Interest Rates Rising, But Still Relatively Low

I have discussed interest rates often as they tend to be a critical element in the real estate market. For younger buyers these higher rates may seem "high" but in reality our rates still remain well below the established 50 year average. A while back I published some charts and graphs showing the plight of rates over the last 50 years.

Today I have returned with more data from Freddie Mac and when we look at the broad picture and compare it to the recent data the rates we have right now are still super low. We had a fairly long period with rates that were at or near all time lows dating all the way back to before WWII. These super low rates were largely produced with subsidies from the federal government. The feds were buying up mortgages to keep the housing market from completely imploding after the severe beating it took in 2009-11.

The real issue is that our economy over the last 15 years has been much more fragile than previous economic cycles. Our national government continues to pile on debt and now it is beginning to become a heavy anchor on the economy. Despite seeing robust growth in the economy, the low rates are a major reason we have the growth. As rates return to "normal" the economy will start to drag again. I am not predicting a recession per se, but interest rates this low are generally not healthy for the financial sector over the long term.

As for housing, we have seen hot real estate markets with 30 year fixed rates in the 7s. The problem right now, especially in high cost markets like the Northeastern US and the West Coast is that many buyers are priced out when rates go up. In more affordable markets rates can continue to rise and buyers will still be able to buy. 

Home ownership is still one of the best ways that a middle income earner can build wealth. With rates low, that wealth builds faster. Equity is gained more quickly with lower rates than with higher rates because mortgages are amortized and the lower rates mean more principle is applied with each payment.

The media does not always present the facts in their entirety and home affordability has many variables. income, interest rates, housing prices are major players and all of them need to be accounted when determining affordability. In 1971 the median household income in the US was $10,383 average Freddie Mac mortgage rate of 7.3%, and median home price of $24,500. In 2016 the numbers looked like this: $83,143 median income, 3.75% mortgage rate, $213,700 median home price. The median home cost 2.36 times annual income in 1971 versus 2016 where it was 2.57 times annual income. Housing prices has outpaced income growth but not by the huge margins many people think. When we apply the interest rates however actual cost of ownership is lower today than it was back in 1971. Assuming zero down, the payment on the median home in 1971 at the average rate was, $168 a month against an monthly income of $865 for a principle and interest housing payment of 19.4% of gross income. 2016 median principle and interest payment of $990 against month gross income of $6,929 yields 14.3%. The median home is cheaper today than it was in 1971 because rates are low. These are national averages and generalizations, of course, but it is important to keep in mind that now is still a great time to buy a house. Someday we may look back at the last few years as the "good 'ole days".

Any rate under 6.5% is still, historically speaking, a low rate. Our government needs to stop overspending and that seems to be something that everyone agrees on yet regardless of which political party is in power, the feds can't seem to stop spending more than they take in.

Since 2010 mortgage rates have been volatile but have never gotten very high. Average Freddie Mac par rates have not been above 5% since 2010. Remember that par rates are based on top tier credit and no cash rebates from lender. Right now, Freddie has the national average rates at 4.86% but this is for a strong borrower with no rebate. Rebate is a term to describe a payment the mortgage investor pays back to the borrower used towards the closing costs. Typically rates paid by a buyer is a little higher than these published figures. So as rates have crept up all year, they are still lower than they were in 2010 and well below the established average since 1971 which is roughly 7%.

That stated, rates are sitting at around 5ish, and that is still pretty darn low. Buyers that are playing the waiting game may find themselves in a worse position next year than they are now even as prices are softening. Higher rates will erode purchasing power faster than rising prices. Higher rates also slow down the speed at which equity is gained.

Banks Seem to Be Working Faster

I have noticed over the last few months that mortgage lenders seem to have streamlined some of the processes in funding home loans. This is more than a welcome anecdote. The loan is the most complex and time consuming aspect of a home purchase. There are just so many little fingers are dipping into the sauce that makes up a home loan. I have noticed a bit of streamlining this year in that process. More and more lenders are getting back into a pre Frank-Dodd timeline. Perhaps it just took them a few years to figure out how to implement the thousands of pages of new Fed regs into a process that is smooth.

The good news for home buyers is that the idea of having to ask for a 60 day close for an 'ordinary' loan seems to be fading into the annals of history. There will be no complaints from this Realtor®. A speedy lender working with a buyer that follows directions and is prompt will lead to the classic 30 day close. 45 days for government loans and or otherwise unusual properties is advised.

