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We are thinking of purchasing a home with solar panels, any concerns we should have?

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Question of the week:  We are thinking of purchasing a home with solar panels, any concerns we should have?

Answer:  Concerns? Maybe. Awareness? Yes.

There are, to my knowledge, three different solar panel options for solar panels on a home in California: homeowner owns the panels, homeowner leases the panels, homeowner has panels and pays for the energy from a third party—a power purchase agreement (PPA).

Depending on the type option is on the home you are buying, or if you are selling, there are different concerns that a lender will have that will need to be satisfied for final loan approval.

Panels are purchased and owned by homeowner

If the solar panels are owned by the homeowner the lender has no concerns. Most solar panels are affixed to the property and their value can be included in the appraised value, if they are owned and not leased.

To be included in the value of the property, the appraiser needs to have comparable properties that have sold with solar panels and can show they have sold for a higher value than similar properties without solar panels. If you spend $20,000 on a solar system and put your home on the market, you should not expect the value of your home to be worth $20,000 more than a comparable home that has sold without the panels. Buying a home with solar panels that will have ownership transfer to you through the sale, i.e. they are not leased, you will very likely be purchasing the panels at a discount due to the limited value they add to the property compared the cost to purchase and install them.

Since they are owned by the homeowner and will be transferred to the new buyer, it is important that you check with your home owner’s insurance carrier to determine how the panels will be covered should they be damaged, and what type of damage is covered. As mentioned, it is likely the entire cost of the panels will not be added to the value of the home for sale, however if the need to be replaced due to severe damage how much of the replacement cost new is covered by your insurance? What is the impact on your deductible and premium?

Finally, when you own the solar power system you benefit from any tax breaks or other financial incentives available for installing the system.

Leased solar panels

When residential solar panels are leased from a third-party lenders concerns start to increase. With a leased solar energy contract the homeowner pays a fixed cost on a monthly basis and the provider guarantees the delivery of a certain amount of power on a monthly basis.

First, because they are not owned by the homeowner they are not considered in the value of the property by an appraiser. This policy is specifically mentioned in the Fannie Mae Seller’s Guide—the underwriting Bible followed by most loan programs. 

Second, because a third party owns, and therefore has significant control, over the panels, which are affixed to the lender’s collateral, there are several items in the lease concerning liability, damage and removal of the panels that must meet the lender’s guidelines. Essentially, the lease must state that the company that owns the panel is liable for any damage that occurs through maintenance or removal of panels.

Third, the buyer must qualify for the lease payment unless certain conditions are spelled out in the lease regarding fixed cost of the energy provided and guarantees as to how much power will be provided.

Fourth, the property must have access to an alternative source of electricity, i.e. the local provider for the community such as Southern California Edison or PG&E, etc.

Fifth, the company owning the solar panels is not named as a loss payee on the homeowner’s insurance policy. If the solar company requires the homeowner provide insurance it is generally on a separate policy from the master policy.

Regarding the sale of a home with leased solar panels, the home buyer will have to be approved by the company that holds the lease to assume the remaining terms of the contract. This approval process typically has a cost that can be negotiated between the buyer and seller to see who will pay the fee. The fee is paid upfront, before the approval is generated.

If there is time left on the lease and the buyer does not like the contract and wants it discontinued before purchasing the property there will be a cost to the owner to cancel the lease. Usually this cost is the remaining value of the contract, if the lease is three years into a fifteen year lease the buyout is twelve years of payments. The solar company will also need to remove the panels and before closing the buyer will need to ensure the panels were removed, any damage caused due to the removal has been properly repaired and the property has been connected to the local utility that is the source for electricity.

Since you do not own the solar power system and tax breaks or other financial incentives will go to the company that owns the system you are leasing.

Power Purchase Agreement (PPA)

A PPA is very similar to a solar lease agreement, with the exception of instead of paying “rent” for the system you are paying a fixed amount per kilowatt for the power generated by the system.

All the guidelines stated above for a leased solar power system apply to a PPA system. Including the company owning the solar panels receives any tax breaks and other financial incentives.

In California, Sacramento has mandated that power companies have 33% of their retail sales of energy to consumers be from renewable sources (solar, wind, geothermal, etc). There are other goals and objectives to increase this percentage beyond 33% in the future with the ultimate objective of 100% of electricity provided in the state be from renewable sources. The current mandate and objectives for the future, if fulfilled, will greatly increase the cost of energy to consumers. This is a primary factor for my consideration to purchase a solar panel system for our home, fix our costs for electricity to protect against future costs which will likely be significantly higher than today.

If you are considering putting panels on your home factors to consider should include how long you intend to be in the property, how much control you wish to have over the power system for your home, future impact on the ability to sell your home, and of course the total cost versus potential savings over what period of time.

Have a question? Ask me!

Still strong or getting weaker? That is the question after the Labor Department released it jobs report for April showing only 75,000 new jobs were added to the economy for the month. The speculation on the significantly lower number of job additions than prior months range from employers slowing growth as they are concerned about the impact of the trade tensions created by the Trump Administration, to scarcity of labor to fill many positions, to the hiring slowdown being a harbinger for economic slowing across the economy. All of these factors could be positive for mortgage rates.

Survey says….speculation is rampant that the Federal Reserve will ease rates at either its June meeting (a 30% chance per the speculators) or at its July meeting (70% chance per speculation) and today’s jobs report reinforces the speculation. The reasoning being that the Fed sees the economy slowing and wants to provide a boost by lowering rates. Counter-intuitively, such a move will likely have the impact on pushing mortgage rates up as it the move would fuel stock prices increasing, pulling funds from fixed rate investments to equities, which would increase the return bonds (and mortgages) would need to provide to attract investors.

Rates for Friday June 7, 2019: Markets are choppy as investors swing from fixed investments, such as bonds and mortgages, to stocks, day to day based on data, speculation and tweets. We are at our lowest rates in about 18 months and it feels like we are at or very near the bottom. Those waiting for lower rates may want to stop waiting

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

30 year conforming                                            3.75%        Flat

30 year high-balance conforming                    3.875%      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.

On Tuesday, for the second year in a row I had the opportunity to present to two classes at Long Beach Poly High School. The class is AP Chemistry and is taught by Mr. Gillette. Once the AP test is completed there is not much to fill the class schedule for the remainder of the year so Mr. Gillette likes to bring in some “real world” education for his students. My topic is what it takes to purchase a home, but is actually financial literacy covering credit, debt, income, saving and long-term consequences—positive and negative. With many/most of the kids on the verge of taking on debt for the first time in the form of student loans it is a timely conversation with them about how debt works and how it has long term impact on their lives.

It has been my belief that financial literacy should be a mandatory class, or part of a class, for every high school student. Understanding how debt works, the power of putting money aside for savings and retirement and the relationship between income and education would increase the level of personal responsibility across communities and decrease the level of dependence.

From my experience interacting with high school seniors on the topic the last two years, they appreciate the information, ask great questions and will benefit, hopefully, moving forward into adulthood and being responsible for their own financial decisions. Expanding such education throughout school districts can only be a benefit for society.

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 can we help our children purchase their first home?

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Question of the week:  How can we help our children purchase their first home?

Answer:  This question came up yesterday when I was having breakfast with Martin and Marc, two attorneys who between them have children between early to late 20’s. Concerned about the cost of residential real estate in California, they wondered how they could assist them get their foot in the door (haha, nice pun) of home ownership.

The concern Martin and Marc have is not unique, many parents with children entering the age they were when they were purchasing their first homes are concerned their children will either have to rent for a very long time, or move to another part of the country to purchase a home and raise their families—and grandma does not want to travel to Frisco, Texas or Nashville, Tennessee to visit her grandbabies!

There are three primary factors to loan qualifying: income, credit and cash to close. How a parent help a son or daughter with each of this areas of qualification, or can they?

Before we get into the different areas I will be addressing the two most common types of mortgages used by all home buyers and especially those purchasing their first homes, conventional mortgages, aka Fannie and/or Freddie, and FHA mortgages. Unless noted otherwise the guidelines will be pretty much the same.

INCOME

Conventional guidelines have loosened up on income assistance and now pretty much mirror the FHA guidelines. It is really hard to get your kid a raise, even if s/he works for you a sudden spike in income will have the underwriter arching eyebrows thinking, “this kid got a raise just to qualify,” which is why working for a family owned business typically requires a bit more history of earnings for qualifying.

A parent can assist with income qualifying by co-signing on the mortgage. When we have a co-signer combine all the borrowers’ income and all the borrowers’ debt obligations in the debt-to-income (DTI) calculation. When parents co-sign we must include their full housing payment, principal and interest on mortgage, property taxes, homeowner’s insurance and HOA dues if any. This inclusion of housing payment can sometimes be the barrier for a co-signer assisting as it throws off our DTI requirements.

It is important for anyone co-signing to know and acknowledge that they are 100% responsible for 100% of the payment. If the kids miss a payment it will reflect on your credit report. If the kids miss several payments and go into default, you are also in default. If the mortgage is foreclosed, you have a foreclosure on your record. Therefore, if you co-sign it is highly recommended you obtain on-line access to the lenders website so you can check in every month to make sure the payment has been made and all is well.

