MORTGAGE RATES REPORT

VA Home Loans Are Not Necessarily "Government" Loans

VA home loans, in San Diego County, account for over 10% of the new mortgage originations.  Our proximity to Camp Pendleton, MCAS Miramar, Coronado, 32nd Street Naval Station, and MCRD makes San Diego a haven for active duty and retired military.  As such, the VA-guaranteed mortgage has been an important financing tool for San Diego County real estate.

Volume for government-insured mortgages spiked in the past two years in response to mortgage credit tightening.  FHA is feeling the brunt of the "non-traditional" credit buyers so much that they've hired a new risk chief.  Congress is worried:

Many lawmakers, especially on Capitol Hill, have expressed concerns that the FHA is taking on too much risk with its greater volume of insured mortgages, exposing itself to future defaults and delinquencies in much the same way as Fannie Mae and Ryan’s employer, Freddie Mac, did before the government took them over and pumped them up with billions of dollars in emergency capital.

Recently, default rates were released for San Diego County.  VA home loans had the lowest default rate, outperforming FHA and conventional prime loans. Why does VA have superior performance?

VA home loans are employee-benefit loans, not pure "government" loans like the FHA.

The VA is an affinity group; a "club" if you will.  It's current and past members share a common goal and feel a responsibility towards each other.  As such, VA borrowers feel a greater moral compunction towards the insuring agency (the VA) and are less likely to default on their obligation.  That "sense of duty" then, makes the veteran a more attractive borrower to lenders.

 

The VA actually cares about the condition of the collateral (house the veteran is buying)

The VA requires lenders to use assigned appraisers to perform a comprehensive appraisal report which includes commentary about the property condition.  Influence from loan originators and REALTORs is diminished because of the "arms-length" nature of the appraisal assignment.  The appraisal report is then reviewed by the Veterans Administration or a designated VA underwriter to complete the valuation process.  The VA valuation process is so successful that conventional lenders adopted the process through the Home Valuation Code of Conduct.  FHA plans to adopt this process next year.

Success of the VA home loan product comes down to this statement; the VA takes care of its own and expects them to appreciate that.  It's been working since 1944; we expect to work for another 65 years.

Check VA Mortgage Rates.

Get Pre-Approved for a VA home loan online.

VA Home Loan: Nearest Living Relative Form

The VA requires all mortgage applicants to furnish a form designating a "nearest living relative".  It's not a standardized, official VA form but rather a letter or lender generated form stating who the veteran's family contact is in case the VA has lost touch with the borrower.

Is it a collection tool?  Perhaps but the VA states that it needs this information in case the veteran moves or is abruptly re-assigned.

The "nearest" part of the form means the closest relative in blood rather than distance.  if your mother-in-law lived a mile away but your brother lived across the country, your brother would be considered to be your "nearest" living relative.  Veterans will be asked to furnish his name, address, phone number, and relationship to the veteran.

No verifications about this information are performed by the underwriters at this time.

New Good Faith Estimate Debuts January 1st, 2010... But Why Wait?

Last week I got my first peek at the new Good Faith Estimate all lenders will be required to use by the Department of Housing and Urban Development after January 1st, 2010.  It is a tremendous improvement over what we have now.  They're not even in the same ball park!  It is so good, in fact, that I predict the quiet rumblings of criticism I've heard within the industry will grow louder.  Why?  Because this is one of those rare, government mandated documents that actually and truly helps the people it purports to help: the borrowers!  This is not good for those lenders that rely on borrowers' gullibility and ignorance as a crucial aspect of their business model.

A quick overview: the new Good Faith Estimate is three pages long.  Within those three pages borrowers will find these helpful sections:

• Important Dates showing how long the rate and terms of the offered loan are valid and the terms of the rate lock.
• Summary of your loan including term, rate, amount, whether it is adjustable, negatively amortizing, subject to a prepay penalty and so on.
• Escrow Account explanation and information.
• Summary of Loan Charges in plain black and white.
• Origination Charges revealing fees charged directly by the lender.
• Other Settlement Charges making clear third party fees not quoted by or given to the lender.
• Instructions clearly explaining which charges cannot increase at closing as well as any limits on increases for those charges that can change at settlement.
• Trade-off Table wherein the lender compares how the payment (rate) and closing fees move in opposite directions for the same loan as the rate moves higher or lower than that quoted.
• Shopping Cart giving borrowers an organized way to compare lenders.

This new Good Faith Estimate is transparency on steroids!  Take a look again at those last two items: a Trade-off Table and a Shopping Cart.  Lenders like Brian Brady and myself have been providing this kind of understanding for years.  We've spent hours explaining the concept of rates vs. costs to borrowers who are often misled by other lenders and even the industry in general.  I can not count the number of times I've heard a client remark to one or both of us, "Gee, no one's ever told me this before."  I guess we can expect to hear that a lot less often.

