What tips do you have for smoother loan process?

Question of the week: What tips do you have for smoother loan process?

Answer:  This question came from a networking meeting last week, and the tips are very simple.

Be prepared.

Be compliant with requests.

Be timely.

Despite the mortgage industry going to complete “full qualifying” since the market meltdowns in 2007-2008, many mortgage applicants still ask why they need to provide certain documents and forms because “we are obviously qualified.” Certainly, you are, we just need to prove that to an underwriter following the regulations and guidelines established by government and quasi-government agencies and individual lenders.

Since the Dodd-Frank Act in 2010 almost all mortgage packages have to show borrower’s ability to repay on a consistent basis; i.e. they have to show income that is available for payment every month. This means that just having enough money in the bank to pay-off your applied for mortgage does not mean you show m

When applying for a mortgage, have readily available, preferably in electronic format, if possible, paystubs, federal tax returns, letters or communications that detail your monthly income from pensions or government payments such as social security. Any income you receive, we will need to show proof and validation of the amount received.

All funds used in a transaction and, if necessary, reserves that will remain in accounts after closing, need to be verified for at least two months prior to the loan application. Checking, savings, investment, and retirement accounts will need to be documents with two months’ statements.

NOTE! All pages of your statements will need to be provided. If your statement says page 1 of 15, you will need to provide all fifteen pages, regardless of what is on each page. If page 15 of 15 is blank and states, “This page left blank intentionally,” we need page 15.

Again, we need the statements, not screen shots from your on-line banking website, the monthly statements.

If you own property, we will need copies of your mortgage statements,

property insurance declaration page and payment statement to verify the coverage, payment and also contact information for your insurance agent.

As we process your mortgage package, depending on the dates on the documents and forms you are issued, we may need to update some documents that are more recent. This is almost always the case with paystubs and quite often bank statements. As you receive any items for income or assets, save them for your loan package as they may be needed.

Often after reviewing a package an underwriter may request clarification of certain aspects of the file, such as a large deposit into your checking or savings that is not from your employer. We will let you know what we need and why.

Going through a mortgage application process can feel invasive to some, I have likened it to a financial enema. Every item we request is requested for a reason, the more information you are able to provide, and the faster you provide it, the easier your transaction will be.

Since the end of January 2020 when interest rates began to drop, our industry has been inundated with applications. This has slowed down the approval process dramatically. Providing items requested in a timely manner will ensure your file continues to move through the pipeline to closing and not get put aside waiting for those items and then getting back into line.

Our objective is to make the mortgage process as easy as possible, having financial records for income, assets and credit obligations readily available throughout your transaction makes the process a lot smoother.

Have a question? Ask me!

Other than a couple booking a wedding at The Plaza Hotel in New York, not many announcements are made two years in advance. Unless you are the Federal Reserve discussing interest rates. Earlier this week the Fed released an announcement that it was looking at increasing interest rates in 2023, with two rate hikes. Having a two-year runway before rates go up would not have investors making early bets with their funds. However, other statements in the announcement, combined with comments made by Fed Chair Jerome Powell in his news conference, triggered a sell of in bonds and mortgages that spiked rates mid-week.

“Inflation, inflation, inflation,” being bellowed by many economists, pundits, and yours truly (the voice the Fed could care less about), is reminiscent for many of us in a certain age bracket of Jan’s, “Marcia, Marcia, Marcia,” with about as much whining. Despite strong increases in consumer prices the last two months, trillions of dollars dropped into the economy from Washington with trillions more being debated in Congress, spiking wages costs for employers to lure workers, the Fed has been as consistent as Carol and Mike Brady with their messaging that the recent surge in inflation is transitory and will slow down in a month or two.

This week the Fed sort of, kind of, maybe acknowledged that inflation might rise faster and longer than expected—expected by members of the Federal Reserve. The official Fed position is its forecast for 3% annual inflation this year that will drop in 2022, a position it has held for the past three month. Recent releases show several members of the Fed’s Open Market Committee (the group that sets rates) are starting to question the forecast and are ready and will to act on rates before 2023 as seven of the voting members now see the Fed raising rates for the first time in 2022. Seven of eighteen voting members will not cause rates to increase, however in March only four members saw a 2022 rate hike.

Rates for Friday June 18, 2021: After the rate spike on Wednesday, conforming rates have tenuously settled back to last Friday’s level, whereas high-balance conforming rates are up slightly from a week ago.

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

30 year conforming                                     2.75%  Flat

30 year high-balance conforming               3.00%  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.

A lot of events this week. June 15th saw the transition of our state to being fully open and relaxing of mask mandates and requirements. Yesterday President Biden signed the bill to make June 19th a federal holiday, starting tomorrow, and Sunday is Father’s Day and the first day of summer. With celebrations planned in many communities tomorrow for Juneteenth, and Father’s Day Sunday, many families and friends will be openly gathering and enjoying being together in person rather than through a screen, our summer is starting on the right track to get closer to how we were in June 2019 than June 2020.

I hope all of you have a wonderful weekend and are able to enjoy your time with family and friends.

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

Update on inflation and rates

Question of the week: No question this week as we are travelling today, currently writing from Phoenix airport, as a result the WR&MU is abbreviated.

Have a question? Ask me!

Soars, spikes, jumps, climbs, pull out your Roget’s Thesaurus (more likely use an internet search engine) to find synonyms for “increases rapidly to describe consumer prices in May. The Consumer Price Index increased 0.6% in May from April, lower than April’s 0.8% leap, but still a very big jump in prices. The annual rate of inflation is 5%, the highest since 2008 when the economy was coming out of the Great Recession and surging oil prices pushed up costs globally.

Data bias is part of the increase, as measuring prices in May 2021 to May 2020 is skewed due to lower prices from many retailers of goods and services to retain business in the early months of the pandemic. “Part” may be attributed to the pandemic price slump. Most of the price increases are attributed to increasing demand as our economy opens up with most areas of the country fully open with no restrictions. A very large component of the jump in prices is supply-chain issues across a broad range of industries.

A factor not commented on in as many articles regarding May’s price jump is the higher cost of labor that is being built into prices by retailers of goods and services. The large amount of job openings across the economy has resulted in employers offering higher salaries and bonuses to attract workers. To ensure profitability these higher employment costs must flow through to prices paid by consumers.

“Don’t worry…” is the Federal Reserve, and many economists’ message regarding the surge in prices the last few months. Their reasoning is that the price increases are temporary due to the supply chain issues and sudden surge in demand, and that once the economy settles into “normalcy” inflation will cool back down to 2% by next year.

But 2% on top of 5% means prices will not drop, they will just increase at a slower rate. Some economists are skeptical of the 2% inflation rate expectation due to a wage-inflation push on prices that create a cycle of rising prices that is hard to break.

The news is not positive for rates, for two main reasons. First, the primary tool for slowing prices in an economy is higher interest rates. Rates will increase due to the expected need for higher rates. Second, the expectation that Congress will pass more legislation that will result in several trillion dollars above the pre-Covid budgets being pushed into the economy. This will greatly increase the amount of borrowing by the Treasury Department to fund the programs being funded. Increased borrowing leads to higher rates as the borrower, i.e., the Treasury, must increase rates to entice buyers to purchase the debt.

Rates for Friday June 11, 2021: As markets opened this morning prices on bonds and mortgages were dropping, which leads to higher rates, however at the moment rates are flat again from Friday to Friday. I am surprised that rates are where they are and my expectation was, is, they would be at least one-quarter of one percent (0.25%) higher than they are.

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

30 year conforming                                         2.75%  Flat

30 year high-balance conforming                   2.875%  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.

Flying today for the first time since September 2019, and other than everyone in face masks everything is the same—full airports and planes. A good sign that America is getting closer and closer to our old normal.

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

Should we pull equity out of our home to pay for college?

