Navigating A Mortgage In Today’s Market

Mortgage underwriting rules have gone from a bad extreme of four or so years ago to an equally bad extreme today. In order to obtain a mortgage, you basically need to be prepared to go into a full documentation loan. You will need pay stubs, W-2’s, asset statements for a couple of months. If you’re self-employed add to the pile your tax returns. All pages will be necessary. (If your accountant sends you them in a PDF, send the PDF). If you own a business or are a partner in a law firm, be prepared to include business returns including K-1’s. If the income of the applicant has fallen over the last year, then be prepared for a letter of explanation so the underwriter gets comfortable with your income. For self-employed income from tax returns, it is generally averaged for the last couple of years. For assets, one needs to start with bank statements for sixty days, all pages, even if the last page is an advertisement for other bank products. Next are stock and 401K statements for sixty days. If there are deposits on the bank and or stock statements, the underwriter is likely to ask for explanations for those deposits. Even small deposits of one or two hundred dollars will be scrutinized. With all the introspection of assets these days, it makes sense to plan ahead on what monies one wants to use for an eventual home purchase. For starters, try using direct deposit for paystubs. Do not cash and then redeposit paychecks. Otherwise one is making a simple transaction more involved then necessary. If a consumer is getting gift money, it is a good idea to know ahead of time what is going to be asked. First, the person who is gifting the money will need to produce a bank statement showing where the money is coming from. (If the account has a lot of recent deposits, the underwriter may ask questions). Next, the recipient has to show the money going into their account. Proof of deposit will be asked for. The bank will provide a form that the donor will have to fill out along with the recipient. Keep in mind the donor has to be a relative of the applicant. Credit reports and scores are more important today than ever before. If you know you are going to be in the market for a new mortgage in the next several months, pull a credit report. If there are problems, it gives one time to correct them. It is also important to have enough lines of credit to qualify for a mortgage in today’s market. Three lines of credit used for at least twelve months are required. Even if you don’t believe in credit cards, maintain at least a few and charge a few items and pay them off each month. This will help satisfy the credit requirements. Knowledge is power and will help make the process a little easier to handle. Bill Starrels is a mortgage loan officer who lives in Georgetown. Bill specializes in purchase and refinances. He can be reached at 703 625 7355 or Bill.Starrels@gmail.com.

The Difficulties for the Self-Employed Borrower

As all of us are aware by now, after the largest housing bust since the great depression, getting a mortgage is far from the pre-bubble days where just filling out an application gave you an over 70% chance of getting a loan if you had good credit. Everything you can think of involving your financial picture now needs to be disclosed and reviewed by a lender. For those of you that are self-employed or own your own business, getting a loan can be even more toilsome. Pre-housing bubble days allowed the "self-employed" to just state their income and put a decent amount down in cash. We, the lenders, just focused on the borrowers' credit scores, the value of the property, and in most cases savings in the bank. As the housing market nationally started to crash, so did more of these stated income loans, referred to these days as "liar loans." Not all self-employed borrowers that used stated income loans were lying about their income, but since the program was abused it went "pop" with the bubble. Here is what you need to know about getting approved as a self-employed borrower: 1) You must have a 2-year history of being self-employed with reported 1040s to qualify for a mortgage. There are some exceptions, so e-mail me if you have any questions. 2) Lenders are looking for several months of "cash reserves," which are total mortgage payments in liquid assets. Many mortgage programs, especially if the loans are over the Fannie Mae/Freddie Mac loan limits, are looking for as little as 6 months or up to 12 months of cash reserves, depending on the loan size and down payment. 3) Lenders are now using income reported to the IRS as taxable income to qualify for a loan. If you are writing-off a lot of deductions then you are going to have a harder time qualifying for a loan. You have to be more conservative in your business deductions, which is hard in this economic climate. Bottom line: pay more in taxes to qualify for a larger loan. 4) Declining income is a red flag for an underwriter. If your business is still reeling from the economic tsunami of 2009, getting a loan can be even more difficult. Lenders will only use the lower of the two years of income to qualify you if, for example, 2010's income is lower than 2009's. We can make exceptions for declining income for a health issue or call to active duty, for example. 5) The higher your credit scores are, the better chance you have of getting a higher loan and qualifying for more. Reducing credit card debt is one of the easiest ways to improve your credit score, since credit card debt has an immediate impact on your score. Work with a credit repair company to get rid of any inaccurate information and make sure you check your credit scores regularly. Gregg Busch is Vice President of First Savings Mortgage Corporation. For more information or a free pre-approval contact him at GBusch@FSavings.com or 202-256-7777.

