How Does Inflation Affect Mortgage Rates?

High inflation often leads to higher mortgage rates by pushing up interest rates, reducing purchasing power and influencing housing demand, ultimately making home loans more expensive overall.

Inflation can affect mortgage rates in a few different ways, both directly and indirectly. When inflation is high, borrowing money becomes more expensive, and that can influence not only the cost of buying a home but also whether it's the right time to do it.

Understanding the relationship between inflation and mortgage rates can help you make informed decisions about homeownership.

What Is Inflation?

Inflation refers to the general increase in prices of goods and services over time, which leads to a decrease in purchasing power. In other words, when inflation rises, each dollar you have buys a little bit less.

The most commonly used measure of inflation is the consumer price index (CPI), which tracks the average change in prices paid by consumers for a basket of goods and services.

How Does Inflation Affect Mortgage Rates?

When inflation rises, mortgage rates tend to follow suit. Here are a few key ways inflation can influence mortgage rates.

Higher Interest Rates

The Federal Reserve often raises the federal funds rate to combat inflation, the idea being that higher rates can help curb consumer and business spending and help bring high inflation down.

While the Fed doesn't set mortgage rates directly, its actions influence them indirectly. More specifically, the Fed's monetary policy decisions play a major role in shaping investor expectations. In turn, those expectations directly influence the yield on the 10-year Treasury note.

Because the 10-year Treasury yield serves as a key benchmark for mortgage rates, changes in Fed policy often ripple into the housing market, pushing mortgage rates up or down accordingly.

Reduced Purchasing Power

When inflation is high, it erodes the value of money. For lenders, this means that the money they get back in the future will be worth less than it is today. To compensate, they may increase mortgage rates to protect their profit margins.

Market Sentiment

When inflation is high, rising prices for everyday goods and services can erode consumer confidence and make potential buyers more hesitant to take on a large, long-term financial commitment like a mortgage loan.

If enough buyers pull back, housing demand drops, which can put downward pressure on home prices and, in some cases, mortgage rates. Additionally, individual lenders may lower rates to attract new borrowers and keep loan volume steady.

Does Inflation Affect Fixed-Rate Mortgages?

Once you lock in a fixed-rate mortgage, your interest rate won't change for the life of the loan, even if inflation continues to rise. However, inflation can affect fixed-rate loans in several indirect ways:

• Higher rates: When inflation is high, fixed mortgage rates are likely to be higher than they would be in a low-inflation environment.
• Reduced affordability: With inflation driving up prices, including interest rates, your monthly payments may be higher than if you had locked in your mortgage during a period of low inflation.
• Opportunity costs: On the flip side, if you already have a fixed-rate mortgage at a lower rate, you're protected from rising rates and your loan becomes more valuable compared to new mortgages.

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Mortgage Contingency

Mortgage contingencies are important clauses in a purchase and sale agreement that can help protect buyers and sellers during the process of buying/selling a home. These contingencies can release either party from the contract if certain criteria aren’t met.

A typical mortgage contingency clause may specify that the buyer is required to secure financing of a certain amount by a certain date before closing.

In other words, the buyer’s commitment to purchase the home depends on securing financing that meets agreed-upon terms. In this example, if the buyer is unable to get approved for said financing, they can walk away without losing their earnest money deposit.

Why It Matters:

• For Buyers: It’s a safety net so they’re not stuck with a mortgage they can’t afford.
• For Sellers: It sets expectations and keeps financing on track with deadlines.

Types of Mortgage Contingency

1. Financing Mortgage Contingency

Financial contingency clauses will vary from contract to contract, but their general format is this: They typically allow the purchase and sale agreement to be canceled if financing cannot be secured in a specific timeframe. This contingency sets a window—perhaps 20 days, perhaps 60—for the buyer to lock in financing.

This contingency also usually states a minimum loan amount needed to complete the purchase. If the lender approves less, the buyer can be released from the agreement without penalty. But if the buyer fails to secure financing at all within the deadline, they may lose their deposit.

