Category: Home Loan

George Bernard Shaw is credited with having written the line, “England and America are two countries divided by a common language.” In other words, while speaking the same language, quite often two people can’t understand a word the other is saying. That, I fear, applies to us in the mortgage world more than we would like to admit. We get all nerdy and start talking about debt-to-income ratios and disclosures, all the while the person with whom we’re speaking zones out and starts thinking, “Today’s Tuesday, right? It’s two-for-one tacos down at Felipe’s for lunch!” Tacos beat nerdy mortgage talk every day of the week and twice on Tuesdays.

These past few months, there’s no way you could turn on the radio or television and NOT hear or see someone talking about the Fed and whether they were going to raise the funds rate. Regardless of the news station, they bring on “the expert” to explain what this means to you and me . . . and that’s when he or she might as well be speaking Swahili with a Ukrainian accent. Sure, the words are all in English, but they’re arranged in sentences that sound like this: “Cats explode microwaving pool cues on leather Sundays.” You’re not sure if you should run for your life or buy stock in these furiously awesome felines. Before you do anything hasty, take two more minutes and read on – I promise to make sense of all this for you.

What the Fed does with the funds rate DOES have an effect on all of us, sure, but it’s not as severe as you might think:

• From May 2004 to July 2007, the Fed funds rate moved up from 1.0% to 5.25% – sounds pretty dire, right?
• In that same period, the mortgage rate rose from – are you ready for this – 6% to 6.75%

As I write this, the Fed funds rate is .5%, and the projections by the Fed indicate that by September 2017, that rate will be at 2.6% – that’s about half of the Fed’s increase in the May 2004 to July 2007 period indicated above. In the words of David M. Blitzer, Managing Director and Chairman of the Index Committee at S&P Dow Jones Indices (he must have really big business cards to fit that title on them), “These data suggest that potential home buyers need not fear runaway mortgage interest rates.”

While we all want to give Davey a nice warm hug, there is a bit of urgency that I would like to inject into the conversation here – and I’ll keep it in plain English, I promise. Over the past year, home prices have averaged an increase of about 5%, which means a $200,000 house is now selling for $210,000 – and the prices are projected to increase by another 5% this coming year. So, according to Mr. Blitzer, a potential homebuyer doesn’t have to buy TODAY to make sure the rates are reasonable, but they should start looking NOW. Every $10,000 increase in a 30-year mortgage, is about a $50/month increase in the payment – that’s $600/year, which is a lot of tacos (twice as many on Tuesday)!

Just before the Christmas holiday – in fact, exactly a week before, on December 18, 2015 – the President signed legislation that renews the tax deductibility of mortgage insurance (MI) premiums for qualified borrowers through 2016.

This new legislation is effective for purchase and refinance transactions closed after December 31, 2014. Mortgage Insurance premiums paid or accrued after December 31, 2014, and through December 31, 2016, may qualify for tax deductibility on borrowers’ subsequent federal tax returns as follows:

• Borrowers with adjusted gross incomes below $100,000 may deduct 100% of their MI premiums
• For borrowers with adjusted gross incomes from $100,000.01 to $110,000, deductions are phased out at 10% increments for each additional $1,000 of adjusted gross household income

Quite often, of course, many buyers immediately stop listening when they hear the term “mortgage insurance” and start thinking about other things like needing to schedule an appointment with the vet to get their cat dewormed or why bread always lands butter side down when dropped. They lose their focus, and that could lose the sale. Get them to focus and remind them that those loan options that have mortgage insurance usually have lower monthly payments, much lower down payment requirements (3%), and cancellable premiums. As it dawns on them that you’re more than a real estate agent – you’re an expert – deliver this coup de grâce (I believe that’s French for “do you want fries with that”) about the tax deductibility, and they just might name their first child after you (or, at least, their next cat – whom I hope has been dewormed).

