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Understanding Mortgages

Gift Money

Using gift money to buy a home

While it’s generally known that home buyers may use “gift funds” toward the purchase of their home, there is also a great deal of confusing information out there that can start your head spinning when you try to figure out what is or isn’t allowed and what documentation will be needed so the gift may be used in the transaction.

The Big Question: Why is gift money a big deal?

Yes, let’s talk about why gift money is such a big deal. It actually goes back to our government’s efforts to prevent money laundering through real estate transactions. This is part of our country’s fight against illegal drugs, weapons and even terrorism. Mortgage companies are required to document the source of all money going into a real estate transaction, and that especially includes money coming from someone other than their borrower(s). There is a wealth of great information on the efforts being made here: https://www.fincen.gov/history-anti-money-laundering-laws

The Amount

“How much of the money I put toward my home purchase can be gift money?“

It depends on the mortgage program you’re going to use. Some programs allow for the entire down payment to be in the form of a gift. Others may require at least 5 percent of the purchase price from your own funds unless the total down payment is 20 percent or more. This is a question to discuss with your loan officer. They’re going to be familiar with the requirements of each mortgage program and will be able to show you your options.

The Donor

“My parents are willing to give me twenty thousand dollars to help me buy a house. Is that okay? What do we need to do?”

Shouldn’t be a problem if everything is above board and documented well. First, write your parents a big, heart-felt Thank You card. Next, educate yourself on what to expect.

In most situations, the gift donor or provider must be a family member, fiancé or domestic partner.  Additionally, they must be able to supply evidence that they can give you the gift. What does that mean, “supply evidence?” This can be a copy of their bank statement, a cancelled gift check or a signed letter from their bank attesting to the availability of funds in their account. Sometimes more than one of these items may be required. It’s important that you understand this and communicate it with your gift donor when arranging the gift, because they will be expected to supply documentation in order for the gift to be used.

The Gift Letter

Your mortgage originator will usually have a form that the gift donor can complete and sign, or a simple letter from your gift donor may be requested. Whether it is a form or a letter, these items usually need to be included:

  • The donor’s name(s), address and relationship to you
  • The donor’s account information (the account(s) where the gift money is being held)
  • The property being purchased
  • The dollar amount of the gift
  • The date or approximate date of the transfer with a statement that the funds are a gift with no expectation of repayment

The Transfer

Properly documenting the transfer of gift funds is vital. Your mortgage loan team will give you the guidance you need to handle the transaction properly. When they do, try to follow their instructions to the letter. It may seem like a lot of silly details but see each one through. There’s no replacement for getting it right the first time.

Here is a typical example of what that guidance may look like:

  • The donor should give the gift in the form of a check or wire
  • If by check, make a copy of the check before depositing it into the account that will be used for verification of funds to close
  • Keep the transaction simple - DO NOT combine this deposit with any other incidental deposits
  • Provide a copy of the deposit slip or confirmation and either an online update or the next account statement as evidence that the deposit “cleared” (meaning the funds are fully available in the account now)

Handled correctly, gift funds can be a big help toward achieving homeownership. Handled incorrectly, there is the potential for gift funds to be ineligible, and you’re now researching other ways to afford the home you want to buy.

If you’re thinking of using gift funds to help buy your home, follow the guidance above. Talk with your gift donor about the documentation that may be needed from them so they aren’t uncomfortable or cause delays when it’s requested. Make sure the gift letter includes all the information needed by your mortgage company. Manage the transfer of the gift money exactly as instructed and provide documentation promptly. If any further documentation is required get it quickly. And ask your mortgage loan team any questions that come up! They’re going to want to help get this right so you can walk away from settlement with keys in your hand saying:

“that was a lot easier than I expected it would be!”


Understanding Mortgages

Which generation buys more homes than any other

The cost of living has turned the typical family household construct on its head.

According to a recent survey from the Pew Research Center, approximately 15 percent of millennials age 25 and 35 years still live with their parents. Compare that to the 10 percent of 25- to 35-year-old Generation Xers who were living with their parents in 2000 or the 8 percent of 25- to 35-year-old baby boomers who did the same in 1981.

