What is the Velocity of Money and How Does it Impact Home Loan Rates?

By Shawn Kaplan, Licensed Mortgage Banker

Kaplan Mortgage Partners – Access National Mortgage

Murfreesboro, TN – If you’ve been watching the economic news, you’ve probably noticed that market experts and traders have been keeping a close eye on the Commerce Department’s Personal Spending and Personal Income reports. Obviously, those reports provide insight into the health of our economy, but did you know they also influence home loan rates? That’s right, personal spending can actually influence the interest rates that are available when you purchase or refinance a home.

Here's why. It has to do with something called the velocity of money. Even though the government keeps pumping money into the system, nothing happens until that money is spent or lent – and passes from one hand to another or one business to another. The speed at which this money passes between parties is called the velocity of money.

With the job market still very sluggish, consumers aren't spending much money these days, and businesses are still reluctant to spend money to make investments in their business. With the present velocity at low levels, inflation remains subdued and that's good for home loan rates. That's because rates are tied to Mortgage Bonds and inflation is the archenemy of Bonds, so low inflation is good for Bonds and rates. However, once velocity increases, the excess money in the system will cause inflation – which is bad for rates, since even the slightest scent of inflation can cause home loan rates to worsen.

While we certainly want to see better economic recovery news in the near future, we have to remember that there's an inverse relationship between good economic news and Bonds and home loan rates. Weak economic news normally causes money to flow out of Stocks and into Bonds, which helps Bonds and home loan rates improve. Strong economic news, on the other hand, normally has the opposite result.

As an added benefit to our clients, we at Kaplan Mortgage Partners pay multiple consulting firms and services to advise and track this info daily to help us advise our clientele.  An added benefit of using us as your chosen mortgage professional.  Currently, home loan rates are at a historically low level, but that situation won’t last forever. That means now is an ideal time to purchase a home or refinance before the velocity of money – and rates – change. If you or anyone you know would like to learn more about the current economic situation and how to take advantage of historically low home loan rates, then please contact me or complete our simple and secure online link where you can pre-qualify 24 hours a day www.Link2Approve.com

About the Author

Shawn Kaplan is an active, 50 state Licensed loan officer with Access National Mortgage.  He specializes in large cap and Jumbo home loan financing for the affluent and high net worth markets seeking innovative solutions.  Contact us at 615-426-3182 to set up a consultation.

Mortgage Approvals : The Income-Equity-Credit Triangle

For as strict as mortgage underwriting can be, it may seem as if there's a magic formula for getting approved. There's not. Getting approved for a home loan is the same as it ever was -- just with higher hurdles.

Satisfy the Mortgage Income-Equity-Credit Triangle and everything else is cream cheese.

The Big 3: Income, Equity, Credit

To get approved for any type of mortgage -- conforming, FHA, jumbo, VA or otherwise -- you'll need to show income, equity and credit. It's that simple, really.

Income, Equity and Credit are mortgage lending's Big 3.

• Income : Your monthly taxable income versus your monthly household debt (i.e. DTI).
• Equity : The percentage of equity you have in your home (i.e. LTV).
• Credit : The middle of your three scores, as reported by Experian, Equifax, and TransUnion.

For each mortgage product available, mortgage applicants must meet some minimum qualification in each of the Big 3. When all 3 factors are in balance, the approval "bullseye" is in plain view, and a mortgage approval is likely.

Hitting The Mortgage Approval Bullseye

The ideal mortgage applicant for a bank will have strong income, big equity, and great credit. In reality, though, not every applicant will. And, that's okay, too.

It's because of something known as "compensating factors".

Compensating factors are strengths in a person's mortgage application that, literally, compensate for weakness in the same.

For example, if a person's income levels are low but, at the same time, they have stellar credit and loads of equity, it's likely they'll be approved in underwriting.

This example is illustrated at right.

The Income-Equity-Triangle is shorter at its top because of low income, but wider at its base because of credit and equity.  It's the compensating factors (i.e. credit and equity) that keep the "bullseye" in view, resulting in approval.

When You Don't Have Compensating Factors

Compensating factors are limited to income, credit and equity; you can't use them for "employment history", for example. For this reason, few applicants have legitimate compensation factors.

Without compensating factors, mortgage approvals are tougher to come by.

For example, if we look at the same applicant from above -- low income but without stellar credit and without big amounts of equity -- the mortgage application gets a turndown. The base of that Income-Equity-Credit Triangle can't widen, so the bullseye breaks the plane of the triangle, resulting in a loan denial.

Loan approvals are scarcer for another reason, too. In recent months, with Fannie Mae and Freddie Mac holding banks responsible for bad loans, underwriters less willing to stick their respective necks out. If a loan doesn't meet strict approval standards, it can be turned down on the spot.

Need A Mortgage Approval ASAP? Get One Now.

The problem with compensating factors is that they're unofficial; they're a bit of common sense injected into an otherwise sterile mortgage lending process. You may not even know if they've been used on your file.

To get a mortgage approval for your upcoming home purchase or refinance, call me at 615-426-3182 or click here for an online rate quote. The rate quote will start the process. You can see my rates and see how they work for you.

About the Author

Shawn Kaplan is an active, multi-state Licensed loan officer with Access National Mortgage. He enjoys helping his real estate agents not only close loans but grow business.  

Call or Email Shawn at skaplan@accessnational.com or call 615-426-3182 to set up a one on one meeting or conference call. Bonus: Click to get a free, no-obligation rate quote. I love to work with my readers!