What is Mortgage Preapproval and Why is it Important?


Mortgage preapproval is often one of the first steps you will take in the complex process of buying a home. Like many other aspects of homebuying, it’s one that’s shrouded in mystery and its fair share of misconceptions. Particularly if you’re a first-time buyer, it’s essential to understand what mortgage preapproval is, why it’s important and how to complete the process.

A mortgage preapproval serves two important purposes:

  1. It allows a mortgage lender to check an applicant’s basic financial background to determine how much it is are willing to lend the would-be buyer for a home loan.
  2. It gives homebuyers a good estimate of how much they can expect to spend on the purchase.

After the rigorous vetting process required for most preapprovals, successful applicants will receive a preapproval letter that can serve like a bargaining chip during negotiations with a home seller. In fact, most sellers today have come to expect preapproval letters from any serious buyers before considering an offer.

While preapproval letters are taken seriously by sellers and their agents, it’s important to know that they don’t constitute a total guarantee from a lender. There are often contingencies and conditions written into the contract that give the lender the right to revise some terms of the loan before giving the final seal of approval. While rare, it’s possible that a lender could back out of preapproval altogether if any of these contractual obligations are not met. If it happens at all, this will usually occur during the closing process.

It’s also good to know that mortgage prequalification is not the same as preapproval, despite the similar terminology. Essentially, prequalification is the light version of preapproval, since it usually means a lender will perform only a cursory credit check and return with a very general estimate of the kind of home loan it could offer you. Prequalification can help buyers survey their options before committing to one lender, but it won’t count for anything once they start entering serious negotiations with a seller.

In short, preapproval will give lenders a vote of confidence in you as a homebuyer, which provides you with the confidence to make a serious, competitive offer on a home you love. Of course, there is a good deal of work that needs to go into the process first.

What you need for preapproval

Mortgage preapproval is just a few steps away from the real deal, so getting ready for one requires work from you and your lender. First, you’ll need to fill out a lengthy application containing as much information as possible about your personal and financial background. Then you need to provide your lender with documents that prove everything you’ve stated in that application is correct.

Start by collecting all the necessary records and copies you will need, which typically include:

  • Identification like your driver’s license, Social Security number, proof of residence and records of your marital status.
  • Recent statements from any bank accounts in your name.
  • Income tax returns and recent pay stubs to confirm employment and income.
  • If you own a business or are self-employed, provide a recent profit and loss statement along with relevant business tax forms.
  • A comprehensive list of all financial assets you own (including property and investments) as well as all liabilities you owe (like a previous mortgage, credit card debt or outstanding student loans).
  • For first-time buyers who were renting, provide recent canceled rent checks or include records of rent payment in your bank statements.
  • If you are using gift money from family or a charitable donation to pay for the down payment, you need to provide written proof from the source of that payment that it is a gift and not a loan.

In the process of reviewing your application, a lender will also pull your credit report to verify the information you provided, as well as to glean additional insight into your financial history. It may be helpful to check your credit report in advance of submitting your application to make sure everything is accurate. If you have any derogatory marks on your report, like bankruptcy or late payments, you may need to provide the lender with proof that those issues are officially resolved.

Mortgage preapproval is a great way to gain a clear view of how much home you can expect to afford, but it’s not something that should be rushed into. Perform as much research on your own as possible into where exactly you want to live and the housing prices in that area to come prepared to the mortgage lender’s office.

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Housing Going Strong, Will Keep Going Strong


Housing led the economy out of the 2009 recession. It leads the economy to this day.

New housing activity is a big deal to economic growth. When all the inputs to a new home — material, financing, sales, accouterments (furnishings and such) — are factored in, it’s easy to appreciate new housings’ contribution to the economy. 

New housing activity remains a big deal, and it remains a big deal where it matters most. The single-family-home segment is where it matters most. 

Single-family-home starts were up a stout 5.3% in October. Starts rose to 877,000 on an annualized rate for the month. More single-family starts are in store. Permits rose to 839,000 on an annualized rate in October.

The numbers in total, which include the multi-family segment (also up in October), show starts at 1.29 million on an annualized rate. Starts have trended higher in recent months. They’ve trended higher for the past five years, but they remain below the historical 1.5 million (annualized) average. Room for growth exists. 

