"All Things Edmonds" Blog

I read this very interesting article about some of the hidden costs of refinancing too close to a sale date.  I thought re-posting it would be beneficial to my readers.  Let me know what you think. 

Obviously, this means that the decision on whether to refi or not will be on a case-by-case basis. Feel free to contact me if you have questions on whether it is the right decision for you.

Click here to read the article.

Casey

You've been paying your mortgage faithfully every month - even as your home's value has plummeted quicker than Charlie Sheen's image. You watch as your neighbors walk away from their mortgages and you wonder why you shouldn't do the same.  The Standard & Poor's/Case-Shiller 20-city index shows price declines in 19 cities from January to February. The index fell for the seventh straight month. Prices fell at a faster rate in 11 markets in February compared with the previous month. Have you ever thought you were so under water with your home that you might just simply walk away?

More and more, people with even stellar credit ratings are making the strategic decision to walk away from their homes (one study says that last September alone, 35% of mortgage defaults were strategic). In what industry experts are calling "strategic walkaways," homebuyers with excellent credit are simply walking away from their mortgages.  And this is more than a rarity. It has been a multi-billion issue for lenders nationwide.

The Fair Isaac Company that developed the FICO scoring has developed a proprietary tool that they claim allows them to identify these traditionally low-risk borrowers who might decide to abruptly walk away from their mortgages. According to FICO, they can identify two-thirds of stretegic defaulters who otherwise would be undetectable. In a sense, they are identifying ticking time bombs.... borrowers who are paying their monthly mortgages on time and then suddenly stop, simply walking away from their homes.

FICO is using this new tool to pre-identify strategic defaulters so that lenders can intervene before borrowers walk away. FICO calls this intervention "pre-delinquent treatments" and they include such things as warning borrowers of the consequences of not paying their mortgage (lower credit scores, inability to get loans, etc).

While the details of how they determine who might be a strategic defaulter remain a secret, some indicators that they track are:

• How long the borrower has owned the house.  The shorter the time, the higher the risk.
• Variations in recent credit usage history. Are they opening new accounts, maxing out credit lines, etc?
• Regional statistics on how much home values have declined.

So, if you have a high credit rating and receive a call from your lender, don't be surprised if it's not to thank you for  your loyal business. They may just be firing a shot over your bough.

Casey

You may be leaving serious money on the table every year by failing to deduct certain allowable costs from your taxable income.  And to add salt to that financial wound?  Uncle Sam will never complain or let you know that you "forgot your wallet" as you leave.

Every dollar you fail to deduct can translate into as much as 50 cents in taxes that you may be unnecessarily paying.

And you don't even have to be a homeowner. For instance, renters may be able to deduct home offices on their taxes.  If you are a homeowner, your home office, in the same example, may be deductible against your mortgage.

I am not a CPA. If you think you'd like a 2nd look at your taxes, you should consult a tax advisor for more info.

Here's to hoping you get a refund this year!

Casey
Edmonds, WA

Here's some good news that should help make selling (and buying) a home a little easier:

Last year the Federal Housing Administration (FHA) announced that it intended to cut the maximum seller contributions from 6 percent to 3 percent for purchasers using FHA-insured mortgages. Seller concessions or contributions are oftentimes a critical component to FHA-financed transactions since many buyers need the seller credits to pay for closing costs. They make otherwise unaffordable deals affordable by allowing buyers to use their cash towards down payments and allowing sellers to pay closing costs.

FHA is now considering a more flexible approach that may vary from region to region. We won't know until a formal announcement is made in April. But the fact that they are reconsidering is a good sign as 3% doesn't always cover all closing costs and with buyers already strapped for cash, many deals that would have otherwise fallen apart, may now be within reach.

Casey
Edmonds, WA

For the first time in 30 years, the U.S. Department of Housing and Urban Development (HUD) has revised its rules regarding disclosures that lenders and mortgage brokers must give to consumers who secure a home loan or refinance. These rule changes are meant to provide greater clarity to the actual cost of borrowing money. And, according to HUD, should save mortgage shoppers on average "$700 at the closing table."

Different people will disagree as to whether these changes are right. Certainly the intent is right. But nothing replaces a trusted Realtor to advise you on any home loan purchase or refinance. Good agents will always help you determine which loans are a good value and which are less of one.

Good Faith Estimate (GFE)
GFE's are intended to give mortgage shoppers an *estimate* of the cost of purchasing a mortgage from various lenders out there. The idea was to give them a ballpark figure (hence "Estimate") and consumers trusted that lenders were giving them relatively accurate figures  (hence the "Good Faith").  Presently, a GFE is actually not required to be given to consumers. I always insist that my clients be given one however, since it's not only their right, but helps them understand the cost of home loans from the various lender options in the market today.

