I want to buy a rental, how much down payment is needed?

With real estate prices and rents booming across the Portland, Oregon metro region over the past few years, it is no wonder that so many people have become interested in purchasing investment property.  However, it seems that many would-be investors are not aware of the down payment requirements for buying a home that they intend to rent.

This post was written in November of 2017 and the facts below can change so it’s always best to check in with me to see if these requirements are still accurate.

This post is focused on conventional conforming loans for home purchases (excludes refinances) where the buyer intends on renting out the property.  The minimum down payment required depends on the type of property an investor is purchasing:

table illustrating minimum down payment for investment property purchase

*Although one-unit investment property purchases only require a 15% down payment, a homebuyer will have to obtain private mortgage insurance with less than 20% down which can prove costly and upset the feasibility of the investment.

Also, it’s worth noting that an investment property purchaser who puts 25% down or more will obtain a fixed interest rate that is ~.375% better than if they put less than 25% down.  Therefore, stretching to 25% down can greatly improve the financial performance of the investment.

This post is written from the perspective of explaining the minimum down payment required to qualify for a loan.  Just because a lender says you qualify doesn’t mean the loan or investment is prudent.  Additional analysis should be completed to determine if the investment is suitable given your level of down payment (I can help with that but won’t take up that topic in this post).

Next, let’s outline what sources are acceptable forms of down payment capital.  The most common forms of down payment we see are personal checking/savings accounts, investments, mutual funds, inheritances, retirement account loans, and loans against equity in homes already owned.  Again, just because a source of capital is acceptable does not mean it is “suitable” and every applicant should consider the trade-offs associated with their transaction.  Gift funds are not an acceptable source of down payment when purchasing an investment property.

Underwriting requirements will also require that the applicant have left over capital “in reserve” when purchasing an investment property.  Those requirements will change applicant-to-applicant so it’s best to talk to us about the particulars of your situation.

There is no question that owning investment real estate can help families generate wealth in the long-term.  I’d love to help you determine if owning a rental property is right for you.  Please contact me if you’d like to learn more.

A flattening yield curve may signal higher rates in the future

Interest rates and US stocks got off to a good start last week but had a rough finish.  For the week mortgage rates worsened very modestly.

We are 30 days away from the next Fed meeting and according to CME group there is currently a ~97% probability that the Fed will hike short-term interest rates.  I am guessing media coverage will pick up on this topic after the Thanksgiving Holiday.

As a reminder the Fed does not directly control mortgage rates.  The Federal Funds Rate is charged on overnight loans between banks and a mortgage can last 30 years.

What’s interesting is that as the Fed has hiked short-term interest rates yields for shorter-term loans (i.e. less than three years) have increased yet longer-term durations have remained relatively low.  A look at he spread between the 2-year and 10-year treasury notes tell the story:

The yield curve is “flattening” which may mean long-term rates, including mortgages, will rise in the future or could also signal a recession.  Time will tell.

As I had written about last week (see HERE) sentiment regarding the tax overhaul is driving the direction of the financial markets. I expect much of the same this week.

The Senate version of the tax overhaul legislation, which was released on Thursday, will now be reconciled with the House version.  Given the vast differences investors now seem pessimistic that a compromise will be made.  Given that the tax overhaul is seen as inflationary this could actually help interest rates remain low……for now.

The economic calendar is busy this week.  Although we lost ground last week I will remain cautiously floating.

Current Outlook: cautiously floating

Sentiment on tax plan to guide mortgage rates

Do you ever wonder what the Federal Reserve talks about during their monetary policy meetings?  It’s nacho business.  Happy National Nacho Day!

It was announced earlier today that New York Federal Reserve President William Dudley will retire his position in February.  With Janet Yellen and Dudley leaving the Fed there is speculation that the philosophical tilt of the Fed could become less accommodative which is not friendly for interest rates.

What is friendly to interest rates is a weaker than expected jobs report and that is what was delivered on Friday.  The report showed only 261,000 new jobs were created in October and that wage growth was modest.  Analysts had expected 300,000 new jobs to be announced.

Mortgage rates improved moderately last week breaking a seven week trend of worsening.  Will they continue to improve?  Much will depend on the progress of the GOP tax plan which was unveiled last week.  The plan, which is not supported by the National Association of Realtors, relies heavily on deficit spending which means the US Treasury will need to issue more debt.  All else being equal a greater supply of debt means yields move higher.

