Pennywise, Dollar Foolish

angie'slist.com

Whoops! It happened again. A buyer decided to save some money by declining the opportunity to have a whole house inspection and got stuck with a wheezing, broken furnace. "The seller must have known," may be a true statement, but prove it and then try to get them to pay for repairs. That is an expensive endeavor often involving courts and lawyers. I don't recommend it.

What I do recommend is doing everything you can to know what you are buying. Buying a home is the most expensive financial investment that most people will make. If you don't have enough money to have the home properly inspected, you probably aren't financially ready to purchase a home.

The home is only five years old, you might say. What could possibly be wrong? Why bother with an inspection? Unless you can see through walls, are versed in how a breaker box should be wired, and are willing to crawl into the crawl space to verify that the property has no termites or standing water around the foundation, you need an inspection.

Wiring issues, termite damage, and water penetration concerns are the items that we see the most. Indiana is a state in which mold thrives. A window that is sealed improperly can leak moisture into the walls. Moisture can create mold, mold spreads. Toxic homes exist. I have known folks that have purchased homes that they can't live in due to mold. The remediation of mold is an expensive proposition-much more expensive than that inspection you chose to skip.

Another potential health hazard is radon. Radon is an odorless gas that is naturally occurring in Tippecanoe County. There are areas of the county where it is more prevalent than other areas. Radon has been linked to instances of lung cancer. Particularly with the more energy efficient windows and doors of new homes or a basement that will be used as living space it is probably a good idea to consider radon testing as well. Adding additional tests for mold, radon, well, and septic could increase the cost of your inspection by several hundred dollars. But...if it keeps you from buying a home that you have to make thousands of dollars in repairs it is well worth the expense.

Managing Expectations

cross15.edublogs.org

  As with most years, I anticipate that this year I will meet and work with a number of first time home buyers. So today I would like to discuss managing expectations. The subject of purchasing a home is often an emotional one. The idea of "home" being very personal. As with anything dealing with emotions, sometimes dreams and reality part company along the route, so it is important to understand what is possible and what is not.

   When dealing with mortgage financing, we are talking about a fairly black and white subject. When i first began originating mortgages in 2001, a well written letter could sometimes make the difference as to whether or not a loan would be approved. Underwriters still had discretion in making decisions. A person with a difficult story that anyone could relate to often was approved for a mortgage. Today, not so much. Mortgage decisions are based on specific quantifiable facts.

  What we look at is what is true and quantifiable. I.E., how much you actually make today, right now, your current debts today, right now. If I am giving a pre-approval I can't take into account what may happen in three months, I have to use the information that is available currently. So the raise, the bonus, the inheritance, the payoff of debt, are factors that could make a difference, but only once they are a reality.

  Often folks think they can buy more than what they actually can buy. The rent you pay for instance, isn't ratio tested to fit a formula as your house payment will be tested. So what you are paying in rent, may or may not be what you can pay in house payment. Online loan calculators don't always take into account the factors that affect interest rate, taxes, insurance or private mortgage insurance. So what you think your payment in a particular price range will be could be way off.

Many folks think that if they pay their utility bills on time that will ensure a good credit score. Since the utilities don't report to the credit bureaus unless the bill goes bad, you will need something else to establish credit. The days of awarding loans to folks with no credit scores are gone. (There does seem to be the beginning of a trend to not use scores in credit evaluation-rather to use payment history and absence of negative issues as a method of gauging credit-but I don't look for that to take over the industry in the near future.)

  Buyers often forget about deferred student loans when they are contemplating what they can afford. Sooner or later student loans have to be paid. Lenders have recognized this and now require those payments to be factored into debt ratio whether or not the loans are in repayment.

  The potential buyer has just begun a great new job. So then the question is-what was he doing prior to this job? School? Was the school work related to the job? Is the job with a temporary agency that supplies workers to various factories in the area. The rules are a bit different with that situation.

  Today's buyers were brought up in the information age. They are used to learning what they need to know on line. But the question is-are mortgages like any other product or commodity that can be purchased over the internet? I mean, you don't need a college degree to originate mortgages. It's not exactly rocket science. No, the mortgage business isn't rocket science. But it is highly regulated and subject to hundreds if not thousands of rules that change frequently.

