Debt-to-Income Ratio Affects Approval & the Interest Rate

Debt-to-Income ratio is a tool that lenders use to qualify buyers for a mortgage and is an important factor in determining loan approval.  It provides an indication of the amount of debt that a potential borrower is obligated to in relation to how much income they have.

Total monthly debts are determined by adding the normal and recurring monthly debt payments such as monthly housing costs, car payments, minimum credit card payments, personal loan payments, student loans, child support, alimony, and other things.

By dividing the monthly income into the monthly debt, you arrive at a percentage of the monthly income.  Lenders actually look at two different ratios commonly called the front-end and the back-end.

The front-end ratio is the proposed total house payment including principal, interest, taxes, insurance, mortgage insurance if required, and homeowner association fees.  Lenders generally don't want these expenses to be more than 28% of the monthly gross income. 

The back-end ratio includes the same items that are in the front-end ratio plus any other monthly obligations like the ones mentioned earlier.  Lenders prefer to see this ratio not to exceed 36% of monthly gross income but some lenders may extend that to 43%.  Borrowers obtaining an FHA mortgage might also be allowed an even higher back-end ratio.

If a borrower had $8,000 monthly gross income, their proposed house payment should not exceed $2,240 or 28% of their monthly gross income.  Then, their house payment and monthly debt should ideally not exceed $2,880 or 36% of their monthly gross income. 

For the sake of an example, let's say that their monthly debt was $900.  That would only leave $1,980 for the maximum house payment.  The monthly debt became a limiting factor affecting the house payment.

In addition to determining whether the buyer qualifies for the mortgage, it could affect the interest rate.  Having good credit and having the proper ratios can result in being approved for a mortgage.  On the other hand, if the debt is on the upper side of an acceptable range, the lender may charge a higher interest rate for the addition risk of a marginal borrower.

While the math is not difficult to come up with your ratios, it is not necessarily a do-it-yourself project.  A trusted lending professional can assess your situation and give you an accurate picture of what price home you can afford and the rate you can expect to pay.

Both things are important to know before you start looking at homes and especially before you contract for one.  All lenders are not the same.  Call me to get a recommendation of a trusted mortgage professional who specializes in the type of mortgage you want. Download this FREE Buyers Guide. 

Buyer's Closing Costs

Ideally, each party will pay their own closing costs associated with the purchase and the sale of a home, but they can be negotiable based on lender requirements and market conditions.

The fees are usually paid at the settlement and will be itemized on the closing statement.  Buyers should be aware of them before contracting for a home.  If a mortgage is involved, the lender will want to verify that the borrower has ample funds available at closing to pay for them.

Buyer's closing costs can range between two to five percent of the sales price.  The real estate agents should be able to give you an estimate of what a buyer can expect.  The most accurate estimate will come from the lender at the time the loan application is made. They may or may not include other fees that will be charged to buyers by the title or escrow company.

Buyers are required to be provided a standard Closing Disclosure form at least three business days before the loan closing date.  This document will include the loan terms, estimated monthly payments, loan fees and other charges.  This can be compared to the loan estimate provided by the lender when the application was made.

Fees connected to a mortgage

Loan origination fee ... This is the lender's fee for processing the mortgage application.  It can vary in amount but typically, it can be one percent of the mortgage amount.  It may be possible to negotiate this fee into the rate of the mortgage.

VA funding fee ... This is a fee charged to the veteran for closing the loan.  It can be paid in cash or rolled into mortgage.  The amount is based on the status of the veteran, their down payment and whether they have had a VA loan before.

Appraisal ... This is a fee paid for a licensed appraiser to determine the value of the property.  It validates that the mortgage will not exceed the purchase price and that the buyer has enough down payment based on the type of mortgage applied for.

Attorney fee ... This fee is charged to ensure that the legal documents are drawn properly so the lender will have an enforceable mortgage.  It is not for legal representation of the buyer.

Discount points ... A point is one percent of the mortgage.  These fees are considered prepaid interest and can be used to adjust the interest rate on the mortgage.

Lender's title insurance ... This coverage insures that the lender has an enforceable lien from title claims on the property.  This policy is usually issued in connection with an owner's title policy and is priced separately.

Mortgage insurance ... Most loans made in excess of 80% of loan to value require mortgage insurance to protect the lender from loss if the property must be foreclosed on.  There is no mortgage insurance requirement on VA loans. FHA mortgage insurance premium has two parts.  There is an up-front charge of 1.75% of loan amount and then, a monthly amount which is added to the payment.  Conventional loans usually collect the first month's premium in advance and subsequent amounts are rolled into the mortgage payment.

Recording fees ... These are fees that are for filing the legal documents with the municipal or county recorders.  The documents would include the mortgage and the deed.

Survey fees ... This fee is necessary, based on requirements of the lender, to verify property lines, shared fences and driveways and to identify any other encumbrances.

Underwriting fee ... This is a separate fee that covers the research and determination that the entire loan package meets the lender's requirements.

Fees required by mortgage for escrow account

Property taxes ... Lenders can require two to three months taxes to be held in escrow so that there will be enough to pay them in full 60 to 90 days before they are due.

Property insurance ... Insurance is paid in advance and the annual premium will be due at closing.  The lender further requires one additional month's amount so that one month prior to the anniversary date, the premium can be paid for the renewal.

Flood insurance ... The lender may require flood insurance on the property based on their assessment of the location in a flood zone or proximity to a flood zone.

Fees connected to purchase of a home

Settlement fee ... This is the buyer's portion of the fee paid to the title or escrow company, or attorney who handles the closing of the sale.

HOA Fee ... Home Owner Association fees are usually paid in advance by the owner.  They are prorated at closing for the amount paid that the seller does not benefit from.

Owner's Title insurance ... This coverage insures that the buyer, the new owner, received clear and marketable title from the seller.  It will protect the new owners' interests should they be challenged.  Even though it may not be required, it is recommended.

