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

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

 

Answer:  A lot or not at all.

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

Have a question? Ask me!

 

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

 

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

 

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

30 year conforming                                            4.375%            Flat

30 year high-balance conforming                      4.500%             Flat

 

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

 

 

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

 

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

 

Have a great week,

 

Dennis

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

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

 

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

 

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

 

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

 

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

 

Why?

 

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

 

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

 

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

 

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

 

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

 

 

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

 

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

 

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

 

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

 

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

 

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

 

Have a question? Ask me!

 

 

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

 

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

 

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

 

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

30 year conforming                                            4.375%            Flat

30 year high-balance conforming                      4.500%             Down 0.125%

 

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

 

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

 

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

 

Have a great week,

 

Dennis

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

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

 

Have a question? Ask me!

 

 

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

 

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

 

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

 

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

 

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

 

 

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

30 year conforming                                            4.375%            Flat

30 year high-balance conforming                      4.625%             Flat

 

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

 

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

 

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

 

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

 

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

 

Have a great week,

 

Dennis

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

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

Have a question? Ask me!

 

 

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

 

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

30 year conforming                                            4.50%                         Up 0.125%

30 year high-balance conforming                      4.625%             Down 0.125%

 

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

 

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

 

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

 

Have a great week,

 

Dennis

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

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

 

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

 

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

 

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

 

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

 

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

 

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

 

What is not income?

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

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

 

 

Have a question? Ask me!

 

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

 

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

 

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

 

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

30 year conforming                                            4.375%      Flat

30 year high-balance conforming                      4.75%        Up 0.125%

 

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

 

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

 

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

 

Have a great week,

 

Dennis

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

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

 

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

 

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

 

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

 

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

 

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

 

What is your loan balance?

 

What is the current fixed interest rate on the loan?

 

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

 

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

 

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

 

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

 

 

Have a question? Ask me!

 

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

 

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

 

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

 

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

 

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

 

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

 

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

30 year conforming                                            4.375%     Down 0.125%

30 year high-balance conforming                      4.625%      Down 0.125%

 

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

 

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

 

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

 

Have a great week,

 

Dennis

5-18-18: Should I change my insurance company when buying a home?

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Question of the week: Should I change my insurance company for my cars when I get my homeowners insurance?

 

Answer: It depends, are you using a different insurance company for your home than for your cars?

 

When buying a new home with a mortgage, or refinancing your existing mortgage, you will need to

provide proof of insurance to the lender showing sufficient coverage to protect the lender’s interest

in the collateral, i.e. your home. This is a good opportunity to do an insurance check-up, is the

insurance you currently have the combination of best protection and value?

 

When getting an insurance quote for homeowner’s coverage I strongly encourage you to have

whoever is providing the quote to also provide a quote including auto coverage and any other

policies you may have. Typically, the more policies you have with a company the better pricing you

will get as they bundle products and offer discounts. Asking for just a homeowner’s quote may be

leaving a discount on the table.

 

As for splitting your coverage between different carriers, I do not recommend it for several

reasons. First, when there are split policies I find the auto coverage is generally with a “discount”

carrier that sells low premiums but do not go into details on the coverage as it is usually the most

basic coverage needed. If you are in an accident will your discount policy cover medical costs, is

so how much? What about replacement parts, new or used/refurbished? Liability protection just

the minimum leaving you exposed to higher costs if they exceed your coverage? Second, if you

bundle your coverages you may find the cost difference for your total insurance costs are not that

different, and if you are with a major carrier will often have more robust coverage and protection.

 

A third reason came up recently in a conversation with friend Marilyn, who is a real estate agent.

She came across a property that had a significant fire, making the home uninhabitable until

repaired, that had been vacant for some time. She made some inquiries and learned that the fire

had started in the garage and there was some dispute as to the cause and that the car may have

been the cause. The property owner had one insurer for the car and another for the home. The

two insurance companies were in dispute as to which policy should cover the damage and as a

result the property owner was without reimbursement for damages or funds for reconstruction. He

had to move out of the property, still needs to make payments for his mortgage, taxes and

homeowners premium. The dispute can go on for several more months, causing significant

financial harm to the insured homeowner. Had he used the same company for both home and auto

the claim would have been processed not long after the fire and he would be able to move forward

with reconstruction to make the property habitable.