  What I am here to tell you is, talk to a mortgage lender before you let your dreams get away from you. Find out what you can actually buy - then do your dreaming.

A Whirling Ball of Credit Confusion

dianekress.wordpress.com

I run into this every year. Confusion about credit; what it means, what is allowable, what it can do or can't do. Good credit is needed to buy a home these days. Not necessarily blemish free credit, but there needs to be evidence that you are in the habit of paying your bills on time. And by bills, we are talking about credit cards, vehicle payments, student loans, as well as personal loans. There is a direct connection between how a borrower pays their credit cards and installment loans with how they will pay their mortgage loan; past behavior being the best predictor of future behavior. It isn't too far a stretch to conclude that someone who never met a bill they liked to pay, isn't going to like that mortgage payment any better.

So, while mortgage lenders can be forgiving of negative credit, even past bankruptcies and foreclosures, there is a standard that most look for with regard to credit. Generally speaking the floor of that standard is a 640 credit score.

And when I say 640-I mean the middle credit score has to be a 640 or above. And by middle score, I mean the middle score of the lowest scoring borrower. Does that makes sense? Here's how it works:

If the borrower is purchasing the house with no co-borrower we will pull credit from three bureaus-Transunion, Experian, and Equifax. Whichever bureau posts the middle score, that is the one we use. IF we have two borrowers, a husband and wife, let's say- we pull credit on both and we use the lowest middle score. So if husband's Transunion is the middle score and it is a 675 and wife's Equifax is her middle score and it is 653, we will go with the wife's score as the score that determines eligibility for the loan. The only way we can use the husband's middle score as the determining score is if the wife is not on the mortgage.

Often I have young buyers who have a parent who is willing to be a co-borrower to offset low or no credit situations. We used to be able to do that. No more. There is no escaping a credit score that is ineligible for a mortgage to obtain a mortgage.

And why is it that my credit report is 20 points lower than what I just pulled off of Credit Karma? The answer is algorithms. Mortgage lending uses a different set of criteria for calculating credit-so that Experian "Kiss My Credit" ad with the blonde sticking her boots up on the desk? It doesn't necessarily work for mortgages.

The other thing about credit scoring is that lenders want to see accounts on credit reports. That is after all what creates credit scores, accounts that are working for you because you pay them on time and accounts that are working against you because you don't pay them on time...or at all. If there is a body of good credit reporting, it can offset to a degree, any bad credit that might be reporting. It's not a cure all. A credit card and a car payment that are paid on time for 6 months isn't going to help if the remaining 25 pages of the credit report are filled with negative credit. What determines credit are these factors:

1) How much you owe compared to how high your balances are. (keeping balances at 1/3 of the limit will obtain optimal credit on revolving accounts)

2) Timely payments

3) Number of open accounts

4) Diversity of type of account (revolving, installment, student loan etc)

5) Length of time accounts have been open

6) Existing negative credit-this includes late payments, collections, charge-offs, tax liens, and judgments

7) Credit inquiries. Anytime credit is pulled it is noted on the credit report for 120 days. One or two pulls don't make a huge amount of difference, but if someone has their credit pulled seven or eight times in a 60 day period scores can drop significantly. Car dealerships in particular hammer credit as they shoot out credit reports to many different finance companies. I have seen as many as nineteen or twenty credit pulls from one dealership for one transaction. It isn't advisable to shop for a car at the same time you shop for a mortgage unless you plan to finance the car through your bank or credit union who will be much gentler with the credit inquiries.

Your credit score will ultimately affect the interest rate. One of our programs has a 620 minimum score. It is a good FHA program-30 year fixed rate loan. But there is a significant interest rate difference between that program and and FHA loan with a borrower whose score is in the low 700's.

The sooner borrowers develop good credit habits the better if there is a mortgage loan in the future. Remember, the lender is taking the majority of the risk in the process. It's their money on the line and they are betting you will pay it back. Give them a reason to bet on you.

