The Federal Housing Financing Agency (or FHFA) recently announced that it will be extending the Home Affordable Refinance Program (or HARP) all the way through December of 2018.
Previously, there was speculation that the program–intended to help homeowners who owe more than their home is worth–would be discontinued in 2017 to make room for a new refinance program from Fannie Mae and Freddie Mac. That program will still be available later this fall, but is expected to require some modification. In the meantime, HARP has been extended to provide an option for underwater homeowners.
This probably doesn’t mean much unless you keep an eye on the housing industry. That doesn’t mean it can’t benefit you, however.
What is HARP?
After the housing bust, home prices in some areas of the country plummeted, leaving owners with devalued properties that were impossible to refinance under traditional guidelines. HARP was created to give those homeowners a way out.
The program requires that:
Fannie Mae or Freddie Mac owns the loan.
The loan closed prior to May 31, 2009.
The loan-to-value (LTV) ratio is between 80%–200%.
The home is primary residence, second home, or an investment property with 4 or fewer units.
You are current on your mortgage, with no 30-day late payments in the last 6 months and up to 1 in the past year.
What does this mean for me?
If you or someone you know has put off refinancing because you know your home isn’t worth what it was, you still have plenty of time to refinance. Just keep in mind that interest rates are still on the low side–while you may have plenty of time to refinance, you might not have much time before they start creeping back up.
Mortgage applications decreased for the fifth straight week – this time down 5.1%, according to the latest report from the Mortgage Bankers Association.
As has been the case for several weeks now, rising mortgage rates and low inventory are contributing to the slowdown in mortgage applications, said Joel Kan, MBA’s associate vice president of economic and industry forecasting.
“The rapidly recovering economy and improving job market is generating sizeable home-buying demand, but activity in recent weeks is constrained by quicker home-price growth and extremely low inventory,” Kan said.
Refinance mortgage applications declined for the fifth straight week. The refinance index decreased 5% from the previous week and was 20% lower than the same week one year ago. Kan said refinancing volume over the past 10 weeks is down by more than 30%.
For purchase mortgage applications, bidding wars and appraisal gaps are discouraging some buyers from looking at existing homes, while high costs for lumber and building materials are pushing up the price of new homes.
The 30-year fixed rate moved up to 3.6% after registering at 3.33% last week. And even though the unadjusted purchase index dropped 4% from the past week, it’s still sitting 51% higher than the same week last year.
The FHA share of total mortgage applications decreased to 10.2% from 11.3% from the week prior. However, the VA share of total mortgage applications increased to 13.38% from 10.3% the week prior.
Here is a more detailed breakdown of this week’s mortgage application data:
The average contract interest rate for 30-year fixed-rate mortgages with conforming loan balances ($548,250 or less) increased to 3.36% from 3.33%
The average contract interest rate for 30-year fixed-rate mortgages with jumbo loan balances (greater than $548,250) increased to 3.41% from 3.34%
The average contract interest rate for 30-year fixed-rate mortgages increased to 3.36% from 3.29%
The average contract interest rate for 15-year fixed-rate mortgages increased to 2.74% from 2.71%
The average contract interest rate for 5/1 ARMs increased to 2.92% from 2.85%
A top bank isn’t always the highest flier, but one that can survive the tough periods in a more turbulent economy.
That’s the story of Gateway First in Jenks, Oklahoma, the No. 1 bank on the 2022 list of top-performing banks with $2 billion to $10 billion of assets compiled by the consulting firm Capital Performance Group. The list ranks the banks by their three-year average return on average equity. The $2.1 billion-asset Gateway’s three-year average ROAE of 25.36% put it at the top of the list.
But compared to its top-performing peers that hovered in the 20% to 30% range in the last three years, Gateway First had a very different journey. Its ROAE was slashed in half from 2020 to 2021, going from 45.66% to 26.58%. This then plummeted down to 3.84% in 2022.
“I don’t think there’s any company I’ve seen that has been through more change in the last five years than we have,” said Scott Gesell, CEO of Gateway First Bank. This included changes brought on by an acquisition and a change in strategy.
“But we’ve weathered the storm,” Gesell added. “And it’s because we got great people.”
