Home Equity category archives

If you’re 62 or older and in the market for a reverse mortgage, take notice.

The almighty Consumer Reports sent out a stark warning about the home loans earlier this week, calling them both “very risky” if homeowners didn’t understand the complicated terms and a “last resort for seniors who want to stay in their homes and have no other alternatives to supplement their income.”

Not very good press for the loans, which were recently touted by none other than the Fonz.

Per The Truth About Mortgage:

The publication noted that many marketers of reverse mortgages, otherwise known as Home Equity Conversion Mortgages (HECMs), engage is “questionable sales tactics” and make misleading claims to minimize the associated risk of these types of loans.

The report also found that many mortgage lenders that sell reverse mortgages cross-promote products that homeowners may not need, including long term care insurance and annuities.

Senior citizens also happen to be very susceptible to misleading marketing, so the danger is two-fold.

The report called for better oversight of the reverse mortgage market along with new consumer protections for borrowers.

Reverse mortgages allow homeowners aged 62 or older to pull equity (cash) out of their owner-occupied homes without taking on a monthly mortgage payment.

However, borrowers still have to pay for taxes and insurance, and failure to do so has led to a rise in foreclosures – in fact, as of March, a staggering 20,631 reverse mortgage loans were in default.

If you think a reverse mortgage may be right for you, be sure to do plenty of research and consult a mortgage professional first to avoid any potential pitfalls.

(photo: zzzack)

MortgagesUnzipped is a great blog with terrific information on how to get through the minefield of getting a loan.  Every day there is a new crop of good advice from the best in the industry.  I do lending in Utah, and I’m proud to be one of the bloggers here.  Recently, though, I’ve been wondering if I might offer a tiny change of pace, just for one post.

Let’s face it: it’s increasingly difficult to get mortgage financing.  Lending in Utah is more complicated every day, and that’s true everywhere.  Even worse, even if we wanted to sell, we will have a rough time of it, because we have very little equity in our homes since the market crash.  Seeing this, many people are talking about remodeling instead of moving, because they’re going to be staying around a while.

From a Utah mortgage guy’s perspective, here are the 3 best ways to botch that task:

1. Don’t plan ahead. Go on!  Strip that wallpaper.  Smash that countertop.  Dig those trenches in the lawn.  Of course you’re going to be able to afford to fix it up later.  Naturally, everything will work out great.  But, seriously, it won’t.  The Law of Entropy says that left to themselves, things go straight to crap.  That will happen with any project you undertake.

Figure out first how long it’s really going to take to do the project yourself.  Think seriously about whether you have that kind of time.  It will also probably be spendy, so is the money set aside, or will you have to borrow it?  Have you budgeted for the project?  Do you know the kind of paint or carpet you want?  Are you sure?  With all projects of any real size, every hour spent in planning will save you five hours of work.

2. Don’t get an expert to help you. Look, it’s really not that hard to install a sprinkler system.  I’m sure that most accountants know right away whether they want a Toro 53805 or a Rain Bird SST-600I system for their house.  Wiring?  C’mon.  Who doesn’t know how to do that?  Metal v plastic?  Pop-up v housed?  It’s a cinch!

Truth is, you probably can do most home improvement jobs yourself.  But it’s also true that if you do, they will take longer and cost more than if you hire someone, even for just a few dollars as an advisor, to assist you.  Unless it’s your day job (or it recently was), get help.

3. Don’t consider the market. Since you will never again sell your home

Image from Ugly House Photo

you can do whatever you want to it, right?  Always wanted it purple?  Paint away.  Have a yen for xeriscaped front yards (and I do)?  Tear out that sod.  Want to add 800 sq. ft. to the back so that your home is now the largest on the block?  Well, why not?