 

We find a lot of our clients are very loyal to their insurance companies. We certainly appreciate

loyalty; however, it is not a bad idea to check occasionally to see if your loyalty is being rewarded

compared to the marketplace. There are some insurers in the market that when we see our clients

using them we strongly encourage them to make a few calls to compare rates and coverage as we

know these companies are generally amongst the highest in the area for home, and generally

auto/bundled, coverage. However, we are also often told by the client they will stick with their

current carrier because they have been with them for so long.

 

Insurance quotes are free, so if you are having to change your homeowner’s policy because of a

refinance, or because you are purchasing a new home, that is a great reason to get a few

coverage quotes and see if a change in insurer is a good move for you and your family.

If you currently have different insurers for your home and autos I encourage you to spend some

time to explore having all your coverage with the same company.

 

Have a question? Ask me!

 

Perhaps reflecting the increase in mortgage rates, local housing markets showed a bit of

slowing in April. According to data released by the California Association of realtors Los Angeles

County the median home price declined 0.1% from March ($528,550 from $528,980) with 2.9%

more units sold in April from the prior month. Year over year the number of sales are flat, up

0.1%; however, the median price is up 10.1% from a year ago.* In neighboring Orange County

the April median price dropped 0.8% below March’s (from $824,450 to April’s median of

$818,000). The OC also had an increase in units sold from March, up 1.9%. Year to year the

median price is up 5.5% and the number of units is up 1.1%. A slow-down in housing, or slower

growth in the market, is generally interest rate friendly as it reflects a balance coming to the

market between supply, number of houses on the market, and demand, number of buyers writing

offers.

 

To address the asterisk. Last April the median price in Los Angeles County was $480,500 and

the 30 year fixed rate mortgage with 20% down to purchase the median home was 3.875%; today

the median price is $528,550 and the rate is 4.625%. The difference by waiting one year to

purchase the median home is $9,610 in down payment and $366 per month in your mortgage

payment. As well, there is the loss of $48,000 in gross equity from the price change.

 

Begs the question, are we at the top of the market? In a discussion this morning with real estate

agent Julaine, we both feel that with the lack of inventory on the market prices still have upward

pressure as demand still exceeds demand. What may slow down price increases is the sharp

increase in mortgage rates thus far in 2018. Not “slow down” not “cause decline.”

 

Rates for Friday May 18, 2018: Today was the best day this week for mortgage rates with

bonds rallying causing a drop from yesterday. Had we not seen the rally today rates would be

even higher as rates spiked earlier in the week. The primary cause for the rate increases has been

the over supply of bonds in the long-term rate markets as the Federal Reserve sells off its

inventory of U.S. Treasury debt and mortgage holdings. This sell-off was announced last year and

at the time we indicated it would cause rates to increase so the increase in this period is not a

surprise. The Fed will continue its unwinding through the year so there is more expectations for

higher rates than lower rates. Lock your rate as soon as you can.

 

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

 

30 year conforming                             4.625%            Up 0.125%

30 year high-balance conforming        4.875%            Up 0.25%

Please note that these are base rates and adjustments may be added for condominiums, refinances, credit scores, loan

to value, no impound account and period rate is locked. Rates are based on 20% down with 740 FICO score for purchase

mortgages.

 

Anyone staying up/waking up for the Royal Wedding? My sister, who generally goes to bed earlier

than I do-and I am not a night person-said she is staying up to watch. I asked why since everyone

has a DVR today and you can watch in the morning with your coffee and toast. She said, “you

don’t get it.” Nope, I don’t. The last, and perhaps only, British Royal event I watched live was

Princess Diane’s funeral, and that was because I was laid up with a bad back.

