From my March 28th, 2010 column in the Sacramento Bee…
If you are buying your first home, chances are you are dealing with more than what first time homebuyers have dealt with in the past. One reason is that today most of the homes on the market are either Short Sales or REO’s both of which require more time to get offers accepted.
Another reason is that prices have dropped so much on houses that the competition for entry level houses is fierce and those homes are also attracting investors which creates even more competition for the lower priced, starter homes.
Short Sales are properties where the property is worth less than is owed on the property. If the owners want to sell the property, they need to first have the potential sale approved by the bank that holds the mortgage. REO properties are properties that banks own because they have been foreclosed on by the bank.
Buyers become frustrated having to make offers on so many properties and then by the long waits. So what can you do to help lessen the stress? You can be a “proactive buyer” while you are waiting.
One thing that may lessen the confusion that occurs with so many offers is to set up a notebook with copies of the offers being made. It is not uncommon for buyers to have offers out on several properties at one time so you may want to have dividers with tabs that have the various addresses.
In this notebook, you can not only keep copies of the offer but also flyers any on the property. You may also want to have pages where you can make notes on the property listing things like pros and cons on each property.
Do you have children? You can also use the waiting period to research the schools that surround each property in a little more depth. Some buyers are incredibly good at checking neighborhood details that includes more than schools. It can also include nearby shopping, freeway access, and convenience to your work.
These things are all important but often buyers don’t have the time to check these things out because an offer on a property is accepted so soon. Once you have an accepted offer of course, most buyers want to have a home inspection done to check the overall condition of the property. Gathering other information though is just a bonus of having extra time.
Another proactive thing buyers can do is to make sure that their financial information is up to date with the lender. More often than not these days there can be months that pass before the buyers actually have their property.
Lenders always need to have things like bank statements and paystubs be no older than 30 days when the file is underwritten. Buyers often forget about this and in getting ready to move, pack up their financial papers. Your financial information is very important to the lender so be sure that you keep that information nearby. For instance, you might have done your income taxes since you first applied. Your lender may need these depending on the loan type you are doing.
Another proactive thing buyers can do is to start getting ready to move. Waiting to get an accepted offer may be a good time to start sorting things. Why move things that you will wind up throwing out when you get to your new home. Moving is always a perfect time to sort through things but usually people don’t have that extra time that buyers have right now.
One thing not to do is to start buying things for a new home. This is so tempting when you see new furniture or things for a bathroom or kitchen possibly on a great sale. But buying new things can either add to your debt or deplete your cash supply. Lenders most likely will need to rerun your credit because the existing credit report is too old.
Keeping your lender in the loop about anything that affects or may affect your financial picture is a very proactive thing. Sometimes that may just be something like whether you should be renewing your car lease. The dealer may be offering a great new lower rate that sounds appealing to anyone but by starting anew you may be increasing the debt. If there is anything financial, make that call to your lender and ask the question before rather than later.
Waiting for offers to be accepted and losing out on properties is frustrating to most buyers. Making use of that time can be a benefit if you use it wisely.
From my March 14th, 2010 column in the Sacramento Bee…
Help with downpayment and closing costs is one of the main things so many first time buyers need. Recently many of the programs that were previously available have not been because they have been out of funds. One of the places that can help and has funding for its programs is the non-profit NeighborWorks® HomeOwnership Center Sacramento Region.
Two of the most popular programs available are the NeighborWorks® CalHome program and the NeighborWorks® Citrus Heights program. As with most “special” programs, there are very specific guidelines involved with both programs.
Both programs require a minimum 620 credit score although some lenders may require a slightly higher score. They also both are for first time homebuyers—not have owned a home in the past 3 years–and require that the property be owner occupied and buyers must attend the “Preparing for Homeownership Workshop” at NeighborWorks®.
The CalHome program is for downpayment assistance and the borrowers may receive from $5,000 to $25,000 depending on how much is required to make the home affordable for the buyer. The interest rate is at 3 percent and it is a fixed rate second mortgage. Payments on the CalHome second are deferred for 30 years which means the borrowers have no payments on the second. CalHome is available in certain census tracts and/or redevelopment areas of Sacramento City and County. The borrower must have a minimum investment of $500.
