The Mortgage Process

Below is a great infographic about the mortgage process.  I can help with all steps, 1-5!  It’s important to mention that down payment requirements have eased over the years.  Depending on income limits, you may be able to get a conventional loan with as little as 3% down or a buy a home in rural areas with 0% down (USDA loan).

www.keepingcurrentmatters.com/blog

Fall 2017 Homebuyer Guide

IT’S OFFICIAL, the Portland-metro homebuyer market has cooled off as the weather is changing and school kicks back into gear.  With homebuying, it tends to be a seasonal event where most buy or sell in spring and summer due to the better weather and school getting out.  This makes it easier and more appealing for many to shop for homes and move into their new home.     For those who didn’t buy during the busy time, now is still a great time to get a home before prices/rates go up.  Here is why: There will be less competition as families settle back in for the school year. Sellers who are still in the market are typically motivated to sell sooner than later meaning it’s easier to negotiate a better deal. Inventory of homes for sale has already kicked up over the last couple months. There have been numerous price reductions on homes currently listed to attract buyers. Mortgage rates are near a 2017 best right now.    Needless to say, now is an awesome time to buy!

Equifax data breach - credit freezes - getting a mortgage

Below is a great article on Equifax’s data breach by Mortgage News Daily.  This is a very hot topic right now, especially in the lending industry, and Equifax won’t give you a definitive answer if your information was or wasn’t compromised.  Because of this, many are already taking steps to help secure their credit information by doing one of the following:

1.       Freezing access to credit reports (here is a great article about credit freezes and how to do so:  https://www.usatoday.com/story/money/2017/09/13/how-freeze-your-credit-protect-your-identity/657304001/)

2.       Ordering a free credit report from www.annualcreditreport.com  

Right now, there is so much traffic to these sites that many are unable to freeze or obtain a credit reports.  I just tried myself with no luck.  The path of least resistance, and more importantly most secure, is using the phone or snail mail to reach out to these credit bureaus/reporting agencies. 

The easiest way to check if your credit information has been compromised and under attack now is to get a free credit report by annualcreditreport.com.  If you haven’t used this site in the last year, you will be able to get a free copy from each credit bureau.  It’s most important to get a copy from Equifax since it was hacked but you should also check the other two bureaus since confidential information may have been compromised and used to gain access to the other two credit systems as well.

This ties into credit freezes.  It’s not enough just to freeze Equifax, to properly secure access to your credit reports, you need to freeze all three bureaus (that includes Transunion and Experian).  The issue here is that only Equifax has waived the fee to freeze credit, so Transunion and Experian will still charge a fee to do so.  Freezing credit is the most secure step to take, but it also can be annoying to unfreeze and refreeze when needed.  These bureaus are already poor at communicating, providing adequate customer service, and are notorious for errors.  Needless to say, there will likely be headaches involved with freezing and unfreezing your credit BUT… it’s the best step to avoid the long-lasting headache when your personal information has been used towards identity theft. 

The best long term solution is to freeze your credit profile with all three agencies OR signup for credit monitoring/identity theft services such as LifeLock.  This is something I am going to consider much more heavily to make sure my identity doesn’t get compromised in years to come. 

It’s important to note that a credit freeze does not stop a homebuyer from applying for a mortgage.  However, the homebuyer will need to lift the freeze for the lender to pull a credit report.  After doing so, the homebuyer can put his/her credit back on freeze.  One thing to keep in mind is that lenders have the right to pull credit again before funding the loan (doesn’t happen often).  Therefore, it may be wise for a homebuyer to unfreeze the credit until the loan has closed to avoid potential delays.  The other option is to unfreeze the credit again a week before closing, which will likely come at an additional cost.  After the loan has closed, the homebuyer can refreeze access to credit. 

For the latest updates from Equifax regarding this incident, you can visit their dedicated website about the cybersecurity hack here:  https://www.equifaxsecurity2017.com/.  Equifax has updated some policies which are identified in their link based on consumer feedback and backlash.  Therefore, some statements in the below Mortgage News Daily’s article are outdated such as “waiving the right to sue” and “continuing subscription” regarding the TrustedID website.   

The above information is my own personal opinion.  I highly suggest you do your own research and what you feel is in your best interest.  The below article is very informative and I highly suggest you read the whole thing. 

Mortgage News Daily – Equifax: Turning a Crisis into an Opportunity

http://www.mortgagenewsdaily.com/09092017_credit_reports_scores.asp

Conventional ARM down payments cut in half to 5%

The down payment requirement for Adjustable Rate Mortgages (ARMs) dropped today to 5% from the previous 10% requirement.  This is great news for many homebuyers.  ARMs currently make up 7% of loan applications.  This figure should increase now that Fannie Mae allows for 5% down with this product. 

Low down payment mortgages, classified as less than 10% down, currently account for nearly 40% of all purchase loan originations.  With this adjustment, conventional ARMs are now in play for “low down payment mortgages.” 

I think this will be a great option for many first-time homebuyers or repeat homebuyers.  When I bought my first house, it was with an FHA 5/1 ARM loan as I knew it wouldn’t be my “forever home.” After 3 years I refinanced to a fixed rate once I had enough equity to drop mortgage insurance. 

The average mortgage is only kept in place for 9 years, before it is either refinanced or the property is sold.  Therefore, a 10/1 ARM can be a great option for many homebuyers to cut interest rate cost.  A 10/1 ARM may save a 0.25% in interest rate for the first 10 years of the mortgage.  Assuming a $300K mortgage held for 9 years, this equates to nearly $6,500 in interest savings.  

Millennials using conventional loans

I woke up one recent morning thinking… “we haven’t done a whole lot of FHA loans lately.”  Today, I received the below image by Ellie Mae Millennial Tracker which shows millennials are preferring conventional loans.  A couple years ago, FHA loans were a great option for first-time homebuyers due to the low down payment requirement of 3.5%, lower credit score requirements, better rates, and tolerance for higher debt-to-income ratios (qualify at a higher price point). 

In December of 2014, conventional 3% down mortgages were reintroduced to the market - lower than FHAs 3.5%.  Since, Fannie Mae and Freddie Mac have eased up on their qualifying guidelines for these 3% down mortgages and made the rates/fees more attractive.  Private mortgage insurance premiums, which are used with conventional loans that have less than 20% down, were also reduced in recent years.  This, along with FHAs adjustment to make mortgage insurance last the life of the loan for less than 10% down mortgages, made conventional loans more competitive and attractive for homebuyers that plan to live in the house long term.  After all, obtaining homeownership should be a long-term plan. 

After seeing this infographic, I decided to research what Team Scott has originated since January 1^st, 2016 regarding 30 year fixed mortgages within the conforming loan limits.  Out of 103 purchase transactions in this criteria, 92 of these were conventional loans (89.3%).  Only 11 were FHA loans (10.7%).  Regarding the conventional loans, 24% were millennial homebuyers.  The FHA loans were made up of 27% millennials.  That’s pretty good for millennials, which will likely continue to increase that percentage as more and more enter the home buying market. 

In my opinion, FHA will likely need to make some adjustments to better compete with conventional loans.  Don’t get me wrong, FHA loans are still a great option for low down payment and low credit score borrowers.  However, conventional loans have found a way to better compete with FHA in recent years. 

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.

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: https://homeready-eligibility.fanniemae.com/homeready/ 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 1^st, 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.