Question of the week: Should we pull equity out of our home to pay for college?

Answer:  Many families will be looking at options to finance tuition for their college bound children this summer, and every summer. Many homeowners, especially those in California, fall into the gap between qualifying for scholarships and financial assistance based on need due to earning too much to be eligible, and not earning enough to comfortably paying the ever-rising costs of college.

As a result, either college options change to reduce costs, or some borrowing is required. Assuming they have enough equity in their homes, many parents feel the need to use some of that equity to help pay costs for their children’s education to fill the gap.

Being the father of two college age children, and also having a bit of knowledge how debt and finances work, our family did a lot of exploring for options to pay for college. The least favorable options were, to us, using any home equity. For a few reasons, a few of which are given below, and primarily, it is our firm belief that students must have a strong financial stake in the cost of their pursuit of a degree to ensure accountability and add value to the work and result of their college experience.

Here are the primary options most families consider:

Cashout refinance: The advantage of this options is a fixed rate payment that is relatively low due to being amortized for 30 years. There are two primary disadvantages to using a long-term fixed rate mortgage. First, you are paying for college costs for 30 years, or until you sell the home; if you refinance later, you are extending the time you make the payments. Second, let’s suppose the amount of money you will need to borrow for four years is $60,000. With a standard refinance you will borrow all $60,000 and then use $15,000 in year one, $15,000 in year two, $15,000 in year three and the final $15,000 in year four. While it will be four years before you use all the money, you have to pay for it at month one.

Equity line of credit: The primary advantage of obtaining a HELOC is you only pay for the amount of money you borrow. Using the example above, in year one you access $15,000 and only pay interest for the $15,000 outstanding balance. As the years go by, depending on how you manage payments, the highest balance you will have is $60,000 but you will not pay for that amount until it is needed and borrowed. Another advantage of most HELOCs is flexible payment options, as many have a minimum payment of interest only. A disadvantage of the HELOC is the rate is adjustable and over time will likely be higher than it is today. One additional advantage I have seen for some families is that while their student is in college, the parents may make the interest payments, when their son or daughter get a job they repay their parents monthly to pay down the loan.

Federal student loans: These loans have a few options that you don’t get to choose, but are offered to you depending on your financial profile. These loans are either offered to students or to parents depending on financial need based on parent’s income; as well the college or university determines how much you are eligible to borrow. If your student qualifies for a “Direct Subsidized Loan” the U.S. Department of Education pays the interest while the student is enrolled at least half-time and for the first six month after leaving school. The other standard type of loan is a “Direct Unsubsidized Loan” and interest is paid by the responsible party; this loan has the option of deferring interest while in school, however the interest accrues. Some students receive loans from both categories and must understand that one loan has interest that is accruing which will increase the amount of money they will owe when they leave school. The advantages of the federal loans are the payment subsidy for those who qualify, and deferred payments while the student is in school. The primary disadvantage is the low loan amounts available to most California homeowners due to the average income of most applicants from our region, resulting in many families needing other financing options to cover the cost – loan gap.

Private Student Loans: There are many of these loans available and offer a lot of flexibility. Typically, these loans have parents and student co-signing on the loan and have several advantages. They are offered for varying repayment periods, enabling the ability to choose longer terms for lower payments to make it easier for graduates to pay with their lower starting pay in the job force. Most lenders offer fixed or variable rate loans, depending on your risk aversion. Finally, it helps students build a credit history with assistance from parents. For parents a disadvantage is they are on the hook for the payments. If your student is out of job five years after graduating and stops making payments, either you make the payments or see the hit to your credit score.

Federal and private student loans are made per quarter or semester, therefore if a student graduates from a four year college attending three quarters per year, they will end up with twelve loans, or if using federal and private loans up to twenty-four loans. This is easily managed as the loan servicers usually consolidate all the payments on one statement (to be clear, all the loans of the same type with same lender will be consolidated for one payment statement).

After graduating, students have the opportunity to consolidate their loans through one of many private lenders. This allows for easier management of the student loan debt, and may result in lower payments and/or interest rates.

Discussions about how to pay for college are quite often the first financial education many young adults have. They are important conversations that can help students decide the value of the degree they seek, weighed against potential income after graduation to pay for the degree they earned.

In our home, our conversations began with how student loans work. We discussed how interest deferment works, and of course how much their payments would be after graduating. In our conversations, the girls learned how much would be contributed to their education and any costs above that would be student loans that would be their obligation to repay.

After looking at schools, costs and subsequent loans needed to cover their financial needs, I broke down what their monthly loan payments would be, added estimates for rent, added estimates for costs of living such as food, clothing and transportation, and then showed them the income they would need to make sure all their costs, including student loans, could be met. Note, not included in the conversations were living at home rent free.

In the end, we, like most families, have a mishmash of federal and private loans. For the private loan we went with a lender that has a one-time approval process that results in essentially a line of credit. Each semester the needed amount is funded against the total amount for which we were approved, with the girls co-signing on each loan. This reduces the amount of paperwork and effort we must go through each semester. One other factor I liked about the loans is that after graduation, when we can show that the girls have made all the loan payments for twenty-four consecutive months, Leslie and I are released from the loan obligation; thus, removing liability and from our credit record.

To answer our question of the week, yes you can use equity from your home to finance your children’s education; however, in my opinion a better option is to pursue other student loan options in which your children are at minimum equally responsible for the cost of their education.

Have a question? Ask me!

Today’s jobs report was much better than last month’s, though if it were not our economy would be in serious trouble; but still not as positive as many on Wall Street expected. May saw 559,000 new jobs added to the economy, more than double the number of new jobs from April, but almost 20% less than expectations. The unemployment rate dropped to 5.8%, that is likely reflective of many potential workers not seeking jobs, as evidenced by over eight million jobs still missing from employment levels pre-Covid. 

The jobs that were added are not enough to cause more growth. Leisure and hospitality created more than half the jobs in May, and employers paid more to get those workers back on payrolls as evidenced by the increase in average salaries. The majority of jobs created were at or near minimum wages rates, which should have seen average pay decline nationally, however reflecting what many business owners have been saying, they have raised wages to entice workers to forego on-going unemployment benefits that are super-charged by government stimulus funds.

As reported in MarketWatch, economists are indicating several factors that explain why many workers are not returning to work. Among these factors are many workers took early retirement during the pandemic, challenges finding child-care and generous unemployment benefits. Expectations are that these conditions will last at least until fall, coinciding with expiration of the unemployment benefits increase.

Rates for Friday June 4, 2021: Markets continue to see choppy trading on a daily basis, but trending upward over the past week. Rates remain flat again this Friday.

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

30 year conforming                                         2.75%  Flat

30 year high-balance conforming                   2.875%  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.

Next week’s update may be a bit late and truncated as Leslie and I, along with my siblings, will be headed to Tulsa, where several generations were born, for a memorial service. It seems that the next several months will be filled with such remembrances for all of us as we have an opportunity to honor, bless and remember those who have passed away during the pandemic and services were unable to be held.

While sad events, they are also joyous in that they provide us the opportunity to see family and friends we have not been with in some time. An opportunity to shed tears and share laughs as we remember good times with those who have passed, and those who remain.

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

Is it better to purchase a home with a high price but a low interest rate or a low price with a high interest rate?

Question of the week: Is it better to purchase a home with a high price but a low interest rate or a low price with a high interest rate?

Answer:  This question was posed earlier in the week from Adam, who purchased his first home a few years ago with his wife using his VA benefits.

It is an interesting question and the answer depends on several factors, including timing, math and personal wants and needs.

By asking this question in the way he has, Adam is commoditizing the home into a financial question. Long time readers of the WR&MU know that my opinion is that a home purchase should not be made from a return-on-investment perspective but rather from establishing a home for your family that is affordable, in a neighborhood that suits your means and needs, and for the long term. Yes, in most of Southern California home prices will likely increase during your time of ownership, giving you a return on your initial investment, however that gain should be secondary to quality of life gains you should expect to receive from homeownership.

