Wells Fargo Shifts Focus Away From Mortgage Lending

Wells Fargo is one of the biggest banks in the nation as well as one of the top mortgage lenders. In fact, it was the number 1 mortgage lender in 2019. However, that’s about to change. 2019 was also the year that Wells Fargo acquired a new CEO, Charlie Scharf, who inherited a company under strict scrutiny as a result of a 2016 fake account scandal. Among the changes Scharf is making is a massive shift away from mortgage lending to focus mainly on investment banking and credit cards.

According to Wells Fargo exec Kleber Santos, investigations into the 2016 scandal also revealed that their mortgage lending business was simply too large in scope. The implication is that it was too difficult to manage oversight of all the facets of the company, and that mortgage lending was the one that needed to be trimmed down. Wells Fargo will not be completely eliminating its mortgage lending business, but it will be cut down dramatically to prioritize existing customers and borrowers in minority groups.

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More: https://www.cnbc.com/2023/01/10/wells-fargo-once-the-no-1-player-in-mortgages-is-stepping-back-from-the-housing-market.html

What Exactly Is A First-Time Homebuyer?

The answer to this question may seem obvious. Of course a first-time homebuyer is just anyone who is buying a home for the first time, right? Well, not exactly. What the phrase is actually referring to is someone who is eligible for a given first-time homebuyer program, usually a lender’s loan program. The lender doesn’t care whether it’s your first time buying or not, only whether or not you are eligible for the loan.

It’s not entirely misleading, though. At least for the criterion related to homeownership, those buying for the first time would qualify. But even that criterion is slightly different; it commonly only requires that you not have owned a home within the prior three years. Moreover, there are multiple other qualification criteria for first-time homebuyer loans. They usually include requirements for down payment, credit score, proof of income, employment history, and a maximum debt-to-income (DTI) ratio. Typically, the down payment requirement is between 3% and 20%, the minimum credit score is 500 for FHA loans or 620 for conventional loans, two or more years of employment are required, and the DTI ratio must be no more than 43%. These numbers, as well as the specific criteria, could vary, both by region and by lender.

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For more information as well as information about specific first-time homebuyer programs, see: https://www.foxbusiness.com/personal-finance/who-qualifies-first-time-homebuyer

Homebuyers Under-Informed About Mortgage Options

Buying a home is a major life decision. Because of this, it’s important that prospective homebuyers take the time to research the best option for them. Unfortunately, that tends not to happen with mortgage loans. Only about 13% of prospective buyers spend at least a month researching lenders. By contrast, 28% spend just as much time researching cars, and 23% vacation options.

One major reason is that they’re simply not well informed. 30% of prospective buyers believe that their credit score will take a major hit if they shop around, the most common reason cited for not shopping around. This is not accurate, as it’s only getting a pre-approval that reduces your credit score, not consulting with lenders. You can submit as many applications as you want within a 45 day period and your credit score will only drop once. 15% also believe that all lenders use the exact same rate, so there’s no reason to get a second quote, which is definitely not the case.

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More: https://zillow.mediaroom.com/2022-11-18-Prospective-home-buyers-spend-about-as-much-time-researching-new-TVs-as-they-do-mortgage-lenders

Don’t Be Afraid To Be Selective With Mortgage Loans

The terms of mortgage loans have a lot more variance than one might expect. It’s well known that the average interest rate is just that, an average, but there would be no competition if that were the sole factor. Be sure to get lots of estimates, comparing both different types of loans at the same institution as well as the same type of loan at different institutions.

Make sure you understand the terms clearly, especially because some loans have hidden costs. These can include fees for printing documents or prepayment penalties, among others. Not all lenders have these, nor necessarily for all loans, so shop around. It’s also important to know the rate lock period, so you can be sure that the rate will still be valid by the time you finalize getting the loan. Some costs may even be negotiable, such as loan closing fees and interest rate.

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Qualified Vs Non-Qualified Mortgage Loans

Before you get a mortgage loan, ask yourself whether you want a qualified mortgage (QM) or non-qualified mortgage (Non-QM). You may be wondering under what circumstances you’d want your mortgage to not be qualified. Well, there are advantages and disadvantages to both. Non-QMs don’t conform to the regulations set forth by the Consumer Financial Protection Bureau (CFPB), but they’re actually entirely legal — the government simply can’t guarantee consumer protections.

