The Best Times to Buy, Sell and Refinance

buy sell refinanceIf you’re at all interested in what’s going on in the housing market, then you’ll likely be considering when to either buy, sell or refinance an existing mortgage. Depending on where mortgage rates are heading, it could either be a good time to buy, sell or refinance.

When to Refinance

The best time to refinance is either when rates are remaining the same or when they are dropping. Depending on when you purchased your home, the interest rate on your mortgage may be higher than the historic lows of the past several years. If that is the case, then there are many strong incentives to refinance.

The general rule of thumb is that if you can shave off at least 1 percentage point on your interest rate with a refinance, then it’s worth it to refinance. Interest rates have been just above 4% on 30-year fixed rate mortgages for a good amount of time.

What’s important to keep in mind also is where rates are likely to be heading. Most mortgage experts expect rates to climb in the second half of the year. The Federal Reserve’s decision to tapper its bond buying program has a lot to with this. This means that in some sense the window of time for many homeowners to refinance is closing.

Another important factor in determining when to refinance is the nature of the interest rate that you have on your loan. Variable interest rates can change with market conditions and therefore can be risky. You should ask yourself whether you will be able to continue making mortgage payments if your rate were to go up significantly. It may be worth your time to switch to a low 30-year fixed interest rate so that even if rates go up in the future your payments won’t be affected.

When to Buy or Sell Your Home

Falling or stagnant interest rates also indicate a good time to sell or buy a new home. A borrower’s buying power has been historically strong at times when rates either remain the same or are dropping. However, this assumes that you have good credit and are therefore able to qualify for a low interest loan.

If, for example, you want to buy a house for $300,000 with a conventional loan at 20% down on a 30-year fixed interest rate at 4% this would cost you %1,145.00 per month. Should you wait for an extended period of time when rates are hovering around 6% then your monthly payments would go up nearly $300. Over the course of one year alone, that’s nearly an extra $3,600.

What you should also consider is where home prices are heading. If you own a home in a large metropolitan area, then chances are you’re in luck if you want to sell. Home prices have been on the rise in many areas of the country. But there are some less densely populated cities where home prices have actually fallen. If you want to know approximately what your home is worth, try to find similar homes where you live and see what they are selling for.

Jumbo Loans Are Driving Credit Availability

jumbo loan record numbersMillion dollar home loans are being handed out in record numbers even as many first time buyers are still finding it hard to get a loan.

Erin Gorman, managing director at Bank of New York Mellon Corp, said that she has seen more borrowers looking to take out $2 million dollars loans than at any time in the past. Some of the borrowers are even taking out loans to purchase second properties.

“These high-net-worth borrowers do act differently than first-time buyers, who borrow because they have to,” said Gorman, who serves as the national mortgage sales director. “High-net-worth borrowers don’t have to borrow. They choose to, so they’re very strategic about what, why, and when they borrow.”

Jumbo Loans on the Rise

The number of Americans who took out a home loan from $1 to $10 million in the most densely populated cities of America stood at more than 15,000 in the second quarter of 2014. That is the highest number ever recorded according to property data firm Corelogic.

There are a number of potential reasons why there is a sharp increase in high volume loans. Many wealthy buyers are looking to capitalize on their investments as the stock market rises and home prices surge upwards. The goal in many instances is to sell these homes for more than their purchasing price and thus turn a profit.

Many of these high end borrowers don’t even necessarily have to borrow in order to come up with the money they need. They do so strategically. At the same time, first time buyers are finding it hard to enter into the market. These buyers simply don’t have the credit scores that many lenders are looking for.

Right before the collapse of the housing market back in 2008, first time buyers made up about 35% of all borrowers. In June of this year, they only made up about 28% of existing home sales. Though many of the new first time buyers entering the market may not qualify for conventional loans, they may qualify for FHA loans. These have lower credit requirements than most loans which makes them especially attractive to first time buyers.

Credit Availability Increases with New Jumbo Loans

Mortgage credit availability has been increasing slightly ever month and that has continued from June to July, according to a report from the Mortgage Bankers Association. The increase was primarily due to a rise in the number of adjustable rate jumbo loans. Jumbo loans are simply loans that are above conforming loan limits. This limit may be higher or lower depending on where one lives.

Whenever credit availability decreases that means that lending standards are tightening. Whenever credit availability increases, that means lending standards are loosening. So, if you were not able to get a loan several months ago, this means that your chances of getting a loan now have improved slightly. Lending standards still aren’t as loose as they were back in 2008 before sub-prime mortgage crisis. But there is still an upward trajectory meaning more and more people will eventually be able to qualify for a loan as time goes by.  

