State Of The Mortgage Industry: Things To Know Before Buying A Home

Before buying a home in the midst of a pandemic, you need to understand the state of the mortgage industry. This information is vital if you want to make the best purchase possible with the information available.

In 2022, as we get out of the pandemic, the state of the mortgage industry is changing. Lending standards are still very tight. However, with higher mortgage rates, lenders are doing less business and being more strict on who they lend to.

I've kept in touch with the mortgage lender representative who refinanced my previous home in 2019. He works for one of the top five largest banks in the country and is a top 20% producer in his department. In other words, he knows exactly what is going on in the mortgage market from the inside.

The housing market is strong for the following reasons:

  • Mortgage rates have creeped higher from their 2020 lows, but are still historically low
  • The S&P 500 closed up 18% in 2020 and 27% in 2021 and the NASDAQ closed up 43% in 2020 and 25% in 2021, but down in 2022
  • Months of pent-up demand due to shelter-in-place and confidence in the economy is returning
  • The realization that having a home is more valuable because more time is spent at home
  • The desire to have a nicer or a larger home given we are spending more time at home
  • The desire to invest in a relatively more stable asset class
  • Supply is still suppressed

If you doubt my assertion that real estate is heating up, mortgage-purchase applications reached an 11-year high. The intent to buy property is very strong for properties hovering around the median price. However, for 2H2022 and beyond, the housing market should soften given mortgage rates have increased by 2% since early 2022.

What You Need To Know About The State Of The Mortgage Industry

Despite the strong rebound in mortgage-purchase applications, real estate investors should not make a sweeping generalization that all property segments will surge higher.

Here's the state of the mortgage industry in 2022 according to my lending officer. We spoke for about an hour.

Liquidity (Profitability) Concerns

A growing percentage of people are not paying their mortgages and banks are uncertain if and when payments will resume. As a result, his bank is only lending to the most financially fit customers. President Biden extended the rent and mortgage moratorium. As a result, banks are setting aside reserves for future default payments.

Stricter Lending Standards

Due to liquidity (profitability) concerns, banks have significantly tightened lending standards. Here are some of the increased lending standards he mentioned to me:

  • At one point, Wells Fargo temporarily stopped allowing for cash-out refinances
  • Several big banks no longer fully counting RSU values when calculating how much a person can borrow
  • Schedule E income (rental income) is no longer includd when calculating how much a person can borrow – big shocker
  • Home Equity Lines Of Credit (HELOC) have currently stopped
  • Minimum downpayment is 20%
  • Raised minimum credit score to qualify for a mortgage to 680

In other words, lending standards are as strict as it gets. As a result, perhaps there is upside to real estate liquidity if there is a reversion to pre-pandemic level standards sooner.

Forced PPP Lending Is Creating Fatigue

Due to the origination fees that banks collect on government-guaranteed PPP money, I would have thought that all banks would be ecstatic about the PPP loan program.

However, my mortgage lender expressed concern that PPP lending round 2 was crowding out other lending activities. He said his bank was also concerned it would have to record losses for a year before the government reimburses the bank for the PPP loans.

Despite the crowding out of loans, the PPP program has been a massive success so far. Round 2 should bring about more relief and protect more jobs.

Jumbo Loans Are More Difficult To Obtain

For 2022, the Federal Housing Finance Agency raised the maximum conforming loan limit for a single-family property will be $647,200, up $98,950 from 2021’s limit of $548,250. That is a record-high increase of 18% based on the FHFA House Price Index

In other words, a loan of $647,201 is considered a jumbo loan. The conforming loan limit in San Francisco, California, and some other counties is $970,800 for a single-family home or condo.

It is easier to obtain a conforming loan because banks are able to sell the mortgage to government-backed Freddie Mac and Fannie Mae. Jumbo loans cannot be sold off to these institutions. When a bank sells a mortgage, its attendant risk also gets transferred, which means the bank can now originate more mortgages.

However, my lender said something I have never heard previously. He said that with new regulation for newly originated loans, after selling a mortgage to Fannie Mae, if the borrower was late on even a single payment or is in forbearance, his bank would be required to not only buy back the entire mortgage, but also pay an 11-point penalty (11%). An 11-point penalty is equivalent to a $77,000 penalty on a $700,000 loan.

Jumbo loans cannot be sold to Fannie Mae or Freddie Mac. They can be sold in the private secondary market. However, due to more regulations, my lender said his bank is keeping most of the jumbo loans on its books. Therefore, banks are being extra stringent when evaluating borrowers who seek jumbo loans.

