Friday, August 25, 2017

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 1st, 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. 

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: 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 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.