Here is a quick summary of how national policy priorities can impact conventional mortgage interest rate calculations. Conventional mortgage giants Fannie Mae and Freddie Mac charge what are called “guarantee fees” in their interest rate pricing models. These “g-fees” cover losses from borrower defaults, administrative costs and provide a return on capital. In 2019, g-fees amounted to 58 basis points on average for a 30-year fixed rate loan. Lenders typically pass these g-fees along to borrowers in the form of higher interest rates.
Congress and the mortgage giants can modify mortgage interest rate fee structures to generate additional revenue to cover national policy priorities. For example, in 2020, Fannie and Freddie implemented a 50 basis point fee specific to mortgage refinances (dubbed the “Adverse Market Fee”). The fee only applied to refinances, not purchases. This fee caused rates on refinances to be slightly higher than rates on similar home purchase mortgages. The refinance fee was eliminated earlier in 2021.
Congress sometimes mandates fees to pay for specific legislative priorities. For example, in 2011, Congress applied an extra 10 basis points to the g-fees charged by Fannie and Freddie. Congress passed this extra fee to cover a three-month payroll tax cut. The fee was set to expire in September 2021. Recently, some Senate members have proposed moving the expiration date from 2021 to 2032. They estimate the extra g-fee will generate $21 billion in revenue to help fund the estimated $579 billion designated to pay for roads, power grid modernization, and rural broadband expansion. Mortgage industry and housing advocacy groups – often in opposition on other policy proposals – are now united in opposition to this use of g-fees. The infrastructure package does not have a housing component. So this proposal will tax home mortgage holders without benefitting national housing concerns. People who pay cash for their homes will not pay this fee.
How will this impact you? If the fee is extended, there’s no change to what people have experienced since 2011 in terms of applying for a home loan or changes for doing a home loan. If the fee is allowed to expire, it won’t cause a significant change in interest rates as the fee is minimal. Ultimately there will be a minimal impact to consumers. I just find this topic interesting.
All of this said, if you (or someone you know) want to buy a home in Georgia, now is still a great time to buy as interest rates are near historic lows. These current low rates increase your buying power. And Dunwoody Mortgage offers tools to help home buyers win the contract in this competitive market. Contact me to get started.
Unison’s March 21 homeownership survey gives interesting insight regarding how the pandemic has impacted Americans’ feelings about their homes. It covers many different aspects of American home ownership in 2021. Here are some points that I find most interesting.
The pandemic forced Americans to do everything from home, so homes became schools, offices, gyms, and more. Therefore, 64% of respondents stated their home is more important now than ever before. 91% of respondents stated that owning a home makes them feel more successful, stable and secure. Before covid, 58% of homeowners felt an emotional attachment to their homes. After the pandemic changed our lifestyles, 70% of owners now feel an emotional attachment to their homes. Millennials reported the highest level of emotional attachment to their homes.
90% of respondents view their home as an asset as opposed to a burden. However, 29% of owners had to take some sort of action to keep up with their mortgage payments due to pandemic impacts. To weather the storm, homeowners accessed retirement savings, delayed remodeling projects, rented out portions of their homes, and sought forbearance relief. The study noted that Millennials reported the greatest economic impacts from covid.
45% of homeowners are planning a 2021 home improvement project. 33% of mortgage-holders say they would tap their homes’ equity to finance a home improvement. That’s up from 21% before the pandemic. The most popular planned renovations are kitchen and bathroom remodels. Only 4% believe creating a dedicated home work space will most improve their home life.
Finally, 37% of Millennials stated that the pandemic has made them consider moving. The biggest drivers of the desire to move are (1) needing more space, (2) reducing living expenses, and (3) job location flexibility.
The study has a lot more detail than I can cover here. Check it out if you want to learn more.
From a mortgage perspective, interest rates are still close to historic lows. Now is still a great time to buy a new home or do a cash out refinance to fund a home improvement project. If you know someone in Georgia considering a move or a refinance, please refer them to me. The Dunwoody Mortgage team can help our buyers win purchase contracts and will make the mortgage process as simple as possible.