The City of Citrus Heights program is for between $5,000 and $40,000 again depending on the amount of the subsidy needed for the home to be affordable to the homebuyer. This program however is limited to properties in Citrus Heights and has a sales price limit of $230,000. The borrower must have a minimum of 1 percent investment with this program.
Both the CalHome program and the City of Citrus Heights program have income limits of 80 percent of the median income limits for Sacramento County which are adjusted for family size. The income of all adult members of the household will be used in these limits even it the income is not being used for qualification of the borrowers.
The 80 percent median income for Sacramento County for 1 person is $40,800; for 2 people, $46,600; for 3 people, $52,450; for 4 people, $58,250; for 5 people, $62,900; for 6 people, $67,550; for 7 people, $72,250; and for 8 people, $76,900.
There are other restrictions on the property that may be more restrictive than some of the programs being used at this time because there is among other things a Housing Quality Standards Checklist that both programs must meet.
Borrowers must first be able to qualify for a first mortgage which may include the borrower having 2 months of cash reserves for the total monthly mortgage payment. This money is not used as a cost of the mortgage but the lender wants to see that the borrowers do have some reserve in case of a need.
NeighborWorks® also has two other downpayment assistant loans both for a maximum of $10,000. Both require a minimum of 650 credit score and both have a 5.5 percent interest rate and both of these loans are due in 10 years.
The first Down Payment Assistance program is for the greater Sacramento area while NeighborWorks® 2 is available for the City and County of Sacramento and for West Sacramento as well. NeighborWorks® 2 also requires that the buyer’s agent be a member of the Sacramento Association of Realtors®.
Both of these NeighborWorks® programs have an income limit that is 115 percent of the Sacramento median income limits adjusted to family size. For 1 person the limit is $58,650; for 2 people it is $66,988; for 3 people it is $75,398; for 4 people $83,735; for 5 people it is $90,419; for 5 people it is $90,419; for 6 people it is $97,104; for 7 people it is $103,860; and for 8 people it is $110,544.
All of these downpayment assistant programs while all different can help qualified borrowers with their downpayment. But these programs have restrictions that borrowers and their agents need to know about before looking for a property. See a Loan Consultant and see if any of them will help you.
From my February 28th, 2010 column in the Sacramento Bee…
The loan process has many layers and is often overwhelming to borrowers especially with everything changing so often. In making mortgage loans, lenders use guidelines regarding the borrowers and the property. During the early 2000’s, guidelines were relaxed quite a bit causing many loans to be made that later resulted in foreclosures. Investors took huge losses as well and many lenders went out of business.
Generally speaking, underwriting guidelines for most loans are set by Fannie Mae, Freddie Mac, FHA (Federal Housing Administration) or VA (Department of Veteran Affairs). These guidelines are set so lenders know what each of these agencies will accept and underwriters know how to underwrite the loan accordingly.
Some guidelines cannot be changed or the loan will not be saleable. For instance, FHA (Federal Housing Administration) is changing the upfront premium on their loans after April 5th 2010. An upfront premium is mortgage insurance that is added upfront to the loan to reduce the monthly premium which makes it easier for borrowers to qualify. Mortgage insurance protects the lender when there is less than 20 percent down. FHA loans only require 3.5 percent down but loans with so little down are considered very high risk loans which is why they have the mortgage insurance. The new upfront premium will be 2.25 percent, up from the current 1.75 percent.
Beyond these guidelines however is where some of the confusion comes in. Lenders need to get the money from Investors who will buy the loans. Investors can have some addition guidelines—these are called Overlays.
Overlays are put in place to further protect the Investor from more loan defaults. One example of an Overlay in place by many Investors is regarding credit scores. While FHA, VA or FannieMae may have a limit that they won’t go below, a certain Investor may have an even higher credit score requirement and the lender must follow that guideline in order to be able to sell the loan to the Investor.
Low credit scores are one of the greatest risk factors in making a loan. Lenders are seeking to lessen the risk as much as possible and having higher credit scores required is one of the easiest ways to lessen that risk. Lenders then are requiring this because it is an Investor Overlay.
