Mortgage Rates and the Federal Reserve

Mortgage rates are often thought to be directly linked to the Federal Reserve.  It’s common for many people to mistakenly think The Federal Reserve actually sets mortgage interest rates.  The media contributes to this misunderstanding.  But it is incorrect.  Mortgage rates are based on the pricing of mortgage bonds which are collateralized by mortgages, known as mortgage-backed securities.

The Federal Reserve

The Federal Reserve sets the Fed Funds Rate (FFR). The Fed Funds Rate is a short-term overnight rate banks charge one another to borrow money. Banks borrow money overnight to meet reserve requirements. This rate is a fixed interest rate and is a tool used by the Fed to manage the economy– either slow it down or speed it up. This rate is not tied directly to mortgage interest rates.

While the Fed does not set mortgage rates, its actions do have an influence over the mortgage market.

Mortgage Rates

Mortgage interest rates are derived from the buying and selling of bonds, specifically mortgage-backed securities (MBS). Mortgage bonds trade all day long, every day of the work week. The price of a mortgage bond changes constantly throughout the day based on supply and demand.

Mortgage-backed securities and mortgage rates move in the opposite direction. As prices of MBS rise, mortgage rates fall. But there’s an easier way to think of it. When MBS prices improve, mortgage rates improve.

Mortgage-Rates-Federal-ReserveMortgage-backed securities are an asset-backed security which is secured by a mortgage. Mortgage-backed securities are traded in the secondary market where lenders as well as private and public investors buy and sell every day. These securities are held by many institutions and sometimes may be found in retirement funds as they are a “safe” investment.

Influences to Mortgage Rates

The natural push-pull of supply and demand causes mortgage rates to rise and fall. Demand for mortgage bonds changes for a variety of reasons, however the most common is safety. In troubling times, investors flock to safe investments and mortgage bonds are a safe haven. When times are great, money leaves the safety net of the bond market and flowes into more exciting instruments such as stocks.

There are six primary factors that move the mortgage market. They influence safe haven trading which causes mortgage rates to rise and fall. These factors are commonly referred to as “fundamentals” and they are:
1. Inflationary Pressure
2. Economic Data
3. Stock Market
4. The Federal Reserve
5. Geo-poloitical News
6. World Events

Mortgage bonds react to the news, both good and bad. What is good for the economy is bad for mortgage bonds, thus mortgage rates rise. Conversely, bad news for the economy will tend to result in improvements to mortgage-backed securities and mortgage rates will move lower.

In the absence of economic, geo-political, and world news, bonds will respond based on technical factors. Technical factors are trends, moving averages, support and resistance levels…statistical type data.

Mortgage rates change with little or no advance warning based on the dynamics of the mortgage-backed security market. Make sure your mortgage lender is watching mortgage-backed security pricing in real time and has an understanding of how the bond market prepares and reacts to these key market movers.

5 Factors That Determine Your Credit Score

Your credit scores usually determine the price you pay for your money, whether it be your mortgages, your auto loans and leases, your credit cards, business loans, your homeowners insurance, and so on.  Perhaps the most significant part of your credit report is your credit score. Credit scores range from 350 to 850, with 850 being the best possible credit score that you could receive (and nearly impossible to achieve), and 350 being the worst possible credit score. 


There are five factors that determine your credit score:

Your Payment History: 35% impact on your credit score

Paying debt on time and in full has a positive impact. Late payments, judgments, charge-offs, collection accounts and bankruptcies have a negative impact. If you have had any bankruptcies within the last 7 years, it will seriously affect your ability to borrow or establish new credit accounts. If you have had any judgments within the last several years, it is very important that you pay off the judgment and get a “satisfaction of judgment” from the court. Any unsatisfied or recent judgments will make a bad dent in your credit scores and adversely affect your ability to borrow. Usually, judgments and liens must be paid prior to the home loan closing. 

Timely mortgage payments are weighted heavily by the scoring systems and are one of the most vital requirements that lenders look for when evaluating your credit history. Many times a single late mortgage payment within the last 12 months can hold up your file or spell the difference between the best interest rate and the next credit level. Your payment history on other debts (car payments, credit cards, etc.) is also given a lot of weight.

The credit scoring systems evaluate how many late payments you have had and whether they were 30, 60 or 90 days late, or whether they are currently in default, with default being the worst situation. Additionally the systems look at whether the late payments were consecutive. If you only have one or two minor late payments on your report with no other derogatory marks, your score will not be terribly affected, but you will have a tough time getting over the critical 700 level. 

