Category Archives: First Time Buyers

Are We Facing A Housing Shortage?

Posted on by
68

In looking at the latest Northwest MLS statistics for King County, it would be tempting to say that our housing market is recovering.  But it is an odd mix of data.  Single family home sales volumes are up (even better than last year), inventory is down sharply from last year, prices seem to be starting to rise again, and average days-on-market is dropping.  That all sounds pretty good.  (larger residential stats charts)

Residential stats 750

(Note that the Northwest Multiple Listing Service neither prepares nor is responsible for these charts – the interpretation is my own.) 

But condominium sales are still slow (though rising some), inventory is staying high, and median prices are not rising.  That doesn’t sound quite as good.  (larger condo stats chart)

Condominium stats 750

What are we to make of this seemingly conflicting data?

 What it looks like to me is that we are in the early stages of a housing shortage.  While Seattle and the west side have been built out for decades, Bellevue and the east side communities have been absorbing most of the region’s growth for the past 50 years or so.  But we passed the Growth Management Act in 1990, and then we added the Critical Areas Ordinances.  As a result, it has become harder and harder to get permits for housing developments of any significant size.  In fact it appears that over the last 10 years or so it has become far easier to get a permit for a 100-unit condominium high-rise than for a 100-home residential development.  The rate of application for new building permits “fell off a cliff

Lower Interest Rate – Escrow Timeframe

Posted on by
18

1) How long is Escrow?

The correct answer is it can be as long or short as the buyer and seller want it to be. However a long escrow timeframe can cause an escrow to fail, because it can create a situation where the buyer no longer qualifies for the mortgage. Just because the buyer qualified when the offer was submitted, doesn’t mean the buyer will continue to qualify on the day the lender is supposed to fund the loan so the escrow can close.

A lender assumes a given interest rate when they qualify the buyer. If that interest rate is different for the reasons detailed below, at time of close, the buyer may not qualify at that changed interest rate.

2) Why do most agents write a contract to close in 30 days or less?

Dan Green of The Mortgage Reports wrote a post today explaining why a shorter escrow timeframe equals a lower mortgage interest rate. His post explains that a 60 day lock “costs more” than a 30 day lock, often in terms of higher interest rate vs. higher cash costs to close.

In order for the buyer to get the rate they think they are getting, they have to be able to lock that rate for no longer than 30 days. While the buyer is not required to lock that rate, it should at least be a possibility. If a buyer looks at a rate quote of 5%, they often are not told that assumes a rate lock period of no more than 30 days. So if they sign a contract to close in 60 days, and then try to lock the rate in the first week of their contract, they will find the rate to do that is higher than the rate they were quoted the day they made the offer.

The rate can change in a few hours without the issues noted in this post. But even if the rate does not change at all, the rate will be higher if you try to lock it through a 60 day closing vs. a 30 day closing.

The honest lender who asks “what is your proposed closing date” and gives you a “60 day lock rate quote” will be higher than the lender who assumes a 30 day lock. Be sure the lenders are using the same parameters when quoting you a rate prior to making an offer, so that you are comparing apples to apples. In this scenario the most trustworthy lender could appear to have a higher rate, when they are being most honest about the potential for rate if you lock for 60 vs. 30 days.

3) How does the closing date timeframe, chosen at time of offer AND ACCEPTANCE, impact the buyer and seller in other ways?

Buyer A gets a pre-approval letter the day they are submitting an offer. The lender pre-approves the buyer for a $300,000 mortgage at 5%.

Seller B accepts the buyer’s offer BUT asks for a 90 day closing, as the home they are moving to is new construction, and won’t be completed for 90 days.

Buyer A accepts the seller’s counter-offer as to closing date.

30 days later the buyer sees interest rates rising and wants to lock the rate. The lender quotes the “lock rate” and the buyer is confused. “I see the rate on your website is 5%. Why are you quoting me 5.25%?” Lender explains that a 60 day lock vs. a 30 day lock adds 1/4 of a % point to the mortgage interest rate.