The bank, originally an independent mortgage company called Gateway Mortgage Group, acquired Farmers Exchange Bank and became Gateway First Bank in 2019. Gateway First’s dominance in the mortgage market proved to be a boon during the pandemic when rates were cut in an attempt to spur economic activity. In 2020, the 30-year fixed-rate mortgage fell below 3% for the first time, and then hit an all-time low of 2.65% in January 2021.
Gesell noted that those were some of the “best years in the history of mortgage lending.” The bank’s mortgage loans peaked at $11.8 billion dollars in the middle of 2020, he added.
Then came the end of 2021, when the bank’s mortgage loans fell to only $4 billion. “It was a transition year away from that and into kind of the worst year in mortgage banking, probably since 2008,” he said.
Interest rates have spiked to more than 7% this year. Ninety-nine percent of borrowers had a mortgage rate lower than 6% or the current market rate, according to Goldman Sachs earlier this year. This has deterred refinancing, with the number of these loans dropping from 1.8 million in the first quarter of 2021 to just 9,700 in the fourth quarter of 2022. Gesell called it a “perfect storm in the mortgage industry today.”
Gateway has made efforts to diversify its balance sheet by racking up more commercial loans while maintaining and monitoring its current mortgage portfolio. Gesell highlighted that mortgage banking is a more “fickle and volatile business” than other lines of business.
Steven Reider, president of the consulting firm Bancography, said that facing a dearth of refinancing and mortgage activity, it’s good for a bank to look for other revenue streams.
“There’s a benefit from diversification because all of our business lines and all our economic sectors don’t tend to move in lockstep,” he added. “But it takes time to build the product. It takes time to build the personnel.”
The industries of Gateway’s commercial loans are diverse, according to Gesell, ranging from hospitality to energy lending. Meanwhile, the bank has steered clear from lending on commercial office real estate given the uncertainty of that business right now. Remote work has persisted since the pandemic, and office vacancies have reached an all-time high at 16.1% in the first quarter.
Besides diversifying its loan portfolio, the company also cut operations and staffing since the mortgage boom ended. The company cut its number of mortgage centers from 170 to 125 and trimmed its headcount from 1,800 employees who work on mortgage originations to 1,100.
“It’s a tough deal but people know that we aren’t doing it lightly,” added Gesell. “The nice thing is we had a couple good years that allowed us to buffer and soft-land the process of downsizing.”
Gateway’s near-future growth strategy will continue to focus on commercial lending, while fortifying its deposit base — the bank currently has one of the highest loan-to-deposit ratios in the top-performing banks ranking at around 140%. Gesell said that they will be able to do this through organic customer growth and acquisitions of banks heavier on deposits than loans. He is aiming to decrease Gateway’s loan-to-deposit ratio to 90% by the end of 2024.
“That’s sort of been the history of the organization. There has been a commitment to reinvesting in the organization on an ongoing basis because you want to maintain yourself in a position to continue to grow,” said Gesell.
With today’s high mortgage rates and a shortage of new homes for sale in many markets, a number of American homeowners may be looking to tap into the equity they’ve built in their homes instead of looking for something new. In fact, the Home Equity Lending Study, released this month by the Mortgage Bankers Association, reveals that home equity is surging. Originations of both home equity loans and home equity lines of credit (HELOCs) increased by 50% in 2022 compared to two years earlier, when the study was last conducted.
“Home renovations and remodeling drove demand for home equity products in 2022, with roughly two-thirds of borrowers citing it as a reason for applying for a home equity loan,” Marina Walsh, CMB, the association’s vice president of industry analysis said in the report’s release. “Other borrower reasons were for debt consolidation (25 percent) and emergency cash management or other (10 percent).”
No matter what your long-term plans are for your home, tapping into home equity can have a lot of uses today — and even specific benefits to help reduce costs. Start by finding home equity rates you can qualify for here now.
Why use home equity today?
If you’ve been keeping up with the housing market fluctuations, you may already be familiar with the incentives home equity can offer homeowners compared to a new home purchase.
For one, mortgage rates are much higher today than they were just a few years ago. While pandemic-era rates dropped new mortgages to under 3% for some borrowers, today’s top mortgage rates are between 6% and 7% or more. But there’s also an ongoing shortage in homes for sale affecting several markets throughout the country — making it even more difficult to afford a home.
