Will we reach the 4.75% that rates were at on September 18th? Will we go even higher, into the 5% range and beyond? One economist brave enough to forecast the future says yes. In fact, he expects mid-2014 to see 5.5%, at the least.
As we receive good news about the U.S. economy, rates continue to rise. Of course, the chart looks like a zigzag, because rates do not increase in a straight line upward. But looking at the overall trend, we do see an upward track.
All eyes will be on the Employment Situation Report to be released later this week. If you have a loan in progress that is not locked in yet, you are taking a big gamble, because the trend is not your friend at the moment.
How Locking In Your Rate Works
Locking in your rate secures a specific rate and protects you if rates go up. To lock in your rate, you must have a fully executed purchase contract, because a rate lock is tied to a specific address. If you are still house shopping, you cannot lock, unless your lender offers the rare “lock and shop” program.
Get It in Writing
When you ask your loan officer to lock in your rate, you must also ask for a written confirmation of the lock. An email confirmation is sufficient. Keep this confirmation! Too many home buyers have been burned when a lock officer failed to honor their rate lock request.
Verbal promises mean nothing in the land of mortgage loans. Only what is it writing stands. So make sure you receive confirmation of your rate lock, the expiration date, and any points (dollar amount) you’re paying. If you’re getting a no-point loan, the lock should state a zero fee.
If you have friends or colleagues who are interested in buying a house or refinancing, please feel free to refer them to this blog information.
This post is not a prediction of interest rates, only a commentary on the apparent trend. It is not advice to lock or float. You and only you are in charge of deciding what interest rate you want to accept and lock.
1) Interest rates are still very attractive at 4.375% to 4.5% for the 30-year fixed rate and 3.5% for the 5/1 ARM.
(The 5/1 ARM is fixed for the first five years, then adjusts every year thereafter. It is a make-sense choice for people who plan to keep the property for six years or less.)
2) The housing market has been improving for the past year, giving home owners more equity, and giving more sellers the ability to sell which gives buyers more inventory to choose from.
3) Buyer’s agents are free to home buyers. They are paid by the seller. Your buyer’s agent is required by law to get you the best price, best terms, and look out for your best interests in every aspect of the real estate purchase.
It is my opinion that making an offer between Thanksgiving and New Year’s Day is a good strategy for getting the best price. Typically, the market slows down during the holidays, so there is not as much competition. Sellers aren’t receiving offers or even lookers, so this is the time for you to pick up a good deal. Furthermore, the market tends to pick up in January when renters make New Year resolutions to become home owners.
Some years back, I bought a condominium for a great price in December. My agent told me later that the home owner was so angry when he saw my purchase offer that he threw the papers across the room. (Thankfully, I didn’t have to see it, because I had a buyer’s agent representing me.) But then his wife said, “Honey, let’s just make a counter-offer.”
The counter-offer was not bad. I countered again, per my agent’s suggestion, and I got a lovely home at an attractive price. I lived there for five years and made a nice profit when I sold.
The first thing you should do is have your real estate agent show the appraisal report to the seller’s agent and ask them to lower the price to match the appraised value. If they agree, then that is your best option. The purchase agreement is amended to the new price, you send that page to your loan officer, and then the loan officer adjusts your down payment and loan accordingly.
If the seller does not agree to lower the price, then you have two choices. You can either make up the difference with cash out of your own pocket, or you can walk away from the deal.
To Make Up the Difference in Cash
Let’s say the sales price is $200,000 and the appraised value is $190,000. In this case, you would have to kick in an extra $10,000 out-of-pocket if the seller will not lower the price. This is because lenders will not go higher than the appraised value for their loan. I suggest you think do a thorough market analysis and put your emotions in check before you take this option. Why would you want to pay more than the property is worth? You’d want to have a very compelling reason to make such a financial decision.
To Walk Away
The seller might disagree with the appraised value and think that a different buyer with a different lender will get a different appraised value; therefore, they might not agree to lower the price. You should have a contingency clause in your purchase contract that allows you to walk away and get all of your earnest money refunded if this happens. A good buyer’s agent always makes sure you have such a clause, and this is one mistake do-it-yourselfers who are not represented by an agent sometimes make. I once witnessed a terrible fight break out between a For Sale By Owner seller and a buyer who went straight to the seller without agent representation. Believe me, it was quite a spectacle when the yelling turned into threats to “take it out onto the street.”
