Category Archives: Mortgages and Home Loans

What Would You Pay First? Mortgage, Car, or Credit Card Debt?

Back in the day, no one questioned the usual response to being short on cash: “Save the house!” was the universal cry, and people paid the mortgage payment first.

But now, reports Mary Umberger in the L.A. Times article, “Paying mortgage isn’t a top priority in tough times, research shows,” the usual order has been overturned. Your average Joe Homeowner starts with the car payment, then moves on to the credit card payment, and then perhaps lets the mortgage slide.

Why? (Take a moment to think about it . . . . )

My first guess was in line with what the experts speculate, namely that if you don’t have your car, you can’t readily transport yourself to the job that might pay the rest of your bills.

What’s more, explains Umberger, “If you stop paying on your credit cards, the credit card account gets closed, and you can’t use it anymore.” I would have also thought that, with credit card interest rates insanely high, the short term consequences of piling on more credit card debt are just too ugly to ignore.

Foreclosures, meanwhile, take nearly a year to bring about. And, they’ve been in the news so much lately, I’ll bet people are more aware of that fact than ever before. Many people may even know someone who’s been in foreclosure, which certainly wasn’t the case ten years ago.

It’s rational consumer behavior — but still doesn’t mean one should let the mortgage slide without trying to do something about it. See Nolo’s article, “When Foreclosure Threatens: Can You Afford to Keep Your Home?” for more information.

In a Strengthening Market, Appraisals May Not Keep Up With Prices

I live in one of those pockets of the U.S. where home prices never dropped as dramatically as elsewhere and in some instances, appear now to be rising. Other such pockets exist across the U.S. — just look at your local (not national) headlines to see whether you’re in one of them. But even if you’re not, keep reading to see what growing pains your own market might soon endure.

We’re only at the tentative beginnings of this mini-trend. And that very transition is leading to complications at appraisal time. The situation was summed up recently by Realtor Julie Scheff as, “multiple offers [] driving prices upward and conservative appraisals [] dampening them downward (in an April 20 article in the Montclarion called “Multiple offers signal a strengthening realty market”).

By way of reminder, most home buyers take out a loan in order to buy a home, thus making the bank or other lender a key player in closing the sale. What the bank says, basically goes. And the bank will nearly always require an appraisal, in order to make sure that the house is worth the amount of the loan in case it ends up foreclosing.

Appraisers, meanwhile, have become a conservative lot. They got burned in the real estate meltdown, collectively accused of having willingly gone along with insane levels of home price inflation. So they take a much closer look at properties now before proclaiming their value, and if they don’t see comparable sales supporting the amount the buyer wants to pay, they may not sign off on the magic number.

The last thing you want in a market that still isn’t exactly superheated is to have the deal fall apart because the appraiser, having looked around at all the low comparables, says that property isn’t worth what the buyer and seller have agreed upon. Fortunately, there’s no reason to just sit back and wait for that to happen.

Avoiding a low appraisal in advance. It’s possible to forestall a low appraisal by helping the appraiser recognize the property’s value. Whether you are the seller or the buyer, you can commission your own, independent appraisal of the property, and give those to the lender’s appraiser ahead of time.

You (or your real estate agent) can also research and advise the appraiser of any local short sales or foreclosures that might artificially bring down the numbers. (Contrary to rumor, you are allowed to speak with the appraiser, though the lender may not do so.) Give the appraiser a list (with before-and-after photos, if possible) of interior features, upgrades, and improvements, all of which can boost the property’s value. And by the way, sellers, keeping the property looking good through appraisal day doesn’t hurt, either.

Your real estate agent’s industry connections can help here, too. Your agent can speak to other agents with homes in escrow and ask for the sales prices, then — assuming they reflect rising values — prepare a list of these homes with their agents’ contact information for the appraiser.

Dealing with a low appraisal. If providing advance information doesn’t work, and the appraisal still comes in low, the seller and the buyer can call up the appraiser and question the bases for the appraisal, hoping for a reevaluation. You can also commission a second appraisal, and (assuming it’s better) show that to the lender — though the lender has no obligation to accept it.

