Millennials, currently aged 28 to 43, are now the largest generation. They are also the generation that should be buying their first homes right now, and certainly some are. However, only about 52% do own homes.

Back in 1990, the average age of first-time buyers was 29. Now it has jumped to 38 – up from 35 in 2023.

It’s not because the majority don’t want to own homes.  In fact, more than 70% say homeownership is part of the American Dream. It’s simply because the economic climate has changed drastically.

In 1990, the median income was only $30,000, and at 10%, interest was even higher than it is now. However, the median home price was only $79,100. That equated to $2,500 per month income and $694 per month for a house payment, or 28% of the average person’s income.

Now, while average income has risen to $80,610, or $6,717 per month, the median home price is $416,880. At 7% interest, payments are $2,773, or 41% of monthly income.

At a time when many millennials are still carrying student debt, and inflation is the highest in 40 years, it has become harder and harder to qualify for a home loan, let alone save up for the down payment and closing costs. Some millennials are willing to forgo some lifestyle pleasures in order to own a home. Others are not.

In major markets across the U.S. it is now cheaper to rent than to buy – but buying can still be a wise decision in terms of long-term finances.

If you are a millennial and plan to stay in one location for the foreseeable future, do consider buying, as it has some important benefits.

• When you buy with a fixed-rate mortgage, you’ll know what you’re paying each month. Renting can come with periodic increases.
• You’ll build equity – both from paying down the loan and from property appreciation.
• You’ll build credit.
• You’ll be free to paint a room or hang a picture without asking permission.
• Unless you buy into a restrictive HOA, you’ll be free to own a pet.

Ownership does come with additional costs. However…

You might hesitate because in addition to the taxes and insurance that will be built into your mortgage payment, you’ll be responsible for sewer and water fees, garbage collection, maintenance, repairs, and HOA fees.

But stop and think. You’re already paying for those things when you pay rent. The landlord pays the actual bills, but you reimburse him or her. Even an allowance for repairs is built into the rental fee, as is a profit margin.

If the down payment is your biggest hurdle…

You may have heard that you must have 20% of the purchase price as a down payment, and that might seem impossible.

It isn’t true. While 20% is preferrable because it frees you from paying for private mortgage insurance, it isn’t mandatory.

Depending on the loan program and your situation and qualifications, you may not need any down payment at all.

• Veterans and service members, for instance, are entitled to zero down payment mortgage loans.
• USDA loans are also available with zero down.
• FHA offers loans with as little as 3.5% down – and that money can be a gift from an employer or family member.
• Fannie Mae’s HomeReady and Freddie Mac’s Home Possible programs offer 3% down payment options for low- to moderate-income borrowers.

These programs come with various qualification requirements, so explore your options.

Talk with your lender to learn about them, and about the down payment assistance programs available to first time buyers. Texas has several programs, so if you are determined to own a home, the opportunity is there.

You don’t need to start with your dream home…

You may dream of a spacious home with all the bells and whistles, and you know that is out of your reach. But don’t let that stop you from taking the first step forward.

Purchase what you can afford now. Let it build equity as you build your earning power and income. When you’ve paid down the loan and it has appreciated in value – so you do have more than 20% equity – refinance to be rid of the private mortgage insurance.

Then, when you’re ready to pursue your dream home, you’ll have the built-up equity in your first home to take care of the down payment.

If you’re dreaming of that first home…

Come and see us at Homewood Mortgage, the Mike Clover Group. We’ll be glad to sit down with you and go over your options. We can tell you about the various loan programs and the down payment assistance available to first time buyers. We can also get you pre-approved for a home loan, so you’ll know just what you can afford before you go shopping.

We offer fast, friendly service, combined with some of the lowest rates and best terms available anywhere in Texas.

If you’ve purchased a home or even offered to purchase a home, you know that you handed the real estate agent a check for an earnest money deposit. But why?

The earnest money does just what the name indicates. It shows that you are in earnest as a buyer. You have, in effect, “Put your money where your mouth is.” Few sellers would even entertain an offer that didn’t include earnest money.

The amount of your earnest money will depend largely upon standard practices in your state and upon what the seller requires before he or she will consider an offer. In Texas, earnest money is typically about 1% of the price you are offering for the home.

In markets where competition for houses is stiff, sellers may ask for as much as 2% or 3% earnest money. Additionally, agents sometimes recommend offering more earnest money as an incentive to the seller to strongly consider your offer or even to negotiate on the price.

Earnest money, also known as a good-faith deposit, is not simply another expense. It is an advance payment on the funds you’ll be required to present at closing. In other words, it is an advance on your down payment and/or closing costs.

Where does the earnest money go after you give it to your agent?

