Fresh Inflation Indicators Drive Rates Higher

Rates are slowly creeping back up due to new inflation indicators.  So far the 15-year rates have held pretty steady, but 30-year rates are moving up.

Here are this week's rates:

30-yr Fixed

Conventional:  3.875%*                 FHA/VA:  3.375%*

15-yr Fixed

Conventional:  3.000%*                 FHA/VA:  2.875%*

*These are the closest “par” rates for the different types of mortgages.  They assume very good credit, sufficient equity, and the absence of other negative risk factors (e.g. property use, cash-out or not, loan amount, etc.).  Different specific risk factors will affect interest rates.

Time For A Bigger Home? What to Consider When It's Time to Upgrade

Americans are quite mobile.  Recent statistics show that we move every 5 years, on average.  Job relocation and the need for a larger home are the most common reasons, with most moves occurring within the same state.  Most homeowners will begin their life of homeownership with a starter home, which is a great way to build equity in preparation for their next—most likely larger—home.  The cycle continues until they reach retirement, when retirees look for a smaller home or even to rent.

Unless you’re paying with cash, you will need a mortgage to purchase your next home, and you may face the prospect of having 2 mortgages at once.  Here are the 3 most common home-transitioning scenarios, with tips on how to make this upgrade doable.

Option 1 – Buy your new home, then sell your former home

This is the simplest and easiest way to transition to a new home, but it requires that you have income (and lack of debt) to support 2 mortgages and that you have money for the requisite down payment.  Remember that your debt-to-income ratios (DTIs) include all of your debt payments, including your current mortgage, even if you plan on selling your home.  Lenders have to assume that you will have that payment indefinitely, so they include both of the mortgage payments in their DTI calculations.  If buying a home was tight before and your income hasn’t increased substantially (or you’ve added significantly more debt), qualifying with both mortgage payments could prove quite difficult.

Tips – Income qualification

·         Consider an FHA loan – FHA loans allow for significantly higher DTIs.  You can even have 2 FHA loans at once, under certain circumstances, or if it’s contingent on you selling/refinancing the other home.

·         Pay down other debt – This requires some planning, but credit cards and car loans have significantly higher payments compared to their balances than mortgages.  Paying down $8000 in credit card debt could give you an extra $30,000 in home-buying power.

·         Consider adding a co-borrower – Is your spouse working but not on your current mortgage?  Adding him/her could give you the income needed.  You can also add a non-occupying co-borrower (such as a parent).

Tips – Down Payment

·         Consider an FHA loan – FHA loans require the lowest down payments (3.5%).  Conventional loans will go as low as 5% (3% for first time homebuyers), but also have stricter DTI requirements.  Most zero-down mortgage options are reserved for first-time homebuyers, so that likely won’t be an option.

·         Purchase from a family member – If you’ve been considering purchasing from a family member, the down payment can often be gifted equity.  This has to be done appropriately, but is often an option when property is passed between family members.

·         Consider gift funds or 401k loans – Gift funds, as long as they are documented and sourced, can be used for down payments as long as they come from appropriate sources (like family members, friends, or even employers).  You can borrower against your 401k as well (the interest is just paid to yourself), but that payment will then need to be factored in and you’ll need to make sure you understand all of the ramifications.

Option 2 – Sell your current home, then buy your next home

If you have a place to stay in the meantime, this simplifies the process substantially.  Hopefully, you netted some cash from the sale of your previous home, which can be used for/towards the down payments.  You also no longer have a mortgage payment, so your debt-to-income ratios will be much less burdened.  If you have family close by and can move in on a short-term basis or can find a place to rent on a short lease, then selling first might be a good option.

But, if you don’t have a place to stay and you don’t have the income or down payment to support 2 mortgages at once, then it becomes a question of careful- and fortuitous- timing. 

You can apply for a new mortgage and indicate that you will have sold your current home before you close on the new home.  The underwriters will then not include your current mortgage payment with your debt payments and you can get a conditional approval.  That means that as long as your current home sells before you close on the new loan, you’re approved.  The same can be done with funds for a down payment: you can indicate that the down payment funds will come from the equity from the sale of your current home and as long as the sale occurs and you have the required funds before the loan closes, you can still get that conditional approval.

As I mentioned, this requires timing to work out just right.  The closing of the sale of your current home has to align with the closing of the purchase of your new home.  This is called a “simultaneous close,” which occurs when you close on the sale of your former home and the purchase of your new home at around the same time (it can also mean closing a first and second mortgage at once).  Since there are often delays and several parties involved, this can prove to be quite the feat. 

Tips – Making a simultaneous close doable (without being homeless)

·         Give yourself time on the purchase - Consider giving yourself a lengthy window on closing the purchase on your new home.  The seller might want more earnest money in exchange.

·         Thoroughly vet the buyers of your new home – Before you go under contract, require an extensive prequalification of the buyer so that there are no (or fewer) surprises.

·         Rent your former home…to yourself – If the buyers of your home are flexible, you could arrange to rent the home from them for a few weeks while you close on your new home.

·         Price your home aggressively – If you can come down on the price of your home, then you can be more picky as to who you sell it to.  A buyer that can pay with cash poses far less potential problems than one that pays with a mortgage.

Option 3 – Rent your current home

Living in a home for a few years and then turning it into a rental is a great way to build retirement income (especially when you repeat the process several times).  Just be aware of the following-

·         Make sure you want to be a landlord – It’s not a bad gig, but it’s not for everyone.  Talk to landlord friends (if you have any) to see what’s involved.  We’re planning a landlord blog post shortly.

·         You’ll need to qualify with 2 mortgages at once – Since you’ll be owning 2 homes at once, you have to qualify with both payments.  If this is your first rental, you most likely won’t be able to count the rental income towards your qualifying income!  The rules/amounts on that vary, but underwriters usually want 2 years of rental history before you can count rent from a new rental.

