3 Home Buyer Financing Lies

September 21, 2011 By 1 Comment

#1 – Buyers need 20% cash down to buy a home

Did you know that some buyers can still buy a home with NO DOWN PAYMENT?  The USDA Rural Development and Department of Veterans Affairs loan programs both offer 0% down payment options.  In the case of the USDA, it is income and location restricted.  For VA loans, active military and veterans are often eligible based on their time, type and years of service.  There can also be some smaller local programs with very specific criteria that can get you close to no down payment too – the Minnesota Home Ownership Center has a great list of affordable loan programs.

For those that do not qualify for one of the programs above, there’s good old-fashioned FHA financing.  For years this program was forgotten but with the tighter lending standards of today, FHA has come back into vogue big time.  In the Twin Cities, loans amounts up to $318,550 can be financed with only 3.5% down payment through the FHA.  Loan limits for other areas are available here.

One more thing to keep in mind is that FHA & VA loans may be assumable by the next borrower (with qualifying) and thus if rates are 7% five years from now and a homeowner can offer the remainder of their loan at 4%, buyers will be lining up to take advantage of that deal!

#2 – Buyers have to have perfect credit

Today people need to be able to demonstrate a history of managing their credit well – i.e. making payments on time, having other loans/credit cards, etc.  They also need to have a stable career, which typically means 2 years of job history in their current line of work (schooling is taken into account for recent grads) and have a few bucks in the bank for unexpected surprises.

From my conversations with several different lender friends, today’s lending requirements are still less strict than they were in the 1990′s.  So in the greater context of home financing in the last couple decades, it is still easy to get a loan if you are actually equipped to handle such a responsibility.

What has really made life tougher is that now each loan has no margin for error.  Each loan application is being reviewed, re-reviewed and reviewed again.  The underwriting department will often come up with what seems like crazy requests for documenting every last item of your credit and income.  Unless you lied or “forgot” to mention something on your credit app, nearly all buyers are still making it to the closing table.

#3 – Banks are not lending money

Banks are lending tons of money.  If banks wanted to lend less money they would simply raise the interest rates they offer to decrease the number of loans people request – simply not lending money doesn’t make sense.  Even though mortgage rates are around 4% on a 30 year fixed rate loan, banks are only paying people .25% for their deposits – there is still money to be made!  Further, many loans are sold off to others and thus free up the bank to re-lend that money again.

If you are qualified buyer (see #2) and are having trouble getting a loan, I’ve got a bunch of lender friends that would be happy to help you!

Filed Under: city grants, General, Info for Buyers, Media, Opinion, special financing

Jumbo Mortgages Are No Fun

October 20, 2010 By Leave a Comment

#1 – Jumbo Mortgages are Illiquid Assets Right Now

The secondary market for jumbo loans has largely dried up, which has reduced availability, tightened debt-to-income (DTI) and loan-to-value (LTV) ratios, and increased the interest rates on these loans.  None of this helps the demand for or sale of housing.  Adding liquidity to this market would spur sales and increased sales of real estate has ancillary benefits for the economy in terms of consumer spending.  Government intervention could help fix a broken market until such time as normal activity and liquidity comes back.  At that time the need for government participation in jumbo mortgages could be re-evaluated.

#2 – Jumbo Mortgages are not Just a Niche Product for the Ultra-Rich

The Regional MLS of Minnesota (covering the greater Minneapolis/St. Paul region) reports 2600+ sales over $500,000 in 2008, but under 1900 in 2009 only 1600 in the first 290 days of this year. Nearly 3500 listings are active today – about a 22 month supply!.  Homes priced over $500,000 are likely candidates for jumbo mortgages as conventional loans max at $417,000.

#3 – Having Fannie Mae and Freddie Mac Purchase Jumbo Mortgages Would Free up Billions for Mortgage and Business Lending

Since banks can’t find anyone willing to buy jumbo mortgages right now, they have to hold those loans “in-house” for now… which means that they cannot lend that money out to anyone else.  In the past, banks have been able to package these loans and resell them in the market (mortgage-backed securities (MBSs) and Collatoralized Debt Obligations (CDOs) are the common terms for this and while these are also the financial instruments that have caused so much pain in the financial industry, it was in how they were rated and put together, not the practice itself, that caused the problems.

Of the 1600 sales over $500,000 that occurred in this market so far in 2010, the total sales price was just over $1.25 Billion. That’s a huge dollar amount.  Now even though many of those sales probably did not need financing or were only partially financed and done using conventional financing, I think it would be fair to guesstimate that half a billion dollars was financed using jumbo mortgages that banks cannot resell in the current market… that means there was $500 Million that banks couldn’t re-loan out to other consumers or businesses. Now imagine the total if you added up those numbers across the country!

#4 – Expanding Fannie Mae and Freddie Mac’s Purchasing to Include Jumbo Mortgages Doesn’t Cost the Country Money

Fannie Mae and Freddie Mac right now ARE using government monies to help stay afloat in this time of crisis but when mortgage risk is properly priced and properly managed, as it was for many years, the business of buying and holding mortgages is quite a good business.  While Fannie & Freddie would need the cash right now to purchase the jumbo loans, that money would almost certainly come back to the US Treasury after the housing market and economy have started to grow again, so this would be a LOAN instead of a GIFT.

