Median Down Payment for Home Buyers Hits All-Time High in 2018

According to a report published in September by ATTOM Data Solutions, the median down payment among home buyers in the U.S. hit an all-time high during the second quarter of 2018.

The nationwide median was $19,900 during the second quarter. San Jose, California topped the charts with a (mind-blowing) median down payment of $306,000. Three other California metro areas rounded out the top four, followed by Boulder, Colorado.

Home Buyer Down Payments Reach All-Time High in 2018

According to the report published last month, the median down payment for single-family home and condo purchases was $19,900 during the second quarter of 2018. That was an increase of 19% over the previous quarter, when the median was $16,750. It also marked “a new record high going back as far data is available,” said the report.

This analysis included 103 metropolitan areas across the United States. Out of those 103, the metro areas with the highest median down payments in Q2 2018 were:

  • San Jose, California ($306,000)
  • San Francisco, California ($220,000)
  • Los Angeles, California ($130,000)
  • Oxnard-Thousand Oaks-Ventura, California ($115,400)
  • Boulder, Colorado ($107,750)

The numbers in parentheses might look like home values, at first glance. But they’re actually the median down payments among home buyers during the second quarter, for each of those metros. (So yes, a typical down payment on a house in San Jose is higher than the average home value for the U.S. The word “anomaly” comes to mind.)

This report also identified another group of metro areas with median down payments of $60,000 or higher, during the second quarter. They included:

  • San Diego, California ($90,400)
  • Boston, Massachusetts ($79,925)
  • Seattle, Washington ($70,100)
  • Fort Collins, Colorado ($68,050)
  • Among others

But home buyers in these metro areas who can’t afford such a large down payment shouldn’t fret too much. In fact, depending on the kind of loan program you use, your minimum required investment could be significantly lower than the figures mentioned above.

Median and Minimum Are Two Different Things

To be clear: the numbers shown above do not represent the minimum down payment required for different mortgage programs. These are just the median figures.

By definition, the median is the midpoint for a data set. So in this case, half of all home buyers in each metro area made down payments above the median figure, while the other half put down less money than that amount.

Minimum down payments are a totally different story. For instance, borrowers who use a conventional home loan to buy a house could qualify for a down payment as low as 3% of the purchase price. Similarly, the Federal Housing Administration (FHA) loan program allows eligible borrowers to make an upfront investment as low as 3.5% of the purchase price.

So why are the median figures so much higher than these minimums? Some borrowers choose to make larger down payments, and for a couple of reasons:

  • Some do it because they want to minimize the loan amount and the size of their monthly payments.
  • They also do it to avoid paying mortgage insurance, which is usually required when the loan-to-value ratio rises above 80%.

Borrowers who make these larger upfront investments push the median and average down-payment figures higher than the minimum requirements mentioned earlier.

Conclusion: Rising home values have forced home buyers to make larger investments on their purchases, in terms of the actual dollar amount. Nationwide, the median down payment for single-family home purchases (where a mortgage loan was used) rose to $19,900 during the second quarter. That was an increase of 19% over the previous quarter. But it’s possible to make a smaller investment, as little as 3% for a conventional loan and 3.5% for FHA.

New Document Rules Could Help Self-Employed Mortgage Shoppers Get Approved

A bipartisan Senate bill introduced in August 2018 could make it easier for self-employed and “gig economy” workers to qualify for mortgage loans, by allowing lenders to use more documents during the underwriting process.

Self-employed home buyers tend to encounter more hoops and hurdles when shopping for a mortgage loan, and much of it has to do with documentation. Self-employed workers sometimes lack the income-related documents of a person with traditional employment. And this can make it harder for them to prove their income.

A new piece of legislation working its way through the Senate could change that. If passed, it would allow mortgage lenders to use additional documents (like the IRS form 1040) when reviewing mortgage loan applications from self-employed borrowers.

More Documents Allowed for Self-Employed Mortgage Shoppers

In August 2018, U.S. Senators Mark R. Warner (D-VA) and Mike Rounds (R-SD) introduced a bill that is officially known as the Self-Employed Mortgage Access Act of 2018. And its name signals its intent. The proposed legislation is designed to boost mortgage access among self-employed workers and “other creditworthy individuals with non-traditional forms of income.”

