Michigan Loan Experts

Consumers and Mortgage Rates

The American Consumer keeps spending. 

On June 13th,  monthly Retail Sales report showed a larger-than-expected jump.  Even after stripping out elevated gas prices, the sales increase was more than double the expected amount. 

The economy surges ahead, fueled by everyday spending, and this does not bode well for the future of mortgage rates.

The recent run-up in mortgage rates is largely from inflation fears.  With inflation, investors' dollar-denominated securities have less value over time because the dollar itself is worth less. 

Runaway consumer spending exacerbates the potential for an overheated economy and that is why today's figures are slightly troubling.  Each time you and I make a purchase, we are (in small way) contributing to the economy's growth.

Inflation, of course, is the enemy of bonds and your mortgage rates are determined by the prices of mortgage bonds.  Inflation erodes the value of the bonds and that is what causes mortgage rates to increase.

As a homeowner, higher mortgage rates may depress your local market because fewer home buyers can qualify for home loans, lowering overall demand.

Rates are up by as much as 0.875% in the past 3 months.

"Repair Credits" could kill your sale

The Southeastern Michigan market being what it is, potential buyers usually shun any homes that need repairs and go straight for homes ready to move in.  So many houses are available that the buyers can afford to be extremely choosy on what to buy.

There are times though when a house with warts is still the one buyers want, but rather than just making a simple offer the buyers make an offer contingent on repairs being done.

At this point the concept of a 'repair credit' comes into play.

The seller may agree to the buyer's demands, but making repairs to a roof or anything else usually isn't convenient if the seller still occupies the house. 

A repair credit is a dollar amount written into the contract to be used to cover the costs of the requested repair.   

The repair credits offer a way for the seller to pay for the work without needing to pay before closing; the money is taken directly from the sale proceeds at settlement.

From my experience, most real estate agents, buyers and sellers, if left to write the contract without loan officer input, do it in such a way that the underwriters will red flag the property for additional review and possible denial.  Even if it goes to closing the loan officer will usually have a more difficult time with it, which usually causes more stress to everyone.

Fact: Unless its specifically a renovation, construction or some type of rehab loan - Lenders do not allow concessions for home repairs to be line-item credited on the final settlement statement. 

This is for two reasons:

1. The lender has no way of knowing that the repair will actually be made by the buyer
2. The lender has no way of knowing whether or not the repair is actually needed

A construction or rehab loan will escrow the money and have inspections to ensure the work is both needed and completed before releasing the funds, but without the protection of an escrow held by the lender those two problems raises the red flag we call "Appraisal Fraud". 

Michigan is one of the states with the highest incidents of mortgage fraud.  Appraisal fraud, where the value of the home is grossly inflated to its true value, is typically a part of most fraud.  In terms of financial crimes, mortgage fraud is one of the highest enforcement priorities for the FBI Michigan Field Office with numerous arrests made over the last two years.

So what's a honest home buyer and seller to do..

There are two correct ways to account for funds for a repair:

1. Depending on loan program you can usually be given between 3-6% in seller concessions.  Check with your loan officer to determine the amount allowed and in the contract make no mention of any repairs but just add this clause: "seller agrees to provide buyer with $xxxx amount in seller concessions". (Always consult with an attorney for the exact wording you should use in your specific situation, but this is the general idea of it)
2. Reduce the sales price by the amount agreed upon.  So if the seller wants 150,000 but the home needs 10,000 in work then drop the price to 140,000.

With either of these ways to handle the repair credit the seller gets the money he wants and the buyer avoids any potential problems with unnecessary fraud flags.