Staying on my theme of credit this month. I’m building on a post from my colleague in late August about credit scores. Last week I gave some real world numbers of the impact credit scores can have on mortgage payments and mortgage insurance.
This time I want to focus on how to avoid the worst parts of lower credit. What I mean is this… Is there a way to avoid the worst impact of a higher rate and/or higher mortgage insurance? Can we reduce the increase of a payment due to higher rate and/or mortgage insurance?
There isn’t much that can be done to improve someone’s credit score if they have legitimate missed payments OR a thin credit profile. That said, there are some things people can do to reduce the impact on the rate and/or mortgage insurance premiums for those with lower credit scores.
Pay off credit card debt: Let’s say a borrower’s credit score is low because of high utilization of credit card debt (not multiple late payments on credit accounts). A maxed out credit card is a quick way to lower a score, and paying it down/off is a great way to make the score jump. I had a client decide to make a 10% down payment instead of a 20% down payment. He used part of his originally planned down payment to pay off all credit card debt, and his credit scores went from the 660s to the 740s (just like weight loss programs, “results can vary.”) Sure, he now pays mortgage insurance. With a credit score over 740 and 10% down, he paid about $70 per month and got a great interest rate. While paying mortgage insurance is a bummer, the amount he was paying each month on his credit cards was way more than $70 per month AND he saved tens of thousands of dollars over the life of the loan by getting a lower rate.
Avoid store based credit cards: I see buyers get in trouble all the time with this. Sure getting an extra 10% off a purchase is nice, but it could cost you. Most store credit cards come with a low limit. Why? Because in a pinch, the first credit cards that don’t get paid are the ones to Kohls, Best Buy, Macy’s etc. These stores do not want a high balances to get reached, so they keep the limit down. Let’s say I get a store credit card to an electronics store to purchase a laptop for my child going back to school. If I get a limit of $1500 on this store credit card and the laptop costs $1200, all of the sudden it looks like I am close to maxing out a credit card and credit scores go lower. Credit score models are not based on total limits versus total debt load. It looks at each credit card individually in terms of its utilization. Also, most people forget to pay store credit cards. It happens A LOT. A missed credit card payment is a missed payment whether it is a major credit card or a store credit card.
Make a larger down payment: It doens’t seem like much, but putting more than the minimum down payment can make a big difference on mortgage insurance and also the interest rate.
10% down versus 5%: while the rate is the same, the mortgage insurance payment drops by 40% in my examples from last week AND the borrower will not be required to even pay the mortgage insurance as long as it is for someone making the minimum down payment.
20% down: if paying off debt isn’t an option (meaning, legitimate late payments and/or collections), then this gets rid of mortgage insurance entirely. The rate will still be higher, but it avoids the double whammy of higher rates and higher mortgage insurance premiums.
40% down: yeah, that is a large down payment. Why am I pointing it out? When putting 40% down, a borrower gets the same rate whether they have a 660 credit score or an 800+ score. The rate is only slightly worse (say 0.250% higher) for credit scores in the 620-659 range.
15 year fixed loans: The rate for 15 year loans are the same whether a borrower has a 620 credit score or one over 800. Yes, you read that correctly. Maybe a large down payment isn’t possible. Perhaps paying down credit card debt isn’t an option. This could be. Also if making less than a 20% down payment, the difference in mortgage insurance is about $110 more per month for a 679 credit score versus a score over 760. Borrowers avoid a much higher rate, avoid the bigger brunt of the mortgage insurance increase AND get the benefit of paying off their home in half the time versus a 30 year loan.
Co-Borrower on the loan: this one sounds silly, but it’s true. Let’s say the borrower has a significant other they were not planning on being on the loan. Perhaps they are self employed and do not show a lot of income. Perhaps they are the primary caregiver for their children and earn no income outside of the home. The reason does not matter. If their credit score is the same (or better) than the primary borrowers, the mortgage insurance premiums each month drop by roughly 20% simply by having two people on the loan (the mortgage rate is still the same).
