February 2022

Groundhog day has come and gone, and here in Southern California we noted a shadow, predicting more wintry weather.  At least we are not dealing with blizzards like much of the country!

INTEREST RATES

It is definitely feeling wintry when looking at the interest rate climate.  Rates continue to rise and we are also facing new “Loan Level Pricing Adjustments” for high-balance conforming loans (those over $647K) as well as big pricing adjustments for second homes. 

The rise in interest rates have a great effect on affordability as you can see here:

$700,000 loan at 3.5% carries a Principal and Interest payment of $3143. The same $700,000 loan at 4% carries a payment of $3342.  This $200/month difference can make or break it for some buyers/homeowners.  There is no time to delay in moving forward with a home purchase or refinance.  As rates continue to rise it may influence home prices/values, but for now inventory remains so low that there is no relief in sight from rising prices.

TAX TIME

Please have your Home Loan Officer review your draft returns prior to filing if you are self-employed or own rental real estate.  I cannot stress the importance of this enough. We frequently see tax returns for self-employed individuals as well as corporate returns where a small adjustment here or there can make an enormous difference in the income used to qualify for a home loan.  If you are planning to buy or refinance in the coming year, make this a priority.

 PREQUAL vs. PRE-APPROVAL vs. ACE APPROVAL

There are a lot of misconceptions about these terms when a buyer is making an offer to purchase a home.  As Real Estate Agents know, sometimes “prequal” or “pre-approval” letters are not worth the paper they are printed on.  A “Prequal” is typically based on a phone conversation providing verbal information on income and assets.  I have yet to speak with a self-employed individual who accurately reported their income to me verbally.  A “Pre-approval” is based on income and asset documentation provided to your lender, along with a completed loan application and a credit pull.  With these the lender can run automated underwriting – universally used today – and provide an automated underwriting approval. 

An ACE approval is a full underwriting approval subject to only identifying a property and obtaining an appraisal. Either the human underwriter or the Artificial Intelligence underwriter, that actually reads the documentation in the file, has reviewed everything and approved the borrower for a specific loan amount.  We strongly suggest obtaining an ACE approval (otherwise known in the industry as a TBD approval) given current market conditions.  It is so competitive!  With an ACE approval we can shorten contingency periods or remove them altogether, offer shorter escrow periods, and even waive appraisal contingencies depending on the borrower.  Why did we name it the ACE approval?  We are the CARD TEAM after all-- and hold all the Aces!

REVERSE LOANS

Baby Boomers are retiring right and left.  By the year 2030 all Baby Boomers will have turned 65.  Whenever we work with clients approaching retirement or already retired, we always show them various financing options, to include reverse loans.  These are helpful in a number of ways, including improving monthly cash flow by eliminating the mortgage payment;  or providing an income stream in various forms such as a line of credit or fixed monthly distributions.  They are also a useful tool for financial planners to use in down market years (to avoid liquidating pre-tax funds which is costly) since the income from a reverse loan is tax free.

There are many misconceptions still floating around about reverse loans: 

1.     The bank does not own the home or take title after the borrower passes.  The home goes to the heirs.  The owner remains on title throughout the life of the loan.

2.      You can’t outlive your reverse loan.  The only event of default is failure to pay your taxes, insurance or permanent move-out.  You must live in the property. The loan is non-recourse and there is no time limit involved.

3.      A reverse loan does not affect Social Security or Medicare.

4.      Reverse loans are no more expensive than a typical FHA loan, and with jumbo reverse loans the costs are similar to a regular refinance. 

As always, please reach out to us with any questions or concerns.  We are here to be a resource to our clients.