·         Make sure your home is marketable – Is there a rental market for your type of home?  In theory, you can rent anything, but higher-end homes often take a bit longer to rent.

In short, the best thing to do if you already own a home and are considering purchasing another is to consult with an experienced loan officer, preferably 6 months before you plan on purchasing.  At Evergreen, we have substantial experience with upgrade home purchases and in almost any instance we can make it work!

Outlook Changes, Rates Stay Low

Rates have gone down a bit since last week.  Additionally, the Fed has hinted they are rethinking the move to raise rates in June due to some bad economic data (and as we mentioned in our last blog post, while the Fed does not control rates, they can be a good indicator of where rates are headed).

Here are this week’s rates:

30-yr Fixed

Conventional:  3.625%*                 FHA/VA:  3.250%*

15-yr Fixed

Conventional:  3.000%*                 FHA/VA:  2.875%*

*These are the closest “par” rates for the different types of mortgages.  They assume very good credit, sufficient equity, and the absence of other negative risk factors (e.g. property use, cash-out or not, loan amount, etc.).  Different specific risk factors will affect interest rates.

What Makes Mortgage Rates Go Up and Down?

One of the questions I am most frequently asked is “Where are rates headed?”  It’s an important question, as slight differences in your mortgage interest rate can make a difference of thousands of dollars over 15-30 years.  But while I appreciate the confidence of my clients in my swami-esque wisdom, predicting interest rates is…pretty hard.  It’s best to have reasonable knowledge of what makes mortgage rates change, so that you can take advantage of low rates when they do occur.

The Short-ish Answer

The simplest- and most accurate (in the long term)- predictor of interest rates is the economy.  When the economy is good, rates tend to be higher and when the economy is not as good, rates are lower.  Likewise, when the economy is improving, rates will rise (and fall when the economy is deteriorating).  Interest rates are simply an indicator of the demand for borrowed money and when more people want to borrow money (which normally happens in an improving economy), lenders can charge more interest for that borrowed money.

The Long-ish Answer

While the Short-ish Answer explains long-term fluctuations in interest rates, it doesn’t address the short-term fluctuations. 

For this purpose we need a basic understanding of bonds.  A bond is essentially a loan to a company/entity/person.  If I “buy a bond”, I loan the seller of the bond money in return for interest.  Bonds have terms and rates (a 5-yr bond at 4% will return 4% per year and pay back completely in 5 years) and the amount that I pay for that bond upfront (or loan the bond issuer) is the price.  The return that I get (the interest) on the price I pay for that point is called the yield.  The lower the price in relation to the interest I will earn, the higher the yield (and the less interest I earn in relation to the price I pay, the lower the yield).

Bonds are considered safer investments than stocks (though they normally don’t provide as much return).  When stocks are doing poorly (as often happens in a declining economy), investors tend to buy bonds instead.  The rules of supply and demand go to work and since a lot of people want to buy bonds, the bond sellers can charge a higher price- which lowers the yield.  This yield is tracked and is the basis for a lot of different interest rates.

While the average term of a mortgage is 30 years, many mortgages are either paid off or refinanced within 10 years, so the movement of the 10-year Treasury Bond yield is taken into consideration when determining mortgage rates.  When the 10-yr Bond yield goes up (because the economy is improving, investors are buying stocks, and bond sellers have to reduce their prices or increase their interest rates to attract buyers), mortgage rates go up.  Conversely, when 10-year Bond yields go down, mortgage rates go down.

But Doesn’t the Fed Control Interest Rates?

The Fed does not control mortgage interest rates.  However, actions of the Fed can and do have an effect on mortgage rates.  The Fed tries to keep the nation’s economy steadily progressing by buying and selling bonds and raising/lowering the what we call the Fed rate, which is the rate at which large institutions can borrower money from the Fed (through bonds).  The Fed increases the Fed rate if they feel the economy is getting too heated (to control for inflation) and decreases the Fed rate if they feel the economy needs a boost (to encourage borrowing/business investment).  The Fed’s actions do not directly affect the 10-yr Bond or other important indicators, but people do pay attention to the Fed’s actions and they are seen by many as an indication of the state of the economy or where the economy is heading.  In this age of instant information, the Fed’s actions often result in quick and significant changes in mortgage interest rates, although the Fed does not intend to directly influence mortgage interest rates.

Other Factors

In addition to considering the yield of a 10-year bond (and Fed actions to an extent), it’s important to know that almost everything else that affects economic outlook also affects mortgage rates.  Employment rates, consumer confidence, Gross Domestic Product, home sale rates, etc., can and do change the going mortgage rate.

Sometimes, when there is a high demand for mortgage loans (in strong housing markets), it gets harder to find investors to back and service all of the loans.  Originators make their money by selling their loans to investors, so sometimes rates will be raised in order to slow the number of people trying to take out a loan.  Conversely, rates might be reduced (by investors) to stimulate mortgage and housing markets.

Practical Applications of this Knowledge

So, how do you time things just right so that you get the best mortgage rate available in a given month?  You can’t.  If I had figured out how to do that, I wouldn’t be writing my own blog posts!  Billions of dollars are spent each year trying to predict the market, with minimal benefit.  The best thing to do is to watch long-term trends and outlooks.  The economy has been improving for a while and it will likely continue to improve, so where are rates headed?  Up.  They might fluctuate day-to-day, but in the long run, they will increase until the economy turns south.

The last—and most important—thing to remember is that your personal financial circumstances also make a huge impact on the mortgage rates available to you.  If you are a risky borrower—for example, if you have poor credit or no money down—your rate will likely be higher so that the lender can protect their investment.

Your best course of action, if you’re considering a loan, is to make sure you’re an attractive borrower (which I will touch on in another post), watch the economy and take advantage of rates while they’re still low, and use a mortgage company that will work hard to get you the best rate available for you: like Evergreen Mortgage.

