Nolo’s Real Estate Tips for Home Buyers

Everyone loves a sequel, right? And as authors of Nolo's Essential Guide to Buying Your First Home, we're thrilled to have just received, hot off the presses, copies of our sequel to that book: The Essential Guide for First-Time Homeowners: Maximize Your Investment and Enjoy Your New Home.

This is the manual we wish we'd had when we became homeowners. It covers everything from housewarming parties to new-found tax deductions, from maintenance to remodeling. And it's loaded with tips for economic hard times, like how to decorate on a budget, deal with your lender if you have trouble paying the mortgage, lower your homeowners' insurance payments, and even save money by going green.

You can start reading a sample chapter right now -- enjoy! And if you know anyone who's just bought a new house, think about this for a fun-yet-practical housewarming gift.

Kudos to Nolo's own Steve Elias, who's been in the news lately, pointing out that efforts in places like Michigan to take owners of foreclosed homes off the voter rolls are not only unfair, but absurd.

Foreclosure has always been a lengthy process, and banks are now more willing than ever to work out a compromise solution, so that the idea that foreclosed homeowners just pick up and leave the moment they get the bank's foreclosure notice couldn't be more off base. For information about how foreclosure affects voting rights in each state, see http://legalconsumer.com/bankruptcy/foreclosure_voter_rights.php?. You'll find links to election rights organizations and state-specific registration information.

I'm no math whiz, so I can sympathize with first-time home buyers  who are confused about what the hullabaloo over the federal takeover of Freddie Mac and Fannie Mae means. The details are probably more complicated than most of us can handle when thinking about factors like choosing the right house, making a good offer, and having the proper inspections.

Luckily, if you're buying a house, it isn't necessary to understand the complicated relationship of these behemouth organizations to the real estate market and Wall Street. But even if you're completely disinterested in the details, you do need to know one thing: the takeover does affect interest rates, which reached a 7-month low this week. (If you're curious, the reason this is so is explained here.)

If you're a first-time buyer, this has a huge impact: it makes your house cheaper. Okay, not literally. But while the seller's price tag doesn't change, what comes out of your pocket does. For example, if you paid a rate of 6.25% for a $300,000, 30-year fixed rated mortgage, your monthly principal and interest payment would be almost $1,850 (and you'd pay a whopping $364,974.58 in interest over that 30 years). But if your rate is 5.75% on the same mortgage, your monthly payment is only around $1,750. And you'll only end up paying $330,258.68 in interest -- no small sum, but still much less.

So while the price a seller advertises is an important factor in determining home affordability, low interest rates are nothing to scoff at, either. You have Fannie and Freddie to thank for that.

Alayna Schroeder

With the foreclosure crisis and the tightening up of credit, getting a mortgage feels like it's harder than ever -- or is it? Let's take a look back in time.

Back before the Depression, home mortgages typically extended for ten years -- not the generous 30 years we're used to now -- and a down payment of 50% of the home's purchase price was expected.

Not surprisingly, this kept a lot of people out of the housing market. In 1940, only about 44% of household heads owned homes. It was only when the federal government stepped in by backing long-term mortgages, thus creating an incentive to homeownership, that the shift to the standard 30-year mortgage with lower down payments began.

The source for these fun mortgage facts? A book called Theorizing Discrimination in an Era of Contested Prejudice, by Samuel Roundfield Lucas.

A good credit record and score has always been important, but with the tightening up of the mortgage industry, people with a low score may have a harder time than ever buying a house -- a shame, if you want to take advantage of recent dips in home prices.

But, warns Kenneth Harney, that's no reason to pay money to the various companies that promise to not only raise your credit score, but find you an affordable home in foreclosure and a low-cost mortgage to boot. For details of the consumer complaints and FTC lawsuits that these companies have engendered, see Harney's article in the San Francisco Chronicle.

As for raising your credit score, you'll have to do it the old fashioned way: by paying down your debt, paying bills on time, and more, as discussed in Nolo's article on Credit Scoring.

Homebuyers, homeowners, real estate agents, and mortgage brokers have all been awaiting, with high expectation, details on the new "jumbo light" loan limits and lending standards. Everyone had hoped these new loans, authorized by the Economic Stimulus Act of 2008, would provide lower interest rates for folks trying to buy or refinance homes in high-cost markets.

Well, the lending limits and standards are finally here, and (drumroll please) it looks like these new loans will do... nothing. That's right. Due to heavy restrictions on the loans, most people won't qualify for one. And even if they do, the interest rates are still much higher than those for traditional conforming loans.

