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The 30-year fixed-rate mortgage dropped to its lowest point of the year as 10-year Treasury yields closed at their lowest level since May 2013, according to Freddie Mac.
This week, the 30-year fixed-rate mortgage fell to 3.80%, down from 3.93% last week. A year ago this time, it was 4.47%, according to the Primary Mortgage Market Survey.
“The temporary decline in rates will likely be short-lived,” said Jonathan Smoke, chief economist at realtor.com®. “Those who can take advantage now and lock in a purchase or refinance at these levels may never see these rates again.”
Falling mortgage rates can be attributed to global economic jitters and plunging oil prices, according to Bankrate.
With the Russian currency in crisis, there is a flight to safety, Smoke added.
“The dollar and U.S. treasuries have become a safe haven for international investment, and when demand for bonds increases, rates go down,” he said.
The 15-year fixed-rate mortgage also came down this week, to 3.09% from 3.20% last week. The rate was 3.52% a year ago this time. In addition, the 5-year Treasury-indexed hybrid adjustable-rate mortgage (ARM) averaged 2.95% this week, 2.98% last week and 3% a year ago this time.
The 1-year Treasury-indexed ARM averaged 2.38% this week, down from 2.40% last week and 2.56% a year ago this time.
A majority of mortgage experts surveyed by Bankrate.com expect rates to either remain unchanged or dip again next week. Among the experts, 42% believe rates will dip again, while another 42% said rates will remain unchanged. Just 16% of respondents thought rates would increase, according to the Bankrate.com Rate Trend Index.
“This is likely the last of the low rates,” said Smoke. “We’re likely to see increases in the weeks ahead.”
Even as the housing market gets back on track, the numbers of first-time buyers continue to disappoint. This is strongly associated with the tight credit requirements facing would-be buyers. Recent important government policy changes and the introduction of new low down-payment programs, however, should set the stage for increased first-time buyer activity in 2015.
Clarity on Mortgage Qualifications
Both Fannie Mae and Freddie Mac finalized mortgage qualification guidelines that went into effect on Dec. 1. These guidelines clarified murky qualification standards set in place as a result of the Dodd-Frank reforms, which were intended to prevent a repeat of the financial crisis.
Up until now, the absence of specific rules and clear guidance on what types of errors would prompt Fannie or Freddie to reject a loan, leaving the underwriting bank or lender on the hook, led to very conservative lending practices. To avoid the risk of Fannie or Freddie rejecting a mortgage months or years after it closed, banks added “overlays,” or additional requirements, to the proposed guidelines.
As a result, according to Ellie Mae, a mortgage software company, the average denied credit score on conventional purchase mortgages in October was 723 even though the minimum standard set by both Fannie and Freddie was 620.
The new standards should lead to thousands more consumers being able to get a mortgage and should also speed up the underwriting and approval process.
Measures of mortgage credit availability from the Mortgage Bankers Association already indicate a slight loosening of credit in November prior to these rules going into effect. All three measures of mortgage credit availability were also higher than November of last year, between 3% and 5%. If that trend continues, it will indeed mean that we are seeing standards revert to more normal levels.
More Attractive Low Down-Payment Mortgages
Earlier this week, Fannie Mae and Freddie Mac both announced the details of new low down-payment mortgage programs they will be offering that enable qualified buyers to purchase a home with down payments of as little as 3%.
While these programs only lower the down payment threshold by 0.5% from similar loans available from the Federal Housing Administration (FHA), they will likely be far more attractive to consumers than the FHA loans. These new programs avoid the FHA fees that effectively increase the rate charged. Another advantage over FHA is the borrower’s ability to stop paying private mortgage insurance fees once the equity of the home reaches 20%.
Fannie Mae’s offering will be the first available to qualified borrowers who have not owned a home before or within the last three years. But Fannie Mae doesn’t lend directly, so it may take some time before we see specific lender offerings—perhaps in early 2015.