Rent or Buy?  Hmmmm? That's A Head Scratcher

depositphotos.com

Which is better, renting or owning? In many cases this is a personal decision. What is your financial situation? Is your job stable? How is your debt situation? Do you have any savings? Does your credit need significant work? Depending on the answers to these questions renting until you have your financial house in order may be the better choice. One thing is true-long term, owning is financially a better decision than renting. It is a fact that the net worth of a home owner is by far higher than that of a renter. The difference is $200,000 to $5000 according to the Federal Reserve's Survey of Consumer Finances conducted in 2013.
http://economistsoutlook.blogs.realtor.org/…/net-worth-of-…/

These are of course national numbers but it is an indication that even given what we have gone through in housing crash, it is still a win-win to own.

The annual percentage of rent increase in 2015 was 8%. The increase in value of homes was 5%. Would you rather obtain a 5% increase that goes into your own pocket or pay 8% out of pocket? You can see why owning a home makes sense. And the fact is, no matter where you live (unless it is your mom's basement) you will be paying somebody's mortgage. Isn't it better that it be your own rather than your landlord's?

Is it no wonder that it is still the American dream to own a home?

Let Me Present:

    The subject of today's blog is not one that I wrote, rather it was authored by a friend of mine and posted on a blog she writes for. What is interesting is the history of home ownership over the last 6 decades and how lifestyles have changed and our expectations of living space has changed. One thing that is important to note (besides the fact that I am quoted) is that one huge difference is that today's buyer doesn't have to save as much money for a down payment and therefore can become a homeowner much earlier in the game. My family was also one of those that had cardboard over a hole on the floor board of the car.

http://www.wisebread.com/this-is-how-americans-spent-their-money-in-the-1950s

Where Did I Put That Down Payment Anyway?

viva-tapas-bar.com

Near the top of the list of questions that I ask potential borrowers is this one: How much money have you saved for down payment? While there are a couple of options available for those who have no down payment saved, it is always a plus when someone has put money away for an eventual down payment whether they choose to use it or not. (It speaks to a pattern of savings. Savings means there is an ability to deal with unexpected emergencies and that is a very good thing. While technically someone with only $50 in the bank may be qualified for a mortgage loan, I am always uneasy advising someone to move forward with the idea of buying a home with so few assets.

Sometimes I think people have difficulty seeing where they have room in their budget to save money for a down payment. I can see how a young family with a couple of children has a hard time stashing the cash. And I think it is true that sometimes we have difficulty discerning the difference between what is necessary and what is nice. (Even at this late date I have issues with the same.)
So here are a couple of suggestions for those of you who don't quite know where you can economize to find your down payment savings:

Who has cable or satellite tv? Show of hands now...ah yes, quite a few I see.What's the average cost of television for that cable? $79 or $89 per month? Might I suggest this-purchase a Chromecast or Apple TV, an HD antennae-all one time hard costs. Subscribe to Netflix or another streaming service. Bingo! Savings of over $1000 per year. Put that money in your house savings account.

Next up do you buy lunch out every day? At an average cost of $10.00 per day or $50 per week you could save $2600 per year. Again-put that money in the house account. And how about going out for drinks? A very social thing to do, right? Why not consider having friends in for drinks-buy a bartender's guide and have your social ocassion at home. Why? If you spend an average of $66 per week on drinks out that is $3432 per year. Put that in your savings account. Let's see, how much have we saved in one year- $7032. That's more than enough for the down payment on a house.

This does require discipline and planning- and I am not saying NEVER go out for drinks. This is just to illustrate there are ways to save money that you may not have considered. While $15 per week may not seem like a lot, it adds up. So here's to my dancing drinks-get started on that savings account for that new house today!

