FHA Updates Loan Limits for 2021

The FHA has increased the loan limits for every category in 2021, a boon to prospective homebuyers who may have been negatively impacted by the recession that came with the COVID-19 pandemic. The two primary categories of loan limits are low-cost area and high-cost area, and each category has separate limits for SFRs, duplexes, triplexes, and quadplexes.

For low-cost areas, your loan limits have gone up approximately between $25,000 and $47,000. The SFR limit went from $331,760 in 2020 to $356,362 in 2021. The duplex limit went from $424,800 to $456,275, triplex $513,450 to $551,500, and quadplex $638,100 to $685,400. High-cost areas saw an increase between about $57,000 and $110,000. For SFRs, it went from $765,600 to $822,375, duplexes from $980,325 to $1,053,000, triplexes $1,184,925 to $1,272,750, and quadplexes $1,472,550 to $1,581,750.

In order to qualify for any FHA loan, the requirements you’ll need to meet include credit score, down payment amount, and debt-to-income ratio. The credit score minimum is 500. If your credit score is below 580, you need a minimum down payment of 10% of the purchase price, otherwise the minimum down payment is 3.5% of purchase price. The maximum debt-to-income ratio for all debt is 43%, and 31% front-end. In addition, you must have an FHA appraisal and home inspection, cannot purchase and resell the home within 90 days, and must use the loan for a primary residence.

Photo by Joshua Hoehne on Unsplash

More: https://www.foxbusiness.com/money/new-fha-loan-limits-2021

Securing a Home Loan After the Pandemic Struggles

With interest rates being low, many people are going to want to refinance or secure a new loan while they’re able to get a rate under 3%. They’re going to need to act quickly, though, since rates are starting to go up and the average is currently hovering around 3% for a 30-year fixed rate loan. But what if you’re in forbearance or were forced to declare bankruptcy as a result of economic pressures? Can you still refinance or get a loan? The answer is, well, maybe. There are different categories of lenders and different requirements.

If you’ve been able to keep up with your payments despite being in forbearance, you shouldn’t have issues qualifying, especially if your new loan is backed by the FHA or FHFA. You can also qualify immediately for an FHFA loan if you’re able to repay any missed payments in a lump sum, though FHA loans have a waiting period for lump sum repayment. If your new loan isn’t backed by a federal agency, the requirements could vary widely, but they’re generally more understanding about losses due to economic situations outside of your control.

If you had to file for bankruptcy, you will probably have a waiting period. If the pandemic was the sole cause of your bankruptcy, you may be able to get a new loan immediately from non-federal lenders, but the interest rate will likely be higher. For FHFA loans, the wait period is generally four years from the discharge or dismissal date for Chapter 7 bankruptcies. For Chapter 13 bankruptcies, it’s still four years from the dismissal date, but two from the discharge date. In either type of bankruptcy, the four years may be reduced to two if a one-time event out of your control is what caused the bankruptcy. The periods are lower for FHA loans — two or one year from a discharge, or zero from a dismissal for Chapter 7. It’s possible to qualify for a loan, with bankruptcy administrator approval, after being in the repayment period for at least one year of a Chapter 13 bankruptcy.

Photo by Raymond Hui on Unsplash

More: https://www.latimes.com/business/newsletter/2021-01-12/new-home-loan-forbearance-refinance-bankruptcy-business

What is the MID?

You may have heard the term MID in the context of purchasing a home or filing taxes. But what does this term mean? MID stands for mortgage interest deduction, and is a type of reduction in taxable income available to homeowners with a mortgage on their first or second home, or secured by their first or second home. When filing taxes, you can either take the standard deduction or itemize your expenditures. It’s common to simply take the standard deduction because many people aren’t sure how to itemize and may not even benefit from doing so. However, MID is one reason homeowners with a mortgage may want to itemize, since it is one of the itemizable deductions. The amount that the MID reduces your taxable income varies from 10% to 37% based on your homeowner’s tax bracket. It’s still possible that you would be better suited taking the standard deduction, depending on your expenditures and tax bracket.

Photo by Constantin Wenning on Unsplash

For more specifics regarding the MID, please see the full article at https://journal.firsttuesday.us/tax-benefits-of-ownership-the-mortgage-interest-deduction-2/73853/. You can also call or email us with any questions you may have.

