According to Reuters, a bipartisan panel of Congress agreed on a measure yesterday that would increase the limit. The increase would apply only to FHA, NOT to loans backed by Fannie and Freddie. It still has to pass the House & Senate, but indications of passing are good.

This is important for our local market, which is considered high priced. When loan limits dropped to $625,500, it meant less purchasing power for buyers trying to borrow more. This primarily affected homes in the $750-900k price range, which, after the drop meant that even with 20% down, in order to get the very best rates buyers were limited to homes under $750k (unless they came up with more cash.) At the new $729k limit, buyers can purchase up to about $875k with 20% down and still get extremely competitive (historical lows, actually) interest rates.

Stay tuned to see if the measure passes.

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1. Proposed Elimination of Fannie, Freddie May Boost Interest Rates; FHA Insurance Premium Set to Increase The administration has released a white paper saying it intends...

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This report comes on the heels of another direct hit on buyers: FHA’s recently announced increase in the monthly mortgage insurance premium of .25% beginning with case numbers assigned on or after April 18, 2011. FHA Commissioner David Stevens said “After careful consideration and analysis, we determined it was necessary to increase the annual mortgage insurance premium at this time in order to bolster the FHA’s capital reserves and help private capital return to the housing market,” said Stevens. “This quarter point increase in the annual MIP is a responsible step towards meeting the Congressionally mandated two percent reserve threshold, while allowing FHA to remain the most cost effective mortgage insurance option for borrowers with lower incomes and lower down payments.”  This means that FHA buyers who have a ratified contract AFTER that date will have a higher monthly payment, so plan accordingly and get those offers in during EARLY April!  On a $400,000 loan it translates into an extra $83 in your monthly payment.

Interest rates have a huge impact on affordability, especially for first time buyers who typically have lower down payments than 2nd or 3rd time buyers who are rolling equity over from a previous home.

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Last week, the Administration proposed lowering the “jumbo” loan limit from $729,750 in our area (one of the highest cost housing markets in the country) to $625,500. Technically, the $729k limit was ‘temporary’ but it had been extended several times and most people came to think of it as permanent. But the Administration is proposing letting it lapse this September, which means higher interest rates for any loans above the new lower limit.

Then, as part of the Administration’s final report advising a restructuring of the nation’s housing market, they signaled their intent to eliminate Fannie Mae and Freddie Mac, the nation’s largest mortgage market maker, which facilitates a nationwide lending environment, keeping fees low, though they acknowledged that moving too quickly could extend the housing decline. Seven years was thrown out as a target timeline, and three scenarios were presented as replacement options, though each has its own set of new risks for taxpayers.

The markets don’t like uncertainty, and these changes are likely to lead to higher mortgage rates in the near term. Home buyers, beware!

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This is a dollar-for-dollar credit against your federal income taxes owed (as opposed to a deduction, which would be worth less.) “First Time” buyers, for purposes of this law, are defined as those who purchased a home during the tax year and did not OWN IN DC in the twelve months prior to purchase. So if you owned in Virginia or another state and then bought in DC, you still qualify!

The maximum credit is for $5,000, or $2,500 if married filing separately. The credit begins to phase out when the modified AGI above $70,000 ($110,000 for married filing jointly) and phases out completely at $90,000 ($130,000 married filing jointly).

If you want to take advantage of the $5000 credit by buying a home in 2011, contact us to start your search!

Search the entire multiple listing service here.

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How does this translate for the typical borrower with FHA’s minimum 3.5% down payment?  On a $275,000 loan, the monthly payment is about to become $70 higher per month! This makes payments less affordable for many first time buyers, and adds ‘insult to injury’ following the expiration of the first time home buyer credit.

If you’re on the fence about making an offer on a home, I’d suggest pulling the trigger before the end of September so that you can get the loan’s case number assigned prior to this hefty increase in fees.

If you’re ready to start your Northern Virginia or DC area home search, please contact us – we’d love to help!

Learn More: Attend a free first time home buyer class

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“In an interview on CNN, Donovan said the administration is “concerned” about the path of the industry. He defended the Obama administration’s record on supporting the housing market, amid new signs that the market is struggling alongside the broader economy.

Donovan did not rule out a further homebuyer tax credit to support the market.”

While plenty of blogs out there are again predicting real estate Armageddon, personally, I don’t think that the huge drop in July sales really should have been ‘unexpected’ at all. But no one wants to read a meh headline like “Home sales drop as expected in July as would be normal following any artificial force on a market.” (OK, I’m sure editors would shorten that headline, should it ever exist.)

Think about all the second half 2010 first time home buyers who pulled forward so that they could close before June 30 to get their extra $8000. We essentially ‘used up’ the first time buyer segment for at least a few months, and probably the remainder of 2010. By the Spring 2011 market there will be a new crop of buyers. Unless Congress intervenes first, that is.

Note to Congress: Spring is NOT the time to have a first time buyer credit expire. It was a double whammy…end of the usual Spring market–giving a credit to buyers who were going to purchase those homes anyway–PLUS the expiration of the credit. Next time, make the credit active in the late Fall and through February so that buyers are buying up the old inventory and foreclosures that otherwise would be sitting.)

And here’s another tip…if you want to jumpstart home sales with a buyer credit, don’t start hinting around about it to the press…Secretary Donovan essentially just wiped out what few first time home buyers there currently are, who are now all going to wait to see if there’s another credit.

Stay tuned.

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So in other words, the up front fees (this amount is often rolled into the loan balance) will go down, but the monthly charge goes up, hampering the monthly affordability for many borrowers.
The change is due to go into effect September 7, 2010.

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When deciding whether to refinance, the best thing to do is calculate the break even number of months where your closing costs equal the savings in your monthly payment. If you’re going to be in the new loan that number of months, then you should seriously think about locking in that savings.