It would do this, in theory, by allowing lenders to use a broader range of documents when considering loan applications.

The Self-Employed Mortgage Access Act would allow mortgage lenders to use the following documents:

  • IRS Form 1040 Schedule C for sole proprietorships
  • IRS Form 1040 Schedule F for farming industry workers
  • IRS Form 1065 Schedule K-1 for partnerships
  • IRS Form 1120-S for S Corporation workers

We should clarify at this point that self-employed mortgage shoppers can qualify for financing — even under today’s guidelines. It happens all the time. But they often have to jump through additional paperwork hoops along the way.

Banks and lenders frequently request profit-and-loss (P&L) statements from self-employed mortgage applicants, as well as other documents that traditionally employed borrowers do not have to provide. The changes being proposed in this bill could simplify the path to mortgage approval.

According to Senator Warner, one of the bill’s proponents:

“An increasing number of Americans make their living through alternative work arrangements, like gig work or self-employment. Too many of these otherwise creditworthy individuals are being shut out of the mortgage market because they don’t have the same documentation of their income — paystubs or a W-2 — as someone who works 9-to-5.”

This bill is designed to alleviate some of those document-related issues, thereby increasing mortgage access for self-employed borrowers.

Supported by Key Industry and Consumer Groups

Most legislation proposed at the federal level has to be approved by members of both the Senate and House, and then be signed into law by the president. To date, this bill has only been introduced within the Senate. So it has a ways to go.

But it also has some momentum behind it, which could lead to an eventual passage. For one thing, it is being supported by key industry groups (i.e., lobbyists) such as the Mortgage Bankers Association. Even a few consumer advocacy groups have voiced their support.

Barry Zigas, Director of Housing at the Consumer Federation of America, said the Self-Employed Mortgage Access Act “would provide common sense direction to the [Consumer Financial Protection Bureau] in its application of the statutory requirements and give lenders and consumers alike an easier, less burdensome way to meet these tests.”

Typically, when a piece of legislation has broad support and few detractors, it eventually becomes law. But only time will tell. We are monitoring this bill and will report on any new developments as they arise.

The key takeaway here is that, if passed, this bill could ease the requirements for self-employed borrowers seeking a mortgage loan. It would allow them to provide alternative documents to verify their income. And that seems like a positive change.

Two Best Ways to Improve Your Credit Score Before a Mortgage Application

A new report from the credit score developer FICO reveals two of the best ways home buyers can improve their credit scores before applying for a mortgage loan. Pay your bills on time, and reduce your “amounts owed.”

We’ve known for some time that “payment history” and “amounts owed” are the two biggest factors that can influence a person’s credit score. But now we have some in-depth analysis to support that claim.

Why Credit Scores Matter to Mortgage Applicants

Your credit score is a three-digit number that’s computed from the information contained within your credit reports. Those reports are a record of your borrowing history dating back several years, and they include things like credit cards, auto loans, mortgages, etc.

FICO scores are produced by the company of the same name. They are commonly used by banks and lenders when reviewing loan applicants, such as home buyers applying for a mortgage loan.

The FICO scoring range goes from 300 to 850. A higher number is better. Home buyers with higher credit scores tend to qualify for lower mortgage rates. They also have an easier time getting approved for loans in the first place.

On the other hand, borrowers with lower scores tend to pay more in interest and might have a harder time qualifying for financing.

The bottom line: if you’re planning to use a mortgage loan in the near future, you should know (and care about) your credit score. It will affect everything from your ability to quality for financing, to the interest rate that’s assigned to your loan.

Improving Your FICO Score

But what if you’re one of the folks with a relatively low score? How can you improve your credit score before applying for a mortgage loan? Two of the best strategies are to (A) pay your bills on time going forward, and (B) consider reducing your debt load or “amounts owed.” These factors weigh more than any other when it comes to the automated credit-scoring formulas.

FICO scoring factors

Which brings us back to the FICO report mentioned earlier. They company analyzed FICO score distribution data among home buyers who used a mortgage loan to buy a house. The resulting report offered a wealth of insight into how these score are generated, and how they affect consumers who are shopping for a home loan.

