Monday, August 14, 2017

Jumbo vs Conforming interest rate spread (MBA)

Last week I received an update from the Mortgage Bankers Association (MBA) regarding their chart of the week (below).  This chart was very interesting and timely for me as I was working with a client who was on the border of a conforming loan (max loan amount $424,100) and jumbo loan (above $424,100).  

The below email indicates jumbo rates averaged 0.25% higher than conforming rates during the recession.  In 2013, we saw a reversal where jumbo rates have primarily remained lower than conforming rates.  The reason for this is because jumbo loans do not require additional fees that conventional loans charge.  The additional fees that Fannie Mae and Freddie Mac charge have gone up over 2x their pre-crisis level. 

One thing to keep in mind is jumbo rates/fees more heavily depend on credit scoring.  The best conforming rates/fees are provided to borrowers with 740 or better credit scores while jumbo loans may provide the best rates/fees to borrowers with 760, 780, or even 800+ credit scores.  Jumbo loans often require larger down payments than conventional loans and may charge a higher rate if less than 20% down. 

Here is part of the email I received:

Source: MBA Weekly Applications Survey

The spread between the rates for jumbo loans and conforming loans historically averaged around 25 basis points and reached as high as 50 basis points during the recession. However, historical rate data from our Weekly Applications Survey shows that the spread narrowed after 2010. In fact, since late 2013 jumbo rates have been lower than conforming rates. Jumbo rates have been six basis points lower than conforming, on average, to date in 2017.

Banks flush with deposits have enthusiastically competed for jumbo loans.  Lenders with the ability to keep jumbo loans on their portfolios have been able to offer lower rates as they do not pay guarantee fees to the GSEs on these loans, and guarantee fees are more than double their level pre crisis.  The very competitive market for jumbo loans has also led to expanded availability of jumbo products to eligible borrowers. This trend was picked up by our Mortgage Credit Availability Index (MCAI), which has shown a significant increase in jumbo credit availability starting around the time the jumbo-conforming spread turned negative.

Wednesday, August 9, 2017

Conventional Loan Updates - Fannie Mae Guideline Changes

Great news, Fannie Mae implemented some changes last week for its conventional loans that will help expand credit and ease guidelines.  These changes may have a BIG IMPACT (upwards) on what homebuyers qualify for.  Below is a brief overview on a few of these changes:

More conventional loans will allow for 50% debt-to-income (DTI) ratios (previously capped off at 45%)
Other than cash, DTI ratios are the main constraint when getting homebuyers qualified at their desired purchase price.  The 5% increase in DTI ratios can greatly boost purchasing power.  Using a $300K purchase price, the additional 5% increase in ratios can boost purchasing around $35,000-$45,000.  Therefore, a borrower who previously was pre-approved at $300K may now qualify upwards to $345K…  sweet! 

This change applies to all Fannie Mae conventional loans ran through their loan system.  This means Fannie Mae’s 3% down HomeReady loan program will allow for 50% DTI ratios.  The 3% down loan is not just for first time homebuyers but there are annual income restrictions which are $74,700 in the Portland-metro area.  Some neighborhoods are classified as “no-income” areas which means there are no “income restrictions” for that neighborhood.  If you have a specific property in mind, you can use: to find the applicable income limit for that property.

Fannie Mae will now start allowing Income Based Repayment (IBR) terms for student loans
Previously we had to use the higher of 1% of the outstanding balance or the payment reported on the credit report.  IBR payments are usually lower than the 1% method so this will help homebuyers with IBR education loans qualify at higher price points. 

As an example, a homebuyer may have $25K in education loans.  That equates to $250/month in obligations under the 1% method.  However, IBR payments on $25K of education loans may only be around $100-125/month.  Now if the credit report shows a lower monthly payment, we can use that instead of the 1% method!

Starting September 1st, Fannie Mae will allow 5% down on Adjustable Rate Mortgages (ARMs)
Previously, ARM loans required a minimum 10% down.  By cutting this down payment requirement in half, more homebuyers will have access to ARMs.  Many first-time homebuyers and repeat buyers are purchasing homes with less than 10% down.  If a homebuyer thinks they may want to buy a bigger and better home in 5, 7, or 10 years down the road, an ARM loan may be a great option to lower the interest rate and cut costs.  This change will go into effect September 1st, 2017.

