Michael Creed's Blog

When building a new home or buying yourself an existing home, it helps to determine what you need to maintain your personal lifestyle. Here are some sample questions you should ask yourself before buying your next home:

Site Design - What views are important? What don’t you want to see? How close (or far away) do you want to be from your neighbors? What outdoor features such as a hot tub, garden, playscapes, etc will you want?

Kitchen/Dining Room - How much cooking is done at home? What kind of entertaining do you do (small or large groups)? Focus on where you’re going to eat and whether the use of the dining area is formal or casual.

Living/Family Room - What will happen in these rooms? What furniture do you have that you want to accommodate?

Master Bedroom - How private would you like it to be? How large should the closets be (compared to your current situation)? It is very important to consider the functionality as you get older (many of my neighbors have sold their homes because they can no longer navigate the stairs comfortably, had they thought about this earlier, they may not have bought the house to begin with).

Master Bath - Separate shower, tub or special features like a bidet or Jacuzzi? Separate sinks for his and her use?

Other Bedrooms/Bathrooms – No matter how obvious this may seem, you need to consider how many extra bedrooms you will need and who they are for?

Storage - Will everyone’s belongings fit in the proposed closets?

Laundry Room - Where should it be? Near the garage, kitchen, bedrooms? Don’t forget to consider the stairs here too!

Heating/Cooling - Do you need air conditioning? What type of heat source is available? Do you prefer forced air, wall radiators, or radiant floor systems?

Plumbing - Septic system or sewer? Well or city water? How much hot water do you use every day?

This is a continuation of a prior post, entitled "Employment Changes - How Can One Affect Your Home Purchase" which can be found here.

As mentioned previously, in most situations, a change of employment will not affect one's ability to qualify for a home mortgage. But for others, as we will see today, the change can be the reason you do not get the loan you need to buy a new home or refinance your existing mortgage. The previous posting mentioned Salaried Workers, Hourly Workers, Bonuses and Overtime. Today I will discuss changes for those that are Commissioned Employees, Self-Employed Individuals and Part-Time Employees.

Commissioned Employees

When a large portion of a persons income is based on commissions - typically 25% or more - you as a borrower should not change jobs before buying or refinancing your home. The reasoning behind this has to do with how we as the lender will calculate your income; we will average your commissions from your current job over the last two years. If you have only been in your current job for two months, your 24 month average is going to be very low because of those 22 zeros!

To take this one step further, I think it is important to note that changing employers creates an uncertainty about your future commissions because there is no past evidence to predict the future. Although you may be selling the same thing with a similar (hopefully better) commission structure, the underwriter will still not be able to logically support future earnings.

Self-Employed Individuals (SEIs)

Here's a HUGE tip...if you plan to change careers or become self-employed before buying a home or refinancing your existing mortgage, do not do it...until the loan has been completed.

When underwriting a mortgage, we will, again, be looking for that two-year record of earnings, just like we did for commissioned employees. Without that two year history, we cannot reasonably determine if your income will be stable for the future. Beyond that, many SEIs will include a boatload of expenses as write-offs on their tax returns - particularly in the infancy period of the business. While doing so will reduce, if not eliminate, your liability to the IRS for tax purposes, it also reduces, if not eliminates, your income for qualifying for a mortgage.

If you are considering changing from one legal entity to another, you should also consider waiting until after the mortgage loan has been secured before doing so.

Part-Time Employees

If you are paid on a part-time basis, typically via an hourly wage, you should consider sticking with your current job because the underwriters will, again, look at the two-year average to determine a stable monthly income for your part-time job. If you have not had your part-time job for two years, you may not be able to use the full amount of income to qualify for your home loan.

As with all things, there are exceptions to the rule. However, that can only be determined on a case-by-case basis. If you would like to dialogue about this further, please feel free to comment on this blog or contact me directly.

Originally posted to my former Blog (http://activerain.com/blogs/michaelcreed) on 07/14/2007

In most situations, a change of employment will not affect one's ability to qualify for a home mortgage.  But for others, the change can be the reason you do not get the loan you need to buy that new home.

Salaried Workers - If your pay comes to you via a salary and you do not earn any additional monies from bonus, overtime or commissions, a job change should not create a problem for you.  This is assuming you will not be changing lines of work (i.e. manufacturing to sales) and that you will be earning at or above your prior job's salary.

Read the about employees who are hourly workers, receive bonuses, overtime or commissions, work part-time, or are self employed here...