As the Mortgage Blog has stated many times recently, buying a home in metro Atlanta is now a very competitive endeavor. Home buyers seek every possible advantage to win. A recent Redfin report documented the effectiveness of certain strategies. Here’s a quick summary:
All cash offers increase the buyers’ odds of winning by 290%.
Waiving the financing contingency increases the buyers odds by 66%.
Using a price escalation clause has no significant impact.
Waiving the inspection contingency has no significant impact.
I must say that the last two surprised me. But let’s focus on the effective strategies. The impact of making a cash offer is obviously huge, but one key in this market is that now cash offers must match or exceed the list price, or the offer may not win.
What if you have the cash but would prefer to finance some of the purchase? You have two options. I’m currently working with a client who made an all cash offer. After winning the contract, he applied for a relatively small mortgage. He could pay all cash, but he’s using the mortgage to keep some money invested in the stock market. With this strategy, we can close on time and it doesn’t concern the seller. But the buyer has no financing contingency or appraisal contingency protections. If the appraisal is low or underwriting denies the loan, the buyer must still close using his cash or will most likely lose his earnest money.
Another strategy for a cash rich buyer is to close the purchase with cash and then immediately do a home loan after closing. We call this a “delayed financing loan.” This gives the buyer the advantages of a cash offer and the ability to finance the home later and recoup some of the assets used for the purchase. Note that all of the assets used for the purchase must be from the buyer’s own accounts. The buyer cannot borrow money from a relative or anywhere else. If any of the funds for the cash purchase (even only $1,000) are from an account not owned by the buyer, then this quick finance option is not available. If not all the funds came from the buyer, then the buyer must wait 6 months after closing the purchase to do a refinance loan. And note that interest rate pricing on the delayed financing loan differs from the first approach described above.
Waiving the financing contingency is an effective tool for buyers who don’t have the cash to purchase without a mortgage. But it can be a risky strategy if the buyer has not addressed financing first. At Dunwoody Mortgage, we can underwrite loans with a “to be determined” property. Once approved, the buyer can confidently waive the financing contingency and offer a relatively short closing date. This is a great way to strengthen your offer versus your competition. Not every mortgage lender can offer TBD underwriting.
Are you buying a home in Georgia and want to win the bidding war? Call me about one of these options today. I’ll work with you to help you win the contract and close on your new home as soon as possible. (And for good measure, here are a few more creative Realtor ideas for winning the contract. I can help you with #4!)
As we have mentioned in multiple recent Mortgage Blog posts, it is a VERY competitive market for Atlanta home buyers. I’ve heard a 15-year veteran of the mortgage business say, “I’ve never seen it like this.” I have a Realtor friend who listed a home on a Friday in late January. By the following Monday she had received 106 offers.
A recent Wall Street Journalarticle covered some painful mistakes that home buyers have made in their zeal to win the contract. It’s a fascinating review of decisions some buyers wound up regretting in this uber competitive market. The article noted that “pandemic buying fever” has sometimes led to buyer’s remorse. A key point for home buyers to consider is that a house, “unlike expensive jewelry or clothing, can’t be returned if the buyer is unhappy with it, so a cardinal rule of home buying is that you shouldn’t rush into a purchase.” Critical home buyer mistakes included:
Waiving home inspections that could have identified unacceptable or expensive problems like woodpeckers and wasps.
Accepting home “issues” that one would not accept in a more “normal” market – the article’s example was toxic black mold and asbestos.
I have recently seen home buyers risk their earnest money with zero-day financing or appraisal contingencies. In my opinion, a zero-day financing contingency can make sense when underwriting has already approved the buyer (see the blog post mentioned below), and a zero-day appraisal contingency can make sense when the borrower is making a large down payment. But these approaches do have risk and the home buyer should thoroughly understand the situation before taking these (calculated) risks.
My recommendation is this…plan ahead and think carefully about what you are willing to risk in this market. Then make offers that are as aggressive as possible, given your risk tolerance. Perhaps you are willing to offer a zero-day due diligence period with a $5,000 earnest money payment. In that case, you may still want to pay for a home inspection to protect your long-term interests. If the inspection identifies an expensive structural issue, it may make sense to terminate the contract and forfeit the earnest money rather than close on a house that will require tens of thousands in repairs. Perhaps you have available cash, and you are willing to risk having to make a larger down payment than you originally planned, in which case you may consider a zero-day appraisal contingency.