Mortgage Checkup

Interest rates continue to be in a narrow range, being pulled in different directions depending on the events of the week. Generally speaking, turmoil and unrest in the world create anxiety. Anxiety causes the markets to gravitate to bonds, which tends to help rates go down. When the markets highlight the strengths in the economy, rates tick up. When the markets concentrate on political instability, then bonds and rates gain favor. When events in Egypt quieted down and Libya, although far from settled, seemed manageable, the events painted a picture of relative stability for investors. This triggered a flight to stocks and money came out of the bond markets. So rates started to move higher again. The housing markets continue to sputter. House prices are stable to moving slightly higher in the Washington, DC marketplace. Once outside of the DC metropolitan area, the housing markets tend to be less stable, with prices stable to declining. Condominium pricing is still trying to find stability. One trouble spot for condos these days are the strict rules Fannie Mae and Freddie Mac have on approving condominiums. When owners have a difficult time selling their unit, many owners turn their condos into investment/rental units. If too many apartments turn into rental units then the investor ratio can get out of whack. If this happens it can be difficult for Fannie Mae or Freddie Mac to write mortgages on the property. Another item one has to keep in mind is the budget for the condominium can be put at risk if there are any delinquencies in the property. This can temporarily wreck condominiums reserves. Underwriting standards remain strict. Full documentation is required on almost all loans these days and account for most of the mortgages being underrated today. Standards do remain strict. Credit standards remain high. In order to get the back rates on conventional loans it takes a credit score of 770 or higher to get the best rates. When credit scores get significantly lower then the fees and ultimately the pricing is more expensive. This is why it is a good idea for a homeowner to get a copy of their credit report every couple of years or so. If there is a problem with the credit report, a consumer can get it repaired. If problems are left alone the credit scores will continue to stay low or go lower. Housing continues to lag. The Federal Reserve noted that the real estate markets showed “some gains from still weak levels”. Oil prices may prove to be a drag on the overall strength of the economic recovery. It will be interesting to see how the spike in oil will affect interest rates. Stay tuned. Bill Starrels lives in Georgetown. He is a mortgage banker who specializes in purchase and refinance money. He can be reached at 703 625 7355, Bill.Starrels@gmail.com

Ask the Realtor

  -Dear Darrell: I picked up a copy of The Georgetowner last weekend, and once again began to think about moving to the city from our home in the suburbs. I love the energy of the city and think I would love living in D.C., but we have a one-year-old and another child on the way. I worry that living here will be difficult for the children, and that the cost of owning real estate in D.C. is way more than where we now live. This isn’t exactly a “real estate” question, but I would appreciate your thoughts. — Melissa H, Gaithersburg, MD Dear Melissa: Great question, and a very difficult one, because the choice of where to live is based on so many case-by-case variables. In principle, I believe very strongly that children can thrive in the city environment, and in some ways the city model is more like small-town living than suburban life is. In Georgetown, for instance, there is a town center, and one can walk to the post office, the library, parks, schools, tennis courts, restaurants, and the town “stream” (i.e. the Potomac). Kids still play on various sports teams and belong to youth clubs — two which come to mind immediately are the Jelleff Boys & Girls Club and the Guy Mason Park rec center complex. Imagine living on R Street, rolling out of bed, and taking the kids across the street to Rose Park to run in the fields, play on the playground, hit a tennis ball or hike down to Rock Creek Park to throw rocks in the stream. The about-to-open renovated Georgetown library is two blocks away. There are French, Turkish, Korean, and Egyptian restaurants — not to mention Ledo’s Pizza — a stone’s throw away, and countless other restaurants within a few blocks. It’s an easy stroll to a showplace Safeway, and there is the easy access to the museums, monuments, galleries and music venues of downtown D.C. Then there are the properties themselves: one-level, two-level, three-level row houses, condos and co-ops, many with decks, patios or back yards. With a little work, I believe you can find a property which would suit your family. In general, the prices are likely to be higher than suburban property, but the tradeoff is the community, more time off the roads, less money on commuting costs, less stress, and easy access to the incredible variety of life in the city. I’ve described Georgetown above, but same applies to numerous other communities all over D.C. Obviously I can’t tell you that your children would be content in the District, but my guess is that if you are content here, they will be also. Children learn from their environment, and they will certainly learn things peculiar to city life, things which I believe will enrich their lives in a very special way. And, of course, yours too! Darrell Parsons is the managing broker of the Georgetown Long and Foster office and abides by Equal Housing Opportunity regulations. Have a real estate question? E-mail him at darrell@lnf.com. He blogs at georgetownrealestatenews.blogspot.com.