Hourly Workers - If your income is based on the amount of hours you work and you always work a regular schedule each week, changing jobs should not be an issue for you.  Again, we must assume you will not be changing lines of work (i.e. manufacturing to sales) and that you will be earning at or above your prior monthly wage.

Bonuses - When a significant part of your income in your new or current job is based on bonuses, you may want to wait until after you have purchased your home to make the job change.  This is recommended because we, as mortgage lenders, will rarely consider future bonuses as income unless you have a proven history of receiving such bonuses in the past (usually two years).  When calculating your income ratios, we will average your bonus amounts over the past 24 months and use the lesser of the current year's average or the 24 month average.

Overtime - This works very similarly to bonus income and would, therefore, warrant a delay in employment change before buying your new home.  

Originally posted to my former Blog (http://activerain.com/blogs/michaelcreed) on 10/12/2007

As a lender, when we review your loan file for final approval, one of the items we are concerned about is the source of funds for your down payment and closing costs. Most likely, I will ask you to provide statements for the last two months on any of your liquid assets. This includes checking accounts, savings accounts, money market funds, certificates of deposit, stocks, bonds, mutual funds, and even your 401K & other retirement accounts. If you have been moving money between accounts during that time, there may be large deposits and withdrawals in some of them that must be documented.

The mortgage underwriter - the person who actually gives the final approval for your loan - will probably require a complete paper trail of all the large withdrawals and large deposits. You may be required to produce cancelled checks, deposit receipts, and other seemingly inconsequential data, which could get quite tedious. To ensure quality control and eliminate potential fraud, it is a requirement on most loans to completely document the source of all funds.

Bottom Line: Moving your money around, even if you are consolidating your funds to make it "easier," could make it more difficult for us to properly document. So leave your money where it is and talk to me before moving it around; the same goes for changing banks as well!

This may be a new concept for you but it is one that can easily be grasped and it goes like this: Typically, a home buyer must pay for certain costs to complete the transaction, however, an agreement can be made between the buyer and seller where the seller pays for those costs on the behalf of the buyer. These costs are paid when you close your mortgage via a credit on your settlement statement from the seller (hence, they are referred to as "closing costs") and can include, but are not limited to:

• Appraisal Fee

• Title Insurance

• Property taxes covering any period after the closing date

• Origination Fee

• Discount Points (1 point = 1% of the loan amount)

• Credit Report Fee

• Attorney's Fee

• Inspection Fee

• Processing Fee

• Odd Days Interest & Hazard Insurance Premiums (often referred to as "prepaids")

• Transfer Taxes

• Homeowner Association Dues

The amount of the costs incurred will vary by location and depend upon what needs to be done. i.e. some states require an attorney to review the loan documents and conduct the loan closing, others do not.

Sounds nice, doesn't it...having a seller to pay you to buy their home?  Why would anyone do this, you ask? Actually, there are huge advantages for both buyer and seller. For the buyer, these concessions will reduce the financial burden of buying a home because many of these transactions have little-to-no money out of pocket at closing. There are also tax advantages--you may be able to deduct some of the fees charged from your taxes.* For the seller, it can be a great way to sell a home quickly, especially when they're trying to close on a new home purchase themselves.

As with all good things, there are limitations to how much a seller may concede and the amount varies from three to nine percent of the purchase price. The specific amount depends on the kind of mortgage the buyer qualifies for, whether or not it is owner-occupied, and the amount of money being put down by the buyer. If you want to know how much the seller can contribute towards your closing, just ask...but chances are good I have already told you about it if we have talked on the phone!

Buying a home will most likely be the biggest investment you ever make and using seller concessions are great way to make the initial outlay of that investment less expensive; if you want to know more about this, please let me know as I would be happy to guide you in the right direction.

*As always, consult your tax advisor to be sure this applies to your situation.

Originally posted to my former Blog (http://activerain.com/blogs/michaelcreed) on 09/29/2007

Studies show that in 2007, almost $1.5 trillion (yes, that’s a “T”) worth of adjustable rate mortgages (ARMs) have already reset or are due to reset soon; that’s five times the number that reset in 2006! You might be asking why is there this sudden increase in mortgages up for adjustment? It’s the result of several factors coming together.

As many of you know, in recent years, interest rates have been at historic lows. To get the lowest rate possible, and leave the door open to potentially get an even lower rate in the future due to the adjustability feature, many home buyers chose an adjustable rate mortgage to save money in the short-term and hedge their bets that the market would go down in the future. The alternative was not nearly as attractive because the 30 year fixed had no savings to be realized and the benefit of a decreasing market was also not there. Many existing mortgage holders also took advantage of low ARM rates to refinance in order to obtain a lower payment and/or to draw funds from their home’s equity to spend elsewhere. Lastly, soaring home prices and low interest rates combined to make these options extremely attractive to homeowners.

