Mortgage Limits Increase Provide Buyers Opportunity

By M. Anthony Carr

Congress has spoken on the economic stimulus package and that means most of us are going to get a nice little check in the bank – complements of yourself (it’s your money anyway, right?) Included in the package is a section that will increase the loan limits for conforming home mortgages. Without getting all financialezey on you, it means that higher loan amounts will come with lower interest rates. That will help more people to purchase in high-priced areas like here.

Where the loan limit used to be $417,000 for the Washington, D.C. metro area, it looks like it will move upwards to $562,500. (They will go into effect March 14, 2008.) Any mortgage below this amount is called a “conforming” loan – it conforms to established guidelines so that the mortgage can be sold on the secondary market (usually on Wall Street). Loan amounts above the $562,500 will now be considered “jumbo” loans, which are subject to more stringent underwriting guidelines and potentially higher interest rates. By raising this limit, loan amounts that were previously jumbo now come under the more affordable guidelines, making it easier for buyers purchasing in high-cost areas such as Northern Virginia.

When you’re talking interest rates of under 6%, you’re talking a lot of savings for many, many buyers. The catch is (and there’s always a catch!) you must apply for the new mortgage BEFORE December 31, 2008.

So what? What does that mean to you? Three things:

1) if you’re considering a move up or refinance, you MUST have your application signed, sealed and submitted before the end of the year.

2) If you need to sell your house first, before taking advantage of these new features in the market, now is the time to fix it up and prepare for the selling process. And,

3) government-backed programs (FHA and VA) are also following these new loan limits.

Blog: http://commonsenserealestate.blogspot.com/

BTW: MILITARY RESIDENTS: Are you or a colleague preparing for your next PCS? Weichert Financial can get you VA financing up to $700,000 for qualified buyers. Call me for help alleviate the stress of the pre-listing/pre-purchasing process.

Multi-Layered Loans Lower Down Payment, PMI

by M. Anthony Carr

If you're in the market to buy a home but have little down and want to avoid private mortgage insurance, you might want to look at the multi-layered financing options which have become increasingly available.

With these programs, there's a first loan equal to 80 percent of the purchase price, and a second loan for 10 or 15 percent of the remaining costs. The remaining money, 10 percent or 5 percent, is the buyer's down payment.

Described as "80/10/10" and "80/15/5" financing, buying with multiple loans allows purchasers to avoid the up-front costs and monthly expenses associated with private mortgage insurance (PMI).

Private mortgage insurance is a policy taken out by borrowers who lack big downpayments. Statistics show that buyers who purchase with less than 20 percent down have a higher risk of default than those who purchase with a downpayment of 20 percent or more.
If you buy with less than 20 percent down, lenders will generally require that you purchase with PMI when financing with a conventional loan. In the event of default, the policy kicks in to protect the lender.

(It's also possible to buy without PMI. In these cases, the lender self-insures -- you don't pay PMI, but you do pay a somewhat higher interest rate.)

Insurance coverage requirements for government programs such as VA and FHA loans are somewhat different.

With FHA, there is a "mortgage insurance premium" or MIP. FHA loans have a 1.5 percent up-front fee plus a monthly premium equal to .5 percent of the outstanding loan balance. FHA programs generally allow homes to be purchased with 3 percent down. The up-front fee can be financed as an addition to the loan amount.

First-time VA borrowers do not pay a monthly premium, however they do face an up-front "funding fee" equal to 2 percent of the loan amount in most cases. Many VA loans are for more than 100 percent of the value of the house, since Uncle Sam allows military veterans to finance closing costs.

Multi-layered loans are for people who want to buy with conventional financing, don't have 20 percent down, don't want to pay PMI, and don't want to wait for years to acquire a massive downpayment. In such cases they obtain a first mortgage equal to 80 percent of the purchase price. There is no PMI requirement here because there is a 20 percent gap between the amount borrowed and the purchase price.

The borrowers then obtain a second loan equal to 10 to 15 percent of the purchase price. Combine the 80 percent first loan with financing equal to another 10 to 15 percent of the purchase price, and the borrower must now bring 5 to 10 percent of the purchase price to closing as a downpayment. If you're looking at purchasing a house with a second trust, there are a couple of nuances about a second mortgage of which you should be aware.

The interest rate for the second loan is going to seem a bit higher than what you will be quoted for a regular mortgage. For instance, if you're paying 7 percent on the first trust, don't be surprised if interest on the second mortgage is considerably higher. Shop and compare rates for both loans, and look at your total monthly costs.

