Coaching and teaching - many through the mortgage process and others on the field

Category: Mortgage (Page 33 of 60)

Economic Turbulence on the Horizon – Recession, Rates, and Real Estate

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!

Which Is Better: Cash-Out Refinance or a HELOC?

When you need cash for home improvements, school tuition, a down payment for a 2nd home, or debt consolidation, you might want to consider tapping into what could be your greatest source of wealth — your home equity.

Interestingly, there is more than one way to access your home equity – so it’s smart to compare available options to find the right fit.

Two of the most popular ways are a home equity line of credit (HELOC) and a cash-out refinance. Both of these loans can work if you want to access your home equity, but they do work rather differently.

The “Cash-Out” Refinance

Cash-out refinancing involves replacing your current home loan with a new one. The “cashing out” part of the equation means you essentially take out a larger home loan than you currently have so you can receive the difference as a lump sum. This strategy works for those who have equity in their homes due to paying down their mortgage balances or appreciation of their property.

To qualify for a cash-out refinance, you need to meet similar requirements as you would if you were applying for a first mortgage – and you must have the equity in your home to qualify, as well.  You can borrow up to 80% of your home’s value.

So, let’s assume your home has a value of $300,000 and you want to take cash out. In that case, you could only borrow up to $240,000 through a cash-out refinance. If you owe that much or more on your home already, you wouldn’t qualify.

The Home Equity Line of Credit (HELOC)

While a cash-out refinance requires you to replace your current mortgage with a new one, a HELOC lets you keep your first mortgage exactly how it is.

Acting as a second mortgage, a HELOC lets you borrow against your home equity via a line of credit. This strategy allows you to withdraw the money you want when you want it, then repay only the amounts you borrow.

You now have two mortgage payments to make each month – your first mortgage payment and the new HELOC.

To qualify for a HELOC, you need to have equity in your home. Depending on your creditworthiness and how much debt you have, you may be able to borrow up to 85% of the appraised value of your home after you subtract the balance of your first mortgage.

For example, let’s say your home is worth $300,000 and the balance on your mortgage is currently $200,000. A HELOC could make it possible for you to borrow up to $255,000, because you would still retain 85% equity after accounting for your first mortgage and your HELOC.

Generally speaking, HELOCs work a lot like a credit card. You typically have a “draw period” during which you can take out money to use for any purpose. Once that period ends, you may have the option to repay the loan amount over a specific amount of time or you might be required to repay the balance in full.

Like credit cards, HELOCs also tend to come with variable interest rates, so you should be prepared for some rate volatility.

Key Differentiators

Before you decide between a HELOC or a cash-out refinance, it helps to do some analysis on your personal finances and your overall goals.

A cash-out refinance may work better if:

  • Your current home loan has a higher rate than you could qualify for now, so refinancing could help you save on interest
  • You need more than $50,000 overall
  • You prefer the stability of a fixed monthly payment or only want to make one mortgage payment every month
  • You have high-interest debts and want to consolidate them at the same rate as your new mortgage
  • What you save by refinancing — such as savings from a lower interest rate — outweighs the fees that come with refinancing
  • You are able to roll your closing costs/fees into the new loan amount so there are no out-of-pocket costs

A HELOC may work better if:

  • You are happy with your first mortgage and don’t want to trade it for a new loan
  • You need less than $50,000 overall
  • Your first mortgage has a lower interest rate than you can qualify for with today’s rates
  • You aren’t sure how much money you need, so you prefer the flexibility of having a line of credit you can borrow against
  • You want to be able to borrow up to 85% of your home’s value versus the 80% you can borrow with a cash-out refinance

Here’s a quick “snapshot” of two different options – notice how the smaller transaction works well with the HELOC, the larger one with the refinance.

As you can see, for the smaller transaction, the HELOC is less expensive overall – both in fees and monthly payment. However, once you go over the $50,000 mark in cash-back, it appears that the cash-out refinance is the most economical, all things considered.

I’d invite you to find out more from Gina Pogol at The Mortgage Reports here….and Holly Johnson at Magnify Money here….

