Let’s talk credit, as it’s so important. Your FICO scores can determine whether you are able to purchase that home or not, and save you a good deal of money on the rate you’re going to pay if your scores are good.
Of course, you want to make your payments on time, but how can you actually improve your credit score in a relatively short period of time? What can you do?
Here are a few things that you might be able to do relatively quickly and improve your scores…
Lower The Balances
It’s a good idea to keep the balance you owe on any of those
accounts below 30% of the credit line. If you have a credit card with $1000
limit on it, keep your balance to $300 or less.
Increase The Trade Line
So, what if your balance is higher than that and you can’t
bring it down? Well, go to that credit card issuer and ask them if they’re
willing to give you a higher limit. By bringing the limit up, the amount you
owe becomes a smaller percentage of your limit. That will help your score.
Don’t Close Accounts
One key thing to remember, don’t close off any credit lines
that you have from the past. That’s good history that you’ve built up. You want
to keep that good history. It’s like getting straight A’s in high school and
not wanting to show the report card. Keeping good history will help your credit
score.
Collection Accounts
Finally, think about some of those collection accounts –
only if they’ve popped up. If the seven-year reporting period is up (starting
from when you first went delinquent with the original debt), dispute the debt
from your credit report. Any proof you have regarding the first date of delinquency
will strengthen your dispute.
When All Else Fails
If you’re not able to get the collection account removed from your credit report, pay it anyway. A paid collection is better than an unpaid one and shows future lenders that you’ve taken care of your financial responsibilities. Once you’ve paid the collection, just wait out the credit reporting time limit and the account will fall off your credit report.
If you have more questions about your credit and how it impacts your ability to finance a home, please do reach out to me, as it would be my pleasure to help!
If you’re shopping for a home today, you know it can be hard work. You might not find something right away and it’s easy to become frustrated and fatigued.
Sometimes buyers get discouraged and say, “Let me take off a few months, maybe I’ll come back 6 months later.”
Some, on the other hand, think that the market might weaken shortly or that interest rates will fall even further…and are trying to essentially “time the market” Is that the right strategy?
The Cost of Waiting
Here’s the potential problem with that thinking…while you
might want to take time off and away from your search, the market isn’t taking
time off!
The cost of waiting to buy is defined as the additional funds it would take to buy a home if prices & interest rates were to increase over a period of time.
The market is quite good in terms of appreciation right now in California and Arizona. The forecasted growth in value is 2.4% in just the next 6 months; let’s quantify that.
The Numbers
A home worth $300,000 today would be worth $7,300 more in 6 months. Additionally, if you were planning on putting the same percent down, you would have to borrow more because the home is more expensive.
What about interest rates? Rates today are at very attractive levels, so does it make sense to wait for rates to go down further…and what if they don’t?
No, the monthly savings with a lower rate are nice but are
dwarfed by the missed appreciation and amortization, and it would take many,
many years to recoup what you would have lost.
One other thing to consider…if rates drop significantly after your purchase, you can always refinance in the future to take advantage of that lower rate.
Today’s Data
Here’s the data from FHFA – see how the forecast is for
nearly 5% appreciation in the year ahead. The longer you wait, the more you
miss out on appreciation and the more expensive you new purchase will be.
Stick with it, keep shopping, and you will find something. Don’t hesitate to reach out to me with questions, as it would be my pleasure to help!
I receive a number of questions regarding mortgage interest
rates every time there is a meeting of the Federal Reserve Board.
Most assume that the Federal Reserve controls mortgage interest rates…and, interestingly, that’s not the case.
I’m linking to a fantastic article by Dan Green at The Mortgage Reports – he does a great job in highlighting what really takes place with mortgage rates. You can read the entire piecehere…and I’ll highlight a few key pieces below.
The Federal Reserve Open Market Committee
The Federal Reserve Open Market Committee (FOMC) is a rotating, 12-person sub-committee within the Federal Reserve, headed by current Federal Reserve Chairman Jerome Powell. The FOMC meets eight times annually on a pre-determined schedule, and on an emergency basis, when needed.
The FOMC’s most well-known role worldwide
is as keeper of the federal funds rate.
The Federal Funds Rate is the prescribed rate
at which banks lend money to each other on an overnight basis. It is not correlated to mortgage rates.
The FOMC met a few weeks ago and dropped the federal funds rate by .25 basis points to 1.75%.
The Federal Reserve does not control mortgage rates
Here’s a fantastic graph (courtesy The Mortgage Reports) that shows how the Federal Funds Rate does not track with the 30-year mortgage rate (the green section tracks the mortgage rate, while the blue section highlights the Federal Funds rate):
When the Fed Funds Rate is low, the Fed is
attempting to promote economic growth. This is because the Fed Funds
Rate is correlated to Prime Rate, which is the basis of most bank lending
including many business loans and consumer credit cards.
