To rent or to buy: what used to be a given – that you would buy a home as soon as you could afford to – has become an agonizing conundrum for many a would-be homebuyer, in the face of the housing market’s big bust and super-slow recovery. Low prices seem to create a wide-open window of opportunity, but they also create the concern that prices will keep falling after closing. And that Catch-22 has hundreds of thousands of buyers-to-be stuck on the fence.
Fortunately, there are handful of life, mortgage and local market signals which indicate that the time *might* be right to hop – scratch that – leap off the fence and into homeownership:
Mortgage rates are going up. Home prices have been low for the last several years, and in fact are currently looking like they’re heading back down to the same levels they were at the depths of the real estate recession. During this same time frame, interest rates have also been low – this one-two punch has created record-high affordability for the last four years running, causing buyers to believe that this window of opportunity won’t be closing anytime soon.
While prices don’t look like they’ll be skyrocketing anytime soon, interest rates are another story. Rates have been on a rollercoaster over the past few months, and with inflation and Fed rates set to spike later this year, today’s low interest rates might be as good as they’re going to get for a long time to come. And I mean a very long time – in the next few years, governmental intervention in the mortgage markets is likely to wind down, and that means higher mortgage interest rates are not only inevitable, they’ll probably be here for a long, long time.
Mortgage rates on the rise are one signal that now might be the peak of home affordability, and the peak of the opportunity to buy.
Rents are going up. Rental rates in many areas are also on the rise – in fact, the foreclosure crisis has acted created additional demand on many markets’ rental housing inventory in several different ways. First, former homeowners who lost homes to foreclosure now need to rent; as well, buyers in foreclosure hot spots have been hesitant to buy, many electing to stay renters far beyond when they would have otherwise. On top of all that, super-tight lending guidelines have stopped even some who would like to buy homes from doing so. As a result, rental homes are in high demand – and rents are rising. Rising rents at a time when the prices of homes for sale are low and, in some places, falling? One more signal that now might just be the time to buy. (Of course, where foreclosures are high, the chances of continued depreciation are, too – to offset this risk, have a long-term plan, to minimize the possibility that you’ll owe more than your home is worth when you need to sell. Read on for more on how to plan for the long term and minimize your homebuying risk.)
Your income and career are stable for the foreseeable future. The smartest homebuyers look to their lives, not just the market, for signals about when the time is right to buy. Homebuying is a long, long-term endeavor these days. The goal is to be able to commit to staying in the same place, geographically-speaking, for 7 to 10 years before you buy (more in a foreclosure-riddled market, less in an area that has been more recession-resistant). Most lenders will require that you’ve been at your job – or in the same general field of work – for at least two years before you buy. But that’s the bare minimum – beyond that, you don’t want to be barely beginning a career in which you think you may need to move sooner than that, nor do you want to buy when you’re advanced in your career, but in an industry which is dying or downsizing the workforce in your region (unless you have a strong Plan B).
When you get to the spot in your career where you can realistically project a stable income 7 to 10 years out, life might be giving you a green light to move forward on your homebuying dreams.
You can reasonably predict the home you’ll need in the years to come. Since successful homeownership requires that you be ready to be in the place for a good number of years, best practice is not just to buy a home with the space and number of rooms you need right now – rather, you should aim to buy the home you’ll need 5, 7 or even 10 years down the road (to the best of your ability to predict, of course). You might be a newlywed with no kids now, but you plan to have them in a few years. Or maybe you’re a newly minted empty nester right now, but can project that you’ll want to retire - and might not want to climb two flights of stairs to get to and from your bedroom - 10 years down the road. Before you buy, you should be in a position to buy the home that meets your future needs – not just your current ones; and that requires that you have a reasonable idea of your life vision and plan for the future.
If you’re able to predict – and afford, at today’s prices – a home with the space, amenity and geographic location you’ll need 7 to 10 years from now, you might be in a good phase of life to get off the rent vs. buy fence.
With that said. . . buying a home is a massive decision and includes multiple, long-term financial and lifestyle obligations, so if one or more of these signals are present for you, that doesn’t mean you have the green light to run out and buy a home tomorrow – rather, it’s a good sign you should begin down that path, if you’re so inclined. You’ll still need to do the work to make sure your personal finances and holistic life picture are also in alignment before you buy, as well of the work it takes to ensure that your real estate and mortgage decisions are sustainable and smart, over the long-term.
