This is a tremendous opportunity for those in the market for a new home. The combination of low real estate prices and low interest rates gives you the most house for your dollar, and the tax credit is just free money. You can use it to pay off debt, spruce up your new home, take a vacation to Europe…however you chose to use it, it gives you an immediate return on your investment in your new home.

Opportunities like this don’t come around often, and this one will end April 30, 2010. If you might be in the market for a new home, call me for a free, no obligation analysis of your home buying power.

That is the tax credit (not deduction, credit) that is currently available, but it expires if you don’t close on the purchase by December 1, 2009.

That means instead of getting a refund of $250 in March or April, you could be getting a refund of $8,250…it means the government will give you $8,000 if you buy a home.  Yes, you do have to stay in the home three years or pay the money back, but if you’re like me, you won’t even be done unpacking in three years.  And there are income limitations: $150,000 for joint filers, $75,000 for individuals.

I am not qualified to dispense tax advice, but if you would like to read it right from the IRS, it’s pretty straightforward – here is the link: http://www.irs.gov/newsroom/article/0,,id=206291,00.html

If you or anyone you know hasn’t owned a home in the last three years, and has a job and decent credit, have them give me a call for a free prequalification before it is too late.  Funds for a down payment may not be necessary, 100% loans do still exist, with certain qualifications.

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One of the challenges of all real estate transactions in our current market situation is answering the question “What is the property worth?” Before the market correction and mortgage meltdown began a couple of years ago, this was no problem; all prices were bubbling up consistently and there were plenty of sales of like properties from which to establish a value. And buyers, sellers, appraisers, real estate agents and lenders were all sure of one thing: the property was worth more than it was the last time it sold.

Since the correction, during which home prices have fallen considerably, and the tightening of credit markets, there is more subjectivity in appraisals because it isn’t as easy to find three or more properties like yours, and close enough to yours, from which to establish value. Appraisers sometimes have to go outside their standard parameters in order to determine a value, and therein lies the problem.

Lenders review appraisals much more carefully these days, and they focus on comparable sales – the sales that the appraiser used to establish the value of the subject property. How old are those sales? How far away are they from the subject property? After answering these and other questions, the lender may question the value arrived at in the appraisal or demand additional support for the value; if their demands aren’t met, they can reduce the value of the property for their loan purposes.

Naturally, this can throw a wrench into a real estate transaction in a hurry, and it usually does.

Just one more thing to be aware of in today’s real estate market.

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In our third and final look at what mortgage lenders consider when they examine your loan application, we will talk about liquid assets. No, we’re not talking about the full tank of gas you have in your car, nor is this about your well stocked liquor cabinet. We’re talking cash in the bank, savings accounts, money market accounts, certificates of deposit, mutual funds, brokerage accounts, IRA’s and 401K’s (I know IRAs and 401Ks aren’t supposed to be liquid; I’ll get to that).

Generally, lenders are looking at the liquid assets you will still have available to you after you complete the transaction at hand and have made your down payment and paid all associated costs. Incredibly, at least to me, most types of loans require very limited “reserves”, which is what lenders call liquid assets still on hand after a transaction is completed. However, many applications that are denied because of a persons overall financial picture would be approved for a person with significant reserves. First of all, it shows an ability to save money over and above normal living expenses, and it is a cushion that will keep you going for a while in the event of job loss, etc. This is also why IRA’s and 401K’s make an application looks stronger; even though they are for retirement, lenders know you could get cash out of them before you started missing payments.

Loans used for investment properties and second homes generally have much higher reserve requirements than those for primary residences.

Unfortunately, liquid assets do not include your car, even if it is free and clear, your boat, your furniture, your gun collection, your baseball card collection, and, believe it or not, cash, if it isn’t in the bank. Yes, they have cash value to you because you know you could sell them, but underwriters don’t care about them because ownership and actual value are hard to verify. There is one exception to this: you can borrow money against an asset such as a car, and you can use this money in the transaction or keep it as reserves, but remember the payments on the loan will be counted in your debt ratio (see previous article). Consult your mortgage person before implementing this strategy.

So that’s it for our series on “What Mortgage Lenders See When They Look At You”. To summarize, remember: A lender will gladly hand you an umbrella…unless it’s raining.

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This week in our series of discussions on how lenders look at you we will talk a little bit about your credit rating. Most people know, generally, what their credit is like. If you have never been late on a bill in your life, have had a few car loans, a couple of mortgages, and pay your credit card balances off every month, you probably have jam-up credit, with a credit score in the 700+ range. These are the people who actually get the incredibly low rates car dealers advertise on the radio, and who get the best available rates on their mortgage loans. In short, their whole life is a few percent less expensive than those with lower credit ratings.

