Last year, the Federal Reserve took action to try to bring down inflation. In response to those efforts, mortgage rates jumped up rapidly from the record lows we saw in 2021, peaking at just over 7% last October. Hopeful buyers experienced a hit to their purchasing power as a result, and some decided to press pause on their plans.
Today, the rate of inflation is starting to drop. And as a result, mortgage rates have dipped below last year’s peak. Sam Khater, Chief Economist at Freddie Mac, shares:
“While mortgage market activity has significantly shrunk over the last year, inflationary pressures are easing and should lead to lower mortgage rates in 2023.”
That’s potentially great news if you’re a buyer aiming to jump back into the housing market. Any drop in mortgage rates helps boost your purchasing power by bringing down your expected monthly mortgage payment. This means the lower mortgage rates experts forecast this year could be just what you need to reignite your homebuying goals.
While this opens up a window of opportunity for you, remember: you shouldn’t expect rates to drop back down to record lows like we saw in 2021. Experts agree that’s not the range buyers should bank on. Greg McBride, Chief Financial Analyst at Bankrate, explains:
“I think we could be surprised at how much mortgage rates pull back this year. But we’re not going back to 3 percent anytime soon, because inflation is not going back to 2 percent anytime soon.”
It’s important to have a realistic vision for what you can expect this year, and that’s where the advice of expert real estate advisors is critical. You may be surprised by the impact even a mild drop in mortgage rates has on your budget. If you’re ready to buy a home now, today’s market presents the opportunity to get a more affordable mortgage rate, find your dream home, and face less competition from other buyers.
The recent pullback in mortgage rates is great news – but if you’re ready to buy now, holding out for 3% is a mistake. Work with a local lender to learn how today’s rates impact your goals, and let’s connect to explore your options in our area.
You’ve most likely heard the rule or had one of your friends give you the advice: save for a 20 percent down payment before you buy a home. The logic behind saving 20 percent is solid, as it shows that you have the financial discipline and stability to save for a long term goal. As with any financial plan, you have to look at the pros and cons and determine which benefits you more both in the short and long term. It is always advisable to discuss with your lender and your CPA to see where and how you can maximize the benefits.
Larger down payments can help you get favorable rates from lenders, but there can actually be financial benefits to putting down a smaller down payment, something as low as three and a half percent, rather than parting with so much cash up front, even when you have the extra money available.
The downsides of a smaller down payment are pretty well known. You’ll have to pay Private Mortgage Insurance for years and the lower your down payment, the more you’ll pay. You’ll also be offered a lesser loan amount than borrowers who have a 20 percent down payment, which will eliminate some homes from your search.
The national average for home appreciation is about five percent. The appreciation is independent from your home payment, so whether you put down 20 percent or three and a half percent, the increase in equity is the same. If you’re looking at your home as an investment, putting down a smaller amount can lead to a higher return on investment, while also leaving more of your savings free for home repairs, upgrades, or other opportunities.
THE HAPPY MEDIUM
Of course, your home payment options aren’t binary. Most borrowers can find some common ground between the security of a traditional 20 percent and an investment focused, smaller down payment. Your real estate agent can provide some answers and introduce you to a lender as you explore your financing options. Sitting down with the lender and discussing the finer details of your goals and your plans can help you make the best decision for you at this particular point in your life.
image courtesy of Mukumbura
You’ve found the home of your dreams, got it under contract, and are working with your lender to gather all of the documents they need to make your loan happen. It’s all going perfectly and you’re getting more and more excited by the day. Then the loan hits underwriting and suddenly you feel like you’re buried in paperwork requests. They need copies of this, letters explaining that, printouts of bank account statements from years ago – they ask for strange things that don’t seem related. It becomes a deluge of requests and you feel like just giving up – no house is worth all this paperwork, is it?
It can be discouraging to have to sift through all of your documents and scanning and sending and resending, but all of that paperwork is leading to your new home. Lenders will request things once, twice, three times…it can be a bit frustrating. The underwriter’s job is to mitigate the lender’s risk and part of that involves creating a papertrail so that there are no doubts about what they see when they look at your financial picture. Often it seems like they’re just harassing you, but they are just creating a file that documents why they felt it was an acceptable risk to give you that loan.