They also highlighted two ways a person could improve a credit score before applying for a mortgage loan. One strategy is for consumers with higher recurring debt balances to reduce those debt loads. High credit card balances were singled out, in particular, because those can have a negative impact on a person’s credit score.

As the report stated:

“Our analysis found that consumers with a FICO® Score increase were more likely to have reduced their amounts owed. ‘Amounts owed’ makes up about 30% of the FICO® Score calculation; not having high revolving balances and paying down installment debt are two indicators of a healthy credit profile.”

That company explained that those consumers with an increase in their credit scores reduced their credit card balances by an average of 49%.

Here’s the part that relates to payment history:

“We also found that as of April 2018, consumers with a decrease in [their scores] were much more likely to have had a missed payment in the past year. ‘Payment history’ is the most important category within the FICO® Score, comprising ~35% of the total score calculation.”

It bears repeating: How you pay your bills counts more than any other factor, when it comes to calculating that three-digit number. Consumers who regularly miss payments on things like credit cards and car loans tend to have lower scores, while those who stay on top of their bills usually have higher numbers.

One Piece of a Bigger Picture

Credit scores are one of the most important qualification criteria for home buyers seeking a mortgage loan. But they’re also part of a bigger picture. Banks and mortgage lenders look at a variety of factors when considering applicants for a loan.

In addition to credit scores, they also look at the amount of money a person earns relative to the amount they spend on their recurring debts. The debt-to-income ratio, as it’s known, is another important factor that can determine whether or not you qualify for a mortgage loan. Income stability is another key factor when it comes to getting a home loan.

That three-digit number is important for mortgage applicants. But it’s not the only consideration.

Disclaimer: This article offers tips on how to improve a credit score before shopping for a mortgage loan. That information was adapted from a report provided by the FICO credit-scoring company. Their information and findings are deemed reliable but not guaranteed. The publishers of this website make no claims about the efficacy of the above-mentioned strategies and advise consumers to conduct additional research.

Mortgage Rate Forecasts for 2019 Predict Only a Slight Increase

A new round of mortgage rate forecasts for 2019 suggest that the average rate for a 30-year fixed home loan could hover within the 4.6% to 4.7% range next year. That’s only slightly higher than where we are right now, as of late summer 2018.

New Mortgage Rate Forecasts for 2019

Over the last month or so, three prominent housing organizations issued mortgage rate forecasts that look ahead into 2019. The groups included Freddie Mac and Fannie Mae — the two government-sponsored enterprises that buy loans from lenders — as well as the National Association of Home Builders (NAHB).

While their mortgage rate forecasts for 2019 varied slightly, it appears that all three groups expect to see some stability in terms of rate movements. Analysts with Fannie Mae and the NAHB don’t expect average rates to rise very much at all over the coming months. Freddie Mac’s team sees them rising gradually over the next year or so.

Did you know: There are many different types of home loans. But long-range forecasts are usually issued for the conventional 30-year fixed-rate mortgage, in particular. That’s because it is the most popular loan type among borrowers, by far.

Here’s a look at those three mortgage rate forecasts for 2019:

  • Fannie Mae’s latest forecast was published in July 2018. They predict that the average rate for a 30-year fixed mortgage will start 2019 at around 4.6% and stay within that range for much of the year.
  • The National Association of Home Builders also issued an updated forecast in July 2018. In it, they predicted that 30-year mortgage loan rates would average 4.71% in 2019. That’s basically in line with Fannie’s long-range outlook.
  • Freddie Mac’s new forecast, also published in July, calls for gradually rising rates over the next year or so. Their quarterly outlook predicted that 30-year loan rates would average 5.0% during the first quarter of 2019 and rise slightly throughout that year.

In July, Freddie Mac’s Economic and Housing Research Group issued the following statement:

“The 30-year fixed mortgage rate has been slightly declining since mid-June and was 4.53 percent in the second week of July. Rates have stepped back because of declining long-term Treasury yields, which continue to be pushed down by anxieties from a potential trade war. Our forecast has the 30-year fixed-rate mortgage averaging 4.6 percent this year, and rising to 5.1 percent next year.”

General Consensus: Big Jump in Rates Appears Unlikely

Granted, these are just forecasts. They are an educated guess based on current trends within the housing market, Wall Street, and the broader economy. So there’s a chance they could become inaccurate over time.

