My Advice to the Class of 2022

This may not be for you, but I bet you know someone that could benefit from reading this – if so, please pass it along.  I want to share a few pieces of advice I think every college student should hear before he/she walks across the stage.

First of all, congratulations.  This is an incredible milestone. You’ve stuck with something through many challenges (once in a century kind of challenges--and then some) and you completed your goal. I promise you that no one--not your parents, not your siblings, not your professors, would have wished to have half of your college experience be during a pandemic.  But you did it. You didn’t quit. You persevered. And now it’s time to celebrate. And as you do, I want to offer you advice I’ve learned along the way that I think is important for you to know as you move on to the next phase of your life’s journey.

• Your education is only beginning. The rest of it simply isn’t for a grade. But to succeed you’ve got to continue investing in education, whether it’s books, internships, podcasts, TedTalks, or time with a mentor. The fun has just begun. Now you get to choose the books you read. Score! There will be lessons and teachable moments all around you. Learn them.
  
  
  

• Failure will happen. Embrace it early. The more you fail, the more resilience you will build. The bigger your aspirations, the more failure will undoubtedly be a part of your journey. Make failure your best friend. Don’t shy away from it. Take risks and move forward.
  
  
  

• You are who you hang out with. Be intentional in spending time with people who encourage you as you move forward in your next phase of life. Be intentional in spending time with people who are doing things—not just talking about doing things or worse yet—people who are just critics. Stay connected with people from college and invest in opportunities to connect with new people at a variety of career phases.
  
  
  

• Structure and plans help. Don’t worry; the plan can be tweaked! But as of the day after graduation you may suddenly find yourself with a lot more time on your hands. Use that time to reflect, dream, and begin to put together 90-day and year-long goals. While you may be uncertain about how to create your long-term vision, you can create a life and career for yourself in the next year that can be meaningful and rewarding. So don’t be afraid. You can (and will) make changes as you go.
  
  
  

• You don't feel fully prepared. Don't worry, you shouldn't. You’ll never know everything you need to know before launching. You’ve got to get out there and try things and sometimes you’ll need to build your wings on the way down. Don’t be afraid to take a job, make a move, or go on a date. This is the beginning of a whole new adventure.

Graduation is truly only the beginning. I’m thrilled for you to celebrate your accomplishments and move forward into this next phase in the journey. 

What is Going On With Rates?

I keep hearing from clients that they need to get their home financing in place before rates go up.  That may be the case and rates may in fact go up further than where we are now, but the reality is that rates have already gone up a good bit.  With that in mind, I thought I’d share a couple of the reasons behind this so that you too are able to share with your home buying clients, in layman’s terms, why rates have already moved up.

The first thing to consider is that movement in mortgage rates almost always fluctuate based on anticipation.  In other words, mortgage rates respond now to what is expected to happen in the future – a characteristic common to most long-term financial investments.  So when change is anticipated to be coming, the mortgage rates respond now to that expectation.  It is only when something happens that isn’t expected that will cause a rate change (particularly significant) in response to current factors.  But most of the time, mortgage rate movement is tied to expectation.

In this case, it started back in November when the Fed announced that the purchasing of mortgage backed securities, something they’d been doing for over a decade (remember the term “quantitative easing”) since the big recession, would start to taper down and become a thing of the past.  Without the Fed’s involvement on that front, it forces rates to be more tied to market and economic factors without the support of government assistance.  The reaction will be somewhat of an unknown as we will be back to more of a traditional market – something we haven’t experienced in over a decade.  And the assumption is that without the Fed support, rates will automatically move higher.

The other major factor right now is inflation.  For the first time in over 3 decades, we are seeing a significant increase in overall consumer prices (cost of goods and services) – like right now, CPI is up 7% year over year (2020 to 2021).  Historically speaking, the Fed has preferred that number to be in the 2-3% range to be considered “healthy”.  A number that is over twice what is desired has to be addressed.  And how does the Fed typically address this?  Yep, with rate increases.  So the second significant change coming our way is the Fed will soon (likely May) begin to increase the Fed Fund Rate, which is the rate banks borrow from the Fed to ultimately lend to consumers (banks will add their margin to the Fed Fund Rate and lend to the consumer at the Prime Rate).  And even though that is a short-term rate, it is more about the sentiment of direction from the Fed versus the rate term.

Granted, there are many other factors that weigh in here – some that are traditional (like employment rates and economic productivity) and some that are not (like Covid and Russia attacking Ukrane).  But the reason rates have moved up a full percent since mid-November is primarily due to the Fed’s announced strategy that will be used to both fight inflation and bring back a more normalized mortgage backed securities market.  We haven’t seen either yet, but the anticipation has caused the change.

Hopefully this gives you a quick, common-sense explanation that you can share with your clients about why rates have moved up.  The next obvious question is probably “where are rates going from here?”.  That one is always tougher to answer.   Hindsight is 20-20, but prediction isn’t quite so clear.  My thought is that we’ll wind up somewhere between 4 - 4.5% for 30 year fixed rates (maybe by springtime) and then see how effective the measures being put in place by the Fed create the desired impact to slow inflation over the remainder of the year.  Many times these actions create restrictions in spending and wind up in a recessionary period – at which point, the Fed will step in and lower rates to fend off a recession.  So while I don’t necessarily see an end to super low rates, I do think we are going to have rates that are higher than what we’ve become accustomed to for the next several months.  And that time period will depend on the economy’s response to the changes.  If the measures the Fed puts in place work, we could actually see rates drift back down some by the end of the year.  If an over correction occurs and we end up in recession, we’ll most likely see lower rates at that point – maybe 2023. 

Regardless of what rates do going forward, we are still in a very good environment at this point from a historical perspective.And it doesn’t appear that values are coming down in middle Tennessee anytime soon.So probably still prudent to buy sooner than lat

Spring 2021 Market Update

It’s been more than a year since I’ve sent out a personal email, so why not make my first update in 2021 be on April Fools Day (see below for something you may not know about this date)?  It was basically a year ago today that the world seemed to turn upside down, and in April’s Fools fashion, played a giant prank on all of us with a virus that we are still trying to figure out.  Life as we knew it changed, and in many ways will never be the same.  So what does that look like right now, at least from a financial and real estate perspective, and how have things changed over the past year?

Rates   After reaching a peak of almost 5% in mid-2018, the 30 year fixed rate steadily dropped throughout 2019.  By late 2019, many who purchased in 2018 were looking at refinancing.  Then Covid hit and the Fed did what the Fed has always done (at least in my 30 years of originating mortgages) and that was to instigate measures to lower rates to help stimulate an economy that just got hit in the head by a 2X4.  We saw unprecedented rates as the 30 year fixed rate dipped down to a low point of 2.5%.  As you can assume, this brought a massive wave of refinancing and millions of customers have been able to lower their monthly payments and set themselves up with a very healthy budget.  Now that we are seeing improvements to the economy and we have a new administration in the White House, we are finally seeing the pendulum swinging back to a little higher rate environment.  Currently the 30 year fixed rate is in the 3.25% range.  So we are well off the lowest levels, but still in a very comfortable range for anyone buying a home right now.

