The 30-year fixed-rate mortgage jumped to an average of 2.79% this week, increasing after last week’s record low of 2.65%, Freddie Mac reports in its weekly mortgage survey. Upticks over the last couple of weeks in 10-year Treasury notes—a key benchmark for mortgage rates—will prompt mortgage rates to rise, economists note.
“As Treasury yields have risen, it is putting pressure on mortgage rates to move up,” says Sam Khater, Freddie Mac’s chief economist. “While mortgage rates are expected to increase modestly in 2021, they will remain arguably low, supporting homebuyer demand and leading to continued refinance activity. Borrowers are smart to take advantage of these low rates now and will certainly benefit as a result.”
Freddie Mac reports the following national averages with mortgage rates for the week ending Jan. 14:
Freddie Mac reports average commitment rates with average points to better reflect the total upfront cost of obtaining the mortgage.
The National Association of REALTORS® forecasts that the 30-year fixed-rate mortgage will average 2.9% and 3% in the first and second quarter of 2021, respectively.
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COVID-19 conditions fueled acceptance and recognition of a global, distributed working model.
The mortgage industry has not traditionally been the vanguard of digital adoption, particularly in data intelligence and applied machine learning. Investments in proper infrastructure, an innate fear of losing process control, and converting the workforce to a digitally savvy “knowledge force” have contributed to “digital apprehension” in the past.
The COVID-19 pandemic served as a force majeure compulsion that has transformed delivery frameworks, perhaps inalterably, toward acceptance and recognition of a global, distributed working model. It has brought in interactive technology and cognitive business process tools as resiliency responses to the crisis.
The mortgage industry has been forced to respond to the massive and sudden work-from-home mandates. It has embraced virtual workforce models that were once considered “risky” or only applicable to trendy Millennial-dominated fintech cultures. It now seems the rank and file mainstream industry stalwarts have learned that there is immense untapped productivity scope to be unveiled from the process “digitization” and operations virtualization.
The sprint to accommodating business process delivery in response to COVID-19 has awakened a new interest in direct-to-consumer and direct business-to-business technology collaboration opportunities. It is no longer a means to experiment with a differentiating model. It is a new standard taking a more significant advantage of productivity tools and means awaiting mass scale adoption.
Below are seven realities that were exposed and highlighted from the mortgage industry’s response to COVID-19. These realities may have been known previously but the enduring changes were brought about by the pandemic.
1. Consumers can succeed as self-directed digital learners
In the past, the mortgage industry operated based on the assumption that customers needed to speak to somebody in person to help them understand the complex issues related to lending. When COVID-19 struck, several customers suddenly faced an uncertain situation and wanted to learn about things like unemployment benefits, impact on mortgage payments, and the optimum way forward.
Given that most mortgage companies did not have time to prepare for the onslaught of queries through one-on-one engagement, they set up communication portals equipped to handle these queries. With their high-quality multimedia content and chatbots, these portals were successfully able to engage with users.
The biggest revelation for mortgage companies was that customers were capable and willing to perform business process activities independently without much hand-holding. With newsfeed and push notification of bite-sized content similar to tweets, customers were encouraged to help themselves.
2. Paper is increasingly becoming a dirty word.
With COVID-19, paper was literally considered ”dirty” since it could transmit the deadly virus to anyone who handled it. As a result, all paper-heavy processes in the mortgage process, whether contract signing or reviewing, moved online overnight. Along the way, people suddenly realized how much simpler the process became in the bargain. The reliance on a physically present notary, a signing room and other such requirements as part of the mortgage process is migrating toward E-sign and notary standards.
3. E-Everything (e-closing and virtual transactions)
Asking customers to physically sign mortgage documents in the presence of an attorney or signing agent has been a long-standing norm. The pandemic proved that customers are apt to adopt e-sign for smart documents, with a preference for more convenient closing processes, even executing closing documentation in the comfort of their homes. It is reported that shifting to e-execution models reduced costs considerably, and eliminated the need to travel to a third-party office location.
4. Working from home may be a new preference for a majority of the workforce.
While several industries such as IT have been allowing and encouraging employees to work from home, lenders have been more old school in their approach to work. They took comfort in being able to ”see” their employees working to ensure their productivity. They placed greater emphasis on hours spent at the office rather than taking an outcome-based review process.
COVID-19 confirmed that not only do the majority of workers prefer to work from home; they are also more productive when they do so. Considering the time spent by the average worker in meetings, lunch, coffee breaks, water cooler chats, and commuting, working from home is more efficient. Besides, the lower overheads related to office maintenance and real estate costs could mean that most lenders may end up working remotely forever.
This model could also open up several opportunities for the mortgage industry to tap a much larger pool of skilled remote workers without worrying about geographical constraints.