FHA loans: when all else fails, this is a great option. I’ve said FHA loans until now for two reasons. One is the up front mortgage insurance premium rolled into the loan amount (meaning borrowers do not pay this out of pocket at closing as it is added to the loan itself) and the mortgage insurance is permanent. The advantages of an FHA loan is the rate will be better for someone with a credit score under 680 (versus a conventional loan), and the mortgage insurance each month would be less. If this isn’t a “forever” home, then the word “permanent” isn’t as scary. We could do a compare/contrast to see if an FHA loan is beneficial to a borrower’s monthly cash flow.
VA loans: for those who qualify, there is no monthly mortgage insurance, and the rate isn’t as bad for those with lower credit scores compared to conventional loans.
There you have it. Some ways to mitigate the impact of lower credit scores when purchasing a home. I know this can all be overwhelming. If you are looking to buy a home in Georgia, need a mortgage, and have some credit problems, contact me today to get started. We can take a look at your situation and see what we can do to mitigate the impact on your home loan.
Rent prices are surging in the US. Since January of this year, the national median rent increased over 15% according to the latest National Rent Report from Apartmentlist.com. Rents aren’t slowing down either as demand continues to remain high.
This is why buyers continue to pay more than the list price for homes and are out fighting in such a tough market. In the Atlanta metro area, it is cheaper to buy than rent.
In addition to saving money on rent, buyers can tap into equity on the home they purchase. The average homeowner gained about $51,500 in equity over the past year, according to CoreLogic. We’ve seen double digit appreciation the past two years, and 2022 is expected to be another strong year.
When you combine higher rent prices, the opportunity to gain equity through home appreciation, and the stability coming with owning a home… these are the trends fueling the current housing market.
It is still a seller’s market, and will be again in 2022. One way to strengthen an offer is to get underwritten prior to making the offer. This way the seller knows your loan has been reviewed by underwriting and you can consider making a 0 day financing contingency offer on a home. It will help strengthen your offer.
If you are looking to purchase in the state of Georgia, contact me today! I can help get you underwritten prior to making offers!
A key concept in sports and business is, “Know your competition.” That concept also applies to home buyers in this very competitive market. So who are you competing with when offering on a home? There are many other people just like you who want to own and live in a primary residence. But increasingly, you are competing with investors, individuals and corporations buying homes which they will then rent. Here are some statistics on recent investor purchases from a second quarter 2021 Redfin study:
Nationwide, investors bought 67,943 homes in Q2 – $48.5 billion.
This is a 15.1% / $9.6 billion increase over Q1.
This is a 106.7% / $27.6 billion increase over last year – 2020 Q2.
Investors bought 15.9% of homes sold – about one in every six homes sold.
Investor purchases of single family homes and condos increased in Q2.
Investors purchased 21.2% of low-priced American homes. But due to Atlanta’s relatively low home prices, investors purchased 23.6% of Atlanta homes.
74% of Q2 investor purchases were all-cash purchases.
OK, “enemy” may be too strong a term, but this tune rocks, and when was the last time you saw a music video in the Mortgage Blog, so let’s use it!
So how do you compete with investors making all cash offers? According to another study by Redfin, noted in this prior Mortgage Blog post, all cash offers deliver the greatest competitive advantage to the home buyer. The second most powerful offer detail is a zero-day finance contingency. By using a zero-day finance contingency, the home buyer is basically waiving her right to an earnest money refund if underwriting denies the loan application. Why would someone take that risk and offer a zero-day finance contingency? Because they have already been fully approved by underwriting prior to making the offer. We call this obtaining underwriting approval on a “to be determined (TBD)” property.