Earnest money goes into a special bank account called a trust account. Depending upon local practices, the trust account could belong to a title company, the real estate agency, or an attorney. Here in Texas, earnest money is held by the title company.

Earnest money stays in the trust account until closing, when it is transferred to the closer to be added to the buyer’s closing funds and disposed of in keeping with the purchase and sale agreement.

Note that buyers should never give their earnest money directly to the seller, even if no real estate agents are involved. It should always be held in a secure account by a third party.

Sometimes purchase transactions fail. What happens to the earnest money then?

Disposition of the earnest money from the trust account will depend upon the reason why the transaction failed. If you want your earnest money back, there does need to be a valid reason why the transaction failed. Changing your mind is not one of them.

Competent agents will help buyers write purchase offers that protect them from losing their earnest money if they are unable to obtain financing or unable to obtain clear title. The agreement may contain other contingencies, such as acceptance of any problems found through the property inspection, an appraisal for at least the purchase price, or buyer’s acceptance by a Homeowner’s Association. Buyers’ agents generally know what issues might affect a given property and should protect their buyers by including relevant contingencies.

When competition for houses is fierce, agents sometimes advise buyers to include as few contingencies as possible.

Note that a low appraisal will not protect the buyer’s earnest money unless it is specified in the agreement. The financing contingency should allow buyers to renegotiate the purchase price or get their earnest money back. It should also specify the maximum interest rate that a buyer will pay to obtain the mortgage loan.

In the event that there is a dispute over disposition of the earnest money, the entity holding that money will continue to hold it until the matter goes to mediation – or even to a lawsuit. This is one reason why some agents advise their buyers to deposit the least acceptable amount.

If you’re thinking about a new home in the new year, now is the time to get pre-approved for your mortgage loan.

We at Homewood Mortgage, the Mike Clover Group, will be happy to show you how much you will qualify for. And, if your credit scores need a little improvement to get the best rates, will be glad to advise you on how to raise them.

We offer fast, friendly service, combined with some of the lowest rates and best terms available anywhere in Texas.

Call us today at 800-223-7409

No matter how you choose to buy or sell property, there are costs involved. Even an all-cash transaction with no real estate agents is not free.

Realtor commission fees have come into the spotlight recently, due to a lawsuit and the subsequent settlement by the National Association of Realtors®.  The new rules stemming from that settlement went into effect on August 17, 2024.

While these regulations were meant to make transactions more transparent, they are the source of confusion and concern for many buyers, sellers, and agents.

In the past, commission fees for both the listing agent and the buyer’s agent were built into the selling price of the home. This was understood and home sellers took it into consideration when pricing their homes for sale.

Homes sold with the commissions included in the price were used for comparisons by both the agent who prepared a market analysis and the appraisers who furnished values to the lenders.

Now things have changed.

Under the new regulations, buyers are legally responsible for compensating the agent who represents them in the transaction. Additionally, before viewing homes with a REALTOR® they must sign a buyer/broker agreement and be made aware that they bear that responsibility. This agreement must also state the flat amount or percentage to be paid to the buyer’s agent.

However, not all buyers will be required to pay that fee.

The seller may choose to include buyer agent compensation, either initially or as part of the negotiations leading to the final agreement. Should the sellers choose to pay the buyer’s agent, they must sign a disclosure stating the amount or percentage rate of such compensation. Sellers may also offer other concessions, such as a willingness to pay the buyer’s closing costs.

When entering the listing into the multiple listing service (MLS), the agent may list concessions the seller will pay, but may not mention the seller’s willingness to pay the buyer’s agent. The MLS, as you probably know, is the marketplace used by listing agents to advertise their offerings and used by buyer’s agents to find properties for their buyer clients.

To gain this information, the agent working with the buyer must contact the seller’s agent.

Why this matters…

Some buyers are unable to pay their agent’s fee in addition to their down payment and closing costs. They simply don’t have the funds to do so.

Therefore, the agent can choose to only show homes for which the sellers have agreed to pay his or her fee, work for free, or negotiate creatively to move other buyer costs to the seller. Another method is to roll the closing costs into the mortgage, freeing up funds to compensate the buyer’s agent.

By federal law, lender must furnish you with a good faith estimate of your closing costs before you begin the process of obtaining a loan. Therefore, you will know approximately how much those costs will be.

What are those other closing costs?

• Title insurance
• Appraisal
• Home inspection
• Loan processing
• Loan origination fee
• Deed recording
• Homeowner’s insurance
• Property taxes
• Homeowners association fees
• Attorney fees (if applicable)
• Survey costs (if necessary)

Closing costs vary, but are generally somewhere between 2% and 7% of the purchase price. In general, sellers pay 1% to 3% while buyers pay 3% to 4% of the selling price of the home. Many of these costs, like the real estate commissions, are negotiable.

