Where is the money?

Most home buyers use some kind of financing to buy a home. Over the last 15 years or so the home buying process has changed because


of technology. The shopping process is easier because of the internet. It is easier to do some research and to learn about real estate and about a particular home. There are online home valuations and information about what the previous owner paid for the home and more.

The process of getting a loan to buy a home hasn’t changed much and most of it is shrouded in mystery. Home buyers fill out forms like crazy and send information to the lender.

Once a buyer has a contract to purchase a home the process goes into a kind of black hole. The property is appraised and the process goes to “underwriting”. Sometimes we get to talk to the underwriter but most of the time we don’t get to and they always seem to be on vacation the week of the closing.

When I work with home buyers or sellers I have no control over the mortgage process and a big part of my process is to constantly ask for updates. It seems like it all works out most of the time.

During the great recession and housing market crash financing “fell through” a lot more often than it does these days.

Often when something does go wrong it is people like me who become the “face” of the purchase and end up absorbing the blows and explaining what went wrong even though we do not have any control over the process.

Working with a loan officer who doesn’t return phone calls or give updates can turn a positive home buying or selling experience into a hellish one.

I am looking forward to the day when consumers will start to benefit from today’s technology when they want to borrow money. A day when the process is transparent and the consumer is in charge. There is plenty of room for better customer service in mortgage and finance.

Chose your lender wisely. Get recommendations from real estate agents and friends, relatives, neighbors and co-workers who have recently purchased homes.

Closing costs and fees and stuff

Getting an offer accepted for the purchase of a home is just one step in a process. The purchase price of the house is actually more than the amount the buyer offers when closing costs are factored in.

Real estate agents don’t create closing costs. There is a state mortgage registration tax of0.0023 and them add on another .0001 for the state environmental response fund.

Some real estate companies tack on an extra few hundred and there are closing and lending fees, and a loan origination fee. There are prorated property taxes and an insurance binder.

Real estate agents who work with buyers get paid by the listing broker, who gets paid by the seller, but not until the sale closes.

There are some who say a buyer’s agent services are free and others who contend that the fee is baked into the price of the house. Either way, a buyers agent can be a great investment if she has a lot of experience, can save you money and help you make a wise choice when buying a house.

Home buyers using any kind of financing will get a good faith estimate that shows fees and closing costs. These good faith estimates must closely match the settlement statement the buyer will receive three days before the closing.

Home buyers should ask their mortgage professional how much cash they will need in addition to the down payment to cover closing costs.

Sometimes buyers finance their closing costs by having them rolled into the loan. Sometimes buyers ask sellers to pay the closing costs which doesn’t work well in multiple offer situations.

There are programs that offer assistance with downpayment and closing costs. I had one client this summer who brought a couple hundred dollars to the closing. The rest of the funds came from a kind of low-interest second mortgage.

The buyer has a place to live for less than what he would have to pay for rent and he still has funds in his savings account.

water lily – at Como Park

Using a reverse mortgage to purchase a home

Maybe you have heard of reverse mortgages. They are not a scam but there are reverse mortgage scams.The youngest borrower in the household must be at least 62 and the homeowners must have a lot of equity.

The reverse mortgage is exactly as it sounds. Instead of making a house payment every month the mortgage company sends the homeowners a check. There are no mortgage payments. The mortgage is due when the home is sold or when the owners die.

The reverse mortgage is a way to unlock the equity that might be tied up in real estate.

Reverse mortgages can also be used to purchase a home. They do require a down payment and the youngest borrower must be at least 62. The borrows must have a lot of equity or own the home outright and have good credit ratings. On loans for purchases, buyers must have the resources to pay property taxes, homeowners insurance, and association dues if applicable.

Reverse mortgages can also be used for home improvements. Sometimes people want to stay in their home and age in place but the home needs some upgrades to make it more senior friendly.

Talk to your bank or lender if you are interested in any of these programs and learn more. There is also counseling for people who choose a reverse mortgage. For more general information visit the HUD.gov web site and read about reverse mortgages.

Historic and current mortgage rates

chart of interest rates
Freddie Mac rates

Mortgage interest rates have been at an all-time low. it is possible that they will go all the way up to 5%, maybe even this year. Back in 2006 during the housing price peak and before the housing market crash and the great recession mortgage rates were over 6.3%. When we look at mortgage rates I think putting them in context helps.

Higher rates are bound to have an impact on the housing market. Here in the metro area, there are so few houses on the market that it will be hard to see the impact.


Can you afford a house?

The question is really about being able to get a mortgage. Most people can not pay cash for a home and need a mortgage and need a pre-approval stating that they are at least qualified for a mortgage.

The easy but not exact rule of thumb is that if you add up all your monthly expenses and a mortgage and divide by your gross monthly income you need to come up with a number no higher than 36%.  Lenders are looking at an income to debt ratio. Debt is car payments and student loans and credit card payments and of course a monthly mortgage payment.

There are mortgage calculators all over the internet which makes it easy to calculate how much a mortgage payment might be.

Home buyers also need a down payment and the ability to pay closing costs. Down payments start at about 3% and typical closing costs will add up to about 3% of the loan amount. There are programs for downpayment assistance and sometimes sellers can help with the closing costs.

We struggled to buy our first home but have never regretted it.

Also see Housing for minimum wage earners

Your house is a bank?

Mortgage interest rates have gone up a little from what has been an all time low. Some are even up over 4%. GASP! I can not help but remember all the years when they were over 8% and even over 15%.

However when rates go up fewer people refinance and that means that fewer loan officers have loans to work on which means their income goes down. Get ready for the post cards and mailers about how much you can borrow.

Last night I even saw an advertisement about how your home is your bank. Using home equity as a source of cash isn’t a bad thing. Especially when the money is used for a new roof or for that boiler you have always wanted. The interest rates are usually more favorable than they are on other types of loans and for some there is a mortgage interest tax deduction.

However there is some danger in treating a home like a bank, because it isn’t just a bank it is where you live and probably your most valuable asset. It wasn’t all that long ago that home values went down and millions of home owners ended up owing more on their homes than the homes could be sold for. Getting into a negative equity situation can lead to foreclosure.

There are numerous advantages in not borrowing money that should also be explored before withdrawing money from the bank of home equity.

Maybe I just have the post housing crash jitters. . . but please borrow responsibly. It doesn’t seem like the banks suffered because they lent money to people who could not pay it back but many former home owners did and still are.