Did Interest Rates Increase .75% Last Week?

Question: Have you already seen interest rates increase since last week’s announcement that the Federal Reserve is increasing rates by .75%?

Answer: Contrary to popular belief, the news you read about the Federal Reserve increasing interest rates does not directly result in changes to the interest rates you get on your mortgage. The Federal Funds Rate is the rate that large banks charge each other for short-term, overnight loans and is one of the many market factors that influence the interest rate you get on a mortgage.

Fed Rate Up, Mortgage Rates Down

Last week, on Wednesday July 27, the Federal Reserve announced they were increasing the Federal Funds Rate by .75%. Many people I spoke with thought this meant that mortgage rates would immediately or quickly increase by a similar amount, however, the reality was that the average 30yr fixed mortgage rate, per Mortgage News Daily, decreased from 5.54% on Wednesday July 27 to 5.22% on Thursday July 28, one day after the announcement. As of yesterday, MND’s research showed that the average 30yr fixed rate had dropped even more to 5.05%.

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Mortgage Rates Are Market-Driven, Like Stocks

Mortgage rates operate like stocks in that they are constantly (daily) moving up and down as they react to changes in the domestic and global markets. In theory, mortgage rates, like stocks, are supposed to reflect the valuation of all current and future market information to determine the cost of borrowing money each day.

What the Fed Rate Means for Your Mortgage Rate

What does that mean in relation to your mortgage rate and the highly publicized Fed Funds Rate?

The Federal Reserve meets eight times per year to set monetary policy, including making any changes to their target Fed Funds Rate. Prior to those meetings, financial experts are constantly adjusting their expectations of the Federal Reserve’s rate announcements and those expectations are embedded on a daily basis into mortgage borrowing rates, so the most significant rate changes occur when expectations aren’t met or surprising guidance is issued by the Fed during these meetings (keep in mind, this isn’t the only information banks use to determine mortgage rates).

Heading into last week’s announcement, I read that mortgage rates, stocks, and other market instruments were priced with a roughly 80% expectation of a .75% increase in the Fed Funds Rates and a roughly 20% expectation of a 1% increase, so when the announcement was made confirming a .75% increase and guidance was given suggesting the Fed will soon be able to slow their rate increases, market instruments reacted in a mostly positive way, which resulted in mortgage rates decreasing because the outcome was weighted towards expectations for lower future rate increases (.75% instead of 1% and slowing future increases).

The next scheduled Federal Reserve announcement on the Federal Funds Rate is scheduled for September 21, you’ll see mortgage rates react daily based on new economic data on inflation, growth, unemployment, global threats, etc that will all influence how the Federal Reserve responds during their next meeting.

Mortgage Rate Forecasts

There’s one thing I’ve learned over the years about mortgage rate forecasts…they’re always wrong. You can see how much of a difference there is in forecasts from the experts in this recent Forbes article, with expectations for 2022 rates ranging from ~5-7% to a technical version of a shoulder shrug.

With that said, if you’re seeing news about inflation coming under control and we avoid new major global supply chain disruptions, odds are that mortgage rates will gradually come down through the end of the year. However, none of that is guaranteed as we find ourselves in a constant state of global and economic volatility and disruption, factors that generally cause instability and increases in mortgage rates. 

If you’d like to discuss buying, selling, investing, or renting, don’t hesitate to reach out to me at Eli@EliResidential.com.

If you’d like a question answered in my weekly column or to discuss buying, selling, renting, or investing, please send an email to Eli@EliResidential.com. To read any of my older posts, visit the blog section of my website at EliResidential.com. Call me directly at (703) 539-2529.

Video summaries of some articles can be found on YouTube on the Ask Eli, Live With Jean playlist.

Eli Tucker is a licensed Realtor in Virginia, Washington DC, and Maryland with RLAH | @properties, 4040 N Fairfax Dr #10C Arlington VA 22203. (703) 390-9460.

Condos Must Be Aware of New Fannie Mae Guidelines

Question: Can you summarize the important details of Fannie Mae’s new condo loan deferred maintenance requirements?