Lenders Are Strict On Their Own Customers

During the height of the pandemic in March-June 2020, existing clients of Wells Fargo could NOT get a non-confining (jumbo) loan. But finally, Wells and other banks eased up in 2H2020 and 2021.

If you are not an existing Wells Fargo customer and want to refinance or get a jumbo loan with the bank, you will still need to transfer $1 million or more in assets to a qualifying. That is still a very high hurdle to pass. But at least Wells Fargo is doing more to help out its existing customers.

In 2022, banks have loosened these restrictions for existing customers given banks have been able to get through a big backlog of refinance demand.

I strongly recommend shopping around for a mortgage online. You will be able to get free quotes and then pit them against each other to get the best deal.

Small Business Owners Are Getting More Scrutinized

He's noticed that small business owners are getting penalized disproportionately more than W2 employees because his lender is concerned small businesses will not recover. In contrast, there continues to be only a routine concern about the W2 employee loan applicant potentially losing his or her job.

During underwriting, if a small business got a PPP loan, it could be seen as a red flag regarding the viability of the small business. This is an interesting stance because you can also make the argument that a small business has a greater chance of surviving because it has received a PPP loan.

But most lenders also use the same logic and say that a rental or vacation property is riskier and therefore requires a larger down payment and a higher interest rate because the lender is assuming the borrower requires rental income to be able to afford the property.

Whereas, some people like me take the view that any rental income is simply a bonus and would make owning a rental or vacation property less risky.

More government restrictions

On Jun 20, 2020, the Fed ordered the country’s 33 biggest banks, including JPMorgan Chase, Wells Fargo, Citibank, and Bank of America, to suspend their stock buyback programs and limit dividend payments to shareholders in the third quarter. The banks must also submit new plans for maintaining enough capital reserves to survive a downturn. 

So far, the financial system is healthy, unlike in 2008-2009, when banks and consumers were overextended. However, due to the latest Fed orders, expect lending standards to continue remaining tight.

In 2021, banks can now buy back their stock. The yield curve has also steepened as well, which means banks are going to be more profitable lending. But this also means that banks can be pickier and can charge higher mortgage spreads.

How A Tighter Mortgage Industry Will Affect Housing

With the state of the mortgage industry still relatively tight, lenders are acting as a healthy throttle towards massive demand for real estate today. So long as tighter lending standards are in place, there will be less capital available to buy property. Banks are very cautious and rightly so.

Today, people are feeling more confident about buying homes due to low mortgage rates, a rebound in economic activity, massive stimulus packages, and a desire for everyone to live better lives. The intrinsic value of real estate has gone way up because we're spending so much more time at home. there are still plenty of folks with 20%+ down, high credit scores, and low debt-to-income ratios that will qualify for a mortgage.

Therefore, as of now, demand for homes that can be purchased with a conforming mortgage is strong. Assuming a 80% loan-to-value ratio, there is strength in the $650,000 – $1,000,000 price segment and below. Follow my 30/30/3 home buying rule if you want to buy property and feel good about it.

The lower the loan-to-value ratio (higher the down payment), the higher the priced home a person can buy. For example, a person can afford a $2,765,600 home using a conforming loan if he puts down $2,000,001, for a 72.32% downpayment. The loan-to-value ratio is the inverse, or 27.68%.

As a buyer borrows more and moves on to a jumbo loan, this is where borrowing gets more difficult and prices are softer. Not many have $2 million to put down in the example above.

Example Of A Jumbo Loan Rejection

My lender gave me an example of a borrower couple with a combined $630,000 income who got rejected for a $1.6 million jumbo loan. Usually, getting a mortgage that is less than 3X your gross income shouldn't be a problem. However, in this scenario, the borrower owned four homes.

All four homes had mortgages that totaled roughly $2.3 million. Despite the mortgages, the homes were all cash flow positive. However, because my lender excluded Schedule E (rental income) in its underwriting consideration, the borrow wasn't able to include over $150,000 in rental income.

If the lender had done so, however, the borrower's total income would have been over $700,000. Lenders traditionally only consider ~70% of rental income to be conservative.

As a result of the tightened lending standards, the borrower's purchase application was rejected by my lender. However, my lender referred the rejected applicant to one of his friends at another top-five largest bank. A month later, the applicant got approved.