As for tenured homes, buyer interest creeps higher.

Existing home sales rose 2% in October to lift overall sales to 5.48 million on an annualized rate. Single-family homes led the charge. They rose 2.1% for the month.

Buyer interest is there. Seller supply continues to dampen enthusiasm, though. 

Total housing inventory decreased 3.2% in October. It’s now lower than it was this time last year. No one should be surprised when prices are considered. The median price for an existing home rose 5.5% to $247,000 in October. The October price increase marks the 68th consecutive month of year-over-year price gains.

We offer the usual caveat — housing markets are local markets: Colorado, Connecticut; New York, New Mexico, they’re hardly the same. Overall, though, things look good. They look good despite a high degree of skepticism.  Read enough of the popular financial media outlets and you’re sure to encounter an article with at least one sentence that contains both “bubble” and “housing.”

A high degree of skepticism is a positive. The fact that many market participants are worried about a bubble suggests there is no bubble. The housing market remains a healthy market due in large part to healthy skepticism. 

Is it a perfect market? No market ever is. That said, we see little proof the housing market floats on air.  


All Quiet on the Interest-Rate Front

The range remains the same, as we expected it would. 

We’ve been portending the recent tend for at least the past month. With little new information on taxes, consumer-price inflation, and economic growth, we thought that interest rates would continue to hold within a tight range. That has been the case, at least on the long-end of the yield curve. 

The 10-year U.S. Treasury note has been anchored at 2.35% for most of November. Deviations have been no more than five basis points up or down. 

As the 10-year Treasury note goes, so go long-term mortgage rates. To no one’s surprise, the 30-year fixed-rate mortgage continues to hold a narrow range. The range has held within 12.5 basis points up or down for most of the year, with 4% serving as the pivot point. Mortgage News Daily tells that 4% has been the most prevalent quote across the country for a prime 30-year conventional loan for the past week. Again, we’re not surprised.

With the holiday shopping season heading to full force, we’ll stick to our mortgage-rate thesis: We see nothing but range-bound quotes from now until the new year. A quote below 4% on a prime conventional 30-year loan is likely worth locking. A quote above 4%? That might be worth floating. Of course, it all distills to individual risk preferences.

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The Yield Curve Flattens. Should We Care?


The yield curve has flattened in recent months: Short-term yields have risen; long-term yields have drifted lower. 

The yield on the 2-year U.S. Treasury note was 1.22% to start the year. The yield on the 10-year Treasury note was 2.45%. Today, the 2-year note yields 1.68%, the 10-year note yields 2.33%.  The yield on the 2-year note is up 66 basis points, the yield on the 10-year is down 12 basis points. (Yields on 20-year and 30-years bonds are also down.) 

Should we care?

We should. When the yield curve flattens, or inverts, a recession has usually loomed. The yield curve has predicted all U.S. recessions except one since 1950. The yield curve, though still normal (upward sloping), is the flattest in a decade. The last time the yield curve was this flat, an 18-month recession ensued.  

A flattening yield curve can indicate that market participants are worried about the macroeconomic outlook. They anticipate a slowing economy, which would prompt the Federal Reserve to lower interest rates and provide more liquidity. Market participants sell short-term maturities and go to long-term maturities because long-term debt prices will rise more on a lower-rate trend. 

That’s one reason.

The Fed simply raising the federal funds rate is another. This reason we know. The Fed has been raising the fed funds rate. It’s likely to raise it again next month. 

The Fed raising the fed funds rate, a short-term rate, could constrict credit growth. Rising short-term rates coupled with falling (or even steady) long-term rates could strangle credit growth. Lenders prefer a steeper yield curve because they earn a greater spread on the price paid for funds and the interest earned lending those funds long term. 

So, does this mean the good times will soon end? 

Not, necessarily. This time is different. Then again, this time is always different. 

A flatter yield could be the new normal. Few market participants before 2008 would have expected the Fed to hold the fed funds rate at close to zero, which it did for six years. That was an unprecedented new normal. Asset prices re-inflated while consumer-price inflation remained remarkably muted. 

The flattening yield curve also could be nothing more than a supply-demand reaction. The U.S. Treasury Department has said it wants to shift the focus to short-term debt. It wants to issue more bills and 2-year and 5-year notes and fewer long-term notes and bonds. More supply on the short-end requires higher yields to draw more demand. 

