A Piece of the Pie

FHA changes could make it more difficult to purchase a home

I'm working on a tight schedule today but I can't put off getting this info out there.  Unless you have stellar credit and at least a 10% down payment plus closing costs, FHA is your only option. Currently, FHA allows borrowers to put down only 3.5% and they can request up to a 6% credit from the seller for their closing costs (unless you're in the East Bay where you'll get flat out rejected if you put that in your offer).  FHA also has a much more forgiving minimum credit score than conventional loans (I thought it was mid-600s but the CAR website says 500). 

The HUD secretary is proposing changes to lessen FHA's exposure to risk and to try to help ward off the need for a bailout.  According to the CAR website, here are the proposed changes:

· Raising the minimum credit scores requirements: Currently borrowers with FICO scores as low as 500 may qualify for an FHA-insured loan. The new minimum credit score has yet to be determined.

· Increasing down payment requirements: FHA borrowers currently can put down as little as 3.5 percent. A proposed change would raise that amount to a minimum of 5 percent.

· Limiting the amount sellers can provide as concessions: The agency is considering lowering the maximum permissible level to 3 percent from its current 6 percent limit.

· Raising up-front insurance premiums: Agency staff is reviewing whether to increase the monthly insurance premiums charged to borrowers, which come on top of insurance paid up front. The current up-front premium is set at 1.75 percent of the value of the loan. The FHA may decide to increase that premium. The amount has yet to be determined.

According to an LA Times article, it's not a matter of "if" but "when" and "how." The Obama Administration is reportedly against an across the board increase in down payment in favor of an increase only for riskier buyers.   

This means that many people who qualify for an FHA loan now, may not qualify under the new standards.  Others may not have enough savings for the increased down payment.

Inventory is very low but competition seems a bit less intense as we approach the holidays. With prices only just starting to creep up, FHA changes on the horizon and interest rates at historic lows; now may just be the time for lower to middle income folks to get out there and buy.

Fannie Mae giving more home ownership opportunities to first time buyers

Here's some good news for first time buyers, especially FHA buyers, who have had trouble competing with cash investors - Fannie Mae just announced that it will only consider offers from owner occupants during the first 15 days that a home it owns is on the market.  Only after a home has been on the market for 15 days will it consider offers from investors.  The goal of this initiative is to promote more stable communities by allowing buyers who will live in the homes and are more likely to be invested in their community, the first opportunity to purchase their REOs. 

This is a huge step in the right direction. On so many levels, I have been disappointed by the overwhelming preference of REO sellers for cash buyers. As I've mentioned before, the process of purchasing a home is very difficult to nearly impossible for most of my clients since the majority of them are first time buyers who are trying to purchase a home with an FHA loan.  I'm also very concerned that entire communities are shifting from  majority owner-occupied to absentee, investor-owned.  I worry about the implications of this trend on the stability of what had been vibrant, lower to middle income, working class, family oriented communities. 

Of course, I work with cash buyers too and they will continue to find opportunities in this market. The most sustainable role that they can play in the current market for single family homes is to purchase homes that are not financeable and either rehabilitating it so that it can be available for a first time buyer or making necessary repairs and then providing safe, affordable rental housing.

Indicators suggest inventory boom and price drops in store for 2010 and 2011

I'm no economist so I don't attempt to predict the future. However, current and future home buyers need to be aware of the buzz in the industry about the possibility of hundreds of thousands of foreclosures occurring in 2010 and 2011. 

For the past several years, industry experts have warned that a huge number of option arm loans are set to reset in 2010 and 2011.  One expert estimates that 75% of all ARMs will reset.  When those loans reset, (the average increase in payment is 63%) the borrower will be responsible for the full payment on the loan, not just an optional, lower payment.  Many bought homes with these loans knowing that they wouldn't be able to afford that payment but they believed that home prices would continue to skyrocket.  That obviously didn't happen. Making matters worse, so many people have lost their jobs or had their salaries cut that even more people will not be able to afford their payments. 

What this means for the housing market is that there are likely to be a very large number of mortgage defaults on the horizon and, absent mass loan modification or drastic government action, many foreclosures will follow.  To give you an idea of what this might mean for the Bay Area, an SF Chronicle article estimates that there are about 54,000 option arms in the Bay Area valued at $30 billion. 

