Down payment sources

March 20, 2014 Posted by Andre Hemmersbach

The biggest issue facing most borrowers in this market is still saving the down payment and closing costs! I thought I would list a number of resources that are helpful to would be purchasers that are a little short on cash.

  • If you work for a company that has a 401K plan, check with your administrator to find out if you can borrow against your vested balance. Many plans allow for a loan up to 50% of your vested balance or $50,000 for a purchase of a home. Best part about this loan is that most of the time the payments will not count against your qualification ratios.
  • Call your HR department or boss to see if your employer has a company program that will do an employer loan for the purchase of your home. This debt does count against you but I have helped borrowers whose employer had incredible rates of interest for such loans.

    Your Backyard

    Your Next BBQ

  • Cash in a Roth IRA for $10,000. Currently the tax rules allow you to pull up to $10,000 without penalties for the purchase of your first home. (you still need to pay regular income tax on the amount you pull and check with your CPA).
  • Sell stocks or better yet, borrow against stocks or securities you own.
  • Check with Non-profits or your church to see if they have any special down payment assistance programs.
  • Sell or refinance a boat, car or RV.
  • Get a gift from any family member or members (some programs allow for 100% gift funds).
  • Find a co-signer or partner with someone with cash and purchase the property together (you can do an equity share agreement that splits the property price appreciation at the time of sale).
  • If you are a veteran, you do not need a down payment as financing is available at 100% of the purchase price.
  • Look for a seller that will carry a second (usually will not work in a seller’s market)
  • If you have already saved around 3.5% of the sales price for a down payment there are programs available that allow the lender to pay all your closing costs.

Call me I would be happy to discuss your particular situation.

Real Estate Time Bomb

January 30, 2014 Posted by Andre Hemmersbach

If you regularly read financial periodicals, you will come across articles from financial experts on doomsday scenarios. Many times they are motivational pieces focused on selling you something to “protect” you against the awaiting catastrophe; other times it is a true warning by an expert that sees something very disturbing. The Dotcom Bust, the Asian Currency Crisis and even our 2008 Real Estate Bubble all had warning signs and experts who correctly predicted the financial disaster.  Today’s popular pending Armageddons are the Student Loan Bubble, the T-Bill Bubble and in the real estate sector a warning about Equity Lines of Credit (ELOC).

If you were a homeowner in 2004 – 2008 you were receiving multiple free offers for ELOC with low payments and teaser rates. Many homeowners took advantage of those freebies and started using their home equity like credit cards to buy everything from automobiles to vacations. In hindsight these mortgage instruments have been pretty good deals. Historic low-interest rates over the last 5 years and the tax benefits associated with the ELOCs have made this a very cheap method to finance any purchase.

Unfortunately, most homeowners do not understand the mechanics of their ELOC. Many times the promissory note they signed ten years ago was never read, explained or maybe just forgotten.  A quick explanation of how an ELOC works will help you understand the time bomb lurking in the shadows.

98% of all ELOC have a 10 year draw period. During this time you can use your line like a credit card to buy goods and services. After the 10th year starts the 20 year repayment period begins (a few ELOCs have 15 year repayment periods).  All ELOC have an index and most are based on the prime rate (currently 3.25%). Lenders use an index to make sure that they receive an interest rate that is commensurate with current market conditions. To the index rate the lender adds a margin (the Bank’s profit) usually 0.0% to as high as 3.0% or more. Check your Promissory Note or with your servicer to find your margin. Every month the lender adds the index rate to the margin and divides by 12. This is the monthly rate you are charged on your outstanding balance. These loans do not contain any sort of periodic cap to protect you from quick interest rate increases month over month. A lifetime interest rate cap of 18% is standard.

So where is the potential powder keg? As the 10 year draw and interest only periods are coming to close, borrowers will get notices of their mortgage payments increasing as their ELOC change to  fully amortizing loans. The amount could be startling for some homeowners! For example, an $85,000 balance, which is pretty typical of what I see on my customer’s loan applications, at a current rate of 4.25% (3.25% Prime Rate plus a 1.0% margin) has an interest only payment of $301.04 this would go to $526.35 on a 20 year repayment. But that’s not the whole story! Understand that we are at historically low rates. In the past the Prime Rate has been above 8% seven times since 1970 and at 8.25% as recently as September of 2007. So let me run those numbers on a balance of $85,000: Current payment interest only $301.04, new payment with rates at 9.25% (Prime Rate 8.25% plus a 1.0% margin) would be $778.49 for a 20 year repayment. If your ELOC has a 15 repayment your new payment would be $874.82. That is a payment increase of $573.77 or 191%

Please do not misconstrue that I am predicting an 8.25% prime rate anytime soon, but recognize that homeowners who have ELOC s with larger balances need to be aware of potential payment increases and how it could affect them.