Clarifying when lenders are at risk and offering low down payment programs should increase flexibility in mortgage qualification. This should pave the way for more first-time buyers in 2015. If we start to see specific competitive low down-payment lender offerings and evidence that standards are loosening, the spring selling season may start earlier than normal. After all, first-time buyers do not have to sell an existing home and can jump into the market at any time.
By knowing how much mortgage you can handle, you can ensure that homeownership will fit in your budget.
Homeownership should make you feel safe and secure, and that includes financially. Be sure you can afford your home by calculating how much of a mortgage you can safely fit into your budget.
Why not just take out the biggest mortgage a lender says you can have? Because your lender bases that number on a formula that doesn’t consider your current and future financial and personal goals.
Think ahead to major life events and consider how those might influence your budget. Do you want to return to school for an advanced degree? Will a new child add day care to your monthly expenses? Does a relative plan to eventually live with you and contribute to the mortgage?
Consider those lifestyle issues as you check out these four methods for estimating the amount of mortgage you can afford.
1. Prepare a detailed budget.
The oldest rule of thumb says you can typically afford a home priced two to three times your gross income. So, if you earn $100,000, you can typically afford a home between $200,000 and $300,000.
But that’s not the best method because it doesn’t take into account your monthly expenses and debts. Those costs greatly influence how much you can afford. Let’s say you earn $100,000 a year but have $1,000 in monthly payments for student debt, car loans, and credit card minimum payments. You don’t have as much money to pay your mortgage as someone earning the same income with no debts.
Better option: Prepare a family budget that tallies your ongoing monthly bills for everything -- credit cards, car and student loans, lunch at work, day care, date night, vacations, and savings.
See what’s left over to spend on homeownership costs, like your mortgage, property taxes, insurance, maintenance, utilities, and community association fees, if applicable.
2. Factor in your downpayment.
How much money do you have for a downpayment? The higher your downpayment, the lower your monthly payments will be. If you put down at least 20% of the home's cost, you may not have to get private mortgage insurance, which protects the lender if you default and costs hundreds each month. That leaves more money for your mortgage payment.
The lower your downpayment, the higher the loan amount you’ll need to qualify for and the higher your monthly mortgage payment.
But, if interest rates and/or home prices are rising and you wait to buy until you accumulate a bigger downpayment, you may end up paying more for your home.
3. Consider your overall debt.
Lenders generally follow the 43% rule. Your monthly mortgage payments covering your home loan principal, interest, taxes and insurance, plus all your other bills, like car loans, utilities, and credit cards, shouldn’t exceed 43% of your gross annual income.
Here’s an example of how the 43% calculation works for a homebuyer making $100,000 a year before taxes:
1. Your gross annual income is $100,000.
2. Multiply $100,000 by 43% to get $43,000 in annual income.
3. Divide $43,000 by 12 months to convert the annual 43% limit into a monthly upper limit of $3,583.
4. All your monthly bills including your potential mortgage can’t go above $3,583 per month.
You might find a lender willing to give you a mortgage with a payment that goes above the 43% line, but consider carefully before you take it. Evidence from studies of mortgage loans suggest that borrowers who go over the limit are more likely to run into trouble making monthly payments, the Consumer Financial Protection Bureau warns.
4. Use your rent as a mortgage guide.
The tax benefits of homeownership generally allow you to afford a mortgage payment -- including taxes and insurance -- of about one-third more than your current rent payment without changing your lifestyle. So you can multiply your current rent by 1.33 to arrive at a rough estimate of a mortgage payment.
Here’s an example: If you currently pay $1,500 per month in rent, you should be able to comfortably afford a $2,000 monthly mortgage payment after factoring in the tax benefits of homeownership.
However, if you’re struggling to keep up with your rent, buy a home that will give you the same payment rather than going up to a higher monthly payment. You’ll have additional costs for homeownership that your landlord now covers, like property taxes and repairs. If there’s no room in your budget for those extras, you could become financially stressed.
