Mortgage Rates and More

Foreclosures have become common in the current real estate market. It's a great way to buy a home at a discounted price.

Although homeowners in the neighborhood lose out from the low amount received from foreclosures, potential buyers on the other hand will turn around and improve the property which is a long term benefit for the neighborhood. In this article we discuss some tips you can use when buying a foreclosed home. This will especially be helpful for those buying a foreclosed property for the first time.

Here Are 5 tips To Follow When Buying A Foreclosed Property:

• Pre-approval: Obtaining a pre-approval from a reputable mortgage broker is an essential component to buying a foreclosed property. With pre-approval, the seller will get to know about you being a serious buyer and can afford to buy the property. Free pre-approvals are offered by United Home Loans. Moreover, potential buyers are provided proper guidance through the purchasing procedure.
• Complete an inspection: Investing in foreclosed property is risky and it's so important that you complete a home inspection. And don't let the cosmetics of the home fool you; there are many homes that look nice but have massive underlying problems. Doing an inspection allows you to identify any type of problem that exists in the property, which when not taken care of before the purchase will only become an expenses for you after you close the purchase.
• Not just the price tag:  Homebuyers looking at foreclosed properties are usually focused on one thing; how cheap can we get this property. But there are lots of other things a buyer should consider besides the low price tag. Foreclosed properties at times require updates and additional work, thereby involving more expenses. Does the layout of the home match your needs? Is this an area you want to live in? How far is my commute? It's very important you answer these questions before making an offer.
• Homework: Doing your "homework" on foreclosed properties is crucial prior to moving forward with the purchase of a foreclosed home. For starters, check the surrounding area and make sure its the kind of neighborhood you want to buy a home in. You'll also want to make sure the improvements you are going to make match the neighborhood and that the values in the are support the improvements. Also talk with an experienced loan officer with years of experience to help you better prepare for the purchase. Have the loan officer quote you various mortgage programs so you can decide which is best for you. It's also important to stay on top of current mortgage rates so that you can lock in a low rate.
• Hire a Realtor that has experience with foreclosed properties: This might be fifth on the list but it's one of the most important aspects of buying a foreclosed property. Working with an experienced Realtor can only help you when you go to buy a foreclosed whom. Generally speaking a Realtor will have tons of information about the property and neighborhood so you can make a more informed decision. The Realtor might also have a good idea of what certain repairs will cost.

Are Mortgage Rates Higher For Foreclosed Properties?

Usually not. Conforming fixed rates for the purchase of a new home are the same no matter who is selling the property. If it's a jumbo loan you should be fine too. Where you may run into problems is if the home is completely trashed and to buy it you have to obtain a very specific rehab/construction type loan which generally carry higher mortgage rates than "regular" mortgage terms.

At the start of the month mortgage rates are near all time lows. Fixed mortgage rates are more attractive than adjustable rate mortgages for both refinance and purchase transactions. Overall mortgage application volume has been lower when compared to March and parts of April however it still remains higher than normal.

We're anticipating that mortgage rates will remain low throughout the month of May with 30 year and 20 year fixed rates being the most attractive terms.

The Economic Calendar And Mortgage Rates:

On Friday, May 1st, 2020 the ISM Manufacturing report came in higher than expected. Expectations were for a 36.1 reading however the report came in at 41.5 (last month it came in at 49.1). The report had no impact on mortgage rates. During the first full week of May we have the ISM-Non Manufacturing report, MBA Mortgage Market Index, ADP Employment report, weekly Unemployment claims, and the monthly jobs report.

The monthly jobs report has the potential to impact the direction of mortgage rates in May. Expectations are for non-farm payrolls to come in at 21 million jobs lost during April and an unemployment rate of 16%.

We'll also be keeping an eye on the weekly Unemployment claims. Last week claims declined and the market is hoping that trend continues. A number significantly below 3 million would be considered a positive for the economy.

The Fed And Mortgage Rates:

Many people believe that the Fed controls mortgage rates. However that is simply not true. Mortgage rates originate in the Mortgage Backed Securities (MBS) bond market. The Fed does have an influence over the MBS market and since mid March the power of the fed has been very influential over Mortgage Backed Securities.

