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The importance of a budget is something you’ve heard me talk about over and over and OVER again, but I realized that for a lot of people, the biggest hurdle is just getting started! Don’t feel bad- this can really be overwhelming if you’re not sure where to begin. So this week, I wanted to talk about how to actually start your budget… what to gather, future savings, and future investing  all with the goal of sustainable home ownership

So budgeting… I struggle too. But I’ve learned that if you get into the habit of budgeting, it becomes the foundation for a solid financial future. But I think it’s really important to clarify what a budget actually is. Budgets are often mistaken for just a list of bills… nope. That’s not it! That has something to do with it, but a real budget is actually a limitation on the amount of money that you will spend in a period of time. For our purposes, we’re going to talk about a monthly budget. 

Where do we begin? Get a baseline of your actual spending. And I mean EVERYTHING. Let’s figure out what you have been spending money on so we can determine where we can maximize cashflow. 

First things first- We want to get three months of spending on paper. When looking at your spending it’s important to look at ALL accounts. So for example, if you are married and you and your spouse have both joining and separate accounts, you should be looking at spending in each of those accounts.  (And by the way, if you want to hear more about how my husband and I talk about money in our family, check out this video)

Once you have three months of spending down on paper, categorize each expenditure into the following categories:

SURVIVAL- housing, food, transportation, utilities, medical bills, child support.  Any mandatory minimum payments that you have to make. This does NOT include personal hygiene spends, or recreational activities.

MAINTENANCE- These are expenditures for maintenance (including healthcare) for your big assets like your car and your house, and then also your children, pets, family and self.

LIFESTYLE- This where you categorize things like pedicures, golf, going out to eat, entertainment, etc. Anything that is not absolutely vital to your literal survival, but is something you spent money on.  

GIVING- I’m a big believer in giving back, so for me, any sustainable budget needs to include a category for charity and giving back.

So keep in mind when you’re categorizing things between lifestyle and survival, things like eating out are lifestyle expenses. Going to the grocery store is survival. So if unsure if which category something fits into, ask yourself the basic question- do I literally need to spend this money for food, shelter, transportation to work, etc? If yes, survival. If no, lifestyle. 

WHAT NEXT?

A Successful budget is about 70% of net take home income. The remaining 30% then goes to paying off debt, saving, and investing. But I realize that if you are just starting out with the concept of budgeting, living off that 70% might be daunting. So let’s look at some of the ways to get you there.  

1- Decrease liabilities – The very first step is to take all that work you did above (categorizing three months of expenses) and determining which of those expenses you can reduce or eliminate. 

This might mean sacrifices… things like moving in with family, getting a less expensive car, etc. But those tough choices now will help you in the long run if it means that you can pay off debt, save, and hopefully even invest! 

 

2- Evaluate assets – If you’ve already taken step 1, and still have too much debt to overcome, it’s time to start looking around to see what kind of assets you might be able to sell to get rid of some of this debt. Things like jewelry, instruments, art, old laptops, phones, clothes… maybe you have a storage space with old furniture, or recreational toys… items that you don’t need or use on a regular basis. 

I know this can be a pain point- trust me, I’ve been there. I personally have gotten myself into a ton of debt before, and had to make sacrifices like this. But because of this, I know it can be done, and I’ve personally seen the benefit.

 

3- Increasing income – When it comes to your 9 to 5, it’s worth seeing if you earn more money. How do you do this? The first thing you want to do is determine if you are a valuable asset or a liability as an employee. Hint: liabilities don’t usually get raises.  Figure out where you can add value, and then negotiate a work for commission compensation for that added value. 

If that’s not possible, do additional earned income work- babysitting, grocery shopping, graphics, etc. Anything you can do with your own talents that you can offer as a service or product, you should! Or, if you have the time to take an additional job doing part time work at a grocery or delivery service, it’s well worth it if it will get you closer to that 70%. 

I know these steps aren’t easy. It takes serious commitment and sacrifice to reach these goals, but I KNOW you can do it. I did it too, and the results in my own life are beyond anything I ever expected. 

