The Gift of Time

The impacts of the housing crisis are finally fading, even for those who purchased homes just ahead of the Great Recession.

Homeownership has once again returned as an engine of wealth creation – even for those who purchased homes just ahead of the Great Recession. Millions of homeowners were buoyed by a healing, if not fully healthy, housing market and the essential precondition to achieving home equity gains – time.

The National Association of Realtors recently published data on home equity gains over time. On average, home sellers gained 23 percent in home equity, or about $40,000, but those numbers vary widely based on when homeowners purchased their houses. Even those who purchased a home just before the recession saw gains of about 1 percent, or $3,000.

Home equity depends on two things: the current market value of a home, and the amount of money left to pay back on a mortgage. The difference – market value minus remaining mortgage balance – is home equity. As homes gain value over time and homeowners make mortgage payments, home equity increases.

In the wake of the housing crisis, home equity has been of concern. “Underwater” became part of the everyday lexicon referring to those who owed more than their property was worth. However, homes purchased in the years between the depths of the crisis and today have made double-digit gains in equity, according to the National Association of Realtors’ data.

 

Those who are selling homes purchased more than 21 years ago saw the largest gain in equity, of 145 percent (about $138,000). Those who are selling homes purchased between eight and 10 years ago – or between 2005 and 2007, just prior to the housing crisis – have seen only a 1 percent gain in equity (or about $3,000). More here.

 

 

Will an Interest Rate Hike Derail Mortgage Applications?

The percentage of Americans who were denied a mortgage loan ticked down last year, according to a report released Thursday by real estate hub Zillow.

But sharp racial divides were still apparent, and a pending national interest rate increase – which will inherently make borrowing money more expensive – could weigh on mortgage applications going forward.

More than 2.1 million conventional mortgage applications were submitted in the U.S. last year, up more than 5 percent from 2013, according to Zillow. Of that group, only 11.2 percent were denied a loan, down from 2013’s 12.4 percent.

And of the more than 791,000 loan applications submitted separately to the Federal Housing Administration, only 16.6 percent were denied, an improvement of nearly 4.6 percent from the year before.

“Denial rates for primary mortgage applications were down across the board last year compared to 2013, particularly for black and Hispanic borrowers,” Skylar Olsen, a senior economist at Zillow, wrote in a research note Thursday.

Despite the year-over-year improvement, however, mortgage denial rates still vary widely by racial demographic. Only 9.4 percent of white applicants for conventional loans were denied in 2014, compared to 12.2 percent of Asian applicants, 18.8 percent of Hispanic applicants and 23.5 percent of black applicants.

It’s also worth noting that homeownership in general is and has historically been skewed toward white Americans. Though the national homeownership rate last year clocked in at 63.1 percent, according to the 2014 American Community Survey, the rate for whites was a whopping 71 percent. Black Americans’ homeownership rate last year was only 41.2 percent.

4 Things You Should Know Before Your First Buyer-Agent Meeting

Real estate brokerage is becoming an increasingly full-service profession – from acting as a source of market insight and information to helping in home selection and providing support before closing. But as much as agents can assist in the homebuying process, they’re also not your fairy godmother.

The best way to ensure a smooth process is to come to the first meeting knowing a few things. Arrive armed with the following knowledge, and your agent will have an easier time making your homeowner dreams come true.

Your actual budget. A key step to successfully buying a home is to first find a lender and receive preapproval on a mortgage. The preapproval amount that the lender offers will help you figure out the home price range you can afford and what you’ll be expected to pay monthly.

But be careful here, says Camille Swanson, a Realtor with Realty Executives who serves the Phoenix metropolitan area.

“The lender will go back and see things on a credit report and say, ‘Here’s what your liability is and here’s what your income is.’ What they won’t see is if you like to take lavish vacations, or you like to go to Starbucks every morning or if you have a gym membership. Things won’t show up on the report, [but] they still are part of your monthly spending and your disposable income, and they can still detract from your ability to buy a home,” Swanson says.

Robert Crawford, a broker for Washington Fine Properties in the District of Columbia, recommends working backward from your income and subtracting any monthly expenses, excluding rent, to determine the amount you could afford on a monthly mortgage payment and any additional utilities, maintenance and home expenses.

“No one wants to be eating macaroni and cheese for the first year that they own a property, and just because a lender is willing to lend you X amount of dollars doesn’t mean that that’s the right number for you,” Crawford says.

