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November 15, 2017


Going into the mortgage process, it is common for many first-time or even seasoned homebuyers to have a few misconceptions. With reasonable and clear expectations, the entire process of obtaining home financing can be simple and painless. Here are few myths about the homebuying process, combined with the truths behind them.

Lenders only look at your best credit scores

When you apply for a loan, all three reports from the major credit agencies — Experian, Transunion and Equifax — are pulled. Your lender will look at all of them then use the middle of the three. If you are applying as a couple, each borrower’s middle score will be looked at and the lowest middle will be used for approval. This means that if you have a score of 780 and your spouse has a score of 700, your loan is likely to qualify at 700.

One exception is jumbo loans: typically in a situation where one borrower has a higher score and is a higher earner, some lenders will allow the higher credit score on the file to be used.

The rate you are quoted at the start will be the rate you get

Rate quotes, unless locked in immediately, are akin to an estimate based on the market and your personal eligibility. The rate quotes can change over the course of the process.

For those seeking a mortgage refinance, locking in a rate when its quoted to you is possible as long as you’ve provided your lender with sufficient information. For homebuyers, through, this is more tricky: you are typically given a rate quote at the start of your pre-approval process, but you cannot lock in that rate until you’ve actually found a property you aim to buy.

Fixed rate loans are better than adjustable rate loans

The loan you choose is going to be the one that works best for you and your unique finances. While rates are historically low, it may be tempting to play it safe and opt for a 30-year fixed rate mortgage. But if you are not sure how long you’ll own the home, a adjustable rate mortgage (ARM) may be a better option. ARMs have lower rates and shorter durations before the rate resets, so if after 5 years you are looking to move on and sell the house, you’ll have saved serious money in that time.

Mortgage insurance is always required for down payments less than 20 percent

While lenders typically require you purchase mortgage insurance on all loans where the borrower is putting down less than 20 percent of the principle as a down payment, certain loan programs like a “piggyback” loan or VA loans allow for no mortgage insurance premiums for those who qualify.

Rates Stay Low as the Economy Keeps Humming Along

November 9, 2017


Businesses keep doing what they’ve been doing for the past five years — hiring employees and making money. 

On the former, business hiring helped lift payrolls by 261,000 in October. The surge in hiring dropped the unemployment rate to 4.1%. This is the lowest the unemployment rate has been since the year 2000. 

The latest round of monthly hiring lowered the pool of available workers to 11.7 million, which is shallow by historical standards. Businesses have been able to hire workers without breaking the bank. Wage growth remains anemic, with average hourly wages up only 0.5% in October. Year over year, hourly wages are up a moderate 2.4%. (That said, total compensation is likely growing at a faster rate when benefits are factored in.) 

On the latter, corporate earnings continue to flow unabated. Eighty-one percent of S&P 500 companies have reported third-quarter earnings. The blended earnings growth rate for these companies is 5.9% year over year. The flow should rise a few notches in the fourth quarter. Factset, a financial data provider, surveyed analysts and the analysts it surveyed expect S&P 500 fourth-quarter earnings to grow 10.4% year over year. 

Businesses are hiring, and they’re efficient about it. What modest wage growth we have has led to even greater earnings growth. (This is rational from an economic perspective: A business expects to receive a positive return on its factors of production.) 

So, wage-rate inflation remains a nonstarter for credit markets. There has been little of it to pressure interest rates to rise. Factor in low consumer-price inflation, another nonstarter, and it’s easy enough to understand why long-term interest rates continue to hover near multi-decade lows. 

As for long-term mortgage rates, 4% on the conventional 30-year fixed-rate loan serves as the fulcrum, as it has for most of 2017. Quotes on the national scene see-saw between 3.875% and 4.125%. 

We’re in a tight range, and we don’t expect to break that range in the foreseeable future. The range could easily hold for the remainder of the year.

It’s still a range worth gaming. After all, the difference in monthly P&I payments on a $300,000 30-year fixed-rate loan financed at 3.875% or 4.12% is $43. That will buy at least a couple of entrees and a round of drinks at the Olive Garden each month. 

For the immediate future, keep an eye on tax reform. If it becomes likely something might pass into law, mortgage rates will likely favor the 4.125% side of the fulcrum.

