Borrow From Yourself to Buy a Home

I personally think 401K accounts are great tools for workers to save for retirement, especially if the employer matches some of the employee’s contributions. Many people don’t realize it, but a 401K account can also help a home buyer purchase a home.

Many, but not all, 401K fund managers permit the account holders to borrow from their 401K accounts to help fund a home purchase. If the fund manager allows this, home buyers can typically borrow up to 50% of their account balance or $50,000, whichever is less. Because this is technically a loan, the home buyer does not pay an IRS penalty to access the account funds prior to retirement and the home buyer must repay the loan based on a schedule set by the fund manager.

As is often stated on the Mortgage Blog, home buyers can buy homes using less than a 20% down payment. In many cases, buyers can obtain a conventional mortgage with only 5%, and sometimes even 3% down. With today’s high home prices, accessing the 3% or 5% required down payment can still be problematic for some buyers. But if those buyers have a 401K account with a substantial balance, borrowing against the 401K balance could make home ownership a reality.

From an underwriting standpoint, the borrower must provide documentation showing that the fund manager permits accessing the 401K funds for a home purchase and 401K account statements showing the balance before taking the loan along with documentation of the funds transfer from the account. Home buyers using 401K funds should plan to start the 401K loan early in their loan approval process. Waiting too long could delay closing as underwriters must review and sign off on the funds transfer. One more added benefit is that, although accessing 401K funds is a loan that must be repaid, underwriters do not include the 401K loan payments in the debt-to-income ratio calculation.

Here is an article giving one financial planner’s perspective on accessing 401K account funds. This planner endorses using 401K funds to buy appreciating assets like a home. But she points out that there are some drawbacks to a 401K loan, including (1) it is a loan that requires monthly payments, so adding the 401K loan payment and a new mortgage payment could “stretch” a buyer’s finances, (2) taking money out of the market could cause the buyer to miss market appreciation during an rising market, and (3) if the buyer changes jobs, the employer might require that the 401K loan be fully repaid shortly after the job change. Ultimately, the home buyer can evaluate her situation, and if she thinks using 401K funds to buy a home now is more valuable than these concerns, then borrowing from the account to buy a home can be a wise option.

Are you considering buying a home in Georgia but have limited available cash for a down payment? If you have been using a 401K account to save for retirement, you might be able to buy a house sooner than you think. Give me a call and let’s discuss your options.

Homebuyers Face Less Competition

From my perspective as a mortgage lender, anecdotal evidence shows there is less competition for those homes listed for sale now, relative to the last few years. Buyers now often offer contracts at or slightly below list price, whereas in 2021 and early 2022, buyers had to offer tens of thousands over list price to win the contract. I now see buyers winning some seller contributions to closing costs, and contracts often include reasonable finance and appraisal contingencies to protect the buyers.

But how much less competition is there, really? I found Redfin’s “Compete Score” on their website. This score measures how competitive an area is for home buyers. The Compete Score ranks geographic areas on a scale of 0 to 100, where 100 is the most competitive. Redfin calculates the score primarily using four key data points: number of days on market, sale to list ratio, number of competing offers, and waived contingencies. For the Atlanta area, Redfin separates the data further, into “Core City” and “Suburb” components. Let’s look at the data for each, starting with the Core City area.

In February 2020, the Core City area earned a 60 score. This dropped to 55 in 2021, then to 53 in 2022, and down to 52 in February 2023. So, the competitiveness of the Core City housing market has dropped each year, and by 13% over this three-year period.

In February 2020, the suburbs earned a 66 score. This increased to 67 in 2021, then jumped to 73 in February 2022. The Compete Score has dropped all the way back to 57 in February 2023. This is a 14% drop from 2020 and a surprising 22% drop in the last year.

We are left to figure out “whys” behind the data. Why is the Compete Score consistently higher in the suburbs? My first thought is Covid-19. With the 2020 pandemic, more people wanted homes with more yards, more rooms / square footage, etc. Housing is less dense in the suburbs, so it makes sense that more people would want to buy homes in the burbs, thus increasing competition there. Other factors could be the construction of more Core City rental units, making the supply lower and pushing more buyers to the suburbs. Differences in home prices in the Core City vs. suburbs areas could also play a role.

