With spring just around the corner, millions of families will be surfing the real estate sites, looking for their dream home. They’ll educate themselves about local price trends, and they’ll review their financial situation to try to answer one question: “Is this the year to be buying a home?” However, they may be asking the wrong question. According to industry leaders, it’s more important to ask, “Is 2012 is a good year to take out a mortgage?”
With rates on a 30-year fixed mortgage lower than anyone can remember, and the Federal Reserve promising to keep short-term interest rates at zero for the next three years, what’s to worry about?
Plenty, says Margaret Kelly, the CEO of RE/MAX, the international real estate franchisor. “This year, a crisis like the European debt situation could trigger inflation and send mortgage rates up, or prices could rise. This is the year many people will look back and wish they had bought a home because these conditions aren’t going to last forever,” she told me.
What will influence mortgage rates next?
John Walsh, CEO of Total Mortgage Services in Milford, Conn., one of the fastest-growing mortgage originators in the nation, sees the potential for a lot of rate volatility in the future. “If the debt situation in Europe is resolved, we could see rates rise significantly, although it seems unlikely this problem will be solved in the short term,” he said. But Europe is not the only factor that could influence rates.
Walsh added, “Although rates could drop if the Fed engages in further quantitative easing, there is a limit to how far rates could fall. Improvement in the U.S. economy or a million other factors could very easily cause rates to rise. There is a limited upside in waiting to take out a mortgage, but a huge downside in waiting. I would advise acting now as opposed to waiting.”
However, taking out a mortgage isn’t nearly as easy as it used to be. In fact, the primary reason most buyers, especially first-time buyers, are losing contracts and not buying a home is that they aren’t qualifying for a mortgage. Move-up buyers who haven’t dealt with the mortgage process since the salad days before 2007 are also in for a rude awakening.
What is killing the deals?
Contract failures were reported by 33 percent of Realtors in December. The leading reasons were declined mortgage applications and failures in loan underwriting from appraisals coming in below the negotiated price, according to the National Association of Realtors.
A major issue when it comes to contract failures is the length of time it takes to approve a mortgage, which grew late last year from an average of 30 days to between 45 and 60 days, according to a survey last October by Campbell/Inside Mortgage Finance. Late or delayed approvals can delay a closing or even cancel a contract.
Walsh advises borrowers to organize their documentation in advance and be responsive to lenders’ inquiries. “A lender can only go as quickly as the information he has to work with. Be ready with tax returns, current pay stubs, and bank statements,” he noted. Walsh added that his firm turns underwriting around in a day and processes applications in two weeks when borrowers are responsive.
Low appraisals also kill deals today. The appraisal industry has undergone great changes over the past five years that make it imperative that borrowers stay on top of the process if they want to avoid last-minute renegotiations with the seller that could torpedo the deal. Should an appraisal come in too low, Walsh suggests asking the lender to include recently sold comparable properties that were not listed on the MLS to provide a wider, more accurate sample.
Walsh warns borrowers not to take any action that would impact their credit score or credit history until closing is complete. New credit standards could require lenders to check credit immediately before closing. A major purchase, such as a car or furniture, or even an application for new credit, can cause a lender to recalculate the income-to-debt ratio and revise the loan’s terms or even withdraw the loan approval completely. Walsh’s advice? “If you want to buy something like new furniture before you move in, buy it on time, not credit.”
“Another reason this is a great year to get a mortgage is that there is a good selection of sound loan products available ranging from FHA to adjustable rate mortgages with very low first phased rates that are a good choice for borrowers not planning to own the property for many years,” said Walsh. “Another benefit to adjustable rate mortgages is that the lower initial payments give homeowners time to grow in their jobs and possibly begin to see an increase in their take-home pay.”
The FHA witnessed a number of changes last year, including changes in the mortgage insurance premium (MIP) and an increase in credit score requirements, but Walsh doesn’t foresee major changes in the next 12 months.
Bottom line: If you have your credit and your financial house is in order, your documentation is ready, and you have a good understanding of your borrowing options, then you’re ready to borrow. If you’re ready to borrow, then you’re ready to buy.
Steve Cook is Executive Vice President of Reecon Advisors and covers government and industry news for the Reecon Advisory Report.
Cook is a member of the National Press Club, the Public Relations Society of America and the National Association of Real Estate Editors, where he served as second vice president. Twice he has been named one of the 100 most influential people in real estate. He is a graduate of the University of Chicago, where he was editor of the student newspaper. In addition to serving as managing editor of the Report, Cook provides public relations consulting services to real estate and financial services companies, and trade associations, including some of the leading companies in online residential real estate.