This contingency may also specify a maximum interest rate and loan type, such as an FHA or VA loan. If the buyer is unable to get approved for the target rate or below, the buyer can leave the contract.

2. Inspection Contingency

In this instance, the contingency clause could specify that the purchase of the home hinges on the property passing inspection. If the home doesn’t pass, the seller might have to make repairs or bring down the sale price. Otherwise, the buyer might walk away.

3. Appraisal Contingency

This contingency states that the property must be appraised at a certain value or higher. If the appraisal falls below that, the buyer may negotiate the price or leave the agreement. Appraisal contingencies can also include a time limit within which the property must be appraised.

4. Sale of Previous Home Contingency

This contingency could protect buyers who need to sell their current home to finance the new purchase, enabling the buyer to leave the contract if their existing home doesn’t sell within a certain timeframe.

How Mortgage Contingencies Can Protect Buyers and Sellers

Buyers:

• Financial Safety Net: If financing falls through, buyers aren’t forced into a purchase they can’t afford.
• Earnest Money Protection: Buyers usually can keep their deposit if they cancel for valid financing reasons within the contingency period.
• Minimized Property Surprises: Appraisal and inspection contingencies can help ensure the buyer knows exactly what they’re getting for their financing.

Sellers:

• Structured Progress Tracking: Sellers can be assured of financing deadlines, helping them to plan next steps.
• Ability to Terminate if Financing Falls Through: If buyers miss deadlines or are unable to lock in a loan, the contract can be canceled.

What Happens if the Mortgage Contingency Expires?

If a purchase and sale agreement contains a mortgage contingency that specifies a deadline for the buyer to find financing, for instance, and the buyer misses that deadline, the buyer could lose their deposit.

Why It Matters:

• Buyers risk losing deposits or facing legal consequences if financing fails.
• Sellers gain full leverage to enforce the contract or move on to other offers.

Best Practices for a Smooth Financing Process

For Buyers:

• Contact us to get pre-approved* before making an offer. A pre-approval letter shows sellers you’re a serious buyer, and also helps you get a clear idea of how much house you can afford.
• Monitor interest rates and lock in when favorable.
• You have the option to ask for an inspection contingency to help ensure the property is up to par.
• Ask for extensions early if delays arise so you don’t lose your deposit.

For Sellers:

• Verify the buyer has a pre-approval.
• Set realistic contingency deadlines.
• Request regular updates on financing progress and keep open lines of communication.
• Keep backup offers in play just in case.

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How Power of Attorney Applies to Mortgage Borrowers

In times when a homeowner becomes unable to handle tasks related to their mortgage, a Power of Attorney (POA) may come into play. POA is a legal instrument that allows an authorized person to act on behalf of the borrower to manage the home loan.

Understanding Power of Attorney

Power of Attorney allows an authorized individual (the “agent”) to handle mortgage matters for the original borrower (the “principal”). This is especially relevant when the borrower is unavailable, incapacitated, or otherwise unable to handle loan servicing tasks directly.

POA Requirements

In order for someone to assume POA on behalf of a borrower:

• A valid, notarized POA document with clear authority to act on mortgage matters.
• The POA must be specific enough to cover the intended actions (e.g., “authority to manage mortgage obligations”).
• In some cases, a durable POA is required. In contrast to a regular POA, a durable POA retains the power to act on the borrower’s behalf even if the borrower becomes incapacitated.
• We may request verification of the principal’s (borrower’s) status (for instance, proof of incapacity or a death certificate).

Common Uses in Mortgage Servicing

Once someone takes up POA for a borrower and becomes their “agent,” they’re typically able to make decisions related to the mortgage that might include:

• Loan modification requests: Negotiating or submitting documents on behalf of the borrower.
• Payment management: Making payments, setting up auto-pay or resolving any delinquency issues.
• Loss mitigation: In cases of hardship, the agent may initiate forbearance or repayment plans.
• Foreclosure prevention: The agent can respond to notices, request reinstatement quotes or pursue alternatives like short sales.

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Common Mortgage Mistakes to Avoid

Securing a mortgage for your home is a major financial milestone. You want to ensure you choose the right mortgage and experience a smooth application and approval process. 