What to Know About FHA Loan Requirements

November 2, 2017


U.S. homebuyers have a number of financial tools at their disposal today when it comes to smoothing out the notoriously expensive and complicated process of purchasing a home. One of the oldest and most well-known is a publicly funded program from the Federal Housing Administration, popularly known as the FHA loan. For qualifying homebuyers who can find the right house, FHA loans are mortgages backed by the FHA that can allow for home purchases with low down payments and closing costs. That makes them particularly attractive to many first-time buyers or anyone who has difficulty qualifying for a conventional mortgage.

While FHA loans are not directly financed by the FHA, they do involve a number of strict requirements that buyers and their potential new homes must pass. It’s essential to understand these rules to decide whether or not FHA is right for you.

The basics

The main selling points of the FHA loan program are its low down payment requirements, competitive interest rates and more lenient credit requirements compared to conventional mortgages.

  • FHA buyers may purchase a home with a down payment as low as 3.5 percent of the loan’s value.
  • Interest rates on FHA loans are still around 4 percent on average.
  • Buyers need a FICO credit score of at least 580 to qualify for the lowest down payment.

According to experts who spoke with Nerdwallet, these main points make FHA loans a generally good option for low- to middle-income borrowers, families and seniors. But gaining approval for an FHA loan also requires its own rigorous application process.

Important FHA credit requirements

Like most lenders, FHA buyers will need to be approved for their loan based on a set of credit and financial requirements:

  • Borrowers will need to provide a valid Social Security number or proof of lawful U.S. residency.
  • Borrowers must have proof of a steady income for at least the last two years.
  • The borrower’s front-end ratio (the cost of the monthly mortgage payment plus mortgage insurance, taxes and other fees) should usually be less than 31 percent of their gross income, although it may be as high as 40 percent in some cases.
  • The borrower’s back-end ratio (mortgage costs in addition to spending on other debt from credit cards, student loans, etc) cannot exceed 43 percent of their gross income in most cases, but may be approved as high as 50 percent.
  • For those with FICO scores between 500 and 580, borrowers will need to make a minimum 10 percent down payment.

The FHA also imposes limits on exactly what sort of house you can buy with an FHA-sponsored loan:

  • The borrower must live in the property as their primary residence.
  • Limits on FHA loan value vary depending on location. In general, the loan limit is equal to 115 percent of the county’s median home price.
  • The property to be purchased must be appraised by an approved appraiser in most cases. The appraiser will assess the home’s fair market value as well as criteria for safety and security mandated by the U.S. Department of Housing and Urban Development.

Mortgage insurance

One other important difference between FHA loans and conventional mortgages is how they handle mortgage insurance. In most situations where borrowers put less than 20 percent down on a home purchase, they need to pay additional private mortgage insurance fees at some point in the life of their loan, which drives up monthly payments. 

In the case of FHA loans, borrowers need to pay two kinds of mortgage insurance:

  • Upfront mortgage insurance may be paid as a lump sum at closing or rolled into monthly costs. Regardless of credit score, FHA borrowers will pay 1.75 percent of their loan value for this insurance premium.
  • Annual mortgage insurance premiums are tacked onto monthly payments, and vary depending on the terms of the mortgage. This premium ranges from 0.45 percent to 1.05 percent of the loan’s value.

Borrowers may need to pay mortgage insurance premiums for only up to 11 years, or they might extend over the entire life of the loan depending on the terms of the mortgage. 

These are just the most essential facts most borrowers need to know about FHA loans, but they do not cover every consideration that each buyer needs to make. Work with an FHA-approved lender like New Penn Financial to understand all the details of the program and whether it’s right for you given your financial situation and specific housing needs.

With this knowledge in mind, you’ll be in a better position to get a great deal on a new home using this popular program.

Rates Are up…and so Are Home Sales

October 30, 2017


It’s more fours than threes these days.

Mortgage rates — rates on the long-end of the curve, in particular — are at a two-month high. 

Our own central bank, the Federal Reserve, has long ago telegraphed its intentions on monetary policy:

Raising interest rates and reducing securities purchases are on order. More recently, the European Central Bank will likely reduce its bond purchases, and it could do so by half. This would tighten the money supply in Europe. Interest rates in Europe are more likely to rise.

“Likely” is not the same as guaranteed, though. As we’ve seen on our side of the Atlantic, market participants frequently buy the rumor and the sell the news (reverse course on the news). For the immediate future, say for the week, quotes above 4% on the 30-year loan will likely persist. Beyond the week, uncertainty prevails. More adventurous borrowers might want to float in anticipation of a rate reversal (the selling of the news).

