Buying a Home


As I’ve recently noted, getting a home loan these days can be extremely difficult unless you have a 20% down payment, a credit score in the mid 700’s and sufficient income so that your housing costs are no more than 28% of your gross income.  In fact, according to the Financial Institutions Examination Council, roughly 25% of all conventional home loan applications submitted in 2010 were rejected. 

These stringent qualification requirements are for loans backed by Fannie Mae and Freddie Mac, but luckily they aren’t the only game in town.  Today, more and more borrowers are taking advantage of the less demanding criteria for FHA loans. The Federal Housing Administration has been in existence since 1934 and has become the largest government insurer of home loans in the world today.

Although every lender might have slightly different requirements, here are the basics needed to qualify for an FHA insured loan:

  • Technically, 580 is the minimum acceptable score, but in practice lending institutions require a minimum of a 620 mid score.  The mid score is the middle score when credit is pulled from all three major reporting agencies; Experian, Equifax, and Transunion.
  • Housing expenses, (mortgage, taxes and insurance) must not equal more than 31% of your gross income, and all payments, (including cars and credit cards) must not exceed 43%.
  • The down payment must be at least 3.5%.  If the down payment is less than 10%, most lenders require a credit score of 640.
  • There is also an Upfront Mortgage Insurance Premium paid at closing and usually financed into the loan.  This premium is 1.75% of the base loan amount.  There is also an annual premium paid on a monthly basis.  This amount will be based on the loan-to-value ratio.

An FHA loan is an excellent choice for first-time buyers, or anyone with less than perfect credit or a small down payment.  If you’re thinking of buying in San Diego,Orange orRiverside County, please give me a call.  The time to get qualified is before you start looking for a home.  There is nothing worse than finding the perfect home, only to discover you can’t get a loan!

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A new law goes into effect today requiring the installation of carbon monoxide detectors in all single family homes in California.  However, there seems to be some confusion about the exact requirements and how the new law applies to rental homes and apartments, so here’s what you need to know.

A carbon monoxide detector is required in all single family homes that have fossil-fuel burning appliances such as a gas heater, water heater, or stove, fireplaces, and/or an attached garage.  If you are the owner of a qualifying home that you rent to others or plan to sell, you must have a detector installed immediately.  If you rent a single family home, please contact your landlord or property management company to make sure that your home is protected.  All multi-family rental units have until January 1, 2013 to have the detectors installed.  Installation of the detectors is now required prior to close of escrow on all single family home sales transactions.

According to the Chimney Safety Institute of America, carbon monoxide poisoning kills approximately 200 people every year.  It is called the silent killer as the gas is colorless, tasteless, odorless and otherwise undetectable.  Most carbon monoxide accidents are caused by faulty LP and natural gas heating systems. 

The detectors cost $10 – $50 each and must be a model approved by the State Fire Marshal.  Like smoke detectors, they should be mounted high on the wall or ceiling and there should be one on every story of your home.  Some homes with alarm systems may have the detector connected to their existing system, so please check with your security company provider.

Symptoms of carbon monoxide poisoning include:

  • Shortness of breath
  • Nausea
  • Vomiting
  • Dizziness
  • Unconsciousness

If you or a family member has these symptoms, or the alarm on the detector goes off, get everyone outdoors, and then call for help. 

Please don’t leave yourself and your family unprotected.  Make sure your detector is installed today!

Anyone who knows me would probably say that I’m a fairly optimistic person, but lately it seems as though the real estate market is developing into a vicious cycle with no way to correct itself.   In a report released on Monday, the researchers at Capital Economics said that we could expect nationwide home prices to fall an additional 3% this year, bringing the year’s total decline to about 5%.  So, despite the fact that some markets inSan DiegoCountyhave seen modest gains in home prices over last year, overall, the picture is less than rosy.