So what are these protections, and why might you want to risk going without them? A QM loan cannot last longer than 30 years, cannot have prepayment penalties, cannot be a balloon loan, and should not have negative amortization. It requires a process for verifying several sources of information, including but not limited to bank statements and income. Because of this, it’s often more difficult to qualify for a QM loan. Therefore, someone who can’t qualify for a QM, such as many gig workers, may risk a non-QM loan. Investors, especially foreign investors, also frequently opt for non-QM loans that only require payments on interest. It’s also possible that you want to go for a longer-term loan, which would come with smaller payments, albeit a higher total amount paid once the loan is fully paid off. In any case, you probably want to ask a professional to explain the terms and risks of any loan you are considering taking, whether qualified or not.

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Benefits of a VA Home Loan

One of the offerings of the Department of Veterans Affairs is mortgage loans. Of course, this is limited to current or past members of the US military. With this restriction comes a few significant benefits if you qualify. VA loans have perks for both low-income and high-income homebuyers.

If you have the money to buy a more expensive home as long as you can get a loan, VA loans may have you covered. There are jumbo loans available which can even exceed $1 million. This may be a good bet even if you are not currently a high-income earner, as long as you are purchasing investment property. This is because there is no minimum down payment for VA loans; you can borrow up to 100% of the home’s value. You don’t even need to worry about private mortgage insurance (PMI), which is required for conventional loans with a down payment under 20%, but not for VA loans regardless of your down payment amount. If your investments pay off, or you start earning more money, you can also pay off the loan faster. VA loans have no penalty for accelerating payments.

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20% Down Payment is Actually a Rarity

It’s long been suggested that one should put down at least 20% of the purchase price as down payment. While this is probably a good idea if you can afford it, many people have taken this advice a bit too much to heart, and are reluctant to try to buy with a lower down payment amount. A third of homebuyers even think it’s a requirement to get a loan.

In reality, most loans have a much lower minimum down payment, with one of the most common types — FHA loans — having a minimum of just 3.5%. Some even have no minimum. In addition, the median down payment is significantly less than 20% for first-time homebuyers at 7%. It’s higher for repeat buyers at 17%, but that’s still under 20%. What’s more, there’s a good chance you can get homebuyer assistance to help cover the down payment. While a majority of homebuyer assistance programs are specific to first-time homebuyers, over a third of the approximately two thousand programs do not have this restriction.

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More: https://themlsblog.com/2022/10/10/saving-for-a-down-payment-heres-what-you-should-know/

Home Equity Loan Facts

You may have heard of a home equity loan, but you may not know what it actually is. A home equity loan uses the accrued value of your home as collateral against a loan, and typically allows you to borrow up to 85% of the difference between the home’s value and the balance due on your mortgage. If you fail to pay back your loan, you may have to sell the house to pay it back. This is similar to a home equity line of credit (HELOC), but unlike a HELOC, a home equity loan is a one-time event with a fixed interest rate. The interest rate tends to be higher than the rate for a standard mortgage loan, but lower than rates for most credit cards. Normal regulations for mortgage loan approval apply to home equity loans as well.

A home equity loan is frequently called a second mortgage. Homeowners frequently still have some balance due when they take out a home equity loan, which means they now effectively have not one but two mortgages. In addition, the money is often used to finance the down payment on a second home. However, this isn’t the only purpose of a home equity loan. You don’t need to have a mortgage to get a home equity loan — if you don’t have one, it just means your balance due is zero, and therefore there is potentially a higher ceiling on loan amount. Furthermore, the money gained from a home equity loan doesn’t need to be used for a second home, or anything relating to homes. It’s simply your money, and can be used without restriction.

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What Is A Drive-By Appraisal?

In most cases, getting a mortgage loan requires a home appraisal. Usually, this is a rather long process that involves extensive analysis of a home by an appraiser, inside and out. But sometimes the process can be expedited by using a drive-by appraisal, in which the appraiser only looks at the home’s exterior. The other advantage, besides the speed, is that it’s much less invasive for any current occupants, especially if they are tenants. Of course, this is at the cost of a much less in-depth evaluation.

Also, it’s not always possible to get a drive-by appraisal. It’s essentially at the discretion of the lender whether a drive-by appraisal is allowed. If the lender wants a full investigation, they simply won’t approve the loan. That said, more and more lenders are permitting them as a result of COVID, since evaluating the interior can be risky. Lenders are also more likely to allow a drive-by appraisal for a refinance as opposed to a new loan.

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Why Interest Rates May Be Higher Than Expected

When getting a mortgage loan, that money generally comes from a bank. But it’s important to realize that a bank isn’t just an impersonal repository of money. Banks are businesses, and as such, they’re always looking for profit. This extends to deciding your interest rate, which is nearly always not the best rate you could get.