It’s not overkill to check in with a mortgage pro, a tax pro, a local real estate broker or agent and a financial planner to make sure all your ducks – not just one - are in a row before you make your move.
By Trulia
Friday, April 29, 2011
A minefield of mortgage charges: What's shopable?
Shopping for a mortgage would be a breeze if borrowers paid only an interest rate and lenders paid for everything else, embedding their expenses in the rate.
The reality is just the opposite: Not only do lenders impose fees of various sorts, but a large number of other players will have their hands in your pocket before you land a mortgage.
The best way for borrowers to navigate this minefield is to identify at the outset the charges that are "shopable" and those that aren't. Don't confuse "shopable" with "negotiable."
A service is shopable if different providers quote different prices, but that does not imply that any of them will negotiate their price. They might or they might not. In many cases, services are shopable, but not negotiable.
Shopping occurs before the borrower has chosen the service provider. It is the only point in a long process at which the borrower is in full control. The service is shopable because the service provider wants to be chosen.
In contrast, negotiations occur (if they occur) after the borrower is at least partly committed to the service provider. Backing out is costly to the borrower, and the further along he is in the process, the higher the cost -- and the less likely it is that the service provider will negotiate.
Lender fees: There are many, but don't get distracted by what they are called or what they are for. The only thing that matters is the total amount at a specified interest rate. It is item A on Page 2 of the new Good Faith Estimate (GFE), but you won't receive that until after you have applied for the loan.
Lender title policy: You are required to purchase a title insurance policy that will cover the lender for the amount of the loan. But you need not buy this policy from the title agency recommended by your REALTOR® or lender. Title insurance can be shopped at EntitleDirect.com and other online providers.
Note that the agent writing the title policy will often be providing the closing services as well, and the focus of the pricing is the sum of the two charges. That should be your focus as well. Shop the sum of the title policy, the closing services and also an owner's title policy if you elect to buy one.
Closing services: These services are provided by the title agent in title agent states, and by an attorney in attorney-preference states, but that should not affect your shopping strategy of combining the two. The GFE combines the two into "Title Services and Lender's Title Insurance".
Owner's title policy: Because the lender's policy only covers the amount of the loan, title insurers offer an optional add-on that covers the remainder of your exposure. For example, if you pay $200,000 for a home and take a $160,000 mortgage, the lender's policy covers title-related losses up to $160,000. To protect $200,000 you have to buy an owner's policy which is available for an additional premium.
The risk that a title claim against your property will arise and require an owner's policy to protect you in full is very small. If you want an owner's policy, you should shop for the complete package covering the lender policy, closing services and owner policy.
Homeowners Insurance: You are required to have a homeowners policy that protects your home against fire and most hazards other than floods. You should have such a policy, even if it were not required. Homeowners insurance is easy to shop for online, at Netquote.com and other sites.
Flood Insurance: If your home is on a flood plain, the definitions of which can change over time, you will be required to purchase flood insurance.
If you don't know that your house is on a flood plain, you will receive the bad news in the appraisal. You can shop for flood insurance at the same time as you shop for homeowners insurance, since the companies that offer one also offer the other.
Jack Guttentag is professor of finance emeritus at the Wharton School of the University of Pennsylvania.
By Jeff Guttentag
The reality is just the opposite: Not only do lenders impose fees of various sorts, but a large number of other players will have their hands in your pocket before you land a mortgage.
The best way for borrowers to navigate this minefield is to identify at the outset the charges that are "shopable" and those that aren't. Don't confuse "shopable" with "negotiable."
A service is shopable if different providers quote different prices, but that does not imply that any of them will negotiate their price. They might or they might not. In many cases, services are shopable, but not negotiable.
Shopping occurs before the borrower has chosen the service provider. It is the only point in a long process at which the borrower is in full control. The service is shopable because the service provider wants to be chosen.
In contrast, negotiations occur (if they occur) after the borrower is at least partly committed to the service provider. Backing out is costly to the borrower, and the further along he is in the process, the higher the cost -- and the less likely it is that the service provider will negotiate.