Another Overlay can have to do with the loan amount. The Lender may require an add-on (extra cost) for a loan amount that is too low or may have a minimum loan amount that they will do. They may also require an add-on for a high loan to value (LTV).
Still another Overlay may have to do with appraisals. The Investor may require more than one appraisal on a property if the loan is over a certain amount, it is a non-owner property or for some other reason that concerns that particular Investor.
Investors look at where the greatest number of defaults were with loans and that is where they are more prone to add Overlays. Cash-out loans for instance are yet another area where Overlays may occur.
Overlays mean that Lenders not only have to follow the underwriting guidelines of whatever program a borrower is using like FHA but then they have to check out any Overlays a given Investor may be requiring.
Sometimes real estate agents or borrowers themselves hear about some new change in say FHA loans—something that seems to have eased up on some guideline. The problem is that lenders may not be able to put that change into affect for a while because they need to find out what the Investors are going to do about that regulation. This time delay can be very frustrating to all involved, including loan consultants who want to make the loans.
It may seem that Overlays have made getting loans even more difficult but in an era where taxpayers have had to bailout large banks and many homeowners have lost their homes, using more caution in making loans may ultimately serve borrowers more.
Now is such a wonderful time to buy if you really are qualified to buy—low sales prices, low interest rates—but the right time isn’t the same for all buyers.
From my column February 21st, 2010 column in the Sacramento Bee…
Knowing the terminology when you are shopping for a home helps. Here are a few terms that may have confused you.
- MORTGAGE INSURANCE—Mortgage insurance (MI) is what the borrower pays if there is there is less than a 20 percent downpayment. MI insures the lender because loans with less than 20 percent down are considered high risk loans. With MI the risk to the lender is lessen and they are more willing to take the risk. However due to the high number of defaults in recent years, MI companies are requiring more down in order to insure the loans too.
- PITI—PITI stands for principle, interest, property taxes and homeowner’s insurance. PITI is often used when describing the monthly payment a borrower will have. The PITI is what the lender will use in qualifying a borrower. Sometimes you will see it as PITIMI and with that, monthly mortgage insurance is included in qualifying the borrower because they are putting down less than 20 percent.
- HOME WARRANTY—Home warranty insurance insures certain things in your home like appliances, plumbing, electrical and heating and air conditioning. In some cases you can pay for additional coverage that will include a swimming pool and its equipment. This insurance is not the same as homeowners insurance and usually only covered the first year in a home. In recent years however, the policies have been extended and borrowers may renew them every year. This insurance is very helpful now especially as homeowners are very reluctant to file claims on their homeowners insurance for fear of increased premiums. In addition to the yearly premium on the home warranty, there is a service fee for someone to come out. You must use the service company that the home warranty company selects in order for the work to be covered. Fees for a visit can range from approximately $55 to $75 but that is all the homeowner pays if it is a covered item—even if they have to come out more than once—and that includes parts. It is a very good thing to have especially for first time homebuyers.
- MELLO ROOS—Mello Roos fees are an assessment on newer properties that help take care of the infrastructure in that area. This fee is found on most newer properties built after 1985 and can be found especially in areas like Elk Grove, Natomas, Antelope, Lincoln, Loomis, Folsom and Rocklin where a lot of new development has occurred. When you are getting preapproved by a Loan Consultant, the Loan Consultant often has no idea where you will be looking and so they may only have considered the PITIMI in qualifying you. Mello Roos fees can run up to several hundred dollars but the Loan Consultant won’t know that information until you find a property. If you are going to be looking at newer homes, be sure your Loan Consultant knows that and then don’t push for the maximum you qualify for until you check out additional fees like Mello Roos.
- HOA DUES—HOA dues are homeowner’s association dues. HOAs are typically found with condominiums but they can also be found on homes in communities where they have amenities like a swimming pool, tennis courts or a gym. HOA dues cover a variety of things and they also range in price from $100 to over $500 a month. Typically they would cover common areas which would include the pool and club house but also the common grounds. With a condo, they may also cover the outside of your property for things like painting. Again, it is important that your Loan Consultant know about any such fees on a property as soon as possible to make sure you still qualify for that property.