The interest rate for the second loan is going to run higher because the loan has more risk to the lender. In case of a default, the first trust holder may foreclose to receive payment on the loan while the second mortgage holder doesn't get a cent until the first-trust holder is paid completely. In addition, the amount of the loan is so small that the lender/investor must charge a higher interest rate to receive ample compensation.

Second trusts typically last for 5 to 15 years. Because they have a short term, they require big monthly payments to be quickly re-paid -- or they have low monthly payments and at the end of the loan term the borrower faces a big single payoff, a so-called "balloon" payment. If you can't pay or refinance the balloon payment, the property can be foreclosed.

The mortgage insurance industry argues that multi-layed loans, so-called "piggyback" financing, may be less attractive than the combination of a bigger first loan plus PMI. (See this calculator here from goodmortgage.com to see if it makes sense for you.)

But whether you prefer multi-layered financing or a big loan plus PMI, the fact is that both options allow you to buy with little down, both have costs, and both have risks. Each option should be reviewed with care to see which works best for you.

Careless Buyers Making Deal-Killer Mistakes

by M. Anthony Carr

It's every homebuyer's nightmare -- write the contract, get it ratified, go through the excruciating mortgage application process, get approved, and then at the last minute a hang-up turns your American Dream into a nightmare. What's most frustrating is when it's your own fault.

Just this week I've talked with agents where a buyer has made some not so wise choices in their home-buying process. The first story was about a buyer who just got cold feet, plain and simple. The second one sabotaged himself financially by taking a vacation with the money that was supposed to be used for closing.

For many cases in this area, the buyers market has people getting nervous and some taking unnecessary risks. In the Washington DC market about 5 percent of properties in the MLS mention either "short sale" or "third-party approval" in the remarks. This is the language of pre-foreclosure. With that said, it can be frustrating in the negotiations to be talking with an agent who doesn't understand the short-sale transaction, a seller who wants to sell but who really doesn't have the final word and a bank employee who's just trying to clear his desk of old cases, preparing for the new ones coming in the door.

When everything comes together, as in the case of this one short-sale buyer, it's even more frustrating when that buyer gets cold feet at the last minute. The buying agent had lined up everyone. The seller had priced it right, the short-sale executive had agreed to the terms of the contract, including a home inspection and closing costs.

The buyer had gotten a full commitment from the bank and then it happened -- she dropped her feet into an icy vat of buyers' remorse. She just couldn't do it. Instead, when the final initial was needed to seal the deal -- she sealed, alright, with her landlord.

Media reports of sub-prime mortgages, dropping sales prices and rising inventories put the fear of failure in her mind that this wasn't a good decision, so she bailed. But if one were to take a look at the regional numbers, a different story arises: inventory is dropping, days on market have tumbled compared to a year ago and in her market area sales prices are up 3 percent compared to the same time in 2006. The stars were aligned, but her feel-goodometer, wasn't engaged.
The second buyer catastrophe was a matter of over exuberance and celebrating too early. The house was situated just across the street from this renter. The family was so excited to stay in the same neighborhood, get a foreclosure property that barely needed any repairs and get the house for thousands under the going rate. The mortgage was in place and settlement date was approaching -- so why not celebrate?

One vacation and final verification later, and the deal was hosed when the buyer spent the reserve money necessary for the house to go to settlement.

Buyers can get great deals in today's market, but they must not be overcome with unnecessary fear, or make financial decisions that could harm their financial standing.

I once had a buyer who was going to purchase his first home. He and his wife had borne three sons while living in the same apartment over 23 years. He could have used his Veterans Affairs status to purchase a property for no money out of his pocket whatsoever, but he didn't understand how it worked.

So once he did, he went after the house with a vengeance. Then he did it. One week before settlement he bought a truck -- for the move, you understand. It nearly wrecked his buying power and the deal almost fell through.

When the contract is signed, the money is approved and settlement's on the way -- buyers should stand in place until the fat lady sings. Worrying about your decision and celebrating too early, can both ruin your dream.

Pocket Markets Reveal Pent-Up Demand

Here’s the Big Real Estate Story – Interest rates are headed in the 5-ish range again and prices have leveled. That’s it. End of story. Sign here. In fact, the market is actually turning around. Despite what the two dailies have reported, homeowners and shoppers must look at pocket markets to determine how they’re doing as far as the equity in their homes and in determining if it’s time to hold or get sold.

