Home Buying Tips: Part 2

In continuation from last week, today’s blog will be tips for the home buying process. Let’s talk about how to find the right home for you!

When looking for a place to live, it is important to consider the community. You should pick a community that corresponds to your family’s needs. Do you have children? If yes, you would probably want to live in a good school district. How close to the freeway or public transportation do you want to be? Do you want to live in a busy area or a more quiet setting? These are the types of questions you need to ask yourself. When you are considering a neighborhood, take a look around it and talk to the people who live there. You will be surprised how much useful information they can divulge.

Eventually, you will find a home you like and schedule a showing. When you are walking through the house, ask yourself:

·         Is there enough space for the present and the future?

·         Do you like the floor plan?

·         Is the yard what you want?

·         Do all the appliances work?

·         Does the home look to be in good condition?

·         Is it the right number of bed and bath rooms?

·         Will all your furniture fit? (Both in size and style)

It is important to find out what appliances and fixtures will be left and what the sellers are taking with them. Also, you want to picture (and possibly see) the home in different weather and times of day. This is the best way to really understand the home and the neighborhood. You don’t want to face any surprises after you are in contract.

When viewing homes, you should take a lot of pictures. You should capture the inside, outside, all the rooms and the yard. Also keep an eye out for anything you think may be an issue. If you don’t get all the pictures you want the first time, you can always go back for a second look. Also, ask your realtor for his/her professional opinion -they are a great resource.

Searching for the right home can be a long and daunting process. There is no set “magic number” of homes you should look at before you make your decision. You just need to keep looking until you find what you want. On average, you can expect to see between 10 and 20 homes before you find the right one. The best way to streamline the process is to make sure your agent knows everything that is important to you. This will ensure that you don’t waste time looking at places you know you don’t like.

I hope this makes your home buying process a little easier. Next week I will go over what to do once you found the home you want.

As always, feel free to ask a question or leave a comment below. Have great rest of the week!

Home Buying Tips: Part 1

With all that’s been going on with our economy real estate industry, there has been a lot of talk about now being the perfect time to buy a home. For many people, this is correct. Although lending guidelines are stricter than in the past, if you have decent credit, you can still get a great loan. There is a huge surplus of great homes for sale, prices are discounted and mortgage rates are at record lows. Because of these reasons, there are also a growing number of first-time home buyers hitting the market so I think it is a good time to go over the steps involved with the home buying process.

When trying to determine if you are ready to buy a home, ask yourself the following questions:

-Do you pay your current bills on time?

-Do you have steady income that is reliable?

            -Can you afford more monthly expenditures?

-Do you have savings for a down payment?

            -Do you have very little long-term debt? (i.e. car loan)

If you answered yes to these questions, you are most likely ready to buy.

To start the process, you must figure out what you need. Think about the size, area, and style of home you want. You should do some research online to see what is available and for how much money. You also need to figure out how much you can afford. This number may be lower than what the bank is willing to loan you, but you need to make sure your payments will not be so high that you cannot keep your other obligations.

When you apply for a mortgage, the lender is going to use two primary ratios to determine the maximum home you can afford. These are the Debt to Income ratio and Housing Expense to Income ratio. Your housing expense to income ratio is calculated by dividing your monthly mortgage payment by your gross monthly income. Gross income is your income before tax deductions and the ratio should not be more than 29%. Debt to income ratios are calculated by dividing your total reoccurring monthly debs by your gross monthly income. Those debts include credit card payments, personal loans, car payments, cell phone bills, alimony/child support, insurance and any other fixed bills which are paid every month. Your total debt should not be more than 41% of your gross income.

It is important to note, that these percentages are just guidelines and are not set in stone. Other factors which have influence are the down payment amount and overall net worth. Your net worth is the value of all your assets minus all your debts. If you have a high net worth, lenders will likely be very flexible when it comes to the ratios.

Next, you need to find the right real estate agent. Friends and family are a great source for finding agents. You should also look online; well-known agents should be easy to find through search engines like Google and Bing. Also check Realtor.com which does a good job of pairing clients with agents. Once you have a list of possible agents, you should start calling them. The best agents will have good knowledge of the area and will have many resources for finding you the right home. You want an agent who listens to you, not one who tries to make you change your mind a lot. The most important thing, however, is that you are comfortable and trust your agent. This is the best way of insuring you have a pleasant experience.

The final step, before actually looking for homes, is figuring out what you want and need from a property. Make a list of characteristics which are important to you. There should be two categories on the list; one for “must haves” and one for “wants”. This will make comparing houses easier. Think about the location, schools, size, yard, and age or anything else you think is important. Remember, this house is for you and your family. It is important to get what you want out of it.

