Want to buy a house – in a year? Here’s your financial checklist

The current market makes the Great Recession sales days
seem like a stampede.

By JEFF LAZERSON | jlazerson@mortgagegrader.com | MortgageGrader.com | February 20, 2023

Article originally posted in Orange County Register on February 16, 2023.

“Tanking” perfectly describes the earliest months of 2023’s homebuying season.

Homebuyer confidence is the lowest I’ve ever experienced in my 35-year mortgage originator career. The current market makes the Great Recession sales days seem like a stampede. Few want to buy right now. Only the most motivated are pulling the trigger.

On Feb. 15 the purchase index plunged 43% lower than one year ago, according to the Mortgage Bankers Association.

“Purchasing applications dropped to their lowest level since the beginning of this year and were more than 40 percent lower than a year ago,” said Joel Kan, deputy chief economist at the MBA. “Potential buyers remain quite sensitive to the current level of mortgage rates, which are more than 2 percentage points above last year’s levels and have significantly reduced buyers’ purchasing power.”

Mortgage payment affordability is just the tip of the inflation iceberg. The Consumer Price Index jumped 0.5% in January after increasing just 0.1% in December, the Bureau of Labor Statistics reported. Undoubtedly, this means mortgage rates are increasing and home prices will go into a steeper descent.

Everything from eggs, energy and insurance is eating into hard-earned paychecks. As he sees it, Fed Chair Jerome Powell isn’t going to be happy until he raises rates high enough to get inflation under control. That’s a job killer. That also portends a consumer confidence spiral.

Similar to goal-setting and working toward a job promotion or a pay raise, now is an excellent time to prepare for your first or your next property purchase.

Do not expect mortgage rates to significantly improve until late 2023. Don’t be surprised if mortgage rates hit 7% between now and summer. Do not expect home prices to find a bottom until early 2024. Prep time is on your side.

Here’s my financing readiness checklist:

— How much money can you cobble together for your down payment? Write it down.

— Review your stash monthly and stay on track.

— Set a realistic monthly principal and interest, property tax homeowners insurance and HOA assessment house payment budget; don’t forget to include utility bills.

Real estate agents and mortgage loan originators tend to push your numbers higher because their paychecks are based on the sales price and loan amounts. Stay within your means and comfort zone. Nobody is going to be there to help you after escrow closes.

— Consider non-obvious sources for the down payment and closing costs. Some banks, for example, are providing generous assistance for low-to-moderate-income borrowers and specific areas of town. Local governments also are offering programs. Nonprofits and employers are also potential sources. Real estate agents and mortgage lenders may be able to contribute toward your settlement charges. Always ask.

— Talk with a mortgage expert now to learn ways to optimize mortgage origination costs with respect to your down payment and FICO credit score.

“It’s Robinhood pricing with no real justification,” said John Ulzheimer, a credit expert and president of The Ulzheimer Group.

— Be skeptical of hard-push mortgage lender referrals from real estate agents. It’s been a real estate and mortgage sales famine for nearly a year. It’s getting worse. Kickbacks are ubiquitous. It always costs the borrower more in mortgage rate or costs when mortgage loan originators are paying referrals.

— Unless you have money to burn or you truly trip upon a one-of-a-kind house, do not buy any property in the next 10 months unless you can ink a contract at least 10% cheaper than what the property is fairly valued at today. No doubt home values are going to fall further.

— California rents have dropped for five consecutive months. Approach your landlord or landlady about a reduction in rent. Or calculate the potential savings if you can find significantly cheaper quarters. For owner-occupants planning to move up, does it make sense to make two moves? Rent your home out with significant financial upside while you rent temporarily. In both cases, what about freeloading on mom and dad?

— Hide your credit cards. Stop spending but for true necessities. Major purchases such as cars and appliances should be delayed until after you buy a home.

“Avoid taking on any new debt obligations before applying for a mortgage. That one will help control the DTI (debt-to-income),” said Ulzheimer.

— Find neighborhoods you like. Consider issues like schools, crime rates, time and distance to your work. Put flyers together and go door-knocking. A year ahead is none too early. Plant seeds with potential sellers. Most all the best bargains are pre-market and off-market finds.

You don’t need to pay an agent to buy a home. A good escrow officer can help you with the few required documents without charge. Or you can pay a real estate attorney for an hour or two of his or her time.

— Put the word out. Your family, friends and circle of influence can be valuable lookouts for you.

— Find a great real estate professional to make your real estate dreams come true. In my experience, 20% of the agents are salt-of-the-earth excellent and 80% are not very good. Be patient in your search.

Freddie Mac rate news: The 30-year fixed-rate averaged 6.32%, 20 basis points higher than last week. The 15-year fixed-rate averaged 5.51%, 26 basis points higher than last week.

The Mortgage Bankers Association reported a 7.7% mortgage application decrease from last week.

Bottom line: Assuming a borrower gets the average 30-year fixed rate on a conforming $726,200 loan, last year’s payment was $1,070 less than this week’s payment of $4,504.

What I see: Locally, well-qualified borrowers can get the following fixed-rate mortgages with one point: A 30-year FHA at 5.5%; a 15-year conventional at 5.25%; a 30-year conventional at 6%; a 15-year conventional high balance at 5.875% ($726,201 to $1,089,300); a 30-year high balance conventional at 6.5%; and a jumbo 30-year fixed at 6.5%.

Note: The 30-year FHA conforming loan is limited to loans of $644,000 in the Inland Empire and $726,200 in LA and Orange counties.

Eye catcher loan program of the week: A 30-year FHA fixed rate at 5.25% with 2 points cost.

Jeff Lazerson is a mortgage broker. He can be reached at 949-334-2424 or jlazerson@mortgagegrader.com. His website is www.mortgagegrader.com.

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* Specific loan program availability and requirements may vary. Please get in touch with your mortgage advisor for more information.

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Jeff Lazerson - Mortgage Columnist since 2011