The U.S. Department of Housing & Urban Development approved  (some time ago) two updated forms that are CENTRAL to the real estate transaction.  These two new forms will go into effect on January 1, 2010:

• Good Faith Estimate (pdf)
• HUD-1 Settlement Statement (pdf)

The new forms (and accompanying rules) are intended to help home buyers (who are obtaining mortgages) to better understand and compare their mortgage options.  In theory, this will allow them to obtain better loan terms, lower interest rates, and lower settlement charges (closing costs).

The new Good Faith Estimate (GFE) is now a standard form across all lenders.  In the past a borrower would receive a GFE with a different format from each lender that they visited --- each having a slightly different set of disclosed loan terms, or vocabulary for referencing such terms.  Now, a buyer can compare two proposed mortgage scenarios from two different lenders and be able to quickly and easily compare the exact same terms from each.  I see this as a huge improvement for the financing process (for buyers), as in the past there has often been much confusion about how to determine which proposed loan program is better than the other.

Here is an excerpt from Page 1 of the new Good Faith Estimate, which (surprisingly?) is quite intelligible!



But there's more!  Beyond a buyer's (borrower's) loan terms and closing costs being easier to comparison shop, and easier to understand . . . there is also more accountability on the lender to make sure that those terms and costs stay intact through to closing.

Some of the costs CANNOT change from the Good Faith Estimate, others can only change by a certain percentage, and others that can change without limit.  This is a big improvement from current HUD guidelines whereby there was no guarantee that any of the closing costs or loan terms from a Good Faith Estimate would be carried through to closing.

If you're buying in 2010, or beyond, you'll have the benefit of these new lending guidelines.  Feel free to ask questions as you go through the process (of me, or of your lender) -- but hopefully the process will be much clearer and easy for you to navigate!

If you're buying a fixer upper that you'll live in, you might want to consider the FHA Section 203(k) loan program!

This program allows a buyer to finance their purchase and subsequent repairs into one loan.  The alternative is for a fixer-upper buyer to obtain a secondary or short-term loan to finance the repairs or improvements that they will make after settlement.

You can finance significantly more than the purchase price of the property in order to have cash on hand for repairs.  The funds for improvements are placed into an escrow account, and the buyer (now owner) can draw on them through the rehabilitation process to pay for the repairs and improvements.

There are a few basic guidelines that can quickly tell you whether this might work for your situation:

• This loan program is not for those purchasing investment properties.
• Single family homes, townhomes, all the way up to a fourplex are all acceptable properties.
• The improvements must meet HUD minimum property standards.
• The planned improvements must cost at least $5,000.
• The improvements must start within 30 days of settlement, cannot cease for 30 consecutive days, and must all be complete within six months of settlement.
• You, the buyer/borrower, can do the work yourself, though you can only be paid for the cost of materials.

Of note, the Streamline 203(k) might also be of interest -- it allows for up to an additional $35,000 to be financed for improvements prior to move-in.

I have had clients consider this program, who didn't end up buying a fixer upper.  Have you purchased a house in Harrisonburg (and surrounding) using this loan program?  Or do you know someone who has?  Please share!

We've all (hopefully) heard of the $8,000 tax credit for first time home buyers --- if you haven't owned a home in the past three years you can receive $8,000 if you buy one by November 30th of this year (6.5 months to go).

But yesterday, the HUD Secretary announced that the Federal Housing Administration is going to permit buyers to use the $8,000 tax credit as a downpayment! 

More details will be forthcoming -- check with your lender in the coming weeks to see how this might work for your situation.

Interest rates for a typical 30-year loan have never been better --- since they started being recorded in 1970.  They're hovering just below 5% right now --- could they go lower?

Of note --- rates for the purchase of an investment property may be as low as 5.25% on a 30-year fixed rate mortgage.  This was a quote from Debbie Huntley (540-568-1056) at SunTrust Mortgage yesterday (4/24/2009).

Let's assume for a moment that a first-time buyer decides to buy a $150,000 townhouse in Harrisonburg.  With the appropriate income and credit scores, they may be able to obtain a rate as low as 4.625% on a 30 year fixed rate mortgage, with no downpayment. 

In the first year, this first-time buyer would likely have the following income and expenses:

• - $3,500 on closing costs
• - $952/m on mortgage payments (principal, interest, taxes, insurance, pmi)
• + $8,000 tax credit
• + $1,400 tax savings from interest payments
  

That is a total net cost of $5,524 in the first year of homeownership.

Contrast this to a buyer who closes on December 1 of this year.  At that point, the tax benefit will have ceased, and I predict that rates will be at least as high as 5.75% on a 30 year mortgage.

• - $3500 on closing costs
• - $1,056/m on mortgage payments (principal, interest, taxes, insurance, pmi)
• + $1,725 tax savings from interest payments

This is a total net cost of $14,447 in the first year of homeownership.

