What Is The Impact Of QM On The Housing Market

If  you are in the Real Estate industry chances are that you have hear about the new QM or "Quality Mortgage" rules from the CFPB. If you have heard anything about the new rules, chances are you have also heard about the impending destruction that it is going to wreak on the improving but fragile housing market. So what is the verdict, should you be losing sleep over the new rules? I'll break them down below.

What is a Quality Mortgage

A quality mortgage is any mortgage that meets the new guidelines for Ability to Repay (ATR) as published by the CFPB. The reason why anyone should care about the rules published by the CFPB is because by meeting the guidelines in their rules, lenders are afforded some degree of legal protection from lawsuits. Predictably we are seeing lenders state that they will only be writing quality mortgages once the rule takes effect on Jan. 10th 2014. In addition to the QM rules there is a special set of rules to qualify for "Safe Harbor" which means that a lender is completely protected from lawsuits on their loans and being forced to buy back any portion of their loans. Again lenders are flocking to the protections of safe harbor as congress hoped would be the case.

What is About to Change

The thought of change has many people panicking, so what changes should you be expecting? In the short term, not much. The main difference with the new rules is that the maximum fess that a buyer can pay are dropping from the current 5% down to 3%, which in certain price ranges can be problematic, but there is a very easy way around the fees, any closing costs paid by the seller are not calculated into the 3%, seller contributions therefore, will be a big part of contracts going forward. If you are a buyer and you want to make sure there are no issues with the 3 % bump up your offer by a couple of thousand dollars and include the raise in the offer as seller contributions. If you are a listing agent, prepare your seller that they may want to price a seller contribution into the listing.

Aside from the 3%, the other changes are as follows there is now a limit on the APR in order to qualify for "Safe Harbor" the APR cannot be more than 1.5% over APOR (Average Prime Offered Rate), the easiest way to make sure this isn't an issue, use seller contributions to pay the fees that are calculated into APR.

There is also likely to be a reduction in total Debt to income ratio to 43% down from 45% on conventional loans. The reason I say likely is because any loan that is eligible for sale to FNMA, FHA, VA or USDA is automatically considered "quality" and "safe harbor" for either the next 7 years or until the Freddie and Fannie are out of conservatorship or until they write their own policy for QM. FHA has already done this, adopting the 3% fee limit and the APR restriction modifying it a bit to include the APOR + 1.15 + MIP. FHA has decided to ignore the guidance on the DTI as they feel it will not allow them to fulfill their mission of helping under-served markets. I am speculating that Fannie and Freddie will both institute the 43% DTI limit, but they have yet to do so.

What's the Bottom Line?

The bottom line is that for all the talk of damage to the market, things are not going to change significantly for those who were underwriting loans for sale to Fannie , Freddie or any of the government agencies,which is just about everyone I know, The place where I could see an impact would be on Jumbo loans not eligible for sale to Fannie or Freddie, but typically Jumbo loans must meet tighter guidelines already than those that are included as part of QM.

If there is any change that needs to be considered, it will be to include seller contributions more readily in the contracts to avoid Fees limit and APR threshold.

Pre-qualification vs Pre-approval

Here in my local area, houses that are reasonably priced and in reasonable shape are flying off the market, over the past year we have transitioned from a buyers market to a sellers market, there is a lot of competition among buyers for quality properties and as such you want to be able to submit the strongest offer that you can. In order to do that, it helps to understand the difference between a pre-qualification and a pre-approval .

Pre-qualification

This is the process that most buyers go through, they speak to a loan officer, reveal as little as possible and get a pre-qualification letter to show their realtor in order to start viewing houses and submitting offers. The quality of the pre-qualification depends greatly on several factors