ARRRRGHHH!  The Appraisal Came In Low

                                                              nathanbangs.com

  My little illustration is an accurate representation of the reaction when an appraisal comes in low. Nothing stops a transaction dead in its tracks as quickly as an appraisal that is lower than the sale price of a home. No buyer wants to buy a home that is overpriced, that is certain and no real estate professional wants to take a listing that they judge to be overpriced. A listing agent spends a fair amount of time going over neighborhood sales numbers trying to hit the sweet spot-i.e. the price at which the seller can achieve the best price for his/her home, but at the same time a price within the reasonable norms of the neighborhood. One can generalize that when a purchase contract is executed, two real estate professionals, a buyer, and a seller have come to an agreement as to what a property is worth. Afterall, it is sales that make a market. And then the appraiser comes along and blows the whole thing up. That's what it feels like, though that may not be the case at all.

  An appraisal is not a computation with a correct or incorrect answer. It is a snapshot of the market at a particular moment. Data that informs the market changes constantly. It is the job of the appraiser to sort through the data to find the best choices to use for comparable sales to establish value. Most of the time the appraisal comes in at the sale price or with a few thousand dollars to spare.

  But if it is the home that you are buying or selling that has a low appraisal all those other appraisals don't matter. What happens then?
From the lender's point of view, it is purely mathematical. If the loan is 5% down, the lender will loan 95% of the sale price or appraised value assuming the appraised value is lower than the sale price. So a home that everyone thought was worth $100,000 that appraised at $95000 will have a decreased loan amount. If the seller insists on obtaining a $100,000 sale price, then the buyer will have to increase the down payment amount by $5000 to cover the shortfall between the lowered mortgage and the sale price. The lender doesn't want to finance an over priced home any more than a buyer wants to buy one. And, since the lender is the party with the most skin in the game, it is a reasonable position.

  On the one hand, the reason homes are appraised is to ensure that the lender isn't loaning more money than the property is worth. The appraiser is the lender's eyes and ears. On the other hand, an appraisal also protects the consumer from unknowingly purchasing a property that is overpriced.

  As I mentioned, one solution is that the buyer makes up the difference in in value with an increased down payment. Generally, buyers don't much care to do that or have the ability to do that. So then it falls on the listing agent to work with the buyer's agent (assuming that is the wish of the buyer) to justify the sale price to the appraiser to see if the appraiser will accept a change to the appraisal. The listing agent might have a comparable property that they used to price the home that the appraiser didn't find. Or perhaps the appraiser made a mistake. It happens. Or the buyer may decide they want no part of the transaction and walk away at this point.

  Keep in mind the reason for the appraisal is to protect both the lender and the buyer. So no buyer should be coerced into paying more for a home than it is worth. And of course, the lender has the ultimate decision on whether or not they will accept an amended appraisal. So while an appraisal can be challenged, unless the appraiser made a mistake and acknowledges the mistake, chances are the value probably won't change.

  Typically, in these types of situations, if the shortfall is not excessive, the buyer and seller can negotiate to split the difference, or in many cases the seller will accept the lower price rather than go to the trouble of putting the home back on the market, losing an approved buyer, and taking the risk that the house will not appraise again.

Finding That Down Payment-Did You Turn Over the Couch Cushions?

smtm.weebly.com

As we begin 2016 I, like many of you am curious about what this year holds for interest rates and the housing market. Depending on which prognosticator you read, interest rates will either go up, or they will stay the same. (Why didn't I think of saying that? I could be making the big bucks like those guys.) Anyway, I take that to mean it's anyone's guess. However, one thing that I did glean from the paid seers, is that one issue that remains is the decrease in first time home buyers.

Back in the days of the housing boom, first time home buyers made up a little over 40% of the home buying market. Last year's first time home buyers came in nationally at a bit over 30%. Various reasons have been cited for this change - student loan debt, slow economic recovery, more new buyers living at home. All are probably valid points, but the one thing that all the experts seem to agree on is the inability of potential first time home buyers to obtain down payment funds.

There is good news on this front. It is not new news, but many people still aren't up to speed on he subject. There are two mortgage loans that do not require a down payment: VA and USDA. These two loans do not work for everyone-obviously if you have never served in the military you aren't VA eligible and USDA has income and geographic limitations. Yet there are other possibilities that don't require a King's Ransom as a down payment.

In Indiana, the Indiana Bond program offered by The Indiana Housing and Community Development Authority offers down payment assistance for qualified FHA buyers. This may be an excellent choice for those who need down payment assistance and qualify credit wise as well as income wise.