Then there are those whose credit ratings, for whatever reasons, have gotten beaten up over the years. Late payments on loans and credit cards (for the purposes of your credit, “late” is anything over thirty days past the due date), car repossessions, unpaid student loans, judgements, all these things negatively impact your credit score, especially if you don’t have a lot of accounts in good standing to offset the negative stuff. Generally, once your credit score drifts below 660 things get challenging, and below 600 you are going to find it tough going to get a mortgage loan unless you have a substantial down payment.

Then there is everyone else who falls somewhere between, those with credit ratings between 600 and 700. This is where you need an experienced mortgage professional, who can either get you into a decent mortgage loan or tell you what you need to do in order to get your credit rating up to the level it needs to be to get a decent loan.

Credit profiles are like health profiles, every one is different, and the remedies prescribed are most effectively done on an individual basis, but here are a few things that everyone can do to improve their scores:

If you are behind on any loans or credit cards, get current and stay current. Late payments (over thirty days) are murder on your scores.
If you have credit cards that carry balances, try to keep the balance at 50% or less of the total credit limit. You want to avoid the “tapped out” look.
Settle disputes with creditors before they are late or written off as bad debts. The car you bought on credit may be a lemon, but the firm that lent you the money to buy the lemon still wants their money back, not the car.
If you have a judgement against you for an unpaid debt, try to make arrangements to settle the debt, even if it is small monthly payments. Then make the payments on time.
If you have no credit or bad credit in the past, get started again with a secured credit card.

These are just a few general things, like quitting smoking is good general health advice for everyone. Your mortgage person should help you map out a strategy to get where you need to be to get the mortgage loan that is right for you.

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Over the years I have on occasion had clients tell me that they would have purchased a home sooner than they did, but they were holding off while they got their debts cleared up a bit, or until they got some more money saved, or until their kids started school, finished school, showed some interest in school, quit school, etc.
When I asked why they waited, they replied, “I thought it would help my chances of getting financed”. While there are certainly good reasons for waiting (such as putting that foreclosure on your last home further in your past), many times people are hoping to correct a perceived weakness in their financial situation that mortgage lenders care nothing about whatsoever. Meanwhile they continue to live in a home that is too small for their families, or worse renting, while opportunities to get into a more suitable home at a good price pass them by.

Mortgage lenders really only focus on three things when considering your loan application: your debt ratio, your credit rating, and your liquid assets. How do they look at these? This week, we’ll talk about the debt ratio.

Your debt ratio is your monthly debt payments divided by your gross income. Your debt payments include any installment loans (like car payments), credit card payments (usually the minimum), student loans, child support and alimony payments, and of course the loan, including taxes and insurance, that you are applying for.

Not included are utilities, auto and health insurance, phone and cable payments, season tickets (and you thought your loyalty to the Gators could hurt you), AND, get this, child expenses, such as day care and tuition isn’t considered either, regardless of how many kids you have. As the father of two teenage girls, if I were the one lending the money, that would be the first question I’d ask. Yes, these are all still expenses to you, and very real ones, but the lender doesn’t care about them, and in fact won’t even ask what they are.

The rule of thumb is to keep your debt ratio in the 45% range, although higher ratios may be approved with other compensating factors. Your mortgage person can go over this with you quite painlessly over the phone, without any red tape, to let you know where you stand. Don’t wait until little Susie gets out of day care in order to look better for the lender…they know that’s just the beginning.

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I get a lot of questions from customers about the benefits and drawbacks of prepaying their mortgage. I define prepaying as paying any additional monies over and above the normally scheduled payment. Many financial planners tout the tremendous savings that can be realized by doing this; some mortgage companies even send their customers solicitations to convert to a bi-weekly payment, which has the effect of making one extra payment per year on your loan. Recently I have seen a new product being sold that uses a combination of computer software and other debt instruments to reduce the term of your loan.

The thing I want my customers to understand is this: any time you make a payment on your mortgage above the amount is due, it comes off the principal, which will reduce the amount of interest you pay and shorten the term of the loan. How much extra you pay and how often you do it determines the savings, which is what makes bi-weekly programs so attractive. They force you to discipline yourself to pay extra on a regular basis, which guarantees significant savings. For a simple example, consider: On a $200,000 loan at 6% for 30 years, your monthly principal and interest payment is $1,199. If, instead of paying $1,199 per month you pay $600 bi-weekly, you will reduce your loan term to 24 and a half years and you will pay about $50,000 less in interest. I call that significant. But the point is any prepayments will save you money.