Jumbo loans are happening, but they are just getting more difficult to obtain and longer to close. You just have to shop around for a mortgage.

Better Value Is In Higher Priced Housing

As a result, if you want to find value in the housing market, it's best to look for homes in your neighborhood that traditionally would require a jumbo loan.

In San Francisco, a lot of dual-income earning couples who have been saving for 10+ years can come up with up to a $500,000 down payment and buy up to a $2,500,000 home nowadays. Many of these tech firms are paying 22-year-old college graduates $100,000 – $140,000 in total compensation a year.

We've also gone through a 10+-year bull market in the S&P 500 and NASDAQ. Therefore, I'm no longer surprised when a 30-35-year-old tells me he or she is looking to buy a $2 – $2.5 million home.

But once you get above $2.5 million, it gets a little more difficult for many of these dual-income earning couples. They not only need a larger down payment, but they may also need a larger income to support a higher mortgage. Hence, there is an increased need to obtain a jumbo loan.

However, if you are able to buy property above ~$2.5 million in San Francisco, you'll be able to get relatively better deals.

It's up to you to find that higher price point in your city where there are more deals to be had. Looking for property deals near your city's median home price is currently a tough proposition.

Don't Get Too Excited About Your Mortgage Preapproval

There's one last thing I want to leave you with. If you get preapproved for a jumbo mortgage in this tight lending environment, it's easy to feel good. Pat yourself on the back for a nanosecond.

Then turn your feeling of triumph into CAUTION. Getting preapproved for a mortgage today is like being part of a small team of soldiers landing on the beaches of your enemy.

Your combat skills and artillery may be top notch, but your enemy will still wipe you out simply because it outnumbers you 10-to-1. To win the war, you would rather have 100X more people on your side with fighter jets and warships.

If you hope for the property market to continue going up, you'd rather have everybody qualified for a mortgage instead of only a small few.

I've been preapproved for a 7/1 jumbo ARM at 2.125%. I've found an off-market house with panoramic ocean views that I want to buy. My goal is to buy as many panoramic ocean view homes in San Francisco for under $1,000/sqft as I can comfortably afford because I believe they are significantly undervalued today.

This home I have found would have sold for ~10% more pre-pandemic than what I can buy it for today. As a result, I've locked in my rate. All that's left is trying to get an even better home price.

Interest rate lock extension

But I'm concerned about moving forward because I don't know when the banks will return to their normal lending standards. Everybody is depending on the government's and the Federal Reserve's continued support to keep the economy from falling into the abyss.

Government Needs to Continue Supporting

Thankfully, for 2021, there is another $1.9 million stimulus package that was passed by Joe Biden. Further, he said there will be another economic stimulus package in the 2nd half of the year.

A 2.125% rate for a 7/1 ARM jumbo is absurdly low. Yes, I am benefitting by 0.375% due to relationship pricing (I have assets with the lender). But still, even 2.5% for a 7/1 ARM jumbo is a great rate. My current rate is so low that it's pushing me to want to buy another property.

If you've ever had the good fortune to purchase an engagement ring, it's a similar feeling. Once you buy one, it burns a hole in your pocket where you just have to propose ASAP instead of waiting for the most opportune moment. YOLO, right?

But this type of thinking is dangerous thinking.

Nobody should buy a property just because they have locked in an ultra-low mortgage rate. That's the proverbial tail wagging the dog. Instead, you should buy property if you've identified the ideal home, can afford the payments, have run various scenario analysis, and plan to live or own the home for years to come.

My lender said the demand he is seeing for purchase applications is “the strongest he's seen all year.” His business is booming because refinancing continues to be super strong as well. The key question is whether the banking industry will return to its pre-pandemic lending standards sooner, rather than later.

Lending Standards Remain Tight

If banks do loosen their lending standards, it would mean that the labor market has returned and liquidity and profitability fears have dissipated. As a result, property prices will likely continue higher.

There is certainly a scenario where we could see the “mother of all bidding wars” in the second half of the year and beyond given there are months of pent-up demand. You know what? It's happening now.

Strategically, I believe investors are wise to buy the following before there is herd immunity:

Hopefully, most buyers will be OK since the average ownership duration is over nine years. However, as always, some people are going to get hurt at the margin.

The Yield Curve Today

Post pandemic, the yield curve is now upward sloping and relatively steep.

I'm personally positive on the housing market. I believe the mortgage rates will stay low for a long time, even though they are up from 2020. The economy is recovering, wages are growing, and corporate earnings are rebounding aggressively.