The Balance You Owe vs. Your Available Credit Lines: 30% impact on your credit score

Keeping your credit balances below 50% of your available limit is very important. Keeping your balances below 30% of your available credit is even better. For instance, if you owe $10,000, and you have $100,000 of credit available to you, you are only using 10% of your available credit line. On the other hand, if you owe $10,000 and you only have $10,000 available to you, you have “maxed out” your available credit and your credit scores will be very negatively impacted. Therefore, it is not how much you owe, but how much you owe compared to what you are able to borrow.

Your Credit History: 15% impact on your credit score

The longer your accounts have been opened, the higher your score will be; newly opened accounts will bring your score down. If you don’t have much of a credit history, and you are planning on taking out a mortgage in the future, it may be a good idea to establish a few open credit lines with little or no balance on them. Although newly opened accounts tend to lower your score initially, they will improve your score once they’ve been open for awhile, somewhat active and paid off with little or no balance.

Type of Credit that you have open: 10% impact on your credit score

A good mixture of auto loans and leases, credit cards and mortgages is always best. Too many credit cards is not a good thing, and having a mortgage does increase your score. It’s always best to having a good mix of auto loans, credit cards and mortgages rather than having only credit cards.

Number of Recent Inquiries made by creditors: 10% impact on your credit score

Inquiries affect the score for one year from the time they’re made. Your score isn’t impacted when you check your own report. It’s only affected if a potential creditor checks your credit. These include department stores, as well as credit card, auto finance and mortgage companies.  Multiple auto and mortgage inquiries are treated as only one inquiry if made within 45 days of each other. So, it’s better to shop for a car or a mortgage over a two week time-frame, rather than to prolong it over a longer timeframe. 

3 Different Mortgage Loan Programs

When you buy a home there are a couple of decisions to be made regarding the type of home loan, the program, term, and the product.  Once you’ve determined the type of home loan that is right for you, the next decision is the program type.  

It may seem a bit dizzying, but think of it like a drop down menu.  First you select the type of home loan, then the sub menu gives you the home loan program options.  And yes, there is another drop down menu from there, but I promise – it’s really not that complicated!


Fixed Rate Mortgage 

The fixed rate mortgage is a mortgage that has a rate that never changes. Your interest rate and monthly principal and interest payments never change. Once you lock in your rate, prior to closing on your home loan, you have secured that rate for the life of your loan.

30-Year Fixed Rate Mortgage: The traditional 30-year fixed rate is the most widely used mortgage program. When interest rates are low, fixed rate mortgage loans are generally not that much more expensive than adjustable rate mortgages and may be a better deal in the long run, because you can lock in the rate for the life of your loan.  And when rates are low, like they are now…wow, what a great time to lock in for life…even if you only end up staying in this home for 7-10 years.

15-Year Fixed Rate Mortgage: This loan is fully amortized over a 15-year period and features constant monthly payments, just like its sister the 30-year loan. It offers all the advantages of the 30-year loan, plus a slightly lower interest rate and you’ll own your home twice as fast. On the flip side, your payments will be higher due to the shorter term. This is a great program for many people but not everyone. You should have reserves and established investment/retirement accounts before committing to a shorter term.

Adjustable Rate Mortgage (ARM) 

3/1 ARM, 5/1 ARM, 7/1 ARM 

Adjustable rate mortgages are mortgages with a fixed rate for a short period of time. The term can be: One, Three, Five, Seven and Ten years. The rate is fixed for the term, then adjusts at the pre-established interval and amount.
Adjustable mortgages rates are made up of two components: an index and a margin. The margin is fixed at the time of locking in your rate. The index, most commonly the Treasury , Cost of Funds or Libor Index, is the component of the mortgage rate that adjusts. When the adjustment period arrives, the calculation of the adjustment is made by taking the current index figure plus the pre-established (fixed) margin (avg. 2.75%). The sum of the two is the new rate, provided that it does not exceed the established maximum amounts.

The loan adjusts at pre-determined intervals and has a maximum lifetime cap that the interest rate can adjust. This product is attractive to financially savvy borrowers as well as geared to borrowers that anticipate moving prior to the adjustment.

Interest Only Loans 

Interest only loans are available for jumbo loans (non-conforming conventional loans) and borrowers with strong credit. This loan is tied to a specific index and the borrower is billed monthly, interest only on the outstanding principal balance. Typically rate adjustments occur monthly, have no periodic cap but have life time cap. This product allows the borrower to make principal reductions during the interest only period up to 20% per year. This product is attractive to financially savvy borrowers who most often are maximizing their assets.

