MORTGAGE RATES REPORT

What's The Cost Of Renting?

Does buying REALLY make sense?  In this goofy real estate market there really are some costs associated with renting instead of buying a home.  Opportunity costs but costs nonetheless.

Why are folks buying homes today?

1- They're cheap. It's going to go up in price. It won't be for awhile but still a good reason to buy .
2- You can write off your mortgage interest.  That's not true for most home buyers today.
3- A fully-amortizing loan is like a forced savings account.  Illiquid savings account but I'll buy that.
4- The US Government is bribing people to buy homes.  We'll harvest that $8,000 tax credit.

Let's run some numbers.

June was considering a Pacific Beach condo for $278,000.  She currently pays about $1,000/month in rent.  She's considering this condo purchase with a VA loan because she's a veteran of the US Army.  Her total payment, including the property taxes and HOA fee, would be about $2200.  June's a nurse who makes $80,000.  She's single so she currently takes the standard tax deduction of $5,700. She plans to hold the home for five years and expects to sell it for 15% more than today's price; she'll net $296,000 after sales expenses (in 2014).

What is the cost of NOT purchasing the Pacific Beach condo today?

1- Let's assume June's right about the appreciation.  She stands to make $18,000 in five years; that's about $300/month.

2- June doesn't fully benefit from mortgage interest deduction.  If she stays put, she can write off $5,700/year (479/month).  She will have paid about $75,000 in interest over the next five years or $1250 per month.  When we back out her standard deduction ($479/month), her benefit of buying the home is that she can write off an extra $771/month.  She'll also be able to deduct her property taxes (289/month) for a total MARGINAL income deduction of $1,060.  That saves her about $365/month in income taxes.

3- June will pay that loan down to $257,000.  That builds equity up of about $350/month.

4- The effect of the $8,000 legal bribe is about $133/month, over five years.

5- June's closing costs are $6,000. Amortized over five years, that's an added expense of $100/month

June's opportunity cost of NOT buying, exclusive of appreciation, is $748.  Subtract that from the $2200 payment and her payment "feels like" $1452.  She gains $352/month by renting instead of buying.

The big question is...will June make 15%, over five years, by owning this home?

or...can June negotiate a lower price, by about $45,000, so that her monthly payment drops about $350/month?  At $233,000, June is actually losing money by renting.

Don't Fight the Fed: June 2009 Rates Won't Break 5%

If you've been paying attention, you know that I have the heart of a trader.  I try to offer analysis  rather than opinion.  Last week, I felt the bond traders were overreacting to optimistic economic news and commentary by politicians.  I generally ignore those folks and focus on the Fed.  I said that one of the first rules of investing was "Don't Fight The Fed"; I won't.

This morning's par mortgage rates (with 1%origination fee):

Conventional:      5.375%
FHA/VA                    5.50%
Jumbo(>$417K)   5.875%          

Last November, The Fed released this:

The Federal Reserve announced on Tuesday that it will initiate a program to purchase the direct obligations of housing-related government-sponsored enterprises (GSEs)--Fannie Mae, Freddie Mac, and the Federal Home Loan Banks--and mortgage-backed securities (MBS) backed by Fannie Mae, Freddie Mac, and Ginnie Mae.  Spreads of rates on GSE debt and on GSE-guaranteed mortgages have widened appreciably of late.  This action is being taken to reduce the cost and increase the availability of credit for the purchase of houses, which in turn should support housing markets and foster improved conditions in financial markets more generally.

Yesterday, Fed Chairman Ben Bernanke said this:

We continue to expect overall economic activity to bottom out, and then to turn up later this year. Our assessments that consumer spending and housing demand will stabilize and that the pace of inventory liquidation will slow are key building blocks of that forecast.

Bernanke might just be off the "support the MBS market" bandwagon.  If he ain't opening the Fed checkbook, expect mortgage rates to naturally gravitate towards the 6% plus level by the end of the year.  This won't happen immediately so there will be periods of market overreaction, which will cause me to issue a "float" recommendation.  Generally speaking, my bias has changed from "there will be sunny days tomorrow", for mortgage rates to "there may be a storm-a-brewin'".