Mortgage rates are up, but so are home sales, at least for September. 

Existing-home sales posted their first gain in four months, rising 0.7% to 5.39 million units on an annualized rate. Price concessions contributed to the rise. The median price of an existing home fell 3.2% month over month to $245,100 .

Existing-home remains tight, at 1.9 million resales on the market. Supply is unchanged at only 4.2 months based on the latest sales numbers. With supply holding tight, sales growth will be difficult to achieve unless we see further price concessions.  

As for new-home sales, they had no trouble posting a gain in September. Sales blew past nearly everyone’s estimate to post at 667,000 units on an annualized rate. Little discounting occurred to move inventory. The median price of a new home rose 5.2% for the month.  

No doubt that some sales were attributable to a post-hurricane Harvey rebound. Sales in the South were up sharply from August, and at the highest level since July 2007. Some contracts in the South were surely delayed until September. 

The South should continue to lead the way with a post-hurricane Irma rebound. New homes, in particular, should see elevated sales over the next couple months due to increase activity. That said, the post-hurricane Irma rebound will have less of impact on existing-home sales.

Is Renting Really the Better Deal? 

According to the Wall Street Journal, 76% of millennials believe renting a home is the better deal compared to buying a home. The latest survey is a 10-point increase favoring renting compared with the same survey a year ago. 

We tend to view such surveys with a degree of skepticism: We don’t know how the questions of affordability were worded. We do know that respondents tend to answer questions to satisfy the surveyor. The respondents are prone to say what they think the other person wants to hear.

All that aside, and if it is true that the younger generations view renting as the more affordable option, will the homeownership rate continue to decline? 

It might not reverse course in the near term, but it will reach a point where it will reverse. That point might be closer than many of the experts expect.

Renting is certainly the preferable option when you first move out of the parent’s house. But continual rent increases and continual moving drive the longer-term costs higher.

Psychological costs also drag on the benefits of renting. An itinerant lifestyle becomes less satisfying the older we get. We want to own. We want to drive a nail into a wall without worrying about the security deposit. A neighborhood of owner occupiers is generally preferred over a neighborhood of renters. 

When all the costs are considered — monetary and psychic — through time, renting becomes more of a false economy for many people. When we finally get a break on relentless home-price appreciation, that false economy will become more apparent to more people.

HARP Extended Through 2018

October 26, 2017


The U.S. government deploys several resources for Americans who need help financing a home purchase, including the popular FHA Loan program. But unbeknownst to some, there are also tools available for current homeowners who have fallen behind on their mortgage payments.

One of them is known as the Home Affordable Refinance Program managed by the Federal Housing Finance Agency, a wing of the Treasury Department. Although it was set to expire in September, HARP has been extended once again, continuing to offer homeowners additional options if they find themselves underwater on their mortgages.

Background of HARP

HARP was originally created as a direct response to the housing crisis and economic recession that began in 2008. During this time, as property values around the country plummeted, large numbers of mortgage borrowers found themselves paying off home loans that were now more expensive than the market value of their house. This caused millions to slip into foreclosure, especially with homeowners who had just recently bought had not yet built up significant equity.

The surge in foreclosures around this time was abetted by the fact that many of these homeowners were unable to refinance and gain some relief from ballooning debt. Conditions in the U.S. real estate market at the time made it unfeasible for financial institutions to save these loans from foreclosure.

To rectify this complex problem, the FHFA authorized federal lenders Fannie Mae and Freddie Mac to enact HARP. Beginning in March 2009, HARP offered refinancing services to homeowners who met certain qualifications. These qualifications remain mostly intact in the current iteration of HARP, which may offer assistance to mortgage borrowers who:

  • Are paying off a mortgage originated on or before May 31, 2009 and is currently owned by Fannie Mae or Freddie Mac.
  • Have a current loan-to-value ratio (LTV) over 80 percent. LTV is the amount of debt owed on the loan divided by the home’s current value, expressed as a percentage.
  • Are up-to-date with their mortgage payments, and have a history of on-time payments over the last year.
  • Either live in the home as a primary residence, or consider it a second home or investment property with no more than four units for rent.

The official website of HARP offers tools for users to find out if their mortgage meets most of these qualifications, and guides them through the application process.