Real Estate  Values are up.  CoreLogic reports mortgage-carrying homeowners saw their equity grow by more than $1.5 trillion in 2020 compared to 2019--an average gain of $26,300 per homeowner for the year!  Contracts are being written at 10% above listing price, buyers are agreeing to pay the difference between appraisal and offer price out of pocket, buyers are paying title, and the chances of getting contracts accepted with a contingency are remote.  If you are a seller, you are golden.  If you are a buyer, you are likely in for a bumpy road.  Many have given up on the possibility of finding an existing property and are turning to new construction – often times to simply avoid the hassles of the search (and builders are much more likely to accept a contingent contract since it will take a while to build and they figure if the deal falls through for some reason, there will be another buyer ready to snap up the property when complete).  And the number of people moving to the Nashville area is still mindboggling – great for our economy, but an additional challenge for local buyers.  I’ve been working in this real estate market for 30+ years and have never seen a higher demand than what we have currently.

Financial Markets  Here is a snapshot of the Dow Jones Industrial Average () over the past year.  On April 1st a year ago, the Dow was right at 21,000.  A year later we are over 32,000.  That means if you invested $100,000 a year ago in a mutual fund that simply mirrored the DJIA, you’d have $150,000 today.

This is another one of the huge drivers of the demand for real estate in our market.  While the low rates are still the number one force behind the surge in the real estate markets, the added investable cash created by the past year’s run up in the financial markets has buyers feeling much more optimistic about their ability to buy a more expensive house – they have more money to be able to do it thanks to this recent bull market!

Other than coronavirus, we also learned new terms in the past year like forbearance, stimulus checks and PPP.  The “powers that be” get a pat on the back for once again spending money we don’t have, jeopardizing the financial security of our country (we now have a national debt of ~$28 TRILLION), to get us back on track today.  Not sure I consider that a success, but the economy is rolling again.  We lost greats like Kobe Bryant, Kirk Douglas, John Lewis, Chadwick Boseman, Gale Sayers, Ruth Bader Ginsburg, Mac Davis, Sean Connery, Eddie Van Halen, Alex Trabek and Chuck Yeager, just to name a few of my favorites.  I do think we continue to make strides as an American people in eliminating barriers – particularly those based on color and sex.  At least I hope so.  So like any other, it’s been a year that saw many successes and failures.  But unlike most, it is certainly a year we will never forget.

Likely Origin of April Fools' Day

Some historians speculate that April Fools’ Day dates back to 1582, when France switched from the Julian calendar to the Gregorian calendar, as called for by the Council of Trent in 1563. In the Julian Calendar, as in the Hindu calendar, the new year began with the spring equinox around April 1. 

People who were slow to get the news or failed to recognize that the start of the new year had moved to January 1 and continued to celebrate it during the last week of March through April 1 became the butt of jokes and hoaxes and were called “April fools.” These pranks included having paper fish placed on their backs and being referred to as “poisson d’avril” (April fish), said to symbolize a young, easily caught fish and a gullible person.

And now you know…..

Establishing Credit... the Right Way!

Do me a favor:  Head to Google.com and search for “build your credit”. Once you hit “search”, I bet it’s no surprise that in under 1 second, about 50,000,000 results can be found. And if you’ve never had a credit card or a loan, your credit history is most likely a blank slate, leaving at least half of your search results inapplicable. Your credit history, as documented on your credit report, is a record of how responsibly you’ve repaid the money you’ve borrowed… and creditors and lenders use your credit history to make decisions about whether or not to give you a credit card or extend a loan. If you have no credit history, however, there’s no record of how you might manage debt. And as a result, many creditors and lenders won’t lend you money. The quickest way to build good credit is by using a credit card, but you can’t get a credit card without good credit. So what can be done to establish credit? And how do we find out if it’s working?

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Become an Authorized User on Someone Else's account

To become an authorized user, a person (usually a family member or significant other) grants you permission to use his/her credit card account. Authorized users can be added to bank accounts and loans for withdrawing, depositing and transferring funds to and from their account… but unlike joint account holders, are not responsible for paying the bill on the credit card or loan account; the repayment responsibility remains with the primary account holder.  As an example, my daughter just graduated college with a great credit score because my wife opened a couple of credit cards, in her name with my daughter as the authorized user, when she started college.  So when she graduated, she had 4 years of excellent credit and now a great score.

Find a Secured Credit Card… and Apply for it!

A secured credit card is a great tool to use when attempting to establish credit. It functions just like any other credit card in the sense that when you use it to make a purchase, you’ll then make payments on that purchase on or before the due date, gathering interest if your balance is not paid in full. The most unique thing about them is the fact that you’re required to place a refundable security deposit when you apply. If approved, your credit limit will generally equal the amount of that deposit, which the issuer will hold as collateral until you close your account. If your application is rejected, you’ll get the money back right away.

All major secured credit cards report account information to at least one of the big three credit bureaus on a monthly basis, and that’s all the opportunity you need to improve your credit score. As long as you pay the bill on time every month, positive information will flow into your credit reports, building a track record of responsibility and covering up mistakes from the past, if applicable.

Get a Co-Signer

While a secured credit card is a great way to build or repair your credit on your own, you can also apply for an unsecured credit card using a co-signer. The co-signer agrees to pay back debt in the case that the borrower is unable. This may include any late fees and collection costs, on top of the full amount of debt. If you do plan on applying for an unsecured credit card by means of a co-signer, make sure you use it responsibly, paying your balance early or on time and never charging more than you can pay back.

Check your Progress by Checking your Credit Report and Score

After six months of timely credit card payments, check your status by viewing your credit report and score. Pay special attention to what is on your credit report and any positive or negative factors listed, so you have a better idea of what you need to work on next. Also make sure to take a look at your credit score – it will help you make sense of your credit report and give you an idea of how well you’re doing.

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There’s a lot to keep track of, but with some strong focus and planning, you can stay on top of your finances and greatly improve and establish credit. After a year of paying your bills on time, potentially adding a new form of credit and removing any errors from your credit report, your credit could look vastly different. If you or your client’s goal is preparing your credit to be a first time home-buyer, by following just a few simple steps, you’re that much closer in making that goal a reality.

