Do's and Don'ts for Mortgage Borrowers

As rates have crept up, buyers are finding themselves in a position to borrow very close to the maximum amount the bank will qualify them. When rates were in the 2's and 3's I found many buyers were borrowing substantially less than the bank offered them. Now, not so much. When the buyer is at or near the maximum borrowing limit the underwriters in charge of approving the loan can get really picky and tight on any discrepancies or variances from the guidelines. Borrowers should not assume they qualify, nor should they assume they do not. Loans are complicated instruments and it is always worth sitting with a professional loan officer to find out if you qualify and what to do the get qualified.

Generally the base guidelines for conventional mortgage borrowing are as follows:

• PITI (Principle, Interest, Taxes, Insurance) is <36% of gross income 
• Total debt service is <43% of total gross income
• Credit report is clean, no derogatory entries in 24 months
• Stable provable income for two years without gaps
• Minimum 6 months on the current job 

These are guidelines and routinely borrowers are granted exceptions based on superior credit, low LTV (Loan to Value), or excellent reserve cash in the bank. Exceptions are often made for job time as well. For example a college engineering grad that takes a brand new job as an engineer can get a waiver on the time on job due credit for time in college so long as employment is verifiable as permanent. 

It is important to check with you mortgage professional who will look at your specific financial situation and give you far better advice than I can. I have seen 50% debt to income ratios approved. I have seen 50% PITI as well. It happens but it almost always happens when the borrower has other strong financial attributes. A low credit score will always make it difficult to get any exception from these guidelines. Being right up against the wall on multiple guidelines will also make it difficult to get an exception even if your credit score is sky high.

Buyers should avoid the following activity when buying a house:

• Opening new lines of credit
• Allowing credit balances to get larger
• Applying for credit lines of any kind
• Moving money around in bank accounts
• Making large cash deposits into personal accounts
• Closing credits lines unless advised to do so by lender
• Changing banks during the process
• Taking unpaid leave from job

Buyers should do the following:

• Leave the down payment money in the account untouched
• Continue making all debt payments on time as scheduled
• Contact your loan officer before making any financial move
• Immediately get documents requested by loan officer

Remember the closer you are to the maximums the harder it is to get exceptions. You will find that a bank making a mortgage loan of $200,000 on a $500,000 home with a borrower that has an 800 credit score, and $800,000 in the bank will be much more lenient than a 620 credit score borrower putting 3% down with a debt to income ratio of 50% and no money left in the bank after the loan closes. 

Buyers need to follow the loan officer's lead. Do not make assumptions, always ask the loan officer before making financial decisions. I have watched buyers lose their buying opportunity because they failed to heed the advice of the loan officer or failed to ask before making a financial move.

The most important thing to remember is this simple rule: He who has the money, makes the rules. They may not seem fair, but they are what they are and banks don't care about your feelings.

Market lacks sellers so buyers still compete for homes

Last month in SW Washington which for the local MLS is all of Clark, Skamania, and the Woodland area in Cowlitz. Closed sales were again light in volume and the bulk of the activity remains at the entry level. Median is holding firm around $500,000 just nudging up a tad this year so far. 

Inventory is the real story. We are very tight and some people feel like everything is slowing down and it kind of did since there was a point a little over a year ago were inventory was measured in DAYS, rather than months. But a neutral market is generally considered to be 5-6 months of inventory so 1.9 is still a hot seller's market.

The inventory has been ever so slowly creeping up but at the pace we have seen 5 months of Inventory would take two years. The spring selling season is knocking at the door. How the activity pans out in April and May as far as new listings will play a pivotal role in determining whether we remain locked in a tight market or whether buyers start to gain a little leverage.

I have said several times over the last year or so, this is not a tight market because we have a lot of buyers, it is a supply side problem of low inventory. Think of it this way if 100,000 buyers are competing for 300,000 properties that's a lot of buyers and ultimately a lot of transactions but buyers would have the upper hand. But if 100 buyers are competing for 10 properties... you get the drift right. There wouldn't be a lot of sales but the sellers would rule the roost.

I hear a lot of agents complain how "slow" the market is but in reality there are just too many agent vying for too few listings. From he buyers perspective it feels like a huge mass of competing buyers are snatching up all the houses and outbidding them. But it is really just an average number of buyers competing for a very low number of available properties.

