Tag Archives: down payment

Leverage in a Tight Market

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TheStreet.com quoted me in Home Shoppers Seeking Leverage in a Tight Market. It opens,

Homebuyers have faced tight supply issues this year, and obtaining leverage in this market has been challenging.

The lower inventories pushed sales in July down by 3%, according to the National Association of Realtors, a Chicago-based trade organization. The decline has resulted in sales falling back to levels in March and April with an annualized pace of 5.39 million, bringing the sales pace down by 2% from July 2015. The level of inventory of homes for sale has declined by 6%.
As the faster summer buying pace has moved into the fall phase when there are fewer buyers, consumers have a greater advantage as homes are on the market longer. For both May and June, the listings stayed on Realtor.com a median of 65 days. By July, that figure rose to 68 days and August brings even more options and should end at 72 days. The reduction of inventory has occurred for 47 consecutive months, helping sellers, but restricting options for buyers.

For homebuyers who want to nab their dream house in the neighborhood they have been eyeing, they still have leverage, but here are some tips to improve the process.

Home Buying Tips

Before consumers start shopping, they should work on improving their finances and avoid making any large purchases such as a car. After finding out your FICO score, the goal is to find ways for it to rise above 700, which means you will qualify with more lenders and obtain a lower interest rate, saving you thousands of dollars, said Jonathan Smoke, chief economist for realtor.com, a Santa Clara, Calif.-based real estate company.

Determine how much you can carve out of your savings for a down payment, but still maintain six months of emergency funds, especially if you are buying an older home which may have unexpected repairs.

The average down payment in 2016 is 11% across the U.S., but it depends vastly on the market and loan you are seeking.

“If you are struggling to come up with a down payment necessary for your market or type of mortgage, research down payment assistance programs,” he said. “Get all of your financial records organized, including recent bank and financial statements, the last two years of income tax filings and pay statements.”

There are many opportunities available since mortgage rates remain near historic lows and are unlikely to see substantial moves soon.

“The buying opportunity is still substantial and now the annual cycle means you will face less competition on homes that are on the market,” Smoke said.

Sellers want to see serious buyers, so getting pre-approved from a lender is important.

“A pre-approval letter as part of an offer will communicate to the seller that you have the ability to close,” he said.

Sellers still have an advantage and even though there are fewer potential buyers with fall right around the corner, the existing inventory remains low, so getting a house under contract can still be problematic, Smoke said.

“Don’t expect sellers to feel desperate,” he said. “Sellers may still act like it is the spring. Listen to the advice of your realtor on the composition of the initial offer so that you are more likely to keep the conversation going rather than face complete rejection.”

While you continue to search for another home, maintain your savings and increase the amount of your down payment and keep paying down your credit cards and student loans. Consumers who will be receiving a bonus in December should include these funds it into their down payment. If the interest rates for your credit card rates are fairly low, consider bulking up your down payment since mortgage rates are very low, said Colby Sambrotto, president of USRealty.com, a New York-based online real estate broker. said. These measures will help increase your odds as you house hunt.

“Ask your lender to recalculate your loan preapproval to reflect your updated debt-to-income ratio and the greater amount you can put down,” he said. “That can reframe your search parameters.”

Down payment assistance is available through employer and community group programs. Some companies will offer loans if you remain employed there for a certain number of years, said Sambrotto. A good source for more information about various programs is Down Payment Resource.

“The loans are usually geared to encourage employees to buy around a certain area, usually within walking distance of the employer,” he said.

Location is Key

Transportation can emerge as a “hidden cost” if your commute includes costly tolls or you want quicker access to cultural and sporting events, schools for children, shopping districts and professional education opportunities.

“Narrow your search to neighborhoods that offer economical options for commuting and routine errands,” Sambrotto said. “Look for neighborhood groups on Facebook and ask to join the conversation so you can quiz current residents about the true cost of living in that area.”

While homeowners might prefer a standard standalone house, a two-family duplex might be a better option, said David Reiss, a law professor at Brooklyn Law School in New York. These homes have a clear advantage because they generate investment income along with various financing, tax and capital gains advantages which the traditional single-family house does not have.

“Think through your preferences and then take a fresh look at the market,” he said. “You might have that idealized picket-fenced house in mind, but a duplex will expand the number of houses you can look at. They also bring along all sorts of additional maintenance responsibilities with them, so they are not right for everyone.”

Can Seniors Get Mortgages? Should They?

