Two new changes to the mortgage lending market are about to go into effect that will help make it a bit easier to obtain a mortgage. The first change is that Fannie Mae and Freddie Mac are raising their debt-to-income ratios to 50% from 45%. This change goes into effect July 29th. “In this case, we’re changing the underwriting criteria, and we think the additional increment of risk for making that change is very small,” said Doug Duncan, Fannie Mae’s chief economist. “Given how pristine credit has been post-crisis, we don’t feel that is an unreasonable risk to take.”
I agree with this change. 8 years ago anyone could obtain a mortgage and it lead to the real estate and mortgage crisis. But like anything the market over corrected and the criteria became too strict. A little loosening up is needed. Obviously we don’t want to go back to just needing a pulse to obtain a mortgage but going to 50% on the ratios for borrowers with good credit and reserves makes sense.
The 2nd change is that the nation’s three major credit rating agencies, Equifax, TransUnion, and Experian will drop tax liens and civil judgments from some consumers’ profiles if the information isn’t complete. Your first response might be, “What? That’s crazy!” But I can’t tell you how many incorrect credit reports I have had to deal with over the years with these issues. It seems like once a month we will have a customer with a judgement or lien that has been paid off but still remains on their credit report. This will no longer be the case. If the credit agency can not verify the lien then the lien cannot go on the report. That makes sense to me.
Both of these rules seem like common sense decisions. I applaud Fannie, Freddie, and the credit agencies for evaluating current lending criteria and making smart changes.
Over the last few weeks I’ve had a few sellers balk at receiving an FHA contract and a VA contract. In both instances I had to reassure the agents to communicate to the sellers that the borrowers were strong and that there is basically little difference in an FHA or VA loan compared to a conventional loan as far as speed and difficulty. Below I break down the 3 different types of loans in terms of processing times and the appraisals.
Processing and closing times: Basically, there is little to no difference in how long it takes to process and close a conventional loan compared to an FHA or VA loan. All 3 types of loans are underwritten and closed by the lender and do not have to go to FHA or VA to be processed or underwritten. When sellers complain that they do not want to accept an FHA or VA loan because it takes longer to close, let them know it is just not true. Also, all 3 loans use computerized underwriting modules. Once the loan is approved by the underwriting module then it is up to the lender to gather the conditions. The FHA and VA conditions are no harder to obtain than the conventional conditions. If the processing and closing time are taking forever then blame the lender, not the program.
Appraisals: As far as value, all 3 programs use basically the same criteria to obtain their values. It will be based on past sales that are similar to the actual home being sold. The same appraiser will get the same value under all 3 programs. Different appraisers might get different values on the same home but not because it was an FHA or VA compared to a conventional. It will be because one appraiser used a different comparable or used a different adjustment than the other appraiser used. The only real difference you will see in the appraisals under the 3 different programs will be that FHA is a bit more strict when it comes to detail. FHA has to check to see that all the mechanicals and kitchen appliances are working and has to inspect the attic and crawl spaces. Plus for homes built prior to 1978 they need to check for chipping and peeling paint. That doesn’t mean that a conventional appraiser will not point these items out but an FHA appraiser has to.
So to recap. If you are an agent then let your sellers know that there is little to no difference in an FHA or VA loan compared to a conventional loan. And if you are selling a home don’t be concerned about the type of loan in the contract, be concerned about what mortgage lender the borrowers are using. The lender is much more important to the speed of the transaction and getting to the closing table than the program being used.
Every 6 months or so I give my rate predictions for the coming 6 months. As I’ve stated in previous blogs, the FED has been eager to raise rates for the past couple of years. But the economic numbers have just not supported the increases they would like to make. Since Trump was inaugurated the FED has raised the Fed Funds rates twice, each time increasing .25%. In general, the FED believes Trump’s policies of less taxes and less regulations will create greater growth in the economy. This increase of .5% in the Fed Funds rates has driven 30 year fixed mortgage rates up about .75%. Currently the Freddie Mac weekly rate average is 4.1% with .5 points up from 3.42% on October 6th.
