Should buyers pay more than the appraised value?

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In this aggressive seller’s market, many successful bidders are waiving appraisal contingencies. Agents must be equipped to address their buyer-clients’ concerns about paying more than the appraised value for a property.

An appraised value less than the contract price will increase the loan to value. This can require additional cash down payment and/or mortgage insurance.

Should a buyer pay more than appraised value? Tough question. But, in this market, the answer is often “yes”.  There are many competing buyers willing to waive appraisal contingencies. However, home prices are moving up at a brisk pace. The appreciation in value will likely help home values catch up to price in a year or so.

The strongest buyers prevail – Successful bidders for homes are making cash offers with no contingencies for the appraised value. Move up buyers are confronted with the challenge to buy a new home before selling their departure residence. One concern is to sell first and not get a new home in time for the move. Such buyers may need to qualify for their purchase while carrying their departure residence because sellers may not consider a contingency for the sale of the departure residence.

Do bidding wars create a bubble in prices? I do not believe that the current trend to higher prices will create a bubble that will burst because the buyers are purchasing for their use, not speculation. Price bubbles in stocks, tulips, and real estate are the result of investors simply speculating that some fool will be willing to pay more for an asset in the near term. I have not observed investors buying homes on speculation to flip at a higher price.

Many sectors of the market have prospered during Covid. As we return to normalcy, the economy will improve even more. So, the upward pressure on home pricing will continue. Higher interest rates in the next 6-12 months may moderate the rate of appreciation unless inflation becomes an additional influence to even greater price increases.

Millennials are entering the home market. We will see more millennials become home buyers in the next few years created even stronger demand for the limited housing supply in San Diego. 

Conclusion – This is a tough market for home buyers with prices rising rapidly and fierce completion for limited inventory. I expect pricing to continue upward in the next year. However, I believe the rate of appreciation will slow later this year as the fear of Covid subsides and more home sellers are willing to list their property.


Changes to Refinances in 2020

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Recently Fannie Mae and Freddie Mac announced that they are raising fees on refinances. The new fee will add 0.5% of the loan amount to the borrowers’ cost. The fee was originally planned to be put in effect starting September 1st, but is currently being charged by lenders.. This fee will cause a slight increase of approximately 1/8th to the rate on many refinances

This fee was put in place to protect against risk of default or forebearance, since many borrowers have been taking the opportunity to refinance their home loans. Rates have remained low, and we can expect them to stay low going into next year. Fannie and Freddie state that this fee will not cause monthly payments to increase. Most borrowers who refinance do achieve a lower monthly payment; and this fee would only reduce those savings by about $15 a month.  

The fee will apply to most refinances, with some exclusions being:

  • Mortgages to purchase a home
  • Refinances with loan amount below $125,000
  • Refinance loan amounts above $510,400, or your conforming local limit (Jumbo Loan)
  • Home Ready refinance loans
  • Home Possible refinance loans

My mortgage interest outlook is that rates could increase due to expectations of greater inflation. The Federal Reserve has announced that they will keep the Fed Funds Rate low into 2023. However, that is an overnight borrowing rate to banks. Rates on long term fixed rate loans will reflect the inflation risk. Another factor that will put upward pressure on rates is economic recovery. In general, mortgage interest rates are very low now by historic comparisons. I see more factors motivating higher rates than lower rates at this time. One other factor that can push rates up is good news on a Covid Vaccine. Of course we all want an effective vaccine. But, I expect news of a vaccine will push rates up.

Bottom line – Rates are great now. Take advantage if you have need.

Let me know when I can help.


San Diego Real Estate Market Update-September 2020

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Over the last few months we have continued to see record-low rates. The average 30 year fixed rate is currently 3.010% which is good news for buyers looking to purchase a home. If you have thought about taking advantage of low rates to refinance, you may want to act fast due to the 0.50% fee* that will be imposed on most refinances. This news comes from Fannie and Freddie and will be in effect for conforming loans delivered after December 1, 2020. This is most likely a response to the large amount of refinances that have occurred due to the low rates. Many conforming lenders are already pricing this fee into their loan locks.

In San Diego we continue to see a low inventory of available homes, meaning more competition for buyers. Inventory for detached homes is 52% lower compared to last year; and attached is 30.2% lower. Low inventory has been a problem for some time now, and it continues to drive up prices. This is good news for sellers who can expect to receive multiple offers on their home and sell it quickly. On average, marketing times are down to 24 and 25 days for detached and attached homes respectively, but we have all seen those homes that sell in a matter of days. If you’re working with buyers, make sure they are prepared to act fast. Get your buyers pre-approved for their financing. Be aware that many lenders have slow turn times these days due to very high refinance volume. Some lenders are running two weeks for underwriting purchases. After loan approval, it can take 10 days to clear conditions for loan documents. There are still lenders who can close purchases in 3 weeks. Get realistic turn times from your lender to meet contingency periods.

Good news on non-conforming loans. The jumbo lenders are returning to the market with competitive pricing. However, underwriting guidelines are still strict with requirements for higher credit scores, lower debt-to-income ratios and higher reserve requirements. Also, self-employed borrowers are scrutinized with more conservative underwriting of income. Also, bank statement loans for self-employed borrowers and debt service coverage loans for investment properties are slowly returning to the market. Rates are higher for these Non-QM loans, but they are coming back. Non-QM loans can also be useful for borrowers with credit events.