Answer: In response to the collapse of the condo building in Surfside, FL last year, Fannie Mae issued new “temporary” lending requirements, effective Jan 1 2022, for Condos and Co-ops to protect against future deferred maintenance issues and, hopefully, incentivize Associations to address issues faster.

I will highlight some of the key changes below, but I advise Condo and Co-op Boards/Management to review the policy changes in detail to ensure properties in your communities remain warrantable (banks will lend using traditional mortgage products), otherwise you’ll risk a significant drop in property values by limiting your buyer pool to cash buyers or those who qualify for alternative lending products (non-Fannie).

Significant Deferred Maintenance and Unsafe Conditions

This is the strictest of the new requirements, but also leaves a lot of grey area and subjective decision-making by each bank’s underwriter(s). The Fannie Mae language states:

“Loans secured by units in condo and co-op projects with significant deferred maintenance or in projects that have received a directive from a regulatory authority or inspection agency to make repairs due to unsafe conditions are not eligible for purchase. These projects will remain ineligible until the required repairs have been made and documented. Acceptable documentation may include a satisfactory engineering or inspection report, certificate of occupancy, or other substantially similar documentation that shows the repairs have been completed in a manner that resolves the building’s safety, soundness, structural integrity, or habitability concerns.

Significant deferred maintenance includes deficiencies that meet one or more of the following criteria:

  • full or partial evacuation of the building to complete repairs is required for more than seven days or an unknown period of time
  • the project has deficiencies, defects, substantial damage, or deferred maintenance that
    • is severe enough to affect the safety, soundness, structural integrity, or habitability of the improvements;
    • the improvements need substantial repairs and rehabilitation, including many major components; or
    • impedes the safe and sound functioning of one or more of the building’s major structural or mechanical elements, including but not limited to the foundation, roof, load bearing structures, electrical system, HVAC, or plumbing.

…These policies do not apply to routine maintenance or repairs that a homeowners’ association (HOA) undertakes to maintain or preserve the integrity and condition of its property. Also, if damage or deferred maintenance is isolated to one or a few units does not affect the overall safety, soundness, structural integrity, or habitability of the improvements then these project eligibility requirements do not apply. Examples of this scenario include water damage to a unit due to a leaky pipe that is isolated or damage from a small fire impacting the interior of a specific unit…”

It’s possible a Fannie Mae loan can be approved on one unit and denied on another. The grey area comes from 1) how the Association responds to the questionnaire sent by the lender and 2) how each lender’s underwriter(s) determine what qualifies as significant/substantial deficiencies. It’s possible that the interpretation of a question, and thus the way that question is answer, can change based on who from the Management company is responding. The same difference an interpretation of a response and support information can occur between underwriters at different banks.

Special Assessments

Associations should be much more careful when choosing to issue a special assessment (as opposed to borrowing or increasing condo dues) because of the extra scrutiny that now applies for loans and possibility that issuing a special assessment may cause properties in the building to be unwarrantable. The Fannie Mae language states:

“Any current or planned special assessment, even if paid in full for the subject unit, must be reviewed to determine acceptability… The lender is expected to obtain the financial documents necessary to confirm the association has the ability to fund any repairs. If the special assessment is related to safety, soundness, structural integrity, or habitability, all related repairs must be fully completed or the project is not eligible. Additionally, If the lender or appraiser is unable to determine that there is no adverse impact, the project is ineligible.”

Reserve Requirements

Associations are now at risk for loans not being approved if they are not allocating 10% or more of their annual budget towards Reserves. In my opinion, this is the most unreasonable of the new Fannie requirements because it doesn’t take other relevant details into account like whether or not the account is overfunded or the recommendations of the Reserve Study. To issue a blanket requirement for every Association to contribute 10% of their annual budget to Reserves is bad policy.

However, there is some flexibility in this requirement. Borrowers putting 10% or more down can get an exception that will allow them to proceed with the loan. Borrowers with less than a 10% down payment have to go through an expensive and time-consuming exception process.