Lender fees: There are many, but don't get distracted by what they are called or what they are for. The only thing that matters is the total amount at a specified interest rate. It is item A on Page 2 of the new Good Faith Estimate (GFE), but you won't receive that until after you have applied for the loan.
Lender title policy: You are required to purchase a title insurance policy that will cover the lender for the amount of the loan. But you need not buy this policy from the title agency recommended by your REALTOR® or lender. Title insurance can be shopped at EntitleDirect.com and other online providers.
Note that the agent writing the title policy will often be providing the closing services as well, and the focus of the pricing is the sum of the two charges. That should be your focus as well. Shop the sum of the title policy, the closing services and also an owner's title policy if you elect to buy one.
Closing services: These services are provided by the title agent in title agent states, and by an attorney in attorney-preference states, but that should not affect your shopping strategy of combining the two. The GFE combines the two into "Title Services and Lender's Title Insurance".
Owner's title policy: Because the lender's policy only covers the amount of the loan, title insurers offer an optional add-on that covers the remainder of your exposure. For example, if you pay $200,000 for a home and take a $160,000 mortgage, the lender's policy covers title-related losses up to $160,000. To protect $200,000 you have to buy an owner's policy which is available for an additional premium.
The risk that a title claim against your property will arise and require an owner's policy to protect you in full is very small. If you want an owner's policy, you should shop for the complete package covering the lender policy, closing services and owner policy.
Homeowners Insurance: You are required to have a homeowners policy that protects your home against fire and most hazards other than floods. You should have such a policy, even if it were not required. Homeowners insurance is easy to shop for online, at Netquote.com and other sites.
Flood Insurance: If your home is on a flood plain, the definitions of which can change over time, you will be required to purchase flood insurance.
If you don't know that your house is on a flood plain, you will receive the bad news in the appraisal. You can shop for flood insurance at the same time as you shop for homeowners insurance, since the companies that offer one also offer the other.
Jack Guttentag is professor of finance emeritus at the Wharton School of the University of Pennsylvania.
By Jeff Guttentag
New mortgage roadblocks on horizon
Going through the mortgage approval process hasn't been easy these last few years, due to lender tightening and underwriting scrutiny. Aside from requiring mounds of documentation, large down payments, and sterling credit scores, conforming lenders now want more of the buyer's money.
Even though interest rates are low, the borrower's cost of financing has increased recently due to new Fannie Mae and Freddie Mac add-ons to cover the cost of perceived risk factors.
For example, well-qualified buyers with credit scores above 800 and a 20-percent cash-down payment are now charged an extra 1/4 percent of the loan amount. So if you're applying for a $500,000 mortgage, you'll be charged an extra $1,250 at closing. The extra 1/4 percent is waived if the borrower puts 25 percent cash down.
The extra fee is higher for buyers with lower credit scores, lower cash downs and other perceived risks like an interest-only loan.
On April 1, the Dodd-Frank bill regarding mortgage compliance requirements took effect. Part of Dodd-Frank deals with how loan originators (mortgage brokers or loan agents) are compensated.
Dodd-Frank prohibits mortgage originators from basing their loan origination fee on the interest rate or terms of the loan. They cannot steer borrowers to a loan with a higher interest rate in order to collect a higher fee, unless they can prove that this was done in the client's best interest.
Loan originators can still base their fee (called points) on the loan amount. However, under Dodd-Frank loan originators can't charge the buyer points and collect an origination fee from the lender (called rebate financing).
Although the intent of the legislation is to protect consumers from being overcharged, there could be complications for buyers trying to get approved for a mortgage in a timely fashion. Most buyers don't know when they make an offer if they want a loan with points or a no-point loan with a higher interest rate. Dodd-Frank could make it more difficult to move from one loan product to another.
HOUSE-HUNTING TIP: In addition to checking into add-on fees and how Dodd-Frank might affect your ability to switch loan products mid-stream, buyers should find out who their loan originator uses for appraisals. In most cases, mortgage approval is dependent on the lender's underwriter accepting an appraisal of the property that will secure the loan. Appraisals that come in lower than the price the buyers have agreed to pay can cause a transaction to collapse.