In fact, we’ve seen some inaccurate predictions in the past. At the end of 2016, some of these same groups were predicting that rates would rise steadily throughout 2017. But they actually dropped during the first half of that year and then hovered within a narrow range.

It’s the general consensus here that’s more noteworthy. And the consensus outlook seems to be that mortgage rates will remain relatively stable through the latter part of 2018 and into 2019. These analysts don’t expect to see a big jump in rates, or at least not a sustained hike.

Home Prices Still Rising in Most Cities

Based on these mortgage forecasts, home buyers might not need to worry about a big jump in mortgage rates any time soon. But rising home values are a very real concern.

House values in most U.S. cities are expected to rise gradually throughout 2019. This could reduce affordability and buying power for many people. So postponing a home purchase could mean that you’ll end up paying more.

In mid-August 2018, the real estate information company Zillow wrote the following:

“The median home value in the United States is $217,300. United States home values have gone up 8.3% over the past year and Zillow predicts they will rise 6.6% within the next year.”

Disclaimers: This article includes mortgage rate forecasts and housing predictions issued by third parties not associated with our company. We have presented them here as a service to our readers. As a general policy, the Home Buying Institute does not make projections or assertions about future housing trends.

Average Credit Score for Home Buyer Mortgage Loans: 2017 Update

The average credit score among home buyers using mortgage loans was 722 in April 2017, according to the latest data. But you don’t necessarily need a FICO score of 722 to qualify for a home loan. Read on to learn why.

In April 2017, home buyers who successfully closed on their mortgage loans had an average FICO credit score of 722. This is based on the latest “Origination Insight Report” published by Ellie Mae, a company that creates mortgage loan origination software.

Ellie Mae’s reports are based on data from a “robust sampling of closed loan applications.” This means they’re a pretty good indicator of what is happening across the mortgage industry.

In addition to identifying the average credit score for home buyer mortgage loans, the company’s reports show which types of loans are used most, average interest rates, loan-to-value ratios and more.

Average Credit Score Among Home Buyers: 722

In April, the average credit score among home buyers using mortgage loans was 722. The majority of purchase loans (70%) had scores over 700.

These numbers are based on the FICO scoring scale, in particular, which ranges from 300 to 850. Higher is better, when it comes to qualifying for a mortgage loan. Generally speaking, home buyers with higher scores have an easier time getting approved for financing, and tend to qualify for lower interest rates as well.

The 722 average credit score applied to all loans that were processed and closed using the company’s software solutions and network. Here are some additional breakouts for the three most popular loan types:

  • Conventional: The average FICO score for a conventional purchase loan was 753, during April 2017.
  • FHA: The average score for an FHA-insured purchase loan was 684.
  • VA: The average FICO number for a VA-guaranteed mortgage was 708.

You’ll notice a significant difference between FHA and conventional mortgage loans. The Federal Housing Administration program requires borrowers to have a minimum score of 580, in order to take advantage of the low 3.5% down payment option. Conventional loans (which are not insured by the government) often require higher scores.

FHA loans are generally easier to obtain, when compared to conventional mortgages. This may account for the wide gap between the average FICO credit scores shown above.

You Could Get By With Less

It bears repeating: The numbers shown above are just average credit scores for home buyer mortgage loans, based on the loan origination data collected by Ellie Mae. They do not represent the minimum scores required for the different mortgage programs.

Based on our conversations with lenders, it appears that most prefer to see a score of 600 or higher for loan approval. But that number is not set in stone. Mortgage underwriting and approval is a highly individualized process. It can vary from one borrower to the next.

Additionally, mortgage lenders tend to look at the big picture regarding applicant qualifications. Down payment size, credit history, income, and financial assets all play a role as well. So a relatively low credit score, by itself, might not be a deal-breaker.

Why Do Credit Scores Matter?

Why do mortgage lenders care so much about credit scores? In a word, risk.

Banks and lenders use these three-digit numbers to get a feel for how a person has borrowed and repaid money in the past. They also look at the credit reports that are used to produce those numbers.

