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Housing Crisis to End in 2012 as Banks Loosen Credit Standards

From DSnews.com, by Krista Franks.

Capital Economics expects the housing crisis to end this year, according to a report released Tuesday. One of the reasons: loosening credit. 

The analytics firm notes the average credit score required to attain a mortgage loan is 700. While this is higher than scores required prior to the crisis, it is constant with requirements one year ago.

Additionally, a Fed Senior Loan Officer Survey found credit requirements in the fourth quarter were consistent with the past three quarters.

However, other market indicators point not just to a stabilization of mortgage lending standards, but also a loosening of credit availability.

Banks are now lending amounts up to 3.5 times borrower earnings. This is up from a low during the crisis of 3.2 times borrower earnings.

Banks are also loosening loan-to-value ratios (LTV), which Capital Economics denotes “the clearest sign yet of an improvement in mortgage credit conditions.”

In contrast to a low of 74 percent reached in mid-2010, banks are now lending at 82 percent LTV.

While credit conditions may have loosened slightly, some potential homebuyers are still struggling with credit requirements. In fact, Capital Economics points out that in November 8 percent of contract cancellations were the result of a potential buyer not qualifying for a loan.

Additionally, Capital Economics says “any improvement in credit conditions won’t be significant enough to generation actual house price gains,” and potential ramifications from the euro-zone pose a threat to future credit availability.

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Monthly Payments for Home Buyers

staff photo of Lawrence Yun

Image via Wikipedia

 

Lawrence Yun, Chief Economist for the National Association of Realtors wrote the following column about our very low current interest rates, and therefore very low mortgage payments, on October 6th.    I wish to share his column with you: 

A home buyer purchasing a typical American home at the prevailing average mortgage rate  today would have a mortgage payment of  $698 a month. This figure is not much different from what a home buyer would have faced 30 years ago. In 1981, home prices were much lower but mortgage rates were reaching 18 percent. Today, home prices have come down by about 33 percent on average from the bubble years, but prices still remain comfortably higher than those of the 1980s. However, thanks to record low mortgage rates, the monthly payment obligations have been greatly reduced.

Compare the chart below on the 30 year payment growth of the overall consumer price index,  rent, food prices, gasoline prices, college tuition, and medical costs, versus the monthly mortgage payment. The rapid increases in college tuition bills may also imply too much demand, perhaps even a bubble in term of students not getting their money’s worth.  A recent spike  in college student loans is due primarily to weak job market conditions, but may also be due to ‘over investment’ in education in relation to the cost.

At the other end, one sees the slowest growth in monthly mortgage payments for homebuyers. It is not that this cost element rose slowly and steadily over time; rather, it is the result of volatile swings in home prices and mortgage rates. Compared with the other items, the value proposition for homebuying is blaring!

Very tight underwriting standards, unfortunately, are keeping some good, hard-working Americans from taking advantage of the super affordable conditions.

Please note that homeownership costs include not only principal and interest payments on a mortgage, but also property tax, insurance, and home maintenance costs, which probably rose in line with the overall consumer price index.

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Put It in the Garage

Autumn / Fall Leaves - yellow lines
Image by Dominic’s pics via Flickr

The observation.  While I was out for a walk this lovely afternoon–63 degrees, no wind, beautiful colored leaves all over the sidewalks–I noticed that a lot of people have a lot of automobiles parked outside their homes. What happens when friends come to visit? Where do visitors park? Perhaps it’s the same in your neighborhood. Sure, in my area, it’s not uncommon to have more than one family unit sharing a home, and sure, we all know that those who can drive, must drive.  

 My point.  Most of these homes have a two car garage. Why aren’t two of the cars in the garage? I know they’re not because oftentimes a few garage doors are open, and many of those garages are stacked to the rafters with boxes and appliances and unused gym stuff and outgrown play things, and yes, even junk. 

The solution.  Set aside time to clear out the garage, and write it on your calendar. Assess what you have in there. Is it worth more than your automobile that’s aging ungracefully in the winter elements? Wouldn’t the car be worth more, when it’s time to sell it, if you keep it in the garage when you’re not using it? (Yes.) What’s that stuff you’re storing worth? And will you really use it later? (No.) Put it in three piles: (1) give it away; (2) donate it; (3) take it to the dump. And if you get it done before the end of the year, you can take a tax deduction for the items you donate! Go for it!

