Author Archive

New guidelines for PMI

March 5, 2018

Not that long ago, conventional loan guidelines began allowing borrowers to have a back debt to income ratio as high as 50%. The “back” ratio is the new housing payment + all other debt / monthly income. The limit was 45%, so the increase allowed  borrowers to carry a slightly higher debt threshold. This is closer to what FHA allows (up to 55%).

Private Mortgage Insurance companies observed the change, and then began making changes of their own. As of this post, all but one of the major PMI companies have changed their guidelines to reflect the following requirement. For borrowers with a debt to income ratio at 45-50%, their credit score must be over 700. For all other borrowers with a debt to income ratio under 45 %, credit scores can go as low as 620. While this change won’t impact a majority of home buyers, it is significant. Basically, if a buyer has a higher debt to income ratio and  a credit score under 700, then they must use an FHA loan to buy a home (or VA if they qualify for a VA loan). For now, conventional loans may not be an option.

Guidelines change frequently, and this could be temporary to see how conventional loans with a debt to income ratio of 45-50% perform. Hopefully that will be the case, but for now, it is in place.

Planning on using a conventional loan to purchase a home, but have a high debt to income ratio? If you are buying a home in Georgia, let’s talk sooner rather than later and make sure no changes need to be made to current plans.


HELOC interest potentially tax deductible

February 27, 2018

A clarification has been issued by the Internal Revenue Service about the deductibility of interest that is paid on home-equity lines.

Under the Republican tax law, joint taxpayers can deduct interest on home loans. This includes first mortgages used to secure primary and secondary homes. OK. Sounds right. Nothing unusual so far…

What caused a ruckus was the suspension of the interest deduction for home-equity loans, home-equity lines of credit and second mortgages from 2018 until 2026.

But an exception exists!

WHAT?? Really? Tell me more!

The IRS clarified the new tax law in response to many questions submitted to the IRS by taxpayers and tax professionals. According to IR-2018-32 issued Tuesday by the agency, when HELs & HELOCs are utilized to buy, build or substantially improve the residential properties used as security for the loans, the interest is tax deductible. An example of a deductible expense is when the proceeds from the loan are used to build an addition to an existing home. On the other hand, if the proceeds from lines of credit are utilized to pay off personal expenses, no deduction is allowed.

As was the case under the prior law, the equity line loan must be secured by a primary residence or second home, not exceed the cost of the home, and meet other requirements.

How to proceed? Contact your tax professional. While the IRS provided the clarification, it also said “meet other requirements.” The IRS also did not distinguish how to apply if portions of the equity line was used. For example, what if someone has a $100,000 equity line. They use $80,000 for an addition to the home, but $20,000 to pay off credit card debt.

While this is welcome news, its application can still be tricky. Contact your tax professional today to find out more. If you need a referral to a tax professional, do let me know!

Any hope for mortgage rates?

February 15, 2018

As my colleague recently posted, mortgage rates are off to a rough start this year. As of this post, mortgage rates are a half point higher for the year. I won’t dig into the details of why this is happening. Rodney did a great job of it in his recent post. Today, I’ll focus on what can turn the tide for mortgage rates.

Stocks have suffered a rough start to the new year too. That is normally great news for mortgage rates. Normally as stock prices fall, bond values rise, and mortgage rates improve. The Dow fell over 2,000 points at one moment over the past few weeks, and yet mortgage rates also got worse. If a 2,000 point drop couldn’t help mortgage rates, what can?!?

We must look back at one of the root causes Rodney discussed – inflation. Mortgage rates hate inflation as it eats away at the value of mortgage backed security bonds. As those bond prices fall, mortgage rates rise. The way to help mortgage rates is to combat inflation. The best weapon we have at our disposal is the Federal Funds Rate… the Federal Reserve can continue increasing the Federal Funds Rate. In fact, every time they’ve done that over the past couple of years, mortgage rates have initially improved. Why? The higher the Federal Funds Rate goes, the more it can combat inflation.