“The housing inventory shortage, combined with home-price appreciation and a low-rate first mortgage, make home renovations an attractive alternative for many homeowners who are looking to improve their spaces,” Walsh also noted.
Borrowing from home equity could help you get lower interest rates since the loan is secured by your home. And if you decide to use your home equity for home renovations or repairs, you can enjoy the improvements now and preserve any increased price value when you are ready to make a change.
Learn more about home equity rates available for you today!
How to borrow from your home equity
If you’re thinking about using home equity today, there are a few different options to consider:
Home equity loan
A home equity loan is sometimes called a second mortgage. When you qualify for this loan, you’ll receive the amount you’re eligible to borrow from the equity you’ve built in your home as a lump sum. Home equity loans have a fixed term and fixed interest rate — so you’ll pay back the loan in monthly installments over time.
Like the other options below, the interest you accrue on your home equity loan may be tax deductible if you use the money for eligible home improvements outlined by the IRS.
HELOC
A HELOC, on the other hand, is an open line of credit that allows you to borrow only the amount you need from your approved credit limit — which is based on the equity you’ve built in your home. Throughout the multi-year draw period, you can borrow as much as you’d like. Then, you’ll repay only what you actually borrowed over the longer repayment period.
HELOCs carry variable interest rates, so they could be a good option if you believe interest rates could drop in the future. Start comparing home equity loan and HELOC rates you can qualify for now.
Cash-out refinance
This option may be best for you if you already have a very high mortgage rate. Unlike the others, a cash-out refinance actually replaces your existing mortgage. You’ll open a new mortgage loan at a new rate that’s worth more than you actually owe currently. Then, you can take the difference as cash.
If you decide to refinance, there are some additional things to consider. For one, you’ll take on added closing costs to complete the loan. You should also think about any differences in the loan term or other details that may differ from your existing mortgage and result in higher costs over time. Finally, if you have a lower interest rate already, you should consider whether refinancing is worth the added cost you’ll pay through the lifetime of your loan.
The bottom line
With the challenges buyers are facing in today’s housing market, you might want to consider tapping into equity you’ve built in your home while you wait out a potential move. Not only is this a great alternative, but it’s also one that many Americans are taking advantage of. Using a home equity loan, HELOC or even cash-out refinance to make lasting home improvements can improve your experience today and boost your home’s value when you sell in the future.
Learn more about your home equity options today and explore rates here!
Mortgage applications decreased for the third straight week – this time down 2.5%, according to the latest report from the Mortgage Bankers Association.
Refinance activity dropped to its slowest pace since September 2020 – down a full 5% – with declines in both conventional and government applications, according to Joel Kan, MBA’s associate vice president of economic and industry forecasting. He added that mortgage rates have moved higher in tandem with Treasury yields.
“Inadequate housing inventory continues to put upward pressure on home prices,” Kan said. “As both home-price growth and mortgage rates continue this upward trend, we may see affordability challenges become more severe if new and existing supply does not significantly pick up.”
The dip in applications is linked to broader trends in the housing market: more than a year of low inventory is forcing interested buyers to snag whatever they can get their hands on, even if it’s overpriced. That’s coupled with a rise in mortgage rates, too.
A recent Redfin study showed that cash is currently king, with buyers increasing their chance of landing that home they want by nearly 300% if they offer all-cash. For most people, though, that isn’t an option.
The 30-year fixed mortgage rate increased to 3.36% last week, and the purchase index increased for the fourth consecutive week – up 3% . The purchase index was up 26% year-over-year, according to the MBA. The refinance share of mortgage activity decreased to 60.9% of total applications, down from 62.9% the previous week.
The FHA share of total mortgage applications remained unchanged at 11.7% from the week prior. The VA share of total mortgage applications decreased to 9.8% from 10.3% the week prior.
