HOME LOANS ARE NOW REQUIRING DOWN PAYMENTS

The real estate market is adjusting to the credit challenges and increasing foreclosures.  Lending standards are adjusting with tightening of the lending requirements.  The down payment is a major factor affecting loss to the lender. No down payments loans are in the past, and underwriting standards now require a down payment from the buyer. This is current information for today’s market

The Down Payment Makes a Comeback

by Jack M. Guttentag
Presented by Yahoo

Over the past 18 months, the mortgage market has changed more rapidly than in any comparable period since the Great Depression. From the standpoint of borrowers, two changes are of paramount importance. The first is an increase in day-to-day price volatility. The second is a tightening of underwriting requirements, with higher down payment requirements the centerpiece. That is the subject of this article.

Underwriting requirements are the rules lenders impose to assure that loans will be paid off, and the down payment has always been the most important of them. The down payment is the difference between the lower of the sale price or property value and the amount of the mortgage loan secured by the property. If you purchase a house for $200,000 that is appraised for $200,000 or more, and you take a mortgage of $160,000, your down payment is $40,000, or 20 percent of value.

Getting Equity

A 20 percent down payment can also be described as a borrower having equity in the property of 20 percent. In the future, equity in the property is measured by the difference between the current value of the property and the current loan balance, both of which are likely to differ from their values at the time of purchase.

One reason the down payment is so important is that it is the single most vital factor affecting loss to the lender. The down payment is a buffer against lender loss in the event of a foreclosure. For example, if foreclosure costs are 20 percent of value and property value does not change, a 20 percent down payment fully protects a foreclosing lender against loss, but a 10 percent down payment provides only partial protection.

Perhaps even more important, borrowers who get into payment difficulties but have equity in their properties usually will sell to avoid foreclosure. By selling, they realize the equity themselves, whereas if they allow the property to go to foreclosure the equity will be partially or wholly depleted by foreclosure costs. Their selling avoids the foreclosure.

Having Budgetary Discipline

There is still another reason why lenders attach so much importance to the down payment. Borrowers who have been able to save the funds for a down payment are less likely to get into payment troubles later on. Saving for a down payment requires budgetary discipline, repaying a mortgage also requires budgetary discipline, and the one carries over to the other. Of course, this assumes that the down payment is saved, not borrowed. Underwriters look for evidence that the funds committed to down payment are the borrower’s own.

When a house is purchased, the owner’s equity is the down payment, but as time passes the equity is affected by two other things. One is any change in the loan balance. If the mortgage is fully amortizing, then the mortgage payment includes a principal component which reduces the loan balance. If the required payment is interest-only, and the borrower does not add anything to the payment, the loan balance will not change. And if it is a negative amortization loan, the balance will increase rather than decrease, and homeowner equity will decline. In the first few years of a mortgage’s life, however, changes in homeowner equity resulting from modifications in the loan balance are usually quite small.

Homeowner equity is also affected by changes in house prices, which can be sizeable. During 2000-2006, house prices in some metropolitan areas rose by more than 20 percent a year. If a home buyer puts nothing down and there is a 20 percent appreciation in his home value over a year, he has as much equity in his property as a buyer who put 20 percent down in a stable market.

Zero-Down in the Go-Go Period

It is hardly surprising that house price inflation during the go-go period resulted in a drastic weakening of underwriting requirements in general — and down payment requirements in particular. Zero-down loans became increasingly common during this period.

When the market turned and home prices began to decline in late 2006 and 2007, down payment requirements had to be drastically revamped. Just as rising prices generate homeowner equity, falling prices destroy it. There are no zero-down loans anymore, except the VA loan for veterans. FHA loans remain available at 3 percent down for smaller amounts, but conventional loans now generally require 10 percent down, and in some areas it is higher. On top of this, lenders now want most borrowers to have good credit scores and to fully document their incomes.

It easily could be worse, and without the federal agencies (FHA, Fannie Mae, and Freddie Mac), it surely would be. Nobody is forecasting a quick end of house price declines, so down payments of 3 percent to 10 percent don’t look like a lot of protection against future losses. Any loan today that is untouched by one of the federal agencies will have a required down payment larger than 10 percent.

