Nolo’s Real Estate Tips for Home Buyers

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.

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