Does HARP work?

Some policy analysts had speculated that after nearly eight years and previous renewals, HARP would soon be on the chopping block for federal budget planners. Its renewal through 2018 is therefore a demonstration of its success as well as the need that still exists.

A study from the Urban Institute found that despite early struggles, HARP could now be considered “arguably the most successful housing policy initiative coming out of [the 2008 housing crisis].” The FHFA estimated that HARP refinanced around 2 million loans just in its first two years, a figure that has since surpassed 3.5 million. With HARP borrowers saving an average $200 per month on their mortgage, the program has provided cumulative savings of approximately $35 billion since its inception.

HARP activity peaked around 2012, but its selective criteria means there are likely few homeowners who would still qualify. The FHFA estimated that as of March 2017, roughly 143,000 U.S. homeowners could still take advantage of the program, but that this was likely an overestimation of the number who will actually do so.

Regardless, the continuation of HARP for another year solidifies its legacy as a landmark policy achievement. That’s particularly true, according to the UI study, because HARP needed to be overhauled several times after its inception before it began refinancing loans en masse. Several of these modifications turned out to be forebears to the way mortgage lenders do business today:

  • Instead of paying for in-person home appraisals, qualifying properties were processed through an automated valuation system.
  • Mortgage insurers adopted a unified approval process to move coverage from old policies to new ones easily.
  • Fannie Mae and Freddie Mac increased competition among lenders by reducing the number of underwriting assurances they required for HARP loans.

The Urban Institute concluded that these three changes to the program were largely responsible for its success in reducing refinancing risks for mortgage lenders and passing savings onto the homeowner. The FHFA has also created additional homeowner assistance programs in the mold of HARP, taking these lessons and applying them to other aspects of the home finance market.

With HARP here to stay, both homeowners and mortgage lenders are in a great position to work more effectively and keep the U.S. housing market as robust as ever.

No Reason to Be Afraid This Time of Year

October 23, 2017


Halloween approaches. We suspect that it’s a favorite holiday for a certain cadre of people. Some people revel in fear. They seek it out; they search for reasons to be afraid. 

Fear is a draw to many financial-market participants as well. The financial website has carved a niche for itself by appealing to the draw. Most everything ZeroHedge reports is reported with a slant to highlight fear: Stories of financial bubbles, impending market crashes, inevitable economic collapses, runaway inflation abound. If you seek a reason to worry, ZeroHedge is the website for you. 

This isn’t to say that there isn’t a need for contrary (or negative) opinion. The world isn’t all sunshine and lollipops. ZeroHedge serves a purpose; it can keep you grounded. Our attention was piqued by a ZeroHedge article titled “Housing Starts, Permits Collapse in September (Spoiler Alert: It Wasn’t Just the Storms).” 

A catchy title, to be sure, but there was no collapse.

Yes, permits were down in September. Specifically, they were down 4.5% month over month.  But when you examine the numbers more closely, you’ll find that they were up where it really mattered.  Permits for single-family homes rose 2.4% to an 819,000 annualized rate in September. Year over year, permits for single-family homes are up 9.3%.

As for housing starts, overall starts were down, but the important single-family segments was up. Single-family starts were up 9.1% year over year.

So, accentuate fear, if you must. At the same time, don’t ignore the possibility that the glass is frequently half full.   

We believe it is more than half full when it comes to housing, particularly the new home market.  Home builders appear to share our optimism. 

After dipping in recent months, home-builder optimism returned with a vengeance in October. The Home Builder Sentiment Index rebounded four points to post at 68 (a posting above 50 is positive). Builders were particularly cheerful on the sales outlook. This component of the index was up five points to post at 78. 

New-homes sales were robust at the beginning of the year, but they faded during the summer months. This latest report on housing starts points to new-home sales regaining momentum.  We expect the new-home market, both starts and sales, to enter 2018 as it entered 2017 — on a rising trend.

A bubble in housing?

We don’t see it. Even after five years of exceptional gains in home prices and building activity, it’s worth noting that single-family starts and completions remain significantly below historical norms. We expect to see a few more years of increasing housing starts and completions, at least in the single-family segment. We see no reason to fear the outlook on housing. 


All Quiet on the Rate Front

Everyone expects Federal Reserve officials to raise the federal funds rate at their December meeting. What’s more, most everyone expects the Fed to slowly and predictably reduce its balance sheet over the next couple years. Because everyone shares similar expectations, we’ve seen little movement in interest rates this month. 

