Christina Dunham's Random Real Estate Musings

Gone are the days of NINJA loans – “No Income, No Job, and No Asset” information disclosed on the loan application form. While stated income loans still exist with private (or hard money) lenders, full documentation and disclosure is the only way to get home loans from prime mortgage bankers and lenders.

The good news is that with the decrease in home prices, more first time homebuyers can actually afford homes in today’s market. Within Alameda, Contra Costa, San Mateo and Santa Clara Counties, there are over 375 single family homes, townhouses, and condos with at least two-bedrooms and two-baths for sale between $300,000 and $350,000.

This means that a household with a combined annual income of at least $75,000 can now purchase a home for practically no money down (for example, FHA loans allow the 3% down payment requirement to come from a gift from a family member or from a non-repayable grant from a city, state or non-profit organization).

Consider this scenario:

A married couple, Jun and Maria, are looking to buy their first home. They have a combined monthly income of $7,000, 620 middle FICO score, $3,000 in their savings account, $20,000 reserves in their 401k, and a $350/month car payment. They are currently paying $1600/month in rent for their 2-bedroom apartment. They find a 3-bedroom, 2-bath single family home in Hayward for $350,000 with a motivated seller willing to pay for up to 6% of the closing costs. Do they qualify?

Let’s take a look at how a lender might review this scenario:

1. First, the lender takes a look at their credit profile:
1. With a 620 middle FICO score, no late payments or collections in the last 24 months, Jun and Maria meet the guidelines.
2. They also pass the CAIVRS check (Credit Alert Interactive Voice Response System), which reveals that they are not delinquent on any Federal debt such as a VA-guaranteed mortgage, Federal student loan, SBA loan, or Federal taxes.
2. Next, the lender will take a look at the collateral and their available down payment:
1. The home values in the Hayward neighborhood where the house is located have stabilized and the appraised value comes in at $350,000
2. Jun and Maria decide to put 3% down payment, for a total of $10,500. They can get this in the form of a gift from their parents, a grant from a first-time homebuyer program, or from their own reserves.
3. With $20,000 in their retirement account, they decide to take a loan out against their 401k instead, leaving them $9,500 in reserves plus their $3,000 in savings.
4. The estimated closing costs, including up front mortgage insurance, are an additional $12,500, which the seller is willing to pay for, so they don’t have to deplete their reserves.
3. Finally, the lender evaluates their capacity:
1. Jun and Maria go for a 30-Year Fixed FHA loan at 6%. With a $339,500 loan amount, their monthly mortgage payment is $2,035. Including taxes and insurance, their total monthly housing expense comes out to $2,598 a month.
2. They provide their 2006 and 2007 W-2s along with copies of their most current paystub verifying their total combined gross monthly income of $7,000.
3. With their car payment of $350, the lender determines their debt ratio to be 42% ([$2,598 + $350]/$7000), well within the maximum of 45%.

As a married couple filing jointly, they are in the 25% federal income tax bracket. Let’s take a look at the long-term benefits of renting vs. owning for Jun and Maria:

At first glance, it seems renting makes more sense since they will save $145 a month. However, assuming an annual rent increase of 3% and an annual appreciation rate of also 3% (the 35 year average appreciation rate for California is 8.6%, so this is a conservative figure), let’s see how these figures would compare in 3 years:

In year 3, while homeownership has cost an extra $2,615 over a three-year period, Jun and Maria have also accumulated $32,454 in equity. Let’s see how these figures look in Year 5.

It becomes clear in Year 5 that homeownership is a better course of action for Jun and Maria. At this point, should they decide to sell, they’ll have over $50,000 in profit to use towards another home purchase.

Does your situation look similar to Jun and Maria? If so, give me a call at 866.7.DUNHAM or drop me an email at contact@christinadunham.com and let’s run some numbers. Homeownership may be more attainable that you think.

Until next week, happy home loan shopping!

Not too long ago, one of my clients was shocked to find out that his credit score was under 600. Because of this, we couldn’t qualify him for a mortgage loan. Having paid everything on time, he couldn’t understand why his score had dipped so low. We reviewed his credit report together, and only then did he discover several derogatory accounts that did not belong to him. He had been a victim of identity theft.

The Federal Trade Commission (FTC) estimates that as many as 9 million Americans have their identities stolen each year. This means that an identity is stolen every 3 seconds, costing the average victim nearly $4,000 and nearly 175 hours to straighten out their problems and their credit. How can you protect yourself from the dangers of identity theft? Here are some suggestions.

Conduct a Credit Check-up – Visit www.annualcreditreport.com to obtain a free credit report every 12 months. Review all three of your credit reports and look for any suspicious activity, unusual or inaccurate names or addresses, or any inquiries that were done without your knowledge. Creditors and lenders typically require written authorization to run your credit, so be very leery of credit inquiries from companies you don’t remember contacting.