Alimony as a reduction to income rather than debt obligation 
Alimony used to be classified as a debt obligation for Fannie Mae, but they have changed the guidelines to make this a reduction in income.  This is positive news to DTI ratios! 

As an example, a homebuyer has $1,000/month in alimony payments at a 43% DTI ratio.  The new calculations may drop this ratio to 34%, a 9% reduction in DTI ratios.  This small change may help the homebuyer qualify at a $100K higher home value.  WOW!  Sometimes small changes make the biggest impact. 

These are some of the biggest adjustments Fannie Mae implemented.  For a full list, please visit Fannie Mae's website. 

Monday, September 21, 2015

7 Ways a Rental Property Can Increase Your Net Worth

Below is a great article about investment properties that generate positive cash flow.  My comments can be seen in red.
If you can find a property where the rental income covers the monthly costs, then you have a winning scenario.
Have you ever dreamt about buying a few units in the condo building downtown and converting them to rentals? Or that cute home near the college campus — just for investment and a side rental profit?
While rental properties do have pesky monthly costs and the sometimes-dreaded responsibilities of acting as a landlord, buying a rental property where rental income covers your monthly mortgage payments is a winning scenario. Here are seven key ways a property can exponentially boost its value — and your net worth!
1. Rental properties create cash flow
Cash flow is one of the cornerstone principles of all real estate wealth building, and rental properties create the opportunity for cash flow. A house or a building with multiple units can generate money each month that pays more than your carrying costs, mortgage, and expenses.
Multi-unit properties such as duplexes and triplexes typically make it easier to generate positive cash flow because there are more units to rent out.  It is almost like buying multiple houses with one purchase.  If you are a first-time homebuyer, FHA may allow financing on multi-unit properties so this could a smart way to get started off with buying your first house to live in and, at the same time, building your rental portfolio.  
2. Positive cash flow pays off your mortgage early
Positive cash flow is created when rent from your tenants exceeds your property’s expenses. Put simply, it’s the money left over each month after all your property bills are paid. Having positive cash flow allows you to pay off mortgages early.
Expert tip: Work to reinvest any positive cash flow to pay down your mortgage balance as soon as possible. The sooner you can pay off your mortgage, the sooner you’ll have checks coming to you, not the bank.
Although it is great to be debt free and have no mortgage obligations, current mortgage interest rates are extremely low from a historical standpoint. This means you may be better off investing that positive cash flow elsewhere instead of paying down your mortgage balance at a faster pace.  Please consult with a licensed financial adviser about this topic to see what makes the most sense in your situation. 
3. Other people’s money pays off your mortgage
Someone else pays off your entire mortgage for you. As you use the rent money from your tenants’ payments toward your mortgage, you are actually paying down your loan amount. Keep that property rented for at least 15 to 20 years and you can own that house free and clear without a penny more out of your pocket. It’s a simple, but brilliant, concept.
This is a great one.  I often tell my friends who rent that if they aren't paying their own mortgage, they are helping their landlord pay his/her mortgage.
4. Improving the property increases its value
Making the right improvements can increase your property’s value and protect you against downward swings in the market. Look to invest in properties where you can add equity and value by making smart, cost-effective improvements.
The key words are “smart, cost-effective improvements.” The average remodeling project recoups just 62.2% of its cost in added home value.  Here is a great article on the average cost and resale value of some common remodeling projects. 
5. Market appreciation boosts your equity
Market inflation and simple supply-and-demand economics also increase home prices over time. The combination of appreciation from improvements and long-term market appreciation is a huge bonus for rental properties. It’s a profit, equity, and wealth builder.
6. Tax advantages keep more money in your pocket
Another aspect of wealth building, from an accounting standpoint: It’s “on paper.” There are tax benefits to owning rental properties, which include depreciation, rental expenses, and mortgage interest deductions you can take each year.
There are great tax benefits to owning a home.  Please consult with a legal tax professional about this topic. 
7. Increasing rents increases the value of your property
When you improve your property, you can increase your rents, which in turn increases the value of the property again. It’s a wonderful cycle. If you buy a run-down property that was poorly managed and you improve it, you not only stand to significantly boost its value and your equity, but you’ll also boost its rentability. You will be turning an underperforming rental property into a gem that attracts quality tenants and higher rents!