For the Federal Reserve, manipulating the Fed
Funds Rate is one way to manage its dual-charter of fostering maximum
employment and maintaining stable prices.
The Federal Reserve can affect today’s
mortgage rates, but it does not and cannot set them.
The Federal Reserve has no direct connection
to U.S. mortgage rates whatsoever.
The Fed Funds Rate and Mortgage Rates
As Dan Green states: “It’s a common belief that the Federal Reserve ‘makes’ consumer mortgage rates. It doesn’t. The Fed doesn’t make mortgage rates. Mortgage rates are made on Wall Street.
Here’s proof: Over the last two decades, the Fed Funds Rate and the average 30-year fixed rate mortgage rate have differed by as much as 5.25%, and by as little as 0.50%.
If the Fed Funds Rate were truly linked to U.S. mortgage rates, the difference between the two rates would be linear or logarithmic — not jagged.”
With that said, the Fed does exert an influence on today’s mortgage rates.
Fixed Mortgage Rates vs. Treasury Yields
A far better way to track mortgage interest
rates is by looking at the yield on the 10 year Treasury bond. These two seem to track quite closely:
The 30-year fixed mortgage rate and
10-year treasury yield move together because investors who want a steady and
safe return compare interest rates of all fixed-income products.
U.S. Treasury bills, bonds, and notes directly affect the interest rates on fixed-rate mortgages. How? When Treasury yields rise, so do mortgage interest rates. That’s because investors who want a steady and safe return compare interest rates of all fixed-income products…and investors move to these type of products to fulfill their needs.
What the Fed Says Impacts Mortgage Rates…and Bond Prices
Dan Green outlines how the Fed impacts rates: “the Fed does more than just set the Fed Funds Rate. It also gives economic guidance to markets.
For rate shoppers, one of the key messages for which to listen is the one the Fed spreads on inflation. Inflation is the enemy of mortgage bonds and, in general, when inflation pressures are growing, mortgage rates are rising.
The link between inflation and mortgage rates is direct, as homeowners in the early-1980s experienced.
High inflation rates at the time led to the highest mortgage rates ever. 30-year mortgage rates went for over 17 percent (as an entire generation of borrowers will remind you), and 15-year loans weren’t much better.
Inflation is an economic term describing the loss of purchasing power. When inflation is present within an economy, more of the same currency is required to purchase the same number of goods.”
Meanwhile, mortgage rates are based on the
price of mortgage-backed securities (MBS) and mortgage-backed securities are
U.S. dollar-denominated. This means that a devaluation in the U.S.
dollar will result in the devaluation of U.S. mortgage-backed securities as
well.
When inflation is present in the economy,
then, the value of a mortgage bond drops, which leads to higher mortgage
rates.
This is why the Fed’s comments on inflation are closely watched by Wall Street. The more inflationary pressures the Fed fingers in the economy, the more likely it is that mortgage rates will rise.
It does look
like most economists are pointing to a recession (although most do think it
will be relatively mild by historical standards) in the next 12 months.
A recession
occurs when there are two or more consecutive quarters of negative economic
growth, meaning GDP growth contracts during a recession.
When an economy is facing recession, business sales and revenues decrease, which cause businesses to stop expanding.
How do the
economists know this? And what does this
mean for interest rates and real estate values?
Read on for more…
Recessionary Indicators
The Yield Curve
One of the major
indicators for an upcoming recession is the spread between the 10-year US
treasury yield and the 2-year US treasury yield.
While
various economic or market commentators may focus on different parts of the
yield curve, any inversion of the yield curve tells the story – an expectation
of weaker growth in the future.
What does
this inverted yield curve look like?
Here’s a good depiction:
Why does
inversion matter? Well, the yield curve inversion is a classic signal of
a looming recession.
The U.S.
curve has inverted before each recession in the past 50 years. It offered a
false signal just once in that time.
When
short-term yields climb above longer-dated ones, it signals short-term
borrowing costs are more expensive than longer-term loan costs.
Under these circumstances, companies often find it more expensive to fund their operations, and executives tend to temper or shelve investments.
Consumer borrowing costs also rise and consumer spending, which accounts for more than two-thirds of U.S. economic activity, slows.
Unemployment
Unemployment
is a recessionary factor, too – as economic growth slows, companies generate
less revenue and lay off workers to cut costs.
A rapid
increase in the overall unemployment levels—even if relatively small—has been
an accurate indication that a recession is underway.
Here’s a
chart that shows what happens when unemployment starts to trend upward – and
notice that recessions follow shortly thereafter:
As you can
see, when things in the economy starts to slow down, one of the first things
business do is to reduce their labor force.
The curve is flatting now, and unemployment might be ticking up soon.
Mortgage Rates During Recession
When a
recession hits, the Federal Reserve prefers rates to be low. The prevailing
logic is low-interest rates encourage borrowing and spending, which stimulates
the economy.
During a
recession, the demand for credit actually declines, so the price of credit
falls to entice borrowing activity.
