President Obama signed into law a bill that will reinstate higher limits on Friday for FHA insured mortgages in high-cost areas. The maximum limits had dropped to $625,500 from $729,750 on October 1, 2011 due to the expiration of the Economic Stimulus Act of 2008. As of November 18th, 2011 the loan limits of the Economic Stimulus Act of 2008 have been reinstated back to $729,750. [callout_left]borrowers will be able to utilize FHA financing to purchase a home that is in a high cost area such as Los Angeles and Orange county.[/callout_left]In layman’s terms, borrowers will be able to utilize FHA financing to purchase a home that is in a high cost area such as Los Angeles and Orange county. Borrowers will be able to take advantage of a lower required down payment and lower interest rates (follow the link below to see an example) along with some of the flexible guidelines that come with FHA such as a higher debt-to-income ratio cap (more buying power).

To illustrate how different it would be if you were to purchase a home prior to November 18th, 2011 when FHA loan limits where $355,350 compared to the new loan limits of $729,750, I have prepared a detailed analysis for your viewing pleasure. First and foremost, I have to explain that when the loan limits were lower FHA financing could not be used due to guidelines, therefore; a Jumbo loan would be utilized and a higher down payment would be required. A jumbo loan requires a 25% down payment along with stricter guidelines and a higher interest rate of about 1% higher.

In summary, these new increased loan limits will allow a qualified buyer with good income who lacks the required funds for a 25% down payment to purchase a home that is above the prior loan limit of $355,350.

Click on the thumbnail below to be directed to the analysis.

This is a very common question. A question I get a lot from peers, past clients, and business partners on a weekly basis. I decided to put this blog together to inform people of the facts about the waiting periods required for buying after selling your home in a short sale. There are three major agencies that regulate the guidelines that banks follow when underwriting loans. These are Fannie Mae, Freddie Mac and FHA. Before I begin, It’s important to know that there aren’t any restrictions on buying a home, the following restrictions are for obtaining a new loan. If you purchase a home cash, the following guidelines/restrictions do not apply to you.

Fannie Mae/Freddie Mac

Borrowers willing and able to invest at least 20% down may purchase a home after 2 years of completing a short sale. Borrowers not able to invest a 20% down payment must wait a minimum of 4 years. Key points to know is that the transaction must be arms-length (any of the parties involved may not be related or have any type of relationship) and must meet all guidelines set forth by Fannie Mae and/or Freddie Mac including some of the basic guidelines listed below:

• Minimum FICO score of 620
• 50% max debt-to-income ratio (with compensating factors)
• No derogatory accounts listed on the credit report for the last 12 months

The rest of the guidelines will be determined by Fannie Mae or Freddie Mac’s automated underwriting system (AUS).

FHA

For FHA, it gets a little tricky because the actual guidelines state that there isn’t a restriction to re-purchasing given that the reason that you sold your house as a short sale was due to extenuating circumstances such as:

• Death
• Your employment relocated to a place too far for you to drive to
• Loss of job
• You have a balloon payment due and cannot afford the payment.

Also, If your current lender accepts a short sale without you being late on your mortgage payments, you can buy another home right away. Till this day, I haven’t seen a bank accept a short sale with out the borrower being late on their payments, but who knows… it could happen.

NOTE: Higher loan amounts for high-cost housing markets have been reinstated. Click here to read more…

The American Reinvestment and Recovery Act (ARRA) was signed into law in February of 2009, temporarily increasing the maximum conforming loan limits. On October 1st the following changes will occur that can negatively affect loan amounts in the mid $350,000 – $450,000 range including the amount of down payment you will be required to invest and an increase in your interest rate.

Prior to these changes the financial industry was entering its crisis and private mortgage lending had all but disappeared. Financing was scarce for both homeowners and home buyers for whom loan sizes exceeded Fannie Mae and Freddie Mac’s national $417,000 limit — even for those with excellent credit and income. In San Bernardino the conforming loan limit is $417,000, anything above that amount up to $500,000 is considered Conforming High Balance. These new higher conforming balances ensured that your down payment remain low and allowed you to use FHA financing. A loan amount above $500,000 enters in to the Jumbo category which requires a much larger down payment and an adjustment to your interest rate which hindered many home buyers from purchasing a home.

If you live in a high-cost area, or a former high cost area, mortgage rates may be low, but the amount of loan for which you qualify may be much less than you expect due to this change.  After October 1, 2011 through 2012, you may find yourself ineligible to use a low down payment FHA loan to purchase your home, thus requiring you to come up with a greater down payment using a conventional loan and abiding to less flexible guidelines including debt-to-income ratios.

WOW, WOW, WOW!!! We’ve had an amazing bond rally which puts us close to being at an all time high (shown in the graph above). The 10 year treasury is not far behind either. Virtually every piece of news that has come out in the last week has been bond friendly AND bad for our struggling economy that is now suffering from crack withdrawal as second quarter has ended.