In August 2020, we used this approach with one of my clients. Jim wanted to buy a home in a very competitive market, and he wanted every competitive advantage he could get. So we obtained his TBD approval before he started making offers. When Jim’s Realtor saw the approval letter, he replied, “This is as good as a cash offer!” Now I don’t know that I would totally agree with that, but I would say it’s the next best thing to a cash offer. Then Jim actually beat a cash offer and has been living in his dream home for the last year now. Many more of my clients have successfully used TBD approvals to win their own homes this year.
Not every lender can obtain underwriting approvals for a TBD address. Dunwoody Mortgage can do it. Do you want to buy your own piece of the American Dream in Atlanta before prices rise more and mortgage interest rates increase? Then call me today and let’s get to work on your TBD approval so you can defeat your competition, whom you now know a little better.
Please note the word “introduced.” This bill has not been passed by Congress. The process has simply started. With that in mind, here are the details.
If enacted, the bill would provide a tax credit for first-time homebuyers. Dubbed the “First-Time Homebuyer Act,” the bill would provide a tax credit for first-time homebuyers of up to 10% of the purchase price, or $15,000. To be eligible for the full credit, potential buyers must not have owned or purchased a home within the past three years.
The program would be targeted to low- and middle-income earners. Participants must also make no more than 160% of the area median income, and the home’s purchase price must be no more than 110% of the area median purchase price.
Borrowers could claim the credit for primary residences purchased after Dec. 31, 2020, so it would be retroactive to purchases from earlier in 2021. Lastly, borrowers would need to use the home as a primary residence for at least four years, or face taxes to recover a portion of the credit.
Since we have a long way to go on this, I have a couple of general thoughts on the tax credit:
the housing market is HOT right now. This isn’t 2009 when the housing market needed people out buying homes. Adding a tax credit on top of the tight supply of homes won’t help our current supply/demand issues.
That said, this tax credit is targeted more to those who need it. Having the credit focused into a income earning/purchase price area that needs it is a good idea.
This is a long way from being here, but it is a start and will be interesting to see how this plays out. When more details are known, I’ll be sure to put up a new post!
In what has become a theme for the month, here is one more reason why inventory is down. We’ve talked about how people are renovating their homes instead of buying a new home. Coupled with this is the fact homeowners are staying in their homes much longer than they were a decade ago.
In 2010, the average time people stayed in their home was eight years. Fast forward to 2020, and the average time to remain in place is 13 years. That is about a 50% increase of time of staying in their existing home.
So we are holding on to our homes longer, and it is costing would-be home buyers. This is yet another reason why the inventory of homes for sale is at record lows and prices are near all-time highs.
Home sales soared last year, reaching their highest level in 14 years, as the coronavirus pandemic sent many looking for a larger home where they could work remotely. Concerns about Covid-19 had the opposite effect among potential sellers.
A fear of strangers entering their houses during the pandemic prompted some people to cancel or delay their plans to list their homes.
Others have put it off due to the fear of not finding a new home.
This is, unfortunately, the reality of the market now. How can a current homeowner buy in this environment if they need to sell their home? Ideally, buyers should make non-contingent offers. Not everyone can. Perhaps the down payment on their new home is tied up in the equity of the current home.
What to do?
One thing to consider is renting your current home back to the person buying your house. For example, as part of the negotiations, put in the purchase contract the buyer will rent the home back to you for 60 days after closing. This is the longest a home can be rented back without negatively impacting the buyer’s loan. With as many buyers/offers happening out there, there is a high probability you’ll find a buyer who will agree to those terms.
Now you are under contract to close in 30 days + another 60 days after closing to stay in the home. You’ll have 90 days from your binding date to sell your current home to find/move into your new home. This is a lot of time, and several of my clients have used this strategy to allow them to get started with the home buying process while selling their home.
Looking to take advantage of low rates and move into a new home? If you are looking to buy in the state of Georgia, contact me today. I can have you ready to make offers on your new home in no time at all.
Will home values drop? Many, many people want to know as the housing market is a major economic indicator for the U.S. If a recent survey conducted by the National Association of Realtors (NAR) is true, we may not experience much of a decline in values.