The comment above about buyers following directions and in a prompt fashion should not be overlooked. Buyers can be their own worst enemy. There are times when mortgage loan officers will ask for documents or other pertinent information that seems trivial or even redundant. Buyers need to set that aside and follow the directions promptly. When an underwriter asks a loan officer for documents or other information, that loan officer has a short window of time to get that info back while that file remains in front of the underwriter. Delays will lead to the underwriter moving the file back into the "stack" and working on another file. Thus causing delays in the process.

No matter how frustrated buyers get at the seemingly endless list of documents in some files they must remember the 'golden rule of finance'; he who has the money, makes the rules. Unless a buyer has a few hundred grand sitting in the bank, they need the lender's cash to buy a house. You have to follow their rules.

A good loan officer / mortgage company and a responsive buyer can get a conventional loan deal closed in 30 days and a government loan (FHA/VA) in less than 6 weeks.  Sometimes even faster if the stars align.

Buyers: follow directions and do it fast.

Undermining the Underwriting is Never a Good Idea

Most real estate sales transactions will involve a lender. Mortgage loans are very complicated and involve a number of individuals in the process. The loan is the longest process in nearly every transaction.

It is important that all parties, including their agents understand the basic process and principles in a mortgage loan. First, there are two primary groups involved in a mortgage loan. Origination and Underwriting. This is a bit of oversimplification on purpose. Origination is the interface with the public and ultimately the individual borrower. Origination includes a loan officer or broker, loan processing staff, and marketing personnel. This can be a large group of people or even just one person. Underwriting is generally done elsewhere and is the entity that protects the interests of the lending institution and the future investors that will ultimately carry the paper to term.

Origination is the capitalist portion of the deal. They want to originate as many loans as possible and often the origination team is working on at least a partial commission basis. Origination spends time, money, and effort to acquire new clients. They retain those clients for future business and referrals by providing a quality and professional level of service to the borrowers. They collect all of the required documentation and guide the borrower through the process. They start by offering counsel on the various types of loan products available to the borrower so the borrower can make the best decision possible. This is where the proverbial rubber meets the road. Not all loan officers and origination teams are created equal. 

A good originator understands the delicate interaction between underwriting and origination. There is a bit of an opposition in the two groups. Originators want to help their client achieve their goal and underwriters are there to protect the bank from a bad deal. So the originator is trying to push his clients loan through to the finish and the underwriter is stopping the process at every way point investigating and sniffing around to ensure everyone is playing within the rules.

Underwriters by nature have to be a bit cynical and pessimistic about every deal. They are the gatekeepers. They are the last line of defense against fraud, abuse, and bad loans. They will absolutely freak out when something odd enters into the equation. They tend to assume guilt until innocence is proven. This is a not intended to a bash on underwriters, but rather to help buyers understand why underwriters seem to be questioning their every document and digging deep into their financials. Make no mistake, the bank is about to loan a large sum of money to an individual whose annual income may only be 1/15th of the loan amount.

Buyers need to follow the instructions of the loan officer to the letter. Buyers need to avoid any significant financial maneuvering during the process. This means do not transfer thousands of dollars into or out of the bank account from which the down payment is coming. Do not go out and buy a new car, or appliances and such. All of this activity will either be suspicious to the underwriter or it may simply change the qualifications of the buyer. It can delay and or kill your deal.

Realtors should avoid last minute addendums to the contract if possible. Underwriters will stop the works and investigate the change leading to delays and possible deal crashing results. Clients that are under the advisement of an attorney should also make sure they keep the Realtors informed of any planned changes to status implemented by the attorney. Few things freak out an underwriter more than the presence of an attorney in their deal.

This is mostly common sense stuff, yet I see all too often real estate transactions suffering a bunch of unnecessary drama at the finish line; it is often due to one person or group puffing up their chest and not keeping all participants in the "loop". Although we cannot "control" our clients, we professionals can control our own conduct and that should always involve open communication and cooperation to result in a happy end for all parties to the transaction.

Buyers and sellers need to follow the advice of all the professionals working on their deal and if a conflict arises in that advice from say the loan officer to the realtor, get the two on the same page before acting. Underwriters may be warm and genuine soft souls outside of work, but inside the office they are calculating and condemning. They don't like surprise parties, and they don't like cloudy gray areas. Most importantly, buyers should carefully choose their Realtor and their loan officer and vet them on character, quality of work, and experience. Lowest price or rate is not always the best deal.

Agents and Clients Need to be Ready For the Routine

Sounds like a , "No Duh" kind of thing, right? Well, I don't know, because it never ceases to amaze me how often routine delays are taken like apocalyptic symptoms of the inevitable end of the transaction in a fiery ball of doom. And sometimes the panic is coming from an agent.

