First, owning a home is an investment. No, it's not a sure-fire way to get rich-quick. It is a long-term investment. Over the course of many years, even through times of economic upheaval, you can build wealth over time.
An average appreciation rate during normal times is around 6.5 percent a year. That means if you buy a home for $100,000, in just ten years you will have a home that could feasibly sell for around $174,000.
During that time you build equity, as well. Equity is the value of your property minus what you owe. So even if you still owe $60,000 on your home after 10 years, you will now have $114,000 in equity. Many homeowners use this equity to take out loans to use for home improvement projects, such as adding on new additions.
Owning a home also comes with less tangible benefits. Studies have shown that it creates a sense of community, motivating community involvement. And family stability is manifested through higher graduation rates and lower crime rates.
When you own a home, you take control of the creation of your surroundings. You can paint, make updates, and style the home to your liking -- all things not possible with most rentals.
You have even further stability when you have a fixed-rate mortgage. A fixed-rate means your rate will never increase. This means you will know the cost of your mortgage for the life of the loan. There won't be any surprises, which is what caught many homeowners off guard during the sub-prime mess. And there aren't any worries about the cost of rent going up each year. You can budget for life!
Don't forget about those great tax breaks, such as deducting your mortgage interest, and tax credits, such as money back for making energy efficient upgrades!
And of course, just think of all the fun times you can have with your family and friends. Memories will be made that will last a lifetime! Today's Local Market Conditions Report
Friday, March 4, 2011
FHA concessions on seller concessions?3 percent ceiling is likely 'off the table'
By Ken Harney
March 01, 2011
There's some good news brewing at the U.S. Housing and Urban Development Department that could save thousands of home sales in the months ahead. The final details aren't fully nailed down and a formal announcement is still more than a month away, but I can tell you about a broad outline taking shape that isn't likely to change.
It's all about seller concessions.
Last year the Federal Housing Administration announced that it intends to slash maximum seller contributions from 6 percent to 3 percent for purchasers using FHA-insured mortgages. Seller concessions or contributions are essential lubricants that make large numbers of FHA-financed home sales flow smoothly to closing. They make otherwise unaffordable deals doable.
Say you're negotiating on a house and the seller absolutely insists on getting a price of $150,000. Perhaps the buyer has struggled to come up with down-payment money and won't have the additional cash resources to pay for the settlement and loan origination expenses, which average about 4 to 5 percent in your area.
Under long-standing FHA rules, your seller is allowed to contribute money from the sale proceeds to help with your closing costs. A 6 percent contributions cap -- the current rule -- allows your seller to put as much as $9,000 into the pot, which would be more than enough to handle your closing costs and prepaids.
But a 3 percent ceiling -- the one HUD proposed last year -- would reduce that to $4,500, leaving you short and endangering the entire deal. A 3 percent cap would also make FHA's standard the same as what's typical in the conventional loan market, where both Fannie Mae and Freddie Mac permit nothing beyond that limit.
After hearing complaints from builders, REALTORS® and lenders, HUD is now planning to adopt a more nuanced approach. A formal notice is expected sometime in April, with the changes taking effect this summer.
The core of the policy revision: flexibility. Rather than an across-the-board 3 percent ceiling on all FHA mortgages, the new policy would permit higher seller contributions -- probably between 4 and 5 percent -- on smaller loan balances. Meanwhile, the 3 percent cap would be mandatory on all loan amounts above some yet-to-be-specified limit.
Alternatively, a dollar ceiling on all seller concessions might be available, such as a maximum of $6,000. On the smallest-balance mortgages, the dollar total permitted might even hit 6 percent. Loans on newly constructed houses, where abuses have been reported when builders use concessions to support artificially high sale prices, could have special restrictions.
Whatever the final version turns out to be, the net result should be much better for home sellers, buyers and real estate professionals than last year's threatened 3 percent cap for everybody. This would especially be the case in hundreds of local real estate markets where FHA is the main support for first-time and moderate-income home purchasers.
For example, in the seven Southeast states where Memphis-based Crye-Leike REALTORS® is a major player, FHA loans are used by 50 percent of all purchasers, according to Steve A. Brown, executive vice president. The key attractions, he said, are FHA's low down payments, relatively generous credit requirements and the 6 percent seller concessions limit.
"FHA is what's keeping us alive," Brown told me in an interview. "If they do a 3 percent across-the-board limit, that would knock out a lot of our sales. But if they go with some graduated deal tied into lower-priced homes, then we should be alright."
The average home price in the Memphis area is about $115,000; the average starter home is $85,000, according to Brown. He figures that a 4.5 percent cap on seller concessions would cover closing costs in most transactions, but a 3 percent limit would be a disaster.
"This economy is pretty darn fragile," he said. "People haven't had a raise in three years, prices keep going up on gas and food, plus you've got all those fixed fees" -- attorney costs, title insurance, loan origination and underwriting, among others -- "and none of them has gone down."