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TheStreet.com quoted me in Can Seniors Get Home Mortgages? Should They? It reads, in part,

Senior citizens can and are getting approved for mortgages, and we are not talking reverse mortgages or home equity lines of credit, but – in many cases – 30-year fixed loans. Even when the borrower might be 85 and the actuarial probability of making it to the end of the loan term is nil.

The federal government is blunt: age cannot be used to discriminate against applicants for home loans. Capacity to repay is a factor – for seniors and every other borrower – but a lender cannot turn down an applicant just because he is 65…or 75…or 85. And loans are getting made.

Which raises the other question: is it wise for the borrower? Bankers can take care of themselves, but seniors need to ask: should I be borrowing a lot of money on a house at my age?

In Vancouver, Wash., Dick Kuiper – who said he is “approaching 70,” as is his wife – “just purchased a new home last year and got a 30 year mortgage at just under 3%, and we both believe this was a brilliant move.”

“We first made sure we made a large enough down payment so we would always have positive equity in the home,” Kuiper elaborates. “With that calculated, we looked at the alternatives, either pay in cash – which would naturally come out of our savings – or take out a mortgage. We looked at what we could get by putting the same amount of money into a retirement annuity with a downside guarantee. That annuity pays a minimum of 5% for life and currently is paying in the 8% to 9% range. Do the math. We’d be crazy to pay cash for the house.”

Kuiper’s right. For his wife and him, it made no sense to pay cash for a house – not when mortgage rates are breathtakingly low.

Case closed? Not at all.

Ash Toumayants, founder of financial advisors Strong Tower Associates in State College, Pa., said that in his experience few seniors ever want another mortgage in retirement after they settled up on their first one. “Most are excited when they pay it off and don’t want another one,” Toumayants says.

Another fact: to get a mortgage, a senior has to demonstrate to a lender a capacity to repay. Age cannot be used against a senior, but lack of cashflow can. And many seniors just have sizable trouble qualifying for a mortgage. “The trick is whether they have enough income to qualify or not,” said Casey Fleming, a mortgage expert in Northern California who said that he right now is working on a loan for an 85-year-old client.

Brian Koss, executive vice president of Mortgage Network, an independent mortgage lender in the eastern U.S., elaborated: “For seniors thinking about getting a mortgage, it’s all about income flow. If you have a consistent source of income, and a mortgage payment that fits that income, it makes sense. Something else to consider: if you have income, you have taxes and a need for a tax deduction. With a mortgage, you can write off the interest.”

*     *     *

But then there is an ugly issue to confront. Is the senior arriving at this purchase decision on his own steam? Brooklyn Law professor David Reiss explained why that needs to be asked. “Seniors should discuss big financial moves with someone whose judgment they trust (and who does not stand to benefit from the decision). Elder financial abuse is rampant.”

Reiss added: “What has changed in their financial profile that is leading them to do this? Is someone – a relative, a new friend – egging them on or leading them through the process?” Reiss is right in the caution, and that’s a concern that has to be satisfied.

Mortgages for Borderline Borrowers

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BiggerPockets.com quoted me in 7 Mortgage Qualification Tips for Borderline Borrowers. It opens,

It’s super easy to qualify for a mortgage when you have an 800 credit score, a six-figure salary, no debt, and 20% to put down. But that isn’t everyone’s story.

It’s far more difficult to be approved with a 620 credit score, a low five-figure salary, some outstanding debt, a car loan, and 3% for the down payment. You can still qualify, but it’s a LOT more difficult. And you’re not going to be getting the lowest rate around.

I asked some experts for their mortgage qualifying tips for borrowers who run the highest risk of being turned down. Here’s what they had to say:

7 Mortgage Qualification Tips for Borderline Borrowers

Go FHA

“Applicants with a low credit scores should be sure to look for lenders who offer FHA-insured mortgages. The FHA will insure mortgages with lower credit scores than most others will accept. Borrowers with small savings should look for lenders with low-down-payment requirements. Again, an FHA-insured lender may be the right match, but Fannie Mae and Freddie Mac also have programs with low down payment requirements, so applicants should ask their lenders about those as well,” says David Reiss, a Law Professor at Brooklyn Law School who also writes at REFinBlog.com.

J.D. Crowe, President of Southeast Mortgage of Georgia agrees. “Those with less-than-ideal credit scores sometimes have home loan options through the Federal Housing Administration. The FHA works with approved lenders to help applicants who have lower credit scores and small down payments, and can offer as much as 96.5% financing.”