Save, Save, Save

Down payment requirements have a critical impact on the capacity of consumers to afford a house. If buying a home is in your plans but you have never been able to save, it is time you learned how. The secret is to make saving a high priority in your budget.

Decide beforehand what part of your income you can afford to save, and create a special account for that purpose. Then, immediately after you are paid, write a check for deposit in that account. If you view saving as a residual — what remains of your income unspent at the end of the month — you are giving saving the lowest possible priority, which is a virtual guarantee of failure.

CAROL PERDEW
Prudential California Realty
(209) 239-7979
www.CentralValleyHomes.com

How to Turn the Housing Downturn to your Advantage

Take a look at this informative article on buying a home. These are some great tips for taking advantage of our downturn housing market.  Sellers are negotiable, prices are affordable and interest rates are low are just a few of the benefits of buying in today’s market. View homes at www.CentralValleyHomes.com

4 Smart Moves for Getting a Great Deal on a House

By Alex Markels, U.S News

The summer home-buying season is in full swing—except things are quite different from years past. While many economists believe house prices still have further to fall, there’s little doubt it’s become a buyer’s market, with buyers gaining leverage that was unthinkable during the boom and the long run-up in prices. For once, qualified buyers have the upper hand not only with sellers but also with real estate agents, mortgage lenders, and even contractors who can bring a house up to snuff.

Here are four tips for turning the housing downturn to your advantage: 

Know the market

The best way to snag a great deal on a house is to come armed with a boatload of data showing that you’ve done your homework and know what the place is worth. Thankfully, information on everything—from what comparable houses have sold for to what exactly has been remodeled, and when—is pretty much at your fingertips, through commercial sites like zillow.com and trulia.com as well as via government databases, such as your local county assessor’s, planning department’s, and clerk and recorder’s websites. Such data are especially useful when making an offer on a foreclosed home that’s been repossessed by a bank, where you won’t have to deal with touchy issues like a seller’s sentimental attachments to his home. “All banks want is to get a fair price and get out,” says Pat Lashinsky, chief executive of real estate brokerage ZipRealty, which lists many bank-owned foreclosures on its website. “Don’t try to low-ball the bank. But if you come in with all the statistics and can make your case that yours is a fair price, they’re more likely to take it.”   

Negotiate…with everyone

If you’re working with a real estate broker, start there. Traditionally, the agent representing the buyer splits the commission—from 4 to 6 percent—with the agent representing the seller. Buyer’s agents are fond of telling their clients that their services are “free” because the seller is the one paying the commission. But what seller wouldn’t be willing to lower his price by, say, 1 percent, if the agent was willing to lower his commission by an equal amount? The truth is, with serious buyers few and far between these days, agents may be willing to take a commission cut, especially with motivated buyers. Of course, the same goes for everyone from the seller’s agent to the contractor you want to add the deck you plan to put out back.   

Don’t expect “found money”

With sellers increasingly desperate and the number of “distress” sales and auctions skyrocketing, there are certainly plenty of deals around. But experts say the number of situations in which you can literally buy a house one day and sell it for more the next are exceedingly rare. “Most sellers that resort to the auction block have already exhausted every other avenue,” says real estate broker Ralph Roberts, author of Foreclosure Investing for Dummies. With such houses already picked over by other investors, anyone who buys one—even at a discount—has to see substantial value in the house that others buyers can’t. For example, will a well-placed $10,000 in improvements yield twice the value? Or is that new company moving 5,000 people into the area next year likely to increase demand for houses in the neighborhood? The bottom line: While it’s always worthwhile to keep your eyes out for that needle-in-a-haystack deal, better to focus your efforts on a house that stands a good chance of building equity over time.   

Location, lo…well, you know this one

The old mantra is as true as ever: No matter how inexpensive a property might seem, it’s no deal if it’s down the street from an oil refinery or in a city suffering from chronic unemployment. While houses near great schools or within a few blocks of public transportation almost always sell at a premium to the overall market, they tend to hold their value in down markets and rise more quickly in good ones. Indeed, while it may seem that it’s the house you’re investing in, it’s actually the land underneath it that appreciates. That’s why some of the best deals to be had may be the worst houses on the best blocks, especially in areas where demographic trends remain strong, such as in Washington, D.C., and the San Francisco Bay Area.

