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Archive for March, 2010

State of CA Announces New $10k Home Buyer Credit! Saturday, March 27th, 2010

 

I wanted to inform you of some breaking news. The State of CA is signing into law a new $10k home buyer tax credit starting May 1st. There is a possibility that new buyers now have an opportunity to make $18k just by purchasing a home over the next few months, as this will combine the current federal $8k home buyer credit along with this new State of CA $10k credit. If anyone has been on the fence about buying a home then this just might be the reason to move forward now

Governor Schwarzenegger proposed the housing stimulus in his January State of the State Address to help revive the California economy. The legislation allocates $200 million for more state tax credits – twice what was offered last year to 10,659 buyers of new, unoccupied homes. The state’s newest housing stimulus will grant $100 million in tax credits to first-time buyers of exisitng homes and $100 million to anyone who buys a new, unoccupied home. Here is a newspaper article on the tax credit.
 
But, it might not get off to a peaceful start on May 1: Get ready for a stampede early on as some buyers rush to overlap with the federal tax credit that’s also dangling $8,000 To buyers. To take advantage of both you would need to be in contract by April 30th so you can claim the $8k federal credit and then close between May 1st and June 30th so you can claim the CA credit also.
 
I am not sure if lawmakers realized they set up a double dipping scenario, as I am sure they they created the $10k CA credit to start immediately following the expiration of the $8k tax credit. We will see if they allow both, I think they will.

For the federal incentive, contracts must be inked by April 30, while closings have to happen by June 30. The California credit covers closings on existing or new homes on or after May 1, leaving a short window for double dipping. “We already anticipated increased contract activity in March and April due to the federal tax credit with scheduled closings in May and June,” writes Credit Suisse builder analyst Dan Oppenheim. “These buyers will now be eligible for both the federal and state credit and will likely consume a significant piece of the state credit given the first-come, first-serve allocation.”

Buyers must be at least 18 years old and be unrelated to the seller. They must live in the home they buy. First-time buyers are defined as those who have not owned a home in the past three years.
 
Personally I think the State must be a little crazy for allocating these funds considering that the budget deficit is $20 billion. But I think this is great news for new buyers here in CA, especially as the federal tax credits were expiring soon.
 
But time is off the essence, as the funds allocated for the 2009 $10k CA tax credit were used up in only 4 months by buyers. Experts are predicting that the funds for this new 2010 tax credit will be used within 4 months again too. 
 
Here are the new tax credit rules:
 
1. Eligible California buyers get a credit equal to 5% of the purchase price or $10,000, whichever is less. (As long as the house sells for $200,000+ the credit is $10k).
 
2. The credit is divided in thirds. You can take 1/3 of the credit for each of the next 3 tax years (so a max of $3,333/year).

3. You must purchase (close escrow) between May 1-Dec. 31, but as long as you’re in contract by the end of the year, you can close escrow all the way up to July 31, 2011.

4. The credits will be allocated on a first-come/first-served basis. Once all the funds have been committed, other eligible buyers will go on a waiting list.

5. If a first-time buyer purchases a new home, the credit will come out of the new-home-buyer pool.

6. Eligible buyers must submit a copy of their closing statement and a certification that they’re either a first-time or new-home buyer within 2 weeks of the close of escrow. The credit isn’t awarded until the state Franchise Tax Board confirms that the buyer is eligible and funds are still available.

Unlike the Federal Tax Credit, which was available for every American who qualified, the state’s program is only available as long as funds are available.

So if last year’s new-home buyer credit is any indication, this could be another case of the early bird getting the worm.
 
Mortgage rates spiked up this week!  
FYI in case you did not hear, mortgage rates fell of a cliff on Wednesday as they went from the lowest levels of 2010 to the highest levels of 2010 in one day. Mortgage bonds lost almost -100bps (see below). This translates to almost an extra 1% increase in fees for the same rate a buyer could have got on Tuesday..for example today it will cost a buyer an extra $4k on a $400k loan to get the same rate as Tuesday.  
 
 
I can’t emphasize enough to clients how important it is that they are getting the correct information about interest rates, so they can make an informed decision when to lock in their rate. If you think about the cost of Wednesday’s rate increase (increase in costs of $4k on a $400k loan), it wiped out half the $8k tax credit for some buyers in one day if they did not lock in! That is why it is so important you are working with a mortgage professional who understands the interest rate markets and will be able to advise you when is the right time to lock.
 