Credit scores are just one part of a broader risk-assessment process. In general, a borrower with a higher number will be viewed as a lower risk (a “safer bet,” if you will) compared to someone with a lower score. Having a high number can make it easier to land a home loan in the first place, and could also affect the mortgage rate you receive from the lender.

As mentioned earlier, there is no single cutoff point used across the mortgage industry. Different lenders have different business models and appetites for risk. So the minimum credit score needed to buy a house can vary from one company to the next. It can also vary based on the type of loan you choose. This is why it’s important to shop around and compare your options.

Disclaimer: This article shows the average FICO credit scores for home buyers using FHA, VA and conventional mortgage loans, as of April 2017. These figures were reported by Ellie Mae. We encourage borrowers to understand the difference between average and minimum credit scores, and to get offers from more than one lender.

Mortgage Rate Forecast for April 2017 – 2018: A Slow Climb Ahead?

Home buyers got some good news last week, regarding mortgage rates. According to the weekly survey conducted by Freddie Mac, the average rate for a 30-year fixed mortgage loan dropped by 11 basis points (0.11%) last week, landing at 3.97%. That marked its lowest point of 2017, and the lowest level since November of last year.

But that’s just a short-term trend. The latest long-term forecast for mortgage rates suggests that they could inch upward between now and the end of 2017, bringing higher borrowing costs for home buyers who delay their purchases.

Revised Mortgage Rate Forecast for April 2017

On April 18, the Mortgage Bankers Association (MBA) published its latest mortgage rate forecast extending through the end of 2017 and into 2018. By their estimation, the average rate for a 30-year fixed mortgage (the most poplar type of home loan) will rise to 4.6% by the fourth quarter of 2017. Furthermore, they expect the benchmark 30-year rate to climb above the 5% threshold sometime around the middle of 2018.

As a result of this mortgage rate forecast, the industry group expects home refinancing activity to decline through the rest of 2017. Home purchases, meanwhile, will continue to dominate the mortgage market with more than twice as many loan originations, when compared to refinances.

Federal Reserve Tweaks Its Monetary Policy

The Federal Reserve has a part in all of this. After years of keeping the short-term federal funds rate near 0%, Fed officials are now raising it in small increments. This is the result of their improved outlook regarding the economy. After its last major policy meeting, which took place in March 2017, the Federal Open Market Committee stated:

“The Committee expects that … economic activity will expand at a moderate pace, labor market conditions will strengthen somewhat further, and inflation will stabilize around 2 percent over the medium term … In view of realized and expected labor market conditions and inflation, the Committee decided to raise the target range for the federal funds rate to 3/4 to 1 percent.”

Additional rate hikes are possible, according to at least one source close to the matter.

The Federal Reserve does not control mortgage rates directly. The interest rates assigned to home loans are primarily driven by market forces. But the Fed’s policies can have an indirect effect on mortgage pricing, by shifting demand among investors. In short, when the Federal Reserve raises the short-term federal funds rate (which applies to inter-bank transfers), mortgage rates tend to go up as well.

This is partly what accounts for the MBA mortgage rate forecast, which calls for a gradual rise through 2017 and into 2018.

Bucking Predictions, Rates Have Dropped in Recent Weeks

Despite a previous increase for the federal funds rate, and additional hikes looming on the horizon, home mortgage rates have actually dropped in recent weeks. According to the nationwide industry survey conducted by Freddie Mac, mortgage rates have fallen steadily for the last five weeks are are currently 23 basis points (0.23%) lower than they were at the beginning of 2017.

The average for a 30-year fixed mortgage fell to 3.95% last week, down from 4.20% during the first week of this year. So they’ve defied predictions that were made at the end of last year.

This is something to keep in mind going forward. The MBA’s latest forecast for mortgage rates predicts a gradual increase through the rest of 2017 and into 2018. But they’ve been wrong with these predictions in the past.

Mortgage Rate Predictions for 2017 Have Been Revised Upward

The Mortgage Bankers Association (MBA), an industry group, recently increased its mortgage rate predictions and forecast for 2017. This was partly a response to the surge in mortgage rates that occurred during the last few weeks of 2016, and is shown in the chart below.

MBA analysts expect that the average rate for a 30-year fixed home loan will climb gradually throughout 2017, perhaps reaching 4.7% by year’s end. That’s up from a fourth-quarter projection of 4.4% in their previous forecast.