It goes without saying that these resets will be devastating for homeowners.  More people will lose their homes and those who don't will see their property values plummet even more. 

For buyers, the future is unclear. On the one hand, increases in inventory will mean that there are more homes to choose from, less competition and possibly lower prices. However, as banks deal with the losses associated with having to sell these assets for much less than they are worth, they are likely tighten their lending standards.  (I read this in an Inman article that I now can't find.)

Here's another article describing the ARM situation - http://www.dailymarkets.com/economy/2009/11/06/the-us-housing-bust-scary-movie-2011/

Feds extend the first time buyer tax credit

If you haven't already heard, the President just signed into law an extension to the $8,000 tax credit.  Now first time buyers who wish to take advantage of the credit now have until April 30th to get into contract on a home.  This is great news for people who have had a tough time competing with investors or other buyers, since they will now be able to take advantage of the holiday season, when there are fewer buyers looking.

FHA buyers looking in the lower price ranges will still probably have a very difficult time competing with cash buyers, investors and other buyers with larger down payments. Hopefully, some of those buyers will take some time off until Spring.

I have several buyers who would love to take advantage of the credit so we'll be working at it through the holidays.

Check out this article for more info on the tax credit extension - http://www.car.org/newsstand/newsreleases/taxcreditextended/

How to avoid sticker shock when buying a house

I'm often shocked by the amount of clients that come to me after meeting with a lender who are unaware of exactly how much money they will need to bring to the table at close of escrow when purchasing a home.  Although I would much prefer for lenders to go over this information with each person they are preapproving, I do it because I need to know if the client will be able cover the closing costs with their savings or a gift or if I need to ask for credits back from the seller. I don't know why more lenders don't go over this information with their clients but I am aware that there are new federal laws that restrict lenders' ability to give good faith estimates before a property has been identified. 

At closing, on top of the balance of your down payment, you will be generally responsible for a myriad of loan fees (usually 1% or 2% of the purchase price and about $1000 for misc fees plus an additional $4000 for FHA buyers), a portion of the city transfer transfer tax (where applicable), title and escrow fees (except on REOs), prorated taxes/HOA fees, one year's insurance premium and other miscellaneous fees such as notary fees and document processing fees.  This can amount to thousands more than a buyer might expect.  It's not a good idea to make offers without an good understanding of these costs because a buyer might realize when it's too late to save their deposit or after paying for inspections and appraisals, that they don't have all of the funds that they need to be able to purchase the home.

The best way to be sure that you have enough funds for your down payment and closing costs and whether you will need to ask for credits is to talk to a lender and try to get a good faith estimate in writing of what your expected closing costs will be at the price point you expect to be at.  If you can't do that, you should visit Closing.com and plug in the city, price of the home, your down payment amount, the type of loan you expect to have (so they put in the fee for FHA, etc) and the city transfer tax so that you can get a good idea of what you might expect to pay at closing. 

If you don't have at least the amount that is quoted, you'll either need to have your Realtor ask for credits from the seller in the purchase contract or you'll need to take a break to save or gather the funds that you'll need to close.

Cash is king, what are you gonna do about it?

Anyone poking around the less expensive edges of the Bay's housing market will quickly learn that cash, and those who have it, are running things. Oh sure, the City of Oakland, the Feds and even HGTV like to tout the many programs available to help first time buyers take advantage of lower home prices. The reality is that it's difficult or impossible for buyers to take advantage of these programs in the Bay Area where they are competing with cash buyers.  And the East Bay seems to have a limitless supply of cash buyers.  

As if it wasn't already hard for entry-level buyers without a lot of cash, it might become even harder to qualify for FHA loans in the future.  Lenders keep telling me of new tweaks to qualification requirements (i.e. buyers must have three lines of credit that have been open for more than a year and not deliquent within the last year), and I keep hearing rumors that FHA might either increase the down payment requirement or increase the minimum required credit score. 

One lesson we should all take from this difficult economic time and from seeing the power of cash is that each of us should prioritize getting and keeping more cash.  We are learning the hard way that we should have saved more and used less credit.  At a time when many people are losing their jobs and many more are experiencing pay cuts; cash reserves are crucial for survival.  To make matters worse, credit is less and less available so without a cash cushion, many people are finding it difficult or impossible to cover their basic needs.  Beyond that, the difficulty of getting credit and the uncertainty in the housing market around lending means that cash buyers are almost always the winners in competition with buyers who must use financing.  In other words, whether it's to be assured of the ability to cover the basics or to make larger, possibly discretionary, purchases, it is crucial to have cash savings (any account, equity line, etc that can be liquified in a matter of days or weeks and retirement accounts).