Therefore, as sentient shifts in favor of the tax overhaul becoming law I expect home loan rates to worsen and vice versa.

Current Outlook: cautiously floating

Mortgage Rate Update October 30, 2017

My father-in-law once told me, “there is nothing more permanent than a temporary tax.”  Speaking of…. property tax statements for homes in the tri-county area are arriving in mailboxes as I type and most are increasing by greater than 3% this tax year.  I recommend reading THIS PIECE for an explanation.  If your customers have not pinged you yet on this topic I suspect some will soon.

As I wrote about last week mortgage rates have been on a brutal ride higher ever since the beginning of September.  Might we get a reversal this week?  So far so good.  Rates have stabilized this morning and pricing has improved since last Thursday.

It is an extremely busy week on the economic calendar.  Earlier today we got the latest reading of the Personal Consumption Expenditure price index.  It showed that core prices (“core” strips out volatile food & energy items) increased by only 1.3% from last year.  This is well below the Fed’s target of 2% and a friendly number for interest rates.

On Tuesday we’ll get the latest reading of consumer confidence and the Fed’s monetary policy meeting begins.  On Wednesday we’ll get the Fed’s statement (not expected to hike rates) and the ADP private payroll report.  On Thursday we get initial jobless claims and on Friday the all-important jobs report.

From a technical trading perspective mortgage rates are trading at important layers of support/ resistance.  They could break out either direction.

Current Outlook: cautiously floating

Mortgage Rate Update October 23, 2017

For the 113th time my beloved Seattle Mariners will not take part in the World Series which starts this week and features the Los Angeles Dodgers versus the Houston Astros.  My money (I don’t actually wager) is on the Dodgers who have only lost once this post-season and have scored 48 runs while giving up only 19.

Mortgage rates are looking to dodge the fate they suffered last week when the stock market caught fire and pushed yields higher.  The culprit?  The Senate passed a budget proposal which allows for a $1.5 trillion reduction to revenue over the next decade.  Analysts agree that the $1.5 trillion exception is designed to allow for a major tax overhaul which is rumored to be in the works.  Should a major tax plan pass it would likely drive stock prices higher along with interest rates.

Technical trading patterns will play a pivotal role for mortgage rates this week.  As the chart below shows the yield on the US 10-year treasury note, which mortgage rates tend to track, is currently at ~2.40%.  The last four times yields hit this level interest rates reversed and move lower.

However, this time the fiscal and monetary conditions are different.  Should yields continue to rise I expect mortgage rates to move another .25% higher before stabilizing.

This week’s economic calendar will deliver fresh housing data.  On Wednesday we’ll get the latest reading on new home sales and the FHFA home price index.  On Thursday we’ll get the latest reading of pending home sales from the National Association of Realtors.  We expect recent storms to distort the results so the significance of these reports may be low.

Current Outlook: locking

Mortgage Rate Update October 16, 2017

During an annual review an employee is astonished when their boss hands them a $10,000 check and says, “great job this year!”.  The employee is speechless.  The boss then says, “if you show me the same level of effort next year then bring that check back to your review and I’ll sign it.”  Today is National Boss’s Day so be sure to give yours a hard time.

Mortgage rates improved modestly last week despite the stock market gaining for the fifth consecutive week.  The cyclically adjusted price to earnings ratio for the S&P 500 remains above 30 which historically has been a signal that stocks are overvalued.  Third quarter earnings reports will be issued over the next couple weeks so we’ll see if profits can justify these lofty valuations.  In general when stocks do well mortgage rates suffer.

Last week tamer than expected core inflation numbers played a role in helping yields improve.  However, oil prices are starting this week higher on news that tensions are flaring between the Iraqi central government and the Kurdish region.  If oil prices continue to rise it will likely stoke fears of higher inflation in the future which would hurt mortgage rates.

This week’s economic calendar is heavy with housing data.  On Tuesday we get the home builders’ index, on Wednesday we’ll see housing starts/ building permits, and on Friday existing home sales.

From a technical perspective mortgage rates are trending in the right direction but will face significant resistance this week.