And I want to leave you with this tidbit: The most impactful thing I have learned about investing and money is that: If invested properly, (somewhere between every 4-6%) money doubles every 10 years. DOUBLES. Every TEN years. 

So I hope this inspires you, I hope it helps you, and if you have any questions and/or want to join me on this journey, be sure to join our SMART Steps community on Facebook! 

 

Stay healthy & stay well!

Lizy

With every day that goes by, we all seem to find ourselves wondering what ways we’re going to see both health and economic impacts during this pandemic. So today, I wanted to talk about what homeowners, and people who are in the process of purchasing a home, might be experiencing in this turbulent financial market. 

Fed Fund Rate vs. Mortgage Rates

Before anything else I think it’s important for people to understand that the “Fed Funds Rate” is not the same as mortgage interest rates. The Fed Fund Rate is the rate that the Federal Reserve designates for loaning money to banks and businesses for overnight liquidity. So when the Fed announces that their rate is zero, it does not mean that MORTGAGE rates are at zero. Mortgage rates are in the 3-4% range. That is historically low, but I don’t want anyone to confuse it with the zero percent Fed Fund rate. 

Varying Rates Between Banks

Pre-COVID, when it came to mortgages, Interest rates didn’t vary much between banks. You could ship around, but in general, rates at different banks were very close (often within a quarter of a percent) to one another. 

Today, we’re seeing significant differences in rates from bank to bank (often over a whole percentage point, or sometimes more). This has nothing to do with how much a loan officer is making on the transaction, but has everything to do with bank liquidity. Depending on the strength of the bank, the loan program, credit, debt to income ratio, etc… any risk factor that may be present will increase the rate of interest in today’s market. 

So what are Risk Factors?

If you’re in the process of acquiring a home loan, your loan officer is going to be looking at several things that are considered possible risk factors and how they are going to affect your probability of repayment. When determining ability to pay, we’re looking at  employment history, strength of credit, income, etc. When determining risk factors, we’re looking at debt-to-income ratio, overdrafts, deposits, etc. In today’s climate, every lender across the board is looking much more critically at how you make payments, what debt you have, etc. in order to determine your likelihood of repayment. 

I know that this may seem like extra hoops to jump through, and can be downright annoying. But the good news here is that there is still plenty of financing available, especially if you’re borrowing under $510,500.

What is a Jumbo Loan?

Borrowing an amount over 510,500 is considered “Jumbo” financing, and has its own set of rules. Some banks are no longer offering Jumbo programs, and those who are have higher levels of scrutiny to contend with during our current economic shift. To be clear, not every bank has abandoned jumbo financing. It just means that there have just been a lot of changes- you might just have to look into different banks rather than the big box banks. If you are seeking Jumbo financing, it’s important to stay informed throughout the process as this situation is so fluid.

The same holds true with things like bond financing and down payment assistance programs… not all banks are offering them anymore, but they are absolutely still available. If the bank you chose no longer offers what you’re looking for, be sure to look to different banks and lenders.

What Isn’t Available Right Now?

If you’re a consumer who needs financing outside of the box, like bank statement financing, or foriegn investors (typically called non QM loans)… you’re going to have a hard time finding it. That type of financing was typically found through investors and hedge funds. As the market declined, that financing was pulled. To be perfectly candid, I don’t know when that will come back. In the last recession we saw it take about 10 years to return. I genuinely don’t know if that will be the case this time, so we will just have to wait and see what develops in the coming months and possibly years. 

Why can’t I “lock”?

ANother peculiarity in this environment is that banks are having to pay very close attention to how many loans they issue because of liquidity issues. They are having to make sure they they have warehouse resources, that they won’t have margin calls on their available resources, and as a result, are limiting the amount of rate locks that can happen within any given time period

What this means for you, if you are in the process of buying a home or refinancing (especially if you are refinancing) you may not be able to lock in your interest rate at the very beginning. This is common right now. But it’s not the worst thing in the world. Rate are incredibly low right now, and since the government is buying all mortgage backed securities, this trend is likely to continue for at least the next 30 days. 