Pest inspection ... A pest inspection by a licensed exterminator can be required by a buyer to determine if there are active termites or termite damage, dry rot or another pest infestation.

Property inspection ... A home inspection conducted by a professional can be required to determine structural integrity of the property as well as all the systems in the home.  It can include but not be limited to plumbing, electrical, roof, heating and air conditioning, appliances and other things.

Title search ... Sometimes, title companies waive this fee when an owner's title policy is issued.  It can be customary that a separate fee is charged in addition to the premium for the title insurance.

Transfer taxes ... When government taxes are required, these fees must be collected.

The Consumer Financial Protection Bureau is a U.S. government agency that makes sure banks, lenders and other financial companies treat the public fairly.  You can download a Closing Disclosure Explainer from their website.

Where Did the Assumptions Go?

Mortgage assumptions have not been a practical matter for the last 30 years because mortgage rates have been on a steady decline.  Even if the seller had a rate lower than the current rate, the new purchaser must qualify to assume the loan. 

In the case of conventional loans, the lender has the right to increase the rate to the current rate which neutralizes the reason for assuming the loan.  This change took place in the early 1980's when lenders added due on sale provisions so lower rates could not be assumed.

FHA and VA loans can be assumed at the existing rate with the provision that the purchaser qualifies for the loan.  This could be an advantage if the rate on the loan to be assumed was lower than the current mortgage rate for FHA or VA and the buyer is going to owner-occupy.  Unfortunately, investors are prohibited from assuming FHA and VA loans.

Besides the obvious advantage of a lower rate which would have a lower payment, the closing costs are lower on an assumption than originating a new loan.  Another benefit is that the loan will be further into the amortization schedule than starting a new 30-year loan which means it would be retired sooner while the equity is also growing faster.

The current rates are close to one-percent lower than they were a year ago, so, assumptions are probably not a method of financing a home purchase in the near future.  The Freddie Mac forecast expects rates to remain low, possibly at a yearly average of 3.0% in 2021. 

Mortgage rates have remained low since the Great Recession even though experts anticipated they would start trending upward.  If rates increase, especially rapidly, assumptions of FHA and VA loans could easily be a tool that buyers and real estate professional alike will be employing.  For sellers with an assumable loan at a below market rate, it could add to the value of the property as well as the marketability.

Vacation Home Sales Up 44%

Vacation home sales are up 44% year-over-year according to the National Association of REALTORS® based on sales during the July to September period.  Not only are the number of units up, but they are also selling faster than in previous years.

On a national basis, 72% of existing vacation homes closed in October were on the market for less than one month.

The increased desirability and affordability of vacation homes, according to the National Association of Realtors, seems to be influenced by the pandemic and low mortgage rates.  The ability to work from home seems to be contributing to this increase. 

Freddie Mac reports the average commitment rate for a 30-year, conventional, fixed-rate mortgage decreased to 2.83% in October compared to the aver commitment rate for all of 2019 which was 3.94%. 

There may also be a safety factor involved with these decisions to purchase vacation or second homes.  Contagious diseases flourish more in highly populated areas like big cities and suburbs. The locations of the vacation or second homes are generally in areas with less residents.

The slower pace from the city may also add to the appeal of considering second homes.  Proximity to the mountains or water, whether it be the ocean, rivers or lakes, have become a lure to people who realize that if where they work doesn't matter, they can select a place where they want to be.

Historically, Americans on the east coast left the cities during the 1793 yellow fever epidemic.  The same migration took place in the mid-19^th century during three waves of Cholera and Scarlet fever. 

Trends have yet to determine whether some of these new vacation home buyers may consider moving permanently or may reconsider the decision after the pandemic.  Currently, it does have broad-based appeal and offers a lot of flexibility to owners who can afford it.

Home Inspections

A home inspector is another key professional involved in a real estate transaction.  Many times, the sales contract will have a provision that allows the purchaser to have inspections made to discover issues that are not readily apparent or have not been disclosed by the seller.

It is important to have a qualified individual perform the inspection.  Regardless of whether a license is required, buyers should ask about the inspector's experience, training, years in business and if they are familiar with the area and type of property involved.

Membership in professional associations can indicate an inspector's commitment to education and training.  References from both customers and agents are helpful and may be more meaningful.  You are encouraged to call the references, especially, if you are concerned about any specific areas.

Errors and Omission insurance is intended to cover mistakes made during an inspection.  It would be good to find out if the inspector has this type of insurance and how mistakes are handled or if omissions are made.

Find out exactly what is included in the inspection and what will trigger the inspector to recommend that you get an opinion by a specialist.  They should be able to provide you with a sample report so you can see the detail with which the items will be explained.  Ask if items that need attention will also be documented with pictures.

Some inspectors will allow you to accompany them during the inspection.  They will be able to point out their concerns and answer any questions you may have about different things.  An inspection can take two to three hours depending on the size of the property.

Generally, there is a time allotted in the sales contract for the inspections to be made and not completing them in a timely fashion could waive your right to use the contingency.  Your real estate professional will be able to guide you through this process.

First Things First

If you are making a particular meal for the first time, it is essential to have a recipe so that it turns out the way it should.  Knowing the ingredients and preparation can guide you through the process.

Buying a home is really no different than making a new recipe.  There are certain things that need to be done, many of which should occur in a particular order to save time, money, effort and disappointment. 

Your first inclination may be to start searching the Internet for homes and schedule some showings or possibly visit open houses.  Even though this is very gratifying, it shouldn't be done until you have gone through the preliminaries.

Buying a home for the first-time implies you haven't been through the process before and even though, you may have a rough idea of what needs to be done, selecting the right agent in the beginning will give you the benefit of years of personal and professional experience that can help you avoid some of the common mistakes made when buying a home.

