Tag Archive for 'Affordability'

More on purchasing a home without a down payment

Published by Joanne on September 29, 2005 in Featured Articles and Financing. 2 Comments

Contributed by:
Joanne Rocheford, Mortgage Loan Consultant
PH: (206) 242-0800 FAX: (206) 225-2017
Rocheford@msn.com

 

Editors’ Note: This is guest contributor Joanne Rocheford’s second article for Seattle Real Estate Talk.

Interest rates are rising….

In my previous article, I wrote about three ways to purchase a home with no down payment. The second type of financing I described was the 80/20 loan. A buyer obtains a first and second mortgage at the time of purchase to cover the full price of the home. The advantage of this type of loan is one doesn’t have to pay mortgage insurance. This has been an extremely popular way to finance homes this year.

What I didn’t explain previously is that conforming lenders require a 680 credit score to qualify for this type of financing. If you have a score lower than 680, most banks cannot offer you an 80/20 loan. There are however non conforming lenders (translated: higher interest rates, higher loan origination fees) also known as sub prime lenders that will offer you a two year fixed first mortgage followed by a thirty year fixed second mortgage that has a balloon payment due in 15 years. This was still a popular option because the rates have been similar to conforming loans for a two year fixed loan as opposed to a conforming thirty year fixed.

It made sense to go with this type of loan because having a mortgage caused the credit score to go up and one could refinance after two years to a conforming thirty year fixed loan. After two years had gone by, the Pacific Northwest homes would have appreciated enough to completely refinance the second mortgage away.

In the past few months, if you didn’t have perfect credit, you could still get a 6% or less interest rate on the first mortgage and 8 -10% on the second mortgage. I swear I barely blinked and now we’re back into the 8% and 12% arena that I saw three years ago.

With sub prime interest rates having risen dramatically, the popularity of the FHA loan is back. Even with mortgage insurance, the payment on an FHA loan is now more often lower than a non-conforming 80/20 loan. Closing costs on an FHA loan are usually over $1000 less than an 80/20 as well. If you have terrific credit, pat yourself on the back and have your lender compare both payments to see which loan option makes the most sense for you.

The Secrets of Borrowing from Uncle Sam

An FHA loan is a government loan. FHA loans are not credit score driven but look at your payment history. An FHA loan requires 3% down. However, listen closely because people pay lots of money to learn the following secrets: there is a loophole in the FHA underwriting guidelines that allows gift money to be given to you to cover the 3% down payment, your loan closing costs, and your prepaid items (first six month’s property taxes and first year homeowner’s insurance.) This gift money can be from a relative or from a non-profit company. There are several non-profit companies that offer gift money for purchasing a home. Alas, there is always a catch. It isn’t just “free” money like it sounds, or that the infomercial gurus would have you believe.

Back in the day when sellers were having a harder time selling their home and it was a buyer’s market, a buyer could offer a seller full price to purchase their home and ask the seller to participate in a gift program. The seller would oblige in order to sell their home. Today, we have to get a little creative.

Here’s How It Works:

Seller is asking $210,000 for their home. Buyer offers $221,000 and asks the seller to make a tax deductible contribution to a non-profit charity in the amount of $11,000. The non-profit charges an administrative fee of $295 to $795 for their services. The non-profit gives the buyer a gift for $11,000 that doesn’t have to be paid back. The non-profit asks the seller to “replenish the down payment assistance pool.”

One client from two years ago was afraid to purchase a home. His real estate agent and I showed him how we could get him in a home with him paying only $400 out of pocket for his inspection. He purchased a $150,000 house in South Seattle. We marked up the price as described above. His home is now worth $230,000 just a couple of years later. Needless to say, he is very happy we encouraged him to step a little bit out of his comfort zone.

I can tell many a tale like this one.

So there you have it. One more way to purchase a home without any money down. With interest rates continuing to inch up and house pricing continuing to leap on up, what are you waiting for?

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Higher prices are good news for home sellers

Published by Louise on September 13, 2005 in Signs & Portents. Closed

The Northwest Multiple Listing Service (NWMLS) issued its monthly recap of sales figures for the Seattle area and surrounding counties. While the median sales price of a home in King County increased by 17% from August 2004 to August 2005, median sales prices rose even more dramatically in Snohomish, Pierce, and Kitsap Counties (21 – 24%). Low interest rates combined with fewer homes on the market account for the increase in prices. Also noteworthy is the shortened length of time a home stayed on the market - approximately 7 days less than a year ago for all of the counties mentioned above.

What does this all mean? For one thing, it’s an ideal time for sellers (higher prices, shorter time on the market, and lots of demand), but it’s tougher on buyers. Higher prices, no doubt, force many buyers to purchase homes farther and farther away from Seattle, in areas where affordability may not be an issue. But that affordability comes with a different kind of price tag: long commutes mean higher stress, more pollution, and more burden on the infrastructure.

Click here for The Seattle Times summary of the report.

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The State of the Nation’s Housing, 2005

Published by Louise on July 25, 2005 in Affordability. 2 Comments

Yes, the Seattle real estate market is hot. However, my clients who are first-time buyers trying to purchase homes on their own (i.e., without the financial help of a spouse, parents, etc.) are often surpised to see just how little their hard-earned moderate income can buy them. These are people who work as schoolteachers, interpreters for the deaf, physicians’ assistants, and graphic designers. While these clients can easily obtain a home loan, they will have to allot as much as half of their monthly income to meet to their new housing costs. This affordability issue seems to be increasingly problematic as housing prices rise in Seattle.