I say this not to discourage anyone from buying a home right now. If you can, especially if you can secure a morgage that is lower than your rent payments. You absolutely should.  But, as I explained above, we all need to prioritize saving.

Not only am I giving you unsolicited advice (you can thank me later), I also need to work on the goal of amassing greater savings, a larger retirement fund and, generally, more cash.  As much as I love Suze Orman, I too, have strayed from her sage advice.  My retirement and savings accounts do not reflect the income that I have made over the years.  I have spent thousands of dollars that I can't account for and on nights that had been forgotten by the next morning.  Furthermore, my industry has been hard hit by the recession and my wages are not what they should be given the amount of work it takes to complete a transaction.

There are three ways that I can think of to increase your level of cash:  make more money, save more money and protect your savings.  I'm no specialist in these areas, so I'm not going to go into detail on how to do these things. I only mention them so that we can all examine ways that we can become more financially secure given the lessons we are learning now. 

Here are some steps I'm taking to increase my cash:

-I'm paying for yoga classes only once or twice a week (down from 4 or 5 times) and I have an inexpensive gym membership that includes yoga classes.

-I rarely eat in restaurants, and never alone.

-Roommates!

-I'm greener - working from home uses less gas, I reuse paper and plastic bags so I spend less.

-I hide money I make in accounts that are difficult to access so that I cannot spend more than what I have allotted for myself in my checking account.

I'd love to hear about the things that you are doing to increase your cash and savings.

Is there any place for a buyer with a loan in a market where cash rules?

While I'm waiting for a preapproval letter to come through I wanted to just let you know what I've been finding lately in the East Bay real estate market (under $250K)...

As the market has shifted from a buyer's to seller's (temporarily?) market and sellers have begun to overwhelmingly prefer cash they have been imposing terms on financed offers that would scare off all but the ignorant, crazy or wealthy buyers. Lately some sellers have stated that they will not accept offers with appraisal contingencies (without this, buyers with loans are risking their deposit). Other sellers have asked that buyers agree that if the property doesn't appraise, then the buyer will come up with the difference in the price (who knows how much of a difference that will be and sometimes this is determined after the appraisal contingency has expired).  Many buyers cannot enter into contracts with these terms so they are effectively shut out. Even without saying that they are only looking at cash offers, that is all that is left after the seller counters with these terms.

On top of all of the things that are hurting buyers with financing right now, I have been told that new federal appraisal rules are hitting lenders that will slow up closings (bank owners like fast closings and threaten to back out of deals and keep buyers' deposits if they go over the closing deadline).  I have also read on Inman that FHA plans to implement stricter guidelines (i.e. requiring higher credit scores) for evaluating borrowers.

There isn't that much that buyers can do. They should absolutely work with a sharp lender that will only have a delay rather than not being able to complete the deal at all if new rules come up.  They should look for homes that have less competition (I will not review my strategies completely) but some listings aren't as widely listed.  Look for homes that are being sold by a human (not a bank, ie short sales) who cares more about who buys the home than if the escrow closes quickly. 

It would also be nice if the government would make their programs actually available for use by first time buyers by requiring that a certain percentage of homes owned by any particular bank be sold to a first time buyer.  The way things stand, these programs are available in theory but virtually no seller in the East Bay will consider an offer from a buyer using them.

New condo listing - perfect for first time buyers with a 20% downpayment

For those of you looking for a condo in the East Bay, I have a wonderful new listing near the Marina in Richmond.  It is a short sale, but short sales have rapidly become a very attractive option (and even more attractive than REOs under certain circumstances). 

The condo is in the newer Marina Bay development. Marina Bay has a great deal of wonderful amenities - pool, spa, tennis courts, gym, and security gate - all for relatively low HOA fees.  Although it is close to the freeway and many amenities, the development is woodsy and near nature walks.

The condo is a spacious 915 square foot one bedroom with loft.  There are cathedral ceilings, a fireplace and a deck surrounded by trees.  This home is serene and immaculate.

