the party’s over?

The party is just getting started in New Orleans (Super Bowl win + Mardi Gras = month long celebration), but it may soon be coming to an end for historically low rates.

Enjoy it while you can!

Mortgage rates hit historic lows in 2009 thanks to the extraordinary efforts of the Federal Reserve.  Back in November 2008, the Feds announced a program to buy mortgage backed security (MBS) bonds.  The reasons were two fold:

• to help push mortgage rates lower to stimulate the real estate market
• to create a market (or in other words, increase the value) of MBS bonds for others to buy

When the plan was announced by the Feds in November 2008, interest rates dropped roughly a half point in one day!  As the Feds began buying bonds, rates dropped down to their historic lows. The initial plan was to buy bonds through the first six months of 2009. It was extended through 2009, and extended again through end of the first quarter 2010.

At their recent meeting, the Feds reiterated their intentions to “seamlessly exit” the MBS bond market with no hint at another extension to the MBS bond buying program.  The question now is “what happens to mortgage rates?”  Take a look at the chart below.

Since mortgage rates dropped significantly on the announcement of the plan, and then continued to improve to historic lows as the Feds purchased MBS bonds, one would logically expect the opposite reaction once the bond buying program comes to an end.  In this case, and at least to some degree, interest rates should rise.

How should you proceed? Anyone who hasn’t refinanced OR is waiting until the deadline to take advantage of one of the home buyer tax credits, go ahead and get prequalified today.  Move forward with the loan now while rates are still ridiculously low. 

There is not guarantee rates will dramatically increase, but also no guarantee they will stay the same.  Take advantage of the market and low rates while they are still available.

to buy or not to buy

That is most certainly the question these days. The answer is an easy one if you look at the market as a whole – home values are down, homes are more affordable than they have been in years, financing is available, and there are incentives (federal and some state tax credits). With all of that in mind, it is a good time to buy!

Specifically, if you are in one of the two categories below, there has never been a better time to buy a home.

• First time home buyers – Conventional loans available with as little as 5% down and FHA loans only require 3.5% down.  The seller can pay for most (if not all) of the closing costs.  The down payment can be a gift from a family member. The $8,000 tax credit still applies to first time home buyers (or anyone who has not owned a home in the last thee years).
• Buyers looking to move up into a larger home – Buyers may lose money selling their current residence, but save substantially more on their next purchase. For instance, I’ve had clients lose a few thousand dollars on the homes they sold only to buy new homes (that were originally listed over $400,000) in the $300,000 price range. Also, don’t forget about the $6,500 tax incentive available to move-up or repeat home buyers.

Now is indeed a great time to buy, and if anyone is looking to take advantage of one of the tax credits, what are you waiting for?  Remember in order to claim one of the tax credits, the home must be under contract by the end of April and purchased by the end of June.

If you haven’t spoken with someone about qualifying to buy your first home OR seeing how much home you could afford prior to selling your current residence, now is the time! I would enjoy the opportunity to speak with anyone looking to take advantage of the current market and/or government tax programs.

New Year, New GFE, New Problems

As of January 1, 2010, the new, standard Good Faith Estimate (GFE) implementation was underway for all banks, lenders, and brokers was underway. The new estimate design was to clear up any misconceptions or misunderstandings about a borrowers loan terms, interest rate, closing costs, etc.

Some of the highlights of the new GFE include:

- providing a summary of the loan showing the interest rate, term, if the interest rate can rise, if the loan balance can increase even with regular monthly payments, and if there is a prepayment penalty
- showing a total fee for all services required for a loan including lender fees, attorney fees, recording fees, etc.
- containing a graph showing the fees that can’t increase for any reason at closing along with the fees that can change so long as they do not exceed a 10% tolerance limit

The benefits?  That is easy – gone are the horror stories of dramatic increases in closing costs at the closing table… no confusion about the terms of the loan… makes comparison shopping easier than before.

However, nothing in this world is perfect and there are couple of items that could use some improvement on the new GFE.

- Borrowers must receive the new GFE within 3 business days of a completed loan application. Ironically, there is not a signature page for borrowers to sign and acknowledge they received it.
- The total monthly mortgage payment for the loan is not listed anywhere on the new GFE.
- The required cash needed at closing (combination of the down payment, closing costs, and prepaids) is also not listed on the new GFE.
- The new GFE shows an itemized list of the costs for services rendered (total attorney fees, total lender fees, etc.), but does not show an itemized summary of those costs. For example, say the GFE shows the attorney fee is $1,000.  That would include the cost of the attorney’s services, title exam, title insurance, etc., but it doesn’t show the dollar amount for each of those items.

Change can be a good thing, and overall, the new GFE is a good thing for consumers and a step in the right direction. That said, it will take some time to adjust – especially for borrowers looking to buy their second or third home. This format is completely different from their prior experiences!