If I can help you figure out how your ELOC will adjust and the steps you can take to minimize the impact please call me at my office. 310 540 1330.

Real Estate Values in 2014

December 20, 2013 Posted by Andre Hemmersbach

Being in the Real Estate industry gives me access to various   tools, reports and statistics that most individuals cannot find. That being said you can find a chart or statistic to make a case for or against almost anything. The big question on many of my client’s mind is where Real Estate prices go from here. Our friends at John Burns Real Estate Consulting do a marvelous job of sifting through the numbers on a state by state and county by county level to come up with relevant, timely and meaningful predictions about matters in real estate.

I found the recent information prepared by JBREC to be extremely interesting as it charts the historical ratio between the median housing payments to income.   A shorter way of describing this chart is an affordability ratio. As home payments get more expensive via higher rates, median home prices or a drop in income it is reasonable to expect a reversal in demand. The historical mean of the average housing payment to income ratio is close to 32.5%. The current ratio through October 2013 is 28.4% based on a 4.1% 30 year fixed rate.

MedianHousingPayment_to_IncomeRatios

If this chart holds true we would need another 13% increase in the national sales price or mortgage rates to go to 6% before we hit the historical mean of 32.5% in affordability.

Please call me to discuss your plans in purchasing a home or Real Estate investment in 2014. Unless you are paying cash, getting all your ducks in a row early will save you time, money and headaches!

How does your credit score measure up?

December 13, 2013 Posted by Andre Hemmersbach

Every once in a while I will get a customer that wants to know how his score compares to the average person. So I did a little research and was surprised to find out that credit scores were not dispersed as I had thought.

Your credit score is a numerical reflection of the quality of your credit based on statistical logarithms developed by some brainiac math geniuses that will not release the exact formula they use. But the generalities break down like this:

Payment history, length of credit history, recent inquiries, number of accounts and used credit vs available credit. For more on how credit scores are generated and how you can raise your score see How a credit score is figured

Back to credit score averages. Statistically, I was expecting to find a bell-shaped curve where the majority of people are in the middle and that either end of the spectrum (lowest and highest scores) would have less people. Apparently credit quality is fairly even across the board. See the chart below to see how you compare.

Its important that you know your credit score and that it accurately reflects your credit history as generally speaking the higher the credit score, the more likely you are to be offered better credit terms.

If I can be of any assistance in educating you about your credit score in preparation of buying your home, please call me.

 

 

Anatomy Of Your Credit Score

November 23, 2013 Posted by Andre Hemmersbach

A Credit Score is a number that ranks a consumer’s credit risk based on a statistical evaluation of information in the consumer’s credit file. In layman’s terms, it’s a number that represents the risk that you will default on a loan, using your prior payment history and other factors as a benchmark. Statistically speaking, the higher your credit score number the less likely the lender will experience delinquencies or a default on your account. Different industries use different credit score products. For instance mortgage lenders rely on FICO or the Fair Issac Credit Company score to determine your credit risk level for home loans. A car dealer and a credit card company may rely on different credit score products. Each mathematical algorithm used to calculate credit scores is unique and extremely complex, so the information below is a simple explanation of how a FICO credit score works.

A FICO score is based on five different weighted factors as presented in the pie chart below:

The most common question I hear about a borrower’s credit score, is how to quickly increase the borrower’s representative score, so that we can get the borrower approved for a home loan. Sometimes we can also quickly improve a score to get a client a better rate and fee combination. The basics for increasing your credit score are all related to the weighted factors in the chart above and have to do with:

  • Correcting any delinquent payment histories that are incorrect.
  • Paying off account balances.
  • Rearranging account balances.

We have tools available by which we can create a plan that actually allows us to try different credit scenario fixes and measure the resulting credit score improvements. This new tool has already saved many of our clients time, money and frustration and is not available through your standard mortgage conduits. If you are looking to purchase a home in the next six months I would highly recommend a free credit consultation to make sure you have the best possible chance of getting the lowest interest rates on your mortgage.

Finally, when dealing with credit score issues it’s best to get help from someone who understands how credit scores are figured.  Attempting to raise your credit score yourself could be counterproductive as simple mistakes made during the process can actually decrease your credit scores delaying or making your home loan more expensive.  Please call me if I can help you.