So it may come as a bit of a surprise that, contrary to what the polls suggest, millennials represent the largest group of individuals who are in the market to buy a house.

Millennials run the real estate market

That's according to a recent survey from the National Association of Realtors. In its Home Buyer and Seller Generational Trends study, the NAR found that 36 percent of residential real estate transactions during the past year involved 18- to 35-year-old men and women. This includes all housing types - townhouses, co-ops and condominiums - and not just single-family residences. That's up from 34 percent over the corresponding period in 2017. These figures are well ahead of Generation X buyers, who made up 26 percent of all home purchases in the past year.

What drives millennial homebuying?

Why are millennials accounting for a larger slice of the homebuyer pie? It's partly due to their spending capabilities. The typical millennial household makes around $88,200 per year, up from $82,000 in the 2017 version of the NAR's Generational Trends analysis.

For about 1 millennial homebuyer in 5, these purchases represent their introduction to homeownership. In other words, buying a home means leaving the nest for the first time.

Millennials are loath to move as a rule, but are also living with their folks for longer periods than their older contemporaries. In fact, 91 percent of the 25- to 35-year-old respondents in the aforementioned Pew Research poll who are currently living with their parents had lived at home for at least 12 months. The same was true for 86 percent of the same demographic of Generation Xers in the 2000s.

Everyone's situation is different, but if nothing else, the numbers suggest more millennials are proving their fiscal mettle and learning that the American dream is still alive.


Understanding Mortgages

First time home buyers moving in to their new home

Most renters want to own a home

Just about everyone who's been in the market for a home has addressed the age-old question of whether it's better to rent or buy. A family's circumstances often tell the tale of which is the better bet, but generally speaking, buying beats renting, especially from a dollars-and-cents perspective.

Even today, when a dearth of supply and a glut of demand has caused asking values to increase, most renters still want to own a home, so says a recently released poll. According to new findings from the National Association of Realtors, approximately 75 percent of "non-owners" say they have every intention of buying a house at some point in the future.

The homeownership rate has gone up and down over the years and is still below the all-time high of 69 percent in 2004, according to data compiled by Trading Economics. Currently, about 64 percent of Americans own a home, based on the most recent quarterly figures available from the U.S. Census Bureau.

Cost, limited supply leaving some renters in limbo

If around three-quarters of the country seeks to purchase a house and apply for a mortgage, why isn't the homeownership rate higher? It's largely because of the economics of it. On average, for the whole year, just over half of respondents in the NAR survey said they couldn't afford to buy a home, slightly lower than the 56 percent who indicated as much during the fourth quarter of 2017 alone.

Driving the price increases are the relatively few options would-be buyers have to choose from, noted NAR chief Lawrence Yun.

"A tug-of-war continues to take place in many markets throughout the country, where consistently solid job creation is fueling demand, but the lack of supply is creating affordability constraints that are ultimately pulling aspiring buyers further away from owning," Yun said.

How problematic of an issue dry real estate markets are is a function of where you happen to be looking, as some regions have more properties in listings than others. From a national perspective, however, choices are slim. In January, total housing inventory actually increased to 1.52 million, based on existing-home sales numbers from the NAR. But even with an increase of 4 percent from this past December, inventory is still down 9.5 percent from January of last year.

"These extremely frustrating conditions continue to be most apparent at the lower end of the market," Yun said, "which is why the overall share of first-time buyers remains well below where it should be given the strength of the job market and economy."

Renters feeling the pinch

But the rental situation isn't much more accommodating. To the contrary, 51 percent of the participants in the NAR survey said they anticipate paying more for rent in 2018 than they did in 2017.

As it stands, the average worker today has to earn more than $21 per hour to afford a two-bedroom apartment, according to the National Low Income Housing Coalition. Given that renters currently make an average of $16.38 per hour, this means that many renters are spending more than 30 percent of their income on rent. Because of these affordability pressures, it's time for developers to kick things into high gear.

Speaking of affordability, many renters or would-be buyers operate under the belief that they can't afford a down payment, under the assumption that they have to put down 20 percent of the property's value up front. Based on a separate poll conducted by the National Association of Realtors, 37 percent of millennials believe a 20 percent down payment is required. Not only is this inaccurate, but it's also far above what the average actually is (5 percent).