All this news and bond rally should bring us to record low interest rates, but know that a large correction can occur anytime and put the bond back to what it was before the rally.

This week should be the time when you should lock in your interest rate and move forward with your purchase or refinance. If you would like to apply using our printable application click here to be directed. 

Screening a buyer’s offer may be one of the most important steps you can take before opening escrow. It will save you time and prevent headaches later in the process. For that reason, I’m listing a few points to look for when reviewing offers:

• First off, you should request a pre-approval letter, proof of credit, proof of funds, and proof of DU approval with every offer. List these as a requirement under the MLS Office comments.

• [yellow]Debt-to-income (DTI)[/yellow]: The pre-approval letter from the buyer’s lender should have the DTI listed somewhere on the letter. The absolute highest DTI ratio for an FHA loan is 56.9% back-end and 46.9% Front. A front-end ratio is the percentage of the total housing payment to the income. The back end ratio takes into account the housing payment plus all other debt listed on the credit report. For Conventional loans 50% is the max for the back end and 46% for front-end. Also, keep in mind that if their are two borrowers that are going on the loan as joint tenants (borrowers who are not married) the combination of debt and income from both borrowers will be used. It’s important to know that the front-end ratio takes precedence. If the buyer’s DTI is maxed you better believe that the underwriter will be looking for compensating factors. This would be a good time to review the proof of funds and credit to find out if they appear strong. If the debt-to-income ratios are not on the pre-approval request a copy of the DU findings, you’ll find them on the last page along with the co-borrower’s information.
• [yellow]FICO Score[/yellow]: Both FHA and Conventional require a minimum of 620, but a lower credit score can still be approved. If there are multiple borrowers, the lowest mid FICO of all borrowers will be used to qualify, therefore; request proof of credit from all borrowers. If the buyer is showing a FICO score lower than 620, ALWAYS ask for the DU findings and credit report. Bad debt within 12 months will usually cause problems, therefore; you may want to pass on this buyer. If you decide to take this offer get a TBD approval from the actual lender. This is an underwritten approval of the buyer’s credit, assets, and income; the property is to be determined. This should have been obtained before the buyer submitted their offer, if they don’t have one, this is a good indication that the loan officer is inexperienced or doesn’t often work with this type of scenario.
• [yellow]Assets[/yellow]: This is obvious, but I think I should mention it just to be thorough. Check the proof of funds to make sure they have sufficient funds to close. Be sure to find out how much of a down payment the buyer is planning on investing and account for any closing costs which range between 3-5% of the loan amount. The percentage depends on the sales price, therefore; the lower the sales price the higher the percentage of closing costs.
• [yellow]Gifts[/yellow]: With FHA and Homepath, Gift funds are allowed. If you feel that the buyer is using gift funds request a copy of the gift letter plus the most recent bank statement from the bank account that the funds are coming from; to show that the donor has sufficient funds to close. This will also show if the loan officer has their “ducks in order”.
• [yellow]AUS Findings[/yellow]: Remember, an approval from an Automated Underwriting System (AUS) is the beginning to every loan. If a loan can not be approved via an AUS the loan cannot be put through to the underwriter unless it’s to be manually underwritten. Manually underwritten loans are for certain scenarios and they have strict criteria. I would definitely recommend requiring a cross-qualification from your trusted lending partner for a situation like this. The two most common Automated Underwriting Systems are Fannie Mae’s Desktop Originator (DO) or (DU) and Freddie Mac’s Loan Prospector (LP).

A second opinion can also be obtained by requesting a cross-qualification. A cross-qual. entails a full review of the buyers credit, income documentation, full bank statements, and a full DU approval to make sure that buyer will be able to get full loan approval. As a free service to my partners, I am available to perform cross-qualification for any offers in which the buyer’s financing may seem “iffy”. I will give an unbiased, non-soliciting opinion of the buyer’s ability to obtain financing.

If you’re thinking of filing bankruptcy and if it’s an unavoidable option know that you must begin establishing new credit as soon as the bankruptcy is discharged. When I work with people that have had a bankruptcy, both Chapter 7 and 13 the first thing I have to look for is established credit after the BK.

Rule of thumb for both Conventional and FHA financing, a bankruptcy must have not been filed within 48 months. Bankruptcies that occur within 2 years will disqualify a borrower for financing.  If the discharge happened more than 2 years ago then you must be able to show new credit with payment history proving that you’ve learned from the past, recovered from any unfortunate life situations, and that you are now able to manage your finances.

Method to establish new credit

As you know or will soon come to find out is that credit card companies and/or other creditors will not extend credit if you currently have bad credit (Usually below 620 FICO). For this reason a Secured Credit Card will be the solution. A Secured Credit Card is a pre-paid credit card that uses your own money to establish your credit limit. For instance, if you deposit $500 into your Secured Card then your total spending limit is $500. These types of credit cards report to the three major bureaus on a monthly basis, therefore; establishing a payment history. Once you’ve had this card long enough you will have developed confidence in other creditors and when that happens you can start expecting offers from other regular credit card companies.

