Fun FHA Facts

Word on the street is that FHA loans are the new subprime, and according to recent news, there may be even better news on the horizon for borrowers with less than stellar credit, even those who need to refi.
What with all the subprime hubub, FHA loans haven't come into play as much the last few years. According to Investopedia.com, an FHA loan is:

"A mortgage issued by federally qualified lenders and insured by the Federal Housing Administration (FHA). FHA loans are designed for low to moderate income borrowers who are unable to make a large down payment. FHA loans allow the borrower to borrow up to 97% of the value of the home. The 3% down payment requirement can come from a gift or a grant, which makes FHA loans popular with first-time buyers."

But it's not only low to moderate income borrowers or first time home buyers who can benefit from an FHA loan. FHA is also good if your credit score is a little low. FHA will accept a minimum credit score of 580, whereas the minimum for a conventional loan has gone up to 620. It definitely gives you a little more wiggle room.

In addition to allowing a 3% gift, FHA also allows up to 6% in seller concessions, almost twice what most conventional loans allow. That's a lot of closing costs!

Best of all, the FHA loan limit for Knox county was just raised to $271,050 (FHA loan limits for others counties can be found here). With that kind of money, you can almost certainly find yourself some very sweet digs in our fine city.

Before You Make That Lowball Offer...

Lowball offers are the new black. Every time I go to the office, I hear another horror story about someone's client who insisted on submitting an obscenely low offer on a home, because said client has heard about how horrible the real estate market is. 9 times out of 10, two things are going to happen in this scenario:

1. Seller counters back at near listing price, offended by the lowball offer.

2. Seller rejects offer outright, offended by the lowball offer.

And a lot of times the buyer winds up losing the house either because someone else submits a reasonable offer, or because negotiations break down due to seller's aforementioned offense at low ball offer.

I blame all this lowballing on the media hype over "the national real estate market." The fact that there is no national real estate market escapes these people's notice (more on that later). Buyers think that the collapsing "national market" means they are going to steal houses in Knoxville.

As I've said here before, just because every business pundit on every news channel in the country is saying the real estate sky is falling, that does not mean that it's falling over Knoxville. Yes, we're in a buyer's market and buyers can definitely get away with asking for more concessions now than they could a few years ago. And that's a great thing for all you buyers out there. But with few exceptions, you're not going to get that $250,000 home for $200,000. Really, you're not. Sellers in some parts of the country may be desperate to sell, but most sellers here aren't. They're just really anxious to sell and there's a big difference between those two.

Having said all that, the lowball offer definitely does not have it's propert time and place. But let's start off by looking at where and when it is not a good idea:

• You really want the house.


• You're doing it "just to see" if you can get it, even though the comps and condition do not support a number anywhere near what you're asking.


• You want/need a lot of concessions from the seller.


• Your agent has strongly advised against it, knowing that you really want the house and/or the comps & condition don't support it.

If any of the above is true, you can stop reading this post and go make a reasonable offer.

If you're still in the running to lowball, you need to find out a few things. Ask yourself and/or your agent the following questions:

• Is the home overpriced?
  

Or maybe even grossly overpriced? Your agent can pull comps for you and help you find this out. If it is, your lowball offer is not really a lowball offer at all - it's a reality check for the seller

• Is the house falling apart, but is priced as though it's not?

Market comps ususally assume a home is in market ready condition. If the seller has priced his home at market, but the roof is falling in and it's 1972 inside, a lower offer might be justified.

• How long has the property been on the market?

The current listing sheet may say the home has only been on the market 30 days. But a quick look in the MLS may show you that this is the 3rd time the home has been listed, and all told, it's been on the market for over a year. Longer time on the market means more negotiating power for the buyer.

• Is the property vacant?

Has it been that way for a while? Nobody likes to have a house sitting empty, epecially when the house is in Knoxville and they are in Honolulu. Insurance companies don't like it either. And nobody likes making two mortgage payments.

• Is the seller motivated?

This is something you can't always know up front. But if you somehow find out the seller is getting divorced/about to go bankrupt and has to move that property, stat, then strike while the iron's hot.

• Are you hoping/needing concessions in the contract?

I mentioned this before, but it bears repeating. This is a can't have your cake and eat it too thing. If you need the seller to pay closing costs or pay for repairs up front, lowball is probably not the way to go. It adds insult to injury.

• Are you prepared to walk away from the house?