Here is a more detailed breakdown of this week’s mortgage application data:
The average contract interest rate for 30-year fixed-rate mortgages with conforming loan balances ($548,250 or less) increased to 3.36% from 3.28%
The average contract interest rate for 30-year fixed-rate mortgages with jumbo loan balances (greater than $548,250) increased to 3.4% from 3.34%
The average contract interest rate for 30-year fixed-rate mortgages increased to 3.35% from 3.25% — the third week in a row of increases
The average contract interest rate for 15-year fixed-rate mortgages increased to 2.72% from 2.67% – the second week in a row of increases
The average contract interest rate for 5/1 ARMs increased to 2.79% from 2.82%
In a surprising turn of events, refinancing is finishing the year unexpectedly strong, per the latest Origination Insight Report from Ellie Mae.
The company revealed that refinances accounted for 45% of mortgage lenders’ loan volume in November, up from 40% in October. It was the fourth consecutive monthly increase and matches the share seen exactly one year earlier.
Additionally, volume has risen 13% from the dismal 32% share seen in July when refinance activity seemed to be sputtering out.
Despite recent improvement, the refinance share was as high as 47% in January of this year and averaged 53% in 2013. Whether it will climb back to those levels remains to be seen.
The refinance share for FHA loans inched up to 17% from 16% a month earlier but remains abysmal because conventional loans are just a better deal nowadays for most individuals.
The refinance share for conventional loans increased to 56% from 49% last month, and is now at its highest point since January.
Amazingly, the refinance market seems to keep finding more life just when it seems everyone has already refinanced.
You can attribute that to the low interest rates that won’t seem to go away, despite forecast after forecast calling for rates north of 5%. Look for those to be revised once more.
And if rates dip even lower, as they have been recently, we could even see a new mini or major refinance boom in 2015. Just look for oil to keep plummeting and you could snag a new low interest rate.
This is especially helpful at a traditionally slow time of year for purchases, giving lenders something to be cheery about over the holidays.
Refis Are Also Closing Faster
Lenders are also doing a better job of closing refinance applications. The average time to close a refi dipped from 39 days in October to 37 days in November, the shortest length of time reported all year.
Of course, this probably means overall refinance volume is down sharply from previous levels. It also means purchase activity isn’t too hot, whether due to a lack of supply or a lack of interest from prospective buyers. It could also be seasonal.
Speaking of, the purchase share of home loans fell to 54% last month, down from 60% in October. It’s now well off the 67% share seen in July, but remains above the 47% share seen in 2013.
Purchases are taking a little longer to close nowadays, with average length of time to close rising from 40 days in October to 41 days in November.
However, the closing rate on purchases increased to 66.5% last month, the highest level since Ellie Mae began tracking back in 2011. It averaged 60.1% last year.
The takeaway is that lenders seem to be doing a better job closing the applications they bring in. Still, I’m sure they’d trade that for more business in a heartbeat.
Ellie Mae also reported that the adjustable-rate mortgage share of closed loans dipped to 6.1% in November from 6.3% in October. It was as high as 7.6% this year, but remains well above the 4.2% average seen in 2013.
Meanwhile, the 15-year fixed share of funded loans increased to 10.3% last month, up from 9.6% a month earlier. It has been as low as 8.9% and as high as 15% this year.
So it turns out 2014 hasn’t been as bad as many predicted, and the way things are going, 2015 might be pretty decent too.
The average U.S. mortgage rate dropped five basis points last week to 3.13%, according to Freddie Mac’s Primary Mortgage Market Survey. It’s the first decline in mortgage rates in two months.
Sam Khater, Freddie Mac’s chief economist, pointed to a modest decline in treasury yields as the leading factor behind last week’s drop. Traders were hesitant in the market ahead of the Fed releasing its March FOMC minutes as many monitored talks of inflation. However, once again, the Fed showed no signs of policy changes despite forward economic recovery.
Fed purchases have helped to drive mortgage rates and other loan interest rates to the lowest level on record by boosting competition for bonds, which compresses yields.
But a slight dip in rates is advantageous for borrowers who missed the “forever rates” period and didn’t refinance when they had the chance. A 40-plus basis point rise in mortgage rates over the past month resulted in approximately 7 million high-quality refi candidates who are no longer able to lock historically low rates, according to a recent report from Black Knight.
