One of the biggest lessons we've collectively learned over the past three years is the importance of having a mortgage that is not only affordable, but sustainable, as well. (By the way, my friend Julie Miller started the consumer advocacy group Lenders Who Care - www.LendersWhoCare.org - based on this principle during the height of the real estate boom.) What exactly is affordable and sustainable? An affordable and sustainable mortgage is simply one that allows you to make your monthly mortgage payments while reaching your other financial goals and objectives.
An affordable and sustainable mortgage does several things:
1) Has a payment that fits into the home buyer's budget.
2) Leaves room for the abililty to save income on a monthly basis.
3) Has a payment that is low enough for the consumer to stay out of non-preferred debt, including credit cards and installment loans, many which have very high rates of interest.
4) The consumer should be able to afford the loan only considering their BASE income, and not overtime, commissions (unless they are 100% commission based), bonuses, tax refunds, or any other income that has the likelihood of decreasing, varying greatly, or going away altogether.
5) If the homeowner has deferred student loan debt, they should consider these payments, even if they will not be a factor for more than a year, into their affordablilty analysis.
6) If your spouse currently works, but is thinkng about cutting back or staying at home on a permanent basis, this should factor into your monthly payment objectives when considering your mortgage.
7) A sustainable mortgage program should NEVER have a pre-payment penalty.
8) A sustainable mortgage should NOT have a "teaser" payment. So many people that are in trouble with their mortgage now were lured into low payments that simply were not realistic over the long haul. Many of these loans were "option ARM's" in which the monthly payment that was due was actually less than the interest that was acruing. While this type of loan was affordable in the first few months, when the loan began to "recast" and the payment increased to make up for the negative amortization, these loans quickly became unaffordable and therefore not sustainable.
9) Interest-only loans were very popular over the past several years. These loans, while suitable for some self-employed or commission-only consumers, were not the best choice for many home-buyers who were only looking for a low payment. At some point in every interest-only loan, the payment adjusts in order to get the loan paid off on time, in most cases 30 years. That means after 3, 5, or 7 years, the payments go up, sometimes dramatically.
10) ARM's....An adjustable rate mortgage, if managed correctly, can be a valuable tool because the rate on an ARM is almost always lower than the rate offered by it's fixed rate cousin. However, if a home buyer spends the payment savings, as opposed to saving it or applying it towards principal, the ARM mortgage plan at some point in time becomes unsustainable.
Remember: there is a difference, sometimes a HUGE difference, in what you can qualify for and what you can actually AFFORD relative to your mortgage. Many mortgage loan originators simply look at getting you QUALIFIED for a loan and do not offer advice based on what is best for your overall long-term financial health. Be sure to be working with a mortgage planning professional who offers advice that will allow you to not only qualify for a loan, but obtain a loan that is affordable AND sustainable.
"Why the $8,000 First Time Home Buyer Tax Credit Helps ALL Home Owners"
By Brent Sute
Most Americans are not happy about the current state of affairs in our economy OR the fact that our government is getting bigger and bigger. The fact that our Federal government is having to basically print money and take large stakes in the American companies to prevent our economy from falling deeper into trouble would have been unimaginable only a couple of years ago. However, the $8,000 tax credit for first time home buyers is a positive step to restoring our beleaguered housing market and will hopefully spark our economy from deep recession.
Housing led our economy into the current funk and it will help lead the economy out of recession. Even though the $8,000 tax credit is only available for consumers buying their first home (or consumers who have not owned a home in the past 3 years), all home buyers and other consumers will benefit. The current excessive inventory of houses will be eased by the fact new buyers are coming on to the market. Also, current home owners who would like to move to a larger home, or simply have to move because of relocation, now have more buyers that are interested in purchasing their home. Also, many of the foreclosures that are contributing to the excessive inventory in most markets are well suited for first time home buyers who will be receiving the tax credit.
Furthermore, the $8,000 tax credit is available to home owners once they buy a home. Recipients are not allowed to use the $8,000 towards their minimum contribution of 3.5% on a FHA loan. Therefore, a couple of weeks after closing consumers now have the much needed funds to go out and buy furniture, lawn mowers, carpet, and other accessories for their new home. This is absolutely a good thing for local businesses, home improvement centers, and people who offer repair and renovation services.
While the $8,000 is great for improving a newly purchased home, I am advising most of my clients to save a good portion of the money for cash reserves and to pay off high interest credit card debt. This approach will create more healthy financial households which lead in turn to a long term healthier group of consumers.
We have a long way to go before our economy fully recovers from the current down turn. However, the $8,000 tax credit is one thing the government is doing right to help the American economic situation.