Prepare Paperwork for Your Lender in Advance
While you’ll never be able to predict everything the lender will ask you for, you can start preparing the paperwork long before you apply for the loan. Gather your bank statements, pay stubs, tax documents, loan information – anything reflecting your income and your debts. If you have some outstanding issues, know what they are. You can get a free copy of your credit report through www.annualcreditreport.com and check for anything that might show up. Do a household budget (you’ll be surprised where you can save some money!). The more documentation you have prepared, the better.
When the lender starts asking for paperwork, turn it in quickly. It can get a bit frustrating when they ask you for the same thing you’ve turned in 10 different times – just take a breath and resend it. The quicker you turn those items in, the quicker someone can review them. Sometimes there will seem that there is no rhyme or reason to what they’re asking, but to them it makes perfect sense. Don’t question it, just send it in and ask if they need anything else.
image courtesy of isaacbowen
If you’ve ever bought a house, you’re probably familiar with hearing “your loan is in underwriting” and then playing the waiting game until it “comes out of underwriting.” It’s one of the steps in the process of getting a loan and often one of the most frustrating. But what exactly is underwriting?
According to the information given by a loan service (check out their company site), underwriting is viewed as a mystical place where loans go somewhere between the time of preapproval and final issuance of the loan documents. Underwriters are kept in secret and you’d be surprised to know that many real estate agents have never met an underwriter face to face (or if they did, they didn’t know it). Loan underwriting is truly a world shrouded in mystery and for good reason – if we all knew our underwriters, it would be very easy for agents to poke and prod an underwriter to get things done. Underwriters would be under a daily assault of phone calls from agents trying to find out where they were in the process and in effect, would be rendered unable to do much more than answer the telephone. This is why lenders keep them locked away in dark caves in highly classified locations.*
Merriam-Webster Online Dictionary defines underwriting as follows:
underwriting – transitive verb
4 a : to agree to purchase (as security issue) usually on a fixed date at a fixed price with a view to public distribution b : to guarantee financial support of (underwrite a project)
What’s Taking So Long? Underwriting.
To put it simply as suggested by Derwent Finance, the underwriter looks at all the supporting documents and says “yes, I think this is a safe loan to make, let’s do it.” Of course they can say the opposite too. This is how some people get preapproved, yet wind up getting turned down for a loan. The underwriter is pretty much all powerful when it comes to you getting your loan. Because of their ultimate power, you and your real estate agent need to pay special attention during the underwriting process.
According to my friend, who wrote a recent Kiva loans review, it all boils down to this: if the underwriter asks for something, you as a homebuyer, better do it. They will ask for ridiculous things at times. Doesn’t matter. They’ll ask for copies of things you’ve sent them four times already. Doesn’t matter. They’ll ask you to move a comma in a sentence in a document you have sent to them. Doesn’t matter. They’ll ask for more information on something you’ve already documented to death. Doesn’t matter.
Underwriting is about the lender covering all their bases – all that documentation you send in stays in a file and if something ever goes wrong (you default on your loan), the investor will want the lender to justify their underwriting of the loan such as poor credit loans.
Underwriting can be a nightmare for a homebuyer (and a seller as well – the longer underwriting takes, the more nervous they become), but by being proactive and jumping through the hoops, you can get your loan in and out much faster and save some of the headaches caused by underwriting. Typically, your agent will also know what the underwriter needs to complete their job, so they may bug you about it too – the key? Get it done. Right away. Don’t put it off and don’t frustrate yourself with trying to find the answer to “why are they asking for this?,” they have their reasons and it doesn’t really matter what they are (although we can discuss them to death, the underwriter will still want them).
Of special note: it pays to have a local lender for your loan, because they often have better, more direct contact with their underwriting departments and can often help a file through the process by being able to have direct access to the underwriter should a problem arise. With some of the larger banks, their loan processing centers might be halfway across the country and you lose that personal one-on-one interaction between your loan officer and underwriter that can help get things done.