Due to changes in Fannie Mae home mortgage appraisal guidelines last year, loan originators are no longer permitted to select the appraiser. They are also prohibited from having any direct contact with the appraiser during the course of the appraisal process. Many mortgage lenders have used third-party appraisal companies to comply with this guideline.
This has in some cases resulted in unsatisfactory appraisals when inexperienced, out-of-area appraisers who don't know the local market are hired to do the job. The third-party companies are often located out of state and they retain a portion of the appraiser's fee. Many good appraisers won't work for these companies.
Local appraisal services have sprung up that provide realistic appraisals from knowledgeable local appraisers. Some lenders and mortgage bankers who weren't satisfied with the quality of the appraisal they received from third-party appraisal companies have set up their own group of local appraisers.
THE CLOSING: An employee from the lender, who is not involved in loan origination, selects the appraiser.
Dian Hymer, a real estate broker with more than 30 years' experience, is a nationally syndicated real estate columnist and author.
By Dian Hymer
Even though interest rates are low, the borrower's cost of financing has increased recently due to new Fannie Mae and Freddie Mac add-ons to cover the cost of perceived risk factors.
For example, well-qualified buyers with credit scores above 800 and a 20-percent cash-down payment are now charged an extra 1/4 percent of the loan amount. So if you're applying for a $500,000 mortgage, you'll be charged an extra $1,250 at closing. The extra 1/4 percent is waived if the borrower puts 25 percent cash down.
The extra fee is higher for buyers with lower credit scores, lower cash downs and other perceived risks like an interest-only loan.
On April 1, the Dodd-Frank bill regarding mortgage compliance requirements took effect. Part of Dodd-Frank deals with how loan originators (mortgage brokers or loan agents) are compensated.
Dodd-Frank prohibits mortgage originators from basing their loan origination fee on the interest rate or terms of the loan. They cannot steer borrowers to a loan with a higher interest rate in order to collect a higher fee, unless they can prove that this was done in the client's best interest.
Loan originators can still base their fee (called points) on the loan amount. However, under Dodd-Frank loan originators can't charge the buyer points and collect an origination fee from the lender (called rebate financing).
Although the intent of the legislation is to protect consumers from being overcharged, there could be complications for buyers trying to get approved for a mortgage in a timely fashion. Most buyers don't know when they make an offer if they want a loan with points or a no-point loan with a higher interest rate. Dodd-Frank could make it more difficult to move from one loan product to another.
HOUSE-HUNTING TIP: In addition to checking into add-on fees and how Dodd-Frank might affect your ability to switch loan products mid-stream, buyers should find out who their loan originator uses for appraisals. In most cases, mortgage approval is dependent on the lender's underwriter accepting an appraisal of the property that will secure the loan. Appraisals that come in lower than the price the buyers have agreed to pay can cause a transaction to collapse.
Due to changes in Fannie Mae home mortgage appraisal guidelines last year, loan originators are no longer permitted to select the appraiser. They are also prohibited from having any direct contact with the appraiser during the course of the appraisal process. Many mortgage lenders have used third-party appraisal companies to comply with this guideline.
This has in some cases resulted in unsatisfactory appraisals when inexperienced, out-of-area appraisers who don't know the local market are hired to do the job. The third-party companies are often located out of state and they retain a portion of the appraiser's fee. Many good appraisers won't work for these companies.
Local appraisal services have sprung up that provide realistic appraisals from knowledgeable local appraisers. Some lenders and mortgage bankers who weren't satisfied with the quality of the appraisal they received from third-party appraisal companies have set up their own group of local appraisers.
THE CLOSING: An employee from the lender, who is not involved in loan origination, selects the appraiser.
Dian Hymer, a real estate broker with more than 30 years' experience, is a nationally syndicated real estate columnist and author.
By Dian Hymer
Monday, April 4, 2011
Make cost-effective home improvements
Imagine walking into an important job interview looking like you just dragged yourself out of bed. You'd be unlikely to make a good impression and diminish your chance of securing the job.
The same goes for selling a home. First impressions are lasting. Some buyers won't even look at the inside of a listing that doesn't have good curb appeal.