Please note:  this post is for informational purposes only and does not constitute legal, tax, or financial advise.  Please consult with a qualified representative on these issues. 

Tuesday, August 25, 2015

Top Up-and-Coming US Housing Markets

Portland, Oregon made the news again ­­recently for housing markets in the US.  This time, GOBankingRates ranked Portland 11th on a list for top 11 up-and-coming housing markets for US homebuyers.  Here is what they had to say about Portland:

11. Portland, Ore.
Arguably one of the most green cities in the U.S., if not the world, Portland is highly bike-friendly and walkable, according to It also has over 10,000 acres of public parks. Portland has a growing population of young adults and was at the forefront of the nation's current widespread microbrewery and sophisticated food truck movements.
These trends coincide with PWC and The Urban Land Institute's findings that the most walkable cities with 18-hour accessibility tend to be the most desirable for millennials -- whose numbers total around 75 million according to the Pew Research Center -- and moderately attractive to boomers, whose numbers are almost as strong.
Job growth in Portland is strong, and real estate is relatively inexpensive compared with California cities of a similar size, although prices are rising. The median home costs $368,000, up 15 percent over last year.
The list was created based off of housing and lifestyle-related data – including housing affordability, job growth, home sales, and emerging real estate trends.  Based on those metrics, I am actually surprised Portland didn’t rank higher.  Our economy has been strong in recent years, we have one of the highest net migration percentages in the country, and Portland recently ranked #2 as the Hottest Housing Market to name just a few reasons why I believe Portland should be higher on this list. 

Thursday, August 6, 2015

Portland #2 Hottest Housing Market

A report was released recently about the hottest housing markets in the US.  This report is based on the percent increase in home sales.  The Portland-metro area ranked #2 on this list!  The increase in homes sales is up 21.68% with the average home price in June at $339,482.  The real estate market here has been crazy with low supply of homes on the market and very high demand. I expected Portland to be on this list, just not as high as #2!

Photo provided by Alex Bailey -

Friday, July 31, 2015

National Housing Outlook and Trends

As a follow up to the most recent post, below includes the outlook/trends in the national housing market based on the Harvard's "The State of the Nation's Housing 2015" report.  

The housing market is constantly changing due to many different dynamics such as the size of new homes are getting bigger.  More duplexes and multifamily units are being built to supplement the high demand for rentals.  Furthermore, Single family homes more often are being purchased as investment (rental) properties. Also, the major changes in demographics will also influence new housing construction as two of the biggest generations (baby boomers and millennials) age and search for more suitable housing for their lifestyle. 