What if you choose not to use a real estate agent?

You will save the cost of the commission, but it could cost you far more in errors.

Remember that agents are experts who will work on your behalf to come to a price and terms that are favorable to you, and to deal with the numerous problems that can and do crop up between agreement and closing. An agent’s job is to advise you, assist you, and take care of your transaction. And of course it is in his or her best interest to do so.

Remember that your agent is the one professional who is not paid unless and until the job is completed. And if the transaction fails, the commission based agent receives nothing for the hours and days expended.

Other choices:

Commission fees vary between brokers and agencies, with some now offering flat fee listings, limited representation, and some flat fee services. 

If you’re a seller, you could choose to have your house listed in MLS, but not marketed. Potential buyers and buyers’ agents would contact you directly for showings and you would negotiate on your own behalf. If you’re a buyer you could choose to have an agent make appointments and show you homes, but not represent you in presenting offers or negotiating. You would order your real estate serviced a’ la carte.

Note that most agents offer only full service.

What about dual agency?

In some states it is legal for the agent to work with both buyer and seller. In this case, the agent is expected to be neutral. He or she will assist both sides in understanding the forms, writing offers, meeting the deadlines, and responding to offers and counter-offers.  A dual agent will maintain the letter of the law in making sure neither party is misled, but will not help either side negotiate price and terms.

Before you shop for a home…

Do become pre-qualified for your home loan. We at Homewood Mortgage, the Mike Clover Group, will be happy to help you pre-qualify and to show you what you can afford with today’s rates. We’ll also be glad to give you further information and guidance with regard to the new buyer brokerage regulations.

We at the Mike Clover Group are known for our fast and friendly service, and for providing our customers with the best rates and lowest fees available in Texas.

We look forward to hearing from you!

Call us today at 800-223-7409

Mike Clover

Mortgage Banker

Homewood Mortgage,LLC

NMLS# 234770

www.mikeclover.com

Home ownership has long been the American Dream, but more and more young people today are postponing it in hopes of better times to come.

For the past 3 years or so, real estate has been under a dark cloud, and it is not likely to lift this year.

First we had a shortage of homes for sale.

After the “boom and bust,” home prices plummeted in many areas. Because they seemed to be a good investment, investors snapped up many of the low to medium priced homes and even some at the high end. Most of these homes became rental properties.

With a shortage of homes for sale, prices began to rise. And the Fed made it easy for people to buy when they dropped interest rates to historic lows. That gave buyers more buying power, so bidding wars drove home prices back to where they had been – and even higher.

Inflation, rising mortgage interest, and rising home prices combined to keep housing inventories low while pushing home ownership out of the reach of a large number of Americans.

Rising interest rates are keeping homeowners in their current homes, and no wonder. The high price they’d receive from selling would be offset by the high price of a replacement home. And, if they now have an interest rate below 3 or 4 percent, they aren’t interested in replacing it with a mortgage loan at 7 percent.

That left us with an inventory of homes belonging to people with a compelling reason to sell.

New construction was going to save us…

Home builders got busy trying to fill the gap in housing inventory, and did have some success. But then, about 3 years ago, things changed.

The new construction industry is hampered by inflation, interest rates, and regulatory burdens.

Inflation has caused the price of building materials to soar, some materials now costing more than twice what they did just 4 years ago.

For home builders, construction financing is now in the 12 to 13% range, which further increases the cost of construction.

Then we add the regulatory burdens. Meeting new regulations and gaining all the necessary permits is not only expensive, but time-consuming – adding to the cost of construction financing.

A study by the National Association of Home Builders found that since January 2021, new regulations have significantly increased costs. While state and local restrictions vary, on average these restrictions, combined with Federal regulations now account for about 23% of the cost of a new single-family home.

Median home prices as they relate to median income and current interest rates.

The latest news is that the median home price in the U.S. is now $420,800. The median income is $74,755, or $6,229 per month. At today’s interest rate of 6.87%, the payment on $420,800 would be $2,762.95, or 44% of the median income.

Since banks prefer borrowers to stay within 28% of income, that means a median priced house is out of reach for a person earning a median income. Naturally this will vary depending upon where you live.

This problem has been steadily increasing since 2022, and peaked in the fall of 2023, when interest rates went to 7.8 and brought the ratio to 40%.

Yes, this happened before…

The last time Americans saw this kind of problem was in 1981, when the interest rate soared over 18% and brought the ratio to 39%. That’s when the median price of a home was $47,200 and the median income was $21,900. An 18% interest rate brought the payment over $700. When rates dropped back to 10%, and the payment dropped to about $500, the ratio was only 23%.

