Nolo’s Real Estate Tips for Home Buyers

For anyone who was counting on getting FHA help with lining up a home mortgage -- via the FHA loan program, in which borrowers who present higher risks than others, most likely due to low credit scores, may qualify for a loan backed by the FHA -- that plan is starting to look a little more tenuous.

The FHA has tightened up its standards, including:

• requiring down payments of at least 10% for anyone whose credit score is less than 580
• cutting the allowable amount of seller financing to 3% of the transaction price, and
• requiring buyers to pay a higher mortgage insurance fee at closing.
  

For a good summary of these provisions and their implications, see Al Heavens's article in the Philadelphia Inquirer, "On the House: FHA alters borrowers' guidelines."

If you're a home seller, don't panic. The changes don't address all borrowers, but only those who were having trouble finding and closing on a loan in the first place. Qualified buyers are still out there, and in some regions of the United States, eager to find a home. Research your local market before drawing any conclusions on whether now is a good time to put your home up for sale. 

I've been reading for months about how lenders have become nitpicky in the extreme when it's time to approve a mortgage loan. Gone are the days when a home buyer could prequalify and be assured that the rest would be smooth sailing.

But there's a difference between reading about something and living it. And having just bought a home -- the second one I've owned (gotta sell that first one now) -- I can say I've lived the mortgage applicant's experience in painful sensurround.

Maybe I was naive, but I thought having a great credit score (the legacy of having been insanely frugal even before it was chic) and making a big down payment would protect me from some of the most suspicious lender queries. Wrong.

First off, they wanted to know where every cent of money was coming from, apparently to make sure we weren't disguising any other loans from friends or family. An investment account? Ok, then how did that large-ish deposit get there? A transfer from my personal checking account? Let's see the bank statement. Getting gifts from parents? Better provide not only a gift letter and proof that they really have the money, but proof that it was in their account for at least ninety days, lest Mom and Dad have been borrowing money from someone else! (Mom and Dad, for the record, were not amused.)

Then they called my employer so often to ask whether I was still working there that the H.R. Director practically begged for mercy.

But here's the one that still has me in a state of mystification. Our lender -- and this is a big established bank, by the way -- wanted a signed letter from us explaining why we were moving a mere 1.24 miles from our previous residence. Huh? The obvious fact that the new house has one more bedroom, one more bathroom, and is in a nicer neighborhood didn't occur to them? Is there something inherently suspicious about moving within the same city? (I'm just happy I don't have to switch dentists.) And if there were some nefarious reason for such a switch (which my imagination has still failed to come up with), would I be dumb enough to say it in a letter in which I could -- and did -- explain that we wanted the extra space?

 But, all's well that ends well (I hope). The loan was approved, and I can move onto dealing with the other craziness of moving and selling . . . more on that to come.

Don't miss this transcript of a radio interview with Bob Diamond, real estate attorney and developer, about the realities of loan modifications -- namely, how to make a request that the overburdened lender will actually pay attention to, and why it's truly in both the borrower's and lender's best interests to work out a modification rather than descend into foreclosure.

Be prepared for some bursts of rage, however, as you read about lenders' slippery tactics for avoiding dealing with consumers -- like Bank of America's continuing to have a working fax line for submissions, while not telling people that it essentially tosses the faxes without looking at them or recording them in its system. Good grief.

The headline of Sandra Block (of USA TODAY)'s recent column says it all: "Home buyers need good credit scores even with 20% down payment." Credit is tight, tight, tight, and even people who assumed they could sail in and get a loan before may have trouble now.

Block also offers some sound advice for raising credit scores, including the latest word on whether to close little-used credit card accounts.

And given that even making a 20% down payment is difficult without some family help, it's worth checking out this Wall Street Journal article by June Fletcher, which succinctly discusses issues like whether it's better to arrange a gift or a loan, and what happens if the giver doesn't file a tax return. (Big penalties despite the fact that no gift tax needs to be paid during one's lifetime!)

If you're planning to buy a home this year in order to take advantage of the $8,000 tax credit for first-time buyers, don't wait too long: Your home purchase has to close by December 1 of this year.  (No, that's not New Year's Eve, it's the beginning of December.)

