December 26, 2013$546,250
In my last column I talked about the conforming loan limits staying the same in San Diego County at $546,250 for 2014. The Federal Housing Authority (FHA) recently announced that their limit is being lowered to $546,250 in San Diego County. Other counties across the United States will have different limits, including up to $625,000.
This is the Veterans Administration (VA) limit for 100 percent financing. Eligible veteran or active duty military personnel can buy a home that costs much more than $500,000 by paying a relatively small down payment.
The Federal Reserved recently announced that they are beginning to taper their bond buying program from $85 billion per month down to $75 billion per month. The mortgage markets do not like this. Expect rates to rise as the taper continues and is eventually eliminated.
In the sci-fi novel Hitchhiker's Guide to the Galaxy, a supercomputer working for 7.5 million years comes up with the "Answer to the Ultimate Question of Life, the Universe and Everything," and that answer came back as "42!" When questioned about the answer, the computer remarked "Well, you didn't give me much to go on."
Under the new Qualified Mortgage (QM) and Qualified Residential Mortgage (QRM) rules that go into effect in 2014, the answer to "What is the maximum total debt ratio that is best for everyone?" is "43."
If we take a borrower's total debts including principal, interest, taxes and insurance on their home, car payments, credit card payments, student loan payments, and divide that by their gross monthly income, the ratio cannot be more than 43.
At one time, loan guidelines stated that this number should not be more than 36. Prior to the real estate crash, loans were getting approved at numbers over 100. (The borrower's total debts exceeded their monthly income) While a 43 percent total debt ratio is a good number, there are certainly circumstances where a borrower can go higher.
The effect of this tightening will be that fewer borrowers are able to qualify for a home that is reasonable to afford, and this, in turn, will have a negative effect on the housing market.
1 Point or Discount Point
Discount points discount the interest rate on a loan. 1 point equals 1 percent of the loan amount. On a $250,000 loan, 1 point will be $2,500 in additional closing costs. For the 1 point, in general, buyers will get a rate on a loan that is .250 lower. So, if the rate on the loan is 4.25 percent with zero points, the rate with one point will be 4.00 percent. But this ratio is not always exact. Sometimes one point will only buy .125 lower in rate, and sometimes .375 lower in rate.
One of the tricks of the points on the loan is that it works in reverse if you raise the rate. Using the example above, if a 4.25 percent rate is zero points, a 4.5 percent rate will be negative 1 point, or a credit on the closing statement of $2,500. This is also called a "rebate on the loan." Rebate pricing is what enables us to do one of my favorite transactions, a "no cost/no fee loan." Of course there is no free lunch. The higher rate will start to cost money in 7 or 8 years, vs. the credit toward closing costs. For many transactions this is just what the borrower needs to make the loan work.
John Yeager is the Valley Center branch manager for Summit Mortgage, NMLS #219612.
He can be reached at 760-749-8931 or by visiting www.john-yeager.com, or via email at firstname.lastname@example.org.