Because you’re taking a large risk, is why not.  You may never intend to sell the house, but the odds are overwhelming that you one day will, and when you do, are you going to have to rip out that front-hall indoor fountain you fell in

love with when you went to the day spa?  Be smart.  There are a lot of good Realtors out there that can give you pretty good estimates for how your home improvement will affect your home’s marketability.  Consult one of them. If you still want to do it, go ahead.  It’s your house.  At least you’ll be comfortable there in case you have to keep it forever.

Nowadays, more people than ever are looking at innovative ways to make their homes more the places they love instead of the places they live.  And there’s nothing wrong with that.  But be smart.

And now, back to the mortgages.  Good hunting.

I don’t know about you…But I would…

That has been the average return on the additional closing costs associated with a renovation 203K loans that I have closed in the last quarter.  By no means am I saying that buying a home is a can’t miss investment…but if you are in the market for a home it would be wise to find the best way to invest your down payment and closing costs.  The perception of renovation lending is that the closing costs are much higher on a 203K renovation loan than a standard FHA loan.

The additional Fees you will pay on a 203K loan are as follows:

• Supplimental Origination Fee (1.5% of the Renoivation Cost)
• Draw Inspections ($150-$250 per inspection-usually 3-5 Inspections)
• Title Run Downs ($50-$100 some lenders require these for each draws others just for the final draw)
• Hud 203K Consultant fee (This will range between $0-$1,500 depending on the size of the Project)

Over the last quarter on average my 203K loans have had additional closing costs of about $2,500 and they have after improved appraised values of more then $29,000 in equity.  It’s equity not cash so it’s not like you will be able to run out furnish your home with the equity…but If you work with the right realtor that helps you find that diamond in the rough…you may have the opportunity to refinance after the work is complete and eliminate PMI.  No one can guarantee that will happen but I know it has happened.  My average loan size is $280,000…Monthly Mortgage Insurance on that loan amount is $128 per month.  For some that cash flow  increase makes refinancing worth while…Not to mention you aren’t spending your weekends and free time scraping wall paper and painting rooms and dropping ridiculous amounts of money at Home Depot…on the Honey Do List!

A fellow blogger on Mortgages Unzipped (Brian Brady) posed a great question on a previous blog post:

“In Southern California, there are many requests for solar panel financing. Can alternative energy improvements be part of a renovation loan?”

I have been originating Renovation and construction loans for more than 16 years and I have been asked this or a similar question 2-3 times over the past 16 years and each time the folks asking the question have been from the other coast….East Meets West….I  found that curious and can only come up with a couple of explanations…

1. Those of us from the east coast are not as environmentally conscious as the folks on the west coast.

or

2. The cost benefit on the east coast is just not as advantageous as it is on the west coast.

 I have to go with number 2…

To answer Brian’s question…alternative energy systems can be included in a renovation loan.  You can also use the Energy Efficient Mortgage benefits along with a 203K loan, although I am not sure that the lift you get from an Energy Efficient Mortgage is worth the additional headache…especially when you are obtaining renovation financing to begin with.

Here’s what I wrote about item #1 on the list last time:

6 months ago is ancient history. What your neighbor sold his house for 6 months ago doesn’t matter.   What the seller was asking for the house 6 months ago doesn’t matter.   What matters is what the market will support today.

So, how are things the same and how are they different?   A couple of things that need to be discussed:

How are things the same?

• What happened 6 months ago is still ancient history.   Since I wrote the first piece, Fannie, Freddie and FHA have tightened up their appraisal guidelines and they will no longer allow an appraiser to use a sale that is more than 90 days old unless they have no other comparables and can write a 5 page essay of why they need to use that one.
• I can’t tell you how many times over the last 12 months, I’ve heard people say, “3 years ago, the seller bought the house for $100,000 more than what I’m paying the bank for it.   I’m getting an awesome deal!”    My first response is, “Maybe.”   Maybe you are getting a deal.   But maybe the seller bought it at the peak of a bubble in the market and paid way too much and now things are just adjusting down to the market.    Maybe it’s not down to what the market will really absorb for the house and if you tried to sell it next year, you’d end up selling it for less than you paid for it.
• “They just dropped the price by $50,000!”   This is a great deal!    Maybe, but then again, I can put my house on the market for $650,000 and then offer to give you $100,000 off the asking price.   Is that a good deal for my house?  (Hint – my house is still WAY overpriced at $550,000 – but I’ll sell it to you for that.)