When the Middle-Man Gets the Boot, Your Rates Get Lower

Economically, rates have held pretty steady, and are still low, historically speaking.  But, as I mentioned last week, with our own new company, we’re able to offer substantially lower rates and NO lender fees.

Here are this week’s rates:

30-yr Fixed

Conventional:  3.625%*                 FHA/VA:  3.125%*

15-yr Fixed

Conventional:  3.000%*                 FHA/VA:  3.000%*

*These are the closest “par” rates for the different types of mortgages.  They assume very good credit, sufficient equity, and the absence of other negative risk factors (e.g. property use, cash-out or not, loan amount, etc.).  Different specific risk factors will affect interest rates.

Evergreen Mortgage Has Arrived

I’m happy to announce the birth of the greatest mortgage company that history will remember:  Evergreen Mortgage!  After long consideration, I decided that launching my own mortgage company would best serve my long term goals as well as the needs of my clients.

What Does This Mean for You?

You may all be thinking “that’s nice, Kjell”, but here is how you are affected by this announcement:

·         Lower Rates and Fees – By starting my own company, I cut out a battalion of middlemen, meaning there are less expenses to cover.  That means I can pass on the savings to my clients by offering lower rates and fees.  Origination fees are decreasing by over 40% and rates will be over 0.375% lower (a 10% decrease).

·         Your loan will close faster – Evergreen Mortgage is a brokerage, which means we don’t lend our own money (if I had $200 million to lend, I probably wouldn’t be writing my own blog posts!).  I’ve brokered a few loans before and I’ve noticed that wholesale lenders underwrite smoother and faster because they have to compete with all of the other lenders (if I think a lender is being slow, I won’t send them any more loans).

So, if you or your friends/family have been holding out on buying a home or refinancing, hold out no longer.  Give us a call and see how we can help.

How Much Home Can I Buy?

So, you’ve decided it’s time to buy a house (usually a good decision)!  If you have trunks of cash lying around, determining how much of a home you can buy is fairly easy.  $150,000 in cash buys $150,000 in house.  But if you’re like the rest of us, you’ll need to turn to a mortgage to finance your new home.

Attempting to sum up in one blog post what essentially takes up my entire work week (and that of processors, underwriters, etc.) is tricky.  There are so many variables that you need to—please—take this with a grain of salt!  This information should be enough to get you thinking; but when it comes time to truly determine your mortgage options, you should consult a professional (like…me!).

Down Payments and Debt-to-Income ratios are the most significant determining factors in purchasing real estate.  However, since there are a fair amount of low-to-no down payment mortgage options (and I will likely have a down-payment blog post in the near future), I’m going to focus on Debt-to-Income ratios.

Debt-to-Income Ratios (DTIs)

Your DTI is the ratio of your monthly debt payments to your gross pre-tax monthly income (debt payment divided by income), normally expressed as a percentage. 

A simple example: if you have a $1200 mortgage payment and a $4000 gross monthly income, your DTI would be 30% ($1200/$4000 = 30%).  Mortgage underwriters look at two different ratios, called your front and back ratios.  Your front ratio is just your mortgage payment (with taxes and insurance and such) divided by your gross monthly income while your back ratio is ALL of your debt payments (including your mortgage payment) divided by your gross monthly income.

To continue our example, let’s you have a $300 car payment in addition to your $1200 mortgage payment (and still make $4000/month).  Your front DTI is 30% and your back DTI is 37.5% (($1200+$300)/$4000).  These ratios would be expressed as 30%/38% or simply 30/38.

Underwriters don’t want you to have too high of a mortgage payment (or total debt payments) in relation to your income.  The higher your DTIs, the less money you have to meet your expenses and the more of a risk you are of not being able to make a mortgage payment.  So, underwriters and lenders set limits as to how high your DTIs can be.  VA, FHA, USDA, and Conventional loans all have different debt-to-income ratio caps, with FHA being the highest (i.e. they allow for the most debt payments in relation to your income).  Since most first-time homebuyers use FHA loans to purchase a home, I’m going to focus on FHA DTI limits and calculations.

As a general rule, FHA allows for DTIs as high as  45/55, meaning they will allow for a mortgage payment as high as 45% of your gross monthly income and total debt payments as high as 55% of your gross monthly income.  It’s important to note that for DTI calculations, your entire monthly housing expense is considered (excluding utilities).  So, for an FHA loan, they will consider your entire mortgage payment consisting of principal & interest, property taxes, homeowner’s insurance, and mortgage insurance.  If you live in a condo or some other association that has HOA fees, those are considered as well.

Now that we have a background on DTIs (FHA DTIs, specifically), it’s actually pretty easy to determine how much of a maximum mortgage payment you can have.  If you have no debt aside from the potential mortgage, you simply multiply your gross monthly income by the DTI limit (45% or 0.45).  Your $4000 income will support a $1800 monthly mortgage payment.  If you have other debts, then the maximum amount of total debt payments you can have per month is $2200 ($4000 x 55%).

Usually, people do have other debts (car loans, student loans, credit cards, etc.) so the back DTI is almost always higher.  Both DTIs need to be under the 45/55 limit, so if one is higher, then the proposed mortgage payment needs to be reduced until both DTIs are under the limit.

Let’s say that you had a $4000 monthly gross income and were considering purchasing a house.  You also have a $500 monthly car payment, $300 in minimum credit card payments, and $250/month in student loans.  Your total debt payments, without a mortgage, are $1050/month, so your current back DTI is already at 26%.  Since you can only go as high as 55% (back DTI), we subtract 26% from 55% to determine how much more of your income can go towards a house payment.  55% minus 26% is 29% (29% of your income can go towards a house payment).  That 29% times your income of $4000 gives us $1160.  The maximum mortgage payment that you can pay each month for an FHA loan, considering your existing income and debts, is $1160. 