5. Virtual operations are secure and reduces climate impact
Security is one of the top concerns cited by lenders when it comes to remote working. While there are always vulnerabilities, companies invested and moved from a minimalist approach to a maximalist approach to security despite the expense. This has given clearance for broader adoption of information security protocols that leverage automation, AI, analytics to deploy cybersecurity solutions with enhanced precision and faster responsiveness to threat vectors.
A robust security infrastructure not only makes virtual operations extremely secure, but remote working goes a long way in minimizing the climate impact.
6. Scale and capacity strategies cannot avoid the logic of the global workforce and automation solutions at scale.
Traditionally, most capacity models in the mortgage industry are extremely people-centric. Scaling during COVID-19 was immensely challenging and remains challenging because there is a significant workforce talent shortage in mortgage operations across all country regions. There were not enough workers when rates dropped at the very start of the peak production season in lending. Most lenders had to grapple with immense challenges of recruiting, screening, and training new hire workers in work from home “shut down” situation.
The result has been an incredibly long application-to-funding lifecycle turn times. The demand response to the dilemma has been a high adoption of production migration to offshore/nearshore work teams and a push to automate backend processes with microservices, API co-source applications, and an increase in process automation software.
Many lenders now see their workforce as a hybrid conception: some on-premise, some virtual; some onshore, some right shore; some human physical, some robotic or cognitive.
7. Loss mitigation efforts do benefit from AI and digital automation- it’s not just for origination sales
With automation, loss mitigation interventions such as qualifying decisions can be made far more effectively based on the rules-driven application of just in time data. Advanced algorithms have increased their role in the servicing of distressed borrowers.
Servicers have increased their utilization of intelligent insights and automated risk modeling to move away from human biases and decision variation when executing a loss mitigation intervention. They have also accelerated the use of Natural Language Processing, allowing consumers to ask questions and interact with the servicing data intake systems in ways that are less embarrassing, threatening, reducing the humiliation of “asking for help.”
Providing digital solutions for consumers has increased the rate at which borrowers ask for forbearance, loan modifications, or re-payment plans.
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The coronavirus pandemic and the ensuing financial crisis have caused immeasurable hardship and pain across the U.S. Paradoxically enough, the crisis has also served as a turbocharged shot to the housing market. Feverish buyers rushed into the market just as COVID-19-shy sellers pulled their homes off—forcing buyers into bidding wars and pushing prices up to new heights. Recession be damned.
Now, as the long-awaited vaccines are being rolled out, home buyers and sellers are eager to take real estate's temperature. Will prices finally cool off? Will the big cities come back? And will more homes finally go up for sale?
Certainly, the vaccines aren't expected to be silver bullets, especially given the rocky rollout rife with distribution problems, inoculation concerns from the general public, and new strains of the virus circulating. Even when America reaches herd immunity, it's not as if the world—and the housing market—will instantly return to some semblance of pre-pandemic normal.
Spoiler alert: The housing market is expected to remain hot, but the frenzy that was a hallmark of the majority of 2020 is likely to die down.
“We’re going to settle somewhere in between where we were before COVID and where we were during COVID," says realtor.com®'s chief economist, Danielle Hale.
More homes to go up for sale, but buyers can expect competition
The good news for buyers is more homes are expected to go up for sale. So desperate buyers won't need to put in offers and waive contingencies before they've even finished touring the properties.
But inventory won't increase overnight.
"Some people will feel comfortable listing their home during the first half of 2021," says Ali Wolf, chief economist for Zonda, a real estate consultancy. "Others will want to wait until the vaccines are widely distributed. This suggests more inventory will be for sale in late 2021 and into the spring selling season in 2022."
Many sellers held off on listing their homes during the pandemic, particularly more vulnerable baby boomers. They didn't want to risk getting sick through an open house or having someone infected touring their home. Once they're vaccinated, they're more likely to go ahead with their moves.
"As the risk of serious illness declines because more people are vaccinated, we expect to see more sellers,” says Hale.
There's also expected to be more new homes going up this year, similar to how builders ramped up construction in 2020 despite the pandemic.
Builders could erect a million single-family homes and townhouses next year, predicts Robert Dietz, chief economist of the National Association of Home Builders. That could help to ease the crunch,
"The growth in single-family homebuilding will continue," Dietz says.
Prices won't go down—but they won't keep escalating as rapidly
While an increase in homes for sale will keep prices in check, buyers shouldn't expect they'll fall. However, median list prices are not anticipated to keep increasing by 13.4% nationally, year over year, as they did in December, according to the latest realtor.com data.
The increased supply will take some of the pressure off the market. There are likely to be fewer bidding wars as buyers have more homes to choose from.
“The very rapid home price growth that we have seen over the last few months should start to moderate," says Frank Nothaft, chief economist of real estate data firm CoreLogic. "I expect price growth to slow."
But high demand will continue to keep prices high. Estimates range from 2% annual increases to around 6%, depending on whom you ask.
As the economy picks back up and people are no longer afraid to be within 6 feet of one another, they'll get new jobs, promotions, and raises. That will give them the cash they need to become homeowners or trade up to a larger abode.