So now you have some information to help get you started in the home buying process. You know how to figure out if you are ready to buy, what you can afford, how to choose a Realtor, and you have a list of what is important to you. Now is the time to get online and start doing some research. Check out as many websites as you can. You want to have some knowledge of what is on the market and what prices are like before you start visiting homes.

Next time I will go over how to find the perfect home for you; including what to look for in a community, where to get school info and evaluating comparable homes.

As always, feel free to leave a comment or question below and I will answer as soon as I can. Thanks and have a great rest of the week.

Choosing an Investment Property

Say you have a decent amount of money in the bank and don’t just want it sitting there. You want to have your money work for you, so you need to invest it. When it comes to investing, there are pretty much limitless possibilities.  You can invest in stock, mutual funds, bonds, cash deposits (CDs), commodities (gold/oil), collectibles, and many others. Now, if you have a substantial amount of savings and a decent credit score, investing in real estate may be your best option.

When it comes to investing in residential real estate, there are three basic options. First, you can do what’s called “flipping”, where you purchase a home that needs substantial amount of repairs and/or renovation. You then have the repairs done and try and sell the home for profit. The second option is to purchase a home, rent it out, and then sell it once it value has appreciated enough to turn a profit.  Finally, you can purchase an apartment building, and use the rents to generate income. Investing in an apartment building requires much more capital and knowledge of property management than the first two and therefore, I will save it for a later post.

Ok, now you need to choose between a rental investment and flipping.  There are pros and cons to both.  One of the major benefits to flipping is the quick turnaround. You buy the house, fix it, and then sell it asap. This is good when you are looking for a way to make 15% or as high as 50% return in under a year. But, there is also a high amount of risk involved. There is often an underestimation of the costs of all the necessary repairs. Buying a home and renting it out tends to be a little less risky, but it takes longer to see the return. However, this type of investment does not require as much cash as flipping does, because you can use the rents to offset the mortgage payments.  Both types require a good amount of work, by the investor, but in different ways. With flipping, you need to make sure all the work gets done well and in a timely manner, where the other type requires handling tenants or finding a property manager to do it for you.

So now, let’s talk about what you should be looking for in these types of properties. When looking for a property, regardless of whether it is to fix and flip or hold, there are a few things you need to keep an eye out for. You want to make sure the property is in well-established area. This is because newer developments tend to have more price fluctuation verses older neighborhoods.  Another important aspect is the school system. The quality of the schools in an area greatly affects the demand for housing and because you plan on selling the property, you want it to be as marketable as possible. Remember, if you plan on renting the property, there are going to be people living at the house (probably a family) so a good school district is not just important for selling the house, but finding quality renters as well. Finally, you need to keep an eye out for properties with a low price to square food ratio, when compared to other properties in the area. These will tend to give the highest rate of return.

This is just a brief explanation on types of investment properties. I will go into detail about evaluating each type of property in later posts. If you have any comments or questions you would like answered, don’t hesitate to leave them below. Who know, your question might be my next blog post.

Hope everyone had a great Thanksgiving. See you next week.

Short Sale Information 4 of 4

Here is the final part in my short sale advise blog. It covers the application process for short sales and some other issues.

V.  Short Sale Application Process and Other Issues

Q  20.  What is the process for applying for a short sale?

A  It is always in the best interest of the borrower to keep the lender informed.  If the borrower is in default of the loan and is contemplating a short sale, it would be best for the borrower to let the lender know before the foreclosure proceedings are well under way.  The lender may or may not grant more time to the borrower to find a buyer.  In general, the process goes as follows:

·  First, the borrower must find a buyer for the property.

·  Second, the borrower must prepare all the necessary documents (See Question 17).

·  Third, the borrower must submit all documents to the lender.

·  Fourth, the lender will send out their own appraiser to make sure that the buyer's offer is at fair market value.

·  Fifth, the lender will make a determination on whether or not to agree to the short sale.

Q  21.  What documentation will a lender typically require?

A  Lenders will typically require a distressed borrower to furnish a variety of documents, which could include the following:

·  Written explanation (and proof) of the hardship the borrower is experiencing;

·  Copy of the purchase contract signed by both the buyer and seller (borrower);

·  Copy of the TDS;

·  Proof of the buyer's ability to purchase the property, i.e., a completed loan application, pre-approval by another lender, or evidence of cash on hand (bank statement);

·  Copy of the certified escrow instructions; 

·  Preliminary title report;

·  Estimated net/closing statement certified by an escrow officer acceptable to the lender;

·  Completed and signed IRS Form 4506, "Request for Copy of Tax Form;"

·  Completed and signed personal financial worksheet;

·  Previous two years tax returns;

·  Employment paycheck stubs for the past two months;

·  Profit and loss statement (if the borrower is self-employed);

·  Past three months bank statements.

