Fannie Mae announced that they have eliminated the Anti-Buy-and-Bail rule, the underwriting guideline that has held back so many move-up buyers.
The previous rule meant that buyers who already owned a property had to have at least 30% equity in it; other wise they would have to qualify using both their existing payment and new proposed payment in the equation.
MND details the change here, along with a few others:
Now a buyer can produce a rental agreement for their existing house, and not have that mortgage payment count in their qualifying equation!
This is the key element that spurred the last few years of the previous boom, as buyers would finance most (if not all) of their non-contingent purchase, and then go back and sell their old house later.
Now they might keep it as a rental, or sell it at some point after they move.
The Anti-Buy-and-Bail rule forced them to sell first, and was probably one of the main reasons we’ve had so many potential sellers be reluctant lately – they couldn’t qualify for both, which forces them to consider selling first and risk the double move!
We haven’t been hearing much lately about how tight credit is choking off the housing recovery. Once it was announced that the GSEs were going to purchase 97% loans for the first time is five years (which starts today), the tight-credit talk started to subside.
But you still have to qualify for a mortgage, which has always been difficult for self-employed folks who write off their expenses to lower their taxable income. The obvious solution is to lower the write-offs and pay more taxes – but that goes over like a lead balloon with those who are used to creative accounting.
The common belief is that you need two years’ worth of tax returns to qualify.
But did you know that Freddie Mac will accept only one years’ tax return?
That’s right, and I just saw it happen. I just had a self-employed buyer with excellent credit and a 20% down payment close escrow after qualifying by using their 2014 tax return only. The Freddie Mac Loan Prospector (their automated-underwriting service) determines whether you need 1 or 2 tax returns – so as long as the computer approves, you’re in!
For the self-employed who had a strong 2014, you may want to bite the bullet and pay more tax now so you can qualify for a bigger loan. The Freddie Mac maximum loan amount in San Diego is $563,350, which puts your payment around $2,700 per month, plus taxes and insurance.
All with no down payment, no closing costs and no mortgage insurance. The Ongs’ real estate agent, Jill Medley, called it “the best loan in the history of real estate.”
The key feature of the so-called wealth-building home loan is a sharply reduced interest rate on a 15-year term. Instead of requiring a down payment, banks allow borrowers to use their money to pay interest upfront, often called “buying down” the rate.
For their $400,000 house, the Ongs used what would have been a 4% down payment — $16,000 — to instead buy down their rate to 0.5%. In little more than three years of monthly payments, the couple will have more than 20% equity in the home, assuming the property value stays the same.
That more than doubles the equity they would build with the same amount down on a 30-year Federal Housing Administration loan at the going rate of 3.25%.
The Ongs pay only about $150 more each month than they would have paid under the longer-term loan, which would include a hefty mortgage insurance payment.
These are NACA deals, which are capped at a $400,000 purchase price. Down payments are required but they come from grants, which is how they get around having to pay the PMI.
Buyers also have to live where they can find a house for $400,000 or under, and select a house that nobody else wants – because if there are multiple offers, these 100% financed deals that rely on multiple grants for the down payment will be the last deal chosen by the listing agent.
Buying down the interest rate is a great idea for buyers who are confident they will be in the home for years. But the benefits diminish quickly for those buying higher than $400,000.
Here is a comparison:
$800,000 purchase price
$160,000 down payment
$640,000 loan amount
15-year loan with 2.0% rate (buydown would probably cost $15,000?)
$4,118.46 per month for 180 months.
30-year loan at today’s 3.75% jumbo rate:
$2,963.94 per month for 360 months.
Paying the loan off in 15 years saves you around $300,000 in interest, which is good. But if you can live with a monthly payment of $4,118 per month, have an extra $65,000 for additional down payment and opt for a 30-year loan, you can buy a house for $1,125,000 and have the same payment as the $800,000 house.
Unfortunately $800,000 doesn’t buy you much around here any more, and if buyers happen to wonder into a house listed for $1,125,000, they may decide to forget the imposed monthly discipline of a 15-year loan, and instead pay down the loan voluntarily as time goes on.
The politicians, talking heads, and NAR pitchmen think that tight credit is to blame for a lackluster housing recovery, but those of us on the street know the local market has been red hot with demand. The strict underwriting is more of an annoyance that anything, with underwriters requesting every document they can imagine in order to minimize the threat of buybacks.
Has it loosened up? Will low rates and looser credit spearhead another big year in 2015? I think so.
Here is an excerpt from this article to demonstrate the loosening:
Let’s see what some random companies, small and big, have been up to lately to gauge lending trends.
