Mortgage Rate update for the week of March 4, 2013

This week’s economic calender would be considered a little on the light side if not for Friday’s Jobs Report. Here are some of the economic indicators scheduled to be released this week.

Tuesday, March 5: ISM Services Index

Wednesday, March 6: ADP National Employment Report and the Beige Book

Thursday, March 7: Initial Jobless Claims and Productivity

Friday, March 8: THE JOBS REPORT

Remember, signs of inflation tend to drive mortgage rates higher. You may also notice that when the stock markets are doing well, mortgage rates tend to rise as investors will trade the safety of bonds (like mortgage backed securities) for the potential greater return of stocks.

Mortgage rates are still very low, however they have been trending higher over the last several weeks.

If I can provide you with a rate quote for a home purchase or refinance located anywhere in Washington state, please click here.

Reader Question: Should I Wait to Refi?

One of my returning clients is considering a refinance, however, they’re not sure if they should wait or not.  Their Seattle area home is really close to that magically 80% loan to value – based on best estimates – which would allow them to avoid private mortgage insurance if their home’s value increases.

There are pros and cons to waiting to a refi, similar to those with having an extended closing when you’re buying a home.  Here are a few:

  • changes to home value. Your home’s value may increase as the Seattle markets seems to be doing well with purchase inventory… or a home in the neighborhood that’s a potentially a strong comparable for your appraisal might become a short sale or foreclosure, which may negatively impact your home’s appraised value.
  • changes to employment. If your or your spouse decides to change jobs and it’s not in the same line of work or the new job has a different pay structure, this may impact qualifying.
  • credit scores vary. Credit scores impact the pricing of your rate and underwriting decisions. Lately I’ve been encountering clients who have paid off credit cards and closed them which sounds great, however they now have “shallow credit” and lower credit scores. I’ve also seen late payments on a credit report caused by a parent co-signing for their child. Sometimes it may be worth deciding to delay a refi if you’re trying to improve your scores, or proceeding with the refi and rechecking scores prior to closing.
  • interest rates. Mortgage rates change daily. Sometimes rates change throughout the day. Although it’s anticipated that mortgage rates will remain low for the remainder of the year, members of the Fed have hinted that the Fed should consider no longer buying mortgage backed securities, which has kept rates at their manipulated lower levels. As the economy improves, mortgage rates tend to trend higher.
  • loan programs and guidelines may change. Currently, unless our elected officials take action, HARP 2.0 is set to expire at the end of this year. Banks and lenders currently adjust their underwriting guidelines (aka overlays). And we’re waiting for FHA to increase their mortgage insurance premiums which impacts FHA streamline and non-streamline refi’s. 

Refinancing now is gambling that your home will appraise high enough or you may be out the appraisal fee unless mortgage insurance or a piggy-back second mortgage makes sense to proceed with the refi.

Delaying the refinance adds other potential risk factors assuming you’re satisfied with the current low mortgage rates and you qualify.

I recommend reviewing possible refinance options that are available now and weigh out the pro’s and cons. Refinancing now, should you decide to, also means that you’re reducing your payment and higher interest sooner. 

If you are interested in a mortgage rate quote for your refinance or purchase of a home located anywhere in Washington, click here.  I’m happy to help you!

The ABC’s of Preparing to Buy Your First Home

Borrowers getting ready to buy their first home are often surprised…for different reasons. I find that some are surprised to learn that they do qualify for a home in their price range and some are disappointed to learn that they have a little work to do before they can buy a home. Getting preapproved with a mortgage professional helps take some of the “surprise” out of the process.

Here are some of the bare minimum “basics” that we look for qualifying a home buyer.

Assets: If you have a 401k, retirement or stock accounts that you’re not planning on using for down payment, often times these accounts are great to have on your application to show that you have “reserves” after savings. Additional assets add financial strength to your application.

Bank statements: Be prepared to provide all pages of your bank statements (even if the last page is blank) and to document any large deposits that are on your statements. Lenders want to know where your funds came from.

Credit history: It’s ideal to have three to four lines of credit in good standing for two years or more. Your credit lines should be used once a month with less than 30% of the credit line in use for revolving debt. New credit lowers scores and old established credit that is paid on time raises credit scores.

Credit scores: Most lenders that we work with currently have a minimum credit score requirement of 640. Lenders use the lowest “middle score” of all borrowers applying for the loan.

Debt-to-income ratios: Lenders like to see your back end ratio no higher than 45%. This is calculated by dividing all of your monthly debts plus the proposed total mortgage insurance payment by your gross monthly income.

Down payment: Currently (as of the publishing of this post) FHA allows a 3.5% minimum down payment; Fannie Mae Homepath allows for 3% down; VA and USDA are still zero down payment. Conforming loans will allow for a minimum down payment of 3% with private mortgage insurance. Some programs will allow gifts from family for your down payment and/or closing cost. These funds do need to be documented and “paper-trailed” with the donor providing a written letter stating no repayment is expected.

Employment: Lenders need to see a two year job history in the same line of work. Good news if you went to school for your field, this may factor into your job history with supporting documentation (transcripts, diploma, etc.).  Gaps in employment over the past 24 months will need to be explained and second jobs are often not be factored if they have not been held for 24 months or more. 

