Top 10 Misconceptions About Mortgages
Top 10 Misconceptions About Mortgages
By Trevor Bennett
Portfolio Loans Provide Local Underwriting and Prequalification Using Restricted Stock Units
Branch Manager, Caliber Home Loans
Seattle is synonymous with innovation and home to dozens of tech titans that have helped attract more than 1,000 new residents to the region each week. With more tech job openings than the Bay Area, meteoric population growth has made the Emerald City the fastest-growing large city in the US with the steepest rise in median home prices, increasing by about 1-percent per month for the last year, according the closely watched S&P/Case-Shiller Home Price Index. Most new recruits opt to lease an apartment in one of those glimmering new rental towers creating a gold rush of development – in fact, Seattle area apartment rents have risen by about 50-percent since 2010. More than 25,000 new multifamily housing units will be built in downtown Seattle within the current decade but remarkably, 94-percent of this inventory will be delivered for rent and not for sale, further exasperating the supply and demand imbalance for homeownership.
“Many of those apartment dwellers have been incubating within these rental buildings for several years and they’re ready to buy,” said Dean Jones, President and CEO of Realogics Sotheby’s International Realty. “They know signing that 12-month lease is going to cost a lot more than the rental payments because waiting a year to reenter the housing market as a buyer means higher prices and potentially higher interest rates.”
Jones says these would-be buyers face several challenges in today’s housing market: 1) a lack of available homes at more affordable price points; 2) tech-driven compensation plans that include both a base salary and future stock options; and 3) misconceptions about mortgage lending. Any one of these headwinds could stall a buyer from making progress as a homeowner.
As a branch manager for Caliber Home Loans, Trevor Bennett ranks in the top 1% of mortgage originators in the US says success in Seattle requires products that caters to the local real estate microclimate.
“Fortunately, we can responsibly underwrite our mortgages considering the unique dynamics of our regional housing market and the borrowers that work here,” adds Bennett. “Not all mortgages are created equal so a nationalized policy will overlook opportunities in the local market. As a non-bank, portfolio lender, we underwrite our own loans and are able to serve a wider range of needs.”
Bennett points to several innovative approaches to serving the Seattle-area borrower that’s unique to Caliber Home Loans:
· Portfolio Lending: Seattle’s housing market trajectory is distinct and requires local expertise to evaluate the risk with a mortgage. Caliber Home Loans fills that niche with portfolio lending solutions and local underwriting.
· Underwriting with Restricted Stock Unit (RSU) Income: Stock options paid by employers like Microsoft and Amazon have had a major impact of the income and wealth in our city and is a significant factor in our housing market. Caliber Home Loans have re-written the rules for how we underwrite loans in order to account for RSU income for loan qualification in these markets.
· The Digital Mortgage: The mortgage process has not fundamentally changed in decades and that is changing as the industry is undergoing a technological shift. Consumers demand a more mobile centric home buying experience. Millennials take it as a given that they will be able to transact online so why not secure a mortgage that way? It is happening now and Caliber Home Loans is leading the way.
So, if it’s quicker and easier to qualify for a mortgage today and the local housing market is rising faster than any other city in the US – does this mean we’re headed back to a bubble like we had a decade ago?
Market pundits don’t think so.
In a recent article on Seattle Times, reporter Mike Rosenberg sat down with Reddit to discuss what’s happening with “Seattle’s sizzling-hot housing market,” from rent hikes and growing home prices, to the condo imbalance and the influence of the tech industry.
Rosenberg admits he is most frequently asked about the stability of the market in Seattle, and says the 13-percent growth rate we’ve seen in the last year has “to moderate at some point” but that it’s key to recognize that the factors present during the recession simply don’t exist in Seattle: “people are paying mortgages on time” and “putting down big down payments,” not to mention the impact the ever-growing tech industry is having on the region’s economy. “Amazon alone is enough to make the city’s economy among the strongest in the country,” he added.
Of Seattle’s growing pains, Rosenberg describes the need for more upzoning to “add more housing, and different types of it (townhomes, apartments, condos, etc.)” and highlights the city’s continued struggle with traffic, saying that in future years, “adding more regional transit will be a big deal” because “we’re lacking compared to other cities.”
Another issue Rosenberg touches on is Seattle’s lack of new condominiums. Echoing sentiments recently expressed by Realogics Sotheby’s International Realty, Rosenberg says that nearly all of the new construction inventory delivering in Seattle in our current decade is for-rent. Rosenberg says one reason for all the apartments is that “banks issue construction loans for apartments because the rent keeps rising and they keep making a lot of money” and Washington’s stringent condominium liability legislation means “a lot of builders don’t want that hassle/risk.”