Ask the Realtor

Dear Darrell, Is there any advantage in my trying to buy a property before the end of the year, rather than waiting for early Spring of next year? Bill E Dear Bill, From a tax standpoint, there might very well be an advantage for you to buy and close before the end of the year. But each person’s financial situation is unique to that person and is something you should discuss with your accountant or financial advisor. From a real estate standpoint, there are a couple of useful things to keep in mind: - If you look at a newly built property, it’s very possible that the builder will be offering end of the year incentives. - Certain owners may be facing tax consequences of one kind or another, which would be ameliorated by selling before the end of the year. These sellers might be more flexible than usual. - Prices and interest rates are low—interest rates, historically low. No one knows how these two will change between now and spring of 2011. Many economists predict that we will see a slow, steady improvement in the economy over the next year or two. If this does happen, it is likely that prices and interest rates will rise. So, the question is: do you want to bet that the economy will be better or worse come spring? Prices already seem to have stabilized in DC. We’ve been fortunate in that regard. Whatever your decision, I encourage you to be in touch with a local Realtor who has a view into our local market. Most of what one hears in the news is based on the national market. To make informed decisions, you need to know what is happening locally. Darrell Parsons is the Managing Broker of the Georgetown Long & Foster Office. Darrell@LNF.com or 202.944.8400. He blogs at: www.GeorgetownRealEstateNews.blogspot.com

Mortgage

A couple of years ago, if a homeowner was offered a jumbo-sized mortgage for a home in Washington for 4.375% they would beg for the loan to be locked. In fact, the customer would probably think the mortgage loan officer was misquoting his or her rate sheet. But that was 2009. Today clients sometimes let greed take over. A lot of borrowers are taking their time in making the decision to move forward in anticipation of even lower rates. Remember 2008 – 2009? The sky was falling. Banks were failing by the hundreds. The Treasury Department headed by Henry Paulson, formerly of Goldman Sachs, launched the TARP program under President George W. Bush in order to stabilize the financial system. Fast forward to the recent midterm elections. Democrats lost the House to the Republicans because many voters believed that among other things that the Democrats were the architects of TARP and that TARP did not work. TARP did pass with the help of Democrats and TARP did salvage the banking system. In fact the Government may make a profit from TARP. The country is climbing out of the deep recession slowly. The recovery is proving to be a slow one that will take time. In reaction to the slow pace of the recovery, the Federal Reserve Bank announced “Quantitative Easing 2,” or “QE2,” which entails the buying of $600 billion dollars of Treasury bills in order to stimulate the economy by keeping Treasury prices at lower levels. With the stimulus program, the Feds also are attempting to keep interest rates down. In early November, before the Treasury started its pre-announced buyback, rates reached the lowest levels that the markets have seen since the 1950s. Unfortunately, even when interest rates hit new lows, perspective mortgage clients can let greed take over. Some folks are always hoping for still lower rates. There are a few reasons why rates have moved higher since the Treasury buyback was announced. First, everyone on Wall Street and elsewhere knew what the Federal Reserve and its Chairman Ben Bernanke were planning on doing. The prices of the 10-year Treasuries and those of the mortgage market reflected the anticipated program. Others are talking about the potential inflationary effects of a devalued dollar. Since the buy back program was announced, the rate on the 10-Year Treasures has gone up and interest rates have also ticked up. Interest rates should stay in a relatively narrow range for the near term. If you can save hundreds of dollars now, go ahead and pull the interest rate trigger. Your next worry will be how to spend the money you will be saving. Bill Starrels lives in Georgetown and is a mortgage loan officer. He can be reached at 703 625 7355 or by email, bill.Starrels@gmail.com