So what are the driving forces behind this downward spiral?  Well, the obvious answer is that there are many complicated factors at play, but the cycle we’re seeing is really pretty simple:   Housing prices are falling due to low demand and too much inventory. Normally after a recession, home sales start to pick-up, but that’s not what we’re seeing.  Instead, demand is being strangled by increasingly stringent lending requirements which restrict buying power.  So instead of more buyers coming into the market to take advantage of the low interest rates, we’re seeing fewer that are able to qualify because of high credit score and/or high down payment requirements.   Even existing homeowners looking to sell and buy up or down are caught in a stalemate as most have limited or no equity to leverage against a new property. 

The cycle picks up momentum every time prices drop.  Lower prices, mean less equity for existing homeowners and for those with a mortgage, an increasing number of borrowers are choosing strategic default.  These voluntary defaults are adding to the foreclosure inventory already on the market and the estimated 5 million foreclosed homes lurking in the shadows.  And so the cycle continues; more foreclosures create a bloated inventory.  With an insufficient number of buyers able to buy, sales drop and prices fall, which breeds more foreclosures, and on, and on.

As I’ve noted before, I’m no economist and certainly don’t have all the answers, but there are clearly two actions that could put the brakes on falling prices and encourage increased sales:

  1. Congress should oppose the Quality Residential Mortgage (QRM) requirements being proposed.   The QRM would require an unnecessarily high down payment of 20% and impose a very stringent debt-to-income ratio for conventional loans.  The result would be that more borrowers would seek FHA loans, which in turn would likely raise qualification standards and insurance requirements.  The bottom line result will be fewer qualified buyers and fewer sales.
  2. Banks need to address the issue of negative equity by offering programs that provide principal reductions.  When a borrower feels that he/she is paying on lost equity that they will never recoup they are more likely to choose to default, adding to the inventory glut.

Do you have any ideas about breaking the cycle of falling prices?  I’d love to hear from you!

 

For most people, buying a home is the largest purchase we ever make, and chances are it was largely an emotional decision.   There was something about the view, the trees, or the kitchen appliances; something spoke to us and we were ready to buy.  Over time, that emotional attachment increases as we put our personal stamp on the house and make it our home.  No wonder that the idea of losing a home through foreclosure can be emotionally shattering.

Grieving for the loss of a home and what it means to you and your family can be very upsetting.  Too often however, I see people avoid dealing with the reality of their financial situation simply because it is too painful to even contemplate.  These are the folks that ignore the letters and phone calls from their lenders and just pray that somehow it all goes away or that they win the lottery.

If any of this touches a nerve, it might be time to take a hard look at your situation.   Try to put aside the memories of holidays in your home, and ask yourself a few simple questions:

  1. Are you behind on your mortgage payments?  What about your property taxes, insurance and HOA dues?  Are you allowing maintenance items to accumulate because you can’t afford to fix things?
  2. Has your bank notified you and provided options to help?  Have you received a Notice of Default?
  3. Do you owe more than your house is currently worth?  Is the negative equity greater than 20%?
  4. Has your household income dropped in the last two years?  Are you dipping into your savings or other assets to make ends meet?  Do you doubt that your income will improve in the next 3-6 months?

If you answered “Yes” to one or more of these questions, it’s time to take action.  As difficult as it might be to face the reality of your situation, it is far less emotionally stressful to act now while you still have options and are still in control.  As soon as you miss a mortgage payment, the clock starts ticking on a countdown to foreclosure.  Wait too long to act and your options disappear.

If you live in San Diego County and are ready to discuss all the various options available, please give me a call for a no-obligation, confidential consultation.

Marti Kilby

Broker Associate, REALTOR

DRELicense # 01474222

619-846-9249

marti@kilby.com

I think we all agree that the lack of regulation in the mortgage lending industry was a primary cause of the housing market collapse.  Not everyone with a pulse should qualify for a zero- down, $400,000 mortgage.  However, the new rules being proposed by the federal government could be the fatal blow to a struggling housing industry that is barely surviving on life-support.

The cornerstone of the proposal is the idea that the very best rates and terms for conventional loans would be reserved for the very best borrowers…..sounds somewhat reasonable, until you understand what an exclusive club that would be, and how difficult it would make buying for first-time or lower-income borrowers.