And, according to a newly-released report (5MB PDF) from Harvard’s Joint Center for Housing Studies, this affordability issue is a growing concern nationwide. From an RIS Media article on the study:

“While the future looks bright for housing investment, there is little cause for optimism that the nation’s housing affordability challenges will diminish; in fact they are growing worse,” says the center’s Executive Director Eric Belsky. Between 2000 and 2003 alone, the numbers of households spending more than half of their income on housing increased by 2.5 million. “Housing affordability is a chronic problem and narrowing the gap between what decent housing costs and what low-wage workers and retirees can afford will remain a major national challenge.”

For those of you not up to reading the full report, ‘The NWReporter‘, a publication of the Northwest Multiple Listing Service, offers a synopsis of the study.

Besides the affordability issue, trends of note in the Harvard study include commuting patterns and the shift in buyer demographics. As the NWReporter notes, “Minority, single-person, single-parent and female-headed households are fueling demand for housing, together with record numbers of immigrants.” Commuting trends saw a three-fold increase in the number of metropolitan areas in the country where more than half of the households live 10 or more miles from the central business district. In other words, lots of people are commuting more than an hour to work. From 1990 to 2000, the number of Seattlites commuting an hour or more to work more than doubled (4.3% to 9.1%).

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It could be worse…

Published by Louise on July 11, 2005 in Affordability. Closed

If you’re getting discouraged about how much house your money can buy you in Seattle, this might cheer you up: the median home price in California is well above $500,000.

MSNBC takes a look at what half a million bucks can buy you in Seattle and elsewhere around the country.

The secret is out: You can buy a home with very little down

Published by Joanne on July 10, 2005 in Featured Articles and Financing. 2 Comments
Contributed by:
Joanne Rocheford
Mortgage Loan Consultant
PH: (206) 242-0800 FAX: (206) 225-2017
Rocheford@msn.com

 

Editors’ Note: Seattle Real Estate Talk is pleased to welcome guest contributor, Joanne Rocheford.

I recently spoke to a senior citizen who shook her head and lamented, “The poor young people today. I don’t know how they’ll ever to be able to afford to buy a home.” I understand why she feels that way. Coming up with a 20% down payment and thousands in closing costs is a daunting proposition for most folks. With the median house price in Seattle hovering around $350,000, few buyers would be able to afford to buy a home if they had to meet those terms.

The good news is that there are ways to buy a house with no down payment these days. And there are ways to reduce your out-of-pocket expenses for purchasing a house – your closing costs – to almost nothing. Would-be homeowners watching late night TV infomercials pay thousands of dollars for audio tapes and CDs that claim to have the “secrets” for buying a home with no down payment. But you, lucky reader, can put your wallet away and go to sleep early tonight, because the secret is out.

Getting your down payment down

There are three ways to get 100% financing, or no-down-payment loans. The first way is to get a 100% loan. This means that if you buy a house for $250,000, you obtain a loan for $250,000, or 100% of the value of the home. In this instance, because you are putting less than 20% down, the lender will typically require you to purchase mortgage insurance, which protects the lender should you default on the loan. On these types of loans, the mortgage insurance can run around $200 per month.

The second way is to obtain a first and second mortgage at the same time. On that same $250,000 house, you would take out a first mortgage loan for $200,000 and a second mortgage loan for $50,000. This in known in the mortgage industry as an 80/20 loan. The interest rate on the second mortgage is a higher interest rate, but you don’t have to pay mortgage insurance with this option. Closing costs are higher on an 80/20 loan because you are actually getting two loans. Most lenders require a credit score of at least 680 to qualify for this type of financing.

The third option is an FHA loan. Although an FHA loan requires 3% down, FHA allows you to use gift money for the down payment. If you don’t have a wealthy great aunt Gertie, you can ask the seller to participate in a gifting program. (I’ll talk more about this in future articles.)

Lowering your closing costs

Now you’ve got 100% financing available to you. What about closing costs? Well, lenders require you to obtain an appraisal, to get title insurance, to use an escrow company, and so on… and they expect you to pay for all this! You can also plan to pay your first six months of property taxes and first fifteen months of homeowner’s insurance. These are known as your “prepaids,” but are often quoted as closing costs.

The easiest way to get your closing costs and prepaids taken care of without breaking your piggy bank open is to ask the seller to pay them. In today’s market if you ask a seller to pay your closing costs, he’ll say no; so here’s what you can do: If a seller is asking $250,000 for his house, you might offer him $256,000 and ask him to pay $6,000 of your closing costs. In essence, you just gave him $6,000 and asked him to give it back to you. Now you have the full amount of the price of the house in financing and all of your closing costs are being paid as well.

So it’s just that simple? Well, almost. When you find a home to call your own, you will write up a purchase and sale agreement offering to buy the property. At this time, you will need to write a check for earnest money to show you are serious about purchasing the home. You will want to have a home inspection done to make sure the house isn’t going to fall in immediately after you purchase it. Most lenders will ask for a deposit of $500 and up to get started.

Now, here’s the beauty of it all: Most lenders will allow you to get cash back at closing up to the amount you put in. In other words, we’ll give you back your earnest money and deposit on the day you close. [This policy varies by lender. Be sure to check with your loan officer or mortgage broker. -Ed.]

Here’s a real live example of a transaction I put together recently. The house was listed for $200,000. The buyer offered $207,000 and asked the seller to pay $7000 of her closing costs. The buyer wrote a check for $500 for earnest money, she paid $400 for a home inspection, and she paid me a $600 deposit. Thirty days later she got $1100 back at the closing table. How much did it cost her for closing? Just $400 for the inspection and the lender doesn’t even require it. (Although we ”definitely” recommend it.) You can see that she had to come up with some up-front costs, but but she got it all back.

Can you afford $400 to buy a home?