One of our recent posts described a smart way for buyers to claim a competitive advantage in this market. I’ve used this approach with several buyers in recent months and it has worked well. In one case, one of my clients beat a cash offer!! If you want to compete more effectively in this home market without taking more risk than you can accept, call me and we can discuss a “TBD property underwrite.” I would love to help you succeed and win, even in this challenging market.
A recent mortgage industry headline surprised me, “Many Homeowners Still Missing Out.” The subheading read, “80% of owners have not refinanced.” Given that interest rates have reached historic lows, with less than 3.0% rates often available for 30 year mortgages, I’m really surprised that so many people have not refinanced.
The article provides the following statistics:
Almost 30% of mortgage holders do not know their current interest rate!!
Almost 20% of borrowers have refinanced in 2020.
Over 25% have considered refinancing but have not done it.
And over 50% have not even considered a refinance.
I am now doing refinances for customers whom I refinanced in 2019. Mortgage interest rates have continued dropping to the point that a second refinance now makes financial sense for some of my clients.
If you have a mortgage on a Georgia home, here are a couple of clues that you might want to talk with me about refinancing now:
Your interest rate is above 3.5%. The rate typically shows on your mortgage statement. Take a quick minute to look at it.
You obtained a FHA loan more than 2 years ago. With recent home appreciation, it’s worth exploring a conventional refinance in hopes that you can eliminate the FHA mortgage insurance.
The ultimate consideration is how much will the loan cost as compared to how much you can save monthly. Yesterday, I talked with a former purchase client. In 2016, she bought a house with a 3.5% down FHA loan at a 3.75% interest rate. That was a great deal for her….back then. Since she bought the house, it has appreciated over $100,000. With her increased equity, doing a refinance now would lower her interest rate almost a full percentage point, and she would eliminate the FHA mortgage insurance that costs her $155 every month. Her total monthly savings could be around $330. I estimate a refinance will pay for itself in just over a year.
What about you? Is your interest rate over 3.5%? Do you have a 2 year (or older) FHA loan? Do you want to give yourself a raise by lowering your monthly mortgage payment? If yes, give me a call. I can easily help you analyze your current situation to see if a refinance makes sense for you. Don’t wait too long. Who knows when interest rates will start rising.
After a crazy 2020 with the pandemic plus related economic impacts, a Presidential election, followed by a year-end pandemic surge, it’s time to ponder what will 2021 bring us. To recap 2020, the housing market started strong, until Covid cases appeared in the US and control measures were implemented. At that point, mortgage application volume showed year over year declines for four consecutive weeks. The following five weeks showed year over year negative growth, but the numbers stabilized. After this two-month period, purchase mortgage applications went positive. And now we have experienced almost 30 straight weeks of purchase mortgage application growth on a year over year basis. The average year over year improvement has been over 20%.
Due to the laws of supply and demand, home prices have risen in this time period. But mortgage interest rates have consistently decreased, enabling more home buyers to qualify to purchase higher priced homes, thus continuing to fuel the higher demand. Ultimately 2020 mortgage origination volume has been at a level not seen since 2003.
The Mortgage Bankers Association (MBA) now predicts that 2021 purchase originations will hit $1.59 trillion. That would be a new record – the previous record was $1.51 trillion in 2005.
The chief economist for the National Association of Realtors (NAR) recently stated, “This year may be one of the best winters for sales activity.” NAR predicts that a continuing housing shortage will keep home prices elevated. The NAR predicts a continued strong economic recovery, assuming an effective rollout of the new vaccine.
Are you still renting? With historically low interest rates, now is a great time to buy. You can buy more house now for the same mortgage payment you would have made on a lower priced home a year ago. The biggest challenge is that this market is very competitive. To win the contract, you need every advantage you can get.
Choosing the right mortgage professional can help you win the contract. (Learn more here.) Do you want to take advantage of the current low rates and perhaps buy a nice yard for some fun social distancing? Or do you want to upgrade your home office? Then contact me. I will do everything a lender can do to help you win the contract so you can move into your new home soon.