Notice that your front DTI limit allows for a mortgage payment of $1800 ($4000 * 45%), but you can’t go that high, because any mortgage payment of $1160 would push your back DTI to over 55%.

So, how much home can I buy?

Now for the fun part.  Once you've calculated the maximum monthly mortgage payment you can have, you can work backwards to determine how much of a mortgage that would support.

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I'm going to give you a quick-and-dirty rule for this, but be warned that this rule makes a TON of assumptions!  I'm using estimates for what your interest rate would be, how much your taxes and insurance would be, etc.  If your rate ends up being higher or if you buy in an area of higher property taxes, these numbers could be significantly off.  Remember, this is just to get you thinking.  You would need a full consultation and analysis to really determine the loan amount.

The Quick-and-Dirty Rule for determining your maximum FHA mortgage using rates and assumptions as of when this blog was written is: multiply your maximum allowed mortgage payment by 165.

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So, if you can afford a maximum payment of $1160/month, your maximum mortgage will be $191,400.

Again, use that with caution!

But how much should you buy?

Everything I've discussed above is just an overview of how much home you might be able to afford.  But how much home should you really buy?  I'll go into this in depth in an upcoming blog post, so stay tuned!

Well, It Was Fun While It Lasted

30-year Fixed Rate is at 4.000%* this week.

Rates crept back up to where they were ending last year, but are still quite low, historically speaking.

A reduced inventory of homes is starting to push up home values, which makes lower rates that much more important for homebuyers.

*This is closest "par" rate for a conventional 30-year mortgage.  It assumes very good credit, sufficient equity, and the absence of other negative risk factors (e.g. property use, cash-out or not, loan amount, etc).  Different mortgage types (such as FHA and VA) and specific risk factors will affect interest rates.

How to Ensure You Have a Good Credit Score

One of the biggest stumbling blocks in buying a home or refinancing is often having a lower credit score.  In our experience, there are three main reasons for a less-than-perfect credit score:

• Late Payments:  If you have a late payment on your credit, it does not bode well for a lender to whom you will be making payments for the next 10-30 years.  Usually, if it’s just one late payment, you can sometimes get it removed from your credit report, but if you have more than one, it’s unlikely that the creditor would be willing to remove it.  The more recent and the more severe the late payment, the more of an effect it has on your score.  If you are currently past due (30 days or more) when your credit is checked, that can bring down your score by as much as 75 points.
• Credit Limit Usage:  Frequently, we will see credit cards maxed out, or nearly.  Sometimes they’re even over the limit.  As a general rule, you should always try to keep your credit card balance no higher than 50% usage (though 25% is even better).  If paying down the balances to 50% is not an option, at least assure that they are under the credit limit.  We can actually run a simulator that will tell us which cards need to be paid down and by how much to achieve the target credit score.
• Medical Collection Accounts: The medical billing system in the United States is maddening.  Sometimes you won’t ever receive a bill, and your account will go immediately to collections.  The good news is that these types of collections accounts can usually be removed from your credit report (though you will probably still need to pay them off).  Often, the collection agencies will even accept a settlement (letting you pay less than they say you owe).

There are also a few misconceptions that we commonly hear regarding credit scores.  These include:

• “Checking my credit hurts it”: This is true if you are obsessively checking your credit over a range of credit types (car loans, department stores, etc.), because it makes you appear desperate.  But getting your credit checked by several different lenders while you’re shopping around for a mortgage is not going to hurt your score.  Also keep in mind that unless you get an actual FICO score from a real credit reporting agency, it is probably not a valid score and can’t be counted on.
• “I should pay off my collections accounts”: The simplified reason for this is that while it may help in the long-term, paying off collections actually hurts in the short term.  Why?  Because as soon as a payment is made to an account, even a collections account, that account is “refreshed” on your credit score and becomes current.  In essence, it would then be as though it were a new credit collection account, which carries much more weight than an older one, regardless of the balance.  In these situations, the best way to deal with a collections account is to get it removed, which usually involves negotiating with the collection agency.
• “I should pay off and close my accounts”:  If you have a good, long-standing credit account to which you have made regular payments, closing this account will take it off of your credit report.  You want these kinds of accounts to show up because they prove you have established good credit.  So go ahead and pay down or even off your accounts, but be careful about which ones you have removed (if any).  Having no credit is bad credit.

So what else can you do to make sure you have a healthy credit score when it comes time to take out a mortgage?

• Keep track of what you owe.  Having a record of all your accounts, including your mortgage, auto loans, student loans, utilities, credit cards, medical bills, etc, will be helpful.  Update your records every time you make a payment.
• Pay your bills, and pay on time.  As mentioned above, a late payment can be a serious hit to your credit score.  Always pay your bills on time, negotiating with your creditors if it is absolutely not possible.  You might also come up with a payment plan for yourself to pay off debts such as credit cards and student loans (if you consistently pay with minimum payments, you could end up paying a lot more in interest, so it could be good for you to pay more than that).
• Protect your identity.  It’s amazing how many people don’t realize they should shred or otherwise destroy (burning is just as fun!) sensitive documents.  It’s easy for identity thieves to pick up personal information from documents (or even credit card offers) that are simply thrown in the garbage instead of destroyed.  Delete suspicious emails (without opening them) and be careful with your wallet/purse.
• Keep track of your charges.  Check bank and credit card statements at the end of every month or so.  Make sure every charge on there is one you remember or have accounted for.  This will help keep you on top of your accounts, keep you from going over your credit limit, and it will be easy to see if there’s a mysterious charge.

If you already have bad credit, what can you do?