This agent can direct you to find the other team members that are required like the lender, title company, inspectors and others.  Each member of the team has an important role to play that if not done correctly, could cause delays and possibly, jeopardize the transaction.

An important step is getting pre-approved so that you'll know exactly what price mortgage and home you'll qualify for.  This may even allow you to lock-in a mortgage rate before you contract for a home.  The pre-approval could also prove very helpful in negotiating with the seller by removing some of the doubt in their mind regarding an unknown buyer.  Another advantage to pre-approval is that if you are competing with multiple offers, you have the advantage of being more of a known commodity.

You'll need to assemble some documents for the lender including pay stubs from the past two months, W-2's from last year, proof of additional income, tax returns for the past two years, bank statements for the last three months, list of all open credit accounts and balances, copy of driver's license and history of residence for past two years.

Buying a home is one of the most important decisions in your life and it should be done with care and research.  When all the things are done in the right order, finding the "right" home is just like following a recipe.  For more information, download this Buyers Guide that includes great information to help you through the process.

More Time at Home

We are all spending more time at home and will probably need to continue to do so for a while longer.  Depending on the makeup of your family, your home is now a home office, a gym, a virtual classroom and considerably more meals have been prepared in your kitchens in the past six months than normal.

Some businesses have undergone a metamorphosis that has shown them that maybe they do not need the big commercial spaces for their employees.  They realize that they can be just as productive with their work force offsite which will cut expenses.

If this scenario sounds familiar, it may be worth exploring what moving would look like for your situation.  To analyze the options, you will need to know what your home is worth and what the net proceeds will be after selling it.

You will need to know what homes are available with the amenities you are looking for together with the prices and mortgage money.  Depending on the interest rate on your current mortgage, there may not be much difference in payment for a larger mortgage at today's incredibly low rates.

Another option that some homeowners are considering is to not reinvest all the proceeds from the sale of their existing home into the new home.  They are reserving some of the cash as a contingency fund for the unexpected. This strategy is providing peace of mind in uncertain times.

It is said that an investor is faced with three decisions every day: buy, sell, or hold.  The equity in a home represents, for most people, their largest investment asset.  While it is an asset, it is also an amenity.

Prudential thinking would insist on protecting your investments, but it would also suggest that you would evaluate alternatives to avoid missing opportunities.  Having the facts available will make the options clearer and possibly, the decisions will become obvious.

We are available to help you assemble the information you need to consider what is best for you.

Cutting Your Housing Costs in Half

Cutting the price will generally bring buyers of anything out of the woodwork that were not serious before.  Some renters could easily lower their monthly cost of housing by half or more by purchasing a home with all the financial benefits that come with it.

The most obvious thing in today's market is that the mortgage payment could be less than the rent the tenants are paying.  With mortgage rates hovering around 3%, this is a major factor of the savings.

The two other major contributing factors are appreciation and amortization of the mortgage, neither of which benefit tenants continuing to pay rent.  According to the FHFA House Price Index, home prices rose 5.4% from July 2019 to July 2020.  There were 400,000 less homes on the market during the summer of 2020 than the previous summer which is influencing appreciation.

With each payment a homeowner makes on their mortgage, a portion is used to reduce the principal amount owed.  This is like a savings account for the owner because it lowers their unpaid balance and increases their equity.

The equity becomes an asset that can be accessed by doing a cash-out refinance or a home equity line of credit once the equity has reached 80% loan-to-value.

A $300,000 home purchased with an FHA loan at 3% for 30 years would have a payment of approximately $2,013 including principal and interest, taxes, insurance, and mortgage insurance premium.  If the tenant were paying $2,400 in rent, this would be a savings of almost $400 a month.

The monthly principal reduction would average $500 a month for the first year which would lower the net cost of housing.  The other major item to consider would be the appreciation.  Assuming, in this example, the home was appreciating at 3% annually, the monthly appreciation in the first year would be $750 which would further lower the cost of housing.

Rent	$2,400
Total House Payment	$2,013
Less Monthly Principal Reduction	$513
Less Monthly Appreciation	$750
Plus Estimated Monthly Maintenance	$200
Net Cost of Housing	$950

 

In this example, it would cost over $1,400 per month more to rent than to own.

A different approach to this would be that the equity in this home in seven years would be $121,579 based on appreciation and principal reduction.  If the same person continues to rent, there would be no equity build-up.

If you're curious as to how much you could cut your housing cost, go to the Rent vs. Own or contact your real estate professional.

Some Mortgage Interest May Not be Deductible

Banks are concerned about making loans that will be repaid not about making loans that are tax deductible for homeowners.  It is good business for the bank but how is the homeowner supposed to know?

Most homeowners and potential homeowners are aware there are tax benefits associated with ownership.  For instance, mortgage interest and property taxes have been deductible expenses from federal income tax since it was enacted in 1913. 

The current law provides that homeowners can deduct the interest on Acquisition Debt which is the amount of debt incurred to buy, build or improve a first or second home up to $750,000.  The amount of acquisition debt decreases as payments are made and it cannot be increased unless the additional funds borrowed are used for capital improvements.

It is not uncommon for a homeowner to refinance their home for any number of reasons.  It could be to get a lower interest rate that would lower the payments or remove mortgage insurance.  However, when additional funds are borrowed for reasons beyond "buy, build or improve", the excess is considered personal debt and the interest is not deductible according to IRS.

Maybe this is not important if the owner is taking the standard deduction because it is higher than the total of the property taxes, qualified mortgage interest and charitable deductions made by the taxpayer.  Currently, it is estimated that 90% of homeowners are electing to use the increased standard deduction implemented with the 2017 Tax Cuts and Jobs Act. 

A confusing issue that occurs at the end of the year is when the lender reports to the borrower the amount of interest that was paid.  While that amount is most probably accurate, the bank doesn't know if it is qualified mortgage interest for the borrower. 

It is the responsibility of the taxpayer to keep track of outstanding acquisition debt and whether part of the balance is considered personal debt.

