Should I Stay Or Should I Go?

If you’re like me, you maybe heard the song “Should I stay or Should I Go” from the Netflix series Stranger Things and felt cool reflecting 1980’s nostalgia.  It can feel like late 2000’s nostalgia with the housing market; home values and interest rates are on the rise with a looming recession in a year or so.  It begs the question, “Should I stay, or Should I Go?”.  Except, darling is your house, not your girlfriend.

It’s a normal market

My clients lately have expressed fear with buying now and have equated the sellers’ market we are in with the 2008 recession and all the elements that led up to the financial crisis.  What I have observed is most of these concerns have come from first-time buyers.  Their normal was the housing crisis and seeing homes sell for next to nothing.  They watched their friends and family either buy homes or get into the real estate or mortgage industries and make big gains.  Those days of slinging homes and doing it on closeout price and loan terms are behind us.

Enter the new housing market where the decision to buy a home is still a great one, but it will take both work and additional considerations for your future.  With interest rates on the rise, the decision to buy now includes discerning your future employment or business outlook.  Should you buy the $600,000 home or be prudent and stick with the $400,000 home.  My clients are wondering what to do and how far they should stretch their budgets for buying a home even more so now because higher rates mean higher payments and a normal market means sustainable home value appreciation, not the insane gains of the last 10 years (which have been awesome along the way).

I own my home

If you own a home now it’s difficult to part ways because of one thing; it was such a great deal!  You likely bought your home when the rates were averaging 3.875% – 4.625% and got in when the value was 12% – 18% below market value.  After a few years, you’ve realized great gains on the value and locked in low payment terms.  If you were to sell and buy now, you will likely pay more for the same size and style of home.  So why would anyone still sell their home in this market?

Many reasons come to mind for selling or staying in your home, but let’s take a look at a couple scenarios dealing with just finances.

You might consider selling if you have a lot of consumer debt and want out.  If that’s the case, I highly recommend speaking with one of our preferred Real Estate partners.  We recently helped a client rebuild their credit by selling their home and paying off all their debt.  It wasn’t just a $10,000 credit card balance but a good $35,000 in debt.  The had plenty of equity from the sale to pay off debt, make a down payment, and put some cash away for their rainy day or emergency fund.  In the end, they still saved on their monthly cash flow, even with a slightly higher mortgage payment because they eliminated those monthly minimum payments with high interest rates.

Owing the IRS is no joke.  Your home’s equity can pay that debt.  Be mindful and understand I am not advocating only selling your home.  Banks and Credit Unions are promoting Home Equity Line of Credit (HELOC) loans and Home Equity Loans because borrowing against your home is still better than borrowing unsecured debt with high rates.  Borrowing against your home could mean a lower interest rate and terms that make your overall payment affordable, all backed by your home.

I keep hearing recession – What happens to my Equity in a recession?

Truthfully, I do not have a crystal ball on this question.  But, I can give you something to consider and keep in mind.  Our 2008 recession heavily affected home values because of aggressive mortgage terms people could not afford.  The result was a massive wave of foreclosures and short sales in the market which brought home values down significantly.  Think about it, if the demand and affordability for a product drops, what does a business do to sell their glut of inventory?  They lower prices, take their losses, and move on.  That’s essentially what the banks did.

It wasn’t always pretty, and many families were displaced and often lied to.  The past is behind us and we can learn from it.  That’s why it’s not expected that home values will have a catastrophic drop as they did in 2008.  Underwriting criteria for home loans tightened up and forced banks to look at income with scrutiny.  If you have variable income or are self-employed and bought a home, you know what I am talking about.    Learn more about Self-Employed Borrowers – Income Qualifying.

A recession will have some down turn in your home’s value, but remember, you’ve gained equity today.  You’ll either not gain equity during the recession for that year or drop down to the value at which you purchased your home.  Some values may dip slightly lower, but it’s not expected that the masses will experience the 40% – 75% drop they encountered in 2008 – 2011.  The regulations and guidelines we use to underwrite mortgage loans were implemented to hedge against housing repeating what happened in 2008.  Check out my post Housing Strong going into 2019.

I’m still reading – What if I’m a buyer?

For buyer’s, great news!  It’s still a good time to buy!  I feel like a broken record and sometimes too salesy, but I maintain and believe in it.  The trends point to a stable housing market and steady appreciation gains all while interest rates maintaining their historical lows.  Yes!  A rate at 5 -5.5% is still considered a low rate.  Even for investment properties, rates are below 6% making it attractive to buy and hold properties for rental income and equity appreciation.  Rental rates are increasing 3%-4% per year and the demand for housing (buying, selling or renting) has only gotten stronger.

