by Anton Blewett on March 3, 2008
By Anton Blewett, Cell: (650) 996-2028
Recently a buying frenzy began for what many investors consider a good deal. Consider the housing auction that took place weeks ago at the San Mateo County Fairgrounds. Many investors bought properties at great discounts, such as $100,000 less than what similar properties fetched last year. Yet ask yourself, “Does great discount equate to good buy?” As you ponder the question, consider: the price dropped $100K in one year. Or perhaps I can phrase it another way: the price dropped $100K in one year.
Buying a home at a $100K discount: good buy or not? Hopefully you’re thinking no, it isn’t. If a property dropped $100K in only a few years or less, then the area obviously doesn’t hold values well. In fact the area is likely experiencing a market correction (as opposed to market cooling). When homes depreciate at double-digit rates, technically the market is correcting. In most correcting markets, economists predict continuing corrections throughout 2009 and possibly into 2010. So what is $100K discounted from last years prices may be bought at a $200K discount next year.
Over the last six to seven years, nearly all Northern California markets experienced high single and double digit growth. Areas traditionally considered slow growth markets exploded with high growth. Consequently the same markets implode with high depreciation. On the flip side, consider Burlingame, Menlo Park or Palo Alto. Were these good buys before 2000? If good buy means steady appreciation over time, then yes. The growth in these markets either flattened or cooled. Many still experience appreciation, only the numbers are much smaller.
Before buying in any area, ask yourself: was it a good buy before 2000? If yes, then expect steady appreciation over time. If the answer is no, then expect at least two years of depreciation or more.
See next week’s follow-up: When buying in a correcting market makes sense.
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by Anton Blewett on February 26, 2008
By Anton Blewett, Cell: (650) 996-2028
Last August, I asked the question, “How much home can you afford?” After working with several first time buyers and friends who are considering making their first purchase since then, I discovered three powerful questions that simplify the process. The first question, which I touched on previously, involves figuring out what your comfortable paying given your lifestyle needs, stress tolerance and investing style. For example, you may be comfortable paying $4000 although lenders approve you for a monthly payment of $6000. With the future in mind, consider the lifestyle you want and the sacrifices you are willing to make.
Question 1: What is a comfortable monthly payment given the lifestyle that I want?
Before the recent mortgage craze, where people stated income (instead of documenting it) and bet on future appreciation with options ARMS, home buyers used a simple, rule-of-thumb calculation to determine their readiness: debt-to-income ratio. The rule recommends a maximum monthly mortgage payment that is forty percent of your gross monthly income. Anything more is too much. For example, if your gross monthly income is $10,000, then your suggested maximum payment is $4,000. And it’s really that simple.
Question 2: What is my suggested maximum payment?
Although sticking to a forty-percent debt-to-income ratio is recommended, exceeding it may make sense in some situations. Some of my past clients bought homes with debt-to-income ratios closer to fifty-percent. When asked if they’d do it again, they reply, “Certainly.” Which brings us to what many Realtors jokingly call the ramen factor. The ramen factor suggests buying a home at a price where the payments require eating ramen noodles for a year. Why would anyone ever do this? Simple: nearly all home buyers wish they bought more home after year one. Over time, home buyers adjust to their payments, incomes increase and situations improve. I recommend buying as much home as you can possibly afford.
Question 3: What is my ramen factor?
Understanding how much home you can afford begins with sitting down, listing out all income and expenses, and answering the previous questions. The second half of the equation requires talking with a great mortgage broker. Like fine tailors, a great mortgage broker quickly sizes up your financial situation and fits you with the best lending products available. A great mortgage broker is worth her weight in gold. Drop me a line if you’d like a recommendation.
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by Anton Blewett on October 19, 2007
By Anton Blewett, Cell: (650) 996-2028
Since the mortgage crisis, the lending industry adopted new practices. One new practice worth highlighting is the switch from stated-documentation and full-documentation to primarily full-documentation only. Lenders made the switch because full-documentation borrowers carry significantly less risk than stated-documentation ones.