You can find the other six tips here.

 

Low, Low, Low Mortgage Rates

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TheStreet.com quoted me in Top 5 Lowest 15-Year Mortgage Rates. It opens,

U.S. mortgage rates have continued to decline in the aftermath of the Brexit vote, low Treasury rates and the stagnant economy, giving potential homeowners an opportunity to save money because of the dip.

The current market conditions give homeowners in the U.S. an opportunity to take advantage of the continuation of low mortgage rates since the Federal Reserve has not increased interest rates.

But, how do you snag the absolute lowest rates?

How to Get a Low Rate

Low mortgage rates can play a large factor in homeowners’ ability to save tens of thousands of dollars in interest. Even a 1% difference in the mortgage rate can save a homeowner $40,000 over 30 years for a mortgage valued at $200,000. Having a top notch credit score plays a critical factor in determining what interest rate lenders will offer consumers, but other issues such as the amount of your down payment also impact it.

A high credit score is the key to ensuring that borrowers receive a low mortgage rate. Here’s a quick rundown of what the numbers mean – a score of anything below 620 ranks as poor, 620 to 699 is fair, 700 to 749 is good and anything over 750 is excellent. Think carefully before canceling a credit card with a long, positive history, but decrease your debt. One of the biggest factors which impact your credit score is your credit utilization rate.

Many potential homeowners focus only on the interest rate or the monthly payment. The APR or annual percentage rate gives you a better idea of the true cost of borrowing money, which includes all the fees and points for the loan.

The origination fee or points is charged by a lender to process a loan. This fee shows up on your good faith estimate (GFE) as one item called the origination charge. However, the origination fee can be made up of a few different fees such as: processing fees, underwriting fees and an origination charge.

Homeowners who are able to afford a 20% down payment do not have to pay private mortgage insurance (PMI), which costs another 0.5% to 1.0% and can tack on more money each month. Having at least 20% in equity shows lenders that there is a lower chance of the individual defaulting on the loan.

Choosing Between 15-year and 30-year Mortgages

Obtaining a 15-year fixed rate mortgage instead of a traditional 30-year mortgage means homeowners can save thousands of dollars in interest. One drawback of a 15-year mortgage is that consumers will be locked into higher monthly compared to a traditional 30-year mortgage or a 5-year or 7-year adjustable rate mortgage, “which could put the squeeze on homeowners when times are tight,” said Bruce McClary, spokesperson for the National Foundation for Credit Counseling, a Washington, D.C.-based non-profit organization.

Many households would not benefit from a 15-year mortgage because it “does more to limit their financial flexibility than to enhance it,” said Greg McBride, chief financial analyst of Bankrate, a North Palm Beach, Fla.-based financial content company.

“Locking into higher monthly payments makes the household budget tighter and for what?,” he said “So you can pay down a low, fixed rate loan? On an after tax, after-inflation basis you’re essentially borrowing for free.”

McBride suggests that this strategy does not bode well for homeowners, especially if they are not paying down their higher interest rate debts and maximizing their tax-advantaged retirement savings options such as IRAs and 401(k)s.

“Even then, you might be better off investing your money elsewhere than tying up more of your wealth in the most illiquid asset you have – your home,” he said. “Just 28% of American households have a sufficient emergency savings cushion, so why the hurry to pay off a low, fixed rate, tax deductible debt. Money in the bank will pay the bills, home equity will not.”

The current economic situation has pushed down rates with 15-year mortgages becoming “relatively more attractive” than even 5-year adjustable rate mortgages (ARMs) over the last year, said David Reiss, a law professor at the Brooklyn Law School in New York. Last week Freddie Mac announced the average 15-year mortgage rate was 2.74% and the average for the 5-year ARM was 2.75%.

“These rates are virtually the same,” he said. “A year ago, the 15-year was relatively more expensive than the 5-year by about 0.16%. If you can swing the higher principal payments for the 15-year mortgage you will be getting about as good an interest rate as you could hope for.”

Another Housing Bubble?

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Trulia quoted me in Warning Signs: Another Housing Bubble Is Coming. It opens,

Signs show another bubble coming. Some experts have a different opinion.

When the housing market crashed in 2008, it caused what came to be known as ”The Great Recession.” When the bubble burst, it ”sent a shock through the entire financial system, increasing the perceived credit risk throughout the economy,” according to a report published in The Journal of Business Inquiry.