Lenders in uncertain territory, but hopeful

As a result of home sales volume dropping by 30% in Quarter 2 of 2020 from 2019, loan origination has also dropped considerably. The effect was somewhat lessened by low interest rates, which resulted in more refinances. The commercial sector, however, didn’t have that luxury. The Mortgage Bankers Association (MBA) forecasts a 59% decrease from 2019 in total commercial loan amount, from $601 billion to $248 billion. The majority of this will be from the multi-family sector, which was at a record high of $364 billion in 2019 but is only expected to reach $213 billion this year.

Lenders are optimistic, though, as long as governments can continue to keep people housed. Vacancies aren’t great for lenders, as they reduce the prospects of landlords, and recently evicted people certainly won’t be looking to originate new home loans any time soon. The MBA expects 2021 to bring the number up to $390 billion for commercial loans. The catch is that commercial landlords aren’t protected by the recently extended foreclosure moratorium. If multi-family homeowners are hit with a foreclosure, all their tenants will be affected as well. Commercial property owners as well as lenders are looking for new methods of loan accommodations.

Photo by Morning Brew on Unsplash

More: https://journal.firsttuesday.us/commercial-lending-plummets-in-2020/72811/

Demystifying mortgage insurance

There are two types of mortgage loan insurance, and it’s also possible to avoid needing insurance. Mortgage insurance premiums (MIP) are the type of insurance required by the Federal Housing Authority (FHA). The other type is private mortgage insurance, or PMI. It’s easier to qualify for FHA loans, but private loans come with some additional benefits if you do qualify. Most notably, it’s only PMI that you can avoid; if you only qualify for an FHA loan and not a private loan, MIP can’t be ignored.

Private lenders generally have stricter credit score requirements than the FHA. In return, the higher your down payment, the lower your premium amount. Furthermore, if your down payment is at least 20%, you aren’t required to get loan insurance, so you avoid paying PMI. If you’re getting an FHA loan, you’re stuck with MIP for at least 11 years. On the bright side, the down payment amount to qualify for a reduction to 11 year MIP is 10%, not 20%.

Generally, the greater you can make your down payment, the better. Of course, paying all cash to avoid a loan at all is ideal, but not everyone can afford to do that, so keep in mind the important breakpoints. If you qualify for a private loan, putting at least 20% down is probably your best bet. Even if you only qualify for an FHA loan, be sure to put at least 10% down so that you aren’t stuck with MIP for the entire duration of the loan.

Photo by Letizia Bordoni on Unsplash

More: https://journal.firsttuesday.us/fha-pmi-or-neither/

August 2020 Sales Analysis

It’s September already! That means it’s time to look at a summary of real estate activity for LA’s South Bay neighborhoods over the past month. Our data is ultra-local which means you get to see the market conditions almost immediately after the month ends.

This summer we’ve been enjoying a relatively busy real estate market with a big jump in sales and mixed results in prices. August 2020 weighed in with the median price nearly 6.8% higher than August of 2019. However, it wasn’t enough to beat the median for this July. August median prices were down by 1.8% from last month. In the first eight months of the year, we’ve seen two months where the median increased, versus six months when it decreased.

Median PricesAugustJuly
2020$1.10M$1.12M
2019$1.03M—-

We saw 450 homes sold in August, up by 10% from July of this year. Compared to August of 2019, sales this year were up 13%. July and August were exceptional sales months compared to January through June. Both months had sales in excess of 400 units, while the first six months of the year were less than 300. March of 2020 made it all the way to 291 sales despite pandemic activity kicking into high gear that month.

Closed SalesAugustJuly
2020450408
2019398—-

July & August sales were up nearly double the sales numbers from the first half of the year. Why the jump in summer? Anecdotally, we’re hearing interest rates being at or below 3% brought those buyers not financially impacted by Covid-19 to the table. That huge savings in interest helped drive prices, as well. To buy now and take advantage of the interest rates, many buyers have been willing to offer slightly above asking price, to lock the deal in.

August brought a significant increase in the number of homes available for sale. At the end of August total available counts stood at 3.68 months of inventory, compared to 2.17 months at the end of July. In raw numbers, that’s an 18% increase in homes available for sale. More sellers put their homes on the market, and there weren’t enough buyers to absorb the increase. As Covid-19 moves to a back burner, we expect the inventory to return to higher numbers comparable to the beginning of the year.

A rising inventory indicates downward pressure on prices.

With subsidies and protective government programs closing, we anticipate fewer buyers will be able to purchase. At the same time, we expect the continuing stress will create more defaults and short sales. Forced sales, also known as ‘distress sales’ tend to push prices down.