Also consider whether or not you’ll itemize your deductions. If you take the standard deduction, you can’t also deduct mortgage interest payments. Talking to a tax adviser, or using a tax software program to do a “what if” tax return, can help you see your tax situation more clearly.
Related: More on Mortgages from HouseLogic
By: G.M. Filisko
G.M. Filisko is an attorney and award-winning writer who’s owned her own home for more than 20 years. A frequent contributor to many national publications including Bankrate.com, REALTOR® Magazine, and the American Bar Association Journal, she specializes in real estate, business, personal finance, and legal topics.
This week’s economic news was a repeat of the positive trends I’ve highlighted lately, so rather than repetitive reporting, I wanted to share a few insights.
I recently presented at the National Association of REALTORS® conference on the topic of millennials and home buying. Here’s my key takeaway:
I’m bullish about the housing market—in part, because I’m bullish about millennials.
That’s because this generation of people, born between 1981 and 2000, is our largest—made up of approximately 90 million people.
The narrative of millennials not forming households and not buying homes is stale and overplayed.
In fact, they’re just getting started, and their sheer size will drive activity in housing for decades. Here’s why.
1. Millennials Are Moving On Up
Today, millennials head up about 20 million households in America.
That number is small relative to the number of people in this generational grouping, but that’s more a reflection of their age—the median age of a millennial today is 23—and initial economic circumstance.
It doesn’t reflect any true shift in attitude regarding their desire to succeed or the value they place on independence and home ownership.
In fact, this summer alone, millennials made up nearly 30% of buyers, and they represented the largest cohort of serious shoppers.
Think millennials don’t already own homes? An estimated 14% of sellers this year were millennials.
2. Millennials Are Starting Families
So what’s driving millennials to shop and buy homes? Quite simply, life.
A whopping 86% of millennial home shoppers indicated they were buying now because of a change in their household size and composition—which includes marriage, having children or planning to start a family.
This “growing household” trigger was much higher for millennials than for any other type of home shoppers. Likewise, millennials were way more likely to say that a stable or improving income triggered them to shop.
And that’s the most encouraging sign that circumstances are improving in the right way for millennials. They started entering the job market out of college at the wrong time and suffered the most from an unemployment perspective.
But that scenario has changed dramatically in the last two years. Their unemployment rate hovers close to the same level as the general population. And this year, millennials are experiencing 60% better job growth than the country as a whole—during a banner year of job creation.
Going forward, job creation favors millennials. Economic opportunity and gains are leading them to form households and buy homes.
3. Cost of Education Will Pay Off
One cause often cited as the reason millennials are holding back from buying is the rise instudent debt. It’s true that a larger portion of students are carrying debt, and the amount of debt has risen—but that debt is an investment as well.
How so? Because of their desire for higher education, millennials are the most educated generation.
Long-term, this should be great for their economic opportunities.
Short-term, 70% of student loan borrowers owe less than $25,000. That number is manageable as employment and income opportunities improve.
Millennials are young and just getting started. Their education, diversity, tech savvy and desire to succeed will be vital to the economic success of the United States.
Right now, credit access and affordability are challenges to their ability to buy a home. That’s why you see a wide range of millennial homeownership rates in U.S. markets, from 23% in expensive Los Angeles to 56% in affordable Grand Rapids, MI.
Yet even in L.A., there are enough millennials with incomes. The L.A. market ranks sixth nationwide for the number of most millennial home-owning households.
A New Economic Force
We’re on the cusp of seeing the impact millennials will have. They should represent two-thirds of all household formations over the next five years. Job creation will favor them. Their economic opportunities are strong. And they’re planning to start families, which increases the desire to purchase a home.
That’s why we see record numbers of millennials educating themselves on home buying, mortgage qualification and local housing conditions. Collectively, they will drive housing trends for at least the next 20 years.
