Mortgage Rate Watch

Provided courtesy of: http://www.mortgagenewsdaily.com/consumer_rates/

Mortgage Rates Nominally Higher Despite Bond Market Warning
Fri, 18 Jan 2019 20:47:00 GMT -

Mortgage rates rose gently today.  Most mortgage borrowers (and many mortgage professionals, for that matter) wouldn't be aware of slightly more alarming risks lurking underneath the surface.  Those risks involve the broader bond market from which mortgage-related bonds take their directional cues. 

More simply put, if US Treasuries are improving, mortgage-backed bonds tend to improve as well.  The level of correlation varies though.  For nearly all of 2018, mortgages weren't improving as quickly as the most widely-used rate benchmark: 10yr Treasury yields.  That began to change recently--especially when 10yr yields began moving higher 3 weeks ago.  During that time, we've seen moderate moves higher in 10yr yields met with modest moves higher in mortgage rates.  Today was another one of those days.

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Mortgage Rates Holding Ground But Volatility Could Increase
Thu, 17 Jan 2019 20:28:00 GMT -

Mortgage rates were technically steady today.  In fact, as of this writing, most lenders are offering slightly better terms compared to yesterday, but only by barely-detectable amounts.  The afternoon brought volatility in financial markets owing to trade-related headline.   That volatility isn't moving in a good direction for mortgage rates at the moment.  The takeaway is that, all other things being equal, lenders will be offering slightly weaker terms tomorrow morning, assuming they don't see quite enough weakness to adjust today's offerings with only a few hours left in the day.

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Construction Loan

Construction Loan

A construction loan' also called a home construction loan in the United States is any value added loan where the proceeds are used to finance construction of some kind. In the United States Financial Services industry, however, a construction loan is a more specific type of loan, designed for construction and containing features such as interest reserves, where repayment ability may be based on something that can only occur when the project is built. Thus, the defining features of these loans are special monitoring and guidelines above normal loan guidelines to ensure that the project is completed so that repayment can begin to take place.

Underwriting of loans

Almost all lenders are concerned that their money lent is repaid, so underwriting of construction loans usually focuses on how that might occur.

In the most basic situation, that of an individual building a home for themselves, a business building a property for business use, or an investor building a property to rent out, the fundamental guideline is for the lender to imagine once the loan has been fully extended and converted into a normal mortgage and the building is occupied, whether the individual, business, or investor can afford to pay back the loan on a monthly basis. In the case of the individual, where the lender attempts to predict whether the individual can pay each month the loan payment that would occur once the person moves into the house, the lender would be primarily looking at the amount of income the individual receives. In the case of the business, a similar analysis would occur. In the case of an investor building rental property, a special appraisal would be ordered which would attempt to predict what the rents will be and whether they will be enough to pay back the loan, plus all expenses and still give the renter a certain minimum amount of income. The key point here is that no matter how valuable the building might be once completed, almost no lender would extend a loan for more than what the occupier could afford, because even though they will not have to make any payments during construction they would have to make monthly payments once completed and there can be no assurance that the owner would pay down the loan enough to make the monthly payments affordable once the project is completed.

Beyond this guideline, the next most common rule is a minimum cash injection requirement. Even if, for example, a business might be able to afford a monthly payment of a loan high enough to pay for the entire construction project, many lenders would require them to instead use a certain minimum portion of their own cash to complete the project. The reason for this is both to psychologically and economically tie in the owner with the project (hopefully making it less likely that they would walk away from the project if something goes wrong), and to give the lender a cushion whereby if something goes wrong they are more likely to be able to sell the real estate at a value that would better cover the loan amount. This guideline is often termed a "loan to cost" requirement, i.e. the lender will only loan up to 85% of the project costs.

The final major guideline is the maximum loan amount the lender will allow relative to the completed value of the project. This rule is designed to help ensure that, after the project is completed, if the borrower stops paying the payment, the lender can sell the property and hopefully recoup all the funds loaned.

Construction Loans are often extended for developers who are seeking to build something but sell it immediately after building it. In this case, a special appraisal is ordered to attempt to predict the future sales value of the project. The first guideline above, affordability, is usually not used because the owner would immediately attempt to sell the property. However, it is used sometimes for example when a developer is building condominium, the lender might evaluate whether if the project was changed from condominium to apartments if the rents received would more than repay the loan each month. Cash injection requirements are often higher due to the added risk (the immediate need to sell). The loan to value requirements however are often the most impactful. This is because the value is often calculated differently than how people might assume. For example, if a developer is building a 20-unit condominium project, a lender might not just loan a certain percentage of the predicted future total value of the condominium, but only a certain percentage of the value of the condominium project if, because of an emergency or unforeseen circumstance, the entire building had to be sold at once to one buyer (known as a bulk sale). Since the realizable sales price in this case might be much lower, the maximum loan many lenders would extend would be much lower.

 

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