One of the ways banks pull a profit is by looking to the future of interest rates. They will frequently take an expected future average rate rather than the current average rate if they expect rates will rise soon. They get slightly ahead of the game this way. The other reason rates are often higher is not entirely within the bank’s control, although it is partially a result of their actions. A common method of reducing risk is for a bank to sell debt to an investor. This also frees up capital for the bank. But it introduces an additional party also looking for a profit, and the bank may need to make concessions for the deal to go through. Increasing interest rates is a way to recoup these losses.

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New Loan Program Aimed At Helping First-Time Homebuyers

The California Housing Finance Agency (CalHFA) has introduced a new loan program called the Forgivable Equity Builder Loan. It comes with some heavy restrictions — only first-time homebuyers are eligible, and it only covers up to 10% of the purchase price. This is because it’s a supplementary loan that can only be taken out in combination with a CalFHA first mortgage. The good news is that this loan has an interest rate of zero percent, and is also forgivable if you occupy the residence continually for five years. However, standard interest rates apply to the CalFHA first mortgage.

The program also requires borrowers to complete a course on homebuyer education and obtain a certificate of completion. This course does require a one-time fee of $99 if taken online, or a variable-rate fee if taken in person. You must also occupy the new home as your primary residence, as well as meet income requirements. The property must be a single-family residence or manufactured home. This can include condominiums if they meet the requirements for the CalFHA first mortgage, or ADUs in some cases.

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More: https://www.calhfa.ca.gov/homebuyer/programs/forgivable.htm

The Upfront Costs of Refinancing

The primary purpose of refinancing is in order to spend less money in the long term. It may seem like this is a good idea whenever rates drop even the slightest amount. However, it’s important to remember that you are technically originating a loan when you refinance, and doing so incurs the same fees. The upfront costs are what deter repeated refinancing.

Most of the fees are a few hundred dollars — unless otherwise specified, you can estimate they will be about that much. Since you are applying for a mortgage loan when you refinance, this requires both a mortgage application fee and a loan origination fee. The numbers vary, but typically, the the loan origination fee is 1% of the loan’s value. You will also need your home to be re-appraised, as lenders want to know the value of your home before approving a loan, which will require an appraisal fee. It’s also possible that your lender will require a title search, and you may need new title insurance, both of which incur fees. Title insurance, if required, could be $1000 or more.

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Qualifying For a Loan on a Single Income

With home prices as high as they are, qualifying for a loan becomes more difficult. This is especially true if your household is single-income. But that doesn’t mean it’s impossible. There are options available for low-income households.

As always, it’s important to check your credit score before attempting to get a loan. You can check it for free once per year from any major credit bureau. If your credit looks good enough to qualify for a loan, you can advance to searching for loans. For low-income households, the best place to look is government loans, since these usually have lower thresholds for down payments. Some FHA loans require only 3.5% down. Your specific region may also have government loan programs. If your credit score is low, however, consider looking for a co-signer for your loans. The co-signer doesn’t necessarily need to be the one paying, but if their credit score is better than yours, it will help improve your chances of loan approval and possibly even get you a lower interest rate on the loan.

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How Refinancing Can Help Pay Off Your Loan Faster

There are two main reasons to refinance your home. One is to reduce your monthly payments in order to free up cash, and the other is to pay off the loan more quickly. But refinancing doesn’t just simply do this automatically; you have to choose a new mortgage with terms that work for you. Figure out what your goal is and pick the right mortgage.

Reducing your interest rate is the surest way to free up cash, but it can also simply be used to pay off the loan faster. With a lower interest rate, a greater percentage of the principal is reduced each time you make a payment. However, this only works if you can qualify for a lower interest rate. If you don’t qualify normally, consider reducing the length of the mortgage. This will probably result in higher monthly payments, but will also likely allow you to qualify for a lower rate, and almost certainly allow you to pay off the mortgage faster as long as you make the payments. If you have plenty of cash on hand and just want to save money in the long run, consider replacing your mortgage with one that allows you to make larger payments on your principal. This is more costly in the short term, but would allow you to pay off the loan early and thus spend less on interest, reducing the overall cost.

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Preapproval Doesn’t Lock Mortgage Rates

Many people are blindsided by rising mortgage rates after getting a preapproval, thinking that the preapproval has locked their rate. It hasn’t. The first opportunity to lock your mortgage rate happens when your final loan application is approved, though you don’t even have to lock it until shortly before closing on a purchase, if you think rates will go down. In addition, the lock period is not indefinite. It usually lasts anywhere from 15 to 60 days, and it could definitely take longer than that to find a home.

