When the real estate market was up many homeowner have taken out second loans on their properties. But as the  market hit bottom owners found themselves with a big problem-resale value. Homeowners hit hard  by the recession are unable to sell their property for a profit or even what they purchased it for and are now facing a short sale or forclosure.

You get what you pay for! There are many risks involved with the purchasing a foreclosed property. Most need repairs and may still have addition liens or judgments against the property, very important to do a thorough home inspection and have your title insurance company provide the information needed. A forclosure is not always a good deal.

 

 

ONLINE HOME SEARCHES

More and more home buyers each day are using the internet to search for properties. The Realtors Multiple Listing Service (MLS) is the main data base for all the online companies such as Realtor.com, Point2, Trulia, Yahoo and others. Some online companies do not give you the complete inventory unless the Real Estate agent pays to join. So as a home buyer it would be to your best interest to contact your local Realtor to see the complete list of homes.

    "2008 National Association of Realtors Profile of Home Buyers and Sellers" study, which reports:

• 33 percent started their home search by looking online for properties for sale (38 percent of repeat buyers, 27 percent of first-time buyers).
• 87 percent claim that they used the Internet as an information source (86 percent of repeat buyers, 89 percent of first-time buyers).
• 81 percent found the Internet as a useful source of information.

 

 

U.S. Treasury: 31% front-end DTI (debt-to-income) ratio, and less than 55% back-end DTI
FHA (Federal Housing Administration) Old: 29% front-end DTI, and 41% back-end DTI
FHA New: 31% front-end DTI, and 43% back-end DTI
Fannie Mae: 36% benchmark back-end DTI with a maximum of 45% with “strong compensating factors”
Conventional loans: 28% front-end ratio, and a 36% back-end ratio

My rule of thumb is a maximum 30% front-end DTI. This means that a homeowner’s monthly house payment or PITIA (principal, interest, taxes, insurance, and association fees) should be no more than 30% of the gross monthly household income. For every $1,000 per month in household income, the homeowner should be able to afford $300 of house payment.

The trouble with these guidelines is that they fail to take into account other mitigating factors. For example, a couple with four children paying their own medical insurance premiums is probably going to be able to afford less house than a young couple with no children whose employers provide health insurance. Likewise, a family that spends $400 per month to heat their home will have less money available for a house payment.

Let’s look at a specific example. Suppose a family of four is pulling in about $6,000 per month. That’s $72,000 annually. To simplify, we’ll assume the family is debt free, except for the new home they are about to purchase. Based on a front-end DTI of 31%, the couple should be able to afford a monthly house payment of $1,860. That leaves them with $4,140 per month to cover everything else.

According to Ginnie Mae’s ‘How Much Home Can You Afford?’ calculator, an annual gross household income of $72,000 can afford a monthly house payment of $2,235. This represents a 37% front-end DTI, which is outside most guidelines.

Before we encourage the couple to purchase a $200,000 plus house, let’s take a look at their current monthly budget. Assuming we were to sell them a house and saddle them with a $1,860 monthly mortgage payment, here’s where the rest of the money ($4,140) would be going each month:

Income taxes (28 percent) $1,160
Daughter’s college $1,000
Electricity (avg.) $250
Husband’s health insurance $160
Groceries $400
Auto insurance $180
Auto fuel $100
Auto license $28
Auto maintenance/repairs $200
Charitable contributions $100
Movies, TV, Internet $120
Medical/dental (un-reimbursed) $250
Clothing & shoes $80
Dining out $100
Gifts $50
Personal care $40
Pets $40
Total $4,258.00

You wouldn't’t exactly characterize this family as living large, yet if they had a house payment of $1,860, they would be struggling every month to make ends meet.

What we as real estate professionals can learn from this example is that home financing eligibility guidelines are just that - guidelines, ballpark figures to get the conversation going. Mortgage lenders, real estate agents, and other professionals who are providing guidance to homeowners on how much house they can afford do their clients a grave disservice by using these general guidelines to make recommendations to specific families.

Currently, we are doing this all backwards. We tell homeowners how much house they can afford and then expect them to make the tough budget decisions to make the payment affordable. When the family still can’t afford their house payment, we assume they are overspending and send them to credit counseling to become further humiliated.

Perhaps a better way to qualify homeowners for mortgage loans is to start with the family’s existing budget and projections and develop a realistically affordable house payment based on current and projected net income and monthly expenses. Remember, every family’s situation is unique. We need to tailor their house payment to their budget, not the other way around.