Combined, a growing inventory and economic stress are precursors of a shift to a buyers’ market. Several noted commentators are predicting a recessionary market lasting through 2021 and possibly into 2022. Like so many things in today’s world, no one is sure of where we’ll end up. But it’s pretty much guaranteed to be different than we had planned.

Photo by Gustavo Zambelli on Unsplash

FHFA delays additional refinancing fees


The Federal Housing Finance Agency (FHFA) announced in August that it would be charging an additional refinancing fee to offset losses due to COVID-19. The new fee was expected to come into effect yesterday, September 1st, but at the last minute, the FHFA rescheduled it to December 1st. We’re still in the midst of a recession, so the FHFA doesn’t want to make too many changes too early.

The new fee exempts refinance loans with balances below $125,000, affordable refinance products, Home Ready, and Home Possible. Applicable loans, which are cash-out and limited cash-out refinance loans, will have 0.5% added to each transaction. While this fee applies directly to lenders, it also indirectly affects borrowers in the form of higher interest rates. While the FHFA certainly wants to recoup their projected $6 billion in losses, they’ve agreed that now is not the time; the economy still needs to recover first.

Photo by Morning Brew on Unsplash

More: https://journal.firsttuesday.us/additional-refinancing-fees-delayed/72824/

Mortgage application rejection on the rise


I’ve previously mentioned that COVID-19 and the current economic downturn have resulted in an increase in mortgage forbearance requests. But what about mortgage applications? Interestingly, even as fewer people are able to pay their mortgages, people are still applying for mortgages, looking to take advantage of the current low interest rates on mortgage loans. And getting rejected at a much higher rate.

Lenders will always want to ensure that people are able to pay back the money they borrow. Obviously if the borrower has a mortgage in forbearance, well, that borrower doesn’t stand a great chance of being able to pay back a new mortgage. But even beyond that, lenders have been tightening restrictions in the wake of lessened economic stability. They are requiring higher credit scores, larger down payments, and more savings. Someone who was largely unaffected by the economic downturn may think they have a good chance at getting their mortgage loan approved. Not necessarily, if they were basing their expectations on old lender restrictions. Lenders are going to need to find the right balance between encouraging borrowers — since that’s how they make their money — and avoiding risky lending practices.

Photo by Cytonn Photography on Unsplash

More: https://journal.firsttuesday.us/forbearance-requests-rise-while-mortgage-credit-availability-falls/72172/

Don’t let unemployment shatter your home-buying dreams


Record-high unemployment since the Great Depression is worrying for people looking to buy a home. And it’s true that it’s very difficult to buy a home while unemployed, since lenders are are looking for stable income. Unemployment income is considered temporary income, which lenders aren’t going to look at. Even once you find a job again, lenders typically want two years of continuous employment. Gaps in employment older than two years don’t impact your chances of lending negatively, though, so that won’t be a concern in a long run.

Another problem is that lack of income could put a strain on your credit score. While you will eventually become employed again, changes to your credit score can be much harder to erase. In order to maximize your chances of getting a loan in the future, you should do as much as you can, starting now, to keep your credit score intact. Always make minimum payments if possible. Ask your landlord and credit companies about other payment plans, deferment, or forbearance. Cut back on unnecessary spending. The good news is that even if your credit score does take a dive, once you’ve settled the debts and start to rebuild your credit, it shouldn’t take too long to get your credit score back up — roughly six months to year, meaning you may have already recovered your credit before lenders will consider your employment to be stable.

Photo by Bermix Studio on Unsplash

More: https://www.realtor.com/advice/finance/how-unemployment-can-affect-your-plans-to-buy-a-home/

Has the Recession Started, Yet?

While you’ll never get just one answer to that question, here’s one more possibility.

All booms come to an end eventually. There is an undeniable link between home sales volume and pricing. Typically, when more homes sell, prices rise 12 months later. When fewer homes sell, prices fall back 12 months after.
The currently unsustainable, slowing sales and rising interest rates imply prices will fall back in 2019-2020.

We feel the cyclical peak for California home prices already occurred in the third quarter of 2018.

So far in 2019, the Federal Reserve is continuing their process of raising interest rates to cool off the economy and induce a business recession.  Despite slowing of interest rate increases, experts expect the effort will continue to pull prices down through 2019 and into 2020, with a bottom likely in late 2020 or early 2021.

Further reading: https://journal.firsttuesday.us/todays-housing-boom-is-one-of-the-largest-in-history/66318/