Current Outlook: neutral

Mortgage Rate Update October 10, 2017

The bond markets were closed yesterday in observance of Columbus Day.  According to historians Christopher Columbus was not the first European to sail across the Atlantic Ocean.  Norse Viking Leif Eriksson allegedly reached present day New Foundland, Canada  in 1000 AD.

If you are an observer of the stock market then you know that this is not the first time that the S&P 500 has reached 30 as measured by its cyclically adjusted price earnings ratio (CAPE).  The concern is the last two times it sailed to these heights was 1929 and 1999 and we all know how that ended.

The Economist Magazine ran a great piece over the weekend (see HERE) addressing asset prices.  It provides explanations for why the CAPE is at lofty levels and why it may not translate into a crash.  However, in the same article they provide reasons for why interest rates may rise.  The main culprit?  As I have written repeatedly on this blog it is expected to be the Fed unwinding its balance sheet.

Speaking of the Fed the financial markets are currently pricing in a 90% probability that they will hike short-term interest rates in December.

Last week’s jobs report was a stinker.  The US economy shaved 33,000 jobs during the month of September but investors are ignoring the results because of the hurricanes.

The highlights for the economic calendar this week include the producer price index on Wednesday and retail sales/ consumer price index on Thursday.  Momentum is not on our side so I will maintain a locking bias.

Current Outlook: locking

Mortgage Rate Update October 2, 2017

It is with a heavy heart that we acknowledge the horrible shootings in Las Vegas this morning.  It is my hope that our leaders can act in a meaningful manner to prevent these events in the future.  That is the greatest honor we can pay the victims.

Mortgage rates were mostly steady last week.  Mortgage note rates are unchanged but the underlying pricing worsened meaning consumers are having to pay modestly higher closing costs at these rates.

Given the shootings in Las Vegas investors are feeling understandably cautious.  Also fueling this sentiment is a non-legally binding vote in Spain.  Voters in the Catalonia region have voted overwhelming to secede from Spain.  The Spanish Federal Government is not required to accept the results.  Uncertainty tends to help US interest rates remain low.

Working in the opposite direction is the GOP tax plan.  As the tax legislation currently stands over $1 trillion would be added to the US deficit in the next decade.  Higher US deficits “crowd-out” non-governmental borrowers (including homebuyers) and causes rates to move higher.

It is the first week of a new month which means the all-important jobs report is due out on Friday.  Market expectations are only for 95,000 new jobs as the recent hurricanes are expected to have taken a toll on new hiring.

I think mortgage rates have a greater likelihood of increasing from current levels than decreasing so recommend a locking bias.

Current Outlook: locking

Mortgage Rate Update September 25, 2017

We are officially in Autumn as of Friday when the Earth’s equator passed through the center of the Sun’s disk.  On an equinox the duration of the day and night are approximately equal all over the globe.  Although the season will be turning to fall I don’t anticipate mortgage rates to fall drastically anytime soon.

Although this leaf is soon to fall I don’t expect mortgage rates to follow suit.

In case you missed it the Fed did follow through last week and announce plans to unwind their ~$4.5 trillion balance sheet.  According to the announcement the Fed is expected to reduce the size of their balance sheet on a monthly basis at a pace which will take approximately 7 years to completely liquidate (although they are not likely take the program that far).  This pace is mostly in line with expectations and therefore mortgage rates did not react in a significant manner to the speech.

As I have written repeatedly I believe mortgage rates are far more likely to increase from these levels than they are to decrease given the aforementioned information.

Presently, geopolitical events are preventing US mortgage rates from increasing.  Preliminary German election results show established parties, including Chancellor Angela Merkel’s, receiving the lowest share of the overall vote in the post-World War II era.  Not surprisingly extreme-right populist parties are faring better than expected.

US-North Korean tensions continue to encourage a “flight-to-safety” trade which US interest rates benefit from.

This week the economic calendar is full of fresh housing data.  I will shift to a neutral position in the near-term but favor a locking bias long-term.

Current Outlook: neutral

A few ideas worth sharing for September 21, 2017

In this week’s edition of a few ideas worth sharing (which you can access HERE) I share two articles about real estate business models that I expect to thrive as home prices continue to rise.  Also, if you are a fine art fan I would encourage you to read about Heather Day’s latest installation located at the Facebook headquarters.  The future of art is blank to the naked eye!