Here’s where it gets REALLY complicated…if the buyer doesn’t qualify to buy the house if the rate is 5.25% vs. 5%, he can’t lock it. If he chooses to wait until the closing is within 30 days before he locks the rate, the rate could be at 5.5% at that time. If the timeframe for the finance contingency protecting the buyer’s Earnest Money expires prior to that time (and almost all do), the buyer is painted into a corner by circumstance.

Moral of the story is often a buyer CAN let the seller have 90 days to close if they are renting month to month. But a buyer must consider the impact of the interest rate floating out for 60 of those 90 days and/or the cost of locking for more than 30 days at time of contract.

Today, it is near impossible for a seller to stay in the property for more than 60 days from time of offer and acceptance. You can close in 30 days and let the seller stay or rent back from the buyer. BUT the buyer’s lender will not allow that seller to rent bank for an extended period. If the buyer is qualifying at an “owner occupied” interest rate, they will impose a maximum number of days that the buyer can rent it to the seller. Beyond that time period the buyer’s lender will consider it an “investment” mortgage, and higher investor interest rate and higher downpayment requirements, vs. an “owner occupied” purchase money loan.

The “ifs, ands or buts” that happen in a split second during negotiations, can change the “assumptions” made at the time the buyer received their preapproval letter. The lender is often not “in the room” while these negotiations take place, or consulted for every tiny change in close date or rent back terms. They most often don’t see those “changes” until the buyer and seller both sign the contract as finally negotiated.

These small changes can put the buyer’s Earnest Money “at risk” of loss. The agent is the “protector of the buyer’s Earnest Money”, as related to changes in contract terms during negotiations. Yet how many realize the changed position the buyer is put in when the seller counters for a longer close date?

We see thousands of articles on “How to choose an agent?” Perhaps asking the agent “what happens if the seller wants to close in 90 days, or wants to rent back for 90 days?”, is a better question than “How many homes have you ‘sold’ this year?” The cost of closing is VERY important to the buyer. Not closing at all, due to changes no one played out to the likely eventual worst case scenario, affects both the buyer AND the seller.

Agents don’t “sell” houses. Agents represent the buyer OR the seller AND the transaction as a whole, as it appears at time of offer…AND as it changes during negotiations and escrow.

Handing a contract to escrow and waiting for a commission check is no longer an option. Changes in lending BACK TO the old tried and true rules of the game, requires agents to be on their toes all the way to the day escrow closes…or doesn’t close.

Why are so many escrows not closing these days? Everyone asks that question. Truth is the skills needed by an agent have changed dramatically back to old school…and agents still think “it’s the lender’s job” vs. theirs.

The First Time Home Buyer Tax Credit Advance May NOT Be Used Towards the 3.5% Down Payment…UNLESS…

Posted on by
112

Update 6/10/2009 11:20 am:  Please read the comments 1-21 (especially Aubrey Cohen’s comments).   Apparently according to a HUD representative, the tax credit can be used for down payment if it’s received through State Housing Finance Agencies.   (I called the FHA help line twice this morning and both FHA representatives say this is not the case).  The representative from HUD apologizes for the confusion and will make sure the Homeownership Centers understand… I apologize for the confusion too!

I feel like shouting “THE TAX CREDIT ADVANCE IS NOT DOWN PAYMENT ASSISTANCE!” up and down the streets of Seattle.  Home buyers utilizing FHA loans still need to come up with a minimum of 3.5% for their downpayment (see the update above).   Per HUD’s Mortgagee Letter 2009-15 dated May 29, 2009:

“The proceeds of the sale of the tax credit to FHA approved mortgagees, the seller, or any other person or entity tha tis reimbursed, directly or indirectly…may not be used to meet the 3.5% minimum down payment, but may be used as additional downpayment, buying down the interest rate, or other closing costs.”