One concern many parents have when co-signing is how it will impact their ability to obtain credit in the future with another mortgage on their record. The current guidelines for mortgage qualification if an applicant has co-signed for another mortgage is if the applicant can show the primary borrower (a term I dislike using since all borrowers are equal) has made all the mortgage, tax, insurance and if applicable HOA payments over the past twelve months the housing payment will not be calculated in the qualifyinig for a new mortgage. For instance, you have co-signed for your kids and the total housing payment (PITI) is $3000 per month. You decide to purchase a vacation home in Palm Desert and are getting a mortgage, but with your current housing payment and your kid’s housing payment you do not qualify. You show proof that you kid has made all the payments for the house, mortgage, taxes, etc, for the past twelve months. Now the payment will not count in your qualifying and now you qualify for that 2500 square foot single-level in back of the golf course. “Proof” will entail obtaining bank statements from your children showing they have made all the payments required for the property, i.e. cancelled checks or direct payments to mortgage company, county tax collector, insurance agency. Note if there are systematic deposits into their account from you, this will be construed as assistance and therefore the payment will count. If there are even occasional deposits tracked to you for large sums there is a good chance this may disqualify the guideline as well.

CREDIT

The cliché in our business is, “you can’t co-sign bad credit.” This means if your credit scores are hovering around 800, and your kid’s credit score is mid-500’s, your 800 score is not relevant. For credit scores lenders use the lowest-middle score of all borrowers. Similarly if the situation is reversed and you have the low score and your kid has the high score, your score is the one that impacts the ability to qualify or the interest rate being higher.

The best way a parent can assist a child with the credit aspect of qualifying for a mortgage is to pay down or off some of the items on the credit report. In the short term paying an auto loan down to below 10 months of payments will have that payment not count in qualifying. If you son or daughter has an auto loan and the payment is preventing us from qualifying, if you are able to pay the account down to less than nine months that payment is not used in our DTI calculations and now they qualify.

The same can be done with other credit payments to lower total debt payments,  such as credit cards. As well, if your kid’s credit score is low, we can run an analysis to determine if there are any remedies to boost the score. Often times this can be done by paying off credit cards, or in many instances just paying them down below certain levels. Raising a score fifteen or twenty points can sometimes result in a lower interest rate and easier qualifying.

Before doing this make sure you consult with your mortgage professional (me!) to ensure it is done properly and does not create a situation that does not help in qualifying. Whenever there is “outside money” we have guidelines that must be followed. That leads us to….

CASH

This is the most common form of assistance that parents provide children looking to purchase their first home, a gift of cash for down payment, closing costs, credit relief, wherever needed.

Depending on when you make your cash gift to your children, there are specific guidelines that must be followed if there is a cash contribution to the borrowers to ensure the legitimacy of the funds are from a “acceptable donor,” essentially a relative or significant other (fiancé(e), domestic partner), and that the funds are not borrowed.

This entails a proof the donor had the funds to gift, proof the funds transferred from the verified donor account to the borrower’s account, a gift letter indicating there is no expectation of repayment.

Before making any cash contribution, or pay-off debt, or consider co-signing, please contact me so we can run through the specifics of the potential transaction and how you might help your children purchase their first home.

Have a question? Ask me!

Still strong. Early in the week the first revision to the 1st quarter Gross Domestic Product data lowered the estimate for growth in the quarter from 3.2% to 3.1%, not as strong as initially estimated but still a strong growth number for the nation’s economy. The news had no impact on mortgage rates.

Financially healthier households. That is the take-away from data released this morning by the government on personal income, consumer spending and inflation in April. Personal income grew at a very good rate of 0.5% for the month. While household revenue increased in the month, the additional funds were not being used for consumption, which grew at a rate of 0.3% from March—not a surprising number following March’s staggering 1.1% increase in consumer spending from the prior month. The Personal Consumption Expenditures index, a key gauge for inflation, increased only 0.3% for the month and is up 1.5% from last April, well below the Fed’s target inflation rate of 2.0%. With incomes up higher than spending it follows that the savings rate increased, from 6.1% in March to 6.2% in April. This is a bit of a mixed news data point, since consumer spending is 65-70% of our national economy, slowing growth in spending and higher rates of savings are great for long-term household finances but a bit of a damper on economic growth. Personally, I am fine with a bit of a slowdown in economic growth as a result of increased personal savings rates. Over all the news is neutral to rates.

Rates for Friday May 31, 2019: A great line this morning form an article on the MarketWatch.com (a Wall Street Journal subsidiary) website regarding the economy, “The U.S. economy is basically sitting in the middle lane of a highway. It’s unlikely to generate enough speed to justify a shift into the fast lane or slow down so much that it will be shunted to an off-ramp.” This middle-lane economy is a bit swervy as investors concerns over the Trump Administration combining trade strategy with foreign policy has them nervous for potential long-term impact on not only the domestic, but also the global, economy. While the domestic economic news keeps rates in the middle lane, domestic politics and international economics has investors in a “flight to quality” today, leaving stocks and buying bonds and mortgages—which puts downward pressure on rates. All the movement of funds has resulted in our 30 year conforming rate being the lowest it has been on a Friday since January 5, 2018.

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

30 year conforming                                            3.75%        Down 0.125%

30 year high-balance conforming                    4.00%         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.

It’s that time of year…near the end of school year but still not near enough for many kids. And parents. This morning as Leslie and I were walking the dog we crossed path with our neighbor who was returning to her home after loading a bunch of stuff into the minivan. “Almost there!” I greeted her. She turned to us with a smile, “I can’t wait. Lauryn (middle school) has a speech to give since she won a contest, a musical recital and then she’s in a play. All today!”

We wished her well and I told Leslie, “She embodies the Maycember song.”

What is Maycember? Click the link to the Holderness Family YouTube page for one of the most spot on, and funny, songs about the end of the school year that almost every parent—especially those with elementary and middle school kids–goes through.

For a great laugh for your Friday click here for “Maycember.” I’m thinking many of you will share this mom’s and dad’s you know can relate.

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

Why did my credit score drop?

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Question of the week:  Why did my credit score drop?

Answer:  This question was posed to me by Bryan, with a Y, a young man who is starting his career, renting and already planning for his future which includes getting married and purchasing a home. He was concerned because he receives updates from his big Bank in America with whom he has a credit card about his credit score, and he received notification that his score had dropped about twenty points. Why?

Before I answered his question, I asked him another: why do you care?

My question was not meant to belittle Bryan, or to be sarcastic. I asked the question because I come across so many people who are very concerned about their credit score when they really do not need to be.

Bryan’s answer was typical, “because, I want to have a good score.” Well, even with the sudden decline in his credit score Bryan still has a really good score—the drop had no impact on his finances, credit or life in general. But still he was concerned.

In our conversation, I brought up when a credit score is important, when you are seeking credit.

By now everyone knows, or should know, that the cost you pay for credit depends to a large extent on your credit scores. The higher your scores the lower your costs for credit, the lower your scores the higher costs of credit.

When you are applying for a credit card, auto loan, a mortgage, your credit scores are important. When you are not applying for credit, or do not intend to for some time, your scores are not as important.

Does this mean you should not worry about your credit? As I told Bryan, live your life, buy what you need, use credit responsibly and you will have very good credit scores. If you use credit wisely and responsibly when it comes time for a large purchase you will have good scores.

Back to Bryan’s question: Why did his credit score suddenly drop?

  • Here are the primary factors that impact your credit score in order of importance:
  • What is your payment history—How you pay your credit obligations is the largest determinant of your credit score. The more serious any derogatory, i.e. late, payments are the more they hurt your score; a charge off or collection account is considerably more damaging than a 30 day late.
  • How much you owe and how much is available—While not as impactful on your score as your payment history, it is almost as important. Your debt utilization rate is more important than the total amount you owe. Debt utilization is the percentage of your available credit on an account that you have borrowed, the higher the percentage the higher the negative impact on your credit card. If you have a card that has a $10,000 limit and your balance is $9,350 the account will cost you points on your credit score; if on that same card you owe $4500 your score would be higher. For many clients we work with to improve credit scores this area is a primary focus as it is easier to lower credit balances than to get creditors to remove late payments.
  • How old is your credit—Having accounts that have been reporting for a longer period of time is better than having new accounts, especially revolving accounts such as credit and department store cards. If you are thinking of buying a home at the start of the year do not succumb to the department store discounts if you open a charge card with them during the Christmas season. As well, if you are considering purchasing a home do not close accounts until after you are in your new home.
  • What kind of credit do you have—Do you have a lot of installment debt or revolving debt or are you pretty balanced? The more broad the type of credit you have, mortgage, auto loan, student loan, credit cards, the better your score will be as long as they are within the parameters above. This factor is not a big impact on your credit score, but does have some influence.
  • Have you been shopping for credit—Multiple inquiries within a short period of time can hurt your credit score. That said some inquiries are worse than others. If you are purchasing a home or new car the scoring systems recognize you are shopping for installment debt, which if successful will most likely result in one auto loan or one home loan, and the impact of more than a few credit inquiries is not significant or perhaps have no impact. If there are multiple inquiries within a short period of time from credit card companies and department stores it is evident you are searching for credit which may signify some type of financial difficulty and the impact on your score could be several points.

Back to Bryan….It seems Bryan and his friends are going on a golf trip and Bryan fronted the funds for the reservations on his credit card. The total amount he charged to secure accommodations and tee times put his card balance over 80% of the card’s limit. Referring to factor two above, credit utilization, the high percentage of used to available credit on his card caused Bryan’s score to drop. When his friends repay their portion of the vacation expenses to Bryan and he uses those funds to pay down the credit card balance his score will increase to its prior level.