1. Honesty of the buyer
   many times the pre-qualification can be done without seeing any documentation at all, the loan officer just takes what the buyer says at face value. Most times, this is perfectly fine as the potential buyer is honest and up front with the loan officer, however there are times especially when dealing with a buyer that last purchased a house in the 2006 - 2008 range and experienced stated income, stated assets loans that this can be problematic.
2. The Loan Officer's knowledge in several area's
1. Agency Guidelines
   The loan officer better have a good handle on what FNMA, VA, FHA Freddie Mac or whoever the loan is going to be insured by will allow and what type of documentation is required
2. Lender Overlays
   Just because FNMA or FHA will allow something does not mean that the lender the file will be submitted to will actually accept the documentation. Many times the lenders are more restrictive than the agencies and will require additional documentation or have additional restrictions.
3. The Underwriters they are working with
   This is especially true in cases where you are looking for some sort of exception, or are looking to overcome a poor credit history or high DTI. The agency guidelines tend to give underwriters a lot of discretion when there is a buyer that doesn't meet the ideal credit profile usually citing "strong compensating factors" to ignore a rule or allow a slightly higher tolerance on a qualification parameter. This is a highly subjective phrase, and it helps to know the people that will be reviewing the file to get a gauge for what they consider "strong"

Pre-Approval

Pre-Approvals are different in that they alleviate many of the issues facing a borrower with a pre-qualification letter. For instance in order to obtain a pre-approval, the documents backing up the claims of income and assets must be submitted, this ensures that borrowers are not trying to stretch the truth a bit in order for their application to look stronger. Also we must remember that most borrowers don't know how the lender will view their situation, for instance a lender looks at w-2 income vastly different than 1099 income. Many times a potential buyer will come in after a recent promotion and thinking they are ready to purchase home come in and say I make x amount per moth, and when we receive the documentation we realize we can only count 1/3 of that income because it must be averaged over 2 years. The requirement that the documents be reviewed by an underwriter eliminates any stretching of the truth , intentional or otherwise

Also an underwriter will have reviewed the file, they have already looked at their guidelines and made any decisions on potential exceptions or extenuating circumstances, there is no ambiguity regarding what a given underwriter may think regarding a situation, you already have a decision and condition list to know what you need to obtain for a final approval.

Here at Freedom we will produce a loan commitment with out pre-approvals making the buyers offer stronger as you have basically eliminated the need for a financing contingency, we don't have to worry about obtaining a loan commitment in 10 or 15 days, A loan commitment has been submitted with the offer.

Review

The pre-qualification is a good fast and easy way to know that the potential buyer at least has a decent shot at good shot at obtaining financing. The difference is basically a prequalification says my loan officer is confident he can convince an underwriter to get me a loan, the pre-approval says my underwriter has said I can have a loan once I provide these conditions. I have been told that FNMA is now requiring pre-approvals in some cases and with the competition that is out there in this market it can only help your chances of securing a contract on the house you desire. There really is not a downside to the pre-approval process, if you start there, I am typically receiving loan commitments on the business day following submission of the application and correlating documents.

If your lender offers a pre-approval process I highly recommend it, I can't speak for every lender out there but for Freedom Mortgage the process is fast and free, and besides if the Loan Officer you are working with thinks enough of your file the submit it for a pre-approval than if the house of your dreams comes available while you are waiting for the loan commitment, there shouldn't be any issues in getting a pre-qualification letter to fall back on.

Fannie Mae Homepath Program Explanied

The Fannie Mae Homepath loan program is a great option for the right type of buyer. How will a buyer know if the Homepath loan is the correct program for him? Let's examine a few distinct features of this program to help determine who it benefits the most.

Features

No Monthly Mortgage Insurance

This is usually the biggest selling point for a FNMA Homepath loan. Most times it is advertised as "No Mortgage Insurance" while this is technically true it is a bit misleading, while there is no monthly mortgage insurance premium that you will pay, there are Loan Level Pricing Adjustments (government mandated fees, based on the riskiness of the loan), which are typically going to land you with the highest interest rate available for that day, plus additional closing costs depending on the occupancy of the property, so while you are not stuck with a mortgage insurance payment for the life of the loan (like with an FHA loan), you are paying a higher interest rate for the life of the loan. Generally speaking the difference in the interest rate between a standard FNMA loan and a FNMA Homepath loan is less of an increase in the monthly payment  than monthly mortgage insurance would be. However even though it is not labeled as mortgage insurance you are effectively paying an upfront mortgage insurance fee in the form of Loan Level Pricing Adjustments and monthly mortgage insurance in the form of a higher interest rate.