 

Carol Perdew
(209) 239-7979
www.PerdewHomes.com

 

 

THINGS TO CONSIDER IN BUYING A HOME

Take a look at this great article from Yahoo Finance on “Buying Your First Home”
Record low home prices and affordable interest rates are providing opportunities for home ownership. Search for homes at www.CentralValleyHomes.com

Buying Your First Home

Finding the right first home starts with a price range and a short list of desirable neighborhoods. But there are many other factors you’ll need to consider before investing in what may be your biggest asset.

Before You Start

• Grab your current household budget so you can consider your financial situation and your ability to make mortgage payments.
• Ask family and friends if they can recommend experts, like a lawyer and an inspector, who can help with the home buying process.
• Think about your lifestyle and how it might affect your choice of home and neighborhood.

1

Buying Your First Home

Home ownership is the cornerstone of the American Dream. But before you start looking, there are a number of things you need to consider. First, you should determine what your needs are and whether owning your own home will meet those needs. Do you picture yourself mowing the lawn on Saturday, or leaving your urban condo for the beach? The best advice is to look at buying a home as a lifestyle investment, and only secondly as a financial investment.

Even if housing prices don’t continue to increase at the torrid pace seen in recent years in many areas, buying a home can be a good financial investment. Making mortgage payments forces you to save, and after 15 to 30 years you will own a substantial asset that can be converted into cash to help fund retirement or a child’s education. There are also tax benefits.

Like many other investments, however, real estate prices can fluctuate considerably. If you aren’t ready to settle down in one spot for a few years, you probably should defer buying a home until you are. If you are ready to take the plunge, you’ll need to determine how much you can spend and where you want to live.

2

How Much Mortgage Can You Afford?

Many mortgages today are being resold in the secondary markets. The Federal National Mortgage Association (Fannie Mae) is a government-sponsored organization that purchases mortgages from lenders and sells them to investors. Mortgages that conform to Fannie Mae’s standards may carry lower interest rates or smaller down payments. To qualify, the mortgage borrower needs to meet two ratio requirements that are industry standards.

The housing expense ratio compares basic monthly housing costs to the buyer’s gross (before taxes and other deductions) monthly income. Basic costs include monthly mortgage, insurance, and property taxes. Income includes any steady cash flow, including salary, self-employment income, pensions, child support, or alimony payments. For a conventional loan, your monthly housing cost should not exceed 28% of your monthly gross income.

The total obligations to income ratio is the percentage of all income required to service your total monthly payments. Monthly payments on student loans, installment loans, and credit card balances older than 10 months are added to basic housing costs and then divided by gross income. Your total monthly debt payments, including basic housing costs, should not exceed 36%.

Many home buyers choose to arrange financing before shopping for a home and most lenders will “prequalify” you for a certain amount. Prequalification helps you focus on homes you can afford. It also makes you a more attractive buyer and can help you negotiate a lower purchase price. Nothing is more disheartening for buyers or sellers than a deal that falls through due to a lack of financing.

In addition to qualifying for a mortgage, you will probably need a down payment. The 28% to 36% debt ratios assume a 10% down payment. In practice, down payment requirements vary from more than 20% to as low as 0% for some Veterans Administration (VA) loans. Down payments greater than 20% generally buy a better rate. Lowering the down payment increases leverage (the opportunity to make a profit using borrowed money) but also increases monthly payments.

How Much Home Can You Afford?

Bob and Janet’s combined income is $50,000 a year, or $4,166 a month. Their housing expense ratio of 28% yields a monthly maximum of $1,166 for mortgage, insurance, and taxes ($4,166 x 0.28 = $1,166).

Their total debt ceiling of 36% is $1,583 (4,166 x 0.36 = $1,500). Their monthly debt payments include a $200 car payment, credit card payments of $100, and student loan payments of $200. Subtracting this total of $500 from the $1,500 permitted leaves $1,000 in monthly housing payments.