3 Reasons Why Rates are on the Rise

As expected, the Federal Reserve raised the Fed funds rate in March - the first of three expected rate hikes for 2018.  It’s the sixth rate increase since the Fed starting pushing the rate back up in January of 2016 (from basically zero to now a tad over 1.5% - pushing the Prime Rate from 3.25% to 4.75%)

In short, the federal funds rate helps determine short-term market rates, as well as the interest rate borrowers pay on car loans, credit cards, personal loans and home equity loans. And although the Fed’s interest rate hike doesn’t directly affect mortgage rates, it influences other factors, such as the 10-year Treasury Bond – that do affect mortgages. And while these changes may only really indicate the mindset of the Fed with regard to where we are headed economically in the long-run, the point to grasp here is that our economy has human characteristics like emotion and is always moving. So we have to adapt and prepare. The questions we need to answer are what should we expect and how are we to properly advise our clients in navigating such murky economic waters?

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Recently I came across a vlog (which you can find here) by mortgage industry executive, Barry Habib, who, in his video, highlights the 3 reasons why he believes rates are on the rise. In an effort to educate my colleagues and their clients, I’d like to share those very reasons.
 
Number 1. The Federal Reserve is going to be buying a lot less mortgage bonds and treasuries.While this began in October of last year, the Fed certainly ramped up this practice a few months ago during January, which puts an incredible amount of pressure on the market.
 
Number 2. Stock prices – which have recently been on the decline, could be due for an upward run. Bonds tend to move like a seesaw with stocks. When the price (or yield) goes up for one, it will go down for the other - and vice versa; which means that when stocks go up in value, bonds are hurt. This essentially affects interest rates for consumers. Barry believes the stock market is due for another decent run up – his advice? Keep an eye on the S&P – if we see it surging, that could mean higher mortgage rates.
 
Number 3. Inflation:  It’s the arch enemy of interest rates. It eats away your buying power and is the bond market’s worst enemy.  Barry believes we are due for a report later in April that will indicate higher inflation numbers – and just hearing it could spook bond markets.
 
So what can we do? Act now, but proceed with caution. Tread carefully and stay informed. As part of my dedication to the education of my clients and colleagues, it is my passion to advise others during uneasy economic climates. And it’s my goal to do all that I can to protect homeowners and potential home-buyers from finding themselves vulnerable to losses.

Education vs. Asset: The Post-Grad Dilemma

It's almost graduation time and you know what that means! Final exams, graduation parties, moving back home, and finding a job within 6 months to begin paying down the average $45,000.00 price tag attached to your degree. While it sounds almost impossible, and quite frankly insane, for the 44 million college graduates now indebted to the federal government (and several private student loan lenders) it’s a stifling and dreadful reality.

If you’ve followed my blog over the past couple years, it shouldn’t come as any surprise that I am as passionate about the financial future of our students and graduates as I am of my own. And as a mortgage advisor, managing student loan debt for first time homebuyers is a routine part of my job. But what can we as real estate and mortgage professionals do to assure young graduates that by financing another huge purchase, they will be benefiting their bank account and not that of a landlord? After all, being a homeowner is a huge part of the American dream, so why shouldn’t our college graduates have a shot at finding theirs?

According to a study by American Student Assistance, 55% of student loan holders said their debt has caused them to put off home-ownership—and many would-be buyers aren't even TRYING to get pre-qualified out of fear of not staying afloat. It’s also important to understand that homeownership and student debt aren't mutually-exclusive. Meaning you can buy a home, get approved for a mortgage loan, and still make good on your student loans. And despite the justified conservativism used by Millennials in deciding where to spend (given the high levels of student debt currently stifling post-graduates), it’s important that they consider homeownership as a safe and financially savvy investment option. 

Still, many young Americans are unaware of the benefits cultivated from homeownership, such as the ability to turn housing costs into an investment, rather than an expense. And in more ways than one. Think about it:  If you manage to buy a home in an up-and-coming neighborhood for $300,000, and its value quickly climbs to $350,000, you'll have a nice little profit on your hands (which is not something that renters can claim). Owning a home can also provide an alternative source of income, for example, when rented out to peers. And a rent payment is essentially all that a mortgage payment is– a rent payment, but instead of heading straight into someone else’s pocket, it heads towards owning a larger share of your home. And when enough equity is built up, homeowners can take out home equity lines of credit to pay for expenses such as home renovations or education costs.

The next step is choosing the right mortgage professional to can help post-college home buyers understand what they can afford and how buying a home versus renting one may greatly improve their financial situation in the years to come. And as someone, like each of us, who benefits from the innovations, improvement, and success of the great, young minds of this country, I’m happy to help.

Will the New Tax Law Save You Money... or Cost You?

It's official:  The new tax law, which is now in effect, may affect potential and current home-buyers… in more ways than one. American homeowners may be facing a lower threshold on the mortgage interest deduction, a cap on the state and local deduction, and a higher standard deduction. So will the new tax law save us money… or cost us money? The answer depends on a complex array of factors that touch on just about every aspect of our financial lives. And Senior Moody Analytics economist Adam Kamins claims, “States in the Northeast and along the coasts are hit pretty hard, and states in the South and Mountain West come out ahead”.

Good news, Middle Tennessee that means we may be in the clear.

The mortgage interest tax deduction is a great way to make homeownership more affordable. It cuts federal income tax that qualifying homeowners pay by reducing their taxable income by the amount they pay towards mortgage interest. And luckily, via the new tax law, homeowners with existing mortgages may continue to deduct interest on a total of $1 million of debt for their first and second home. But for new buyers, the $1 million limit fell to $750,000 for a first and second home.

For example, if I already have a $750,000 mortgage on a first home and a $200,000 mortgage on a second home, then I can continue to deduct the interest on both on Schedule A. But what if I already have one home with a $750,000 mortgage and want to use a new $200,000 mortgage to buy a second home this year? Well, in this case, I couldn’t deduct the interest on the second loan.

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"States in the Northeast and along the coasts are hit pretty hard, and states in the South and Mountain West come out ahead."

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While the new tax law doesn’t affect just homeowners or individuals wishing to finance a home, a few other caveats, such as a moving expense deduction overhaul, exist. For example, under the former tax law, you could deduct some moving expenses when you moved for a new job. You had to meet complex criteria involving distance and timing of the move. But as of the beginning of 2018, only active-duty members of the armed forces will be allowed to deduct moving expenses.

So if you came out ahead on the tax bill with respect to housing or any other aspect of the bill, congratulations! If not, don't worry. Since 2018 is an election year, I wouldn't be at all surprised to see beneficial tweaks in the tax law via new legislation.

Remember that while taxes may be permanent, the size and distribution is always changing. And as far as the potential effects such changes may have on the housing market, I have no fear. Owning a home is part of the American dream, and maybe even the pursuit of happiness. According to Logan Mohtashami, a spokesperson for AMC Lending Group, “In general, people buy homes because they want to raise their family, they want to own something, forced savings,” he continues, “and not have to deal with a landlord.”

