FHA Jumbo

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Update 10/18/2008: This post was written in April 2008 and since then, many FHA guidelines have changed.  This post has been updated, however it’s very important to not rely 100% on mortgage information from what you read on the web.  Our guidelines are changing too quickly these days!  FHA Jumbo loan limits mentioned in this post are effective through 12/31/2008 and will be reduced to 115% of the median home value 1/1/2009 (estimated at $522,000).  Click here for an update on FHA guidelines.

Update 2/27/2009:  Lenders are applying a minimum credit score of 620 for FHA loans and the 2008 loan limits are returning.  Is it possible for me to chop up this post any more?

I thought it might be helpful to provide some information for you to use for when I quote rates on Friday for the FHA Jumbo mortgage. There are other criteria to be considered beyond looking at the rate. You may not have considered FHA before due to loan limits, now it’s more attractive: how else can you buy a home priced at $584,000 with 3% down and credit scores below 720?

FHA Mortgage Insurance

FHA charges both upfront and monthly mortgage insurance regardless of how much money you’re putting down. Seriously, if you’re putting 50% down and using an FHA insured mortgage, you’re paying mortgage insurance. FHA mortgage insurance does not cancel out automatically when your home has an 80% loan to value. You will pay the FHA mortgage insurance for a minimum of 5 years and 78% of the original value (lesser of sales price or appraised value) of the home.

Upfront Mortgage Insurance

Upfront mortgage insurance for a FHA insured mortgage is 1.5% 1.75% of the loan amount for a purchase. With an FHA mortgage, you have a base loan amount and the adjusted loan amount (after you add in the upfront mortgage insurance). For example, if your base loan amount is at the current King, Snohomish and Pierce County level of $567,500, your adjusted loan amount will be $576,012 $577,431 (567,500 plus 1.5% or 8,512 1.75% or 9,931) . Once upon a time, FHA upfront mortgage insurance could be refunded if the mortgage was terminated early with a balance of the mortgage insurance premium remaining, this is no longer the case for new FHA mortgages (which I believe is part of the reason FHA fell from favor during the subprime boom). The adjusted loan amount is what your principal and interest payment is based on. So if the rate going for a FHA Jumbo was 6.500% (this is not a rate quote; this is for example only), the principal and interest payment would be $3,640.79 $3,649.76 (576012 577,431 amortized for 30 years at 6.5%).

Monthly Mortgage Insurance

Yes…as if paying that 1.5% 1.75% upfront MI wasn’t enough…FHA has monthly mortgage insurance as well…the good news is that it is at a low rate compared to traditional private mortgage insurance (especially factoring in a jumbo loan amount, higher loan to value and credit scores below 720). The rate for FHA mortgage insurance is 0.5% 0.55% (for a purchase) of the base loan amount. Using our current example, your monthly mortgage insurance would be $236.46 $260.10 (base loan amount = 567,500 x 0.5% 0.55% divided by 12).

FHA is a fully documented mortgage loan. You will need to provide 2 years of W2s (tax returns if self employed) and your most recent paystubs covering 30 days of income. Any gaps of employment during the past 24 months will need to be explained. There are no income limitations and the DTI is roughly 43%.

Low Down Payment

FHA Jumbos allow for as little as a 3% 3.5% down payment. This means you could be a home priced around $585,000 with the base loan amount of $567,500. Your down payment must be fully sourced and seasoned. Be prepared to hand over your last 2-3 months of bank statements and any asset accounts (all pages) and to explain any large deposits that are not from your source of income.    The Seller may contribute up to 6% towards closing costs however the buyer has a minimum investment required of 3% 3.5%. Family members can gift funds towards closing costs as well which counts towards the buyer’s required 3% 3.5%.

Update: Effective January 1, 2009, the minimum down payment will be increased to 3.5%.

Speaking of documentation…

I’ve covered FHA before…and the guidelines for traditional FHA are pretty true for the temporary Jumbo FHA mortgages as well. Here are a few more pointers for our current market:

* FHA does not have price or loan to value limits for geographical areas determined to be soft or declining.

 * FHA does not have credit score risked based pricing for credit scores above 620. (Lenders may have their own risk based pricing for credit scores under 620).

Sellers with homes priced around the new FHA jumbo loan limits should consider buyers utilizing FHA financing. A sales price of $584,000 would allow for a minimum down FHA insured mortgage. However a home buyer could always use more towards down payment and opt for a FHA mortgage meaning that if your home is priced higher, you may still want to consider allowing FHA buyers as they may be considering FHA over the price hits conforming has if their score is below 720.

Condo’s are acceptable for FHA financing as well. They may not be on the FHA approved list, however, if the condo meets the requirements for a “spot approval”, they can still qualify for FHA financing.