Today's buyers are picky. There is no sense of urgency in the market, so buyers are holding out for the best home they can find that will work for them for years to come. In some areas, there are a lot of homes for sale. It's important to make sure that buyers will be attracted to your home before they even walk through the front door.
Fortunately, exterior improvements needn't be expensive. The recent Remodeling Cost vs. Value Report 2010-2011 found that the improvements that yielded the highest return on the investment when sold were a new steel front door and a new garage door.
The average cost nationally for a new front door was $1,218; the return was 102 percent. The average cost for a new garage door was $1,191; the return was 83.9 percent. The top nine of 10 most cost-effective improvements nationally were for exterior projects. Curb appeal is as important as ever, and may be more so in this market.
The Remodeling Cost vs. Value Report is a collaborative report done annually by Remodeling Magazine and the NATIONAL ASSOCIATION OF REALTORS®. It compares construction costs with resale values, which are based on estimates from more than 3,000 REALTORS® and appraisers.
Sprucing up the front yard for sale needn't be costly. Clean out weeds and dead plants. Add flowering plants for color and mulch to tidy up areas that aren't heavily planted. Replace a lawn that has seen better days with less lawn and a border bed of flowering shrubs.
Do in-ground planting well in advance, if possible, so that plants have a chance to get established before your home goes on the market. If you have no choice and must plant at last minute, be sure to remove the ID tags from the nursery.
A deteriorated fence should be removed, repaired or replaced. Any peeling paint on the front walk and steps and house exterior and trim should be refreshed. The side of the house that gets the most exposure needs the most maintenance. If you've let it go, you'll be docked dollars by the buyers unless you repaint where needed before you sell.
HOUSE HUNTING TIP: The amount returned on home improvement investments varies from one location to the next. It's important to consult with your local real estate agent before you embark on an upgrade to make sure that you don't overpay on an improvement that won't generate the desired result. Most homeowners assume they'll get their money back and more when they sell. In fact, most upgrade investments often don't return 100 percent of the amount invested, particularly in a down market.
A minor mid-range kitchen remodel returns 72.8 percent nationally, according to the 2010-11 Remodeling Cost vs. Value Index. In the Pacific region of the U.S., you're likely to recoup 84.1 percent.
However, a major upscale kitchen remodel pays back only 59.7 percent nationally and 66 percent in the Pacific region. It makes sense to take on a major remodel project only if you're staying in your home and can enjoy the use of the improvements before selling. A deck addition ranked high on the list of popular exterior improvements. Although, nationally the cost recouped is only 72.8 percent, it may be an essential enhancement if your home has no outdoor living space and all the homes for sale in your neighborhood do.
THE CLOSING: Supply and demand in your local area will also impact how much you'll recoup from your fix-up investments.
By Dian Hymer
Dian Hymer, a real estate broker with more than 30 years' experience, is a nationally syndicated real estate columnist and author.
The same goes for selling a home. First impressions are lasting. Some buyers won't even look at the inside of a listing that doesn't have good curb appeal.
Today's buyers are picky. There is no sense of urgency in the market, so buyers are holding out for the best home they can find that will work for them for years to come. In some areas, there are a lot of homes for sale. It's important to make sure that buyers will be attracted to your home before they even walk through the front door.
Fortunately, exterior improvements needn't be expensive. The recent Remodeling Cost vs. Value Report 2010-2011 found that the improvements that yielded the highest return on the investment when sold were a new steel front door and a new garage door.
The average cost nationally for a new front door was $1,218; the return was 102 percent. The average cost for a new garage door was $1,191; the return was 83.9 percent. The top nine of 10 most cost-effective improvements nationally were for exterior projects. Curb appeal is as important as ever, and may be more so in this market.
The Remodeling Cost vs. Value Report is a collaborative report done annually by Remodeling Magazine and the NATIONAL ASSOCIATION OF REALTORS®. It compares construction costs with resale values, which are based on estimates from more than 3,000 REALTORS® and appraisers.
Sprucing up the front yard for sale needn't be costly. Clean out weeds and dead plants. Add flowering plants for color and mulch to tidy up areas that aren't heavily planted. Replace a lawn that has seen better days with less lawn and a border bed of flowering shrubs.