Q  22.  Does C.A.R. provide any special forms for short sales?

A  Yes. REALTORS® may use C.A.R. form SSL (Short Sale Listing Addendum) when they take the listing and C.A.R. form SSA (Short Sale Addendum) should be available shortly to be used with a purchase agreement.

Q  23.  Where can I obtain additional information?

A  You may consult the seller's lender directly about their policies and what is required to apply for a short sale of a property.  The internal departments that handle short sales differ by lender.  You may try asking for the problem loan department, loan workout department, loss mitigation department, or foreclosure department.

As always, feel free to ask a question or leave a comment below. Take care and see you next week.

Short Sale Information 3 of 4

Here is part 3 of 4 of my short sale information blog. It is about the licensing requirements and questions 12-15. Enjoy.

III.  Licensing Requirements for Short Sales

Q 12.  What is a short sale consultant?

A  A short sale consultant is someone who advises on short sales.  Depending on the agreement between the parties involved, the typical short sale consultant assists a homeowner or listing agent to prepare a short sale application package, submit it to the homeowner’s lender, and negotiate with the lender on the homeowner’s behalf to approve the short sale.

Q 13.  Does a short sale consultant have to be a real estate licensee?

A  Yes.  Generally, if a short sale consultant negotiates real estate loans or performs services for borrowers or lenders, both the short sale consultant and the short sale consulting company must be properly licensed with the California Department of Real Estate (DRE).  More specifically, unless an exemption applies, a real estate license is required for someone who, for compensation or in expectation of compensation, does or negotiates to do any of the following acts on behalf of another:

•  Solicits borrowers or lenders for loans secured by real property;

•  Negotiates loans secured by real property;

•  Performs services for borrowers, lenders or note holders for loans secured by real property; or

•  Collects payments for loans secured by real property.

(Cal. Bus. & Prof. Code § 10131(d).)

To check someone’s license status with the DRE, go to its Web site at http://www2.dre.ca.gov/PublicASP/pplinfo.asp.

Certain exemptions to the licensing laws may apply.  For example, a real estate license is not required if someone merely performs clerical or administrative services, such as assembling a short sale package as long as final determination as to its completeness is made by the broker (see 10 Cal. Code of Reg. § 2841 which lists other permissible clerical activities).  For other exemptions to the licensing laws, see C.A.R.’s legal articles, Licensing Guide for REALTORS® and Licensing Chart for REALTORS®.

Q 14.  Can a licensed short sale consultant collect an advance fee?

A  No, unless certain requirements are met.  An advance fee is a fee charged upfront for services not yet performed.  An advance fee is broadly defined to include a fee claimed, demanded, charged, received, collected or contracted from a principal for negotiating real estate loans (Cal. Bus. & Prof. Code § 10026).  Among other things, no less than ten calendar days before collecting an advance fee, a real estate broker must submit to the DRE the advance fee agreement and all other materials to be used for advertising, promoting, soliciting, or negotiating the advance fee (10 Cal. Code of Reg. § 2970).  Furthermore, if a Notice of Default has been recorded against a property involving one-to-four owner occupied residential units, an advance fee is prohibited for foreclosure-related consulting services under the foreclosure consultant law (Cal. Civ. Code § 2945 et seq.).  For a list of real estate brokers who have received “no objection” letters for their advance fee agreements, go to the DRE Web site at http://www.dre.ca.gov/mlb_adv_fees_list.html.

Q 15.  If a real estate broker collects an advance fee, does it have to be handled in a special way?

A  Yes.  A real estate broker who collects an advance fee must deposit it in a trust account with a bank or other recognized depository.  Amounts may not be withdrawn for the agent’s behalf until actually expended for the benefit of the principal or five days after a verified accounting as specified is mailed to the principal in compliance with Section 2972 of Title 10 of the California Code of Regulations.  (Cal. Bus. & Prof. Code § 10146.)


Remember to leave a comment or ask a question below. Happy Veterans Day. See you next week!

Short Sale Information

Here is the second part of last week’s blog. It covers the effects of short sales on the borrowers. Questions 7 – 11.

II.  Effect On Borrowers of Short Sales

Q  7.  Does a short sale adversely affect a defaulting borrower's credit rating?

A  Yes.  Lenders will report the short sale as being settled for less than the full balance.  This would show up on the borrower's credit report as a negative mark for seven years.  (Cal. Civ. Code § 1785.13.)

Q  8.  Suppose the borrower is late with his/her mortgage payments, causing the lender to begin the foreclosure process by filing a notice of default. Before the foreclosure sale occurs, the borrower pays the lender what is owed on the note. Could these activities appear on the borrower's credit report?