3

Costs of Buying a Home

Many home buyers are surprised (shocked might be a better word) to find that a down payment is not the only cash requirement. A home inspection can cost $200 or more. Closing costs may include loan origination fees, up-front “points” (prepaid interest), application fees, appraisal fee, survey, title search and title insurance, first month’s homeowners insurance, recording fees and attorney’s fees. In many locales, transfer taxes are assessed. Finally, adjustments for heating oil or property taxes already paid by the sellers will be included in your final costs. All this will probably add up to be between 3% and 8% of your purchase price.

4

Ongoing Costs

In addition to mortgage payments, there are other costs associated with home ownership. Utilities, heat, property taxes, repairs, insurance, services such as trash or snow removal, landscaping, assessments, and replacement of appliances are the major costs incurred. Make sure you understand how much you are willing and able to spend on such items.

Condominiums may not have the same costs as a house, but they do have association fees. Older homes are often less expensive to buy, but repairs may be greater than those in a newer home. When looking for a home, be sure to check the actual expenses of the previous owners, or expenses for a comparable home in the neighborhood.

5

Choosing a Neighborhood

Before you start looking at homes, look at neighborhoods. Schools and other services play a large part in making a neighborhood attractive. Even if you don’t have children, your future buyer may. Crime rates, taxes, transportation, and town services are other things to look at. Finally, learn the local zoning laws. A new pizza shop next door might alter your property’s future value. On the other hand, you may want to run a business out of your home.

Look for a neighborhood where prices are increasing. As the prices of the better homes increase, values of the lesser homes may rise as well. If you find a less expensive home in a good neighborhood, make sure you factor in the cost of repairs or upgrades that such a house may need.

6

Finding a Broker

If you are a first-time home buyer, you will probably want to work with a broker. Brokers know the market and can be a valuable source of information concerning the home buying process. Ask lots of questions, but remember that most brokers are working for the seller, and in the end, their primary obligation is to the seller and not to you. An alternative is a so-called buyer’s broker. This individual does work for you, and therefore is paid by you. Seller’s brokers are paid by the seller.

Make sure that the broker has access to the Multiple Listing Service (MLS). This service lists all the properties for sale by most major brokers across the country. Brokerage commissions average 5% to 7% and are split between the listing broker and the broker that eventually sells the home. Don’t be surprised if your broker is eager to sell you their own listing since they would then earn the entire commission.

Home Buying Costs
Down Payment	0% – 20% of purchase price
Home Inspection	$200 – $500
Points	$1,000 and up for 1% – 3%
Adjustments	3% – 8% of purchase price

Once you’ve determined a price range and location, you’re ready to look at individual homes. Remember that much of a home’s value is derived from the values of those surrounding it. Since the average residency in a house is seven years, consider the qualities that will be attractive to future buyers as well as those attractive to you.

Although it can be difficult, try to remember that you will probably want to sell this home someday. The more research you do today, the better your decision will look in the years to come.

Summary

·                       Buying a home can mean building significant value through the years.

·                       Think carefully about how much you can afford to spend and consider borrowing guidelines  
         like  those used by Fannie Mae.

·                       Prequalifying with your lender is a good way to determine how much house you can afford.

·                       You will need cash for a down payment and closing costs. Generally speaking, the higher
        the down  payment, the lower the interest rate and monthly mortgage payment.

·                       In addition to your mortgage payments, you will also need to consider the other costs of
         home ownership.

·                       Schools, taxes, services, crime rates, transportation, and zoning are important
         considerations when selecting a neighborhood.

·                       Brokers usually represent the seller, but they can be valuable sources of information for
         buyers as well. A broker that belongs to the Multiple Listing Service will be able to offer a
         wider variety of homes to choose from.

·                       Remember to consider resalability when buying your home.

Checklist

• Update your household budget so you can begin to realistically assess how much home you can afford. Be sure to factor in all your monthly income and all the expenses that may come with a home.
• Add up any savings you could use toward a down payment, and decide whether you need to save more before you start house shopping.
• Start talking to lenders about your options for prequalification and preapproval.

Thanks
Carol Perdew
(209) 239-7979
www.CarolPerdew.com

 

How to Build Your Credit to Buy a Home

F r e d d i e  M a c ’ s  G u I d e  t o  t h e  H o m e  B u y i n g  P r o c e s s
Establishing Your Credit

Don’t have credit, or would like to improve your credit? Building good credit doesn’t have to be difficult, but it does require time and patience. Follow these tips and you’re on your way:

·         Pay your bills on time.
Credit scores emphasize your most recent payment record. Paying on time raises your credit score. If you’ve been late, start paying on time!

