Buying Up in a Down Market

 

Are you looking for a larger house but are afraid to sell the one you now own because it’s worth less than it was a few years ago? This may actually be a perfect time to buy, as the graphic illustrates.

Let’s say that your current  home was worth $300,000 last year, but is now worth only $270,000—a loss in value of $30,000 (10%) . The home you desperately want was worth $500,000 last year but because it also lost 10% of its value, it now costs $450,000.

At the height of the market, the gap between the price of the home you have and the price of the home you want was $200,000. Now that gap has fallen to $180,000, presenting you with a $20,000 savings. While the market is rarely as  neatly ordered as the graph, the idea behind it is absolutely sound.

If you’d like to have us help you put the power of this idea to work for you, give us a call.

The Importance of Your Credit Score

We sat down with Josh Burruss of Potomac Mortgage Group today to discuss credit scoring, the factors that impact those scores and what he looks for when assessing a home loan applicant.

Josh indicated that he divides credit scores into five basic categories, which are driven for the most part by current loan underwriting rules over which he has little or no control. The guidelines below are extremely important for both conventional loans and second mortgages, and Josh was quick to point out that certain loan programs have minimum credit scores that must be met. 

• A score of 740 or higher is almost universally considered great credit presenting no problems for any current loan product;
• A score of 700 to 739 is considered “good,” and will assure the borrower of approval under most programs;
• A score of 660 to 699 is rated only “fair,” and renders the borrower ineligible for some loans;
  

  How Your Credit Scores Are Determined

• A score of 620 to 659 is considered “questionable,” and the applicant will be highly scrutinized at the very least before any approval is made;
• A credit score below 620 makes it very difficult if not impossible to for an underwriter to approve an applicant in today’s tight-credit environment.

It was Josh’s opinion that credit criteria may grow even tighter in the months ahead.

What are the largest factors that impact one’s credit score? 

• Previous Credit Performance: Late payments and the length of time since the last late payment, bankruptcies, liens and judgments against the would-be borrower;
• Current Level of Debt: Total amount owed, the number of open credit accounts, and the proportion of the balances to the credit limit. Put another way, having available credit is good, but using more than 40% to 50% of one’s available revolving credit line sends up red flags—even if it’s only on one of the three credit cards a person might have;
• Amount of Time Credit Has Been in Use: the length of time since the credit lines were opened;
• Pursuit of New Credit: the length of time since the newest account was opened and the number of inquiries made by potential new creditors; and
• Type of Credit Used: the number of revolving credit card accounts, as well as the number of finance company accounts (car loans, student loans, etc).

When counseling borrowers on how to improve their credit scores reasonably quickly in preparation for purchasing a home, Josh said he looks first at ways his clients can reduced the ratio of debt to available credit on each of their credit cards. Doing that one thing can impact the interest rate they ultimately pay on their mortgage. He also makes his clients swear they will make NO significant purchases—cars, furniture for the new house—until after the transaction closes. That mistake can cost the applicant the chance to even buy a home. It’s simple yet very good advice.

USDA Loans — Get Them in PWC While You Still Can

 Murielle and I attended a great presentation today with George Dao of National Family Mortgage. The subject was United States Department of Agriculture-backed housing loans, which are meant to provide financing for home purchases in rural communities with fewer than 20,000 residents—something that at first blush would seem an unlikely fit for buyers in Prince William County.

It turns out that a surprising number of neighborhoods in Bristow, Gainesville and Haymarket qualify for such loans because of the lag in updating population statistics following the decennial census. Much of the data the USDA uses to define “rural” still reflects the population counts derived from the 2000 census—before much of the growth in western Prince William. The same is true for homes in Aldie and South Riding, which no one would think of as rural these days. This window will close for the most part by the end of the year when the data is updated to reflect the 2010 head-count, but in the meantime this is a great program for many first-time home buyers.

The program highlights include: 

• 100% financing on loans up to $417,000;
• Credit scores as low as 620;
• No monthly mortgage insurance;
• No reserves required; and
• Up to 6% seller concessions allowed 

Sadly, not everyone qualifies. Household income cannot exceed 115% of the median income for the area. In Prince William, Spotsylvania, and Fauquier counties, that means the income limit is reached at $92,600. With a credit score of only 620, the allowable debt-to-income ratios of the borrower are fairly strict—total debt cannot exceed 41% of income and housing costs cannot exceed 29% of income. Still, for those who may lack the cash for a sizeable down payment this loan program offers a great 100% financing option.

If you know someone who wants to buy a home but thinks they might not be able to swing it for lack of the down payment, have them give us a call. We never stop looking for ways to help.

Prince William Market Update — April 2011

Four Financial Reasons To Buy Now

We’ve been saying for months that buying a home now is a great decision for those who are even remotely considering the possibility. In reading through KCM Blog this morning–it stands for “Keeping Current Matters,”  for those of you who aren’t familiar with it–we came across the following pithy explanation of why waiting until next year might not be such a good idea. As KCM puts it:

Interest Rates Are Increasing
Interest rates have increased almost 3/4 of a point in the last six months. Most experts expect rates to continue to increase through the year. Interest rates along with price determine the overall cost of a home. Even with prices softening, if interest rates rise, it may be less expensive to buy now rather than wait.

The 30-Year Mortgage May Disappear
There has been much debate regarding the federal government’s role in providing support for homeownership. There are several experts who believe that if Fannie Mae and Freddie Mac’s roles are eliminated, or even limited, it may be the end to the 30-year mortgage. This concern is addressed in MSN Real Estate’s Is it curtains for the 30-year mortgage?

QRM Requirements Could Be Much More Stringent
Here are some of the proposed changes to the requirements for a so-called ‘qualified residential mortgage’:

• Certain mortgage types would be eliminated
• You would need to put a minimum of 20% down
• You would need a minimum 690 FICO score
• The ratios of income to both the mortgage payment and overall debt would become much more conservative (28% and 36%)
• There would be loans available to purchasers who don’t qualify under the new rules. However, they will probably be more expensive to the buyer (both in rate and costs).

Should these proposals be adopted, many people who currently qualify for a home loan will find themselves unable to borrow enough money to purchase the home they want.

Rents Are Expected to Increase
The supply of available rentals is decreasing and the demand is increasing. That will lead to an increase in rental costs throughout the year. The Wall Street Journal this week quoted a report by Reis, Inc:

“Expect vacancies to continue declining, and rents rising through the rest of 2011 at an even faster pace.”

Bottom Line
You may be waiting on the sidelines to see if prices will continue to depreciate before you purchase a home. The mortgage expense is a major piece in the overall financial picture of homeownership. Make sure you consider it when timing your decision.