Rates Keep Climbing – But It Won’t Last
Rates have been climbing sharply over the last few weeks – ostensibly because the economy remains hot. It won’t last, per Mr. Habib and Mr. Snider. Both remind us again and again that the markets often respond temporarily to Fed comments, Fed narratives, and economic data – WITHOUT DIGGING INTO DETAILS (like both Mr. Habib and Mr. Snider always do). Rates will likely fall in March with an updated (and more accurate) employment report and in May when a favorable inflation report is expected – per Mr. Habib’s comments today. Mr. Snider reminds us that rates will invariably fall this year because the economy is most definitely NOT hot – when you look at forward indicators like the yield curves and manufacturing orders.
Underwriters Are Not Dumb 😊
That is my reminder for “house hackers” who are buying properties with “owner-occupied” financing.
House hacking is a phrase that was coined by BiggerPockets podcast host, Brandon Turner. And Forbes wrote all about it way back in 2018.
Briefly, it simply refers to renting out a portion of your owner-occupied property in order to get someone else to help pay back your mortgage much more quickly.
House hacking traditionally referred to buying 2, 3, or 4-unit properties, and living in one of them while collecting rent from the remaining units.
But, house hacking has evolved to buying single-family homes and then renting out space or an accessory dwelling unit (in-law) on the same property.
We are HUGE FANS of house hacking, and our Mortgage Advisors are well-versed in the “art” of house hacking – and they bring it up whenever possible.
But – there are risks of course.
One risk is obvious: if a house hacker needs the rental income to make her mortgage payments, and she loses a renter, she can be in a world of hurt.
But, here is the biggest risk that some house hackers do not seem to consider: getting their loans called “due” or even getting foreclosed on.
Owner-occupied financing provides many benefits over investment property financing – including much lower down payment options (3% vs. 20% to 25%, for example) and far lower rates (as much as 1% lower now).
So, house hackers are very wise to take advantage of owner-occupied financing. And that is also often the ONLY financing they can afford.
But, in their zeal to become real estate investors, some of those house hackers don’t actually intend to move into those properties – even though the “owner-occupied financing” documents require them to move in and remain in the property for 12 months.
Do buyers actually need to stay in the property for 12 months? No, but they do need to have an explanation for moving at the ready.
And – are we willing to work with house hackers no matter what? Most definitely, yes.
BUT – this is just our warning that underwriters, lenders, and servicers in general are savvier than many borrowers suspect.
And – if they get suspicious about a buyer’s actual intention or actual residence address after close, they will either condition the heck out of borrowers for proof of intention or they will do an “occupancy check” after close.
If they find out that buyers don’t actually live in the property, they can and will call the loan due. I know this because I have seen it done.
It is a bigger risk now because both Fannie Mae and Freddie Mac have started to scrutinize loans after close much more aggressively.
So – this blog is just a very friendly reminder for house hackers to be careful and to take as many steps as possible up front to avoid excess scrutiny (this too is something our Mortgage Advisors are happy to discuss).
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