• Remember that certain items stay on your credit longer.  Inquiries stay on for 2 years, delinquencies for 7 years, and public record items for 7-10 years.  Maybe you only need to wait a bit longer for something to go off your credit report, or at least until it gets old enough that it doesn’t have much of an effect.
• Give it time.  If you know it’s going to be another year or so before that bankruptcy no longer matters, use the extra time to save up more for a down-payment (or to pay off other debt).  Being able to put up a larger down payment when it comes time for a mortgage will significantly help your rate/terms.
• Consider using only your spouse’s score.  Your score only matters if your name is going to be on the mortgage.  If you have a poor credit score, but your spouse’s is just fine, consider letting the mortgage be only in his/her name.  Later on down the line, you might be able to refinance when your score is better, and put yourself on the loan at that time.  You can still be on the title without being on the actual mortgage.  Understand, though, that if your credit isn’t used, your income can’t be considered either.
• “Alt-A” Options are Available.  Mortgage options for credit-challenged borrowers are coming back (and these ones are legitimate!).  In some cases, you can even get a mortgage just 1 day out of bankruptcy.  The rates are higher and they are more stringent on other areas (like income and down payment), but those options may be best for some.
• Keep on top of things.  Aside from the tips already listed above, you can periodically check your own credit score.  You are entitled to one free credit report from each of the big three reporting companies each year.  Annualcreditreport.com is a legitimate website that deals with getting these free reports.  You can stagger ordering from each company, say every four months or so, and get an updated report for free throughout the year.

Ultimately, an experienced mortgage professional will be able to determine what your options are now, what they could be in the future, and will be able to help you put together a plan to accomplish your financing goals.  We’ve helped many clients who were certain they had no options, so let us see what we can do!

Rates from Lows, But Still Good

30-yr Fixed Rate is at 3.875%* this week.

Rates are up from the lows of the end of January/beginning of February, due in part to some stability in the Ukraine/Russia crisis and oil prices.  Still, they are lower than the 2014 average.

All but 2 Fed chairpersons have signaled that they will vote to raise the Fed rate in June.  Mortgage rates will likely increase before in anticipation.

*This is closest “par” rate for a conventional 30-yr mortgage.  It assumes very good credit, sufficient equity, and the absence of other negative risk factors (e.g. property use, cash-out or not, loan amount, etc.).  Different mortgage types (such as FHA and VA) and specific risk factors will affect interest rates.

When to Choose a Broker Over Your Bank

When considering refinancing (or getting a home loan for the first time), you might wonder whether you should use your bank or a non-bank broker, like me, for your home loan.  They both have advantages, and you should consider both.

When/Why a Non-Bank Broker/Lender is Better-
Most people will think of their bank first when considering a loan.  So the advantage of a non-bank lender is that they are willing to compete for your business, which is a good thing.  There are other advantages:

• Rate/Fee Advantages:  It’s true that roughly the same rates are offered by banks and non-banks, but lenders have a bit more flexibility in reducing rates offered or fees charged.  That flexibility comes from several factors, but mainly has to do with the lack of red tape that lenders have to go through to make exceptions.  Bank policies are quite rigid, with any changes requiring approval from corporate headquarters, and no guarantee they’ll approve them.

• Motivation/Service Advantages:  Most bank loan officers are paid a salary with an insignificant bonus or commission.  This means that as long as they fulfill their minimum job requirements, they get paid, and there’s no real upside for going beyond that.  That translates into less willingness to proceed when there are obstacles (credit issues, income problems, etc.).  It might also mean poorer service, because if the loan doesn’t close, it doesn’t affect the bank loan officer much.  Conversely, if a non-bank broker, like me, doesn’t close a loan, I don’t get paid.  That drives me to go above and beyond, increases the chance that the loan will be closed, and provides for a better experience for the borrower.  It also drives me to be better at my job.

• More Available Products:  Banks do a lot of things: they’re depositories, car loan issuers, credit card lenders, etc., and therefore can’t spend all of their time and energy developing their mortgage side.  Lenders, on the other hand, only do mortgages, so they focus their time and resources and those products and options.  Brokers, especially, can often find an investor that will fund a loan when a bank can’t or won’t do it in-house.

• Borrowers whose credit isn’t as good:  Most banks don’t like to deal with non-AAA credit borrowers.

When/Why a Bank is Better than a Broker/Lender-
Besides having your loan in the same place where your checking account is, there are some ways where local banks and credit unions have advantages:

• Home Equity Lines of Credit: Also known as HELOCs, credit unions usually offer better rates and terms for these types of loans than lenders/brokers.

• Really Weird Loans: Local banks and credit unions have their own portfolios (because they are also a depository), which allow them pretty much full discretion on how they want to lend that money.  A borrower that has a good, established relationship with a credit union and has a very specific lending need (for instance, can I get a loan against my boat and my cabin at the same time?), would likely have more luck with a credit union.

• Super-Prime borrowers: Borrowers with 800+ credit scores, 25%+ equity in their homes, loads of reported income, and no debt can sometimes get better rates or terms from a local bank.  But keep in mind that if a lender or broker wanted to, they could often out-do a bank for these types of loans!

So when you’re considering where to go for your loan, remember the advantages for both banks and non-bank lenders.  If a bank is right for you, go for it.  But don’t forget that a non-bank broker (like me!) is going to go above and beyond to make sure you close on the best loan you can get.

Massive Drop in Interest Rates

30-yr Fixed Rate is at 3.750%* this week.

With the weakness of the European economy, investors are flocking to the certainty of US Treasury bonds, helping to drive down mortgage rates.

With the Fed signaling that they WILL increase rates later this year, this is the time to refinance or purchase, if you can!

*This is closest “par” rate for a conventional 30-yr mortgage.  It assumes very good credit, sufficient equity, and the absence of other negative risk factors (e.g. property use, cash-out or not, loan amount, etc.).  Different mortgage types (such as FHA and VA) and specific risk factors will affect interest rates.

Rates Maintain 18-Month Lows

30-yr Fixed Rate is at 4.000%* this week.

