Lending Standards: Are They Actually Loosening?

by The KCM Crew on May 2, 2013 · 1 comment

in For Buyers

money lockIn a recent story on MSN Money titled, Mortgage Borrowing Is Getting Easier, it was revealed that:

“Credit is not raining down on would-be borrowers, but it will be a bit more accessible this year.”

The article bases it findings on the Federal Reserve’s January Survey of Loan Officers. Dan Greene of the Daily Mortgage Report addresses the survey:

“The Q4 2012 survey marks the ninth straight survey in which fewer than 10% of banks tightened standards. Many more are loosening instead. It’s a good sign for the 2013 home purchase market, which has shown strong buyer demand and rising home prices. Despite what you may hear from friends and neighbors, the nation’s banks are no longer tightening their respective mortgage lending standards.”

In the article, Cara Hawkins, a production manager at Ameripro Funding also weighed in on the subject:

“There are more players in the mortgage buying ‘game’ than in past years, which opens the door to looser credit standards because the appetite for loans on the secondary market is higher. While it is still fairly black and white when it comes to mortgage qualification, I am seeing an increase in more approvable loans than in past years because of the market opening up.”

And a recently released report from FICO/PRMIA, US Consumer Credit Risk Trends and Expectations showed:

Expectations among bank risk professionals for the relaxation of lending standards increased sharply, rising from 12.1 to 19.9 percent

Why Are Lending Standards Easing?

The FICO/PRMIA report revealed two reasons for the industry’s current comfort with the housing market.

  1. 83.7% believe that the level of mortgage delinquencies will decrease or stay the same, a significant improvement over last quarter.
  2. 70.8% feel that home prices were rising at a sustainable pace.

The Niche Report also covered the FICO/PRMIA report explaining:

“One out of five bank risk professionals now expect the approval criteria for loans to become less stringent, the third highest level ever registered for looser lending standards in the three year history of the FICO survey.”

What Will This Mean for the Real Estate Market?

Dr. Andrew Jennings, chief analytics officer at FICO and head of FICO Labs, said it best:

“The latest survey results, combined with data that indicates the real estate market is improving in many regions, paint a positive picture for a sector of the economy that has been slow to join the recovery. Mortgage lenders have been understandably guarded over the past five years. The improvement in their sentiment should be welcome news, and I wouldn’t be surprised to see lenders cautiously expanding their mortgage and home equity lending businesses.”

Buy or Rent: Which Makes More Sense Financially?

by The KCM Crew on May 13, 2013 · 19 comments

in For Buyers

rent buyEvery potential home buyer has to stop for at least a moment and consider this question. Today, we want to look at one of the many financial reasons to buy instead of rent: the housing expense moving forward.

According to the latest Existing Home Sales Report from the National Association of Realtors, the median sales price of a home in the U.S. is $184,300. The mortgage payment (principal & interest) on that purchase would be $661.89 assuming a 20% down payment and a 3.5% mortgage interest rate. Currently, the median asking rent in the U.S. according to the Census Bureau is $717 a month.

We realize that the two payments do not necessarily reflect the housing cost on a similar residence. However, that is not the point of the post. All we are saying is that the monthly housing expense on a median price home is $661.89 and the median rent is $717. We now want to discuss what will happen to these costs over time.

The principal and interest portion of the mortgage payment is locked in for the next 30 years. We know real estate taxes may be included in the payment and will increase to some degree over that time. We also acknowledge that the homeowner will have occasion to spend money on repairs. They also receive many tax advantages as a homeowner.

However, the actual monthly housing expense remains the same for the next 30 years.

Now, let’s look at what happens to a rent payment. The best thing to do to predict the future is to study the past. Here is a graph of the median asking rent since 1988 based on Census Bureau data:

Rents

We believe rents will follow their historically pattern and increase dramatically over the next 30 years. Buyers have a choice: either lock in your housing expense or deal with the uncertainty of rental increases.