In the Minneapolis-St. Paul area, the situation is similar: FHA loans account for 35 percent to 45 percent of all transactions, according to John Anderson, broker at Twin Oaks Realty. The average home price is $163,000 -- somewhat lower for FHA transactions -- and settlement costs average about 4.5 percent.
"Ninety percent of our buyers are asking sellers to pay closing costs and prepaids," said Anderson. "This is a tight economy, and you can't turn to parents and grandparents any more for gift money because they're worried about their own" pension fund shortfalls and depleted savings accounts.
Many brokers agree with FHA that 6 percent contributions may be excessive in higher-end transactions; they top out above $43,000 in the most expensive housing markets. Brokers also concede that there have been abuses and games played in the past that have increased FHA's insurance fund losses.
An example: Say a prospective buyer wants a house that's listed for $100,000. The seller agrees to make a maximum $6,000 contribution to the closing costs but insists that the final selling price be adjusted up to $106,000.
But now the house has to appraise at $106,000, or FHA will be insuring a loan with an artificially inflated price with little or no borrower equity -- making it a prime candidate for future default and insurance claims. FHA says it holds appraisers and lenders responsible for sniffing out such frauds, but officials acknowledge they can't catch them all.
Will a tightened seller concessions policy put a better damper on such abuses? I have no doubt that a mandatory 3 percent cap for all higher-balance mortgages and loans on some new construction would limit the damage in dollar terms.
A graduated system for average-sized and low-balance loans might limit risks as well, while still allowing most home sales to get to closing. A set dollar limit for concessions -- say it's $6,000, hypothetically -- might also provide a flexible way to lower risk while still allowing the lowest-balance loans to enjoy seller contributions up to 6 percent.
In the meantime, the good news is that the widely feared, draconian 3 percent limit appears to be off the table. Something more flexible is coming that might just balance FHA's legitimate needs to safeguard its insurance fund while accommodating home sellers' and buyers' legitimate needs for affordable housing with agreeable financing terms.
Ken Harney writes an award-winning, nationally syndicated column, "The Nation's Housing," and is the author of two books on real estate and mortgage finance.
Thursday, March 3, 2011
Wednesday, February 23, 2011
Tuesday, February 22, 2011
Brian J. O' Connor / Detroit News Finance EditorA grim echo of the housing bust is building for Michigan homeowners who've lost their homes to foreclosure or sold them in short sales. Without even knowing it, they could end up owing tens of thousands of dollars in mounting debts under a previously unenforced provision of the state's foreclosure law.
"It's a huge problem," said Julia Gordon, senior policy counsel at the Center for Responsible Lending in Washington. "This is the last thing anyone needs." There are no figures to show how many Michigan homeowners could be liable for deficiencies, but foreclosure rates suggest there will be plenty.
Since 2006, the number of foreclosures in Michigan has more than doubled to nearly 136,000 last year, and the state has recorded nearly 500,000 filings for homes in or near foreclosure. As a result, property values in southeast Michigan have plummeted. Home prices dropped 34 percent during the past decade and recently hit their lowest point since the summer of 1994. Before the real estate meltdown, few lenders ever pursued borrowers for mortgage deficiencies, said bankruptcy attorney Stuart Gold of Southfield. "We used to see it maybe once a year or very infrequently," Gold said. "In the last two years it's become more and more prevalent."
Values sink under waterBefore the recession, foreclosed homes in most cases were worth enough that banks could recoup the amount they were owed plus legal costs, if not more. At the county sheriff's foreclosure auction, lenders would bid the amount they were owed on the mortgage, then sell the property, and banker and homeowner could move on.
But now that many homes in the region are worth far less than their mortgages, lenders aren't bidding what's owed. They enter bids for the current value of the home or, sometimes, even less. Under state law, the lenders can then pursue the homeowner for the shortfall between what was owed and what the lender got when the home was sold, plus legal fees and interest.
Lenders have up to six years to sue for the bad debt and, once they obtain a judgment, can pursue the borrower for 10 years. If they still haven't collected, they can renew the judgment for another decade, repeating the process indefinitely.
During that time, interest can build on the debt at the default rate stated in the original mortgage. That's usually four or five percentage points above the original mortgage rate, so a deficiency on even a low 6-percent loan would be charged 10 percent or 11 percent interest, doubling the cost of the debt in as little as six and a half years.
"The whole situation has gotten kind of crazy," said bankruptcy attorney Mike Greiner of Warren's Financial Law Group. "I have one or two clients a month who are being sued on the first mortgage, and it's usually a large number, $50,000, $60,000 or $70,000. It's quite a shock because the client's attitude is, 'I gave the house back to the bank.'"
Short sales not excludedThese unseen debts also are cropping up on short sales, where the bank approves the sale of a home for less than the amount owed. But just because the bank OKs the sale and releases its lien on the property doesn't mean it can't sue for the balance, said Dan Lievois, a short-sale expert and chief executive of Devon Title Agency in Troy.
"There are a lot of folks walking around now who don't understand that in three or four years they're going to wake up and have letters coming in from debt collectors," Lievois said. "That's what's sad."