So what is different?   A couple of things are a bit different from last year:

• The First Time Home Buyer Tax Credit/Buyer Frenzy – If you are any where near the radio/newspaper/any mortgage lender or Realtor, you’re probably getting sick of hearing about the $8,000 first time buyer tax credit.   I’ve written about it before and I’m not going to discuss it here other than to discuss it’s impact on property values.  
• As the number of first time buyers has skyrocketed in virtually all areas (got to get that free money), it has stablized and in some areas has turned around the property values in the lower end of housing prices in many areas.  
• So that can actually show prices now being higher than what they were 6 months ago (for certain segments of the market – but certainly not all of them).  Does that mean that the market has turned around?   Do you rush to buy now because houses are going to be more expensive next year?
• Or is real estate going to follow the same route that automobiles did with the “Cash for Clunkers” program?   You know, the one where sales spiked during the first few weeks of the plan, then slowed down and after the program was over, they dropped quite dramatically?   If that happens to real estate, then how does that play into the plans of  first time home buyer?    If they can’t make it to the November 30 deadline (and time is almost up), do they buy now any way thinking prices are going up or wait because prices are going to come down?

In summary, 6 months ago is ancient history in real estate even today.   However the government’s initiatives that have been attempting to prop up the housing market and encourage first time home buyers have made the calculations and prognostications of what is and what might happen with housing prices much more challenging.

Next we’re going to look at the question of whether what you paid for your house matters or not and the negative equity situation.

I got an e-mail yesterday asking: What is a 203K loan?  Every once in awhile I need to remember that I sometimes use acronyms and assume everyone knows what I am talking about.  The reality is…in many cases the acronyms do more to confuse folks than to clarify.  So I am going to take a step back and explain a little about the “203K” loan.

This loan program can be used for the purchase or refinance of a property that needs work.  It allows you to borrow the funds you need to purchase and renovate the property.  These loans are not new but took a back seat to other ways of financing the cost to renovate.  With property values no longer increasing by double digits, and with equity loans being capped at 70-80% of current values (rather than 100% you could get just a few years ago), the options for financing renovations are limited.  I started a thread on Zillow asking how folks are paying for home improvements.  Inquiring minds want to know! 

In addition to the FHA 203k program similar programs are offered by Fannie Mae and Freddie Mac.

California is considered a “declining market” by lenders, the secondary market, and appraisers alike.  Appraisers have been instructed to adjust the “comparable sales”, on a Uniform Residential Appraisal Report (Form 1004), by 1.5% per month.  What this means is that the appraiser will use an exact model match (same size, floor plan, and location in the subdivision) from December, and lower the price by 3%, for a current appraisal.  For example, if the property sold in December for $300,000, the adjusted price in February will be $291,000.

Sounds reasonable, right?  Sometimes, that’s not necessarily a fair depiction of current market conditions.

Much of the Southern California market is driven by bank-owned properties.  The banks, in an interest of disposing of the property, pursue a “fire-sale” pricing method in order to generate multiple offers.  Ask buyers in the tony San Fernando Valley how hard is is to buy a bank-owned home.  One of our borrowers has made over 30 offers, unsuccessfully, to purchase a bank-owned property,

The free market has “priced in” future market declinations and has “discovered the true bottom”.  Still, appraisers have their hands tied.  Pursuant to directives from the secondary market, the appraisers adjust those “free market base prices” because they were closed a month or two ago.  The cycle becomes never ending.  The lower adjustments provide an unnatural price pressure, driving prices even lower.  The policy then becomes a market factor.

The policy can be counterintuitive to its originally stated purpose; to provide a “true” reflection of this “declining” market.  It assumes that prices will continue on an 18% annual decline, forever.

