Last week Congress approved raising the loan limits on FHA loans to $729,750.  How will that effect Palos Verdes homes owners?  At first glance, one would guess that there is not too much Palos Verdes real estate selling in the lower ranges.  Currently, 25% or 51 single family Palos Verdes houses are for sale for less than $1,000,000.  However, 46 out of the 47 Palos Verdes condos/townhomes currently for sale are under $1,000,000.

FHA mortgages require lower FICO scores than a conventional loan – 620 for FHA and 660 for conventional.  FHA mortgages require less down payment – a minimum of 3.5% versus 20% for a conventional loan.  This is attractive for some buyers and therefore helpful for some sellers of Palos Verdes real estate.  The downside for buyers is that FHA requires PMI (private mortgage insurance) which is an additional payment on top of the mortgage payment – 1.15% of the loan amount.

Kenneth R. Harney wrote a recent article in the LA Times with some wise advice, “Bottom line for house shoppers: Take a hard, close look at FHA with a local loan officer, in light of the rule changes.  Pencil out the costs, down-payment requirements and more generous standards on credit.”  Click here to read his article.

Fun wintery photo courtesy of Arvin Design

When a seller of Palos Verdes real estate and the buyer who submits an offer on a Palos Verdes home are waiting for the appraisal to come in, they generally presume that an appraisal expert from the area will be doing that appraisal.  That is not always true.  I have written several articles regarding the frustration resulting from the appraisal process (the most recent can be accessed by clicking here) created by the Dodd-Frank financial reform law last year.

In order to separate the potentially biased lender from the appraiser, a new layer was created – Appraisal Management Companies.  The LA Times printed a recent article by Kenneth R. Harney entitled, “Who’s getting appraisal fees?” which gets to the root of the issue.  The issue is that the appraisal management companies (some of which are owned by or affiliated with the lenders themselves) are  keeping as much as half the appraisal fee and offering the appraiser the other half.  According to Harney, “Most experienced independent appraisers refuse to work for $200 to $250 because they can’t pay their overhead at these rates.  Less-experienced appraisers, who sometimes have to travel long distances from their home markets, tend to be more willing to work for the lower amounts.”

This does not only affect buyers and sellers but current owners of Palos Verdes houses who are refinancing.  What can be done?  Some appraisal groups are lobbying to get this changed.  Harney has a great suggestion, “But in the meantime, consumers should demand transparency:  Of my $500 appraisal fee, who got what? And why?”

My clients purchasing Palos Verdes real estate are told by their lender not to apply for additional credit or open new accounts when they purchase a Palos Verdes home  and have a loan (or even a refi) being processed.  I can’t tell you how many times the borower forgets.  They are planning to redecorate their new home, one client needed a new car as her car died, etc.  It can be any number of reasons.  However the new lender now runs a credit check just before the loan (and house) closes.  If there is additional outstanding loans or credit, that may negatively affect the borrower’s ratios and put a hold on the new loan.

Kenneth R. Harney has written an excellent article in the LA Times warning about this very issue.  “If inquiries pop up on your files during this time, lenders must check them out to determine whether any new debt might require a re-underwriting of the originally quoted terms.”  That is just what you want to avoid.  Harney goes on to explain that lenders are even looking back 120 days before you applied for the loan looking for credit inquiries to make sure that there are not any new loans that have not been picked up by the 3 major credit reporting services. 

Harney’s cautionary advice should be heeded, “Be aware that your credit files -  not just your FICO scores – are probably being checked, rechecked and evaluated for the third of a year preceding a mortgage application and two to three months prior to the closing.  The cleaner and simpler you keep the files, the easier your path to an on-time closing should be.”  To read his entire article, click here.

Interest rates have been at historic lows since last year and all my clients have opted for fixed rate mortgages for their Palos Verdes homes.  According to a recent Los Angeles Times article by Kenneth R. Harney, adjustable rate mortgages are becoming more popular.  “Adjustables accounted for just 3% of new home loans in early 2009 but are projected to be picked by nearly 1 out of 10 borrowers in 2011.”

I thought that was a surprising statistic so I called a local lender for his input.  He had not read the article but confirmed that last year he had done more adjustable rate mortgages and the trend was continuing this year.  When I asked why, he told me that certain buyers who are tight with their loan qualification ratios are opting for adjustable rates to get loan approval as the lower adjustable rates net lower monthly mortgage payments for the first five years.  However, the majority of his loans continue to be fixed rate.

To read the LA Times article, click here.