Another area where it could become important is if the property was lost due to foreclosure, deed in lieu of foreclosure or a short sale.  The provisions of the Mortgage Forgiveness Act have been extended through 12/31/20 which exempts the forgiven debt from being considered income and therefore taxable.  However, it only applies to acquisition debt.  Any part of a mortgage refinance that is considered personal debt could be taxable in that situation.

As an example, let's say that homeowners originally borrowed $300,000 to purchase a home that they owned for 15 years.  During that time, the home appreciated significantly, and they refinanced it twice.  Once, they made some improvements and took out cash to pay off personal loans and the second time, it was only a cash out.

Original acquisition debt	$300,000
Remaining acquisition debt including improvements	225,000
Unpaid balance on current mortgage	$550,000
Personal debt	325,000

 

In the example above, the personal debt of $325,000 would be considered income on foreclosure and recognizable as income on that year's income tax return.

If you have never refinanced your home or have refinanced it but never taken any money out of it except to make capital improvements, your unpaid balance in most likely acquisition debt.  However, it you have refinanced your home and pulled money out of it for purposes other than capital improvements, those funds may be considered personal debt.

This article is for information purposes.  If you are unclear about the current acquisition debt on your home or need advice for your individual situation, contact your tax professional.  Additional information can be found in IRS Publication 936, Home Mortgage Interest Deduction.

Seven Questions to Ask Before You Choose an Agent

The concern today when putting your home on the market should not be whether you'll get a contract; it's whether you are going to recognize the majority your net proceeds without any unnecessary delays.

What you realize from the sale of your home has to do with maximizing the sales price while minimizing the sales expenses.  Interestingly, the buyers will be trying to minimize the price they have to pay for your home and possibly, have you pay some of their expenses.

Taking a few pictures with a cell phone and putting a sign in the yard may be enough to get a buyer but successfully selling a home in today's market requires expert marketing and expert negotiations. 

Marketing begins with the preparation of the property to optimize the first impressions it makes to potential buyers.  A skilled professional can make recommendations that can help the home sell for the most money and in the shortest amount of time.  Cleaning, painting, depersonalizing, removing unnecessary items and possibly staging are a few of the recommendations you might receive.

93% of buyers rely on the Internet to search for properties and information and is something they engage even before they find an agent.  Positioning the home so it only can be found effectively in the search is making it appeal favorably and requires careful consideration.

Professional-level photography will make the property look appealing.  Experience knowing the right angles, the proper lighting, and having the right lens are only a few of the things can make a property stand out from the competition.

Negotiations plays a huge part in the sale of any home.  There will be negotiations during the offer/contract stage with the buyer and the other agent.  After that, there may be negotiations regarding inspections, repairs, the appraisal, or anything that might threaten the ultimate closing.

The following are seven questions that you can ask when interviewing an agent to market your home.  The answers should help you evaluate and select an agent who can represent you and your interests.

1. Do you use a professional photographer?
2. Have you sold homes in this area recently?
3. Explain your timetable for preparation, "going live" and market exposure.
4. Describe your efforts during the negotiation process.
5. Do you have a pricing analysis, showing actives and solds, for my neighborhood?
6. Which properties will be our strongest competition?
7. How do you get the most exposure to get competing offers?

On the surface, it may appear that all agents are the same.  They are all be licensed to sell real estate and can put your home in the MLS for other agents to find.  Experience and skill sets can vary widely among agents and the questions provided in this article can help you determine who can do the best job for you in today's environment and the market your home is located.

Four Things Sellers Should Do Before the Sign Goes in the Yard

Just like buyers should be pre-approved before they begin to look at houses, Sellers should have their home pre-approved.  The reasons are similar: appeal to the "right" buyers, discover issues with the home early, improve marketability, increase negotiations position and close quicker.

For the seller, there are few things that need to be done before the sign goes in the yard and definitely before prospective buyers see the home.  The first is to understand that once you decide to sell the home that it needs to appeal to the broadest base of buyers and that means depersonalizing your home.

Once the home is sold, you will need to pack your things for the new home.  Think of this as starting the process early.  Get moving boxes and make decisions on what you intend to give away or discard in each room and closet.  Identify and pack those items before the home goes on the market. This will be the first wave of making your home more marketable.

When your home hits the market, it needs to be a neutral commodity and not "your" home.  A good rule of thumb is to remove items that involve religion, hunting and sports.  That means removing personal items like family photos or collections displayed in the room.

Next, in round two, go through every room to remove the items that make too large of a statement or take up too much room.  Pool tables may be appropriate in a game room, but they are not in a dining room or a living room.

Personal collections may have taken you years to accumulate and you're proud of them but the people who come to see your home will either not appreciate them or they will become distracted by looking at them instead of the home.  The livability of your home needs to be the focal point.  The buyers need to visualize themselves living in the property that will become "their" home.

The four most important rooms to address are the primary bedroom, kitchen, living room and dining room.  These rooms have a major influence on buyers when determining whether "it is the right home."   Bright colors, possibly used as accent walls, should be neutralized. 

After you have depersonalized the home and removed non-essential items that could make the rooms or closets look small, you might want to consider another technique referred to as staging.  Rearranging furniture so the room shows to its best advantage is simple and doesn't cost a thing.  You might decide that a coffee table or statement piece would be nice and your REALTOR® or stager can suggest a place to rent it rather than buying it.

Once the home is depersonalized and staged, you are ready to have a professional photographer take the pictures that visually describe your home to potential buyers long before they ever look at the home physically.  These will be used on websites, portal sites, MLS, and social media.  Anyone with a point and shoot camera thinks they are a photographer but a pro with the correct wide angle lens, who understands lighting and has an "eye" for what makes a great picture is worth every dime you'll spend.