For a self-employed person who wants to buy a home in 2021, now is the time to start planning. Mortgage underwriting for self-employed borrowers is very different than for W2 salary borrowers, and it’s all about what the borrower reports on tax returns. Before reviewing the steps a self-employed person should take now, let’s do a quick overview of mortgage underwriting for the self-employed.
First of all, what is a self-employed borrower? In the mortgage world, a borrower is self-employed if one owns 25% or more of the business. And even if paying oneself using a W2, if owning 25% or more of the business, the self-employed rules apply. No exceptions.
Secondly, underwriters calculate self-employed income using the net income reported on the borrower’s tax returns. We use the net, not the gross, because the net shows the amount of income left after the borrower runs the business. Only the income remaining after paying business expenses is truly available to pay the mortgage. In many cases, underwriters will calculate income based on a two-year average of reported net income. In some cases, underwriters will consider only the most recent year’s reported income. Discuss this with your loan officer.
So how should the self-employed prepare now for a 2021 home purchase:
Review current year P&L statements to understand the income situation.
Determine a reasonable budget for a home mortgage payment – based on the buyer’s home purchase criteria.
Work with a mortgage professional to determine what 2020 net income is needed to win underwriting approval of the payment. (Your lender may want to review prior year tax returns.)
Plan to report expense deductions that will allow for the needed net income.
Plan to have enough available cash to make the income tax payment.
In some cases, the self-employed buyer may want to explore other financing options. My current client started her business in October 2018. Her 2019 business return shows a loss, and 2020 is not complete, so she has not filed a return. But her business has grown rapidly and it is now profitable. She has also found the perfect house. We can obtain a mortgage using income calculated from the last 12 months of her business bank statements, which is strong. So we can help her buy that perfect house now, before she has two full years of positive tax returns. I can tell you that she is thrilled, as several other lenders have not been able to help her.
Are you self-employed and want to buy a house in 2021? Or do you know someone who fits this description? Connect with me now so we can plan for a successful underwriting experience in 2021. Waiting until after 2020 ends may be too late and your business expenses could hurt your home buying plans. It’s best to do some planning now.
Historically low mortgage interest rates have created a refinance “boom” in 2020. Millions of homeowners have realized significant monthly savings by lowering their interest rates. Current rates are still very low by historic standards, but refinancing is now getting more expensive.
Several weeks ago, mortgage giants Fannie Mae and Freddie Mac announced a new 0.5% “Adverse Market Refinance Fee,” applied to all mortgage refinances (not purchase mortgages). They announced this fee as a risk management step to address “loss forecasting precipitated by continued economic and market uncertainty.” In layman’s terms, Fannie and Freddie are collecting this new revenue to offset losses from expected foreclosures due to the pandemic and related economic stress.
Fannie and Freddie announced that the new fee would be effective for all loans they purchase starting on September 1, 2020. There was an immediate outcry from the mortgage industry. One mortgage association executive called this new fee an “ill-timed, misguided directive,” and urged its repeal. The same executive noted that the fee will raise interest rates on “families trying to make ends meet in these challenging times.” Fannie and Freddie relented, a bit, and delayed the implementation of the new fee until December 1.
What does that mean now if you want to refinance? It may be too late to avoid the fee. Many lenders are now pricing this fee into their published interest rates. Why so early? It can take a lender 30 – 60 days to package closed loans and sell them to Fannie and Freddie. Since lenders will pay this fee beginning December 1, loans locked for 30 to 45 days in late September may not be sold to the mortgage giants until after the December 1 fee date. The lenders don’t want to pay the fee themselves, so many are now passing the fee along to their customers.
What does this mean for new mortgage customers? Well first, if you want to buy a home, the fee does not apply and you can still take advantage of the lowest interest rates in history. Call me to get prequalified and then you can start your home search. Secondly, if you bought a home in 2017, 2018, and early 2019, it might still make good financial sense to refinance now, even if you have to pay the fee. Call me and we can evaluate your current mortgage versus a new mortgage. I can calculate your monthly savings, your loan costs, and determine a “return on investment” period for you. I often hear investment advisors recommend, “Don’t try to time the market.” I think that applies to a refinance. If the numbers make good financial sense now, don’t wait for rates to fall further, because they could go up instead. Let’s talk and evaluate what’s the best move for you now.