Income: How you are paid (your pay structure) will impact what lenders can use for qualifying. Those paid an annual salary are the easiest to calculate. Borrowers who are paid hourly with hours varying will probably find their income averaged over the last two years. Self employed or commissioned borrowers will also find their net income averaged over the last two years. If a borrower receives annual bonuses, they will probably need to be received by that employer over the last two years and will be averaged.

You may have strong employment or assets and your credit is “shallow” causing you to have a lower credit score. Or perhaps you need to work on saving up for a down payment and delay buying that new car. This is why it’s important to meet with a mortgage professional as soon as possible. I often help clients who aren’t planning to buy a home for six months or even longer – they want to be prepared to put their best foot forward.

If you’re considering buying your first home, I’m happy to help you! I have been helping first time home buyers at Mortgage Master Service Corporation since April 2000 buy homes in Renton, West Seattle, Redmond, Bainbridge Island and all over Washington state, where I’m licensed to originate mortgages. If you would like me to provide you with a rate quote, click here.

Changing jobs during the mortgage process

Sometimes an employment opportunity may become available while you’re in the process of buying a home or refinancing. Lenders are looking at a borrowers employment and income stability so depending on the type of field you’re in, a change of employment may or may not impact your loan approval. 

As long as you’re staying in the same line of work and if you have an annual salary, it probably won’t be an issue. The lender will probably require at least one pay stub (possibly more to document your income) from your new employer as well as a verification of income. If you have an employment letter or contract from the new employer, this can be helpful to provide the lender as well. With new employment, signing bonuses are not factored into the annual income however, they may be used towards the down payment or closing cost as your seasoned funds. 

If the new employment is not related to the same line of work, this may cause an issue with the loan approval as lenders are looking for two years of employment in the same or related field. If the income structure has changed, this may cause an issue as well unless it is to an annual salary. The underwriter may require a written letter explaining your employment history.

Moving from annual salaried income to a potentially flexible type of income may derail your loan approval. Self-employed, hourly income, bonus or commissioned income requires a two year history before a lender can use it for qualifying purposes.

Sometimes a promotion can impact loan approval if pay structure changes. For example, if a borrower was paid an annual salary and then receives a promotion which reduces the annual salary in exchange for a higher bonus or commission structure, the bonus or commission income cannot be used unless the borrower has been receiving that type of income for a minimum of two years. In this case, the new lower base salary (the “guaranteed” portion of the income) can be used, but not the “flexible” bonus type income. 

If you are considering a job change during the mortgage process, it’s crucial to inform your mortgage originator as soon as possible. Your loan application needs to be updated and the lender will be doing a verification of employment prior to funding your mortgage.  

If you’re considering buying or refinancing a home anywhere in Washington, I’m happy to help you!

Explaining the “Letter of Explanation”

preapprovalIt’s not unusual these days to have a lender request a “letter of explanation” from a home buyer or someone who is refinancing their current property.  I letter of explanation (or LOE) is often used to help provide more information to the underwriter or lender based on information that is disclosed on an application or credit report. LOE’s may address anything from gaps in employment to inquires on a credit report and is intended to help explain or add support to the transaction. If a borrower has had an extenuating circumstance and is trying to have an exception made to an underwriting guideline, they may be asked to write a LOE.

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5 Ways to Derail Your Loan Approval

MonorailYou’re getting ready to buy a home or refinance your home with your closing day around the corner when your mortgage originator contacts you to let you know there may be a problem.  Some issues may not revealed until days or sometimes weeks into a transaction.  Anytime documentation is provided to the mortgage company, it has the potential to raise more questions or require more documentation to satisfy underwriting guidelines.   Here are five situations to be aware of that can cause headaches during the loan process.

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How Strong Are Your Legs?

J0384828A borrower in a mortgage transaction is kind of viewed like a chair with four legs.   The legs on the chair provide strength to the base or seat of the chair.   If one leg is shorter than the others, the chair is still strong, but may wobble a bit.   Shorten two legs and the chair becomes less stable.    Three week legs and the chair is just waiting to tip over on you.

So how strong are the legs of your chair?

Consider each of these items as one leg in your chair.

  • Employment.  Having a minimum 2 year history in your line of work (this can include education).  Employment gaps that don’t make sense to an underwriter, may cause issues with getting your mortgage approved.   A lender wants to know that you are going to be able to keep your job and therefore, make your mortgage payments on time.
  • Income.  If paid salary and regular hours, this can be pretty easy to compute.  When your hours vary, the income needs to be averaged.   Also, if you’re paid bonuses or commission and going for the best interest rate (not stated income or no income verified), then your bonuses and commissions are typically averaged for the past two years.   Debt-to-income ratios are crucial for qualifying for mortgages.   A $500 car payment equals $50,000 less home that you can purchase.
  • Savings and assets.   There are many zero down loans, even if you are considering that route, it is in your best interest to have at least three months of your future mortgage payments in savings after all closing costs are paid.  The more money you can put down towards a home, the better your interest rate will be.
  • Credit Scores.   Having scores above 680 are a worthy goal.  A score 700 or more is even better!   Pay your accounts on time.   Keep your balances below 30% of the credit limit for the best scores.   Take care of your credit and it will take care of you.   Credit is reflective.  If your credit score is on the low end, meet with a Mortgage Planner to help you develop a plan to improve your score. 

All of these factors impact how a borrower qualifies for a mortgage.    The more strong legs you have reduces the risk to the lender, which in turn means a better interest rate for you!