Many folks who remained employed were able to contribute more to their down payment savings since they weren't going out to eat or on vacation. Plus, there are simply more first-time buyers out there. The millennials are a larger generation than the previous one, and as they get older, they're settling down, having families, and buying real estate.
"Demand is up, particularly among first-time buyers and Generation Xers who are looking to trade up," says Nothaft.
Mortgage rates could rise
One big downside for buyers in 2021 is rising mortgage interest rates. Rates hit record lows as a response to the wounded economy. As hiring begins again in earnest and people begin spending again, the economy will improve and rates will likely tick up.
Those ultralow rates were the foil to the nation's highest home prices in history. They kept monthly mortgage payments at least somewhat manageable even as prices shot up. (Rates were an average 2.65% for 30-year fixed-rate loans in the week ending Jan. 7, according to Freddie Mac.)
That affordability calculation could change if rates begin going back up. While rates aren't expected to shoot up this year, they'll likely increase a little, moving back up around 3%. Combined with higher prices, that could price some would-be buyers out of the market.
The upside is that the increase in inventory coupled with rising rates could help to slow down the crazy, ratcheting up of home prices. It could also dampen demand, even just a bit, which could help to ease some of the competition in the market.
Will the big, expensive cities stage comebacks?
The pandemic helped ratchet up home prices in most of the nation—except in the largest, most expensive cities. Suddenly, it seemed like madness to pay exorbitant rents and mortgages to be confined to itty, bitty spaces when the reason residents pay those small fortunes—the nightlife and restaurants and cultural life of big cities—were all shuttered.
In addition, living on top of one another and sharing common spaces, such as lobbies and laundry rooms, suddenly felt unsafe with the virus spreading. Many residents who could work remotely, and had the money to move, relocated to more spacious, single-family homes with private, outdoor space in the suburbs and beyond.
That pushed real estate prices in some of the biggest, most expensive cities down to levels not seen since the bottom of the Great Recession. Now those low prices—and the promise of a vaccine—are luring people back.
"There's a dramatic reset in affordability," says Jonathan Miller, a New York City–based real estate appraiser. "It's starting to trigger interest from younger renters who were priced out and unable to enter the market."
In Manhattan, rents fell 22% year over year when adding in concessions, such as a free month's rent or other perks, says Miller. He's also seeing sales of condos pick back up again.
"Don’t write off city living," says Zonda's Wolf. "The return to a non-socially distanced life brings with it the draw to be around other people again, especially as restaurants, bars, sporting events, and concerts fully open. As the appeal of cities returns, so will strong demand for townhomes and condos near downtowns."
After 9/11, it took about three years for the city to recoup its population, says Miller. In the aftermath of the disaster, many New Yorkers moved away.
Post-COVID-19, cities are expected to attract more 20-somethings just starting out than older couples with kids focused on more space and good school districts. Gen Z and younger millennials are more likely to crave the excitement—as well as the nightclubs, dining, and social scenes that cities offer.
"A city is not just a place to work," says realtor.com's Hale. "It's a place to socialize and meet other people."
Will the suburbs remain the place to be?
Families are less likely to return to the cities. They can get more square footage for their money in the burbs, perfect for a home office or a spot to home-school the kids in, a yard for the children to play in, and a good school district.
That's why the suburbs became the place to be during the pandemic. Thanks to Zoom and other technology, they're likely to stay that way, at least for the foreseeable future.
Some form of remote work is likely here to stay. Most employers aren't expected to require white-collar workers, who will have been clocking in from home for over a year, to suddenly resume their five-day-a-week commutes once everyone is vaccinated. It's more likely that those who don't need to be at their desks to do their jobs, will come in a few days a week or go to a satellite office instead. That's if they don't go 100% remote.
That opens up farther-out real estate markets with more affordable homes. If workers are going to the office only twice a week, they may not mind a longer commute.
“Single-family homes in the suburbs will clearly be favored over the condominiums in downtown, city centers," says Lawrence Yun, chief economist of the National Association of Realtors®. “People may seek out more distant suburbs.”
Bigger is better when it comes to housing
This year, "bigger is better" may replace "location, location, location" as the housing market's new mantra.
If housing had a popularity contest, stand-alone, single-family homes would win in a landslide. Even once it's safe again to venture out into the world, buyers are expected to continue seeking out larger houses. And with working from home expected to endure, a property large enough to accommodate a home office or two will remain a housing must-have.
"They'll have lasting memories of the pandemic," says CoreLogic's Nothaft. "People will want to have more space between them and their neighbors."
The shift toward more spacious residences is reflected in construction trends. After years of shrinking square footage and smaller homes in downtown, urban areas being all the rage, builders are putting up larger residences.
The median square footage of a newly built abode was 2,274 in the third quarter of last year, according to U.S. Census Bureau data. That was compared with 2,262 a year earlier.