According to the Mortgage Bankers Association, refinance mortgage applications declined for the fifth straight week. The refinance index was down 5% from the previous week and 20% lower than the same week one year ago. Overall, refinancing volume over the past 10 weeks is down more than 30%.
Increasing Lending and Servicing Capacity – Regardless of Rates
The low-rate environment won’t last forever, and both lenders and servicers need to be able to keep their costs down while managing volume fluctuations once things start to normalize.
Presented by: Sutherland
Borrowers need to act fast though, as treasury yields are already recovering. Recent comments by the Fed could potentially push rates back up by next week’s time. As mortgage rates rise, purchase demand will also rise, though homebuilders are fighting an uphill battle due to historic lumber prices and supply chain and labor issues.
“There might even more intensity this year, since 2020’s spring homebuying season was limited by virus-related lockdowns,” said Fannie Mae Senior Vice President and Chief Economist Doug Duncan. “Home-selling sentiment experienced positive momentum across most consumer segments, nearly reaching pre-pandemic levels and generally indicative of a strong home seller’s market.”
Because I recently eliminated all of my non-mortgage debt, I have a significant positive cash flow. The $1,000 per month I was putting toward debt can now be used for investing. I’m making maximum contributions to my Roth IRA, of course, but that still leaves several hundred dollars each month available for other purposes. This has forced me to evaluate my financial goals.
Mortgage Prepayment Options
For the past year, Kris and I have discussed making accelerated payments on our mortgage. I’ve written about this choice several times at Get Rich Slowly, and it seems clear that mathematically it makes more sense to invest the money. However, it’s also clear that eliminating a mortgage offers a tremendous psychological boost. I’ve never heard anyone say they regret owning their home outright.
I’ve researched a variety of mortgage acceleration schemes:
Refinancing from a 30-year to a 15-year mortgage is appealing, but the interest rate drop (from 6.25%) isn’t enough to make this worthwhile.
I could sign up for my bank’s bi-weekly payment program, but I don’t like the enrollment fee, and I don’t like the increase in paperwork.
We could make an extra payment every year, or pay an extra $100 per month. But I feel like we could do more.
Ultimately, we decided to use the method described by Charles Givens in his 1988 best-seller Wealth Without Risk:
You can pay off your 30-year mortgage in half the time without refinancing by making extra principal payments. On the first of the month when you write your regular mortgage check, write a second check for the “principal only” portion of the next month’s payment.
Wealth Without Risk
For most of homeowners, the principal portion of a mortgage payment is quite small. For example, our February mortgage bill was $1681.79. Of this, $1119.16 was designated for interest, $295.19 for escrow (taxes and insurance), but only $267.44 for principal.
Using Givens’ plan, if I include an extra $267.44 with my payment, I’ll also knock off the next month’s payment from my mortgage. That $267.44 accomplishes the same thing $1681.79 usually does, but at 16% of the normal monthly cost. That’s a bargain.
The advantages this method are:
It has a sliding degree of difficulty. At first, the extra principal payments are lower. But as we pay down the mortgage, these extra payments increase. We have time to “grow into” these increased payments.
It’s easy for us to back out. If we decide our money is better used elsewhere, we can simply stop making extra principal payments.
Every time we make a payment, we’re essentially making two payments, cutting the term of our mortgage in half.
After discussing the pros and cons, Kris and I have agreed to follow a modified version of Givens’ plan. To make things simple, we’re using round numbers. During 2008, for example, we’re going to pay $2,000 toward our mortgage each month, which gives us an additional $318.21 against the principal.
Every January, we’ll adjust how much extra we’re paying. If our budget gets too tight, we can cut back at any time.
The Drawbacks
To be fair, Givens doesn’t recommend this method for low-interest mortgages like ours. He clearly states, “Never pay off low interest mortgages — those under 9%. Instead, use the extra money in a better investment.” He wouldn’t advocate using this method on a 6.25% mortgage.
The March 2008 issue of Consumer Reports has a brief exploration of this topic. Their conclusion?
Many people find peace of mind in paying off their mortgages and owning their homes outright, especially as they approach retirement. That can make an investment in your mortgage a worthy choice, psychologically if not financially.
Still, the bottom line, according to our Money Lab, is this: Although there are exceptions, chances are you’ll be better off putting extra money into a good mutual fund, not into prepaying your mortgage.