Realistic timeline expectations. Unlike on HGTV’s “House Hunters International,” you won’t be able to find your next home in 30 minutes, including commercial breaks.

Steve McKenna, Realtor for Bowes Real Estate Real Living in Arlington, Massachusetts, says buyers should expect to spend four to six months working with their broker. During this time you’ll establish your wants and needs, search for the right home and work toward closing together.

Still, he says it can be shocking how quickly inspections and meetings with lawyers or lender representatives need to be scheduled once you’ve reached an agreement with a seller. “Everything happens at lightning speed,” he says.

Even when the process moves quickly toward closing, recentchanges to mortgage disclosure rules have lengthened the period of time it takes to close on a loan.

Effective Oct. 3, the TILA-RESPA Integrated Disclosure rule, among other things, requires lenders to provide the Closing Disclosure form to borrowers at least three days before closing, meaning if the lender is delayed in getting the form to the borrower, the closing must be pushed back.

“The days are gone where we could close in 14 days, unless it’s obviously a cash buyer,” Crawford says.

While the time it takes to close depends on the buyer’s needs, brokers who spoke to U.S. News say TRID appears to be extending closing times up to 40 to 45 days, though that could come back down once lenders get used to the new process.

Swanson tells her clients: “Whatever the timing used to be, add 10 days on the front end and potentially another six days on the back end,” referring to the start and end of the closing process.

Neighborhood insight. Homebuyers are in a better position than ever to learn about neighborhoods with a simple online search, and then compare them to other nearby neighborhoods to determine which is best for them. Online tools for house hunting are constantly developing more innovative ways to provide consumers with the best information possible.

An online search can also determine whether the neighborhoods you like best will fit your needs when it comes to local amenities, such as nearby grocery stores or public transportation, while still being in your price range.

Alley Ballard, broker for @properties in Chicago, says schools are often a key factor for her clients when selecting their next home, not just to provide a good education for their children, but also because they affect property values. “If a school is highly sought after, you are going to pay more for the same house in that neighborhood than another neighborhood,” Ballard says.

Once you’ve started touring homes, it’s also important to visit the neighborhood at varied times to make sure it suits you in the day and night. Don’t be shy about talking with neighbors, either. “Neighbors will disclose everything – the good, the bad and the really ugly – so I always encourage people to go out and do that,” Swanson says.

Must-haves and deal-breakers. Letting your broker know what home features you absolutely can’t live with, and without, can be extremely helpful, and cause far less antagonism when touring homes.

“This is your deal-killer list, so to speak. If you will never live in a house on an alley, put it down,” Ballard says. “Because to me, I might be thinking in the city you have a 20-foot alley on the side of your house, you get all day light. We [as brokers] come at it from a different angle sometimes.”

Providing your broker with a list of required and desired details helps him or her form an idea of homes on the market that would best meet your needs. As you visit homes, the list will likely evolve. More here.

Credit, Mortgages and Your Ability to Buy a Home: It Doesn’t Have to Be Scary

The subprime mortgage crisis is still a wound that hasn’t fully healed for many Americans, serving as a cautionary tale against buying a home, The fact that millions of people lost their homes is hard to forget, and many who witnessed the tragedy are leery of entering the market for fear of another housing bubble just waiting to burst.

Margaret McNeal, a housing counselor for ClearPoint Credit Counseling Solutions, a national financial counseling organization based in Atlanta, says many homebuyers didn’t understand their mortgages, which became a major contributor to the housing crisis. “Primarily, people weren’t educated,” she says.

While the economy has largely returned to pre-recession levels, and the real estate market has recovered, many consumers are still a little gun-shy to close on a home.

John Sulzbach, a financial and housing counselor for LSS Financial Counseling in Minneapolis, likens lending to a pendulum, swinging back and forth over time, reacting to market events and borrowers. “It went from greed in 2007 to fear in 2008, ’09 and ’10. Now I see that pendulum is coming back to a more neutral position,” Sulzbach says, adding that lenders are doing their due diligence when considering a loan and want borrowers to do the same.

Buying a home shouldn’t be scary. The key is understanding your financial situation and what you are able to afford, as well as the kind of lending you sign on for. Following the steps below will not only make buying a home possible, but a positive financial move.

Know your credit score. Potential homebuyers should know their credit score and any problem areas in their credit history, which can be obtained through a number of free providers like AnnualCreditReport.com.