"The typical new-home buyer is looking for more space, and that trend will continue," says economist Dietz.
Mortgage rates spent the majority of 2020 on a steady decline, repeatedly hitting record lows late in the year. For many homeowners, it’s brought an opportunity to seize upon these low rates and refinance their mortgage.
“Perhaps one of the biggest takeaways we’ve learned from 2020 is the importance of reviewing and reducing spending and debts where we can,” says Brittney Castro, the in-house CFP for Mint. “For many people this year, that meant refinancing their mortgage.”
Rates are expected to remain low in the first few months of 2021, but experts predict they won’t stay there throughout the year. So, is now the right time to refinance your mortgage? Here’s what to consider.
Mortgage rates are historically low
The average 30-year fixed mortgage rate was 3.86 percent at the beginning of 2020, according to Bankrate data. By the end of the year, the average rate had plummeted to 2.96 percent. Rates continue to hover at record lows to start 2021, and they could fall even further in the next few months.
“It will be an especially volatile year for mortgage rates, with fixed rates falling to even lower lows early in 2021 on economic concerns but rebounding in the back half of the year as widespread vaccinations lead to a surprisingly strong surge of economic activity — and the inflation worries that come with it,” according to an annual interest rate forecast from Greg McBride, CFA, Bankrate chief financial analyst.
Meanwhile, the National Association of Realtors predicts mortgage rates will average 3.1 percent in 2021, up from 3 percent in 2020. The Mortgage Bankers Association says rates will average 3.3 percent in 2021. With rates predicted to increase in the second half of the year, homebuyers who can benefit from refinancing should aim to do it while rates are still at historic lows.
Derek Carroll, principal of High Peaks Capital, works out the math to demonstrate just how lucrative a refinance could be in today’s current climate.
“Comparing a $250,000 loan at the current (Freddie Mac) average rate of 2.67 percent versus just 3 percent, this new rate will save over $25,000 over the life of the new 30-year loan. Even with the new FHFA Adverse Market Refinance fee and new closing costs, a borrower will save considerably over the life of the loan.”
Keep in mind that the Federal Housing Finance Agency (FHFA) added a new 0.5 percent mortgage refinance fee that went into effect Dec. 1. Although the fee technically went into effect in December, many lenders had been factoring the fee into their pricing months earlier after it was announced. However, Carroll says that not all refinancers will be impacted by these new fees.
“With the market being so competitive, many lenders are willing to eat closing costs and pay them for new borrowers or at least significantly contribute towards them, helping to further make the case for refinance,” he says.
When refinancing your mortgage makes sense
The biggest question is whether refinancing makes sense for you.
Bill Packer, executive vice president and chief operating officer of eLEND, provides a quick tutorial on factors to consider. “Refinancing a mortgage is a factor of three key items: (1) the after-tax monthly savings (new payment compared to old payment after any tax-favored treatment); (2) the amount of time that I intend to be in the home; and, (3) the cost to obtain the new mortgage. Once you know these three things, you can then calculate your return and see if it is positive.”
Shelby McDaniels, channel director for corporate home lending at Chase Home Lending, offers a few scenarios where you could benefit from current market rates:
One important thing to remember: Refinancing isn’t free. Homeowners should calculate their break-even point to see how long it would take to recoup the costs of refinancing, says Jared Maxwell, vice president of consumer direct lending at Embrace Home Loans.
“The break-even point on a mortgage refinance occurs when savings equals costs,” Maxwell says. “If your refinance costs $4,000 in lender, title and third-party closing costs, and you are saving $200 a month, your break-even point would be 20 months. Every month after that, you are saving money.
“The one thing consumers also need to consider is the impact of shortening or lengthening their mortgage term,” he adds. “If you have already paid down your mortgage by eight years and you are refinancing to a 30-year term to save money, you have to consider when you would like your mortgage to be paid off and whether you have a plan to pay additional principal each month.”
The bottom line
If there’s one thing that our experts agree on, it’s that the decision to refinance is a personal one that should be based on your individual situation.
With mortgage rates at all-time lows, millions of homeowners would benefit from refinancing their loans. And with many industry experts predicting rates to increase later in the year, homeowners should do research now to see if they’re among those who would benefit from refinancing. If the answer is year, be sure to compare offers from multiple lenders.
Few people who sign a mortgage intend to walk away from it. Still, unforeseen circumstances — huge medical bills, lost jobs, divorce or eroding property values — can overwhelm even the best-intentioned borrower.
Missing a house payment by a few days won’t put you in danger of foreclosure. But if you still haven’t paid by the end of the grace period, if your mortgage lender has sent you past-due notices, or if you’re multiple mortgage payments behind, you need to act quickly to get your mortgage back in good standing.
The fact is, a simple twist of fate can leave you facing a homeowner’s worst nightmare: foreclosure.
Foreclosure rules vary by state, but the most important tip is to be proactive, because procrastination will not make your mortgage problem go away.