The full guidance letter from Fannie Mae can be downloaded here.

If you’d like to discuss buying, selling, investing, or renting, don’t hesitate to reach out to me at Eli@EliResidential.com.

If you’d like a question answered in my weekly column or to discuss buying, selling, renting, or investing, please send an email to Eli@EliResidential.com. To read any of my older posts, visit the blog section of my website at EliResidential.com. Call me directly at (703) 539-2529.

Video summaries of some articles can be found on YouTube on the Ask Eli, Live With Jean playlist.
Eli Tucker is a licensed Realtor in Virginia, Washington DC, and Maryland with RLAH Real Estate | @properties, 4040 N Fairfax Dr #10C Arlington VA 22203. (703) 390-9460.

20% Down Payment Myth

Question: Are there ways to buy a home without putting 20% down?

Answer: I hope everybody is enjoying the holidays and some time off!

Next month we will take some time to look at market performance in 2021, but this week I’ll address one of the most common questions I get – is it necessary to save 20% for a down payment in order to buy a home? Studies show that the most common reason people give for not buying a home is not having enough savings for a down payment.

About 1/3 of Arlington buyers purchase a home with less than 20% down and for many buyers, especially first-time home buyers, they’re putting as little as 3-5% down.

Programs For Everybody

For those with good credit, there are popular Conventional Loan programs allowing for as little as 3% down and for those with lower credit scores, FHA Loan programs range from 3.5%-10% down. There are also some exceptional 10-15% down programs available to those with great credit and good incomes that do not include mortgage insurance premiums.

Specialty Programs For Military and Doctors

If you are an active-duty or former servicemember you likely know about VA Loans that allow purchases with zero down. Doctors also have access to special loan programs offering great rates with low down payments for large loan amounts.

Mortgage Insurance

Many loans with less than 20% down will include mortgage insurance, which I wrote about here. It will increase your monthly payment and is usually a higher the less you put down. However, there are options to get rid of the mortgage insurance fees by buying it out or applying for early removal after a couple of years.

There are also loan options that do not include mortgage insurance at all.

Impact on Negotiations

Clients often ask me if a lower down payment will impact their ability to negotiate, so in 2018 I did an analysis on the topic. The results showed that only cash buyers (100% down) and buyers not putting any money down were materially impacted by their down payment, the negotiation leverage was similar for everybody in between.

However, it would be misleading to suggest that down payment percentage doesn’t have any effect. Most sellers will respond more enthusiastically to higher down payments, and this comes into play in competitive scenarios (multiple offers), which are common in Arlington and the surrounding DC Metro neighborhoods. When sellers are choosing between multiple, similar offers, buyers with higher down payments have an advantage.

Buyers can combat the potential negative impact of a lower down payment in multiple offer scenarios by getting a strong pre-approval letter from a reputable local lender, offering to get pre-approved by a lender of the seller’s choosing, increasing the Earnest Money Deposit, or several other tweaks to the contract that will be looked at favorably by the seller.

Favorite Mortgage Programs

If you’d like any additional information or recommendations on lenders or loan programs, don’t hesitate to reach out to me at Eli@EliResidential.com.

If you’d like to discuss buying, selling, investing, or renting, don’t hesitate to reach out to me at Eli@EliResidential.com.

Video summaries of some articles can be found on YouTube on the Ask Eli, Live With Jean playlist.

Interest Rate Forecasts and New Loan Limits

Question: What do you expect from mortgage interest rates in 2022?

Answer:

Historically Low Rates

The first thing to understand about mortgage interest rates is that they are market-driven and forecasting comes with the same amount of unpredictability as any other economic/market-based forecasting (GDP, Unemployment, Stocks, etc). So take predictions/forecasts with a grain of salt.

Higher Prices Still “Manageable”

For perspective, the chart above shows the average 30yr fixed rated mortgage in the US since 1971. Historically low interest rates have been one of the main drivers of the rapid housing price appreciation we’ve witnessed over the last 12-18 months.