The combination of the tax credit, and the extremely low interest rates we are currently experiencing are likely to save you almost $9,000 in the first year of homeownership. 

As you can see, much of the above $9,000 of savings is in the $8,000 tax credit for first time buyers --- but the additional savings because of a low interest rate becomes quite dramatic over the course of the loan.  Buying now at very low rates (4.625%) may save you as much as $37,000 over the next 30 years as compared to buying at 5.75%. 

• A $150,000 purchase financed over 30 years at 5.75% will result in $165,129 paid in interest. 
  
• If had been financed over 30 years at 4.625%, you would only paid $127,635 in interest.
  

In days gone by (2002, 2003, 2004, 2005) you could buy a home in Harrisonburg or Rockingham County and sell it two years later for a tidy profit.  Home values were escalating so rapidly that you no longer had to consider how long you would be in the home before needing to sell it.  Today's recent home buyers, however, find themselves in a significantly different scenario.

The graph below shows the progress made over time in paying down the principal balance of a 30-year mortgage of $225,000 at 5.5%.



As you can see, the majority of the principal is paid off in the tail end of the mortgage life cycle --- 53% of it is paid off in the last 10 years.  But if we take an even closer look at the first five years, we can see what some recent home buyers would be facing if they needed to sell just two years later.


Consider these three factors:

1. As you can see in the chart above, after two years of making regular payments on the mortgage, only 2.8% of the mortgage has been paid off. 
   
2. The cost of selling a house, however, is often between 5% and 7% of the sales price. 
3. There was a less than 1% increase in average sales prices in our market over the past two years.
   

Given the above factors, a buyer who obtained a 100% LTV mortgage two years ago, who needed to sell now, would be in a bit of a tight spot.  Their house would have likely only increased in value by 1%, they would have paid off only 3% of their mortgage, and they would have (perhaps, roughly) a 6% total cost of selling the property.

What do you need to take away from this illustration?

1. It will likely continue to be difficult for the next 12-18 months to sell a home within the first two years of owning it while not losing money.  That is, of course, only taking into account principal reduction and appreciation, and does not include other financial benefits of buying such as the tax savings each year.
2. Be thankful that the Harrisonburg and Rockingham County real estate market has not seen drastic downward shifts in home values.  Other parts of the state and country have seen 20-40% declines in home values!
3. Do bear in mind that there is one extra equalizing variable for those considering a first time home purchase right now.  The $8,000 tax credit can change the game considerably for first time home buyers.
   

First time buyers who purchase before December 1 of this year will be eligible for an $8,000 tax credit.  While there are many things a first time buyer could do with that money, one idea might be to apply it directly to the principal balance of the mortgage!

Assuming a $150,000 purchase price, this eliminates 3.5 years of mortgage payments off of the end of your loan!  Even more exciting --- those 3.5 years of mortgage payments (that you won't pay) would have cost you a total of $33,000.

There are many exciting aspects of this $8,000 tax credit to first-time buyers --- if you have any questions about it, feel free to call me (540-578-0102) or e-mail me (scott@cbfunkhouser.com).

This illustration assumes a $150,000 purchase price, with 97% financing at 5.25%. 
Contact a qualified lender for more details!

Just a few hours ago, the long-awaited (by some) stimulus package made its way through Congress, and it will likely be signed by President Obama by the end of the weekend.  The stimulus plan affects many areas of our economy, as described in this AP press release, but one section in particular should stand out for first time home buyers.

Potential first time home buyers will now have an $8,000 reason to buy a house in the next nine months!  Here are a few of the fine details of this new (soon-to-be-finalized) legislation:

• You must buy a home between January 1, 2009 and November 30, 2009 to be eligible.
• Only those who have not owned a home in the past three years are eligible for the tax credit.
• The $8,000 tax credit will be applied to the 2009 tax year --- you'll actually receive the $8,000 financial benefit in Spring 2010 (whenever you file your taxes).
• The $8,000 tax credit does NOT have be re-paid, unless the home is sold within the first three years.

There are certainly several other fine points to know (it is, after all, a 1,000+ page piece of legislation), but those are the main points to remember.  If you are a first time buyer, or if you know one, this makes it a great time to consider buying a house.  (Oh yeah, low interest rates, lots of housing choices, and lots of negotiation power with sellers are also a good reasons to get in the buying market.)

Fannie Mae's current policies don't allow an investor to finance any more than four properties backed by Fannie Mae.  Thus, if you own the home you live in, you could only purchase three additional properties as an investment.  This has directly affected several of my clients who have had to stand on the sidelines, or seek a commercial loan as they considered recent investment purchases.

THE GOOD NEWS --- effective March 1, 2009, an investor will now be able to finance up to 10 properties through Fannie Mae!

