Category Archives: Mortgages and Home Loans

Single Homebuyers Face “Headwinds,” Says National Association of Realtors

The annual Survey of Home Buyers and Sellers is just out from NAR (the National Association of Realtors). The biggest news is a drop in the number of unmarried home buyers. While they formed 32% of the market back in 2009, they’ve dropped to a mere 25% of the market today.

What’s up? (Or down?) It’s certainly not that everyone is getting hitched. At the end of 2011, a Pew Research Group study found that marriage rates in the U.S. had hit all-time lows, with scarcely half of U.S. adults married. (No wonder I haven’t been invited to any weddings lately!)

NAR’s vice president of research, Paul Bishop, explains the trend this way: “We’ve known for some time that stringent mortgage credit standards have been holding back home sales, but these findings show single buyers have been hurt the most over the past two years.  Total home sales would be 10 to 15 percent higher without these unnecessary headwinds.”

In other words, without two incomes, your chances of qualifying for a loan are reduced.

That doesn’t mean that single homebuyers should give up. But if you’re thinking of buying your first home, you might want see how closely you fit within NAR’s other statistics for first-timers, including:

  • a median age of 31
  • a median income 0f $61,800
  • average home size of 1,600 square-foot
  • average home cost of $154,100.

If you’re a 21-year old hoping to buy a $200,000 home on an income of $31,000, the odds aren’t looking so good — depending, of course, on where you live and what a mortgage broker or banker tell you about your qualifications. For tips on buying as a single female, see Nolo’s article, “Single-Woman Homebuyers: What to Consider.”

 

What These Crazy-Low Mortgage Interest Rates Mean for You

If you’re new to the housing market, take my word for it: Today’s interest rates are eye-poppingly low. A 3o-year fixed rate mortgage at 3.44%? A 15-year fixed rate mortgage at 2.83%? (Figures from Bankrate.com.) No, don’t take my word for it: The press is calling these “record lows.” As in, record for all of U.S. history. Even back when Grandpa was buying an ice cream cone for a quarter, his family was probably paying 7% on their mortgage.

If you’re in the market to buy a home, just sit back and enjoy. Or if you’d like to gloat, play with some online calculators and realize how much interest you’ll be saving over the life of the loan as compared with people who bought houses just a few years ago.

Using Bankrate’s “Mortgage Calculator,” for instance, I plugged in numbers for a 30-year fixed rate loan on a $250,000 house at 3.5% interest; and then the same loan at 6.5% interest. (Be sure to press the “Show/Recalculate Amortization Table” for a full rundown of interest payments and totals.) With the first loan at 3.5% you’d pay $154,140 over the life of the loan. (Gulp. Really, when you add it all up, even the lowest-interest mortgage results in a big pile of cash handed over to the lender.)

Now let’s look at the same loan at 6.5%. Total interest = $318,861. That’s a difference of $164,721. With figures like that, homebuyers today can afford a lot more house than they will be able to when interest rates rise again. (And there’s little doubt that they will, someday.)

If you already own a home, now’s a good time to think about refinancing — or perhaps even re-refinancing. But run some numbers on that first, too. You can do so using Nolo’s Refinance Calculator. The upfront costs of getting a new loan sometimes wipe out the savings. The key is to find your “breakeven point,” indicating how long it will take you to work off the initial closing costs by saving money on interest each month. If you expect to stay in your home for less time than it takes to reach your breakeven point, the refinance definitely isn’t worth it.

There’s a Reason You Can’t Find a House to Buy

Deciding that you’re really ready to buy a house and finding an actual house to buy are two different things — especially in the current market. If you’ve been scanning the home listings or visiting open houses and thinking, “Why don’t I see anything that looks good?” it’s probably not your imagination. It’s not even your innate fussiness.

A shortage of housing inventory is affecting many parts of the United States. This issue, and the multiple reasons for it, were major topics at the recent conference of the National Association of Real Estate Editors (NAREE) in Denver.

Curt Beardsley with Realtor.com observed, “Total for-sale inventory is 20% down. That means we’re down to about 1.8 million single family homes for sale, from 3.1 million in 2007.”

The most massive decreases in inventory, says Beardsley, are along the West Coast, in Seattle, Oakland, San Francisco, and San Jose. On the other side of the country, Tampa and Atlanta have the most limited offerings of homes for sale.

Here are some of the reasons the experts offered for the shortage:

  • Potential sellers feel trapped. According to Scott Ryles, CEO of Home Value Protection, Inc., “One quarter of homeowners are underwater today” (owe more on their mortgage than the home is worth, in cases where they have a mortgage) or they simply “can’t afford to move.” Even if these owners want to sell, the numbers just don’t add up for them — and won’t, until home prices rise.
  • Builders aren’t building. Before the crash, builders of new homes were adding to the nation’s inventory at three times the rate they are today, according to David Crowe, Chief Economist at the National Association of Home Builders (NAHB). Across the U.S., there are only about 50,000 newly built homes where the carpets are in and you can move in tomorrow, says Crowe. What’s more, it’s not easy for builders to reverse course and start building again. Crowe explains, “We’ve lost a lot of capacity; contractors, materials supply . . . No one has come back strong. Plants have been mothballed.”
  • Investors are turning single-family homes into rentals. As a potential buyer, you’ve got competition from investors savvy enough to realize that the rental market is stronger than ever. Margaret Kelly, CEO of RE/MAX notes, “Twenty five percent of home buyers now are investors. These are good investors, not flippers. They’re going to drive the recovery. Families who’ve been foreclosed on can’t qualify for a home. If you have kids, dogs, and so forth, you want a yard; you’re not going to move into an apartment.” Of course, if you want to buy a home, get ready to watch some of the bargains being snapped up.

This doesn’t mean that you should give up. Stan Humphries, chief economist with Zillow.com, believes that every time prices spike upward, it will “free some owners from negative equity, and you’ll see some surplus in supply for a while.” But hoping for low prices as well as lots of choices may be too much to hope for.

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.”