One more consideration should be to have the home inspected before it goes on the market.  It won't replace the buyer's inspections but it will discover any items that need repair and they should be done before the home goes on the market.  This will probably save you money because it might cost less to repair them than they'll want in second round of negotiations when their inspector finds it.

Another benefit is that if their inspector identifies a problem area that your inspector did not, you have a basis for legitimate disagreement that could just be personal opinion instead of a "fact."

While the process of depersonalizing should take part before you put the home on the market, you'll want you have the benefit of your real estate agent's experience to help you with the process.  At age 18, a person can expect to move nine more times but by age 45, they may only expect to move another 2.7 times.  Your REALTOR®'s experience can be valuable not only in saving your time and money but actually, make the difference in a successful sale.

Selling or Buying Smart Homes

More and more homeowners are employing smart home technology within their homes.  It may start with a video doorbell or lights and progress to other devices.  The smart-home device market is rapidly growing and Forbes research expects it to grow from $55 billion in 2016 to $174 billion in 2025.

The popularity of these high-tech features will require a few additional steps to consider when selling a home.  The seller should determine which items will and will not stay with the sale of the home and identify them in the listing agreement.

Confusion can arise when a home's marketing mentions its smart-home technology and is unclear if a piece like the hub, which is easily considered personal property but is integral to the working of the system.  Some might consider it an accessory and others a component.

A smart home can contain multiple technology devices connected to the Internet that allow them to be controlled or accessed from computers, tablets or most commonly, on mobile apps.  Many of the devices can also be accessed through a hub like an Amazon Echo or Google Home.

Thermostats and lights may have been some of the first such devices but the video doorbells added a new level of WOW factor by being able to see and talk to the person at your door and even get a video recording.  Porch pirates are now seeing their images on social media caught in the act thanks to these devices.

Homeowners sometimes start with one item like a smart sprinkler system control.  When they find out how cool it is and that it actually saves them money not to mention how convenient it is, they starting planning their next smart-home device purchase.  Some of these items absolutely are permanent and become real property and others, border between personal and real property.

If the seller is including smart devices with the sale of the home, they should have administrative access and any personal information removed and return the devices to the default settings.  The seller should also review the privacy settings and delete the permissions for their personal mobile devices.  For the benefit of the buyer, any manuals or warranties should be left for the new owner.

Equally as important, the buyer should verify that the smart devices have been returned to their factory settings and no longer coupled with the seller's mobile devices.  The buyers can create their own account to register the devices in their name.  Then, as security updates are available, they will be notified.  At the same time, the buyer will want to create new access codes and preferences.

Alternative Investments

In a recent article, The Wall Street Journal reported that investors have rarely been this flush with cash.  The economic uncertainty due to the pandemic and the volatility of the stock market has caused assets in money-market funds to increase to approximately $4.6 trillion, the highest level on record according to Refinitv Lipper.

The question becomes should an investor be "out of the market" until things settle down or should they seek to find alternative investments to produce satisfactory results.  Even in the middle of this uncertainty, residential rental property has been a stable performer.

Rents are continuing to increase along with values.  Investor mortgages are available at 80% loan-to-value at fixed interest rates for 30-year terms.  Most other investments must be purchased for cash or at best, are limited to low loan-to-value loans, at floating interest rates for relatively short time frames.

The use of borrowed funds, especially at today's low interest rates, contribute to the rate of return and in some cases, increase it.  This characteristic is known as leverage.

Income properties enjoy specific tax advantages like long-term capital gains rates lower than ordinary income rates, standard depreciation, which is a non-cash deduction, as well as expensing many big-ticket items in the year purchased.

Tax deferred exchanges are available for investors wanting to avoid the tax due on sale and defer the profit into the replacement property.

One of the most cited reasons people invest in rental homes is that they feel they are more in control.  They understand a rental home because it is the same type of property and requires the same maintenance as the home they live in.  They can make the decisions to improve it, repair it, what rent to charge and when to sell it.  For most owners, a home represents their largest financial asset.  That familiarity becomes a natural bridge to decide to invest in rental property rather than something they are less familiar.

If you'd like to know more about the benefits, download the Rental Income Properties guide and call me at (215) 641-2500 to discuss what kind of opportunities are available.

Smart Sprinkler Controller

It seems like most homes have sprinkler systems and if they do, they have some form of controller to automatically turn the water on and off for the time and days you feel necessary.  It seems like basic functionality and if it isn't broken, you may not feel the need to replace it. 

Today, there are so many smart home devices that are not only convenient, but they'll end up saving you enough money to pay for the upgrade.  There are different manufacturers, but you should at least consider the Rachio if for no other reason than the easy installation procedure. 

The process is simple.  Unplug the old controller and disconnect the wires being sure to label which wires went to which stations.  Using the Rachio template, mark three spots on the wall, drill holes in the drywall, insert the anchors into the holes and screw the new controller to the wall. 

This model has convenient wire connectors that do not require crimping a wire around a screw.  It is quick and easy to put the numbered wires in the corresponding slot.  The directions are simple and easy to follow.  When complete, connect the power source and plug it into a wall socket. 

Now, install the Rachio app to your phone and continue following the instructions to connect the controller to the Wi-Fi.    In minutes, you'll be sitting in a lawn chair making adjustments and seeing what it will do. 

Some of the features you'll find very convenient are the multiple schedules that can be created and easily switched from one to another.  As you set up each zone, you can take a picture of the area and be able to identify with a glance which area you want when individually selecting one. 

Another thing you might like is that when you're trying to track down a broken head or just need to adjust it, you can turn on a zone from your phone while looking at the yard.  When you identify which head is the culprit, turn the water off from your phone, make the adjustment or repair and turn the water back on to test it without having to go back and forth to wherever your controller is located. 

Rachio will even monitor the weather to skip a scheduled cycle in case of rain, high wind or freezing temperatures.  You could literally be anywhere in the world where you have an Internet connection and you'll be able to adjust your watering cycle.  This device really does save time and money while being fun to operate. 