“Better” therefore becomes a relative term to each family when considering the answer to the higher price/lower rate vs. lower price/higher rate proposition.

For my response, I am assuming the question is in regards to purchasing the same house, or very similar one in regards to what the value would be. My reply to Adam was as follows.

If you are asking, were you better off to buy your home at a lower price and higher rate in the past than you could today, the answer is yes, because you own the home, have seen it appreciate in value and later were able to refinance to a lower rate and payment. So not waiting for lower rates has benefited you.

If you are asking if today, in the current market, is it better to purchase a home with a higher price and a lower rate, the answer is yes because, again, you own the home, which will appreciate over time and you own it with a very low rate saving you money and the need to refinance in the future.

If you are asking for the future, the question begs the next question of, “will prices go down as rates go back up?”

My opinion is that when this real estate market cools, we will not see much of a decline in prices, if any, depending on the area or region where the home is located. Cooling off will mean less of a feeding frenzy created by fewer properties on the market than buyers chasing the limited supply of housing. We will see more of an equilibrium and “normal” market. This will slow price growth, may stall it to almost zero, but in most of our region I see little evidence of prices dropping much or at all, absent a big down turn in economy and job losses for those with incomes able to afford homeownership. The lack of job and income losses for most of those with incomes able to afford homeownership is what has created the current real estate market pushing prices higher and make it very difficult for buyers to have their offers accepted due to the competition.

My medium to long-term outlook is home prices stabilize as higher values as rates go up, which means the same home today will cost more in the long run due to higher mortgage payments.

Some quick math for those, like me, who benefit from numbers.

High price/low rate, assuming 20% down payments:

Price $650,000

Loan Amount $520,000

Rate 2.875%

Monthly payment = $2157

Low price/high rate (May 2019—assuming about 18% price increase)

Price $550,000

Loan Amount $440,000

Rate 4.00%

Monthly payment = $2100

As you can see the lower price/higher rate is a better financial proposition, for about the same monthly payment your cash to close is a lot lower, $20,000 in down payment plus savings in closing costs of around $2-3,000.

Looking forward to the implication of Adam’s question that prices will drop in the future and is it better to wait to purchase until they drop. I cannot see a drop in values of up to 18% in the future, again absent a catastrophic event resulting in large scale job losses.

However, let’s say prices drop 5% and rates go back to May 2019 levels:

Price: $617,500

Loan Amount: $494,000

Rate 4%

Monthly payment = $2358

As you can see, the down payment for the lower price is only $6500 less than the higher value of $650,000. Because of the rate increase, the monthly payment is about $200 more per month.

My position on when the best time to purchase a home has always been, when you can afford to do so; especially in Southern California where over time residential real estate has consistently shown growth in value over time, making it more expensive for you to purchase the same home the longer you wait.

If you, or someone you know is considering purchasing their new home, please contact me to explore the options and opportunities for homeownership.

Have a question? Ask me!

Economic data released today showed an expected slow down in consumer spending in April and a decline in personal income. The contractions were expected as March saw large increases in both spending and income due to the $1400 checks Washington sent most families. April did see inflation continue to increase, prices rose 3.6% on an annualized basis, the highest rate since 2008.

Rates for Friday May 28, 2021: Investors are sitting tight on fixed rate investments, such as bonds and mortgages, and as a result we see rates flat from last Friday.

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

30 year conforming                                         2.75%  Flat

30 year high-balance conforming                   2.875%  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.

Growing up in the Midwest and East Coast, where there are four seasons, Memorial Day weekend meant the opening of swimming pools and was the official start of summer. Family cookouts and gatherings were the tradition.

This weekend we will recreate some of that at the Smith house as my older sister is visiting for the weekend to see her nieces, and my brother and family will be here Sunday for family barbecue.

I hope you and your families are able to get together, enjoy time together without mumbling through masks, and as, if not more, importantly hugging each other.

Besides protecting us from the Covid-19 coronavirus, the biggest benefit of the vaccines is their enabling us to enjoy each other’s smiles and physical contact with hand shakes and hugs. I look forward to more of each as we all feel more and more comfortable engaging with others.

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

Should we use an escalation clause in our purchase offer?

Question of the week: Should we use an escalation clause in our purchase offer?

Answer:  This question came up yesterday in a monthly real estate networking group that consists of lenders, brokers, attorneys, accountants and other professionals in the industry.

To answer the question of the week we must first answer, “what is an escalation clause?”

Raise your hand if you have ever purchased or sold something on eBay or other on-line auction sites {raises hand}. If you have, you are aware of the “auto-bid” function. If you have not, here is how it works.

I want to purchase a baseball autographed by all members of the 1980 World Series Champion Philadelphia Phillies. The current bid is $1000 and the auction is open until Saturday at 6:00 PM. I’m tied up tomorrow at that time so I won’t be able to sit at my laptop and keep hitting refresh to see latest price and deciding to make a higher bid. I use the auto-bid feature by entering my bid of $1010, indicating that I will increase my bid by $10 increments to a maximum of $1100** Before I turn off my laptop Saturday at 10:00 a.m. I am the highest bidder at $1040. Before I go to bed at 9:15 Saturday night I check the auction and see that the baseball went for $1120, either someone was waiting until the last second to bid, or they had an auto-bid that was $20 more than the highest bid with a higher maximum.

**I love the Phillies but would not spend this much for a signed baseball, if I were to do so I would not put the transaction in a communication that is sent to over 600 people, many of whom know my wife…who may tell her, since she is one of the more than 600 people on the e-mail list but admittedly does not read the WR&MU weekly.

An escalation clause in a real estate purchase contract is similar to the auto-bid feature on eBay. 1980 Phillies Place goes on the market for $535,000. There is a lot of activity and your agent informs you that there appears to be several offers and the deadline to get an offer in is Monday at noon. You have written offers on a few houses, going above the listed price, and have lost out to higher offers. You really like this house and want your offer to be accepted. You and your agent sit down to write the offer and feel because of the market, the house itself and its location that it will likely sell for around $560,000. Your agent suggests you write your offer for $545,000 with an escalation clause. In this clause you write that you will pay $2500 more than the next higher legitimate offer up to $565,000.

Is this a tactic you should use to better your chances of having an offer accepted?

Possibly, but before you decide to use an escalation clause here are just some of the factors you should consider.

Look, I have two pair. Would you announce that if you were playing poker? When you write an offer with an escalation clause you have told the seller that you have two pair, giving them the advantage. Why should they take less than your maximum offer? Imagine you are the seller; you have four offers from your list price of $535,000 up to $559,900. Your expectation is the seller will counter you at a price of $562,400, but the seller sends you a counter-offer for $565,000. Do you accept the counter-offer? Well, before I accept the counter-offer I would want to see the next highest offer. Why would the seller show you? You said you were willing to pay $565,000, the seller is agreeing to your price.

That is one scenario. Another scenario is the listing agent knows your maximum price. There are multiple offers on the property and some of the agents representing other buyers, possibly including the listing agent, have indicated their buyers are willing, and able, to increase their offers. The listing agent advises the seller to issue counter-offers for $575,000 and see if anyone bites, or counters the counter-offer at a price higher than $565,000. Your escalation clause has possibly helped the seller get a higher price.

It isn’t always all about the money. The California Association of Realtors Residential Purchase Agreement is ten pages. The first page includes the price and the buyer’s financial terms for purchasing the property. The other nine pages are filled with terms, contingencies and clauses for who agrees to do what and when. You have an offer to purchase 1980 Phillies Place for $545,000 with the above escalation clause. You also disclose that you will put $10,000 into escrow upon acceptance of your offer by the seller, that you intend to purchase the property with a loan covering 80% of the purchase price, and that you want to have a contingency for 15 days to receive and approve an appraisal report, and wish to close in 35 days from the date an agreement is made. These are normal terms and conditions for most real estate purchase transactions.

