof the funds left their account and went into your account with either a cancelled check or bank statement showing the funds being transferred, a statement from your banks showing the deposit.

Situations such as this are why it is extremely important to get fully pre-qualified, including a credit report, before starting your home search. With all the needed information for your income, credit obligations, and funds available, we can strategize “what if…” for different home prices, interest rates, and loan programs. This may entail paying off, or down, debt, accessing more funds for the transaction, or adjusting sales price and/or loan amount for your new purchase.

*For most loan programs if there are ten or fewer payments left on the installment payment, the payment is not counted in the DTI calculation. In this case, instead of paying off the auto loan for $7800, paying the balance down to $4500 (10 x $450 per month) will result in the payment being left out of the DTI. This saves $3300 in cash to lower the DTI to get approved.

If you, or someone you know, is considering purchasing a home soon, or in the future, contact me to make sure the resources are available and properly allocated for a successful closing on your new home.

Have a question? Ask me!

Not good news. That is the short take away from the Bureau of Statistics Consumer Price Index data this morning. Often there is a glimmer of positive in economic data that in the whole picture are negative, not so today. The CPI rose 1% in May, year over year prices are up 8.6%, the highest since 1981. Pun intended, fueled by gas prices which rose 4.1% from April. Energy costs impact virtually every consumer item, simply because of transportation costs, but have a very large impact on food as not only transportation but cultivation is also very reliant on petroleum by-products. Food prices are up 12% from May 2021.

The “core” rate of inflation is the number that the Federal Reserve uses as its gauge of prices in the economy because it is more stable since food and energy costs are stripped out. Not a lot of good news there as the core rate increased 0.6% for the month, near the expectation for the full CPI growth, and is up 6% from May 2021.

Piling on the negative news, inflation is moving from goods to services. Typically, inflation takes a while to move from groceries, gas, shoes, rent, to services, that “while” has arrived in the U.S. economy. The concern with this transition of higher costs is that once service costs go up they do not come down, making the inflation permanent. Across all sectors, “real” wages, income after accounting for inflation, dropped 0.6%, for the same income to purchase the same goods and services, workers will need to dip into savings or use credit.

Rates for Friday June 10, 2022: Rates were climbing all week before CPI data came out this morning, today’s news pushed them even higher. Rates are up 0.50% from last Friday as investors look to protect their funds from further declines in values.

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

30-year conforming                                        5.375%                Up 0.500%

30-year high-balance conforming                   6.00%               Up 0.500%

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.

Sobering news for the economy with no short-term fixes available. Summer is typically a very high consumption month as families take trips, go out more, and typically spend time and money with family. What impact inflation will have on this summer’s spending is not known. From our stand-point, Leslie and I embark on a summer drive trip later this month in the Southeast. I am glad we will be paying about $1-1.50 less per gallon than if we were doing a drive trip in California.

Have a great week,

Dennis

Past Weekly Rate & Market Updates can be found on my blog page at my website www.DennisCSmith.com/my-blog