There are many different strategies you might deploy, and if you have an adjustable rate or an interest only loan things get even more interesting. If you are a numbers person and enjoy this sort of thing, you may want to invest in a financial calculator which will show you the effects of any type of prepayment scenario, or you can just call your mortgage person and run through scenarios with him.

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Should You Hold A Mortgage On The Sale of Your Home?

Suppose you are trying to sell your home or a rental property. You may have noticed that things aren’t moving as quickly as they were a few years back when you bought it. You may have also noticed that people who want to buy the property are having a harder time getting their financing approved. If so, welcome to the post-correction market, where I’ve noticed a lot of vacant looks, glazed over stares, and utter incomprehension (and that’s just here in the office).

One thing you can do to make the property easier to sell is agree to finance all or part of the purchase price. Financing all of it may be difficult unless you don’t need the money from the sale right away, and you were going to put the proceeds in CD’s paying less than 4%, and would rather receive an income stream paying 6.5% or more. There are a lot of people like that (I don’t meet many, since they never need to borrow money). If you do need the proceeds from the sale, say to purchase another property, but don’t necessarily need all of it, agreeing to finance a fraction of the purchase price may help you sell. This is usually called a “seller held second”.

Say the asking price for your home is $200,000, and you have prospective buyers who have 5% ($10,000) to put down. But the lender will only lend them 90% of the purchase price ($180,000) leaving them $10,000 short. You could agree to finance the $10,000 difference by holding a second mortgage for that amount, and the buyer makes payments to you on terms that you agree upon, for example at 8% interest for five years the payments would be $202.76 per month.

The net effect to you, the seller, is you walk away from the closing with $10,000 less cash, but you have a note and mortgage for $10,000 paying you 8% interest.

There are hazards to this approach, and you should certainly seek your own counsel before doing it, but I do know from experience it can make a deal work that otherwise wouldn’t. And in this market, you need every tool you can use.

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In the last few months I have had more than a few calls from people who wanted to refinance their existing mortgage in order to get out of their current loan because it was an “interest only” loan. Admittedly, nothing sounds more ominous than an interest only loan; if all that is ever paid on the loan is interest, it will never be paid off, right? Well, not really, once your interest only period runs out (usually anywhere from 36 to 120 months), the loan balance is converted to a fully amortizing loan over the remaining life of the loan, resulting in a substantial increase in payments. So, remembering that closing costs are a part of refinancing, is it a good idea to refinance to get out of an interest only?

The thing to understand about interest only loans is that you are only required to pay the interest that is due each month. Having done that, you can pay any amount you wish towards the principal, reducing your loan balance and reducing the amount of “interest only” that you will be required to pay next month. Some loans do have prepayment penalty clauses, which prevent you from paying down your principal by more than 20% of the balance in any one year without paying a penalty, but on a $100,000 loan this means you could still reduce your principal by up to $20,000 without incurring this penalty.

If your current loan is a variable rate interest only, or if it is a high fixed rate, it may make sense to consider refinancing to a fixed rate loan…or it may not. It all depends on your circumstances, how long you plan to be in the home, your loan balance, your budget, etc. Sit down with your mortgage person and go through the numbers as they relate to your situation, and make your decision based on solid numbers, not hype or a sales pitch.

Remember, nobody cares as much about your money as you do.

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The Federal Reserve’s announcement of a quarter-point decrease in the Federal Funds rate, it’s seventh such cut since it began easing credit conditions in September, most likely will be the last in this series of rate cuts. While these cuts have benefited those with adjustable rate mortgages, they have had little effect on long term fixed rates, which remain in the 6% range. The cuts also haven’t done much for investor confidence, which means that credit standards in the mortgage markets themselves will remain tight for the foreseeable future while the overall credit markets and housing markets work through their problems.

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When I was in school, a professor that I “studied” under spent 13 weeks explaining to us how investments work. What I learned in that class could be boiled down this: buy low and sell high, and keep the cost of your funds as low as possible. The current residential real estate market presents opportunities that seem to fit both these criteria. Purchasing real estate as a long-term investment (so-called “flips” are another game) is a proven wealth builder provided you get a good price going in and can finance the deal at decent terms. This is true whether we are talking about your home or rental property, which are really the same investments with different cash flow structures.

Now may be the time to consider investing in residential real estate if that is something that appeals to you. If the thought of being a landlord turns you off, you can always use a real estate management firm to handle the details (for a fee, of course), and relieve you of the burden of the day-to-day operations.

The current combination of lower prices and low interest rates doesn’t come around often. Consider the possibilities.

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