The charts below, courtesy of the National Association of Realtors, show that low interest rates have kept affordability, based on mortgage payments vs income, lower than the ’05-’07 housing bubble despite housing prices soaring relative to income; even higher than ’05-’06 peaks.

Forecasting Future Rates

For years, we’ve been reading/hearing pundits say that it’s hard to imagine mortgage rates getting lower, often coupled with overly salesy messaging from the real estate industry that you must buy now because rates have never been so low and likely will not remain this low much longer. The problem with those claims is that mortgage rates have been dropping for about 40 years now (with relatively minor fluctuations along the way)…

With that said, even small fluctuations in rates in the near/mid-term impact affordability and buying decisions, making forecasts for the upcoming 12-24 months relevant to those currently, or soon-to-be, active in the buyer/seller market. The chart below shows the latest 30yr fixed mortgage rate forecasts from four leading housing research sources:

Everybody expects mortgage rates to increase over the next 12-24. This is mostly based on the expectation that the Fed will start easing its economic support and will increase interest rates (indirectly influences mortgage rates) to fend off inflation, so if that strategy changes, so too will mortgage rate forecasts.

It’s my belief that a slow, gradual increase in rates, as predicted by Fannie, Freddie, and NAR, is unlikely to have much influence on home values but any sharp increases, or even the pace predicted by MBA, could result in some downward pressure on prices. Home values are an important part of the US economy so you can expect efforts to be made by the Fed to prevent mortgage rate spikes that shock the housing market.

High Loan Limits

The Federal Housing Finance Agency (FHFA) just released new conforming loan limits for 2022, with significant increases to reflect recent price growth. The jurisdictions in the greater DC Metro area were given the maximum loan ceiling of $970,800. Beginning in 2022, Fannie/Freddie will insure loans up to $970,800 with as little as 5% down, or the equivalent of a purchase price just under $1,022,000 with 5% down. The new conforming limits increase the maximum loan amount with 3% down to $647,200, or the equivalent of a purchase price just over $667,000 with 3% down.

For any conforming loan (or any loan for that matter), borrowers must also qualify on several factors including credit score, debt-to-income ratio, first-time buyer status, and more. Feel free to reach out to me for lender recommendations if you’d like to explore your mortgage options.

If you’d like to discuss buying, selling, investing, or renting, don’t hesitate to reach out to me at Eli@EliResidential.com.

If you’d like a question answered in my weekly column or to discuss buying, selling, renting, or investing, please send an email to Eli@EliResidential.com. To read any of my older posts, visit the blog section of my website at EliResidential.com. Call me directly at (703) 539-2529.

Video summaries of some articles can be found on YouTube on the Ask Eli, Live With Jean playlist.

Financing a Major Remodel or New Construction

Question: We are deciding between buying a lot to build a new house on or expanding and remodeling our current home. Do you have a recommendation for a lender who can finance these projects?

Answer: Over the years, I’ve found that one of the best banks for construction or major remodeling loans, and a favorite amongst local builders, is Sandy Spring Bank. They are large enough to offer some excellent, customized products with great rates and local enough that relationships with builders and homeowners matter to the success of their business. That’s usually a good combination for a business, especially lenders.

I have worked with Skip Clasper (sclasper@sandyspringbank.com), a loan officer at Sandy Spring Bank, for years so I reached out to him to gather up some details on their popular construction and remodel loan products.

Remodel Loans

Sandy Spring Bank will give you a loan to finance the cost of your remodeling project based on the expected post-construction value of your home. Given how high market values are now, that means you can get a significant amount of financing to expand and remodel your home.