Do in-ground planting well in advance, if possible, so that plants have a chance to get established before your home goes on the market. If you have no choice and must plant at last minute, be sure to remove the ID tags from the nursery.
A deteriorated fence should be removed, repaired or replaced. Any peeling paint on the front walk and steps and house exterior and trim should be refreshed. The side of the house that gets the most exposure needs the most maintenance. If you've let it go, you'll be docked dollars by the buyers unless you repaint where needed before you sell.
HOUSE HUNTING TIP: The amount returned on home improvement investments varies from one location to the next. It's important to consult with your local real estate agent before you embark on an upgrade to make sure that you don't overpay on an improvement that won't generate the desired result. Most homeowners assume they'll get their money back and more when they sell. In fact, most upgrade investments often don't return 100 percent of the amount invested, particularly in a down market.
A minor mid-range kitchen remodel returns 72.8 percent nationally, according to the 2010-11 Remodeling Cost vs. Value Index. In the Pacific region of the U.S., you're likely to recoup 84.1 percent.
However, a major upscale kitchen remodel pays back only 59.7 percent nationally and 66 percent in the Pacific region. It makes sense to take on a major remodel project only if you're staying in your home and can enjoy the use of the improvements before selling. A deck addition ranked high on the list of popular exterior improvements. Although, nationally the cost recouped is only 72.8 percent, it may be an essential enhancement if your home has no outdoor living space and all the homes for sale in your neighborhood do.
THE CLOSING: Supply and demand in your local area will also impact how much you'll recoup from your fix-up investments.
By Dian Hymer
Dian Hymer, a real estate broker with more than 30 years' experience, is a nationally syndicated real estate columnist and author.
How public record errors hurt real estate sellers
Real estate buyers today often turn down a listing because they think it's priced too high relative to the livable square feet it has to offer. In some neighborhoods, like planned unit developments, price per square foot might be a fairly reliable value indicator because there is little variability in the housing stock. It's of limited use in neighborhoods with great variability in home style, size, age and condition.
Regardless of what the sellers report as the livable square footage, the buyers usually want to know what the public record on the home says. For example, if the sellers say their house has 3,000 square feet of living space, but the public record reports only 2,300 square feet, the buyers expect an explanation for the discrepancy.
It's not only prospective buyers who are concerned when the public record differs from what is reported in the multiple listing service. Due to recent lender tightening, many appraisers consider only legal square footage, that can be verified with a building permit, to establish valuation.
Owners of homes that were added onto over the years without the benefit of building permits from the local planning authority could end up with a low appraised value. A lender will lend only a certain amount (usually 80-95 percent of the appraised value). If the price on the purchase contract is much higher, the transaction could fall apart unless the buyers put down more cash or the sellers lower the price, or both.
A low appraisal might not cause a problem if the buyers are making a large cash down payment. If they make a 50 percent cash down payment ($150,000) for the purchase of a $300,000 house and the house appraises for $250,000, the lender will likely lend up to $200,000 with 20 percent down, or $50,000. However, if the purchase contract includes an appraisal contingency, the buyers could withdraw without penalty based on the low appraisal.
HOUSE HUNTING TIP: The information reported in the public record is often wrong. Before you put your home on the market, find out what the public record reports on the characteristics of your home and try to correct any mistakes that could work against a sale.
In California, properties are reassessed for property taxes based on renovations and additions done legally, with permits. Often, the local assessor's office will update its record but the information doesn't get into the public record that is accessible by real estate agents, buyers and appraisers.
In one case, a couple had purchased a vacant lot and architectural plans from the previous owner who couldn't afford to build. The couple then added more than 1,000 square feet to the plans and built a bigger house.
The public record showed a 3,600-square-foot house, which was the size of the house that was originally planned. The Certificate of Occupancy issued by the city planning department reflected the larger 4,800-square-foot house that was built. Armed with this documentation, the appraiser had no problem appraising the property for the purchase price.
Sometimes, when an addition is made to a home, the public record is not amended to include the additional square footage. In some areas, a seller can visit the Assessor's Office and ask for a copy of the Property Characteristics Report on their home. If it's not accurate, the seller can request that changes be made.
Mistakes in the public record aren't confined to livable square feet. The public record also includes information about such things as the number of total rooms, the number of bedrooms and bathrooms, and whether there's a garage.