Real estate deals have one thing in common 99% of time, they will have a delay or some mild drama before they are closed. The sun will rise and set at the end of day, and real estate transactions will have someone, somewhere, somehow, need more time for an integral part of the deal. So we know it's coming, we are told in advance it will, yet... EEEEK!! The appraisal is late! Of course it is, it's nearly always late. OH NO! The lender needs some additional documentation! Yes the lender usually does.

Don't get mad, don't get even, just relax. It's all good. Better agents will tell their clients about the potential problems in a transaction and this helps keep the lid on the classic "freak out" when there is a typical bump in the road to closing. It is always good advice to expect the best but prepare for the worst.

A few things that buyers and sellers can do to protect themselves from these potential issues.

• Do not try to perfectly time the closing of your current home and the closing of the new one. That is a 75% fail rate. Get the buyer of your current home to offer you an optional rent back for at least a week after expected close date.
• Buyer's currently renting; don't give up your rental for at least two weeks after you "expect" to close. This will cost you half a month's rent but it will give you a nice cushion for unexpected delays in closing and will give you time to move without the pressure of the "gotta get out today" syndrome.
• Buyers getting a mortgage; when the loan officer asks for paperwork or other documents no matter how mundane, do it, do it right NOW!
• Buyer's using a loan; Do not move big chunks of money around between accounts. Park your cash in the account you gave the lender and leave it there until you get the keys to the new house.
• Buyer's getting a mortgage; do not borrow money or buy any big ticket items on credit and don't even apply for credit till you get your new house keys. Yes even when the clerk at Macy's says, "if you apply for a Macy's card you get 25% off this whole purchase..." Make like Nancy Reagan and just say NO!  

Most real estate transactions will have bumps along the way, don't panic, it's got a 95% chance of being fine. Sometimes deal crushing bad news comes and that is just the way the ball bounces in life; but most of the time it is gonna be OK, so relax, take a deep breath, because you will be closed in no time.

Enjoy This Blast from the Past!

Rates continue to remain super low. We have been talking about a low rate bubble for quite some time and it looks like things will stay the same until at least early next year when a new presidential administration will take over.

Originally posted October 16th, 2015, by Rod Sager

Holy Rate Basement Batman! Banks are Practically Giving Money Away!

Have you looked at the mortgage rates lately? Most lenders are offering qualified borrowers a 30 year fixed rate loan at around 3.5% These may not be the lowest rates ever but if not, they are very close to the lowest ever. I have discussed the notion that interest rate is far more important than purchase price especially if one intends to stay in the property for a long term period of seven or more years. Imagine borrowing $240,000 from the bank at 4.5% over 30 years fixed. By all measures this is a good loan at a great rate. The principle and interest payment (PI) would be $1,216 per month. But right now you may very well find lenders offering 3.5% 30 year fixed loans. Now the $240,000 mortgage payment looks more like $1,078. That is a whopping $138 per month less! That is a savings of $16,560 over ten years and nearly 50 grand over the life of the loan! In the heavily paraphrased words of the immortal Doctor McCoy, my God man, why aren't you buying a house!

Seriously my friends, these are truly fabulous times. Sellers will get the strongest offers when rates are low because more buyers will qualify at the higher price. Buyers will get the most bang for their buck at 3.5%. Buyers can also qualify for a lot more money. The same buyer that qualifies to borrow $240,000 at 4.5% will qualify to borrow $270,500 at 3.5%. These super low rates will allow buyers to essentially get 12.5% more money for the same monthly payment. 4.5% is a great rate, 3.5% is a OMG rate! Be sure to check with your favorite mortgage professional as there are a few variables that banks look at such property taxes, mortgage insurance, etc. But in general these are pretty accurate figures.

Yes prices have crept up and many entry level buyers have found themselves in a pickle. But there is a window of opportunity to effectively take 12.5% off the price of a house. Seller wins, buyer wins, everybody wins, except the bank. That my friends is a good scenario. Happy hunting!

I warned about this... now it's happening.

That is a rather ominous headline. The warning to which I refer is the issue of entry level home buyers getting priced out of the market. With prices escalating at a rate of roughly 10% annually and wages rising at only a fraction of that, many buyers no longer qualify. I have had buyers hesitate sometimes against my recommendation, and now they cannot afford a home.

In the market under $300,000 it is a strong seller's market. "Seller's Market" refers to the conditions favoring sellers. Any home priced well sells quickly and often with multiple parties bidding above the listed price. From $300-$500k it is a moderate seller's market. Above $500k it is near neutral with a slight favor to sellers.

