Real Estate Update
Real Estate Update – Fact vs. Fiction
By Ron Pfleger
A new client who needed to be pre-approved for financing to purchase a new home recently contacted me. While this client had good income, credit and funds for a down payment he was very concerned about his chances of actually getting a loan. After talking with friends and family, who apparently had been declined for financing, and reading the hype in the news about the near impossible lending qualification standards, he felt defeated before he even started the process.
With all the misconceptions and misinformation regarding mortgage financing today, I thought I would address a few of the myths I have encountered lately regarding real estate financing.
Myth #1 – Banks are not making loans today
While lending standards have no doubt tightened over the past few years, I’m happy to report that lenders are in fact making loans and offering historically low rates. But unlike the easy lending days of the not so distant past, you actually have to qualify today. Banks learned the hard way that making loans without verifying income and assets is a bad business decision that could lead to a world wide economic meltdown.
Today most banks are sitting on huge amounts of cash reserves. With defaulted loans still on the rise, lenders don’t want to get caught short if the housing crisis continues on for a number of years. So there is no shortage of available money to lend.
While banks are declining a record number of loan applications due to insufficient income, credit issues or declining value, they are making loans to qualified borrowers. The key word there is “qualified”. And in many cases, “overly qualified”.
Myth #2 - It takes two months or longer to get a loan
It is true that banks are busy these days with rates so low. And there is a lot to get done during the loan process – compiling the paperwork, getting it to the loan agent, scheduling an appraisal, providing follow-up conditions to the lender, signing documents, etc. But if you are organized and work with an organized loan agent the whole process can be accomplished in weeks, not months.
Often the delays are due to the borrower providing incomplete information initially which delays the whole process. When your loan agent gives you the detailed list of required items for the lender it is critical that all items be provided. Missing bank statements, pay stubs, tax returns, etc. will always cause delays. And make is easy for the underwriter to approve your loan. Letters from the borrowers explaining things like large deposits or withdraws from your accounts, gaps in employment, credit inquiries or late payments should be included because the lender is going to ask for them.
Myth #3 – Interest rates are going to be much lower in the weeks or months ahead
I hear this quite a bit from clients refinancing - “Why should I lock now, I read interest rates are dropping so let’s just wait.” While this strategy may work, it often backfires and you end up with a higher rate or no loan at all. And remember, everything in your loan file is time sensitive, like your credit report, asset verification, pay stubs, appraisal and so on. After a month or two everything may need to be updated which means a lot of extra work and potential delays for you.
The truth is that no one knows where rates are headed and arguments could be made for both sides of that debate. These are unprecedented times for the financial markets and economies around the world. Our mortgage rates are pegged to the 10-year U.S. treasury and those rates are the lowest they have ever been. While interest rates could drop lower there is also the possibility that our economy will start showing signs of life and guess what the feds will do when that happens? Start raising the federal funds rates, which sends a signal they are tightening to slow future inflation. And when rates start moving up, and they will someday, it will be a swift rise leaving many unhappy borrowers who where waiting on the sidelines for the even lower rates.
And remember banks are getting flooded with applications lately and have little incentive to lower rates even though their cost may be dropping. That’s why their profits are so high right now. As Michael Douglas in Wall Street said, “Greed is good”.
So plan on continued volatility with interest rates in the weeks and months ahead and when you have the opportunity to lock a rate that lowers your payment, don’t get greedy.
Myth #4 – You can get better rates from internet lenders
The advertising sure looks tempting – 30 year fixed at 3.29%, no points, no cost. And if something looks too good to be true you know what they say. It’s pretty unlikely that some out of state boiler room lender will actually follow through on these below market rates. And providing all of your personal financial information to an out of state Internet company is a huge gamble I don’t recommend.
In my opinion it is always best to deal with reputable lenders with a local presence and someone to help you through the process, especially if you need to close quickly. Local mortgage bankers and brokers represent many lenders and can help you get the best available rate in a timely manner.
And the client who came to me for a pre-approval ended up getting a loan with a great rate and a new home for his family.
Ron Pfleger, MBA is a licensed California Real Estate Broker affiliated with California Mortgage Advisors, Inc. He may be contacted at 707-933-8100 or email at firstname.lastname@example.org.