Our take is that things don’t feel “recessiony,” as unscientific as that explanation is. We still have low inflation, solid corporate earnings growth, persistent employment growth (with low wage inflation), and a lot of folks worried about the flattening yield (a good thing).

We see business as usual. Business as usual includes mortgage rates holding a tight range through the remainder of the year, with the range possibly holding into 2018. The range has held 3.875% to 4.125% on a prime 30-year loan.  We expect more of the same.

Taxes Revisited

More details have been released on President Trump’s tax reform plans presented to Congress. A few could impact our business directly. 

We have the good: The mortgage-interest rate deduction remains, though it has been capped at $500,000. People will still be allowed to deduct state taxes and local property taxes, though it has been capped at $10,000. An incentive to itemize remains. 

We also have the bad, at least from the NAR’s and NAHB’s perspective: The standard deduction is nearly doubled for individual and married couples. Relatively speaking, the mortgage-interest rate deduction loses value. The NAHB also failed to get the home-buyer tax credit it sought. 

We remain sanguine. No one knows what tax reform will emerge once Trump’s plan is run through the sausage grinder. Congress could accept some, none, or all of the plan (though “all” is unlikely).  Let’s keep in mind, too, that housing is an influential constituency with considerable lobbying muscle. 

And if everything goes the other way?

We’ll survive. Yes, people act on tax benefits. They’re more likely to act on psychic and economic benefits. An owner-occupied home provides both psychic and economic benefits that are independent of tax benefits.

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Going into the mortgage process, it is common for many first-time or even seasoned homebuyers to have a few misconceptions. With reasonable and clear expectations, the entire process of obtaining home financing can be simple and painless. Here are few myths about the homebuying process, combined with the truths behind them.

Lenders only look at your best credit scores

When you apply for a loan, all three reports from the major credit agencies — Experian, Transunion and Equifax — are pulled. Your lender will look at all of them then use the middle of the three. If you are applying as a couple, each borrower’s middle score will be looked at and the lowest middle will be used for approval. This means that if you have a score of 780 and your spouse has a score of 700, your loan is likely to qualify at 700. 

One exception is jumbo loans: typically in a situation where one borrower has a higher score and is a higher earner, some lenders will allow the higher credit score on the file to be used.

The rate you are quoted at the start will be the rate you get

Rate quotes, unless locked in immediately, are akin to an estimate based on the market and your personal eligibility. The rate quotes can change over the course of the process. 

For those seeking a mortgage refinance, locking in a rate when its quoted to you is possible as long as you’ve provided your lender with sufficient information. For homebuyers, through, this is more tricky: you are typically given a rate quote at the start of your pre-approval process, but you cannot lock in that rate until you’ve actually found a property you aim to buy. 

Fixed rate loans are better than adjustable rate loans

The loan you choose is going to be the one that works best for you and your unique finances. While rates are historically low, it may be tempting to play it safe and opt for a 30-year fixed rate mortgage. But if you are not sure how long you’ll own the home, a adjustable rate mortgage (ARM) may be a better option. ARMs have lower rates and shorter durations before the rate resets, so if after 5 years you are looking to move on and sell the house, you’ll have saved serious money in that time. 

Mortgage insurance is always required for down payments less than 20 percent

While lenders typically require you purchase mortgage insurance on all loans where the borrower is putting down less than 20 percent of the principle as a down payment, certain loan programs like a “piggyback” loan or VA loans allow for no mortgage insurance premiums for those who qualify.

New Penn Financial is here to educate homebuyers and connect them with the loan that is right for them. 

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Rates Stay Low as the Economy Keeps Humming Along


Businesses keep doing what they’ve been doing for the past five years — hiring employees and making money. 

On the former, business hiring helped lift payrolls by 261,000 in October. The surge in hiring dropped the unemployment rate to 4.1%. This is the lowest the unemployment rate has been since the year 2000. 

The latest round of monthly hiring lowered the pool of available workers to 11.7 million, which is shallow by historical standards. Businesses have been able to hire workers without breaking the bank. Wage growth remains anemic, with average hourly wages up only 0.5% in October. Year over year, hourly wages are up a moderate 2.4%. (That said, total compensation is likely growing at a faster rate when benefits are factored in.) 