What is a Short Sale – Buyer

A short sale occurs when a current homeowner is attempting to sell their home for less money than currently owed on the property. Often times, this is prompted by a homeowner being delinquent in their payments and it is anticipated that the lender will be initiating a foreclosure action. In many cases, the homeowner is currently facing an active foreclosure proceeding and is trying to sell before the lender takes ownership of the property.

The stages of buying a short sale
1. Contact Amy Nelson (630) 542-8848 – Why contact Amy?
It is critical to use an agent familiar with the stages and unique requirements of a short sale. Prior to placing an offer on a property, it is critical to determine what stage of the process a short sale is in. This allows the buyer, to assess whether that is a timeline you are able to accommodate.
2. Make an Offer
With a short sale all offers are provided to the seller’s agent and the purchase price is negotiated with the current homeowner. However, the purchase price must be approved by the current property owner’s lender(s). It should also be noted that in a short sale or foreclosure situation, lenders rarely agree to pay for pest certifications, roof inspections or other repairs. That is the responsibility of the buyer. You should be aware of these conditions prior to presenting an offer.
3. Short Sale Lender Reviews the Offer
Depending upon the stage of the short sale, the current lender(s) may review an offer for weeks or even months without providing a response to the buyer. There are distinct stages that a short sale must proceed through including having a negotiator assigned, ordering a BPO, a type of appraisal, submitting the offer to an investor, etc. This is when the quality of the selling agent is key to you to stay appraised of the status of your offer. All progress is dependent upon the lender and this stage can be quite frustrating if all parties do not maintain regular communication.
4. Lender Accepts or Rejects Offer
Prior to this stage it is strongly advised that a buyer not spend any out of pocket expenses on the home for items such as an appraisal for their financing. The seller’s lender has the right to revise or reject the buyer’s and seller’s agreed price at any time. Buyers should be cautious of committing any finances prior to written confirmation of acceptance. Offer will either reject, counter or accept offer. Buyer has option to meet counter offer or reject offer from bank.
5. Acceptance of Offer for Buyer
An acceptance letter will be furnished by bank to seller with an expiration date. Buyer is obligated, once offer is accepted, to close on the property on or before that date.

What is a Short Sale-Seller?

• What is a Short Sale?
In the world of real estate, a short sale refers to the sale of real property for an amount less then the amount owed on the property. In the short sale scenario, the bank agrees to accept less then the full balance due on the debt, and usually “forgives” all or a large portion of the difference.

• How will the short sale affect my credit?
Short sales are still a relatively new concept. Banks have the option of submitting the short sale to the credit bureau as “Paid in Full” or “Settled for less then full balance”. As far as your credit score is concerned. There is no evidence whatsoever to support that a short sale will lower your credit score. Some have the idea that this is like a bankruptcy or a foreclosure. That’s far from the truth! In a short sale, the lender is simply allowing you to pay less then you owe! If you are currently behind on your mortgage or facing foreclosure, the short sale will actually help your credit! How? Because once you are approved for the short sale, all collection activity will STOP and you will avoid foreclosure!

• Who benefits from the short sale?
Short sales are a win-win situation. Lenders, mortgagees, and real estate agents all benefit from the successful short sale. Mortgagors get the majority of their money back, Mortgagees get the relief they need and are able to sell their property and avoid foreclosure, and real estate agents can facilitate the transaction and receive compensation (commission) from the sale of the property.

• Why would banks forgive the difference?
To mitigate their losses, banks often accept a settlement of less than what is owed on the property. When faced with the option of getting the property “back” through foreclosure, a short sale often makes a much wiser business decision for the bank.

• This sounds too good to be true!?
Not really. Things that are “too good to be true” usually don’t make good economic sense. The short sale makes good common and financial sense for the banks who grant them. The fact of the matter is mortgage companies and banks are NOT in the real estate business. They are in the LENDING business. The last thing they want is that property back.

• Can FHA, Conventional or VA loans receive a short sale?
Yes!! We have successfully negotiated short sales for each of these loan types.