Historically, a rule of thumb is that if rates are 1% lower than what you’re currently paying, you should at least look into it. Remember rates change several times each day, so don’t be surprised if you call one day and then the next day rates are back up again. The decision of whether refinancing makes sense for you — even with a 1% drop in rates — can get complicated very quickly given our recent market conditions though.

You need to think about is the current market value of the home and your equity in it. That’s important because if you got a loan a few years ago, credit conditions have changed dramatically and you may not be happy with the loan options available to you right now, even if the rates are low. For example, if you have two trusts on your current home loan (popular a few years ago in order to avoid paying Private Mortgage Insurance) then that option is no longer available. Banks are requiring private mortgage insurance for anything higher than 80% Loan-To-Value (LTV) – in other words, unless you have 20% equity in your home, you will be required to get one loan and pay the PMI. Second trusts are no longer available in almost any situation. In fact, it’s rare to find a bank willing to lend more than 90% of the current market value of the home, which becomes an issue if your home has depreciated in value. So if you have two trusts it may not be as lucrative for you to refinance as you think, even with lower rates. Similarly, if the home has depreciated at all then you may run into issues as well because your LTV has changed and you will have to pony up some big cash to make up the difference in your “underwater” home.

Let’s take an example: Let’s say you bought a home at $400K with $20K down. Let’s say further that now it’s worth $390K. (The bank will require you to pay for a non-refundable appraisal, which costs about $350-400, to justify the current value of the home before you refinance. And the bank has to choose the appraiser, so don’t bother paying for one on your own and then shopping it around.) The bank may only be willing to lend 90% of that amount (depending on your credit and other factors), or $351K. But you only have $20K equity in the property and still owe $380K. That means in order to finance you have to come up with the difference of $380K-$351K = $29K PLUS your closing costs (similar to costs when you first purchased, and includes county fees, lender fees, title fees, etc.)

Even if your property hasn’t depreciated at all,  the bank’s new policy could very well be to lend no more than 90%, and then you only borrow $400K * 90% = $360K, leaving you to still come up with $20K (= $380 you owe less the $360 the new bank is willing to lend) PLUS closing costs.

Finally, even if the property hasn’t depreciated, and even IF  the bank is still willing to lend you 95% of the value—in this example the entire $380K you owe—then your payment still may not be as low as you expect because now you’re required to have a single loan at 95% LTV which requires PMI (rather than your current two trusts at 80% + 15%).

Closing costs can generally be rolled into the loan amount if you have enough equity to meet the LTV requirements. But unfortunately a lot of people will have to come up with cash if they want to refinance. But if your property has held its value, and/or you have sizable equity in it, then it’s almost definitely worth it to re-fi. So the bottom line is that there are a lot of variables to determine whether or not it’s worth it to refinance. It’s best to talk to a lender to figure out your specific situation. Contact me if you want my recommendations on lenders I would (and do) personally use (my recommended lenders can lend nationwide).

Closing costs, by the way, vary by lender and by settlement company, just like with a purchase. When a lender gives you a good faith estimate, you should focus  on the “Lender Fees” to see what they’re charging you, and compare that across lenders to find the best deal. Those fees are  negotiable. But banks need to make money too, so don’t expect them to charge nothing. Also look at the settlement company fees, also somewhat negotiable. You do NOT need to use the settlement company the bank recommends. Contact me if you want a recommendation on who I personally would use.  (I always recommend local settlement companies, so sorry for those readers outside the DC metro area.)

Paying Points: Whether or not to pay points to get a lower rate is a judgment call, and depends on how long you’re going to stay in the property. A point equals 1% of the loan amount. So you might get a quote for 4.785% (no points) and 4.5% (1 point). If you have a $380K loan then that means you pay $3800 at closing to get the 4.5%. So you just calculate the savings in payment, divided by the $3800, and that gives you the number of months you need to keep that loan in order to make it worthwhile to pay the point.

So as you can see there are several variables in the decision of whether or not to refinance, so the best advice I can give is to (1) have a realistic idea of what your home is worth and (2) talk to a lender. Even if you start down the re-fi road and one of these scenarios ends up being bad news for you, the worst case is that your out the $400ish for the appraisal and you keep your current loan.

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In other news…

Read the Washington Post article about the difficulties of obtaining financing for certain condo buildings in our area, with some commentary by Katie Wethman of the Wethman Group.

And finally, given our recent heat wave, you may be cringing at those high air conditioning bills — this is a great time to think about some energy efficient upgrades for your home, while you can still take advantage of the tax credits that expire at the end of this year!

Congratulations Arlington on being named the #1 Best City for Families by Parenting Magazine!

As always, if we can be of assistance with your real estate needs, or you know someone looking to move, please don’t hesitate to contact us.

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The House also passed legislation this week granting the Federal Housing Administration (FHA) the authority to raise the annual fees it charges borrowers to help shore up the agency’s dwindling cash reserves.  The fee is currently capped at 0.55 percent of the value of the loan. The bill raises the cap to 1.5 percent.  FHA Commissioner David H. Stevens said it wants to raise the fee for new borrowers to 0.9% next year to help raise capital and also make the fees more consistent with private mortgage insurers. FHA has certainly been a good deal for buyers recently, with very competitive rates and low insurance charges, which resulted in FHA’s share of purchase loan market from 3% in 2006 to 30% recently.   As the agency raises those fees, it plans to somewhat lower the upfront fees it charges borrowers.

Buyers:  FHA is still a great option in 2010–low rates and fees, and only 3.5% down.  If you’re interested in starting your Northern Virginia home search, contact us.

More: Attend a free first time homebuyer class in Arlington.

Search: See homes for sale in Northern Virginia and Washington, DC.

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