A much easier question is “Why have the Compete Scores dropped in the last year?” The quick answer is mortgage interest rates. Home prices rose significantly in the last few years, and yet people were buying homes as fast as they went on the market. The downward trend of home purchases and those applying for pre-approvals began when mortgage rates jumped. And, wow, have mortgage rates jumped in the last 14 months. These higher interest rates have caused many people to put their home purchase plans on hold, which is driving the lower competition for homes.

That means less competition for those who can and still want to buy a home. And now we can measure that drop in competition. In both Core City and Suburb areas, competition has dropped significantly, in general, in the last 12 months. The drop has been more significant in the Suburbs, but there is still greater competition for homes in the Suburbs than in the Core City areas.

Looking to buy a home in Georgia? Now is a great time to buy – read this post to better understand why. It’s still a seller’s market, though. If you want a lender who has tools to help you win the contract, give me a call, and let’s get you ready to make the most competitive offer possible.

When will the housing shortage end?

Isn’t that the million dollar question? I wish I knew the exact answer. A safe answer is not in the next couple of years.

I’ve talked a lot about the lack of homes for sale. The same issue is in the rental market too. Reflecting the unprecedented housing shortages across the United States in the post-pandemic market, U.S. vacancy rates hit their lowest readings in decades in 2021. According to NAHB’s analysis of the 2021 American Community Survey (ACS), rental vacancy rates reached a new low of 5.2%, the lowest levels recorded by the ACS since the survey started generating these data in 2005.

Additionally, NAHB’s forecast indicates the balancing of the market will take years to correct itself, and will take place between 2025 and 2030. Even on their short term projection, it is still two years away.

If the rental market is stretched, and we’ve already discussed the shortage of homes being built/for sale in my February series, what should a buyer expect in 2023? Glad the question was asked 🙂

Realtor.com 2023 housing forecast says 2023 will offer buyers less competition on the number of for-sale homes. Compared to the wild ride of the past two years, 2023 will be a slower-paced housing market, which means drastic shifts like price declines may not happen (if at all) as quickly as some have anticipated.

Going back to the Zillow report referenced in my first post this month, it noted, while national home value declines from peak levels have been minimal, some markets have seen significant changes. Atlanta isn’t one of those markets. People are still moving into metro Atlanta, and there are not enough homes to buy for the number of people wanting to own homes in this market. Our housing prices have a floor, so there is no need to fear a 2008 home value crash.

In all of my posts, we are seeing a trend. The housing crunch isn’t changing in the next few years, more buyers will enter the metro Atlanta housing market as the US population continues to move to the southeast, housing prices have a “built in” floor due to supply and demand… the only thing different from the past few years and when the market heats up again is the competition… or lack thereof. Those who got out of the market and quit trying to buy will find it very different now in this cooled/fewer looking for homes market.

I remember speaking with someone is March 2020 saying they wanted to wait until the summer to get a really good deal as the housing market collapsed from Covid. I advised him if he wanted a good deal, he needed to purchase a home in March or April. Why? My thought process then was there was nothing wrong with the economy. When things open up and go back to normal in a month or two, home prices will go back to where they were and we will pick back up where we left off. Other than me being wildly optimistic on when life would go back to normal, when the economy opened up, the “deals” were gone.

I feel we are in a similar window now with fewer buyers making offers on homes. My clients are getting under contract with time for due diligence, appraisal/financing contingencies, the seller giving money for closing costs, and even contingencies to sell a home prior to buying the new home! This is as close to a “buyer’s” market we will see until the housing inventory issue sorts itself out, which is forecast to be years down the road.

Next month – new topics. Promise!

If you’ve read these posts and decided now is the time to buy before everyone else jumps back into the housing market, contact me today (see my banner above for contact info). I’ll get you ready to make offers on homes in no time!

Request to Extend Affordable Mortgage Access

The Mortgage Bankers Association (MBA) has officially requested that the Federal Housing Finance Agency (FHFA) expand income eligibility for certain low down payment loan programs. FHFA regulates mortgage giants Fannie Mae and Freddie Mac. The MBA sent a letter to FHFA specifically requesting changes to the Home Ready and Home Possible loan programs.