For those who like the Royal events I hope you enjoy the wedding, and may Prince Harry and

Princess Meghan have many happy years together and are able to manage the British tabloid

press.

 

Have a great week,

 

Dennis

5-11-18: Should I use funds from my 401(k) to buy my new home?

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Question of the week:  Should I use funds from my 401(k) to buy my new home?

 

Answer: This is a great question that has come up a few times recently as home prices continue to climb and for many families down payment is a barrier to home ownership.

 

“Should” is the key word, and as with most of our questions of the week the answer varies from person to person, family to family.

 

Before we answer “should,” let’s answer “can.”

 

If you have a 401(k) retirement account through your employer it has several rules, regulations and policies as to how the your account must be handled, including access to funds. Since the money was put into the account before taxes, all the money in your account has accumulated with no taxes being paid. Therefore when the money does come out of the account it will probably be taxed, unless the money is borrowed to be repaid and you do not violate any of the rules and policies of either the plan or the IRS.

 

Most 401(k) plans allow loans to participants for hardship, medical or education costs and the purchase of a primary residence. Note, “most,” so your plan may not allow loans. One of the provisions of any 401(k) loan is that if it is not repaid on time you will be subject to taxes, and penalties if you are under 59 ½ years of age.

 

Assuming your plan allows you to borrow money for the purchase of your home, here is how it usually works.

 

The maximum amount allowed to be borrowed is either $50,000 or 50% of your 401(k) balance, whichever is less.

 

You must repay the loan with interest that is paid to yourself, at a rate that is set by your 401(k) policy, typically Prime + X. So if your plan has the interest on the loan is Prime + 1 today your rate would be 4.75% + 1 = 5.75%.

 

The term of repayment varies from plan to plan, most plans have a maximum repayment period of five years, with exceptions for home loans that can be up to ten year amortization periods.

 

Your repayment is made via your paycheck with after tax dollars. You can, and should, continue to make 401(k) contributions during your repayment period.

 

If your employment terminates and there is a balance due on the loan you either need to repay the balance or face tax consequences on the unpaid balance. For instance, you are offered a job with another company that is a fantastic opportunity, but you have a $6500 balance due on your 401(k) loan. Your options are to leave the company and roll the 401(k) into another account, either the 401(k) with your new employer if they allow it, or into a rollover IRA, without repaying the loan. In this case the $6500 will be taxable and if you are under 59 ½ you will have a penalty. Or, you can contact the plan administrator, find out who and how to make out a check and pay off the loan, and then transfer the account. Most plans allow you 60-90 days to make arrangements for your employer sponsored retirement account.

 

The funds for your loan are taken from the funds, or investments, within your 401(k) at your direction. You are borrowing $25,000 for the purchase of your new home, and you have your 401(k) invested in four different mutual funds and company stock. You direct your administrator to take $5000 from each of the funds and the stock account to fund your loan. As you repay the loan most plans allow you to direct the payments back into the funds from which they were taken in the same proportion to which they were liquidated, so your account allocation will still be the same as before the loan was funded.

 

Now that we know the “how,” let’s look at the “should.”

 

There are many that argue against borrowing from your 401(k) for any reason, and there are many that argue it is not a bad idea, and in fact can be a good idea. For disclosure purposes, I purchased my first home by borrowing $7500 from my 401(k) for the down payment. It was one of the best financial decisions I ever made.

 

One argument, and perhaps the one made most frequently, against borrowing the money is that you lose the growth opportunity of those funds invested in the market and growing tax free. This is true, if you take $25,000 from your 401(k) those funds are not subject to any market growth or dividend reinvestment while they being repaid; this also means that the funds are not subject to any declines in market value while they are outstanding. Lost in this argument is the interest you will be repaying yourself. If the interest rate you are paying is equal to or greater than market performance plus and dividends then there is no net loss to your account during the period. If the market grows at a significantly greater rate than your interest rate on the loan then your opportunity costs are the gains in your investments less the percentage you are paying.