One More Option
Occasionally, there is an appraiser who royally messes up the value. The report that comes in is nothing short of idiotic. The comparable properties are totally inappropriate with better comps in the neighborhood ignored. Not only that, but special features that increase the property value have been ignored. When this happens, the seller probably won’t lower the price. If you want to continue to fight for this house, you can ask your mortgage broker to go to a different wholesale lender for the money and thus start fresh with a new appraiser.
This works because your loan file goes to a whole different company with a different underwriter who never saw the bogus appraisal. Of course, you will need to pay for another appraisal.
If your lender is a direct lender or a bank and does not have the option to shop wholesale lenders for you, then this choice is not available. Once an underwriter has seen an appraisal, she (or he) will not consider a different appraisal, even if the second one is more accurate. Only if the original appraiser will change the report will the underwriter accept a different value. (Getting underwriters to change their reports, even when they are dead wrong, is impossible 99% of the time.) So in this case, you would have to withdraw your application from the bank and shop for a mortgage broker yourself in a super speedy manner. Depending on the closing date, this could be problematic.
No matter which option you choose, you need to discuss the situation with your real estate agent and your loan officer. With the three of you working together, you should be able to select the best choice and protect your earnest deposit.
In neighborhoods where the median price of homes is higher than the national average, loan limits are higher as well. This enables buyers to purchase a home in a higher priced area of the country (such as coastal cities) without having to take a high priced jumbo loan.
The current limit for a high cost area is a loan of $729,750. However, that is set to end December 31, 2013.
The loan limit would then lower to $625,500.
Will Congress act to extend the high loan limits?
Since there are no crystal balls for mortgage, no one knows for sure. What we do know is that December 31 is not that far away, so if you’d like to purchase a home with a loan in the higher range, you might want to act now just to be safe. Contact your local Realtor who will act as your buyer’s agent to preview homes and negotiate a contract for you.
When taking a large loan, it’s more important than ever to get the best rate and terms. Recently, I helped a home buyer save over $2,000 in upfront fees when he used my Review and Coaching Service. For information on how you can have me review your cost estimate or Good Faith Estimate with a telephone consultation, click on the page above that says “Review My Estimate.” Because I do not do loans myself, I am an unbiased expert source, working on your behalf.
Even though any loan officer can pre-qualify you for a loan amount, ultimately, it is your responsibility to decide how much house you can afford. I once heard a mortgage sales manager tell his staff of loan officers to qualify their people for a higher mortgage than what they’d originally asked for.
He said, “If they buy a more expensive house, they will be happier.” Of course, his real motivation was for bringing in larger loans, not for their happiness.
But here’s the thing. Even if the home buyers were happier at first with their larger, fancier houses, how happy were they later when they discovered that their house payment was preventing them from going out to dinner and a movie? It’s not fun being a slave to your mortgage.
A good loan officer who is your advocate will never push you to get a bigger loan than what you’re comfortable with.
Unfortunately, just as often it is the home buyer who is pushing the loan officer to get them qualified for more than they should. This happens after they tour dream houses that are slightly above their price range. They fall in love with a house and think there must be a way to get into it.
This is partly why the mortgage industry created bad loans, such as the 2/28 teaser loan that had a low payment for the first two years and then went up, and negative amortization “pick a payment” loan that turned toxic for so many. A large number of these loans became unaffordable, causing the people to go into foreclosure. And we all know how that affected the U.S. economy!
Even though printed guidelines say your debt-to-income ratio should be 28% for the mortgage and 38% for both mortgage and other credit obligations, in reality, most lenders do not follow those rules. It is common for debt ratios to be pushed to 45% and some will go to 49.99%.
If your debt ratio on paper is 49%, but your real debt ratio is much lower because you have income that the lender won’t include, then taking the higher payment might be justified. For example, some people have a side business selling on eBay, at swap meets, or other venue. The lender might not include that business income for various reasons, so the lender’s calculated debt ratio might be higher than your reality.
How to Calculate Debt Ratio
To calculating your debt-to-income ratio (dti), use your gross income, before any deductions. Include the new, proposed mortgage payment, including property taxes, insurance, and mortgage insurance (if applicable) along with auto loans, student loans, credit card payment minimums, and anything else that shows up on your credit report. In general, the max dti for all expenses should not exceed about 35% to 40%. Stay on the lower end if you have children to support or if you like to spend a lot of money on entertainment, shopping, etc. and need a higher disposable income available after your mortgage payment.