Is hope on the horizon?

Of course. If interest rates ease off and regulatory burdens are lifted, homes will once again become affordable. In the meantime, more will remain tenants and more first-time buyers will likely buy smaller or less elaborate homes.

The do’s and don’ts for getting a home mortgage loan have changed a bit since interest rates started climbing. In addition, some of the old assumptions about mortgage loans are simply wrong.

Let us begin with the don’ts…

• Don’t assume that you need a 20% down payment.

This assumption has been around seemingly forever, and for most of those years it simply has not been true. Some loans require far less. Fannie Mae has a 3% down first-time buyer program, and FHA requires only 3.5% down on approved credit. Do keep in mind that borrowers must pay for private mortgage insurance when paying less than 20% down.

In addition, VA has a zero down payment program for veterans and members of the military.

• Don’t focus exclusively on the interest rate.

Naturally every borrower wants the lowest possible interest rate. However, sometimes that lower interest rate is too expensive!

Lenders with big splashy ads touting the lowest rates anywhere are probably not telling you the whole story. That is that to get that rate you may have to pay points.

Points are a fee that lenders can charge to “buy down” the rate. Essentially, what it amounts to is pre-paid interest. Each point equals 1% of the loan amount, so one point on a $300,000 loan would be $30,000.

Mortgage seekers, therefore, must ask potential lenders for an estimate of all costs and fees associated with obtaining a loan at the interest rate they quote.

They must also remember that different lenders have different programs, so it is wise to shop around.

• Don’t choose a loan program without exploring the alternatives.

As stated, there are an abundance of loan programs to choose from. You might be best off with a conventional loan – or with FHA, VA, or USDA.

Different lenders offer different programs and some loan officers may not even be aware of the other programs available.

Do your own research and talk with more than one lender.

• Don’t confuse pre-qualification with pre-approval.

Years ago, home buyers could get a pre-qualification letter from a lender and use it to go shopping. Today, most home sellers demand that potential buyers have a pre-approval in hand before touring their homes.

Why? What’s the difference between them?

A lender can give you a pre-qualification letter based on a conversation. They ask about your income and your obligations and then say “I think you’ll qualify for a loan up to X dollars.”

That doesn’t count for much today.

A pre-approval is completely different. The borrower fills out all the same paperwork necessary to apply for a loan. Then the lender verifies all the information, just as if they were ready to go forward on that loan immediately.

Many savvy buyers today take this a step further and become fully approved. They can then approach a homeowner with a letter verifying that they can pay the amount they’ve offered.

Full approval in advance can also mean that the loan will close much faster than normal.

Do keep in mind, however, that even a fully approved borrower can be rejected at the last minute. Lenders do check again before closing, so borrowers who were foolish enough to quit their jobs, empty their bank accounts, or buy a new car before closing will likely not be buying a house.

• Don’t assume that you can get a loan instantly.

There is no instant gratification when it comes to getting a home mortgage loan.

First you’ll fill out the paperwork. Then the lender will check your credit and verify things like your employment, your bank accounts, and your obligations. They’ll want to know the source of your down payment, and if it has not been in your bank account for at least six months, they’ll want proof of where it came from.

After that’s done, they’ll call for an appraisal, because no bank wants to lend more than a house is worth.

• Do take time to understand all of the fees and costs in addition to your down payment.

In addition to a down payment and a fee to the closer for “closing costs,” borrowers pay for title insurance, an appraisal, a home inspection, and homeowner’s insurance. These additional charges can easily add $5,000 to $12,000 to the funds needed to close.

• Do consider first-time homebuyer programs.

You might as well take advantage of help that is freely offered!

Go on line to look around, then talk with lenders about programs available. Different communities have different offerings, so be thorough in your search. Some offer help with closing costs and/or down payments, some offer lower interest rates or tax credits, and if you’re a first responder or educator, they may be programs just for you.

• Do check your credit score before you do anything else.

This number offers a numerical opinion of you and the way you handle your finances. Because it reflects how well you’ve paid your obligations in the past, it will determine the amount of interest you’ll be required to pay when obtaining a home mortgage loan.

If you’ve had a few bumps in the road that caused your score to go down, the time to address the problem is before you apply for a mortgage loan.

You may be able to bring your scores up significantly simply by paying off a credit card – or even by moving debt from one card to another. This is a topic to explore with a mortgage lender you trust, because he or she can give you helpful advice.

Order a copy of your credit report and read it carefully, because mistakes and identity theft do happen. So check to see that:

• Every account listed is really yours.
• Your address on every account is correct.
• That the spouse named on every account is really your spouse.

An error with any of those things could indicate that someone else is using your credit, and that could mean trouble for you. If you see such an error, contact the credit company immediately.

