FHA Changes: How Will They Affect You?Thursday, January 28, 2010

You have heard of the big changes that will take hold this Spring in regards to FHA Financing – but I think it is important to take them in context and see how much (if any) these changes will affect you as a home buyer.

To quickly summarize the changes coming, here they are:

1. The Upfront mortgage insurance fee will increase by .500% to 2.25%.
2. The seller concessions have been decreased from 6% of the sales price to 3%.
3. For credit challenged borrowers (sub 580 credit scores), the minimum down payment required will be 10%.

I think the best way to illustrate this is to use an average home buyer profile and see how the numbers are affected.

Joe is a home buyer and has found a home priced at $250,000. He is planning on the 3.5% down payment option and having his closing costs credited by the seller. The closing costs are $5100 and the prepaid taxes, insurance and interest total $1750 for a total cost to close of $6850. Under the new FHA guidelines, we have 3%, or $7500, that the seller can credit on this price point, so we have the closing costs covered with room to spare.

The upfront mortgage insurance that is financed into the loan would currently total $4221.88 (1.750%). When added to our base loan amount of $241,250 we have a total loan amount of $245,471.88. At a rate of 5% the payment is 1317.75. When the upfront premium is changed to 2.25%, the funding fee for this borrower would equal $5428.13, taking the loan amount to $246,678.13 with a payment of $1324.22. The borrower’s payment is virtually the same, differing by only $6.47.

Lastly, Joe does not have great credit. We review his credit and notice that his mid score is 605. He has some late pays hurting his score but also has a credit card that is maxed out. He holds two other cards but they both have small balances. We advise Joe to transfer the balance across all 3 cards to get his balance on each card below 50% of the limit of each card (preferably below 33% of the limit). Joe makes the changes and we review his score the beginning of the following month – are mid score is now above 620, so we move forward with this loan approval.

FHA lenders (not FHA directly) have typically required borrowers to have a 620 mid score in order to lend to them. There are a few niche lenders that go as low as 530, but they require something else in return which is normally a larger investment from the borrower to offset the risk. The new change being made with FHA will not have much impact other than requiring these niche lenders to obtain 10% down payments on these risky borrowers before FHA will insure the loan.

I hope this example helps illustrate the new FHA changes and their true impact on you as a home buyer. Please call or email me anytime if you have questions.

Barney Frank Looking to Dismantle Fannie & FreddieMonday, January 25, 2010

Financial Services Committee Chairman Barney Frank (D-Mass) is looking to do away with Fannie Mae and Freddie Mac, the government chartered institutions that securitize mortgages. Mr. Frank's intention is to improve the oversight and regulation of this industry but unfortunately, he has no plan for how to replace these vital organizations if removed.

The purpose of Fannie & Freddie is to securitize mortgages so that they may be traded in the secondary market, freeing up bank/lender funds to loan more money to home buyers. This process keeps the market liquid and allows for the demand of borrowers to be met. Of course there might be a better way to conduct this process, but until one has been developed and purposed, let's hope we stay the course and not run into new issues in the housing market while we are still inching our way toward a recovery. In addition, making this announcement will only damage the stock value of these companies; totaling 5.4 trillion in bond assets and 1.7 trillion in unsecured debt.

Recent Changes to FHA LoansFriday, January 22, 2010

As a First Time Home Buyer, using the FHA loan is a very important tool in acquiring a home with lower out-of-pocket cost and very favorable terms. The recent changes are attracting a lot of attention, however they will not have much impact on your buying power. Most importantly, these changes will help ensure that the FHA stays around and helps new buyers become homeowners during this amazing real estate market.

The basic changes are:

• The Upfront Mortgage Insurance premium has been increased .500% to 2.25%. This is typically financed into your loan. It does increase the loan amount, but in all honesty at the low prices and low rates of interest, this change will very little impact on your loan.
• For borrowers with credit scores below 580, 10% will be the minimum down payment amount. This change makes perfect sense, and any of my clients that are in that credit score range work with me to improve their credit before buying a home to take advantage of better rates and lower downpayment requirements.
• Decrease the allowable seller concessions from 6% to 3%. In some instances, this change might negatively impact a purchase in which considerable credits are being negotiated to the buyer. However, in the case of covering your closing costs, 3% will typically cover that amount - and any repairs the seller would like to credit you money for versus fix can now be requested to be completed by them before you take ownership of the home.

These changes will start in mid Spring and Summer, so if you are considering buying a home, now is a great time to get prepared.

Forecast for 2010Monday, January 11, 2010

Stock Market:
Has room to move higher but will have a hard time sustaining the gains. We will likely see stocks end the year near current levels. Until jobs increase, not much true growth will be realized.

Good stock picks for this year are in the Medical supply/service companies and also Insurance companies depending on how the new health care bill is structured.


Jobless #s:
In order to keep up with population growth 125,000 jobs need to be created each month. During times like these where we are losing thousands upon thousands of jobs - it will take decades to get back to 6% unemployment rates. I believe the norm moving forward will be far higher levels of unemployment.

Home Prices:
We are near the bottom, however home prices will likely decline during the summer months after the tax credit rush in the Summer. Prices will then climb back up and end slightly up on the year. 2011 and 2012 should yield around 3% annual appreciation.

Mortgage Rates:
They will go up, no question. We will likely see some inflationary pressure begin to push rates up, the gradual increase in rates is due to the Fed backing off and eventually canceling their mortgage backed securities purchase program (March 31st). We will likely see rates around 6% at the end of 2010, however they will likely peak around 7% during fluctuations in the market along the way.

It Still Makes Sense to Buy Versus RentFriday, January 8, 2010

Nearly a full third of households are still renting. If you’re one of them, you could be paying a hefty price.