Credit scores are important as they are a very good indication of the risk a creditor takes when they lend money to someone. For individuals it is important to behave responsibly in credit use, but it is also important to not let concern about your credit score have too much influence on how you live your life.

Take Bryan, he is not buying a car or a home in the near future, so his credit score dropping twenty points for a short period of time is not very relevant. If he knew the credit score dip was going to occur would he have not made all the reservations for the guys’ golf trip? Probably not, Bryan’s a good guy and would make it easier for his friends, and himself, to secure the accommodations and tee times they needed so they can go ahead with their plans.  If Bryan was using a credit card that had “points” or other advantages, such a move was also very smart on his part.

In July of last year our Question of the Week was, “When should we have our credit report pulled when exploring the purchase of a new home.” If you missed this incredibly informative WR&MU you can read it here.

Have a question? Ask me!

Good timing award, goes to me for discussing personal debt and credit scores the same week the Federal Reserve released its monthly report on financial stability, in the report the Fed stated, “Household borrowing remains at a modest level relative to incomes, and the debt owed by borrowers with credit scores below prime has remained flat.” Consumer credit growth has slowed in recent months, while personal incomes have grown. It appears consumers are either increasing their purchases with cash and/or increasing their savings with their increased incomes.

Inflation remains tame. Both the Producer Price Index and Consumer Price Index increases in April were below expectations. Pushed higher by gas and energy prices the growth was only 0.2% for the PPI and 0.3% for the CPI (adjusted to 0.1% when food and energy stripped out of the data to obtain the “core” index). Year over year inflation for consumers edged up slightly from 1.9% to 2.0% in April, well within the Fed’s range of comfort. The news is rate neutral as it reinforces common sentiment that rates should remain stable for quite some time.

Rates for Friday May 10, 2019: This week was a good example of why watching financial data on an hour to hour, day to day, basis can be a bit maddening. As investors reacted to the comments by President Trump leading up to today’s trade negotiations with China and his then threat, now reality, to increase tariffs on Chinese goods by selling off in the stock markets, then buying back, then selling off we saw a similar see-saw in rate markets. Now that the words have become deeds, as I write this both credit and equity markets have rebounded. Over all the impact on rates from last Friday has been nil, we are flat for the fifth week in a row for conforming rates.

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

30 year conforming                                            4.00%        Flat

30 year high-balance conforming                   4.25 %       Flat

Please note that these are base rates and adjustments may be added for condominiums, refinances, credit scores, loan to value, no impound account and period rate is locked. Rates are based on 20% down with 740 FICO score for purchase mortgages.

We are a culture of hyperbole, everything is the best this, the worst that, the most awesome thing ever. Social media, if anything, has exacerbated our tendency to hyperbole—enhanced with pictures and comments from friends validating our hyperbolic opinions J!!

Where the word “best” is not hyperbolic is when used like this, “I have the best Mom ever…” Because for the overwhelming majority of people this is true—our Moms are/were the best ever. The best at hugs, the best at turning tears into laughs, the best at being your personal chef to cut off the crusts or leave off the mustard. The first and best at unconditional love.

To all the Moms, you are the best! Thank you for being the best for all of us sons and daughters! (And from us husbands, thanks for being the best Moms for our children as well!)

One final note, a special happy birthday wish to my big sister who has spent many years filling some of Mom’s roles for my brother and I. We love you.

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 happens if the appraisal or home inspection present a problem?

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Question of the week:  What happens if the appraisal or home inspection present a problem?

Answer:  In last week’s Weekly Rate & Market Update we covered the difference between an appraisal and a home inspection. To recap, an appraiser’s duty is to set the value of the property for the buyer, and the lender if a mortgage is funding part of the purchase price; the inspector’s duty is to inform the buyer as to the condition of the property and improvements.

Not all appraisal and inspection reports are green lights to continue with the transaction, some are yellow lights to proceed with caution and occasionally a bright red blinking light telling the buyer to Stop! What happens if you are not getting a green light from the appraiser’s or home inspector’s reports?

The standard purchase contract contains several very important clauses, at the top of the list are the time frames during with buyers can complete necessary investigations to determine if they wish to continue the transaction. These dates are known as contingency periods.

Within this period the buyer obtains an appraisal and completes any necessary inspections. If, after review of the reports, the buyer has concerns about the property and/or the price to purchase the property as agreed to with the seller, the buyer has the ability to cancel the transaction and receive a full refund of their good faith deposit, provided such notification is made during the contingency time frames in the purchase contract.

But is cancelling the only option?

Here are the options should your appraisal or home inspection report not support the sales price or reveal concerns regarding the condition of the property.

Appraisal

There are two primary issues in an appraisal report that could create an issue for a borrower. The most obvious issue is the value provided by the appraiser is lower than the sales price. The other issue is the appraiser notates issues with the property that need to be corrected.

We will cover the property condition issue first. In last week’s WR&MU when discussing the role of the appraiser we mentioned that the appraiser does not perform an in-depth inspection of the property, but will notate visible conditions that could impact the health and safety of the occupants or lead to future deterioration of condition; items such evidence of leaky roof, missing flooring, etc. If there are such conditions noted the underwriter will require that these conditions are corrected prior to final loan approval. Prior to issuing the approval the appraiser will need to return to the property and provide a written statement and pictorial evidence of the correction to the underwriter.

If this occurs then the loan is contingent on the repairs being made and the buyer can notify the seller that unless the conditions are correct they will cancel the transaction. The seller can then decide that they will make the corrections, or reply to the buyer no corrections will be made and they are fine with the transaction being cancelled. If the latter occurs the buyer has two options, first, move forward with cancelling the sale. Second, inquire if the seller will allow the borrower to make the corrections at their own cost after initial loan approval and before the close of escrow.

If the seller will not allow the borrower to make any repairs during escrow we move to another option to enable the sale to close. In some instances, the lender will allow the repairs to occur after close of escrow if there is a bid from a licensed professional to make the corrections and the funds plus contingency reserve (usually fifty to one hundred percent of the bid) is left in escrow to fund the cost of the repairs.

Quick recap: Appraisal report notates conditions on the property that need to be completed. Options are a) seller repairs noted conditions b) seller allows buyer to make the repairs before close of escrow c) lender allows buyer to make repairs after close of escrow d) neither party wishes to make the repairs and the transaction is terminated. Which option is decided upon between the buyer and seller depends on the market, seller’s motivation and ability, and the buyer’s motivation and ability.

The other issue that occurs with appraisals, and the one of greatest concern to all parties involved is what happens if the appraised value is lower than the sales price.

Before we get in to the options for the buyer and seller should an appraisal come in under sales price it should be noted that the first action when this happens is a very thorough review of the appraisal and the comps utilized. We then contact the agents for the buyer and seller notifying them of the low value and provide them with the comparables used and ask them to come up with other sales we can ask the appraiser to use that would support a higher value. Since I have access to the Multiple Listing Service, I research the properties used for the comparables in the appraisal report to see if any should not have been used. Perhaps one of the comps was a flip, or the previous owner died in one of the comps, a comp is on a very busy intersection and this was not accounted for, etc. I then research the area for better comps to see if we can find any that would enable the appraiser to increase the value. With the comps from the agents and my own research I write an appeal and submit it requesting the appraiser reconsider the value based on the new information provided. We have a fairly high success rate in having adjustments to the value on low appraisals. There are, however, some properties that are sold at values higher than the current market supports, or there is a lack of comparables available to justify the appraiser increasing the value on the report. In these instances, or if an appraiser rejects our appeal, we must go through the options for having a value lower than the sales price on the appraisal report.

Most home purchases involve the buyer getting a mortgage to enable the purchase to close. A major part of the rate and cost of the loan is the loan-to-value, or LTV, which is what percentage of the purchase price is the loan? If you are putting 10% down the LTV is 90%, If you are putting 25% down the LTV is 75%. The lender calculates the LTV based on the lower of the sales price or the appraised value. If you are putting 10% down on a $500,000 purchase obtaining a 90% loan for $450,000 and the appraised value is $490,000 you LTV has gone from 90% to 91.8% LTV. This move up from 90% LTV changes the rate and/or price of your loan and the premium on any mortgage insurance.

In this scenario, not only are you potentially paying more of your mortgage but you may be more concerned that you are over-paying for the property. So, what are your options. It should be noted that the impact on a low appraisal is of greater concern to those with lower down payments than those with higher down payments as the impact on the cost of the mortgage is less, or none, the lower the LTV; i.e in above scenario there will be a higher rate/cost moving above 90% loan to value with the low value, if the original LTV was 55%, the low appraisal moving the LTV to 56.1% will have no impact on the rate or terms of the mortgage.

There are four basic options when an appraised value is less than the sales price.

The first option is you notify the seller of the lower appraised value and you wish the sales price of the contract to be lowered to the appraised value. The seller agrees to lower the price and you continue with the transaction at $490,000 and you put 10% down for a new loan of $441,000 at 90% of the appraised value and purchase price.