Home Ready and Home Possible currently provide interest rate pricing discounts and mortgage insurance premium discounts for borrowers whose incomes are less than 80% of the Area Median Income (AMI) where the subject property is located. These discounts apply to home buyers whose credit scores are 680+ and who complete a free online home ownership course. Lender pricing typically adjusts interest rates higher for borrowers with lower credit scores and those who are financing condos using loan amounts greater than 75% of the condo’s value. For Home Ready and Home Possible borrowers, these credit score and condo pricing adjustments are eliminated. Making these programs even more powerful is the fact that the discounts apply to borrowers who can make only a 3% down payment.

Saving enough cash for a down payment is one of the greatest challenges that homebuyers can face. Providing these interest rate and mortgage insurance discounts for loans with only a 3% down payment is a powerful tool for homebuyers without alot of available cash.

In the letter to FHFA, MBA requested that the agency expand Home Ready / Home Possible eligibility to borrowers with incomes up to 100% of the subject property’s AMI. MBA also requested that the income threshold be eliminated completely in low-income census tracts. This change would encourage homebuyers to seek properties in low-income areas. MBA president and CEO Robert Broeksmit stated, “Raising the AMI limits to expand access to these programs would still be beneficial as there are key features of Home Ready and Home Possible loans, such as a 3% down payment, that make homeownership attainable for historically underserved borrowers.”

I think an increase is warranted. When you look at 80% of the average income in an area versus the average home price, it eliminates many borrowers from qualifying for these programs. For example, in DeKalb County, the Home Ready / Home Possible annual income limit is $76,560. Some first-time buyers may qualify to buy an average-priced home, if they have no additional debt, but it is tight. By allowing the amount to go to 100%, more borrowers would qualify to purchase the average home price in the market with some additional debt. This is important as most first-time home buyers are in the Millennial/Gen Z demographic. These generations have additional student loan debt that previous generations didn’t have. Raising the income threshold to 100% AGI isn’t about buying more home. It is allowing first-time home buyers to purchase the average home in their area while having some additional debt obligations. If these programs are intended to help first-time home buyers, then let’s help them.

For reasons covered in a recent Mortgage Blog post, now is a great time to buy a home. If you want to buy a home in Georgia, give me a call and we can quickly determine which discounts you can obtain, and then set you on a path to home ownership.

Lower Rates and Easier Approvals for Some Home Buyers

In recent weeks, mortgage giants Fannie Mae and Freddie Mac have announced changes that will give better interest rate pricing to specific borrowers. A quick primer on interest rate pricing….lenders price loans based on risk factors. The greater the risk, typically the higher the interest rate. Key risk factors that can impact mortgage interest rates are:

• Credit score – the lower the borrower’s credit score, the greater the default risk, and therefore the interest rate is adjusted higher to compensate for the risk.
• Down payment – the lower the down payment, the greater the risk and therefore the interest rate is adjusted higher.
• Condominium – lenders consider condos to be riskier properties due to potential issues with the HOA. So the interest rate for a condo loan with a less than 25% down payment is adjusted higher.

In the mortgage industry, we call these “Loan Level Price Adjustments” or LLPA’s. Given that background, here are the recent changes that will help some borrowers.

Removal of the LLPA’s for first-time home buyers whose income is 100% or less than the Area Median Income (AMI) for their home purchase location. First-time home buyers include anyone who has not owned a home in the last three years. The AMI differs by geographic area, but a quick check of a southeast Atlanta address shows an AMI of $95,700. One caveat is that if the borrower’s qualifying credit score is less than 680, the interest rate will be adjusted higher to compensate for the additional credit risk. I think this new program is great news for potential home buyers who qualify. The biggest benefits will accrue to qualified borrowers with credit scores between 680 and 700 who want to buy a condo with a low down payment.