This condo is priced well below the market at $95,000.  The seller will submit the highest and best offers to her lender.  One thing to note about this condo is that there is a lower owner occupancy rate and a relatively high developer ownership rate which means most lenders will not finance it.  However, some lenders have been able to finance condos in that development when the buyer has the 20% down payment.  Daniel Watt of Bank of America represented a buyer on a condo in the same development that closed within the last few months.  Buyers who are interested in purchasing this condo with financing should call him at 925-287-6705.

The condo will be open this (tomorrow) and next Sunday from 2-4PM.

Here is a link to the listing for more information - http://MAXEBRDI.fnismls.com/publink/default.aspx?GUID=5dc04ef4-7341-4f9a-9cbb-d965b03ca7b7&Report=Yes

FHA and and the under $200K market

After I posted my last article on how difficult it has been for FHA buyers to compete in this market I began to think that my numbers weren't telling to whole story.  My observation had been that cash buyers focus on the lower end of the market, which is largely the same part of the market that many of my first time buyer (usually FHA) clients are in.  So I ran the numbers for homes under $200,000 and found that 92% (186 of 202) of the cash buyers brought homes that were under $200,000. 

Even fewer FHA buyers were able to purchase these homes.  Only 15 (5%) of the 279 homes under $200K that sold this summer went to FHA buyers.  A whopping two thirds went to cash buyers. 

Of course, some of the homes that are less expensive are so because they need work and FHA requires that the property be in a certain condition.  However, that doesn't detract from the fact that FHA buyers were almost completely shut out of the most affordable segments of the Oakland real estate market.

The fact that 279 of the 532 homes that sold in Oakland this summer were under $200,000 showed that there was great potential for first time buyers to buy affordable homes in Oakland. It's a shame that more of this benefit hasn't been realized by people who plan to live in these homes and neighborhoods.

Statistics show that Oakland's FHA buyers are having big problems competing

After a summer of writing FHA offers with no success and talking to other Realtors who are having the same problems with their FHA clients, I decided to run some statistics to find out how FHA buyers fared generally in Oakland.  The statistics confirmed what we all suspected, sellers, especially in the lower price ranges, are overwhelmingly preferring cash and conventional (loan) buyers even though there are many buyers with FHA in those price ranges. I have about 15 active clients right now and almost all of them are FHA buyers. 

Of the 532 single family homes and condos that were sold in Oakland in June, July and August, only 38 or 7% were sold to FHA buyers.  On the other hand, 202 or 38% were sold to cash buyers.  For condos, the stats were similar, 7 or the 81 condos sold (8%) went to FHA buyers.  Also, the median price of homes sold to FHA buyers was higher.  The median sold price of homes that went to FHA buyers was $263,000 while it was only $212,000 for other kinds of sales.  The median price for cash sales was $100,000.

FHA is generally the only option for buyers who do not have the 10% down payment plus closing costs now required for conventional loans. It has also become the only option for people who do not meet the tighter credit and lower debt-to-income ratio now being required for conventional loans.  It is a great option for first time home buyers, requires only 3.5% of the purchase price for a down payment and has very competitive interest rates.

What these numbers show is that low to medium income first time buyers have not, to the same extent as investors and higher income buyers.  FHA also has stricter requirements that conventional loans for the condition of the property so some of the sales would not be able to go to FHA buyers.  However, I often look back at the MLS for houses that I put offers on for my clients and see that many went to cash or conventional buyers.

I believe that many sellers, especially the banks who are repeat players in this market, have been burned by FHA buyers who were not able to close either due to the ineptitude of their loan officer, the unreasonable requirements of an underwriting department or the inexperience of real estate agents who allowed an FHA offer on a property that would not qualify (although some issues are beyond the control of any party).  Bank owners also prefer quick closings and many (although not all) lenders require 45 days and often need extensions due to back ups in underwriting to close the deal. 

This seller preference is furthering the negative affects of the housing crisis.  One positive possible outcome of the devastation of so many families losing their homes is that the low prices could enable many individuals and families who could not otherwise afford to safely purchase a home to achieve their dream of owning a home with a manageable mortgage payment.  The fact that so many neighborhoods are losing owner occupants to investors and renters is a shame since so many buyers who would live in those houses are trying to buy them.

Hopefully as banks release more of their foreclosed properties and the competition lessens as we approach the holidays, sellers will again start looking at FHA buyers. It's a shame that so many will miss out on the $8000 tax credit.