 Trust me. You’ll feel so good when you drive your auto into its garage. No more getting soaked by rain while rushing to the house. No more multiple trips from the street with heavy bags of groceries. And by getting those autos off the street and driveway, you will have added curb appeal to your home! Try it; you’ll like it. 

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How foreclosure impacts your credit score

People have been asking me lately how foreclosure, or short sale,  impacts credit score.  The article that follows, written by Les Christie, a staff writer for CNNMoney.com on 4/22/2010, addresses these issues.  I hope you find it helpful. 

NEW YORK (CNNMoney.com) — If you’re delinquent on your mortgage, your credit score will suffer. Everyone knows that. The question is, by how much?

 Until recently, those answers were hard to come by. Credit bureaus were uncommunicative about expressing, in points, just how much impact different foreclosure types of mortgage delinquencies have on scores.

 To come to these figures, Fair Isaac created two hypothetical consumers, one who starts out with a fair-to-middling score of 680 and the other with a very good one of 780. (FICO scores range from 300 to 850.)

 The hypothetical person with the 780 FICO has 10 credit accounts versus six for the 580, plus a longer credit history, lower utilization of total credit limit and no missed payments on any account. The other consumer has two slightly damaged accounts. Neither have any accounts in collection or adverse public records.

Recently, Fair Isaac, which developed FICO scores, pulled back the curtain a bit, revealing some estimates of point-score declines following mortgage delinquency problems.

 Here are the average hit your credit will take:

 30 days late: 40 – 110 points

 90 days late: 70 – 135 points

 Foreclosure, short sale or deed-in-lieu: 85 – 160

chart_credit_score.gif

See the chart above to see how each scenario affected each borrower. Notice that for both borrowers a single one-time black mark results in steep drops, but it is when they fall further behind that things get really harsh, according to Craig Watts, a spokesman for Fair Isaac.

 “The lending industry tends to regard an account differently when it has become 90 or more days late,” he said, “The likelihood that consumers will resume paying their overdue obligations drops off significantly after the delinquencies have reached 90 days.”

One reason credit companies were so closed-mouthed is that they often can’t definitively state how much each delinquencies will affect scores because there are too many variables.

Some borrowers will fall much more steeply than others for the same payment problem, according to Maxine Sweet, vice president for public education at Experian, one of the nation’s main credit bureaus.

“If you picture someone who has just one mortgage and one other credit account versus a mature credit user like me with 15 accounts, if they miss one payment that would impact their scores a lot more,” she said. “For me, one missed payment would just be a blip.”

The point loss also depends on the borrower’s starting point: People with very high credit scores have more to lose than low-score borrowers; the impact of a single blemish on an 800 score is more than on a 500.

Of course, it just gets worse when you face foreclosure.

Mortgage borrowers can lose their homes three basic ways: a foreclosure; a short sale, where the home is sold for less than than is owed and the bank (generally) forgives the difference; or a deed-in-lieu, in which the borrower gives back the property and the bank again forgives any unpaid balance.

Sweet said credit bureaus generally slash scores equally for those three resolutions to someone losing their home. The important factor, she said, is that “it’s reported that you paid less on a settled account.”

Some borrowers may think that because they never missed a payment, they can “walk away” from their homes with relatively little impact on scores. Not true. “When a deed-in-lieu or short sale is reported as a partial payment, it’s treated as a serious delinquency,” Watts said, “just like a foreclosure.”  Read the rest of this entry »

It Sold! No it didn’t!

As I was walking through the neighborhood, I saw a client who had written a contract a few days ago.  He had hoped to purchase a particular REO property, as he wanted to help some friends by renting the house to them.  This was a multiple offer situation, and he wrote his cash offer above the listed price. 

Photo courtesy of Stockvault.net

I called to him and said, “I haven’t heard anything yet.”  He called back to me, “It sold!”  When I caught up to him, I asked what he meant, as it didn’t seem possible that it could have sold already.  “Oh yes,” he said, “I read it in the newspaper.”  I must have looked incredulous, as he asked me if I wanted to see the paper.  “Yes,” I said, “please show it to me.”  When he showed me the clipping, I saw that some recent sales were listed, and among them was the address of the home on which he had written the offer.  “It sold for more than I bid,” he said, looking at me with disappointment. 