What does this mean? For starters, people living in high-cost real estate markets that are having trouble meeting their mortgage obligations, or are already behind in payments, won't get relief from a jumbo light loan. Those folks will (1) continue to struggle, or (2) join the large ranks of those in foreclosure. And those trying to buy a home in a high-cost market won't get help from jumbo light loans either. So much for economic stimulus.

Here are the details of how all this works:

What Are Jumbo Light Loans? In the past, Fannie Mae, Freddie Mac, and the Federal Housing Administration (FHA) could guarantee real estate loans up to $417,000. In a nutshell, the guarantee meant lower interest rates for those loans -- which, in turn, made them more affordable. Loans above $417,000 (called "jumbo loans") carried higher interest rates, due to a perceived greater risk. In its Economic Stimulus Act of 2008, Congress authorized Fannie Mae, Freddie Mac, and the FHA to guarantee (until December 1, 2008) mortgages as large as $729,750 in some high-cost markets.

This creates three types of loans:

(1) Traditional loans under $417,000 (called conforming loans).

(2) "Jumbo conforming loans" or "jumbo lights" (between $417,000 and up to $729,750). The upper lending limit depends on where you live. To find out what the limit is in your area, check the HUD FHA Mortgage Limits.

(3) Jumbo loans (loans over $729,750 -- or less, in lower-cost markets). These loans carry the highest interest rates.

The hope was that the new category of jumbo light loans would carry lower interest rates, so that people in high-cost real estate markets could more easily buy a home or refinance an existing mortgage. Alas, according to mortgage brokers, the qualifying guidelines for jumbo light loans are so difficult to meet that many people cannot get one.

Restrictive Qualification Rules. Some examples of these restrictive guidelines are:

• The Debt-to-Income Ratio must be no more than 45%. This means that your total monthly housing expenses (mortgage, home insurance, taxes, and other home related expenses) divided by your gross monthly income is less than 45%. In high-cost housing markets, where people have to spend a large portion of their income on housing, these limits may be tough to meet. Yet these high-cost housing markets are precisely where the need for jumbo light loans is greatest.


• Borrowers must submit full documentation of income and assets (which can be especially difficult for self-employed people, since the typical self-employed person can deduct a variety of expenses and show very little income at the end of the year).


• Borrowers must have a credit score of at least 700 if their LTV is greater than 80% or at least 680 if their LTV is less than 80%. This factor alone eliminates a lot of would-be borrowers.


• Borrowers cannot have made a late mortgage payment within the last 12 months. Oh well.

In addition, those who are refinancing cannot wrap a second mortgage into the new jumbo light loan. Because second mortgage holders are skittish in the present market, borrowers may have to repay a substantial percentage of their second mortgage in order to refinance the first.

Not Much Relief in Interest Rates. In addition to these restrictions, the hoped-for favorable interest rates of jumbo light loans haven't yet materialized. Currently, the interest rates for jumbo lights range from 7% to upwards of 7.5%, not much better than rates for the regular jumbo. In contrast, the interest rates for traditional conforming loans are less than 6%.

Jumbo Light Loans May Improve in the Future. Some experts believe that it will take jumbo light loans a while to hit their stride, and once they do, interest rates may dip a bit. Some predict that for this reason, Congress may extend the planned December 31, 2008 expiration date.

Kathleen Michon, attorney & guest blogger.

News has spread: recent legislation signed by President Bush will put cash back into taxpayer hands--$600 for most individuals, $1,200 for couples, and an additional $300 for each child.

If you're looking to buy your first house, the extra cash can't hurt. But if you're looking to buy a house that costs more than $417,000, that may not be the best part of the new plan. It also raises nonconforming loan limits from $417,000 to up to $729,750 in high-cost areas. This applies to loans originated through the rest of the year.

What exactly does that mean? Hopefully, if you're borrowing in the range identified, a lower interest rate. Because nonconforming loans can't be resold to Fannie Mae or Freddie Mac, the two largest purchasers on the secondary market, they've generally carried higher interest rates. As Sue McAllister points out in the Silicon Valley Real Estate Blog, borrowers will have to wait and see whether lenders will start dropping rates on these larger loans to conforming loan levels right away, in anticipation that they'll be repurchased on the secondary market.