• Do prepare for the possibility of a low appraisal.

Given today’s high listing prices and the prevalence of bidding wars, some houses do go under contract for more than their current market value.

As already mentioned, the lender won’t lend more than the appraiser says the house is worth. So what will happen if the appraisal comes in low?

This is a subject you should discuss with your real estate professional. Then the answer to that question should be written into your offer. The possibilities are:

• The agreement becomes null and void and the earnest money is returned to the buyer.
• The seller agrees to sell for the appraised value and the sale goes forward.
• The buyer pays the difference in cash. If they are unable or unwilling to do so, they forfeit their earnest money.

As you can see, having it in writing could prevent future trouble.

• Do take the time to interview lenders and choose the best one for you.

Your real estate agent will advise you to use a local lender, and there’s a good reason for that.

You’ll get the best success when you work with someone who will answer your phone calls – even outside of business hours, if necessary. This is important because questions can come up at unexpected times.

That person should be willing to help you explore your options and come to financial decisions that are in your best interest.

You’ll also do best when you work with someone you like – someone you’re comfortable talking with.

And one more…

Do Call Homewood Mortgage, the Mike Clover Group

We’re known for our fast, friendly service and some of the lowest rates available in Texas. We’re always glad to sit down with you or get on the phone to discuss your options – and we do keep abreast of the special programs available to Texas borrowers.

We’re also glad to show you just what your loan will cost under different scenarios- and to show you exactly what fees and costs would be included in each of them.

If you’re unsure about where you stand, we’ll be happy to take a look at your financial situation and let you know the interest rate we could offer today.  And, if your scores need improvement, we’ll provide some sound advice on raising them.

Call us today at 800-223-7409

Sometimes telling everything you know or think can be counter-productive. One of those times is when you are meeting with a mortgage lender.

Here are 5 things you should not say during that meeting:

1. “Please don’t tell my spouse what you find on my credit report.”

A statement like this can wave a couple of red flags for a lender. The first, of course, is whether your credit report is going to reveal an inordinate amount of debt. Of course, a lender can’t make that promise, because it all has to go on your credit application. And unless the loan will be in your name alone, your spouse will need to read and sign that application.

The second red flag will be about the state of your marriage. The lender can’t discriminate against you because he or she has doubts about whether you’ll still be together a few months from now, but they may look more closely at other issues because of it.

• “I’m still working on getting my down payment together.”

If you make a statement like that, complete it by telling the lender what toys you’re selling or what investments you’re cashing in to come up with the money.

Lenders want to see that you have something to lose should you default on your loan. With that in mind, they want assurance that none of your down payment funds are borrowed – either from a friend or relative or from, for instance, a cash advance on a credit card.

Banks do allow borrowers to use gift monies, but they must present proof that the money was a gift – and the giver must provide documentation to show that they could afford the gift.

Down payment fraud is second only to income fraud in lending scams, so lenders are careful to verify the source of down payment funds.  

• “I’m a little concerned about getting the right insurance coverage on this house.”

While you definitely should research insurance availability and costs before purchasing a house, this is not something to discuss with your lender. You’ll have to present proof of insurance before closing, but don’t send up any red flags during the approval process.

• “We aren’t going to be able to move in right away. There’s a lot of work to be done first.”

You don’t need to give your lender a reason to reject your house or to reduce its value. They’ll call for an appraisal, and that’s enough.

Don’t mention the inspection report or what negotiations you did before coming to agreement. Otherwise, the lender may request more inspections or assurances that the house isn’t about to fall apart.

If you are able to do those repairs and will gain a nice chunk of sweat equity in the process, that’s wonderful. So just be quiet. Do the work and smile.

• “I’m sure glad the seller agreed to sell me the hot tub on the side.”

With this one you not only should not talk about it, you should not do it. You‘ll be required to sign a document at closing stating that no money has been exchanged between you and the seller outside of the closing.

Making a deal like that and not disclosing it constitutes fraud. So if there’s something you want that was not included, have your agent write it into the contract and include the payment in the price of the house.

• “I’ll be so glad when this loan is closed so I can quit my job.”

Again, your lender has to look at your situation as it is or will be on the day of closing. But revealing your plan to reduce your income will make him or her look very closely at every other detail in your transaction.

You may have a very good reason for quitting. Perhaps you’re starting something you believe will bring in even more money. Perhaps one of you is going to do more overtime so the other can quit a hated job. It doesn’t matter. I’m sure the plan does not include immediately defaulting on your loan. So – just keep your mouth shut.        

If you’ve decided that you want to remain in your home for the long term, then you’d probably love to pay it off long before the 30 years – or 15 or 20 if you opted for a shorter term.