In many states, you may place a 90-day "Fraud Alert" on your credit report, which further restricts access to your credit information. Simply call one of the three main credit bureaus to activate the alert. Here are the toll-free numbers: Equifax 1-800-525-6285; Experian® 1-888-397-3742; or TransUnion® 1-800-680-7289.

Under California law, you can also place a security freeze on your credit reports. Unless provided with a PIN or password to the credit bureaus, lenders will not have access to your credit report and an identity thief will not be able to get new loans and credit in your name.

For more information on how to freeze your credit, visit http://www.privacy.ca.gov/sheets/cis10securityfreeze.htm. The California Office of Privacy Protection website provides step by step instructions on how to initiate the “security freeze.”

Don't Give It Up – Avoid falling prey to phishing scams, both over phone and through email. In a phishing scam, identity thieves pretend to be someone from your bank or a credit institution and simply ask you for your personal information. Rather than following a link from an email, type up the website address on your browser to verify that the information came from the institution you do business with.

If someone contacts you and requests any personal information, don't give it to them. Verify who is requesting the data and why, and then ask to call them back on their toll free number to ensure that you are indeed talking to the institution in question. One extra phone call could save you a lot of trouble and money.

Stay off the Pharm – While phishing enables thieves to pilfer information from you, pharming is another kind of scam that consists of hijacking your computer and stealing your personal information. A pharming site is designed to look just like the website you're trying to visit. However, enter your information on this fake site and not only can it track your moves within it, it may also direct your computer to give up other personal information at a later time. Be sure you are visiting the correct site, that the address in the navigation bar is correct before entering any information. Typically, the website addresses for secure servers begin with an “HTTPS” rather than just “HTTP.”

Return to Sender – Some scammers simply fill out a change of address form and divert your mail to another location. Others simply steal the mail they want right from your mailbox. The key to avoiding this scam is to know your statement delivery dates and pay close attention to any unusual delays in delivery. A lot of identity thieves do things the old-fashioned way: They rummage through your trash to collect your information that way. Be sure to shred any junk mail or other documents that may contain your personal information before you throw it away.

Opt-out of Special Offers – Visit www.optoutprescreen.com to cut down on the pre-approved offers from credit card and insurance companies. Advice your family and friends to do the same, especially if they're thinking about buying a home. When people apply for a mortgage, they often become "trigger leads" to the credit bureau, who sell the information to any number of companies. It only takes a few minutes to opt out, but it could spare you a ton of junk mail and could possible save them from identity theft.

Until next week, happy home loan shopping!

Knowing the Guidelines Solves the Mystery

AOL’s 2008 Real Estate Survey indicates that despite market jitters, “69 percent of Americans aren’t scared to keep their money in real estate as a viable investment strategy.” In the West, 73% of homeowners surveyed still believe that real estate is a good investment.

The report also indicates that 56 percent of Americans believe their homes will maintain their value or appreciate in the next five years.

What then affects property values? First and foremost is location, location, location. A three bedroom/two bath house that costs $149,000 in Cambridge, Maryland sells for $875,000 in Half Moon Bay, California due to the variance in location. Location takes account of the quality of the neighborhood and area services (schools, churches, transportation), accessibility to conveniences (shopping centers and playgrounds), as well as climatic conditions.

While websites like Zillow.com to help homeowners “zestimate” their home’s value, there is no substitute for the expert assessment of an appraiser. It is the appraiser’s job to interpret what’s occurring in the marketplace to arrive at an opinion of value, at a specific point in time. For example, a home that appraised for $785,000 last year might only be worth $650,000 this year due to one or more factors.

The appraisal process often baffles consumers. They may feel that their home is worth a higher dollar amount, and so the appraised value doesn't always make sense to them. It is important to know that the appraiser is completely independent from lenders, buyers, sellers, and Real Estate Agents, and that the guidelines to which they adhere are dictated by the Uniform Standards of Professional Appraisal Practice (USPAP) and Fannie Mae. In most states, the mortgage lenders must also disclose the purpose of the appraisal, as each transaction carries its own set of rules.

In essence, these important guidelines help appraisers put a fair market value on homes based on comparable sales in the same area, and the home must be bracketed in size and value.

For example, there is no set dollar figure associated with a great view, pool, spa, bathroom upgrades, etc. If a homeowner installs a custom pool that cost them $30,000, but the local marketplace supports the value of a pool at $15,000, then that item will be bracketed as [$15,000] on the appraisal.

