We constantly
hear about how depressed the residential real
estate market is and how difficult it is for people
to get financing or even purchase a home in today's
market. While I do not dispute this, here is a
narrative of how you might approach purchasing
(or selling) if you are considering a move in
today's market.
Many people have lost their home due to foreclosure
or short sale. The damage to one's credit report
makes it nearly impossible to purchase another
residence using traditional financing methods.
However, there are properties for sale that can
be financed by the current owners. Since the current
owner becomes the bank, a prospective purchaser
should be willing to accept terms of sale that
could differ from traditional lenders.; for example,
a larger down payment, a higher initial sales
price, and/or an above market interest rate might
be required to satisfy the seller's need to be
compensated for the risk assumed in the transaction.
A purchaser in this situation should also be
willing to provide credit reports (on both spouses),
personal references, and other information required
as by a seller. Typically, the owner-carry loan
contains a balloon payment 3-5 years in the future,
when it is expected that the purchaser's credit
will have recovered to the point that traditional
financing is obtainable. Both seller and purchaser
should question whether the deal should proceed
if the purchaser's total monthly expenses (including
the new house payment exceeds 50% of the purchaser's
gross income). Ideally, the monthly expense to
income ratio should be around 35%.
|
For buyers obtaining
traditional financing, be aware that interest
rates are at historic lows and are almost certain
to rise over the next few years.
Adjustable rate loan advertisements seem to be
everywhere, with the initial rate quoted being
much lower than traditional 15- or 30-year fixed
rate loans. One tactic I hear touted is that most
families move every five to seven years, so purchasing
a loan that adjusts after five years is still
a great idea. My question, what if you don't move
and your mortgage payment rises due to your interest
rate rising substantially after the initial guarantee
period?!?
Finally, loan underwriting and appraisal guidelines
are complex and opaque. Most lenders and realtors
struggle to understand current guidelines--and
those guidelines help make it difficult for folks
to qualify for traditional financing. Further,
if the property you are attempting to purchase
has unique qualities (i.e., extra land, outbuildings,
etc.), finding comparable sales could be a challenge.
Without comparable sales, you will likely not
be able to get financing.
In most cases, you should not pay more than 1%
in fees to get a new traditional loan. Consult
your financial, tax, and legal advisors as well
as your realtor and mortgage originator when considering
a real estate purchase.
|