How HOA Payments Reduce Your Buying Power

buying powerIf you buy a condo or town home, there is almost always a homeowner’s association (HOA) that charges a monthly fee. What the fee buys you varies, but typical benefits are exterior maintenance, water, trash, and sometimes amenities such as a pool, tennis courts and club house.

The issue with HOA payments is they reduce your buying power, which is the amount of house you acquire for your monthly payment.

How You Lose Buying Power
Most people have a total monthly payment (TMP) they can afford, say $1200. If your HOA fee is $335, it takes $335 from the TMP. This leaves $865 for the rest of the TMP. If your HOA fee is $167, it leaves $1,033 for your TMP. Obviously you can borrow more with $1,033 a month than with $865, so that’s how the HOA fee impacts how much house you can buy.

Impact On Buying Power
What can you buy for $865 per month with a $335 HOA fee?

  • A $155,000 condo with 3.5% down and 4.5% interest creates a monthly payment of $840.18 (Principle + Interest + Mortgage Insurance)
  • You also need $77.83 for taxes and about $20 for insurance
  • $335 HOA fee
  • TMP = $1264

What can you buy for $1,033 per month with at $167 HOA fee?

  • A $175,000 house with 3.5% down and 4.5% interest creates a monthly payment of $948.55 (PI + MI)
  • You need $88.92 for taxes and about $20 for insurance
  • $167 HOA fee
  • TMT = $1,165.87

As a seller with a high HOA fee, you are competing against properties that are 11% higher priced, most likely with more features, more square footage, perhaps newer, or in better locations. As a buyer, you are bypassing properties that are 11% higher in price.

Another consideration is property appreciation. Since HOAs tend to increase over time, they put a drag on appreciation as they rise.

That being said, when a property is RIGHT for you, then that is your major consideration, not the HOA fee; it becomes something you live with to have the house you want.

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Appraisals

Real-Estate-AppraisalWhen you buy a house, your lender will require an appraisal on the property before they will complete your loan. Why is an appraisal necessary? Because the bank wants to know that they are not loaning more than the property is worth.

What’s an Appraisal?
Appraisals are completed a week to ten days before the closing. Even though lenders require appraisals, you get to pay for them. The cost is $400 to $500.

Appraisals are conducted by – believe it not – appraisers! These are professionals who specialize in determining the “actual value” of properties. The actual value is based on past sales, features, condition, location, and other factors. Appraisers attempt to remove biases and simply look at facts and numbers.

Appraisers vs Real Estate Agents
Instead of “actual value,” real estate agents determine the “market value” of properties. Market value is the price that buyers will pay for a house in the current market. Market value is based on supply and demand, marketing plans, buyer emotion, and market trends. If a market is active and buyers are frenzied, they will often pay higher prices than past sales appear to support.

What to Look For in an Appraisal
From a buyer perspective, your objective is for the appraised price to be at least as high as the purchase price; anything higher is a bonus. You don’t want it to come back lower than the purchase price. The reason is that lenders loan you money based off the appraised value.

For example, if you are buying a $200,000 house with an FHA loan (borrow 96.5%), and the appraisal comes back at $195,000, then the bank will only loan you $188,175 not $193,000.

If the appraisal comes back too low, you have a couple of options. First, make up the difference out of your own pocket. In the previous example, that means you come up with $11,825 down payment (5.9%) rather than $7,000 (3.5%). Another option is to have the seller lower the purchase price to match the appraised value. Your third option is to terminate the contract and walk away.

Summary
Think of your appraisal as a reality-check on the price you agreed to pay the seller. It’s nice when a third party agrees that your new home is a good value – or warns you that the house is over-priced.

Mortgage Rules Changes Are Coming in 2014

Mortgage_rulesThe world of mortgage lending has changed significantly since the housing bubble burst. Mortgage lenders have returned to traditional loan standards that require extensive documentation of income and assets for a loan approval.

Government regulatory agencies also continue to react to the housing crisis, with more adjustments to mortgage requirements set to go into effect in 2014:

Qualified Mortgage Rules

Whether you’re thinking of buying a home or mulling over refinancing your mortgage, Jan. 10, 2014, could be an important date for you to remember. The Consumer Financial Protection Bureau is in the process of implementing regulations to meet goals set forth by the Dodd-Frank Act in Congress, which was meant to correct the errors that led to the housing crisis. The CFPB’s “Qualified Mortgage,” or QM, rules go into effect in January. Essentially, these rules require lenders to prove borrowers’ ability to repay a loan by meeting several guidelines, including a maximum debt-to-income ratio of 43 percent. While many lenders already limit borrowers to a similar maximum debt-to-income ratio, the new rules won’t allow for any compensating circumstances such as significant cash reserves or a large down payment to be considered in order to offset a higher debt ratio.