If you are a first-time homebuyer or seasoned homebuyer, you have a lot to look forward too in buying a home in today’s market.  Read my latest post 6 Reasons to Buy a Home.

Finally, the end of this post!

If you’ve made it this far, I both applaud you and sincerely thank you.  I’ve wanted to write about this topic and honestly, I could go on even more.  It’s an exciting time for the mortgage industry because clients want information about their home’s equity and how to use it to make a better lifestyle for their families.  Should you stay, or should you go just depends on what you hope to accomplish with the results.

If you own your home and want ideas about selling, refinancing, or renting your home, read my post Homebot: Mortgage Reports Just for You and set up your monthly mortgage digest.  There, you will get real data and information about your home in our current market.

Follow this link for your FREE Homebot Report!

Chris Gonzalez
(480) 442-4494 | christopher@allwestern.com | All Western Mortgage

Homebot: Mortgage Reports Just for You

Available to Gifford Groves Homebuyers!!

Tech meets Mortgages

It’s no secret that people are turning to their smartphones and technology to guide them with information and decisions.  The Real Estate industry is littered with technology to give you the most updated data feeds on the housing market and your home’s value.  But what about technology tailored for your actual mortgage and the ways to build cash flow or save on interest?

Meet Homebot, a new sophisticated service we are providing to all our clients at no cost who have completed a mortgage loan with us.  This service allows our clients to see their potential equity and show them what a possible refinance looks like in the future.  It also tells clients what their home might rent for on popular sites like Airbnb.com and VRBO.com.  It’s a handy update our clients will receive once a month.

Sound like something you would like?  Awesome!  You can subscribe to these updates on your home at no cost.  Even better is you share it with your family and friends.  Click Here!

Why would I use this?

The question most people ask is “why do I need this”?  Everyday I discuss the benefits of home ownership and how a home’s equity can improve monthly cash flow or open the opportunity to pay off debt or start a business.  A home is a vehicle in addition to a place to live, that has helped many of my clients realize a tremendous amount of savings on interest and building wealth.  One of my clients recently paid off their debt selling their home and had plenty of equity left over for a down payment on a new home.  There are many strategies to using your home’s equity.  Homebot can give you ideas and solutions.

Homebot is a tool that empowers clients with detailed information about their mortgage and not a guesstimate as to their home’s value but real data.  Data is pulled from recent sales and rental rates (in a given area) and presented in an interactive way.  You can also plan and estimate how consistent principle reduction payments will save you on interest and pay your mortgage off sooner.

What if I am Buying a Home?

Great news!  Homebot is a great tool for Buyers wanting to find homes meeting their budget.  The Buyer features let’s you locate homes and get a sense of price p/sq ft and homes that are available at your price point.  It’s a good tool if you are relocating and compliments the work your Realtor does on your behalf.  It does not replace your Real Estate agent, but gives Buyers an opportunity to see the data for the area from a Birdseye view.  Contact me directly for more on how to set this up.

All of this is FREE and doesn’t cost you a thing.  If you’re already a client, you will receive your free report once a month starting in the next couple weeks.  It’s my way of continuing to say Thank You for trusting me with your family’s home.  Enjoy!

Follow this link for your FREE Homebot Report!

Chris Gonzalez
(480) 442-4494 | christopher@allwestern.com | All Western Mortgage

Creative Thinking Saves Client $200k

Saving my Client from writing a $200,000 check

We run into a lot of interesting scenarios in the mortgage industry to help people get home loans. After a while, they blend together because trends come and go. However, this scenario was unique and challenging. We recently closed a mortgage loan for a high income earning client saving them from writing a $200k check to their ex-spouse.

Before we continue, I must point out that our client is not avoiding any due payments but instead following the advice of their financial adviser in the timing of payments.  Without too much detail, a large sum had been paid out prior to this $280k described later on.  We simply were attempting to help lesson the financial hit all at once with saving the borrower the $200k upfront.  The borrower is fulfilling their roll as we speak.

Learning from the Past

This wasn’t our first rodeo with our borrower. A year earlier we worked together helping them purchase an investment property with 30% down. The credit score was 620 and to top it off, there were several late payments on their existing mortgage loan. You might ask, “why would a high income earning professional be late and have a low score?”. The answer: It was not their fault.

Life happens, and the borrower was in the middle of separating from their spouse, who was living in the home with the late mortgage payments. They made an agreement that the spouse would pay the mortgage. However, payments were missed, and it adversely affected our client’s credit in a big way, dropping his FICO score to 620. Our client of course brought the mortgage current and managed the payments moving forward.