A recent RSIR report reveals that in September 2017, the median home price for in-city resale condominiums increased a staggering 35-percent year-over-year in downtown Seattle, indicative of the city’s continued struggle with population growth, rising real estate prices for renters and buyers, and a supply and demand imbalance with little relief in sight.
Some would-be buyers are combatting Seattle’s frenzied market by securing condos through presales, in projects such as the NEXUS condominium tower which will deliver 382 units to the burgeoning East Village neighborhood in 2019.
As for those mortgage misconceptions, here are Bennett’s answers to the top ten most common misconceptions about mortgages as contributed to the FutureCast Forum’s questions on the topic:
1. I should wait to buy my retirement dream home until I retire.
You have worked hard and have done all of the right things. You have no, or low, debt and tons of equity in your home. The plan is: retire, buy the home in the sun, and finance part of the purchase. Then when you are settled in, you will sell your current house and payoff the new house. It is an awesome plan, but it might not work if you are not working and earning sufficient retirement income to qualify for your next mortgage. Most mortgages are not asset-based loans. They are income-based loans. Plan ahead for retirement by purchasing your new house now a year or two ahead of retirement.
2. My son or daughter cannot afford a house.
Your son or daughter is out of college and has a bright future ahead of them, but is stepping into either a high-priced rental market or has the opportunity to buy a house. Consider giving the gift of wealth building. Your assistance does not have to come in the form of a financial gift. There are low down payment loans for first-time homebuyers and some of the programs allow for a relative to be on the loan as a non-occupant co-borrower. You can help them qualify for a loan by going on the loan with them.
3. Mortgage insurance is a waste of money.
I hear this often. People tell me that they are going to wait a year or so while they save more down payment to avoid MI and, in the meantime, the houses that they are looking at are becoming more expensive. Here’s the deal with mortgage insurance: it is a relatively small payment premium that allows you to buy a house with less than 20% down which is hard to do, unless you are selling a house, because you have the good fortune to already own one. Get on the equity-building bandwagon. Your first home does not have to be your forever house and the loan does not have to be your forever loan.
4. I have to refinance to remove mortgage insurance from my loan.
Conventional Fannie/Freddie loan programs and MI guidelines allow for the removal of MI. There are a variety of requirements such as documenting the value and equity in the property, but for a conventional loan with borrower-paid monthly MI, the MI is not a permanent feature of the loan.
5. The Federal Reserve controls interest rates.
The Fed controls the Federal Funds Rate. Mortgage rates are based on the price of mortgage backed securities (MBS).
6. All income is treated the same when it comes to qualifying for a loan.
Salary, bonus, commission, restricted stock units (RSU), self-employment income, increasing income, decreasing income…income guidelines run deep and wide. Start the mortgage planning process early with your loan officer. A well-planned mortgage may give you a competitive advantage in a multiple offer situation because you will know exactly what options you have.
7. A low appraisal means I have to bring more money to the table.
Maybe, but it depends on how much you were planning to put down and the loan-to-value (LTV) requirements of the loan. Let’s say that you are buying a $600,000 home and putting $300,000 down (50% LTV) and the home appraises for $500,000. The loan to value for the mortgage would be based on the appraisal: $500,000. If you are still paying $600,000 and borrowing $300,000 but the lender is using a value of $500,000 then the LTV would be 60% and that might be perfectly fine for the loan.
8. Recast vs refinance.
You do not have to refinance to lower your monthly payment, if you have extra cash to pay down your loan. A recast allows you to pay down your home loan with a large (usually $5,000 or more) principal reduction and then have your mortgage payment recalculated based on the reduced principal balance. This can be a better option than refinancing if you have obtained a cash windfall or a liquidity event, like the vesting of restricted stock units or the sale of another property.
9. I had a foreclosure or bankruptcy and I need to wait to buy a house.
There are now a variety of loans, commonly referred to as portfolio loans, which allow for consumer credit events such as a foreclosure, short sale or bankruptcy with little or no waiting period. The loans are carefully and responsibly underwritten and are a great option for people who have had a financial misfortune but want to get back into the housing market and not stand on the sidelines.
10. I want to move but I can’t because I would have to sell first.
Let’s say you are outgrowing your house and you have equity in that home that you want to roll into the next home but want to do that without putting yourself in the position of selling first and then buying the next house. A common concern is coming up with the down payment on the new house with your equity tied up in your current house and also qualifying to carry both mortgages while your home has not sold. One solution that may work for you is to put a minimum amount down on the house that you are buying. After you move in and then sell your previous home, you may have the option of making a large principal reduction on the new loan and then having that loan payment recast rather than refinancing to achieve the payment that you are ultimately looking for when the dust settles. In some cases, the loan can also be structured in a way so as to omit the payment on the home that you are selling in order for you to qualify. There are specific loan guidelines for that scenario.