The foreclosure spiral begins when your loan payment becomes 16 days overdue. At that point, your mortgage servicer will try to contact you to work out a repayment schedule to bring your loan current.
If your first payment becomes 30 days delinquent and the next month’s payment is not in the mail, collection attempts begin in earnest.
Within 36 days after you miss a mortgage payment, your mortgage servicer should have contacted you directly. It’s important to be proactive about responding to calls or opening any mail from your lender or mortgage company.
Within 45 days, the mortgage servicer will notify you in writing about your delinquent status and will inform you about your options for avoiding foreclosure.
If your payments fall 120 days behind, the servicer will likely initiate formal foreclosure proceedings. Once that happens, state rules differ on how long you’ll have before the actual foreclosure.
The coronavirus pandemic puts foreclosures on hold
During 2020, foreclosure rates fell to record lows. That’s partly because many states put a halt to foreclosure proceedings. What’s more, the federal Coronavirus Aid, Relief and Economic Security Act allows homeowners to miss payments for up to a year with no penalties.
Generous forbearance programs — which give borrowers a break from payments — have staved off foreclosures. How the relief works:
Housing economists expect foreclosures to resume during 2021. But, because homes have soared in value, most homeowners will be able to sell before losing their homes.
Ask your lender: What are your options for avoiding foreclosure?
Lenders want their money repaid in a timely way and the interest that comes with it; they don’t want your house. If you seem to be a good risk, the lender will offer to help keep your mortgage afloat. But be forewarned: If you seem like a bad risk, the lender may cut its losses by taking steps to foreclose and evict you as quickly as possible.
The key is to communicate with the lender before your debt gets the better of you. The sooner your lender knows of your problem, the more help it can provide.
Federal law requires mortgage servicers to help delinquent borrowers and work with them to get back in good standing. Tell your bank or lender that you want to learn about options for “loss mitigation,” the technical term for avoiding foreclosure.
Also, look for a letter from your lender describing options for avoiding foreclosure, along with instructions and applications for any programs that might apply to you.
Your mortgage servicer should also provide a contact person, who should be available by phone to answer your questions and provide accurate information about your options for avoiding foreclosure. By law, this person should be assigned to you within 45 days after your loan becomes delinquent, according to the Consumer Financial Protection Bureau.
If you feel you aren’t getting proper assistance from your mortgage servicer, file a complaint online with the CFPB, or call (855) 411-CFPB.
Ways to avoid foreclosure
Here are some options your lender may offer to avoid foreclosure. You may want to seek legal advice before going any of these routes:
Mortgage repayment plan: If you suffer a short-term financial setback (i.e. expensive car repairs, a medical emergency), your lender may provide some breathing room by agreeing to let you pay off your missed payment in two installments over the next two months.
Loan modification: Mortgage servicers can adjust the terms of your loan — most often by lengthening the amortization schedule, lowering the interest rate or rolling the delinquent amount into the loan and re-amortizing the new balance — to help you bring the loan current.
Deed-in-lieu of foreclosure: A deed-in-lieu of foreclosure is when you turn over your home to a lender voluntarily to avoid foreclosure proceedings. In some instances, going this route could help you avoid paying the remaining loan balance on your mortgage but that depends on your lender’s rules and the state you live in. Before you get a deed-in-lieu of foreclosure, ask your lender if they will waive any deficiency, which is the difference between your home’s value and what you still owe on the mortgage.
Short sale: A short sale happens when the lender allows you to sell the house for less than the outstanding loan amount, takes the proceeds and forgives any remaining debt. A real estate agent with experience in short sales may be able to help you find a buyer and guide you through the lengthy process of obtaining the necessary bank approvals.
Short refinance: The lender forgives some of your debt and refinances the rest into a new loan. This type of refi was more common in the aftermath of the mortgage crisis and may not be available for most homeowners now.
Refinance with a “hard money” loan: You won’t like the high rates and fees of a hard money loan — one from a private lender, often an individual — but it may buy you time to sell your home and avoid foreclosure.
Get free expert help: Speak to a HUD-approved housing counselor
If you aren’t getting anywhere with your mortgage company, you can obtain free advice and support from a housing counselor sponsored by the U.S. Department of Housing and Urban Development (HUD). An expert from a housing counseling agency can guide you as you try to work with your mortgage company to avoid foreclosure.
You can find a local HUD-approved expert online, or call HUD’s Office of Housing Counseling at (800) 569-4287. If you have an Apple device, you can download HUD’s free Housing Counselor Locator app.
Beware of foreclosure rescue scams
Unfortunately, scammers masquerading as legitimate housing counselors often try to take advantage of homeowners who are vulnerable. As you work through your mortgage issue, keep a skeptical eye out for fake programs and scams.
Warning signs of a scam include organizations that require advance payment or that guarantee to fix your foreclosure problems.