Act fast…FHA Jumbo is only here until December 31, 2008.  loan limits will be slightly reduced on January 1, 2009.

There's No Fool Like An April Fool

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If your home has been on market for more than 100 days, it may be a good day to take a hard look at why that may be. Being wrong from April 1st until June 30 is a whole lot worse than being wrong from January 1st through the end of March.

1) Write down the 5 best things about your house and the 5 worst things about your house. If you can think of 20 things that are good about your house and can’t come up with 5 things that are bad about your house, you likely are in the wrong mental space to sell your home. In my experience, owners who can’t get themselves to say one bad thing about their house, out loud, take a much longer time to sell their home.

2) If you are priced at anything 09 or 59 change that to 00 or 50 right now. $259,000? Make it $250,000. $309,000? Make it $300,000. $459,000? Make it $450,000. Someone who didn’t pick your house to go and see in the $450,000 to $500,000 category, may have picked it if it were in the $400,000 to $450,000 category. Don’t miss the boat by being in the wrong price tier.

3) Remove all words from your public remarks section that are negative. Don’t be unique or unusual. Don’t be cute or cozy. Don’t tell them the chandelier does not stay.

4) If you have had no showings in the last 20 days, stop waiting for “just the right person”. No showings equals wrong price.

5) If you have had 30 people come to see your house and no offers, your price and mls presentation are probably right and what is wrong is at your house after they get there. Smell? Smell is a big one, especially if you have pets. Dark? Turn the lights on…Yes, ALL of them. Did they say “you have a lovely home” as they were leaving? That usually means your home is too personalized and they visited you. They couldn’t picture anyone there but you. Remove the personal photos and your “treasures”. Give them a blanker canvass to picture themselves in.

If you have been on market for 100 days, don’t just say “Oh goodie! It’s April 1. NOW someone will buy my house because it’s Springtime. Change something…today.

Buyer Agency – Don't pay someone to "open a door"!!!

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Don t pay for door openersYesteday I received an emailed flyer with this subject line:

“PRICE REDUCED 450K MUST SELL”

While that was a 26% price reduction, looks like someone had bought it for the higher price but that sale was cancelled and the property is back on market at 26% less. What can you say besides thank God that sale didn’t go through?

The day before yesterday, on Saturday, I was showing 6 properties. Virtually all of the properties I chose to show were overpriced by $100,000 to $150,000. 4 of 6 were also $100,000 or more higher than my buyer client’s price range. But I showed them because I am pretty sure most if not all of them will sell for less than my buyer client’s cap price.

Just 7 or so houses from the first property we looked at there is a house priced at twice as much that has been reduced by $350,000 since the first of the year, and another nearby just reduced by $150,000.

Technically speaking there are 75 properties on market in my client’s price range in the area where he wants to live. Only 6 properties were worth showing, and 4 of those were priced over the price range, but believed by me to be in his price range as to what it will sell for and what it is consequently “worth” vs. what the sellers are asking. Two were for sure…too were iffy.

Client’s often ask if what a Buyer’s Agent does is “negotiate”. NO! It does you no good to get $100,000 off of a property that is going to sell at $400,000 less. In that same price range from my Saturday and Sunday experiences, all homes sold in the last six months sold at 98.9% of ASKING price. Relying on a buyer’s agent is NOT about getting a house at 98.9% of asking price, or even at 90% of asking price. It’s about knowing that 73 of the 75 properties on market are overpriced and by how much.

Do NOT pay anyone 3% of the sales price to open the door. If all you need is someone to open the door, hire an agent with a license and a keybox and duct tape on their mouth and pay them by the hour, and do not listen to their advices as to “how to negotiate a great deal”.

If an agent can’t tell you what the house is worth, but instead promises to be “a great negotiator”…run away as fast as you can.

Using an agent to buy a house? That is soooo 20th century…

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This post is not legal advice. For legal advice, consult an attorney directly (i.e. not via a blog).

This is Part I of a multi-part post.
Part I: Visiting the Property
Several months ago, I authored a post about buying a house without utilizing the services of an agent. It generated quite the conversation (concluding with this tasteful comment from our friends at Bloodhound Blog: “Entirely self serving, badly argued with serious errors of omission, it generated some pleasant acrimony in the comment section…”) and eventually led to the promise of a “blogging death match” between me and Ardell — okay, Ardell, it’s ON!

It used to be, way back in the 20th century, that a potential buyer had no way of searching the “market” for the perfect home. There was no single “market” (as in marketplace) for consumers because properties were invariably listed on the MLS, and MLS data was private and accessible only through an agent. Thus, to search the marketplace, the buyer needed to hire an agent who could then search the data for the perfect home.