Be sure to work with a loan originator who knows the new good faith estimate, can explain it, but also offer you some of the missing information – like the total monthly mortgage payment!

one more thing

The Federal Housing Administration (FHA) is channeling their inner Steve Jobs with their continued amending/changing of loan guidelines. You know how Steve operates… even though it appears he is wrapping up the annual “state of Apple” speech, he often comes back back on stage saying “one more thing” and proceeds to introduce a new product offered by Apple.

While Steve talks about a cool new product, currently, the FHA releases tighter loan guidelines – definitely not as fun!  No one knows for sure when the tightening of loan guidelines will end, but recent changes include:

• a 580+ credit score is now required in order to qualify for the minimum down payment of a 3.5%
• credit scores lower than 580 will require a 10% down payment
• the up front mortgage insurance premium will increase from 1.75% of the loan amount to 2.25% of the loan amount
• seller contributions to closing costs will be reduced from 6% of the purchase price to only 3% of the purchase price

As always, it is more important to know how these changes will impact borrowers. Let’s take a look at each of the changes and their potential impact:

• CREDIT SCORES – While the FHA itself has not required credit scores, lenders have required a minimum credit score of at least 620 for some time now. The lender required 620+ credit score will probably not change, so the FHA 580 credit score requirement will not apply in most cases.
• UP FROM MORTGAGE INSURANCE – The up front mortgage insurance premium has been required in some form for as long as FHA loans have existed. The up front premium is charged to the borrower BUT rolled into the loan amount – meaning the borrower is NOT paying the fee out of their own pocket at closing. Ultimately this will only slightly reduce the max purchase price of the borrower.
• SELLER CONTRIBUTIONS – If a borrower only has enough for the minimum down payment on an FHA loan, the seller usually pays the closing costs and prepaids on the borrower’s behalf.  Under the old guidelines, a 6% contribution of the purchase price would easily cover all closing costs and prepaids on the loan.  However, 3% of the purchase price may not cover everything and borrowers will need to find other sources (gift from a relative, low OR no closing cost loan, etc.) to cover any additional funds due at closing.

In the grand scheme of things, these changes should not have a dramatic affect on borrowers qualifying for FHA loans.  It will primarily reduce the amount of house a borrower can afford to buy.

That said, planning ahead becomes more and more important.  Gone are the days of easy financing and no planning needed.  Anyone looking to buy a home using the tax credits (for first time home buyers OR move-up buyers), need to talk to a professional and make sure everything is in order now instead of waiting until the tax credit deadline and realizing (when it may be too late) that there is a potential problem!

Conventional and FHA loans revisited

In 2008, I released a series of posts comparing the pros and cons of conventional and FHA loans.  If you haven’t noticed, a lot has changed in the last couple of years. 

On that note, I thought it wise to make note of new guidelines and highlight some changes to existing guidelines for both conventional and FHA loans. For reference, I will also provide links back to the original posts from April to June 2008.

Minimum credit score requirements (click here for the original post):

• Lenders now require a 620+ credit score for FHA loans (a 660+ credit score for some programs). Credit scores between 620-660 may see a slightly increased interest rate.  - this is a change from no minimum credit score requirements
• Conventional loans also require a minimum credit score of 620+, but interest rates for scores under 680 see a noticeably higher interest rate. - this is a change from possible approval below 620 and higher rate adjustments occurred below 620.

Credit history requirements (new requirement):

• Brand new – FHA loans now require borrowers to have at least three active OR recently closed trade lines (accounts) in their credit history.  See this recent post for more details.
• Conventional loans do not have this requirement.

Minimum down payment requirements (click here for the original post):

• FHA loans require a minimum down payment of 3.5% regardless of the credit score. - change from 3%
• FHA down payment assistance programs are no longer allowed.
• Conventional loans require a minimum down payment of 5% and a 680+ credit score in order to obtain Private Mortgage Insurance.  - no change in the amount needed down, but the minimum credit score requirement is new
• If a borrower’s credit score is below 680, then a 20% down payment will be required on conventional loans.

Private Mortgage Insurance (click here and here for original posts):

• FHA loans still require an up front Mortgage Insurance Premium fee of 1.75% of the loan amount. The fee is rolled into the loan amount. - change from 1.5% up front fee
• FHA monthly mortgage insurance payments are still lower than conventional loans.
• Conventional loans do not have an up front fee, which is why their monthly premiums are higher than FHA loans.

The last couple of years haven’t changed the overall differences between FHA and conventional loans.  They have however tightened up the qualifying guidelines making planning ahead crucial. If you are looking to buy (or refinance) a home in the next 6-12 months, give me a call to help ensure you everything is in order when you make an offer on a home.