I heard potential a home buyer say something like, “I can’t get a home loan. I have too much student loan debt.” Often, the opposite is true. Many buyers are able to qualify for the home they want even with student loans. Lending guidelines do not focus on the total amount of student loan (or other type of) debt. The focus is on the borrower’s monthly payments relative to their income. We calculate a debt to income ratio. As long as that ratio falls within our guidelines, the borrower should qualify from an income and debt perspective, even if the outstanding debt balance is very large.
In 2018, I helped a young woman purchase her first home. She had earned two graduate degrees. In the process, she accumulated over $350,000 in student loan debt. Many people would have simply rented, thinking that their student loan debt was too high to win mortgage approval. But my client’s income was high, and it more than offset the monthly loan payments. We closed her home purchase and she was thrilled.
Some home buyers have deferred student loans. They may hope that we do not have to consider deferred student loans in the debt to income ratio, but that is not an option. If a student loan is in deferment, we can often qualify the buyer using 0.5% of the student loan balance. If the buyer is on an income-based repayment plan, even if the payment is $0, then we can use the plan-specified payment. We use these calculated amounts in our debt to income analysis. Loan originators must be careful to follow the correct guidelines so that borrowers do not encounter unpleasant surprises during underwriting.
One caveat here is an FHA mortgage. FHA loans require using 1% of the current loan balance or an amortizing monthly payment schedule. FHA loans do not allow an income-based repayment plan if the monthly payment is not an amortized payment. In short, it’s often a better option to use a conventional loan instead of FHA when it comes to student debt.
Do you want to buy a Georgia home but fear that your student loans put home ownership out of reach? Don’t let your fears hold you back. Give me a call and let’s explore your options. You might be able to buy a home sooner than you think. I’ll help you find the best loan program to get you into a home as soon as possible. If that’s not right now, I’ll coach you to prepare for a home purchase as soon as possible.
An August 5 study released by Ellie Mae shows that Millennial purchase activity is increasing. The study showed that, in the Second Quarter 2020, Millennials closed more purchase loans than any other generation cohort. Ellie Mae’s COO, Joe Tyrrell stated, “Millennials are emerging as a dominant force relative to driving the purchase market forward in the next few years.” Tyrrell continued by saying that the Millennial home purchase boom is just beginning, and that as more Millennials reach home buying age, this age group will drive purchase volume in 2021, 22, and 23.
US Census data shows that over 4 million Millennials will reach the 29 – 30 age level every year for the next several years. That 29 – 30 age range is the average age when Millennials enter the home purchase market.
The report continued by stressing that online loan applications, automatic updates and eClosing capabilities give Millennials the seamless digital experience they want while “freeing up time for the human interaction necessary to answer questions or concerns they may have as they navigate the home buying process for the first time.” That point is key, and it emphasizes the importance of obtaining wise counsel from a mortgage professional.
Other recent studies have noted that while young people show enthusiasm for home ownership, they recognize the challenges they face such as increasing home prices, saving for a down payment, and unstable jobs or job changes. They also note student loan debt as another challenge.
A large percentage of young people report that they are not confident in their mortgage knowledge. Of these, almost three fourths said they would consult a parent to learn more about mortgages, while less than half said they would consult a mortgage professional. I literally just spoke with a fifty-something parent of three adult children. He’s buying a house and he does not understand mortgages at all. Mortgage guidelines and pricing are changing rapidly, especially in our pandemic-crazed world. Only we mortgage professionals understand all the details and can give complete and up to date mortgage advice.
So parents of adult children, don’t “guess” at your kids’ mortgage questions or tell them about how things worked when you got your loan 10 years ago. Have them call me. I can counsel them now on the best interest rates and the critical COVID employment verification requirements. And I know all the right questions to ask them – to avoid surprises coming up after they have a house under contract. I will make sure they are truly prepared to buy and I will coach them all the way through to closing, helping them avoid potential unpleasant surprises along the way.
Clay Jeffreys is a Mortgage Consultant with Dunwoody Mortgage Services and a writer for “the Mortgage Blog.” If you would like to be a guest writer for "the Mortgage Blog" please contact Clay for details.
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