MortgageMinute with Art Alvarez - Is No Money Down Financing Even and Option

Good afternoon everyone. Welcome to this week's Mortgage Minute. My name is Art Alvarez with Mortgage Works where we have the answers and they're on the house. Come coming to you from Palm Springs in the greater Coachella Valley area. We're actually enjoying pretty good weather, pretty moderate weather for, for this area in June, late June. It's only 98 degrees here so far, so quite comfortable as at least relatively speaking for the low desert here. So we're enjoying that. And of course if you've seen this show before, oftentimes Jeff is looking for me to do a sports report. So I will mention that my angels, I'm a long time lifelong fan, they're clawing back. They're actually at five at 500 now 40 and 40 and they're in third place and they're in striking distance for the wild card. And don't forget in 22,002 they won the World Series and got to that through the wild card slot. So there's still hope. We got three months of baseball to go. So with that let's go ahead and get into the interest rate and bond market. Kind of an interesting week actually. First we're going to show you our rate grid right off our website, the home page. And I have good news there. Rates have trended a little bit lower. We're now well into the low sixes. And in fact on a conforming loan, if you've got a decent credit while good credit score and decent sized down payment, we can actually arrange a 30 year fixed rate loan for you for six and a quarter with no points. Those buy downs are down to three and three eighths, four and three eighths respectively. And FHA VA now back under six at five and seven eight. So then look at that 15 year five and a half. So those are all pretty darn good. And again we're still on the sixes but now we're trending into the lower sixes. So that's really, really good news and I think people should be aware of that. Quit hearing or reading on the financial pages what have you that rates are still near seven. That's just not the case for most borrowers. So let's look at the bond market. That'll help tell the story a little bit more. That's the kind of trend we like to see. Remember this is a five day chart and so yeah, all the way down to four and a quarter, not just a couple weeks ago we were at four and a half. So that's a full quarter percent in rate and you can see that reflected in mortgage rates in general. And you know, we saw that. You can see that Wednesday dip that Jeff likes to see. In this case, though, it's still dipping. So we dipped yesterday from Tuesday and we're dipped again today from yesterday. So I like that kind of dip where once it dips, it keeps on dipping. So hopefully that'll continue. In terms of data points this week, a few things going on. First of all, just one data point of note you'd probably be interested in. For those of you on the real estate agents and so forth. Existing home sales came out in May. It was called sluggish 4.03 million, but it was still better than the month before in April when it was just under 4 million. So now going back to the heydays before the pandemic, that number would be closer to 6 million plus. So it's still considered sluggish. And of course, it's been in this 4 million plus or minus now for quite some time. Case Shiller Index, we always like to bring that up once the most recent report is released. And again, Case Shiller is an index that tracks home prices in the US and the Case Shiller Index shows in April another gain, 2.7% now, albeit it's a lower rate of increase, but 2.7% still a gain. Again, this is national numbers. It's based on a 20 city composite index. And year over year, 3.4%. So as we keep, you know, repeating home prices, though, in some markets, yeah, there's been some softening overall. Home prices, generally speaking, throughout the country continue to go up, albeit at a little bit slower rate. And of course, that really means that home prices are kind of going up more along the historical average of around 4%, plus or minus, which happens to be the appreciation rate used in reverse mortgage proposals that I think we've talked about before. Fed Chairman Powell did speak this week. He did hint at Fed funds rate reductions to come soon. The next possibility would be in July. But yet, after saying they are coming soon, he then goes ahead and declares that they're going to hold off because of expected inflation rising from trade wars. Well, that's kind of interesting. So what the Fed chairman is doing is saying, okay, the data suggests that a rate cut should be coming soon, but we're going to ignore the data because we expect the data to get worse. It's not worse yet, but we expect it to get worse, therefore we're going to hold off. Well, of course, there are many in the financial markets that think that's the Wrong read. And again, particularly as I've mentioned, this grumpy guy in this big White House in D.C. is all over Chairman Powell about they need to cut rates, that the data suggests that they should cut rates. But he's saying we're not, we want to see what happens with the trade wars. Well, who knows how long that's going to take. So it's really kind of a muddled message and I think it's not, you know, help the markets. Although I will tell you today, part of the reason you saw that dip continue today in the 10 year bond and of course we had the stock market up by 400 points is because the news hitting today is our President is looking to is narrowing the candidates for replacing Powell and that the change could come in September or October. And the expectation is if it happens that fast, whoever replaces Chairman Powell is gonna be more friendly to rate cuts. And so the market is anticipating that. That's why the stock market went up so much and why the bond yields are dropping is because it's beginning to be believed that Powell is gonna get replaced soon and replaced by somebody who's gonna start looking at lowering rates quickly. In fact, now there's a 27% probability of a Fed rate cut of a quarter percent in July and believe it or not, a 92% bet probability in the futures markets for the fed Funds rate, a 92% bet that rates the fed funds rate is going to go another quarter point lower in September. Well, we'll see if that plays out. But you know, again I want to caution everyone, just when the Fed lowers that fed funds rate, do not expect an immediate, you know, kind of dollar for dollar reduction in mortgage rates. It doesn't work that way. It'll trickle down through over time and it takes a while. And of course it would be nice if these rate cuts continued for a while to really trickle down and have some impact on mortgage rates. We'll have to see how that plays out. The other couple of data points you should know about new home sales at a seven month low 623,000, it was close to 700,000 in April. So home builders are suffering a little bit getting their inventory moved. But remember I keep telling you they do what they have to to provide incentives to move the homes. So you know, if you're looking to buy a home, you can't discount the new home market because there's lots of incentives to be had. And by the way, if you go that way, a lot of them have their own lender. So we May not be able to help