I am trying to buy ocean-view single-family homes in San Francisco as I believe big city real estate is going to make a huge comeback. Given mortgage rates are up 2% since the beginning of 2022, the real estate market should cool.

However, for savvy investors, from now through 2023 could be the best environment for real estate buyers in a while. I'm definitely looking for deals.

Yield Curve 2021

State Of The Mortgage Industry Conclusion

Please really think things through before purchasing a property today. Yes, mortgage rates are enticingly low. Yes, open houses are not back yet, which means you don't have to get into a bidding war with emotional buyers. This is a huge advantage for buyers.

However, I encourage you to take your time. The current state of the mortgage industry is not helping the housing market.

If you haven't found the ideal property, move on. There will always be another property that will come along. Finally, pay attention to your local mortgage industry. The supply of capital is paramount for a strong housing market.

Check the latest mortgage rates online. You'll get real quotes in minutes. The key is to shop around and make lenders compete for your business.

Invest In Real Estate More Surgically

The combination of rising rents and rising capital values is a very powerful wealth-builder. I encourage readers to invest in real estate to build more wealth for the long term. Negative real mortgage rates also makes investing in real estate very attractive.

Invest in real estate surgically without a mortgage through real estate crowdfunding. Here are my two favorite platforms that are both free to sign up. I've personally invested $810,000 in private real estate funds to diversify my holdings and earn more passive income.

Fundrise: A way for accredited and non-accredited investors to diversify into real estate through private eFunds. Fundrise has been around since 2012 and has consistently generated steady returns, no matter what the stock market is doing. For most people, investing in a diversified eREIT is the easiest way to gain real estate exposure. 

CrowdStreet: A way for accredited investors to invest in individual real estate opportunities mostly in 18-hour cities. 18-hour cities are secondary cities with lower valuations, higher rental yields, and potentially higher growth due to job growth and demographic trends. If you have a lot more capital, you can build you own diversified real estate portfolio. 

49 thoughts on “State Of The Mortgage Industry: Things To Know Before Buying A Home”

  1. Papa Foxtrot

    I have heard that next year will be the first time house prices drop in nine years. Any thoughts or predictions?

  2. Hey Sam,

    You seems to always be reading the pulse of what we are all contemplating about.

    I just finished refi on my primary to 2.375% on a 15 fixed with no cost (rate locked around 6/14/2020). However, I wasn’t able to refi against my investment property (jumbo loan) because I couldn’t find a good deal (everything was 4% plus). I am surprised you were able to get that 2.125% ARMS from Wells Fargo through your assets/relationship. I know you have been promoting Credible, but even knowing that tools as such bears no risk I refrain from trying because I know it will return any good deals for most. My big question is…how do i get deal similar to yours!!??

    I also find it interesting that your investment mix is heartlands of US using CFs real estates tools plus ocean view SF for <1000 / SqFT (do you rent these out?).

    Would you ever recommend borrowing from your 401ks/IRAs?



      1. Yes, I have a discount with BOA at about .375 but the problem is that it doesn’t start at 2.5% (as you did) or anywhere near it!! I never asked others banks about transferring asset bonuses, that’s worth a try and see though…I wonder if it’s because the announcement after 6/20 everything is even harder now with Jumbos.

        1. I’ve had a private banking relationship with Wells for years and have done numerous refis. They gave me a great rate on a Jumbo no cash out refi but declined the loan after 100 days of asking for documentation. Their underwriting kept tightening the rules.
          Different rates and rules for:
          Purchase vs Refi
          Jumbo vs conforming
          Cash out vs. no

          Renta income will really screw up your app.

          1. Yikes, after 1000 days? Oh yeah, I think you mentioned this.

            Wells is currently NOT accepting Schedule E rental income… but ARE including all rental property expenses. So that reduces affordability.

            Same with other banks.

            1. Money Ronin

              Yes, 100 days. I started an application with First Republic that has no problem with rental income. For anyone with a lot of rental income, I’d recommend giving their Private Bank a try.

  3. The state of the mortgage industry is …cheap as all get out. I refinanced to a fixed rate that is barely inflation. Once you add in tax deductions it’s below inflation.

  4. Madame Moneybags

    Hey Sam,
    Dipping back into your writing after many years (like, 10?). Awesome article, I’d been thinking about a refi and decided to back off and just enjoy being mortgage free for a bit, keeping some powder dry. I FIed during the pandemic, kind of extremely anti-climatic to be honest! Looking at different properties now but not quite ready to pull the trigger yet.