The Fed announced they were going to start a new wave of buying MBS bonds to help keep mortgage rates low for homeowners and homebuyers. They also expressed deep concern about the economy which is another positive for the MBS market (bad economic views from the Fed is generally a positive for the MBS market and positive views on the economy are generally bad for the MBS market). 

It's important to avoid using the Fed as a major part of your mortgage strategy. Talk with an experienced Loan Officer and set up a strategy that will best take advantage of current market conditions.

Cash Out Refinance Mortgages:

If you are looking to take cash out of your home then you might want to move forward sooner rather than late. Banks like Wells Fargo and Chase have started to pull back as some lenders no longer offer cash out refinance mortgages. And the ones that still do are coming up with stricter guidelines which is making it harder to obtain a cash out mortgage.

Anyone who has been following mortgage rates from the end of February 2020 until mid March 2020 is probably wondering what is the world is going on with mortgage rates?!?!? Mortgage rates made a dramatic move lower towards the end of February and that continued into March. Then came the all time low mortgage rates for both 30 year and 15 year fixed rate loans.

Then came the decline which started on March 9th and since mortgage rates have been moving higher. For some mortgage lenders they've been moving significantly higher.

How Low Did Mortgage Rates Go?

First off it's important to remember that everyone's loan scenario is different. Not every homeowner qualifies the absolute lowest rock bottom rate; even if you have an 800 credit score. The amount of equity in the property, your debt to income ratio, are you setting up an impound account, the size of your loan, how you plan on qualifying, and what type of property all play a role in the structure of a mortgage.

Just before the move down mortgage rates were already low; 30 year fixed rates were between 3.50% and 4.00% for most transactions and 15 year fixed rates were between 3.125% and 3.50%. Keep in mind that just over a year prior mortgage rates were 1% higher so a 3.50% 30 year fixed rate was very attractive considering where the market was previously.

As we moved into March 30 year fixed mortgage rates dropped to 3.00% to 3.50% and 15 year fixed rates dropped to 2.625% to 2.875% for most transactions.

Needless to say there was a massive wave of loan applications and that created the first big problem for the mortgage industry.

First Major Problem For Mortgage Rates:

On a good day the mortgage industry takes in about $1.5 to $2.0 billion worth of new loan applications. 

Prior to the big move down in mortgage rates many lenders were already receiving significantly more loan applications then they normally would. When March, 2020 loan application volume did a super spike. There were days in which the industry took in $8 to $13 billion worth of new loan applications. Way too much and the industry become overloaded.

Because the industry became overloaded with application mortgage lenders decided to raise rates despite the huge rally in bonds. They did this to slow down the number of applications they were receiving. 

One important fact that most people don't realize; mortgage lenders can only lend so much money. The money they have to lend is not endless.

Second Major Problem For Mortgage Rates:

The second major problem for mortgage rates was that the bond market, specifically the Mortgage Backed Securities market, fell apart after the Fed announced it was going to be buying Mortgage Backed Securities (MBS). Everyone knows what happed in the stock market but for the average person it's impossible to see what was happening the the MBS market. Let's just say it was a total melt down. The pricing of these bonds went down dramatically and as a result you started seeing 30 year fixed mortgage rates in the mid to high 4's. 15 year fixed rates in the low 4's. 

A dramatic difference from the previous weeks.

What Happens Next?

The million dollar question as we near the end of March is "What will mortgage rates do?" 

Eventually the market will settle down which is what we need. Volatility is not something that is good for consumer mortgage rates. The Fed has stepped up their purchases of MBS (largest ever) so that should help bring the market to a more stable range. The timeline for this is unknown but hopefully it's something we see over the next few weeks.

If the market stablize and mortgage lenders reduce the number of applications in process mortgage rates should move lower and remain somewhat stable. 

However don't expect mortgage rates to reach record lows again; at least not any time soon. Even if the bond market is in a place in which lenders would be able to do that they probably will resist. And they're not doing it to be greedy. The main reason would be to make sure they don't get overwhelmed again.