Regardless of what the supply situation looks like, renters are looking to buy, primarily because they're running out of room. In a Realtor.com poll, nearly 93 percent of respondents said they wanted at least two bathrooms in their future home.

With the inventory situation showing some improvement, prospective buyers should be able to get exactly what they're looking for in the not-too-distant future.


Understanding Mortgages

self-employed woman applying for a mortgage online

How to best approach the mortgage process when self-employed

The benefits of self-employment are undeniable. If they weren't, then there wouldn't be approximately 41 million Americans who work for themselves, according to estimates from MBO Partners.

Being your own boss is extremely freeing, as you're able to set your own timetable, pursue your passion or simply do something you're particularly good at. But as with any job, there are some challenges to being self-employed. One of them can be applying for a mortgage. It's not that the process itself is any more difficult than it is for those who work for a business, but there is a certain level of due diligence that self-employed applicants must reach in order to check all the boxes.

Here are a few smart ways to approach the process and simplify it:

1. Prep your paperwork

Paperwork is the name of the game in mortgage approval. An accountant can provide tips for obtaining the proper documentation, such as tax forms, profit and losses, etc.

2. Contact a mortgage professional

Rely on the expertise of a real estate or mortgage professional rather than going about it on your own. They understand exactly what it takes to be approved for a home loan and can offer sound advice.

3. Maintain a clean credit profile

A high credit score speaks well to your fiscal responsibility, which will go a long way toward improving the likelihood of authorization.


Understanding Mortgages

 

Couple holding a house

Interest rate are climbing, but how high will they go?

The answer is a bit foggy, as is their effect on conventional mortgage rates. However, should they head higher, newly released information suggests that many would-be buyers say they wouldn't let this get in the way of entering the market.

On March 21, the Federal Reserve - as expected - raised the benchmark funds rate to 1.75 percent, following several quarter-percent increases in 2017 and a few more in previous years. This most recent hike puts short-term interest rates at their highest level in a decade.

When key interest rates rise or fall, they cause a ripple effect that impacts savings, credit card fees and mortgage rates. Indeed, tracing back to when the Fed first started raising interest rates in earnest, mortgage rates have followed suit, although at a more moderate pace. For instance, according to data from Freddie Mac, 30-year fixed-rate mortgages used to average below 4 percent. Now they average around 4.5 percent.

Additional rate hikes may be in store

Economists seem to agree that the central bank isn't done. According to The Washington Post, some predict as many as two or three more rate hikes before 2018 concludes. But even if this comes to pass and mortgage interest levels run higher in response, most Americans wouldn't let it deter them from buying a house.

That's according to a poll conducted by SurveyMonkey, which found that, of the 4,000 individuals who participated, just 6 percent said they'd change their mind about buying a house if mortgage rates surpassed 5 percent.

Recent evidence seems to suggest as much. Home sales continue to spring up like roses. In February, purchases for all housing types rose 3 percent compared to January, according to the National Association of Realtors. This translated to a seasonally adjusted total of 5.5 million properties bought across the U.S. in February.

This gives credence to the general consensus among real estate agents who say their clients aren't altogether bothered by rates on the rise. In fact, financial advisor Peter Boockvar believes it's having the opposite effect.

"Higher rates are actually spurring buyers to step up and lock in with a purchase and a funding rate before they head even higher," Boockvar told CNBC. He added that weekly mortgage application data, maintained by the Mortgage Bankers Association, is further evidence of this. In early March, purchase loans were - and likely continue to be - the most popular mortgage type.

5 percent is the norm for interest rates

Historical context may also be playing a role in how prospective buyers are seemingly unperturbed by rates elevating. After all, the historical norm for short-term interest rates is 5 percent, and 30-year FRMs once averaged in the double-digits during the 1970s.

Real estate experts are none too bothered either, but admittedly they would rather see inventory levels do the climbing.

"To fully satisfy demand, most markets right now need a substantial increase in new listings," National Association of Realtors chief economist Lawrence Yun told CNBC.

With the economy on firmer footing and consumer sentiment at 17-year highs, that just might happen. But much like the direction of interest rates, only time will tell.


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