There are a few things that stand-out about the way Sandy Spring Bank handles these loans:

  • They offer 90% loan-to-value (LTV), meaning you can get financing for 90% of the future value of your completed home. Most banks limit their loans to an 80% LTV.
  • They accommodate a flexible draw schedule. Banks give borrowers/builders draws to pay for construction incrementally as the project progresses. Many banks offer their draws on a fixed schedule, but given the unexpected twists and turns construction can take, a flexible draw schedule makes for a better process for everybody.
  • You only pay interest on the money you have drawn from the loan so you only pay interest on the money you’ve used, not the money you will use
  • Interest rates are competitive with rates you will find on standard, non-construction loans. This is noteworthy because oftentimes specialized loan products require paying higher interest rates.

Construction Loans

A construction loan allows buyers more control over building a new home because it allows you to finance the purchase of the lot and construction yourself. That means you can purchase the lot you want (easier said than done) and choose the builder you work with, as opposed to hoping that the builder who acquires a lot you like is also a builder you want to work with.

Here are some highlights and key pieces of information about the Sandy Spring Bank construction loans:

  • You can purchase a tear-down/lot and finance the construction of your home with a single closing. After closing on the tear-down/lot, they will finance the construction, and then the loan will automatically convert into a permanent 30-year loan after the construction is completed.
  • The loan is interest-only until construction is completed, making your payments during the construction phase much lower
  • Sandy Spring allows cross-collateralization on construction loans, meaning they will include equity in your current home towards your future down payment when considering your loan application/qualifications for your construction loan
  • It will take 6-8+ weeks to finalize the loan on your tear-down/lot purchase, which may put you at a disadvantage in some cases if you are competing against buyers or builders who are paying cash or using a standard loan product that can close faster
  • All construction loans are Adjustable Rate Mortgages (ARMs), but can be refinanced into a fixed rate mortgage with a second closing
  • Interest rates are competitive with rates you will find on standard, non-construction loans. This is noteworthy because oftentimes specialized loan products require paying higher interest rates.

If you’d like to talk with Skip Clasper about Sandy Spring’s remodel, construction, or other loan products the best way to reach him is by email at sclasper@sandyspringbank.com or phone at 301-928-7523.

The 20% Down Payment Myth

Question: Is it possible to buy a home with less than 20% down?

Answer: I’m always surprised by the number of people who assume they have to put 20% down to buy a home and delay their goal of becoming a homeowner for years because of it. Studies show that the most common reason people give for not buying a home is that they don’t have enough for a down payment.

In reality, about 1/3 of Arlington buyers purchase a home with less than 20% down and for many buyers, especially first-time home buyers, they’re putting as little as 3-5% down.

Programs For Everybody

For those with good credit, there are popular Conventional Loan programs allowing for as little as 3% down and for those with lower credit scores, FHA Loan programs range from 3.5%-10% down. There are also some exceptional programs available to those with great credit and strong incomes allowing for 10%-15% down at great rates.

Specialty Programs For Military and Doctors

If you are an active-duty or former servicemember you likely know about VA Loans that allow purchases with zero down. Doctors also have access to special loan programs offering great rates with low down payments for large loan amounts.

Mortgage Insurance

Most loans with less than 20% down will include mortgage insurance, which I wrote about here. It will increase your monthly payment and generally represents a higher percentage of your loan amount the less you put down. However, there are options to get rid of the mortgage insurance fees by buying it out or applying for early removal after a couple of years. There are also some programs that do not include mortgage insurance at all.

Impact on Negotiations

Clients often ask me how much a lower down payment will impact their ability to negotiate, so last year I ran the numbers on the impact of different down payments on the percentage buyers were negotiating off the sale price. The results showed that only cash buyers (100% down) and buyers not putting any money down were materially impacted by their down payment, the negotiation leverage was pretty similar for everybody in between.

However, it would be misleading to suggest that down payment percentage doesn’t have any impact. Most sellers will respond more enthusiastically to higher down payments and this comes into play in competitive scenarios (multiple offers), which has become common in Arlington and the surrounding DC Metro neighborhoods. When sellers are choosing between multiple, similar offers, buyers with higher down payments have an advantage.