So where will we be by years end? I see this upward trend continuing. The FED is just itching to keep raising the Fed Funds rate and it will not take much for them to pull the trigger. If Trump gets his wish of lower taxes I believe the Fed will raise right away. One of Trumps biggest campaign promises is to get the economy robust again. If he succeeds with his agenda and lowers taxes (personal and corporate) the economy will accelerate and the FED will raise rates 2 to 4 more times this year. My prediction is that 30 year fixed rates will be hovering around 5% by years end.
Before you start yelling at me about ‘oh no, here we go again’, hear me out on this. The biggest obstacle I see with first time home buyers and move up buyers is the money it takes for a down payment. First time home buyers are obviously cash tight and move up buyers are having the same issues because their current home has not fully recovered from the real estate recession of 2008. They are not necessarily upside down with the equity in their home but they are strapped. After paying the realtor fees and closing fees a lot of these borrowers need the option of a no down payment loan. If Fannie and Freddie would come up with a good no down payment mortgage I believe this would jump start housing and really bolster the economy and help everyone.
So many of the customers I prequalify have good jobs, good credit, but no money. After hearing that they will need at least 3% to 3.5% to buy a home they give up the process. My suggestion is that Fannie and Freddie develop a program for these borrowers. I would like to see at least a 700 credit score with no more than a 45% back ratio (monthly mortgage payments and debts divided by monthly income). I also would not have an income limit or have it restricted to just first time home buyers.
Here are the reasons this program would be different than the zero down payment loans that were available in the mid 2000’s that helped create the real estate crisis. First of all, we now have QM (Qualified Mortgage) and ATR (Ability-To-Repay). Both of these rules were put into place to make sure borrowers can afford their mortgages and both rules eliminated certain features that lead to risky loans and higher default ratios (interest-only, negative amortization, balloon features, stated income, etc). I can remember back in 2005 there were mortgages available that were zero down, stated income, interest only, with 680 credit scores. And if you could prove your income then you could get a no down payment loan with as little as a 580 credit score! Talk about a train wreck. The only thing this new loan would have in common with the loans of 2005 is the zero down. The income would be verified, ratios limits would be followed, and credit scores would have to be high.
I understand peoples trepidation and hesitancy with the zero down payment mortgages. But, if handled in the correct way, these loans would be a big boost to the housing market and overall economy without increasing the risk of another real estate crisis.
It has been reported that Donald Trump may issue an executive order freezing a number of actions by the Obama administration including reducing the monthly FHA mortgage insurance premium. The premium cut was supposed to take place January 27th reducing the monthly mortgage insurance to .6% from .85%. Assuming Trump signs the executive order, this will give the new HUD secretary, Ben Carson, time to review the mortgage insurance reduction and make a decision on whether it should take effect. We will keep everyone updated on what transpires.
Starting January 27th, FHA will lower their monthly mortgage insurance to .6% from .85%. On a $200,000 mortgage that would be a reduction of approximately $41 a month. It looks like we are starting to see the housing and mortgage market remove the roadblocks of first time home buyers. Although FHA is not solely a first time home buyer program, it does help first time home buyers get into the housing market by offering a 3.5% down payment option.
This is the 2nd sign we’ve seen this year that the powers that be look like they are all in for kick starting the housing market and getting the economy moving. Yesterday I posted a blog about Freddie Mac offering a new 1% down program and now FHA reduces their monthly mortgage insurance. These both look like positives signs. I will continue to keep you abreast of any new changes that occur in the mortgage and housing markets.
Freddie Mac has come out with a new program designed to help more borrowers obtain financing with lower down payments. Since the real estate crash of 2008 Fannie Mae and Freddie Mac have increased their down payment rules. It now looks like it’s starting to soften a bit. Under this new program the borrower only has to contribute 1% down payment which can come from their own funds or a gift. Below are some of the parameters of the program:
- Minimum 700 credit score.
- Maximum debt-to-income ratio of 43%.
- 3% seller concessions for closing cost and pre-paids.
- Program available with or without monthly mortgage insurance.
- Borrower can not make more than 100% of area median income (roughly $77,000 in Albemarle County).
This should help open up the first time buyer market. While FHA has been consistent with the 3.5% down program and Rural Development is available in rural areas with 0% down payment, it is now nice to get Freddie back in the ball game!