Note: At the time this story was published, on New Year’s Eve, 30-year mortgage rates were averaging 4.32% according to Freddie Mac.

Mortgage Chart Shows Rate Spike at End of 2016

Soon after the U.S. presidential election, mortgage rates in the U.S. began a steep upward climb that was still ongoing when this article was published. You can see this trend clearly in the chart below, which is based on the weekly market survey conducted by Freddie Mac.

PMMS Chart Dec. 29
Mortgage rate trends through December 29, 2016. Source: Freddie Mac PMMS.

This chart also shows why economists and analysts have revised their mortgage rate predictions for 2017. Many forecasts were built on the assumption that 30-year rates would start the new year somewhere between 3.5% and 3.75%, which is where they were a couple of months ago. But they’ve now surged well past that range and have crossed into 4% territory, requiring a new set of mortgage rate forecasts for 2017.

Here are the average rates as of December 31, 2016:

  • 30-year fixed mortgage: 4.32%
  • 15-year fixed: 3.55%
  • 5/1-year adjustable (ARM): 3.30%

So that’s where we are right now. Looking forward, here are some mortgage rate predictions for 2017.

MBA’s Mortgage Rate Forecast for 2017

As mentioned earlier, analysts with the MBA expect that home loan rates will rise gradually during 2017. They are not predicting a huge spike like the one we saw over the last few weeks (see chart above), but rather a gradual upward trend.

Here are the Mortgage Bankers Association’s quarterly predictions for average 30-year loan rates.

  • Q1 2017: 4.3%
  • Q2 2017: 4.4%
  • Q3 2017: 4.6%
  • Q4 2017: 4.7%

So during the first quarter of the new year, they expect 30-year mortgage rates to average 4.3%. That’s where we are right now, at the end of December 2016, which means they expect some rate stability over the coming weeks.

Going forward, the industry group forecasts a steady but gradual rise in mortgage rates throughout 2017.

Of course, these are just predictions. No one can predict future interest rate trends with complete accuracy. In fact, at the end of 2015, MBA’s analysts predicted that rates would rise steadily throughout 2016, and that did not happen (though we did see a spike during the last nine weeks of the year).

The point is, you have to take these mortgage rate forecasts with a grain of salt. They are an educated guess based on current conditions, and nothing more.

A Different Outlook from Freddie Mac?

The economists at Freddie Mac — the government-controlled corporation that buys and sells mortgage loans — seem to have a slightly different view for 2017.

In December 2016, their economic and housing research team issued some predictions for mortgage rates. Based on their quarterly forecast, they expect the average rate for a 30-year loan to hover around 4.2% throughout 2017. Though they did say that “Interest rates will gradually rise as the Federal Reserve continues on its path of policy normalization.”

Again, predictions are a tricky business, especially with the kind of volatility we’ve seen lately. The one thing we can say with certainty is that borrowers will encounter higher mortgage rates at the start of 2017 than at the beginning of 2016. The chart above is evidence of this.

Disclaimer: This story contains mortgage rate predictions and forecasts for 2017. Such statements were provided by third parties not associated with our company. As a general rule, the Home Buying Institute (HBI) makes no claims or assertions about future trends within the housing industry.

2016 Mortgage Rate Chart Shows Big Surge

On Thursday, December 15, Freddie Mac reported that mortgage rates rose again in their latest industry survey. But that’s just the tip of the iceberg. As shown in the 2016 mortgage rate chart below, home loan rates in three categories have risen for the last seven weeks in a row and are now at their highest point of the year.

If that weren’t enough to light a fire under would-be home buyers, the Federal Reserve recently announced that it would increase the short-term federal funds rate for only the second time in a decade. Indirectly, this could lead to even higher lending rates in 2017. Borrower beware.

Mortgage Rate Chart Shows Late 2016 Surge

Freddie Mac published the 2016 mortgage rate chart shown below earlier today, along with the results of their latest weekly survey of the mortgage industry.

mortgage rate chart 2016
Mortgage rate chart for 2016. Source: Freddie Mac PMMS

If a picture is worth a thousand words, then this chart speaks volumes. A couple of things will jump out at you right away. The first is the large spike in mortgage rates, shown on the right side of the chart. That surge took place over a six-week period that began in mid-November. You’ll also notice that rates are higher today than they were at the start of 2016.