So move over, baby boomers—there’s a new economic force in town
Generally speaking, your housing choices during the late fall are still healthy. October and November are great months to go house hunting. December is usually sparse, market-wise, but if that fits your timeline, you could luck out.
The benefits to buying a house at the end of the year include the following:
1. Tax savings
If you close by December 31, you can deduct mortgage interest, property taxes, points on your loan and interest costs. These deductions are significant, especially in the early years of your loan when you’re paying off a lot of interest.
2. Motivated sellers
Many sellers want to enjoy tax savings on the next home they purchase. They may accept lower bids in order to meet Uncle Sam’s deadlines. However, if you’re in a strong seller’s market, you’ll want to be conservative and heed advice from your real estate professional.
3. Builder incentives
If you’re buying a house that is brand new, there’s a good chance builders may push to close the books on their year—and meet quotas. They may offer upgrades or little extrasto sell houses before the calendar turns.
4. Available movers
Many moving companies are booked six weeks or more in advance during the busy summer months. In the fall and winter, it’s normally easier to secure the services of amoving company or rental equipment on shorter notice.
5. Paying toward something you own
If you’re renting, your monthly check goes toward something that will last you a month: You’ll never see any return on that money. When you buy a house, your monthly mortgage payment goes toward an investment—and ultimately a roof that’s yours.
Modernize your kitchen, paint your home’s exterior neon orange, change your fixtures orreplace your carpeting; whatever inspires you, no one can tell you, “No!”
8. Gaining equity
In the beginning, most of your payment goes toward interest. But gradually more will go toward paying off your principal, meaning you build up equity—or savings—in your home. Another factor in equity is appreciation: As home values rise, so does your rate of equity.
Updated from an earlier version by Michele Dawson.
While it may be acceptable to snap up a pair of shoes on an impulse, the choice to buy a home requires thoughtful planning and decision making.
Whether you’re becoming a homeowner for the first time or you’re a repeat buyer, buying a home is a financial and emotional decision that requires the experience and support of a team of reliable professionals including a REALTOR®, a lender, a lawyer and a range of other individuals.
Why Do You Want to Buy a Home?
The emotional part of the decision comes into play when you think about why you want to move. If you’re a first-time buyer, you need stability in your career and the desire to commit to living in the same community for five to seven years. You should want to establish roots in a neighborhood and look forward to decorating as you please without requiring a landlord’s permission.
Purchasing a home is a lifestyle choice that requires you to think about how you like to spend your time and the type of community where you want to live—such as a rural area without nearby neighbors, a high-rise building in a city or a home within a planned community with recreational amenities.
The more you understand your priorities for a home, the easier it will be for you to narrow your real estate decisions.
Homeownership can also be a powerful way to increase your personal wealth for you and your family, since you’ll be building equity in your home as you pay off your mortgage.
Are Your Finances Ready for Homeownership?
While your dream home may not be within your reach right away, you can take steps to become a homeowner the moment you earn your first paycheck.
In order to qualify for a mortgage to buy a home, you’ll need good credit, a pattern of paying your bills on time while still saving money and a maximum debt-to-income ratio—your gross monthly income compared to the minimum payments on all recurring debts—of 43% or less. Some lenders have stricter guidelines, so the lower your debt-to-income ratio, the better your chances of a loan approval.
While loan programs are available with low down payments of 3.5% to 5%—and a few programs offer no down payment at all—you’ll still need some savings to pay for closing costs, moving expenses and an earnest money deposit on a home. It also is very wise to have cash reserves on hand after you buy.
Housing prices and rents vary from one location to another, but you can use realtor.com®’s Rent vs. Buy calculator to estimate the difference between your current rent and buying a home. In some markets, buying a home can cost the same or even less than renting.
In addition, you should think about your plans for the future and how you spend your money—along with your comfort level with a mortgage payment. A lender will tell you how much you can borrow, but that lender won’t know how much you spend on travel or golf or your plans for potentially reducing your work hours when you have a family.