Forbearance vs. Deferment vs. Modification

I spent some time talking about this in detail a couple weeks ago (you can see that video here) But I want to bring this up again because it is SO important right now. There are differences between forbearance, deferment, and loan modification. 

Forbearance does not mean forgiveness, it does not mean deferment, and it does not mean loan modification. It means that you are able to delay your payment for up to 90 days. But when that time is up, you owe all those payments. A forbearance does not automatically happen. You have to apply, and that application is reported to credit agencies. It does not negatively affect your credit score, but they do have an impact on your ability to borrow in the future. 

My warning against doing this is to only seek this sort of relief if you absolutely have to. In the past when people have sought a forbearance, they were prevented from getting new financing for a number of years (up to seven!). We don’t have guidelines out right now to determine what 

will happen as a result of COVID related forbearances, but I will say that if you are still able to make your payments, you should. 

Deferment programs are slightly different in that whatever payments would have been made during the deferment period are simply tacked on at the end of your loan term, and they still accrue interest as they normally would. 

Loan modification means that you’re either breaking up late payments over a course of time to be paid along with your regular payments, or you’re lowering your payment, but you are still responsible for the entire amount by the completion of your loan. 

All of these can be a great move if you want to stay in your home and you know that you’re going to get back on your feet. My only warning is that if you’re seeking a forbearance, only do it if you know that you will have a large sum of cash available to you by the end of your forbearance period so that you can make the payment that will be due. 

I’ve lost income- can I still buy?

This is the type of news that every loan officer hates to give: If you’ve been furloughed, or lost your income, it will have an impact on your purchasing power and ability to qualify. 

You may be wondering if you can use other income to make up for what was lost. As a basic rule (any time, not just during this pandemic), if the lender cannot “rely” on the income – things like bonuses, overtime, shift differentials – they can’t include it. 

So just please be aware that if you’re looking to use “other” types of income to apply for a mortgage, they’re subject to an analysis of their stability. Same goes if you’re self employed. Lenders want to know that your business is still making money, so they may ask for invoices, current receivables, profit/loss statements, etc. 

And on a positive note, if you have been furloughed or are unemployed, if that gap is less than 6 months, we will be able to use that income again for your home loan. Not all hope is lost! 

So hang in there, and if you have specific questions, I really am happy to answer them. Take care and stay well!

We’re living through unprecedented times. With the pandemic starting to rear its ugly head in our country, we’ve already seen economic disruption, and are bracing for much more. In an effort to mitigate the damages, our federal government passed a financial relief bill that addresses both individuals and small businesses impacted by COVID-19. CARE ACT

So today I want to talk to you about how that relief package is affecting the homeowners and the housing market, and what some of your options are as we as a nation face a difficult economic situation. 

 

IF YOU READ NOTHING ELSE, READ THIS: 

Before anything else, the MOST IMPORTANT thing I can tell you right now is that if you are under financial distress as a direct result of COVID 19 and cannot pay your mortgage, you have to contact your mortgage servicing company. This federal relief act does not mean that your mortgage payments automatically stop. It simply enables you as a homeowner to apply for relief and be protected from financial hardship as it relates to your mortgage.

As an overview, this bill puts a halt on all evictions and foreclosures for a period of 60 days. There is already talk of extending this period, but as of this writing, this halt extends through May 2020. So, if you find yourself in a COVID 19 related financial hardship, this bill gives you 60 days to figure out your next steps as it relates to your mortgage. 

The Difference between Forbearance and Deferment

The forbearance part of this act means that there is a hold on evictions and foreclosures. If you are financially impacted by COVID 19, you have a period of time that you are not required to make payments. Then when that grace period is up (in this case, two months), you will have to make both your regularly scheduled payments, and make up for the payments that would have occurred during the grace period. Depending on your circumstances, you will either have to pay that amount up front, or you will make modified payments along with your regular payments. 