If you’re the seller, your main hope may end up being that the buyer is willing to pay the original price (particularly likely if you were in a multiple bid situation) but increase the down payment and take out a smaller loan. That just heightens the importance of sellers carefully scrutinizing the buyer’s financials before accepting an offer, and asking for detailed information on the buyer’s income and savings. Yes, it may feel like the seller is delving for private information, but the buyer has good reason to consent to share it in this situation. (It’s also another good reason for sellers to prefer a buyer who offers a large down payment to begin with.)

Barring this, a price drop (or failed deal) may be your only option. But buyers, don’t be overly alarmed if an appraisal comes in low, particularly if you did your research or were in a competitive bidding situation. While the appraiser is a professional, and the process is backed up by evidence, every house is unique. A house’s value comes down to what a buyer is willing to pay and a seller is willing to accept.

Buy Small, Save Big

Remember the days of stretching to buy as much house as you could possibly afford? Once upon a time, it made sense, given that you’d be sitting an a rapidly appreciating asset. But now that real estate appreciation is looking like a thing of the bubbly past, it may be time to shift focus to the advantages of buying less house than you can afford.

That’s exactly what Money magazine did in its April, 2012 issue, under the article, “Buy Less House Than You Can Afford.” (Note: The online version is much shorter than the print one.)  Money compared the long-term financial implications of two different home purchase possibilities:

  • a 2,000 square-foot house, with a purchase price of $239,000, and
  • a 3,000 square-foot house, with a purchase prices of $389,000.

They assumed a 20% down payment, a 30-year fixed-rate loan at 4% interest, and other costs, such as insurance, taxes, maintenance, increasing at 3% per year.

Meanwhile, they calculated how much you would earn if you took the money saved on the sale and upkeep of the house and invested it at 6% per year. (That rate of return may be a little optimistic, but hey, we’re talking about a 30-year window.)

The drum roll please: By buying the smaller house, Money found that you would, after 30 years, have socked away an extra $1,016,800. Of course, that assumes that you actually save the money. Spending it bit by bit will destroy the advantages of earning interest or dividends, not to mention ofcompounding those earnings.

Online Mortgage Research Without the Followup Calls

I’m meeting more and more people who are drawing back from, rather than plunging into, online engagement. Perhaps they’re bucking an unstoppable trend, but they want no part of the Internet’s increasing undermining of one’s privacy. The sense of invasion can become particularly acute when the elves of cyberspace figure out that you’re shopping for something — you will see ads in every available pane of your screen until this space gets filled by your next consumer-object-of-desire.

All of this makes shopping online for a mortgage especially perilous, given the big dollars at stake. If you’ve got a mortgage broker you trust, you might skip this step entirely — but how do you double check that your mortgage broker really is getting you the best deal without some online research?

Jack Guttentag (the Mortgage Professor) can’t help you stop all those cyber-elves’ activity withe regard to your Internet privacy, but he has provided a useful table showing which mortgage-comparison websites allow you to do your research anonymously — that is, without entering your name and assuming the very real risk that your phone will start ringing with mortgage offers. His table is part of an article called “6 features you need in a one-stop mortgage shop.” Check it out; it covers other ways to evaluate the various major mortgage websites too, such as based on their price accuracy and provision of value-adding services.

Parents Helping WIth Kids’ Home Purchases

The trendspotters are out in force, noting that the tight mortgage market is prompting kids to get financial help from Mom and Dad, in order to take advantage of low real estate prices and buy their first home.

Some wannabe buyers are asking their parents to cosign onto a bank loan, as described in Shandra Martinez’s article in the Grand Rapids Press, “More parents helping their grown kids buy first homes by co-signing mortgage loan or providing financing.” But that has some downsides for the parents’ credit rating — they’ll be viewed as, in effect, having taken on more debt, and their credit will suffer if the buyer defaults. Learn more in Nolo’s Q&A, “Should we cosign for our son’s mortgage?

Other buyers are going straight to the “Bank of Mom and Dad,” as described in Sandra Block’s article in USA TODAY, “More parents finance their kids’ mortgages.” That has the advantage of keeping all the interest income within the family, as further described in Nolo’s article, “Borrowing From Family and Friends” (which also offers tips on preparing the paperwork).



Short Sales Still a Long Process in California

Remember my post last year, called “Short Sales: A Trap for the Unwary?” It described how short sales weren’t always the deal they seemed to be for sellers, whose credit rating suffers more than people realize, and whose lenders, if and when they finally get around to approving the deal, might sneak in language making the homeowners agree to continued liability for the remaining mortgage debt.