  5. Hey Sam, thanks for following up and fleshing our more details Re: increases in purchase money apps. I’m in the middle of trying to sell two SF condos so I had sent your previous newsletter to my realtor and my financial planner because we’d had one condo buyer fall out of escrow and we were discussing what next steps to take.

    They had been pre-approved for two loans as they were only putting 10% down. But, when it came time to release their financing contingency, their mortgage broker said the interest rates on the 2nd loans had gone through the roof and were now coming back around 9-9.5%, which was disqualifying them for the first. They asked us if we would carry a $360k second at 5.5%. We liked them and wanted to get the sale done so we said we’d consider it, at a higher rate. But after reviewing their credit package our financial planner (a former mortgage lender) said no way.

    The real bummer for us was that the unit they’d offered on was the fixer of our two units. We had expected it to go for less than list. But they came in at $100k over list so, naturally, we accepted.

    Because our condos are newly-converted from a 2-unit duplex, we have to close on both units simultaneously or we have to get interim financing for whichever unit we would hold, something we’re not inclined to do for a short time. So, those buyers would have had to wait for us to get another buyer on our nicer, rehabbed unit—which we expected to go for over list. Again, because we liked them and we just wanted the whole thing done, we accepted the first offer that came in on the other unit after we had accepted the $100k over on the fixer. Even though that 2nd offer was for list, not over, we took it because we’d already gotten the $100k over that we’d been hoping for from the nicer unit. It didn’t matter to us which unit it came from, just that it came.

    Then those $100k over buyers lost their financing, asked us to make the $360k loan, then their realtor was going to make the $360k loan, but she was not allowed by the first lender, so we released them from escrow and set about finding another buyer.

    But, now we’re locked into escrow with the second buyer who was at-list on our nicer, bigger, better unit…the one that was supposed to net us more than the fixer. So, now we are scrambling trying to make some inexpensive updates to the fixer so we can remove some as-is disclosures that were scaring buyers, just so we can attract a buyer and finally close the sale.

    We moved to Hawaii in October, with the expectation that we would be selling two fixers in early November. Delays with the team meant we rolled into holiday season with no units ready to list and the assertion that we would list at end of January, early February.

    Along the way, a unit two doors down from ours went for over $1k/sq ft so we felt that justified making some renos to our units. So we had drawings done and plans submitted to DBI for needed permits. Our plans were finally approved the day the shelter in place was ordered. #Bazinga

    We made the decision to halt all renos that would require permits or inspections and to just make cosmetic updates instead. Since our building is entirely vacant, our awesome crews arranged to go in, one at a time, to do their work without any other folks onsite. A neighbor reported us to DBI, twice. Building inspectors and NoVs then got thrown into the mix.

    Needless to say, we feel like we’ve been through the ringer, a few times, and we desperately want this sale completed. But, now we have to spend more to just try to get an at-list buyer and I’m sick of spending money on something I fear we may not recover it from. But we also feel like our hands are tied.

    No one plans to sell in a pandemic.

    Since 2013 when we bought the building we’d been 20+ year tenants in, Ive had a repeating mantra constantly running in my mind, “Don’t fuck this up.” and “Don’t get into a situation where you have to sell the building for less than its worth.” I’d been doing really well on the first of those two…the second though? Who knew a global pandemic was on the horizon?

    Meanwhile, we are not even considering buying in Hawaii right now as prices here are coming down every day.

    1. Sorry to hear about these troubles. Maybe it’s best to hold off on the second unit and rent it out? At least you guys are in Hawaii right? I’ve been looking at the higher in market about $3 million and it looks pretty soft. What segment are you looking at that look soft?

      I think Hawaii has the third highest unemployment rate in America given the massive dependence on tourism. I would wait or aggressively look for bargains now.

      1. Hey Sam, we went back to the handful of buyers that had seen the unit prior to our decision to make needed repairs. One pair of them, a realtor and a doctor, were overjoyed to have a second chance to get the (improved) unit. Luckily, the doc has access to special doctor financing, so even though they are only putting 10% down, their lender has explained to my agent that they are not like other lenders and their funding is rock solid.

        We thought we were in the clear once we ratified their offer but now we are struggling with the lower unit and an NoV we got thanks to the neighbor that reported us for doing work after the shelter in place. Fun times. Selling in a pandemic is not something I can recommend.