 

Also lost in this argument is the accumulation of equity in the home you are purchasing during the period to loan is outstanding. So the true cost, or benefit of the transaction is the difference between the gain in value of the funds in your 401(k) less the combined gain in market value of your home plus the rate of interest on your 401(k) loan. As an example, the $7500 I borrowed to purchase my first home resulted in substantial equity growth that we then used to purchase our current home—the $7500 invest in 1994 is worth considerably more today than the growth of $7500 in the market during the time period.

 

Another argument against borrowing against your retirement account to purchase a home is that you are hurting your retirement. This may be true depending on your age and how long until you retire, how much you borrow, whether you are able to repay the loan before retirement to avoid a large tax liability, and what is the status of the home you purchase. If you are young, working for a long time and are able to repay the loan with plenty of time until your retirement and your home value rises then you are not worse off, in fact may be better off, by purchasing your home by leveraging your retirement account.

 

Bill and Sue are in their late 30’s, have been unable to purchase a home as they do not have enough money saved for down payment and closing costs. They each borrow $25,000 from their 401(k)’s and purchase a $500,000 with 10% down payment. They are able to repay their respective loans in five years. In twenty years when both kids are out of college they are getting close to retirement. Their home is not paid off, they took out some equity for college costs, but they have a lot of equity.  They plan on retiring in about five to ten years and looking at their home value, and costs for homes near where both their kids are living, discover they will probably be able to sell their home and purchase their retirement home without needing a mortgage. They enter retirement with no housing cost—typically the primary cost in retirement—except property taxes and insurance, and retirement accounts that have grown during their years of employment.

 

Some of the advantages of 401(k) loans used to purchase homes. There are usually no transactions costs, perhaps a $25 processing fee. Most loan programs do not count a 401(k) loan repayment against you for qualifying purposes. There is no qualification process for the funds, as long as you have the money in your account and the plan allows it you can borrow it. Funds are usually available within two weeks or less of your reqest.

 

Should you borrow from your 401(k) to purchase your new home? Maybe. Give me a call to discuss your situation and I can help you make that determination.

 

Have a question? Ask me!

 

Inflation concerns are a bit abated with the Producer and Consumer Price Index data from April, both of which were lower than expectations. On the wholesale side PPI showed 0.1% growth in the month and is up 2.6% year over year. For consumers the CPI was up 0.2% for the month and 2.5% for year. With the tame inflation data for April, investors’ concerns about inflation forcing rates up are dampened and the data announcements had no impact on rates.

 

Rates for Friday May 11, 2018:  Week to week we are flat once again, three Fridays in a row with the same rate shows some rate stability and what is probably the new “normal” for mortgage rates.

 

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

30 year conforming                                            4.50%       Flat

30 year high-balance conforming                      4.75%       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.

 

Spoil the moms! Your own, your children’s, your neighbor’s, your brother in-law’s, spoil them all this weekend. And remember what my mom always said, “every day should be mother’s day, not just one day a year…”

 

Have a great week,

 

Dennis

5-4-18: Do I need to get re-pre-qualified?

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Question of the week:  Do I need to get re-pre-qualified?

 

Answer: Probably.

 

As you can see from the chart below rates for 30 year fixed rate mortgages are about three-quarters of one percent (0.75%) higher than they were in January.

In real numbers, on a $400,000 mortgage that is a difference of about $175 more per month. Depending on several factors, with the increase in the rate you may not qualify for the same price today you did in January.

 

Let’s assume that you were pre-approved for the purchase of a $500,000 home with 20% down and a $400,000 30-year fixed rate mortgage in January. Your credit obligations are about 10% of your gross income. When we pre-approved you in January your income was about $6500 and you were at the maximum debt-to-income ratios will all factors considered (cash reserves, credit score, etc). If there are no other changes to your financial situation for the same purchase of a $500,000 home with 20% down you will need to earn $500 more per month to qualify.

 

If your income is the same, then you either need to pay down your debt so your monthly payments drop $175 per month, or lower your sales price and loan amount. Using the same $100,000 down your new sales price would be $470,000, a drop of $30,000 in purchase price due to the increase in rates.