We finalized the loan on the investment property but spent a lot of time sorting out details and collecting all the necessary paperwork for their loan. Some loan approvals can be messy, but they were approved and now have a great income producing property!

The Scenario

Fast forward to 2018, our client was interested in purchasing a new home. From our last experience, we both knew everything had to be right this time around. We are in a seller’s market and the last thing we needed was to waste time and lose money.

It’s always serious business when buying a home. In this case, we were preparing for a purchase of $920k and working to make the payments affordable while building a loan application around guidelines favorable to the client for an approval.

We collected our client’s financials, reviewed their credit and discussed our strategy. For everything to work, the divorce had to be finalized. Last year, the couple was in mediation working out the details. They had just filed their petition with the court around the time we began the pre-qualification for the new home.

In addition, there was a lingering item on credit holding back our client. He had a high FICO of 780, but his mid-score was showing 650. We referred him to our credit expert and for $100, the negative item was removed, and his score jumped to 750. Beautiful! It should be noted the negative item was not his and he had proof to show it. We just helped him remove it faster.

So far, we are moving smoothly recalling last year and the issues we struggled with. Our homework was paying off and we were ready to start shopping for homes. We were moving along so well; our client went under contract and we agreed to push for closing before the actual close of escrow (COE). This is not something we promise in scenarios as complex as this, but we felt confident in the opportunity.

Our Challenge

Understanding how loan guidelines work, it’s important to have your plan for getting an approval defined from the start. You should also maintain a back up plan if the first one doesn’t work. We had a plan B and used it.

Our client’s jumbo loan was not going well because the investor had a pass/fail approach to their credit. Remember those mortgage late payments from last year? Well, the investor didn’t like the fact that they occurred within the last 24 months. The kicker was, we provided over 2 years of financial reserves and accounted for their requirements that the reserves be 70% of the balance to account for time and the vesting style of those funds. In addition, our debt-to-income ratios were well within limits.

Plan B was to split the mortgage into a first and second. Our first mortgage needed to be $453,100 to conform to Fannie Mae loan limits (for 2018) and we financed a portion of the down payment in the form of a second mortgage at $236,900. Our client came in with $230,000, 25% of $920k, their original commitment. The “plan A” mortgage payment was roughly $120 less then the plan B solution, but the second mortgage could be paid off sooner with no penalty effectively lowering their housing expense without refinancing. For borrowers with high incomes, this solution can be favorable as a low maintenance solution.

The Solution & Result

The jumbo loan idea was scrapped to give us a chance of closing before the intended COE. We turned around a loan approval for the first mortgage at $453,100 within 24 hours and submitted for the second mortgage approval in that same time. After another 24 hours, we received the second mortgage approval with some conditions.

One of the conditions for the final approval, issued by the second mortgage firm, required proof that our borrower completed the lump sum alimony payment to his ex-spouse as described in the divorce decree. What made this condition problematic was the divorce decree did not describe how or by when the payment needed to be completed. It was one sentence with no clear direction.

Equalization Payment

a. (Client) shall pay to (ex-spouse) the sum of Two Hundred Eighty Thousand Dollars ($280,000) as a non-taxable equalization payment for the division of property.

Our underwriting team (first mortgage at All Western Mortgage) did not require this to be paid prior to the loan approval. In most cases, alimony payments & child support are added to a borrower’s monthly debt obligations because there is a clearly defined payment and date for the payment to be received. However, this kind of payment is treated as a contingent liability and is NOT required to count in the borrower’s recurring debt obligations per Fannie Mae guidelines. See below:

Writing a check for the remaining $200k he owned, upfront, was something he was not prepared for, especially since the funds were tied up in specific stocks which had penalties if liquidated too soon.

Fortunately, our client already paid out $80k towards this balance owed ($280k) in the last 45 days. They were clearly paying to chip away at this total. Anytime a liability is less than 10 months away from being paid off, the lender can choose to omit the debt/liability from the application if the debt does not adversely affect the borrower’s ability to make their mortgage payment.

Based on our client’s assets, their payments towards the $280k owed to their ex-spouse, and their reserves, we presented the case that the remaining $200k will be paid off in less than 10 months, given the rate the borrower paid thus far and other factors. Our client was approved with the clear-to-close on the second mortgage because of this presentation.

Conclusion

The client was grateful and happy that everything worked out. They were phenomenal despite our challenges. Not to say it wasn’t stressful. It’s worthy to note that our client’s Realtor, Liz Lovett, was fantastic and amazing to work with and my Processor played a huge roll in the approval.