Buyers can combat the potential negative impact of a lower down payment in multiple offer scenarios by getting a strong pre-approval letter from a reputable local lender, offering to get pre-approved by a lender of the seller’s choosing, increasing the Earnest Money Deposit, or a number of other tweaks to the contract that will be looked at favorably by the seller, without increasing risk to the buyer or increasing the offer price.

Favorite Mortgage Programs

Here’s a link to an article I wrote with some of my favorite mortgage programs and contact information for great lenders who offer them.

If you’d like any additional information or recommendations on lenders or loan programs, don’t hesitate to reach out to me at Eli@EliResidential.com. If you’re thinking about buying a home in Arlington or the surrounding Northern VA/DC Metro neighborhoods, I’d be happy to meet with you to discuss your options.

Question: Do I have to put 20% down to buy a home?

Answer: This is the most common question I’m asked by buyers and there are a surprising number of people who are well-qualified and want to purchase a home, but sit on the sidelines trying to save for a 20% down payment. Over the last 18 months, nearly one third of buyers in Arlington put less than 20% down and most of those people put 10% or less down.

Popular Low-Down Options

  • Conventional loans are available at 3%, 5%, 10% and 15% down
  • FHA loans are available at 3.5% down
  • If you or your spouse are active or former military, you can qualify for a zero-down loan through the VA. I detailed VA loans in this post from May 2016.
  • Typically, if you have a Jumbo Loan (loan amount exceeds $679,650) you are required to put 20% down unless you qualify for one of many preferred mortgage programs available in the market, which I mention in this post from November 2017.

What’s The Downside?

If you use a non-VA loan with less than 20% down you will have to pay Mortgage Insurance (option to pay it off up-front), which is essentially a monthly penalty/fee assessed on top of your mortgage payment that increases the less you put down and the higher your loan amount.

I explain Mortgage Insurance in this post from July 2016, and explain the process for removing these payments in this post from February 2016.

How Much Are Arlingtonians Putting Down?

Below are statistics pulled from the MLS on the amount Arlingtonians put down to purchase homes over the last 18 months.

These numbers are manually entered by the listing agent at the end of the deal and I think that in some cases agents write 0% financed (cash) instead of entering the correct info so it’s my belief that the number of loans with low down payments is actually a bit higher than the statistics reflect.

  • 32% of all purchases were made with less than 20% down, 26% with 10% or less down, and 18% with 5% or less down
  • 39% of townhomes, 37% of condos and 22% of detached/single family homes are purchased with less than 20% down
  • 14% of purchases were not financed (cash)
  • Only 3% of purchases required FHA financing and less than 2% were FHA-financed condo purchases, so consider this if your Condo Association is setting rental caps simply to qualify for FHA financing

Feel free to reach out with any questions you have about your loan options for purchasing a home anywhere in Virginia, Washington, DC or Maryland. I’m happy to answer any specific questions you have or connect you with a lender who specializes in the type of loan you’re looking for. I’m available any time via email at Eli@EliResidential.com.

Question: Are there good loan options available if I don’t have 20% or more to put down?

Answer: There are an abundance of loan products on the market that cater to different professions, down payments and financial circumstances that you should be aware of. “Rate shopping” is easy and moderately effective, but “product shopping” can be much more valuable and something an informed Agent can assist you with. Here are some of my favorite loan programs and the lenders I work with who provide them:

Doctors: Doctor Loan Program from SunTrust: CJ Kemp (cj.kemp@suntrust.com, (301) 651-4189)

The Doctor Loan Program is a residential mortgage loan specifically created for licensed medical professionals to make obtaining mortgage financing easier and more hassle-free. It recognizes the financial toll of medical school and strong, stable future income post-graduation. The rates on these loans are also fantastic.

Eligible Doctors include:

  • Licensed residents/interns/fellows in MD and DO programs
  • Medical doctors
  • Doctors of osteopathy
  • Doctors of dental medicine/surgeons/orthodontics/general dentists (DMD/DDS)
  • Psychiatrist licensed as a medical doctor

Available financing terms include fixed and adjustable rate mortgages for purchases and rate/term & cash out refinances.