At a certain price , a property becomes less costly to own than to rent.  Many analysts believe that price establishes a “natural” bottom for the property, in a balanced market (six months absorption rate).  The theory is that buyers would be crazy to rent the property when ownership is less expensive.  Compunction then becomes an economic necessity; if a buyer doesn’t make his mortgage payment, the alternative is more costly.

This fundamental analysis should trump the declining market adjustments, at best or become an important footnote, in the least, on the appraisal report.

Originally posted on Millionaire Real Estate Lender

I remember the Sigma Chi Frat parties at LSU in the early to mid 80′s playing Prince’s song: “1999” from the late 1982 album with the same title.  Ah, the good old days. We partied, danced and spent money like rock stars. When we ran out of money, many of us contacted our parents and requested a “bailout” of some sorts. We got scolded for mismanaging money and being irresponsible, but promised to manage our funds better, attend classes regularly and maintain our class load for the semester.

25 years later, corporate America is partying like it’s 1929! There is a “soup line” for corporations and industries that mirrors those of almost 80 years ago. Instead of soup, these companies are looking for green. We need a “Soup Nazi“. While some of them humbly approach the line with their heads low and others take the posture and position of some type of extortionist, we’ll call them  ”Extortionsistas”. These guys are attempting to scare the US Congress and all of us who actually pay for this experiment, into fearing that if a particular company were to close down, the entire world may come crashing down with them. 

This is a very sad picture for humanity for several reasons to me.  In one way, the fear mongers are selling this “systemic risk” to us as if the entire world had a catered lunch from Kenny Rogers Roasters and the chicken served had the “bird flu“. Furthermore, Pandora’s Box has been opened and we, the US taxpayer are finally seeing that we were not the only one who had money management issues and that entities and municipalities were/are all tremendously leveraged and are spending today what they hope to receive in the future.

Let’s  take a look at the Welfare Soup Line.  All of these business types are connected to the world in some way. Cars, credit cards, insurance, lending and homebuilding are just several major industries that are in Hank and Ben’s Inbox with the Subject Line: “BAILOUT”.  The first initiative was to save the banks and free up liquidity.  I know it has just started, but I have not heard of a single borrower with any credit being further extended. Rather, the HELOC lines are being adjusted lower or frozen, but the rates have moved lower. Fannie Mae and Freddie Macare now fully in the government’s hands in conservatorship. This has not significantly lowered mortgage rates at all. Mortgage rates should actually be much higher given the risk of them and the depreciating collateral, but that is not the way it was “sold to us”. Next, was one of the largest insurance companies, AIG, in the world. This is where it gets very complicated.  Basically, AIG, lost or is on the hook for these complicated credit default swaps, but the insurance and annuity divisions are just fine, separately. However, the threat from AIG is that if they were not bailed out of their bad debts, they would fold on the retirement annuities (run out of money) for retired school teachers throughout America. Next in line are the car makers.  They make gas-guzzling, comfy living rooms on wheels, and now know that America can’t afford their vehicles even with 0% financing. Their argument is about massive unemployment that would travel across the country and affect numerous industries directly and indirectly. Next in line are the credit cards and their argument is that without credit, the world will stop spinning on its axis.  After cards, are the builders. Their argument is that they must be bailed out to shore up the housing problem. But wait, weren’t they blamed for being a major part in the problem to begin with?

I am picturing the CEOS of these companies standing in line waiting for their soup from Hank and Ben  or Nancy and I am just wondering when someone finally gets the courage to say, “No Soup For You!”

Thanks again to my gifted partner, Larry Jacobson of Clearpoint Mortgage,  for the images provided. His pictures are really worth 1000 words.

Winter is just around the corner, and more than a few roofs across the country will surely be diagnosed by a professional roofing expert as “DOA, time to get a new one!”