Mistake #1: Ignoring the Full Financial Picture

It’s critically important to understand what your monthly budget will look like as a homeowner. Your mortgage shouldn’t be a big burden on your finances. Follow these tips to maintain a comfortable budget:    

• Reference the 28% rule: Some experts suggest that your mortgage payment should account for no more than 28% of your income.1 You can use this as a benchmark to see what you can afford.
• Use a Mortgage Calculator: Have a price range in mind for a new home? 
• Factor in All Parts of Your Monthly Mortgage Payment: Mortgage payments typically aren’t limited to principal and interest – they usually also include homeowner’s insurance and property taxes, which will vary depending on the property’s location. 
• Add Up the Rest of Your Budget: Account for typical monthly expenses (groceries, gas, cell phone bill, etc.) and then add in planned future costs like childcare, education or retirement plans. Here’s a more detailed guide to budget setting.
• Leave Room for Emergencies: Don’t let unexpected costs knock your budget off balance. Budget some wiggle room for home repairs or other needs that arise.

Mistake #2: Getting Scared Off by the Down Payment

If you don’t have enough money saved for a 20% down payment, homeownership may seem out of reach. But you should know that there are loan programs that allow you to get a mortgage while making a smaller down payment, if you qualify.

• A Federal Housing Administration® (FHA) loan may enable you to qualify with as little as 3.5% down. It also offers flexibility on your debt-to-income (DTI) ratio, and you may qualify with less-than-perfect credit. Learn more.
• HomeReady® and Home Possible® loans are designed to grant homeownership to those with low-to-moderate income for as little as 3% down.
• Veterans Affairs (VA) loans are available to active-duty Military, Veterans and their families. Eligible borrowers may be able to put as little as zero money down. Learn more.
• U.S. Department of Agriculture (USDA) loans are available to those with low-to-moderate incomes living in less populated areas, and may enable borrowers to put no money down.

Mistake #3: Not Getting Pre-Approved**

If you’re putting an offer on a great home, there’s a good chance you’re not the only potential buyer vying for a seller’s attention. Don’t get lost in the buying crowd – make your offer stand out by adding a pre-approval letter from your lender.

• Give Your Offer Weight: Pre-approval shows sellers and real estate agents that you’re serious about buying and you’ve got the finances to back it up.
• Have a Clear Financial Benchmark: Pre-approval sets a clear financial limit on how much home you can afford so you don’t waste time during your search.

Pre-approval requires you to verify your financial situation to a lender with documentation. Your lender will also perform a detailed check of your credit history.

Mistake #4: Making Big Financial Changes During the Approval Process

Once your mortgage application is submitted, sudden financial changes may raise concerns for lenders, and might affect their approval determination.

• Notify Your Lender of Job Changes: Switching employers or changing to a new pay structure is material to your ability to repay a loan. Be sure to notify your lender as soon as possible if any details regarding your income change.
• Delay Large Purchases: Getting a new line of credit or buying big-ticket items like a car, furniture sets or large appliances may alter your debt-to-income ratio.
• Thoroughly Document Large Deposits: Any significant bank transfers – even between your own accounts – have to be documented to comply with underwriting guidelines.
• Delay Credit Inquiries: If you pull your credit or another party makes a credit inquiry, your lender will likely need to verify that no new debt has been incurred, which could delay or impact your loan approval process.

Mistake #5: Neglecting to Plan for Closing Costs

First-time homebuyers may forget about these costs until they’re committed to a new home, which could lead to stressful surprises at closing.

Closing costs are typically between 2-5% of the home’s purchase price and include things like appraisal fees, loan origination fees, discount points, real estate agent commissions, attorney’s fees, the title search, title insurance and more.

Make sure you’re prepared for these expenses, and know that closing costs typically vary depending on the price of the home, the property’s location and your lender, among other factors.

Mistake #6: Not Consulting with A Mortgage Professional

Sometimes, getting a mortgage can feel like a very impersonal transaction. At Newrez, we want to give our borrowers top-tier guidance so they truly feel they’ve found the right mortgage for their lifestyle and financial circumstances. Source

Happy Independence Day!