There are various products within loan types and programs such as low down payment options and renovation loans.  It’s very important that you discuss this with a mortgage professional who can explain your options clearly and answer all your questions.  After all, financing a home is a huge financial decision and transaction – make sure you are getting your information and advice from a qualified professional, not your well meaning friends and family.


What Types of Mortgage Loans are Available?

There are several different types of mortgage loans available to homebuyers as well as various programs. It can often get confusing, so let me unravel it for you.

The first distinction in mortgage loan type that needs to be made is based on the size of the home loan you are seeking.

Conforming Loans and Non-Conforming Loans

One way home loans are differentiated is by the GSE (Government Sponsored Enterprise) eligibility. If the loan meets requirements set forth by Fannie Mae and Freddie Mac, it is considered a conforming loan. If the loan doesn’t meet all the underwriting requirements set forth by the GSEs, it is considered “non-conforming.”

One of the main ‘rule of thumb’ guidelines that determines whether a mortgage is conforming or not is size of the loan amount. Generally, a mortgage with a loan amount below $417,000 is considered conforming, whereas any loan amount above $417,000 is considered non-conforming, also referred to as a “jumbo loan.” However, in Alaska and Hawaii the confirming limit is $625,500. Each year, the GSEs announce the conforming limit for the up coming year, some years it changes and then sometimes it is left alone, based on the housing market.

MortgageLoanTypeOptionsConventional Loans and Government Loans

The next distinction is choosing between the classification of either a conventional loan or a government insured loan.

A conventional mortgage / home loan is one that is not insured or guaranteed by the government in any way. Conventional loans can be conforming or jumbo as previously mentioned. As mentioned, conforming loans must conform to the guidelines prescribed by either Fannie Mae or Freddie Mac which are very similar. Non-conforming loans, or jumbos, still have guidelines that must be followed and most often those guidelines are more strict.

Government Insured Home Loans

The most common, and widely popular is the FHA mortgage loan. This type of mortgage is backed by the Federal Housing Administration (FHA). The government insures the lender against losses should the borrower default. FHA home loans offer an option to you of a low down payment of only 3.5% of the purchase price. With that great advantage comes a price: you will have to pay mortgage insurance (insures the lender) which will increase your monthly payments. FHA mortgage insurance does not go away over time. FHA home loans also have a loan size limit which can change from year to year and are specific to the local area. FHA home loans are available to all types of homebuyers, not just first time buyers.

Another common government loan is the VA mortgage loan, backed by the U.S.Department of Veteran Affairs. Similar to the FHA program, these home loans are guaranteed by the federal government. This program is available to service members and their families. The primary advantage of this program is that borrowers can receive 100% financing on the purchase of a home.  The mortgage rates on VA loans are also very attractive.  The max loan amount for these types of loans varies by county.

The United States Department of Agriculture offers a loan program as part of its USDA Rural Development Guaranteed Housing Loan Program commonly referred to as USDA mortgage loan. USDA is available to homebuyers of identified rural properties who meet certain income requirements. Both the property and the homebuyer must be “eligible” for the program. This type of loan offers 100% financing, at very attractive rates, and helps low to moderate income level families achieve the dream of homeownership.  The good news is that “rural” might not be as rural as you imagine.  Amazingly, 97% of the U.S. is in USDA-eligible territory!

As you can see, there are many options out there.  I’ve shared the “high altitude” overview here, however there are many more details to each loan type so  it’s critical to work with a mortgage professional to help determine the best loan type for your needs.  Watch for my next article explaining loan programs!

4 Things You Need to Get Approved for a Mortgage

So you want to buy a home? Well, most likely you will need a mortgage in order to do that. One of the biggest myth’s in the buying a home today that it is “very difficult” to get approved for a mortgage. That’s just not true. Contrary to this common belief, getting approved for a mortgage is not the nightmare you may think.

Lenders have eased many of the tough requirements and it’s becoming a much lot easier for buyers to get approved for a mortgage. Few banks make their “own loans”. Instead, most lend against guidelines set by Fannie Mae, Freddie Mac, FHA, VA and USDA. However, some lenders are more conservative than these guidelines allow and put additional standards, commonly called “overlays”, in place which were enforced by the lender but not in the program’s official mortgage guidelines.

Lately, things are getting looser throughout the industry. Banks are softening, or even removing, its overlays. Minimum credit scores have dropped. Self-employment documentation may be reduced. Maximum loan-to-values have increased.

With stable income, some down payment money, and a decent credit score, more people are able to obtain a mortgage for a home purchase or refinance.

Employment & Income

Yes, you do need a job with documented income to obtain a mortgage loan. In fact, without a job you “do not pass go” like you can if playing monopoly. You will need a two year history of employment and if you are self-employed, lenders will want to see at least two years of tax returns and will figure your income as an average over the last two years which could potentially reduce the amount of financing for which you can qualify.