When a mortgage lender is overwhelmed everyone loses. Processing times get significantly longer and the cost to process a loan gets more expensive.

If you have questions for your loan officer about what's going to happen next it's important to have that conversation sooner rather than later. Being prepared and making a plan to lock in when the time is rate could save you thousands of dollars in interest and fees. And make sure you consider all your options since a mortgage transaction has significant financial implications that last years and possibly decades.

When mortgage rates move lower many homeowners look to refinance their current mortgage. The reason for refinancing varies from one homeowner to the next but most will agree the number one motivating factor are current interest rates.

Reasons to consider a refinance include a lower interest rate, a shorter term (going from a 30 year to a 15 year term), or consolidate a first and second mortgage (including a HELOC). An additional reason is to obtain cash out from the property to improve the home or to payoff consumer debt such as credit cards and car loans.

Here is a simple to follow step by step guide to help you navigate the refinance process.

Step 1 - Be Prepared:

Being prepared is essential, in fact it's a must. 

If you are not prepared you could end up paying a higher rate and more in closings costs. The good news is it doesn't take that long and it's a fairly simple process. The first thing you want to do is determine why you want to refinance and clearly understand your current mortgage rate and term.

Have a clearly defined purposed enables you to determine the best corse of action when it come to getting your quotes and picking a mortgage company to work with. Establish why you want to refinance, the pros and cons of a new loan and lastly review your current loan terms to make sure you can make an accurate comparison with the quotes you receive. You'll want to know what your term is (30 year, 20 or 15 year), the interest rate and what your monthly payment is (without property taxes and insurance).

To complete the process of being prepare you'll want to gather your income documentation. If you are an employee that receives a W-2 then you'll want to grab your two most recent W-2s and your two most recent paystubs. If you are self employed you'll want to grab your two most recent IRS tax returns, all pages (don't leave anything out including any K1's you received).

And if you have a mortgage statement for your current mortgage along with contact information for your homeowner's insurance agent then you are in an even better position to move forward.

Step 2 - Brush Up On The Basic Mortgage Terms:

Knowing some of the basic mortgage terms is incredibly helpful.Things like the "1003" (which is the Loan Application, Loan Estimate, PITI, the difference between Discount Points and Origination Fees, what third party fees are and more. Learning these important key mortgage terms will only take ten - fifteen minutes and it could end up saving you hundreds, possibly thousands, of dollars.

Knowing the difference between a fixed rate term and an adjustable rate term is important because these are two very different loan types. Knowing what a pre-payment penalty is means you'll be able to ask a question to see if you'll have to pay a fee if you payoff your loan early. While most people knows their credit score is important to the refinance process; most don't know that their Debt-To-Income (DTI) ratio is every bit important as well.

Having a clear understanding of these terms puts you in a better situation to navigate the process. It also allows for you to ask the Loan Officer more informed questions (more on this below).

Step 3 - Making The Calls:

Contacting a mortgage professional is the next step. 

The best advice I can give is stay away from companies that have a bad reputation. You can use services like the Better Business Bureau, Zillow or Yelp to research the best companies to use. You can also access the NMLS Consumer site which every reputable mortgage company and Loan Officer is licensed through. If a company has below an B rating at the Better Business Bureau website you may want to look elsewhere. To be safe you may want to stick with the companies that have an A or A+ rating.

Find two to four top rated mortgage Loan Officers and then visit their website to find out a bit more about the company. Check out the Loan Officers that are listed and find one that has at least five years of experience. You may want to spend about five - ten minutes checking out his or her profile and reviews on line.

The number one thing to do when you contact a mortgage company:

It's simple; the answer is ask questions and ask lots of questions. 

Now in Step 2 I mentioned you should brush up on your mortgage terminology and this is where it will payoff. Why is asking questions so important? 

One obvious reason is so that you can better understand the quote and service they are providing. But that's not the reason I'm saying this. You should ask questions to test the Loan Officer and see if he or she is a good candidate to work with.

If the Loan Officer is someone who answers you directly, in depth and doesn't rush you then that's a great person to work with. If on the other hand the person "beats around the bush" or seems irritated that you're asking questions then that's your clue to move on the next company.