The only way out for the homeowner is to get a specific release on the amount owed, Lievois said. Often in short sales, the deficiency is negotiated down and paid off by having the seller take on a new unsecured loan for the amount owed.
"In instances where the consumer didn't get that waiver of the deficiency," he said, "they have to understand that the lender has the right to sell that debt or collect on it, and do whatever they want with that asset."
This, consumer experts say, is where the real trouble can start.
In the past two decades, a robust business has grown up around the buying and selling of old consumer debt, from years-old credit card balances to long-forgotten traffic tickets and library fines.
Collection agencies buy the debt for pennies on the dollar, then try to track down the debtor with threats of legal action and damage to credit scores. Often, the debt may not even be legally owed because it's beyond the statute of limitations, which is six years in Michigan.
Now, mortgage lenders can start selling their deficiencies to make up some of their loan losses, unleashing debt collectors who may wait years to file suit — well after foreclosed homeowners have rebuilt their financial lives and have assets that can be pursued for collection.
"There are certain lenders that know borrowers will become viable for collection down the road," Lievois said.
The best way for borrowers to avoid the problem is to get a release from the lender in a short sale or, in the case of a foreclosure, file for bankruptcy. If they file soon after a foreclosure, when they have few assets, they can wipe out the debt entirely in a Chapter 7 bankruptcy. But if they wait until a collector shows up years later, they might have to pay some of the debt under a Chapter 13 bankruptcy, or may not qualify for bankruptcy at all. "You can garnish their wages or you can seize property," said Greiner, the bankruptcy attorney. "You can go after people for their assets. "It's like a big iceberg out there. We haven't even seen the beginning of it yet."
Increasing Seller's Property Value
Some tips to achieve a positive impact on value are:
- Perceived size impacts value, even more so than actual square footage. Open floor plans make a room feel bigger than larger spaces with smaller rooms. Showing property that is furniture free, or at reduced clutter, helps to make the space feel bigger.
- Vacancy increases sale-ability. Property is easier to show and easier to sell, and quicker to take possession of when it is vacant at the time it is offered for sale. Evidence of problems to take possession of the property -- such as encroachments, or tenants who wont allow buyer tours -- negatively impact value. Vacancy also helps the buyer walk through the property imagining ownership. Sellers should remove personal trinkets and family pictures as well as being conveniently absent during a buyer tour.
- Cosmetics are important.
- Fresh paint will always add more value than it costs.
- Clean or new carpet/flooring adds more value than it costs.
- Landscaping adds more value than it costs. At the very minimum, make the entrance area neat.
- If you can, add some colorful flowers and new sod.
- Take care of the obvious! The spot on the ceiling from the roof leak takes thousands of dollars from the perceived value and the offer price.
- Condition affects value. Do a seller's home inspection to identify and fix the problem BEFORE closing. No point holding up your check a few extra days; plus a failed buyer's inspection could cost you the sale. Buyers will often bargain down your asking price to accomodate for property condition and repairs.
- If you can, remodel/update the kitchen and master bathroom. These two areas have a big impact on home buying decisions.
- Strategic renovations impact value and your bottom line. Don't spend more money to renovate the place than you can recapture in value on the sales price.
Tuesday, February 15, 2011
How Much Can You Afford?
Start out with a budget so you can determine your price range
Before you start touring homes for sale, it's important to start off with a budget so you know how much you can afford to spend. Knowing what mortgage payment you can handle will also help you narrow the field so you don't waste precious time touring homes that are out of your reach.
Where to beginThe key factor in figuring how much home you can afford is your debt-to-income ratio. This is the figure lenders use to determine how much mortgage debt you can handle, and thus the maximum loan amount you will be offered. The ratio is based on how much personal debt you are carrying in relation to how much you earn, and it's expressed as a percentage.
The ideal ratioMortgage lenders generally use a ratio of 36 percent as the guideline for how high your debt-to-income ratio should be. A ratio above 36 percent is seen as risky, and the lender will likely either deny the loan or charge a higher interest rate. Another good guideline is that no more than 28 percent of your gross monthly income goes to housing expenses.
Doing the mathFirst, figure out how much total debt you (and your spouse, if applicable) can carry with a 36 percent ratio. To do this, multiply your monthly gross income (your total income before taxes and other expenses such as health care) by .36. For example, if your gross income is $6,500:
Next, add up all your family's fixed monthly debt expenses, such as car payments, your minimum credit card payments, student loans and any other regular debt payments. (Include monthly child support, but not bills such as groceries or utilities.)
*Your minimum credit card payment is not your total balance every month. It is your required minimum payment -- usually between two and three percent of the outstanding balance.
To continue with the above example, let's assume your total monthly debt payments come to $750. You would then subtract $750 from your total allowable monthly debt payments to calculate your maximum monthly mortgage payment:
In this example, the most you could afford for a home would be $1,590 per month. And keep in mind that this number includes private mortgage insurance, homeowner's insurance and property taxes. To determine the price of home you can afford based on this amount, use a home affordability calculator.