The new HUD rules for will now require that lenders and mortgage brokers provide consumers with a standard Good Faith Estimate that clearly discloses key loan terms and closing costs.

HUD-1 Settlement Statement
Upon closing a loan transaction (be it a new mortgage or a refinance of an existing one), lenders are required to produce a standard closing cost form commonly known as the "HUD-1" form. This form details the actual costs of the loan, as opposed to the estimated costs given in the GFE. 

Because the time lapse between the GFE and HUD-1 statement is typically 30-45 days, many borrowers can forget what they were told at the beginning of the process.  New HUD rules now stipulate a new HUD-1 form (3 pages long now) that requires lenders to show a side-by-side comparison of estimated costs (GFE) with actual costs (HUD-1). This is not a present requirement. This change can be found on the top half of page 3 of the new form.

What this means for you
These new HUD rules are meant to provide consumers with more information. Continue to shop as you have for a home loan and definitely continue to use the expertise of your trusted local real estate professional to help you understand what you're given.  Good lenders and mortgage brokers are probably already providing you with the information you need to make sound financial decisions when it comes to home loans.

If in doubt, remember that the customer is always right. Never feel intimidated or stupid to ask questions or to questions what you're told. If you do, you might want to consider finding a new mortgage lender.

December 7, 2009 -- On Monday, the Federal Housing Administration started limiting the number of buyers in condo buildings that can get loans insured by the agency. The rules also put restrictions on buildings with poor finances, too many delinquent owners and a high number of rentals.

First, a little background for you...
The Federal Housing Administration (FHA) determines which condo complexes throughout the country are eligible for FHA financing. If you are looking to get an FHA-insured loan, you can only purchase a condo within a complex that is FHA-approved. It used to be that you just found an FHA-approved complex (with the use of a resourceful Realtor) and were good to go. But on Monday, FHA adds newer restrictions -- even beyond just finding approved complexes.

Why not just get "conventional" financing? Well, with a minimal requirement of just 3.5% down, FHA loans are a very attractive option for many home buyers. And with default rates on FHA-insured loans at about 18%, the FHA is looking for more security. I wrote more about lending restrictions on FHA loans in an earlier blog. For those complexes that are approved, there are new restrictions.

Here's a summary:

• Only half of all units wiithin a complex are allowed to be FHA financed (the others being conventional loans or other financing).
• In 2011, this number goes down to 30%.
• There has been talk that the minimum down payment threshold of 3.5% may go up. No word yet on how much but if they are as arbitrary as I think, it might be 5%.
• It's not all bad. The FHA has relaxed the numbere of pre-sold units that must have already closed before the lend money to anyone. It used to be that 50% of new buildings had to be sold; that number is now 30%.

So, if you're considering purchasing (or even selling) a condo in Edmonds, keep in mind that there are new guildelines that your lender should be aware of. Ask first; you'll save some time and heartache. 

Now I'm off to educate my own condo clients....

November 30, 2009 -- The Federal Housing Administration (FHA) has proposed tighter rules for lenders to reduce its risk and assure it can cover future losses. More on this as new information comes out, but here's a quick summary of why they are doing this and what impact it will have on our local real estate market in Edmonds, WA.

The FHA insures almost a quarter of all new loans made in 2009, and about 80 percent of that business is from first-time homebuyers.  Especially with the $8,000 homebuyer tax credit, the rush for new purchases has perhaps given some lenders incentive to push the lending limits for less qualified buyers.  This results in higher rates of mortgage delinquencies and because FHA guarantees these loans, they are left "holding the bag." 

Here's an interesting statistic: for the first nine months of 2009, 18% of FHA borrowers were at least one payment behind or in foreclosure, compared with 14 percent for all loans, according to the Mortgage Bankers Association.  Part of why FHA guarantees these loans is to promote home ownership among folks who otherwise might not afford it.  It gives lenders an incentive to lend out money.  But at the same time, just because the FHA is guaranteeing these loans isn't license for lenders to qualify the really unqualified.  Or so says the FHA.

The New Rules
The FHA proposes to require lenders to have a net worth of at least $1 million in the first year and $2.5 million within three years. That's up from the original requirement of $250,000. The government agency also wants to tighten approval requirements for lenders who want to originate, underwrite or service FHA loans and make them liable for those loans, including ones originated by mortgage brokers. 

The agency is tightening its regulations as its finances continue to worsen. FHA said in mid-November that its reserves fell to $3.6 billion, compared with $685 billion in outstanding insured loans for the fiscal year ended Sept. 30. That's a ratio of 0.53 percent and far below the 2 percent threshold required by Congress.