“Did you see this article?” Kris asked me, after she finished reading it.
“Yes,” I said. “What do you think?”
“I don’t care” she said. “I want to do both. I want to invest and prepay the mortgage.”
“So do I,” I said.
Financial Freedom
If we have a substantial emergency fund, if we’re fully-funding our retirement plans, and if we’re saving for other goals, I believe that paying down the mortgage makes sense for us. We understand that we’re sacrificing some theoretical (and probable) future investment returns, but we’re also working to create a financial situation that’s easier for us to maintain in the long run.
If we have no mortgage, that’s $1400 less each month that we have to pay in expenses (we’ll still need to pay taxes and insurance). Since we split the payment, that’s $700 less per month that I have to pay. Without a mortgage, my fixed expenses would be about $600/month. My total expenses would be about $950/month. This would provide tremendous freedom, granting me an opportunity to try things that I might not otherwise be able to do.
Another Form of Diversification
Every investment book I’ve read says that a smart investor diversifies his portfolio, putting some of his money into each of several different types of investments. I view prepaying the mortgage as diversification. Sure, the stock market will probably beat the 6.25% I’ll earn by doing this, but it’s guaranteed money. To me, it’s better to put my money into my mortgage than into bonds, certificate of deposit or a high-yield savings account. Especially if we’re entering a recession.
As we enter the second quarter of 2021, it’s time for the mortgage industry to reflect on the past 12 months and think about how to plan for the same period ahead. After all, it was mid-March of last year that the president declared a national emergency leading to school closures, the wearing of masks, and the emptying of office buildings across the country. A little over a year ago, we could have never imagined the actual implications of COVID’s impact to come on this nation, our communities, families and our business.
Take working remotely for example. In early 2020, Zoom was barely a known company in America. The impact of COVID made it a household name. By October, the market value of Zoom exceeded that of Exxon-Mobile, reflecting the dichotomy of an intransigent society staying at home and working remote. The stock value of Zoom grew 650% during this one year as many other aspects of the economy slowed or shuttered as a result of the shutdown.
But housing was the true bright spot in the economy. Low mortgage rates, driven by quantitative easing by the Federal Reserve helped fuel a boom in both mortgage refinancing and purchases, making 2020 the second-best year in U.S. history for mortgage origination volume. Augmenting the low rates was an increase in demand driven by the sudden surge of the millennials, finally now out to buy a home.
In fact, as reported in the Wall Street Journal in late August of 2020, “Millennials reached a housing milestone in 2020 when the group first accounted for more than half of all new home loans, and they consistently held above that level in the first months of 2021, the most recent period for which data are available, according to Realtor.com. The generation made up 38% of home buyers in the year that ended July 2019, up from 32% in 2015, according to the National Association of Realtors.”
Now, with the economy looking toward life past COVID, the focus is beginning to shift to a recovering economy, perhaps hotter than expected, driven by an excess in stimulus provided, and a likely end to the low single-digit mortgage rates seen over the previous year.
But a reminder to all is relevant now. Low rates are often the sign of a poor economy. As Bankrate’s Chief Economist Greg McBride, recently highlighted: “Bad economic news is often good news for mortgage rates. When concern about the economy is high, investors gravitate toward safe-haven investments like Treasury bonds and mortgage bonds, pushing bond prices higher but the yields on those bonds lower.”
So, the good news is that the economy will survive COVID and may actually catch on fire in the rebound with GDP forecasted to grow by 6.5% this year. Job growth will be the result of increased spending across every sector — from travel to goods and services. In fact, the pent-up demand can be reflected by the growth in retained savings after expenses during COVID, as Economist Mark Zandi of Moody’s Analytics highlights.
With 916,000 jobs created in March, many economists are bracing for what might be a spending spree from a nation that has been locked away for far too long and now recovering at a record pace. With summer on the horizon, look for the pace of spending to only grow with tourism augmenting what would already be a robust growth spree.
In fact, the recovery from the COVID pandemic is in stark contrast to that of the 2008 Great Recession. The fact that this recession was brought on by a virus versus weakening economic variables is key to the distinction. If you compare the employment growth between the two recessions there is truly no comparison.