I also expect an even greater share of business to come our way.  For a number of lenders out there, this new Good Faith Estimate means their model for doing business is going to change.  That benefits the borrowers (obviously) but it also benefits those of us who have been doing this all along.  As a matter of fact, I am going to start using this new Good Faith Estimate now, along side the older one.  Why wait until January 1st, 2010?  This is the clearest explanation of fees I've seen yet and it will only serve to educate our customers.  As Brian is fond of saying: "An educated customer is our best customer."

by Sean Purcell

Documentation Needed For A Mortgage

Lenders will require the following information after you make a loan application:

1. most recent two pay stubs
2. last two years W-2 forms
3. If you're self-employed or a comissioned sales person, lenders will want to see the last two years 1040 tax returns with ALL accompanying schedules.  Sign all copies where you would normally sign the original
4. most recent two months bank statements (all pages), documenting the down payment *
5. most recent two month securities accounts statements.  Lenders will only "credit" 70% of the value of that account
6. most recent account statement for an IRA or 401-k account.  Lenders will only credit 60% of the value of that account.
7. copy of the dicorce decree if you are divorced
8. copy of your driver's license, passport, or social security card (two out of three)

* If you plan to use a gift, from a family member, for the down payment, the documentation needs to be REALLY complete.  We need a gift letter, signed by both the donor and recipient, a copy of the cancelled check (from the gift), and two months bank statements from the donor, documenting that they owned those funds for 60 days, prior to the gift.

PS: If you plan on using a VA home loan benefit, a copy of your Certificate of Eligibility and/or DD-214 will be required

Downtown San Diego Condo Loans: VA and FHA Approved Complexes

If you want to purchase a property within one of Downtown San Diego condominium developments, you might choose to use an FHA loan because of the low down payment requirement (3.5%).  Prior to last week, FHA condominium approvals could be issued on a "spot approval basis", meaning a HUD-approved lender could approve a loan regardless of the FHA complex approval. That practice has been discontinued.

Veterans choose to use a VA home loan because there is no down payment requirement.  Like FHA's amended policy, VA home loans can't be approved if the complex isn't.  VA, however, accepts the FHA approval and grants reciprocity.  FHA-approved condo complexes in Mission Valley will have explicit reciprocity by the VA. 

The following Downtown San Diego condo complexes are approved for both FHA and VA loans (as of 8/6/2009):

• Aperture
• Aria
• Atria
• Park View
• The Park at Tenth Avenue
• Terrace Village
• Park Row
• Park Terrace East Village
• Solara Lofts
• Union Square at Broadway
  

This information is not guaranteed for accuracy.  FHA condominium approvals can be searched at the HUD portal and VA condominium approvals can be searched at the VA portal.  It is advised to search at the portal before visiting the complex.

Mission Valley Condo Approvals For FHA and VA Mortgage Loans

In Mission Valley, there are 39 condominium projects.  If you want to purchase a property within one of those Mission Valley condominium developments, you might choose to use an FHA loan because of the low down payment requirement (3.5%).  Prior to last week, FHA condominium approvals could be issued on a "spot approval basis", meaning a HUD-approved lender could approve a loan regardless of the FHA complex approval. That practice has been discontinued.

Veterans choose to use a VA home loan because there is no down payment requirement.  Like FHA's amended policy, VA home loans can't be approved if the complex isn't.  VA, however, accepts the FHA approval and grants reciprocity.  FHA-approved condo complexes in Mission Valley will have explicit reciprocity by the VA. 

The following Mission Valley condo complexes are approved for both FHA and VA loans:

Friar's Pointe
Friar's Hollow
Friar's Mission
Creekwood at River Run
The Franciscan
Friar Gardens
Union Square
River Scene
Mission Gate
Mission Greens
Mission Heights
Mission Playmor
Mission Plaza
Mission Village
Mission Ridge
Mission Verde
Park Villas North
Rancho Mission Villas
River Colony

As of today (August 6, 2009), the following Mission Valley condo projects do not have FHA or VA approval:

Presidio Place
The Courtyards
Mission Bellwood
Woodspring
Rio Vista
Park Place Estates
The Bluffs
Mission Valley Terraces
City Scene
Fashion Hills
The Vistas at Fashion Heights
Hye Park
The Mission at Rio Vista
The Lido
Escala (Bridges, Bungalows, Courtyards, Terraces, Verandas, Villas)
Rio del Oro

This information is not guaranteed for accuracy.  FHA condominium approvals can be searched at the HUD portal and VA condominium approvals can be searched at the VA portal.  It is advised to search at the portal before visiting the complex.

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.