FHA & VA Assumptions

Not many buyers have assumed a mortgage in the past 25 years. Most people think it was because FHA and VA in the late 80’s began to require that buyers qualify for the assumptions. Not having to qualify for a mortgage would certainly benefit certain buyers. 

If a homeowner must qualify for an assumption like a new loan, they'll generally choose the mortgage with the lower interest rate.  Over the past 25 years, rates have been trending down but it appears that rates have bottomed out and will gradually increase.   As they continue to rise, the lower rates on the FHA and VA loans created in the last few years will appeal to buyers even if they do have to qualify for the assumption.

There are significant advantages to assuming one of these government insured mortgages if the current interest rate on a new loan is higher:

1. Mortgage is further into amortization schedule
2. Lower interest rate loans amortize faster than higher interest rate loans
3. Lower closing costs than a new mortgage
4. Easier to qualify than on a new mortgage
5. No appraisal required

FHA assumptions are only allowed as owner-occupied residents. The borrower must meet current FHA guidelines for borrowers. The total debt ratio including house payment to be assumed cannot exceed 41% of borrowers’ monthly gross income.
VA loans are also assumable with buyer qualification. However, in order for the veteran Seller to have their eligibility reinstated, the buyer must also be a veteran with eligibility.

A 1% difference in the current rates and a lower assumable mortgage rate begins to make it very attractive to assume a mortgage. When the differential becomes even greater, assumptions will become more prevalent than they’ve been in over twenty years.

Debt Relief = Income

Many times a homeowner might feel relieved being out from under the obligation of a mortgage they can’t afford even though the property was lost due to foreclosure or short sale. If a lender cancels or forgives debt, a taxpayer must include the cancelled amount in their income for tax purposes depending on the circumstances. The tax significance could be serious.

Congress enacted the Mortgage Relief Act specifically to help homeowners who might be affected in the housing crisis that started approximately in 2007. The Act expired on 12/31/12 but was temporarily extended by Congress until December 31, 2013.

This relief only applies to a taxpayers’ principal residence which does not include second homes and investment property. The maximum amount is limited to $2 million of mortgage debt forgiveness or $1 million if filing separately.

Another provision is that the debt relief is limited to acquisition indebtedness used to buy, build or improve the property. It excludes cash equity loans whether made separately or in a refinance of the original mortgage.

Due to the serious consequences involved in short sales and foreclosures, it is advised that homeowners faced with this possibility should seek expert advice from their legal and tax professionals.

Serious Buyers

Inventory is dramatically shrinking and it is commonplace in many markets to have multiple offers on a home. While the sellers would prefer to be able to choose the best offer for them, it can be incredibly frustrating for the buyers who might consider the following tips to get their offer accepted.

1. Remove the uncertainty that you may not be approved for a mortgage by having a pre-approval letter from your mortgage company.
2. Show your sincerity by increasing the normal amount of earnest money customary for the area and price of the home. The earnest money will be applied toward your down payment and closing costs. Consider placing even more money in escrow when the contingencies have been met.
3. Specify a closing date in the contract but acknowledge that you can be flexible to accommodate the sellers moving date. If it becomes an issue, it still must be mutually agreed upon.
4. Make the contingency periods shorter if possible to make the seller feel that they’ll know sooner that the offer is solid.
5. If the contingency really isn’t important to you, leave it out of the offer. The more contingencies included in a contract, the more the seller will feel might happen to keep it from actually closing.
6. Write a personal note to the seller explaining why you like and want their home. Consider including a picture of your family and pets.
7. Physically sign the offer with a felt tip pen of contrasting color. You’d be surprised how this adds a personal touch to the offer.

Offer a fair price for the property in your initial purchase agreement. It shows sincerity and good faith that you’re actually trying to purchase the home and not trying to take advantage of the seller. The old adage that you can always go up later may never happen if there are multiple offers on the property in the beginning.

Renters Want to Buy

Fannie Mae, in a recently released study, states that consumer attitudes continue to be favorable about homeownership, particularly with the younger generations, ages 18 to 34. Slightly over half of them think that owning makes more sense than renting when comparing the financial and lifestyle benefits.

90% of aspiring owners expect to purchase a home someday and slightly over half think they’ll do it within five years. The primary challenges are having sufficient savings and the difficulty of getting a mortgage today. Younger renters see renting as a temporary stepping stone toward homeownership.

Homeowners are far more likely than renters to be “very positive” about their housing experience. Some of the benefits identified are:

• Having control over what you do with your living space
• Having a sense of privacy and security
• Having a good place for your family or to raise your children
• Having the best investment plan
• Living in a nicer home
• Building up wealth
• Saving for retirement
• Living in a place where you and your family feel safe
• Feeling engaged in your community

To satisfy a buyer’s doubts about qualifying for a mortgage, make an appointment with a trusted mortgage professional. If you’d like a recommendation at no cost or obligation, please contact me at MeredithWhisnant@gmail.com.  Check out this Rent vs. Own to see the real cost of owning a home.