Upon closer examination of the details in the newspaper I noticed that the sale date was January 10, 2010.  We had dated his offer February 9th, and so far had not heard back from the listing agent.  The list of sold homes was prefaced with the explanation that these sales were purchased through foreclosure by lenders.  When I pointed out to him that the sale reported in the paper took place in January, he looked puzzled.  You may be too.  This is what happened:

The prior owners lost their home to foreclosure.  The home was purchased in January by the loss mitigation department of the lender holding the note.  The lender paid $237,000 which was reported in the newspaper.  The lender then engaged a Realtor to sell the home, and as this home needs work, it was listed at $180,000, less than the lender paid for it.  Because this San Jose home was listed so low, multiple bids came in on the property, many of them above the listed price. 

We must wait to see what the sale price will be on this house.  That is not disclosed until escrow closes and the property has been recorded in the new owner’s name.  Will it be what the lender paid?  Or less?  Or more?  It could be any of these, but in this case, in this area, it’s likely to sell for a higher price.  In this troubled time in our nation, lenders would be happy to recoup what they paid, but they may not.  Lending institutions are in the business of lending money, not owning real estate, and their interest is in getting the REO property off their books.

Preparing to Buy: Getting Finances in Order

You’ve been pre-approved, and you’ve been shopping with your Realtor. She’s encouraging you to write an offer on that cute little house you saw today. “When do I need to have my funds available?” you wonder. Some funds need to be available right away. An earnest money deposit, or “consideration,” is part of writing a real estate purchase contract, and you are expected to put a check with the offer you write. Your agent will collect a check from you, usually up to 3% of the purchase price. If your offer is not accepted, she will return your check to you. Once your offer is accepted, she generally has three days to deposit that check into an escrow account for you. This money becomes part of your down payment.

In addition to the remainder of your down payment, you will need cash for closing costs. These costs may include escrow charges, title insurance, lenders’ fees, the transfer taxes that are collected when a property changes owners, prorated property taxes and various small fees. Both buyers and sellers have closing costs. Who pays for what depends upon the terms of the contract and the county in which the property is located. The money for closing costs is brought in with your down payment, shortly before your escrow closes and you become the new owner of the home.    

“Okay, so I need money when I write my contract, and I need my down payment and closing costs just before my escrow closes. Do I need to have any other money available during the escrow process?” I’m glad you asked! Yes, probably so. While the deposit, down payment, and closing costs are most of the money you will need to bring in to purchase your new home, you may have to pay “up front” for the appraisal the lender requires. Of course if you’re paying cash for your home, an appraisal would be optional. Also, you may wish to have inspections made on the property you are buying. Most inspectors give us the choice of paying for an inspection at the time of inspection or having the cost of the inspection billed to escrow. In the latter case, the fee is higher. Questions? I’m here to help you.

“Turn Your Kitchen Scraps Into Garden Treasure”

That was the headline on the front of the catalog I received today from a garden supply company.  And they’re right!  If you have a backyard, or even a small area where you can plant your favorite veggies, don’t shove those peelings, stems, or whatever raw, organic matter you don’t use, into the garbage disposer.  Save it for your garden. CSC_0450 I keep a container on my countertop near the sink, for vegetable peels and trimmings, as well as any produce that may have been forgotten about in the fridge’s veggie crisper. Each day or two I take those veggie scraps outside, and simply toss them into a portion of a raised bed (or garden area) that currently isn’t planted.  

Use a shovel once in a while to quickly turn those scraps under, or cover them with a little soil.  When you water the rest of your garden area, give those garden scraps some water too, and you’ll help those veggie clippings break down faster, making terrific compost for the following planting season.  You may begin to see beautiful healthy worms when you turn a shovelful of soil, and the worms also will assist in breaking down your kitchen scraps into nutrient-loaded compost.  Happy gardening!

Property Inspections: How Important Are They…And Who Pays for Them?

