We are all learning here.
This month, I was reminded
that
while I sometimes assume that everyone knows
what mortgage rates are,
this is not the case.
So perhaps more attention should be paid, as it were, to this part of my monthly blogging.
In truth, unless someone is actively thinking about refinancing or purchasing, why would someone necessarily be monitoring the mortgage rates with the same vigor
that a real estate
professional would?
So, the important
information for you to know:
First, the good news.
Rates are closer than ever to 4% for mortgage amounts under $750,000.
Even if the cutoff for “conventional” loans goes down to $625,000, we are still going to see rates below 5% for the next two years.
This, according to the Fed last month.
Historically low rates.
Stunning.
Great, etc etc.
All good things if you’re thinking about buying.
Great thing if you’re refinancing.
Even if your property is underwater- which is not common in Manhattan- The HARP program allows you to finance up to 103% of the value of your home and have the loan qualify for Fannie Mae underwriting- that is, you can get the loan without having to bring additional equity to the table.
Read about it here.
The expectation was that many, many more people would take advantage of this program than are currently.
If you have
rate of over 5.5% on your apartment or home, you should certainly take a look at this.
Almost everyone in Manhattan could take advantage, assuming you put 20% down on your purchase when you bought.
Second, the bad news- beware of bad appraisers and underwriters.
Enjoy this story:
Does it take a magician to get a mortgage these days?
Recently,
a customer of mine went into contract on a property that needs a complete renovation.
Great price, nice building, will become a terrific apartment.
The renovation will unlock a ton of value, and he’ll be able to enjoy gorgeous Hudson River views in a quiet Pre-war building for years.
Awww… That’s the end of the story.
Let’s go back to the beginning.
Once we had identified the apartment and agreed upon a price, my customer began the process to get a loan commitment.
A mortgage broker whom I love scared the bejeezus out of my customer, who thought he might not be able to get a conventional mortgage due to
the apartment
condition.
Huh?
We’re not building houses here.
This is the standard “gut renovation” that you may read about in realtor-speak on property listings.
A previous appraisal (this is essentially an estate sale) had not only valued the property at a much higher price, but also noted its condition as “poor.”
I completely agree with that description.
The owner had actually begun to do some prep work for a renovation that never happened, opening walls, scraping paint, creating a half-finished worksite- and then proceeding to live there for many years.
The building had to come and inspect electical systems before the property hit the market.
But all of this gets baked into a sale price- and any buyer is going to do a full renovation.
However, and shockingly,
according to many bankers and brokers I spoke to, current underwriting standards, not all lenders will lend against a property that is not in live-in condition.
All of this, for a purchaser who was putting almost 50% down (about $400,000).
The question was- what would a new appraiser have to say about the apartment- and in turn, what would underwriters say?
Could my customer get a convention loan (of about $500,000) at the best rates available?
The answer to this question could be the difference of around $300-400 per month in carrying costs.
This adds up over the lifetime of a mortgage.
Who wants to pay more than they need to on a mortgage, anyway?
Who wants to take out a construction loan at a higher rate?
Seems like overkill, underwriting insanity.
Time to work some magic.
Nearly a month was spent researching lenders and underwriting standards.
The end result was an agreement in the sales contract
for the seller to do some cosmetic work to make the apartment look “livable.”
This cost the seller about $5000 (and a very happy superintendent, I might add).
With a kitchen that worked (albeit barely) and clean and
standard bathrooms, windows, floors, all parties
agreed that an appraiser in a relatively good mood would be able to issue an appraisal to pass muster with underwriters.
Off we went, knowing this entire
song-and-dance was set to impress an appraiser whose expertise with NYC apartments could be extremely limited, even criminally
poor.
We crossed our fingers.
And here is
the kicker:
The appraiser ended up doing what’s known as a “drive-by” – He/she didn’t even set foot in the apartment!
All of this heartache to prepare the apartment for a detailed appraisal that never happened.
Some would call this Murphy’s law.
If we hadn’t done the work, the appraiser would have come to the space…
I’ll end this post with a question.
Let’s assume that the Fed is true to its word, and rates do stay (some would say artificially or irrationally) low.
Will inflation hit the rest of the economy?
Will that impact apartment pricing?
Will the combination of low rates and good small-apartment inventory break the impasse and begin the deal flow for smaller units?
Will the combination of low rates and low volume of larger apartments push pricing up significantly.
We will see.
As of now, buying a one-bedroom apartment is cheaper than renting.
That has not been the case in New York City for a long time!
Investors and primary users take note.
-Scott