 

Happy Independence Day from us at Work and Associates Home Loans!

We hope you have a safe holiday weekend!

Phone: 916-847-3090

1350 Old Bayshore Hwy Ste. 520

Burlingame,  CA  94010

margeate@workhomeloans.com

NMLS ID 394275 | DRE ID 01769353

What To Look For When Buying A House

Buying a house is a major decision. It’s critical to know what to look for when buying a house so you enter the process with clarity and purpose. Having criteria for your dream home and neighborhood could mean the difference between finding the right fit—or making a mistake. 

Here are some key criteria to consider when buying a home: 

•  Price. What can you afford to spend on a property? The pre-approval letter from your lender will include the maximum loan amount you qualify for. Consider your down payment amount and what you can afford in monthly mortgage payments coupled with recurring debts and household expenses (like daycare, groceries, utilities, tuition, etc.). You’ll also want to have savings set aside for home maintenance and major repairs. 

• Location. The neighborhood, city, town or state you want to live in is almost as important as a home’s amenities. Do you care about peace and quiet, or proximity to recreation or entertainment? What about being close to shopping, dining, grocery stores, schools and job hubs? 

• Commute time. How long would your commute to and from work and/or school be? Will you have easy access to public transportation and how important is that for your day-to-day needs? 

• Schools. If you have or plan to have children, you’ll want to research the quality of the schools a home is zoned for. Pay attention to school ratings, test scores, teacher-to-student ratios and other success metrics to evaluate schools and school districts in the areas where you’re looking for a home. 

• Home type. Owning a single-family home tends to come with higher upfront costs and maintenance responsibilities than buying a condo or townhome. Condos and townhomes tend to be smaller and less expensive. However, you’ll likely pay higher monthly homeowners association or condo fees for shared amenities, services and maintenance. 

• Design and upgrades. A new construction home is brand new, energy-efficient and can be tailored to your design tastes. The same goes for a flipped home, which is a property that is bought, fixed up and resold in a short timeframe. With a flipped home, you won’t have a say in design elements, but you’ll likely pay more than an existing home because it’s been upgraded. Or you can buy an existing home that may need to be updated but the price might be lower. 

• Condition. Some properties may need minor cosmetic repairs like new paint and carpet, while others need significant renovations or require you to replace major costly systems. Do you have the extra cash, time and energy to account for a house that’s not move-in ready? 

• Space. Consider how many bedrooms, bathrooms, offices and other spaces you may need. Do you want a large kitchen or a specific number of bedrooms to accommodate a growing family? Does the property check off all of the boxes right now—or does it have the potential to add those spaces in the future? 

• Energy efficiency. Utility bills can impact your monthly budget. How’s the property’s energy performance? What would need to be done to improve it? Are the appliances, windows and other structures energy-efficient? What direction does the home face and how does that impact energy usage? 

• Square footage. How big does the home need to be to match your lifestyle, family and storage needs? Keep in mind the larger the home/property acreage, the higher your costs to maintain it. A larger home also means you’ll pay a higher purchase price. 

• Parking. Do you want a garage/off-street parking, or are you okay with parking your vehicle on the street? Do you need other outdoor storage spaces for a boat or RV? 

• Property additions. Do you want a property with the interior or exterior space to extend the property or convert the loft or garage into an additional room? Is there a basement space you could finish down the road to add to your livable square footage? 

• Outside space. Do you want a garden, patio or back deck? How much maintenance are you able and willing to do? If you’re buying a townhome or condo, will you have access to any private outdoor spaces, or are they shared with other residents? 

• Historical district. Check if the home is located within a historic district. This might impact your ability to extend the property or make changes to its exterior. 

• Potential drawbacks. Is the property on a busy road, next to a highway or railway track, in a food desert or in a high-crime area? Decide what issues you are willing to live with before you buy. These properties may also take longer to resell and be harder to rent out. Source

Contact us with any questions regarding buying a home, we would love to assist you! 