        As for Hawaii, we’re gonna keep an eye on the market, certainly looking for deals, which are absolutely coming, but we want to live through a hurricane season, and a growing pandemic, before we commit to buying island property. Not being able to get toilet paper back in March was eye-opening, to say the least. Also, we’re still learning about landslide risks here…once you see the USGS slide potential risk maps, you’ll definitely think twice about buying anything built on something other than the flattest of land.

        Meanwhile, good luck with your ocean-view home collecting.

        1. Makes sense to take your time before you buy.

          Hurricane season usually isn’t bad in Hawaii. Although, we did see major floodings in Kauai and one part of Oahu.

          I’m down to negotiating a remaining $25,000 off the asking price from this one property. It’s come down to the wire and I think it’ll happen. The total price discount from where I think the property would have sold for in Feb 2020 would be 10%. That’s fair.

  6. I have a 20+ year relationship with Wells Fargo Private Bank. My last successful refi was only 18 months ago at 3-3/8% on a 30 year jumbo. My relationship is so good, my Wells guy called me in February for another refi just to save 1/4%.

    Most of my stock and banking are with Wells so they know I’m good for the money. My wife is a W-2 earner. After Covid begin, the pace of communication really slowed down but I figured they were slammed and people were working from home.

    4 months after I started my refi, I got a very generic denial letter from Wells. The word on the street is that they are counting 0% of rental income but 100% of rental expenses. Given my real estate portfolio, that killed my numbers. Their lack of communication was worse than the denial itself and dragging the process out for 4 months.

    Upon receiving the letter, I immediately started my refi with First Republic’s private bank who is offering a lower rate and a 10 year interest only option. At a tax deductible 3.0%, I never want to pay off my mortgage so that works for me. (I’ve looked into your 2.125% 7 year ARM but I’ve been told that is not available on jumbo refis).

    As for direction of real estate prices, all real estate is local. S.F. is a one of a kind city with very limited land. Short of a major earthquake, people will want to live there and keep prices stable or increasing.

    1. Yes, Wells has limited Schedule E income per this post and the example.

      It’s definitely limited a lot of real estate investors from borrowing more.

      The good thing is that it’s not gonna last forever, the restriction. Therefore, I expect to see more liquidity get injected into the system at some point in the future.

  7. Curtis Sharp

    I locked a 15 year at 2.625 last week. No points. Should cost about $1700 in total fees on a 225k loan.

  8. We are another family from SF trying to get out of the city to find extra room for our family.We are now in our third offer attempt to buy in Pleasant Hill. Everything is going above 10%, 15% to pre-pandemic prices with 10 to 15 offers within 48hrs since going to the market . It is very frustrating and difficult to understand.

  9. We locked in 2.75% on a conforming 30 year on a house located at the very bottom of Santa Clara county. No points. $1788 in closing fees and the new lender waived the appraisal. House is a new build purchased 7 months ago with a 3.75% rate. I’m pretty excited about this deal. We are planning on being in the house for the long term as it’s our peak house prior to future downsizing for retirement.

  10. Sam, I always appreciate your insights. However, I think you are overlooking a very significant trend, especially in the Bay Area: the shift to work from home. Since this is a shift in the mindset of companies (many are seeing decent productivity in a remote work environment), this is beyond the time scope of this pandemic and might be long-lasting. Note that the shift to WFH needs not be universal: even if 20% of total tech workforce are now allowed to work remotely 70% of the time or more, it can be a beginning of a tectonic shift in where people choose to live.

    1. Do you think the people who leave the San Francisco Bay area will not be replaced by a new crop of people looking for Fortune?

      Check out this article as to why I am investing in the heartland of America. I’ve been on the work from home trend since 2016 with real money invested.

      I’m gonna take the view that people will leave and then return and even more people will come. And if you think about it, if there is 20% less people anywhere, the city gets much better. I’m willing to pay up for less congestion.

      Do you own or rent in the bay area? What are your plans?

  11. Hey Sam, I love your articles. I was wondering with the home prices so high, if we buy now, should I be worried of losing equity in the next 5 years? I worry that the job losses might get worse as the pandemic flares here and other countries and home prices will crash. I want to upgrade to a larger home but not sure if this is the right time given the uncertainty of the economy.

    1. Yes, I think there is a more than 50% chance if you buy now you will not be able to get back your selling price and break even for several years. Selling costs are still high.