 

As the prices and loan amounts go higher, so do the differentials in monthly payment with the rate increase, for a $500,000 loan the difference is about $255 more per month today than January.

 

For those who have been waiting for prices to come down before entering the real estate market you are losing more purchasing power with rate increases than you may be looking at whenever any market correction may occur. Take the example above, with a decrease of $30,000 in purchasing power the borrower has lost 6% in value from what s/he could have purchased in January.

 

If you have been pre-approved to purchase a new home longer than three to four weeks ago I strongly suggest you have your information updated so you know what you are qualified to purchase. If you are a real estate agent, I strongly suggest any pre-approval you receive has current rates and “fresh” qualification information—they potential buyer may have been qualified in February, but may not be qualified today to purchase your listing.

 

To go through your options for purchasing a new home, please contact me so we can run through your options.

 

 

Have a question? Ask me!

 

First week of the month economic data is always interesting. On Monday we learned that personal incomes rose a modest 0.3% in March, which was outpaced by consumer spending which was 0.4% higher in March than February. With the increase in spending above income the savings rate declined slightly for the month to 3.1%. The eye grabbing news for investors in the report is that the core inflation rate year-over-year for March was 1.9%, nudging up against the Fed’s 2.0% target rate. Overall the news was somewhat mortgage rate unfriendly, while the increases are somewhat subdued; they are nonetheless reflective of continued growth in the economy and employment.

 

Taking into consideration the inflation rate, on Wednesday the Federal Reserve released its minutes from it meetings this week. The Fed’s expectation for inflation was a high of 1.9% for the year, again just below its target rate of 2.0%. With prices hitting their expected high in the first quarter there is concern from Fed members that they may need to make some unannounced, or expected, rate increases this year. At this point it appears there will be another hike of 0.25% in June, but if inflation speeds up we should expect more rate increases as the Fed tries to keep ahead of prices and not have to chase inflation. The meeting notes were somewhat concerning to investors and puts upward pressure on rates.

 

April employment showed continued growth at a solid pace. Payroll growth was within the range of expectations;164,000 new jobs over all of which 168,000 were in the private sector. Hourly earnings were up a scant 0.1% from March and are up 2.6% year over year. The headline number is the unemployment rate dropping below 4% to 3.9% for the month. The news shows growth in employment, a bit mild but still solid, and that is negative for mortgage rates.

 

Rates for Friday May 4, 2018: An opportunity to catch our breath with rates flat from last Friday after a few consecutive weeks of rates increasing. The expectation is not for rates to drop, if they do it will either be very temporary or as result of some major negative event. What we are looking for is the top of the range. Rates, like stock prices, generally stay within a range for a period of time before breaking out, up or down, and establishing a new range. With rates increasing one-quarter of one percent (0.25%) in two weeks we are looking for when the increases will stop and rates remain within a range week-to-week. Perhaps we have found a new range, but we won’t know until at least two more weeks. Lock your rate when you can!

 

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

30 year conforming                                            4.49%       Flat

30 year high-balance conforming                      4.75%        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.

 

Star Wars fan? Me not so much. I enjoy the movies, but am not a big fan or follower. For instance, I got really confused when they started the making movies that were decades beyond the release of the first one and then called it Episode 1. I have no knowledge of the characters beyond the originals, the hairy thing, the beep-boop robot and the others, but understand others are very much into the whole genre. And to them I, somewhat reluctantly, say May the Fourth be with you!

 

Have a great week,

 

Dennis

4-27-18: Should I buy the home I rent?

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Question of the week:  Should I buy the home I rent?

 

Answer: This question has a reverse side as well, “Should I sell my rental property to the tenant?”

 

I have a client who contacted me the other day about wanting to sell a home she rents out because the tenant has given notice. She is nearing the end of the time frame of living in a home two out of prior five years to avoid capital gains and the time is perfect. I asked if she contacted the tenant about purchasing the home, however the tenant is giving notice because they had already entered a contract—otherwise did not think of asking to buy the home or they would have.