Steven Carlton offers $555,000 for the property, will deposit $75,000 into escrow upon acceptance of his offer, will provide the rest of the purchase price in cash within fifteen days of the offer being accepted. His only contingency is a twelve-day physical inspection contingency.

Your escalation clause indicates you would pay $557,500 for the property—but the seller can counter your offer to $565,000 which you would probably pay.

If you were the seller, which offer would you take?

Is it worth $10,000 more to you to accept an offer that has several factors that could result in your home going back on the market, and delaying your receipt of the funds in two weeks as opposed to five?

What if the other competing offer is the same price as yours, but the buyer has eliminated all contingencies and puts a $25,000 deposit into escrow?

Terms often trump price, and even if an escalation clause may put your offer at the highest price, it is not always the highest price that has an accepted offer.

You are buying a property for $30,000 more than an appraiser says it is worth.  Every few years the WR&MU covers what are the options when an appraisal is lower than the sales price (most recently September 2020). In the scenario above, an agreement is made between you and the seller for $565,000 purchase price and you are getting a loan for 80% of the sales amount (80% loan-to-value, or LTV), or put another way, you are putting $113,000 down.

The appraisal report has a value of $535,000—the initial sales price. The seller will not lower the price from $565,000. What are your options? As listed in the WR&MU linked above, the lender bases the loan-to-value on the lesser of the sales price or appraised value. In this case, if you wish to have an 80% loan you must now have $137,000 for down payment, which stretches you very thin. Or, you can still put $113,000 down, have a loan for $452,000, and pay mortgage insurance as your LTV is 84.5%. (Which is what I would recommend.)

If you are writing an escalation clause you need to be consider your options if the appraisal comes in lower than your sales price and be prepared to accept one of the possible options.

I think escalation clauses are a good idea, if offers are being reviewed by a computer, such as with eBay’s auto-bids. Or, if everyone involved is operating above board and ethically—but whose ethics? Is the seller or listing agent being unethical if you tell them the highest price you will pay and they say you can buy your new home at that price?

Unfortunately, in our current real estate market there is no short cut or gimmick guaranteed to have your offer accepted. Preparation, information and diligence are a must to improve the opportunity for you offer to be accepted. Three things we offer to all our clients.

Have a question? Ask me!

A crack starting? Earlier this week the minutes from the Federal Reserve’s Federal Open Market Committee (FOMC in geek-speak) from the April meeting were released. For those who do not peruse economic journals or financial pages, the FOMC is the policy making body of the Federal Reserve. This group is in control of our nation’s monetary policy and actions, including, but not limited to, setting the federal funds rate, and determining whether to buy, sell or hold assets such as mortgages and United State’s Treasury debt.

The minutes revealed that “several members” of the twelve member FOMC are “willing to discuss” reducing the amount of monthly purchases of Fannie and Freddie mortgages and Treasury issues due to concerns about current and pending inflation.

This activity, the Fed purchasing fixed rate assets, is known as Quantitative Easing. Why does this matter? With the tremendous amount of mortgages being funded and debt being issued by the Treasury, a correspondingly tremendous amount of supply should be coming to the markets. As we all know, the greater the supply the lower the price; in fixed rate financial instruments such as bonds (Treasury) and mortgages lower prices mean higher rates. Since last March the Fed has been sucking up over $3 trillion in these assets, the supply on the open market has remained stable, or decreased, which has resulted in interest rates staying very low through the pandemic.

If the Fed reduces its purchases, economic principles show rates should increase, unless is also reduced. Notice the nuance of the language. The minutes did not state that several members are willing to reduce the Fed’s purchasing policy, but are willing to “discuss” such an action. This is the crack. It signals to investors and markets that the Fed is opening up to reducing its purchasing program, or easing the Quantitative Easing. The expected path that is being signaled is the Fed reduces the amount of it is purchasing each month, tapering off purchases until it is no longer making any purchases. As well, the FOMC will begin to increase its federal funds rate. When? How much? How long? These are the questions investors are trying to answer, but their reaction to the minutes show they are anticipating higher rates sooner than later.

Rates for Friday May 21, 2021: As happened last week, a mid-week rise in rates was tempered by hostilities in the Middle East. With the cease fire between Israel and Hamas announced yesterday rates have calmed today and as a result we are flat from last Friday.

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

30 year conforming                                         2.75%  Flat

30 year high-balance conforming                   2.875%  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 weekend for the Smith family this weekend as our oldest daughter comes home tomorrow from Boston. She will be with us for two weeks before returning the Beantown for her summer job in a lab on campus before starting her senior year in September. The opportunities for the four of us to get together are diminishing as the girls get older and start their lives of independence; a somewhat bittersweet part of life that has been our goal as parents.

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 going on with rates?

Question of the week: What is going on with rates?

Answer:  They are going up.

As I have been writing for the past several months, rates have been lower than anticipated, by me anyway, due to the amount of money flowing into our economy from Washington and economic activity rapidly expanding.

Last week we saw the employment data saw significantly fewer new hires in April than expected, about three-quarters of a million fewer. The result has been employers increase starting pay rates, offering incentives, and paying a lot of overtime to current workers.

For restaurant and bar owners they are facing a double-whammy to their bottom line as not only are they facing wage pressure, but also cost pressure on the products they purchase.

Supply chain issues are present throughout the economy. Many of the shortages are from the start of supply chains. You have been reading about the costs of lumber spiking, part of this is demand but a very big part of the spike is the lack of supply. Like many industries, wood producers shut down, or decreased, production last spring when cities and states around the country started shutting down businesses and commerce. Prepared lumber is not a product that can be easily stored and left to sit for prolonged periods of time. Anticipating a large drop in demand that would leave them with large inventories and having to cut prices to move the stacks of lumber they felt would have little demand, sawmills slowed production. What happens when a company slows or stops productions? They furlough or lay-off workers.

Not too far into the pandemic demand for lumber picked up and suppliers faced other challenges. They needed to restart production, but to do so needed to increase the amount of raw lumber they purchased. Knowing mills were decreasing production, the logging companies reduced their production. Low supply for raw product, higher demand for their finished lumber pushes prices up.

During the pandemic shipping and transportation lines saw tremendous increase in demand as consumers staying at home ordered goods delivered directly to their front doors. The trucking industry saw a demand for more licensed truckers than were available, creating a labor shortage and wage pressure on transportation companies, and there for transportation cost increases to wholesalers and retailers.

Those who live near the ports of Long Beach and Los Angeles have seen the harbor packed with container ships waiting to find a berth to unload their goods. A friend of mine runs and import-export company. In a phone call yesterday, he said the cost to ship a container from Hong Kong to Long Beach has increased almost four-fold. Some shipping companies do not want their containers put on a truck in Long Beach and then driven to Cleveland because they need the empty container as quickly as possible to ship back to the Far East to fill with goods to bring back to the United States. So unbalanced is the current trade market he said he has trouble getting trailers exporting goods on ships as there is more of a premium for the empty containers.

A huge factor that is now impacting the transportation industry is the spike in fuel prices. The average monthly retail price for diesel fuel, which propels our trucking industry, is up almost 30% from Thanksgiving. With production decreasing in the United States, requiring more imports, prices can be expected to continue to increase.

All of the issues in these industries are repeated for goods throughout our economy where we see shortages due to decisions made last March, April, and May by wholesalers and suppliers as they anticipated where their products would be needed, or what retooling they needed to do to remain open. Other goods are feeling the impact of the shipping and transportation imbalances.