While home buyers hope values will reduce given the Covid-19 situation, the NAR survey seems to indicate values will hold steady for a few reasons:
available homes for sale are lower than normal due to the pandemic impact on the market. A lower supply of homes will mitigate a dramatic drop of home values.
NAR expects the normal Spring market activity will shift to later in 2020 as the country/economy/our lives/etc. shift back toward “normal.”
with forbearance and most people who filed for unemployment benefits in the “furlough” and not “laid off” category, there is not the concern over high numbers of foreclosures.
So far sellers are holding firm to their list prices with roughly 70% saying they have not lowered prices to attract buyers. About 60% of sellers in the survey admit Covid is only delaying them selling their home this year at their originally intended list price.
In the same survey, about 60% of buyers felt home values would drop due to less competition of people out looking to purchase homes. While the demand for those looking may be down, the supply of homes is also down. As I mentioned earlier in this post, the lack of available homes may mitigate any drop of home values.
What should a buyer do? This is a national survey, so let me address more of the local market.
My advice to buyers is always this… if you find the home meeting your needs, go ahead and make an offer on the home. You cannot always count on the next home being there, or hoping values drop, or hoping mortgage rates stay low. If the home is the right one, go for it!
Buyers are heading back out into the market place. Over the past two weeks, I’ve had several clients go under contract to purchase their new home. The homes under contract went for near, at, or more than the list price. Some of my clients were involved in multiple offer situations.
In other words, in metro Atlanta, it appears recently listed home values are holding and buyers are headed back out into the market. I had one agent tell me there is one home for every three buyers in the metro Atlanta market. If the statement is true, it is still a seller’s market and home values may not come crashing down as some hope (at least not in the near term).
Looking to get out into the delayed Spring market? The housing market is coming back to life! If you are buying in the state of Georgia, contact me today! We can get you prequalified in a few minutes, and you’ll be ready to purchase your new home!
About that last post… seems with new data coming out, the housing inventory levels will not be as good as initially thought.
Last time on The Mortgage Blog, I discussed a report with forecasts of more inventory in 2020 and a more balanced market in 2021. This may no longer be the case.
As we move into the latter part of the first quarter, all of the stats/numbers are in, finalized, and reviewed from the fourth quarter 2019. The fourth quarter wound up being a busier time than normal as home buyers purchased more homes than usual. They took advantage of stabilized home prices and lower mortgage rates. An already limited inventory selection got even worse.
In fact, inventory levels hit a record low, according to a study by realtor.com. National housing inventory fell by 13.6% in January, the sharpest year-over-year drop in more than four years. With the volume of newly listed properties down by 10.6% since last year, the housing crunch shows no signs of abating in the near future.
The news is bleaker in the metro Atlanta area where builders are way behind on new construction due to all the rain. What can a buyer do in this ultra competitive market?
The best strategy isn’t a prequalification letter… nor a pre-approval… the strongest offer letter one can give is a credit approval letter. This means the file is underwritten prior to making an offer. All the client would need to close is a satisfactory appraisal, clear title, and insurance on the home.
Going this extra step lets the seller know this buyer has been thoroughly vetted and approved pending getting under contract to buy a house.
If you are looking to purchase in the state of Georgia, contact me today. We can get you prequalified for a home loan in 10-15 minutes, and we can also start down the road of getting your file underwritten so you can make a strong offer on your new home!
2020 is shaping up to be a great year for those looking to purchase a home. The past few years have seen housing inventory at lower than normal levels, which put pressure on those looking to purchase a home. This is shaping up to be the year in which inventory levels change.
Home builders seem to be confident. Recent construction numbers are surpassing initial estimates. According to the US Census Bureau, new construction housing starts sit at a 13 year high. December 2019 marked seven consecutive month housing starts have grown.