Upgrades can usually be expressed at a higher percentage of their value in newer homes because the only way to obtain those upgrades was to put more money into the cost of building the home. On the other hand, the upgrading or remodeling of an older home is rarely reflected in full in the final appraisal. This is because typically 25-40% of the project involves demolition and the fixing of issues that aren't uncovered until the project has already begun, such as plumbing or wiring that may need updating.

Ultimately, the value of the upgrades must be supported by comparable examples within the same marketplace. These comparisons must be drawn from current market activity within the last six months. This is a safeguard to prevent appraisers from attaching too high a value to the home in question, and opening up the appraisal for review. This guideline further states that appraisers can only base their opinion on the value of homes that have actually closed escrow.

This means that while your neighbor’s house is listed for sale at $1.1 million, it cannot be used as a comparable property until its sale is finalized and its sale price reflected in county records.

It’s important to note that a home’s VALUE may be different from a home’s PRICE. The latter is determined by what a buyer is willing to pay. During the real estate boom in 2004 and 2005, it was common for a home to sell for $50,000 or even $100,000 over its appraised value. Today, buyers are in the driver’s seat, with sellers discounting their homes for a faster sale.

Until next week, happy home loan shopping!

Christina Dunham is a Mortgage Advisor with the Dunham Group at Sierra Pacific Mortgage, a nationwide mortgage banker funding over $8 billion in loans annually since 1986. She may be reached at contact@christinadunham.com. For a free consultation or more information about the mortgage market, contact Christina Dunham at 866.7.DUNHAM.

More than half (57%) of borrowers who are delinquent on their mortgage are unaware of their alternatives to avoid foreclosure, according to the latest research by Freddie Mac. The study, entitled “Foreclosure Avoidance Research II,” a follow-up to their 2005 benchmark study, reports that homeowner’s are generally in the dark about the options available to them when they are struggling with their mortgage.

According to the survey results:

• Lenders are unable to contact borrowers in more than half of the foreclosure proceedings
• Delinquent borrowers are four times as likely to pay key monthly bills late
• 47% of delinquent borrowers are first time homebuyers
• 20 percent of respondents believe that “it takes a while for anything to happen if a person is late on their mortgage payment”

In general, delinquent borrowers “feel less comfortable talking to their financial institutions about personal finances,” which perhaps explains why 25% of them first turn to the internet for information (nearly double since 2005) while 14% turn to family and friends for advice (up from 8% in 2005).

While a majority of the delinquent borrowers have tried to contact their mortgage lenders, 40% said the communication was “frustrating,” and about a fourth considered the conversation “intimidating,” “confusing,” or “pointless.”

Of the 25 percent of delinquent borrowers who said they did not contact their lenders, a majority (18%) believed they could handle the situation themselves. Other reasons given include:

• Belief they lacked the money to repay (16%)
• Fear, embarrassment, or nervousness (15%)
• Claim they never had difficulty paying their mortgage (12%)
• Belief there was nothing the mortgage lender could do to help (8%)

Despite the recent surge in media coverage about foreclosures, when asked unaided, 57% of delinquent borrowers said they are not aware of foreclosure alternatives offered by mortgage lenders. The good news is that 9 in ten respondents indicated they would be more likely to contact their lender if they had more information about the foreclosure alternatives. When presented with the list of options, borrowers are “most likely” to know about:

• Paying the lender the entire amount overdue in a lump sum
• Converting from an ARM to a fixed rate mortgage
• Arranging for a repayment plan

The survey results indicate that the public awareness campaign for the HOPE hotline is working, with almost a quarter of delinquent borrowers reporting seeing the ads. The HOPE Hotline (888-995-HOPE) is operated by the Homeownership Preservation Foundation (HPF) and provides free foreclosure counseling nationwide. According to HPF, HOPE Hotline counselors field between 1500 to 3000 calls per day, up from 250 per day a year ago, and have thus far received more than 200,000 calls from distressed homeowners.

Lenders are not in the real estate business and prefer that homeowners keep their home. They do not want properties to sell, so most will work with borrowers until they get back on their feet. For more information about ways to avoid foreclosure, early warning signs, and a list of the Dos and Don’ts of Foreclosure, visit Freddie Mac’s website at http://www.freddiemac.com/corporate/buyown/english/avoiding_foreclosure/index.html.

Foreclosure options	Percentage who are aware	Likely to use
Talking to housing counseling agency	44%	74%
Forbearance agreement	43%	72%
Adding missed payments to loan balance	54%	73%
Changing interest rate	55%	72%
Extending mortgage term	52%	69%
Repayment plan	63%	64%
ARM to fixed-rate	68%	68%
Lump sum payment	78%	66%
Assumption of mortgage	42%	28%
Deed-in-lieu of foreclosure	41%	28%