First Impressions Count: How Airport Growth Runs Parallel with Nashville Real Estate Development

Have you ever left an airport with the feeling of unexplained curiosity for the city in which it sits? What about confidence in your decision to know that you’ll never, ever want to return? Have you ever formed a similar opinion despite never having left the airport you’d arrived in? Sometimes long-lasting opinions are formed during our time spent in-between exiting an aircraft and speed-walking to baggage claim. But how could our minds jump to such conclusions about anything in such a short amount of time?

I like to think of every airport as each locality’s front door. Whenever a leisure or business traveler exits a plane, an impression is made… even if said traveler’s only concern is locating the nearest Cinnabon (or if you’re me – the nearest restroom). Sure, such impressions may be positive. Some, negative. But studies clearly tell us that time spent in an airport helps shape an individual’s overall perception of a destination.

Like many Americans, I travel to a handful of airports each year, and by that I mean I spend a lot of time in long check-in lines, browsing overpriced food stands with subpar offerings, and desperately searching for an electrical wall outlet. In my experience, the first impression is generally less than great.

In 2016, Nashville International Airport officials announced a design expansion to the tune of $1.2 billion dollars; one which includes fund allocations for retail, entertainment, and both residential and office space funding. And that’s just the beginning. So why would an airport, one which happened to be named one of seven most entertaining airports in the world by CNN, need a “design expansion”?

According to the New York Times, Nashville’s entire skyline has been and continues to be reshaped by a building boom, one which includes a burst of hotels, office buildings, and residential high-rises to meet the demands of the men and women who make their way through the city as either tourists or new residents every single day. And as a city named “top housing market for 2017” by real estate listing company Zillow, Nashville’s relatively affordable housing market and, interestingly enough, growing healthcare community are huge driving factors in the growth of Middle Tennessee’s ever-changing city.

Sometimes in business, it really is true that you never (or seldom) get a second chance to make a good impression. When travelers pass through our airport and see good, strong images of both the leisurely and business climates of Nashville, it’s a return of investment. And when such impressions lead to additional growth and expansion, the general value of property and space increases… and with such an increase, the environment for investing becomes both strong and manageable.

While I’m unsure of what such growth means for the future of Nashville’s infrastructure, I can be sure of one thing: first impressions do count. Why else would a community invest billions into expanding its immediate impressionability upon new visitors? And as either a homebuyer, real estate agent, or investor, why wouldn’t you follow the lead of the Nashville International Airport and invest in something that can only grow along with the continuing development of the city itself.

Not only do first impressions bring in new tourists and residents, they bring an increase in property value and growth probability.

Let the Welcome Home Program Welcome You Home!

While this time of year may have you pumped for chocolate hearts and shamrocks, it’s got me pumped for an entirely different reason (despite my love of chocolate) — one of my favorite programs, the Welcome Home Program of the Federal Home Loan Bank of Cincinnati, is officially back as of March 1st! And thanks to F&M Mortgage’s relationship with the FHLB, I get to help homebuyers take advantage of this truly one-of-a-kind program for yet another year!

The Welcome Home Program, a down payment assistance program that assists homebuyers in getting the funds they need prior to the closing of their new home, offers grants to fund reasonable down payments and closing costs incurred in conjunction with the acquisition or construction of owner-occupied housing by low and moderate income homebuyers. In layman’s terms, it provides free money to homebuyers who meet certain requirements. And who doesn’t love free money?

Sounds great, right? Well, there is one caveat:  This exceptional program is only available for a limited time, i.e., until the funds run out. But there’s no need to worry; in my experience, Welcome Home funds have, within the past couple years, been available through early to mid-April. But we’ve got to act fast!

Here are the details:

1. Up to $5,000.00 is available as down payment and closing cost assistance. Please note that the grant is forgivable if the buyer lives in home for 5 years. If sold before, pay back is prorated over 60 months. 
2. The funds are provided as a grant and therefore, no repayment is required.
3. The borrower must have a home under contract (primary residence only) to place a reservation for the funds.
4. The borrower must put at least $500.00 of their own money into the deal (60% of the $500.00 may be gifted).
5. This program is available in conjunction with certain low interest rate programs such as FHA, as well as THDA, USDA and that of conventional loans – but it is not available in conjunction with repair programs such as 203K.
6. While the borrower does not have to be a first time homebuyer, all first time homebuyers must complete a homebuyer education course as part of the requirements to receive said funding.
7. Income limits most definitely apply (it’s basically 80% median).
8. The income limit in Davidson County, TN, is $65,760 for 1-2 person household and $76,720 for 3+ person households.
9. This program may take a little longer to process due to the file having to be underwritten by the FHLB in Cincinnati, resulting in an up to 45 day processing time (but it’s certainly worth it).
10. While it may be used for new construction, the home in question must be completed by December 1, 2018.

Remember, Welcome Home funds will be available for reservation on a first-come, first-served basis beginning at 7:00 AM CT on March 1, 2018, and will remain available until all funds have been reserved.

If your client will be going into a home contract anytime within the next month or so, then it only make sense to have them take a look at the Welcome Home Program. And I can help. Let the Welcome Home Program help welcome your clients into the home they’ve always dreamed of!

Cracking the Credit Code: How to Supercharge Your Score

If you’ve ever been in the market for financing, chances are your full financial profile was examined by a lender. And if you’ve ever been prequalified for a loan, the inspection of your employment income, credit, assets, and debt-to-income ratio most likely laid the groundwork in determining your candidacy. But despite all four items, did you know your credit has the most pull in determining your eligibility (or ineligibility) for financing?

While your credit score is just a number, chances are it’s already had a measurable effect on your wallet. And when it comes to borrowing money, your credit score is one of the most important factors in determining which rates you will pay on everything from a business loan to a mortgage. Doesn’t seem too scary, right? Well, look at it this way: If you have a poor credit score, you could end up paying hundreds (or even thousands) more in interest over time on anything from credit cards to an auto loan. So how can you tell if your credit score is “good”, and what should you do if it’s in need of some serious improvements?

If you’ve never actively worked to improve your credit, a credit score may seem mysterious or enigmatic. You may understand that scores run from 300-850, but that’s where the credit knowledge of most consumers ends. And when you don’t quite understand the way something works, it’s easy to assume you have little control over it, or in this case, where you fall on the credit score spectrum. In reality, however, your credit score is based on very real and measurable criteria… and you have the complete power to change it. In fact, most consumers are in a position to improve their credit with very little effort. 

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The breakdown.

FICO is the biggest name in town when it comes to credit scores. Most major card issuers and lenders in the U.S. use FICO’s traditional model to decide whether to extend credit to consumers and at what interest rate. Using the information in a borrower's credit report, FICO breaks that information into categories. Those five components each get different weights.   