The second option, which occurs if the seller refuses to lower the purchase price to $490,000 you can agree to retain the purchase price of $500,000. If you choose this option you can either put an additional $9,000 down and obtain a loan of $441,000 to retain the 90% LTV rate and terms; or you may decide to retain the $450,000 loan amount with the $50,000 down payment and accept the rate and terms that would be available at the 91.8% LTV. In this scenario, we often go with the lower down payment scenario and move forward with the higher LTV mortgage as the math works in the buyer’s favor; however it depends on the buyer’s cash situation and preference of cash in the bank or higher monthly payment.

The third option occurs if the seller does not want to come down to the appraised value and the buyer does not want to pay the original sales price. Buyer and seller find a price between the appraisal and contact sales price. Usually, but not always the amount is cut in half, in this case the buyer and seller agree to complete the transaction at a price of $495,000. The buyer can then decide to increase the down payment to $54,000 or obtain a low at 90.9% loan to value.

The fourth option is the buyer does not want to pay more than the appraised value and the seller does not want to sell for less than the original sales price and the sale is cancelled. We usually see this option when there is a very wide spread between the sales price and the appraised value, and/or there are significant conditions with the property that will need to be addressed per the appraiser and/or home inspector. If the spread between the appraised value and the sales price is not too wide we rarely see neither side willing to move of their perceived value of the property. From the seller’s side, even if they had multiple offers they may not want go back to a previous buyer and chance another appraisal or worse go back on the open market. For the buyer, long term a few thousand dollars, while a lot of money, will likely make little to no difference in the long run of owning the home.

Of the four options when an appraisal value is lower than sales price in order from most often to least option outcomes we see Options 3 (meet in the middle), Option 2 (buyer pays sales price), Option 1 (seller lowers price to appraised value, Option 4 (transaction is cancelled). Most buyers and sellers want to complete the transaction.

Inspection

Not every home is perfect. Correction, no home is perfect. How unperfect are you willing to accept when you purchase your new home?

In the WR&MU update we discussed how a home inspector will go through, above and under a home and complete a report detailing the condition of the property, notating what is in working condition, what is not, what needs to be corrected now, soon or later, and what is in good condition and will not need to be replaced for quite some time.

Too often buyers are overwhelmed by the report and the list of items that are noted as, let’s say flawed. Cracked or broken switch plates? No home is perfect, move on. Cabinet under the sink damp and pipes rusted? No home is perfect, but this may cost quite a bit to fix and cure.

Upon receipt of the inspection report the buyer should go through the report to determine what falls under routine maintenance and are minor issues, such as the cracked switch plates and walls that need painting, and what issues are somewhat major and need to be addressed fairly soon to prevent further damage to the home or create a health and safety issue, like out of date electrical or plumbing.

After receiving the report and within the contingency period the buyer can provide the seller a list of items that they would like corrected before the close of escrow. In this instance we are discussing repairs that have come up from the inspectors report, we dealt with options for items on the appraisal that underwriting would require to be fixed above.

When this happens we typically see three replies from the seller: a) okay we will do the repairs b) sorry, we will not do the repairs c) we will not do the repairs but we will give you a credit of X thousand dollars so you can make the repairs after escrow closes.

If Option A is the reply to the repair request, woo-hoo! you are saving money on repairs. If Option B is the reply you have a decision to make, cancel the transaction, get your deposit back and start looking again for you new home, or stay in escrow and make the needed repairs yourself after escrow closes.

Which brings us to Option C, the seller offers to provide a credit so the buyer can correct the items themselves after escrow closes. When these credits arise we typically do not lower the sales price, but rather have the credit go through escrow to pay for closing costs for the borrower. This is usually because our clients are leveraging their purchase with a relatively high loan to value mortgage, 75% or more, and a credit for closing costs puts the funds into their pocket dollar for dollar as opposed to lowering the sales price. Huh?

In the above example with a $500,000 sale and the borrower putting down $50,000, or 10%, total cash to close can approach $70,000 when the cost of the loan, escrow, title, recording fees, funds for pro-rated interest and to establish an impound account for taxes and insurance. Let’s assume that the inspection report showed the electrical and plumbing systems needed to be upgraded or replace and the buyer received and estimate of $10,000 for the work to be completed. The seller does not want to live through the work being done while they are working, sending kids to school and packing for moving to their new home so they have agreed to pay for the $10,000 through the sale.

If the buyer agrees to lower the sales price by $10,000 for the credit the amount of cash they will need to close will be close to $70,000 still as the only real cash they are saving is the 10% on the $10,000 reduction (10% of original $500,000 sales price is $50,000; 10% of the reduced sales price of $490,000 is $49,000). There are incremental savings on the other fees but the total will likely be $500 or less. So the buyer saves $1000 in cash to close but will need $10,000 to make the repairs.

If the seller credits the buyer $10,000 in closing costs the buyer needs $60,000 to close the transaction instead of $70,000, a savings of $10,000—the amount to make the repairs.

If the credit is listed in escrow as “$10,000 credit to buyer for repairs listed on home inspection report” the underwriter will ask to see the report and may decide more items need to be fixed, as well the $10,000 plus a cost overrun contingency of 50-100% will need to be left in escrow and released only when proof is provided that the repairs were completed.

It is important to note that very rarely (very rarely) does an underwriter see the report from the home inspector. This enables the buyer and seller to negotiate regarding any repairs the buyer would like to see completed without having the lender mandate any corrections not notated on the appraisal report.

No home is perfect. A low appraisal or discoveries of flaws by a home inspector need not kill your purchase transaction if both parties are committed to closing. If one party is more intent on getting “a deal” than purchasing or selling a home then the opportunity increases for the transaction to no move forward, however if both parties are willing to negotiate and be open to a solution more often than not the buyer will be getting the keys to their new home and the seller will be receiving their net proceeds to move onto their next home or bank account.

Following last week’s update Cathy, real estate agent extraordinaire in the Central Coast, sent me this message, “The biggest difference between an appraiser and an inspector…if you get a stupid appraiser, it is not your fault. If you get a stupid inspector, it is.”  Which is why we have an appeal process.

Have a question? Ask me!

Positive news keeps coming. This week we had some important economic data released and all of it was positive. Monday we learned that consumer spending in March had its biggest one month increase, 0.9%, in nearly a decade, and 2.9% increase in spending over the past twelve months. Perhaps fueled by continued increases in personal incomes continuing to rise and having gained 3.8% from last March to this. This data suggests another strong quarter of growth in the second quarter. Strong growth in spending and wages is traditionally mortgage rate unfriendly it supports economic growth which leads to inflation which leads to higher rates. However the core inflation rate released with spending and wage reports showed no increase in prices in March and a dip in the annual rate to 1.6%, just above the Federal Reserve’s floor for what it considers acceptable inflation of 1.5%.

The week started and ended with positive news, as today the Labor Department released employment data for April showing 263,000 new jobs in the economy for the month and a drop in the unemployment rate to 3.6%, the lowest rate since the month my 58 year old brother turned 9 (December 1969). In a separate measure of income from the report on Monday, the Labor Department reported hourly wages increased in April for annual increase of 3.2% from the prior year. Over all the news is also negative for mortgage rates.

Rates for Friday May 3, 2019: Based on the economic data, or most of it, rates should be higher this week. However the tame inflation numbers have investors backing off expectation for higher rates, and this sentiment was supported by the Fed which this week announced…nothing. No movement expected for the rest of 2019 by the Federal Reserve which has investors sitting tight on fixed rate investments. Week over week we are flat for the fourth week in a row for conforming rates.

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

30 year conforming                                            4.00%        Flat

30 year high-balance conforming                      4.25 %       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.

I guess this Marvel Avengers movie thing is a pretty big deal. Who knew? My daughter did and does. Like many others she saw the latest, and last, of the series on opening night and then again, a few nights later. Reading the receipts for the movie domestically and internationally it seems I might be missing out on something. Can’t wait for it to be on Netflix so I can pause it several times during its three hour run time for some refreshments and subsequently needed bathroom breaks.

I’m pretty old fashioned when it comes to movies, and other things. I like the old Westerns, dramas, mysteries and musicals and have never been a big fan of the Star Wars, comic book genres.

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 a home inspection?

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Question of the week:  What is the difference between an appraisal and a home inspection?

Answer:  This is a great question that comes up frequently with first time buyers, and some experienced homeowners purchasing for the first time in a long time.

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.

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.

Next week what happens when appraisal is low or inspection shows major issues?

Have a question? Ask me!

“Well, that’s surprising.”  This was the thought of many investors, analysts and watchers of the economy this morning when the government released the data for the Gross Domestic Product for the 1st quarter of 2019. Expectations at the end of the 4th quarter in 2018 was for growth this past quarter and as the quarter progressed and economic data was received for January, February and March the consensus expectation rose to 2.3%. Today, the first report for GDP growth in the 1st quarter was 3.2% growth, well above expectations. Besides strong economic growth in the quarter inflation eased from the prior quarter’s annualized rate of 1.9% to 1.4%. Of concern in the data was a slowing in consumer spending to 1.9% growth, the lowest in a year. The report should have no impact on the Federal Reserve’s decision to change its current policy to hold firm on rates through the year. Overall the report should be negative for rates as a growing economy leads to higher rates, however the tame inflation segment of the report and consumer spending data is positive for steady or lower rates.

Rates for Friday April 19, 2019: Will the GDP report cool the speculation about a recession later in 2019? That is the major question investors will be analyzing moving forward as investors react on what they feel may happen, or what others may feel will happen directing their actions. For now rates remain flat from last week.