Entry level buyers need to act now before they find themselves unable to buy. These kinds of markets generally require buyers to be less picky about the home. I find many people buying their first home feel like they must get the "perfect house". That is just highly unlikely. We have an interesting market issue that is making the entry level home more competitive than in the past. Retiring baby boomers are downsizing into the same types of homes that first timers are seeking. This has put enormous pressure on the sub-median priced homes. These 'down-sizers' are often coming in with huge down payments or all cash after selling a much bigger home.

All else being equal, a seller would prefer a cash offer as there is no third party (bank) involved in the transaction. Cash sales close faster and with a higher success rate. Some buyers have just decided to sit it out. They will rent and rents are rising nearly as fast as home prices.

Here is the basic math. The oft used qualifying formulas that the debt to income ratio needs to be less than 45% (FHA) and the total monthly payment on the home including principal, interest, taxes and insurance (PITI) must be less than 33% of total income produce semi-predictable scenarios.

So a borrower(s) that earns $3,000 per month can have a house payment equal to or less than $1000 per month and no more than $1400 per month in total debt service (credit cards, car payments, house payment, etc.) How much house does $1000 a month PITI buy? About $175,000 at current rates with an FHA loan and 3.5% ($6,100) down. There are many variables in lending and this is just a typical example based on some standard underwriting guidelines. A buyer with good credit can likely rent a home at $1400 a month despite only qualifying for $1000 PITI mortgage. Landlords have more discretion in determining the ability to pay of a renter. Of of this considered, buyers need to talk to a lending professional to see exactly where they lie in the mortgage market. Some borrowers can borrow more based on a variety of other underwriting factors, some less.

Here in America's Vancouver, $175,000 doesn't buy much house. At current rates of market appreciation a $175,000 house today will cost $179,000 in just three months! Many buyers miss out on houses because they bid too low. Sometimes it is due to qualifying and that is understandable. A buyer should never bid more than they can qualify for. But sometimes they are trying to get a "deal" and in this market trying to get a deal has a 95% chance of costing the buyer more money.

So let's say you have a house at $200k and you offer $200k but someone outbids you and gets the house for 203k. Three months later a very similar house will be offered at closer to $207k. Would it have been prudent to step up three months ago? YES!

Many things can happen. Buyers could have a financial event that disqualifies them and takes them out of the market. Some say that is a blessing. I say, often it is not. One needs to rent if they cannot buy and rent is as much as a comparable mortgage in this market. Having bought a house and then having a crisis can be better than being a renter in that scenario. Why? Because a landlord can evict you long before a bank can foreclose. And short of being homeless, you have to live somewhere, living in your own house is almost always better than living in a rental when times get tough. The financial event could be unrelated to the buyer. It could be an interest rate hike that pushes the buyer out of the market. It could be bank regulatory changes. Buying now is almost always better than waiting in this kind of market.

This is often most difficult for new home buyers to grasp. For those homeowners on the fence about listing, now is a good time to list a home price at or below the median. The Clark County median home price is hovering just shy of $300,000 right now. The bottom line is this, buyers are losing buying power rapidly and sellers are losing opportunity. The future is uncertain, but the 'now' is predictable.

New Lending Rules Are in Place

The dreaded new lending rules took effect earlier this month and local lenders seem to be reasonably well prepared. In general these new regulations have created a closing delay. This is no fault of the local loan officers or their staff. This is a delay that is essentially mandated as part of the legislation passed by the Congress.

It is important for both buyers and sellers to be aware that closing times are going to be extended on any transaction involving a mortgage. For the short term these could be delays up to 10 extra days. I would imagine that things will get streamlined as time wears on. The new law addresses among other things, the amount of disclosure required by the lender to the borrower, additional time for the borrower to review the lending documents and a post signing period by which the buyer can cancel the transaction. All of this adds up to additional time to close.

A thirty day closing on a home sale transaction involving a mortgage was always a tough nut to crack. Sure, it could be done and many lenders made bold promises. But often they could not be kept. The days of the thirty day close are most likely in the rear view mirror.

This is important mostly because sellers are often in contract to buy another home upon the sale of their home. If they agree to close on the new home in thirty days and the buyer of their home is unable to close on time then they have two problems that could be expensive. Real estate transactions are governed by serious contractual obligations by all parties. No matter what the lender promises on closing times, always give extra closing time on the contract. The seller is rarely obligated extend the closing date. Generally the seller will do so to keep the deal afloat, but they are not necessary contractually require to do so, with few exceptions.