Low interest rates, the demand surge from the millennials that are now reaching peak buying years, significant stimulus brought on by three large recovery bills, not to mention a potential infrastructure package, and massive pent-up demand from the lack of spending over the past year should have everyone simply bracing for lift off from the U.S. economic engine as it fires up.
So mortgage rates will likely continue to rise modestly as the Fed tapers from its intervention in the MBS (mortgage backed security) supply, which will slow refinancing and thus reduce mortgage volume overall in the market. Clearly, mortgage forecasts from the MBA and others reflect the expectation that overall volume will slow, but purchase activity will continue to grow.
For those that have focused on purchase lending, they will see less of a drop in total volume. But for those that have overly depended on refinancing, the impact will be more severe. Fortunately for lenders that were already more purchase-focused, the impact will be far less than many other refinance dependent operations given the strong purchase to refinance mix.
And one last perspective is important for everyone. The graph below from the Federal Reserve of St. Louis is the most important point about perspective. Look at 30-year mortgage rates as they stand today compared with any time going back decades when these rates were even captured on an aggregate basis. Rising mortgage rates will certainly be tolerated by the market.
In fact, small hikes in mortgage rates can lead to panic-buying periods which can drive small volume surges. Mortgage rates have never been this low and yet through previous cycles home sales have continued. In fact, the largest home purchase year in this nation’s history was 2005 when rates were near 7.5%.
The nation’s greatest obstacles ahead will come from the shortages in available single family home inventory across the county. But as America returns to work, supplies for builders will return to needed production levels, new home construction will continue to rise, and ultimately the supply-demand imbalance will rectify itself. The current proposed infrastructure bill includes funding for over 100,000 affordable housing units among many other housing initiatives, reflecting the recognition of the need to address access and supply to affordable homes.
For those in the mortgage banking industry, market corrections are part of the business. But in the year ahead, while having less mortgage volume overall, it will be met with a strengthening economy, a healthier nation, and enormous demand for home ownership. How lenders re-tool for this shift to a stronger economy and a purchase-dominated mortgage market will be the most important variables in long-term success. For companies that prepare for this, the market shift will be far less impactful compared to so many others.
This column does not necessarily reflect the opinion of HousingWire’s editorial department and its owners.
To contact the author of this story: Dave Stevens at [email protected]
To contact the editor responsible for this story: Sarah Wheeler at [email protected]
Guaranteed by the U.S. Department of Agriculture, USDA home loans are available to borrowers in certain rural areas. If you’re in an eligible area, you could qualify for this special no-down payment mortgage, provided your income falls within the program’s criteria.
How do USDA loan programs work?
The USDA guarantees several mortgage programs, including the Single-Family Housing Guaranteed Loan Program (sometimes known as Section 502 Guaranteed), which assists USDA-approved lenders with providing 30-year, fixed-rate financing to low- to moderate-income homebuyers in specially designated rural areas.
The key benefit of USDA loans: You don’t have to make a down payment — you can receive up to 100 percent financing for the purchase or construction of a home. Unlike other types of mortgages, there are also no limits on the amount you can borrow.
The downside: There are guarantee fees when you close the loan and again annually for the duration of the loan’s term. The upfront fee equals 1 percent of the loan (the amount you borrowed); the annual fee equals 0.35 percent. While these fees are charged to your lender, in most cases, your lender will pass them on to you.
While the program’s name includes “Single-Family,” the home can actually be a detached or attached property, a condominium, a home in a planned unit development (PUD) or a modular or manufactured home.
In addition to the Guaranteed program, the USDA offers other home loan programs, including:
Single-Family Housing Direct Loans (Section 502 Direct) – Low-interest home loans available through local USDA offices; only available to low- to very low-income borrowers in certain rural areas
Single-Family Housing Home Repair Loans (Section 504) – Low-interest home loans or grants for improvements or repairs, available through local USDA offices; only available to low- to very low-income homeowners in certain rural areas
USDA loans are also eligible for refinancing.