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Recently I came across an article titled, “How Your Credit Score is Calculated” by personal finance writer Miriam Cross of Kiplinger Magazine. Miriam’s article, which you can access here, outlines each credit-affecting factor in your financial life, and details how to positively steer each factor in the direction of an improving credit score. It also proves to be the most concise credit guide I’ve ever had the pleasure of finding and I felt compared to share it with you.

Let me ask you something— when was the last time you checked your credit score? And if your answer is, “I haven’t”, did you know that several credit card issuers and personal finance websites such as Credit Karma allow their users to frequently check their credit score at no cost? Seriously. It’s free. It’s also seriously imperative to understand how to go about improving your credit score, especially if it’s not up to par (and there’s always room for credit score improvement, anyway).

As a mortgage advisor and loan originator who aims to educate, advise, and inspire, it is my goal is to do all that I can to help potential borrowers find their footing along the path to home-ownership. And with that, I’d like to share some important tips, many requiring little effort, that allow potential borrowers, or anyone in need of financing, increase their credit score. You may also reference the linked article above for a more detailed explanation of each:

1. Make your payments on time and for the right amount – every month.
2. Avoid over-extending your credit, and stay away from unsolicited credit cards as they won't benefit in any way to your credit score.
3. Don't ignore your overdue bills, and if you face any problem regarding repaying your debt, contact your creditor for repayment arrangements.
4. Be sure of what type of credit you have, as credit from some financing companies can affect your score in a negative way.
5. Try keeping your outstanding debt as low as possible – particularly on revolving debt (credit cards). Extending your credit close to your limit constantly is considered to be bad and will reflect negatively in your score.
6. Restrict your number of credit applications as a credit report having many hits (credit inquiries) is viewed poorly.  In other words, the more times you let people pull your credit, the worse your score is likely to be.  But not all hits are considered to be negative, like monitoring of accounts, prescreens, etc., are viewed positively.

Your credit score plays an important role in your life that can put you on the right path towards financial success, or even simply veer you off course.  When you improve upon your credit score, you are also improving upon your confidence… and with confidence comes the power to seek out and follow through with the goals you strive to meet. Besides, if you are one of the 8 in 10 Americans who consider owning a home as part of the American dream, are you really going to let something as easily changeable as a credit score hold you back?

97% Conventional Loan Options

As we head into 2018 and continue to be in what we would probably all agree to be a seller’s market, understanding the various lending options plays a key role in getting contracts accepted for your buyers. 

For whatever various reasons that might exist, it seems that sellers are much more inclined to accept offers when the buyer’s financing is with a conventional loan versus an FHA loan.  And while I believe that FHA serves a critical role in home finance (many clients, particularly those with lower credit scores are better served with an FHA loan), there is a very distinct benefit for buyers using conventional loans to make their home purchase – and it’s not just in getting the seller to accept the contract.

There are basically two types of 97% conventional loans: the standard 97% scenario and the Home Ready (HR) option.  To qualify for the standard 97% program, at least one of the buyers must be a first time homebuyer – but there is no income limit.  The buyer doesn’t have to be a first time buyer to qualify for the HR program (although they can’t own any other property at time of purchase), but there is an income limit based on property address.  

The main things to remember is that HR offers a discounted interest rate and mortgage insurance (MI) is cheaper than the standard 97% program.  In many cases, particularly when the buyer has a good credit score, the HR program is better than FHA (less down payment and cheaper MI).  So not only does this type of financing work better for the buyer, because it is a conventional loan, the contract offer is more readily acceptable from the beginning.

Here are the statistics.

Borrower benefits

• Down payments as low as 3%
• Competitive pricing meets or beats our standard loan pricing
• Flexible sources of funds with no minimum contribution requirement from borrower’s own funds (1-unit properties)
• Rental and boarder income may be considered for qualifying
• Others who don't live in the home can join buyer on the mortgage
• Cancellable private mortgage insurance per Servicing Guide policy
• Reduced MI coverage requirements for LTVs above 90% (up to 97%)
• Homeownership education and housing counseling options empower borrowers to become successful homeowners

I’m happy to discuss any specific questions you may have regarding this, so feel free to call. Be sure to check out the following  links for further information. 

HomeReady Fast Facts  |  Income Eligibility Look-up Tool  |  FAQs

What do you want them to say about you?

As we head into a new year, everyone is excited to turn the page and get a fresh start – a “do-over” if you’ll permit that expression.  New Year’s resolutions are commonplace – whether health, finance, exercise, family, etc…, most everyone wants to do better next year.  Which is a great thing!  But what do we need to do to make sure those pledges that we make to ourselves stick? 

Where we fail most often with our New Year’s resolutions (and any other goal for that matter) is in execution.  We have this grand idea of what we want to happen, but lack the gumption to execute.  To execute, there must be discipline.  And for there to be the kind of discipline needed to promote the execution that accomplishes the resolution, there must be passion behind the “why” to the resolution.  So we need to dig a little deeper and determine what the “why” is behind the goal and use the passion and energy created from the “why” to make the change.

I was given an exercise about 15 years ago from a business coach I had hired to help me with my work/family balance.  The first thing he asked me to do was get in a room by myself, with no distractions, for a couple of hours while I wrote my own eulogy.  In other words, he asked me to write down what I would want my friends/family to say about me when I’m gone.  When I did that, it gave me the fuel to change everything about my actions that needed changing.  I was able to focus on the things that needed to be done to allow what I wanted said about me to happen.  I got to the core of what was important to me and let that be the motivator for everything, both big and small, that needed to change in my life.  So ultimately, the things I wanted said about me when I’m gone not only could be said, but would be.

So figure out what it is that you want said about you when you are gone and design your life (daily routine and activities) around making that happen.  May 2018 be your best year ever!

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Part 2 | Quick Market Review

Friday morning the President signed into law the biggest tax code overhaul in more than thirty years. Its centerpiece is a cut in the corporate tax rate from 35% to 21, plus cuts in individual tax rates.

Critics of the bill say lower taxes will raise the deficit, supporters claim the boost in economic growth, jobs and wages resulting from the tax cuts will ultimately increase government revenues. Part of the new package includes the Tax Cuts & Jobs Act. For homeowners, the capital gains exclusion on home sales, and the mortgage interest deduction on existing mortgages were left unchanged. But the interest deduction on new mortgages is only available up to $750,000 (down from $1 million). 

Time will tell the ultimate benefit of the new legislation.  For now, the housing market continues to boom.  I can’t help but think that we are in for higher interest rates in the near future.  For now, we continue to trade in this tight range (near the bottom of the range) that we’ve been in since the end of March.  If/when the mortgage bonds break through the bottom of this channel, higher rates are likely.