In particular, beware of offers to help you get a loan modification through the federal HAMP Program, a federal loan modification program that expired at the end of 2017. In the past, fraudsters have told homeowners that they were approved for the program as a way to trick them into sending money.
Also watch out for phone calls or mail solicitations that appear to be from your mortgage company but direct you to send payments to an unfamiliar address that doesn’t match the one on your mortgage statement.
If you’re having difficulty making your house payments, your best bet is to reach out to your lender and a HUD-approved housing counselor as soon as possible. This will improve your chances for a happy resolution that helps you avoid the financial and emotional pain of foreclosure.
One may or may not be familiar with the term ‘government backed’ but it might be a bit confusing at first. First, what it’s not, isn’t a guarantee someone is going to get a mortgage because it’s backed by the federal government. These types of mortgages are differentiated from so-called ‘conventional’ mortgages. A conventional mortgage is one where the individual lender assumes all the risk of issuing a particular home loan. A government backed mortgage has degree of a guarantee should the loan ever go into default.
Most conventional loans issued today are those underwritten to Fannie Mae or Freddie Mac standards. When a lender makes a loan based upon these guidelines, the loan is typically sold to either Fannie or Freddie individually or ‘in bulk.’ Most conforming conventional loans make up nearly two-thirds of home loans issued today. The rest fall into the government backed category while a still smaller percentage are called ‘portfolio’ loans where the lender has no intention of selling the mortgage but instead keeps it in-house.
There are three prominent types of government backed mortgages and they are those underwritten to standards issued by the VA, FHA and USDA. But while these loans do carry some sort of guarantee, the guarantee is issued to the individual lender, not the borrower. This is where some get confused thinking a guarantee is a promise to issue a home loan. Instead, the guarantee compensates the lender for part or all of the loss sustained during the instance of a default.
VA loans are guaranteed at 25% of the loss. If a VA loan goes into default and the loan amount is $200,000, the guarantee to the lender would then be $50,000. This guarantee is financed with the VA’s Funding Fee. This is in essence an insurance policy with the lender as the payee. The funding fee can vary based upon the number of times the borrower has used the VA program to buy a home. Currently, the funding fee is 2.30% of the initial loan amount but is not paid for out of pocket but instead rolled into the final loan amount.
The Federal Housing Administration’s FHA home loan program also carries a guarantee but instead of partial compensation to the lender the lender is compensated for the outstanding loan balance. There are two such fees for the FHA program, an upfront fee and an annual fee paid in monthly instalments along with the regular mortgage payment. The upfront premium is 1.75% of the base loan amount and the annual premium is based upon the original down payment amount and the actual term of the loan. Each year, as the mortgage balance is paid down, the annual premium is recalculated for the coming year.
The last of the three is one developed by the United States Department of Agriculture, or USDA. The USDA loan also provides full compensation to the lender in the instance of default and like the FHA program has two separate fees. The upfront fee is based upon 1.00% of the initial loan amount and the annual premium is 0.35% of the outstanding loan balance.
When you’re buying or selling a home, you are likely going to face a home appraisal contingency. It can be anxiety-inducing on either end of the situation. Knowing what to expect can prepare you and reduce a bit of that anxiety.
What Is an Appraisal?
During an appraisal, someone who is licensed to conduct appraisals will do an inspection of a home to determine its actual worth. This is not always the same as the listing price. An appraiser will create a report of their findings, and then they’ll generate the appraised value of the home.
If you’re a buyer and you’re making a purchase with a loan, your lender will likely order the appraisal.
The lender doesn’t want to give more money than what a property is worth. Lenders often require buyers to include appraisal contingencies if they make an offer.
The appraisal usually happens after you sign a purchase agreement and before your lender approves your loan.
The appraiser is someone who is a neutral third-party and who is unbiased. They don’t represent a buyer or a seller.
Who Pays for An Appraisal?
Appraisals can cost hundreds of dollars. If it’s for a loan, a buyer or seller can’t order one directly from the company they choose. Rather, the lender goes through a third-party appraisal management company. The buyer pays for the assessment. The lender sets the fee, not the appraiser.
Why Do Appraisals Come in Under Contract?
There are a few main reasons a home might fail to appraise. The first is simply that the contract price is higher than market value. This situation is especially common in hot markets, where buyers might be competing for the same house.
There may be an issued identified during an appraisal that could affect its value. For example, maybe a room was added to a home without the proper permits.
There can also be problems on the part of the appraiser. The appraiser might not know the area well, for example.
What Do Appraisers Look for?
Most appraisers use a universal form called the Uniform Residential Appraisal Report. It includes questions about housing trends in the area, demographics, property condition, utilities and how the house is a fit within the neighborhood.
An appraiser is unlikely to put a lot of stock in upgrades. Their entire objective is to create a comparison of the home to similar properties nearby.
As a seller, the most important thing you can do to prepare for an appraisal is to keep your home in great shape. You want it to look clean, clutter-free and well-maintained. Anything otherwise is going to give off the impression you haven’t taken care of the home, and that’s going to lower the appraisal which can derail your deal.