How Does It Measure Up?

People are always looking for a "down and dirty" way to determine the value of a home and square footage seems to be one of the most common things used by people whether they are buyers, sellers or real estate agents.  While it seems straight forward, there are several variances that can lead to inaccurate determinations.

The market data approach to value uses similar properties in size, location, condition and amenities to compare with the subject to arrive at a price.  Differences in any of these things can affect the price per square foot.  Appraisers are trained and licensed to make these adjustments but the differences are not necessarily objective and that is where opinions start to influence the value.

Even if a person were to make accurate adjustments, they would be based on the assumption that the square footage of the comparable properties is correct.  That leads to the next area of concern: how was the subject property measured.

It is commonly accepted to the measure the outside of the dwelling on detached housing.  Is it customary in this area to include porches and patios under roof and if so, do they get full value or only partial value?  Is there any value given to the garage since it isn't living area?  What about other areas that do not have HVAC coverage?

Some areas don't give consideration to basement square footage at all.  Others might give some value if it is finished or has access directly to the outside like a walk-out basement.  Similarly, attic space could be finished and under HVAC but if the ceiling height is not standard for the home, it may not receive value.

The problems become exacerbated when different comparables are not treated consistently and yet the common denominator ends up being an average of the square foot price of each.   This is calculated by taking the sales price and dividing it by the number of square feet being quoted.

The source of the square footage should be listed to help determine the accuracy.  It could be what the builder said it was to the original purchaser.  If there is a set a plans available, that might seem credible but it is not uncommon for the builder to make changes while the home is being built which could increase or decrease the square footage.

Another source is the tax assessor.  In many cases, they don't actually measure the home but take the word of the builders or appraisers for it.  If permits were obtained to add on to the home since it was built, it should be reflected in the square footage.  However, sometimes permits are not secured properly.

After reading this, you may think that more doubts have been introduced than solutions and you are correct.  It takes diligence on the part of all parties to determine the correct amount.  The most highly trained person will be the appraiser and they should be measuring the home in its "as is" condition but understand that even a competent person can inadvertently make a mistake.

It's Worth Digging a Little Deeper

There are hundreds of thousands of people who believe, for one reason or another, they cannot afford to buy a home currently.  Some people  may not for any number of reasons but it would be very surprising to know how many who can buy but have gotten some bad information along the way.  It's worth digging a little deeper to find out the facts.

John and Karen have been renting a home for the last five years at $2,000 a month.  During that time, the value of the home they were renting went up by $30,000 in value while the unpaid balance decreased by $18, 400.  Even though they were fortunate enough the rent remained constant over the five years, they missed out on close to $50,000 of equity that the owner realized instead of them.

Another thing to consider with today's low interest rates, it is quite common for a mortgage payment to be lower than a tenant is paying rent for a similar property.  So, in this example, John & Karen paid more to rent than a house payment would have been and missed out on the equity build-up that occurred due to appreciation and amortization.

The simple fact is when tenants like John and Karen pay their rent, the landlord is the beneficiary of the rent received as well as the equity earned.  Over time, the rent paid by John and Karen and other tenants will pay for the landlord's rental.  It a great concept and a good investment.

True, not everyone can afford a home.  A buyer needs money for a down payment and closing costs.   They also need to have income and good credit to qualify for the mortgage.  Some of these may seem insurmountable but instead of imagining that buying a home is not in the cards at the current time, talking to a real estate professional is a better route to take.

There are lots of low-down payment mortgages available including 100% financing for qualified veterans and USDA eligible buyers.  It is sometimes more difficult to find sellers willing to pay all or part of a buyers closing costs when inventory is low, but lenders do allow it.  It is a matter of finding the willing seller.

The source of the down payment could be a gift from a family member as long as there is no repayment expected.  It's amazing how many parents or grandparents might be willing to help a relative get into a home.  Funds for a down payment may be available as loans or withdrawals from qualified retirement programs like IRAs or 401k plans.  It's worth investigating based on what retirement programs you have.

Good credit is necessary to qualify for a loan but buyers should not assume that theirs is not adequate.  A trusted mortgage professional can assess a situation and may be able to suggest some things that will not only raise the score enough to be approved but possibly, even raise the score enough to qualify for a better interest rate.

There are a lot of misunderstandings about whether a person can or cannot qualify for a home at this time.  Instead of relying on second hand information or something that might be floating around on the Internet, spend some time with a real estate professional who can give you the facts, assess your situation and if necessary, point you in the right direction to get help from a trusted mortgage professional.  Call (215) 641-2500 to schedule an appointment where we'll help you dig deeper to determine whether you can buy a home now.

Download our Buyers Guide to give you more information.

Grilling Safety

More people grill in July, June & August than any other months and correspondingly, there are more injuries, as well as fires, due to grilling accidents in those months. Even though Labor Day is in September, we still need to be aware of safety.

Close to 20,000 patients per year visit the emergency room due to injuries involving grills.  Approximately half of the injuries involving grills are thermal burns.  If you are around fire, there's a chance of getting burned. 

About 2/3 of American households own at least one outdoor barbecue, grill or smoker.  Interestingly, gas grills contribute to more fires than charcoal grills.  In addition, there are over 10,600 home fires started by grills each year.

While grilling is associated with celebrations, good food, fun and friends, it is important to make sure that accidents don't interrupt your activities. 

• Only use BBQ grills outdoors and in ventilated areas
• Place the grill away from home or anything that could be flammable
• Keep grill stable
• Keep fire under control
• Keep children away from grill
• Never leave the grill unattended
• The grill lid should always be open before lighting it.
• Grease should not be allowed to build up in the grill
• Use long-handled utensils

Gas/Propane

• Check the tank hose for leaks before using it for the first time each year by using a light soapy water solution to see if bubbles appear.
• You should not smell gas when the grill is lit.  Move away from the grill and call the fire department.
• If the flame goes out, turn off the gas for 15 minutes and open the lid before re-lighting it.