We also haven’t seen the next dip in mortgage rates that we thought could occur after rates rose in September. We could still get one, though. It’s worth noting that North Korea’s leader Kim Jong Un has amped up his belligerent posturing in recent days. Markets are also nervous about the prospect of Catalonia breaking away from Spain. We could see more investors seek a haven in the usual assets — U.S. Treasury securities and gold. Should that occur, we could see the dip that has generally followed the rise over the course of 2017. 

Today, though, it’s mostly sideways, as it has been for most of October. This isn’t bad. A rate range of 3.875%-to- 4% is still the going range on a top-tier 30-year conventional loan on the national scene.  In the grand scheme of mortgage-rate history, this is still a good rate.  Of course, we all want a little better, but a little better doesn’t appear likely in the immediate future. 

Time for Another Rate Dip?

October 17, 2017



The commercial will be right one of these days. Whether “one of these days” is tomorrow, next week, next year, or next decade, we can’t say. 

Lenders have warned repeatedly in print and radio ads over the past five years that higher interest rates will soon befall us. The rationale is predicated on historically low interest rates (which can’t last) and the Federal Reserve raising interest rates (which it has). 

Here we are in 2017 and mortgage rates, though not at historical lows, are still low by historical standards. Rates have trended higher in recent weeks, but the trend is best measured in basis points (one basis point being 1/100 of a percentage point), not full percentage points. 

Consumer price inflation continues to trend stubbornly low by Fed standards. The Fed is fixated on consumer price inflation continually rising 2% annually. Something it has yet to do. What’s more, few market participants expect a ramp-up in inflation. Rate remain low at the long end of the yield curve.

A quote of 4% on a 30-year fixed-rate mortgage is the prevalent quote across the country, according to Mortgage News Daily. Depending on the supply-demand paradigm, time of day, lender incentives, alignment of the stars, and what not, 3.875% will materialize. If recent past is prologue, 3.875% (and lower) could materialize more often. 

We’ve mentioned more than a few times that this lending market has been characterized by a repetitive cycle. The market has oscillated between peaks and valleys every few weeks or so: The December peak gave way to the January valley. Rates rose from the January valley to the March peak, which gave way to an April valley. Rates rose from the April valley to the May peak, which gave way…. You get the picture. 

The latest valley occurred in early September. The latest peak was last week. Rates have eased since. 

Does another valley loom?

We’ll give our best answer, as equivocating as it may be, it could: The stock market has been lackadaisical of late. Third-quarter earnings exceptions have ratcheted lower. Gold and silver prices have trended higher. (The opportunity cost of holding gold and silver falls when market participants expect falling interest rates.) 

The real question is to float or lock? We’re not alone in noticing the peak-and-valley cycles that have occurred this year. Borrowers who have anticipated another valley by floating have been disappointed not to see a robust bond-market rally, which would lead rates lower.

This isn’t to say that locking is the default position. All it takes is one slice of bad news — an earnings miss by a major corporation, a downgrade in GDP growth, another North Korea dust-up, a political scandal — and we could get that bond market rally that drops us into another valley. It’s not like it hasn’t happened before.

Buy Low, Sell High (Easier Said Than Done)

It sounds so simple: buy when others are selling, sell when others are buying. So simple, yet so few can do it. Contrarianism is contrary to most people’s nature. 

But it’s not contrary to everyone’s nature. Bloomberg ran a story this past week on investors buying flood-damaged Houston homes for forty cents on the dollar. Bloomberg goes on to tell us that such a contrarian strategy has paid off in the past. Buyers were able to take ownership of New York co-ops and office towers at a deep discount when the city was on the verge of bankruptcy in the mid-1970s. 

More recently, contrarian investors snapped up residential properties on the cheap after the 2008 financial crisis. We remember those days. Though despair filled the air, we continually implored people to focus on the full half of the glass. This, too, will pass, we reasoned, and so will the opportunity to buy real estate so cheaply. The housing market today has proved us right. 

The takeaway from  Bloomberg’s Houston story is to venture into areas where other people are afraid to venture. Instinctively, most of us want to remain with the herd and adhere to the trend. But if we can see things the way they could be and not as they are and act accordingly, a lot of money can be made. We expect a lot of money will be made by Houston’s intrepid real estate investors. 

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