If you have credit problems or a high debt-to-income ratio, you may want to push through your loan application for a refinance or home purchase to make sure you close your loan before the new rules go into effect. However, many lenders are already using QM standards in order to make sure they’re in compliance with the regulation. Mortgages that don’t meet QM standards will have to be held by the lender rather than sold to Fannie Mae and Freddie Mac, so most lenders are careful to meet the new standards.

The 3 Percent Rule

The new QM requirements also limit fees for originating a loan to no more than 3 percent of the loan amount. If you’re financing a more costly home, such as a $400,000 home or more, the lender can easily keep fees under 3 percent, which in this case would be $12,000. However, if you’re refinancing a smaller loan balance or purchasing a less expensive home — for example, for $80,000 — the lender might find it more difficult to keep all fees under $2,400. Mortgage lenders are less likely to offer loans for smaller amounts since they won’t always recoup their costs and make enough profit to pay their staff. If you need a small loan, you may want to push to get it closed before Jan. 10, 2014.

Self-Employed Borrowers

One particular group of borrowers will most likely be impacted by the QM rules: self-employed borrowers. These borrowers already are heavily scrutinized and find it more difficult to obtain a mortgage because they must prove their income based on tax returns and profit-and-loss statements, rather than standard paystubs and W2 forms. The “ability-to-repay” feature of QM rules requires all borrowers to prove they have the cash flow to make payments on their mortgage. Self-employed borrowers often have fluctuating income and rely on cash reserves to pay bills in-between payments, but the emphasis on cash flow can make it harder for lenders to approve a loan even for someone with significant funds in the bank.

Potential Lower Loan Limits

The Federal Housing Finance Agency, which regulates Fannie Mae and Freddie Mac, announced in October that plans to reduce the maximum loan limits for conventional conforming loans will be delayed until later in 2014. Typically, loan limits are adjusted on Jan. 1 of each year, but the agency decided to wait to see the impact of the introduction of QM rules before making changes. Currently, the limits are $417,000 in most housing markets and rise to $625,500 in high cost areas. If you need a mortgage near these limits, it would be wise to close your loan earlier in 2014 rather than later in case limits are lowered.

If you would like a referral to a qualified lender, please contact me. 

Reprinted from Realtor.com, December 2013

Three Ways to Negotiate the Price of a House

negotiationWhen you are negotiating the sale or purchase of a house, the amount being paid is a common point of discussion for both buyers and sellers. There are three ways to approach this issue.

Change the Price
Changing the purchase price is the simplest, most straight-forward way to negotiate. Suppose the asking price is $200,000 and the buyers offer $195,000.

Seller Concession
A concession is when the purchase price remains the same, but the seller “gives” money to the buyer. For example, the purchase price is $200,000 and the concession is $4,000, the net price $196,000. The buyer uses the concession for closing costs, repairs, or improvements such as landscaping.

Credit at Closing
A credit at closing means the bank loans additional money to the buyer, above the amount needed to purchase the house. For example, assume the purchase price is $200,000, the down payment is $5,000, and the loan is $200,000. The borrower uses the additional $5,000 for home improvements or repairs.

Which Way is the Best?
As the old saying goes, you have to choose the best tool for the job. If you want to avoid borrowing any more than you have to, then negotiating the price is the best option. If you want to bring the least amount of money to the closing as possible, then a seller concession is the best option. Credits at closing are rare. The money must be earmarked to a specific company doing a specific repair, and then it can only be for a small amount.

Thanks to William Griffiths at First National Bank for editing this blog.

Types of Home Loans

Home-Equity-Loan-3Unless you are blessed with a large bank account that allows you to pay cash for your house, you’ll have to borrow some money. There are two basic types of loans you can pick from. The difference between them is how much of a down payment you make.

The down payment is a big factor because, to banks, down payments indicate risk. Large down payments mean a more secure loan because you have more “skin in the game.” To calculate risk, banks use a Loan-to-Value ratio. For example, if you have a $200,000 house with a $180,000 loan, the LTV ratio is 90% ($180,000 / $200,000).

Loans with an LTV of more than 80% require Mortgage Insurance, which insures the lender against you defaulting on the loan. Mortgage insurance is an additional cost to you, but it’s a trade-off for a lower down payment.

Conventional Loans
Back in the day, conventional loans were the gold-standard. The security for the loan is provided solely by the mortgage. House appraisals are very important to the lender, as are the borrower’s credit history and income reliability.

Traditionally, you put 20% down (for an 80% LTV ratio) with conventional loans. Today conventional loans can be obtained for 10%, 5% and even as little as 3.5% down, although very few banks offer programs with low down payments. Also be aware that down payments of less than 20% require some mortgage insurance. Check with your banker for details.