Banc Home Loans has expanded its Jumbo guidelines. Its “Program 55” highlights include up to 85% LTV no MI (to $2M), Loan amounts to $5 million, Minimum 660 FICO to $1.5M, 1st time home buyer- loan amounts to $2M, and Primary Residence: Cash Out Refinance now to 75% LTV (Cash-out up to $1 million).
Caliber’s enhanced Fresh Start Program was rolled out. The two biggest features are bank statement option for self-employed borrowers, and no seasoning or mortgage payment history required for Short Sale, DIL, Foreclosure or Bankruptcy.
BluePoint Mortgage has Jumbo IO products with 89% LTV up to $1,500,000 with NO MI Loans up to $3,000,000 and 80% IO to $2,000,000, Up to $500,000 Cash Out, Second Home and NOO options, Cash out for second homes and NOO.
Carrington Mortgage Services, LLC announced the national availability of “The Carrington Loan,” offering borrowers a more transparent, simplified home loan process with no closing costs or upfront financing fees. The Carrington Loan can facilitate home purchases for borrowers in the sub-640 FICO score range.
Wells Fargo Funding improved its refinance adjusters for all non-conforming products as of November 10th, adjuster improvements are listed on the daily rate sheets. In addition, its minimum down payment requirement has been removed from its conventional conforming loans.
Stearns Wholesale is now offering new FHA FICO options 600-619 FICO score program.
Next year should bring in more demand from those who have been shut out previously from getting a mortgage, and those types aren’t known for patient decision-making. It might feel more like 2006 all over again?
Rob Dawg brought up how discriminatory the underwriting guideline is for those who use interest/dividend income to qualify – they have to prove that the income will extend three years into the future. Yet those homebuyers on salary or hourly pay don’t have to make any such assertion, and they could get fired the next day after closing.
There are other underwriting guidelines that make you scratch your head too. Here are some examples:
1. ‘Gift’ for down payment – The previous standard was that as long as your down payment was at least 20% of the purchase price, the entire amount could be a gift. But now the Fannie/Freddie automated underwriting is allowing 10% down payments to be all-gift too. Is that really ‘skin in the game’? Sellers can still pay all buyer closing costs too.
2. Reserves – If you are buying a rental property, you have to use at least a 20% down payment (25% on 2-4 units), AND have at least six months’ worth of payments in the bank at closing – which includes your PITI payments on current residence and the new rental property. It makes sense too – you could get hit with a quick vacancy, and the bank would want you to have ample reserves.
However, when buying a residence as an owner-occupier, the required reserves are much less. The guideline states that the buyer should have two months’ worth of payments in the bank – which isn’t much – and a lender told me he has been closing FHA/VA loans recently with less than one payment’s worth of dough left in the bank!
3. Appraisals –With the new rules that isolate appraisers from influencing agents, you’d think the inflated-appraisal problem would be solved. But they still give appraisers the actual sales price and tell them to hit it, which takes out some of the objectivity. Even so, today’s article (LINK – hat tip T&W) included this quote, “If you thought what was happening before was an embarrassment, wait until the second time around”.
Think of these questionable guidelines when you hear how the ‘tight credit’ is mucking up the market!
Seniors can have trouble qualifying for a mortgage, in spite of having ample assets. Here are some tips, from the wsj.com (their comments are good too):
High-net-worth individuals often will argue that they clearly have enough money in assets to pay off a loan at any time, says Bill Banfield, vice president at Quicken Loans. “They may be thinking that they have a big IRA and they could use that to take a distribution to make the loan payments,” he adds. “That’s all good and fine, but we’d like to see that all set up before they apply for the loan.”
The key to qualifying is to demonstrate that a retiree’s assets translate into income via tax returns, bank statements and other documents, he adds. “The lender is going to want to make sure you have receipts for distributions and a schedule for receiving them,” he adds.
Retirees also need to show proof that the payments will continue in the same amounts for at least three years into the future, Mr. Banfield says. If a borrower is an early retiree under 59½ years old, the threshold for taking withdrawals from IRAs without tax penalties, the lender will adjust income estimates accordingly, he adds.
For retirees who don’t want to increase their distributions, another possible option is a nonqualified jumbo mortgage, which offers flexibility on the federal DTI rule, Mr. Wind says. Lenders have to waive liability protection to issue nonqualified mortgages, but some lenders will take that risk with retirees who have substantial invested assets they don’t want to liquidate, he adds.