Jane and John are buying a home using FHA for financing with a sales price of $300,000.   FHA requires they invest a minimum of 3.5% of the sales price into the transaction.   Jane and John need to have $10,500 of their own funds (which can be gifted or loaned from a family member) invested into this transaction.   Assuming they qualify for the First Time Home Buyer Tax Credit and the IRS figures out how to resolve the issues of how to pay the FTHB Tax Credit Advances, they could use the $8000 towards closing costs, prepaids and any extra funds (after paying closing costs and prepaids AND after they invest $10,500) could go towards downpayment.  (Unless…see the update above).

This is not a zero down program and this is not like the ol’ DPAs (Nehemiah, etc.).   This is (if the details are ever worked out in time) an advance or loan against your tax credit.

Haaa… I feel a little better now.  🙂  One of the benefits of blogging… venting!

Good Faith Estimate – Protecting Your Earnest Money

Posted on by
12

Protecting your Earnest Money Deposit starts before your offer is written.  I highly suggest you do the following, before going out to look at homes for sale. It’s a little unorthodox, but very effective.

1) Ask your lender to base your pre-approval on the current interest rate PLUS.  I’d say +.50% to +.75% at this time.  Use the higher number if the going rate is 5% or less at the time of the pre-approval.  If the going rate is 5% (rates move in 1/8ths) have the lender qualify you as if the rate is 5.75%.  Give yourself a little breathing room for rates to fluctuate while you are looking at property and making offers.  You don’t want the fact that rates are moving up, to stress you into making bad choices about other things, during the process.

Example: If you have salaried income of $95,000, you qualify for a payment of roughly $2,375 if the rate is 5%.  Take the $375 off for taxes and insurance, and make sure you check that $375 a month against the taxes on the house you make an offer on later in the process, and the amount the lender assumed as the taxes when doing the pre-approval letter.

After deducting RE taxes and Insurance, we are looking at a monthly payment for Principal and Interest of $2,000 which gives you a loan of $372,500 at 5% and a loan of $342,700 at 5.75%.  If you are planning to use an FHA loan, deduct $5,500 for the upfront MIP that you are likely going to finance, and that gives you a loan amount range of $337,200 to $367,000, depending on the interest rate at the time you lock it.  Add the 3.5% downpayment, and you are looking at a sale price of about $355,000 to $385,000.

Remember that your approval is based on a % of your gross income and you qualify for a monthly payment, not for a sale price.  So if you qualified for a house price of $385,000 (and the letter is absolute max within the lender’s assumptions), and they assumed taxes and insurance of $375 and the real taxes and insurance are $500, you no longer qualify for the sale price on your pre-approval letter. Likewise, if they used an interest rate of 4.875% and maxed out the price of home based on that rate, and rates are 5.125% when you lock, you won’t qualify at the sale price noted on your preapproval letter.

By asking the lender to use current rate PLUS  X when issuing the preapproval, you can worry less about rates fluctuating while you are busy trying to find the right house, and making the best deal.

These days, the very best deal OFTEN has RE Taxes higher than the amount assumed when producing your preapproval letter, making this issue of importance moreso now than it has been in the last 10 years. Plus lending guidelines are stricter, so a slight variance out of the assumptions can clearly make the difference between loan approval and denial, moreso now than in the last 3-5 years.

Make sure your pre-approval is based on a higher interest rate than today’s “going rate” and higher annual real estate taxes. The reason this is MORE important today is many people are buying short sales and foreclosures. The better the “deal”, the more likely annual real estate taxes are going to be higher than a lender will estimate as an area average for that purchase price.  So if you are Woo-Hooing about the fabulous price you just negotiated, it’s a good sign you need to check the ACTUAL RE Taxes against the lender’s original assumed monthly tax amount.

2) Get a Good Faith Estimate along with your pre-approval letter.  Before you even begin to look at property, you want to be sure you have the total cash you will need to close escrow.  While a Finance Contingency may protect you if Step 1) is done incorrectly, it will not protect you if you do not have the funds to close escrow.  If your loan is approved, but you can’t close because you don’t have the amount of money escrow tells you to bring to closing, the Finance Contingency will not protect your Earnest Money.