Palos Verdes homes owners have heard stories or have actually experienced equity credit lines being reduced by financial institutions.  A letter is usually sent to the homeowner explaining that market conditions have dictated this reduction.  For example, a homeowner may have originally had a $60,000 home equity line and now it has been reduced to $35,000; the homeowner has currently used $30,000 of their original credit line.  Most believe that their credit scores are unaffected and that is incorrect.

Let’s go a step further.  Your credit card limit was also reduced from $20,000 to $10,000 and your balance this month (after the Black Friday sales) is $9,000.  You have never been late or missed a payment but suddenly your FICO score has dropped from 750 to 675 which will make it more difficult to get a new mortgage should you want to refinance or purchase a home.  What happened?

Your new ”line limits” were reduced closer to your balances and you are nearer to being maxed out.  According to Kenneth R. Harney in a recent LA Times article, “Credit scoring models typically penalize high utilization rates because they are statistically correlated with future delinquency problems.”  “Not fair,” you say; and I agree with with you – so does the National Association of Realtors which, according to the LA Times article, has demanded that Fair Isaac Corp., creator of the FICO score that dominates the mortgage market, take immediate steps to lessen the negative effects on consumers when banks abruptly cancel or slash credit lines of non delinquent customers.”  With National Association of Realtors lobbying for change, hopefully help is on the way.   Click here to view the LA Times article.

Whether you are purchasing or refinancing a Palos Verdes home, your credit score will determine both the ease of qualifying for a loan as well as your interest rate.  Do you actually know what a credit score is and how it is determined?  Or do you just follow along not quite understanding?  RIS Media’s Real Estate Magazine recently shared the following information:

     – Your credit score is technically a statistical method of assessing your ability and likelihood to pay back your debt (creditworthiness).

     – Credit scores are based on several different factors, including your payment history, amount of outstanding debt, length of credit history, use of new credit and types of credit used.

     – Credit scores are primarily based on credit report information, which is typically sourced from credit bureaus.

     – Credit scores often come from any of the three largest credit bureaus in the U.S. (Experian, Equifax and TransUnion).

     – Credit scores range between 300 and 990, depending on the scoring system and algorithms used (i.e., FICO, NextGen, CE Score and VantageScore).

And there are changes on the horizon after the first of the year.  According to Kenneth R. Harney in his recent LA Times article, “..VantageScore 2.0 which is expected to be rolled out nationwide to lenders in January, focuses on the subtle warning signs of credit stress that might have been missed earlier and penalizes or rewards consumers with higher or lower risk scores than they would have received before.”  Click here to read full article.

Photo courtesy of Arvin Design

Owner and buyers of Palos Verdes real estate have been treated to a year of low mortgages – a wish come true.  According to a recent Los Angeles Times article, “interest rates are the lowest since Freddie Mac, a government-sponsored corporation that purchases home loans from lenders, began tracking the 30-year loan in 1971″  Click here to view the entire article with rate information.

What an incredible opportunity this has been to both refinance and to purchase a new home.  This year, it seems that many Buyers have decided to stop waiting and buy their new home.  Here on the Palos Verdes Peninsula, we have been blessed with a “softer landing” from the financial crisis than many other areas; our market has been pretty stable this year.  We have great schools, great weather, convenient location to downtown LA, the Los Angeles airport and the Westside.  Buyers have taken notice.

The eternal question is ‘How long will these low interest rates last?”

We spoke (complained), and were heard.  Fannie Mae told lenders on June 30, 2010,  that they “prohibit lenders from changing appraisals” according to a LA Times article yesterday (click here for full story).  This is good news for owners of Palos Verdes real estate and buyers also. 

Here is what has been happening since the new May 2009 Guidelines.  Lenders have been ordering appraisals from Management Companies who sometimes choose an appraiser from out of the area who may have only “minimal access to local realty data” and the appraisal comes in low.  Additionally, “Lenders unilaterally may be lowering the numbers on the appraisals submitted to them to avoid accusations that the loans they sell to giant investors Fannie Mae or Freddie Mac are based on inflated appraisals.  Such value inflations can expose lenders to ‘buyback’ demands, forcing them to repurchase loans at huge costs,” according to Kenneth R. Harney in his LA Times article.

As of September 1, 2010, the LA Times article goes on to say,  “lenders must contact appraisers to resolve any disagreements about the valuation.  If that’s not possible, they should order a second appraisal – not just chop the value supporting the real estate contract.”  Finally, the voice of reason.