 

This was a missed opportunity for both parties. When they decided they wanted to own their own home the tenant should have informed the landlord, who gladly would have worked with them to see if the right price and terms could be found, saving each party a lot of time and expenses.

 

What are the opportunities for the landlord and tenant in having the tenant purchase their rental home from their landlord?

 

From the landlord side, there are several advantages to selling to your tenant.

 

For most landlords selling their rental property the status of the tenant is a primary factor in how the process will proceed. If it is a single-family residence then the buyer will almost always be looking to owner occupy the property, so the property needs to be vacant.

 

Typically, the dwelling should be vacant during the marketing period to maximize the ability to show the property to the most buyers and encourage offers. If you have a long-term lease with the tenant you will need to wait until the lease is nearing termination and provide notice that the lease will not be renewed and the tenant must vacate. If the lease is month-to-month you will need to give the tenant a 30 day notice to vacate. Depending on your tenant at this point it can get sticky if your tenant decides to not vacate on time. In California, the tenant has significant rights to delay vacating the property and can prolong any eviction process for a very long time. Several times over the years I have witnessed landlords paying tenants to vacate properties to get the process over and property vacant for sale or closing.

 

If you tenant is cooperative and does vacate the property you will continue to have costs, mortgage, taxes, insurance, maintenance, until you close escrow with a buyer, without receiving any rent. Depending on many factors you could have a vacant, non-revenue producing property for two, three, four or more months.

 

Speaking of maintenance, when selling to the tenant there may be some repair work requested by the tenant-buyer following a home inspection, however there will not be the costs of preparing the home for showing. No landscaping for curb appeal, refreshing flooring, painting, or other touch-ups most sellers go through before marketing their home to try to maximize value.

When selling to your tenant you have a bit more control of the escrow period, which can be especially important if your intention is to purchase a new rental property, rolling over your proceeds in what is known as a 1031 Exchange to postpone capital gains taxes. When participating in a 1031 Exchange there are time frames to identify your “up-leg” and close on that transaction, if you miss them then your gains from the sale of the property are subject to capital gains. If your sale is an open market sale with two or three other transactions that you have little to no control over it is more difficult to extend the closing date of the sale of your rental property if you need more time to find and close on your up-leg.

 

Your costs of sale can be significantly lower selling to your tenant than going on the open market. You can have more control over timing of the transaction. If you are considering selling your rental property it is advisable you contact the tenant to see if they are willing and able to purchase the home.

 

From the tenant’s perspective purchasing the home you have been renting also has several advantages to going to the open market.

 

One big plus is you do not have to pack, move and unpack. You will not have the added expenses that occur when you move, new shower curtains, dustbins, pieces of furniture, lamps, fixtures, etc. Of course, now that the home is yours you may want to make some changes, however we have found most tenants who purchase their rental home make fewer changes and spend less than those who move into a new home.

 

Familiarity is another major benefit. If you like your neighbors and neighborhood you become a homeowner and still go to the same store for groceries, walk to your local coffee shop to meet friends, go to the same schools for your kids and the same dog park with Phideau.

 

Utilities, seemingly a small thing, but no getting set up with gas, electrical, cable. Dealing with timing to meet vendors or pay deposits.

 

Not every home is perfect, even if you purchase a newly constructed home there can be, and usually are, some issues. Purchasing the home you have lived in for a while you already know the quirks and issues, some of which your landlord may be willing to fix as part of the transaction.

 

A major plus, does not always happens but usually does, is the tenant-discount. Because the landlord does not have to have the property vacant, require your cooperation to show the property if on the market while you are still living there, nor spend the funds to get it “market-ready,” we typically see some discount to market for the tenant-buyer. Some landlords have refused to offer any discount and see their tenants leave the property instead of purchasing the home and the landlord later regrets trying to maximize price instead of maximizing combination of total costs and efficiency of the sale.

 

One more consideration both tenants and landlords should consider, rent control. In more and more cities throughout the state, and at the state level, the rent control movement has been gaining momentum. I will not use this space to present the case that rent control does the exact opposite of what it is intended to do, however it is something to consider if you are a tenant or landlord.