  • 0% down up to $750,000 loan amount
  • 5% down up to a $1M loan amount
  • 10% down up to a $1.5M loan amount
  • No mortgage insurance required

Homeowners Buying And Selling: Second Trust/HELOC Program from First Home Mortgage: Jake Ryon (jryon@firsthome.com, (202) 448-0873)

This is a great program for current homeowners who will be buying and selling simultaneously. It allows you to use the future proceeds from your home sale to make a large down payment on your new home, before even putting your current home on the market.

They partner with local banks and credit unions to provide you with a second trust that allows you to put as little 5% down up to nearly a $1,000,000 loan amount. The second trust finances the remaining amount of your down payment (e.g. 15% if you put down 5%).

The HELOC/second trust payment is interest-only, can be paid off any time and can be used like a bridge loan to allow you to purchase a new home without a home-sale contingency and to sell your existing home unrestricted.

Low Down Payment: Mortgage Insurance Payment Eliminator from McLean Mortgage: Troy Toureau (ttoureau@mcleanmortgage.com, (301) 440-4261)

This program enables you to put as little as 3% to 5% down using conventional financing (not FHA) and eliminate the monthly mortgage insurance payment by making a one-time more affordable payment.  This provides multiple benefits including a potential increase in buying power by reducing the Debt-to-Income ratio (lower monthly payment), allowing you to negotiate for the seller to make this payment by rolling it into closing costs, and ensuring that the entire payment is tax deductible (confirm with your tax advisor).

Large Loan Amounts: Non-Confirming Jumbo Loan Program from Wells Fargo: Email me for contact info at Eli@EliResidential.com

It’s not just the Doctors who can find low down payment options without mortgage insurance for high-value (jumbo) loans. Wells Fargo’s “Professionals” Program lets you put 10.01% down on loans from $424,100 up to $1,000,000 without any mortgage insurance and the rates are incredible. They have options for fixed and adjustable mortgages as well. A high credit score and strong income are key factors for qualifying. It’s referred to as the “Professionals” Program because it’s popular amongst high earning, non-medical professionals like lawyers and consultants.

Make The Right Choice

Choosing the right lender is a combination of selecting the program that’s right for you, getting the best market rates, and working with somebody who provides a high level of service. Earlier this year I wrote an article with additional tips for selecting and comparing lenders. If you have any questions about the programs I summarized above, other lending programs like construction and rehab loans, or would like an introduction to one of my preferred lenders please reach out to me at Eli@EliResidential.com.

Question: What is the likelihood that a lender will approve a loan for ~$500,000 for a first time buyer putting 10% down in a condo building that is approaching or over 50 percent units being rented out?

Answer: This question gives me another opportunity to bring in an industry expert: loan officer Jake Ryon of First Home Mortgage (NMLS #993471). Below, Jake debunks the common myth about rental ratios in condo buildings and introduces the factors that actually impact condo loans most frequently.

MYTH: Buyers Can’t Qualify For Condo Loans If More Than 50 percent of Units Are Rented

One of the most common myths that exists in the industry is that buyers cannot get a loan if more than 50 percent of units are being rented out in a condo building.

TRUTH: Most Homeowners Can Qualify For Condo Loans Regardless Of Rental Ratio

The percentage of units rented in a condo building (aka investor ratio or owner occupancy ratio) has no impact on loans for borrowers that are purchasing or refinancing their primary residence or second home.  If the borrow is an investor seeking a conventional loan, the building must have at least 50 percent of the units occupied by owners (not rented).  FHA’s requirement is the same but does not apply to second homes.  While condo associations may elect to self-impose a rental cap, as it stands now with Fannie Mae and Freddie Mac, it currently doesn’t impact borrowers who are purchasing or refinancing their primary residence or second home.

What Does Impact Loans On Condo Buildings?