My research with several reputable sources shows that nearly 25 percent of mortgages held today carry adjustable interest rates; that’s not surprising considering the savings they’ve provided over the past few years. Those of you that were in the market in 2003, for example, may recall the interest rate on a 30-year fixed-rate loan was around 6.5%, whereas ARM rates were under 4%; for a $200,000 note, that’s a monthly savings of $309.30! Who wouldn't jump all over that?

Many of today’s ARMs are also hybrid products meaning they combine the features of both fixed rate and adjustable rate mortgages, typically starting off with several years of fixed payments before converting to an annually adjusted rate. Someone who took a 3/1 hybrid ARM in 2004 would have had a fixed interest rate for the first three years and would only now be facing an adjustment in 2007. This "reset phenomenon" will continue for the foreseeable future because those that got into the 3/1 ARM in 2005 will be resetting next year, those that got into the 5/1 ARM in 2004 will be resetting in 2009, the 7/1 ARM in 2004 will reset in 2011, etc.

The problem is that many ARMs due to reset this year will be doing so at a considerably higher interest rate. Not only have interest rates increased, but the gap between fixed and adjustable rate mortgages has narrowed significantly. Those who took out an ARM for less than 4% back in 2003 could see their mortgage rate jump to 7.5% after the adjustment. For that same $200K mortgage I mentioned earlier, that's an increase of over $440 a month and many homeowners simply cannot afford the new payment.  This huge increase in a homeowners monthly payment is also fuel for the fire regarding declining home prices...sellers are willing to sell at deep discounts to get out from under that smothering mortgage payment.

But even if your mortgage is resetting at a higher rate, the news isn’t all bad. Before you freak, consider the following:

You’ve Benefited From a Low Initial Rate - Remember, the fact that you chose a low-interest ARM means you’ve most likely already reaped the benefit of saving several thousand dollars a year during the first few years of your mortgage.

Mortgage Interest is Usually Tax Deductible - Even though your payments may be increasing when your ARM resets, the fact that mortgage interest is usually tax deductible means there may be less net impact than you may expect on your overall finances.

You can refinance to a fixed-rate mortgage - If you’re concerned interest rates may continue to rise and want the security of knowing your monthly payment won’t rise to an unaffordable level, you have the option of refinancing to a fixed-rate loan.

Historically, Today’s Interest Rates Are Still Low - Twenty years ago any mortgage under 10 percent was a great deal. Today’s rates are still historically low.

You Chose the Right Mortgage if You Plan to Move Soon - Choosing an ARM was the right decision if it enabled you to save money during most of the years you lived in your home. Those savings should more than offset a short period of higher interest payments just before you sell your home.

You Have Options - If you’re worried about your adjustable rate mortgage resetting, you can calculate how much you will pay after your ARM adjusts by checking out my loan calculator or contact me to find out about all of your available options.

By knowing what to expect and by planning ahead, you can stop worrying about what the future may hold and start coming up with a solution that can meet your budget and financial needs.

Originally posted to my former Blog (http://activerain.com/blogs/michaelcreed) on 09/22/2007

When seeking a mortgage, borrowers often get fixated on a specific rate that has an emotional brink; usually something like 6.49% or any other number that we as humans find visually pleasing.  

However, deciding to buy down an interest rate is far more complicated than just an attractive number up front.  Borrowers really need to look at their long-term plan for the home before moving forward.  After all, buying down the interest rate is an upfront cost with savings that will not be realized for many years to come.

The Scenario

§         You are offered a rate of 6.25% on a $250,000 fully amortized, 30 year fixed rate loan with no discount points

§         You have convinced yourself that you need a rate of 5.99% at a cost of one point (1% of the loan amount - in this case $2,500)

§         Your savings for buying down the rate to 5.99% will be $42.02 per month

Consider this: How long will it take you to recover the upfront cost?  $2,500/$42.02 = 59.49 months, or just short of five years. 

This is the part that many people overlook; you need to decide how long you plan to stay in the home and how long you plan to stay in the loan.  If you sell or refinance before those five years have passed, simply put, you have lost money.  However, if you stick around a bit longer, the buy down will begin to make sense.

Another issue to consider is that many borrowers who have paid to buy down a rate will wait to refinance because they want to ensure they meet the savings they were originally going after when they bought down the rate; if the rates drop significantly, you could be missing great opportunities to save even more money.