Unless you had cash with which to buy your home, you know you’ll be paying a house payment no matter what. It will either be for your house or for a house belonging to your landlord. But when you think about all the interest you’ll pay over the life of the loan, it’s still painful!

Paying your loan off early means paying less interest, so consider these options:

Add a few extra dollars to each payment. I have a friend who shortened her car loan by about 5 months simply by adding $3.24 to each payment. She rounded the payment from $271.76 to $275. That was painless.

If she’d added $13.24 the term would have been even shorter.

However, if you can afford it…

Add an extra payment to each payment. And no, I don’t mean make double payment. Just double the amount of the payment that is going toward the principal. Here’s an example:

An actual home loan with an interest rate of 3.625% carries payments of $1,632.53 per month. Since the loan is only a few years old, the amount going to the principal each month is only $427.09. That means paying $2,059.62 is equal to paying two payments. A payment of $2,486.71 would effectively make 3 payments.

As time goes by, you’d have to increase that amount, because more of each payment will go to principal as less goes to interest. But you’d still reap the benefit of shaving a few interest-bearing months off your loan early on.

The beauty of these methods is that you can do it when you can afford it, and not do it if you need the money for car repairs instead.

Make one extra payment a year. If you receive a Christmas bonus or get a tax refund each year, consider putting that money toward an extra payment on your loan. In the example above, that one extra payment added to your regular payment would be equal to making 3 extra payments.

Create your own amortization schedule.

If you’d like a bit more structure, first decide how soon you want to pay off that mortgage. Then go on line to find an amortization schedule and plug in your numbers. You’ll learn what your new payment would need to be (minus the taxes and insurance) to pay off the loan in that amount of time.

Do Note:

With any of these methods, be sure to fill out your payment coupon or screen correctly. When you pay extra money, designate it to go to the principal of your loan.

Refinance to a shorter term loan.

While this method might lock you in to a higher payment each month, it has advantages.

I say “might” because one of the advantages is that if you have an FHA loan and now have 20% equity, your refinance to a conventional loan will remove your mortgage insurance premiums.

Second, since shorter term loans generally carry lower interest rates, you may be able to refinance at a lower rate.

Refinancing does come with costs, so talk it over with your mortgage broker and get all the facts before making a decision.

Before you make a decision on paying your mortgage loan off early…

Consider the rest of your financial situation. Would those extra dollars be better spent somewhere else? For instance, if you have credit card debt, or any other higher interest loans, they should be paid off first.

Are you saving for retirement or for your children’s educations? Do you have some money set aside for emergencies – or opportunities?

Would you like to talk it over with a professional?

Then call us today at Homewood Mortgage, the Mike Clover Group. We’ll be glad to show you the facts and figures regarding a refinance – or to help you cerate your own new amortization schedule.

We offer fast, friendly service, combined with some of the lowest rates and best terms available anywhere in Texas.

Call us today at 800-223-7409

When you decide to buy a home, you will likely visit a lender and gain a pre-approval before beginning to shop. After looking at your income, expenses, and credit scores, your loan officer will tell you how much you can borrow and quote you an interest rate. (This is, of course, subject to change as the Fed raises or lowers interest rates.)

You may think that means you’re home free, but that isn’t so. Even though your lender will have checked your credit and done verifications, your loan still must gain approval from an underwriter.

Although underwriting guidelines have been around since 1935, prior to 1970 most lending decisions were based on local knowledge. The banker knew the customers, knew what they did for a living and knew their reputation for paying bills on time – or not.  But then, in the 1989, the Fair Issac Corporation came up with FICO scores and during the 90’s lending became more standardized.

During the housing boom that began in the early 2000’s, underwriting standards were loosened. A sub-prime market was born. For a while, some joked that all you has to do to obtain a loan was have the ability to fog a mirror.

Then, of course, that whole sub-prime scheme crashed, along with home prices. Lenders lost money when borrowers simply could not pay.

The result: tougher standards. The Consumer Financial Protection Bureau enacted requirements for tougher background checks into a potential borrower’s bank accounts and other assets, employment and employment history, spending habits, and credit rating.

An Underwriter will check your credit history.

He or she will look at your FICO scores from Experian, Equifax, and Transunion. If your reports contain a red flat such as a bankruptcy or a collection, you’ll be required to submit a letter explaining why that happened and what you’re doing to ensure that it doesn’t happen again. Depending upon the credit problems you’ve had and how long ago they happened, you may be required to make a larger down payment. And of course, poor credit scores always mean that you’ll be offered a higher interest rate than a borrower with no blemishes.

Your perceived risk comes next.

