the mesh network | northern california real estate

Loan Changes Coming to FHA

There are a few changes coming early this year that will impact specific real estate markets or price points across the Bay Area.  Yesterday’s WSJ reported that the FHA (a type of government-backed loan program) is running short of their reserves so they intend to increase their loan placement fee to 2.25% (from the current 1.75%).

What does this mean?  If you get an FHA loan, you will need to pay a higher fee to “buy” the loan.  For a typical $500k house with only 10% down, your loan fee just went up to $10,125 from $7,875.  It is probably not enough to crash the housing market, but it will price some buyers out who will have to delay their purchase.

Recommendation: If you are likely to use an FHA loan -- meaning you have less than 20% for a down payment or you have credit issues that make a conventional loan rate very high, then I would say you should move quickly to find the right house and get an offer accepted before FHA fees go up.

-Mark

New Rates and Loan Limits -- It Will Impact You

We are coming into some big changes in the mortgage market that will bring a huge impact for 2009. The Feds are buying $500M in housing loans through the bond market from now through June of 2009.  This translates into lower mortgage rate for borrowers and we are already seeing interest rates around 5%.  Will they head lower?  Probably.

If rates continue down, maybe toward 4.5%, it brings bigger buying power -- it gives you the ability to buy more house for the same payment.  Of course this will help more buyers get into the market and put a bottom into the housing slump.

However, the “jumbo” loan limit has moved.  Last year it was temporarily raised to $729k for our area but the jumbo line for 2009 is set at $625k.  This means that buyers with 20% down can get a reasonable rate on a $625k loan and afford a home up to $780k.  I’m saying “reasonable loan” because the interest rate difference between the $417k loan and the $625k loan is minimal, unlike the true jumbo loans over $625k, where you will find that you still need to pay a rate premium -- sometimes as much as 1 point.

Where is this taking us?  Well, we should also start getting lots of good news from the Obama Bounce during his first 90 days.  In my opinion, I think we’re going to see a lot of sales activity through the first half of the year assuming no more big bad news, and if you have been thinking about buying a home, don’t wait too long since I believe the best deals are going to come in the next 6 months.

-mark

Buying Power

When you start thinking about buying a home, most likely you begin with how much house can you afford to buy.  I know that’s how I started.  But the way to really look at how much you can afford is to think of your Buying Power in terms of your monthly payment.

There are many factors that go into calculating the actual price range of homes you can afford, but for simplicity we will make some assumptions.  You have a 20% down payment toward a 30-year fixed rate loan, good credit with FICO scores in the mid-high 700s, and you have a stable job where you can show pay stubs each month -- basically, a solid buyer.

In our example, let’s say you have decided you don’t want to spend more than $3,000/month on your mortgage (of course there are other expenses like property taxes, insurance, HOA, etc).  If interest rates are 6.25% today, then this means you can have a loan amount of $487,000; add your 20% down payment and this gives a purchase price of $609,000.

I know there are quite a few buyers “on the fence” right now who would like to take a “wait and see” position because they think prices are going to drop further due to all the bad news in the media.  I completely understand, and waiting for prices to drop may make sense depending on your underlying reason for buying a home.

However, waiting also comes with a risk.  For the same example above, lets say you are determined to wait until home prices drop further before you jump in to buy a home.  If during the time you are waiting, interest rates go up 1/2 of a percent (from 6.25% to 6.75%) this will impact on your Buying Power.  Now, at 6.75% your same $3000/month mortgage budget can only get you a loan of $462k, and with your 20% down payment, your Buying Power came down to $578k -- basically the 1/2 percent of interest increase has cut down your Buying Power by 5%.

In the end, your Buying Power is the most important component of buying your home.  It may not make sense to wait for home prices to come down 5% (from $609,000 to $578,000 in our example) because if interest rates go up 1/2 of a percent during the time you are waiting, the same home will still cost you $3,000/month mortgage. 

So while you are waiting the home prices to come down more, you also need to pay attention which direction the interest rate would go in the future.  Put together your Buying Power profile and when you feel it is as strong as you can get, you should focus on finding the right home that fits your profile no matter what is happening in the overall market.

-mark

Meeting the market challenge in 2008 by Wells Fargo

I recently attended a special event at the Oakridge movie theater.  I was invited to join a 1-hour session hosted by Wells Fargo Bank in which they assembled a live panel of 4 high-profile people within the real estate business in front of an audience of thousands of real estate professionals.

A moderator asked some leading questions and the panel responded from their perspective as this event was broadcast live to dozens of theaters.  The speakers were Cara Heiden, Co-President of Wells Fargo Home Mortgage; David Bach, author of the bestsellers like The Automatic Millionaire and Start Late, Finish Rich; Terry Watson founder of Watson World and notoriously famous real estate family brokerage; and Brian Buffini, enormously successful former real estate broker and now founder of his training and business coaching company for Realtors -- all very well respected in their fields.

The title and underlying theme was about Meeting the Market Challenge for 2008.  Essentially, it was a great time to hear how these very influential people believe the market correction we are experiencing today has created a great buying opportunity.  They are encouraging us as real estate professionals to bring this message to our clients since opportunities like this in the housing market happen about once every 15 years (historically).

What I found to be the most interesting take away was that Wells Fargo sponsored the whole event.  This was broadcast to 50 movie theaters across the country where 12,000 agents gathered to hear the insights of these speakers.  To me, it was nice to see a company like Wells Fargo committed to bringing a positive message to the industry.  With so much negative media around housing and financials, it was refreshing to hear a new perspective.

I don’t think anyone will be able to point to “the bottom” of the recent housing shift until we are well into a recognized recovery, but in my opinion, when big home loan institutions like Wells Fargo bring a message -- we have money and we are here to lend to your clients and take advantage of market opportunities -- it must be a step in the right direction.

-mark

FHA loan is back. . . and very welcome!

The mortgage markets are tightening daily - this is nothing new because it has been front page news since August, 2007.  For homebuyers, this has had the effect of 1) generally higher interest rates, 2) higher FICO credit scores needed to qualify for a loan, and 3) a need for higher down-payments --- this has especially impacted first time home buyers.

However, there is a sign of hope known as the FHA (Federal Housing Administration) bringing great news to both buyers and sellers.  The FHA is a government-backed loan program that has not been used much in California in the last 10 years since normal retail banks were offering the best mortgage programs to the public.  But now these same retail banks are stepping away from risk, FHA programs are making their way back as a great option for homebuyers.  Let me show you how.

Using FHA may help get around many of the problems buyers are having with typical retail loans today.  FHA does not have a high credit requirement so low credit scores may be accepted.  FHA loans can go up to 97% loan to value ratio, so buyers can get into a home with a low down payment.  FHA loans also go up to $729,750 on a single loan and the interest rates are very competitive, around 6.25% today.

These new FHA loans do have some restrictions, but nothing that should scare anyone from using them to buy the home you want.  You need to have 2 years continuous employment, any late payments on your credit report will need to be explained in a written letter, and you need to wait 3 years after a foreclosure to try to use an FHA loan for a new purchase.  On the down side, FHA loans do require a 0.5% per year mortgage insurance payment and 1.5% origination cost at the time of purchase.  You also need to consider that since this is a government-backed program, allow for a 60 day close instead of 30 days because there is more “process” involved.

Out of what we are seeing in the housing market today, the FHA program is a very important piece and we believe this will begin to repair the market.  If you believe you are out of the housing market because you only have 5% or 10% saved as a down payment, you now have other options.  If you are a seller of a home that is not moving after being on the market for a long time, it may be wise to consider concessions that will let buyers qualify for a loan on your home instead of reducing the price.

-mark