Industry Updates

As you have probably heard by now, the conventional loan limit will be increasing effective January 1st, 2018 (for any closing taking place after that date).  The former limit has been $424,100 and will now be $453,100.  The expanded limit for both Fannie and FHA will now be $494,500 versus the old figure of $466,900.  So borrowers will now be able to go up to $453,100 on both conventional and FHA loans at standard pricing and will be able to go up to $494,500 with a small pricing bump (typically .25% - which is pretty standard for typical jumbo pricing).  So a nice feature now will be that someone could go to $550,000 in price and basically do a 90% conventional loan versus having to go jumbo and put 20% down.  And basically all borrowers can now go up ~$30,000 in price/loan amount to stay at equivalent conforming rates.

There is still LIFT money available.  This program is pretty narrow, but you may have a client that could take advantage of it.  Property has to be in Davidson, Wilson, Sumner or Rutherford and unless the borrower is a first responder, military or teacher, the income limit is basically $55,000 per year.  But if eligible, there is a $15,000 down payment assistance fund available.  FHA still requires a 3.5% down payment from borrower, but the conventional 97% Home Ready will allow the assistance funds to go towards down payment.  It is somewhat of a niche program and funds will run out (was estimated to have been out already).  To read more about the program, go to http://www.ahrhousing.org/neighborhoodlift-program/.

THDA has lowered its rate from 4.625% to 4.25% on the Great Choice program (the one most buyers use).  That helps make this program a little more advisable.

Not really industry news, but I would like to introduce a new member to my team.  Emily Keller started working with me on December 4th and will be in charge of all things related to how my team markets and communicates with our clients and industry partners.  I’ve had a vision for this position for a couple of years and am thrilled to have her on my team!  Emily.keller@myfmbank.com

Rent or Buy? The Answer is in the RATE!

Mortgage rates are at the heartbeat of my business, offering the greatest insight into whether homeownership is affordable.  So it’s no surprise that when headlines scream that rates are on the rise while others declare that rates are historically low, borrowers have questions and concerns.  Historic context is key to understanding how rates behave – and the key to understanding where we are today. The downward trend of rates the last 20 years will prove that buying a home truly is a better option than renting.  Sure prices have been on the rise, and that makes buyers freak out.  But that’s just part of the equation.  We’ve talked about the Home Affordability Index before, so not going to beat that drum today (basically, the HAI considers price, rate and income to determine how affordable buying a home is).  And while price certainly plays a role, rate is what is the driving factor in payment – which is what matters when considering affordability and comparing to rent.

Let’s consider a couple of things:

1) Rates have been falling for years

We’ll use the 30-year fixed-rate mortgage as a benchmark since they’re the most popular home loan option in the U.S. and often used as a basis for news and research findings. Take a look at this chart showing the 20 year trend line for the 30 year fixed rate mortgage.

As you can see, rates on 30-year mortgages peaked at just over 8 percent in 2000 (they were as high as 18 percent in the early 1980’s). Rates have been on a steady decline over the last 20 years. Sure, there have been ups and downs — the most dramatic of which was the credit crisis that drove rates to historical lows. But even today we find ourselves in close proximity to where we were then.

2) Buying a home was a bargain back then. It still is today.  What about renting?

In June 2000, the median price of a home was $140,000 and the rate on a 30-year mortgage was 8 percent. If a borrower financed this at a 90 percent , the principal and interest payment was approximately $925 a month. Compare that to 2017 when the median  price of a home is $245,000 and the 30-year mortgage rate is 3.8 percent. If a borrower finances this at a 90 percent, the P&I payment would be approximately $1,025 a month. This shows that in the span of 17 years, the average mortgage payment has increased by just $100 for P&I (an 11% increase).

Rental rates, meanwhile, continue to rise with no sign of slowing down. In 2000, the median rent in the US was $602.  By 2015 that number had grown to $959 (a 60% increase in just 15 years).

The bottom line: Homeownership over time is a better investment and more affordable than renting – and even more so in today’s low rate environment.

Thanks to my friends at Movement Mortgage for this data!

Bonds have trended up a tad over the past week and a half, but still well below our lowest rate point of the year back in late August.  30 year fixed conventional still hanging below 4% and FHA under 3.5% for good credit buyers.

Housing is Still Much More Affordable Than a Decade Ago

Home prices continued to rise nationally in August, up 0.9% from July, in the latest Home Price Index and HPI Forecast from CoreLogic, a global information and analytics firm, putting prices up 6.9% from the year before. But does that mean house prices are becoming unaffordable?  I keep hearing this common theme from buyers – that houses are just getting too expensive.  But are we/they truly looking at this from a proper perspective?  The First American Real House Price Index (RHPI) reported that "while affordability is lower than a year ago, it remains high by historic standards." The RHPI is 38.4% below its housing boom peak of July 2006.  
What does that mean?  House prices are typically reported nominally. In other words, without adjusting for any inflation. Just like other goods and services, the price of a house today is not directly comparable to the price of that same house 30 years ago because of the long-run influence of inflation in the economy. The RHPI helps provide an alternative view of the change over time of house prices in different markets across the country. The three key drivers of the First American Real House Price Index (RHPI) are incomes, mortgage rates and an unadjusted house price index. Incomes and mortgage rates are used to inflate or deflate unadjusted house prices in order to better reflect consumers' purchasing power and capture the true cost of housing.  So when interest rates are low and overall employment/income is improving, higher prices don’t necessarily mean less affordability.  According to CoreLogic, wage growth is outpacing home price growth in about half of all local markets so far this year.  And we know how low rates continue to be.  So when those things are considered, higher housing prices don’t necessarily mean that they are too expensive.
Bottom line – when our current buyers complain about how high the prices of housing has gotten, we can remind them that from an affordability standpoint, we are actually still in a great position.  For more information on this, go to http://www.firstam.com/economics/real-house-price-index/.  It is very interesting.

After about a month and a half of pressure to move rates higher, we may actually be moving back into a better scenario – let’s just hope the activity of the last couple of days continues.
 

Smoke and Mirrors

OK, I’m going to apologize on the front end as this will be a little longer read than my typical update.  But I’m pretty passionate about the topic, so forgive me.  I’m over all of the gimmicks out there designed to pay off your mortgage faster.  Honestly, I think it is the wrong argument anyway, or at least wrong from an execution standpoint, and I’ll get to that shortly.  The two I’m going to pick on today are the bi-weekly mortgage and the concept of using a HELOC in place of a mortgage as strategies for paying off a mortgage faster. 

I’ll start by focusing on the whole concept of what is really required to get a mortgage paid off quickly.  It’s not rocket science.  If you want to pay a loan off faster, and it doesn’t really matter what type of loan it is, you simply pay more than what is required.  There is no magical formula that makes the debt disappear.  It requires discipline and effort.  You want to lose weight?  Eat less calories and get on a treadmill.  You want to save money?  Do a budget and manage your finances by it.  Want to be a better golfer?  Go to the driving range.  You get my point…  The bottom line is that to accomplish anything out of the ordinary, your behavior has to be out of the ordinary.  It’s all about discipline.