Before talking about purchasing a house, it’s important to note two things. First—and this is extremely important—the housing market is actually localized. So the outlook in your hometown may be different than another city across the state or on the other side of the country. Second, home prices are tied to employment. For example, if someone feels like their job is in jeopardy, it might be enough to stop them from making a move. So, if your local job market is feeling a pinch, the home prices in your area may be down as well.

But with all those factors under consideration, it still makes sense to buy instead of rent. In fact, renting may be costing you a bundle.

Let's look at an example…

If you are paying rent at $1,500 per month and your landlord increases your payment by a modest 5% each year, you would wind up paying just about $100,000 over a 5-year period! Worse yet, after forking over $100,000, you still would have nothing to show for it.

And speaking of having nothing to show for it, how about any improvements you might make to a rental property? It's not uncommon for renters to freshen up the paint, install new light fixtures or plant some nice flowers outside. But guess what… all your efforts, labor and the benefit of that improvement belong to the landlord, not to you.

With convenient down payment options still available for qualified buyers, affordable home prices and low interest rates, the very same money could have been used towards home ownership.

Even using a standard 30-year fixed program, a mortgage of $300,000 could be obtained with a total monthly mortgage payment—including property taxes and insurance—of around $2,200. Assuming a 25% tax bracket, this would be equivalent to the average amount spent on rent during the same period after your tax benefit.

And the benefits of home ownership are quite considerable. Because the mortgage is being paid down each month, equity is being built. After 5-years, the $300,000 mortgage could be reduced to $279,000, adding $21,000 to your net worth!

But if laying out the initial increase in monthly payment and having to wait for your tax benefit to show up next April is a tough nut to crack, the IRS wants to help. Instead of waiting to file for the tax benefits derived from your new home purchase, you can simply adjust the amount of your withholding. This allows you to have less tax withheld from each paycheck so you can handle the new mortgage payment more comfortably throughout the year. In essence, you are taking your tax refund as you go instead of letting Uncle Sam hold it all year, interest free.

Visit www.irs.gov and use the IRS withholding calculator. This very handy tool can quickly show you the impact that a change in withholding will do to your net paycheck. Remember to balance this with the expected refund and it is always a good idea to check with your tax advisor.

Don't fall victim to the national headline hype. Talk to a professional who understands your local market. And remember, buying a home is a big step, but it is almost always one in the right direction.

Goal Setting: Actually Achieve your New Year’s ResolutionsThursday, January 7, 2010

Setting goals is paramount to achieving success at anything we do; from goals of losing weight, eliminating debt or receiving a promotion at work. The problem is many people are very uneducated on how to properly set and achieve their goals. When people fail at the goals they have set, it is rarely due to their inability to achieve them, but rather their lack of properly identifying the Why and the How. Below is a goal setting system I use and have found extremely successful in realizing my own goals.

6 Areas of Goal Setting
FAMILY FINANCIAL SPIRITUAL BUSINESS MENTAL PHYSICAL


To illustrate an example, let’s focus on Financial goal setting.

Step 1 - Define your Committed Objective
Ex. ‘Be free of credit card debt in 24 months’

Step 2 - Figure out the ‘why’ behind your Objective
Why is it important to you?
Ex. *Feeling in control of your finances
*Allocate more $$ toward cash reserve (safety)
*Have more freedom with your money

Step 3 - Who is your Champion?
This will be an advisor that can keep you accountable to your objective
Ex. Your Financial Planner or CPA

Step 4 - Action Steps
You need to put actions in place that will get you toward your goal on a daily basis
> Create Debt Elimination Plan
> Cut up credit cards so you do not use them
> Use cash and only pull out the amount you allow for spending each day

Step 5 - Accountability Structure
Create a system to eliminate the ability to fail
> Weekly call/meeting with your champion to keep you on target and motivated

The Basic Benefits of Home OwnershipMonday, January 4, 2010

When I was a first time home buyer, I remember the anxiety and doubts I had about buying a home. Was it a good investment? Could I afford the type of home I wanted to live in? Would the possible costs of repairs put me in a bind financially? I did plenty of research, but what really pushed me forward to action was seeing all of my friends buying homes. I asked them why they felt so confident and they told me their parents convinced them, and looking at what prices their parents bought their homes and what the values were currently put $$ in their eyes and they were sold. I followed suit and spoke with my parents, relatives and so on and arrived at the same conclusion - over the long term real estate has always appreciated and before you know it, you have accumulated a large sum of equity.

It is always vital to figure out what you can truly 'afford' on a monthly payment level to determine if you are ready to buy (and I stress the word 'afford' because it has to include your ability to save for cash reserves and retirement). The big benefits are:

1. Appreciation - the value of your real estate will move up and down, but the trend is upward over the long term. The long-term is relative, and depending on what type of real estate market you buy into will dictate the term needed to reach the appreciation (or increase in value) level desired.
2. Leverage - there are very few investments you can buy where you can leverage up to 100% of the cost. Real Estate allows you to obtain a large asset, let's use a $250,000 home for example, for a few thousand dollars in cost (and in some instances for $0). This allows you the compounding appreciation on an investment vehicle worth $250k versus a stock where you have to pay full price for it. In a few years time, your $250k investment could be worth $295k - and that $45k increase is something you could likely not achieve on a smaller asset that you could not leverage. Along with leverage, owning your home can allow you to easily purchase an investment property with the equity earned in the home.
3. Tax Savings - the mortgage interest you pay to the bank, along with several other costs involved in owning real estate, are tax deductible allowing you to keep more of the money you earn. Depending on your tax bracket, the amount you save by being a home owner can be considerable.

There are many factors to consider when buying your first home. Please contact me anytime if you have questions and would like to learn more.