Well, I told you so...
In October, 2008, and again in January, 2009, we urged buyers to BUY NOW. The recommendation was made based on a number of key economic factors, including:
- Historically Low Interest Rates
- Excess Inventory - Favorable Pricing
- Federal First-Time Home Buyer Tax Credit ($7,500)
Well, I have some good and bad news for you...
Loan products are still readily available and interest rates are still at historic lows. However, credit and underwriting standards have tightened. For more information on this trend, read the 2008 Office of the Comptroller of Currency's 2008 Survey of Underwriting Practices.
Underwriting Trends for Residential Real Estate 2008
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Eased Credit Standards - 0%
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Credit Standards Unchanged - 44%
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Tightened Credit Standards - 56%
The changes to credit and underwriting standards has resulted in the disappearance of interest only, stated income, 100% financing and other high risk loan products. However, the disappearance of these types of loan products is just a part of the picture. Other changes include increased loan-to-value requirements, tougher appraisal standards, changes in pricing of loans for high risk borrowers and properties, increased documentation requirements, etc.
FannieMae is still the largest purchaser of loans in the United States and forms the back bone of the secondary market. On April 1, 2009, the costs charged to lenders for delivering loans to FannieMae will increase. As the lender delivery costs increase, lenders will pass these charges on to consumers and there will be a rise in interest rates as well as the use of points. For more information on the changes, read Fannie Mae's Announcement No. 08-24 issued October 2, 2008. Here is an example of how the new guidelines impact the pricing of loans:
Loan Scenario: 30-YR FRM IO, Purchase, Condominium, Credit Score = 690, LTV = 80%
- Loan Delivered Before April, 2009: Delivery Cost - 1.250%
- Loan Delivered In or After April, 2009: Delivery Costs - 3.250%
The costs of the loan delivery to FannieMae has a direct impact on the interest rate that you will obtain on the loan for your new home. As these delivery charges are implemented, the interest rate on your loan will likely increase. Also, since these delivery charges are based on the type of property, down payment, credit score, etc., it is another reason that you can't and shouldn't rely on interest rates quoted over the telephone without a loan application or broad statistical interest rates published on the internet or your local paper. Often, these interest rates represent the best possible rates - and not all borrowers can or will get these rates.
Interest rates are slowly rising. On January 15, 2009, the national average interest rate on a 30-year fixed loan was 4.92% On February 26, 2009, the national average increased to 5.32%. Although these rates are still good compared to historic rates, the delay in purchasing changed your monthly loan payment on a $200,000 loan from $1,063 to $1,113 and just cost you an additional $18,000 over the life of the loan.
In addition, interest rates may rise or may fall in the future - but the real question is: "Are you willing to risk the certainty of great, historically low interest rates now to possibly get a better rate in the future?" Contrary to popular believe, interest rates will likely rise in the future. Some economists and real estate professionals predict that interest rates will rise to 6.25% by the end of 2009. Under this scenario, the monthly loan payment would increase to $1,232 and would cost you an additional $42,840 over the life of the loan (compared to a loan originated in January, 2009).
The landscape for residential lending for the purchase of new homes is constantly changing. Although we try to stay current on the trends and issues in the mortgage industry that impact the purchase of a new home, we rely heavily on our preferred lenders to assist our purchasers with the selection of the appropriate loan product to meet their needs and requirements. For homes in St. Louis, Missouri, we highly recommend:
Interested in City Living in Lafayette Square, Soulard, Washington Avenue Loft District, or the Other Historic Neighborhood of the City of St. Louis? Need a trusted advisor to explain the loan process to you? Need some tools such as loan calculators, guides to selecting loan products, and other tips to guide you through the lending process? Contact Ryan Shaughnessy at PREA Signature Realty at 314-971-4381 or by e-mail to Ryan@PREASignatureRealty.com. Or, visit our website's finance page.
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