I've got you locked if you're closing your loan before June 21.  Today, I'm locking anyone who is closing by July 15, 2009.  The past two weeks have been a fun ride and many of you got 5% mortgage rates by being patient and nimble.  The tacit change in Fed bias has me too worried right now; lock all loans at application.

Apply online now.  It's really simple and should take about 20 minutes.

VA Home Loans: Seller Can Pay Veteran's Debt To Qualify

We've talked about seller contributions towards closing costs but did you know the seller can pay off a veteran's debt to qualify?  The seller contribution is limited to 4%.  Typical VA closing costs in San Diego total about 2-3 % of the selling price; that "extra" 1-2% could be used to "buy the rate down" or to retire the veteran's debt for qualification purposes.

Here's a real life example:

One of our borrowers was buying a $380,000 home in Mira Mesa.  The seller agreed to pay 4% of the sales price towards closing costs ($15,200).  Closing costs for a 5.25% VA loan were about $8,000 while a 4.75% VA loan would have had $16,000 in closing costs.

We opted to accept the higher rate and use the extra $7600 in seller contributions to pay off the veteran's car loan; this eliminated a $500 payment from the veteran's debt-to-income ratio.  The borrower earned about $83,000 annually and would have had a debt-to-income ratio of 48% which exceeded to VA guideline of 42%.

When we paid off the car loan (using the $7600 in "free" seller contribution), the debt-to-income ratio dropped to 41.6% rendering the loan APPROVED.

Sometimes, you gotta be a juggler to get loans approved in this market.

FHA & VA Mortgages Are Assumable

One of the benefits we often forget, when describing VA home loans and FHA mortgages, is they are assumable.  What this means is that a buyer can "take the payments over" from a seller, if the existing loan is a FHA mortgage or VA home loan. 

First, let me tell you why this is exciting:

Today, a VA home loan rate will be around 5%.  I believe that inflation will kick in, sometime in the next 6-18 months, causing mortgage rates to skyrocket to 6.5% or higher.  Left unchecked, inflation could drive mortgage rates into double digits by 2012.  The good news is that home prices will probably jump up, too (if runaway inflation is present).

How hard will it be to sell a house in five years, with mortgage rates at 10% ?

Pretty tough...unless you can offer the buyer a below market interest rate.  Let's assume a San Diegan buys a $300,000 home today and finances $306,000 with a 5% VA home loan.  His payment will be $1,642.

That same veteran looks to sell that home, in 2014, for $400,000 but VA home loan rates are at 10%.  The new buyer, looking to finance $408,000 at the market rate of 10%, would have a payment of $3580; that's over twice the original payment.

What would happen if the selling veteran, held a $100,000 second mortgage, for 25 years, at 12%, and allowed the buying veteran to assume his 5% VA home loan?

The payment on the second mortgage would be $1,053. Add the (now) 25-year, original VA home loan, at 5% payment of $1,642 and you have a financing package that is about $900 cheaper than a $408,000 VA home loan.

Now, here comes the bad news:

VA home loans are only assumable to other veterans (that limits the market).  Technically, any deed transfer would trigger a due-on-sale clause causing the original VA loan to be called.  Pragmatically, that doesn't happen.

Unless the original loan is formally assumed, with VA approval, the selling veteran will have his VA home loan eligibility tied up.

Even with a formal assumption, the selling veteran is still responsible for the original loan payments for the first five years.  You had better be certain that the buyer is credit-worthy.

The seller is stuck with a note, not cash.  That note could be sold on the secondary market but prices are typically about 70 cents on the dollar; that could cost the seller some $30,000 in profit.

The same rules apply for an FHA mortgage, too (except that neither the buyer nor seller needs to be a veteran).

On balance, the assumption of a VA home loan or FHA mortgage could be an excellent selling feature.  Low prices and historically-low mortgage rates make these loans a consideration when comparing them to a conventional loan.