For the right borrower, this is acceptable and even advantageous. 

No Appraisal Required

This is one area that Homepath can save some money, an average appraisal at  least in my area runs between $400 - $500. A Homepath Loan does not require an appraisal and uses the contract price for the value of the home.

When Does a Homepath Loan Make Sense
There are several scenarios in which it would make sense to consider a Homepath Loan

• A borrower with a high credit score, that would like to keep more of their money in their bank account rather than put down 20% to avoid mortgage insurance on a primary residence. Let's put this into numbers, let's assume a loan amount of 200k for easy math, a borrower with good credit would have to put 40k down to avoid mortgage insurance, with a homepath loan they could put down 5%  or 10k and pay about 50/month more for their mortgage, this could make sense to a borrower if their 30k is worth more to them than 50 monthly. Especially if the house they are purchasing is viewed as something that they will want to upgrade from in a few years.
• A borrower that wants to purchase an investment property that doesn't have enough money in the bank to put 20% down. Investment properties cannot have mortgage insurance on them, so the only option most of the time is to put down 20%, with the Homepath program a borrower can put down 10% and still avoid mortgage insurance. Even considering the loan level pricing adjustments for an investment property on a Homepath loan, the 10% plus additional fees is still likely to be around 12-13%. This makes Homepath properties attractive for investors who would rather spread their assets across multiple properties
• If a borrower wanted to avoid an appraisal for any number of reasons, the Homepath loan is a good solution. If the borrower is willing to pay the asking price for a Homepath eligible home, but is worried that the house will not appraise for the asking price, then the Homepath Loan is a good option. If  a home inspection was completed, and the property needs some work, but the borrower is comfortable purchasing the house then making the repairs, the Homepath loan is good, because any issue that is noted by an appraiser will need to be resolved prior to closing. If there is no appraisal done, then there is no potential for improvements to the property being a condition to getting an approval on a loan.

These are just a few examples where the Homepath program would make sense for a borrower to make use of. Keep in mind that Homepath loans are only available on Fannie Mae owned properties that are Homepath eligible. Homepath loans are not required on Homepath eligible properties and are sometimes not the best option even when available, however for the right set of circumstances it is a fantastic product. Speak with your mortgage professional to ensure that the program makes the most sense in your given situation

When Purchasing A Home, Where Do I Start?

I hear customers saying all of the time, "what do I do first?". This may not surprise you coming from a mortgage professional, writing on a blog called Florida Mortgage Pro, but the absolute first thing that you want to do is talk to a mortgage professional, even before a Real Estate Agent and here is why.

Start With a Mortgage Person?

I believe that you should start by seeing a mortgage professional for the following reasons, and I believe that many Real Estate Agents would tell you the same. Speaking to a mortgage pro first will have many benefits, the following are just a few.

1. Realistic Expectations: Nothing makes the home buying process more frustrating, than seeing a house that you love, only to find out it is above your price range. Every house that you walk through afterward is compared to the house that you loved, but couldn't afford. It is likely that any house with similar features will be similarly out of the price range, and therefore any house within the price range will be missing features that you love about the house you cannot afford. It is better to look know what your price range is, and look at houses you can afford. Your loan officer can also give you the monthly payments for different loan amounts, it may be that you qualify for $300,000 at 100% financing, but you are only comfortable with the monthly payment on a $150,000 loan. If that is the case you don't want to spend time looking at $300,000 properties, but you won't know that for sure, until you speak to a loan officer.
2. Pre-qualification or Pre-Approval: You are going to need at least a pre-qualification letter from a lender before any listing agent will take an offer you submit seriously, so it is better to have the letter ahead of time in case you quickly find a house that you love. Also a lot of the more experienced buyers agents don't want to spend a lot of time with you until you are pre-qualified as well and for good reason, if you cannot get a mortgage than you are wasting your own time as well as their time. Another benefit of seeing you mortgage professional first is, that if they offer pre-approvals like Freedom Mortgage does, you can obtain a loan commitment before you identify a property, this tells a seller and listing agent that they do not have to worry about accepting your offer only to have it fall through because you are unable to obtain financing. A pre-qualification letter means that a loan officer thinks he can get you a loan, a pre-approval with a  loan commitment means that an underwriter has said that you can have a loan based on your information.
3. Know Your Loan Options: Your sales contract is going to set the maximum amount of financing that the seller is willing to accept, your mortgage professional will be able to discuss with you the different loans that you qualify for and in your situation is it better to go with 80%, 90% or 95% financing, what are closing costs likely to look like? Are you a veteran, eligible for the VA loan? Is an FHA loan or Conventional loan better in your circumstances? You may want to take advantage of the USDA program and their favorable terms, but the program is not valid in all areas, you don't want to look at houses that will not qualify based on their location. These are questions that your loan officer will be able to answer and it helps to know them ahead of time, to make sure you are being effective with your time looking at houses.