  • Multifamily (2+ units) starts rose steadily to nearly 360,000 units in 2014—more than in any year in the 1990s and 2000s.
  • More than 90 percent of multifamily units started last year were intended for the rental market, up from less than 60 percent in the mid-2000s.
  • Rental growth is likely to remain strong as members of the huge millennial population enter the housing market. According to the latest JCHS projections, individuals that are currently under age 30 will form over 20 million new households between 2015 and 2025, and most of these households will be renters.
  • There will also be a large increase in renters over age 65 as more members of the large baby boom generation cross this threshold over the coming decade.
  • Single-family construction starts increased 5 percent in 2014.
  • Just over one million housing units were started last year, which until the recent downturn would have been the lowest annual total in the past half-century.
  • Multifamily construction starts increased 16 percent in 2014.
  • More multifamily units were started in 2014 than in any year since 1989.
  • Up to 1 million households who lost their homes to foreclosure have already restored their credit standing, making them again eligible for FHA and other mortgages, and 1.5 million more could do so shortly.
  • While the volume of new homes built is near record lows, the median sales price of new homes hit a record high $283,000 last year.
  • The median sales price of new single family homes is now 35 percent above the median sales price of existing single-family homes.
  • Rather than signaling a broadly healthy market, however, this record-setting price is largely due to changes in the size, quality, type, and location of new homes.
  • The size (median square footage) of the typical new home increased 12.5 percent in 2009–13.
  • Although the three major Census Bureau surveys all show that household growth since 2008 has remained far below the 1.2–1.4 million annual average of the previous decade, the Housing Vacancy Survey—the timeliest of the sources— reported a marked pickup in the fourth quarter of 2014 that brought household growth for the year to 800,000, closer to its long-run potential.
  • The Joint Center for Housing Studies projects that demographics will support baseline household growth of just under 1.2 million annually in 2015–25, with the millennial generation driving much of this growth.
  • By 2035, given headship rates similar to those of previous generations, the millennials (born 1985-2004) are expected to form more than 30 million new households.
  • Over the next two decades, the number of adults aged 70 and over will increase by 91 percent, driving the demand for housing that is affordable, accessible, and provides social connection and supportive services.
  • At more than 86 million, the number of people that comprise the millennial generation has already exceeded that of the baby boomers at similar ages and will increase over the next 20 years as immigration (typically of young adults) continues to pick up.
  • In 2015–25, the typical millennial will move from the 20–24 year-old age group (where just one in every four persons has formed an independent household) to the 30–34 year-old age group (where half of the population lives independently).
  • As the labor market makes steady gains, rising employment rates among young adults will impact household growth, as employed younger adults in their late 20s and early 30s are 50 percent more likely than unemployed younger adults to head independent households.
  • Although net international immigration is still below the 1.2 million annual average in 2000–07, the pace of immigration is projected to pick up in the decades ahead, projected to reach nearly 1.4 million by 2035.
  • Minorities are expected to drive 76 percent of net household growth over the next 10 years and fully 85 percent over the next 20.
  • Homeowners continued to pare down their mortgage debt in 2014; real aggregate mortgage debt totaled about $9.4 trillion last year, a 2 percent decline from 2013 and a 13 percent drop from 2010.
  • Despite a decline in mortgage debt at the aggregate level, a higher share of older owners are entering their retirement years with mortgage debt: more than a third (38 percent) of owners aged 65 and over had mortgages in 2013, up from a little over a quarter in 2001.
  • According to Fannie Mae’s National Housing Survey for the fourth quarter of 2014, 82 percent of respondents thought that owning made more financial sense than renting. Even among renters, 67 percent agreed with this statement.

Friday, July 24, 2015

Rental Market Continues to BOOM

The Joint Center for Housing Studies of Harvard University recently released a report called “The State of the Nation’s Housing 2015.” You can view the report here. This type of report has been released by Harvard since 1988. The goal of these reports is to provide a current assessment of the state of the rental and homeownership markets; the economic and demographic trends driving housing demand; the state of mortgage finance; and ongoing housing affordability challenges.

Here are a few Key Facts from the report:

  • · The share of US households that rent their housing rose to a 20-year high of 35.5 percent in 2014, marking the 10th consecutive year of robust renter household growth.
  • · Households in the top half of the income distribution contributed 43 percent of the growth in renters.
  • · While single persons still make up the largest share of renter households, the numbers of renters of all family types rose over the decade.
  • · Single family homes housed more than half of the growth in renters in 2004–2013.
  • · The national rental vacancy rate dipped to 7.6 percent in 2014, its lowest point in nearly 20 years.
  • · Rents rose at a 3.2 percent rate last year—twice the pace of overall inflation.
  • · Rental growth is likely to remain strong as members of the huge millennial population enter the housing market.
  • · In 2015–25, the typical millennial will move from the 20–24 year-old age group (where just one in every four persons has formed an independent household) to the 30–34 year-old age group (where half of the population lives independently).
  • · At more than 86 million, the number of people that comprise the millennial generation has already exceeded that of the baby boomers at similar ages and will increase over the next 20 years as immigration (typically of young adults) continues to pick up.
  • · By 2035, given headship rates similar to those of previous generations, the millennials (born 1985-2004) are expected to form more than 30 million new households.
  • · The Joint Center for Housing Studies projects that demographics will support baseline household growth of just under 1.2 million annually in 2015–25, with the millennial generation driving much of this growth.
This information is based on national data. The rental market has been even stronger here in the Portland-metro area as rents have rose over 20% in the last 5 years alon­­­­e.

Right now would be a great time to purchase a rental property as rents are expected to increase at a pace above inflation.  This will make it easier to generate positive cash flow.  Also, the strong rental demand has lowered vacancy rates which means it is easier to find new tenants quickly.  These factors make it a favorable market for investment property owners as they can hike rents and find new tenants quickly.  Another great reason investment properties are a great buy right now is because of above average home appreciation which Oregon has been witnessing the last couple years.