·         Pay at least the minimum amount required.
You can always pay more – and it’s a good idea if you can afford to. But you should never pay less than the minimum.

·         Keep your credit card balances low.
Don’t “max out” your credit cards – that can lower your credit score.

·         Don’t apply for too many loans or new accounts.
Applying for a lot of credit in a short period of time may concern lenders that you won’t manage your debt well. Only apply for credit when you need it.

·         Keep your debt-to-income ratio at 20%.
Generally, you should not have debt that’s more than 20% of your net monthly income.

·         Establish credit if you don’t have any.
Open a free or low-cost checking or savings account and make regular deposits. Only write checks when you have money to pay for things. And apply for one or two credit cards, use them carefully, and pay them off each month.

Resources

Do you need help getting your credit in order? Find a credit counselor.

Do you know your credit rights? Look at the FTC’s information on credit and consumer rights.

Are you credit card savvy? Visit PBS’s Frontline Web site for the Eight Things A Credit Card User Should Know.

What if I have nontraditional credit? If you have nontraditional credit (no bank account or credit cards), your lender will work with you to use payment information such as rent and utilities to determine your creditworthiness.

But remember, a bank account is always a good idea and it’s never too late to begin to establish a traditional credit history.

Thanks,
Carol Perdew
(209) 239-7979
wwwCarolPerdew.com

GUIDE TO THE HOME BUYING PROCESS

Freddie Mac’s Online Guide to the Home Buying Process

Negotiate a Sales Price

Before you negotiate a sales price, it’s important to determine if you or the seller has the stronger position. Knowing this will help you plan your negotiation.

The seller may have the stronger position if:

• The local real estate market is strong and homes are selling quickly.
• They aren’t in a rush to move.
• Similar houses have sold for close to or above their asking price.

The buyer may have the stronger position if:

• The local real estate market is weak.
• The seller needs to move quickly.
• The house has been on the market for a long time.

When negotiating, more information is better. Look at your notes from when you looked at the house. If there’s anything in need of repair or replacement, you may include these costs in the negotiation. If you want certain appliances or fixtures to stay, be sure to include them in the negotiation. You may also want to make your offer contingent upon your obtaining financing or the house passing a professional home inspection, especially if it is an older home.

There are several steps to negotiating:

·         Asking price.
This is the price the sellers have originally listed. In a buyer’s market, you may be able to successfully offer below the asking price. However, in a seller’s market you may want to be prepared to offer more. Before making an offer in a seller’s market, know how much above asking price you are willing, and able, to bid in case the seller gets multiple offers.

·         Initial purchase offer.
This is your first offer. It may include contingencies (such as a requirement that the home pass a professional inspection or that you receive adequate financing from your lender.)

·         Acceptance of offer or counter-offer.
The seller can accept your offer or make a counter-offer of a new price or additional contingencies.

If you’ve made a home inspection part of the contingencies and something serious is found during the inspection, you may want to submit a new counter-offer and discuss the situation with your lender. The process may go back and forth several times before you and the seller reach an offer that is acceptable to you both. Remember that in some instances, your lender may not approve your mortgage if the home has serious deficiencies that could affect its value.

·         Escalation clauses.
If you live in a market where homes are selling quickly and have multiple offers, your contract may need to be offered with something called an escalation clause, which allows the offer to increase by certain dollar increments if another competitive offer is obtained and entertained by the seller.

A word of caution about a “hot” market

If the real estate market where you are looking to buy is “hot”, meaning that the houses are selling quickly and often for above the asking price, don’t be tempted to bid more than you can afford for a home.

You may find that you are outbid on a number of houses but don’t be discouraged – the right home is out there. Remember, it is truly only the perfect home for you if you can afford it. If you get caught up in a hot market, you may find yourself with a bigger mortgage than you can comfortably afford.

Search for Homes at www.CentralValleyHomes.com

Thanks
Carol Perdew
Prudential California Realty
(209) 239-7979
www.CentralValleyHomes.com