Rates kept at their lowest levels in over a year, keeping a 4-week stretch at 4%.  However, the Fed signaled that it could increase its rate in 6 months, as opposed to its previous stance of keeping the rate at zero for a “considerable period of time”.

*This is closest “par” rate for a conventional 30-yr mortgage.  It assumes very good credit, sufficient equity, and the absence of other negative risk factors (e.g. property use, cash-out or not, loan amount, etc.).  Different mortgage types (such as FHA and VA) and specific risk factors will affect interest rates.

Loans for Self-Employed Borrowers

Self-Employment: for many of us, this is the essence of the American Dream.  Taking risks and going it alone, hopefully for better and sometimes for worse.  Our economy is arguably anchored by a foundation of small businesses that hire, grow, and most importantly, innovate. 

The prevailing impression is that self-employed borrowers can’t get mortgage terms as favorable as employed borrowers (let’s call them “W2-ed” borrowers), if they can get a mortgage at all.  Fortunately, that is not truly the case, although self-employed borrowers will have some unique challenges (and unique opportunities) in qualifying for a mortgage.  I’ll address some of those challenges, how they can be mitigated, and touch on some advantages that self-employed borrowers enjoy.

The Bane of Self-Employment:  Documented Income

Underwriters need you to be able to prove your income.  For W2-ed borrowers, this is fairly straightforward: there are paystubs, W2s, or employers themselves that are fairly easy to access.  However, self-employed borrowers usually don’t issue themselves paychecks or W2s (and even if they do, you could imagine how underwriters would scrutinize that).  The best documentation that underwriters can get regarding a self-employed borrower’s income is his/her tax returns.  Just like W2s and such are reported to the IRS, tax returns are how self-employed borrowers report their income to the IRS (and subsequently pay taxes).

One of the great perks of self-employment is the ability to write-off expenses in order to reduce taxable income.  Do you use your cell phone for work?  You can deduct it from your income.  Same thing with travel expenses, storing inventory, buying a four-wheeler to entertain clients (!), etc.  Self-employed borrowers are able to reduce their taxable income, often paying fewer taxes than comparable W2-ed borrowers.  However, there is a flip-side: that reduced taxable income is the same figure that underwriters will use for your qualifying income when you apply for a mortgage.  If you earned $50K/yr, but wrote it down (through business expenses) to $30K/yr, it is going to be more difficult -if not impossible- to qualify for most mortgages.

It’s a double-edged sword: the more you write down, the less you pay in taxes, but the lower mortgage amount you can qualify for.

Key Points to be Aware Of

The key to getting a loan when you are self-employed is advance planning.  You first need to know some things about how underwriters will calculate your income.  This subject could be a weeklong seminar in itself, so I will just point out some key items-

·         You have to use the same tax returns you filed with IRS – You can’t have 2 sets of tax returns.  If you do, you’ve got bigger problems…

·         Your total income is considered, not your taxable income– This is line 22 of your federal income tax return (your 1040s).

·         The last 2 years’ tax returns are considered – If your income is less for your 2013 returns then it was for your 2012 returns, they will use just your 2013 tax returns.  However, if your 2013 income is more than your 2012 income, they will consider the average of the 2 years.

·         Some income can be “added back” – Things such as depreciation or property taxes can be added back to your total income.  This is especially applicable if you have rental properties.

What to Do

As I mentioned, planning is the key when being self-employed and trying to get a mortgage.  Since tax returns are used as your income documentation, it may mean waiting until the next year’s returns are prepared.

·         Calculate what you can qualify for now – This is an oversimplification, but for both your 2013 and 2012 tax returns, take your 1040 line 22 income and subtract any non-recurring losses or gains (like IRA distributions, unemployment compensation, etc.).  Now average those figures for 2012 and 2013 and divide by 12.  This is the figure that can be used as your qualifying income.  Now take that number and multiply it by 0.35; the result will be, approximately, your highest allowable monthly mortgage payment (including taxes and insurance).  Keep in mind that if you have a lot of other debts, they could reduce your highest allowable monthly mortgage payment. 

Example:  2013 Total income: $65,000, 2012 Total income less Unemployment compensation: $40,000.  The average is $52,500, giving you $4375/month in qualifying income.  Your highest allowable monthly mortgage payment is $4375 * 0.35 = $1531.

·         Calculate what income you will need – Let’s continue the previous example and say you wanted to buy a home (or refinance) that would require a mortgage payment of $2000.  With your 2012 and 2013 tax returns, you don’t yet qualify, but you may be able to with your 2014 tax returns.  To figure out how much income you will need to show on your 2014 returns, we work backwards.

$2000 / 0.35 = $5714 in required monthly income.  That’s $68,570 a year, so if we double that and subtract your 2013 Total income, we get $72,140, which is how much income you will need to show on your 2014 tax returns to obtain this loan (remember that we are no longer considering your 2012 income, since we only look at the 2 most recent tax returns).

If you were aggressively writing off business expenses before, you could ease up a bit and show over $72,140 on your tax returns for 2014.  You will pay a little bit more in taxes, but you’ll qualify for the mortgage.  This is the “silver lining” of being a self-employed borrower: you can control the income reported and consequently, control the mortgage (within reason).

Tips

I will say again, this is an oversimplification.  A good loan officer (like…me!) will be able to accurately determine what you qualify for and what needs to happen to make it work.  Here are some general tips for self-employed borrowers that are thinking about getting or refinancing a mortgage:

·         Start using a CPA – Taxes get a lot more complicated when you’re self-employed and a good accountant can save you money, protect you from audits, etc.  Plus they carry a lot of weight with underwriters. 

·         Be fair – I’m not going to approach the ethical/moral/legal arguments of whether or not you should write off that matinee movie, but I do believe in karma, so show an honest income and pay an honest tax.  In the long run, you’re better off getting a mortgage with which you are truly matched (considering true income).

·         PLAN – If you’re thinking about buying a home within the next 2-3 years, talk to a loan officer (me) now to see where you stand and where you need to be.