Fannie Mae does, however, put some rather significant limitations on this new policy.  This summary is my interpretation of the new policy, but I encourage you to talk to read the policy yourself as well:

• The highest loan-to-value ratio will be 70%.
• The borrower must have a minimum credit score of 720.
• No bankruptcy/foreclosure during the past 7 years.
• No mortgage delinquencies (30+ days) in the past 12 months.
• Rental income on proposed and current properties must be documented.
• Reserves must be shown for the proposed and current properties.

Again, these changes won't go into effect until March 1, 2009, but if you meet the criteria listed above, you'll soon have significantly greater financing options on investment purchases.  This is great news for the investors who have keyed in on good opportunities in our market but who have been called back to the sidelines due to this financing restriction.

Thanks to Jeremy Hart, a fantastic Realtor in Blacksburg, VA for bringing this to my attention!

Some of the agents in my office remember when interest rates were as high as 15% for a 30 year fixed rate mortgage.  Wow!  Who could afford to buy at those rates!?



Today's rates, roughly 4.75% on a 30 year fixed rate mortgage, provide for great opportunities for those considering a home purchase.  Here are a few examples of how this rate would affect a monthly payment, as compared to an interest rate of 6.5%, which we saw not too long ago!

First time buyer of a city townhome at $155,900 (100% financing):
Principal & Interest at 6.5% = $985 / month
Principal & Interest at 4.75% = $813 / month
Savings = $172 / month = $2,064 / year!

Upper-end Barrington Home at $459,000 (80% financing):
Principal & Interest at 6.5% = $2,261 / month
Principal & Interest at 4.75% = $1,915 / month
Savings = $346 / month = $4,152 / year!

As you can see, these low interest rates can make a significant difference in a buyer's monthly budget!

As I mentioned a few days ago, low interest rates are helping people in this area cut down their monthly housing costs.

And yet interest rates keep falling further --- according to MarketWatch:


What is remarkable is that the national average rate is always somewhat higher than you can acquire from a lender locally.  I reviewed a good faith estimate yesterday for a re-finance at 4.875% fixed for 30 years. 

If you'll definitely be buying in the next 3-6 months, now is a great time to consider doing so, given current rates.  And if you aren't looking to buy / sell, but you have a rate higher than 6%, you should definitely investigate the cost savings of re-financing.

Here's an insightful article from yesterday's Daily News Record that uses a local example to show what a significant impact current interest rates can have on a family.

Depending on your financial picture, some borrowers are currently obtaining fixed-rate mortgages at or below 5.0%, and some local lenders that I have talked to expect that rates should stay at (or just below) 5.0% into the near-term future.

Even if you aren't looking to buy a home right now, this can be a great time to examine potential savings from refinancing.

One of my clients forwarded me a story from the Atlanta Journal-Constitution, which discusses new Fannie Mae and Freddie Mac rules that states that Fannie and Freddie will only back up to four real estate loans by one person. 

This new four-loan rule apparently replaced a previous limit of 10 loans, and was is in place to keep inexperienced or start-up real estate investors from over-investing.  The four-loan limit does not allow for any exceptions for income, assets or credit scores.

In checking with a local lender, I was told that if a borrower has more than 4 non-owner-occupied homes and a primary residence, no one but a commercial lender can help them on their next investment purchase. 

So, what is the solution??  One option is to move several existing residential investment loans into a commercial "blanket loan" thus removing residential loans from their balance sheet. Commercial loans on residential properties don't count against the four loan limit if they are in an LLC.

If any lenders or investors know of any other options with this new loan limit, please let me know!

Interest rates keep going down --- the Daily News Record reports today that they're down to around 5.375% for a conventional 30-year fixed rate mortgage.

If you're considering a home purchase in the next month or two, it might be worthwhile to consider getting the ball rolling now, while interest rates are so favorable!

Of note --- one statistic in the article is way off base...

"In addition to lower mortgage rates, home prices also have reached extreme lows. Prices of single-family homes plunged a record 17.4 percent in September from a year earlier, according to the Standard & Poor's/Case-Shiller Home Price Indices."

That may be the case nationally, but locally, we have seen home sales prices remain stable.

A short sale is one where the sales price was insufficient to pay the total of all liens and costs of sale; and where the seller did not bring sufficient liquid assets to the closing to cure all deficiencies.  In other words, the seller had to sell at a price where they needed to bring money to closing, but they couldn't. 

A short sale almost always results in an incomplete payoff of one or more mortgage debts, so a lender has to agree to a short sale.  Lenders are apt (in the current market) to consider a short sale because they are likely to recoup more of the money owed to them than if they are forced to foreclose on the property.