Lenders Can't Evict Sailors & Marines Because of Landlord's Foreclosure

If your landlord doesn't pay his mortgage, the lender will evict you, right?  Not if you serve as an active duty service member.  Cindy Jones, a real estate agent in Woodbridge, VA, tells us why:

Military familes who are forced to make a local move due to a foreclosure may find some relief from the Servicemembers Civil Relief Act.  Not many servicemembers know that under section 531 in the SCRA anyone looking to evict an active duty servicemember from a rental property that is their primary residence must have a court order.  This applies to rent that is less than $2831.113 per month.  Servicemembers can apply to the court to stay their eviction or reduce their rent until their case works it's way through the legal process.

As of July 2008 servicemembers who are being forced to leave their rental property due to foreclosure can apply to their base legal services and transportation office to seek financial assistance with their move.  In addition to the assistance you may find through your base you can also seek "cash for keys" from the lender who is foreclosing on the property.

San Diego sailors and Marines are discovering that the base pay and BAH increase for 2009, combined with drastically reduced real estate prices has made home ownership a reality.  If faced with such an eviction threat, we recommend you contact your base legal services office and read up about how VA home loans could help you get a home of your own.

VA Home Loans Webinar: Links and Content

I recorded this webinar on March 11, 2009. The AUDIO IS HERE and will open in a new window.  Listen along and click through the links as I discuss them:

• The zero-down loan limits for California counties
• How a purchase price, above the VA loan limit, might not require a 20-30% down payment
  •     VA downpayment requirements- Example #4
• Why returning Iraq and Afghanistan veterans are buzzing about buying a home
  •     BAH Tables
  •     Pay Scale- 8% increase in past two years
  •     House Prices Down  (use $8/thousand)
    • 732 Butterfield, Oceanside ($1,600/month)
    • 5346 Rio Plata, Oceanside  ($2,640/month)
• How residual income analysis is used instead of debt-to-income ratios for underwriting purposes
• How to assuage the fear associated with a VA offer
  • Non-allowable costs to VETERAN
  • Document preparation, loan closing or settlement, mailing or postage charges, escrow charges or fees, document preparation and / or assignment, notary, loan application, processing,undewriting fee, trustee's fees or charges and tax service.
  •  About $1,200-$2000
  • WHO PAYS?
    •     borrower (as a discount fee)
    •     lender
    •     real estate agents
• Why VA underwriters hardly ever challenge the VA appraisal
  •     LAPP underwriting
  •     Certificate of Reasonable Value
• How VA home loans can be a less costly alternative to jumbo and FHA jumbo financing
• Why the VA home loans are a better alternative than Cal-Vet loans
• How to verify that a condominium complex is VA-approved
• How to secure a VA approval for a condominium complex
  •     FHA condo approval
  •     VA guidelines for condo approval- Lenders's Handbook- 16A.02

Contra Costa County Veterans: ZERO DOWN Up to $1,094,000

If you're buying a home in Contra Costa County, you need to let your REALTOR know that you served our country honorably.  There is a credit crunch going on and the new VA loan limits, for 2009, allow Contra Costa County veterans to purchase a home, with NO MONEY DOWN, up to $1,094,000.  Let me repeat that for you;

ZERO DOWN PAYMENT UP TO A MILLION DOLLAR PURCHASE PRICE IN CONTRA COST COUNTY

The word isn't out about this, yet.  Contra Costa County REALTOR Wendy Cutrufelli made this observation today:

Let me preface my response with the following information:  I am located in Contra Costa county (northern California) and VA financing hasn't been used in this market for close to 10 years.  So the fact that his realtor got a bank to accept VA financing AND pay for Section 1 repairs.......every fiber of my being wanted to tell this buyer to genuflect at his realtor's feet for accomplishing a miracle.

This is my fault, not the Contra Costa County real estate agents'; I should be screaming this message to them at the top of my lungs.  With a median price of $659,000 in Contra Costa County, more than half of the homes selling are covered by the new VA home loans.  With the higher limits, that percentage steadily increases as prices drop there.  Contra Costa County REALTORs would do well to ask homebuyers if the are eligible for VA home loan benefits.  After all, one in ten Californians between the ages of 21 and 55 have VA eligibility.

How do VA home loans work?  From an article I wrote on the HomeGain Blog:

The VA Home Loan Program is the only national 100% financing loan program. Veterans can purchase a home with no down payment and the seller can contribute up to 4% of the sales price for their non-recurring closing costs and impounds.