While your real estate agent is going to be the person to help you find the house of your dreams, it is always wise to make sure that the house of your dreams, fits within the budget of your reality first. The only person that is going to be able to help you figure that out is your mortgage professional, especially in the market we are in right now with the interest rates being as volatile as they have been over the past few months.

What Documents Will I Need?

Your loan officer will be able to tell you exactly what documents their lender(s) will require but here are a few items that are pretty consistent across all lenders

1. Income Documentation: The days of "this is how much I make , take my word for it" are over, any income that is used to qualify you will have to be verified, Here are some quick guidelines.
1. Plan to bring you most recent paystubs at a minimum and all w2s and 1099's from the previous year, it is always a good idea to provide your loan officer with the previous years tax returns as well.
2. If you are commissioned or self employed, 2 years of tax returns, including w2s and 1099s
2. Asset Documentation: The days of "this is how much I have in the bank, take my word for it" are over, any assets you use for purposes of paying a down payment or closing costs are going to have to be verified
1. Most Recent Bank Statements
2. Statements for any investment or retirement savings that you will be drawing from for down payment or closing costs
3. Photo ID: Passport or Driver's License are the best.

Typically that is enough to get you started, but your loan officer will be able to walk you through any additional information that he or she may need.

203(k) Rehabilitation Loan, Is It For Me?

What is an FHA 203(k) Loan?

There seems to be a lot of confusion about the 203(k) loan from FHA. It is easy to see why, just look at the name, when I think of rehabilitation I think of a long drawn out battle. If I close my eyes and imagine a property that I would need a rehabilitation loan for I picture an old dusty mansion with exposed pipes, a broken down roof with mold damage everywhere, the hard wood floors are worn, warped and need replacing, there are holes in the walls exposing daylight through the bricks and I picture the only thing salvageable being the foundation and load bearing walls. In truth, the 203(k) is perfect for that type of home, but it is also a good program for other types of homes as well. Let's examine some of the options available with this wonderful program.

What is the 203(k)...Really?

One of the questions I'm most commonly asked is "Do you think that this property will pass FHA inspection?". My reply is always the same, as much as people seem to believe that FHA has their own super strict inspection, the do not. There is no inspection required by FHA. They do require that the house is insurable, and sometimes the insurance company will require a 4 point inspection, but FHA doesn't require it. The only other "inspection" required is the appraisal and as long as there are no obvious reasons for the house not to be in good livable condition it passes FHA guidelines. Why do I bring that up? Because the first thought I get when I think about a "rehabilitation" loan is a loan for properties that don't pass FHA's "required inspections", but the 203(k) is so much more than that.

If I were naming the 203(k) loan product, I would have used a slightly different term than rehabilitation. I would have called it the 203(k) Home Improvement loan. This loan can be used to modernize a perfectly livable home, or to change the flooring in a house because you would prefer bamboo flooring to carpet, or tile flooring to hard-wood because you like it better. There is a minimum $5,000 repair threshold in order to do the loan, that has to be met on structural changed, such as remodeling a bathroom and kitchen or changing the flooring. After that 5,000.00 threshold is met, you can even include items like new appliances.