Chip makers shifted some productions for automobiles to consumer electronics, creates supply issues for automakers. Pulp used for paper goods, like toilet paper and paper towels, is facing supply issues due to lack of shipping containers. Pork, chicken, produce, are all seeing costs rise due to transportation costs increasing.

This week inflation data was released that seems to be the final push needed for investors who have been anxiously watching data to determine when rates would, should, start to climb off their lows. Somewhat placated by the Federal Reserve purchasing hundreds of billions of mortgage and U.S. Treasury debt every month, and repeated announcements by the Fed that it had some, but not a lot, of concern for inflation in the economy. Investors have been content to maintain the low-rate status quo.

When data was released, showing prices rose at the highest rate in thirteen years in April, up 0.8% for the month, economic principles that have not applied in the last year hit home. Supply issues, transportation issues, increased demand as people leave their bubbles and go out to eat, travel, trade-in cars, and continue to need to feed their families, with more people being employed, others receiving federal and state stimulus checks, with benefits continuing for another four months, create a perfect storm for higher prices.

Returning to our nation’s capital, the flood of funds into the economy with prior and proposed spending has two impacts on interest rates. First, is the money itself that creates environment where demand for goods and services is greater than the supply of same. Second, where does the government get this money? It borrows it. Increasing the supply for fixed rate investments. When supply exceeds demand, prices drop; long time readers of the WR&MU know that in bonds and mortgages, when prices drop rates rise.

The Federal Reserve has deemed our current spike in prices, “transitory inflation;” aka, temporary. Its position being that once supply chain, transportation, and initial pent-up demand by consumers are resolved we will see inflation return to the target rate of 2%.

But once employers raise wages they cannot, or not easily, lower them. Rarely do we see prices for most goods and services drop after being raised, with the exception of fuel costs which is perhaps the most elastic in price. Which means for the most part we will see a shift upwards in wages and prices that will remain.

What needs to be answered, is how long will this stabilization take to come about and how high will inflation rise during this “transitory” period? The Fed feels in a short period of time, short enough that there will be minimal impact on rates. Others feel long enough and high enough that rates will increase, dampening economic expansion and inflation.

We are most certainly in a transitory phase in the economy. In my opinion it is transitory from very low inflation to moderate, perhaps high, inflation that will see rates move upward in the near and medium future.

For those in the housing markets, as buyers, sellers, agents, lenders, how high will rates need to go to dampen demand for homes and mortgages?

The answers to these questions will likely be known only after the fact.

Have a question? Ask me!

What do they know? Last week we saw how analysts whiffed on their estimate of job growth in April. This week we see them swing and miss again on retail sales estimates. After an almost historic 10.7% increase in retail sales in March, estimates were for an almost 1% increase in April from March.  Earlier today it was announced that retail sales were flat from March; stripping out auto sales dropped almost 1% from March. Auto sales were up 3% despite shortages in popular models and little price flex from dealers due to demand. Bars and restaurants saw a similar 3% increase in sales as more indoor dining had registers ringing.

Is this a sign everything you wrote above is wrong? Possibly, but I don’t think so. After a huge surge in buying a slow down is always expected. Auto sales and dining out are very good indicators of consumer confidence, as if they are worried about their economic future, they are not going to enter into long-term payment contracts or splurge on night’s out. More importantly, Americans are sitting on around $2 trillion in personal savings—a huge amount of money. A significant portion of this amount will likely be spent through the summer and fall. As well, there are still around eight million fewer workers today than in February 2020; and around eleven fewer than would be expected had job growth not been interrupted by the pandemic. Future spending should continue to increase as the accumulated savings and new employment hires wages enter the retail markets.

Rates for Friday May 14, 2021: Rates are up from last Friday, and down a touch from earlier in the week as investors bought up fixed rate products as concerns about growing conflict in the Middle East threatens to expand into all out war. There are any pressures on markets economically and politically, domestic and global.

Correction to last week’s rates, I indicated the high-balance rate had declined 0.125%, but did not change the rate to 2.75% from the prior Friday’s 2.875%

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

30 year conforming                                         2.75%  Down 0.125%

30 year high-balance conforming                   2.875%  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.

Greetings from the Central Coast as Leslie and I are taking a long weekend away to enjoy a few of our favorite activities which will include tri-tip sandwiches and beer on the patio of the Firestone Grill, a winery or two, and relaxing in one of the wonderful rooms at the Apple Farm.

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 steps should we take to purchase a new home?

Question of the week: What steps should we take to purchase a new home?

Answer:  Typically, May is the start of home-buying season as many families wait until school is out for the summer to move. As you are aware, this has not been the typical year and with school age children not going to school for over a year many families moved in the middle of the school year. However, many families are starting to enter the home-buying market, so here are some tips that should lead to a smoother process.

Before you look at properties, consult with a mortgage professional (synonymous with Dennis Smith), have readily available your financial information:

  • Recent paystubs
  • Prior two years’ W2’s
  • Prior two years’ federal tax returns—especially if your income is commission base, self-employed, full or part ownership in a company, or have any investment property
  • If receiving retirement income have award letters available indicating the gross amount you will be paid
  • Statements for asset accounts, including but not limited to checking, savings, investment and retirement accounts
  • List of credit obligations, credit card balances and minimum payments, auto loans, student loans, anything that will show on your credit report
  • If you own other property, you will be retaining, mortgage, insurance and HOA (if applicable) statements

This information will be needed to determine sales price and mortgage options for your new home purchase.

During the initial consultation, reveal your secrets. The most apt metaphor for going through the mortgage price, while a bit crude, is going through a financial enema. If you have, or had, spotty credit, tax liens, judgements or liens, short sales or foreclosures, employment gaps for more than two years, they will come out as early as when a credit report is pulled, or later when a title company does some investigating. The sooner we know about these items the sooner we can create a plan that will enable you to move forward with your home purchase. Holding back information can create bigger problems later when you are in escrow, and in some instances result in your losing your deposit. Like your doctor, lawyer, or priest, anything you tell us is confidential, but we need to know.  

After discussing price and mortgage options, the next step is to be obtain a pre-approval. This will require all the items listed above that you already have ready to send to us. At this point a loan application will be initiated and a credit report will be pulled.

“But I don’t want an inquiry on my credit report.” Then you will not get a pre-approval. You will get pre-qualification that says, “subject to credit report.” Which tells a seller’s agent, “they might not be able to purchase the house, why don’t we look at another offer.”

With your financial documents and credit report, for the vast majority of home buyers purchasing with a loan below the Fannie Mae/Freddie Mac loan limits ($822,375 in high-cost areas), we will upload your information to Fannie and/or Freddie to get credit approval.

At this stage we will be ready to provide your real estate agent with a pre-approval package to show a seller. This will include a letter stating the price you are qualified for in purchasing a new home, evidence of your credit scores, funds to close, income used to qualify and very importantly, a copy of the approval from Fannie or Freddie.

If you have not already found an agent to represent you for your purchase, this is your next step. Like with your mortgage professional, your agent should have experience and knowledge to provide you with advice and solutions should any issues crop up. You do not have to be best friends with your agent; however, you do want to have a very good working relationship.

Whether it is your first home purchase or your tenth, it can be, and often is, an emotional experience. Consider that you are committing yourself for a long period of time, spending a significant amount of your savings, obligating yourself to what will likely be your largest monthly expense; oh, and looking at moving your family which entails packing, unpacking, shutting off and turning on utilities, all while continuing to work, parent, volunteer and lead your normal life.

You need to get along with and trust your agent and mortgage professional.

Advice that I have given home buyers, again whether first time or tenth time but especially first-time buyers, that has worked very well is to make a list. This is more important is you are purchasing your new home with a spouse or significant other than if you are buying on you own, but important none the list.

If buying with someone else, each of you needs to agree to be selfish. Go into separate rooms and think about the home you want. Write down the three things you most want in your home.