THE CLOSING: It can take months for changes to show up in the public record, so start working on this early.
By Dian Hymer
Dian Hymer, a real estate broker with more than 30 years' experience, is a nationally syndicated real estate columnist and author.
Regardless of what the sellers report as the livable square footage, the buyers usually want to know what the public record on the home says. For example, if the sellers say their house has 3,000 square feet of living space, but the public record reports only 2,300 square feet, the buyers expect an explanation for the discrepancy.
It's not only prospective buyers who are concerned when the public record differs from what is reported in the multiple listing service. Due to recent lender tightening, many appraisers consider only legal square footage, that can be verified with a building permit, to establish valuation.
Owners of homes that were added onto over the years without the benefit of building permits from the local planning authority could end up with a low appraised value. A lender will lend only a certain amount (usually 80-95 percent of the appraised value). If the price on the purchase contract is much higher, the transaction could fall apart unless the buyers put down more cash or the sellers lower the price, or both.
A low appraisal might not cause a problem if the buyers are making a large cash down payment. If they make a 50 percent cash down payment ($150,000) for the purchase of a $300,000 house and the house appraises for $250,000, the lender will likely lend up to $200,000 with 20 percent down, or $50,000. However, if the purchase contract includes an appraisal contingency, the buyers could withdraw without penalty based on the low appraisal.
HOUSE HUNTING TIP: The information reported in the public record is often wrong. Before you put your home on the market, find out what the public record reports on the characteristics of your home and try to correct any mistakes that could work against a sale.
In California, properties are reassessed for property taxes based on renovations and additions done legally, with permits. Often, the local assessor's office will update its record but the information doesn't get into the public record that is accessible by real estate agents, buyers and appraisers.
In one case, a couple had purchased a vacant lot and architectural plans from the previous owner who couldn't afford to build. The couple then added more than 1,000 square feet to the plans and built a bigger house.
The public record showed a 3,600-square-foot house, which was the size of the house that was originally planned. The Certificate of Occupancy issued by the city planning department reflected the larger 4,800-square-foot house that was built. Armed with this documentation, the appraiser had no problem appraising the property for the purchase price.
Sometimes, when an addition is made to a home, the public record is not amended to include the additional square footage. In some areas, a seller can visit the Assessor's Office and ask for a copy of the Property Characteristics Report on their home. If it's not accurate, the seller can request that changes be made.
Mistakes in the public record aren't confined to livable square feet. The public record also includes information about such things as the number of total rooms, the number of bedrooms and bathrooms, and whether there's a garage.
THE CLOSING: It can take months for changes to show up in the public record, so start working on this early.
By Dian Hymer
Dian Hymer, a real estate broker with more than 30 years' experience, is a nationally syndicated real estate columnist and author.
Little-known secret to reduce mortgage payment
A mortgage recast is an adjustment in the monthly payment that makes the payment fully amortizing. The recast will be a payment increase when the existing payment is less than fully amortizing, and a payment decrease when the existing payment is more than fully amortizing.
For example, let's say your home loan has a balance of $100,000 at 5 percent with 300 months to go and a payment of $450 that, if continued, will not pay off the balance. The payment recast is an increase to $584.60, which will fully amortize the balance over 300 months. However, if the current payment was $650, the recast would be a payment decrease to $584.60.
Payment-increase recasts occur on two kinds of mortgages. One carries an interest-only option, where the required payment for some initial period, often 10 years, covers only the interest. The payment-increase recast occurs at the end of the interest-only period.
The second type of mortgage open to a payment-increase recast is the adjustable-rate mortgage (ARM) that allows payments that are less than fully amortizing. These ARMs sometimes have recasts at specified intervals, often every five years, or the recast may be triggered by the loan balance reaching some limiting value, such as 110 percent of the original loan amount. This can happen at any time, or it may not happen at all.
Payment-increase recasts are designed to protect the interest of the lender by making sure that the loan will pay off as scheduled. All interest-only loans and all ARMs that allow payments that are less than fully amortizing have explicit provisions for recasts in the loan contract.