Of course, the flip side is raising it too much can cool off the economy (don’t want that). Also, with the new budget deal passed last week by the government, more bonds will be sold to fund the increases to our national budget. More bonds available for sale also lower bond values, pushing mortgage rates higher. As I said in a post late last year, the environment for mortgage rates to get worse is here. That seems to be occurring. While mortgage rates are still low, the time of super low rates could finally be behind us.

The Federal Reserve could increase the Federal Funds Rate to fight inflation and help mortgage rates, but given the other factors at play, the increase to the funds rate may not help improve rates over the long haul for the time being.

If you’ve been sitting on the fence about purchasing a home over the past year because “rates are so low, why hurry,” the time may be now. If you are purchasing in the state of Georgia, contact me. We can get the prequalification process completed in minutes and have you ready to go out and find your new home!

Happy Holidays

December 17, 2017
Happy Holidays!

Happy Holidays!

Republican tax plan and mortgage rates

December 12, 2017

All signs are pointing to the Republican party passing tax reform. The Republicans are using the “budge reconciliation” process to get the bill passed. By going this route, the Republicans avoid the need for 60 votes for approval in the Senate while preventing the Democrats the ability to use  a filibuster. Whether you opposed tax reform OR couldn’t wait until it arrived, tax reform seems likely to be here once the House and Senate finish reconciling their two tax reform bills.

What does this mean for mortgage rates?

Initially, nothing. On the surface, tax reform has no direct impact on mortgage rates. This is just like when the Federal Reserve raises the Federal Funds Rate. The Funds rate impacts second mortgages, car loans, credit card rates, etc., and not mortgage rates. But…. the impact these have on the market can impact mortgage rates.

Stocks have been on a major rally for roughly two years now. The DOW continues to set record highs. Why the surge? Wall Street has bet on tax reform that would benefit business. Trump’s election prompted a big rally back in November 2016, and this rally continued throughout 2017.

Now that tax reform is here, stocks seem poised to continue their good run and maybe continue to push higher. As stock values rise, bond prices normally fall due to the fact that people are putting more money into stocks than bonds. As bond values fall (specifically mortgage backed security bonds), mortgage rates go up. While tax reform doesn’t directly affect mortgages rates, the impact on stocks can influence mortgage rates.

Frequent readers of this blog are aware of how stock prices/mortgage backed security bond prices impact mortgage rates. If you are new to this blog, use this link to read past posts about the subject. 

Currently mortgage rates are definitely off of their yearly lows and moving back toward their yearly highs of 2017. Combine tax reform, continued stock market rally, and the Federal Reserve no longer purchasing bonds from quantitative easing (they are beginning to sell their bonds now), and you have an environment where mortgage rates could go noticeably higher.

Market analysts have said for years now (since 2010) that “this is the year mortgage rates go up,” and rates haven’t gone up. When do I think rates will go up? At this point, I’ll believe it when I see it. That said, the environment for mortgage rates to increase is as real as it has ever been in the past several years.

Considering refinancing or buying a home, but been pushing it off since rates are so low? Maybe now is the time to at least have a conversation about your plans, timing, and how to proceed? If the home loan will be in the state of Georgia, I can help! Contact me today and we’ll get started!

Conforming Loan Limits going up!

December 5, 2017

For the first time since 2006, there is a significant increase in the conventional loan limit. The new maximum loan amount for conventional loans will be $453,100. Technically there was an increase from 2016 to 2017 (from $417,000 to $424,100, which is less than a 2% increase). This time the maximum limit gets a more significant increase.

What does this mean?

Buyers can purchase a $477,000 home with only a 5% down payment. If using a 3% down conventional loan, then the buyer can purchase a home as high as $467,000 in value. Prior to the increase, if a buyer wanted to purchase a home at $500,000 and avoid a Jumbo loan, then the down payment needed to be 15% to get the loan down to $424,100. Now a $500,000 home can be purchased with less than a 10% down payment.

This increases the purchase power for home buyers, and these new conventional loan limits can be used now! The start date for the conforming loan limit increase is January 2018, but the loan process can start today and close after the start of the new year!