It must be noted that Volatile trading days will be the new norm in the interest rate markets from here on, especially since the Feds are pulling the plug on their life support for the mortgage rate markets come March 31st. Understanding interest rates.  
 
If you have any questions in regards to the tax credits or you need help getting anyone pre-approved for financing, please feel free to contact me directly at 858-200-9602. I look forward to chatting soon. 
 
 
 
 

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Underwriters Reveal the Top 5 Reasons Why Loans are Being Denied! Wednesday, March 24th, 2010
 

If it seems like banks are being tough with loan approvals these days then you are correct. From talking to several underwriters over the past few weeks about the state of our lending environment, I wanted to share with you the top 5 reasons why loans are getting turned down or not closing out escrow. Almost everyone I talked to shared the same information with me and had the same concerns. I will definitely be using this inside information as a guide on all future loans that I work on.   

Here are the top 5 reasons why loans are getting turned down, they are in no particular order.  

1. Some lenders don’t allow flipped properties

“Flipped properties” are homes that were bought in the past 90 days and are to be sold for a reasonable profit, most of the time these are bought by investors. Every underwriter admitted that they have to turn down this type of loan transaction everyday. Each lender has a different set of rules for flipped properties, but unfortunately many of these loans get submitted to a bank that does not accept this type of loan. For example, even though  the FHA suspended their “90 day flip rule” , not all FHA lenders have followed suit and many still carry their own rules.  

  

 
It is important to know which bank allows flipped properties within 90 days if a buyer is purchasing this type of property. Also it is important to note that if the property is being sold for more than a 20% profit, the buyer may have to pay for a second appraisal with some lenders, this may cause a further delay in the transaction.
 
2. Properties are being overpriced and appraisals coming in much lower
 
Properties are going into contract overpriced and over valued and because of this appraisals are coming in under value. Some underwriters are seeing appraisals come in as much as 5% or more under contract price. Then because there is such a disparity between the contract price and the appraisal, both the buyer and seller cannot agree on a price or the buyer cannot afford to come in with any more funds and the loan falls apart, as the lender will base their loan to value financing approval for the buyer off the appraised value and not the contract price.
 
3. Not following condominium guidelines
 
Condo guidelines are changing all the time. For example, is there Litigation in the complex and if so what type of litigation? if it is structural litigation it will probably be turned down immediately.
 
 

Are there more than 15% of the tenants delinquent with their HOA dues? If so then Fannie, Freddie and FHA for example will not lend in this complex. Is the complex FHA approved? Is the complex Fannie Mae approved? All underwriters recommend contacting the HOA of initially and asking questions to try and dig up as much info as possible on the subject complex.

As condo’s are the type of property that most first time buyers can only afford, it is very important to do some homework upfront, as addressing all of these questions will ensure your loan will get approved.

4. The loan file does not qualify for the loan program
 In many circumstances the loan file does not get submitted for the right loan program or to the correct lender. A good example is let’s say a husband previously bought a property in his name only before they were married, but now he has a short sale on his credit. When the wife with the clean credit tries to buy a home in her name only and tries and qualify through FHA financing, they will not qualify because the FHA must take into consideration both of their credit reports.
 
5. No one explained the buyer’s motivation so the loan was denied
 
This is a subject that is especially annoying to an underwriter, whereby loan files are being submitted without any explanation. It is important to note that underwriters are not giving the benefit of the doubt so they will turn these files down immediately. For example a buyer lives in a 2800 sq feet home on an acre that is worth $550k, but goes into contract on an 1800 sq feet condo worth $325k. An underwriter will turn this down immediately becuase she assumes that this is probably an investment property purchase, (because this is considered buying down and why would they move out of their nicer bigger home).
 
The correct thing to do here is to provide a letter of explanation written by the buyers advising that they are near retirement age and the upkeep of this bigger house is too much for them. As homes are much more affordable now and they are are preparing for retirement age in 3 years, they want to buy a smaller house that will not have any stairs or a large yard to maintain. This now makes sense to an underwriter and will get approved in most cases.
 