What Happens After You Get a Valuation?
The report from an appraiser will include a valuation. The report will outline the methodology used by the appraiser and will include the photos they take. You and your lender receive a copy.
Then, one of three things could happen.
If the appraiser's valuation matches the price agreed upon by you and the seller, then your lender can proceed with underwriting your loan. A match with the appraisal and the price is the last step of getting a loan.
If the appraiser gives you a valuation higher than what you’re paying for the house, then you have instant equity. This isn’t common, however.
Then, there’s the third thing that can happen. The appraisal is less than what you’ve agreed to pay. Your lender won’t give you a loan for more than the appraised value. At that point, there are a few different ways you can proceed. Your agent should be able to help you figure out the best path.
The best option tends to be convincing the seller to lower the sales price or perhaps to split the difference with you.
You can also appeal the appraisal or ask for a second one. You can also pay cash for the difference yourself, but that might be from a buyer’s standpoint one of the worst options.
If you want to take none of those options or they don’t work out, then an appraisal contingency gives you the chance to walk away from the deal and still get your earnest money deposit.
Young families looking to buy a home stand to save significant sums of money thanks to low mortgage rates, but the reduced number of homes for sale nationwide poses a challenge.
Mortgage rates started 2021 by falling to a fresh record low, but changes coming to Washington appear poised to push interest rates higher in the coming weeks.
The 30-year fixed-rate mortgage averaged 2.65% for the week ending Dec. 31, down two basis points from last week and one basis point from the new record low of 2.66% set two weeks prior, Freddie Mac FMCC, -4.81% reported Thursday.
The 15-year fixed-rate mortgage fell one basis point to an average of 2.16%, representing a record low for that mortgage product. Meanwhile, the 5-year Treasury-indexed hybrid adjustable-rate mortgage rose by four basis points to 2.75%.
While rates dropped this week, there are signs that they could soon rise. Generally, mortgage rates track the movement of long-term bond yields, particularly the 10-year Treasury note TMUBMUSD10Y, 1.120%. On Wednesday, the 10-year Treasury rose above 1% for the first time since March, in response to the results in the runoff elections for the U.S. Senate in Georgia.
“The future outlook for mortgage rates remains uncertain this week amid a changing landscape in Washington,” said Danielle Hale, chief economist at Realtor.com. “The outcome of the Georgia Senate race seemed to indicate the possibility of less gridlock, making another stimulus a more realistic possibility.”
Hale cautioned though that markets have not fully reacted to the chaos that unfolded at the U.S. Capitol on Wednesday when violent Trump supporters stormed the building, though the 10-year Treasury’s yield did move higher following the certification of President-elect Joe Biden’s win early Thursday morning.
Additionally, other economic data could put a damper on any upward movement in interest rates. The direction mortgage rates take is “largely dependent on the economy’s ability to improve,” said Zillow ZG, +2.10% economist Matthew Speakman, who added that “the first test of this will be Friday’s December jobs report.” If the number of jobs added and unemployment rate do not meet expectations, the upward movement in rates could slow.
Either way, home buyers will struggle to gain footing in the current housing market to take advantage of these eye-popping interest rates, experts say. A new analysis from Realtor.com found that the number of homes for sale has dropped below 700,000 as of December, down nearly 40% from the year prior. That figure represents a record low since Realtor.com has been tracking this data.
“Homebuyers can still take advantage of low rates to offset the steep rises in home prices that we’ve seen in most areas over the last year, but finding a home will continue to be challenging,” Hale said.
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FHA borrowers have a bigger budget when it comes to buying a home in 2021. The Department of Housing and Urban Development (HUD) increased FHA loan limits for most U.S. counties this year. Here’s what to know if you’re looking for a mortgage with a low-down payment.
What is an FHA loan limit?
These limits are the maximum amounts that the FHA (Federal Housing Administration) will insure for different categories of homes mortgage loans–for example, single-family homes and duplexes–in different counties in each state. Loan limits, which vary with local housing values, are calculated, and updated annually, and are influenced by the conventional loan limits set by Fannie Mae and Freddie Mac.
An FHA mortgage loan is one issued by an FHA-approved lender and insured by the FHA. Designed for low- to moderate-income borrowers, FHA loans enable borrowers to qualify with lower minimum down payments and lower credit scores than are required for many conventional loans (those not guaranteed or insured by a government agency).
What are the current FHA loan limits?
For single-family home loans this year, these limits range from a floor of $356,362 an increase of more than $20,000 over 2020, to a ceiling of $822,375, an increase of nearly $60,000.
Here are the 2021 FHA loan limits for low-cost areas:
More expensive areas have higher loan limits. For example, a house in San Francisco has a higher valuation than the same basic house in Houston.
To find the limit for any county or state, Bankrate has compiled the limits for every county in the nation here.