On the latter, corporate earnings continue to flow unabated. Eighty-one percent of S&P 500 companies have reported third-quarter earnings. The blended earnings growth rate for these companies is 5.9% year over year. The flow should rise a few notches in the fourth quarter. Factset, a financial data provider, surveyed analysts and the analysts it surveyed expect S&P 500 fourth-quarter earnings to grow 10.4% year over year. 

Businesses are hiring, and they’re efficient about it. What modest wage growth we have has led to even greater earnings growth. (This is rational from an economic perspective: A business expects to receive a positive return on its factors of production.) 

So, wage-rate inflation remains a nonstarter for credit markets. There has been little of it to pressure interest rates to rise. Factor in low consumer-price inflation, another nonstarter, and it’s easy enough to understand why long-term interest rates continue to hover near multi-decade lows. 

As for long-term mortgage rates, 4% on the conventional 30-year fixed-rate loan serves as the fulcrum, as it has for most of 2017. Quotes on the national scene see-saw between 3.875% and 4.125%. 

We’re in a tight range, and we don’t expect to break that range in the foreseeable future. The range could easily hold for the remainder of the year.

It’s still a range worth gaming. After all, the difference in monthly P&I payments on a $300,000 30-year fixed-rate loan financed at 3.875% or 4.12% is $43. That will buy at least a couple of entrees and a round of drinks at the Olive Garden each month. 

For the immediate future, keep an eye on tax reform. If it becomes likely something might pass into law, mortgage rates will likely favor the 4.125% side of the fulcrum.

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What to Know About FHA Loan Requirements


U.S. homebuyers have a number of financial tools at their disposal today when it comes to smoothing out the notoriously expensive and complicated process of purchasing a home. One of the oldest and most well-known is a publicly funded program from the Federal Housing Administration, popularly known as the FHA loan. For qualifying homebuyers who can find the right house, FHA loans are mortgages backed by the FHA that can allow for home purchases with low down payments and closing costs. That makes them particularly attractive to many first-time buyers or anyone who has difficulty qualifying for a conventional mortgage.

While FHA loans are not directly financed by the FHA, they do involve a number of strict requirements that buyers and their potential new homes must pass. It’s essential to understand these rules to decide whether or not FHA is right for you.

The basics

The main selling points of the FHA loan program are its low down payment requirements, competitive interest rates and more lenient credit requirements compared to conventional mortgages.

  • FHA buyers may purchase a home with a down payment as low as 3.5 percent of the loan’s value.
  • Interest rates on FHA loans are still around 4 percent on average.
  • Buyers need a FICO credit score of at least 580 to qualify for the lowest down payment.

According to experts who spoke with Nerdwallet, these main points make FHA loans a generally good option for low- to middle-income borrowers, families and seniors. But gaining approval for an FHA loan also requires its own rigorous application process.

Important FHA credit requirements

Like most lenders, FHA buyers will need to be approved for their loan based on a set of credit and financial requirements:

  • Borrowers will need to provide a valid Social Security number or proof of lawful U.S. residency.
  • Borrowers must have proof of a steady income for at least the last two years.
  • The borrower’s front-end ratio (the cost of the monthly mortgage payment plus mortgage insurance, taxes and other fees) should usually be less than 31 percent of their gross income, although it may be as high as 40 percent in some cases.
  • The borrower’s back-end ratio (mortgage costs in addition to spending on other debt from credit cards, student loans, etc) cannot exceed 43 percent of their gross income in most cases, but may be approved as high as 50 percent.
  • For those with FICO scores between 500 and 580, borrowers will need to make a minimum 10 percent down payment.

The FHA also imposes limits on exactly what sort of house you can buy with an FHA-sponsored loan:

  • The borrower must live in the property as their primary residence.
  • Limits on FHA loan value vary depending on location. In general, the loan limit is equal to 115 percent of the county’s median home price.
  • The property to be purchased must be appraised by an approved appraiser in most cases. The appraiser will assess the home’s fair market value as well as criteria for safety and security mandated by the U.S. Department of Housing and Urban Development.