you. However, I will suggest to you one idea. A lot of these home builders do co op with real estate agents. Well, you know, we're licensed in real estate. We could represent you as a buyer's agent. If you go to a new home site, we just register your name. They pretty much take it from there. We, we get this commission which is kind of easy, you know, it's easy. Well, it's income that we get that's for doing very little work because like I said, most of them have a sales office where the salespeople on staff take over. Why should we keep all that money? You could have us represent you as a buyer's agent in a new home site. And let's say they're co oping at 2 and a half percent. We could take that 2 and a half and provide it to you towards your loan rather than us just keeping it at income. So that could be a way to compete with their in house lender. Just keep that in mind. And then the other data point that came out is pending home sales forecast at minus a half. Remember it was down 6% last month, but it was projected to be only down a half a percent in May. Well guess what? Pending home sales announced today were actually up 1.8%. So a little bit of good news there. And again, pending home sales are sales that are in escrow, pending to close. And then tomorrow is the last remaining data point that could have an effect on the market. The PCE Personal Consumption Expenditure Index. That is the Fed's favorite inflation target. It's forecast to be flat at 0.1% in May. It was 0.1 in April. And then the year over year, core PCE which excludes food and energy, is forecast to be 2.6, up a tick from 2.5 in April. So again, moderated numbers pretty flat. If these numbers bear what's being forecast come out to be true as forecast, that's another signal to the Fed that hey look, inflation looks like it's pretty under control. And so there's a reason why you need to really start looking at lowering rates. Plus the fact there are some that think the labor markets are showing some signs of weakness. I'm not sure. I totally agree with that. I mean unemployment rate's still at 4.2%. Initial claims for unemployment did not jump up a whole lot. It was 236,000. So nonetheless, the PCE alone, if it comes out as forecast, that is very modest. That's mild. That should be another reason the Fed ought to make a move on rates and hopefully we can see them do that in July. So with that we're going to go ahead and talk about a little bit something different that we haven't talked about in quite some time and that is down payment assistance. When you're trying to buy a home. Yeah. What do you do if you want to buy a home and, and you just don't have the down payment? Are there options for you? So that's what we're going to go over. And in fact what I want to do is I want to kind of give you an example based on a. It's actually a real life example. It's something I'm working on this past week. So let me tell you a little bit about it. I was approached to pre qualify some buyers interested in buying a home for 589,000 and the home's located in Big Bear. And as I reached out to them, talked to them a little bit, they did acknowledge that they needed help with the down payment, submitted their application and so I took a look at it. And so what I decided to do was let them know about down payment assistance, specifically through an agency, a state agency here in California. We call it calhfa, that's the California Housing Finance Agency. Now CALHFA has been around for decades. I did CALHFA loans back when it was called chafa in the 1980s. So it's been around for decades. It's probably the biggest down payment assistance agency. You know, certainly in the state there are again programs at a more local level, county or city, that may be available in your individual markets, but statewide this is like the big dog in down payment assistance. So what I wanted to do with these folks is show them how they could address their down payment challenge with this kind of product. So what it involves is using a FHA loan as a first mortgage. They call it a CalHFA FHA and then combine that with a program that CalHFA has called a My Home Assistance second. This, My Home Assistant second is a, is the down payment assistance. Now on an FHA loan, the minimum down payment is three and a half percent. So you can see there on the screen, that means the cash required just for the down payment, $20,615. Well, these buyers, they don't have it and they've admitted that. And so my job was to come up with a solution. So with this approach, CALHFA FHA 3.5% down is required. 20,000. 6, 15. But then we add to that the My Home Assistance second lien, it's a second mortgage and in this case it can be up to 3.5% of the price. So voila, that equals the down payment required. So this my home assistance second is the assistance that these buyers can get to cover the down payment entirely. So they can essentially buy this home with no down payment. So then what happens with the terms of the first FHA loan as well as the second? Well, the FHA first mortgage, the current CALHFA rate is at 6.5%. Now also I would point out that that rate with calhfa does require paying a one point loan fee in most cases. When we originate a market rate FHA loan, not a CALHFA down payment assistance FHA loan, we usually offer those rates at. So the current FHA rate for this type of approach with CALHFA is 6.5. Then the second mortgage, the my home second, that rate is at 1%. It's 1% simple interest. And that's why I see that I show there the APR is the same as the 1% because there's no fees charged on the second mortgage. So that is essentially the interest rates for the entire package. Six and a half percent on your first mortgage at 96.5% of your purchase price. And then that 3.5% second mortgage in terms of amount is at 1%. It's a deferred payment loan. So you don't make payments at all. The 1% interest, simple interest does accrue or add back to the balance and this loan can remain in place up to the 30 year term of the first mortgage. So that basically again covers your down payment entirely at this point. As far as we've gone here so far, you've got no money out of pocket to complete the purchase. Now if you go to the next screen, I want to show you a couple other criteria for this type of an approach. Your minimum credit score has to be 660 and then your maximum debt ratio is 45%. And I'm going to come back to those two in a minute. But let me go ahead and finish this particular scenario. What about closing costs? On the previous screen I showed you that we can use an FHA first and a my assistance second mortgage through calhfa. So you have no down payment at all. And by the way, if you're a first time home buyer, which is what this program is for, don't forget a conventional loan is actually available at 3% down, not 3.5%. And you can still use the same my assistant second mortgage combined with that. So we have both a conventional and FHA option. In this case, I'm just showing you the FHA option. But again, back to what about closing costs? Because closing costs, especially if The FHA Calhalfa first charges 1 point plus all your escrow and title fees appraisal, and then you've got your funds you have to provide up front to set up your impound account.