At this point, too much is unknown--and it may not be time to start cheering. Critics point out that the higher loan limits will be based on local median home prices, and probably won't affect most markets. And while Fannie Mae and Freddie Mac are authorized to buy these loans, they aren't required to.

Also, investors may not be as comfortable with securities backed by these newly eligible loans, because they remain riskier. As Bankrate's Holden Lewis notes, that could mean that mortgage-backed securities segregate regular conforming loans from these new "superconforming" loans. If so, rates on the superconforming loans are still sure to be higher.

If you're looking to buy between now and the end of the year, and you're expecting to borrow more than $417,000 because median home prices where you live are sky high, stay tuned.

Alayna Schroeder

All this talk of foreclosures, interest rates, trouble in the mortgage industry--what does it mean if you're a first time buyer?

Here's the picture a few years ago: the market was hot. Buyers, without a single penny down, financed 100% of their purchases, with historically low interest rates. Some didn't have the income to support a fixed-rate payment, so they either used stated income loans (sometimes called liar loans, because income information was often fabricated) or creative adjustable rate mortgages (interest only, frequent adjustment periods, option ARMs, or some combination of these) to lower monthly payments, increasing the overall amount they could borrow.

The picture today: According to an article at CNNMoney.com, you can probably forget 100% financing. Plan to put at least 5% down--10% if you're in a falling market. If you need a jumbo loan (more than $417,000), you'll also find that it costs a little more. And if you have a low credit score, you'll probably have to pay an additional, upfront mortgage fee.

But the good news? Interest rates have stayed pretty low, and prices in most places have come down while inventory has come up. It's a buyer's market--a savvy, solvent buyer's market, that is.

Alayna Schroeder

Yes, we harped on it in our book (Nolo's Essential Guide to Buying Your First Home), but it's nice to have confirmation from Consumer Reports nonetheless:

Buying homeowners' insurance is not a time to go cheap and get the minimum. In fact, buying too little insurance is listed in a story in Consumer Reports' February 2008 issue as one of 12 major blunders that could cost you $1 million.

Why? Because the amount you're given to replace your house, in a disaster, may not allow you to rebuild what you had, and you'll lose any home appreciation you gained over time. Yes, disasters (such as fires, earthquakes, and floods) are unlikely, but the message here seems to be, why gamble on such a huge part of your life -- and your net worth?

The other major blunders are mostly focused on retirement planning and keeping yourself healthy. But when it comes to homeownership, insurance is a biggie.

Ilona Bray

A few months ago at a social gathering--well after the mortgage industry's problems were coming to light--I met a woman in her mid-twenties who was a real estate appraiser. "My job is easy," she told me, wide-eyed and innocent. "All I have to do is go in and say that the value of the property is the sales price." Yikes. This professional approach is indicative of an industry-wide problem: and it helps explain why so many homeowners are in such a jam right now, struggling with unaffordable mortgages that banked on equity that either didn't exist or didn't materialize.

And there are no quick fixes. The Bush Administration's newly revealed mortgage rescue plan received a lot of attention last week. The basics of the plan are this: borrowers who took out adjustable rate loans (with initial rate periods of 36 months or less) between January 1, 2005 and July 31, 2007 that are due to reset between January 1, 2008 and July 31, 2010  are eligible for a five year interest rate "freeze." Lender participation is voluntary.

Critics noted that the plan is likely to aid very few borrowers, and since it's intended to prevent foreclosures, doesn't do anything for those borrowers already in it. In a New York Times editorial, Paul Krugman pointed out that its real purpose is to "create the appearance of action", thus undercutting support for alternative plans with actual bite. Looking at how few will likely benefit from the plan, and its voluntary nature, it's hard not to agree.

So who won't benefit? Anyone who has lost a home to foreclosure already (according to one estimate, approximately 800,000 since mid-2007), seen an adjustment they can't afford, took out an ARM before the set period, bought with a conventional loan, has a decent or improved credit score, or (like 55% of subprime borrowers) was given a subprime loan when they could have qualified for a conventional one. In short, a lot of people. And that doesn't even deal with investors who have seen drops in the value of mortgage-backed securities, or the borrowers who can take advantage of the plan--but still have the same mortgage, perhaps one they can't afford to pay, five years later.

Amidst all this, the mortgage industry bemoans its losses. But it's a lot harder to feel very sympathetic toward those who created and sold these products to people who weren't capable of affording them--and astonishingly enough, sold them to people who were capable of affording something better, like a conventional loan without an astronomical future interest rate.

Alayna Schroeder