Looking to buy a home in the state of Georgia? Wanting to use a conventional loan to purchase $500,000 or so home using a small down payment? Now you can! Contact me today and we’ll get going on your new home!


PIWs are back!

October 10, 2017

Every few months, there are changes made to loan guidelines. Often, the changes are minute and not worth talking about very much. This time, there is something worth discussing.

Property Inspection Waivers (PIW) are back! Technically, they’ve been back for a while, but it was rare to use them. But what are PIWs? Property Inspection Waivers mean a borrower does not need to order an appraisal for the loan if they are satisfied with the value Automated Underwriting (AUS) assigns it. These have been available, but really only used with making a significant down payment (or having lots of equity if the loan is a refinance). How much is significant? Lets say 40% or more in equity.

With this latest change, Fannie Mae/Freddie Mac are saying it will be more widely used and available for clients with smaller down payments/amount in equity – even for purchase transactions.

Currently, I am working with clients on a refinance with just 20% equity and no appraisal needed. How is this of benefit to the borrower? For one, it saves money. Appraisal costs range from $450-$500, and the PIW fee is only $75. It also creates a much quicker turn time for closing. Imagine closing start to finish in under two weeks.

Lenders will not know if a loan will qualify until it gets into Automated Underwriting. That means the borrower will have to apply and be under contract on a home with the final purchase price. That said, it is always great to have the opportunity to save money and close faster! We’ll see how well this rolls out, but it’s good to have PIWs back as an option.

The Feds are halfway there

August 22, 2017

One of the Federal Reserve presidents recently said the Fed was halfway home to raising rates. Currently, the rate sits at 1.25%, and the statement implies the target is 2.5%. The San Francisco Fed President feels a rate of 2.5% is the normal target rate for the US economy.

If true, what does that mean for rates, economy, etc.?

One interesting aspect would be the ability of the Fed to help when the economy experiences another downturn – and it will. The economy rises and falls, and it will slow down again at some point. Before 2008, the Federal Funds rate sat at 5.25%. The Fed lowered the rate to virtually zero to help the economy. What happens the next time there is a down turn, and the rate sits at 2.5%? There wouldn’t be as much room to lower the rate to stimulate the economy. Of course, no one expects another down turn like 2008 to happen.

What about mortgage rates? Since the Feds began raising the Federal Funds rate, mortgage rates have improved every time. The only reason rates haven’t set new historic lows is due to the rapid rise of mortgage rates after the 2016 election. In fact, was the dropping of the Federal Funds rate that helped pushed mortgages rate lower. Over the past 5 months, mortgage rates have been flat. As they are near historic lows, there really isn’t that much more room for improvement. That said, more rate hikes could help push them lower as an increasing Federal Funds rate can help mortgage rates improve.

In the end, it will probably be more of the same when it comes to rates… staying low. That has been the Fed’s goal since the 2008 market crash. They’ve achieved this goal by buying bonds and then several rounds of quantitative easing. Now that the economy has improved, the Fed’s attention turns to keeping inflation in check. They do this by increasing the Federal Funds rate, which helps mortgage rates improve (mortgage rates hate inflation). The Fed continues their goal to keep mortgage rates low. When will rates go up? Honestly, at this point, I don’t think anyone knows. I’ll believe it when I see it!

Potential Shake Up at the Federal Reserve

August 1, 2017

Janet Yellen’s days may be numbered. She is the current head of the Federal Reserve, and her role is up for renewal by President Trump. While he has been coy in the past about his plans to (or not to) replace her, signs are pointing to the fact he might indeed do so.

Trump has made no secret about his desire for low interest rates. This tends to fuel stock values/growth (something President Trump enjoys), but it could cause problems down the road. It also marks a significant shift in the philosophies of our major political parties:

  • Democrats traditionally want lower rates to encourage job and wage growth.
  • Republicans tend to want the Federal Funds rate to be higher to fight off inflation.

