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.

Housing market subdued

Subdued. That’s how Fannie Mae’s chief economist describes consumer sentiment toward the housing market, as recorded in the enterprise’s latest Home Purchase Sentiment Index (HPSI).

To which I respond…. “Oh, really? I hadn’t noticed.”

For those of us in the real estate industry, it is pretty obvious the market is subdued. I get it. Home prices are high and not substantially coming down (if at all depending on your market area). Also rates remain stubbornly high compared to the past few years. It is easy to see how the market got subdued.

While the index increased in January for the third-consecutive month, it remained well below its pre-pandemic high.

One thing to note about this index, it looks at past actions/sentiment. The recent reading from early March included data collected in January. Meaning, the data is five weeks old at its time of release.

Something changed in late February and March. My phone began ringing more often. My clients are making offers on homes with multiple offers. A more “real time” analysis seems to show the market gaining some momentum. Perhaps rates jump over 7% again (they’ve tested 7% twice in the past several months, and both times moved back below 7% rather quickly) or another bank crashes and people get really nervous. It’s quite an interesting time out there!

Even with all of this happening, the Spring market is here. More people are out looking, and competition for the limited number of homes out there is beginning to increase. I’ll be interested to see the HSPI numbers later this year once we have the figures for March and April.

For those of you looking to purchase a home in the state of Georgia, contact me today! I can get you ready to make an offer in just a few minutes, and work toward getting your loan pre-underwritten to make your offer stronger in an increasingly crowded market.

Mortgage rates find their range

It feels as if mortgage rates have found a comfortable range to move back-and-forth in, for now. Let’s talk about mortgage rates, how they change, and why I feel as if they’ve “found a range.”

Mortgage rates may change everyday. Sometimes they may change more than once per day. Mortgage rates behave differently then other rates. For example:

• the Federal Funds Rate remains static unless it is changed by the Federal Reserve (and wow, it has changed a lot over the past year).
• Prime Rate moves based on the Federal Funds Rate. It doesn’t change unless the Feds make a move.
• Savings/CD rates typically increase/decrease on the Federal Funds Rate changes too.

From those examples, it is easy to see how the Federal Reserve and their Federal Funds Rates drives a lot of the rates out there (I didn’t even get into credit card and car rates). Mortgage rates move on a daily basis. Their values (up or down) move more like stocks on a day to day basis… some days they go up a bit, then down a bit, and sometimes up and down in the same day.

Mortgage rates move on bond values. As those values change, so do mortgage rates (and as previously stated, change day to day and sometimes more than once a day).

With the knowledge mortgages rates do not behave like other rates and can change often, they usually find a comfortable “range” to float and up and down in until something (economic data, recession, high inflation) moves them out of it.

I feel the mortgage rate range is moving in the low to high 6s… say 6.25-6.75. Why am I making this statement? When mortgage rates went over 7% several months ago, they immediately began to improve. When rates touched a little under 6% not so long ago, they immediately got worse. In both directions, they changed pretty quickly until they feel back into this 6.25-6.75% range and then slowly moved back and forth.

Which puts us… in the 6s for now. If the economy does enter a recession, expect mortgage rates to improve and move under 6%. If inflation jumps back up, expect rates to get into the 7s again. Depending on who you read, there is talk of inflation stagnating/not improving along with many saying a recession is right around the corner. It feels as if a lot can happen in 2023.

So here we are, possibly in the 6.25-6.75% “eye of the economic storm” for 2023.

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.

FHA finally makes a change to mortgage insurance

FHA finally reduces the amount borrowers will pay on a monthly basis for mortgage insurance. This is something the writers here at The Mortgage Blog have clamored about for years now. What exactly did FHA do?

The change is the amount borrowers pay on a monthly basis. Assuming a borrower makes the minimum down payment, the annual premium is 0.85% (or 0.0085) of the loan amount. Then divide that figure by 12 for the monthly amount. The new figure for those making the minimum down payment drops to 0.55%…. a 30 basis point reduction.

Per the announcement, FHA expects this to save borrowers, on average, $800 per year. Some quick examples:

• Using rough numbers, a purchase price at $300,000 would save about $600 per year
• A purchase price of $350,000 would save close to $1,000 per year.

The $800 on average makes sense when looking at homes over $300,000.