Subprime Lending Moving Back Into the Mainstream

subprime lendingSubprime lending is becoming an option for many homeowners once more several years after an overflow of subprime loans brought the housing market to its knees.

Shortly after the financial crisis in 2008, subprime lending became synonymous with risk and foreclosure. Too many people simply couldn’t afford to keep paying their mortgages as they lost their jobs and the interest rates on their home loans increased.

Banks quickly abandoned these types of loans and tougher underwriting standards began to be put in place with the passage of the Dodd-Frank bill. But as of 2013 and well into this year, a number of banks are beginning to offer subprime loans once more.

What are subprime loans?

A subprime loan is a loan with an interest rate above prime rates for borrowers who are unable to qualify for prime rate mortgages. Subprime borrowers typically don’t have the best credit score and thus pay a premium to be able to borrow. They are statistically more likely than other borrowers to default on their loans.

When it comes to buying a house, a subprime loan can costs tens of thousands of dollars more than a conventional loan in interest payments. They are often used as a last resort after the borrower has tried and failed to qualify for loans that come with better terms.

Subprime loans that are being offered today

Only a handful of banks are currently offering borrowers subprime loans. Those that are offering these types of loans are attaching 8-13% interest rates with them as opposed to the 4% interest rates that borrowers can get with a 30-year fixed rate mortgage.

As underwriting standards have gotten less restrictive borrowers who have gone through financial hardship are finding it easier to qualify for subprime loans. However, these borrowers will have to pay a premium in order to compensate for the riskier nature of their loan. In most conventional loans, the borrower will end up putting somewhere around 10% down. For an FHA loan, the borrower may be able to still purchase a home with as little as 3-4% down.

The borrowers in today’s market who find that subprime loans are their only option will often end up putting at least 35% down. This has given them a rather limited appeal as many buyers simply decide to improve their financial standing than take out a loan with such a high down payment and interest rate.

Some housing market analysts have argued that subprime loans will likely continue to play a more important role as time goes on. It has been estimated that after the financial crisis, around 12.5 million people were shut out of the housing market who previously might have qualified for a home loan. Minority groups have been hit especially hard as the new regulations have made it more difficult to qualify for a loan. Easing these buyers back into the market could give new life to a housing market that’s had many ups and downs over the last several years.

The Difference between How Much You Can Afford and How Much You Should Borrow

afford vs borrowThe housing market continues to pick up steam in 2014 with a number of new buyers entering the market for the first time.

Many if not most of these buyers will not have the cash reserves on hand to pay for a new home all at one time. This is where borrowing comes in. An affordable home loan can make the dream of owning your own home possible.

Depending on your income, credit score etc. the amount of money that you will be approved to borrow is going to vary. And just because you’re approved to borrow a certain amount doesn’t necessarily mean that it’s financially wise to take out a loan for that maximum amount.

Buying a Home

When you begin the process of buying a home for the first time, mortgage companies will examine your debt-to-income ratio to determine how much you can borrow. Mortgage banks look to make sure that no more than 36% of your monthly income is going to pay debts.

In order to calculate your monthly payment threshold you take your annual salary multiply that number by 0.28 and then divide by 12. So, if you make $100,000 a year then you would have a monthly mortgage threshold of $2,333. This is a pretty good rule of thumb that will serve most people well.

Most people most of the time won’t be teetering on the verge of foreclosure. What’s important to consider is what is unique to your own financial situation. Just because you make enough now to be able to afford a home loan at a certain price doesn’t mean that you’ll be able to continue doing this well into the future.

A number of factors could come together that would make paying back a home loan at a certain price prohibitively expensive. If, for example, you take out an adjustable rate mortgage, then your monthly mortgage payment could go up according to market conditions. Inflation is also going to drive up the cost of nearly everything that you purchase on a day to day basis.

Necessities such as food, energy and clothing are all bound to get more expensive the more time goes by. In other words, just getting by with the same amount of money is going to become more difficult. Another important factor to consider is job security. It’s worth considering how likely it is that you’ll be able to do the same job and earn the same wage or higher well into the future. Moreover, how much would you be earning if you had to switch careers in order to adapt to the changing job market?

These are all issues worth considering when deciding how large of a loan you should take out. No one has ever been seriously harmed by being too financially secure and by having too much money stored away in their savings account. Choosing the size of the loan you want to borrow is a combination of understanding what’s unique about your financial situation, planning for the future, living comfortably and taking on risk.

What is a Bank Statement Loan for the Self Employed?

bank statement loanIf you own a business, a bank statement loan may be the solution you have been looking for. Business owners often have a difficult time qualifying for a mortgage loan because their taxes don’t reflect the full amount of money they are actually making. This can make your debt to income ratio appear much higher than it actually is.