Repeat after me: the lowballer shall not get emotionally invested in a property. The lowballer must always be willing to walk. Lowballing is gambling, so be prepared to lose.

Ok, so you've asked the important questions and you have a yes answer to two or more. Now you want to lowball! Slow down, grasshopper. You have one, last very important task to complete -

Find out what the seller owes on the property.

It is very rare that a seller is able to afford to write a check at the closing table, much less agree to do it. In some situaitons coming out even will suit the seller fine, but paying someone to buy their home will not.

Once you know what the seller owes, you and your agent can formulate your offer accordingly

At this point, I will ask you one more favor. Please, please, please, please -

listen to what your agent has to say!

Because you do have an agent, right? And he or she is a professional, correct? Real estate is their job and negotiating contracts is their bread and butter.
If you don't trust your agent enough to listen to their advice, then maybe you should find another agent. Seriously.

Once you have your agent's blessing, go forth and lowball. It's apparently the hip thing to do.

Property Virgins

For me, watching home buying shows on cable when I get home from a long day of listing appointments, house showing, and contract negotiations, is probably the very last thing I want to do. Who wants to watch work after work? So when one of my clients, a first time home buyer, started talking about a show called "Property Virgins" a few nights ago, it was the first I had heard of it.

So, imagine my sense of deja vu when I was reading today's posts over at fivecentnickel and saw this:

"I was watching the show Property Virgins for the first time the other night, and I was shocked at what I heard on that show. Let me give you a rundown…
The buyer was a single woman who wanted the best quality in a house, but didn’t want to spend a lot of money. She knew exactly what she wanted and how much she wanted to pay, and she wasn’t willing to budge much on either issue.

The property expert seemed nice enough, and she was a saint for dealing with the opinionated buyer, but halfway through the show, she said something that stopped me cold. She had just shown the buyer a home that was brand new and had everything the buyer wanted. The problem? It was $40,000 more than the buyer wanted to pay.
The ensuing conversation went something like this. These aren’t exact quotes, but you’ll get the idea.

Expert: The price on this property is $240,000.

Buyer: What? I definitely can’t afford that!

Expert: That’s about $1700 a month, not including insurance and HOA fees.

Buyer: The insurance and HOA fees are extra? I really can’t afford that. This is what I want, but I’m not paying that price.

Expert: Well, there is another option. We can do a 35 year loan and bring your payments down to $1500 a month.

Buyer: That’s just so much money! I can’t take on that much debt! (I was cheering for her at this point).

Expert, talking privately to the camera: She’s only thinking about the big number here. She can easily afford the monthly payment. That’s what she should be looking at… Whether or not she can afford the monthly payment."

The writer of this post, Lynae from Being Frugal, is absolutely right to be horrified. Most of my first time buyers aren't looking anywhere near the price range described above and even then, I know that as little as $5,000 or $10,000 can put them over the edge. If you're working with a buyer's agent (and hopefully you are) and you feel your agent is pushing you to view or buy properties that are out of your financial comfort zone, you might want to first confront your agent. Be very clear about how much you have been approved for by your lender and/or what you are comfortable borrowing. Just because you qualify for $200,000 doesn't mean you have to buy that much house on your first time out. If, after talking to your agent, you feel like you are still not being heard, it may be time to find a new agent.

And what about "only thinking about the big number"? What else are you supposed to think about? That's why they call it the bottom line, fool. It is absolutely essential to consider HOA fees and property taxes when calculating the monthly payment for a property.

Take property tax. In Knoxville, for example, if your new $100,000 home is only in the county, and you're taxes are roughly $600 per year, that's $50 per month added to your payment. But if your home is in the city as well as the county, you're going to have roughly double that amount, meaning you're going to be adding roughly $100 per month to your payment.

HOA fees , especially for condos, vary widely in our area and what you get for that money also varies widely. I've recently been looking in the $100,000 range with the above-mentioned first time buyer, and HOA fees for those properties range from $50 per month to almost $200 per month. Paying an extra $200 per month, in addition to the property taxes, on a $100,000 home is a pretty big pill to swallow.

As I've said before, a home is one of the biggest investments of your life, so ask as many questions as you need to up front. And educate yourself. The rest of Lynae's post brings up some very good points for first-time homebuyers to ponder before they buy.

As for me, I'm going to continue to watch all of my CSI-like forensics shows after work and let all the forensics people watch the home buying shows.

First Time Homebuyers, Think For Yourselves! fivecentnickel.com