It can be anything, walking distance to school, three bedrooms, more than one bathroom, a pool, single story. Whatever you really want your home to have. When we purchase our current home in 1998 Leslie said all she really wanted was a formal dining room. Guess what we have?

After your “must have” list, make a list of items that if a home has it you won’t buy it. Again, it can be anything, not on a busy street, a pool, an outdated kitchen, choppy floor plan.

I recommend only three items on your “must have” list because after each of you have completed your lists you will want to compare. If you each have three different must-haves, you now have six items on the checklist, which can be a lot to fill. Typically, the two lists have at least one, possibly two but rarely all three, that are similar. I put no limit on the “can’t have” lists because most people only have one or two items. If the can’t-have list is too long it puts you in the same position as the must-have list being too long, i.e. decreasing your chances of finding the right home.

Now, compare your lists. This is important because if one spouse has on the must-have list a pool and the other spouse has that on can’t-have, how do you reconcile? It is challenging because one spouse will not get what they want. Another personal interjection, neither Leslie nor I put down having a pool on either list. Neither of us had a backyard pool growing up and we just didn’t really consider it. We bought a home with a pool and are not sorry that we did. We lucked out in that regard.

With your list in hand, and all discussions had on any cross-overs, present the list to your agent. This will make the agent’s job a lot easier, and not infrequently leads to a call. “Hi Dennis, this is Fred. I’ve met with Maria and Burt to discuss their new home and what we will be looking for. They have given me a list of what they want or don’t want and looking through homes in the area they want to buy it looks like they will need to go about $40-50,000 higher in price. Can they do it?”

Once you identify your agent introduce him/her to your mortgage professional so they can initiate communication. Clear, open communication between your agent and us is critical to how your transaction will go. This is one example of why.

What do we do if what you want costs more than we discussed when going through price and mortgage options? Were we restricted by funds to close and need to put less down? Was it debt-to-income ratios and we need to pay off debt? Add mom and dad as a co-signer?  Or with your financial situation that large of an increase is not possible, which means to get the home you want you need to look in another area?

Working together, you, your agent, and we will discuss all the what-if’s and show what will work and what will not work within the parameters of your new home, its amenities, location and ability to finance.

Finally, get off perfect.

I have seen many would be homeowners, almost always first-time buyers, over the years who have an idea of the home they want that is unrealistic with their financial abilities. They want the perfect home in the best location and they just cannot afford to purchase. Often, after meeting with the agent and me we can show them what is available in their price range. Discuss with them that this is their first home and over the years as their financial position improves, and their home acquires more and more equity, they can have a better opportunity to purchase a home that is closer to their dream home. However, waiting to purchase until you can buy the dream home may entail more years of waiting as you chase its price growing at the same, or faster, rate than you are able to be in a better financial position.

When you decide the time is right to purchase your new home, work with professionals and be open with them about what you want and what you can afford. I strongly recommend working with trusted professionals instead of trying to find the right home and loan on the internet. You can save hours, days, weeks, working with professionals who know what you want, what you can afford and have a lot of the leg work already done.

If you or someone you know is thinking about buying a new home click the link below to reach out to a mortgage professional helping families purchase homes since 1987.

Have a question? Ask me!

Words matter. A pre-recorded interview with current Treasury Secretary, and former Chair of the Federal Reserve, Janet Yellen, was released on Tuesday morning in which Yellen seemed to contradict the Fed’s rate policy, saying that “rates may need to be slightly higher if the economy overheats.” The comments caused markets to dip, later mostly recovering after Yellen responded by saying she is not predicting or recommending the Fed raise interest rates. Some saw Yellen’s rates comment as what could occur based on President Biden’s release of different spending plans that total approximately $4 trillion. Of course, what Yellen said is true, if the economy begins to overheat, or even over-warm, rates will need to be higher. From my perspective looking at the current economic growth and possible additional spending from Washington the question is not if rates go up, but when, how much and how fast.

Swing and a miss. The monthly first Friday of the month jobs report was a shocker. Every month prior to the release Dow Jones and The Wall Street Journal survey economists for their estimates on how many jobs were created or lost in the prior month. For April the consensus was an estimated 1 million new jobs added to the economy for the month. Today the Labor Department’s data showed that only 266,000 new jobs were created in April. In the decades I have followed labor statistics this is by far, on a factor of ten to fifteen times, the biggest miss by the estimators. To say the job gains are a disappointment is an understatement. What happened? The economy is opening up with the leisure and entertainment industries approaching full activities, bars, restaurants, hotels, entertainment venues have millions of job openings, and there are still millions of unemployed workers.

Interviews with employers show that many businesses are saying it is harder to find employees largely due to the emergency unemployment benefits have deterred some workers from accepting jobs, or looking for them; the benefits do not expire until September. Average wages have climbed, in some part due to businesses offering higher pay to attract workers. The smart long-term play for those unemployed is to get hired now before a wave of workers coming off benefits enter the job market.

Rates for Friday May 7, 2021: Yellin was not wrong in her comments, but for the meantime rates hang around our historic lows. The conforming rate remains flat after last week’s decline and the high-balance rate dips for the first time in a month.

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

30 year conforming                                         2.625%  Flatt

30 year high-balance conforming                   2.875%  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.

My turn. This afternoon I am getting my second vaccination shot. Looking forward to having whatever part of my subconscious has been on hyper-alert to recede to relative caution as a result. Many people I have spoken to about their vaccinations have commented how they had an unexpected feeling of relief, or calm, following their being vaccinated. This feeling will become even stronger if we, as a community, can encourage everyone to receive both doses. And sooner rather than later.

Happy Mother’s Day to all the moms. This past year has been extremely challenging for many, especially the mothers to younger children who have been home all day every day. It is challenging enough to juggle jobs, parenting, marriage, friendships, in normal times when everyone has a place to go every weekday. Removing those places-to-go, and increasing workloads for at home schooling, has created additional challenges. One bright spot through the pandemic has been seeing how well most people have adapted and coped, in some cases thrived, as home-school-work lives were re-created.

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 the difference between an appraisal and an inspection?

Answer:  This is a great question that is frequently asked by first time buyers, and with more entering the market it is time to revisit the answer.

The first difference is one is usually required and the other is optional.

Appraisal

If you are getting a mortgage to purchase the property the chances are very high the lender will require an appraisal. (In some instances, Fannie Mae or Freddie Mac may allow a “waiver” for the appraisal, this could happen for transactions with a low loan to value. Waivers are not rare, but are not common either.) The primary purpose of the appraisal is for an uninterested, licensed, professional to ascertain the value the property used as collateral for the mortgage on the date the offer from the buyer was accepted by the seller. The secondary purpose of the appraisal report is to notify the lender if there are any noticeable defects that could impact the value and/or salability of the property or present health and safety concerns for occupants.

It needs to be noted that we, the lender, have no control in the appraisal process. Starting in 2009 with the Home Valuation Code of Conduct and strengthened in the Dodd-Frank Act, direct communication between a lender and appraiser is forbidden. The purpose of this is to allow the appraiser to independently value the property without undo influence from the lender. As a result, we order appraisals through an Appraisal Management Company (AMC). Once the order is placed, the AMC passes the order along to an appraiser, who submits the finished appraisal to the AMC, who then sends the report to us.

Many people are surprised at how little time most appraisers spend at the actual property. They spend so little time because most of the work to prepare the appraisal report is done before the appraiser goes to the property for his/her inspection.

An appraiser will receive a copy of the purchase contract and any counter-offers for the transaction at the time the order is made. Before heading out to the property the appraiser, using the Multiple Listing Service and public records, will research the area looking for comparable properties. A comparable property is one that is similar to the subject property in type of dwelling, size, number of bedrooms and bathrooms and other amenities that impact value such as a pool. The appraiser will look at recent sales to determine prices for the closed sales, how long the properties were on the market, and the condition of the properties at time of sale. Properties that have been recently sold but have not yet closed escrow (called “pending sales”) will also be noted to determine if there is current activity for comparable properties to the subject. Finally, the appraiser will look at active listings on the market to determine what other options did the buyers have at the time they purchased the subject property and at what price and condition.

