The real estate industry as a whole has been notorious for looking over it’s shoulder. We value appraised prices on past sales and analysts look to historical trends to predict future markets. However in these unprecedented times, that practice may not be the wisest or most effective.
More and more, we as an industry are trying to interpret a potpourri of data and news available today in order to best inform our clients about tomorrow.
And what is that information telling me?
It’s shouting strongly indicating if you’ve been sitting on that proverbial fence, it might be time to think about jumping off and getting engaged in the home buying process.
There is strong evidence financing difficulties may be on the horizon due to higher rates and tougher credit standards.
Most experts agree there is a strong chance interest rates will rise once the Fed stops buying mortgage backed securities….a move scheduled to take place at the end of this month. According to the article on CNN, rates could rise as much as a quarter percent in the coming weeks.
Higher rates on the way. But even if the Fed holds onto the mortgages it has already purchased, the act of no longer buying additional mortgages is likely to raise mortgage rates in the coming weeks
Others see rates climbing a full percentage point throughout the year.
What could that mean for you?
Let’s do the math. (Sister St. Peter would be so proud of me right now).
On a $250,000 30 year fixed rate mortgage, using today’s rate of 5.25% , the monthly payment (for the sake of this example, we are excluding the variable of taxes and insurance and using p+i only) would be $1380.51 .
IF rates were to rise to 6.25% by Fall, the payment on that same $250,000 loan is now $1539.29. But wait…that’s only a difference of $158.78 per month, not a huge amount. Maybe not in terms of monthly payment, but it can be a huge factor in qualifying for that $250,000 loan.
At the lower rate, a buyer would need to have a gross monthly income of $4600 per month for a 30% front end ratio (again just using p+i here). At the 6.25 rate, that monthly requirement jumps to $5130.97.
In the above example, you would need an additional monthly income of $530 per month to qualify for the same house at the higher rate. Or get a raise from $ 55,200 a year to $61,571 to get financing for the same house…..how long do you think it might take to get that raise and where might prices be then?
Will lenders tighten credit even further?
Maybe monthly income isn’t an issue for you. Your job history is good, position secure and income steady. But will lenders become even more critical in evaluating you as a credit risk? According to recent numbers released by FICO Score Trends Service, Americans are now defaulting on mortgages in an historically phenomenal way, despite boasting high credit scores.
the mortgage default risk for consumers with high FICO scores now exceeds their credit card default risk, even though most credit cards are unsecured credit and mortgages are secured by real estate
The article goes on to say:
The company found that lenders had tightened their lending criteria in 2008-2009 and began “cherry picking” their new borrowers. As a result mortgages granted between April and October last year used significantly higher standards than those granted earlier.
So with this new trend emerging of “good credit” borrowers defaulting, will the “cherry picking” continue with even higher standards? Will well qualified buyers with strong credit still be denied financing?
Or should you buy now while you qualify, take advantage of the tax credit and lock in a lower interest rate that will save you thousands of dollars over the life of your loan?
Just a few things to consider in case that fence getting a little uncomfortable.
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