The Distinction
Stated-documentation loans were an attempt to simplify the documentation process. Instead of verifying bank statements, a borrower simply said, “I make $120,000 annually, I have $80,000 in my savings account, I carry $10,000 in credit card debt.” The lender accepted these statement as fact. Today most loans require full-documentation, meaning a borrower must provide actual documentation.
Is not stated-documentation an oxymoron?
Impact? Less borrowers qualify
Less buyers qualify for two reasons. First, the stated reality versus actual reality are sometimes very different. Now borrowers that qualified by lying are ferreted out. Second, variable-income earners, such as myself, salespeople and consultants, have much difficulty documenting steady past and future income. Consequently variable-income earners who are new (without three or more years of steady income) or had bad years (low income) no longer qualify.
Final Thoughts
Variable-rate earners make up a large portion of the Peninsula buyer pool and therefore, the loss of their presence definitely impacts demand for local homes. On the flipside, lending to risky borrowers fueled the mortgage meltdown. Moves to safer practices, such as requiring full-documentation, are welcomed with open arms.
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by Anton Blewett on October 19, 2007
By Anton Blewett, Cell: (650) 996-2028
In an effort to make loans more secure, the lending industry tightened its rules and requirements for obtaining money. Understanding the changing landscape and taking the necessary steps today puts you in the best purchasing position tomorrow. Here’s a simple list to get started:
Improve your credit score
Because FICO scores determine the risk of a borrower, lenders are offering incentives (lower rates) those with strong scores and penalizing those with weak ones. In some cases, lenders refuse money to borrows under a certain score.
- Get your credit report so you know where you stand
- Take steps to improve it
Eliminate debt
Debt is a major factor lenders consider. Computing your debt-to-income ratio requires both the potential mortgage and all other outstanding debt, such as credit cards and auto loan. Minimize or eliminate these and improve your loans options and receive more incentives.
- Create a debt destroyer to reduce outstanding debt (read Stacy Johnson’s Life or Debt for a how-to)
- Know your Latte factor and control spending (read David Bach’s Finish First series)
Give it a trial run
Start saving today as if you are carrying a mortgage already. Making monthly payments for 6 months to a year shows whether you are consistent enough to pay a monthly mortgage and puts more money towards your down payment.
- Set aside $2,000 per month into a high-interest savings account for 6-12 months ($1,987 doesn’t count – it must be at least $2,000).
Down payment assistance
There are many sources private and public equity to assist you with the down payment. Some possible sources:
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by Anton Blewett on August 30, 2007
Although figuring out what you can spend is straightforward (simply talk with a great lender), figuring out what you can afford requires a close examination of your personal needs and finances. For example, while you may be approved for a monthly payment of $6000 given your income, you may be comfortable only paying $4000 given your lifestyle needs, stress tolerance and investing style. So look at your income and expenses, then ask yourself what monthly payment you are comfortable paying. Some additional questions:
- Do I have assistance for the down payment? (e.g., government aid, family assistance or equity sharing)
- How much down payment can I make?
- What is my budget for purchasing and maintaining a home?
Ultimately you must talk with a great lender to figure most of these variables out. If you need a recommendation, just let me know.
Basic Terms
Before you call, familiarize yourself with the following:
- Debt/income ratio: The sum of monthly debt obligations (including the prospective mortgage) to monthly gross income. Most lenders look for a debt-to-income ration of 36% or less.
- Housing expense/income ratio: The sum of monthly housing expenses to monthly gross income. Most lenders look for a house expense/income ratio of 28% or less.
- Credit Score: The most common credit score system, called FICO, assigns scores that range from 300 to 950. The higher your credit score, the lower the assumed risk that you will fail to repay the loan.
Some friendly advice
Most people are unaware of their actual credit score. Moreover it is my experience from working with past clients that the perceived credit score is much greater than the actual credit score. One client told me his score was easily over 750; it turned out it was 670. So find out your credit score and get it cleaned today!
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