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

30 year conforming                                            4.00%        Flat

30 year high-balance conforming                     4.25 %       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.

Earlier this week we began the Great College Search II with our youngest daughter. We spent a few days in Seattle seeing the sites with the primary site being University of Washington as a possible landing spot. A very successful trip on all accounts. I like Seattle a lot, similar in many respects to San Francisco, but a nicer, cleaner, seemingly safer place to visit the last several years, in my opinion.

Next week is back to regular schedule in the house as spring break ends and the grind to the last day of school begins. I like regular schedules…

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

Good Friday Short Update

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Question of the week:  No Question of the Week due to Good Friday

Answer:  With many readers of the WR&MU having short day for Good Friday today and weekend Easter activities we have an abbreviated communication this week.

Tune in next week as we delve into appraisers and inspectors and the roles they play.

Have a question? Ask me!

Markets are closed today, but we have some important economic data this week that impacts rates. Retail sales for March had a very strong jump from February. With a 1.6% increase in retail sales, the highest monthly jump in 18 months, prospects for a potential recession later this year dim. The large increase in sales was pushed by new auto sales, which climbed 3.1% for the month and gas prices which were up 10% nationwide in March. Stripping autos and gas from the data and sales still recorded a very strong 0.9% increase for the month. Overall the news is interest rate unfriendly as consumer spending is 65-70% of our economy, stronger retail sales indicates a strong or strengthening economy which puts upward pressure on rates.

The California Association of Realtors released home sale data for March, and the data shows an apparent early start to the buying season locally. Statewide the median price for a single-family home was $565,880, which was up 5.9% from February and up 0.2% from March 2018. Total sales in the state were down 0.2% for the month and off 6.3% from 2018. In Los Angeles County the median price was down 2.9% for the month and 0.7% for the year at $525,520. The dip in prices and drop in rates created a large jump in sales as the number of units sold was up 36.3% from February, though down 6.3% of the number of sales in March 2018. Next door in Orange County the $809,500 median price was up 2.1% from February and down 1.8% from a year ago. Sales volume in the county was up 52% (not a typo fifty-two percent) from February and down 12.5% year over year. Overall, we see buyers coming to the Southern California market in a big way in March, and based on our activity in our office April and May numbers should be positive as well—though given the very strong increases in sales in March it will be challenging to match those numbers.

Rates for Friday April 19, 2019: The 30 year conforming rate is flat from last Friday and the high-balance rate (loans over $484,350) are up 0.125% from last week. The high-balance products have been interesting this year as they have changed independent of the conforming products due to market and regulatory forces. Fannie Mae and Freddie Mac have restrictions on what percentage of high-balance loans they sell in their pools, without going into the weeds it is generally around 10% of any given pool. If lenders are funding a large amount of high-balance loans they will push the high balance rates higher to slow the number of applications they get. In the past few weeks we have seen some odd pricing on high-balance mortgages, lenders have been getting more high-balance mortgages than they would like so they are trying to slow the flow. This week was one of those weeks, and since most pools are national in structure, a spike in sales in Southern California can skew the pool balance and an effort by lenders to slow their California high-balance volume.

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

30 year conforming                                            4.00%        Flat

30 year high-balance conforming                   4.25 %       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.

Last week in this section I wrote about how much I love the Masters, Sunday morning watching Tiger Woods’ comeback reinforced that feeling. Watching extremely high-level athletes compete under pressure has always fascinated me. Their ability to execute under extreme pressure within the contest, compounded by the large audience in the arena of play and television cameras all around them is wonderful to watch. Some say, “well they are just playing a game and get paid very well to play it.” True, both those games support hundreds of thousands of families around the country. Their own managers, coaches and agents, those who work at the venues, if a team sport the hundreds who work for the organization, local establishments that depend on fans buying food, drink, souvenirs and lodging, television and radio personnel from the voices we hear to those who spool out the cables and hook them up.

Sports in America are about a $100 billion industry. The value of franchises depends on the performance in thousands of split second moments by individuals. Who are just playing a game. Tiger was just playing a game last week that generated tens of millions of dollars circulating in the economy. So were the other players in the tournament, but he was the one who executed the shots that did not go in a pond, or rolled into the cup.

I for one am glad I do not have to perform my job with several cameras recording me every move and slow-motion replay allowing commentators to inform millions how I missed a decimal point or forgot a guideline I needed to go back and double check. But then again, when I make the phone and get to say, “Congratulations! We funded your loan and you are now homeowners!” it would be great to have it broadcast with in-depth analysis!

We start Spring Break in the Smith household this week with the thousands of other Long Beach Unified families. That means the end of the school year is about six weeks away!

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 buy a fixer for our new home?

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Question of the week:  Should we buy a fixer for our new home?

Answer:  I have always been a strong believer of buying the worst house in the best area that you can afford. There are some qualifications that I will get into, but in general the quickest way to create value in real estate is to improve a property.

Getting a loan on a “fixer” can be easy, or quite the challenge, depending on what makes the property a fixer. Before we discuss the mortgage aspect of a fixer, let’s take a look at some other factors to consider.

Every neighborhood has a price range, the lowest part of the range is the value of the dirt. What is a vacant lot worth in the neighborhood? There are some properties that may be worth less than the lot value, consider a home that was gutted by fire and the lot must be scraped before any new structure can be built, in this type of instance it will cost a buyer significantly to get the permits and pay for the demolition and removal of the old structure.

The highest part of the price range in a neighborhood is a bit harder to determine, but generally not too far above the highest price of the home that has sold in the recent past. There are some exceptions in very high price areas where cash is common for the purchase transactions and the lot values alone have two commas in them. However, in most neighborhoods there is a ceiling above which it will be hard to get an appraisal to support a sales price—and since we are talking about using a mortgage to purchase a property the appraisal is critical.

Consider a neighborhood where most of the homes are somewhat similar, with about six or seven different floor plans ranging from three to five bedrooms and square footages up to 4,000 square feet. The most recent sale of a five bedroom, 4,000 square foot home with a pool that has is in excellent condition and modernized in terms of fixtures and appliances was for $750,000. This is the top of the market, the only other sale near this one was a similar size home without a pool that sold for $725,000.

Can you breach the highest sale in the neighborhood? If you own the exact same model, with a pool, how much more than $750,000 can you sell your home for if you make improvements? If you remodel your kitchen to a smart-kitchen with talking appliances, put in the latest Japanese toilets in all four of your bathrooms, convert the family room into a home theater experience with remote screen, window coverings, dimming lights and of course ultimate sound, plus the highest quality carpets and flooring, if you did all this and spent $100,000 or more how much more will your home sell for than the home that sold for $750,000? Will you get the entire $100,000 you invested plus costs of sale? Will you get more?

You possibly can, but to do so your buyer will likely need to bring a lot of cash to the table as even with all the money you put into the home and the improvements you made, an appraiser will be limited on how much higher than $750,000 s/he will be able to support in value given the neighborhood and other sales. You will have a home that is very nice, but still in the same neighborhood with values within a certain range. If you want to recoup the costs of your improvements, plus costs and some profit so want $900,000 for your fantastic home, the reality is that an appraiser may cap the value at $800,000 to $850,000 leaving your buyer needing to come up with $50-100,000 cash if they are getting financing to purchase.

A property is worth what someone is willing and able to pay for it; if the “able” part requires a loan then the value becomes what an appraiser tells the lender the property is worth.

Back to buying a “fixer.”

When looking at properties there are generally two conditions available, turn-key and needs TLC, aka a “fixer”. Some sellers spend some money before putting their homes on the market to freshen landscaping, paint the interior and possibly exterior and update floor coverings to make the property look as clean and fresh as possible to capture the highest price possible for the size in the neighborhood. These homes are perfect for the family that wants to just have to unpack boxes, purchase some new wastepaper baskets and plug in their entertainment devices.

The second type of property condition, the fixer, has a very broad range of what “fixing” is needed. From a lending stand-point, this is where things can get interesting.

Homes in the non-turn-key condition range can go from needing interior paint and new floor coverings to replacing electrical and plumbing systems, roofs, foundation repairs or other major work. There is generally a direct correlation between the amount of work needed to bring a home to the average, or beyond, for the neighborhood and the price to purchase. Factored into the price is often the ability to obtain a loan based on the condition, the more loan friendly a home generally the higher a buyer will, and can, pay as leveraged markets enable higher prices than cash markets.

What difference does it really make to a lender if a property is not in the greatest of shape? This is a question that comes up with buyers looking at properties that need some work to get them into decent living condition. It is important to remember when getting a loan that two entities are being evaluated for approval, the borrower to ascertain payments will be able to be made on a time basis, and the property to ascertain that not only is the value sufficient to support the applied for mortgage without significant costs to bring the property to reasonable standards and condition. Some clients argue, “well it will be once we fix what needs to be fixed.” What if in doing your repairs and upgrading it is discovered there are deeper issues than you were able to account for and because of this you run out of money trying to bring the property up to snuff?

From a lender’s perspective, the primary concerns are health and safety. If when an appraiser is inspecting a property sees something that s/he feels is of concern that will either cost a tremendous amount of money to fix or is a health and safety factor it will be noted on the appraisal. When reviewing the appraisal the underwriter will make final loan approval conditional on the items listed being corrected.

What are some examples?