      Therefore, I encourage you and other readers to try to bargain as hard as possible right now if you want to buy a bigger home and want to live it up more.

      I think buyers should try to get at least a 5% discount to February 2020 levels, if not a 10% discount. Real estate downturns take several years to work its way out. Yes, we had the fastest downturn in the stock market and probably the economy ever, which means we will probably have the fastest rebound ever.

      But I really caution everybody to think rationally and logically. Be disciplined in this environment. And just expect to lose on any new investments. These lingering unemployment figures are concerning.

      I’m looking to buy because I know I can get a deal on this one property versus before the pandemic. I also want to try to live my life more today than wait for another couple years. But I also know that it is highly unlikely I will be able to turn a profit on this property for another 5 to 10 years, even if there is a quick rebound.

      But just like most people did not expect a return to all time highs in the NASDAQ so quickly, perhaps real estate will rebound very strongly once open houses open up an economy opens up in the third and fourth quarter of this year.

      1. Thanks Sam! A lot of factors to take into consideration. I guess with my low risk appetite I’m inclined to stay put unless as you mentioned a good deal comes our way.

  12. Great article Sam! Thanks for the info.

    United Wholesale Mortgage, Devon Bank and Cardinal are 3 lenders that are providing rates at about 2.5% to 2.875% for 30yr fixed. I’ve referred folks to all 3 and they are very happy with the fees and rates. We got 2.875%. Paying only around $1900 for the refi due to lender credit of $2100, saving $320. I would start with UWM. Btw I don’t work for any of these companies

  13. Just a few observations talking to my mortgage lender:

    (1) I have not been told Schedule E renter income is excluded. In fact, my lender takes my renter income into consideration when determining my borrowing capacity.
    (2) My lender is requiring a lower LTV on a rental property purchase. They want more money down.
    (3) My lender rates have gone up on rental properties compared pre-COVID-19.

    Also, I think it makes sense to factor in cost of funds in looking at rental properties. The lower the mortgage rate, the better the return profile on an investment property.

    Therefore, I don’t agree with this statement “nobody should buy a property just because they have locked in an ultra-low mortgage rate.”

    I think locking in a very low rate can make an otherwise unattractive property attractive.

      1. Jumbo loan in size but portfolio loans, not Fannie. The lender offers better terms on their portfolio loans than ones sold to Fannie (maybe for the reasons you describe in this post).

      2. Appreciate the guidance Sam. Wife and I plan to purchase property #4 in Scottsdale, AZ this August, and we recently locked at 2.875% with Chase – 20% down @ 30YR Jumbo (slightly above $510K). Chase permitted our rental income; however, they excluded my self-employment income as it’s <2 years. The Scottsdale property will initially serve as a second home and then future retirement home during the winter months.

        Once we close on this home, we may sell our home in Cupertino and purchase a home in Carmel, CA given our current gigs are nearly 100% remote. What are you thoughts on Carmel/Monterery RE?

  14. I’ve worked in mortgage lending 10+ years (most of them for one of the top 3 retail banks). I moved over to the mortgage broker side in the past year. Conforming loans (generally less than 800k depending on the county) don’t have all the extra overlays (rules) jumbo loans currently have. Putting less than 20% down, counting rental income, and having a less than 680 credit score is not currently an issue with conforming loans (within the mortgage broker space).

  15. Fascinating insights on the lending market for mortgages. The stricter requirements for loans makes sense but must be very frustrating for buyers to deal with. Interesting on the minimum 20% down requirement and not counting schedule E rental income for buyers. Not being able to count rental income can be really significant for buyers with a lot of investment properties.
    I’m really curious to see what happens in the coming months.

  16. Thanks for another great article, Sam.
    IMO, Federal Reserve had done enough to support the economy from falling into the abyss (spending over $3 Trillion in 3+ months). Speeding up inflation would just hurt our future (not to mention future generations).

    1. Not sure there will be inflation with so many people unemployed.

      But if there is inflation, you want to own an asset like real estate that will inflate with inflation or faster than inflation.

  17. “A genius is the man who can do the average thing when everyone else around him is losing his mind”

  18. Sam, I have the same worry with you. Housing here in NoVa has gone nuts. Bidding war on anything around and below medium price, which is 1.3 here. I’ve lost two full price offers with no contingencies…

    Then I just stopped. It’s getting irrational. The schools won’t even reopen in fall. The work from home is dependent on schools… People are not getting paid higher in this environment, even if you can keep the job. I even thought about selling my house to time this bizarre sellers market…

    Honestly, I don’t understand what’s going… but I have retreated to observing mode for now

    1. I think there is simply a greater appreciation for owning a home since we are all spending so much longer in our homes.