What Happened?
Today was one of those days we hate to see coming. Actually, there is a sliver of good news in reasons behind today's market move. The 30 Year FNMA 4.0% bond was down 206 basis points today. This is a huge move to the negative and caused mortgage rates to sky rocket throughout the day. Usually, when there is such a strong move one way or the other, the market tends to overreact and come back the other direction shortly thereafter. However, at this point, the damage has been done to our mortgage rates and we'll have to wait and see what happens in the coming days.
Perspective
To put things in perspective, the average 30 year fixed rate mortgage, according to Freddie Mac, last week was 4.82%. That is about where rates started out this morning. Right now, the best 30 year fixed rate loan with 1% origination and no discount points and a 750 credit score is 5.375%, a one day increase of .5% in rate. This morning, Alabama Housing Finance Authority's Step Up rate was 5.0%. It ended the day at 5.625%.
Why?
Why the dramatic increase? A few reasons, including:
1) Bill Gross from PIMCO, the largest bond insurer, questioned the AAA credit rating of the U.S.;
2) Credit Suisse said that the Fed may be slowing down their purchase of mortgage bonds;
3) Better than expected Consumer Confidence yesterday;
4) A slightly better Existing Home Sales Report today.
These factors, along with the notion that inflation could be a problem if the economy turns around, sent the bond traders into a selling frenzy.
So, What Next?
Anyone who has been pre-approved over the past couple of months should re-evaluate their loan approval if the rate in which they were qualified was under 5.5%. A .5% difference in rate could be the difference in an approval or a decline in today's underwriting environment.
Secondly, I'd recommend buyers that are looking at purchasing right now evaluate the market carefully to see if we are going to see any improvement in rates. NOBODY knows right now whether or not rates will come back down, stay the same, or go higher. The next couple of days will be key to knowing which direction the market decides to head. I'm usually advising my clients to lock ASAP and take a good rate while you can get it. I'll probably take a day or two to see what the coming trend may be before advising my clients to wait to lock or go ahead and cut their losses while they can.
Third, what happened today is exactly what we've been telling clients may happen at any time. People that were waiting for rates to fall below 4.5% before they locked are going to be very disappointed. Rates never were going below 4.5% and we will look back one day and remember this period where rates were in the 4's for an extended period of time. If you have clients or friends who are waiting to buy a home based on rates falling a quarter percent, please remind them that they are gambling and that rates are just as likely to go up .5% as they are to drop another .25%. The lesson: don't be greedy and take a great rate while you can get it. We may be looking at a situation where someone could have locked at 4.875%, but wanted to wait for 4.5%, and ended up with 5.5%.
HUD Secretary Donovan appeared at a NAR function yesterday, and this is an exact excerpt of his remarks:
"We all want to enable FHA consumers to access the tax credit funds when they close on their home loans so that the cash can be used as a downpayment. So FHA will permit trusted FHA-approved lenders and HUD-approved nonprofits, as well as state and local governmental entities to "monetize" the tax credit through short-term bridge loans. We think the policy is a real win for everyone, ensuring that borrowers can tap into the numerous organizations that are already part of the FHA network to receive this additional benefit. FHA will be publishing the details shortly."
What does this mean? It means that HUD is puttting the finishing touches on allowing home buyers to access the $8,000 tax credit for their down payment at closing. This will allow more people to access housing, decrease inventory of existing homes, and allow the economy to possibly rebound quicker.
As I receive more information regarding the tax credit, I will pass it on.
It is my pleasure to now serve my clients from Henger Rast Mortgage in Tuscaloosa. Henger Rast is an exciting place to work and I am very glad to be here. We have access to the country's best investors and offer our clients a variety of mortgage plans including FHA, Conventional, Jumbo, Alabama Housing bond programs, and USDA loans. Please do not hesitate to contact me for more information.
Some of the issues I've come across in the first two months of 2009 relative to obtaining mortgages:
1. 80% of the loans I am currently originating are FHA loans.
2. Soon, you will likely need a 620 credit score to qualify for a mortgage, including FHA. (Note: many lenders have already implemented the 620 minimum credit score; New South is not yet one of them.)
Also, underwriters are becoming more and more subjective when it comes to interpreting guidelines and manually reviewing credit. Expect underwriters to ask for documentation they wouldn't have before, perhaps delayed underwriting decisions, and sometimes a bumpy road to closing. With that said, originators and processors are still adjusting to what the underwriters are requiring and we will be able to help our clients manage the process better over time.
3. 70% of my new clients are first time home buyers - the $8,000 FTHB tax credit is certainly helping generate new homeowners.