HELOC Pros and Cons

Pros

  • Applying for a HELOC allows you to maintain the terms of your original mortgage, which can be an advantage if your rate is low.
  • You can use money from a HELOC for anything you want, and you only have to repay amounts you borrow.
  • HELOCs tend to come with lower closing costs than traditional mortgages and home equity loans.
  • HELOCs can generally be closed quicker than refinances

Cons

  • Taking out a HELOC means you’ll need to make two housing payments every month — your first mortgage payment and your HELOC payment.
  • Interest on a HELOC is no longer tax-deductible, unless the funds are used for acquisition or updating your home.
  • They are more expensive the more you borrow – if you are needing more than $50,000, your payments might be higher than that of a refinance
  • Since you only repay what you borrow and the interest rate on HELOCs is typically variable, you may not be able to anticipate what your monthly payment will be. Your monthly payment could also be interest only at first, meaning your payment won’t go toward the principal or help pay down the balance of your loan.
  • The interest rate on HELOCs tends to be higher than first mortgages, and their variable rates can seem riskier. You may also be required to pay a balloon payment at the end of your loan, so make sure to read and understand the terms and conditions.

Refinance Pros and Cons

Pros

  • You can use the money from a cash-out refinance for anything you want, including home upgrades, college tuition, a vacation or debt consolidation.
  • If rates have gone down or your credit has improved since you took out your original home loan, you could refinance your mortgage into a new loan with a lower interest rate.
  • You can choose from different types of loans for your refinance, with various terms and fixed or variable rates available.
  • Interest on your first mortgage may be tax-deductible.
  • Interest rates on first mortgages tend to be lower than other options, such as home equity loans or HELOCs.

Cons

  • Closing costs for a cash-out refinance are typically higher than those of a HELOC
  • If interest rates have gone up since you purchased your home, you could be trading your mortgage for a higher interest loan that will be more expensive.
  • Refinancing your home to take cash out may leave you in mortgage debt longer.
  • You won’t qualify for a cash-out refinance unless you have at least 80% equity in your home after the process is complete.

In Conclusion

As you can see, there’s really no right or wrong decision to be made here, but it is important that you know the benefits and drawbacks of both options. Please do reach out to me for more information, as I’d be happy to go over the specifics of your scenario to find the best option.

A True Mortgage Approval Before a Purchase – The “TBD” Underwrite

In today’s competitive real estate market, potential home-buyers need every advantage they can get.

One way to differentiate your offer from the myriad of others is a true “TBD underwritten” loan approval. 

I’m not talking about the typical pre-qualification letter that is a cursory overview of a borrower’s ability to gain an approval, but a fully underwritten approval that is only waiting for a contract.

This process is for the home-buyer who wants a solid, iron clad pre-approval that has been fully underwritten and signed off by mortgage underwriters. 

How does that work?

Well, it works very similarly to a full-fledged underwrite – except the address is left blank – or “TBD” (to be determined).  The underwriter analyzes the file as if it was a true loan – and provides the actual loan conditions that the borrower must meet.

What’s the downside?

The only real downside is time.  This process could take as long as a few weeks, because all documentation needs to be gathered (tax returns, W2s, pay stubs, bank statements, etc.) and then analyzed by the underwriter.

What’s the advantage?

There are a multitude of advantages.  First and foremost, the borrower will know the exact size of the mortgage that they will be able to qualify for.  They will have a very good idea of the monthly payment and be assured that the loan will go through.

Equally important, the offer you submit will essentially be like a cash offer.  The real estate agent presenting the offer will share with the seller’s agent that the mortgage approval is actually confirmed – not pre-qualified.  This will make your offer much more attractive to the sellers, as they don’t have to be concerned about mortgage approval.

Finally, the closing can take place more quickly than standard financed transactions.  Essentially all that’s needed is an appraisal to confirm the value of the property.  Instead of a 30 to 45 day close, these can be done in less than 20!

In Conclusion

If you know that you will be purchasing a home in the near future, ask your mortgage lender about a “TBD approval” to see if that’s an option.  If so, I highly recommend that you go through the process early – and in that way you will be miles ahead of your buying competition!

Please do reach out to me for more information, as I can absolutely help you with a “TBD” underwrite!

Mortgage Options for Newly Self Employed Borrowers

Self-employed mortgage applicants must prove stability of employment and income, traditionally going back at least two years.  This regulation is a bit tougher than it is for regular salaried employees.

Traditionally, mortgage lenders have required two years federal income tax returns in securing a mortgage for purchasing or refinancing real estate. 

Fortunately, there is a way to use just one year of tax returns to qualify for a mortgage. 

This can help newer business owners, as well as those who experienced a down year in the past.