The bottom line is to be patient and just write the offer with a 45 day close or maybe even a little longer. Here in Washington you can write an offer with a "on or before" closing date. This is an effective way to build in extra time to close even if your intention is to close quickly. If the buyers have challenging issues associated with the loan such as marginal credit scores or high debt to income ratios, additional time WILL be required. I spent a fair amount of time on the wholesale side of the mortgage industry and believe me, when the borrower is up tight against the minimum requirements, the underwriter looks at every little detail in that file. No matter what the optimistic loan officer says, that file will take longer to close.

The bottom line is to be prepared for a longer closing cycle and everything will be just fine.

Lenders Follow the Money, Very Closely!

If you are buying a house and using a mortgage loan it is very important to follow the direction of the Loan Officer even when it seems redundant or even stupid. Ever since the 2008-09 crash the government has been putting banks beneath an ever watchful eye of regulators and under the oppressive thumb of the government. Every significant deposit or withdrawal into any account the borrower uses is carefully analyzed. The bank needs to know where the money came from and where it went.

Make no mistake about it, the bank will kill your deal and leave you standing at the proverbial altar with out so much as a Dear John letter if they can't "follow" the money trail to a happy place. by all means do not hide money under the mattress! Cash that magically appears from fairy dust will kill your deal faster than Superman saves Lois Lane.

Any funds used in the transaction should be well seasoned, in the account for several months or deposited from reliable traceable sources such as a payroll check, government agency, insurance company, pension fund, etc. Any larger deposits or withdrawals totaling more than a couple hundred dollars should be logged by the borrower so they can explain to the bank if needed. Also any funds used for the purchase of the home should be taken from the same account the borrower has reported to the lender. No funds should ever be sourced from an account the lender has not vetted.

So in short, your moving and decide to have a garage sale. You do well selling off your unwanted junk. You net a cool and crisp $600. So you deposit the cash into your account. Keep a log of where that $600 came from. A loan underwriter is trained to assume that anything unknown is corrupt. Did ISIS give you that $600? Did your uncle give it to you because you can't really afford to buy this house? Do you moonlight as cat-burglar and this was the loot money? I am not kidding. They are very concerned about the comings and goings of your finances. Remember they are about to loan you hundreds of thousands of dollars based on your promise to pay them back. You are going to have complete control over the very asset that is collateralizing the loan. It is serious business and it is not difficult to comply, but you must comply if you want to play in their vault.

Unfortunately we had some loose regulations prior to 2008 that lead some people and companies to be dishonest and deceitful in their business practices. This helped create a very bad financial collapse that cost the American taxpayers dearly. As is typical with government, there was a gross overreaction that has lead to somewhat oppressive regulations that now create a new series of headaches for the American people.

It is very important to understand the age old adage "Those that have the money, make the rules". Banks have the money and if you want their cash, you play by their rules. The banks have to play by the government rules for a similar reason.

So be mindful and get your dream house.

Loan Changes Ahead

The regulators have decided to change the loan process again with new requirements on final HUD statements and disclosures that many in the industry feel will slow the process down by a few weeks. Right now a government backed loan product already averages nearly 6 weeks to close and potentially adding another two on the end could make that process a two month ride.

Borrowers whether using FHA, VA, USDA or Conventional products need to follow the loan officer's explicit instructions and most importantly in a timely fashion. This will become even more important when the new regulations are activated in August.

Conventional loans that currently close in 20-30 days will likely see close times increase to 30-40 days. Government backed products will likely nudge up against that 2 month window. Buyers need to be sure to ask for a long enough closing time to get everything complete and ready for recording.

All too often buyers are sluggish getting the required documentation into the lender and this causes delays that could result in having to ask the seller for an extension. In this robust seller's market asking for an extension could end up in causing the whole transaction to end.

Buyers need to follow the advice of the loan office and act quickly on getting requirements fulfilled so the loan is funded on time and without complications. The added issue is that inspectors, appraisers and other professionals involved in the process are all quite busy right now and they may need several extra days to complete their process.

Buyers simply need to stay on top of the process and respond promptly and they will be in their dream home before long.

The Strongest Offer Isn't Always the Highest Offer

Sometimes a seller is faced with the desirable dilemma of having multiple offers on their home. Initially the tendency is to think the highest offer is the best. Generally that would be true, but not always. If the seller is trying to move to a new house they are purchasing they have to think about the big picture. If the sale fails, then that could cost them money on the house they are moving into or even cause that sale to fail. Sometimes the best offer is the one with the least obstructions. That all cash offer with a five day inspection period and two week close might work better for the seller than a USDA financed offer with a ten day inspection and a 60 day close that's $5,000 higher and right up against the buyer's maximum approval.