• Why “negative equity”?
Here are a few common reasons:
1. Person bought at the height of the market and the market has now declined or paid more than the property was worth.
2. The area has become less desirable for any number of reasons, so property values have declined.
3. Person purchased the home with little or no money down and wants to sell within a few years of purchase and the property value has not increased during that time. Therefore, costs associated with selling the property may create a balance due at closing.
4. Person refinanced the home (with a high appraisal value) and now has little or no equity.
5. Person bought in a brand new subdivision or recently developed area that has not been fully developed or has not appreciated (or has depreciated) in value.
6. The market is soft because there is too much builder (new home) inventory or too many existing homes on the market (buyer’s market)

• What if I owe what my home is worth?
Even if you owe exactly what your home is worth, you may still need to do a short sale in order to pay for the costs of the sale (agent fees, title policy, and other seller closing costs).

• What if I’m not behind on my payments?
Short sales work – even if you’ve never missed a payment!! Yes, I know.. short sales have gotten a stigma of being only available for folks who are in foreclosure. But I have successfully negotiated dozens of short sales for folks who have never missed a mortgage payment! They just happen to be in a negative equity position and need the short sale in order to sell their home.

• How long does it take?
Short sale approval once we have a contract can take 30-45 days, sometimes longer.

• What if my home is already in foreclosure?
Your foreclosure sale will usually be suspended during the short sale process. That’s why it’s imperative that you contact me right away!!!

• Will my lender send me a 1099 on the debt forgiven?
In 2007 the U.S. Congress passed the Mortgage Debt Forgiveness Relief Act and it is in effect until 2012. As a result of that act, borrowers no longer pay taxes on the debt forgiven on their primary residence. So if the property is your primary residence, then no, you should not receive a 1099 for the debt forgiven or have a pay any taxes on the forgiven debt.

For investment property, the lender does have the right to report to the IRS the amount they have “forgiven” in a short sale transaction, the amount of the resulting tax will be far less then the debt forgiven.

• How much will the short sale cost me?
We strive to complete the entire short sale process without asking the seller bring any money to closing. In late 2007, some lenders changed their policies and there are certain expenses that the lender might not pay, such as unpaid Home Owners Association dues, certain escrow fees, and some minor closing costs. In most cases, these items total no more than $300 to $800. We will not know exactly how much they will be, if any, until we are closer to a closing. It is a good idea to set aside $500 to $1000 for these incidental expenses.

• What is a Short Sale?
Although this may sound high, it is usually less than one month’s mortgage payment. The Nelson Real Estate Team will get the lender to forgive your unpaid taxes, unpaid mortgage payment, pay all of the real estate agent’s fees associated with the sale and customary seller closing costs. The savings to you is typically in excess of $20,000, so the amount you might have to bring is a small price to pay for the large debt forgiveness.

 To be able to buy after a short sale?

Here are the guidelines:

-Take advantage of declining market conditions, and
– Purchase at a reduced price a similar or superior property within a reasonable commuting distance.
The grid provides guidance for financing a new loan transaction following a Pre-foreclosure or Short Sale.

Pre-foreclosure/Short Sale of Prior Property
**Delinquent Mortgage
- Treat as foreclosure. A minimum three years must have elapsed since the date of pre-foreclosure/short sale completion
- If FHA insured loan, CAIVRS will reflect claim paid.
- Exceptions may be made to the three years for isolated cases only:
-The default was due to circumstances beyond the Borrower’s control (such as death of primary wage earner, long term un-insured illness, loss of job, other circumstances beyond Borrower’s control) and
-Credit was satisfactory prior to the circumstances that led to the default
**Non-Delinquent Mortgage
- No late mortgage payments made in the 12 months prior to the short sale
- No late payments on any installment debt made in the 12 months prior to the short sale
- Subject property is not located in the same geographic area as the property on which the short sale was completed.
- Proceeds from the short sale serve as payment in full. The existing note holder must write off the amount of indebtedness that cannot be refinanced into the new mortgage due to a decline in property value and/or a reduction in income.
- Follow current FHA and GMAC Bank credit guidelines