·         Other Options – There are other options for self-employed borrowers, such as Stated Income Loans.  These are not nearly as attractive as they used to be before the real estate crash, but they are making a slow and controlled comeback.  If you have a substantial amount of equity and/or cash to use as a down payment, and don’t mind a slightly higher interest rate, a Stated Income Loan might work.

Bottom-line

Self-employed borrowers have just as many mortgage options as W2-ed borrowers, they just need to understand the significance of their income reporting and plan accordingly.

Rates Post Slight Increase

30-year Fixed Rate is at 4.125%* this week.

Rates ticked up slightly by 0.125%, but are still 0.25% lower than in September.  FHA 30-year Fixed rates at under 3.75%.

*This is closest “par” rate for a conventional 30-yr mortgage.  It assumes very good credit, sufficient equity, and the absence of other negative risk factors (e.g. property use, cash-out or not, loan amount, etc.).  Different mortgage types (such as FHA and VA) and specific risk factors will affect interest rates.

When to Get a 15-Year Loan

Many of my clients have taken advantage of the significant savings offered by a 15-yr mortgage as opposed to the more traditional 30-yr loan.  For those that can afford it, it’s a great way to pay off your home in half the time and save tens of thousands of dollars in interest, but borrowers need to consider their financial standing and options before committing themselves to this type of mortgage.

What is a 15-yr Mortgage?

A 15-yr mortgage (we’ll just call it a “15-yr”) is a fixed-rate mortgage that is amortized (the process of paying a loan down in equal payments over a certain period of time) over 15 years instead of 30 years.  The interest rates are normally lower than 30-yr mortgage rates (that’s the incentive to pick a 15-yr loan).  Because of the way amortization works, even though the loan is paid off in half the time, the mortgage payment is not twice as much.

The Pros of a 15-yr

Fifteen-year mortgages have the following main benefits-

·         Lower interest rate than a 30-yr – How much lower depends on the market.  There have been times when the rates for a 15-yr and a 30-yr have not been that far apart, but historically, 15-yr rates have averaged 0.625% lower than a 30-yr.  So for example, if the going 30-yr mortgage rate is 4%, you can expect a 15-yr mortgage rate of about 3.375%.

·         Pay off the mortgage in half the time without paying twice as much – The payment for a 15-yr loan will be about 48% higher than the a 30-yr for the same mortgage balance.  Even if you factor in the increased payment for the 15-yr loan, you pay over 60% less interest over the life of the loan.

·         Mortgage Insurance is cheaper – If mortgage insurance (not to be confused with homeowner’s insurance) is required (it’s mostly required for FHA loans and mortgages with less than 20% equity), it’s normally less expensive than 30-yr mortgage insurance.

The Cons of a 15-yr

Although they’re normally great, beware of the following downsides of a 15-yr loan-

·         You can’t buy as much of a home – Because the amount that you can borrow is determined in large part by the size of the mortgage payment compared to your income, many borrowers will not be able to purchase as large of a home with a 15-yr as they could with a 30-yr.  For example, if it’s determined that the maximum mortgage payment your income can support is $1200/month (principal & interest, assuming 4% for a 30-yr and 3.375% for a 15-yr), then you could buy a home for $251,000 with a 30-yr mortgage, but your max purchase price would be $169,000 with a 15-yr mortgage.

·         The interest rate is not always much better than a 30-yr – Anybody can pay down their loan faster by paying more each month, so if there isn’t much of a difference between a 30-yr interest rate and a 15-yr interest rate (I would say less than 0.5%) then there isn’t as much of a benefit with picking a 15-yr with a higher payment.

·         You don’t get a “do over” – You can always make a 15-yr payment on a 30-yr loan, but you can’t make a 30-yr payment on a 15-yr loan (lenders tend to frown/foreclose on that).  If you think a 15-yr could be a stretch, don’t risk it.

Main Consideration – What Else Can I do with my Money?

So, is a 15-yr good or bad?  Usually good, but you MUST consider the opportunity costs, i.e. what else could you do with that money?  In my opinion, the following items are a better use of money than putting it towards 15-yr mortgage payment:

·         Emergency Savings – If you don’t have a rainy day fund, get one before you put extra towards your mortgage.  If you got a 15-yr loan and weren’t able to save money otherwise, what would happen in the case of an emergency?  You would be forced to use debt, likely at a higher interest rate than your 15-yr loan, which would negate the whole purpose of getting a 15-yr loan (to save money).

·         Higher Interest Debt – What sense does it make to pay extra towards 4% debt (the current 30-yr mortgage rate) while only making the minimum payments on 15% debt (the average rate for credit cards)?  A 15-yr is all about paying less interest, but if you do it at the expense of having other high interest debt, you’ve shot yourself in the foot.  Before you pay more towards your mortgage, pay off your higher interest debt (usually credit cards).

·         Retirement Savings – I meet with a fair amount of people that are 15 years from retirement and really want refinance to a 15-yr so that they can own their home by the time they retire.  However, these same clients have often not saved for retirement and won’t be able to do so if they get a 15-yr loan.  What will they do for income when they retire?  They’ll have to either sell or re-mortgage the home they just paid off!  Make sure that you are sufficiently funding your retirement savings before you pay extra towards your mortgage.

Bottom-line

Fifteen year mortgages are a great way to save on interest, but make sure your other ducks are in a row and that it really make sense before you make that irreversible commitment.  I’d be happy to help you with that analysis!

Rates at 12 Month Low

30-year Fixed Rate is at 4.000%* this week.

Following a string of losses in the stock market, mortgage rates hit a low for the year.  This is a prime opportunity to buy or refinance in light of the Fed's scheduled rate hike in January.

*This is closest "par" rate for a conventional 30-year mortgage.  It assumes very good credit, sufficient equity, and the absence of other negative risk factors (e.g. property use, cash-out or not, loan amount, etc.).  Different mortgage types (such as FHA and VA) and specific risk factors will affect interest rates.