The Federal Reserve has announced a more aggressive policy to allow higher inflation before raising their overnight discount rate. According to the Fed, their long-term strategy is to keep rates low for the upcoming years. This is an effort to boost spending. However, long term lenders who make 15 and 30 year fixed rate loans may raise rates in anticipation of inflation. In my opinion, this indicates that mortgage interest rates are more likely to go up from here than down.

Let me know when I can help.

*The fee will apply to most refinances, with some exemptions being:

  • Mortgages to purchase a home
  • Refinances with loan amount below $125,000
  • Refinance loan amounts above $510,400, or your conforming local limit (Jumbo Loans)
  • HomeReady refinance loans
  • Home Possible refinance loans

Financial Planning for Home Buying

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Whether you are thinking of buying a home this year or next year, there are some important factors to consider. A few questions to begin are:

  • How much will you have for a down payment?
  • How much down payment do you need?
  • How much can you afford each month?
  • How much will a bank lend you?
  • How much are you willing to pay back?

These questions may seem daunting, but I can help you answer them. Many buyers believe they need a down payment of 20% or more, but that is not always the case. There are some loan programs that require as little as 3.5% down. When thinking of a down payment you’ll want to think about your overall budget for a home. You will want to consider what your monthly payment will look like when deciding what your budget will be. This is why getting pre-approved is a great first step to home buying. Through the pre-approval process I can help you determine what a bank is willing to lend you and what that will look like on your finances.

Apart from the above questions, you need to keep your credit score in mind. I always tell borrowers, “Your car payment guy doesn’t care about your house payment, but your mortgage guy cares about your car payment.” When applying for a loan don’t take on new credit in the form of credit cards or car loans. This can negatively affect your credit score and may put your home loan at risk.

When deciding on your mortgage options we will take a look at you Debt To Income Ratio. This is a ration that shows how much monthly debt you have with your housing payment, plus other payments compared to your gross income before taxes. Keeping your debt low can go a long way to helping you get the loan you need for the house you want.

This may be a lot of information to consider, but we can help you through the loan process.

How to Choose A Mortgage Broker

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When choosing a mortgage broker don’t just look at who is promising the best and lowest rate. It’s important to work with someone who has your best interest in mind and will help you make the right choice for your loan. The mortgage process can be long and you may hit some bumps in the road, so it’s important your broker is experienced and can help you navigate your different options and any difficulties that may come along. Here are some of the things you can expect from your mortgage broker:

1. Form a mortgage plan

You need someone who will not simply get you a loan, but a mortgage plan. This can include knowing the basics like what you will pay now and down the road for the life of the loan. Remember that a mortgage can last many years so you want to know what to expect during that time. A mortgage plan can also include evaluating investment options for you down the road. Mortgages are not one size fits all so your mortgage broker should help you put together a plan just for you.

2. Inform and educate

We truly believe there are no bad questions when it comes to your mortgage. You should expect to have all your questions answered in a timely manner and to make sure you are really understanding what is going on. A home is a large investment so we want to make sure you are in control and aware of what’s happening every step of the way.

3. Personalized service

We make sure that when you have questions or need assistance you are speaking directly to us and don’t have to go through a large phone tree with getting no help. That can be a big difference between working with an independent mortgage broker and choosing a loan with a big bank. Make sure that your mortgage broker gives your loan the attention it deserves to make sure you are getting the best possible option.

4. Experience and expertise

Sometimes we will hit bumps in the road with your mortgage, so make sure you are working with someone who has the experience and expertise to navigate any issues that may come up. The difference between an experience broker and one that is not, could cost you your loan so be aware of this.

5. Have your best interest in mind

You may encounter brokers who simply want to close a loan, no matter what it is. This could result in you getting a loan that is not right for you and could lead to problems down the road. In my many years of working with borrowers, there have been time where I’ve simply had to present the available options and if they were not right then borrowers had to walk away. I was always understand of this, but also ready to help when more favorable options were available.

6. Doesn’t forget you after one loan

A good broker will make sure you are aware of how market changes are affecting you and when a possible opportunity comes your way. This can mean refinancing your home for a lower payment or investing in property. Your mortgage broker should remain in contact with you about these options and will work with you again when the time is right.

Spend Some Time Outside

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Spending too much time inside may be causing some of us even more stress, so let’s try to spend some time outside. Now is the perfect time to work on the exterior of your home. If you have projects you started and didn’t finish (don’t we all have that endless list), try find some time to continue working on them. Even if you don’t finish them, it will still help you to feel productive and get you moving.

If you are looking for new projects to start here are some ideas:

  • painting your front door (make the right first impression)
  • pressure washing decks and exterior
  • landscape clean up or renovations
  • repainting your home’s exterior

With these ideas, make sure you are staying safe and following social distancing guidelines. Many of these tasks can be accomplished on your own and don’t require you to hire contractors. If you do work with others, make sure you keep the recommended distance and try to complete any paperwork electronically. Stay safe!

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