In the Washington, D.C. area, headlines from The Washington Post and The Washington Times would make any mere human shake in their household boots – “Region’s Home Prices Continue to Fall; Some Pockets Thrive,” and “Overvalued Homes Discourage Buyers.” The statistics tell a different story. Consider these numbers from http://www.mris.com/ (the local MLS web site):

December 2007 home sales prices of single-family homes compared to December 2006:

Washington, D.C.: +22%

Arlington County (VA): +21%

Alexandria City (VA): +12%

Fairfax County (VA): Even

So what? What does that mean to you? Answer these questions:

Ü When do you want to buy that move up property?

Ü Now, while the prices are low and interest rates drive down your monthly payment?

Ü While sellers are willing to provide buyers with thousands in closing costs?

Ü While there are plenty of great looking houses with new flooring, new kitchens and baths?

Ü Or when the prices start up, the seller subsidy evaporates and the monthly payment inflates because of higher interest rates?

It starts inside the beltway and moves outward from there. Where do you want to be in 2008?

For more information on Commonsense Real Estate Advice, visit Anthony’s blog at http://commonsenserealestate.blogspot.com/.

The Rental Game: What Are The Rules?

by M. Anthony Carr

What do you do when the dishwasher has spewed soapy water across the kitchen floor and leaked down on your neighbor below? Who's responsible? The landlord or the tenant? Across the country, tenant law differs as much as the geography. Nevertheless, some principles remain the same regardless of the local nuances of tenant and landlord rights. One of the first places to visit is the landlord/tenant area posted online by Cornell University's Law School.

Commonly speaking (because the biggest problem I find with legal websites is that they don't speak in such basic terms) there are certain rights reserved for the landlord and certain rights reserved for the tenant. Tenants, says Cornell, have "a property interest in the land...for a given period of time." The lease reflects the length of the landlord/tenant agreement and what the tenant is allowed to do with the property. "The lease," says Cornell, though not historically or strictly a contract, may be subject to concepts embodied in contract law."

"Basic to all leases is the implied covenant of quiet enjoyment. This covenant ensures the tenant that his possession will not be disturbed by someone with a superior legal title to the land including the landlord," according to the site. Now, I bring Cornell's Web site to the forefront as it is an official sounding, and at most of all, reputable place, for all of us to seek out what the law says. However, a site based in Cleveland puts the responsibilities of landlords and tenants into simple language.

NeighborhoodLink is a product of Levin College of Urban Affairs, a part of Cleveland State University. An easily navigable site with plenty of information on rental laws in Cleveland, the site also includes form letters for tenants who must deal with unresponsive landlords. (This is a very cool part of the site -- check it out.

Nevertheless, the lists of landlord and tenant duties found here give a simple approach to who's responsible for what in a lease agreement and are generally relevant across the country.

Here are a few sample landlord duties from the site:

• Keep the premises fit and habitable.
• Keep the common areas safe.
• Comply with building, housing, health, and safety codes.
• Keep all systems in good working order -- plumbing, electrical, heating, etc.
• Maintain all required appliances and equipment.
• Provide, in most cases, running water and reasonable amounts of hot water and heat.
• Provide garbage cans and trash removal.
• Give adequate notice, at least 24 hours in some jurisdictions, before entering a tenant's unit -- except in emergencies. Enter only at reasonable times.

And what about tenants? The school says that tenants have an obligation to:

• Keep the premises safe and sanitary.
• Dispose of rubbish in the proper manner.
• Keep the plumbing fixtures as clean as their condition permits.
• Use electrical and plumbing fixtures properly.
• Comply with housing, health, and safety codes that apply to tenants.
• Refrain from damaging the premises and keep guests from causing damage.
• Maintain appliances supplied by the landlord in good working order.
• Permit landlord to enter the dwelling unit if the request is reasonable and proper notice is given.
• Comply with state or municipal drug laws in connection with the premises and require house-hold members and guests to do likewise.

Oh -- who is responsible for that leaky dishwasher? Most likely, the tenant has an obligation to limit the damage by shutting off the machine and drying the floor. The landlord who supplied the appliance should have it repaired or replaced as soon as possible.

Keep in mind, tenant laws differ by jurisdiction. For details regarding your area, speak with local realty brokers, attorneys, and housing offices.

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For more information on real estate investing, resources and news, check out my Commonsense Real Estate Blog at http://commonsenserealestate.blogspot.com/.

Originally Published: May 4, 2001