In addition to your credit score, the underwriter will want to know your income and the amount of money you owe. He or she will consider all debts, including student loans, child-support payments, car loans, and private loans. The difference between your income and outgo is known as your debt-to-income ratio.

Different lenders have different regulations, but in general your total monthly debt obligation, including your home mortgage payment, should be no more than 43% of your pre-tax monthly income.

The underwriter or an investigator will verify your bank information and will contact your employer to verify your employment. Lenders like to see stability in employment, and 3 years or more in the same job (or with an employer who has given you job advancements) is a good thing.

If there is anything about your employment history, finances, or credit history that raises questions, the underwriter will ask for additional information. The best thing you can do to assure that you’ll get that loan is to respond quickly, completely, and with good humor.

Lastly, the Underwriter will examine your home appraisal.

Learning from the past, underwriters (and the lenders who hire them) want assurance that the appraised value does make sense.  Yes, that does mean that some of the loans granted in the early 2000’s were based on fraudulently inflated home values. Appraisers were sometimes being pressured by buyers, sellers, and even real estate agents and loan officers. Backed by the belief that the true price is the one that a buyer is willing to pay, those appraisers allowed prices to climb, and climb, and climb.

The attempt to avoid this problem led to a shake-up in the appraisal process with unintended consequences. New regulations called for the use of appraisers who were not familiar with the lenders or agents, or with the communities and the real estate markets in which they were appraising homes.

In addition to scrutinizing the appraisal, a good underwriter will consider the location of the home and how it might be affected by natural disasters, such as floods.

Underwriting standards and loan requirements were extremely tight immediately following the housing crash in the late 2000’s. Fortunately, they have now relaxed a bit.

Underwriters take their task very seriously.

The term originated with the insurance industry – Lloyds of London, specifically. The person who said “Yes, I will accept and insure that risk” signed his name at the bottom of the paper – under the proposal.

Today, the person signing is not risking his or her own funds, but is obligating the bank to take that risk. It’s no wonder that they want to be very careful.

If you want to buy a home, call or come and see us…

We at Homewood Mortgage, the Mike Clover Group, will be happy to get you pre-approved using the same methods and underwriter uses.

In addition, we have a well-deserved reputation for fast, friendly service, combined with some of the lowest rates and best terms available anywhere in Texas.

https://www.hud.gov/states/texas/homeownership/buyingprgms

Before you attempt to buy a house…

Unless you are sitting on a bag of money large enough to purchase a house for cash, you should become pre-approved for a home mortgage loan. If you skip that step, home sellers will not take your offers seriously.

Before you become pre-approved – which is exactly like making an application for that loan – you need to consider three things:

• Your credit score – because it will affect everything
• How much down payment you’ll need
• Your debt-to-income ratio

Since your credit score affects everything, let’s start there.

The higher your score, the better your odds of qualifying for favorable loan terms.

While many credit scoring models exist for different purposes, most lenders will use your FICO score. A perfect FICO score is 850, but few people are perfect. Here’s how scores are rated:

• 760 and above: excellent
• 700 – 759: good
• 650 – 699: fair
• Below 650: poor.
• 580-649: you’ll only qualify for a FHA loan or possibly a VA loan.
• 579 and less: Get busy improving your credit before you try to buy a home.

Before visiting a lender, go to annualcreditreport.com and request a copy of your credit report. You’re entitled to one free report every year, and you should take advantage of that. Even if you aren’t planning to borrow money, checking your report will allow you to catch mistakes that could cause trouble later. That means do read each entry and make sure it is accurate.

If you’re planning to purchase a home, do pay the extra fee to get your FICO score. Then, if you need to raise the score, begin taking those steps.

How much down payment will you need?

You’ve no doubt heard/seen the figure 20% named as the gold standard. It rates that nickname for two reasons:

You’ll get the best rate and terms if you put down 20% or more.

If you put down 20% you will not be subject to private mortgage insurance, which can add several hundred dollars per month to your house payment.

Many lenders offer programs with down payment requirements ranging from 5% to 15%, and FHA loans require only 3 ½% down. Veterans can get VA loans with zero down and no private mortgage insurance. USDA loans are available with the same zero down terms.

Will you ever need MORE than 20% down?

Yes, if you want a jumbo loan (a loan above the limits for government sponsored loans) your down payment may need to be as much as 30%

Right now the limit for government-sponsored loans in most communities is $726,200. In areas with an extremely high cost of living (such as Manhattan and San Francisco) the threshold is $1,089,300.

The more you can put down, the better, so seek help if you qualify.

This USDA website https://www.hud.gov/states/texas/homeownership/buyingprgms offers information on down payment assistance programs in Texas.

What is your DTI ratio?