A  Yes. The lender can report to a credit bureau receipt of any payments made 30, 60, 90 or more days after their due date. This may appear on a borrower's credit report as a "foreclosure in process," "foreclosure proceedings," "current was 30," or in some other way. Any such terms, or other similar reporting comments, harm that individual's overall credit rating.

Q   9.  Is the method by which lenders report a short sale a negotiable item?

A  Typically, no.  The short sale is usually reported to credit reporting agencies as settled for less than the full balance. However, a borrower may try to negotiate this at the time the short sale is being arranged.

Q   10.  Are there any special risks to borrowers when negotiating a short sale with their lender?

A  Yes.  In particular, REALTORS® who assist borrowers should be aware and warn their clients of one particular risk.  If the borrower was less than completely honest when using the stated income method in applying for the loan, this information may become apparent to the lender when the documentation listed in Question 17 (such as tax returns and paycheck stubs) are submitted to the lender in the application for short sale approval.  This may put the borrower at great risk of potential liability for their dishonesty. 

Q  11.  Are there any tax effects of a short sale?

A  Yes. The tax implications for the borrower could be so significant that a short sale would not be in the borrower's best interest.  Before a short sale is contemplated, it is strongly recommended that the borrower seek the advice of a professional tax advisor.

Generally speaking, any relief of indebtedness from a short sale, regardless of whether the loan is a recourse or nonrecourse loan, is taxed as ordinary income. There are, however, some exceptions to this rule that may benefit a taxpayer involved in a short sale.  For more information on the tax implications of short sales, see the CAR legal article, Taxation of Foreclosures, Deeds in Lieu of Foreclosure, and Short Sales.

Next week will cover the licensing requirements for short sales. Don’t forget to leave a comment below.

Short Sale Information

Hi everyone,

Today, I'm going to give the first part of a 5 part series on Short Sales. The first part will be the introduction and what the lenders options are when a buyer defaults. Here we go.

Introduction

Increasingly, lenders are making loans in amounts that become too difficult for borrowers to repay.  Some of these borrowers may not be able to fulfill their mortgage obligations.  When a borrower is no longer in a position to make the mortgage payments, is facing foreclosure and the current market value of the property--including escrow costs--is less than the loan on the property, the borrower may consider a short sale.  This could save the lender the expenses of foreclosure proceedings and from having another REO property on its books.  From the borrower's perspective, the short sale prevents having the foreclosure on the borrower's credit history, and releases the borrower from an obligation that he or she can no longer afford.

In essence, a short sale is a sale transaction subject to a lender's approval in which the lender consents to a sale of the security interest for less than what is owed on the note and accepts the proceeds in full satisfaction of the loan amount.  A short sale requires much paperwork and preparation on behalf of the borrower.  Typically, before applying for a short sale, the seller must have a ready buyer and all the paper work prepared to present to the lender.  The buyer of the property must also be prepared for a protracted time period to conclude the purchase of the property.

I.  Lender's Options Upon Borrower's Loan Default

Q  1.  What options does a lender have on a debt secured by California real property if the borrower does not make the payments on the loan?

A lender may foreclose on the defaulting borrower's real property which secures the loan.  There are two types of "foreclosures" available to a lender:  a trustee's sale and a judicial foreclosure.  (Bank of Italy National Trust & Savings Assoc. v. Bentley, 217 Cal. 644 (1933).) Technically, a trustee's sale is not a "foreclosure" but the term has been used for both a trustee's sale as well as a judicial foreclosure.

For certain loans, a lender has no choice and must conduct a trustee's sale.  With a trustee's sale, a lender cannot go after a deficiency judgment.  A deficiency occurs when the current market value of the property is less than the loan on the property.  See Questions 3 and 4 for more details.

The lender may also be able to pursue "guarantors" of the debt who have signed written guarantee agreements (not including the borrowers).

Q  2.  What other options may the lender consider instead of foreclosure when the borrower is delinquent?

Depending on the situation, a lender may consider one of the following:

Loan Workout:  Basically, a loan workout is any resolution of a problem loan between the lender and borrower that modifies the original loan agreement.  Some of these options include forbearance (e.g. forgiving a portion of the debt or late charges); deferment; renegotiating interest rate, monthly payment amount, principal amount, maturity date; or the enforcement an acceleration clause in the loan.

Deed in Lieu of Foreclosure:  After the borrower is in default, the borrower voluntarily delivers title to the lender for consideration and the lender accepts the conveyance of the property in full satisfaction of the mortgage debt.  Using this method, the lender saves the costs of foreclosure and the borrower avoids having a notice of default on his/her records.  (Hamud v. Hawthorne, 52 Cal.2d 78 (1959).)