 

From the landlord side, if you have owned a single family home as a rental in an area that appears somewhat likely to be under rent control you will want to consider all options for the future. This includes the option of selling the property, getting out of the landlord business and paying your taxes, or selling the property and going through a 1031 Exchange to purchase a rental property in an area where there is less of a chance that rent control will be enacted. If the option that appeals to you most is selling the property, contact your tenant. If the tenant does want to, or cannot, buy the property then start the process of putting the home on the market.

 

From the tenant side, if rent control goes into effect your options down the road become somewhat restricted as there will likely be fewer units on the market for you to rent when the time comes and the rent you will be paying will likely be significantly higher. If you are in an area where rent control appears to be likely and you have been thinking about purchasing a home in the somewhat near future, say one to two years, then consider moving up that time frame. Call a mortgage professional (I would be an appropriate call…) to get pre-qualified and determine your purchasing power. I can also provide a ballpark price range for the home and if there is a near match and you like the home you have been renting then contact the landlord and make an offer. If the landlord does not want to sell then you know your price and we can hit the open market to see what is available.

 

If you are in a residential rental relationship, as landlord or tenant, and are considering severing that relationship by selling or buying please contact me and I can assist you with options and other professionals who can assist you.

 

Have a question? Ask me!

 

Not great but very good. That was the news this morning from the Commerce Department when it released its first estimate of GDP growth for the first quarter of 2018. The estimate showed economic growth of 2.3%, below the 2.9% growth for the final three months of 2017 but higher than the 2.0% estimate many expected. Part of the slower growth was a slowdown in durable goods purchases, namely vehicles, perhaps a hangover from the huge amount sold post hurricane season in Texas and Florida. By beating expectations the news is slightly mortgage rate unfriendly.

 

Costs going up. The cost of employing the average worker climbed the fastest in a decade in the first quarter, increasing 0.8%. Add to this extremely low unemployment, layoffs near a five decade low and some scarcity in qualified labor and the expectation is for wage inflation to start to impact prices for consumers. This is not friendly news for mortgage rates as higher costs and inflation lead to higher interest rates.

 

Rates for Friday April 27, 2018: The benchmark 10-year Treasury note broke through the 3% mark for the first time since December 2013, in doing so dragged other fixed rates on bonds and mortgages up as well. With very strong employment markets and solid economic growth, what looks like peace potentially breaking out on the Korean Peninsula, there is nothing currently on the horizon to cause rates to drop. We see rates climb again this week from last Friday and it is apparent we have broken out of the prior range; now the question is when will rates level out? We could see rates increase another one-quarter of one-percent before this happens.

 

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

30 year conforming                                            4.49%       Up 0.115%

30 year high-balance conforming                      4.75%        Up 0.125%

 

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

 

Pretty remarkable footage of South Korean President Moon Jae-in and North Korean leader Kim Jong Un meeting at their border today and shaking hands. This is historic and appears to heading to being this generation’s version of the Berlin Wall being torn down. There is historic correlation between the Berlin Wall and the separation of Korea.

 

Korea had been ruled by the Japanese since the 1910’s when it invaded and occupied the county. North Korea and South Korea were created in 1945 as part of the treaties ending World War II, with the Japanese removed from the peninsula and Russia and the United States occupying the peninsula, Russia the northern part and the United States the southern part—the dividing line the infamous 38th parallel. This was the same manner in which Germany, and Berlin, were divided after the war with the exception that France and England joined in those divisions.

 

In 1950 the North Korean Army sent troops over the 38th parallel and the Korean War began. The armed conflict ended in 1953 when an armistice was signed by the representatives from the United Nations, North Korea and the People’s Republic of China. The armistice has been in effect these past 65 years but no peace treaty has ever been signed between the two countries, meaning they have continued to technically be at war.

 

The world watches and hopes that the Korean leaders are able to walk the path to peace and put an end to the tensions and potential for more armed conflict.

 

Have a great week,

 

Dennis