* We have no actual proof that lenders keep underwriters locked in caves or that underwriting is actually an ancient mystic art involving a combination of wizardry and voodoo.
image courtesy of GotCredit
I need some closing costs paid by the seller, but how much?
It is common for buyers to want assistance with closing costs when they are getting ready to purchase a home. Remember that closing costs are separate and above the amount of down payment required by the lender to get a loan on your new home. What do a buyer’s closing costs consist of? Buyer’s closing costs are a combination of a portion of the title policy, the appraisal fee, tax and flood certificate fees, title fees such as recording, escrow, delivery, copy and recording fees, HOA transfer fees, and possibly a few other negotiable fees such as the cost of a survey.
Closing costs are also different than prepaid items. Prepaid items usually consist of one year’s worth of homeowners insurance, and a minimum of three months of property taxes to be held in escrow.
How much in closing costs can a buyer ask for while negotiating their offer with a seller? The amount is always negotiable, but the following rules apply depending on the type of loan the buyer is using.
With a conventional loan with 5% down payment, the most in closing costs they can ask a seller to pay is 3% of the sales price. If they are putting 10% down with a conventional loan, the seller can pay up to 6%. If the buyer is doing an FHA loan, the seller can pay up to 6% of the sales price in closing costs. And if the buyer is using a VA loan, the seller can contribute a maximum of 4% in closing costs.
These are great numbers to use as a guideline when considering how much you will require as a buyer, and also what the maximum amount you could ask for in assistance toward closing costs from the seller.
image courtesy of zzzack
Is a 15 Year Mortgage the Right Choice?
So, right off the bat you must be thinking – what on earth can 15 year mortgages and tapioca pudding possibly have in common? And you’re right – at first glance there isn’t much, but as you dig deeper the similarities will surprise you and do completely read what he said about it and how it sinks into real life.
Tapioca pudding is a sweet pudding desert thickened by man-made tapioca pearls. Tapioca does not occur naturally, but must be processed from cassava root. Most recognizable are the tapioca pearls that are a staple in both tapioca pudding and in the increasingly popular Bubble Tea. Tapioca has been around for quite some time and was quite popular in the 18th and 19th centuries, particularly because the starchy tapioca pearls were an easy thickening agent and partly because they were easy to digest. Often, they were prescribed to the very young or old and infirm with digestive problems. Tapoica pudding saw a rise in popularity in the US in the 1960s through the 1980s and then fell off the culinary bandwagon for a while. However, we are seeing a recent resurgence in its popularity in modern times again.
The 15 year mortgage also has a history of rising and falling popularity with a slight increase in interest in the current market. By far, the most common term of a residential mortgage is 30 years. Interestingly, most people stay in their homes for fewer than 10 years (3-5), so for some, 30 years seems daunting. The prospect of not being able to fully pay off a mortgage may be difficult for some to digest (see what I did there?), so the concept of a shorter term mortgage was invented. Generally the qualifications for this type of loan are stricter (higher credit scores and tighter debt to income ratios) and that’s because payments are higher (you’re paying twice as fast) and lenders earn less on interest because of the faster payoff. Lately, we’ve been seeing these type of loans taken out by investors, on second home purchases, and on later in life home purchases.
But the 15 year payments mentioned on this website, may not be palatable by just anyone. Your finances may support paying more now, but if you’re uncertain about your job or reluctant to over commit “just in case,” a 15 year mortgage may not be the right avenue for you. Consider making additional payments on your 30 year mortgage instead (just make sure they are applied to principal only). Doing one additional full payment per year could decrease your actual mortgage payoff time from 30 years to as little as 20 or more! When it comes to protecting your system and data you can opt for a security that can protect from ICS and OT security threats.
Much like there is a time and a place for tapioca pudding, 15 year mortgages might not be the perfect fit for everyone’s financial situation, but in both cases, variety is the spice of life and simply knowing more about the many unique and unconventional options available to you may just help satisfy you completely. Need someone to help you find the right recipe for a successful real estate transaction? Let John Alaniva show you the proof in his pudding.
image courtesy of Presagio