If you’re not sure how to do this, any loan officer can help you with this calculation.
Just when some lenders and real estate agents are saying underwriting is getting better, six Federal agencies are working to get tougher, stricter requirements for becoming a home owner passed into law. Here are three things they want:
1) Bigger down payment. They want you to make 30% down payment to get the best interest rate and best terms. Ouch! How many first-time home buyers have that kind of cash? This would force tens of thousands of borrowers to take a higher rate, even if they have great credit.
2) Stricter credit requirements. Even with the sub-prime loans far in the rear view mirror, they want even higher standards for credit. This will decrease home sales and home ownership, which is counter-productive to growing our economy.
3) Ban combo loans. They want to ban getting a second mortgage in combination with a first mortgage to avoid paying the monthly private mortgage insurance (PMI). So the strategy of putting 10% down, taking an 80% first mortgage with a 10% second mortgage to save money would become illegal. I have to ask, why are they trying to force everyone who doesn’t have 20% down into paying PMI?
The six agencies asking for this are the following:
1) The Federal Reserve
2) The Federal Deposit Insurance Corp.
3) The Federal Housing Finance Agency
4) The Dept. of Housing and Urban Development
5) The Office of the Comptroller of the Currency
6) The Securities and Exchange Commission
Who Does NOT Want Stricter Home Ownership Requirements:
1) The National Association of Realtors
2) The Mortgage Brokers Association
4) Mortgage Bankers Association
5) Private U.S. citizens
David H. Stevens, CEO of the Mortgage Bankers Association and a member of the coalition opposing the plan says, “We plan to be very clear and very vocal” in fighting this. I say, “You go, Mr. Stevens, and go strong!”
If you don’t want to see this 505-page proposal become law, please make your voice heard by contacting your state representation and saying you are against “QRM-Plus.” And please make others aware of this via Twitter, Facebook, email, and other means, because home ownership affects us all.
“Are any dangers lurking at the final signing that we should be alert to and wary of?”
My Answer: Yes, Rick, the first document you want to look at is the Settlement Statement. This is a three-page document prepared by your closing agent (escrow or title agent or closing attorney). It details all of the fees and costs for your mortgage. Turn to the last page of this document.
On page 3 of the Settlement Statement, you will see a side-by-side comparison of the Good Faith Estimate and Settlement Statement figures. The lender fees should not be increased at all, not even by $1, per federal law.
Third party costs such as title, settlement closing fee, and county recording fee must be accurate within 10 percent of the original quote on the GFE. The exception is if the loan officer gave you a quote from a different title company and closing agent than the one you ended up using.
If the fees are off by more than 10%, that is a violation of federal law, and you would refuse to sign until that was corrected. You would make a phone call to your loan officer and ask him or her to get that corrected immediately so you can complete the signing. It should take less than 30 minutes; and in the meantime, you can go ahead and sign the other loan papers.
After the Settlement Statement, the document you want to pay close attention to is the Loan Note. This is usually two or three pages. The Note tells you the interest rate, principal and interest payment, when the first payment is due, and confirms there is no prepayment penalty. If you are getting an Adjustable Rate Mortgage (ARM), then you will have additional documents detailing the terms of the ARM. Make sure you read and understand that as well.
You have the responsibility and the right to ask any and all questions you need to ask so that you understand your financing. This is a large legal commitment, so make sure you understand what you are signing.
Personally, I don’t care for the cliche “signing your life away.” That is NOT what a mortgage is! You are not signing your life away–you are signing for financing to become an owner of real property. That act should enhance your life, not take it away. When you understand the terms of your loan, you will not have a sense of signing your life away.
If you need my help in understanding your loan or to make sure you’re getting the best possible loan, please click on the page above that says Review My Estimate. I’ve helped many good people save money and gain peace of mind.
Mr. White, a renter, is buying a house from the Greens. The Greens are buying a house from the Blacks. Mr. and Mrs. Black cannot move out, because their loan is not closing due to the government shutdown. Because the Blacks’ loan isn’t closing, the Greens and Mr. White are also blocked from their home purchase transactions going through.
This is a true story, names changed. Because home buying is often a “domino effect,” the government shutdown is blocking more loan closings than it might appear on the surface. I’ll explain.
Lenders who sell their loans to Fannie Mae are required to verify the borrowers’ social security numbers and tax returns. The government agency that does the verifications is shut down. Some banks and mortgage companies are allowing their loans to close without the verification, with the stipulation that the verifications will be done as soon as the agency reopens. So even though the loans are closed, it still must be done. However, not all lenders want to take that chance.