FHA mortgage insurance is different than conventional in that the coverage amount (0.55%) is the same regardless of the credit score of the borrower. Mortgage insurance on conventional loans change depending on borrower’s credit score and the amount of the down payment. There are two situations where FHA mortgage insurance changes:

• When making a 5% down payment (and not the minimum 3.5% down), the mortgage insurance drops to 0.50%
• When making a 10% (or larger) down payment, the mortgage insurance premium stays the same, but the borrower no longer pays mortgage insurance on a monthly basis after 11 years.
• In my 17 years in the mortgage industry, I’ve rarely had anyone get an FHA loan with a larger down payment. Almost everyone goes with the 3.5% option, so the mortgage insurance is fixed at 0.55% for the life of the loan.

The “permanent” state of the mortgage insurance is what I would like to see changed. Conventional loans eventually drop their mortgage insurance coverage. I think it should be the same for FHA loans too. There is no reason why someone should still be paying mortgage insurance after 11 years when they have a lot of equity in the home.

Yet beggars can’t be choosers. FHA mortgage insurance premiums were set at 0.85% and permanent for many, many years now. Hopefully this is a first step (and needed change), and maybe soon it can also go from “permanent” to 11 years max payment on mortgage insurance. One can dream!

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.

2023 is not like 2008

Another housing crash weighs on a lot of people’s minds. Sharply rising mortgage rates, a steep decline in home sales and a record price appreciation slowdown have raised concerns that the housing market could crash. I get the logic, yet experts argue that these market trends are a symptom of a correction after two years of massive growth.

I wouldn’t expect 2023 to be like 2008. For one, something as extreme as 2008 only occurred twice in the past 100 years…. the first was the Great Depression in the 1930s. The second was the Great Recession beginning in 2008. The housing market and overall economy is completely different now versus 2008.

There are two huge differences:

• Risky mortgages created an environment where people could buy more home than they could afford to pay. If people lost their jobs (and they did), it created a vicious feedback loop a cooling market/declining value market + more foreclosures = more declines in home values (and this cycle kept repeating itself).
• In 2008, there was a glut of housing inventory. For once, too many homes were being built. This is the opposite problem we have today with housing inventory levels in Atlanta hovering around 3 months (ideal amount is 6 months to create a balanced market).

There are also too many people who do not own a home that want to buy a home. The housing glut in the 2000s was followed by close to a decade of under-building that contributed to a shortage of millions homes today. This was exacerbated by millennials coming of age near the end of this period of underproduction along with Boomers not downsizing as previous generations did (moving in with extended family, or to retirement communities, or to assisting living/nursing homes). The lack of homes along with the housing needs of the two largest generations in the history of this country (one looking to buy their first homes and the other not selling their homes) should put a floor on home prices.

While 2023 isn’t like 2008, 2024 could be like 2020- 2021. When the national media begins talking about “now being a great time to buy a home,” we’ll see a similar situation as we did during the peak buying years of the pandemic. This is why I keep harping on now being a great time to buy. Purchasing a home now with fewer competitors – even with a slight decline in home values – will be much better than double digit offers, over asking price offers, no contingencies, etc. as we are likely to see the next time it is ” a good time” to buy.

If you are thinking, “maybe 2023 is a good time to buy,” contact me today (see my banner above for contact info). We can get started in just a few minutes and get you pre-approved for the offer on your new home!

Home prices stabilizing

I started the year saying now is a great time to buy a home. For the month of February, I’ll include a series of posts expanding on this thought process. We’ll touch on affordability, housing prices, and the shortage of homes.

Let’s start with affordability. Zillow, Seattle, said U.S. home values are easing down, starting to provide relief for potential home buyers facing affordability challenges. Zillow reported the typical U.S. home fell to $357,733 in November, and is now down 0.5% from the peak peak last year.

Add on the fact mortgages rates improved to end 2022/start 2023, monthly costs for home ownership went down for the first time since July, and for only the second time in the past 19 months.  

We are not at a point of home prices dropping (more on this in the next post). But for the first time in several years, we aren’t seeing double digit appreciation.

Zillow Senior Economist Jeff Tucker said November’s news is a positive sign that affordability may at least stabilize in 2023, helping households budget and plan for housing decisions in the months and years ahead. Tucker said, “The two big questions are whether mortgage rates will continue to decline, and whether that will be enough to bring buyers back in time for the spring selling season. In the meantime, those on the prowl for a house will benefit from motivated sellers, unusual bargains and a welcome lack of competition.”

As I said to start the year, the articles saying 2023 is a bad time to purchase a home aren’t talking about the lack of competition. The quote from Zillow’s Senior Economist is spot on for those who are looking, and they are seeing contingencies, sellers doing repairs on homes, and seller concessions.

Beginning to think 2023 may be a good time to buy a home? If you are buying in the state of Georgia, contact me today! I can get you pre-approved quickly and have you out making offers in no time!

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.