Deferment programs are slightly different in that whatever payments would have been made during the deferment period are simply tacked on at the end of your loan term, and they still accrue interest as they normally would. This is really similar to the way student loans work. The thing to note here is that you have to be able to prove that this is a COVID 19 related hardship, and the deferment period (for now) is only 180 days. So if you had job loss prior to the pandemic, it does not qualify. At the current moment, only Fannie Mae and Freddie Mac have issued guidelines on deferments, but I do anticipate more to come in the weeks ahead.

So in summary, the CARES Act impacts the housing market by injecting liquidity (in the form of direct payments to tax payers- read more on that HERE, halting evictions and foreclosures, and offering deferments to those in need.

 

How mortgage banking works

This is a hefy topic, but I’m going to do an extremely simplified overview as it relates to what’s going on right now. 

Once a home loan is closed, it is transferred and managed by a mortgage servicer (the bank you make your payments to). The asset (closed loan) itself is sold to investors or a government agency like Fannie Mae, Freddie Mac, or Ginnie Mae (FHA/VA). The servicer’s role is extremely important because they collect payments from the borrowers and pay property tax insurance and handle customer service related questions/issues. They are also responsible for timely payment to investors (in this case, the government) who buy pools of these loans through investments called Mortgage Backed Securities (MBS). 

The reason it’s important to understand this right now is because the CARES Act does not provide relief or guidance for Servicing companies. Which means that if a homeowner stops paying their mortgage, the service provider is STILL on the hook to pay the investor (the government). This is why it is SO IMPORTANT for people to continue paying their mortgage if they are still employed. It was this exact problem that contributed to the housing crisis in 2008. People who still had an ability to pay stopped, and then servicing companies were not able to fulfill their obligations to investors. 

 

My advice

I know this is not going to be the popular opinion, but I truly believe that if you have equity in your home, and you are in a position (for whatever reason) where you can no longer afford your mortgage, you should sell. That way you can figure out housing that is within your budget (which may be dramatically different now), pay off your debt, and still have assets left. This will leave you in a stronger financial position on the other side of this, rather than deeper in debt. 

Also, for those of you who find yourself suddenly unemployed, and don’t know what to do next, I really believe that there is serious value in work, and there is work to be found right now. So many groceries are hiring, and delivery services too. Obviously, I don’t want anyone to put themselves or their families at risk. But if it is a possibility for you, don’t feel bad for stepping away from whatever your chosen work was to do something in the interim. It may not be what you want to do with your time, but, if the choice is giving up or doing an honest day’s work, DO THE WORK. We all need to do what we can to help pull ourselves and our communities out of this.

In closing, please stay safe out there. Stay healthy, and be well. We WILL get through this, and as always, if there are any questions I can help answer for you, please don’t hesitate to reach out. 

The world we’re living in has changed dramatically, and keeps changing day by day. Keeping that in mind, I want to deliver the most relevant and practical advice and information I can to you right now, and will continue to do so as we all ride this crazy rollercoaster. 

We are in uncharted territory. Many of the events of the past week were unprecedented, and there are sure to be more. So I want to talk to you about what is happening right now, and what I see happening in mortgage banking for the next 6 months based on where we are right now. Now more than ever, we cannot predict what happens next. But we can and will get through this together. 

The week of March 16th-20th, we saw massive and unprecedented changes in our financial markets. The bond and stock markets crashed, and Mortgage Backed Securities (MBS) were not purchased by anyone. The result is that we now have a banking crisis.

Last week, many people who are in the midst of the home buying process heard that they could not lock in their rate. The mortgage market was moving too quickly for banks to be able to hedge and determine pricing. We saw that the mortgage bond market would be stable at opening because the government was buying the mortgage backed securities, and then as soon as those purchases were finished, that market would crash. There was no stability. As a result,  many banks did not issue rate sheets, some limited refinancing. 