As with most things, many parts of this situation are uncontrollable because of the often-unknown interest rate environment and, therefore, make this a difficult decision.

The Bottom Line: Paying points may make a lot of sense if interest rates climb significantly in the years after you buy down your rate, because you'll likely stick with your current mortgage and see the savings through; the opposite is true in times when interest rates decline sharply. Beyond that, you may find a buy-down to be advantageous if you plan to live in the house – and not refinance the loan – for a very long time. With that being said, please take the time to analyze your situation to see if buying down your interest makes sense for you. I would be happy to help you think this through.

Originally posted to my former Blog (http://activerain.com/blogs/michaelcreed) on 07/14/2007

A bi-weekly mortgage can and will save you thousands of dollars in interest cost over the life of your loan. This happens because you amortize your loan faster and, in turn, you shorten the time it takes before you own your home free and clear.  Isn't that a nice thought? Let's say it again, free...and...clear!

Instead of making monthly payments, bi-weekly mortgages require a mortgage payment every other week.  For instance, let's say your normal monthly payment was $1,500 per month, with bi-weekly programs, you would have to pay $750 every two weeks. If you do the math, you will see that you are making 26 bi-weekly payments per year which is the equivalent of 13 monthly payments per year (26 / 2 = 13).

It's important to note that you can make more than your minimum bi-weekly payment with these program as well.  If you want to pay even more toward your mortgage, you can do so at any time.

A bi-weekly mortgage program does not have the same term as a normal 30 year mortgage even though your payment is traditionally based off of an amortization of 30 years.  On average, you will shave off about 24% of your payback time when set up with a bi-weekly payment plan from the beginning.  For instance, a 30 year fixed rate mortgage at 7.0% would be paid off in 23.7 years when following the bi-weekly program; that's a savings of over $34,000 in interest per $100,000 borrowed!

Keep in mind that you do not have to use a bi-weekly program to make extra payments; if you have the self-control and drive to force yourself to make one extra payment per year, you can save just as much money as you saw above!  Lastly, it is important to realize that paying extra to your mortgage, no matter how you do so, can cost you income tax deductions in the future; when you pay less interest, you have less to write off!

Originally posted to my former Blog (http://activerain.com/blogs/michaelcreed) on 07/14/2007

The peaceful days of home selling are definitely a bygone time and one can no longer simply put out a for sale sign and sit back and watch it sell.  There are signs of a softening market both in our neighborhoods (a plethora of homes on the market) and in our newspapers (foreclosure notices taking up large sections each week).  Beyond that, we have scares of inflation and the rising cost of basically everything; many people are simply trying to get out of a home they now know they never should have been in to begin with or they are not upgrading at all.

Barbara Kohut, a Realtor in the Chicago area, was once quoted as saying, "Houses that would have sold in less than two days [in years past] now stay on the market upwards of 60 days."   Imagine if you worked those numbers out for a house that would normally sell in a week; that's a marketing time of over eight months!

To get the money out of your home that you really want, you need to make it stand out from all the other homes in your area.  It's time to stop thinking like an over-confident homeowner and start behaving like a marketing professional that is trying to move merchandise off of a crowed superstore shelf.  The steps he or she would take to move the merchandise are almost the same as the steps you need to take today.

Learn how to price & makeover your home along with how to entice your buyers here...

Price Your Home Right on the Money

Realtors will tell you that the single biggest mistake that sellers make in a sluggish market is that the seller will overprice their home.  Asking for top-dollar may be a good idea when people are fighting over your home with bidding wars and multiple offers but that simply is not the case in most areas of the country any longer; good values and reasonable asking prices are the transactions that are closing today.

To get a good sense of where you should be pricing your home, check the following areas:

• Your neighborhoods sales over the past six months

• Your county assessor's website or office

• Your Realtor's office

Your Broker/Realtor should not only be familiar with selling conditions in your neighborhood, but also with prices for properties that are the most comparable to yours.  The key factors to consider are the number of bedrooms & bathrooms, square footage and other features that may be in demand in your area.

Another thing to consider would be to possibly price your home five to ten percent below market so as to start a bidding war with potential buyers.  If you do this, your Realtor has to market your property very efficiently because you want to create a major buzz on your property quickly.  Doing so will, as I said before, start a bidding war on your home, but more importantly, it will get people emotionally attached to your home.  When buyers start thinking with their emotions, they are bound to push your price up to or even above the fair market value.

In the future, I will cover the almighty home makeover and some common seller incentives that will go a long way.