Big changes to mortgage market in 2014

Borrowing money to finance a real estate purchase is about to become more expensive for some homeowners. Fannie Mae and Freddie Mac will charge higher fees on loans to borrowers who don't put down at least 20 percent or who have credit scores of 680 to 760. The Federal Housing Finance Agency (FHFA), which regulates Fannie and Freddie, is imposing the new fees in order to level the playing field between the government-owned companies and private providers of capital. Separately, the FHFA said  it would study reducing the loan amounts that Fannie and Freddie guarantee by to $400,000 from the current level of $417,000. Those changes would not take effect before October 2014. Meanwhile, the Federal Housing Authority loan limits are set to change. Loan limits currently can’t exceed 125 percent of the median home price for a given county, with a national ceiling of $729,750. Those limits, which were enacted by Congress five years ago and extended repeatedly, expire at the end of the year. Beginning next year, the FHA will only be able to guarantee loans up to 115 percent of the median home price, ranging between $271,050 and $625,500.

The real estate industry is going to fight these changes, claiming that they will kill the housing recovery.  The anti-bailout crowd will respond by saying that the country needs to reduce the government's role in housing. Regardless, if you are in the market for a mortgage or a re-fi right now, it would be prudent to move the process along!

What do you need to know about attaining a mortgage now? “The process has improved from a year ago, but it is still labor intensive. Borrowers need patience and perseverance” according to Mike Raimi, President of WCS Lending. Mortgages for new home purchases can take about three weeks to close, while refinancing can take longer – “anywhere from 45 to 90 days.”

If you are looking for a 30-year conventional mortgage with 20 percent down, the best rates are available for those with credit scores above 740. For every 20-point drop in score, the mortgage rate jumps by a quarter of a percent. If your credit score is below 620, it’s tough to get a loan closed, unless you qualify for the government’s HARP plan. (Credit scores do not have nearly as much impact on loans of 15 years and shorter.)

Whether you are trying to refinance or buy a home with a mortgage, here's what you need:

• W-2 (2 years)
• Tax Returns (2 years)
• Pay Stubs (2 months)
• Bank statements – all pages (2 months): You may also need to provide the lender with an explanation for any large deposits that have been made into bank accounts. This has more to do with beefed up anti-money laundering efforts than the mortgage process itself.
• 6 months of mortgage payments in cash reserves (sometimes less, but this is a good rule of thumb)
• Investment accounts: If bank accounts do not show adequate assets, lenders may ask for investment account statements.
• Donor letter: If a family member or friend is helping you with your down payment or providing cash for the re-fi, he or she may be required to provide a letter and may also have to present his or her account statements.
• Self-employed applicants: Must have 2 years of proof of self-employment and 2 years of tax returns. Gone are the days when self-employed borrowers can "add-back" tax preference items. While you may have used the tax code to your advantage, the bank will not cut you any slack - the numbers on the return are set in stone.

Mortgage application preparation kit

The average interest rate on a 30-year fixed rate conventional has risen from 3.6 percent two months ago to 4.6 percent last week. The reason for the increase is the jump in the 10-year Treasury yield, which has moved from 1.6 percent in early May to 2.6 percent currently. Although rates are still low by historic standards, the bond market has not seen a full percentage point increase in such a short time period since 1994. Those higher rates have started to cool off the bidding wars that you may have heard about during the spring. While there are still markets that hot (San Francisco, New York), the national housing market remains firmly tilted towards buyers, with prices about 25 percent below peak levels. That means that it is still a great time to buy. You should of course run the numbers and make sure that a purchase is right for you (check out this great rent vs. buy calculator from the New York Times) and if you are in the market for refi, I like this calculator from HSH.com.

What do you need to know about attaining a mortgage now? “The process has improved from a year ago, but it is still labor intensive. Borrowers need patience and perseverance” according to Mike Raimi, President of WCS Lending. Mortgages for new home purchases can take about three weeks to close, while refinancing can take longer – “anywhere from 45 to 90 days.”