I’m telling you this so that if you are either in the process, or about to purchase a home, you understand what mortgage companies are facing right now. I do believe the mortgage market will stabilize, and if you were able to lock in your rate last week, then great. And if you’re about to purchase, it’s going to be ok. Just be aware of what is going on, and be sure to have a candid discussion with your loan officer and realtor about what they are seeing, and what your best options are while rates fluctuate so rapidly. They may recommend “floating” your rate right now, which is actually what I am recommending to some of my current clients, depending on their circumstances. 

 

Bank Liquidity

It’s worth a deeper dive to understand why mortgages are affected just like the rest of the financial markets are right now. It has to do with liquidity. Banks have a limit to the number of loans that they can fund. They way they replenish that fund is through the sale of mortgage backed securities and of loans. 

When mortgage rates dropped so dramatically, so many people wanted to refinance that it actually maxed out banks capacity to fulfill the lending demands. Without anyone purchasing MBSs (which is how they replenish their ability to lend more), the banks ran into a liquidity issue because they didn’t have the liquid funds to lend out. 

So why are investors not buying the mortgage backed securities? Because in our current crisis, this pandemic is causing people to lose jobs and income. We’re seeing people go on furlough, and in general, there is nothing but uncertainty for so many. This gives investors the feeling that the likelihood of people defaulting on loans is much higher than in previous years. 

Considering all of this, I think that in the short term, the government will end up purchasing all mortgage backed securities, much like they did back in 2008-2009. And I do think that will help to stabilize the market. And also, at this point, I actually feel fairly confident that the government will come up with a stimulus plan that will also help with that stability.

 

So what now?

Even though this situation is evolving and changing daily, from what we’re seeing right now, it seems that the peak of this pandemic will affect the US this summer. That means that the income for so many, especially in the service industry, will be impacted for a long period of time. I don’t know how that will affect mortgage guidelines yet. As of right now, the rules have not changed. But I do anticipate that there will be new requirements for additional verifications of income and assets for people seeking home loans. I will keep you posted if and when that happens, but it’s a pretty safe bet looking into the foreseeable future. I also think that down payment assistance programs may not be available in the near future.

But it’s not all bad news. I do think that there are going to be a lot of late payment/forgiveness programs, and many states are already asking companies not to report late payments to credit bureaus. 

 

If you have equity…

I always tell people to not sell their homes in a time of panic. And that still absolutely holds true. If you still have your income, what is happening right now is no reason to sell. Truly. 

However if you have lost your income and have no savings, considering selling your home is not a panic sale. Homes are investments, and if you need to cash your investment to survive, that’s what it’s there for. It’s important during times like these to weigh all of your options, and if cashing in on the home investment you made is going to get you through this, that’s ok. 

I also want to point out something that I think helps with perspective- a recession DOES NOT equal crash in home value. We have had almost sixty recessions since this country was founded, and only two of them negatively impacted home values. Typically, during a recession a home is a stable investment because it is not subject to the same fluctuations of the market.

In fact, right now in Arizona we have had HUGE influx of people, and not enough homes on the market to keep up with the demand. So rents have gone up, and people are looking to buy.

So let me repeat, do not firesale your home if you don’t have to. If you are in a position where that is how you will financially survive, by all means, take refuge in your investment. But otherwise, sit tight and know that this too shall pass. 

 

Practice sound financial strategies  

Ready for my new favorite analogy?? Try to be the oak tree in a hurricane. If your roots are deep in the earth, you may lose leaves and even a few branches. But after the storm passes, you’ll be ok. So how do we root? If you have not started budgeting already, there is quite literally no time like the present. Below are my SMART Steps for budgeting, and you can download my budget sheet for help (it’s free)

My husband Skyler and I actually started a facebook group for SMART Steps, and I want it to be a place where we can share more information like this, answer questions, and offer best advice possible during such difficult times. I hope you’ll join us there. 

Stay safe, stay well. Focus on your loved ones, and keep hope. I know these are scary times, but we will all get through it together.