Many small business owners will write off expenses that the business pays for, instead of including that in their salary and making the payment after taxes. For example, the business may pay for their cell phone, car payment, car insurance, and meals and entertainment. Those funds add up and if they were included as part of their salary would significantly increase what they make per month. The write offs are good for taxes but by lowering your take home pay, it makes it more difficult to qualify for a traditional mortgage loan.

A bank statement loan is the solution because the underwriter will use bank statements to calculate your income instead of tax returns. By looking at the total deposits coming into your account, they are able to determine what your total income really is.

How Does a Bank Statement Loan Work?

• Gather twenty four months of bank statements. Your mortgage lender and underwriter will need to review these for your personal and business account, though they may only ask for one set to begin with.

• Average monthly income is calculated. Since the underwriter isn’t using your tax returns, they need to look at the total deposits coming into your account over the past two years in order to get your average monthly income. This is done by adding up all of the deposits coming into your account and dividing that number by 24.

• Deductions. The mortgage lender may deduct certain expenses from your average monthly income, but that will be determined based on what they see on your bank statements.

• Calculating your Debt to Income ratio. Your underwriter will use your final average monthly income as the figure that you make every month. They will then calculate your total expenses. Your expenses divided by your income is your debt to income ratio. The more money you make, the lower your DTI will be, making it easier to qualify.

If you are concerned that you may not qualify, even with a bank statement loan, speak with your mortgage lender about your situation and your loan options. If you are simply looking to lower our interest rate, you may be able to do that with a streamline refinance. In FHA streamline refinance or a VA Interest Rate Reduction Loan, you don’t have to prove your income or even your credit score. As long as you have an existing FHA or VA loan, make your payments on time, occupy the property, and can show that refinancing will save you money or fix your interest rate, you should qualify for a streamline refinance.

There are many ways to obtain a purchase loan or refinance your home while owning your business. Call your mortgage banker today to find out if a bank statement loan is right for you.

Millions of Young Adults Absent from Todays Housing Market

young adult homeownersEven as the housing market continues to recover, there remains a large number of young adults who still aren’t buying houses.

Data from the U.S. census bureau shows that homeownership for young adults in America has declined from 43.6 percent to just 36 percent over the last decade. There are a number of reasons for this trend.

Why Homeownership Has Declined For Young Adults over the Last Decade

Interest rates aren’t the only thing that has been steadily creeping up over the last year. Home prices have as well, which is great if you’re looking to sell your house. It’s not so great if you’re a first time buyer looking to enter the market. The median price for a new home in the United States now sits at $290,000, which is the highest that it’s ever been.

What can be seen from looking at the numbers coming out of the housing sector is that the higher end of the market is doing well, but the lower end is still struggling. The young people in question are not only having a hard time making a down-payment for a home, but more and more aren’t renting either. About 3 million of them have had to move back home with their parents.

The reason that these young adults are moving back in is that the jobs that are continuing to be added to the economy are lower wage jobs. Those with stable jobs and good incomes are facing difficulties as well. Many of those who work in larger cities like San Francisco find that they simply can’t afford to purchase a house anywhere near where they work.

Student debt has also continued to play a significant role in keeping younger people out of the market. The more debt that a person has taken on to go to college, the more difficult it will generally tend to be to come up with the money to be able to afford a down payment on something like a home.

Economists have been arguing for a while that student loan debt has been a tremendous overhang on the market. Consider, for example, that students graduating in 2014 are expected to be the most indebted in history. Nearly 7 out of 10 college graduates will be in debt with the average graduate owing around $33,000.

In years past, it may have taken college graduates around 5 years or so to pay off all the debt that they accumulated to go to college. Nowadays, many young people make it well into their 30’s before they even start to get their student loan debt under control. Some have speculated that younger adults find it difficult to take on the psychological burden of adding on more debt.

So, unless something can be done about stagnant wages and the rising price of college tuition, more young adults will likely continue to find it difficult to afford their first home. The real question is whether this should be viewed as a policy concern for the government to deal with or whether the free market will sort things out. Either way, the absence of nearly 3 million potential homeowners will have implications for the housing market for years to come.

Fannie and Freddie Want to Play Bigger Role in Housing Market

fhfa mel wattThe housing market regulators Fannie Mae and Freddie Mac have outlined some new policies recently aimed at helping more homeowners get a mortgage as well as providing relief to troubled borrowers.

Fannie Mae and Freddie Mac don’t issue loans directly to consumers. Instead, they act as a sort of umbrella organization that insures loans against losses. They buy loans that originate from banks, securitize those loans and then sell the housing securities to investors while guaranteeing them against losses.