Again, this is a little unorthodox, but I have found this method to be essentially foolproof. So much so, that I have been able to guarantee that there will be no surprises at closing, unless the buyer elects to buy down the interest rate for reasons other than needing to do so to qualify.

Don’t just look at the bottom line monthly payment, interest rate and cash to close on your Good Faith Estimate (GFE).  Turn it into a “working” document by converting the format to the official HUD 1 you will see at closing.  This gives you the added comfort of seeing BEFORE you start looking at homes, exactly the same Closing Statement you will be facing the day you go to sign your closing papers.

Find a blank HUD 1 and print it out. I always do these numbers by hand in blue ink, so I can clearly differentiate it from the forms that come later in the process. I have seen many and varied formats for Good Faith Estimates over the last 20 years, but the final closing statement, the HUD 1, has been virtually the same from year to year and even from State ot State.

I just printed one out directly from the HUD website.   Always round the numbers up, and get the numbers directly from the source as much as possible.  I expect lenders to be absolutely accurate when “estimating” their own charges, so the lender fees on the Good Faith Estimate should be accurate. BUT when they are estimating 3rd party costs on the Good Faith Estimate, such as Title and Escrow charges and even County recording fees, I often find those numbers to be underestimated.  Remember to add the Home Inspection fee, which is almost never on a GFE.

Every time a sale closes, I double check the actual costs against my own original estimates. By getting your numbers directly from the source, and rounding up, you will not likely have any surprises at closing, in fact most often, the amount you need to bring should be less than you originally anticipated.

Always use worst case scenario when calculating your monthly payment and your Cash needed to Close BEFORE you go out looking for homes. This will insure that your real case scenario will always be brighter by comparison.

VERY IMPORTANT: If you do not have enough cash to close, that often means the agent needs to include a credit toward closing from seller to buyer IN THE OFFER.  So doing this after you are in escrow…is too late.

Often there will be changes DURING the process that can throw these numbers off. By doing the numbers yourself, by hand, as I do, the little red flags will pop up as changes are proposed during the process.

EXAMPLE 1:  Closing date is the 25th of the month, so the cash to close on your Good Faith Estimate has 6 days of interest at $55 a day = $330.00.

Two days before closing the seller asks you to extend close to the 11th of the next month instead.  These discussions happen all the time WITHOUT the buyer knowing that the $330 for 6 days interest will increase to 20 days at $55 a day or $660. In reality it costs you less, but for practical purposes it costs you more with regard to “cash needed to close”.  ALSO, often the lender doesn’t know the date was extended until they are sent the addedum changing the close date AFTER both the buyer and seller have signed agreeing to that change.  If they only locked the rate to the day of closing or until the 3rd or 5th of the next month, you could end up with a different interest rate by signing the close date extension, and in this period of volatile rates they will likely hold you to the HIGHER of the two rates.

Again, if you are buying a short sale or bank owned property, the extension of close date may not be something within your control. You can’t MAKE the seller close on a given day, regardless of contract provisions.  So being qualified from the beginning at a higher rate becomes a necessity vs. a preference, if you plan to close escrow.

EXAMPLE 2:  You receive your Good Faith Estimate and it says you qualify for a sale price of $300,000. It says your total costs will be $13,000 of which $5,000 is up front MIP, which will be financed.  Total cash needed to close is $18,500 and you have $15,000.

Two months later you make an offer on a property and it is accepted.  No one told the agent that the approval assumed the seller would be paying $3,500 toward the closing costs, and it is now too late to rework the agreement with the seller. Escrow fails for insufficient funds to close, and seller keeps the Earnest Money which is more than the $3,500 you needed to complete the transaction.  You don’t get the house AND you lose $5,000.

It is very important that you turn your Good Faith Estimate into a working document, and not just file it away as another piece of paper.  THE AGENT WRITING YOUR OFFER DOES NOT GET THE GOOD FAITH ESTIMATE, unless you personally give it to them, or instruct your lender to send it to them.  There are many assumptions made by the lender when producing a pre-approval letter.  If the real facts don’t match those assumptions at time of offer and acceptance, it will likely be too late to turn back the clock, and that can put your Earnest Money at risk.