4. Refinancing can be very challenging in this market; mostly because of appraisal concerns. Even in Alabama, where we lead the country in home appreciation in 2008, we are seeing it difficult to get appraisal values where consumers need them in order to refinance.
5. It is very difficult to predict what mortgage rates are going to do day-to-day, week-to-week, or month-to-month. In years past, it was easier to predict the range in which rates would move based on technical factors, inflation, etc.
6. PMI companies have gone crazy. Any loan with a debt to income ratio over 45% is being turned down by the PMI companies. If you have a 780 credit score and 83% LTV, but a 48% debt to income ratio, you probably can not obtain PMI on your conventional loan. If your debt ratio is under 45% and you qualify for PMI on your conventional loan, your annual rate may be more tan 1.0% of the loan amount.
7. The Alabama Housing Finance Authority's Step Up program is still the best thing going in my opinion. They still have down payment assistance for FHA loans (3% of the sales price; FHA requires 3.5% down), their rates are good (currently 5.5%), you do not have to be a first time home buyer to qualify, and your total household income must be under $97,000.
8. It is still my opinion that first time home buyers should put as little down as possible, unless they have access to lots of money. My reasoning: the MOST important factor in creating financial security is the accumulation of a reserve savings account. If a buyer uses all of their available money for a down payment and leaves nothing back for reserves, what's going to happen if they lose their job? Don't spend your reserves on a down payment if you don't have to. If you do put something down, only do so if you will have enough money in reserves to last several months of payments. To put things in perspective, a 3.5% down payment ($3,500) will only save a borrower about $25 per month on a $100,000 loan. On the other hand, the $3,500 would be enough to make a consumer's mortgage payments for nearly 6 months!
9. I believe the $8,000 tax credit is great for first time buyers because it allows them to pay off debts, accumulate savings reserves, and eliminates the need to use credit cards to buy furniture, home furnishings, and yard supplies after closing. This simply means, if managed correctly, the first time home buyer can live in their new home with a peace of mind that they will be able to afford and sustain their lifestyle.
10. Don't become paralyzed by the news. Understand what is going on, but don't see things worse than they are. Only be concerned with the things you can control, prepare for risks, but don't worry about the things in which you have no control. Also, now is the time to ACT on opportunities that will not be available forever. America will recover and will be better off in the future. There will likely be no other time in our lifetimes where we will see opportunities presented as we have right now. Relative to housing, we have lots of good inventory to choose from, home values that have come down (can you say "on sale?"), sellers that are willing to work with reasonable buyers, tax incentives for first-time buyers, and rates that are within 1/2% of the all time lows.
President Obama just completed a speech given in Mesa, AZ in which he highlighted the specifics of his plans for helping the U.S. housing markets recover.
He laid out a 5-point plan that included the following aspects:
Help 4-5 million American homeowners who are upside down on their mortgage (their loan balance is higher than their market value of their home) refinance with Fannie Mae and Freddie Mac. Cost to taxpayers will be zero.
Sub-prime lenders to modify terms of loans. Only 12% of mortgages are sub-prime loans, but over 50% of the foreclosures are from sub-prime products. The government is setting forth clear guidelines in which these modifications must be handled. The lenders must reduce the mortgage payments down to no more than 31% of the borrower's income. An estimated 3-4 million home owners may be affected.
Ensure liquidity and take mortgage rates low my continuing to buy mortgage bonds secured by Fannie Mae and Freddie Mac. Also, help shore up the liquidity of state housing finance authorities.
Help families avoid foreclosure by reducing balances to market values on primary residence homes.
$2 billion in grants for local neighborhood efforts in fighting foreclosures.
I was impressed by the President's effort to clearly and specifically explain how he plans to tackle this huge problem. I also liked the fact that he ended by saying that lenders, bankers, and consumers must act more responsibly in the future in order for us to avoid encountering these types of problems again.
Now, what the President said sounds good and hopefully will be successful. The question remains, can they pull it off, execute the plan, while still ensuring our future and the future of following generations. Only time will tell.
Please note that in order for the tax credit to be accessed by prospective Alabama home owners when they PURCHASE a home (not afterwards), the Alabama Housing Finance Authority would need to have the blessing of the state legislature. It is unknown at this time whether or not this will happen.
Disclaimer: ActiveRain Corp. does not necessarily endorse the real estate agents, loan officers and brokers listed on this site. These real estate profiles, blogs and blog entries are provided here as a courtesy to our visitors to help them make an informed decision when buying or selling a house. ActiveRain Corp. takes no responsibility for the content in these profiles, that are written by the members of this community.
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