Provisions for payment-decrease recasts, in contrast, which are designed to meet the needs of borrowers, are not included in loan contracts. The lender can agree to a recast; can agree subject to a charge, which can range from nominal to extortionate; or can refuse it. I have encountered all three such responses.
The borrowers who request recasts usually have fixed-rate mortgages (FRMs) on which they have been making extra payments in order to pay off before term, and then unexpectedly encounter a financial reversal. With their income reduced, their objective shifts from paying off early to reducing the payment, for which purpose they need a recast. They deserve it, and the cost to the lender is nominal, but some lenders will take advantage of them just because they can.
The borrower's right to a payment-reducing recast ought to be mandatory for all home mortgage contracts. Borrowers should not have to grovel for what can be critically important to them and of little consequence to lenders. Making recasts into a right would have the side benefit of encouraging borrowers to make extra payments as a form of contingency insurance.
Note that payment-reducing recasts are needed for fixed-rate mortgages much more than for ARMs. The reason is that when the interest rate is adjusted on an ARM, the payment is automatically recast. On ARMs that reset the rate every year, no additional recasts are needed. On ARMs with initial rate periods of 5-10 years, however, the need for a recast can arise in the early years just as it does on FRMs.
Today, borrowers are motivated to make extra payments primarily with the hope of getting out of debt sooner. With a right of recast made explicit, they will also view extra payments as a worst-case backstop. The more you pay when you have the means, the larger the payment reduction you can command in an emergency. I can't think of an easier way to motivate consumers to save more.
By Jack Guttentag
Jack Guttentag is professor of finance emeritus at the Wharton School of the University of Pennsylvania.
For example, let's say your home loan has a balance of $100,000 at 5 percent with 300 months to go and a payment of $450 that, if continued, will not pay off the balance. The payment recast is an increase to $584.60, which will fully amortize the balance over 300 months. However, if the current payment was $650, the recast would be a payment decrease to $584.60.
Payment-increase recasts occur on two kinds of mortgages. One carries an interest-only option, where the required payment for some initial period, often 10 years, covers only the interest. The payment-increase recast occurs at the end of the interest-only period.
The second type of mortgage open to a payment-increase recast is the adjustable-rate mortgage (ARM) that allows payments that are less than fully amortizing. These ARMs sometimes have recasts at specified intervals, often every five years, or the recast may be triggered by the loan balance reaching some limiting value, such as 110 percent of the original loan amount. This can happen at any time, or it may not happen at all.
Payment-increase recasts are designed to protect the interest of the lender by making sure that the loan will pay off as scheduled. All interest-only loans and all ARMs that allow payments that are less than fully amortizing have explicit provisions for recasts in the loan contract.
Provisions for payment-decrease recasts, in contrast, which are designed to meet the needs of borrowers, are not included in loan contracts. The lender can agree to a recast; can agree subject to a charge, which can range from nominal to extortionate; or can refuse it. I have encountered all three such responses.
The borrowers who request recasts usually have fixed-rate mortgages (FRMs) on which they have been making extra payments in order to pay off before term, and then unexpectedly encounter a financial reversal. With their income reduced, their objective shifts from paying off early to reducing the payment, for which purpose they need a recast. They deserve it, and the cost to the lender is nominal, but some lenders will take advantage of them just because they can.
The borrower's right to a payment-reducing recast ought to be mandatory for all home mortgage contracts. Borrowers should not have to grovel for what can be critically important to them and of little consequence to lenders. Making recasts into a right would have the side benefit of encouraging borrowers to make extra payments as a form of contingency insurance.
Note that payment-reducing recasts are needed for fixed-rate mortgages much more than for ARMs. The reason is that when the interest rate is adjusted on an ARM, the payment is automatically recast. On ARMs that reset the rate every year, no additional recasts are needed. On ARMs with initial rate periods of 5-10 years, however, the need for a recast can arise in the early years just as it does on FRMs.
Today, borrowers are motivated to make extra payments primarily with the hope of getting out of debt sooner. With a right of recast made explicit, they will also view extra payments as a worst-case backstop. The more you pay when you have the means, the larger the payment reduction you can command in an emergency. I can't think of an easier way to motivate consumers to save more.
By Jack Guttentag
Jack Guttentag is professor of finance emeritus at the Wharton School of the University of Pennsylvania.
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