Another recent change affects the Home Ready / Home Possible programs offered by Fannie and Freddie. In the past, these programs removed the LLPA’s for borrowers who qualified: (i) credit score of 680 or higher, (ii) income less than or equal to 80% of the AMI ($76,560 in the area mentioned above), and (iii) down payment of less than 20%. These programs offer improved interest rate pricing and discounted mortgage insurance premiums for qualified borrowers. For these programs, the borrower does not have to be a first-time buyer. The recent change was eliminating the down payment requirement. I’ve had past customers who wanted to put 20% down, but who qualified for better pricing with a 19.5% down payment. With the change, borrowers making a 20%+ down payment will still obtain the discounted pricing if they meet the other program requirements. Note that these programs require the borrower to complete a free online homeownership course.

One other recent change that may help some borrowers is that Fannie and Freddie will now allow the use of cryptocurrency assets to cover a borrower’s down payment and closing costs. Before now, cryptocurrency assets were not allowed. To use cryptocurrency, the borrower must move the assets to a bank account (checking or savings) prior to closing and must provide documentation showing that the borrower legitimately owned the crypto assets and documenting the transfer from the crypto account to the bank account.

For reasons covered in a recent Mortgage Blog post, now is a great time to buy a home. And if you qualify for the new discounts or you have crypto accounts, the situation just got better for you. If you want to buy a home in Georgia, give me a call and we can quickly determine which discounts you can obtain, and then set you on a path to home ownership.

Wills – A Wise Move for Homeowners

If you own a house in Georgia, and you want to control who receives title if you die, you need a will. In the last two weeks, I have heard of two young homeowners who died without a will, compounding the grief of their loved ones.

To be clear, I am not an attorney, so I strongly recommend you seek legal counsel regarding a will, but I have talked with multiple attorneys recently and here’s what they taught me.

Georgia homeowners can use a will to specify who will receive title to a home they own upon their death. If the will is legally drafted and properly executed, homeowners can specify anyone – even someone not related to them – as recipient of their home’s title upon their death.

Without a will, here’s how Georgia law works. Upon the homeowner’s death, then the home title is divided between the deceased’s legal spouse and children. The legal marriage is critical here. If the deceased is not married and has no children, then the home’s title passes to the deceased’s parents. Remember this is Georgia law – without a will to specify who receives title, Georgia law will always transfer title according to these rules.

Now here are two horror stories for instruction. An estate attorney told me about a client who lived with someone for several years, but they never legally married. The client’s partner owned the house, but title was never granted to the client and the partner did not have a will. Because this couple was not married, when the partner died suddenly, the deceased’s title passed by law to the deceased’s parents. Why? The surviving client was not on the title, the couple was not legally married, and the deceased had no children. The parents did not like the client and they took title to their child’s home per Georgia law and evicted the client.

Someone called me last week asking if I could help them refinance the home they occupy. This person and their fiancee lived in the home together for several years. They never married and the home’s title was in the fiancee’s name only, and there was no will. Then the fiancee died suddenly at a young age. The surviving partner was defined as beneficiary on the deceased’s accounts and insurance policies and was even able to obtain legal authority to serve as the estate administrator. Yet as administrator to an estate with no will, the surviving partner has a fiduciary duty to dispose of the estate’s assets according to Georgia law. While this person has been making all mortgage payments and has lived in the home for several years, they are now at the mercy of the deceased fiancee’s parents regarding the home. They could evict, move into the home, or force a sale of the home and take all of the profits from the sale. This person has no rights to the home under Georgia law.

If you own a home in Georgia, the easiest way to avoid these nightmares is to legally / officially execute a will. This is especially true if you want your house to go to someone who is not your legal spouse, your child, or your parent. It is not very expensive and will be priceless to your heirs if they can avoid the heartbreaking examples I described above. Even if you are young, tragedies can happen – none of us is guaranteed another day. I can connect you with an attorney who will handle your will efficiently and effectively.

And if you want to buy a home in Georgia, please give me a call. Dunwoody Mortgage helps our clients win contracts in competitive bid situations. I’ll remind you to document a will after closing.