Another great part of this program not many understand is that the 203(k) can be done as a re-finance to a home you already own, this truly makes it a home improvement loan rather than a rehabilitation loan.

Limitations

Of course this is still an FHA loan, so only owner occupied properties are eligible, though the program seems like the perfect fit for the investor buying a foreclosure property that needs some updating, investors need not apply. However a person looking to buy a foreclosed home as their primary residence is the perfect candidate for this type of loan.

Also the process for a 203(k) loan does take longer than a traditional FHA loan, but when you do move in you can have the house completed to the way you like it, with the repairs done by certified professionals and the cost rolled up into one payment with your mortgage.

All of the work must be properly permitted and completed by professionals that are licensed and insured, so there is no getting Uncle Larry to do the work for you to save money. For the right borrower, the 203(k) loan is a fantastic product and should be seriously considered as an option for those not 100% satisfied with the house they may be purchasing. I for one, am very excited about the opportunity to start offering these loans to my clients again.

If you are a realtor with a house that has been on the market for a while and is in need of some updating, it would probably be a good idea to talk about the 203(k) option with your favorite mortgage professional

Underwriting Guidelines Will Begin To Loosen

The mortgage market has changed. Back in April we were enjoying historically low interest rates and many mortgage companies were leaning on the easy picking of re-financing loans to make money. Then May 3rd came and the unemployment rate dropped to 7.5, which is still overwhelmingly high, but it is at it's lowest since 12/08. The market reacted to this news coupled with the idea that the FED would begin tapering off the purchasing of MBS and rates began to climb, and climb and climb. Rates have stayed higher than they have been in over a year. This has all but dried up the refinance market and lenders now must find a way to make up for the lost loans. The easiest answer is probably to loosen the lender overlays that sit on top of the FNMA guidelines to allow more people to qualify for mortgages. Another step is to start participating in more programs, the more options that you have for people the more likely you are to get business right? We can see an example of this in the company I work for. Freedom mortgage has recently announced that they are lowering the minimum Credit Score requirements on FHA and VA loans, and also has started to participate in the manufactured housing program through FHA.

What does this mean for you?
What this means is that more people are going to be able to qualify for mortgages, which will create a higher demand for the already limited inventory that is out there, which means that after several years of being a buyers market the housing market is rapidly changing to a sellers market, this will lead to further increasing in home prices, which will ultimately lead to more people trying to sell their houses, once the values of the homes catch up to the remaining balance on their mortgages.
The bottom line is that now is likely to be the best time to purchase a new house for the foreseeable future, especially if you are in the situation where previously tight underwriting guidelines left you unable to obtain a mortgage.

What Rising House Values Mean To You As A Buyer

Those of us in the real estate and mortgage industry have been telling clients that we are seeing housing prices on the rise, now there is empirical data to support our anecdotal evidence. The Case-Shiller 20 City Composite report is showing that the average of the 20 cities has the housing prices on the rise, back to the levels of April 2004. In news that is a little more pertinent to our market, Tampa FL is back to the levels of November 2003 and on the upswing with a 10% rise when comparing May 2012 with May 2013.

What does this information mean to you?
This means several things for the prospective home buyer.

