Tuesday, July 08, 2008

Manhattan Beach-Beach Cities: 5 Things You Need to Know About Buying and Home Loans

I received a call yesterday from an agent who used to work for me. She has a client who wants to buy an REO that is next door. Everyone was ready to buy until we started talking about how much cash the buyer had... turns out it was 10% of the purchase price. They were upset to learn that it was extremely unlikely they would obtain a loan on a non-owner occupied property with 10% down. The only type of loan that might work would be FHA. However FHA is no longer a slam dunk. While easier then conventional financing the rules are getting significantly tougher... especially after reports yesterday on the fiscal health of both Fannie Mae and Freddie Mac.

Dan Green at The Mortgage Reports.com has a super article for all home buyers or homeowners who need to refinance within the next two years. The 12 Bullet Points That Matter... gives some insight into obtaining a home loan in the future. The bottom line is that real estate loans are going to be harder to get and more expensive then in the past. One of the key messages from the market is that lower rates will not translate into loans that are easy to obtain. Those days are gone!

Is this the end of the world as we know it? Nope... just a return to sensible guidelines for most borrowers. Until 2002/2003 sensible loans were the norm not the exception. A lot of homes changed hands with higher interest rates and higher down payments. However, the biggest disappointment is that the Alt-A loan will likely disappear. The Alt-A is not a bad loan program. The problem was it should have included verifiable assets along with the stated income proviso and a minimum of 20% down. These loans were initially meant for a small segment of borrowers not the entire home buying pool. The fact that anyone and everyone could get one of these loans is where the program went bad.

The 5 basics to consider if you want to buy a home:

1. Save money...do not spend everything you make each month. This may seem like a no-brainier but it's amazing how many borrowers don't have a clue what that actually means. You need to put money into an account other then a 401K to use as a down payment. Most lenders are going to require a minimum of 20% down. There are a few who continue to offer an 80/10/10 on a conforming loan but they are rare. Plan on 20% -25%down for a conforming loan (under $725,000) and 25% to 35% on jumbo loans over $725,000 but under $1,000,000. On loans over $1 million you will need 30% or more as a down payment. If you don't have enough down to buy the home of your dreams then you will either have to buy the home you can afford or continue renting.

2. Watch credit card debt and pay your bills on time... This is another item that is pretty basic. If you want a good credit score you have to keep your debt low and pay your bills on time every month. I know a lot of people who think being late on payments isn't a big deal as they have a good income. They are wrong. Having high balances on your credit cards and being late on your monthly payments will give you a low FICO score no matter how much money you make. If you want to buy a home then now is the time to clean up your credit. Pay down credit card balances and be on time with every payment.

3. Get pre-approved by a lender; not pre-qualified... I don't understand why buyers have such an aversion to getting pre-approved for a loan. It's like deciding to have gall bladder surgery but not talking to a doctor first. Pre-qualified means someone ran your credit and said we will give you a loan, maybe, after we really qualify you. It means nothing! If you are pre-approved the bank is saying they will give you a loan up to $XXX. If you qualify for a $500,000 loan but want to buy a $1,000,000 house then you will need $500,000 cash as a down payment. If you don't have $500,000 for a down payment you can't buy a million dollar home. If you only have $200,000 cash you can only buy a $700,000 home. Seems pretty simple to me.

4. Negative Amortization loans can be big trouble: About 10% of the population knows how to utilize a negative amortizing loan . Everyone else just seems to get into big trouble with them. The problem is that most homeowners don't really understand how these loans work. They are always surprised to find out that the minimum payment doesn't cover the interest let alone make any payments toward the principle. The initial payment is great but once the loan adjusts.. and that can be every month.. if you pay less then the full payment you are simply increasing the amount you owe. If you have to take out this type of loan to buy a property ... you shouldn't be buying the property.

5. Don't be house-poor... Just because you want to live in Manhattan or Hermosa doesn't mean it is a smart to buy a home there if you really can't afford it. It makes a lot more sense to buy in North Redondo or Torrance and be comfortable then to buy in Manhattan or Hermosa and be a month away from disaster. My Daddy always said you should have an amount equal to 6 -12 months of mortgage payments in the bank as a safety net. This is sound advice. No matter how much you make you should always have an emergency account. No one knows what the future will bring... a serious accident or sudden illness can have disastrous consequences.

** Updates: 7/11/2008 ... I was very surprised to see BofA go through with the purchase of Countrywide. I'm no financial genius but this seems like a bad move from a company as smart as Bof A. IndyMac is history as the Fed's decided to close it today . This is a major blow to a return of confidence in the financial community. The worst part of the who scenario is that the "run" on the bank maye have been becuase of a letter written by Senator Chuck Shumer that caused a panic among the bank's customers.


Anonymous said...

great advice . I think some our bigger instutions need to follow , maybe even our government ! (sarcasm) I think south bay will be a bit more affected , than you do kaye . They're a lot of people that own there own business , that have income (stated) and some $$ , but arent ready to put 2 million down because they only can get 720k mortgage . The purchasers I know who bought in the boom of 02-05 had no problem . Most business owners arent going to have the full documented income to support that mortgage. but , of course I agree south bay will hold up , better .

Kaye Thomas said...

Anonymous 3:12,
That's why I hate to see the demise of stated income loans... they were a good tool for a number of people who are not salaried on a traditional W2. This is a case of throwing the baby out with the bath water.

If we see a major recession with a lot of job losses then the South Bay will have a harder time.

Mike said...

Wow. You're really going out on a limb there, Kaye. Still love ya, though.

Kaye Thomas said...

Ya think? Hey this is just common sense we used back in the dark ages... Funny thing is .. people bought and sold houses even when they had to qualify..