Mortgage insurance

One other important difference between FHA loans and conventional mortgages is how they handle mortgage insurance. In most situations where borrowers put less than 20 percent down on a home purchase, they need to pay additional private mortgage insurance fees at some point in the life of their loan, which drives up monthly payments. 

In the case of FHA loans, borrowers need to pay two kinds of mortgage insurance:

  • Upfront mortgage insurance may be paid as a lump sum at closing or rolled into monthly costs. Regardless of credit score, FHA borrowers will pay 1.75 percent of their loan value for this insurance premium.
  • Annual mortgage insurance premiums are tacked onto monthly payments, and vary depending on the terms of the mortgage. This premium ranges from 0.45 percent to 1.05 percent of the loan’s value.

Borrowers may need to pay mortgage insurance premiums for only up to 11 years, or they might extend over the entire life of the loan depending on the terms of the mortgage. 

These are just the most essential facts most borrowers need to know about FHA loans, but they do not cover every consideration that each buyer needs to make. Work with an FHA-approved lender like New Penn Financial to understand all the details of the program and whether it’s right for you given your financial situation and specific housing needs.

With this knowledge in mind, you’ll be in a better position to get a great deal on a new home using this popular program.

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Rates Are up…and so Are Home Sales


It’s more fours than threes these days.

Mortgage rates — rates on the long-end of the curve, in particular — are at a two-month high. 

Our own central bank, the Federal Reserve, has long ago telegraphed its intentions on monetary policy:

Raising interest rates and reducing securities purchases are on order. More recently, the European Central Bank will likely reduce its bond purchases, and it could do so by half. This would tighten the money supply in Europe. Interest rates in Europe are more likely to rise.

“Likely” is not the same as guaranteed, though. As we’ve seen on our side of the Atlantic, market participants frequently buy the rumor and the sell the news (reverse course on the news). For the immediate future, say for the week, quotes above 4% on the 30-year loan will likely persist. Beyond the week, uncertainty prevails. More adventurous borrowers might want to float in anticipation of a rate reversal (the selling of the news).

Mortgage rates are up, but so are home sales, at least for September. 

Existing-home sales posted their first gain in four months, rising 0.7% to 5.39 million units on an annualized rate. Price concessions contributed to the rise. The median price of an existing home fell 3.2% month over month to $245,100 .

Existing-home remains tight, at 1.9 million resales on the market. Supply is unchanged at only 4.2 months based on the latest sales numbers. With supply holding tight, sales growth will be difficult to achieve unless we see further price concessions.  

As for new-home sales, they had no trouble posting a gain in September. Sales blew past nearly everyone’s estimate to post at 667,000 units on an annualized rate. Little discounting occurred to move inventory. The median price of a new home rose 5.2% for the month.  

No doubt that some sales were attributable to a post-hurricane Harvey rebound. Sales in the South were up sharply from August, and at the highest level since July 2007. Some contracts in the South were surely delayed until September. 

The South should continue to lead the way with a post-hurricane Irma rebound. New homes, in particular, should see elevated sales over the next couple months due to increase activity. That said, the post-hurricane Irma rebound will have less of impact on existing-home sales.

Is Renting Really the Better Deal? 

According to the Wall Street Journal, 76% of millennials believe renting a home is the better deal compared to buying a home. The latest survey is a 10-point increase favoring renting compared with the same survey a year ago. 

We tend to view such surveys with a degree of skepticism: We don’t know how the questions of affordability were worded. We do know that respondents tend to answer questions to satisfy the surveyor. The respondents are prone to say what they think the other person wants to hear.

All that aside, and if it is true that the younger generations view renting as the more affordable option, will the homeownership rate continue to decline? 

It might not reverse course in the near term, but it will reach a point where it will reverse. That point might be closer than many of the experts expect.

Renting is certainly the preferable option when you first move out of the parent’s house. But continual rent increases and continual moving drive the longer-term costs higher.

Psychological costs also drag on the benefits of renting. An itinerant lifestyle becomes less satisfying the older we get. We want to own. We want to drive a nail into a wall without worrying about the security deposit. A neighborhood of owner occupiers is generally preferred over a neighborhood of renters. 

When all the costs are considered — monetary and psychic — through time, renting becomes more of a false economy for many people. When we finally get a break on relentless home-price appreciation, that false economy will become more apparent to more people.

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