Rates Come Back Down Following Rough Patch for Stocks

30-yr Fixed Rate is at 4.125%* this week.

After sitting at 4.25% for close to 2 months, rates dropped a bit this morning after several days of losses in the stock market.  Strong job reports will give them upward pressure, however.

*This is closest “par” rate for a conventional 30-yr mortgage.  It assumes very good credit, sufficient equity, and the absence of other negative risk factors (e.g. property use, cash-out or not, loan amount, etc.).  Different mortgage types (such as FHA and VA) and specific risk factors will affect interest rates.

Zero-Down Home Purchase Options

The down payment for a mortgage can be a prohibitive factor for many people hoping to purchase a home, but it doesn’t have to be.  Many potential homeowners still expect to have to put down 20% (that’s $40,000 for a $200,000 home), which is not an option for many (in the 1940s, it used to be 50%!), but over the years, many different low-to-no down payment options have been created, making it possible for most people to buy a home that want to.

Below are some common loan options/strategies for “Zero down” mortgages, listed in order of which I think are the best options.

VA Loans

These loans are meant for borrowers (or spouses of borrowers) who have served time in the military.  Note that you do not have to be a war veteran to get a VA Loan!  You just need to have finished your stint (even it’s the Reserves or National Guard) and not have been dishonorably discharged:

Pros:

·         No down payment required, for both purchases and refinances

·         NO MORTGAGE INSURANCE!  This is a huge advantage over other 0-down mortgages

·         Often higher loan limits than other 0-down mortgages (you can buy more house)

·         Rates are normally significantly lower than conventional mortgages

Cons:

·         You have to have been in the military (but again, the requirements are very broad)

·         There is a Funding Fee added to the loan.  This is anywhere from 0-3.3%, depending on the nature of your time in the military, but it does not have to be paid out of pocket.

USDA Loans

Sometimes called rural loans, these loans are meant for borrowers that are willing to live in areas that USDA considers “rural”, which in Utah is essentially south of Spanish Fork, north of Ogden, west of Bingham Canyon, and east of Provo.

Pros:

·         No down payment required, for both purchases and refinances

·         As with VA loans, NO MORTGAGE INSURANCE!  This is a huge advantage over other 0-down mortgages

·         Rates are normally a bit lower than conventional mortgage rates

Cons:

·         You pretty much have to live outside of the Wasatch Front, but areas like Heber, Payson, Eagle Mountain, Tooele, and Brigham City are all currently considered rural by USDA.

·         There are income caps, based on the county, family size, etc.  They are not meant for rich borrowers.  The credit requirements are a bit higher as well.

·         There are loan limits (based on the county) that are normally lower than other loan types, so getting a $400,000 could be difficult.

FHA loan with local grant programs

FHA loans normally require the lowest down payments, but they still require something (3.5%, or $7000 for a $200,000 home).  Grant programs exist both on the state and county levels that will pay that 3.5% for qualified borrowers, making it so that the borrower doesn’t need to come in with a down payment.

Pros:

·         No down payment required (purchases only)

·         Only 1 loan (other no-down-payment FHA options require 2 loans)

·         Lower average rates than other FHA no-down-payment loans and conventional loans

Cons:

·         As with USDA, there are income caps

·         There are lower loan limits than normal FHA loans as well as restrictions on the property type

·         It’s an FHA loan, so you will have mortgage insurance.

FHA loan with a small 2nd mortgage

This is probably the most common no-down-payment mortgage option.  A government “grant” is given that allows for a 2nd mortgage to take the place of the 3.5% down payment.  There are variations of the program for first-time home buyers, previous home buyers that had a bankruptcy/foreclosure, and even a conventional mortgage option that doesn’t carry mortgage insurance.

Pros:

·         No down payment required (purchases only)

·         The program is pretty established and the government grant is large, so it’s fairly easy to qualify for.

·         Fewer restrictions on income and loan size, compared to the previous option

Cons:

·         You’ll have a 2nd mortgage with a higher interest rate on top of the FHA 1st mortgage

·         Again, since it’s FHA, there is mortgage insurance (and the 2nd mortgage payment)

·         The interest rate is normally a bit higher than if you had an FHA loan without the 2nd mortgage.

·         There are stiffer credit requirements.

Gifted down payment

This is not a loan program as much as it is a strategy.  FHA loan programs- and now even Conventional loans- allow a parent, family member, friend, or even an employer to give you the funds to cover the down payment.

Pros:

·         No down payment (from your pocket, at least!)

·         Far fewer restrictions on what type of loan you can get (get something without mortgage insurance)

·         Work with friends/family instead of a government entity for the down payment (which can be easier and faster)

Cons:

·         You need generous family members, friends, bosses, etc.!

·         The gifted funds need to be “sourced”, which means there needs to be proof that the funds actually belong to the “gifter” and they are legitimate (no money laundering).

Bottom Line

To be clear, having a down payment usually gets you more favorable loan terms and always reduces the size of the loan, giving you lower mortgage payments.  However, the benefits of homeownership, even if terms are slightly unfavorable because of a no-down-payment mortgage, far outweigh the disadvantages.  In short, not having a down payment should not and WILL NOT keep you from owning a home!

Rates at 2 Month High…Barely

30-yr Fixed Rate is at 4.375%* this week.

Though only an increase of 0.125%, rates are up to their highest point since July, continuing their gradual but steady increase since Spring.

All eyes are on the Fed who will likely take measures to increase the Fed rate in October.

*This is closest “par” rate for a conventional 30-yr mortgage.  It assumes very good credit, sufficient equity, and the absence of other negative risk factors (e.g. property use, cash-out or not, loan amount, etc.).  Different mortgage types (such as FHA and VA) and specific risk factors will affect interest rates.