Introducing Two-X Flex 1-Year

Finance of America Mortgage has a new, proprietary product that drastically reduces the amount of documents and simplifies qualification. 

Two-X Flex 1-year requires only one year of income documentation and offers borrowers more flexibility in qualifying for a mortgage.   

Product Details

  • 1-year of income documentation used for qualifying
  • Wage earner and self-employed borrowers
  • Up to 90% loan-to-value with no mortgage insurance
  • As low as 640 minimum FICO
  • $100,000 minimum loan amount
  • Up to $3,000,000 maximum loan amount
  • 30 year fixed
  • 5/1, 7/1 and 10/1 ARM –fully amortizing and interest only
  • Primary Residence, Second Homes, Investment Properties
  • Up to 50% debt-to-income ratio
  • 1-2 units, PUD and warrantable condos

In order to utilize this one-year requirement, it’s important to understand that your tax return must reflect a full year of self-employment income.

For example, if you became self-employed in April 2017, that year’s tax returns are not going to reflect a full year.  If you started your business in November 2016, then your 2018 tax returns will demonstrate a full year of experience running your business.

Give me a call to find out more – as there are multiple alternatives that we can examine!

It’s Easier to Qualify for a Mortgage Than You Might Think

One of the largest misconceptions that potential borrowers have about buying a home is that it’s too tough to qualify for a mortgage.

Qualification can be a lengthy process, to be sure, but it isn’t impossible by any stretch.

Think about it this way…people buy homes every day, and many borrowers don’t have the perfect situations. 

Erik J. Martin from The Mortgage Reports has put together an interesting piece that I’ve linked to here.  I highly recommend you take a look at it – and I’ve summarized some of it in this article.

Don’t Overthink the Perceived Difficulty

Believe it or not, most potential borrowers with a reliable job, that have regular income, and average credit can most likely qualify for a mortgage.  Of course, there are specific regulations that must be met, but qualification isn’t as tough as many might think.

Interestingly, many potential buyers willing to own a home don’t even try to qualify for a mortgage. Many believe that rigid mortgage requirements will disqualify them.

Per Martin’s article: “new research indicates that consumers think it’s harder to qualify for a mortgage loan than it actually is. And many lack the facts and know-how to properly pursue home financing.”

He continues: “don’t rule out buying a home because you think you’re ineligible for a loan. Chances are that, armed with knowledge and the right guidance, you can buy that home you’ve been thinking about.”

Report: Consumers believe guidelines are tougher than they really are

Martin references the study from Fannie Mae that recently polled 3,000 consumers about their understanding of mortgage requirement rules. Some findings were surprising:

  • Only 11 percent were aware that the minimum FICO credit score needed to obtain a mortgage is 580. Most thought it was 650.
  • Over 40 percent didn’t know their own credit score.
  • Most people think you need to put down at least 10 percent for a down payment. The truth is, the median is 3 percent; some programs don’t even require a down payment.
  • Only 23 percent of respondents were aware that low down payment programs are available.
  • Over three in five didn’t know that the debt-to-income ratio lenders don’t want total debt payments to exceed is 50 percent.
  • Only 12 percent of homeowners and 9 percent of renters were able to identify the correct credit score range needed to qualify for a mortgage.
  • The top five reasons cited for expected difficulty in getting a mortgage were
    • Insufficient income (chosen by 23% of respondents)
    • Too much debt (17%)
    • Insufficient credit score/credit history (15%)
    • Affording the down payment or closing costs (14%)
    • Lack of job security/stability (9%)

One more thing regarding those who would rather rent than buy…the report intimates that these are the people are most unclear about mortgage requirements.

My guess is that this uncertainty is holding them back from learning more details or reaching for a goal that seems to difficult.

Give it a Try!

More often than not, there are two things get in the way of buyers seeking a mortgage: their own fears and lack of info about mortgage requirements.

There are many things potential borrowers can do – one of the first is finding out your FICO credit score.  You can find more on that here….

Most importantly, reach out to a trustworthy lender and go through the mortgage application process.

When talking with your lender, make sure to ask about different loan options – and find out what you qualify for. Learn what your minimum down payment and credit score need to be.

Determine how much you’ll pay monthly and over the course of a given loan. Your lender can also talk with you about the particular requirements for that particular loan.

Please do reach out to me, as it would be my pleasure to help!

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