FHA Loan Limit Rises for 2023

The Department of Housing and Urban Development recently announced the increased FHA mortgage limits for 2023. In the new year, the FHA limit will go to $592,250 for single family homes in Metro Atlanta counties. That’s an increase of 25.6% over the 2022 FHA loan limit of $471,500.  (Note that non-metro Georgia counties will have a lower FHA loan limit. Most, but not all, non-metro counties will have a $472,030 limit for 2023. Go to https://entp.hud.gov/idapp/html/hicostlook.cfm to search for the FHA limit in your specific county.)  The new FHA loan limit means that a Metro Atlanta buyer can purchase a $613,730 house with a 3.5% down FHA loan.

On a percentage basis, this increase is significantly higher than the 12% increase in the conforming loan limit which was recently reported in the Mortgage Blog.

For perspective, the 2018 FHA loan limit was $359,950, so the FHA limit has increased by about 64.5% over the last 5 years. In that same time period, conventional loan limits have risen from $453,100 to the new $726,200 level – a 60.3% increase.

The greatest benefits of FHA loans accrue to home buyers who have less than great credit and limited cash for a down payment. Home buyers can obtain an FHA loan with a 3.5% down payment. For buyers with lower credit scores, FHA loans often provide lower interest rates and payments than conventional loans. And FHA loans allow shorter waiting periods after major credit events such as foreclosures and bankruptcies.

High home value appreciation in 2020 and 2021 has driven the increases in FHA and conforming loan limits. But in 2022, the rapid pace of home value appreciation has cooled considerably.  In recent months, home buyers have been able to win some contracts with offers less than the home’s list price, and some sellers have contributed cash towards closing costs.  Unless market forces change dramatically, my expectation is that the 2024 FHA loan limit increase will be much less than 25.6%.

If you want to buy a Georgia home in 2023, give me a call. I can help you think through your options, plan for your purchase and make aggressive offers needed to win in this competitive market.

Mortgage Interest Rates Improve

The most exciting mortgage news from the week before Thanksgiving was the significant drop in mortgage interest rates. Official reports show rates improved almost one-half of one percent. I actually had a client whose rate improved by five-eighths (0.625) of one percent. That is a significant impact on home affordability and I hope that trend continues.

Many people wonder how mortgage interest rates can decrease when the Federal Reserve has been consistently raising the Federal Funds rate in recent months. As discussed in a recent Mortgage Blog post, mortgage rates are not directly linked to the Federal Funds rate. The Fed most directly influences mortgage rates using purchases of mortgage bonds. Now that the Fed is not buying mortgage bonds to lower interest rates (called quantitative easing), other economic factors naturally impact mortgage rates.

One of the most important economic influences on mortgage rates is inflation. When inflation trends higher, mortgage rates tend to increase as well. It’s no surprise that without Fed mortgage bond purchases keeping mortgage rates low, the recent high inflation numbers have caused mortgage rates to rise rapidly.

In mid-November, published data was positive – inflation is still high but the inflation rate cooled from prior months. Freddie Mac’s chief economist noted that mortgage rates decreased due to data “that suggests inflation may have peaked.”

This good news does not mean that the period of relatively high mortgage rates has ended nor does it indicate a trend of declining mortgage rates. That will all depend on future inflation report data. But the good news is that when mortgage rates hit the 7% level, they quickly moved lower. Hopefully that 7% level will remain the ultimate ceiling for mortgage rates.

Are you (or perhaps someone you know) looking to buy a home in Georgia? With the recent drop in mortgage rates and current sellers’ willingness to negotiate contract terms (such as price and closing cost contributions), right now could be the best time in almost two years to buy a home. Give me a call and we can get you fully underwritten with a TBD address so you can make an aggressive offer, giving you strength to negotiate contract terms in this more favorable market.

The Cause of Higher Mortgage Rates

A recent article in the Wall Street Journal gave an interesting explanation for 2022’s rapid rise in mortgage interest rates. Most people think mortgage rates have risen because the Federal Reserve has increased the Federal Funds rate several times this year. Not exactly. Here’s quick evidence of that. The first mortgage I closed in 2022 had an interest rate of 3.00%. On March 15, I locked the rate for a new loan at 4.375%. The first time the Fed raised the Federal Funds rate was on March 16.