Short Sale*:  A short sale is a transaction in which a lender allows the real property securing the loan to be sold for less than the remaining mortgage amount due and accepts the proceeds as full payment of the loan.  A lender may accept a short sale when the borrower is in severe financial straits and market conditions make a short sale the best choice to mitigate the lender's damages.  Like a deed in lieu of foreclosure, this saves the lender the costs of foreclosure and the borrower avoids having a foreclosure on his or her credit report. 

Short Payoff*:  With a short payoff, the lender accepts less than the remaining mortgage amount as full payment of the loan.  The property need not be sold.

*Note:  Some lenders do not differentiate between a short sale and a short payoff.

Q  3.  What is a deficiency judgment?

A deficiency judgment is a judgment obtained by the lender in court against the borrower for the difference between the unpaid balance of the secured debt and the amount produced by sale or the fair market value of the security, whichever is greater, in a judicial foreclosure. (Cal. Code Civ. Proc. § 726 (b).)  A lender may obtain a deficiency judgment only with a judicial foreclosure.  With a trustee's sale foreclosure, the lender cannot go after a deficiency judgment.  See Question 4 for more details.

Q  4.  Can a real estate lender obtain a deficiency judgment against a defaulting borrower following foreclosure?

It depends.  California has "anti-deficiency statutes" that protect certain borrowers from deficiency judgments.  Under those circumstances, a lender would opt for a trustee's sale foreclosure which is quicker and less expensive than a judicial foreclosure.  A trustee's sale foreclosure does not involve the courts. Generally, there are five situations in which a deficiency judgment is prohibited:

1)  Purchase Money.  If the loan is obtained to purchase a residential 1-4 unit dwelling all or part of which is owner occupied and the loan is secured by that property, the lender may not obtain a deficiency judgment against the defaulting borrower. This loan is entitled to "purchase money" protection.  (Cal. Code Civ. Proc. § 580b.)  Note, however, that should the buyer refinance the home, the new loan is no longer "purchase money."  Thus, the buyer would lose the protection against a deficiency judgment in the event of a default.

2)  Seller Carryback.   If the purchase money loan for any type of real property is financed by the seller and secured by that same property, the lender/seller may not obtain a deficiency judgment against the defaulting borrower/buyer. (Cal. Code Civ. Proc. § 580b.)

3)  Trustee's Sale.   A lender may not pursue a deficiency judgment against the borrower should the lender opt to foreclose by a trustee's sale foreclosure (a non-judicial action).  (Cal. Code Civ. Proc. § 580d.)

4)  3 Month Time Limit.   An action for a deficiency judgment must be brought within 3 months from the time of judicially-ordered sale.  (Cal. Code Civ. Proc. § 580a.)

5)  Fair Value Limitations.   A deficiency judgment is limited by the difference between the amount of the indebtedness and the fair market value of the property, unless the actual sale price exceeds that value.  (Cal. Code Civ. Proc. §§ 580a, 726 (b).)

When a deficiency judgment is permitted, the lender may obtain one only following a judicial foreclosure, or when the security has become valueless (such as when security for a second trust deed loan is wiped out when the first trust deed lender completes its foreclosure).  Holders of a junior deed of trust (second, third, etc.) should note that if the "wiped-out" junior lien is not purchase money or seller carryback, then the junior lien holder may sue on the note and the borrower on the junior loan may be personally liable.  (Roseleaf Corp. v. Chierighino, 59 Cal. 2d 35 (1963).)

Q  5.  Can a lender avoid the foreclosure process and just sue the borrower on the note (i.e., treat it as an unsecured note)?

No.  A lender cannot sue on a debt secured by a mortgage or trust deed except for a judicial foreclosure.  This is called the "one action rule" or "one form of action rule." (Cal. Code Civ. Proc.  § 726.)  One exception to this rule is if the security for the loan has become "valueless" after the lender's security interest was recorded (e.g., a "wiped out" junior lien holder).  In this case, the lender can sue directly on the debt (note) unless the borrower's loan falls into category 1) or 2) in Question 4.

Q  6.  Why would a lender agree to accept a short sale?

Lenders may have ample incentive to negotiate a short sale with a distressed borrower. For example, should the lender take back a property pursuant to a foreclosure sale, the lender would become responsible for a variety of costs, including property maintenance, utilities, HOA fees, and might risk destruction of the property by vandalism. Furthermore, lender-owned properties (REO) may take a long time to sell, in part because so many REO properties are now for sale.

A lender will typically evaluate the financial situation of the borrower as well as current market conditions to determine whether or not to agree to a short sale. It is really a business decision for the lender to determine whether it would receive more money by accepting the short sale, or completing a foreclosure, reselling the property, and pursuing personal liability (i.e., deficiency judgment against the borrower and/or claims against guarantors, for loans on which those remedies are available.) 