Charcoal

• Never add any starter fluid or other flammable liquid to a fire
• Only use charcoal starter fluid and not gasoline, kerosene or other flammable liquid.
• Keep starter fluid away from heat sources and out of reach of children.
• Electric starters have a coil that ignites the charcoal.
• When finished cooking, close off the grill vents to suffocate the fire and save some of the remaining charcoal.

Practice safe grilling and enjoy any occasion to cook outdoors and share time with your family and friends.

Forbearance is Not Forgiveness

Forbearance is a temporary postponement of mortgage payments.  The lender can grant this option to a borrower instead of forcing the property into foreclosure.  The CARES Act provides protections for homeowners with mortgages that are federally or Government Sponsored Enterprise backed or funded such as FHA, VA, USDA, Fannie Mae and Freddie Mac.

A mortgage holder should contact the lender to explain the temporary difficulty they are having making payments and ask for relief under forbearance or other options.  Once the lender grants approval, it is important for the borrower to get the terms of the forbearance agreement in writing to be clear about when the payments will resume and how the missed payments will be recovered.

Generally speaking, homeowners in a forbearance plan will not incur late fees and it should not adversely affect their credit.  Unfortunately, borrowers must be vigilant to see that the lender is protecting them from delinquent credit marks according to their agreement.

Forbearance is easy to receive but not so easy to recover from.  Free credit reports can be obtained on a weekly basis until April 21, 2021 at www.AnnualCreditReport.com.  Reports are available from Experian, Equifax and TransUnion.  This will allow borrowers to monitor whether the lender has inadvertently reported items inaccurately.

Prior to the end of the forbearance period, borrowers should contact their loan servicer, the company that accepts their payments.  Review the terms of the forbearance plan and expectations for repayment.  Verify the unpaid balance and that there are not any payments marked as late or delinquent during the forbearance period.

One more item to discuss with the loan servicer is the payment of the property taxes and insurance.  Since multiple mortgage payments may have been missed and most payments include 1/12 of the annual amounts for these items, there may not be enough to pay for them when they become due.

Since it is estimated that there are over four million borrowers in forbearance currently, it may be difficult to talk to the servicer but starting the process early and being persistent will be helpful. 

At the end of forbearance, the borrower needs to resume regular payments and establish a plan with the lender to repay the missed payments.  The terms are negotiated between the borrower and the lender.

One way is through a loan modification which can restructure the loan.  In some cases, it would add the missed payments to the loan balance and recalculate the payments for the remainder of the term. 

A borrower could pay the forbearance money in cash but the practicality of that is not realistic.  If the person couldn't make the payments during forbearance, they probably don't have the liquidity to pay them afterward.  This option is entirely at the buyer's election.

Forbearance is a temporary way to postpone the mortgage payments with the understanding that you will be able to resume repaying the loan.  If the circumstances that caused the issue initially become permanent, then, other remedies must be considered.  If there is equity in the property, selling the home may be the way to materialize it for the homeowner.

Please contact us at (215) 641-2500 if you need to know what your home is worth and how long it would take to sell it.  We're happy to provide this information as a service without obligation so you can be aware of your options.

Three Reasons to Refinance

Three reasons to refinance a home include lowering the cost of housing, shortening the term of the mortgage to pay it off sooner or to using the equity to accomplish another purpose.

Replacing the mortgage at a lower interest rate, which is entirely possible in today's market, would reduce the payment.  On the other hand, shortening the term of the mortgage could make the payments increase but would allow the home to be paid for sooner.  In either case, the equity would not be reduced unless the refinancing costs were rolled into the new mortgage.

Refinancing the home to take money out would increase the mortgage on the property and lower an owner's equity; careful consideration should be made before doing so.

Mortgage rates are considerably lower than credit card rates and usually lower than short term borrowing like student loans or car loans.  For that reason, homeowners will sometimes refinance to payoff higher cost debt.

Some people refinance for more than their current balance to improve their cash position, possibly, to have funds available in case they need it.  Other reasons could be to use it for an investment such as rental property or other things.  Still others may use it to make capital improvements on their home like remodeling or a pool.

Another legitimate reason to refinance may be to combine a first and second lien on the home that might result in lower payments and a savings in interest. 

One more situation that causes a person to refinance a home is to remove a former spouse or co-borrower from the existing mortgage.  In the case of a divorce, a couple may no longer be married and one of the former spouses may have no financial interest in the home any longer but because they signed the note originally, they are still liable along with the other spouse.  This could be an untenable position.

There can be a lot of reasons that cause a homeowner to refinance the home.  The equity is a valuable asset that has powerful borrowing power combined with the good credit and income of the homeowner.  A Refinance Analysis can help you to determine the new payments and how long it will recapture the cost of refinancing.

For the recommendation of a trust lender, give me a call at (215) 641-2500.

Things Have Changed

The soothsayer in Shakespeare's Julius Caesar issued his famous warning "Beware the Ides of March."  Who knew that in 2020, around the middle of March, the world, as we knew it, would force such dramatic changes on us from the Coronavirus.

In America, it has brought our economy to its knees as we sheltered in place for over four months.  During this time, changes have affected our lives and many of those changes could be permanent.

Previously, smaller homes were becoming the trend for not only efficiency but upkeep so owners would have more time to do things including travel.  Now, travel is minimal and our world, in some respects, is reduced to our home.

For families with children, their home has become a school.  With so many people working from home, it has become our office or store or studio.  If there is more than one working adult in a home, it needs to have space for each party to work.  The home fitness industry is experiencing record sales in exercise equipment so the home can become a gym.

Since we're all spending more time at home, it is also the place to recreate.  We're cooking more; a larger kitchen and dining area would be nice.  We want to enjoy the yard, garden, pool or balcony and our current home may not even have them or we'd like to upgrade. 