A property last sold in 1985 and nothing has been done to the home since. The electrical and plumbing work, the roof still looks good and there are not leaks but the place is dirty with walls showing where pictures hung for over thirty years, the carpets are stained and show a clear path through every room, window coverings are dated and need replacing. None of these are health and safety issues, nor take a considerable amount of money to fix. Depending on the size of the home and whether the buyers can do the work themselves or need to hire others, the house can be spruced up pretty quickly for less than $10-15,000. The buyers of this home putting in some sweat equity will be able to purchase a home at the bottom of the range of value because of the condition and quickly bring the value to the average or above average of the neighborhood.

If you are willing to spend your evenings and weekends peeling decades old wallpaper and painting walls and ceilings this is very good type of property to purchase. The challenge is finding a home with the potential on the market and then being able to outbid other buyers with the same objective in mind.

A property last sold in 1985 and has the same conditions as above but also several other issues:

  • Several of the window panes are cracked or missing; these will need to be replaced as broken and missing glass are health and safety issues.
  • The electrical system in obviously faulty, there are extension cords running from outlets in one room to lights, etc in another room; an obvious safety issue as patchwork electrical is a fire hazard.
  • The roof is visually very worn and sagging, inside the house there are water stains on the ceiling; it appears the roof needs to be replaced as it is leaking.
  • In one of the bathrooms there is a bucket under the sink that is full and the shower head is missing; another health issue as there are obvious plumbing issues.
  • Under the window in the family room the wall is bubbly, evidence of prolonged water damage and the wood flooring below the window has rotted through so the subflooring support is visible; another obvious health issue with a leaky window and unstable flooring.

This home is very much a “fixer” and the type of property that can likely be purchased at the lower end of the price range in the neighborhood and after tens of thousands of dollars are spent to fix the many issues in the home can be brought up to well above the average condition and value.

This property would need the above items to be corrected before any traditional conventional, FHA or VA mortgage would receive final approval and be able to fund. This type of property typically would sell to a cash investor as the seller would not want to take the property off the market while a buyer tries to get loan approval, as well the seller will not be willing to spend the money to correct the items before the buyer gets loan approval—otherwise the work would have been done before putting the house on the market.

Homes in this type of condition can get mortgages from Fannie Mae or FHA using a home improvement loan. These loans are a bit more complicated than the standard loan but for the right amount of patience and effort can be effective in helping potential homeowners with the purchase and repairing of properties that otherwise would not be able to obtain loan approval.

Should you buy a fixer for your new home? If the right opportunity arises a fixer may be the perfect situation for you and your family. If you do find a property that is in disrepair before you commit to a contract give me a call so we can discuss the condition and the options that may be available to you based on your financial situation and ability to qualify.

Have a question? Ask me!

Inflation continues to not be a concern. Consumer and Producer Price Index data released this week shows that absent energy costs inflation both the CPI and PPI are favorable for consumers and the economy. Both indexes were high in March when the complete basket of goods and services were measured, primarily due to higher costs for gas and electricity—nationally gas prices were up 10% in March. Stripping out the volatile energy and food costs, what is known as the “core” rate of inflation, was up only 2% year over year for the PPI and only 1.9% for the CPI. Overall the news is friendly for rates as the higher inflation goes the higher rates go, tame prices lead to tame rates.

Rates for Friday April 12, 2019: A little upward pressure on rates this week, but we end the week flat from last Friday. Investors have been selling their fixed return assets, i.e. bonds and mortgages, for equities this week looking to profit from low inflation, strong labor markets and the Fed taking any rate increases for the rest of the year off the table. We have a very stable rate market and absent any major event rates should drift up and down from current levels no more than an eighth of a percent (0.125%) in the foreseeable future.

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

30 year conforming                                            4.00%        Flat

30 year high-balance conforming                      4.125 %      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.

Sunday will wrap up one of my favorite weeks of the year. No, not the week before the April 15th tax deadline. The week of enjoying announcer Jim Nance as we move from the Final Four and Championship game in the NCAA basketball tournament to Augusta, Georgia for the Masters golf tournament. Mr. Nance is fortunate enough to be the lead announcer for both of these events, and we are fortunate to have him describing the action for us.

I love golf, my passion much better than my ability, and really enjoy watching the major golf tournaments. The impossible dream for me would be watching a tape of Jim Nance after the final round of the Masters saying, “And Dennis Smith drains the five footer for par on 18 to win the Masters!” I think I look good in green, especially a green jacket with a lovely logo on the breast. My rooting interest this weekend is for Ricky Fowler, one of the nicest men in golf, to win his first major. As it looks as I write this he has a long way to go as he is six strokes behind the leaders.

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

Do we have to pay closing costs?

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Question of the week:  Do we have to pay closing costs?

Answer:  Frequent readers of the WR&MU know the standard answer to the majority of questions of the week: Yes. No. Maybe.

 All real estate and mortgage transactions have costs, the question being asked is does the borrower have to pay them or can someone else?

Everyone has heard the ads, “no closing costs…” This is semi-truth in advertising. There are always closing costs, and someone is paying them, who and how?

Before we dig into who and how the closing costs can be paid we need a look at what closing costs are present in mortgage transactions.

Closing costs is usually a general term for any funds collected during the transaction. In reality, there are actual costs and recurring payments that combine to be called closing costs, we define these as non-recurring and recurring costs.

Non-recurring costs are fees you are paying only because you are in this transaction, fees for the appraisal, escrow, title, lender, county recorder are paid once, i.e. they do not happen again until the next time you enter into a transaction to purchase or refinance real property.

Recurring costs are funds that are collected to pro-rate mortgage interest, homeowner’s insurance and property taxes. These are costs that you pay because you own a home and have a mortgage. The funds to cover these costs will depend on three primary factors: whether you will have an impound or escrow account set up for the lender to collect and pay your property insurance and taxes, what day of the month your transaction closes, and what month of the year your transaction closes.

Closing costs are different for purchase transactions and refinance transactions, typically costs for purchases are higher due to the escrow and title fees being higher than for a refinance. If your transaction is a refinance there are two options for closing costs to be paid, if you are purchasing a new home you have those two options plus one more.

The first option is the most obvious one, you pay the closing costs. In refinance, you usually can add them to the new loan, which means you will be paying the costs over the life of the loan. If you are purchasing a home it does not make sense to add them to the loan amount as it would change your down payment, and that would change your loan to value, and that could change your rate. For example, you are purchasing a property for $450,000 with 10% down and your closing costs total $10,000, you add the costs to your loan increasing the loan amount from $405,000 to $415,000, this increases your loan to value from 90% to 92.2% which can impact your interest rate and mortgage insurance. For most refinance transactions, we encourage clients not to add the recurring costs for interest, insurance and taxes to their loan balance so they are not paying interest on those fees they would be paying whether they refinanced or not.

The second option is for the lender to pay the costs. This option occurs very frequently in refinance transactions where we close “no points” transaction and the other costs are either paid by the borrower or added to the loan. The lender can pay part or all of the closing costs for borrowers in a refinance or purchase transaction, on paper. In reality, the borrower is paying for the closing costs through a higher interest rate. Long-term readers of the WR&MU know the teeter-totter relationship between costs to close and monthly payments. The higher the interest rate, and therefore your payment, the lower the costs to close. This is because the higher rate a lender has on a mortgage the more money it can sell that loan for in the secondary market. If you are an investor with $100,000 looking for a relatively safe long term fixed rate investment and you have the choice for either a 4% return or a 4.5% return which would you want? If the cost for both is $100,000 you would obviously take the 4.5% return, but because of the way the market works the 4% investment would be offered to you for less than $100,000 because you will receive $500 less per year, conversely you would pay more for the 4.5% option because the return is higher. Here is the simple way to understand the relationship between costs and interest rates:

Higher Rate
Lower Costs

When locking in a loan for either a purchase or a refinance we will give a range of interest rates and their corresponding payments and what the total costs for each of those options will be. Some borrowers prefer spending more money for a lower rate and others are looking to minimize costs to them out of pocket and opt for the higher rate and payment. As a rule the breakeven point for having lender paid fees due to a higher interest rate is between five to seven years depending on the loan amount and costs; i.e. if you are saving $3500 out of pocket on a refinance by taking a rate that is 0.25% higher costing you about $45 more per month, it will take you about six and a half years to pay for the costs due to the higher payment (3500 divided by 45 = 77.78 months); or the other way if you pay the $3500 up front and reduce your payment by $45 per month you save the $3500 in 77.78 months. Long term you pay more for the costs being added to your rate, short term you do not have to pay the $3500.

The third option, available for those purchasing a property, is to have someone else involved in the transaction pay some or all of your costs for you—most typically the seller. I have always thought this a great option for homebuyers, but it is more popular during periods when the home sales market is slower. Here is how it works. You find a home you like for $525,000. We go through the numbers and with 10% down all your costs for the transaction including points to buy down the loan, escrow, title, etc total $13,000. You have a total of $56,000 in your accounts, so not enough for the down payment and closing costs. You write your offer to the seller for $538,000 with the seller to credit you $13,000 at closing for costs. The seller is going to net almost the same amount at closing—a bit less since if typically costs sellers about 8% to sell their home on the open market using real estate agents. Yes, you pay more for the property, but you save $13,000. Instead of $52,5000 down payment and a much higher rate to cover the $13,000 you do not have, your down payment is $53,800 and your loan amount goes from $472,500 to $484,200; at a 4% rate your payment is $56 more per month. Your “payback” for the $13,000 you did not pay at closing is almost twenty years; if you purchased the home for $525,000 and pay the closing costs of $13,000 and put $56 every month into a coffee can in the kitchen it will take you twenty years to save the $13,000 you could have saved when you purchased the home. I really like this option for home buyers even if they have the funds to pay their own closing costs, unfortunately not many agents encourage their clients to write such offers, or if they are representing sellers to accept such offers.