      The more we appreciate some thing, the more valuable it gets.

      There is also this feeling that we should be investing in things that we can enjoy and utilize. The volatility in the stock market does not feel good.

      Instead of keeping your money in stocks that could disappear in value overnight, why not buy real estate and at least enjoy your investment.

      I have been utilizing my home much more since I love my day job in 2012. As a result, I have no problem spending money on a hot tub, building a deck, remodeling the house and so forth.

      I think this propensity to spend on real estate after a certain price point is what is happening now.

      I appreciate my home more than ever before. And I think other people do too as well.

      1. You are right, that’s why I was looking for a bigger house too… But I’m not sure how long this could last…

        Sam, I’m also curious about the frenzy around Millennial Robinhood traders in the stock. My observation is people who buy properties and people who trade on robinhood do not overlap during this crisis. Kind of parallel universe.

  19. Are you sure that is an 11 point penalty and not 11 basis points? Why would a bank ever sell a loan to Fannie if they had to take on an 11% penalty for someone missing one payment? That is totally out of the banks control, unless the bank is willing to eat the cost of the missed payment(s) to avoid the penalty. Still not a good business decision for the banks!

    1. Indeed. I double checked with the 11% penalty and my lender reconfirmed.


      But remember, just bc the borrower goes into forbearance, Doesn’t mean the mortgage goes into default.

      Default rate was only ~1.9% in October 2019.

  20. Hi Sam – long time reader and big fan of your site. As always, thanks so much for the valuable insight and knowledge sharing. Am in a similar situation considering an additional investment property purchase – Question – Is the pre approval you have specified for a rental property? Am hearing it’s harder to get funding for investment props in current environment and rates are getting higher for them.

  21. Sam-

    It’s definitely all about relationship banking. In the middle of all this, we found another rental in heartland America, and got an accepted offer, and closed in 17 days, just closed a couple days ago. We are in So Cal and work with a mortgage broker who we have used several times in the past who is local to our rental properties in TN. 30 year fixed, no points, 25% down 3.6%, and we got a great deal on the property. Should be a 9%+ cap rate. They did use 70% of our existing rental income, though we probably qualify without it. There were some additional Employment Verifications, and a little extra paperwork but nothing too crazy.

    6 months ago we closed a refi with Citi on our Jumbo at 3.375, no points on a 30 year fixed. Now, another bank whom we moved some money over to is offering a 7/1 at 2.65, or 30 fixed at 2.95 no points, both about $2500 in total closing costs. We are starting that refi process today, though I’m torn which one to go with. What are your thoughts between the two?

    We will be saving about $260 a month on the 30 (only 6 months in on our current 30).

    Disclaimer- my wife and I are DINKS (dual income, no kids), with 10+ year jobs, no debt besides mortgages, and a 60-63% LTV on our primary. Relationship pricing is key!


  22. Hi Sam,

    I have been reading your blog for a few years now and this is my first time posting here. Before asking my question, I just wanted to thank you for sharing your knowledge and experience. You podcast recently about racial discrimination is particularly inspiring. So, thank you.

    My question is about rate lock. You mentioned that “I’ve locked in my rate. All that’s left is trying to get an even better price.”. Do you mean you will renegotiate your rate with your current lender or go to another lender?

    I recently locked my rate for 30 yr fixed refinancing (with cashout) at 3.25%, but I have heard that some lenders offer 3.1% (but I haven’t identified one yet). I thought that it’s difficult to leave the lender once we lock the rate since all loan paperwork has begun? What would I lose if I walk away and lock the rate with another lender?

    Would appreciate your help. Thank you

    1. You don’t lose anything. Locking in a rate does not prevent you from going with another lender.

    2. I’m referring to negotiating on the home price front. If rates go down further, I will negotiate a lower mortgage rate too.

      Everything is negotiable. A lock is a lock, but you have the ability to negotiate lower if rates move. Banks will still earn a spread. Ask about a re-lock and the cost.

      Mine said there is a .12% cost to re-lock at a new lower rate, however, the lender has some ways to make me not pay the fee if rates do go lower.

      Everything is negotiable.

      1. Thanks, Sam. My lender said that I can’t relock within 30 days, if I decide not to stay at my current locked rate. Is that a typical procedure?

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