To calculate an income estimate in such cases, EverBank will assign a conservative earnings rate to the total dollar amount of the assets and amortize the amount to the loan’s term length, Mr. Wind says. Wells Fargo uses a similar method to calculate DTI for nonqualified mortgages for borrowers with multimillions of dollars in assets, Mr. Blackwell says.
The first step for any retiree or person approaching retirement is a financial adviser, Mr. Blackwell says. An adviser can look at a retiree’s overall financial picture and advise whether to pay cash or borrow when buying as home. The adviser can also calculate retirement-account distributions that will help the borrower qualify for a loan, he adds.
A new mortgage lender is loosening documentation requirements, allowing applicants to provide less paperwork on income and assets than is typical to get a home loan.
Social Finance, a peer-to-peer lender often referred to as SoFi, rolled out mortgage lending in five states—New Jersey, North Carolina, Pennsylvania, Texas and Washington—and the District of Columbia on Tuesday. The San Francisco-based lender began offering mortgages in California in August.
The firm has specialized in student loans since it launched in 2011. The move into mortgages comes as SoFi prepares to file to raise $200 million to $250 million in an initial public offering early next year, according to its chief executive Mike Cagney.
SoFi’s mortgages will be geared toward borrowers with high credit scores, though other criteria will be less onerous than what most other lenders require. The firm isn’t requiring tax returns to verify applicants’ income or proof of funds to verify the source of borrowers’ down payments—requirements that most lenders have had in place since the housing downturn. Instead, SoFi is accepting applicants’ most recent paystub or W2 as proof of income. It will also take all applicants at their word that their down-payment funds aren’t coming from a loan they have taken out elsewhere, says Mr. Cagney. Borrowers will have to make a minimum 10% down payment.
Hat tip to daytrip for sending this in fromcnbc.com:
The sharp rise in home prices in 2013 caused two conflicting results: The return of positive home equity for hundreds of thousands of borrowers and considerably weaker affordability for an equally large pool of potential homebuyers.
While positive equity allows more borrowers to move, weaker affordability keeps them in place. So which will be the greater driver of housing this spring?
“There’s going to be a reality check in the spring in terms of realizing that what we saw in 2013 is not a real market,” said Daren Blomquist of RealtyTrac, a real estate sales and data website. “It’s a nice bounce-back market, but ultimately you need the biggest pool of potential homebuyers out there to be able to afford those homes.”
In an analysis of housing affordability, RealtyTrac found that the estimated monthly house payment for a median-priced, three-bedroom home purchased at the end of 2013 was a whopping 21 percent higher than it was at the end of 2012 in more than 300 U.S. counties. That includes mortgage, insurance, taxes, maintenance and the subtracted income tax benefit.
The rise is the result of higher home prices and higher mortgage rates. RealtyTrac used a 30-year fixed-rate mortgage with an interest rate of 4.46 percent and a 20 percent down payment. That is versus a 3.35 percent interest rate the previous year.
Some metro regions, especially in California and parts of Michigan, saw monthly house payments rise about 50 percent from a year ago.
Housing foreclosure authorities LoanSafe.org and YouWalkAway.com have created a new website to help people re-enter the housing market after having been through a previous foreclosure. The website is called AfterForeclosure.com and helps those most affected by the housing crisis take charge of their financial future and own their own home again.
Fannie Mae and Freddie Mac are too big, and changes are coming.
Beginning on January 10th, the new QM rules take effect – limiting the debt-to-income ratios to 43%, and capping points and fees charged by lenders to 3% of the loan amount.
Because lenders will be subject to repurchasing any mortgages that don’t comply, some lenders are talking about limiting the DTI to 39% to provide a margin of error.
In the past, borrowers with compensating factors have been able to stretch their D-T-I ratio as high as 50%. Now they won’t.
Is it a big deal?
It is for lenders, but to home buyers and sellers all it means is that there will be fewer people in the buyer pool for each house for sale. Buyers may need to lower their sights, which will make the cheaper homes in each market more competitive.
The other change is how Fannie/Freddie will add more fees depending on your down payment and credit score. It is rather arbitrary too, where borrowers with 680-740 FICO scores get hit the worst. They can look forward to a nasty choice; to pay 1/4% to 3/4% higher in rate, use a 30% down payment, or manipulate your credit score downward to pay less fees.
For home buyers who are looking for more to reasons to stay on the fence, this is a truckload of fun. But for the highly motivated buyers (the ones making the market), all it means is being more determined to fight for the best deal you can find, and hope that home prices will reflect the new era.
For anyone selling a great house on a great street, these changes won’t mean a thing. For those trying to sell an inferior home for retail-plus, don’t be surprised if 2014 brings a more-measured response.