If you have recently received the news of “you need a new roof” from your local roofing expert, perhaps it will help you feel better to know that FHA has a loan program that is designed to help finance things such as a roof replacement and makes it as easy as possible to get qualified and get the repairs done.

The loan program is called the FHA 203k streamline program and it is designed to allow homeowners to finance improvements for up to $35,000 into the mortgage. For those homes that need major rehabilitation, there is also a full FHA 203k loan which will allow more than $35,000 worth of rehabilitation work to be done.

Because the 203k streamline is an FHA program, all standard FHA guidelines apply when qualifying for the loan and you can choose an FHA fixed or variable interest rate when qualifying.

More Than New Roofs Are Eligible

Depending on the size of your roof, a new roof could easily cost more than $15,000 and for many families the easiest and most cost effective way to finance the cost of the new roof is to use the FHA 203k streamline program.

Many times when replacing a roof, there are other items that homeowners replace as well – heating/air conditioning systems, storm windows and doors, insulation upgrades and weather stripping.  All of these items are also eligible for financing under the 203k streamline guidelines.

A short list of the most popular eligible improvements under the 203k streamline guidelines include:

• Repair/replacement of roofs, gutters and downspouts
• Repair/replacement of HVAC systems
• Upgrade of plumbing and electrical systems
• Flooring
• Exterior decks, patios or porches
• Storm windows/doors
• Purchase and installation of new appliances
• Disability access improvements

These things are not everything that is eligible under the 203k program, just the most popular improvements that people use the program for.

Using Licensed/Bonded/Insured Contractors

Under the 203k streamline guidelines, you must use contractors to complete the work unless you can provide documented proof that you can perform the work yourself (for example, if you are a licensed plumber or electrician) and the lender will verify that contractors credentials in the loan process.  The contractor will also have to provide licensing, bonding and insurance documents and professional estimates.

Also, for the 203k streamline program a general contractor is not required, you can line up the sub-contractors who will complete the work yourself.

Payments To Contractors

Once the loan is approved and closed, the repair funds are held in escrow until payment is made to the contractor.  You will have up to 3 months from your closing date to complete the work and no more than 2 payments (first payment and final payment) may be paid to the specific contractors.  The first payment is limited to a maximum of 50% of the total cost and all payments are disbursed to the contractor unless the borrower is performing the work as approved earlier.

Why The 203k Streamline Program Is Popular

As a result of the credit crunch of 2008, many lenders have tightened their guidelines for Home Equity Lines of Credit (or even eliminated them altogether) and the 203k streamline program has become a more popular option for those people needing (or wanting) to make significant investments to improve their property.

Like those people who need a new roof!

(photo courtesy of Boston.com)

This week, the Federal Reserve cut the “federal funds rate” from 1.5% to 1% and the “discount rate” from 1.75% to 1.25%. What does this mean? Well the federal funds rate is the rate that banks lend money to other banks overnight. The discount rate is basically the interest rate that the Federal Reserve charges banks when they borrow money from the government. So in short, a “Fed rate cut” basically makes it cheaper for banks to borrow money from each other and from the government.

There is a common misperception that when the Fed cuts rates, mortgage rates also drop. This is not necessarily the case. In fact, 30 year fixed mortgage rates have actually risen in Zillow Mortgage Marketplace since the Fed cut rates earlier this week.

Why? Well just because it’s cheaper for banks to get money doesn’t mean they pass those savings on to borrowers. Mortgage rates fluctuate based on supply and demand for mortgages — they drop when banks’ propensity to lend increases. Unfortunately, in this crazy lending environment, lower borrowing costs for banks do not necessarily translate into lower borrowing costs for mortgage holders. The one exception is loans (e.g., HELOCs) which fluctuate based on a particular rate such as the discount rate or the prime borrowing rate. Those loans do adjust when the Fed cuts rates. But on the whole, it’s a mistake to assume that when the Fed cuts rates, mortgage rates decline.

For more information about this admittedly confusing topic, check out our Discussions section on mortgages.