Like most mortgage questions there is no simple answer to whether you should pay the closing costs of your transaction, it depends on your situation and what makes you the most comfortable in trading off costs and payments. Not being a cookie-cutter lender, I always run through all the options with my clients for their purchase and refinance transactions so they can choose the option that works best for them and their families. Call me to explore the options for your transaction.

Have a question? Ask me!

Playing catch-up from the shutdown, the federal government economic data releases are giving us a picture of the economy in January as well as February. Combining the first and second revisions to the Gross Domestic Product for the 4th quarter of 2018, the initial 2.6% growth in the quarter was revised down to 2.2% and the overall growth in 2018 was 2.86% for the economy. This news is somewhat neutral for rates as the growth is of moderate strength, which should put upward pressure on rates, but with the revision being lower than the initial announcement showing slowing growth that is positive for rates to remain stable.

Consumers still in good shape, per the reports on income, spending and inflation. We will get the February data in the future, but for January consumer spending rebounded 0.1% to the positive after the surprising decline, and very surprising amount of decline, in December. The Price of Consumer Expenditures (PCE), the primary guage of inflation for the Fed, also should 0.1% growth for the month. The annual PCE increase dropped from 1.8% in December to 1.4% in January. The large drop in prices year over year from the prior month is positive for rates as it is well below the target 2% inflation rate. Overall this news is positive for rates as it portends a slowing economy and supports the Fed’s announcement at it most recent meeting that it is backing off on the number of rate increases in 2019.

Possibly putting upward pressure on rates, personal incomes continue to grow as they rose 0.2% in the month of February. Higher personal income reflects a strong labor market, which combined with low inflation should lead to higher consumer spending and economic growth. Overall the news is somewhat mixed for the economy with labor markets signaling a stronger economy than inflation and spending have shown.

Rates for Friday March 29, 2019: Rates tried to break a bit lower early in the week but are flat today from last Friday and the conforming rate is below 4% for back to back weeks for the first time in fourteen months. Now is a great time to explore your options for refinancing to lower your payment, consolidate a HELOC or other debt or purchase a new home—Call me!

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

30 year conforming                                            3.875%        Flat

30 year high-balance conforming                    4.00 %         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.

The great thing about yesterday was despite losing half of my Final Four in my bracket contest with my friends from college (we estimate the core group has been together in this pool since 1985 or 1986) was that it was Opening Day for baseball. That alone would have taken some of the tarnish off Michigan and Tennessee’s horrible shooting, but a shine was put on because the Phillies won convincingly and optimism abounds in the City of Brotherly Love—as much as any Philly fan can be optimistic.

The best $20 I spend every year is for my mlb.com subscription which gives me access to every radio broadcast of every major league game and playoffs for the year. If you call me between now and October, depending on the time of day, you will likely hear a baseball game in the background as I prefer that to music as the sound in the office. If the Phillies are not playing I will dial up whatever game is on the air, often looking for the smaller market broadcasts as I love the local advertising—for instance last summer listening to a Kansas City Royals broadcast during the weekend while crawling around pulling weeds I heard an ad for Popsicles. Popsicles! When was the last time you heard an ad for Popsicles!

Go Phillies, ring the bell!

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 co-sign for our son or daughter’s home purchase?

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Question of the week:  Should we co-sign for our son or daughter’s home purchase?

Answer:  Yes. No. Maybe.

As we have seen in the news lately, many parents will do anything they can to help their children get a leg up, to get a strong start, to ensure a more comfortable life. Some parents do it by trying to help their kids get into certain colleges, some parents do it by helping their children with the purchase of their first home. We all want the best for our children, the question is how far are we willing to go, or for many parents how far can we go?

It is hard for most families to purchase their first home, especially in Southern California. Our question this week is courtesy of long-time friend Andy who was inquiring, not for California real estate but in Central Pennsylvania—where home prices are also challenging for first time buyers given the average incomes and real estate prices. Andy’s daughter and son in-law want to purchase a home, but need a bit of help to do so sooner rather than later. I received an email from Andy with the question above, which after speaking about the situation boiled down to not should he help, but what is the best way to help.

There are several ways parents can help their children purchase a home. Each has different consequences, short and/or long term. A primary factor I have parents consider when we are having these conversations is what will be the impact on their lives today, and in retirement, or if they are retired their future.

Let’s explore the different ways parents can help their children obtain their own home.

SCENARIO ONE: One way some parents help is by purchasing the house themselves. They provide the down payment, they qualify for the mortgage, and they are the only ones on the title and mortgage. Their child moves in and the agreement is that at some point the parents will give the house to their son or daughter.

Typically, under this type of arrangement the child will make all, or some, of the payments for mortgage, taxes and insurance, either directly to lender, tax collector and insurance company. However, we have seen this situation where they do make the payments but pay their parents directly . If the latter the parents can then claim the payments as rent and then, if eligible, write off certain expenses. In this set-up, the parents essentially purchased an income property and rented to their child.

If the agreement is that the child will make the payments for the mortgage, taxes and insurance it is advisable for the parents to add the children to the title of the property. If it can be shown they have made those payments then they should be able to deduct the mortgage interest and property taxes (checking with tax professional first). In this scenario, the parents purchase the home, but essentially turn the home over to their child. In the future, by showing they have been making the payments and living in the property it will be easier for them to refinance in the future, should it be beneficial, and remove the parents from a mortgage obligation and obtain full title.

In this scenario, the consequences for the parents are that they are obligated on a mortgage and the tax liability of owning property. If there is some issue between the parents and kids and the children move out then the parents have to determine what to do with the house, sell it, rent it, make amends so the child moves back in. Having the children participate by making the housing payments to those owed directly creates more of an ownership mentality for them and makes it easier to transition the home later on. The risk here for the children is the parents still control the property and can sell it without the children’s consent—unless the children are on title.

In my opinion, this is the least desirable way to help your children obtain home ownership.

SCENARIO TWO: A more desirable way to assist your children in the purchase of their own home is to co-sign for them on their mortgage application. Most loan programs will allow family members to co-sign for mortgages for owner occupied purposes—what we call “non-occupant co-borrowers.” In this scenario, the child cannot qualify for the mortgage, usually because their debt-to-income ratio is too high. Depending on the parent’s total income and debt obligations, including their own housing payment, they may be able to co-sign for their child and enable loan qualifying. The parents would be on the mortgage and on title to the property.

The parents are still liable for the loan payment, as they are in Scenario One above, however the child is also responsible and have a lot more control over the situation than they do in Scenario One. Some parents are concerned, rightfully, how their being on the loan may impact their ability to get a loan in the future; most loan programs have a guideline for such a situation, known as “contingent liability.” If the parents can show the child has made the last twelve payments in a timely fashion then most mortgage programs will not count the payment for their qualifying.

In the future if it makes sense for the child to refinance then it is easier in this scenario than Scenario One as they are on title and on the loan so there is less to verify for the lender.

SCENARIO THREE: Show me the money! Or in this scenario, show your kids the money. As mentioned in the Weekly Rate & Market Update on March 1st, lack of funds for down payment is the primary reason most families wait to purchase a home. Many parents help their children purchase their homes by giving them the funds needed for down payment and/or closing costs. Many families have the income to qualify for a mortgage, but are short in the amount of cash they need. Enter Mom and Dad who can provide a gift for the funds required.

The process is simple, we only need three items for this scenario: proof of funds to gift, proof funds have transferred to the child, a gift letter signed by donor and recipient.

There are loan programs that allow for gift funds for all of the down payment and closing costs, some programs as low as 3.5% down, other five or ten percent.

If the resources are available this is the easiest scenario to enable parental assistance, and the one that has no long-term consequences other than not having those funds available for the parents own use in the future.

After some conversation, this was the route that Andy and his wife have taken to help their daughter and son in-law purchase their new home in Pennsylvania.

If you are considering helping your children with the purchase of their home in the future, or you are wanting to purchase a home but may need parental assistance, please call me so we can develop a strategy that works the best for everyone in the family and results in that homeownership.

Have a question? Ask me!

Fed says what? After spending part of 2017 and all of 2018 broadcasting they would very likely, extremely likely, raise their Federal Funds Rate three times in 2019. Over the past few months three rate increases became less likely based on the minutes from the Fed’s meetings and this week three increases become not likely at all and even one may not happen. This news was very interest rate friendly.

Existing home sales had their biggest one month increase nationally since 2015 in February. The National Association of Realtors reported today that nationwide sales of existing homes were up 11.8% from January, a huge jump for one month. Total sales were down 1.8% from last February per the report and the nationwide median price of $249,500 was up 3.8% from a year ago. The market is still being held back by lack of first time buyers, in recent history first timers have been about 40% of the market and last month only 32% of homes closed were first time buyers. Over all the news is slightly negative for mortgage rates as higher sales puts more demand on mortgages and shows signs of positive economic news.