Often referred to as the VA No-No program, combining the max sellers’ closing cost contribution with a VA home loan affords buyers the chance to “get into a home”, for no money, at a below market rate.

There are no “stated income” options nor “interest-only” options for a VA home loan. Veterans must qualify on full income documentation. Their total monthly obligations (including the proposed mortgage payment) must be under 43% of their monthly income unless they meet the VA residual income qualification. Current service members receive an allowance for housing (BAH) and food (BAS) and those figures can be “grossed up” 115% for income qualification.

Appraisals are assigned by VA and ordered by the lender. Many lenders participate in a delegated underwriting program (LAPP) but some opt to let the VA underwrite the appraisal. General guidelines suggest that if the home is inhabitable, the loan can’t be made. VA appraisers, however, are not so stringent that the home needs to be “new home perfect”.

There is no minimum credit score requirement for a VA home loan although a 12-24 month history of good payments is required. Some lenders have imposed credit score minimums but a good mortgage broker always has a lender who will fund VA loans on the more relaxed VA-compliant credit requirements.

Frequently Asked Questions:

Are VA loans more expensive?

Heck no.  A VA home loan offers, with a loan balance under $417,000, offers rates that are equivalent to what a conventional loan costs.  Today, that interest rate is about 5.0%.  Loans from $417,001 to the $1,094,000 limit carry an interest rate of about 5.25%.  Compare that to the jumbo rates of 5.5% to 8% and the VA home loan program offers even better rates than the conventional loans.

Doesn't the VA funding fee make it more expensive?

I don't think so.  For a first-time VA home loan user, a 100% loan requires a 2.15% charge (added to the loan) but eliminates the need for costly PMI.  There are no 100% conventional loan options in Contra Costa County.

A 95% conventional loan (if you can get one) has an annual PMI charge equivalent to .875%.  The VA funding fee for a 95% loan is just 1.5%; that money is "recouped" in 20 months.  If you plan to own the home for at least two years, the VA home loan is much less expensive.

A 90% conventional loan requires an annual PMI charge equivalent to .625%.  The VA funding fee for a 90% loan is just 1.25%.  Again, the money is recouped in less than two years.

Do VA home loans have higher qualification standards?

Nope,  Quite the opposite. 

The appraisal can be a tad more onerous but that benefits you, the buyer, because they really analyze the property in greater depth than a conventional appraiser. 

The VA credit requirements don't have a minimum credit score but most lenders require a 620 credit score today.  Conventional loans become more expensive with credit scores under 740 and conventional loans over $417,000 require 660 credit scores.

Income calculations are more pragmatic as the VA home loan underwriters use residual income analysis in addition to the traditional debt-to-income ratios conventional underwriters use.  The VA also uses residual income analysis for determining "capacity".  From the VA website:

The primary method of evaluating a veteran's income is the residual income method.  Under this method, the underwriter determines that a veteran has sufficient income to cover day-to-day living expenses after paying housing expenses, taxes, and other debts such as car payments and credit card payments.

For example, if an 0-2 (with three years service) were receiving a base pay of $3484, a BAH of $2000 and BAS of $300, her total monthly income would be $5784.  We would deduct her taxes (on the base pay), of about $800.  She's single, without dependents so there are no childcare expenses.  This gives her contributory income of $5084.  If she had $1200 in monthly expenses (credit cards, car loans, etc), her contributory income is reduced to $3884.  The VA requires a residual income of $491.  In order to "trump" the debt-to-income ratio analysis, we would need residual income of 120% of that, or about $600; this would allow for a maximum housing expense of $3,200.

Using the "eight dollars per thousand" estimate, Lt (jg) Smith would be approved for a $400,000 VA home loan.

VA home loans offer Contra County Homebuyers a great chance to take advabtage of fallen prices and more generous underwriting guidelines.  I can't think of any other time, in my fifteen years of lending, where someone could buy a million dollar home with no money down.

Veterans in Contra Costa County can do that today.  Remember to remind your REALTOR that YOU are eligible and call me at (858)-777-9751.  You've EARNED it by proudly serving our great country.