- REO PROPERTIES—REO properties are bank owned properties. These are properties that have been foreclosed on and the bank has taken back. REO properties can be priced aggressively because they are costly for the bank to hold on to and the bank wants to sell them as quickly as possible. These properties are often in need of repair because they might not have had repairs made on them by the previous owners or they might have been vandalized which often occurs when properties stand vacant too long.
- SHORT SALES—Short Sales are owner occupied properties. These properties are typically upside down which means the borrower owes more than the property is worth in today’s market. When the owner however still wants to sell, they list the property with a real estate firm and the offers are presented to the bank to see if the bank will accept a sale at a price less than what is owed to them. These sales typically take longer because the bank has an owner in there that is already making the payments and they are not eager to take a loss on a property if it is not necessary.
From my February 14th, 2010 column in the Sacramento Bee …
Tax time is one of my favorite times! No, I’m neither crazy nor an accountant but tax time in that special time of year when people—even the most disorganized—seem to get organized at least as far as what I need. They can put their hands right on those W-2s and the income tax returns which is often a problem for people later in the year when those things have found their way into the back of some shelf or drawer or worse yet…the shredder!
Here are some other things that you might be discussing with your tax preparer other than how can you get a Tax Credit which is also a wonderful thing to discuss.
- If you are not a homeowner, then ask about the potential benefits to you personally of homeownership. There are many benefits to homeownership but depending on your income they may vary and you need to know what works best for you.
- If you are a homeowner with equity of over 30 percent and have considered buying a second home for vacation home or for a rental home, now is a perfect time for those who are qualified. For vacation homes, remember that foreclosures and the declining market have created wonderful opportunities to buy in places like Palm Springs, the coast and the mountains. For investment properties, you can look right here in our area for some wonder opportunities. Your tax person can best advise you on how either of these might benefit you tax wise. A Real Estate Agent can tell you about where some good values might be and a Loan Consultant can tell you whether you qualify for a loan for such a property. Don’t forget too that a rental property might be where you plan to retire at a later date.
- Are you a self employed buyer who writes off as much income as possible? This is most self employed people do to help them with their taxes. If you hope to buy something this year, though, be aware that lenders typically use your “adjusted gross income”. That’s the figure found on the bottom front page of your 1040. Previously many borrowers used “stated income” for self employed borrowers but those days are long gone and stated income loans are not too likely to reappear for anytime in the foreseeable future. The stated income loan was largely designed to help self employed borrowers but there was just too much abuse of the program. Ask you tax preparer if showing a little more income this year—despite the added taxes—might work out for you.
- If you purchased a property or refinanced one, then be sure and take your closing papers into the tax preparer because you might be able to write off some things. The closing statement is the final breakdown of costs that the Title Company gave you when you closed escrow. This is usually referred to as the Settlement statement or the HUD I. You receive many estimates of costs when you are buying or refinancing but this is the final breakdown of costs and it will have the Title Company’s name on it.
- This real estate market has led to many very unfortunate situations for homeowners in both our area and the country as a whole. Some have been forced into foreclosure or short sales. Still others are deciding whether they should go the short sale route or not. Short sales are where the homeowner owes more than the value of the property. Sometimes these homes are listed and when a buyer is found, the offer is presented to the lender holding the current mortgage to see whether they will settle for less. Whether you have taken that path or are considering it, perhaps you should ask your tax preparer if there would be any tax consequences involved.
- And certainly if you are hoping to buy a home this year, ask your tax preparer about the current Tax Credit, what is involved and how it will help you. A Tax Credit works as a dollar to dollar credit against money owed the IRS. If for instance, you owe $10,000 and you have an $8,000 Tax Credit, then you would only owe $2,000. It was renewed for this year and is spurring a lot of people to buy this year!
What is most important is to understand where to get tax advice. Ask a professional because they are the ones who know the details and the tax regulations. Ask other people other people and you are dealing with opinion—”opinion” that may prove to be costly to you in the end. This is tax time and this is the time to ask your tax expert!