FHA / VA Loans
The terms “FHA and VA loans” refer to loans insured by the Federal Housing Administration (FHA) and Veteran’s Administration (VA). The FHA and VA do not lend money. Loans are made by FHA and VA approved institutions.

The big selling points of FHA and VA loans are that they only require a 3.5% down payment, and they are widely available. With FHA and VA loans you will have to buy mortgage insurance. There is an up-front premium charged at closing, which can be financed. And there is an annual premium, usually charged monthly.

Mortgage insurance is expensive, as much as 1.75% of the loan. There is light at the end of the tunnel. By law, when you accumulate 22% equity in the property (based on the purchase price of the home) you no longer need mortgage insurance.

For a list of lenders that I like to work with, email me at: gary.clark@century21.com

Seven Things NOT to Do When Applying for a Mortgage

So you applied for a mortgage because you are buying a home. Congratulations! Applying for a mortgage is the most important step in the home buying process (see my blog “What Bankers Want from Homebuyers When Applying for a Mortgage”).

If you want to keep your underwriter happy, you need to be careful during the underwriting process. It is possible to mistakenly, inadvertently, or accidentally lose your loan. I’ve seen nice people with pre-qualification letters lose houses because they could not get loans. Why? It was due to something they did after getting the pre-qualification letter.

Here are seven things NOT TO DO when you are applying for a loan. This list was provided by William Griffiths, a mortgage loan officer with First National Bank.

Don’t Buy or Lease an Automobile
Lenders look closely at your debt-to-income ratio. A large payment, such as a car lease, or purchase can greatly impact those ratios and prevent you from qualifying for a home loan.

Don’t Increase the Balances Owed on Credit Cards
If the new purchases increase the amount of debt you are responsible for on a monthly basis, there is a possibility this may disqualify you from getting a loan.

Don’t Move Assets from One Bank to Another
Transfers from one account to another show up as a new deposit and complicate the application process, as you must then disclose and document the source of funds for each new account. The lender can verify each account as it currently exists. You can consolidate your accounts later if you need to.

Don’t Change Jobs
A new job may involve a probation period which must be satisfied before income from the new job can be considered for qualification purposes. A new job may pay commission, overtime, or bonus income versus a guaranteed salary. Income other than a guaranteed salary must have a minimum of one-two years history before you can use it for qualifying.

Don’t Run Your Own Credit Report
This will show up as an inquiry on your lender’s credit report. Inquiries can lower your credit score. All inquiries must be explained in writing, i.e. do you have new or more debt.

Don’t Consolidate Bills
If this needs to be done, ask your underwriter for advice on the best way to do it.\

Don’t Pack or Ship Information Needed for a Loan Application
Paperwork such as W-2s, bank statements, divorce decrees, and tax returns should not be packed if you are moving. Finding copies could take weeks and delay the closing date on your new home.

What Bankers Evaluate in a Mortgage Application

So you’re shopping for a new home. You’ve got a pre-qualification letter from a lender, which you use to make an offer on a house (see my blog What is Pre-qualifying and Why is it Important?).

After your offer is accepted, the next step in the home-buying process is applying for a mortgage.

When you apply for a mortgage, you work with an underwriter, who will ultimately determine if you get a loan, and how much you can borrow.

So what do underwriters look for these days? Basically, they evaluate four criteria:

Credit History
Bankers like to see a score of 700 at least.  At 680, bankers will start asking you questions. At 650, you may find it difficult to qualify for a mortgage.

Income Stability
Bankers like to see two years of consistent, verifiable income. Their favorite form of income is a guaranteed salary. This makes it tough on self-employed people. Self-employed people have a hard time because their income can fluctuate, and because they often try to minimize their taxable income. This keeps taxes low, but it’s a problem for loans because it doesn’t show enough income to qualify for a mortgage. Ask your banker about alimony, military disability payments, social security, and income from investments.

Employment Stability
Bankers like to see two years at the same job.  This makes it tough on job changers, because it can take one or two years to build employment history. One exception is a civil servant job, such as police and fire, where a letter of intent can count as verifiable employment.

Debt
Debt is found in the form of student loans, car loans, credit card debt, and other loans. Lenders calculate your debt-to-income ratio, which is a percentage of your monthly gross income that goes toward paying debts. In order to qualify for a mortgage the lender requires a debt-to-income ratio of 28/36:

Yearly Gross Income = $45,000 / Divided by 12 = $3,750 per month income.

  • $3,750 Monthly Income x .28 = $1,050 allowed for housing expense.
  • $3,750 Monthly Income x .36 = $1,350 allowed for housing expense plus recurring debt.