The crash caused homes to lose up to half their value. People became underwater, owing more than their home was worth. And who wants to pay on a mortgage that’s larger than what the home could sell for? Although some people did just that, many more opted to short sell their homes or to simply walk away and have the bank foreclose.

Present Day

Fast-forward to 2016, and we are seeing hot, even ” overheated,” housing markets; bidding wars; rising home prices; and house flippers – all the signs of a housing bubble that’s about to burst. Are we repeating the mistakes we made before? Yes and no. Let’s explore four reasons the housing bubble burst and whether we’re experiencing the same conditions today.

1. Easy Credit

Before the 2008 crash, credit was easy to get. Pretty much, if you were breathing, you could get a mortgage loan. This led to people getting mortgages who ultimately couldn’t afford to pay them back. They lost their homes, and this contributed in large part to the housing crisis. Today the situation is different. ”Credit is still much tighter than it was before the financial crisis,” says David Reiss, professor of law at Brooklyn Law School. ”This is particularly true for those with less-than-perfect credit scores.” He explains: ”There are almost no no-down-payment loans as there were in the early 2000s. Those defaulted at incredibly high rates.”

But what about Federal Housing Administration (FHA) loans? They feature ”low down payments, low closing costs, and easy credit qualifying.” Those are the very features that should sound some warning bells. But before you get too alarmed, keep in mind that the FHA has been making loans to people who do not qualify for a conventional mortgage since 1934. ”While there are low-down-payment loans available from Fannie, Freddie, and the FHA, their underwriting standards appear to be higher than those for low-down-payment products from the early 2000s,” says Reiss.

2. Low Interest Rates

Mortgage rates have been low for so long that you might not realize that was not always the case. In 1982, for example, mortgage rates were 18 percent. From 2002 to 2005, the rates stayed at about 6 percent, which enticed people to take out mortgage loans. And in 2016, we’re seeing historic lows of under 3.5 percent. If rates go up, we might see housing demand and housing prices fall.

3. ARMS

Before the housing crash when home prices were rising fast, many people were priced out of the market with a fixed-rate mortgage because they couldn’t afford the monthly mortgage payments. But they could afford lower payments that were possible with an adjustable-rate mortgage – until that rate adjusted up. In 2005, 38.5 percent of the mortgage market was ARMs. But in 2015, that amount has dropped considerably to 5.3 percent.

4. A Buying Frenzy

There’s an old story that before the stock market crash of 1929, Joseph Kennedy, Sr., sold his shares. Why? Because he received a stock tip from a shoeshine boy. Kennedy figured, the story goes, that if the stock market was popular enough for a shoeshine boy to be interested, the speculative bubble had become too big.

Before the housing crash, this country saw a home buying frenzy similar to what happened before the stock market crash. Everyone from lenders to rating agencies to investors (foreign and American) to investment bankers to home buyers was eager to get into the mortgage game because house values kept rising. Today, we are seeing a similar buying frenzy in some markets, such as San Francisco, New York, and Miami . Some experts think that the price increases of homes in those areas are not sustainable. They say that because heavy foreign investment in those areas is part of what’s driving up prices, if those investments slow or stop, we could see a bubble burst.

So what do some experts think?

David Ranish, owner/broker for The Coastline Real Estate Group in Laguna Beach, CA, says: ”There are concerns about another housing bubble, but I do not see it. The market could stabilize, but a complete collapse is highly unlikely.”

Bruce Ailion, an Atlanta, GA, real estate expert, says,” ”Five to six years ago, I was a buyer of homes. Today I am a seller.”

David Reiss says, ”It is probably a fool’s game to predict the future of the housing market or whether we are in a bubble that is soon to burst.”

Retiring with a Mortgage

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MassMutual quoted me in Is it OK to Retire with a Mortgage? It opens,

The conventional wisdom is that you should pay off your mortgage before you retire. Yet, about 4.4 million retired homeowners still had a mortgage in 2011, according to an analysis of American Community Survey data by the Consumer Financial Protection Bureau (CFPB). More than half of them spend 30 percent or more of their income on housing and related expenses, a percentage that may be uncomfortably high even for working homeowners.

Not having to put such a large percentage — or any percentage — of your retirement income toward a monthly mortgage payment in retirement will certainly make it easier to meet your other expenses. But is it really so bad to have a mortgage payment during retirement?