Closer to home for most readers, data for California and Southern California was a bit mixed. Statewide total sales also eclipsed 11% for the month, with sales 11.3% higher than January, but down 5.6% from last February. The median price across the state dropped 0.6% for the month and showed a 2.2% increase over the past twelve months with a price of $534,140. The two biggest counties in Southern California showed no consistency between them. Median prices were down in both counties from January, with LA County down 4.3% and Orange County down 0.5%. LA’s median price of $541,390 was up 2.7% from last February, while Orange County’s $792,500 price was down 1.6% for the year. Total sales in Los Angeles Country dropped 2.5% from the prior month and 10.9% from 2018, while the OC saw total sales increase for the month by 1.0% but a sharp drop of 16.5% from last February.

What does this mean?  Year over year sales being down sharply in the region are obviously a concern for long term real estate activity, however prices are holding fairly well against the declining sales. With rates looking to stay low for some time the housing market, in my opinion, should move sideways with slight ups and downs neighborhood by neighborhood, city by city, county by county, for the year. Again, in my opinion.

Rates for Friday March 22, 2019: With the Federal Reserve news this week showing a lack of interest to raise interest rates in 2019 rates improved this week and we see the conforming rate drop for the third week in a row and the 30 year conforming rate dipping below 4% for the first time since the second week of January last year when it climbed to 4%. Time for a rate check? Call me.

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

30 year high-balance conforming                      4.00 %         Down 0.125%       

30 year conforming                                            3.875%        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.

College athletes in major sports are provided a scholarship that includes tuition, room, board and stipends for books and incidentals. The NCAA Men’s Basketball Tournament tipped off this week with teams from 68 colleges competing in a one-and-done contest to determine the national champion, also known as March Madness for the many games that are decided on the final shot and small schools knocking big schools out of the contest.

In 2016 the NCAA signed an eight year contract with some networks that will be worth $1.1 billion per year.

This year it is estimate that one-in-five Americans will participate in some type of pool or bracket challenge for the tournament. According to the American Gaming Association these pools will have about $4.6 billion in wagers on the line. Since the Supreme Court ruled that the it was unconstitutional for Congress to prohibit sports betting several states have passed laws allowing sports betting, as a result of all the new legal betting opportunities in around 25 states it is estimated that almost $4 billion will be bet on the games—40% more than on the Super Bowl in February.

Excluding ticket sales, merchandising and other revenue, the gambling and television revenues total almost $10 billion for the tournament which is held in ten days over three weeks.

But at least the players get a chance to go to college for free.

I have Duke beating North Carolina in the final game. Surprisingly, given the great history of both these teams and their intense rivalry, they have never met in the tournament.

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 we ready to buy?

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Question of the week:  Are we ready to buy?

Answer:  In the March 1st Weekly Rate & Market Update I covered the number one reason to the question, “Why didn’t you purchase a home sooner?” from the California Association of Realtors 2018 Home Buyer Survey. That reason was “Needed to save for a down payment,” and it came up as I answered the question, should potential home buyers wait to purchase their new home until they have a 20% down payment. Sidebar, I failed to put in the 3/1/19 WR&MU that that most home buyers save for 5 years for their purchase.

The number two reason respondents did not purchase their home sooner was “waiting for our financial situation to improve.” In other words, are ready, or in many cases feel ready, to buy.

My knee hurts. It has been hurting for a little while and I am finally tired of the pain so I make an appointment. I call the orthopedic doctor’s office and make an appointment for next Thursday at 8:00 so he can operate on my knee and fix it.

Wait. What?

That is how many families go about purchasing a home, they try to go right to surgery.

When they think they are ready the go to an open house, or meet with a real estate agent, find a home they like and write an offer. Are they able to qualify for their mortgage? Could they be looking at homes that are higher priced, bigger, in better neighborhoods? Should they be purchasing a home right now, or should they spend more time working on different factors that impact their ability to qualify for the home they want to buy?

 Working with families purchasing new homes my experience has shown three types of buyers:

  • Buyers who write offers, get an offer accepted, go look for a loan, discover if they can qualify for the purchase of the home or not
  • Buyers who meet with me, determine the sales price, loan amount and loan type for which they qualify, go write offers and purchase a home they can afford
  • Buyers who meet with me, have some issues that prevent them from qualifying for the home they would like to buy, work with me to resolve those issues, become able to qualify for the mortgage they need to purchase the home they would like to purchase, go write offers and purchase a home they can afford

The vast majority of clients we work with fall into the second category. We meet, determine qualifying home price and terms and they work with their real estate agent to purchase a home they like and can afford. Often these clients have spent time on their own getting ready to purchase a home, and we find that many of them could have purchased a home sooner, but they did not know they would be able to do so.

Many of our clients fall into the third category. They know they want to purchase a home in the future, but are not sure how long in the future or what they need to do so they can purchase a home in the future.

The first category of buyers we see from time to time, thankfully most real estate agents will require their clients get pre-qualified, or better yet pre-approved, before writing offers and certainly before accepting them if they are representing the seller.

When we pre-qualify a family for a home purchase, we are answering their question, “are we ready to buy.” For some the answer is, yes immediately. For others it is either yes but not for as high a price as you would like or not yet; if this is the case we show where they are deficient in the qualifying guidelines and put together a plan so they will be ready to buy.

What deficiencies might potential home buyers have?

Not surprisingly, while there are many factors that going into a loan approval the primary ones are about you and money; how much do you make, how much do you have, how much do you owe and how well you pay what you owe. For most home buyers one of these determines their maximum purchase price and loan amount. You make great income and have little to no debt, but the funds you have for down payment determine your price. You have a nice savings account and little to no debt but your income limits the amount of a mortgage you can qualify for to purchase. You have good income, nice savings but a lot of debt and high monthly payments on your credit cards which impacts your qualifying. Or, good income, nice savings, not a lot of debt but in the past you had some serious delinquencies that could impact your ability to obtain a mortgage.

Some of these issues are easier to solve than others depending on your financial situation. By working with a mortgage professional as soon as you decide you want to purchase a home in the not too distant future you can work on the area(s) that you need to improve to increase your ability to qualify. My definition of “not too distant future” is up to 24 months, and it is routine for us to work with clients for up to that amount of time before they purchase their new home.

My knee has been hurting. I go to my chiropractor and after a few sessions she tells me I need to see a physical therapist. I see the therapist and he says it appears it is something structural that therapy will not cure and tells me I need to see an orthopedist. I see the orthopedist, he orders and X-ray and an MRI which shows some damage. I can either continue to live with the paid or have a surgery that will fix the issue.

Am I ready for surgery? I know more about my situation now that I have met with professionals who have guided me through the process—a much better scenario than just scheduling a surgery and letting the doctor figure it out once I am on the table.  

Before you have surgery, or buy a home, get the proper advice and take the proper steps to ensure you are ready when the time is right.

Are you ready to buy? Maybe, maybe not but the only way to know is to call me to make an appointment so we can see where you stand today for qualifying to purchase a new home, and if necessary what you need to do so you are qualified sooner rather than later.

Have a question? Ask me!

Economic data slow to reach the public due to the government shutdown is being published as the analysts play catch up. One of these reports was retail sales for January, which increased 0.2% in January after the largest drop in monthly sales in decade to end 2018. Removing auto and gasoline sales and the increase was a somewhat robust increase of 1.2% for the month. The news was neutral for mortgage rates, higher consumer activity is generally negative for rates since that is 65-70% of our economy.

Inflation is not a concern. Both the core Consumer Price Index and core Producer Price Index saw very modest increases in February, both up 0.1% for the month and CPI up 2.1% year over year and PPI up 2.3% annually (the “core” index removes food and energy from the basket of goods used to calculate the price indices as they tend to be very volatile and can skew data). The target rate of inflation for the Federal Reserve, and therefore an indication of whether rates should go up or down for investors, is 2.0% and the economy is pretty much on the target. The news is slightly positive for mortgage rates as it removes a reason for the Fed to increase rates, or for investors to behave with the expectation of higher rates and therefore cause rates to increase.

Rates for Friday March 15, 2019: Rates hit a fourteen month low this week due to economic stability and no major news that could create market turbulence. The analysts and forecasters are reading the data, technical factors that include chart shapes, ranges and other factors and it appears we should be in a period somewhat stable rates for a few weeks, “should” being key word. Now is the time to take advantage of the lowest rates we have seen since last January when they started to rise.

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

30 year conforming                                            4.00        Down 0.125%

30 year high-balance conforming                    4.375%   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.

Everyone is Irish this week, because how many people do not like the opportunity to gather with friends and (or?) family and sip beer, eat good food, tell corny jokes and laugh? We’ll be spending part of the weekend with Leslie’s family for the annual gathering as March 17th happens to be our niece’s birthday, and as her maiden name is McCormick a gathering to tip a toast to St. Patrick in gratitude for ridding the homeland from snakes is appropriate. As well, her sister makes wonderful corn beef and husband Dave is a serviceable home bartender! Since my mother was a Kennedy and the “C” in my name is for Cleary after my great-grandfather I am partial to celebrations of the Irish bent I look forward to the annual birthday and St. Patrick’s festivities.

Wherever your St. Patrick’s Day weekend may take you I hope you spend it with those you love, those you like and those who make you laugh and that everyone returns to their homes safely.

Slainte!

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