The advent of the internet changed all that, of course. Today, while agents (or more accurately, brokers) still control the data, it is available publicly through innumerable search engines . Thus, a buyer can now find the perfect home without ever speaking with an agent — until it is time to actually visit the property before making an offer (buying a home sight unseen based on pictures on the internet is only for the very brave and the very foolish). As a result, most buyers at that point simply contact an agent (we’ve all got family, friends, friends-of-family, and family-of-friends who are agents and who would love to assist) who can then provide them with access to the property.

But that service (and perhaps others! Good agents are a veritable repository of helpful information concerning property) comes at a significant cost. The typical buyer’s agent expects to be paid 3% of the selling price as a fee for his or her services (with some portion of that going to the buyer’s broker). This substantial sum (do the math yourself — it is a lot of money for even an “affordable” starter home) travels a circuitous route from the buyer to the agent. When listing the property on the MLS (still the de facto marketplace) the seller signs a contract with the listing agent (more accurately, the listing broker). That contract entitles the agent to a certain percentage of the sales price (typically 6% but there are many exceptions). That commission is then shared via MLS rules with a buyer’s agent, with 3% usually going to the buyer’s agent. Accordingly, at closing, 3% of the purchase price is paid by the buyer to the seller, who then pays it to his listing agent/broker, who then pays it to the buyer’s agent/broker.

So if you want to see the property but don’t want to hire an agent because you don’t want to pay such a significant sum, how do you get in to see the property? Easy: Contact the listing agent. Way back when property values were skyrocketing, some listing agents felt that they should not have to assist a buyer in seeing the property. Those days — at least for now — are over. As TJ commented on my last post:

I think the time when sellers and sellers agents have the luxuary to pick and choose buyers on petty criteria’s like if they have a buyer’s agent or not is soon going to be history.

Contact the listing agent, let her know you want to see the property, and schedule a mutually convenient time. In this market, the listing agent should be more than happy to show the property to a prospective buyer.

[Part II coming soon: “how to get that 3% back into the buyer’s pocket” which will further discuss the services that might otherwise be provided by the agent.]

Seattle Real Estate – Sunday Night Stats

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real estate market is flatlining

Before I get to tonight’s stats, let’s talk a little bit about some myths out there. Many are saying that the volume of sales is down by 30% this year because the low end can’t finance, as if only the lowest of price ranges is reacting to the mortgage markets. Not so. In fact the results are pretty startling across the board in that they are virtually identical in every price range!

Number of sales is down 30% equally in every price segment.

In Jan & Feb of 2007 when there were 4,226 properties sold, 46% of them were priced between $200,000 and $400,000

In Jan & Feb of 2008 the number of sales dropped from 4,226 to 2,919, but still 46% of them were priced between $200,000 and $400,000.

Virtually the same for all price segments. $400,000 to $600,000 represents 28.5% of sales in both years. To see all price segments and compare the percentages to 2005 and 2006 and to see all of the underlying data too boring to post on RCG 🙂 go here.

Up to this point more people were buying at higher prices each year. This “flatlining” of percentage of purchases in each price category is another way of saying that prices are flat.

When will we know that prices are down? When more people can and do buy more houses at lower prices and those percentages start increasing on the low side and decreasing on the high side, you will know that prices have been affected by more than just a little. Conversely if these percentages stay the same or start moving up again, then volume is down and prices are not affected. Personally I don’t see how volume can continue to reduce by 30% YOY without that affecting prices more than it has to date.

I will be waiting a week or so before reporting for the full first quarter in a like comparison. It takes a good week or even two weeks for agents to post their March month end sales. But as soon as we’re pretty sure all of the sales are posted, the all telling 1st Quarter 2008 numbers will be very interesting. Generally the 1st quarter accounts for 20% to 22% of the year’s sales. So we should be able to make some assumptions about how we expect the year to play out once we have all of the 1st quarter data.

OK…on to Sunday Night Stats and our regular programming.

King County Residential Sales

Active/For Sale -10,064 – UP 285 – median price $528,000- up $3,000

In Escrow – 2,664 – DOWN 48 – median price $447,725 – UP $3,725

Closed YTD – 3,273- UP 390 – median price $435,000 – DOWN $2,500

King Conty Condo Sales

Active/For Sale – 3,518 – UP 83 – median price $324,950 – no change

In Escrow – 863 – DOWN 39 – median price $299,900 – DOWN $50 (asking prices)

Closed YTD – 1,097 – UP 139 – median price $285,000 – no change

“Statistics not compiled or published by NWMLS.

Purchase Implosion: Pre-approval letters worth the ink?

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Nearly everyone has had a personal experience of a deal falling through via the other side of the transaction not performing. It is hard to swallow when you have no control over the other party or their financing efforts. Especially bad, the call to your client who is in boxes and ready to move within hours. It takes guts to make the call and is character building.