How to Manage Your Finances

Today, I’m going to give advice on managing your cash flow. One of the most important to consider, when managing your personal finances, is to treat yourself as a business. Businesses live and die on cash flow. If a business runs out of cash, it fails.

Managing your cash flow in today’s world is necessary for financial success. The first step is to log all your income sources. For most, this is easy. Include all ways you get money. Obviously the biggest source is probably your job. Others include money from investments, interest, bonuses, child support, alimony, and allowances.

Next, you want to estimate your expenses. Include everything you spend money on. Groceries, gas, tuition, utilities, rent, credit card payments, mortgages, eating out, insurance, and anything else you can think of.

The next step is to put everything into a spreadsheet. This is important because it gives you an easy way to view all the information and make comparisons. Start your spreadsheet with you income page. The spreadsheet will have three columns for each month; estimated, actual, and variance. This will include all those sources of income you just listed. List the items in whatever order you wish, with a summation of total income at the bottom. Then you want to estimate the how much you will earn from each item each month, and sum them at the bottom.

The next page will be your expenses page. This should be set up in the same manner as the income page, except there will be categories. The two major categories are fixed and variable expenses. Fixed expenses are those which you know you will have to pay each month and have a cost which does not change. Examples of fixed expenses are insurance premiums, rent, mortgages, and loan payments. Credit card bills can be included, only if you pay the same amount every month. Variable expenses are everything else. You want to break up your variable expenses into categories, as well. These categories can be anything you like. It is best to break them up in a way which makes it easier for you to visualize. I use food/drink, transportation, entertainment, personal care, wardrobe, and gifts. Then, as with your income, you need to estimate all the expenses for each month. You should do this for at least four months.

Once you have all your income and expenses estimated, you can see if you are at a surplus (extra cash) or deficit (negative cash) and adjust your spending accordingly. The benefit of this is that if you know you are not going to have enough income to cover all your expenses, in a given month, you can do something about it. You can spend less the month before or plan on having to use your credit card. At the end of every month, you need to fill the “actual” column with what you actually earned and spent; then subtract those numbers from your estimates to get your “variance”. The goal is to have your variance equal zero. The closer your variance is to zero, the better you are at estimating your income and expenses.

This is the best way to manage your finances; it gives you an excellent visual breakdown of all your expenses and allows you to adjust. It also connects you with your finances so you are more in touch with what you spend your money on, which is a great way to make sure you don’t over spend.

There are many computer programs which can help you set this up.  I fine Microsoft Excel works best for me. If you have any questions or comments, feel free to leave them below and I will get back to you as soon as I can.

How much house can you buy

One of the major problems in the mortgage industry today is, most potential home buyers over estimate how much home they can afford. I will discuss how your bank evaluates your income and how you can use what the banks use to figure out how much you can spend.

The two major ratios that banks use to determine how much you can afford are the debt to income ratio and the housing expense to income ratio.  The later is calculated by dividing your estimated monthly housing payment by your gross monthly income.  Your estimated monthly housing payment includes the payment of principal, interest, taxes and insurance. This number is expressed as a percentage.

Your debt to income ratio is similar to the housing expense to income ratio, except it includes all your reoccurring debt.  This includes credit cards, auto loans, child support, and any other debts which have a monthly payment.  Most lenders, for conventional loans, those which are not government sponsored want a debt to income ratio under 38% and a housing expense to income ratio less than 30%.  However, these numbers are only guidelines.  Many compensating factors, such as net worth, credit score, and the ability to make a large down payment will allow for higher ratios.

The other factors you need to consider are your down payment amount and closing costs.  Your down payment is mostly your decision and should be based on how much you feel comfortable with.  One of the benefits of a large down payment is you the lower your loan amount to value ratio, the lower your interest rate will be.  The loan to value ratio is calculated by dividing the total loan amount by the appraised value of the home (or the sale price, whichever is lower).  If your LTV is over 80%, you will need private mortgage insurance, which will add to your monthly payment. Your closing costs usually add up to about 2% to 3% of the sale price.  Closing costs are paid at the close of escrow and is due on top of your down payment.

Now let’s do an example.

Say you, the buyer, make $15/hour and you work 40 hours a week.  To find your gross monthly income (income before taxes) we will multiply your hourly wage by your hours per week then by weeks in a year and finally divide by months in a year.

                $15 X 40hours = $600 per week

                $600 X 52weeks = $31,200 per year

                $31,200 / 12months = $2,600 per month

Your gross monthly income is $2,600

Let’s apply the 30% rule to your housing expense to income ratio.

                $2,600 X .3 = $780

This means, to have a hosing expense to income ratio of 30%, your maximum monthly house payment cannot exceed $780.