Once you’ve thought through the emotional and financial aspects of becoming a homeowner, your next steps should be to find a reliable, experienced REALTOR® to become your partner in the home-buying process and to meet with a reputable lender who can discuss your options for financing your purchase.
Read the rest of the 10-Step Guide to Buying a Home:
For many home buyers, pre-qualification is the first step to buying a house.
But you shouldn’t put your feet up after the first step and expect everything to just fall into place: There’s plenty more to be done.
Here’s a straightforward guide for going from pre-qualified buyer to homeowner the smart way.
Step 1: Pre-Qualification
The pre-qualification process is quick and free. It should take less than an hour. During the process, you speak with a loan officer and answer questions about your financial situation.
Pre-qualification will give you a rough estimate of how much house you can afford. It’s not a binding agreement—it’s simply something you can use to gauge your buying capability.
Pre-qualification can be especially useful if you’re not sure you can afford a mortgage.
Step 2: Pre-Approval
After you’re pre-qualified, your next step is to get pre-approved. This is an in-depth process. You’ll need to submit paperwork about your income, assets, employment history and residency status to a lender.
Getting pre-approved is almost like applying for a real loan, but it happens before you select a home.
Step 3: Shop
Now it’s time for the fun part: home shopping. Using your pre-approval amount as a guide, shop for homes within your budget.
Since sellers and REALTORS® view pre-approved buyers more favorably, shop with confidence. You’ll come across as a much more serious buyer than any non pre-approved competitors.
Step 4: Put in an Offer
Once you find a home you want to buy, the next step will be to put in an offer. If your offer is accepted, you’ll need to apply for a loan. The mortgage process can take some time, but since you’ve been pre-approved, the process may be faster because the lender will have all or almost all of your needed documents.
However, if too much time has passed since you were pre-approved, you’ll need to provide fresh bank statements and document updates.
Just when you thought the days of zero down-payment loans were gone forever, a nonprofit is testing a new concept to offer low-to-moderate-income home buyers the chance to secure a 15-year mortgage with little to no money down.
The Wealth Building Home Loan (WBHL) creates a path to homeownership for first-time buyers, low-income buyers and those burdened by student debt but earning a solid income.
The WBHL has a generous credit requirement, as income is weighed more heavily than FICO scores. It also offers a chance to build equity at a faster clip than a traditional 30-year mortgage, according to one of its creators, Edward Pinto of the American Enterprise Institute International Center for Housing Risk.
“In the first three years of a WBHL, 77% of monthly mortgage payments pay off principal, creating huge amounts of equity,” Pinto said.
The 30-year fixed-rate mortgage—which has become the industry standard—attributes 68% of each mortgage payment to interest in the same period, according to Pinto.
“This will be a game-changer,” said Bruce Marks, CEO of the nonprofit Neighborhood Assistance Corporation of America (NACA), in a statement. “The majority of the mortgage payment will now go to the equity in the home effectively providing debt-free homeownership.”
Home buyers can convert their down payment to buy down the interest rate. If they don’t have money to put down, they can use a 3% seller concession to buy down the interest rate to near zero. For every 1% paid upfront, buyers can get a half percentage point discount in their interest rate, twice the industry standard for rate buydowns. Bank of America will hold the 15-year mortgage loans and subsidize the interest rate buydown.
Monthly payments are a bit higher with the Wealth Building Home Loan, but because the term is truncated, the buyer will own the property free and clear in a shorter time.
NACA is tasked with providing the loan, while Bank of America and Citigroup are funding the loans. The WBHL is only available through NACA. The nonprofit has 37 locations nationwide and is using Charlotte, NC, as the initial test market.
Once you’ve found the home of your dreams and joined the seller in a hearty handshake, there’s still one more step to complete.
That final step is the escrow process, also referred to as closing.
While your real estate agent, lender, title agent and closing agent will guide you through the process, that doesn’t mean you should be unaware of what’s taking place.
Here’s what you need to know to understand escrow and get the best deal.