Once the appraiser knows the terms of the transaction and has an idea of the comparable properties in close proximity, s/he will inspect the subject property. The appraiser will measure the property’s interior room by room to make a sketch showing the overall size of the property and rooms. While measuring the appraiser will visually inspect the property to ascertain the overall condition, and not any noticeable issues that may impact value or the health and safety of inhabitants. Any noticeable water stains in the ceilings will be noted as they indicate a leak in the roof at some point, if there are missing window panes, flooring that is missing or has holes, missing sinks or toilets, anything that deters from the property being fully habitable or that could be evidence of a bigger issue is photographed and noted. In California the appraiser will also photograph and take note that the property meets state law by having smoke and carbon monoxide detectors properly installed and that the water heater has earthquake straps and is on a stand or platform so it is off the ground.

The appraiser will not test the plumbing or electrical systems, test windows for their ability to open, or otherwise perform a very close and detailed inspection.

The appraiser will drive by the comparable properties that are being used to establish value and take photos for them from the street.

After all the data is collected the appraiser will prepare the report. The report will compare the comparable properties and make adjustments to the sales price of those properties for size, condition of property, amenities, location (such as on a busy street), etc to arrive at an opinion of value.

Inspection

When you and the seller agree to a sales price one of the clauses you will likely agree upon is the opportunity for you, at your cost, to engage a professional to inspect the property, what the industry calls a “home inspection.” You may choose whomever you desire to perform the inspection, it is recommended that you choose someone certified by the California Real Estate Inspection Association (CREIA). In California there is not state licensing or regulations for real estate inspectors, CREIA a professional organization that has requirements for its members that include continuing education and following codes of ethics.

It is important to note that the inspector works for you. Not the seller or the real estate agents, but for you. The objective of the inspector is to perform as thorough and examination of the subject property as possible, the result of which will be a very detailed report.

The inspector will grade everything examined from needs replacing to estimated longevity to in fair-good-excellent condition. It is not the inspectors concern if the report “blows the sale” or “makes the sale” but to provide an objective, honest report of the property’s condition.

A thorough inspection will include inspecting the roof, and if possible, the attic and/or crawl space below the roof. If on a raised foundation, crawling under the property. Inspecting the electrical panel and testing outlets and switches. Testing the plumbing by flushing toilets and turning on taps to gauge water pressure. Appliances that use gas will be tested to determine if they are functioning properly with appropriate hook-ups and safety features. These are the major areas of concern and cost to repair or replace, but all aspects of the property will be inspected and put into the report for the buyer.

Not included in the report will be the cost to correct any defects noted, and it is not ethical for an inspector to quote, bid on or complete any repairs noted as needed on the report.

Once completed the report will provide the buyer with a very good indication as to the condition of the property. It should be noted that there is not “perfect” home in regard to condition; even brand-new homes can have faults and issues that need to be corrected. The important issues to consider on a home inspection report are the major, “big ticket” items that may need to be replaced or repaired in a short period of time. If there are any such items listed, say the electrical needs to be updated, it is encouraged for the buyer to obtain a bid from a licensed contractor for the cost to correct, and then make a decision how to move forward.

It is highly recommended that you accompany the inspector when s/he visits the property for the inspection. Note that this inspection is much more thorough, and therefore time consuming, than the visit from the appraiser, in some cases a few hours. By attending the inspection, you can learn a lot about your new home, where is the gas shut off valve, education on the electrical panel, where are the clear-outs for plumbing, and most importantly get a verbal report and detail form the inspector that will shed more light on the condition than just reading a formatted report.

The primary difference between an appraisal and an inspection is their purpose. While the appraiser will note some condition items the primary purpose is to let the lender know if the sales price is supported by the market in the area, the purpose of the inspection is to inform the buyer of the condition of the property and its components. Both are very important because of their purpose.

A few years ago after this was the question of the week, witty-agent Cathy in the Central Coast emailed me, “the biggest difference is if you get a stupid appraiser it’s not your fault, if you get a stupid inspector it is.”

Have a question? Ask me!

A lot of economic data to unpack. This week saw very positive economic data for the American economy. In March the economy saw:

  • 1st quarter Gross Domestic Product jump 6.49%
  • 1.5 million jobs added
  • Personal income, on the back of $1400 stimulus checks, increase 21%
  • Consumer spending jump 4.2%
  • Personal saving rate increase to 27.5%
  • Inflation climb to 2.3% annualized

In normal times this amount of extremely strong economic news push rates up very quickly. It was all tempered however by the Federal Reserve announcing it will continue the current course of low rates and purchasing hundreds of billions of U.S. Treasury debt and mortgages for the foreseeable future.

Rates for Friday April 30, 2021:  Counter intuitive to historical economic principles, rates, which started to lean lower at the end of next week, did dip down this Friday. I’m lost. With the trillions of dollars coming from Washington, and promises for trillions more, an economy that can be described as booming growth, with more booming to come, rates should be pushing higher and higher. Take advantage before they do.

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

30 year conforming                                         2.625%   Down 0.125%

30 year high-balance conforming                   2.875%  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.

It’s here! Friday April 30th! Two weeks ago our youngest booked a flight on her own for the first time and it was to fly from JFK in New York City to LAX in SoCal. She’s coming home for the summer after her first semester at college.

Leslie and I have been pampering our dog Sammy, talking to him and getting extra pats, since January as both the girls are gone. He may pout for a while with a lot of attention shifting to our daughter, but she should make up for with a third person here to spoil him.

Looking forward to this evening when I get to give and get a very big, long hug at the airport!

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 should we keep from our loan closing documents?

Question of the week: What should we keep from our loan closing documents?

Answer: Because our industry is very paper oriented, lots of paper oriented, this is a question that primarily comes from minimalists.

The IRS suggests keeping tax records for three years, or two years after you have paid your taxes, whichever is later. In some cases, they suggest you retain records for seven years. (IRS on record retention)

However, depending on the transaction for your mortgage you may want to retain some of the records longer.

To make sure we are clear, the documents we are discussing are forms from your loan application and closing. Not the statements, paystubs, tax documents you provided the lender, but the documents and forms provided to you by the lender, title company and escrow company.

As part of your mortgage transactions, either purchase or refinance, you will receive from the County Recorder where the property is located original copies of any Deeds that have been recorded.

It is very important that you keep all recorded deeds. As well, if you refinance or payoff a mortgage the recorded reconveyance which is filed by lenders when a mortgage is paid off—this instrument removes the mortgage from your property as a lien.

Back to application and closing documents.

For application documents, I can see no reason to retain any of them once the mortgage closes. These can, and should be, disposed of properly. *

For closing documents, I suggest you retain copies of the deeds, at least until you receive the originals from the recorder, and your closing statement from escrow which details the terms of the transaction and amounts you paid and/or received as part of the transaction, for tax preparation for the year of the transaction. Per the IRS you should retain the closing statement for a minimum of three years.

As well, you should retain a copy of the Note, which details the terms of your mortgage, for as long as you have the mortgage. Most lenders will provide a copy of your Note; however, it may take a while to get a copy if needed, and if your mortgage servicing is sold or transferred the document may get lost in transition.

If you close on a Home Equity Line of Credit, HELOC, I recommend you retain the Credit Agreement, which also details the terms. Should your refinance later and wish to retain your HELOC the refinancing lender will want a copy of this document.

With the ability to store and retain records electronically many people are less willing to retain paper records. If you transfer your application and closing documents to electronic records make sure they are securely backed up.

A quick recap, from the application forms and documents I see no reason to retain any of them. From your final closing documents, I suggest you retain the final closing statement as well as the Note and any recorded deeds.