What caused mortgage rates to rise? In short, it’s economics 101 – supply and demand. In this case, the product involved is mortgage-backed securities. The vast majority of mortgages originated are sold to Fannie Mae and Freddie Mac. Fannie and Freddie package the mortgages into mortgage-backed securities (MBS) and sell the MBS to investors – insurance companies, pension funds, mutual fund managers, etc. Economic factors generated by the pandemic and then its fading created supply and demand shocks that first caused mortgage rates to drop, and then recently caused rates to rise.

When the pandemic first hit, the Fed began buying large quantities of MBS to hold in its portfolio. The increased demand for MBS pushed the security prices up but that inversely pushes the interest rates down. This process is known as “Quantitative Easing.” Banks also bought large amounts of MBS. Americans began saving more during the pandemic. Bank deposits increased significantly while consumer and business borrowing decreased. Since banks had an excess of cash, they decided to buy MBS and put their excess cash to work. So during the pandemic, the Fed and major banks combined to purchase over $1.5 trillion of MBS.

This cannot go on forever, so the Fed began backing off their MBS purchasing in November 2021 and completely stopped in February 2022 – right before rates began rising rapidly. In fact, my colleague discussed this in a January 2022 mortgage blog post. In addition, the 10 largest bank holders of MBS have reduced their MBS holdings by $133 billion in the first 3 quarters of 2022, as bank deposits have leveled off and customer borrowing has increased, leaving less excess cash to buy MBS.

Ultimately, the demand for MBS has dropped significantly now. To motivate other buyers to purchase MBS, the market has forced interest rates much higher. The effect has been dramatic. In recent weeks, mortgage lenders have charged 7.00% or more for 30-year fixed mortgages that had a 3.00% rate to start 2022.

Next time someone tells you they are holding off on a home purchase to see if the Fed raises rates in the coming months, tell them it’s not that simple. Then connect them with me. Mortgage rates are higher, but I still have clients who have saved money with a home purchase compared to the very high current market rents.

Signs of a More Balanced Market

Once the housing market recovered from its initial Covid-19 shock in 2020, it has truly been a seller-dominated market. The demand for available homes was so great that to win a contract, home buyers had to avoid requesting seller contributions to closing costs, set the financing and appraisal contingencies to zero days or other very short windows, contract to cover some portion of an appraisal shortfall, and often offer a price higher than the home’s list price. The largest appraisal shortfall I saw a buyer willing to cover was $30,000, and I dealt with one home that sold for $110,000 more than its list price.

Higher mortgage rates have changed the housing market in recent months and lowered competition. I am now seeing this trend as I review my clients’ contracts. Some of my clients are winning contracts with offers at or slightly lower than the list price. I have recently seen sellers contributing $5,000 – $10,000 toward closing costs. And all of my recent contracts have included finance and appraisal contingencies of 12 – 21 days.

Since sellers are accepting buyer contingencies again, now seems like a great time to explain these contingencies. Both the finance and the appraisal contingencies protect the buyer’s earnest money for a set number of days. The buyer typically wants a longer contingency period to have more earnest money protection. The seller wants the contingencies as short as possible. Here’s how they work.

The finance contingency is a binding contract term giving the buyer a specific number of days to obtain financing approval. If the buyer’s loan application is denied and the buyer delivers a lender’s loan denial letter (documenting the loan type, interest rate, and down payment percentage specified in the contract finance exhibit) within that time period, the buyer is contractually entitled to an earnest money refund. If the buyer submits a loan denial letter after the contingency period has expired, the buyer forfeits the earnest money – the contract permits the seller to keep it.

The appraisal contingency is a binding contract term giving the buyer a specific number of days to obtain an appraisal on the subject property. If the appraisal report specifying a value less than the contract price is delivered within the contingency time period, the buyer is contractually entitled to an earnest money refund if the parties cannot negotiate a compromise agreement. If a low appraisal is delivered after the contingency expires, the seller can keep the earnest money if the buyer terminates the contract.

At Dunwoody Mortgage, we meet contingency deadlines! If I tell you to put “X” number of days for the contingency in the offer, we will get the job done on time to meet the contingency.  Dunwoody Mortgage prioritizes delivering loan approvals and appraisals within the contingency period helping clients manage their financial risk and the associated stress.