Usually the highest offer is the one the seller takes but there are times when a "cleaner" offer that is a little less money is the better route for the seller. In this seller's market, buyers should try to structure their offer to suit the seller's needs. The buyer's agent is well advised to talk to the seller's agent a try to figure out what the seller is looking for in an offer. Not so much the dollar amount but the terms. Sometimes sellers have a natural inclination to refuse to pay closing costs for a buyer. Even though an offer can be structured to net the seller the same amount he wants, some sellers have illogical or emotional reasons for not taking a particular offer that is otherwise very strong. In a multiple offer scenario the buyer may not get a second chance to present the best offer possible or to modify terms to suit the seller's idiosyncrasies.

In this fast selling market buyers need to be thoughtful about their approach to an offer.

Buyers Need Their Loan in Place First!

I have a listing, a gorgeous 2200 square foot home in a neighborhood full of kids built in 2004. The price is right and it has been very busy with showings and offers. Funny thing is that three times this property has had offers that either failed to close or were withdrawn due to financing issues. Even though buyers are "pre-qualified" they should be "pre-approved" before making an offer. But even pre-approved can be tricky especially if the buyer is right up near their maximum borrowing limit. One of the three was due to the proceeds on a contingent sale falling short of the lenders required down. That was an unusual issue. The other two however were pre-approved borrowers that were likely riding right up against the max credit available trying to buy this home. As a listing agent I have the duty to get as much out of the buyer as possible and to help my seller pick the strongest offer. Even due diligence however can become moot when the buyer is pushing the limits of financing.

Pre-approvals differ from pre-qualification in that a pre-qual is based off verbal or online questionnaires about income and expenses with a soft credit pull. Approvals have the income documents in, full credit pull, and a computer underwriting approval in place. The pre-approval is conditioned upon the buyer maintaining their credit standing, down payment, and rates remaining favorable. If the borrower is trying to buy a house right up against the maximum amount approved, then it is real easy for that approval to go away if anything changes in the buyers financial situation of if rates have a negative fluctuation.

Back in 2012 when housing prices were at or near the bottom, I found that buyers were very cautious. It seemed like nearly every buyer was looking at houses well below the lender approval amount. As a result I had almost every single deal close once past the inspection period. These days it seems buyers are pushing things right to the ragged edge. That could be due to the sharp rise in prices. Let's face it, three years ago I could put a buyer into a nice clean livable house in a solid neighborhood for well under $200k. Frankly, $150,000 bought a great starter house. Those $150k homes are over $200k now, and that means buyers are pushing the financial envelope a little harder these days.

Seller's need to be diligent with the financing contingency and make sure the borrower is really approved and that they have a loan lock in place as soon as possible after the inspection period. Buyer's need to be sure to avoid adding any new debt during the entire home buying process. Buyer's also need to be vigilant in protecting their credit score as a drop in score may cause a "hit" to rate. If the buyer is up against the ceiling that slight 1/8th hit could crash their deal.

My experience has been that buyer's approved from large online national mortgage companies are far more likely to crash than those using a major or local bank, credit union, or local mortgage company. It seems like the online companies use best case scenario tactics to lure buyers to them. That best case scenario often does not materialize and the buyer is left with no loan after spending money on an inspection and maybe an appraisal as well.

Lenders are the most important piece to buying a house unless the buyer is using all cash. The best agents have one or more trusted lenders that they know will give their buyer solid approvals and offer the highest chance of a successful closing.

Buyers should to some extent shop offers between lenders but understanding that most loans are ultimately underwritten by the same small group of investor's standards. FHA and VA approvals should be very similar across all lenders. Fannie and Freddie loans will also be pretty close on approval amounts. The difference between lenders will usually fall into the fee category. This is where a buyer can shop the deal around. I have found that after the strict regulations imposed following the market crash that most local lenders fees run pretty darn close. Sometimes one bank may offer a program or an underwriting exception that might help a buyer get a house. Any claims of getting a significantly larger approval amount however are likely bogus.

This is a seller's market and buyers need to be ready to close. The loan and proper down payment need to be in place before buyers submit an offer. Buyers are risking the expense of inspections and possibly appraisal when making an offer so having the loan solidly approved just makes sense.

   

The Mortgage Insurance Debacle

Mortgage insurance (AKA "MI") is one of those necessary evils that most buyers have to endure in order to get into their new house. I find that many people are unaware of exactly what MI is and what it "covers".