Now let’s do the same for your debt to income ratio, DTI.  Say you have an auto loan which you pay $150 per month, a credit card with a minimum payment of $50 and no other reoccurring debt.  If we add that to your $780 house payment, we get $980.

                $980 / $2,600 = .38 or 38%

As you can see, you would meet the guidelines for the ratios. However, if you had more debt, say child support, you would not qualify and you would probably need an extensive down payment or impeccable credit to get the loan.

Now we can find out how much you can spend on the house.  Say market interest rates are at 5%, using your $780 per month payment with a 30 year fixed rate mortgage and a financial calculator; we find your maximum loan amount to be about $145,000.  Now that you know how much of a loan you can get, you just need to figure out how much of a down payment you can make.  This completely depends on your comfort level and your funds available.  Most banks like an 80% loan to value ratio, and you should too.  Because private mortgage is required for any loan with a LTV of over 80%, you can save a lot of money by paying more up front.  Therefore, if you use an 80% LTV, you can buy an $180,000 house.  If you can’t manage to make the large $35,000 down payment, you can always have a higher LTV and just pay mortgage insurance.

This just briefly touches on how banks determine what you can afford, but it is good to know. If you have more questions about what I presented here, feel free to leave a comment or give us a call at (800) 741-3710. I’ll have a new article for you next week and I will definitely be touching on this subject again.

How to Improve Your Credit

Now, more than ever, one’s credit score has a huge impact on what they can “afford”. Credit scores play a major role in determining your worthiness for mortgages, auto loans and credit cards. They can even affect your ability to get a job. Many of us, especially in these times, have a few, if not many, negative remarks on our credit reports. Because of that, I am going to give a few tips on how to build or rebuild your credit.

Pay your bills, in full.

I know this is easier to say than do, but it is important. If you can, it is best to pay off your full bill every month. This s good for two reasons; One, when you pay your bill in full every month, you don’t pay any interest and two, it shows that you are well within your spending ability, given your income and credit.

Keep your balances low.

It is best to keep your balances under 30% of your limit. It is better to spread your debt over a few cards than to have one card with a high balance and two cards with no balances.

Pay your bill on time.

This is one of the most important ways to keep your credit in good standing. Creditors do not want to see late payments. This can reduce a good credit score; say 720, by as much as 100 points, depending on the circumstance. We all hit hard time and it can be tough to pay all one’s bills on time, but if you know you are not going to be able to make you payment, call your creditor. There is a good chance they will move back the deadline, but remember, do it early. The sooner you let them know, the more likely they are of giving you an extension.

Don’t apply for a lot of credit.

This is something that a lot of people don’t know, but when you apply for a new credit card or loan, it shows up in your report. Creditors do not like to see a lot of inquires within a short period of time because it is a sign that you are in serious need of money, which is a red flag for risk.

Keep your old cards.

When it come to your score, credit history is very important. The longer you have been using credit, the better; so don’t close your old accounts. It is much better to keep them open and to use them. Each is beneficial for its own reasons. Keeping old accounts open benefits in both credit history and overall available credit. Using those old cards will help spread your debt.

Ask your creditors to increase your limit.

This can be very beneficial because it will spread the gap between your balances and your limits. I recommend asking for an increase every 2 to 3 months. One of the pros of doing this, other than the obvious, is when your current creditors pull your report for an increase; they do a “soft pull”. A “soft pull” is similar to when one checks their credit report and it does not have a negative effect. This is not true of a “hard pull”, which is when you apply for new credit, such as a loan or new credit card. “Hard pulls” show up in your report and, like I stated above, creditors do not like to see a lot of inquires.

Review your report.

The best way to keep your score up is to review your report often. Mistakes happen in credit reports and they can have a huge impact on your score. You can get a free report once a year from annualcreditreport.com and there are many services that will send you a monthly report. Remember, your own inquires will never affect your score, so check it as often as you want. If you are new to credit, I recommend checking your report once a month. This will aid in your understanding of the report, its self, and ensure that you won’t be stuck with any surprises.

Feel free to leave a comment or a question below.

I hope this helps. We are all going through tough times, but remember, good things come to those who make it happen.

Government Doing Too Much

There’s a lot of talk nowadays about how much the government should be intervening with our economy and housing market. Many believe Washington is simply throwing money at a problem and will never solve it. Many also believe that without the government’s help, we would be in a far worse situation than we currently are.

I personally feel that it is time to let everything take its natural course. Let the foreclosures happen and stop of the bailout, tax credits and subsidized mortgages. Clearly, what our government has been doing is not working and spending more money on the same programs won’t work either.

I think the best way to get out of the mess we are in, at least in terms of the housing market is to get rid of the ridiculous lending qualifications to allow able home buyers to find a loan, but continue to keep strict guidelines in lending practices. Meaning, lenders need to be willing to accept applications from less than perfect borrowers, but do their due diligence to ensure the lowest risk.