1. What Title Companies Do
Title companies make sure a title is clear of any and all encumbrances. This includesliens, judgments, forgeries, fraud and anything else that must be cleared before the deal goes through.
After the title company deems the title clear, it issues an insurance policy (title insurance) to protect the buyer and lender from claims and disputes over the property that may occur in the future.
2. What Escrow Agents Do
Escrow services provide a neutral third-party agent or officer who handles title and escrow work, financing, transaction instructions and other paperwork related to the home purchase, mortgage refinance or other title transfer.
Escrow officers are there to safeguard documents, follow instructions and make sure everything is filed timely. They’re not there to provide advice to buyers. But if closing is taking too long, you may want to reach out to the escrow officer to see if there is anything you can do to expedite the process.
3. How to Find Good Agents
Your real estate agent may suggest a closing agent, but you can also seek referrals from family members, friends, co-workers and other professionals you trust. You want a referral to the title or escrow officer—not the company.
The officer should be familiar with the type of home you are buying, especially if it’s a condo, multiplex or historic home. You also want to find an office conveniently located near you to save time.
4. How to Find the Best Deal
Many home buyers aren’t aware they can shop for title and escrow services. While lenders will suggest companies, you don’t have to go with their recommendation.
Ask for a list of title and escrow costs. Check on everything from escrow service fees to title search and insurance premiums.
Determine whether the buyer or the seller pays the fees.
Be aware of title and escrow discounts available for refinance-related transactions or sales that include the same lender and title and escrow services.
If the initial quote seems low, watch out for incidental fees likes wire transfer, copying, courier and fax fees. Those smaller items can add up.
Keep in mind, title and escrow services don’t dictate fees related to the home loan. While all fees—title, escrow, lender and more—show up on the final settlement sheet (known as the HUD-1 document), lender fees will be generated by the lender.
Updated from an earlier version by Broderick Perkins.
Pre-approval may be the first step towards getting a mortgage, but you’ll need to get some things in order first.
When you’re ready to start the home-buying process, begin by following this pre-pre-approval checklist—and you’ll be in a great position to secure the mortgage you need to buy the home you want.
1. Review your credit report (get one for free at annualcreditreport.com).
2. Dispute any blemishes on your credit report if they don’t look right.
3. Gather your (and anyone else applying for the the mortgage) last two years of tax returns and proof of income (W2s or pay stubs)—or your year-to-date profit and loss statement if self-employed.
4. Have your down payment money and closing money ready in the bank.
5. If the down payment and closing money were gifted to you, be ready to explain it.
6. If you’ve been renting with a private landlord, put together the last 12 months of proof (such as check copies and money order receipts) showing that you’ve been on time each month with your rent payments. Also ask your landlord for a written referral.
7. Gather personal documents, like two forms of government identification. Also haveother personal paperwork, like copies of divorce papers, if applicable.
8. Provide proof of regular income from all forms including Social Security, child support or government assistance.
9. Provide proof of account balances for IRAs and retirement accounts.
10. Disclose money held in the stock market.
11. Bring proof of other property currently owned.
12. Be ready to disclose past financial issues like bankruptcy. Provide a written explanation of what happened and what steps you have taken to correct your situation.
13. Keep your credit score healthy. So do not do the following:
Apply for new credit.
Take on new debts or make large purchases.
Cancel any current credit accounts.
Ask a creditor to lower your limit.
Remember, if you apply for a mortgage loan with an excellent credit score and the score goes down during the pre-approval or mortgage process, you may not qualify for the loan.
When you’re all done and the pre-approval is successful, your lender will give you a Good Faith Estimate, or GFE. This is a line estimate of what your general mortgage costs will be if you go with that lender. Now that you have it, there’s one final step to take.
14. Go to another lender and get pre-approved all over again.
You’re not done yet. Mortgages are too expensive to take the first offer. Get out there and do some comparison shopping, using those GFEs as your guide.