Our Expert Panel of Independent Mortgage Brokers Provide Insights on Property Bidding and Home Equity Loan Trends, and Whether the “28 / 36 Rule” Remains Relevant
The most important and often largest investment in most peoples’ lives is their home. But the physical building and its financial cost represent only a small part of its significance. Ultimately, it is where you build your life with your family – And it’s the cornerstone of the American dream.
But in recent years, the lack of housing inventory and significant increases in home prices has made what can be a complicated and emotional experience even more challenging. The impact of these trends, along with expected interest rate hikes, can make this major investment a headache for millions of potential homebuyers and their financial advisors.
Last month, I asked a panel of experts from around the country to address a few of the top questions from readers of WSR about the nuances and complexities of the current real estate market. The first set of answers drew an additional batch of questions from readers, some of which we will address in this month’s Real Estate Roundtable.
- Phil Shoemaker, President of Originations, Homepoint (one of the nation’s largest wholesale mortgage lenders, with over 6,000 affiliated mortgage brokers across the country)
Q: There’s been increased chatter about overall housing inventory increasing relative to the past several months. Do you see this trend continuing – Why or why not?
A: Lindsey Casher, Loan Originator at Stratton Mortgage in Columbus, Ohio, reachable via email at lcasher@strattonmortgage.com.
While I do foresee overall housing inventory increasing at a slow pace, the market will remain very competitive for buyers for quite some time. We are seeing sellers cashing out some of the equity gains that they have seen over the past two years by moving into larger homes or more desirable areas for their family, which provides opportunities for buyers.
At the same time, we recently saw a three-month low in housing starts due to construction costs, supply chain issues, and overall buyer/builder sentiment due to a resurgence in the pandemic.
Once these factors improve over the next six months to a year, buyers will find less competition in the bidding wars and a little more inventory, but it will still be important to have a good Realtor and lender to help them navigate multiple offer scenarios.
Q: What does the market for home equity loans look like right now, and what are the pros and cons of taking out such a loan from the borrower’s perspective?
A: Jim Black, Founder and Loan Officer at All Cal Financial, Inc. in Soquel, California, reachable at jim@allcalfinancial.com.
Positioning a variable rate home equity loan or a “HELOC” can be a good short-term debt instrument for some clients. However, when a client is looking more than three years down the line, we suggest using other solutions that include fixed and predictable payments.
The most important factor in this decision is the total blended rate on the carrying costs of all personal debts for a family. Sometimes, it is better to take a cash-out refinance, even at a higher rate than a borrower’s current first loan, to meet the time horizon until the payoff.
Q: What is the 28 / 36 rule for potential homebuyers, and do you believe this rule still applies in a residential property market characterized by rising home prices, limited inventory and interest rates that remain at historic lows?
A: Leo Whitton, Founding Partner and Loan Officer at Empire Home Loans, Inc. in Fair Oaks, California, reachable at leo@empirehomeloans.com.
The federal government implemented new rules for mortgage lenders across the nation in 2010, one of which pertained to borrowers’ Ability-to-Repay (ATR). As part of the standard underwriting guideline in the industry, a borrower’s debt-to-income ratio needed to be 28/36 – meaning no more than 28% of their gross income can go to housing expenses, and no more than 36% can go towards all debt, including housing-related expenses.
Fannie Mae and Freddie Mac have automated underwriting engines that will often go much higher than the standard 28/36 guideline based on the overall strength of the borrower. The specifics of this regulation were supposed to be changed and the industry has been working with regulators on a temporary rule since January 2014.
I personally don’t see things changing, especially with housing prices continuing to increase. I expect the Consumer Financial Protection Bureau will make new rules to eliminate Fannie and Freddie from the ATR rule when they come out of conservatorship. At that time, it should be business as usual.