Make sure all homework is done upfront
I hope these 5 reasons provide an insight into what the underwriters are looking for on transactions. Remember sometimes it is taking almost a week or two before an underwriter can decision a loan, so if the homework is not done properly on a loan upfront, you can find yourself in the middle of escrow with a loan application that just got denied. This is why it is so important that you work with a mortgage professional that understands the market and will take the time to answer all these difficult questions that will arise.  
 
If you have any questions regarding any of the information above, please feel free to contact me and I would be happy to help. I look forward to chatting soon.
 
 
 
 

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The Cost of Waiting to Buy a Home? Compare a Loan at 4.875% vs 5.875%! Friday, March 12th, 2010

 

Should you buy now or wait until the summertime or after to buy? That is a decision that many new buyers in the market are facing. As interest rates are going to rise over the next few months due to the government cutting off funds on their rate reduction program on March 31st, I wanted to show you the overall savings on a loan at 4.875% versus 5.875%, so you can factor in what the cost of waiting to buy might be. 

 

Let’s compare buying the same property at 5.875% vs 4.875% on a 30 year fixed loan!

Let’s say you are able to buy a property at either today’s record low interest rates, or you can wait to buy the same property later this year at a slightly lower price as values may come down a little, but rates will be higher. 

 

You can get a $327k loan with today’s qualifying interest rate of 4.875%, but later this year the same loan will probably qualify at a rate of 5.875%, (which is where rates will go to sometime later this year). We can even lower the loan amount $2k on the 5.875% loan to $325k to factor in a slight decrease in purchase price of the home later this year. The mortgage payment on the 5.875% loan is $1,922 versus $1731 for the 4.875% loan. This is a difference in payment of $192 a month. 

 

                                      Compare   5.875% vs 4.875%

   
 
 
 

Now let’s do a total cost analysis on both of these loans over 30 years. The 4.875% loan will save you in total $135,217 in mortgage payments and interest versus the 5.875% loan. 

                                                Total Cost Analysis      
  
 

Now let’s put these extra monthly savings of $192 back into the loan to payoff the home faster, by applying the $192 into the loan each month it will reduce the 30 year term to 24 years.

 

Use Monthly Savings to Payoff the Loan faster
      
  
As you can see above, by taking advantage of today’s record low rates, you can save over $135k in mortgage payments and interest on a home purchase around $325k, versus waiting for values to perhaps drop a little more and being stuck with a higher interest rate later this year.
 
Even if Values drop 5%, the lower rate loan is still cheaper!
Now many people may argue that values are due to drop a little more in value this year, and this is a very fair argument considering the first time buyer $8k tax credit is ending next month and the Feds rate reduction program is ending at the end of this month. But even if the value drops another 5% on this property above later this year sometime, this would only amount to $16,250 in additional savings for the buyer. These savings disappear once you factor in a higher rate at 5.875%, as this mortgage payment is still higher than the loan at 4.875%. 
 

The value would have to drop around $40k to a loan amount of $285k for the buyer at 5.875% to have the same payment on the $325k loan at 4.875%. I think it is fair to say that values will not drop that far.  

 

The “Total Cost Analysis” report above is a great tool to show you how much money you can save on the overall cost of a home purchase. As there are various other factors and issues apart from price reduction which effect the overall cost of a loan, evaluating the total cost is the key to selecting the lowest cost mortgage for a buyers individual needs.

 

Saving money is not all about getting a lower price!

 
 
A reduction in price is not the only way to get a great deal on a purchase. Too many buyers have become conditioned to being fixated on further value depreciation with all the data and reports they see on TV and read in newspapers etc. Do not let some report advising that home values may drop down another 2-3% make your decision to buy or wait, what matters is does this affect the overall cost of your purchase and will it really save you more money in the long term? 
 
I present this “Total Cost Analysis” above to all my buyers, so they get to see what will be the cost of waiting to buy.  If buyers understand that rates are going up, they will be able to make a better decision on the overall cost of a loan by factoring in a higher interest rate versus a lower price. As the numbers above show, a higher interest rate of 1% alone can cost you over $135k in mortgage payments and interest on a $325k home. 
 
If you would like to look at some figures or get pre approved for a home loan, please feel free to contact me directly at 858-200-9602
 
Best regards,
 
Michael
 
 

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