How to qualify for a USDA loan
Compared to a traditional mortgage, to qualify for a USDA loan, you must meet specific income requirements and plan to buy a house in an eligible area. This can make getting approved for a USDA loan somewhat more challenging than a traditional mortgage. However, if you do meet the qualifications, a USDA loan can help you become a first-time homeowner.
To qualify for the USDA Guaranteed program, you must:
Be building or buying a home in a rural area
Have a household income within the program’s limits for your area; you can find out whether you qualify with this tool
Fulfill your lender’s requirements, which might include a minimum credit score (640 is common)
Live in the home as your primary residence
USDA Guaranteed program
The income requirements for a USDA guaranteed mortgage will depend primarily on factors like your location and family size. However, there are some universal requirements to keep in mind. You must:
Have an income that does not exceed 115% of the national median household income
Meet your mortgage lender’s credit requirements
Live in a qualified rural area
Live in the home as your primary residence
Meet citizenship requirements: Be a U.S. citizen, non-citizen national or have qualified alien status
USDA Single-Family Housing Direct Loan
This loan is designed for low- and very low-income borrowers. It provides payment assistance to help applicants find safe and sanitary housing. The program essentially offers a short-term subsidy to help people in rural areas get back on their feet. To qualify, you must:
Agree to live in the property as your primary residence
Be unable to obtain a loan from other sources
Currently be without safe and sanitary housing
Be a citizen or eligible non-citizen
Have the legal capacity to incur a U.S. loan
Not live in a property designed for income-generating purposes
How to apply for a USDA loan
If you meet the USDA loan qualification criteria and you’re ready to buy a home, take these next steps:
1. Compare and contact USDA-approved mortgage lenders
Here’s the current list of USDA lenders by state. (If you’re planning to build a home, here’s the current list of USDA construction loan lenders.) Keep in mind not all lenders offer USDA loans, but most applicants can find multiple options to choose from. The biggest USDA lenders include:
Many USDA loans come with below-market rates, but it’s still worthwhile to compare costs — aim to compare at least three lenders.
2. Get preapproved for your USDA loan
A preapproval letter shows sellers that you are serious about purchasing a home and likely to receive funding if your financial situation doesn’t change. Having this letter can streamline the purchasing process.
Common documents required for preapproval include:
Proof of income, such as pay stubs and tax returns
Account statements for financial assets, such as CDs or mutual funds
Statements for car loans, student loans and other debt
Credit score information
Identification documents, including a government ID and social security card
Here’s more on the difference between prequalification and preapproval and how to get preapproved for a mortgage.
3. Find a home in a USDA-approved area
As you shop for a home, you can use the USDA property eligibility tool to see if a particular address will qualify for a USDA mortgage. If you don’t know where to start, the USDA also offers a list of qualified homes for sale by state.
Having a real estate agent that has worked with people seeking USDA loans might help you find the best property for your needs in an eligible area. Use our Bankrate RE Agent Match tool to find an agent near you.
Once you find an eligible home you like, make an offer. If it’s accepted, you’ll sign the purchase and sale agreement with the seller, provide any initial earnest money deposit and move on to applying for your mortgage.
4. Go through underwriting and loan approval
Once you’ve made an offer on a home, you’ll need to submit a USDA loan application to your lender. As your lender processes your application, be ready to answer any questions. During this time, you’ll also obtain a homeowners insurance policy and prepare to pay closing costs. While you’re doing this, the underwriter is verifying your income and credit, having the property appraised and ordering a title search.
During underwriting, be careful not to make any changes to your credit or finances, such as buying a car or taking out a new credit card. If you do, your lender might need to restart the underwriting process, which could delay your closing.
5. Close on your new home
Once your lender approves your loan, you’re ready to proceed to closing: the final step in purchasing a house. While timelines can vary, it typically takes 40-50 days to close on a home, from the time you make an offer to closing day itself. On closing day, you’ll sign the mortgage note and other paperwork and get the keys to your new home.
Bottom line
The no-down payment requirement associated with USDA loans makes homeownership more accessible. While USDA loans have stricter location restrictions than a traditional home loan, if you’re a low- to middle-income family trying to buy in a rural area, they can be an excellent option. To get a USDA loan, find a USDA-approved lender and consider working with a real estate agent experienced with these loans to help you buy an eligible home.