Phone Number: 916-847-3090

DRE ID # 01769353

NMLS ID # 394275

What is an FHA loan?

An FHA loan is a type of mortgage insured by the Federal Housing Administration (FHA), which is overseen by the U.S. Department of Housing and Urban Development (HUD). While the government insures these loans, they’re underwritten and funded by FHA mortgage lenders. Many big banks and other types of lenders offer them.

FHA loans have a low minimum credit score and down payment requirement, which makes them especially popular with first-time homebuyers. You can get an FHA loan with a credit score as low as 580 if you have 3.5 percent of the home’s purchase price to put down, or as low as 500 with 10 percent down. These flexible underwriting standards are designed to help more borrowers become homeowners.

You can’t buy just any home with an FHA loan, however. You can’t use this loan to buy an investment property or vacation home. Based on your credit and finances, the lender determines how much mortgage you’d qualify for within the FHA loan limits for your area.

Who are FHA loans best for?

FHA loans are generally best for borrowers with lower credit scores, limited down payment savings or both. This might include first-time or younger homebuyers, or those with smaller incomes.

How do FHA loans work?

FHA loans work like most other mortgages, with either a fixed or adjustable interest rate and a loan term for a set number of years. There are two term options: 15 years or 30.

You’ll also pay closing costs for an FHA loan, such as appraisal and origination fees. The FHA allows home sellers, a home builder or a mortgage lender to cover up to 6 percent of these costs.

To insure these loans against default — that is, if you were to stop repaying your loan — the FHA requires borrowers to pay mortgage insurance premiums, or MIP. These go into the Mutual Mortgage Insurance Fund (MMIF), which helps cover loss claims. Although you’ll pay the premiums as the borrower, FHA mortgage insurance protects the lender — not you.

FHA loan requirements

Here’s an overview of the requirements for an FHA loan:

• FHA credit score: As low as 580 with a 3.5 percent down payment or as low as 500 with a 10 percent down payment
• FHA down payment: At least 3.5 percent down if your credit score is at least 580, or at least 10 percent down if your credit score is between 500 and 579
• FHA debt-to-income (DTI) ratio: At most 43 percent (up to 50 percent in some cases)
• FHA occupancy rules: Primary residences between one and four units
• FHA mortgage insurance premiums (MIP): An upfront premium of 1.75 percent of the loan principal, typically paid at closing; plus annual premiums between 0.15 percent and 0.75 percent depending on down payment and loan amount and term, typically paid monthly

FHA minimum credit score

If you put just 3.5 percent down, the minimum credit score for an FHA loan is 580. You can qualify with a score as low as 500, but you’ll need to make at least a 10 percent down payment. Keep in mind that the FHA sets this limit, but individual lenders might require a higher score.

FHA down payment

For an FHA loan, you’ll need a down payment of at least 3.5 percent. This minimum increases to 10 percent if your credit score is between 500 and 579.

FHA loans allow borrowers to use down payment funds from sources other than their savings, such as a gift from family. Borrowers might also be eligible for down payment assistance to help cover the cost.

FHA debt-to-income (DTI) ratio

To meet the DTI ratio requirements for an FHA loan, your combined monthly debt payments, including your mortgage, shouldn’t exceed 43 percent. No more than 31 percent of your income should go toward your mortgage payments.

That said, your lender could make exceptions for your overall DTI up to 45 percent, 50 percent or even 57 percent with an FHA loan, assuming you have mitigating factors like a lot of liquid assets or can make a sizable down payment.

FHA mortgage insurance

All FHA loans require you to pay mortgage insurance, which is split into two components:

• Upfront premium: 1.75 percent of the loan amount, which is paid either at closing or incorporated into the final loan amount
• Annual premiums: Amount varies based on down payment, loan amount and loan term

For example, if you’re an FHA borrower who opts for a 30-year term and a 3.5 percent down payment, you’ll pay 0.55 percent of the loan amount, divided by 12 and added to your monthly payment. That means if you borrow $300,000, you’ll pay $1,650 a year — or $137.50 monthly — for MIP. Source

DRE ID # 01769353

NMLS ID # 394275