I am listing a property this week that will almost certainly be a short sale, and I was surprised to learn from the owner that the bank had encouraged the short sale and was quite willing to go along with a short sale.  This was somewhat of a surprise to me because over the last years I have heard countless stories of lenders who are hesitant to consider a short sale, and instead pursued foreclosure. 

If you are considering buying a property that will be a short sale, it will likely take a little bit longer for the transaction to take place, as the bank must approve of the deal that is worked out between buyer and seller --- but a short sale can be a great opportunity to buy at a good value.

I'm working on several exciting improvements to my web site, and this is the first.  It's been a long time coming, as many of you have asked if there is any way to integrate an easy to use mortgage calculator along side the property listings.  At last, the calculator is in place --- allowing you to quickly determine the principle and interest of your monthly mortgage payment. 

Enjoy, and let me know if you have any difficulties using it.

Here is some interesting news that Jon Ischinger (Wells Fargo, Harrisonburg) shared with me last week... If a sales contract is contingent upon a well inspection, septic inspection or termite inspection, the loan underwriter must be privy to any issues, and must approve how the buyer and seller choose to address those issues.  And this is on all new FHA and conventional loans!

It is my understanding from talking to Jon that this won't change the loan process drastically, but it will make things slower, and may make things more problematic if there are any issues with the termite, well or septic inspections.  As Jon notes, "In the past you could have worked something out with the borrower/seller and it would happen very quickly, outside of the lender's scope - now, if there is any inspection mentioned in the purchase contract, we have to see it and send it to underwriting.  If any maintenance is required, it will need to be addressed and re-inspected and then that documentation will have to be reviewed."

I'm curious to see how this plays out in a real transaction --- but I'm not too surprised to see yet another tightening on the loan process as lenders become more conservative in their lending practices.

The current VHDA interest rate is already low, at 5.875%.  But for first time buyers looking for affordable housing, it can be tough to finance a purchase even at that low rate.  So....how about 4.875%? 

If you're buying at Covenant Heights, a neighborhood being developed by Hope Community Builders (a non-profit group), depending on your income levels, you may be able to have the current VHDA rate lowered by an entire percentage point!

And these are nice properties we're talking about here -- duplexes and townhomes with three bedrooms, all of which are pre-inspected and built to EarthCraft and EnergyStar standards.

If you have a friend or co-worker who is seeking affordable housing, do them a favor and tell them about Covenant Heights!

It's anyone's guess what interest rates might do in the next 3, 6 or 12 months, but rates continue to be historically low.  Given these low rates, you may be considering whether it would be worthwhile to refinance.

Here's a sample analysis of whether "Bob" should refinance, that might be helpful as you analyze your own scenario.  Here's what you need to know about Bob....

• Home Value = $275,000
• Original Mortgage = $212,500 @ 7% for 30 years
• Current Balance = $200,000 (after five years, thus 25 years remaining)
• Current Payment = $1,414/month (principal & interest)
• Refinance Opportunity = 6.25% with a fee of $2,500

If Bob refinances for $202,500 (including the refinance fee estimate of $2,500), his new payment will be only $1,247/month.  This means that it will take only 15 months for the savings to have added up to the cost of the refinancing process.  ($2,500 divided by the difference in monthly payments)

One important note --- Bob lowered his payment by $167/month by refinancing not only because he lowered his rate, but also because he extended his remaining loan term from 25 years back up to 30 years. 

So, bottom line...

• Can refinancing your mortgage lower your monthly payment?  Absolutely!
• Can you recoup the cost of the refinancing process?  Absolutely!
• Should everyone refinance if the current rates are lower, or if it would lower their monthly payments?  Not necessarily! 
  

If an analysis of your current finance/refinance scenario would be helpful to you, please let me know.  I can either walk you through some of the basic calculations, or put you in touch with a qualified lender who can.

One option you have when obtaining a mortgage is to pay a loan discount point to lower the interest rate on your mortgage.  In most cases, a loan discount point will cost 1% of the loan amount, and will lower the interest rate by 0.125% over the life of the loan.

For example, on a 30 year, $200,000 loan at 6.5%, with no discount points, your principal and interest payment would be $1,264.14.

If, however, you paid one point, the $200,000 loan at 6.375% would require a principal and interest payment of $1,247.74.

The cost of the loan discount point would be $2,000, and it would save you $16.40 each month.  Thus, it would take 122 months (10 years, 2 months) before you started to realize any savings.

However, to take it one step further, we should include the tax benefits of having bought the loan discount point.  The $2,000 is tax deductible, thus if you are in the 25% tax bracket, you would have a tax savings of $500, and only need to recoup $1,500 of savings.  By including this tax perspective, it would only take 92 months (7 years, 8 months) for you to start seeing savings for having bought the discount point.

Bottom line --- in the examples above, if you don't plan to own the house for more than 7-ish years (or 10-ish years), it is likely not worthwhile to buy the loan discount point.