If the verifications do not come back with satisfactory information, the lender must unfund the deal, which is a costly hassle. Lenders have their individual tolerance levels for taking such a risk.
In addition, the USDA loans (loans for certain neighborhoods with income limits) cannot close at all until the U.S. government reopens, so all those loans are in wait mode.
There is an even bigger financial domino effect on the economy when loans don’t close. The six real estate agents involved with the White, Green, and Black transactions are not receiving their commissions. The three loan officers do not receive their commissions. The three loan processors don’t receive their file bonuses. That is money they don’t have to spend on a celebratory dinner out, which affects the restaurant business.
Potentially, three moving companies lost income. New furniture and appliances will not be purchased. Pizza delivery for moving day is not happening. In turn, the people in the food and furniture industries do not have that income to spend on clothing and other things. On and on it goes with lost money to put into the economy. Experts say the U.S. economy has suffered by $2 billion so far due to the government shutdown, and the real estate industry is a part of that.
I don’t give political advice, but personally, I will not be voting for any incumbents at the next election. Let’s hope we get some good news from Washington D.C. soon.
What is the worst request you’ve ever seen from a mortgage underwriter? What paperwork was asked for that was totally over-the-top ridiculous? More and more, home buyers and homeowners refinancing are being asked to provide documentation that makes no sense whatsoever. Some of the information they’re asking for has already been provided in two different forms already, so digging up yet a third verification seems downright stupid.
And then there are the underwriting requirements that are actually illegal.
That’s right. Some underwriters today are asking borrowers to give them paperwork they have no business asking for! It’s high time this come out in the open and that underwriting supervisors and mortgage managers put a stop to this madness. Can we have some common sense in the underwriting department, please?!
For example, yesterday I was talking with a self-employed chiropractor. When his purchase loan was in progress, the underwriter from the wholesale bank that his broker was going through asked him to submit all of the checks he had deposited into his business account in the last year. He had already provided three years’ income tax returns (which they verified with the IRS) and his bank statements. And now the underwriter wanted to see all the personal checks that each and every one of his patients had paid him as well? He told her, “No way, that is doctor-patient privileged information, and it would be illegal for me to give that out.”
Another home buyer (at a bank) was trying to get pre-approved. His application showed a gap in employment during a time when he was hospitalized. However, during that time he maintained his perfect credit; and now he was fully recovered and back to work. The underwriter asked him to provide a letter from his doctor stating he would not get ill again. Can you imagine any doctor guaranteeing someone would not get ill in the future? Talk about underwriting stupidity!
I am making a public call for common sense to come back into the underwriting department.
In the meantime, what is the worst underwriting requirement you’ve ever seen? Please either post a comment (you’ll see the comment tab at the top of this post) or send me an email by clicking on the Ask a Question page (see big blue tab at top).
Heads up! Lenders are jacking up the interest rate or raising points–even after it is locked in. If you have a loan in progress, you need to know what’s going on so you can prevent it happening to you.
Today I received this email from T. Smith:
“I have a GFE (Good Faith Estimate) dated 13 September. Trying to close this week and they say our credit report has expired and want to increase the cost of our points. Is that legal?”
Yes, credit reports have a limited life; but moreover, a lender has the right to re-pull a credit report at any time, regardless of the date of the original report. Now more than ever before, lenders are re-pulling credit right at the end of the process in order to make sure no new negative information has popped. “Negative information” could include a new line of credit or an increase to a credit card balance.
If you purchased a car, opened a new line of credit for appliances or furniture for your new home, opened a new credit card, or increased the balance-to-limit ratio on a current card, then any one of those things could easily lower your credit score. And a lower score could place you smack dab in the middle of a higher risk category as a borrower.
Additionally, a new late payment would lower your score.
If a lender discovers that a borrower has a lower score than what they were previously approved at, then yes, they do have the right to raise your interest rate or increase your points in order to compensate for the higher risk they perceive you to be. (Increasing points is another way of charging more in interest. Points are interest paid up front in the form of a fee.)
This is why I have been warning people not to make any changes whatsoever–and not to purchase anything on credit at all–during the loan process. Patience is the name of the game while you have a loan in process. There will be plenty of time to shop after your new mortgage is funded and closed.
If you know someone who is refinancing or buying a house, please pass on this timely warning to them.