Just a couple of reminders to keep in your back pocket:

• Under the Homeowners Protection Act of 1998, lenders must terminate MI once the loan is scheduled to reach 78% of the original home value – the insurance policy should be automatically cancelled at that time
• The CFPB, this month, issued a compliance bulletin reminding lenders of this automatic cancellation requirement – even if the home’s value has dipped below the sales price

• The cancellation rules DO NOT apply to the low-down-payment FHA loans – borrowers are required to pay insurance as long as they have an FHA loan (if the loan was acquired after June, 2013)

While it should have been a front-page, headline-screaming report, a VERY interesting piece of information was buried several paragraphs deep into a Wall Street Journal story on the reasons the housing market isn’t doing a better job at boosting the U.S. economy. Buckle up, it’s a good one!

The percentage of homeowners who are underwater – that’s a figurative term, of course – is 8.7%. Not that anything other than 0% is ideal, but let me put that into perspective for you. According to CoreLogic, that statistic back in 2011 was 21%! You have to agree that’s pretty impressive by itself – but wait, there’s more!

The percentage of homeowners who BELIEVE they are underwater, according to data from Fannie Mae, is 27%. Yes, you read that correctly – 27%, as opposed to the 8.7% who are truly underwater. That means that for every three people who BELIEVE they’re underwater, only one of them is. Let’s expand that number: in a sample size of 100,000 homeowners, 27,000 of those homeowners believe that their homes aren’t worth what they owe; in reality, though, only 8,700 are really facing that struggle. This means you instantly have 18,300 people whom you can turn from “no, I can’t” to “YES, I can” in listing their house.

It’s highly likely that this perception is one of the chief reasons so few homes are actually on the market. According to the National Association of Realtors (you’ve heard of these cats, right?), inventories fell another 2% in October, and this remains well below historical levels when compared to the sales pace.

I’m just spitballing here, but wouldn’t it make sense to make a VERY BIG DEAL of this in your marketing? It could be something as simple as “Two out of every three people who believe they’re underwater in their home really aren’t – let’s talk!” Let’s be honest, the average homeowner, when it comes to the value of their home, relies on gossip and the flyer on the house two doors down. Do you want to rely on those two items as your “marketing team”?

Food for thought: In one of our past editions of this extraordinary oracle of lending lore – sorry, I got carried away there for a moment – we talked about properly reading an appraisal to assure you’re getting the most for your seller. That same expertise will arm you with the ability to BE THE EXPERT and convince a potential seller that they’re ready to put their house on the market NOW.

If your client is a first-time homebuyer, do both of you a favor and consider a multi-unit property. Obviously, most first-time homebuyers are looking for that cute little house with a two-car garage and a white picket fence – one of the symbols of the American Dream, of course. However, consider for a moment that many first-time homebuyers are willing to look at and embrace a “tweak” to the American Dream: a revenue-generating investment. While most investment properties require a fairly significant down payment, an FHA loan only requires 3.5% (and it can be a gift). Making an even better case for this type of purchase is the size of loan FHA allows for the following sizes of properties:

o2-unit property: $347,000
o3-unit property: $419,255
o4-unit property: $521,250

Your buyer is only required to live in this property for 12 months. Once she’s hit the 12-month mark, she can slide another renter into her unit and look for a single-family residence (if she so desires). In addition to the rental history she’s built up with her other tenants, she can immediately count future rents for the unit which she’s just vacated as long as she has a one-year lease signed for that unit – all of that will be used as income in helping her qualify for the loan on the SFR (perhaps with a two-car garage and a white picket fence).

We’re not kidding ourselves into believing that every child dreams of being a landlord when he grows up, but it doesn’t hurt to have a two-minute conversation with your new buyer and present him with the option as outlined above. He’ll thank you for presenting him with all the options – and if he takes your advice, he’ll either be asking you to find a house for him in a short twelve months or look for more multi-unit properties, which means you could have a lifetime client looking to grow and manage a lucrative portfolio. We’re fairly confident that’s worth a two-minute conversation.

Expand Your Horizons

Relocation and timing don’t always coincide with one another, and that usually leads to the potential buyer signing a twelve-month lease on a rental property when she’s moving to a new city because she thinks she needs an employment history to qualify for a mortgage. For those professionals with jobs that are tied to a contract (doctor, attorney, teacher, nurse, dentist, etc.), we can close and fund 60 days before their starting that new job and use that income to qualify. Put that information in your back pocket and start marketing yourself all over the country – or around the world.