The dreaded phone call: “….hate to bring you bad news, but our transaction has fallen through, and ….”

Chew on this scenario:

A transaction is stopped in its tracks just hours before it is slated to close. Seller has already signed closing paperwork and escrow is waiting for lender documents to have borrower sign and then proceed to close the transaction as scheduled. Escrow is then notified that the deal is apparently dead. Why? Escrow is informed by the agents that buyer’s financing fell through. Buyer’s financing addendum gives the borrower x amount of days to obtain financing, which was written to expire the day of closing. As is tradition, the selling agent provided a pre-approval letter (not pre-qualification) at the time of the offer.

In a sentence in paragraph #2 of the Financing Addendum Contingency (NWMLS Form 22A) it states:

“A letter from the lender generated or dated at or prior to mutual acceptance shall not constitute a letter of loan commitment which complies with this paragraph.”

1) Should the listing agent and seller fight for the earnest money?
2) What do you find would be some of the transaction management pitfalls that could have been avoided?
3) Is the buyer fully in compliance or did they fall short of a duty to act in a timely manner. Time is of the essence.

Another day, another real estate agent student collapses in the classroom

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I’ve only faced three serious emergencies while teaching continuing ed classes over the past 16 years. The first one was 11 years ago when my water broke six weeks early with my second pregnancy while teaching at Windermere Edmonds. I wasn’t having contractions so I finished the class and drove up the hill to the hospital. The second emergency was during the Feb 28, 2001 earthquake. I was teaching in Bellevue that morning. Please realize folks that most adults in the Seattle area didn’t go through earthquake drills when we were kids. NOW the kids do, but all the Realtors insisted on running outside with the exception of the Realtors who had moved up here from California.

On Wed, while teaching a very involved Short Sale class in Seattle, a student yelled “Something’s wrong here.” Heck, I thought he was talking about the content of what I had just said, but then he pointed to the Realtor next to him. She had been eating so my first inclination was to make sure she wasn’t choking.

I am amazed at how the mind stores memories. In the Nov 2007 issue of National Geographic, there’s an excellent article on memory. I learned that one way memories make it into the long-term area of the brain is when the memory has strong emotions attached to it. I just found my First Aid teacher from 1992 and sent him an email to let him know that the way he delivered his material must have stayed with me because I was able to help.

I noticed that she wasn’t grabbing her throat and that she had become stiff and rigid in her chair. The Realtor next to her said that her eyes had rolled back. Then I knew she was having a seizure. I remembered that the teacher told us that if someone was having a seizure, he might injure himself further by falling off a chair. I said we should get her on the ground but others didn’t agree. I also remember my teacher telling us that in an emergency, we all want to help but someone has to take control so I YELLED to get her onto the ground. Then I remembered about the head, you have to protect the head and sure enough, her head was jerking up and down. I held her head, her mother (another Realtor in the classroom) held her hand and as she continued to seize. It seemed like forever for the paramedics to arrive but I’m sure it was only 5 minutes.

The parameds asked us to leave the room so they could attend to her.

What’s a teacher to do? All our class materials were in the room. Well of course we left the room. I told everyone that we were going to take a nice long break and that in a half hour we’d reconvene. Our student was going to be okay, they took her to the hospital and the broker, who was a student as well that day, asked me how I was going to bring us all back together.

firstaidI decided to take some time to talk about safety and first aid and we talked about what the office could do as a team to make sure that there was always one staff member with an updated first aid card on duty. I compressed the material and we finished on time. On reflection, I plan on updating my own first aid card this summer. Maybe I can take the class from that same teacher.

I think I know why I retained so much from that first aid class. Our final exam was a surprise. We all thought we were going to be given a traditional paper exam. Instead, when we showed up for class that day, he had a mock emergency staged in the college parking lot. The pretend victims were graduate volunteers all pretending to have had something happen to them. Some were pretending to be unconscious. Our job was to assess, tend to emergencies like airway, breathing and circulation problems and mobilize any broken bones. Other graduates were observing our every move and grading us. I will never forget that final exam. It was awesome.

I will also never forget how the agents at that office did everything they could to help their fellow Realtor through her crisis.

The first Realtor to notice that something was wrong looked to me for help. As an instructor, perhaps first aid training should be mandatory. In addition, what about basic first aid training for all of us? Realtors, would you be prepared if one of your clients had a heart attack during a showing?

Buyer's question at signing

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A recent buyer asked us at signing (a day or two prior to closing):

“I’ve noticed that the fees charged by my loan officer are about $1,600 more than my Good Faith Estimate. I recall only being charged 1% loan origination. Is there any explanation for this?”

What are the re-disclosure laws (both state and/or Federal)? Obviously, this buyer was a bit under pressure and did not want to create waves to delay the purchase.