What Fannie and Freddie Plan to Do

One of the ways that the regulators have planned to accomplish this goal is by first holding off any reduction in the size of loans that firms are able to purchase. According to Federal Housing Finance Agency Director Mel Watt, there are plans in place to ease standards that determine when banks are required to buy back faulty loans. In time this would ease credit standards thus allowing more buyers to gain access to home purchase and refinance loans.

“FHFA will not use its authority as conservator to reduce current loan limits,” Watt told the Brookings Institution. “This decision is motivated by concerns about how such a reduction could adversely impact the health of the current housing finance market.”

Tight lending standards have made it especially difficult for first time buyers to enter into the market. And this doesn’t even take into account the fact that both home prices and interest rates have been steadily rising over the last year.

Along with helping prospective new buyers afford their first homes, one of the goals of the new measures is to help ensure mortgage market has ample liquidity. In other words, Fannie and Freddie are trying to help ensure that housing assets can be bought and sold easily without the sales affecting the price of homes.

Help for Troubled Borrowers

Watt stated that the Freddie and Fannie do not plan on taking measures to expand the Home Affordable Refinancing Program. HARP, as it is otherwise known, has played an integral role over the past few years in helping homeowners who are underwater refinance to an affordable rate. Borrowers with this program have been able to reduce the interest rates on their home loans and even reduce their monthly mortgage payments.

Instead of taking that route, there is a plan to improve servicing standards and help to improve foreclosure prevention programs. The so called “Neighborhood Stabilization Initiative” aims to target the areas of the country which have been hit by the housing collapse the hardest. The first pilot program for this initiative will launch in Detroit.

Many of the proposed changes that Fannie and Freddie are looking to implement will ultimately need to be passed through the congress. The House of Representatives is still controlled by republicans while the Senate remains narrowly controlled by Democrats. It remains to be seen whether or not there will be enough bipartisan support to pass any major bills, especially with the midterm elections just a few months away.

Consumer Financial Protection Bureau Proposes New Mortgage Rules

cfpb mortgage rules
The Consumer Financial Protection Bureau, a financial oversight agency created by the Dodd Frank Act, has proposed some minor changes to existing mortgage rules.

These adjustments are said to make it easier for non-profits to provide lenders with access to their credit history as well as making it slightly easier to get higher priced mortgage loans. The CFPB has been easing restrictions over the past year as the housing sector has stabilized. And if the proposed changes go into effect, they would be in keeping with that trend.

“Our mortgage rules are now helping to protect consumers all across the country from debt traps, runarounds, and surprises,” said CFPB Director Richard Cordray. “Today’s proposal would maintain those strong protections, while making minor changes to ensure consumers have access to credit. This includes helping nonprofits that provide working families with important pathways to affordable homeownership.”

Another proposed change would allow lenders under a limited number of circumstances to reimburse borrowers excess fees that they collect and have the money go towards making the borrowers mortgage be considered ‘qualified.’ So, for example, let’s say a bank makes a loan to a borrower and its fees exceed 3 percent of the principal of the loan. Under the rules set forth by the CFPB, banks are no longer allowed to do this. Under the proposed changes, that money would then be given back the borrower.

Per the rules set forth by the CFPB, home loans must be qualified which means they have certain features that will help make it more likely that the borrower will be able to pay back the loan. The aptly named ability-to-repay rule does just that, and its scope could change slightly for a few number of organizations.

How the Ability-To-Repay Rule Would Change

The ability to repay rule was adopted in response to what many people in Congress believed were loose underwriting standards that had become commonplace prior to the financial collapse. In short, it sets up a number of qualifying standards for the borrower which make it more likely that they will repay their loan.

According to the CFPB’s website, those factors are as follows:

(1) current or reasonably expected income or assets; (2) current employment status; (3) the monthly payment on the covered transaction; (4) the monthly payment on any simultaneous loan; (5) the monthly payment for mortgage-related obligations; (6) current debt obligations, alimony, and child support; (7) the monthly debt-to-income ratio or residual income; and (8) credit history.

With the proposed changes, certain non-profit organizations that make fewer than 200 mortgages per year would be able to extend some interest-free, forgivable loans and not have that count towards their 200-loan limit. So, this isn’t going to have any major impact on the actual borrower.

Unless you’re part of a non-profit that gives out mortgages, there doesn’t appear to be anything in the proposed changes that would have a major impact on purchasing a house. If, on the other hand, you get your home loan from a non-profit, then there would appear to be a small possibility that you may get your interest free loan extended.