Part of the job description for Loan Officers is being willing and able to answer questions about refinancing a mortgage. Someone who is not willing to do this really should not for another job. Don't trust your financial well being to someone who is unwilling to do a basic part of their job.

Step 4 - Picking The Right Company:

There are two things to look for when deciding on which company you'll use; who has the competitive rates/terms and do they provide a high level of customer service. Some people would say just go with the lowest quote but the people who say that are missing an important piece to the puzzle. Anyone can quote a low rate at great terms but can they deliver that at closing? Do they exhibit the professionalism needed to ensure the loan closes as expected and on time.

If a Loan Officer doesn't have the ability to provide a high level of service you are taking a risk with your refinance in that you may be left in the dark, not knowing when you are closing and what the terms of the loan are going to be at closing.

It goes with out saying; the mortgage industry benefits from a strong housing industry. So mortgage industry professionals like to keep an eye on trends that are developing in housing (both new construction and existing home sales). A big part of our business in the mortgage industry is devoted to the purchase market.

Heading into 2020 we have some good things working for the housing industry:

• The economy is doing good; not great but good enough to help more people buy homes
• Unemployment is low
• Wages are up just a bit
• Interest rates are low
• Strong demand for affordable housing

All these factors should help make 2020 a good year for the housing industry. 

The Economy, Employment and Wages:

The economy is good and its hard to argue that. Some will say it's great however there are areas of concern and GDP is below 2.00%. The stock market is not great indicator as to how well the economy is doing and one can argue that the rally in Q3 and Q4 was induced by the Federal Reserve with the lowering of rates and expansion of their balance sheet. 

Moving forward all eyes will be on the weekly jobless claims reports and the monthly employment reports. If those reports show a healthy job market that will go along way with keeping mortgage rates low. Inside the monthly employment report is wage data and we need to continue to see that grow to enable greater home buyer purchasing power.

Low Rates And Strong Demand:

Heading into 2020 mortgage rates are at great levels. Both 30 year fixed and 15 year fixed rate mortgage rates are near their multi-year lows which makes it easier for more potential home buyers to enter the market. Provided the Mortgage Backed Security market remains stable we should see mortgage rates remain low compared to 2018 levels.

The demand for new housing is strong as builder optimism is high right now. The fact is we don't have enough homes to satisfy the demand so home values could continue to remain elevated as we move further into 2020.

Mortgage rates originate in the Mortgage Backed Securities market (bonds) and each day investors trade these bonds depending on various things. The economy is always the number one mover of Mortgage Backed Securities but there are other factors and events that shape the trading day/week/month/year. 

Some of those factors include:

• International markets (mainly the European Bond market)
• Important political events and elections
• Trade agreements or lack there of (ie trade war with China)
• Market movement. Strong moves could cause other investors to follow

One thing is for sure; the Mortgage Backed Securities market changes daily....it's never the exact same. It may end up at the same spot in which it began but during the day there is constant movement as traders position themselves. Consumer mortgage rates are directly impacted by these moves. Small moves have little impact (sometimes not at all) and medium - big moves will cause a sizable adjustment to the mortgage rates quoted to consumers.

Today was an interesting day in the MBS market. Right from the opening bell Mortgage Backed Securities were selling off with European bonds. Even after this mornings Chicago PMI report (which came in stronger than expected) MBS continued to sell off. However by late morning/early afternoon things settled down and MBS started to rally along with the 10 year Treasury. The FNMA 3.5 coupon hit a three month high after hours (a positive for mortgage rates).

The big question is why?

Unfortunately there is no simple - easy answer. Once the European bond market closed MBS continued to rally and that rally continued into the "After Hours" trading session. And yes even though the market technically closes you can still trade MBS bonds and US Treasuries.

And by late afternoon six mortgage lenders improved pricing just a bit which is good news for consumers. The movement is something to keep an eye on especially if it continues into next week. Don't expect huge improvements to mortgage rates this week even if the Mortgage Backed Securities market continues to rally. Certain times of the year mortgage lenders are conservative with the mortgage rates they quote and this is one of those times. By early next week mortgage companies will return to a more aggressive rates.