First a basic profile of loan types. Conventional loans generally conform to a set of standards and guidelines imposed mostly by one of two major investors; Fannie Mae and Freddie Mac. These loans are packaged and traded as securities on the open market. They are based on a 20% down payment. Since many borrowers lack the ability to make a 20% down payment; mortgage insurance companies offer to insure the down payment (or lack thereof). FHA loans are insured by the Federal Government rather than a private mortgage insurance company. VA and USDA loans are guaranteed by the Federal Government. A federal guarantee is stronger than Federal Insurance from an investors point of view. There are non-conventional loans that represent a very small percentage of mortgages. These loans are often held in the lender's portfolio rather than sold to investors.

MI is designed to cover the bank's (or investor) exposure to risk due to a small down payment. Traditionally a 20% down payment is required to avoid having mortgage insurance. Often people assume that the MI covers the full balance of the loan in case of default. It does not however. It covers the gap between what was actually paid as a down payment and what "should" have been put down. For example, if a borrower is buying a $200,000 home and plans on paying a down payment of 5% with conventional financing they will pay $10,000 down. The actual 20% down payment would have been $40,000. The bank is therefore taking on additional risk to the tune of $30,000. They will require  PMI (private mortgage insurance) to cover the $30,000 gap in the down payment. These conventional loans are packaged and sold to investors who are expecting a 20% down payment. This is why the PMI is needed.

Buyers need to understand the basic difference between these various programs and the insurance associated with them to make the best decisions possible when considering their options for buying a home. Since I am not a professional loan officer, I will only use broad terms for discussing mortgage rates and services. I always recommend consulting a licensed mortgage professional for more detailed information. Mortgages are complex and programs vary substantially based on lender, borrower's credit profile, location, etc.

In general FHA is the most commonly used mortgage in our current lending environment. The attraction to FHA is widespread because it offers a low down payment of just 3.5% and very lenient credit and debt ratios when compared to conventional loans. This however translates into a more aggressive MI. FHA loans require a 1.75% up front MI fee. This fee is financed into the loan amount. Then there is a MIP or monthly insurance premium which is based on an annual premium of 1.35%. Using the same $200,000 dollar scenario as I did above it works out as such: $7,000 as a down payment leaving $193,000 as the loan amount. $3,377 is added to the loan amount to cover the 1.75% up front fee bringing the amount borrowed to $196,377. Now the monthly MI is calculated annually at 1.35% of the loan amount that works out to $3,043.84 a year or $253.65 a month. The MI on FHA loans is very expensive. The silver lining is that government loan rates (VA, FHA) are often the very lowest around and the aforementioned leniency can help borrows qualify where they might not otherwise.

Conventional loans use private mortgage insurance. These loans are underwritten by the lending institution but are subsequently underwritten again by the PMI company. Borrowers are run through two underwriting gauntlets which increases the chance of a loan failure. Conventional loans typically have slightly higher interest rates and are generally underwritten with tighter standards on credit profile and debt ratios. Conventional loans also have the advantage of temporary MI payments. Whereby FHA loans the MI is paid over the full life of the loan, PMI on a conventional loan can be removed once the loan to value drops under 80%. A borrower must refinance or payoff an FHA loan to get the MI removed. Refinancing in the future could be difficult if rates are substantially higher. PMI rates will vary widely based on both the down payment amount and the borrower's credit profile. A 5% down borrower will see a range of PMI monthly payments in the annualized 0.67% to 1.20% based largely on credit profile with those over 720 FICO seeing the lowest rates. I have a comparison below.

USDA loans are for rural areas and have modest income requirements. These loans offer 100% zero down payment loans to people who earn less than 115% of the local median income. There are a variety of restrictions, but this program can be a godsend for many borrowers. My experience is that USDA rates trend closer to conventional interest rates rather than the lower government rates on VA/FHA. The upside is in the MI. There is a 2% up front MI payment that is added to the loan amount and then a very low 0.40% annualized monthly payment. On that same $200,000 scenario the MI payment would be based off a higher loan amount since there is no down payment the borrowed sum would be $202,000. MI monthly would work out to only $67.33 per month!

VA loans are the best loan product going. They have the low government interest rates like FHA but have no monthly MI payments at all. VA requires what they call a "funding fee" up front but financed into the loan of 2.15%. Veterans with disabled status have this fee waived.

Now I would like to offer up a comparison of these various programs based on a borrower with average credit and solid debt ratios. As I mentioned above, buyers should always consult a local trusted mortgage professional to have their individual scenario evaluated. This example is purely designed for a comparative analysis only and borrowers may see different results based on their individual situation.