Keep you eyes open as we stroll into springtime, perhaps sellers are ready to list and make that up move or downsize.

  

 

Multiple offers are not gone!

Although the market is a little less wild and crazy than it was 18 months ago, the multiple offer scenarios are not gone. Houses priced at or below the median and reasonably priced are in fact seeing multiple offers and bidding up. I just called an agent about a pending property I am using as a comp for another property. She had it listed at a very competitive price and I was curious about the offers. She had seven offers and several were well above asking. 

The median price has ticked down over the last several months, but I have mentioned this multiple times, and I'll do it again now, higher end properties are not selling as much as they were last year. More sales right ow are happening in the entry level market. That is lowering the median price despite the fact that actual prices are still rising, just at a slower pace that we have seen in recent years. 

2023 is shaping up to be a decent market. Inventory is tight and there are not enough sellers to go around, so buyers will remain in the hot seat for the time being. Sellers should remain cautiously optimistic and buyers should be very optimistic as things have at least calmed down a bit.

I have seen this pattern many times before. Right now is a great time for a buyer to make a move up. If you have a 3 bed 2 bath home priced around the median of $500,000 or less, you will sell fast and for top dollar. Then make the move up to a larger more expensive house where the market is not quite as crazy. Sellers int he mid-tier are more likely to work with a contingent buyer.

Don't worry about rates, if they go down later you can refinance if they go up later you stay put. Some buyers a parked in a loan with a low rate say less than 4% if you are one of these buyers, are you prepared to stay in that same house for the rest of your life? You have to ask yourself that question, because the 3's we saw were ALL TIME LOWS, we may never see that again. What we could see however is even higher rates later on and that could force you to stay in that same house. These 6.5%-7.5% rates are pretty "normal" when you look at the 50 year average.

If you are ready to make that move up, then now is the time.  

Is the Market still Hot?

The news media, the doomsayers, and other miscellaneous talking heads have declared the real estate market as terminally ill with rising interest rates. Hmm, all because rates are now at the 50 year average. Not above average, not the soaring double digit nightmare that was the late 1970s and early 1980s. No we're are 'plagued' with average interest rates. I'm sorry friends, 7% mortgage rates will not tank a real estate market. This slight slowdown in units sold is a typical adjustment period after coming off a long period of low rates, in fact the lowest mortgage rates in the history of 30 year loans. 

When you look at the historical housing market you see it has had a few bumps in the road over a 50 year history of going up, up, and up. You juxtapose that with the 50 year mortgage rates chart which shifts position more than a politician in a purple state. You see that this "crisis" is completely manufactured. The media and notably other organizations that have something to gain from negative news about real estate, may be behind it.

The real estate market is only temporarily slowed by changes in the interest rates. The demand for housing never goes away, increasing rates can make it difficult for some buyers and that can slow things down for a short while, but banks will always find a way to make loans, and people will always find a way to buy homes. Historically we have only had two major downturns in the last 100 years and they were 1929-1941 and 2008-2012. Every other "downturn" has been short lived and in the grand scheme of things, insignificant. 

Is it a good time to buy or sell real estate. Yes friends it is a good time. Real estate has always been and will likely always be an excellent long term investment. There is no 'day trading' real estate. The transactions are slow and expensive. It is a long term investment. Buyers and sellers need to stop thinking short term. If you plan on living in a house for less than 2 years, generally it's better to rent or buy a house and rent it out when you need to leave. Even during the Great Depression of 1929-1941 real estate was a good long term investment. Why do I say that when prices were declining or flat through most of that period? Because the home still provides you with its essential function of shelter for you and your family.

In my 2010 book, "Don't Panic" I have an entire chapter dedicated to dispelling the notion that your primary residence is an investment property. If it is an investment property you should be renting out any extra rooms you have to maximize that investment and increase your rate of return. But most people don't. Why not? Because it is their home, safe haven, shelter from the elements, a basic human need. That's why. Owning that shelter is better than renting it from a third party in 99% of life's scenarios.

As for the market, locally we are sitting on a 2 month supply of houses. With 4-6 months being average, we are in fact still hot. Yeah, it's a good time friends.