  1. Commercial/Non-Residential Square Footage: Currently, Fannie and Freddie cap the total commercial/non-residential square footage in a building at 25 percent of the total space, up from 20 percent a few years ago.  Your lender may be able to obtain a project waiver directly from Fannie Mae if the commercial/non-residential square footage exceeds the 25 percent cap.  I was recently able to obtain a waiver for a five unit project that has 38 percent commercial space (in D.C.) because we were able to show it was common in the area, didn’t impact marketability and were able to provide several comps with similar square footage of commercial/non-residential space.
  2. Single Entity Ownership: The maximum number of units owned by one entity can’t exceed 10 percent of the units in the project per Fannie and Freddie guidelines.  If it is a 2-4 unit project (rare in Arlington, very common in DC), no entity can own more than one unit.  Both Fannie and Freddie do allow one entity to own two units in a project with 5-20 units.  A project waiver may be possible from Fannie Mae if a single entity owns greater than 10 percent.
  3. Delinquency: Fannie and Freddie do not allow more than 15 percent of the units in the Association to be > 60 days delinquent on the payment of their monthly assessments for the project to be warrantable (approved for loans).  A project waiver may be possible with Fannie Mae if the delinquency rate is slightly higher than 15 percent.
  4. Budget: Fannie and Freddie require the Association’s current year adopted budget to include a minimum of 10 percent of the annual monthly assessments to go towards the reserve fund.  If the budget does not document the required 10 percent, a current reserve study that supports the Association’s current level of contribution may be acceptable.

If you have any questions about condo warrantability or anything else loan-related, Jake Ryon can be reached at jryon@firsthome.com202-448-0873 or online. He is located at 1015 15th Street NW Suite #375 Washington DC 20005.

Question: We are buying and selling a home simultaneously and our lender has provided us with a few options to qualify for the purchase without making our offer contingent on the sale of our current home. Do you have any tips for choosing which mortgage product is best for us?

Answer: Buying and selling a home at the same time can be a complex transaction logistically and financially. I explored the seller side of home sale contingencies in October, but here I’ll share advice I give buyers who face difficult financing decisions. Tip of the day: it’s not just about getting the lowest interest rate.

Weigh Your Options

Selling your home before making a purchase may afford you the best loan options, but it doesn’t always make sense for buyers:

  • It weakens your negotiation position on pricing (you’ll pay more) and your ability to compete for new listings
  • You weaken your position on the sale side, with more pressure accept an offer quickly
  • For many families with children and/or pets, selling your home while living there is a logistical nightmare

Mortgage Solutions

Certain lenders have a wide range of loan products to help buyers with limited cash reserves for a down payment, but substantial equity in their homes, qualify for a home purchase without a home sale contingency. The options include a Home Equity Line of Credit (HELOC), a second trust loan in which a large portion of your down payment comes from a second interest-only loan, and bridge loans (less common). Each of these options come with different short and long-term costs, so it can be difficult to decide what is best for you and your family.

Get A Professional Opinion

Most real estate transactions involve three professionals – your agent, your lender, and your title company, but when you’re faced with complex financial decisions, I highly recommend using a Financial Consultant to help you determine which financing option suits you. Your lender can explain the cost, pros/cons, and time constraints of each loan option and your agent can explain how different types of loans and contingencies will impact your transaction, but a good Financial Consultant will be able to help you determine the best way to leverage cash, debt, and tax write-offs to maximize your financial position.

Financial Consultants should do more than help you pick mutual funds for your retirement accounts and act as an expert sounding board when you’re facing major life decisions, like how to finance your home purchase. They can build models and run scenarios within the context of your personal savings/investment plan to help you make your decision. Although an experienced advisor can provide great advice with limited knowledge of your personal finances, you’ll get the most from somebody who has a complete picture of your finances and goals, so engage a professional early, if you haven’t already.

If you’re looking for a recommendation, Carl Grund (CFP, CPWA, AIF) with Signature Financial Parners has helped multiple clients of mine with difficult real estate decisions and is a local Arlingtonian. Feel free to contact him at cgrund@sfpfinancial.com or 703-287-7128 for immediate or future advice.