Well, I wish I could report that things have improved, but according to a recent report in Realty Times, by Bob Hunt, California short sales have gotten more difficult than ever, impacting buyers as well as sellers. Fewer than 3 in 5 short sales even closed successfully last year, and the lender-approval process often took sixty days or more. Pending legislation to improve the process has gone nowhere.

Is it time to rename this a “long sale?”

Normal Mortgage Loan Market? We’re In It

Wondering when it will become easier to get a mortgage? Don’t start holding your breath until you’ve read Chicago Tribune real estate writer Mary Umberger’s interview with Greg McBride, senior financial analyst for Bankrate, Inc., a Florida-based financial-research firm.

McBride describes the new sobriety in lending as just a return to pre-bubble normalcy. Here’s a summary of some of his other key points:

  • The fact that one out of four borrowers are currently being rejected for mortgages still means that three-quarters of applicants are getting approved – not bad when unemployment is over 9%.
  • Americans’ median credit score, according to Bankrate Inc’s tracking, is now about 700 on an 850-point scale. That’s not far from where it was a few years ago. Most people do pay their bills on time.
  • It takes a score of 680 or above to get a loan today (at least, to get one without difficulty or paying a high interest rate). A score of 740 or above will get you the best interest rate.
  • Credit scores aren’t everything in getting a mortgage. You’ll need a combination of good credit, proof of income, and a down payment.
  • That down payment won’t necessarily need to be 20 percent. Although new federal regulations (the “qualified residential mortgage” or QRM regs now under consideration) mean the feds won’t, in many cases, back mortgages with less than that amount down, “It’s not that loans that don’t meet the QRM standard won’t be made,” and “Over time, as housing stabilizes, you’ll see a return of credit availability for higher loan-to-value loans.”

Reverse Mortgages: Not Just for the Cash-Poor

When reverse mortgages first came out, they were mostly discussed as the answer to elderly homeowners’ cash problems  in cases where much of their net worth was locked up in a house that they weren’t ready to sell.

By way of a quick review, a reverse mortgage is one that’s available to homeowners who are at least age 62 and have substantial equity in their home. It allows you to receive regular payments from your lender, which you’ll repay when you leave your home, perhaps due to death, a home sale, or entering a nursing home.

In the June 2011 issue of Kiplinger‘s, however, Patricia Mertz Esswein points out in the article “Homemade Money” (which has a different title online; “New Lower Cost Reverse Mortgage Option“) that even affluent homeowners might have some good reasons to take out a reverse mortgage, for example to:

  • allow you to delay taking Social Security until you either qualify for full benefits at your normal retirement age or even greater benefits at a later age — the important thing to remember here being that once you start drawing on your Social Security benefits, you lock in your benefit rate, or
  • avoid drawing money out of investments that offer higher returns, such as a 401(k) or traditional IRA.

And new reverse mortgage options described in the article offer reduced upfront costs — unfortunately, while also reducing the amount you can borrow. The bottom line message: You’d better sh0p around.

How Far Will FHA, Fannie Mae, and Freddie Mac Loan Limits Fall in Your Area?

By now you’ve surely heard the news:  The feds are planning to reduce their presence in the home loan program, by lowering the maximum dollar amounts of loans they will back. This is scheduled for October of 2011, and creating worries that finding an affordable loan will get harder for buyers, thus leading to lowered offers being made to sellers. (Most loans are federally backed — and those that aren’t become so-called “jumbo loans,” offered at higher rates and requiring higher down payments.)

Note that the loan limit varies by area of the United States. So if, for example, you’re reading an article on this topic from a local paper like the Washington Post, but planning to buy a house in Poughkeepsie, the numbers you see mentioned may not apply to you. That’s why you’ll love the handy interactive map and chart provided by The Wall Street Journal in its article, “Sellers Brace for New Mortgage Caps.”

Using this map, I can, for instance, quickly see that here in Alameda County where Nolo is based, the current FHA loan limit is $729,750 (which believe it or not, doesn’t buy you much around here, especially if you’re looking for a good school district); the pending FHA limit is $625,500; and the overall decline will be $104,250. That could completely change the home-buying picture for people who have saved up just enough to put, say, 15% down on a home worth$650,000.