PS:  Ask some of the Navy and Marine Corps veterans who I've helped about my VA home loan expertise.

V.A. Mortgage Rates Report: February 19, 2009

San Diego veterans can get a VA home loan today with the following terms:

5.0% with 1.5% discount fee
5.5% with .5% discount fee
6.0% with 0 discount fee

If you plan on being in the home for more than two years, it makes sens to pay the discount fee and secure a lower rate.  Will VA home loan rates go up or down, in the near-term?  I discuss the effect of the Obama mortgage plan, on veteran borrowers, in my Long Beach Mortgage Rates Report:

The Obama Mortgage Plan isn't going to help new home buyers.  In fact, it might just hurt you a lot.  The cornerstone of the plan is to force lenders to compromise loan balances and original mortgage terms.  While that sounds all well and good in theory, in practice it sends a message to lenders;

The terms of the loans you write are rock-solid...unless they aren't, then the gubmint's gonna intervene.

San Diego VA Home Loan Limit Remains $697,500 Through 2012

President Bush signed the Veterans' Benefits Improvement Act of 2008, extending the enhanced VA loan limits (current $697,500 for San Diego), through December 31, 2011.

In addition to the loan limit extension, the VA extended ARM products through September 30, 2012.

VA refinance loans are now allowed for up to 100% of the value of the home and up to the full $697,500 loan amount.  This is notable inasmuch as refinance transactions couldn't exceed 90% of the value of the home and had a loan limit up to $417,00.  This should help many veterans who are stuck in non-prime ARM loans about to adjust upwards.

VA loan limits were scheduled to revert back to the $417,000 limit on January 1, 2009.  This legislation rescinds that schedule.  FHA  and conforming loan limits, scheduled to adjust downwards to $625,000, in San Diego County, on January 1, 2008, should follow the VA's lead.  If that were to happen, my opinion about San Diego's 2009 real estate market outlook might be tempered.

Brian Brady is San Diego County's VA Home Loan expert.  He has helped existing sailors, marines, soldiers, and airmen finance their first home by using the power of the VA-guaranteed home loan with NO MONEY DOWN.

Here's an excerpt of what one Navy family said about Brian:

I literally was one of the first loans to close this kind of VA loan and Brian was able to pull it off, which is no small task in today's market.  I really can't say enough good things about him and he even put me in touch with some amazing real estate agents.  If you can use your VA benefits I would suggest doing it before the end of the end of the year, when the guidelines change again.  Look this mortgage guy up and give him a call, seriously!  Cuz the closest next option is 3% with FHA and mostly 10% with Conventional.

While the loan limits have been extended, San Diego housing prices have fallen to their lowest level in 4-7 years.  Service members have a great opportunity to own a home they can afford.

Call Brian at (858)-777-9751

Can More Than One Person Be On a VA Home Loan?

I was asked this question when someone was searching for a VA home loan in San Diego, today:  How many people can "go on" a VA home loan?

The borrowing veteran and his/her spouse can be borrowers for a VA home loan.  The veteran and her fiancee can not.  The service member and his girlfriend can not.  Only spouses can be co-borrowers on a VA home loan...

...UNLESS...

Both borrowers are eligible for VA home loan benefits.  An example:

Bill is an active-duty, Petty Officer Second Class.  As an E-5 without dependents, Bill receives $1,650 for his housing allowance and about $200 for his sustinence.  He earns about $2,400/month in base pay.  With monthly obligations of $400, he qualifies for a home loan for $150,000-$175,000.  While that may help him buy a condo, in San Diego, Bill has his eye on a single-family home.

Bill's ship mate, Frank, is also an E-5 with similar benefits and monthly expenses.  Buying a home together expands their buying power to about $350,000.  That makes the prospect of a single-family home more attainable.

If Bill chose to have his father, a former Navy yeoman (from the Vietnam service era) buy and live in the home with him, he would qualify because he has VA home loan eligibility.  Certainly, he must qualify on her income and credit as well.  If Bill's father were deceased, his mother may have "inherited" her late husband's VA eligibility if she hasn't remarried.

Marriage is the only relationship outside of shared VA eligibility that allows for a non-eligible co-borrower