Here’s a
quick snapshot of what mortgage rates have done during recessionary periods:
Obtaining a mortgage during a recession might actually be a good opportunity. As mentioned, when the economy is sluggish, interest rates tend to drop.
Refinancing
or purchasing a new home could be a great way to get in at the bottom of the
market and make a healthy profit down the road. A borrower should be market-
and financially savvy when considering large real estate purchases in a
recession
Real Estate During Recession
Believe it
or not, outside of the “great recession” of 2007 (which was caused, in part, to
a housing crisis), home values and real estate actually appreciate historically
during times of recession.
That seems counter intuitive…but because interest rates generally drop during recessionary periods, homes become MORE affordable to potential buyers (even though property values are higher), due to the lower payments provided by those lower rates.
When more
people can qualify for homes, the demand for housing increases – and so do home
prices.
In Closing
Although no one likes to see recession, you can observe that it actually can be beneficial for homeowners and would-be purchasers to refinance or purchase during these periods.
If you have more questions and or would like to strategize about purchasing or refinancing, don’t hesitate to contact me, as it would be my pleasure to help you!
It’s a good idea to put together a list of questions to ask potential lenders in order find out which one will be best for you. These and other questions should help you choose the right lender and the best home loan.
How do I obtain pre-approval?
One of the best ways to
ensure a smooth home buying process is what you do before you begin
your home search.
Mortgage pre-approval,
without the pressure of a closing date, is easier than trying to engineer a
full approval from the ground up. And having a pre-approved mortgage means you
can close faster when you’re ready to buy.
Ask the lender what documentation they need and what processes they have in place to secure and automated underwriting approval. If they can’t provide that information, find another lender! You can find out more about the pre-approval process here….
Which type of mortgage is best for me?
This question will help you know if you’re talking to someone who wants to sell you a loan quickly — or a trusted loan advisor who will be looking out for your best interest.
When you ask, “What are my
options?” for a particular type of loan, the mortgage lender should dive deeper
into your situation and ask YOU questions about your financial goals. You can really gauge the professionalism of
the lender by the questions he/she asks.
What’s your communication style?
Mortgage lenders can communicate with you in
multiple ways – including by phone, email and text. Some are tech savvy and
others prefer traditional methods.
The point is to be clear about what you
prefer.
If you respond more quickly to text messages
versus voicemail – tell your loan officer. Often times, there are time
sensitive issues that arise during the loan process, so it will make everyone
happy if your loan officer knows how to get questions answered, additional
documentation etc. in a timely manner.
How often will I be updated on the loan’s progress?
You
should be introduced to all parties that will be involved with your loan – from
the originator, to the processor, and any other assistants. Have their contact information handy during
the loan process.
And how
will you be updated on the progress: by email, phone or an online portal? How often?
I
recommend that you share your service expectations upfront, and check to see if
the lender you are working with has these types of processes in place that meet
your requirements. If not, move on!
How much down payment will I need?
A 20% down payment may be nice, but borrowers have multiple choices. Qualified buyers can find mortgages with as little as 3% down, or even no down payment, depending on the property location.
Again, there are considerations for every down payment option and the best lenders will take the time to walk you through the choices, based on your stated goals. You can find out more about down payment requirements here….
Will I have to pay mortgage insurance?
If you put down less than 20%, the answer will probably be “Yes.” Even if the mortgage insurance is “lender paid,” it’s likely passed on as a cost built into your mortgage payment, which increases your rate and monthly payment.
You’ll want to know just how much mortgage insurance will cost and if it’s an upfront or ongoing charge, or both. You can find out more about mortgage insurance here….
Are You Equipped to Approve Loans In-House?
Underwriters review loans and issue conditions
before approving or rejecting a loan. Ask
if the lender handles its own underwriting and does their own approvals. This can be a make or break proposition if
you need to close the loan in a timely fashion.
What other costs will I pay at closing?
Fees that are charged by third parties, such as for an appraisal, a title search, property taxes and other closing costs, will be paid at the loan signing. These costs will be detailed in your official Loan Estimate document and your almost-time-to-sign Closing Disclosure.
Of
course, you want to know what your target closing and move-in dates are so you
can make preparations. And just as important: Ask what you should avoid
doing in the meantime — like buying new furniture on credit and other
loan-busting behavior.
Is there anything that can delay my closing?
Well, buying a home is a complex process with many stages and requirements. While delays are normal, the best way to avoid them is to stay in touch with your lender and provide the most up-to-date documentation as quickly as you can. If you have any past credit issues or job related changes, let your lender know immediately to avoid any last minute delays.
Thomas Eugene Bonetto
Mortgage Loan Originator
NMLS: 1431961
About The Coach
Tom Bonetto has been helping his customers and players achieve their best for nearly 30 years. His goal is to provide both a superior customer experience and tremendous value for both his business associates and his players alike.