There are also some excellent low down payment choices. FHA has a 3.5% down payment requirement. The 3.5% can be a gift from a family member if the borrower doesn't have the funds for down payment. FHA also allows non occupying co-borrowers if for any reason the borrower's income isn't enough to qualify to purchase a home. In the case of a co-borrower both the borrower and co-borrower must qualify for the loan credit wise. I have had several questions lately about borrowers who want to use a co-borrower because their own credit isn't enough to qualify-in all cases if one has a co-borrower both borrowers must have eligible credit.
Conventional lending also has a 3% down mortgage that is available for borrowers who qualify conventionally. Down payment can be a gift in this case as well.

So depending on what a first time home buyer wishes to buy (or a second or third time buyer for that matter) there are options that shouldn't break the bank. Don't assume that you can't buy a home because you don't have 20% to put down. This is something that every renter should consider if they intend to be in a specific geographic area for any length of time.

                                                             sodahead.com

Let's begin the new year right with a word about regulation. I know-what a bore. But I think a short discussion of Federal Regulation on lending might be instructive. The National Association of Realtors projects 2016 as the best year for real estate since 2006. Many folks will be new to the market and many will be re-entering a market that is light years different than when they originally bought their homes and obtained mortgage financing.

One might argue that regulations gum up the works, and they certainly can slow things down, that's for sure. However, given the recent recession that was in a large part caused by an over inflated real estate market and the selling of fraudulent mortgage bonds, I would have to say as much as regulations make the process more difficult, they were needed.

So how do these federal requirements affect you, the consumer? Let's begin with the Patriot Act. While on the surface of it, that doesn't look like a law that would affect mortgage lending, it affects banking, specifically deposits. The Patriot Act requires that when a consumer is engaged in any activity that involves the Federal Banking system - which includes mortgages -that all large deposits are sourced. In other words, the origination of the deposit has to be documented. What is considered a "large" deposit? The Federal government has left it up to individual lenders to define a large deposit. I have seen lenders that cite any deposit over $99 as a "large" or in the case of our company that uses 50% of the borrower's gross monthly income which is much more generous. So while tracking down that $5000 gift Granny gave you for Christmas may seem like a hassle, we aren't doing it because we are trying to make your life more complicated - we are doing it because we have to. (This act also covers money laundering and lending fraud as well as is a monitor of terrorist activities.)

Then there are the Qualifying Mortgage Regulations that came into play a couple years ago. This set of regulations determine the rules we have to use to be sure mortgages meet a certain set of guidelines with the borrower's ability to pay back the mortgage. Those rules also determine how much we can charge to do the mortgage which in turn determines how big a mortgage we can do. (This is why it is very difficult to find anyone who can work with you on a $30,000 or $35,000 mortgage-we can't close it without breaking federal law on the amount we can make on a mortgage-basic fees put us in non compliant situation.)

The Dodd/Frank Financial Reform Act establishes how we disclose fees to our clients with strict timelines on when these fees must be expressed. This year's TRID (or TILA-RESPA Integrated Disclosure) further refined Dodd/Frank and sets wating periods prior to closing once the final closing disclosure has been delivered to the borrower. Dodd/Frank also set out requirements for how appraisal are handled - the requirements being that the information and appraisals be managed by third party companies in order to remove lending influences on appraisers.

The TRID waiting period has been one that most consumers have difficulty understanding. The idea is to allow borrowers to see the final fees with enough time to question them prior to closing without feeling pressured to close. In reality many buyers want to dispense with the waiting period and get to the closing table and get the keys to the new house. This is a case of the Federal Government protecting people who may not think they need protection.

Whether you like the idea or not, the role of your lender is to work as efficiently as they can to get you to the table as soon as they can within the law. Some things just are what they are, and it is better not to try to fight it. For every day that a borrower delays getting information to a lender that the lender needs to close a loan within the permeters of federal law , the borrower is only getting in the way of closing as quickly as possible. While none of us may care for having the process tinkered with, none of us is going to find a way around law either, so we might as well work with it to achieve a good result for all our buyers and sellers.