*For proper disposal please shred all personal and financial information. I recommend every home have a small shredder. As well, see the final section for an opportunity to dispose of your records, provided you are met the IRS timing requirements.

Have a question? Ask me!

Rates for Friday April 23, 2021:  Rates lean a bit lower this Friday, and we may see a dip next week, as investors have been going in and out of equities depending on what the rumors are from Washington for changes to the tax code—most importantly the proposals being batted about for capital gains taxes. Investors contemplating which will have more impact on returns, inflation from the trillions coming from Washington, or slowdown caused by reduced transfer of assets from dramatic increase in taxes on these transactions. Indecision such as this usually benefits lower rates.

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

30 year conforming                                         2.75%   Flat

30 year high-balance conforming                   2.875%  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.

Where do you keep your files and documents that need to be destroyed? In boxes in the garage? File cabinets in your office or spare bedroom? Garbage bags in the garage? How would you like to get rid of these piles, stacks and boxes, safely and securely?

This Sunday, April 25th,  I am co-hosting with Koh Realty Group a shredding event from 100:00 – 1:00. The address is 5222 E Los Altos Plaza, Long Beach.

Remember, three years retention for tax documents, if you have any older documents taking up room in your house that you have been wanting to securely destroy, come see us on Sunday!

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 get a mortgage with low income but a lot of assets?

Question of the week: Can we get a mortgage with low income but a lot of assets?

Answer: This question comes up more frequently every year, especially as more and more baby-boomers are retire(d)(ing).

More and more people have transitioned from employment income to retirement income from pensions, social security, distributions from their retirement accounts. They want to refinance their existing home, or sell their home and down size.

Their income has drastically reduced in retirement; however, they have very significant retirement, savings, and/or investment accounts. With their lower income they do not qualify for the mortgage they wish to obtain.

“How can we no qualify? We have enough money in our accounts to pay off the loan we are applying for?”

In 2010 the Dodd-Frank Act was passed as a result of the real estate and mortgage market melt downs in 2008. There were many purposes for the Act, as exhibited by its 2300 pages and over 400 new rules and mandates. One purpose was to change the mortgage industry to eliminate, or greatly reduce, the number of mortgages that had no-income qualifying, no interest only payments, no negative amortization, by creating guidelines for “Qualified Mortgages,” or QMs.

If lenders want to sell their mortgages on the secondary market, i.e. to Fannie Mae or Freddie Mac, there are some guidelines that must be followed. One of which is that mortgage applicants must show the ability to repay the mortgage on a monthly basis; i.e. they must show monthly income that would support the mortgage payment, their other debts, and remain with in the 45% debt-to-income ratio mandated as part of the QM statute. (Debt-to-income, or DTI, is your total housing payment plus your credit obligation divided by your gross income.)

Based on this the QM guidelines, many retirees, or non-retirees, who have significant assets but limited monthly income, do not qualify for conventional mortgages.

Let’s take and example of Linda, whose is 74 years old. Linda is looking to refinance her $500,000 mortgage with a 30-year fixed rate mortgage, with a 3% rate and a payment of $2108 per month. Adding her taxes and insurance of $750 per month, Linda’s housing payment (PITI) is $2858 per month. She also $750 per month she is paying for a car payment and some credit card balances.

Her total obligations for qualifying are $3358 per month. Using the maximum DTI ratio of 45%, Linda needs monthly income of $7800 or more per month.

Linda worked in several industries in her career and owned her own event planning business for several years. She was frugal but not cheap, which enabled her to save for retirement, as well her parents passed away several years ago and left her a nice inheritance.

Linda is receiving $3200 per month in Social Security income, and draws $2500 per month from her rollover IRA account. The IRA has a balance of $750,000 and she also has an investment account with $1,200,000 that is mostly in mutual funds.

Her monthly income from her Social Security and IRA total $5700 per month. As we saw above, she needs $7800 or more to qualify for the $500,000 refinance. Based on her income she does not qualify.

But she has almost $2 million in semi-liquid assets, how can a lender not loan her the money?!?

Some lenders will not, but some lenders who know the regulations of Fannie Mae and Freddie Mac know that their guidelines have a formula by which assets such as retirement accounts, and/or savings/investment accounts, can be converted in income for qualifying purposes.

We call this asset depletion; the formula is applied that calculates depleting the assets over twenty or thirty years on a monthly basis this can be used for income.

To simplify, since Linda is drawing from the IRA, we will not use that account. However, with her investment account, because it is in mutual funds the calculation takes 75% of her balance, which is $900,000, and divide that by either 240 months (Freddie Mac) or 360 months (Fannie Mae).

Using Freddie Mac, the math results in $3750, which is what we use as qualifying income.

Linda’s qualifying monthly income is now $5700 she receives every month from Social Security and her IRA, plus $3750 from the asset depletion calculation, for a total of $9450.

She qualifies for the mortgage of $500,000 she is applying for to reduce her monthly payments.

There are several restrictions on this form for qualifying depending on the lender, and type of transaction. Before taking out your asset statements and calculator to determine if you can qualify, call a loan expert, especially one who is familiar with this type of qualifying, to run the numbers for you.

Click the Ask Me link below to get in touch with just such a lender.

Have a question? Ask me!

Economic growth continued in March as evidenced by strong increases in retail sales, up 9.8%, and the Consumer Price Index, up 0.6%. Part of the surge is tied to another round of stimulus checks, however, most of the growth is attributed to more and more of the economy opening up. In my opinion, the large increases in spending, continued upward pressure on prices and increasing employment must come through to higher inflation; the Federal Reserve does not agree with me. Which is a good thing for mortgage seekers as the Fed’s opinions obviously matter more than mine.

Rates for Friday April 16, 2021:  Rates remain flat from last week, despite, as stated above, economic news that should be pushing rates higher.

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

30 year conforming                                         2.75%  Down 0.125%

30 year high-balance conforming                   2.875%  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.

Last weekend provided a wonderful exhibit in strength, mental and emotional. For those who don’t follow golf, last weekend was The Masters golf tournament, one of the four “majors” for men’s professional golf. Saturday. It has an international field and going into this weekend has had winners from eleven nations. Starting the 3rd round (there are four rounds), Hideki Matsuyama, from Japan, was three strokes behind the leader, Justin Rose form England.

Of the eleven nations who have had a golfer win The Masters, Japan is not one of them. In fact, no Japanese player has won any of the four men’s majors.

Golf is a very big sport in Japan. They have more driving ranges per person than any other nation. Japanese golfers travel around the world to play the game. Japan also has a very aggressive press that has a history of putting a lot of pressure on their sports stars—ask Japanese baseball players who have come to play in the United States.

At the end of play on Saturday, Matsuyama led the tournament by four strokes over four players, tied for second place. In golf, they like to say that it is tough to go to sleep on Saturday night leading a major, especially the Masters. It is even tougher if you are a young golfer from Japan trying to become the first person from your country to win one of the most prestigious tournaments in the world.

Matsuyama slept well enough. Despite some miscues as he played the final nine holes, despite the immense pressure of not only winning his first major, but being the first Japanese player to the Masters or any other major, despite immense nerves as he teed off to start the day, Matsuyama held it together long enough to sink his final putt, to win by one stroke.

He smiled, and waved at the crowd, and as he took the long walk from the 18th green to the clubhouse to sign his scorecard, his face and manner changed as the enormity of what he had accomplished slowly hit him. He was coming to the realization that his life has changed forever, his is not only a major champion, a Masters champion, but a national hero who will always be known to anyone in Japan who plays golf.

I love sports for many reasons. Sunday afternoon watching a young man carry his nation on his shoulders with what could be crushing expectations to the finish line was one reason I love sports. Congratulations to Hideki Matsuyama and the people of Japan.

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