1. The days of offering 75% of the asking price on a short sale or bank owned property and getting an offer accepted are likely over, unless the comparable sales in the market show a substantially lower value than the asking price. This is no longer a market where it makes sense for the bank to take whatever they can get and cut their losses as quickly as possible. In today's market if a bank has to keep the house on the market even for 6 months, at the end of those 6 months the property is going to be worth 3-5% more than it was when it was listed. Offers now have to make sense and what we are seeing be accepted today is typically offers within 5% of the asking price
2. It may be time to start thinking of accepting higher loan values and paying Mortgage Insurance rather than depleting your savings, in a market where houses are gaining 10% of their value year over year, many times it makes more sense to keep your money in your own pocket, put less money down, pay a years worth of Mortgage Insurance and let the increase in value remove the Mortgage Insurance for you. To illustrate, let's look at an example home sale of $100,000 to make the math easy. In order to avoid paying mortgage insurance you would have to put down 20% or $20,000.00, which would have a principal and interest payment of $417.00 / month. Instead you could put 10% down, save $10,000.00 and have a principal and interest payment of $469.00 / month. Mortgage insurance would be required and carry a premium oc about $37.00 / month. The math looks like this. 469 (principal + interest at 10% down) - 417 (principal and interest at 20% down) + 37 (monthly mortgage insurance premium) * 12 = $1068. The following year pay for an appraisal, let's estimate high at $500.00. You have spent a total of $1,568.00 to save $10,000.00. If the housing market should increase only by 3% over the next 3 years you are still saving a substantial sum of money looking at a total cost of $3,704.00 paid over three years including the estimated $500.00 for the appraisal vs saving $10,000.00 at closing.
3. Adjustable rate mortgages are about to start making sense again. While the rates were at historic lows in the 3% range, it only made sense to lock that rate in for as long as possible, as mortgage rates climb higher towards historical norms in the 5-6% range, it could make sense to lock in a 3.75% rate for three years. While the mortgage rates are likely to rise, they are also likely to stay within a point or two for the next 3 years, Interest rates haven't started with a 7 since 2002 coming out of the dot com boom. At this juncture it is likely to take significant growth from the economy to raise the interest rate more than a point. When you look at locking in a rate in the 3's for 3 years and the interest rate not likely to be much higher than it is now in three years coupled with the rising price of houses. It may make sense to take a low interest rate for three years, especially for a first time home buyer on a starter home, then sell in three years to move up rather than taking in the higher rate for 30 years.

In summary, now is an excellent time to buy as the market is still in the infancy of the rebound, this is a time where the housing prices are less expensive that they are likely to be at any time in the near future, with rates that are still on the low side historically speaking, but with rising mortgage rates, it may be time to start considering all of the financing options available and not just locking in the rate for as long as possible.

Roller Coaster Ahead For Mortgage Rates

All indicators point to a turbulent week ahead for mortgage rates. There is a plethora of reports scheduled to hit this week. All of them are expected to be good news for the economy in general, which is bad news for mortgage rates. Let's break each of these reports down

Tuesday: Consumer Confidence Index
This report measures the consumers willingness to spend, because consumer spending makes up a large portion of our economy, this report has the potential to move bond prices and thus mortgage rates either way. Currently it is expected that the report will come in at 81.6 which would be a slight increase from the previous month. If the forecasts are accurate mortgage rates will inch higher.

Wednesday: Second Quarter GDP Report
This report is considered the best indicator of economic strength and thus has the ability to significantly impact mortgage rates either positively or negatively. The current forecasts are expecting a rate of growth of about 1% a higher number will drive rates even higher, a lower number will likely mean cheaper rates after Wednesday this week.

                     FED Post Meeting Statement
The FED is holding their fifth meeting of the year Tues.-Wed. It is expected that afterward, they will release a statement to try and assuage the fears of the market and try to help out interest rates. I am expecting this to have minimal impact on the mortgage rates, much like the last few times that Mr. Bernanke has spoken to the press and tried to calm the markets. Everyone knows that as the economy continues it's slow rebound, that eventually the FED will have to stop supplementing the housing market with it's purchasing of Mortgage Backed Securities.

Thursday ISM Manufacturing Index This report is one of the more important economic indicators that we have, this report measures the sentiments of business executives on business conditions. Last month we saw a reading at 50.9, any reading above 50% is likely to keep rates high, if the report comes in under 50% though rates would likely fall on Thursday, currently the forecast is for just above 51.

Friday. Department of Labor - Employment Report This is one of the most important reports that we get, if this report shows a decrease in unemployment numbers , which is what is currently expected, then rates are likely to continue their climb. It would likely take a higher unemployment rate coupled with a loss of jobs to ipact the mortgage rates positively. This is not likely to happen. Bottom Line:
I'm not much of a gambler, so I have all of my lock eligible clients locked and I will be maintaining a locking stance until I see some significant report that would lead me to believe gains are on the horizon.