Photo courtesy of Arvin Design

Buyers of Palos Verdes homes often ask what a loan point is.  My clients who are refinancing also have the same question.  Here is a very concise explanation provided by a Bank of America loan officer:

What exactly are “points”?  What tax benefits accrue from “points”?  What is the “APR” and in what ways is it important?  And what are the benefits to home sellers who may consider paying a buyer’s “points”?  We look at the basics here, urging you to take your specific questions to your tax advisor, while hoping to help you better formulate those questions.

Traditionally, a “percent” is often expressed as one or more “points.”  Thus, if you pay two percent of the loan amount to originate a loan, you are paying two “points.”  It realy isn’t any more exotic than that.

If the loan is a mortgage, the total origination fee will be a combination of points and fees for services, like the appraisal fee, the escrow fee, the recording fee, and other costs.  If the mortgage is for the purpose of buying a home, known as a “purchase money loan,” then the points are deductible on your tax return for the year in which the home was purchased.  The other fees are not deductible.

Further, points paid on a refinanced mortgage are not fully deductible in the year of the transaction.  Instead, the deduction is spread (or amortized) equally over the full life of the loan.

This raises an important question.  What happens when you refinance a mortgage that has already been refinanced; that is, what happens when you refinance a second or third time?  The points paid for the prior refinanced loan become deductible in the year of the newly refinanced loan.

Points are considered prepaid interest.  They are one part of the overall interest you pay on your loan.  That is why we can deduct them against our ordinary income on our personal tax returns (remembering that the deduction schedule is different, depending on whether the loan is a new purchase money mortgage or a refinanced loan).

Understanding what points actually are and the basics of how they work can open up a world of possiblities.  Consider this: if the stated interest rate on a mortgage is surprisingly low, the lower interest rate may often be counter balanced by higher points.  Thus, one loan may bear an interest rate of 5.5% and another 5.625%.  The first loan obviously looks better than the second – until you look closely at the origination points.  Often the first loan requires slightly higher points, and the difference in the life-of-loan interest costs for each loan could be minimal as a result.

In order to make certain that consumers are aware of the expense that higher points can add to a loan, the government long ago required lenders to provide an “APR” calculation on loan settlement papers.  The Annual Percentage Rate (APR) blends the interest cost of the points and other fees into the potential life-of-loan interest payment, and then provides a new, “adjusted” interest rate that takes into consideration the loan points and associated fees.  This sounds confusing because, frankly, it is.  At best, it provides a way of comparing two loans and seeing which will cost more in the long run.

What makes far more sense is the fact that you can often pay higher points in order to pay down your loan’s interest rate, and make your monthly payment smaller.  You will want to discuss such possibilities with your Mortgage Loan Officer, tax advisor and financial advisor.  You may also want to look at the life-of-loan savings you can create with an accelerated pay-down of your mortgage, adding to each month’s principal payment and thus, if it is a fixed-rate loan, decreasing both the number of years in which you make loan payments or, if it is an adjustable rate mortgage, potentially lowering the monthly payment when the loan adjusts.  In either case, you an lower the life-of-loan interest that you pay.  (Keep in mind that an amortization schedule simply adjusts each payment so that is pays all of the interest owed on the loan balance if paid in monthly payments.  Lower the loan balance by making larger payments to the principal balance of the loan, and you will owe, and pay less interest towards the principal.)

Also worthy of discussion, when you are selling your home, is the possibility of helping the buyer by paying the points on his or her purchase money loan.  Not only is the seller allowed to do this, but the tax deduction for those points can be taken by the homebuyer, which provides a large value incentive for them.  The home not only meets the home buyer’s needs, it also costs less to purchase and decreases the buyer’s tax liability.  Again, be sure to discuss these options with your tax and financial advisors.

In the last six weeks interest rates for Palos Verdes real estate have remained fairly steady. The interest rate for a 30-year fixed mortgage going down 1/4 point to 4.75% for a conforming loan and remaining at 5.785% for a jumbo loan. A 5/1 Year ARM is 3.75% for a conforming loan and 5.125% for jumbo loans. A 5/1 Interest Only conforming loan has a 3.75% interest rate and a jumbo loan has a 5.25% interest rate.

Demand is up for U.S. Treasury Bonds. Yesterday there was 3 times as much demand compared to supply for sales of 2-year Treasury notes (investors bidding at 1.035%) . Interest rates for home mortgages have remained low. Conventional wisdom says that when bond rates go up, interest rates usually go down but at this time both are fairly low which is a mixed signal. These are interesting times.