Most lenders want the quick and easy loan to close. Despite the difficulty and challenges, I am grateful for the opportunity for growth it presented. But most importantly, I am humbly appreciative of the Client, their Realtor, and my Processing team for trusting & helping us through this file.

Chris Gonzalez
(480) 442-4494 | christopher@allwestern.com | All Western Mortgage

The Hidden Costs of Renting

A long time ago, before I ever worked in mortgage finance, I moved 5 times in one year between apartments and friends’ homes.  I finally landed living with my Grandparents so I could finish school and afford my bills.  I struggled financially and was truly grateful for my Grandparents taking me in.  I finished school and later moved out shortly thereafter.  But all those moves taught me something valuable; renting and moving are expensive.

Granted, the average family is not moving 5 times in a year.  In fact, they may move once every year or two.  While my expenses added up much faster, it occurred to me that even the one move or continuing the rent cycle adds up overtime both in dollars actually spent and missed opportunity with rising interest rates and home value appreciation.

Convenience

Renting a home can be more convenient for a number a reasons; A Landlord takes care of major repairs, you are not committed to living there permanently, and sometimes it will be less expensive in the short term.  Yet, the same considerations for renting can translate into homeownership becoming a better option for convenience. 

As a homeowner, you are your own Landlord.  You will need to maintain your home.  But YOU maintain your home to YOUR standards, not sub-standards to save a couple bucks.  YOU control the level of work done with repairs and maintenance.  I have heard countless stories of how Landlords fixed a broken water heater or dishwasher with a used one as the replacement for the appliance to just give out on them a month later.  Another story involved a leaking roof that the landlord did not fix properly which later created black mold issues in the home.  While you are responsible for your home, the quality of life can be much better.

Rental Rates on the rise

According to an Inman article with CoreLogic data, rental rates increased 6.9% in 2018 in Phoenix and 3.1% Nationally due to job creation and limited supply for housing.  Phoenix is listed as one of the top markets for cost of living affordability and economic growth.  This means owning a home and/or buying a home in 2019 will still help you take advantage of an appreciating market when values increase. 

The housing demand is noticed locally in the Phoenix market with many new home projects underway.  That’s because both single-family homes and rentals are in such high demand for new families, growing families, college graduates, divorcees, and retirees.  Between rising rents, right-sizing and job growth, people are looking to fix their monthly expenses while leveraging wealth creation.

Looking at the Numbers

Let’s dig deeper at the numbers.  Take a 3 bed 2 bath single-family home valued at $250,000 in a neighborhood.  Rent is $1,600 per month.  Below are additional expenses:

Security Deposit: $500

Pet Deposit: $300 (if applicable)

First Month’s rent: $1,600

Moving: $1,500 – $3,000

Total: $3,900 – $5,400

Cost of Waiting

Your total cost of entry is nearly 75% of the down payment needed to purchase a home.  And, you “skip” a payment when the mortgage comes due.  When you try buying that home in a year or two, you will likely pay more for the home which will increase your cost of entry and the monthly payment due to rising rates and appreciation on the home’s value.  Appreciation occurs when the supply is lower than the demand.  Homes in this price point are hot in today’s market.  See below:

The chart above depicts the historical appreciation in Maricopa County.  The conclusion to consider is how much more you will pay for every year you decide to wait.  The appreciation of home values makes the cost of entry higher.  If rental rates are themselves expected to increase, why wouldn’t home values increase?  Remember, there is a supply and demand issue. 

Amortization is a way of spreading out the cost of something.  For housing, it means payments of money owned/borrowed (principle) and the cost of money (interest).

Looking at amortization (principle payments) and appreciation combined, you start to see how owning a home creates wealth.  The cart below depicts how overtime the money you are paying into a home works for you.  After year one, you would gain $15k in ownership.  This combines the money paid toward your principle and the equity gained.  In year two, that number doubles to $30k.  Paying $1,600 per month towards rent ($19,200 over 12-months) goes toward zero.

Summary

As a lender, it is obvious I am a proponent of homeownership.  Afterall, it’s my business.  I am not opposed to why someone will continue renting and in some cases, I may recommend that setup.  However, I wouldn’t be doing my job if I didn’t take the time to explore the numbers and overall breakdown of how and why homeownership is a better solution, even if the payment is a little higher than renting for the short term. 

Ultimately, any decision requires some emotional and rational thought process.  If you can afford a rent payment that equates to a mortgage payment, you are truly missing out on opportunity, even if it’s for the short term.

Chris Gonzalez
(480) 442-4494 | christopher@allwestern.com | All Western Mortgage