Understanding the terminology of “loan docs”

Posted on by
40

signing-docsBack in February of 2006 I took the time to type out an outline of everything that happens with a real estate transaction, and color coded it to reflect who does what. I called it Anatomy of a Real Estate Transaction, and I did it backwards from the end to the beginning. Many have found it helpful, but it may be time to re-write it, though I don’t think much has changed since then as to how an escrow starts and ends.

Recently with loan processing becoming a bit more difficult than it was back in 2006, I have noticed a lot of confusion regarding the terminology used by lenders and agents and escrow at the end of the transaction.  In the 2006 post I said:

***This one little line is THE MOST IMPORTANT PART OF ANY REAL ESTATE TRANSACTION INVOLVING FINANCING!  And yet, I purposely put it there as quietly as it happens, no fanfare, no bold lettering, no all caps, to notice to all parties.  “Docs are in” – A quiet little event between the lender and escrow that is clearly THE BE-ALL-END-ALL OF EVERYTHING!*** 

There are actually three things that happen at the end of a real estate transaction where the buyer is using a mortgage to purchase.

1) Docs are ORDERED

2) Docs are SENT

3) Docs are IN

This is the nail biting stage of every real estate transacton. 

Often the confusion regarding the last word in those three stages creates many phone calls back and forth due to a misunderstanding of the terminology.  This happens often enough that I thought it would be helpful to those buying and selling homes to highlight the distinction in a separate blog post.

Often the buyer will say “lender said the loan documents are at escrow” when what the lender really said was the loan documents have been ordered.  Sometimes the lender says the loan documents have been sent, which is not quite the same as their being in escrow.

If you are buying a home you want to make sure your lender is instructed to notify you TWICE. 

You want to be notified when the docs have been ORDERED, as that pretty much means your loan is really fully approved and out of underwriting.  It also tells you that you likely are pretty much “done” and on your way to closing.  It also tells you to start preparing to go and sign your closing documents, as most escrow companies will not sechedule a signing appointment until they receive the loan documents.

You also want to be notified by the lender when the loan documents are SENT, especially if you need a little advance time to clean up your desk, or give your boss a little notice that you will likely be leaving work to go sign your closing papers. The closer the loan documents are ordered to the actual closing date, the less time you will have to give your boss notice that you need a little time off or a longer lunch to sign your closing papers.  These two cues: Docs have been ordered and Docs have been sent, can be pretty important if you can’t just jump up and leave work without notice.

Unlike states that don’t have escrow, where people have 30 days or more notice as to what day they need to take off from work to go and sign their papers, escrow states require that the buyer sign at least a day before closing. In WA and CA, closing is a phone call, often between 4 and 5 p.m., so taking off from work “on closing day” is not usually needed.  In fact, if you do take off on closing day, be prepared to be sitting around staring at the wall waiting for a phone call before you can get the keys and start moving  into the house.

I am currently waiting for “docs” on two closings.  In one “docs have been ordered”, on the other “docs have been sent” on neither have docs made it to escrow.  As the agent, I wait impatiently for docs to be IN so I can review the closing numbers for my clients.  One is a seller, so those numbers are not loan document sensitive and final numbers have already been reviewed and corrected at my end, and the seller has already signed their closing papers. 

On the other, I can’t review the final numbers for my buyer client until the loan docs are IN, as escrow prepares the Buyer Closing Statement after receiving those loan documents.  We are pretty sure what the numbers should be…but given the documents are “late”, I vigilantly watch my email and phone so I can review the numbers immediately.  I don’t want to be part of  the delay on a closing, by not being available to review the final numbers within 15 minutes of receiving them.

“docs have been ordered” is the breathe a little easier cue.  That usually converts IF it will close to WHEN it will close. So asking your lender to notify you when docs have been ordered, is a very good idea.

Top 3 Mistakes Home Buyers Make

Posted on by
27

If every agent would post the Top 3 Mistakes they actually see home buyers make in the real world, we would have an excellent list for people to use. 