Down Payment MoneyMortgage-Cash-ER

Gone are the days of zero down payments loans (with the exception of VA and USDA home loans). Depending on the type of loan you choose, you will need anywhere from 3% to 20% to put down on a home. In addition, you will need to have funds available for the closing costs, interest, taxes, and insurance for the home purchase in order to be approved for a mortgage.

Plus Cash On Hand

Many loans require “reserves”. These are funds that are not used for your down payment or closing costs, but funds left over that can be used in the event of an unexpected financial crisis. Lenders want to see that buying a home isn’t going to drain your account and that you have funds in the event of an emergency. If your loan requires reserves, you will not be asked to liquidate the funds but you must prove the ability to liquidate the funds if needed.

Credit Score

Many potential borrowers often don’t apply for a home purchase or refinance because they think they must have near-perfect credit to get a mortgage and fear having their application declined.

It’s true, the best mortgage rates go to those with credit scores of 740 or higher, however borrowers can qualify with lower scores. Borrowers can usually get a conventional mortgage with credit score of 640 while borrowers with scores in the low 600’s can usually qualify for FHA loans.  If you don’t know your credit score, it’s wise to contact a mortgage professional to find out where you stand.

The Bottom Line…

The bottom line is you don’t have to have perfect credit and 20% down payment to get into a home today. It is much easier to get approved for a mortgage than you probably think.  Whether you’re making a mortgage application for the first time, or re-applying after a turn down, it’s an excellent time to shop for a home loan.

Home Prices Heat Up in Spring

Home prices are on the rise this Spring.  Home prices are determined by housing supply, housing demand and housing affordability.  It’s pretty much the lesson we learned in economics 101.

Housing Supply: What’s the Outlook?

Housing supply measures how many months it would take to sell all the houses currently listed for sale, at the current pace of home sales. For example, if there are 600 homes currently listed for sale, and an average of 100 homes are selling each month, there would be a 6-month housing supply. This is because it would take 6-months to sell all the homes currently listed for sale.

A buyer’s market is anything more than 6 months. A seller’s market is anything less than 6 months.  In this case, sellers would have greater negotiating power, and buyers may have to bid higher than list price in order to compete with multiple offers.  We are seeing a lot of that in the DFW housing market.

Housing supply has been running below 6 months across the US since 2012.  This indicates a seller’s market.  In many parts of the country, buyers are competing with multiple offers… in some cases dozens of offers on the same house.  In the DFW market, oftentimes it is more than “dozens” of offers, depending on the area and price point. This tells us that house prices are poised to continue going up in the next several months.

Housing Demand: What’s the Trend?

Housing demand tends to pick up in the spring because most home sales occur during the spring and summer. Housing demand is expected to be strong this spring because the economy is doing better and people have jobs in most parts of the country.

Housing Affordability: Can Buyers Afford Houses at Current Prices?

The National Association of Realtors publishes a “Housing Affordability Index”.

A value of 100 means that a family with the median income has exactly enough income to qualify for a mortgage on a median-priced home. An index above 100 signifies that a family earning the median income has more than enough income to qualify for a mortgage loan on a median-priced home, assuming a 20 percent down payment. For example, today’s reading in the 170 range means that median-income families have 170% of the income required to qualify for a mortgage with a 20% down payment.

However, the story is a little different for first-time homebuyers.  As you can see from the chart on this page, the housing affordability index for first-time homebuyers has a significantly lower reading at 108.  This means that a first-time homebuyer family with the median income has 108% of the income required to qualify for a mortgage on a median-priced home using a 10% down payment.

1stToday’s reading in the 108 range means that houses are still affordable for first-time buyers as they generally are making slightly more than enough income to qualify for financing.  Although affordability is not nearly as good as it is for non-first-time hombuyers, it’s also not nearly as bad as it’s been for all homebuyers throughout the years.  For example, the affordability index was below 100 throughout much of the 1980s.  Yet people still purchased homes, and home prices went up during that time period. Down payment requirements today are also not as strict as they were in the 1980s.  This also makes it easier for first-time homebuyers to qualify for financing.

Keep in mind that housing affordability in your situation could be higher or lower depending on the amount of your down payment and the mortgage strategy you choose.

Conclusion: we anticipate an increase in house prices over the next several months because housing supply is likely to remain low, housing demand is likely to increase, and houses will continue to remain affordable for most buyers. Please contact me for specific information on housing supply, housing demand and housing affordability in your local market.

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