National conforming loan limits for Fannie Mae and Freddie Mac jumped in 2021 to $548,250, making FHA’s floor limits about 65 percent of their conforming-loan counterparts. Conforming limits are also higher in high-cost counties. Mortgages above these limits are known as non-conforming or jumbo loans.
Factors affecting FHA limits in 2021
The hike in limits is due to swelling home prices. In the third quarter of 2020, existing single-family home prices rose 13 percent to $309,300 from a year earlier, according to data from the National Association of Realtors (NAR).
The National Housing Act, as amended by the Housing and Economic Recovery Act of 2008 (HERA), mandates that the FHA set single-family forward loan limits at 115 percent of median home prices.
HERA rules state that the FHA must set floor and ceiling loan limits based on the loan limit set by conventional mortgages backed by Fannie Mae and Freddie Mac. In 2021, the national conforming loan limits for Fannie Mae and Freddie Mac will tick up to $548,250, making FHA’s floor limits 65 percent of their conforming-loan counterparts.
HERA also requires the FHA to set its ceiling loan limit for expensive metro areas at 150 percent of the national conforming limit. The new FHFA conforming loan ceiling will rise in 2021 to $822,375, the same as FHA maximum limits.
FHA loans can be helpful for homebuyers with smaller down payments, less-than-excellent FICO scores and a tighter home-buying budget. To be eligible for an FHA loan, borrowers must have a FICO score of 500 to 579 with 10 percent down or a FICO score of 580 or higher with 3.5 percent down, along with verifiable employment history or income. Additionally, FHA loans can only be used for primary residences.
Country’s wealthiest zip codes get higher FHA limits
The majority of housing markets with high ceilings were concentrated in the San Francisco-Oakland-Berkeley; Washington-Arlington-Alexandria; and New York-Newark-Jersey City metro areas.
Within this list are the five most expensive housing markets, according to NAR Q3 data. These include the San Jose, Calif. metro area (median existing single-family price was $1.4 million); the San Francisco metro area ($1.125 million); the Anaheim, Calif. metro area ($910,000); the Honolulu metro area ($866,200); and the San Diego metro area, ($729,000).
FHA raises reverse mortgage limits
FHA-insured Home Equity Conversion Mortgages (HECMs), also known as reverse mortgages, got a jump in limits, too.
The FHA raised the limits on HECMs to $822,375 for all areas, an increase of $56,775 from 2020’s $765,600 limit. This change is effective for all case numbers assigned on or after January 1, 2021 through December 31, 2021.
For many middle-aged and older homeowners with several years of equity on their homes, 2021 could be a prime time to refinance from a 30-year fixed-rate mortgage into a 15-year mortgage.
The three primary reasons homeowners refinance to shorter-term loans are to save money on interest, to pay off the loan faster, and to build equity. But the possibility of reduced future earnings is another key reason some refinance into a 15-year loan. Why head into retirement with a mortgage?
It’s been well documented how spectacularly mortgage rates fell in 2020, and it’s not a stretch to think they might hover around 2% all year. In the final week of the year, the 15-year fixed-rate mortgage averaged 2.19%, a full point lower than the same period in 2019.
This also means that, similar to 2020, mortgage refinance rates should remain highly competitive – allowing homeowners to potentially save a ton of money on their mortgage payments.
But don’t wait too long to refinance to a 15-year mortgage if you’re planning on it, said Glenn Brunker, president of Ally Home.
“This strategy is definitely something for borrowers to consider if they’re able to make the higher monthly payments and meet the qualifications for a shorter-term loan,” he said.
A 30-year loan on a $400,000 mortgage today has an average rate of 3.204%, while the rate for a 15-year loan for that same $400,000 loan is just 2.637% – saving the homeowner who switches up to $138,000 in interest, according to Brunker.
Similarly, refinancing a $300,000 mortgage at 3.6% over 30 years to a 15-year loan – in the same amount – at 3%, the homeowner could save $120,000 in interest.
The economic situations of consumers varied dramatically in 2020 and are likely to remain in flux for much of 2021, with many currently out of work, behind on rent and mortgage payments due to the effects of the COVID-19 pandemic and subsequent shutdowns. For some, buying a home right now at all isn’t feasible – but for others, especially those renting at high prices, buying a home has never made more sense.
Middle-aged homeowners are refinancing in droves, real estate agents and loan officers said. A popular refinancing age is 50, when many homeowners have dipped under 20 years remaining on a 30-year mortgage. And others are refinancing with an eye on selling their homes and downsizing.
“I reach out to old homebuyers all the time and ask them if they are interested in selling, and the ones that say yes usually get the idea to refinance to a 15-year mortgage and take advantage of the market,” said Laura Wilfong, associate broker and agent with Caldwell Banker Upchurch Realty. “But it’s also an individual question. Are you going to be staying in this home long term? Do you get transferred for your job every five years? In that case I would say to take advantage of the low rates and don’t do a 15-year.”