Mortgage rate chart fast facts:

  • The average rate for a 30-year fixed mortgage loan rose three basis points (0.03%) this week to land at 4.16%. That’s the highest it has been since October 2014.
  • It bears repeating: 30-year mortgage rates haven’t been this high in over two years.
  • The average rate for a 15-year fixed home loan rose to 3.37% this week. It is also at its highest point of the year.
  • Borrowers paid an average of 0.5 points (a.k.a. discount points) in order to secure these rates. This is a common strategy used to reduce total borrowing costs over time.

Not surprisingly, the Mortgage Bankers Association reported a drop in home loan applications yesterday. According to their data, total application volume declined by 4% (on a seasonally adjusted basis) last week from the previous week. Clearly, this “new normal” for mortgage rates is pricing some buyers out of the market, and closing the window of savings for homeowners who are trying to refinance.

As we enter 2017, the mortgage industry will have to adjust to the effects of rising rates shown in the chart above.

Rising Home Prices Add to the Urgency

Surely, home buyers are feeling a sense of urgency right about now. The recent surge in mortgage rates has caught everyone’s attention, lenders and borrowers alike. But that’s not the only concern for buyers. Rising home values are creating a “double whammy” situation by further reducing affordability.

In most cities across the country, home prices rose steadily over the last year. And they’re expected to rise further in 2017, though possibly at a slower pace. According to the real estate data company Zillow, home prices nationwide rose by 6.2% during 2016. Looking forward, the company’s economists expect house values to rise by around 3% in 2017.

The message to home buyers is clear: You might want to think about buying sooner, rather than later.

Disclaimer: This story includes a 2016 mortgage rate chart provided by Freddie Mac. This chart shows averages based on a survey of about 125 lenders across the country. Individual loan rates vary based on a variety of factors, including borrower credit scores, the type of loan being used, etc.

Analysts Predict Mortgage Rates Will Rise in 2017, but Gradually

We’re halfway through October, with the end of the year right around the corner. That means a lot of would-be home buyers are looking ahead to 2017. And many of them have the same question: Will mortgage rates rise during 2017, and if so by how much?

Unfortunately, nobody can predict future mortgage-rate trends with complete accuracy. But that doesn’t stop economists and housing analysts from making predictions. The general consensus among many industry-watchers is that mortgage rates will rise in 2017, but gradually.

Rising Mortgage Rates in 2017?

Reuters recently published the results of a survey of mortgage industry analysts. According to the survey respondents, the average rate for a 30-year fixed mortgage loan is expected to rise gradually in 2017. Thirty-year rates are currently hovering just below 3.5%, according to the latest Freddie Mac market survey published last week. They are expected to climb to an average of 4.08% in 2017, and 4.60% in 2018.

“The tighter U.S. labor market will lead to stronger wage income growth over the coming year. Combined with still-low mortgage rates, income growth will lead to stronger purchase demand,” said Andres Carbacho-Burgos, an analyst for Moody’s Analytics.

So, what factors might lead to rising mortgage rates in 2017? The Federal Reserve’s monetary policy plays a role. Fed officials will meet on November 1, 2016, for one of their regularly scheduled policy discussions. They’ll meet again at the end of December. Many analysts believe the Fed will raise the short-term federal funds rate after their December meeting.

The funds rate is used by banks when transferring money among themselves. While it doesn’t affect mortgage rates directly, it can have an indirect influence by shifting investor demand. In short, when the federal funds rate goes up, mortgage interest rates tend to rise as well. And a growing chorus of voices is predicting this exact scenario as we move into 2017.

MBA Also Expects Rising Rates

A recent forecast from the Mortgage Bankers Association (MBA) also predicted a gradual rise in home loan rates during 2017. Economists at the MBA anticipate that the average rate for a 30-year mortgage loan will rise to 3.7% by the end of this year, and continue inching upward throughout 2017.