A bi-weekly payment plan will definitely help you pay a loan off faster.  You are simply making 26 half payments every year – in essence, one extra principal payment per year.  I don’t have a problem with these plans unless there is a fee involved.  The reality is that you can make that extra payment on your own – either portioned out monthly or annually, and accomplish the same thing with no extra cost.  So why pay a fee (most of the bi-weekly programs out there charge one) to do what you can do by yourself? It’s all about discipline.

Recently I had a client decide he would buy his home using a HELOC to finance it versus a traditional mortgage.  He was wooed by a company’s claim that by using its strategy, he could pay his home off in 7-8 years using a HELOC versus the traditional mortgage.  This concept intrigued me enough to get the book, offered by the company promoting the strategy, and read it.  I was open minded about it hoping to learn something when my natural skepticism hinted that I wouldn’t.  I guess I should have been immediately more skeptical when glancing through the 127 page book, I noticed the last 56 pages were about strategies to make more money and credit repair.  I read it anyway – and was once again confirmed by the fact that if you make anything sound too good to be true, not only is it, but sadly there are those out there that will believe it – and ultimately buy it.  At the end of the day, the concept is nothing more than paying a loan off faster by paying more than is required monthly.  Granted, I believe that a HELOC is a great product and can be used strategically to both grow and protect wealth.  I have one myself.  But the central argument used in the book is that it is all about debt balance and not rate.  I couldn’t disagree more.  Banks make money based on the rate.  You eliminate balance by paying principal.  They faster you pay principal, the less interest (rate) you pay – that’s the whole point, to pay less interest.  You can definitely get your loan paid off faster using this strategy, but it is just another gimmick.  You are simply paying more than what is required versus a traditional mortgage.  There is actually a real danger here and that is you are using an inferior product (a loan with a rate that fluctuates) to accomplish what can be done on your own – paying extra on the debt.  And I’m sure there is probably a pretty good sized fee from the company touting the strategy to help you get everything set up.

But are we really even focusing on what is in my opinion the more important concept?  I agree that it is all about getting out of debt.  But what does that really mean?   Most would say that it means owing no money to anyone.  I disagree.  I’ve stated for years that being debt free isn’t really about having no debt – it’s about having the ability to pay off the debt anytime you want to.  In other words, it’s about having more financial resources than money owed.  If you have $200,000 in a safe investment and owe $150,000 on your mortgage, you have the ability to pay that loan off anytime you want – you are debt free, you just choose strategically to have debt.  I used to crack up listening to The Money Game back in the early 90’s with Dave Ramsey and Roy Matlock.  They used to argue about this concept.  Back then mortgage rates were around 8% and the rate of return on equity investments was around 12%.  Dave wanted people to pay off their mortgage and Roy argued that it made more sense to invest the money versus paying off the mortgage – an alternative to the traditional thought of being “debt free”.  I love Dave, but I was always on Roy’s side when they argued this topic.

I’ll give you a simple example related to the whole HELOC versus mortgage concept – and I’ll be generous to the HELOC concept assuming that the rate never changes.  The last two times the Fed started increasing the Fed Fund rate (that prime is tied to), prime topped out around 8%.  Prime is currently 4.25%, so we’ll use that figure.  The 30 yr mortgage is at 3.75% right now, so we’ll use that figure as well.  We’ll assume a $200,000 mortgage and that the payoff target is 8 years.  The P&I payment on the mortgage is $923 per month.  We’ll assume an average of $4,250 per year of interest on the HELOC (that is averaging the interest over 8 years with constant rate assuming the balance will be paid down to zero by the end of 8 years).  To pay off the loan on a monthly basis would require a payment of $2,392 ($2,038 in principal dividing $200,000 by 96 (8 years) plus $354 in average interest).  So the first 8 years will require an additional payment of $1,469 versus the 30 yr mortgage.  If the person with the mortgage invests that extra $1,469 over the 8 year period at 6% (very conservative as pretty much any 10 year period in the history of the equity markets provides a return of 8%+), the total saved/earned will be $181,337.  By the way, his principal balance at this point is ~$163,000, so he’d have the cash needed to pay off the balance if he wanted to at that point – with some left over.  But here is where the real magic exists.  Let’s say that the person that did the HELOC and paid his loan off in 8 years now invests the $923 per month (the amount the mortgage guy will still be paying) over the next 22 years.  His investment will grow to $506,687. Let’s assume that the guy with the mortgage, who invested his money over the first 8 years, continues to pay his mortgage and never pays an extra penny towards his investment or paying his mortgage early (I’m keeping the amount paid by each the exact same for the full 30 years). The investment he grew over the first 8 years will be worth $653,454 by the end of the 22nd year.  He comes out $150,000 ahead.  So who was the real winner? And all of this assumes the HELOC rate never changed, the investment return was below average, and isn’t considering the tax benefit of the interest paid.  Thank you compound interest – the only real magic in this entire equation.

So I guess my point is that regardless of strategy, and I believe I’ve proven that investing versus paying down the mortgage (particularly in this low rate environment) makes more sense, what doesn’t make sense is to use gimmicky options, especially if there is any type of fee involved, to pay the mortgage off early.  If you want to do that, get a safer fixed rate option and just pay extra.  Or, in my opinion, invest the difference and work towards having the cash available to pay the loan off when you want to.  Either way, it’s all about discipline – not a hokey strategy.

We’ve seen a couple of dips since we started our run to better rates at the beginning of July.  But the one we had last week took us out of the upward moving channel for the first time.  It will be interesting to see if that continues over the days and weeks to come, but we’ll keep you posted.

Make Your Argument Against FSBO’s

In a market as hot as ours, selling a home should be as easy as putting a sign in your yard and waiting for offers to come in – right???  That seems to be a common thought among many home sellers – particularly those who are needing to net the maximum amount from their sale and are looking for all advantages to make the most money possible (and what better way to start than to eliminate 6% right from the beginning by selling without representation?).  Obviously we know better.  You know how much work is involved.  You know that NAR studies prove that comparable FSBO’s sell for ~ 7-13% less than homes represented by a Realtor (depending on price and location).  You know the value of the service you provide.  But are you doing a good job of letting your clients know that?. 

If you don’t already have this, why not put your service model in writing?  Have a defined description of why the service you provide is not only better than your competitors, but is also persuasive enough to make any potential seller realize that selling without representation is a losing proposition?  I’m sure you can come up with even more reasons than this, but this article below from Realtor.com is a good start.  It gives 5 compelling factors (listed below) that sellers likely don’t understand or are not giving full consideration to when attempting to sell on their own.  Certainly you can add to this, but I believe a drawn out, then well-executed strategy, will help your clients immediately recognize the benefit of your service.