With your credit report, you can spot errors and areas that require additional effort to improve your credit score, which could help get you better mortgage rates.

While a mortgage may have seemed hard to come by unless you had stellar credit during the recession and immediately following it, that’s not the case today. Those with credit scores below the good rating of 700 can potentially show their creditworthiness through nontraditional credit scores, which factor in nontraditional lines of credit, such as utilities payments and rent that aren’t included in a FICO score.

Sulzbach recommends using a nontraditional credit score to see what actions might bestimprove your credit history, rather than to actually get a home loan. He says he advised one interested homebuyer with little credit history who couldn’t receive a FICO score. In that case, the buyer used a nontraditional score to see what credit areas he should work on.

Though less common, nontraditional lines of credit are used by some lenders to determine the best possible loan for a borrower, like with BECU, a credit union based in Seattle that primarily serves residents and workers in Washington. Lorraine Stewart, vice president of mortgage lending at BECU, says nontraditional sources of credit can be helpful for finding the right type of financial assistance for a member with a weak credit history.

“Many people out there today – especially first-time homebuyers – a lot of them haven’t established a lot of credit, and so we have to look at alternative sources of credit,” Stewart says.

Educate yourself and get organized. All homebuyers, whether it’s their first house or fifth, should take the time to educate themselves on their finances and changes to government regulations on lending.

McNeal says homebuyer workshops are a great way to learn the process step by step. Many local state and city governments set up free or low-cost workshops that include conversations with real estate professionals so consumers can better understand each group they will work with, from loan representatives to home inspectors.

Banks want you to be more educated as well, McNeal says. “They’re in some cases requiring that you go through some type of workshop – whether it’s online, over the phone, in person – so that you have some knowledge of what’s going to happen throughout this process,” she explains.

Stewart adds that all homeowners should have the necessary documents in order to give the lender during the application process. “You’re going through the biggest transaction in your life – buying a home, especially for the first time – and then there’s someone asking for a bunch of information on top of it,” she says. Pay stubs, W-2 forms and bank statements are among the required documents. You should also be prepared to explain any anomalies in your past, like a significant gap of time between jobs. More here.

Homebuyers are hitting record credit scores

New mortgages for purchasing homes are churning out at a fast clip, with the borrowers getting those loans having some of the highest credit scores ever. Because credit is favoring a smaller segment of borrowers, the result is that loan performance is arguably the best in history.

Purchase mortgage originations in the second quarter of this year were up 15 percent from a year ago, according to Black Knight Financial Services. June, the height of the spring sales season, saw the largest purchase loan volume since 2007, due to a high volume of sales.

As cash-heavy investors move out, mortgage-dependent borrowers are moving in. Cash sales made up about 30 percent of total home sales in July, the latest reading, down from 34 percent in July 2014. It is at the lowest level in nine years.

High-credit borrowers, those with FICO scores above 700, are almost entirely behind the surge in purchase applications. Activity among borrowers with lower scores is flat to slightly lower from a year ago, according to Black Knight. In fact, just 20 percent of purchase originations over the past three months have come from borrowers with credit scores below 700, the lowest level in more than a decade. This as the average credit score for purchase mortgages hit a record high of about 755. The median credit score in the U.S. is about 720 according to FICO, and the average score is 695.

FICO is the most commonly used scoring model to determine credit risk. It was created by Fair Isaac Corp. “Scores are calculated based solely on information in consumer credit reports maintained at the credit reporting agencies,” according to FICO. Scores range from a low of 300 to a high of 850. The higher the score, the lower the risk.

“Purchase volumes are seeing the most growth among the middle third of home price values ($150,000 – $349,000), higher than the national average, which speaks to middle-class strength,” noted Ben Graboske, senior vice president of Black Knight’s data and analytics division. “Sure, regulatory changes have tightened the credit box, but as the result has been the best-performing mortgages we’ve ever seen, that’s inarguably a good thing.”

While there are programs for borrowers with lower credit scores, like the government-insured FHA loan program, those borrowers are required to pay mortgage insurance; they also may not get the lowest interest rate available on their loans.

Fannie Mae recently announced it will require lenders to use so-called trended credit data when underwriting borrowers. Provided by Equifax and TransUnion, this data provide a more thorough analysis of the borrower’s credit history, according to a Fannie Mae release:

More here.