Let's assume Rhonda Renter is seeking to buy her first home. Rhonda is a Veteran of the US Armed forces with out a disability rating. She is pondering her options for a mortgage in a USDA qualified rural area and her income falls below the 115% of median threshold. Let's assume that Government rates are at 4.25% and USDA about an 1/8th higher and conventional 3/8th higher. She is willing to put as much as 20% down but wishes to hold on to her cash if possible. She has low debt to income so she qualifies for any of the standard programs. Below is a chart showing an estimate with three different credit scores. This is just a rough estimate. I would like to thank Mike Roy at Pinnacle Mortgage Bankers for calculating the PMI on the conventional loans for me.

CLICK HERE FOR LARGE IMAGE

In most cases, the best bet for a Veteran is the VA loan. For non-vets you can see a dramatic difference in the programs. Remember, FHA is often the most expensive loan for monthly payment, but FHA can also require less income for the same amount of borrowed money. This is especially true when the borrower has other debts. Many loan officers can work an FHA loan with clients that have over 50% debt to income ratios whereby the conventional product will rarely allow a borrower to exceed 45% debt to income. Often it is even tighter than that. FHA is also a bit more forgiving for lower credit scores and less rewarding for higher credit scores. Buyers should try to keep their overall debt as low as possible and should work on getting that FICO score up above 720. Non- veteran buyers can look to areas where USDA loans are approved but should be warned the the USDA process is a bit longer and sometimes runs out of funding. Buyers should be certain to check with a qualified loan officer before presuming that USDA is available.
 

It's Getting Tough to Buy Condos with FHA or VA

500 Broadway, Vancouver, WA
Condos on the upper floors

Many buyers are interested in a condominium home. There are many advantages to this type of home. The homeowner is only responsible for the interior of the unit and they pay an HOA to manage the grounds, external facilities and common areas. Small modestly built condos can also be less expensive than a comparable home. There are disadvantages as well but once a buyer has decided that a condo is for them, they must be certain that they can finance it.

If the buyer is a veteran looking to use a VA loan or is intent on an FHA loan, they must be certain the condo is approved by HUD (Federal Government, Department of Housing and Urban Development). HUD has stopped approving condos on an individual basis and is requiring the entire complex to be approved. In the Clark County, Washington market I am finding that the overwhelming majority of condos are either expired or not approved at all.

If the condo is approved, the buyer and their agent ought be certain that the approval does not expire before the sale closes. This is paramount should the condo be a short sale. Short sales take much longer to close. Buyers should have at least 6 months and preferably a year of approval left is wise when offering on a short sale condo.

The good news for FHA buyers is that some banks are offering a 95% conventional loan. These loans do not require FHA approval on the condo unit or complex. They will however have some underwriting requirements that could pose problems. For example, most banks are looking for at least 50% owner occupied units in a condo project. These conventional loans require a slightly higher down payment than an FHA loan but offer superior terms regarding mortgage insurance. It is always a good idea for buyers to meet with a mortgage professional prior to home hunting.

When offering on a condo, buyers should be certain that their agent is thorough in vetting any potential issues with financing.

Since I am on the subject of condos, I will touch on HOA issues as well. Condo projects have HOAs that oversee the common areas and buildings. Since the unit owner only owns the space inside, the HOA owns the buildings and land. The HOA is a common ownership of all the unit owners. Essentially condo owners have two things they own. They hold title to the unit (interior space of their unit) solely as an individual and then they hold title to the whole complex property as a partial owner, usually held as tenants in common. They have an equal share with each of the other owners or possibly proportionate to the relative value or size of their unit.

HOAs are required to keep to state standards for financial disclosure and management. Before buyers commit to a purchase on a condo or other property with an HOA, they should be certain to check out the HOAs financial and legal status. There are times when an HOA is involved in litigation. They can be either the plaintiff or the defendant. In either case, financing is nearly impossible to obtain while there is an open litigation or a judgement is in force.

Attached Townhouse in Camas, WA
This is not a condo

Condos should not be confused with other homes in planned unit developments. Many neighborhoods and attached housing projects have an HOA but they are NOT condos. A condo is unique in the ownership as just the space inside the walls. Attached housing with common walls such as a townhouse or row houses are often held in ownership the same as detached housing. The owner owns the structure and the land. Typically the HOA (if present) takes care of keeping the neighborhood consistent by enforcing rules designed to protect its integrity. These HOAs may also provide upkeep and care of other amenities such as a neighborhood park, swimming pool, etc. In these scenarios, the HOA is not responsible for the structure of the buyers home, roof, siding, etc. The dues are likely to be lower than those in a condo. The FHA and VA loans will not require HUD condo project approval on these types of developments.

Buyers should work with an experienced agent when considering a condominium home. They can be a wonderful opportunity for quality living, but they have a few quirks that require thorough care during the purchase process.