These positive developments along with a strong economic outlook caused Fannie Mae to revise its housing forecast for the better in 2020. Fannie Mae now expects over 1 million new homes to be made available by 2021. This will also increase the number of resales of existing homes.
In other words, the days of the seller’s market is coming to an end. The playing field is leveling, which will only help buyers in this competitive housing market.
Ready to get started on a home purchase for 2020? The Spring Market is already here! If you are buying a home in the state of Georgia, contact me today. Whether you get started with our online application, or give me a call, in a few minutes you can be well on your way to purchasing a home in 2020!
My colleague, Rodney Shaffer, is putting together a series on the advantages of home ownership. There are four posts as of this entry. They all focus on how home ownership, over time, provides a solid return in investment along with stabilizing/increasing the home owners own net worth. Those are very good reasons to consider home ownership, but there is still on major hurdle for potential home buyers.
Many potential homebuyers are not aware of the realities of getting a mortgage and may be putting off their purchase because of it.
A new survey from FDIC-insured bank Laurel Road asked college-educated Americans about their homebuying plans. The poll found many misconceptions about the housing market and arranging financing, with down payments, interest rates, and affordability all weighing on potential buyers. The survey found that almost half of respondents are unaware of alterative down payment requirements; instead, believing that 20% down is barrier to their homeownership dreams. This is fundamentally untrue. Conventional loans require as little as 3% down and this is not limited to first time home buyers. FHA loans only require 3.5% down.
There is also a misconception about interest rates with many thinking they will hit 6% by year-end and believing they’ve missed out. This is also untrue. The Mortgage Bankers Association forecast for year end is just 4.6%, which is about where rates sit now. Why do people think mortgage rates will continue to rise? While mortgage rates can rise, most believe they will rise exponentially due to the Federal Reserve raising rates. The Federal Reserve raising rates doesn’t directly impact mortgage rates (it does impact home equity lines, car loan rates, credit card rates, etc.). This blog has discussed ad nauseam the fact that mortgage rates are not directly tied to the Federal Reserve raising rates. Recent examples can be found here, here and here. For the full list of entries dealing with this topic, check out this link. It is a lot of posts.
In reality, you STILL do not need 20% down in order to qualify to purchase a home. While rates are higher in 2018 versus previous years, they are not anywhere close to 6%. Don’t get mortgage rates confused with prime rate (that is over 5% and will be closer to 6% by the end of the year. Prime rate and mortgage rates are not the same thing!
Wanting to buy a home in Georgia but don’t have 20% down? Not a problem! Contact me today, and I can help you toward owning your new home!
Last time we discussed the competitive market for home buyers. I suggested getting underwritten prior to making an offer on a home. That way the offer can say the buyer is “approved” and can close in about two weeks (only need the appraisal!). When I talk about this option with clients, they also ask about whether they can lock the interest rate. Most lenders/banks prefer a buyer be under contract to purchase a home, but that isn’t the case with Lock and Shop.
Buyers can lock in their interest rate today without a purchase contract, and then go out looking for a home. The program typically works like this:
We start the loan process as if we have a contract to purchase a home.
We submit the loan to underwriting for approval, and can lock the borrower into a 60 day rate lock.
This provides plenty of time to find a home, get under contract, and complete the closing
This is a great program for buyers. They can go ahead and get underwritten for a home purchase. They can also lock in a rate now, and not feel so pressured to find a home before rates could possibly get worse. With a 60 day lock, there really isn’t a rush on either side of the equation (finding a house and then getting loan approval). 60 days is more than enough time for both!
On top of that, there is a one-time FREE float down on the rate lock. The window to use the float down is within 30 days of closing (or rate expiration) and 8 days prior to closing (or rate expiration). If interest rates have improved by 0.250% or more, the rate can be lowered to the current market. That’s it. No fees and no tricks. There is a roughly 3-week window to use the float down, and rates must be improved by 0.250% or more.
If you’d like to learn more about the lock and shop program for a home purchase in Georgia, you know where to find me!
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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