As home prices inch their way back, I’m seeing more “regular” listings in our inventory, not just foreclosed homes and short sales.  That’s encouraging news for both sellers and buyers.  Sellers who have been holding out are putting their homes on the market now, and these regular sales are quite appealing to many buyers.  “Why is that, Lexie?” you may ask.  Much of our inventory of homes for sale in the past year has been distressed properties.  When a home is owned by a lender, they are not willing to provide inspection reports—and they want As-Is sales.  That means they are not willing to make any repairs to the home.  What you see is what you get. 

 In contrast, traditionally sold homes generally are, overall, in better condition.  Because sellers don’t want surprises that could affect their bottom line, many are willing to pay up-front for inspection reports.  Having inspections done prior to putting a home on the market makes good sense.  Buyers can go over the provided reports with their agent before they write a contract.  Buyers don’t want surprises either.  They benefit by having a better idea of what they’re bidding on and, once they have the contract, they won’t need to have the provided inspections repeated.  Having inspection reports available benefits the seller also because it not only gives them an opportunity to correct some of the items mentioned on the reports, but it also decreases the chance of the buyer backing out after winning the contract. 

 Sometimes a seller is not willing to pay to have inspection reports done.  In this case once the buyer has won the contract, he has a certain number of days to have inspections done and to review the resulting reports.  In this case of course the buyer pays for them.  “What inspections should I have done on the house I’m buying?”  That depends on the house.  Does it have a fireplace?  Does it have a pool?  Did the seller provide any inspection reports?  Each house is different.  Your agent can assist you in determining which inspections should be done, in ordering those inspections, and being at the house when inspections take place.  Are termites brunching on beams or enjoying sub-floor for supper?  Does the home have clogged arteries with corroded pipes?  Regardless of who pays for the inspections, both parties will have a clearer idea of the condition of the home being sold, resulting in greater peace of mind for all parties involved in the transaction.

Are You Ready To Buy a House?

So, you want to buy a house? Of course! It’s the American dream. You can paint the walls the colors you like. You can plant what you like in your backyard. Maybe you’d like a pool in your backyard. You can remodel your house to show off your style, to make it your own, to make it a comfortable and comforting place for your lifestyle. You can make it a home.

Okay, what’s the first step? Well, let’s find out how much house you can buy. To do that you need to talk to a lender and get pre-qualified. You can do that over the phone. But is that good enough to start shopping? Not any more. These days, now that lenders have suffering in their history, they aren’t as lenient or as open minded as they used to be. One Realtor said recently, speaking of that bygone era, “all you needed was to be able to fog a mirror to get a loan.” Those days may be gone, but the good news is that lenders are still in business to make money and they do that by selling loans.

Ask a lender to get you pre-approved for a loan. This entails enabling the lender to request and look at your credit report, and learn your FICO scores. You will also fill out a loan application form. He or she will ask you to bring in a couple recent pay stubs, bank statements, and tax returns. That lender now has a pretty good idea about your income, your debt, and your payment habits. Ask the lender to give you a pre-approval letter. Now you’re ready to call a Realtor and start shopping for your new home!

I’m Pre-Approved! Where’s My House?

Mr. and Mrs. First-Time Homebuyer have been out looking at homes, and they found one they like in their price range.  Okay, let’s write a contract to purchase that home.  How exciting!  “Honey, where will we put the big screen TV?”  Several days go by, and still no word from their Realtor.  “She said she would call when she had news for us.  How can there be no news?” 

“That house was pretty trashed; who would want it besides us?  Who has the vision we have for making improvements to that house?”  Well, apparently a lot of people are thinking that same way.  Much of our current inventory, especially at entry-level price range, is distressed properties.  Many have gone through the foreclosure process, and the seller, most likely a lender, realizes that many of these homes have had walls put up or removed, garages may have been converted into living quarters.  Sometimes light fixtures, stoves, faucets, even copper piping may have been removed from the property. 

 That’s part of the reason these homes are now priced so attractively.  They may be listed at several hundred thousand dollars less than they sold for three or four years ago.  We live in an area where there is great value in the land, therefore it’s not unusual to have even dozens of offers on a bargain property when it comes onto the market.  (This is why it may take a while before your agent receives news on your offer back from the seller’s agent.)  Many of these homes are being snatched up by investors, paying cash.  My advice to you is, keep writing offers.  You will win a contract!  And when you do you truly will be a winner.  Economics is cyclical, prices most certainly will come back–and there is value in that land!