For more information about the Fannie Mae survey in presentation form, Click Here.

 

What's It Worth?

How much is a one carat diamond worth? Anyone who has shopped for one knows that the price could have a significantly wide range of value. It's been said that purchasers  should consider the color, cut, clarity and carat size to compare stones but when it gets down to decision time, buyers still want to know “how much is it worth?”

Real estate valuation can be equally as confusing to the public. There are three commonly used tools that today’s home buyers rely on to make decisions but they vary significantly in the methods used to make the determination as well as the possible final consideration.

Appraisals are an opinion or estimate of value based on specific guidelines made by individuals who are licensed and possibly certified. Buyers and sellers may be reluctant to engage an appraiser because there is a fee of several hundred dollars that must be paid in advance even if no sale is ever consummated.

A Broker’s Price Opinion (BPO) as defined by the National Association of REALTORS® is an “estimate of the probable selling price of a property.” The Dodd-Frank Act describes a BPO as “an estimate…that details the probably selling price of a particular piece of real estate property and provides a varying level of detail about the property’s condition, market, and neighborhood, and information on comparable sales, but does not include an automated valuation model.”

A Comparative Market Analysis (CMA) is a commonly used tool of salespeople to provide information to buyers and sellers to facilitate a sale. In most cases, it would be difficult to distinguish a CMA from a BPO because the steps considered are essentially the same and practitioners commonly use the terms interchangeably.

Another method called Automated Value Model (AVM) use software to search available data on the Internet to arrive at an approximation of value. Zestimates found on the Zillow site use this method. AVM’s may not consider all the market activity such as MLS sales and active listings. They can’t make adjustments based on human experience and market knowledge.

For what it’s worth, a buyer or seller might want to acquire as much current and factual information as possible from a trusted real estate professional familiar with the market before making a decision on the largest single asset most people acquire.

Will the "Good Life" Be Ready When You Are?

The Life of Riley was a TV show from the 50’s starring William Bendix but the title’s origin came from an expression meaning that a person was living the “good life.” Most people envision themselves living the good life by retirement but don’t really have a plan to get there.

There’s a rough rule of thumb used to estimate how much net worth a person would need by the time they retire to generate a certain income. The target annual income is divided by a safe, conservative yield to determine the investable assets needed.

A person who wanted $100,000 annual income generated from a 5% investment would need investable assets of $2,000,000. If a person had $500,000 now, they would need to accumulate $1.5 million more by the time they retire. If it was estimated to be 15 years away, they would need to save about $100,000 a year, each year until retirement.

It is a sobering example that could be depressing without a plan. It might be easy to say, “I should have started sooner” which may be true but there is still hope.
Gradually, over the next several years, accumulate rental property and allow the tenant to retire the debt for you. The equity in each property will grow from the amortization of the loan each time a payment is made. It also grows as the property increases in value due to appreciation.

Single family homes as rentals offer the investor an opportunity to meet their retirement and financial goals for the following reasons:

• The ability to borrow large loan-to-value mortgages
• At fixed interest rates
• For long terms (easily up to 30 years)
• On appreciating assets
• With significant tax advantages
• And reasonable control not offered by alternative investments.

 

Breathe Easy

The benefits of regularly changing the heating and air-conditioning filters are obvious to homeowners; the real challenge is creating a system to make sure it gets done. 

A reasonable schedule would be to replace it with a new one-inch pleated filter every 60-90 days. Households with shedding pets should consider replacing them every month. Some people change their filters every month when they pay their electric bills.  A simple system would be to set a recurring appointment on your calendar like Outlook or Google.

Filters trap dust, mold and bacteria which can directly affect the air quality and play havoc with your allergies. When a filter is dirty, it prevents proper airflow and allows dust, dirt and allergens to blow through your home. Changing your filter regularly helps to avoid maintenance, improves equipment life and produces increased energy savings.

When shopping for filters, it’s understandable to look for the best bargain but the cheapest price may not be the best choice. When purchasing, recognize that HEPA-rated and HEPA-type filters are not the same thing. HEPA stands for high-efficiency particulate air. A HEPA filter meets or exceeds standards for efficiency set by the U.S. Department of Energy. Most HVAC contractors recommend HEPA filters.

Some filters need to be changed monthly and other types have manufacturer recommendations of every three months. An alternative to disposable filters are the permanent, washable types. These will cost more initially but because you can clean them and re-use them, eventually, you’ll recapture the cost and realize savings.