“The logic behind the rule of thumb is that your income will go down in retirement, so it would be helpful if your monthly expenses went down significantly as well,” said David Reiss, a law professor who specializes in real estate and consumer financial services at Brooklyn Law School in New York. But if your income from Social Security and a pension (if you have one), and to some extent your assets (the nest egg you plan to draw on for additional retirement income), will be sufficient to make your monthly mortgage payment and meet your other expenses in retirement, there is no real reason that you have to get rid of the mortgage, he said. The key is that keeping your mortgage during retirement should be part of a plan and not a response to a crisis.

More Homeowners are Retiring with a Mortgage

More homeowners retired with a mortgage in 2011 than a decade earlier, according to the CFPB’s analysis of U.S. census data.1 They’re less likely to have their homes paid off because they’re purchasing later in life, making smaller down payments and tapping equity for other purchases.1 In fact, 36.6 percent of homeowners ages 65 to 74 and 21.2 percent homeowners age 75 and older (some of whom may not be retired yet) had mortgages or home equity loans in 2010, according to the Federal Reserve. The median balance was $79,000 for the 65 to 74 age group, and $58,000 for the 75 and up age group.

The CFPB points out two problems with carrying a mortgage during retirement: less accumulated net wealth and the possibility of foreclosure if retirees can’t make their mortgage payments. Foreclosure is harder to recover from when you’re older because you may not be able to return to the workforce to compensate for the loss and because you’re more likely to have health problems or cognitive impairments, the CFPB said.1

Having less accumulated net wealth is a problem, especially if most of your wealth consists of your home equity, which is less liquid than stocks, bonds and cash. Foreclosure is a serious problem if it happens to you, but the odds are slim: even in the aftermath of the housing crisis, in 2011, foreclosure rates were only 2.55 percent for homeowners 65 to 74 and 3.19 percent for homeowners 75 and older.

Some retirement-age homeowners who haven’t paid off their mortgages undoubtedly would rather be debt free but couldn’t afford to retire their home loan sooner. But others might be putting the money that could have gone toward extra mortgage payments to a better use. (footnotes omitted)

Millennials and Homeownership

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TheStreet.com quoted me in Millennials Are Accruing Less Debt, Bypassing Homeownership. It reads, in part,

Millennials are accruing less debt than their counterparts did back in 2003 — despite being saddled with large amounts of student loans — because they are putting off buying homes.

The research conducted by Torsten Sløk, a Deutsche Bank international economist, shows that Millennials, ages 25 to 35, attained less debt in 2015 than their counterparts did in 2003. The data demonstrates a 29-year old in 2003 had an average debt amount of $41,761 compared to $36,810 in 2015 or a 33-year old owed $56,859 in 2003 and $52,640 in 2015.

“It is an urban myth that the young generation today is more indebted, it is the older generations that have higher debt levels,” said Sløk in a research note. “The reason is that since 2009, it has been difficult for Millennials to get a loan. As a result, 25 to 35 year olds today have less debt than in 2003.”

Debt has been “harder to obtain” for Gen Y-ers whether they are credit cards or mortgages, said Jim Triggs, a senior vice president of counseling and support of Money Management International, a Sugar Land, Texas-based non-profit debt counseling organization.

“Millennials have not been inundated with easy to obtain credit cards like in past years,” he said. “Creditors are not on college campuses offering credit cards to college students any longer.”

While Millennials are saddled with record levels of student loans because of the skyrocketing costs of college tuition and the ease of obtaining these loans, Millennials “continue to have less credit card and mortgage debt than their parents and grandparents,” Triggs said.

The level of student loan debt is hindering borrowers ages 18 to 35 from paying for necessities such as rent, utilities and even food as 43% expressed this sentiment, according to the National Foundation for Credit Counseling’s 2016 consumer financial literacy survey, said Bruce McClary, a spokesman for the Washington, D.C.-based national non-profit organization.

“There is a staggering amount of student loan debt and it is a burden for many,” he said.

Homeownership Delays

Although Millennials have expressed the desire the own a home in the future, they are keen to keep renting in part because many of them switch jobs frequently, have not amassed a down payment or do not want the financial commitment. The zeal to pursue the “American dream” of owning a home has waned.

*     *     *

The assumption that home values would rise faster than other investments has been challenged since the Great Recession, said David Reiss, a law professor at Brooklyn Law School.

“One big issue is the role that home ownership plays in wealth creation,” he said. “The bottom line is that homeownership can help build a nest egg for retirement, but long-term trends and individual decisions about homeownership will have a big impact as well.”