Mortgage Rate Watch

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

Mortgage Rates Continue Defying Bond Market Weakness
Wed, 02 Dec 2020 21:19:00 GMT -

Although it was the focus of yesterday's discussion, the ability of the mortgage market to hold steady in the face of bond market weakness continues to impress.  This is interesting because mortgage rates take direct cues from the bond market.  That's still the case, but at the moment, the mortgage side of the bond market is playing with a stacked deck.  If Treasuries are only a little bit weaker on any given day (like today), mortgage bonds and mortgage rates have been consistently holding their ground or actually improving.  

Today was more of a "ground-holding" sort of day, but it depends on how any given lender responded to yesterday's bond market weakness.  Those who adjusted rates higher yesterday were generally in slightly better shape today.  Those who abstained yesterday were offering slightly higher rates today.  

Regardless of the movement, the average lender remains very close to all-time lows and well under 3% for most top tier conventional scenarios.  Purchases offer the best rates, followed by no-cash-out refis.  Adding a cash-out option takes the average rate closer to 3%, but it takes additional risk factors like non-owner occupancy, lower FICO, or lower equity to see quotes over 3%.  

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Mortgage Rates Surprisingly Steady Despite Market Drama
Tue, 01 Dec 2020 21:05:00 GMT -

Like many industries, housing finance has a superficial layer that's fairly easy to understand for the average consumer.  A person wants a home.  They don't want to pay cash.  They get a loan.  Lower rates = lower payments.  The end.

Shortly below that superficial layer of understanding, where a surprisingly high percentage of mortgage professionals operate, it's popular to discuss 10yr Treasury yields as a basis for mortgage rates.  The only problem with viewing 10yr yields as the basis for mortgage rates is that they're not.

Anyone can observe this objective fact by jumping just a bit deeper into the rabbit hole and acquainting themselves with MBS (mortgage-backed securities).  These are the true raw ingredients for mortgage rates even though they frequently mimic 10yr Treasury yield movement.

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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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