There are ways to mitigate the issues presented by shifting mortgage rates. Rates don’t tend to change much during a typical closing period, but you want to lock early when rates are rising and late when rates are falling. Consider budgeting for a loan lower than your preapproved amount in order to account for fluctuations in mortgage rates. Different lenders also have different locking policies. Make sure to shop around and ask about lock periods, renewing options for locked rates, and the possibility of locking out rising rates but not falling rates.

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More: https://themortgagereports.com/89634/can-my-rate-rise-after-preapproval

January 2022 Real Estate News for Los Angeles South Bay

January 2022 showed a different face than we were seeing all last year. Of course, in many respects that’s a good thing. Depending on whether you’re buying or selling, the real estate market for 2022 could be wonderful or horrible. As always, the location will make an even bigger difference.

Sales Volume Dropping

Check out all the red ink in the table below. Compared to December, sales volume is down by nearly 50% at the Beach and on the Hill. November and December of 2021 were heavy with transactions spurred on by the fear of increasing interest rates. The number of homes sold in comparison to January of last year also dropped, though not to as great an extent.

Sales volume down, prices up

As of right now interest rates are expected to hover in the 3.5% to 4% range for the balance of the year. The increase from under 3% to roughly 3.5% has served to lock a substantial portion of entry level buyers into the rental pool. Those who found a place and could afford to buy last year did. The first part of this year is expected to continue to show declining sales volume as many first time buyers drop out of the purchasing market.

Prices Starting to Reverse Direction

Prices meanwhile are faltering in the unsustainable march upward. As the table above shows, the Beach and the Inland areas have already begun declines in the median price. Simultaneously buyers in the Harbor and Palos Verdes communities have continued pushing purchase prices higher, though not nearly as fast as last year.

We expect price corrections in all four areas as the year rolls out. Initially, we anticipate buyers in the Inland and Harbor areas to balk at the combination of higher interest rates and historically higher prices. Lower priced homes are traditionally impacted sooner and to a greater degree by changes in mortgage interest.

Homes on the Palos Verdes Peninsula and in the Beach communities of the South Bay are expected to also experience price declines as the market adjusts to the new reality of higher prices, steeper interest rates and the shrinking impact of Covid.

The Covid Connection

Covid wreaked havoc with social lives, business practices and just about every other aspect of society. When the pandemic struck in 2020 the real estate world was already heated because of low interest rates. Unfortunately, protecting society from Covid meant slowing down much of the business world, including real estate transactions. For months agents were dealing with masks, alcohol gel and the task of wiping every surface touched by potential buyers. And the buyers kept coming because the interest rates made buying a home affordable for many.

By the time 2021 started, the industry had found ways to show property and ways to consummate paperwork with relative safety from Covid. Keeping one eye on the mortgage interest rate, the buying public responded promptly. It was one of the busiest years ever for brokers and agents. As the year ended and lenders continued raising the cost of purchase loans, buyers started showing signs of stress.

January appears to have been the fulcrum point for a shift in market dynamics. The people involved are more than ready for relief from Covid. Bidding wars have all but ended. Price reductions are coming after only a few weeks on the market. The State has declared Covid “endemic.” Essentially we’re ready for normal business.

The first month of the year has pointed in the direction of a slowing market, with some pricing shifts to compensate for over-exuberant purchases in the close out of 2021. We anticipate February to show more of the same. We’ll be back soon with charts comparing the monthly progress. (You’ll find the beginning charts for 2022 at the bottom. Not real exciting without data to compare.)

The High Sale and the Low Sale

We’ve had requests for a little “human interest” added to the dry statistics we throw out here every month. We’re going to try to do that while still maintaining privacy for the people involved. Let us know how we’re doing.

For example, an observation we made this past month was the highest sale versus the lowest sale as reported by TheMLS for January. Those of you who follow us know the Beach areas are invariably at the top of the chart, so you won’t be surprised to find that the highest sale in January was in the Manhattan Beach hill section. New in 2021, this expansive 6 bed, 6.5 bath home sold for $6.5M. At nearly 6500 square feet, that’s over $1,000 per sq ft.

It’s far from the highest price we’ve seen there, but that piqued our curiousity. So we looked to the other end and found the lowest January sale in our part of the South Bay. Down from 6500 sq ft to 400 sq ft, and from $6.5M to $255K, this studio condo in Long Beach calculates out to a hair over $600 per sq ft. In other words, about 60% of the cost to build new construction in Manhattan Beach.