Here is their latest forecast for 30-year home loans, issued in September:

  • Q1 2017: 3.9%
  • Q2 2017: 4.1%
  • Q3 2017: 4.3%
  • Q4 2017: 4.4%

But let’s not forget that the MBA made a similar forecast at the end of last year, which didn’t pan out. In December 2015, they predicted that the average rate for a 30-year fixed home loan would rise to 4.8% by the end of 2016. But that doesn’t seem likely, since the current average is around 3.47% (according to Freddie Mac). So you have to view these mortgage rate forecasts for what they are — an educated guess.

The key takeaway here is that most analysts and economists expect mortgage rates to rise gradually, and slightly, during 2017. As a result, home buyers who postpone their purchases until later next year might end up paying more interest on their loans. It’s just another point to consider when laying out your home-buying plans.

Disclaimer: This article contains forward-looking statements from third parties not associated with the Home Buying Institute. We make no claims or assertions about mortgage trends in 2017.

Wells Fargo 3% Down Payment Mortgage Gives FHA Run for Its Money

Not to be outdone by its competitor Bank of America, which announced a 3% down payment mortgage program earlier this year, Wells Fargo recently stated that it too would offer fixed-rate mortgages for first-time buyers with down payments as low as 3%.

This is significant for two reasons: (1) Wells Fargo is the largest mortgage lender in the United States, by volume. So this new program could be extended to a significant number of home buyers nationwide. (2) The 3% down payment falls below the FHA’s minimum requirement of 3.5%.

The fact that this program undercuts FHA is not a matter of chance or coincidence. Bank of America, Wells Fargo, and other lenders with similar offerings are essentially luring business away from the Federal Housing Administration. They’re doing this by offering an attractive and potentially cheaper alternative to the government-insured FHA loans.

The Wells Fargo 3% down payment mortgage has a nifty name too. They call it yourFirst MortgageSM (the italics are theirs). From here on out, I’ll refer to it as “the loan program” for simplicity.

Wells Fargo 3% Down Payment Mortgage

So what does this sexy new loan program offer for qualified first-time home buyers? Here are the specific features and requirements, adapted from a May 26 news release:

Smaller down payment means less money out of pocket.
Borrowers who qualify for the program could obtain a conventional (non-FHA) fixed-rate mortgage loan with a down payment as low as 3%. But borrowers don’t necessarily have to pay it out of their own pockets. According to the Wells Fargo program announcement, the down payment and closing costs “can come from gifts and down payment assistance programs.”

Educational incentives give home buyers a reason to learn.
Wells Fargo wants first-time home buyers to make smart, well-informed decisions about their purchases. To that end, they are offering an education-based incentive. Customers who complete an approved home buyer education course could earn a 1/8-percent interest rate reduction on their loans. The course must be provided by a HUD-approved counselor.

Broader credit and income requirements mean less hurdles for borrowers.
The Wells Fargo 3% down payment program also features “expanded credit criteria.” This means first-time home buyers with limited credit histories (that might have disqualified them in the past) could still qualify for the loan. The company will expand its credit history requirements to include “nontraditional sources, like tuition, rent, or utility bill payments.” Additionally, Wells Fargo said it will consider the income of others who will live in the home, such as family members or renters.

Borrowers must be able to repay the loan, with documents to prove it.
In keeping with the federal government’s fairly new (and sensible) Ability-to-Repay rule, first-time home buyers who use the Wells Fargo 3% down payment mortgage program must be able to demonstrate their ability to repay the debt. This is typically done with bank statements, pay stubs, and other documents that show income and assets. Additionally, the loan must be “fully documented and underwritten,” according to Wells Fargo.

Fewer Barriers for First-Time Home Buyers

These are noteworthy changes to the company’s lending policy, and they could affect a large number of first-time home buyers who otherwise might not qualify for a mortgage loan. The 3% down payment program reduces the upfront expenses associated with a home loan, and it offers broader qualification criteria to bring more borrowers into the program.

According to Brad Blackwell, Executive Vice President of Wells Fargo Home Lending:

“[W]e wanted to provide access to credit and simplify the experience while maintaining responsible lending practices. We partnered with credit experts such as Fannie Mae and Self-Help, an affiliate of the Center for Responsible Lending, to develop an easy-to-understand affordable loan option that gives homebuyers the best offering in the market.”