Adding Fannie Mae and Freddie Mac as buyers of these mortgages would bring down the interest rates of them as it did with conventional mortgages, which dropped almost a full percentage point in interest rates when the government stepped in to help Fannie and Freddie buy more loans.  This is because the rates were artificially high due to slack demand from mortgage bundle buyers and once that demand came back, the rates adjusted accordingly.  It is very likely we could see the same thing in the jumbo market, which would make higher-priced homes more affordable and bring more buyers forward who have been sitting on the sidelines due to the currently unattractive jumbo mortgage rates.  This would spur even more sales but because it is based off of basic market principles, I don’t see this as an artificial inflation of the housing market.

Filed Under: Community Issues, Info for Buyers, Opinion, special financing Tagged With:

Minnesota Offers $2 Million in Energy Saver Rebates

September 30, 2010 By Leave a Comment

An additional $2 million in Energy Saver Rebates is available for homeowners who install eligible energy-saving home improvements. These improvements must be financed using a Fix-up Fund loan, which allows homeowners finance the cost of making energy efficient upgrades.

Rebates up to $10,000 are available for application on a first-come, first-served basis. More information and an Energy Saver Rebate application are available at www.mnhousing.gov. Or call Minnesota Housing at 651-296-8215 or 800-710-8871.

Filed Under: Energy Efficiency, special financing, tax credits

8 Predictions for 2010 Twin Cities Housing Market – August Update

August 24, 2010 By 3 Comments

Below you will find my predictions from a January 7, 2010 blog post and my comments on each of those predictions as of August 24, 2010:

  1. Foreclosures will continue to come on the market and many will be scooped up quickly with multiple offers.
    Correct!  This has been the case so far this year, though this was certainly the easiest prediction I made – the months supply of foreclosures is still very low – 2.8 months currently – but has ticked up a little in the last few months.  Unless we see 4+ months supply though we’re still likely to encounter many foreclosures with multiple offers.
  2. The “next wave” of foreclosures won’t show up till AT LEAST July – and likely later than that since there has been no uptick in sheriff sales yet.
    Correct! HousingLink’s data shows foreclosures are increasing in numbers in the last few months but there is no huge wave of foreclosures yet in view – the activity is elevated from 2009 levels but not yet at 2008 levels.  We may see 2010 end with the highest number of sheriff sales on record but it won’t be that much higher than 2008′s.  New bank owned (REO) properties hitting the MLS are still down 10% versus last year at this time but we’ll see that number tick up some as the sheriff sales from the 1st half of the year get listed for sale in the 2nd half.
  3. Short sales will also continue coming on the market but we’ll see more of them successfully close.  Some banks will learn how to get short sales done quickly but some will still take months to even reply.
    Correct!  New short sale listings have largely flattened out.  Short sales are a larger percentage of our sales each month than they were a year ago – depending on the month approximately 1 in 8 closed sales is a short sale.  Some banks are responding a little quicker but it is still taking 3-5 months for many to respond.
  4. Mortgage rates will be in the 5% – 6%, with rates climbing as the year goes on.
    Wrong!  I’m thrilled I was wrong on this one – interest rates have actually been sinking and I’ve seen some quotes for 30yr fixed rate mortgages in the 4.25% range in the last month!
  5. Mortgage underwriting standards will continue to tighten, meaning soon you will need to go through one of those airport naked-cam scanners to get approved for a loan, and then need to have your whole family go through one for a 2nd screening 2 days before closing.
    1/2 Correct: While the Minneapolis/St. Paul International Airport is in the process of rolling out the full-body scanners, luckily lenders have not.  Lending guidelines have softened a little on the higher-end – down payment requirements are a little lower and interest rates on jumbo loans have definitely improved. Lending rules in general have continued to tighten though – and the FHA mortgage product in particular – has gone through several changes.
  6. Median sales prices will remain flat or tick up slightly - foreclosure prices are at their bottom but short sales and traditional sellers will likely drop a little further but higher-priced homes will be selling in greater numbers, pushing the Median up.
    Correct!  The tax credit expiration has skewed all these numbers for a few months but in general this trend is right.  Take a look at The Thing for your own take on house prices.
  7. The $1M+ housing market will still be very slow and the $500k-$1M will only improve slightly – since jumbo mortgages are still tough to get these houses have fewer potential buyers.
    Correct: The higher ends of the market are starting to loosen up some with the improved lending options I mentioned above – inventory in the higher price points has fallen and the $500k+ year over year sales activity is relatively flat, which is better than some of the lower price points.
  8. Total inventory on the market is likely to continue its 2009 fall (20% in 2009) – dropping to numbers we haven’t seen since 2005.
    Wrong!  We were on the right track with this till the tax credit expired and now we are adding inventory at a healthy clip.  The good news is it isn’t more sellers listing properties that’s the problem – it is that fewer buyers are buying.  Much of this is likely attributable to the tax credit expiration but we are not sure how much.

Based on my own scoring of my predictions, I stand at 5.5 out of 8 correct, which I don’t consider too bad considering how unpredictable this market has been so far this year.

What do you think about my predictions?  What do you see happening in the housing market?

Filed Under: Community Issues, Crystal Ball Projections, Foreclosures and Short Sales, Info for Buyers, Info for Sellers, Market Stats, Mortgage Rates, Opinion, Personal Experiences, Short Sales, special financing, tax credits Tagged With:
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