And if you've been researching this process at all, you know that actually closing a sale can take several weeks after you've made an offer and then you and the seller have signed a purchase agreement. Forty-five to 60 days is common.

So, realistically speaking, you'd want to be in contract to buy by October 1 of this year. it's hard to imagine as you head for the beach, but that's less than three months away.

Meanwhile, for one homeowner's clever idea of taking advantage of the tax credit by having his 22-year-old daughter be named as the buyer, see this Wall Street Journal article.

According to the 2009 survey of California homebuyers (by the California Association of Realtors), a full 32% of people buying homes in traditional (non-foreclosure) sales "either did not know or were not sure they knew the terms of their loan."

Yikes! Isn't this how we got into a lot of mortgage trouble in the first place? If there's any cause for hope, I suppose it's that most of these (88%) were fixed-rate mortgages, which are inherently more predictable than the other varieties that were so prevalent a few years ago. No big surprises or balloon payments in store. Nationwide, the trend is toward more use of fixed-rate mortgages.

Still, I would recommend scanning the fine print on your mortgage at least once -- especially if there's a chance you want to sell or refinance within the next few years, in which case you need to watch out for any prepayment penalties.

Having a hard time keeping up with your mortgage? If so, you're like many other Americans, for the mortgage is a first priority -- and primary source of worry.

But don't let that lead you to forget that homeowners' association dues are almost equally important. If left unpaid, the association may have the right to foreclose on you -- check your purchase agreement for details.

Worse yet, it may not be your fellow homeowners who make the decision. Homeowners' associations commonly turn the difficult job of dues collecting over to management companies.

For more information, see the article, "Neighbors are forcing neighbors into foreclosure," by Paul J. Weber, Associated Press.

This almost qualifies as "weird news": For whatever reason, Experian has stopped letting individual consumers (such as home buyers) access their FICO scores. You can still get your credit history, but not the score (not even if you're willing to pay for it).

This isn't the end of the world, since the other two of the "big three" credit reporting agencies (TransUnion and Equifax) will still give you a score. But because all three of them collect different information, you might not be able to find out if Experian's score is out of whack compared to the other two -- and deal with that fact before prospective mortgage lenders see your score.

For details, see this Wall Street Journal article.

Many homebuyers are overwhelmed by a sea of paperwork when they sit down at the closing table. Buried in the paperwork is the HUD-1: the settlement statement that summarizes the buyer's (mostly mortgage-related) closing fees.

Buyers should see the HUD-1 before closing, in draft form. But things can and do change before getting to the closing table, and many buyers find new or increased fees tacked on at the last minute. Those anxious to close may not bicker with the higher fees, or even notice them as they deal with everything else. But the Department of Housing and Urban Development (HUD) has noticed the trend. After much debate, HUD has created some new mortgage rules to deal with it, hoping to save homebuyers an average of nearly $700 at the closing table.

The most important change is that now, lenders and brokers are required to provide buyers with a standard Good Faith Estimate (GFE) within three days of receiving a mortgage application. (The GFE was commonly used in the past, but no standard format existed.) On the GFE, brokers must now disclose how they're paid, through the "origination charge."

This is the cost to the borrower for getting the loan, expressed as a percentage of the overall loan amount. The charge may be paid in "discount points" (points the borrower pays upfront in exchange for a lower interest rate) or as part of the interest rate itself.

In addition, lenders and brokers can't increase some costs between the GFE and the HUD-1, and other costs can only go up by up to 10%. For example:

• Origination charge: cannot increase.
• Transfer taxes: cannot increase.
• Appraisal fees: can only increase up to 10%.
• Government recording fees: can only increase up to 10%.
• Title insurance: can only increase up to 10% if borrower uses the title insurer selected by the lender.

The HUD-1 is also revamped to make it easier for borrowers to compare to the GFE. Lenders and brokers aren't required to start using these forms until January 1, 2010 -- but they're allowed to use them immediately. If you don't receive a GFE when you apply for a loan, ask for one -- or better yet, ask the lender to use the new forms together and to agree to be bound by the fee increases on those forms.

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.