If you are looking for a 30-year conventional mortgage with 20 percent down, the best rates are available for those with credit scores above 740. For every 20-point drop in score, the mortgage rate jumps by a quarter of a percent. If your credit score is below 620, it’s tough to get a loan closed, unless you qualify for the government’s HARP plan. (Credit scores do not have nearly as much impact on loans of 15 years and shorter.)

Whether you are trying to refinance or buy a home with a mortgage, here is your Mortgage Application Preparation Kit:

• W-2 (2 years)
• Tax Returns (2 years)
• Pay Stubs (2 months)
• Bank statements – all pages (2 months): You may also need to provide the lender with an explanation for any large deposits that have been made into bank accounts. This has more to do with beefed up anti-money laundering efforts than the mortgage process itself.
• 6 months of mortgage payments in cash reserves (sometimes less, but this is a good rule of thumb)
• Investment accounts: If bank accounts do not show adequate assets, lenders may ask for investment account statements.
• Donor letter: If a family member or friend is helping you with your down payment or providing cash for the re-fi, he or she may be required to provide a letter and may also have to present his or her account statements.
• Self-employed applicants: Must have 2 years of proof of self-employment and 2 years of tax returns. Gone are the days when self-employed borrowers can "add-back" tax preference items. While you may have used the tax code to your advantage, the bank will not cut you any slack - the numbers on the return are set in stone.

Mortgage market: What you need to close a loan

Mortgage rates have spiked recently, which prompted me to call my pal Mortgage Mike (Mike Raimi, President of WCS Lending) for an update on what’s cooking in the mortgage market. “Over the past two weeks rates have jumped by a half of a percent across the board. While that’s a big move in a short time, it still seems kind of crazy to talk about how 30-year fixed-rate mortgages on conventional loans are averaging as much as 4 percent. After all, from a historic perspective, 4 percent is still an awfully low rate.”

To help you gain that perspective, this chart clearly demonstrates how a 30-year bull market in bonds has pushed down mortgage rates to current levels.

Still, the idea of landing an even-better deal often undoes borrowers, even when rates are at these low levels. Mike told me a story to illustrate the point. A little over two weeks ago, he had a client who was refinancing a $320,000 30-year mortgage, which carried an interest rate of 4.5 percent.

“The new rate was 3.375 percent, but the client wanted to hold out for 3.25 percent.” The difference in monthly payment on the loan was $23 per month, so Mike encouraged the guy to grab the 3.375 percent and to not look back. The client balked and said he would wait for 3.25.

Guess what? He never got 3.25 percent! Instead, when he called Mike this week, the rate had jumped to 4 percent, which meant the re-fi didn’t make as much sense. In other words, it’s just as hard to time the mortgage market as any other market!

What do you need to know about attaining a mortgage now? “The process has improved from a year ago, but it is still labor intensive. Borrowers need patience and perseverance” according to Mike. Mortgages for new home purchases can take about three weeks to close, while refinancing can take longer – “anywhere from 45 to 90 days.”

If you are looking for a 30-year conventional mortgage with 20 percent down, the best rates are available for those with credit scores above 740. For every 20-point drop in score, the mortgage rate jumps by a quarter of a percent. If your credit score is below 620, it’s tough to get a loan closed, unless you qualify for the government’s HARP plan. (Credit scores do not have nearly as much impact on loans of 15 years and shorter.)

If you are preparing for the mortgage process, here’s what you will need:

• W-2 (2 years)
• Tax Returns (2 years)
• Pay Stubs (2 months)
• Bank statements – all pages (2 months): You may also need to provide the lender with an explanation for any large deposits that have been made into bank accounts. This has more to do with beefed up anti-money laundering efforts than the mortgage process itself.
• 6 months of mortgage payments in cash reserves (sometimes less, but this is a good rule of thumb)
• Investment accounts: If bank accounts do not show adequate assets, lenders may ask for investment account statements.
• Donor letter: If a family member or friend is helping you with your down payment or providing cash for the re-fi, he or she may be required to provide a letter and may also have to present his or her account statements.
• Self-employed applicants: Must have 2 years of proof of self-employment and 2 years of tax returns. Gone are the days when self-employed borrowers can "add-back" tax preference items. While you may have used the tax code to your advantage, the bank will not cut you any slack - the numbers on the return are set in stone.