Out with the old…

… and in with new FHA guidelines. Given the time of year, it seems almost appropriate.  Regarding the new change…

FHA loans now require borrowers to not only have a minimum qualifying credit score to be approved for a loan, borrowers also need to have at least three trade lines (accounts) in their credit history.  The three trade lines must:

• Trade lines can be a credit card(s), student loan, car loan, mortgage
• Have at least 12 months of history (current or closed account)
• If an account is closed, it cannot be closed more than 24 months ago or it will not be counted toward the required three trade lines

Because of this new change, even if a borrower has the minimum down payment (3.5%) and a qualifying credit score (620+), they would still not qualify if the new trade line requirement is not met.

Why would FHA require this? There has not been an official statement, but they could be thinking “if there are only one or two trade lines, is the credit score an accurate score based on the limited history.” Regardless of the reason, this is just one more item to keep in mind when looking to buy a home.

I’ve said this before and I will say it again, planning ahead is key.  Knowing where you stand, how much you can afford, and when it the best time to move forward is essential in this ever changing market.

Happy Holidays!!

Wishing you and yours the best this holiday season!! 

it’s official

The new bill extending the first time home buyers tax credit passed through both the House and the Senate.  The last stop is President Obama’s desk.  Once signed, the law goes into affect.

Several aspects of the bill are the same, but there are some new twists this time around.

• First time home buyer tax credit of $8,000 extends through April 30, 2010. Home must be under contract by that date and closed on or before June 30, 2010.
• As before, first time home buyers are individuals who have never owned a home OR have not owned a home in 3+ years.
• A “moving up” tax credit of $6,500 is available for current home owners buying a new home.  To qualify, home owners moving up must have lived in their current residence for 5+ years.
• Income levels for a single purchaser are limited to $125,000 adjust gross income (up from $75,000) and $225,000 for couples (up from $150,000).
• Home buyers with adjusted gross income above those levels can still qualify for the tax credit, but the amount of the credit diminishes as you move above the income limits.
• In order to cut down on fraud, home buyers must be at least 18 years old and must submit a copy of the HUD-1 settlement statement from closing.

There you have it.  New life in the tax credit and let a new countdown begin… only 175 days left before you must have a home under contract to qualify for either of the tax credits.

The recession is over… right?

The numbers are out. The last quarter saw the GDP grow by 3.5%.  That means the recession is over and it’s time to party!!

Or is it?…

GDP growth is a great way to measure the state of the economy, but unusual circumstances (such as the $600 government rebate check in Q2 2008 or “cash or clunkers” in Q3 2009) can mask actual deficiencies. Moving forward, there are some other areas that one would like to see some improvement.   

• Jobs – While job creation typically lags behind an economic recovry, seeing fewer jobs being shed month-to-month would encouraging – September had more overall jobs lost than August.
• Home values and sales – The housing market is slowly stabilizing and home sales are increasing month-to-month, but we are not there yet.  When people feel confident in their job, they are more likely to make bigger purchases (homes, cars, etc.).  Until the job market rebounds, the housing market will continue to struggle.
• Inflation – This has definitely not been problem during the current recession. Inflation figures are below 0% and have NOT given way to major deflation.  Ironically, mild inflation can be viewed as a good thing for the economy. It shows that people are spending/investing money.  When year-over-year inflation figures are below 0%, it means people are not spending/investing money. That is not the best scenario for an economy primarily based on…
• Consumer Spending – Whether you like it or not, consumer spending comprises 60-70% of the U.S. economy.  There was a 3.4% growth in consumer spending in the last quarter, but some of the growth is attributed to the “cash for clunkers” program. It will be telling to see how consumers behave as we move into the holiday spending season.
• Stocks – Wall Street has roared back after falling to decade lows in the market.  Even though the market is still volatile, the recovery in stocks has been a much needed boost. 

Is the recession over?  While there have been great strides made, in the words of Obama and others… “we’re not out of the wood yet.”  These other areas need to see improvement too if we truly want to see an end to the longest and deepest recession since the Great Depression.

Seems that time is not running out

There has been a lot of talk coming out of Washington regarding extending the first time home buyer’s tax credit.  There are those that want it extended for another year.  Others that want it phased out gradually over the next year.  There are some who want it to end now.

After weeks of hearing about it, there are actual developments to report on a possible new bill that will extend the tax credit.  Note the use of the word “possible” because this is not a done deal.

• the tax credit applies to first time home buyers (never owned a home OR not owned a home in 3+ years) and could also apply to buyers moving up to a larger primary residence (must have owned current home 5+ years)
• the first time home buyer credit would remain at $8,000 and the trade up credit would be $6,500
• home buyers (first home or new home) adjusted gross cannot exceed $125,000 ($225,000 for couples filing  jointly)
• homes must be under a signed contract by the end of April and close no later than June 30, 2010
• tax credit only applies to homes $800,000 or less

As of this posting, the bill has not been passed and no vote is scheduled.  What does that mean? If you want to make sure you get the $8,000 tax credit as a first time home buyer, start the process now and own your home before the end of November.