1.      Marketing your home isn’t as easy as you think

2.      Homes for sale by owner could be priced wrong

3.      You could underestimate (or over estimate) how much money to spend on curb appeal

4.      Showings are a drag

5.      Preparing your own paperwork can be tricky

http://www.realtor.com/advice/sell/why-fsbo-sales-fail/  (scroll to bottom of page)

The bond market continues its upward swing (lowering rates).  Since July 6th, the bonds are up almost 125 basis points.  I’ve been able to lock a few clients in recently at 3.75% on conventional 30 year fixed and 3.25% on FHA 30 year fixed.  So low rates are certainly still favorable for buyers right now.

Being in the Real Estate Industry is Awesome!

“This is the true joy in life, the being used for a purpose recognized by yourself as a mighty one, being a force of nature instead of a feverish selfish clod of ailments and grievances complaining that the world will not devote itself to making you happy.  I am of the opinion that my life belongs to the whole community and as long as I live, it is my privilege to do for it whatever I can.”

I read this last night (quote from George Bernard Shaw) and can think of no better way to describe the opportunity we have every day to help our clients as they pursue home ownership.  Every single client provides a new opportunity for us to invest in them personally.  We get the opportunity to get to know them in a unique way and serve them during a time of personal fulfillment.  I am so guilty of sometimes getting caught up in the numbers game: How many loans am I closing this month?  What was my volume last year?  How do I rank among my peers?  And while all of that does matter – particularly for someone with a competitive spirit, it’s not what is ultimately most important.  When we look back on our lives and our accomplishments, the people that we were able to serve and help improve their lives (spiritually, financially, physically, emotionally and philanthropically), is what will ultimately determine the value of our efforts.

A friend of mine, who is in his early 30’s and has a business installing and repairing AC units, was sharing with me the other day about how much fulfillment he gets from his job – he gets to help people, make their lives more fulfilled, save them money, and make enough money to meet all of his needs.  Great perspective.  Similarly, I had dinner with an older friend recently and when we started talking about little idiosyncrasies with our respective employments, he commented, “If you never dread Monday’s, you never look at the clock during the day for the purpose of determining how much longer you have to work that day, and you make a positive difference in the lives of the people you serve, you have found a job worth having.”  Well, that is exactly what our jobs in the real estate industry provide us. The sooner we recognize that blessing, the sooner in our own lives we can start focusing on how to be a blessing to others – which is ultimately the true measure of success!

When we make our mission one that focuses on the improvement of others, and not just on selling or financing real estate, we understand what a privilege it is to get to do what we do.  Success follows.

These past 3 months have been a roller coaster ride.  Rates have gone down, back up, and back down again.  We are back to really low levels, but looking very much like we are heading for another dip that could move rates back up a tad – so keep an eye out.

Student Loans – from a qualifying standpoint

We have talked in the past about student loans and how it is my opinion that this will be the next financial crisis faced by the American public.  Americans owe over $1.4 trillion in student loan debt, spread out among about 44 million borrowers. That’s about $620 billion more than the total U.S. credit card debt. The average Class of 2016 graduate has $37,172 in student loan debt, which is up six percent from 2015.  This is not something that is going away any time soon and it has a significant effect on first time home buyers and the age that they are able to buy their first home.  But what I want us to look at today is how we (mortgage lenders) consider student loan debt from a qualifying standpoint based on the most common types of mortgage loans they are eligible to obtain.

·        Conventional (which includes the 97% Home Ready program) – we use whatever the credit report reflects as the monthly payment for qualifying purposes.  If there is no payment listed, the loan is in deferment for example, then we have to use a 1% of the total balance as the monthly payment unless the borrower can provide paperwork showing what the exact payment will be when repayment begins.  So if the student loan debt is $50,000, the borrower has no payment and no documentation reflecting what the payment will be, then we have to count a $500 monthly payment when calculating the debt ratio.  But if there is a payment listed on the credit report, we go with that payment.

·        FHA – we use the greater of the payment that is listed on the credit report OR 1% of the balance when calculating debt ratios.  As an example, if the borrower has $50,000 in student loan debt with a $250 monthly payment (typical for someone in an income based repayment plan) or no payment because the loan is in deferment, we would have to count a $500 payment when calculating the debt ratio even though the required payment is much less.

·        THDA – same as FHA

·        USDA – same as FHA

The requirement that FHA, THDA and USDA have of counting a minimum of 1% for student loan debt can play a significant role in qualifying a first-time home buyer for a mortgage.  It is important that we (everyone involved in a real estate transaction) understand the implications of this and make sure both we and our buyers understand it.  The price a buyer can qualify for is limited by what debt ratios allow and our requirement to potentially count a higher payment for student loans in that ratio, than what the borrower is actually paying, can certainly lower the price he/she can afford.

Affordability Defined

I saw an interesting statistic last week I thought worth sharing.  I keep hearing about how continued price appreciation is making buying a home less and less affordable for the average homebuyer.  I certainly won’t argue the fact that it’s easier to buy something priced cheaper than something more expensive.  But I think the term “affordable” might need a little clarification in our concern about rising prices. 

Right now, prices are simply being driven by supply and demand – there is more demand than supply and that naturally drives prices up.  And while we may be feeling this a little more intensely right now here in Nashville, it is a common issue nationwide.  Pending home sales declined in March and April, meaning closing numbers in June/July will likely be lower as well.  But the issue is not a lack of buyers (or a willingness to pay the higher prices), it is simply a lower supply than what is needed (inventories are down 9% nationwide from a year ago).

But back to the statistic I found most interesting: if you go back to 2000 and 2006, the last two times prices seemed to get “unaffordable”, and you adjust prices for interest rates and increased average incomes, we are currently 9.3% lower than where we were in 2000 and a whopping 32.5% lower than the peak in July, 2006 from an affordability standpoint.  So while it does feel at times that prices are getting too high to be considered affordable, particularly in a few markets around town,  the reality is that with the current interest rate environment and the increase in wages over the last 10+ years, buying a house is quite a bit more affordable than the level reached in either of the last two periods of significant price increases.

So if anything, that should be an encouragement to our clients to get out there and buy now before rates go up and prices continue to climb.  But then we are back to the old supply/demand issue where there just isn’t enough supply to meet the demand – and that’s really the issue more so than homes being unaffordable.  I guess the other thing I would suggest at this point, and it probably goes against everything that is going on right now, is a simple reminder that real estate is a commodity – the prices will certainly go back down at some point.  Let’s not get caught thinking that because we are in the hottest market in the country that it will stay like this forever.