There is another angle to consider: Ammunition for the Federal Reserve when there is another economic down turn. Lowering the Federal Funds rate is a classic monetary policy employed by the Federal Reserve to help stimulate the economy in times of slow growth/recession. We saw the Federal Reserve lower the funds rate after the “.com” bubble burst, and then raise it as the economy recovered. This repeated after the housing collapse, and the Feds are now raising the rate again to have this as a fallback position for next time (there will be a next time). If rates are kept low, the Feds won’t have this as an option. Japan have kept their “federal funds” equivalent at zero for many, many years with little impact. They recently started a “negative” rate policy that has also shown little results in getting their economy back on track.

It is a delicate balance, and will be interesting to see how it plays out.

The question that most people reading this blog want to know is how will this impact mortgage rates. Mortgage rates tend to work in opposite fashion to the Federal Funds rate.

  • the Federal Funds rate directly impacts rates on second mortgages, car loans, credit cards.
  • mortgage rates are determined by the value of mortgage backed security bonds. These bonds (and all bonds) hate inflation. As inflation rises, bond values drop. As bond values go down, mortgage rates go up.

It stands to reason that mortgage rates could improve as the Federal Reserve raises the Federal Funding Rate. That is exactly what has happened as the Fed raised rates. Mortgage rates improved after the Federal Reserve raised rates in December 2015. Mortgage rates skyrocketed after the election (when stock prices went up dramatically). Mortgage rates have improved since the Fed began raising the Federal Funds rate again at the end of 2016 and into 2017 (while stock values have been mostly flat/slightly higher).

It will be fascinating to watch how this unfolds as traditional party philosophies, the economy, monetary policy, and mortgage rates all stand to be impacted by the decision.

Homebuyers squeezed out of the market

June 13, 2017

Last week there were a series of articles published by the Wall Street Journal, CNN Money, and more describing how Millennials are being squeezed out of buying homes. For the most part, articles focused solely on lending requirements. Honestly, that misses the mark on what is really going on out there right now. Let’s dig into this a little more.

The articles primarily focused on how lending guidelines are stricter. While that is true when compared to 2007, lending requirements have loosened up quite a bit over the past several years. Here are some quick examples:

  • Conventional loans allow borrowers with a credit score of 620 (the same as FHA). Average credit is 660-680 depending on what article/source you read, so home buyers with below average credit can qualify to purchase a home.
  • Smaller down payments are back. VA and USDA loans do not require a down payment, FHA only requires 3.5% down, and Conventional loans can be used to buy a home with as little as 3% down.
  • Self-employed borrowers with an established business of 5+ years can qualify to buy a home with only one year of tax returns.
  • Condos can be purchased with as little as 3% down.
  • Rental income from investment properties can be used even if the property hasn’t been rented out for two years.

Lending guidelines are much more lenient today than they were just a few years ago. That isn’t really the problem.

A Washington Post article from January discussed the elephant in the room, and nailed it when it comes to the issue that all home buyers are facing – inventory.

I attended a Realtor meeting recently where a stat was given stating there is less than a 3-month supply of homes available in in-town Atlanta. A balanced market is a 6-month supply, and nationwide the supply of homes is well under 6 months. That’s not good. Think it is bad in Atlanta? It’s worse in Seattle. The lack of inventory puts Millennials (and any home buyer with a smaller down payment) at a disadvantage. Also, it is pushing home values higher than a normal market due to the impact of supply and demand.

How does one compete in this market? A few things come to mind.

  1. Home buyers must go out and look at homes as soon as they are listed. This can be difficult depending on one’s schedule, but homes are going under contract in a few days in most cases.
  2. Home buyers should be underwritten prior to going out to look at a home. This way the offer letter isn’t a prequalification letter or pre-approval letter, but the letter can read the home buyers are “approved to purchase a home pending a satisfactory appraisal, clear title, and sufficient insurance coverage.” That is much stronger than a simple “prequalification” letter, and I go into more detail this in a previous blog post.

By planning and being ready to move on a home at a moment’s notice, home buyers can increase their odds of getting under contract on a home.

Looking to purchase in Georgia? Wanting to get ahead of the game? Contact me today, and we’ll get started toward achieving the goal of your home ownership!