First, a 20% down payment would be required.  In some parts of the country, you can buy a nice home for $150,000, but even so that would mean a down payment of $30,000 – a big number for a lot of people.  But here inSan Diegowhere a nice 2 bedroom condo is going to cost you around $320,000, a buyer would need $64,000, which is most likely a staggering sum for anyone considering a condo purchase.

If you think that sounds a bit harsh, you’ll love the other suggested requirements for the so-called “Qualified Residential Mortgage” or QRM:

  • Strict debt-to-income ratios.  A max of 28% of gross monthly income could be used for housing expense and total monthly debt could not exceed 36%.  Currently, both Freddie Mac and Fannie Mae guidelines take other factors besides DTI into consideration, and Freddie can go up to an overall debt-to-income ratio of 45%.  And of course, this is fully documented income, so tough luck for the self-employed.
  • To refinance your existing loan for a better rate you would need a minimum of 25% equity, and if you wanted to take out any cash, 30% equity would be required.  Today’s requirements vary by lender, but are no where near that strict.
  • Pristine credit.  If you were 60 days late on any account in the past two years you would not qualify.

So to put this into perspective, let’s see what someone might be able to afford here inSan Diegowhere the median household income is $67,000.  Their total monthly housing expense, including tax and insurance could not exceed $1,563.  This means they could purchase a single family home for $295,000 (if they could find one that would qualify for conventional financing), but would need a down payment of $59,000.  Presuming their monthly take-home pay is $4,466 and they are currently renting a 2 bedroom apartment for $1200, and after all other expenses they could still manage to save $500 a month, it would take these would-be home buyers 9.8 years to save for the down payment!

What if you don’t qualify?  Get ready to pay-up.  The mortgage industry estimates that non-QRM rates will be from .75 – 3.00% higher, again pushing more people out of the market with higher rates.  So if you are like the majority of today’s borrowers and don’t have a big down payment, make an above average income and have perfect credit you could be paying 8.00% interest while the QRM borrower will pay just 5.00%.  Sounds really fair and I’m sure that will mean a big boost to the housing market, right?

This is a total over-reaction that threatens to kill the small gains and recovery that we’ve seen in the past year.  I agree that reforms are necessary, but requirements should not be so stringent that home ownership is only accessible to a privileged minority.  If only the wealthy can purchase a home, some of our troubled neighborhoods (where the QRM buyers won’t want to live themselves) will be owned by investors and would-be buyers will be doomed to a life-time of renting from them.  I don’t know about you, but to me this doesn’t sound like a way to re-build neighborhoods or salvage the American Dream of home ownership.

Do you know a first time buyer?  Well, now might be the time for them to make their move.  On Monday, Fannie Mae announced the launch of a new incentive aimed at moving some of their REO inventory off the shelves.  For a limited time, buyers purchasing a Fannie Mae owned home, sold through their REO disposition operation known as HomePath may receive up to 3.5% of the purchase price in closing cost assistance.

Fannie Mae has successfully used similar incentives in the past, and hopes that this program will encourage buyers to step forward and purchase a home now.  The company acquired 262,078 homes through foreclosure in 2010, which is a considerable increase over the 145,617 homes they added in 2009. As of the close of the year their inventory was 162,489 single family homes with a carrying value of $15 Billion. Like I said, they have to move some inventory.

In order to qualify, buyers must be purchasing a home they will live in – the incentive is not offered for investor purchases.  The initial offer must be submitted no earlier than April 11, 2011, and must close escrow by June 30, 2011. Buyers may also have the opportunity to take advantage of Fannie Mae HomePath Financing and Homepath Renovation Financing which offer loans with as little as 3.00% down payment.

To a new buyer, this basically means that all their closing costs will be totally covered as those costs generally equal about 3.00% of the purchase price.  On a $300,000 home they would need just a $9,000 down payment in order to get into a home of their own.  Pretty sweet deal.  If you know someone who might be interested, please have them give me a call as I have access to all available qualifying homes in San Diego County.

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