Ask the Realtor

Dear Darrell: I hear the city shuts down in August and there is no point in trying to sell my house then. I don’t want to miss a possible buyer, but I also don’t want the hassle of open houses, etc. if no one is going to be looking. What’s the best time of year to sell? — Lloyd L., Woodley Park Dear Lloyd: As with most things, it depends. It is questions like yours that make me long for a different personality, one which was certain of everything. So I could just say, “Don’t put your house on the market in August. The city is dead then.” But being who I am, I don’t see this as an either/or question. Yes, the market is traditionally slower in August, and people are traditionally away on vacation, and it is traditionally hot and humid. However, when is the last time anyone found the current world traditional or predictable? It isn’t! And neither is the real estate market. There are plenty of potential buyers who don’t go away in August, maybe because they are saving their money, or are gearing up for the fall, or any one of a myriad of reasons. The old real estate adage, “it only takes one buyer,” is never better applied than in this situation. No one knows when that one buyer will come along. There is one thing for certain, however: if your house is not for sale in August, no one will make an offer on it in August. What it boils down to is how you feel about the process of having your house on the market. If it really stresses you out, and you aren’t in any rush, then you can afford to wait. But if you really want to sell, I encourage you to meet with your realtor and come up with a plan which will allow you to have your house on the market without stress. For instance, you don’t have to have open houses. If your house is being marketed through the usual channels, your realtor will get to the potential buyers. And when a buyer wants to see your house, all you have to do is get things straightened up. My advice is to put it on the market now and begin looking for your buyer! Darrell Parsons is the managing broker of the Georgetown Long and Foster office and abides by Equal Housing Opportunity regulations. Have a real estate question? E-mail him at darrell@lnf.com. He blogs at georgetownrealestatenews.blogspot.com.

Ask the Realtor

Dear Darrell, I am working with a Realtor to buy a house. He keeps asking me for more and more of my financial information. I like working with him and think he is a good agent, but am a little put off by having to give my financial particulars. I also don’t want to be rude by telling him this is private and that I don’t want to share it. Is it common for agents to request this sort of thing? Amanda R. Dear Amanda, Without knowing exactly what the Realtor is asking you for, it’s a bit hard to answer your question. But assuming the Realtor is asking questions related to the resources you have available for purchasing a property, these are legitimate questions. Part of the work of a good Realtor is to educate his client. There are a couple of ways to go about this when discussing financial information. One is for the agent to ask the questions (as is happening in this case). Another is for the agent to encourage you to talk with a mortgage broker who can tell you about a wide variety of loan programs which might be suitable for you. Either way, it is important for you to understand the costs of buying a home—the immediate costs and the long term costs. As evidenced by the huge number of people who have gotten into trouble because they were overextended financially, it is critical that you be certain that you have both the cash (down payment and closing costs, etc.), and the income to support the monthly mortgage cost. If you are uncomfortable giving this information to your agent, you can certainly give it directly to a mortgage broker, and that person can counsel you on financial matters. If you don’t know a mortgage broker I suggest you talk with friends or ask your agent for a recommendation or two. One other very important aspect of this process is that in light of the recent systemic financial problems, lenders are being far more cautious. This makes the process longer, and requires a fair amount more documentation and review. Your agent no doubt knows this and is probably trying to help you get your ducks in a row early on, so that when you find the property you want, you will be prepared to make an offer and move forward.

Ask the Realtor

Dear Darrell, I know you are probably predisposed toward someone buying rather than renting, but it seems to me that buying now is not a good idea since it looks like house prices are still dropping — at least that’s what I seem to be hearing and reading. Why do realtors keep telling me it’s a good time to buy? — Steve A. Dear Steve, I’m not necessarily predisposed to sales as opposed to rentals, but there are actually at least a couple of good reasons to buy now. I know there is the general idea that one shouldn’t buy before the market hits bottom. That’s good advice, but the only way to know when the bottom is reached is when one is looking back at the bottom. So it is a guess, and it involves other factors, the most important of which is mortgage interest rates. Even if one were to guess right about the bottom of the market, the interest rates at that time probably would have risen, and the advantage of buying at a lower price would be wiped out by higher cost of the mortgage. I say this with trepidation, but I see signs here and there that things are beginning to stabilize. Also, what you are reading is typically national news rather than local news. In fact, D.C. has fared better than most areas, and the bottom here will be different than the bottom elsewhere. In the case of realtors who are suggesting it’s a good time to buy, I would quiz them about why they believe that to be a good idea. I’d ask them to go over the numbers with you so you can actually see whether it makes sense for you at this time or not. Also, renting is great in some ways, but it isn’t perfect either. If you decided to buy, keep these three things in mind: location; don’t overpay; buy what you can afford. Darrell Parsons is the managing broker of the Georgetown Long and Foster office and abides by Equal Housing Opportunity regulations. Have a real estate question? E-mail him at darrell@lnf.com. He blogs at georgetownrealestatenews.blogspot.com.