First, what is a DTI ratio? DTI stands for debt-to-income and it is the ratio of how much you earn to how much you are obligated to pay out each month.

It encompasses all of your debts, such as a car loan, credit card balances, school loans, etc.

If you earned $6,000 per month and paid out $1,000 in debts, your DTI would be 16.6% (1,000 divided by 6,000). In general, lenders want to see your DTI ratio to be 36% or less after figuring in your new monthly mortgage payment.

So if your new payment would be $1,000 they would add that to the $1,000 you’re paying in other debts and calculate DTI by dividing 2,000 by 6,000. Your new DTI would be 33.3%. Some lenders will allow a DTI of up to 43%, but if you plan ahead to keep your DTI ratio under 36% you’ll always be safe.

What happens next with interest rates?

Anyone wanting to buy a house with a home mortgage loan right now is wishing interest rates would come down. But is that likely to happen? And if so, when?

People are also wondering: “Why have mortgage interest rates increased so much in 2022 and 2023?”

Because inflation has been raging. In response to that, the Fed raised interest rates to bring it under control.

The thirty-year mortgage interest rate hit 7.2% in August, 2023, marking the highest rate in more than 20 years. This was done purposely to rein in spending. When there’s less spending, inflation cools.

Thinking back: Following the global financial crisis, rates were dropped to stimulate the economy. Now it appears to been over-stimulated, possibly by the “stimulus money” and abundant unemployment benefits that were distributed to citizens in response to the pandemic shutdowns. This influx of money, together with increased fuel prices, brought about inflation. Now interest rates have been raised higher than anticipated because the increase has not been working as well as expected.

Housing has taken a severe hit, but other sectors of the economy have been slower to respond. Many financial experts believe that household savings and a greatly increased use of credit card debt has kept other spending moving along. That should change over the coming months, when we’ll see a sharp drop in spending in other parts of the economy.

What about the yield-curve inversion?

First, what is a yield-curve inversion? It is the situation that comes about when short-term (2 year fed-funds) bonds yield a higher rate than long-term (10 year Treasury) bonds.

I expect the current situation to hold steady as long as the yield-curve inversion holds.

Will interest rates fall?

Hopefully, the last rate hike was in July. Then, again hopefully, the Fed will begin cutting the fed-funds rate after its first 2024 meeting in February.

An inflation rate of 2% is the goal. When that happens, which they hope will be by the end of 2025, the concern will shift to shoring up economic growth. At that time, we expect to see the 30-year home mortgage rate drop to about 4.5%. So far, the average for 2023 is 6.75%.

As for inflation…

Many of us do expect inflation to drop drastically. In fact, it may well fall below the target of 2% and average only 1.8% from 2024 through 2027.

Since everything is tied together, the GDP is also affected by interest rates.

We believe that if the fed shifts to easing the rates by the end of this year, the GDP should start to accelerate in 2024 and 2025. Of course, if that doesn’t happen, then we’ll see the fed raising rates higher than we expect in order to cause a short-term recession.

Housing is a major component of the GDP, and is the most interest-rate sensitive. Thus, we’re hoping to see lower rates in order to enable more consumers to obtain mortgages.

It’s a tough call for many consumers, since higher interest rates may lessen demand and thus reduce home prices in some markets. The question for them will be “Do I buy now and refinance when interest rates drop, or should I hold off because prices will come down and I could get stuck with an upside-down mortgage?”

Looking to the future, we’re choosing optimism…

We believe the fed funds rate will fall below what many investors are expecting, and we believe inflation will fall faster than the Fed expects. If we’re right, then the Fed will cut interest rates more than current projections would indicate.

Following rate cuts, we expect to see GDP growth.

This should begin to happen approximately 9 months from now and continue on into 2025, 2026, and 2027. As supply constraints ease, the GDP should grow without triggering inflation again. We expect to see about 3% more growth than the consensus of opinion expects.

While we are still experiencing shortages in durable goods, energy, and automobiles, we believe those shortages could shift into gluts in just a few years. If we’re right, inflation will fall.

What does the future hold for interest rates?

Right now, the forecast is focused on the Fed and what it will or won’t do to reduce inflation. That’s the short run.

In the long run, the Fed will be less important and interest rates will be determined by other aspects of the economy. For decades, forces such as age demographics, productivity growth, and economic inequality have played a role by creating an excess of savings over investment. These forces haven’t gone away. They’ve simply taken a temporary back seat to more forceful and chaotic forces.

The tide will turn, and we believe interest rates will come down and stay down for quite some time.

For the lowest home mortgage rates available in Texas today…

Contact Homewood Mortgage, the Mike Clover Group. We have a well-deserved reputation for fast, friendly service, combined with some of the lowest rates and best terms available anywhere in Texas.