2022 Charts – The Beginning Point

The first chart of the year is less than exciting. We’ve included them here for reference. In March, when we can compare January to February and we can be confident we are past the bulk of the pandemic, these should be much more interesting and informative.

Mortgage Rates to Transition to New Benchmark

The most commonly used benchmark rate to determine mortgage rates has long been the LIBOR, or London Inter-Bank Offered Rate. However, this has some issues. The LIBOR is not tied to actual transactions. Because of this, bankers that have influence on the LIBOR can simply manipulate the rate to their benefit. This occurred in the 2008 recession, where the LIBOR was kept artificially low to encourage people to borrow money. The financial world has finally decided LIBOR won’t cut it as a benchmark, and it’s being phased out.

Financial institutions won’t be forced to stop using the LIBOR, but if they do use it, they will be required to include at least one rate that isn’t LIBOR-based as a backup. They will have until the end of 2021 to comply. The front runner for a backup rate in the US is the SOFR, or Secured Overnight Financing Rate. This rate is administered by the New York Fed. It’s not subject to the same manipulation that LIBOR is because it does take into account actual completed transactions. Fannie Mae and Freddie Mac already swapped from LIBOR to SOFR in 2020.

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More: https://journal.firsttuesday.us/libor-phase-out-begins-on-december-31-2021-are-you-ready/81002/

When to Consider a Shorter-Term Loan

The most common mortgage loan length is 30 years, which offers the lowest monthly mortgage payments. But that isn’t the only option. Shorter-term loans require larger monthly payments, but they have other benefits.

Shorter loan lengths, such as 15- and 20-year loans, ultimately result in less money spent over the course of the loan. The reason is twofold: Not only are you paying interest for a shorter period of time, but shorter loans actually also have lower interest rates. The monthly payments will still be higher since it needs to be paid off faster, but you’re saving money in the long run. So, shorter-term loans are a good idea if you’re not worried about being able to make monthly payments. If you have concerns about making payments, consider talking to an accountant about your taxes. Mortgage interest and property taxes are both deductible, as long as you are itemizing. If you weren’t itemizing before, doing so may mean the extra monthly payment really isn’t all that much more.

Refinancing also doesn’t necessarily mean you have to start your payments all over again. It’s possible to switch to shorter-term loan as part of a refi. This is especially beneficial if your loan doesn’t actually have all that much time left. If at all possible, when refinancing for a lower interest rate, try to take a loan with the same length as the remaining life of your current loan. This will ensure that you’re definitely saving money in the long run. You may even be able to find even shorter loan lengths, such as 10 years.

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More: https://www.cnn.com/2021/10/21/homes/which-mortgage-is-best-fe-series/index.html

Mortgage Rate Surpasses 3%

While mortgage rates are certainly not high, we can no longer safely call them low. The average rate for a 30-year fixed conforming loan is considered low when it’s below 3%. They’ve been slowly increasing. In the first half of August, it barely qualified at 2.99%. Now, the number sits at 3.06%.

As a result of increasing mortgage rates, demand for refinances has also decreased, dropping by 5% as soon as the rate passed 3%. Applications for purchase loans are less sensitive than refinance applications, and dropped only 1%. Despite the decreases in number of mortgage applications, the total dollar volume is still high, as a result of high prices fueled by heavy competition.

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More: https://www.cnbc.com/2021/08/18/mortgage-rates-hit-highest-level-in-a-month-and-weekly-demand-drops.html

Be Aware of Renovation Financing Options

Most people want to buy a home that’s move-in ready, but if you don’t mind buying fixers, there are a couple of finance options for you. This doesn’t mean just anyone can renovate a fixer — there’s a lot that goes into it, and you need to make sure you have the know-how or the money to pay someone who does. It can be expensive, and the payout is in the return on investment. If that’s much later down the line because you also plan to live there, that’s okay if you have the money, but it’s important to keep that in mind.

If you don’t have the money, you still need at least a decent credit score. There are two kinds of mortgages designed with home renovation in mind. The 203k Mortgage, one type of FHA loan, is meant for a vast array of different construction projects. In order to secure one, though, you’ll need a credit score of at least 580. Fannie Mae has a loan type specific to renovations, called the HomeStyle Renovation Loan. The max borrow amount is 50% of the total value of the home, and it’s possible to borrow against projected equity. It requires that the renovation be completed within 12 months, and necessitates a credit score of 680 or higher.

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