Yesterday I gave my $.02 on the Top Ten List of mistakes “first time buyers” make that’s been floating around the internet. But I can’t honestly say I saw the real mistakes people make in that list. I also don’t like the idea that “first time buyers” make more mistakes than 2nd time buyers.  Not necessarily so. In fact 1st time buyers are more likely to spend lots of time making sure they aren’t making mistakes.  4th time buyers may not be paying enough attention to changes that took place since they bought their last home.  So being careful not to make “mistakes” is not only for “first time” buyers.

Here’s my view of The Top 3 mistakes I see buyers (almost) make:

1) Starting out with the wrong attitude.

The Appropriate Attitude

It’s a big decision.  Starting out with the right attitude for “home shopping” is very important.  Knowing your own strengths and weaknesses will help you select an agent who complements you best.  Sometimes finding an agent you disagree with more often than not, will give you the right balance.

Ms. Happy Face often likes everything and never likes to say anything bad about anyone or anything.  If you can’t change to Ms. Objective and Discerning, find an agent who looks for all the bad stuff for you. Biggest mistake Ms. Happy Face can make is having an agent who is always happy, happy with her.  We all like our “YAY-Days”, but best to save YAY Day for “loan docs are at escrow” day, and not every house you go to see.

Mr. Sad Face is often too sure that the house he buys isn’t going to make him happy. The fact that nothing is perfect is too embedded in his psyche.  Biggest mistake Mr. Sad Face makes is he often ends up sucking up defects as “oh well, they all have defects” and doesn’t make the right list of priorities as to acceptable vs. unacceptable defects.  Mr. Sad Face is best served by an agent who will list all the pros and cons of the home he selects, both before and after home inspection, and separates “normal” defects from “abnormal” defects.  Otherwise they tend to get all lumped together and overlooked in their entirety.

Mr. Angry hates the process. He hates that he has to use an agent.  He hates agents. He hates that the process isn’t more simple so that he can proceed without an agent.  He hates it if the agent is stupid.  He hates it if the agent doesn’t know more than he does.  He hates it if the agent thinks they do know more than he does.  He hates having to talk to so many different people during escrow.  Mr. Angry isn’t happy until it’s all over and behind him and he can sit down and watch his TIVO in his new home. Mr. Angry would be best served by delegating everything except choosing the house to someone he trusts.  Finding someone he trusts is the hard part 🙂

Mr. and Ms. Objective and Discerning are of course the model for Right Attitude.  Their glass is not half full or half empty.  They empty their glass before each home, and look at each home’s particular strengths and weaknesses each time anew.  They narrow their choices down to the top two or three, and then they compare those one to another. In the hot market, these nice people were pressured by the “quick sales” and not having enough time to apply their best judgment.  But in this market, Mr. and Ms. Objective and Discerning will thrive and be successful and happy with their choices.

The alternative to BEING Mr. and/or Ms. Objective and Discerning, is to hire Mr. or Ms. Agent who is Objective and Discerning.

2) Spending too much time on WHAT and not enough time on WHERE.

Everyone knows someone who moved fairly quickly after they bought their home.  Now go ask them why they were unhappy.  Chances are they were unhappy with WHERE vs. WHAT.  Before going to Open Houses or talking with a lender or an agent, spend lots and lots of time finding the “Where of Happiness” for you.  Buying where you are currently renting and happy, is good.  Renting at another where before you buy there, is good.  Renting in your percieved best where before you buy there, is the best advice I can give on this one.

3) Not being selfish enough.

This problem is more about couples that are buying than single people. The Red Flag that you may be in this category is if you say to the agent “We always agree on everything”.  No one always agrees on everything.  BE SELFISH! Don’t factor in what you think your spouse may or may not like, when you are evaluating homes.  Make your own separate list of pros and cons, and make sure they are All About YOU.

If you aren’t selfish enough, one day you may wake up to find that neither one of you really liked the house in  the first place 🙂