What do you all think? Leave a comment and let me know.

Mortgage Application Essay

Today I read an article on credit.com citing a New York Times story about Wells Fargo. It says that Wells has violated the Fair Housing Act by requiring applicants for their mortgage products to answer an essay question. Wells is in violation of the law because the question includes procuring about the applicants’ familial status.

Now, I am 100% for giving everyone an equal opportunity to get housing and loans, and I don’t think that one’s gender, age, family size, or other personal preferences/beliefs should be a determining whether or not to give them a loan, but I also don’t think that having an “essay” question is too bad of an idea.

I think that having applicants write an essay about what their intentions are with the home and why they feel like they are qualified for the loan can be a really good thing. Not only will it give lenders useful information about the applicants, but it also gives the applicants a chance to explain any previous derogatory credit information. Having this type of requirement will help make the loan application process more personal and, I think, it will reduce the number of defaults.

One issue with this, however, is that it will be difficult for non English native speakers to articulate their worthiness for loans. Therefore, the “essay” should be accepted in all languages and verbally, as well. I know this is a touchy subject, because it leaves room for there to be discrimination based on ones educational background, and that definitely needs to be considered. I do not have an answer for that at the moment, but I’m thinking about it.

What are your thoughts on the subject? Leave a comment and let me know.

Lending Regulations, Too Strict

Mortgage rates are still at record lows. But, what does this mean for all of us? Yes you can get a home or refinance your current mortgage at a phenomenal interest rate, but there is more to it. Why are interest rates so low right now?

Interest rates continue to fall because there are not enough people buying homes. With a lot of the “Bank Owned” inventory hitting the market, there just are not enough qualified buyers. There are not enough buyers because lending practices have become increasingly strict. I agree that the practices during the sub-prime mortgage boom were a major cause of the housing bust, but that doesn’t mean that all of the requirements were too lenient.

Yes, there needs to be good regulation in lending, but there are too many people, wanting to purchase homes, and in the past, would have been qualified to, that cannot. If our government really wants to get rid of all the inventory on the market and pull us out of this recession, homes have to be sold. For homes to get sold, there has to be qualified buyers, and with the lending standards the way they are right now, not many people, who do not already own one or two houses, can qualify.

Leave a comment and let me know what you think.

Will They Forgive Underwater Mortgages

This is a re-post of an article from Barron's.com by Randall W. Forsyth, which I thought was very interesting. I would love to hear your comments about it. http://online.barrons.com/article/SB50001424052970203667404575412951885388376.html?mod=googlenews_barrons

Buying Junior Liens

This article by by Colin Said of the San Francisco Chronicle tell the story of a couple who purchased a trustee's deed to a home in Santa Cruz at auction. Little did they know, they bought a second mortgage on a foreclosed house, that has no actual value.

The article states that Roberta and Randall Stand paid $97,606 for a house at a courthouse auction. They gave the home to their daughter and her fiancé, who in tern, spent over $13,000 fixing it up. Months later, a notice was posted on the door stating the home would sold at auction. After much litigation, Wells Fargo and the couple settled for an undisclosed amount.

http://www.sfgate.com/cgi-bin/article.cgi?f=/c/a/2010/08/01/MNRU1EL529.DTL

This just goes to show that you really need to do all the research when you are buying anything from an auction as there are no guarantees to title or condition.

What do you think about this? Leave a comment and let us know.

Credit and Loans

In today’s economy and real estate market, the most important asset in securing a loan is good credit. But should it be? Does having good credit mean that you will make your payments on time and does having bad credit mean you won’t? Although one’s credit is definitely a good way of showing a person’s past actions, it may not be the best way of showing their future. I believe there needs to be less emphasis on credit ratings when it comes to loans. There are many items which can affect credit, and sometimes, they cannot be controlled. For instance, say you went to a medical institution for physical therapy. You paid your bill on time, every time. But, they say you owe them for a visit. They can attack your credit and you have no choice but to enter a dispute. This has a great negative effect on your credit rating. Furthermore, proving that you do not owe them any money can be extremely difficult. Now it might only be $200, but that can be the difference between a 10% and 7% loan rate.

Also, say you defaulted on a credit card 5 years and entered a rate reduction plan and have been paying your bill every month on time for the past 5 years. This still has an extremely detrimental effect on your rating. Personally, I think loan qualification should be based on more recent than past history and also, more on your income debt ratio. If you have $50,000 in the bank and you want a $20,000 loan, it shouldn’t matter what you did 5 years ago, as long as within the last 2 to 3 years you have been doing all the right things. I just think, as a society, we put too much emphasis on arbitrary numbers that are based on actions, which so nothing about how you carry yourself and your finances now.