My recommendation

I recommend applying for a Secured Credit Card from a local recognized Federal Credit Union. Compare at least three Secured Cards to make sure you’re getting the best deal.

Ask the following questions:

1. Does the creditor report to the three major bureaus on a monthly basis?
2. What are the fees? Are the fees monthly or annually?
3. What is the interest rate?

I hope this information has been helpful in your “after bankruptcy” planning. Before I end this I also would like to mention that establishing bad credit is very bad. Not having any newly established credit is better than having negative items on your credit report after the BK, but both should be avoided. To summarize, establish new credit and protect it by not being late on any payments.

If I make a list of the top 5 questions I get asked whenever I bring up the topic of real estate in a conversation, “is this a good time to buy?” has to be second right below “how’s the market?”.

For that reason, I decided to do a little research on statistical data leading to the right answer to that question. The number reason a person should decide to buy a home should be when they are mentally and emotionally ready. The investment portion of buying a home should be second to your personal reasons. Now, that you’ve taken the steps to get mentally and financially prepared,  I like to point out the graph below which represents the affordability of buying a home…and I was pleasantly surprised to have found such results.

Between the early part of the 1970′s and 80′s, the affordability of buying a home dropped quite drastically. This was found to be interest rate driven. Towards the mid 80′s we see that affordability of owning  a home began turning and it got a little better. This is when FHA jumped back in the picture and started offering more flexible loan guidelines and rates also began dropping as well; this enticed people to start buying again.

In the 90′s the index bounced up and down, but remained steady until the famous BOOM which started in 2003. This boom lasted until 2007 and was ended by another boom of it’s own. The Boom ended itself! Owning a house got to expensive which is shown by the affordability index dropping from 125 to 100 (shown on the graph). Some people blame it on the adjustable programs other people have other reasons, but ultimately it was caused by lower affordability.

When I remember back when we were right around the end of the boom, right around 2005/2006. I had a friend in his mid 40′s and he has gone through this type of cycle before. Remember that real estate performs in cycles of approximately 7 years. Well, when everybody else was buying everything they could get their hands on my friend ended up selling his house and began renting. We couldn’t fathom what was going through his head knowing that property was appreciating so fast and there was a fortune to be made. Well, he was the smart one because the bottom of the market ended up falling out and everybody who had property that was purchased within that time got “caught” with their hands in the cookie jar. He rented a house till about late 2009 and as you can see in the graph the affordability index when up to about 170, that is when he decided to buy again. This seems to be within the bottom of the housing market which fundamentals tell us, when you buy low and sell high, YOU PROFIT!

Look closely at the chart for a second………… What did you notice? It has never been more affordable to own a home. The reason for this spike is due to home prices dropping and the recent reduction of interest rates. There was a time when interest rates reached a 50 year low, I mean interest rates for a 30 year fixed mortage are right around 4%.

So, for all those people who have asked me the question of “is this a good time to buy?”, I’m confident to say “YES!”. With so many good deals out there, low interest rates, and in contradiction of what the media is saying… flexible loan guidelines and the willingness of banks to lend I think it’s a great time to buy if you are emotionally and financially ready. The fact that mortgage payments are now lower or the same as a rent payment should be a good indication that buying a home is more beneficial. Contact me for a personalized rent vs own analysis that will help you understand if you should own a home or rent one.

Some house hunters will find themselves considering a house that they can see themselves calling home, but when you check the property tax rate of that area you come to find out that its surprisingly higher than the norm. This can increase your payment therefore; increase your debt-to-income ratio. Your debt-to-income ratio or DTI is one of the most important factors  used by lenders to determine if you are able to afford the payment. It’s the percentage of your debt in relation to your income. For example, if your gross income is $1,000 and your total debt is $500 per month then your debt-to-income ratio will be 50%.

Well, you absolutely love this house and you are willing to cut down on other costs to compensate for the increase in payment, but now you have a high DTI ratio to deal with which is keeping you from qualifying. What now?

I’m pleased to announce that we are able to qualify you based on a 1.25% property tax rate regardless of the actual rate which will allow you to close your loan move into your home in as little as 30 days. This is a niche solution that we offer to our clients and as proven to be a great asset for home-buyers.

Time for the disclaimer… your tax rate will be based on the area or community not on 1.25%. One way you can check to find out what your tax rate would be is by going to the county’s tax assessor’s website and using their calculator to figure it out. For San Bernardino County you can visit www.mytaxcollector.com and navigate to the “Estimate your new tax bill” link. Fill in the blanks and wah-la, you got your tax rate. Another way would be to email me the address and I can pull a Tax Roll from our partner title company which will list all the info that is needed to determine your total tax rate including any mello-roos and assessments.