People are wanting and needing more space to do all of these things at home.  Many experts are anticipating that these changes we thought were temporary may be part of the new normal even after a vaccine and cure have been discovered.

If you have had any of these thoughts and would like to know more about how to buy or sell a home in our current market, we would love to tell you about the many options available while being responsible to stay safe.  Whether it is buying for the first time, moving up or moving on, I would like to help.  Call me at (215) 641-2500.

Do you like to negotiate?

Whether you like to or not, buying and selling a home involves negotiation at all stages of the process.  It is not like the retail world where once you decide to purchase, you pay the price.  It is easily the most expensive purchase or sale that most people experience and emotions get involved that could affect the negotiations adversely.

The word "home" by itself conjures up emotions and selling a home you've lived in for a while could even complicate things more.  A real estate professional can separate their emotions from the process to be able to help the one they are representing.

The price of the home, the type of financing and concessions, closing costs, personal property, closing dates and possession are just a few of the many things that can be negotiated in a contract.  Since the seller wants to get the most for their house and the buyer wants to pay the least, their objectives are diametrically opposed.

Even after the contract is signed, removing the contingencies can cause considerable negotiations.  The appraisal, the inspections or the repairs could be a source of reevaluating the terms and provisions of the contract.

Negotiating the sale or purchase of a home is a competition; for one person to get something, someone has to give something up.  If you don't feel comfortable with this, it is important to work with an agent who can bring their skills to the table on your behalf.  As your advocate, they can champion your position.

I'd like to share how my skills, training and experience can benefit you in a sale or purchase.  Call me at (610) 316-5524.

REALTORS Thoughts on the Recovery

The National Association of REALTORS® just released the Market Recovery Survey of a random sampling to close to 100,000 members conducted June 24-26, 2020.  The following statements are the members' opinion on various aspects of the recovery to the Covid-19 pandemic as it relates to real estate.

In response to the safety of buyers, sellers and agents, REALTORS® are expecting within the next year to have increased demand for the following technologies used to market properties:

• 67% - Zoom or other video technology to communicate with clients
• 66% - virtual tours
• 63% - live virtual tours conducted by agent using video
• 60% - virtual open houses

Nine out of ten respondents indicated that some of the buyers have returned to the market or never left the market.  Agents currently working with buyers report that slightly more than half of buyer's timeline has remained the same with about the same level of urgency.  27% believe the buyers have more urgency.

The most popular reason cited by buyers with an increased timeline is that the delay during the pandemic has amplified their demand for a new home.  Others realize that new home features would make their home life more comfortable.  Some buyers are wanting to buy before a potential second peak of Covid-19 occurs. 

During the week the survey was taken, three out of four buyers saw the home in person physically while 26% did not.

Roughly 2/3 of the buyers are looking for the same features as they were prior to Covid-19 while new feature considerations include home office, space to accommodate family, larger home for more space, place to exercise and bigger kitchen.

Most buyers are looking for the same type home, however, respondents reported that 13% are moving away from multi-family properties to a single-family home and only 1% are going from SFH to multi-family.

89% of respondents stated that some of the sellers have returned to or never left the market.  Only 23% reported more urgency to sell a home due to the pandemic.

On the commercial side, 2/3 of REALTOR® respondents felt like the demand for office space would decrease and 72% felt that retail space demand would decrease.

The stats mentioned in this article pertain nationwide.  To find out specifics in your market, call your REALTOR® Nancy Helfrich at (215) 641-2500.

Who Decides Value?

The seller can put a price on the home but the value is ultimately, determined by the buyer. Individually, a buyer could pay over market value because they love the location, or the elevation of the home or the proximity to something that is important to them.  The shortage of available homes resulting in increased competition among buyers could drive the value higher.

Most experts agree initially pricing it properly will generally result in the highest sales price.  If a home starts out too high, it could actually sell for a lower price after it has been on the market for a while.  It gives the impression that there must be something "wrong" with the house because it didn't sell immediately.  

So, how does a seller determine what price to put on the home?  It has nothing to do with what the seller needs to get out of it.  Nor does the price the seller paid for it make any difference now.  Even if the seller made considerable improvements, they may not affect the value of the home.

There are three common sources for a seller to determine market value: an appraisal, a broker price opinion or an automated value model found online.

AVM, automated value models, are mathematical estimates that analyze limited public record data to determine a value.  While this process can easily compare square footage, age, number of bedrooms as objective data, it is much more challenging to make adjustments for subjective data like appeal, quality of construction, floorplan and updating.  Zillow Zestimates are the most common AVMs but there are many others providing similar services.

Appraisals can only be made by a licensed appraiser.  Most mortgages require an appraisal as part of the underwriting process to verify that there is ample collateral to secure the mortgage in case of default by the borrower.  FHA, VA, FNMA, Freddie Mac and USDA as well as most private lenders require an appraisal especially for high loan-to-value mortgages.  In some situations where the risk is lower, some lenders may use an AVM.

An appraisal requires the appraiser to visit the property, perform a visual inspection, analyze the property considering three approaches to value and accurately report the property information that is verifiable.

Broker Price Opinion, BPO, as the name indicates, is a price opinion on a property made by a licensed real estate agent.  The determination of whether the estimate accurately reflects the market will depend on the experience of the agent with that type of property and market area.  It is possible that a BPO could be more sensitive to the actual market because it will consider homes currently for sale and recently expired properties as well as comparable sales.

While all three methods, used recent, comparable sales to arrive at a value, the appraiser and the real estate professional can make a series of adjustments for the differences in the comparables.  While the appraiser is highly trained in this technique, the real estate professional also adds credibility to this process based on their experience in how the buying public might react to specific features and the home in general including positive and negative influences.

Current condition of the property is very important for a number of reasons.  In some price ranges, a buyer may only have the necessary down payment and closing costs but is not able to make improvements like paint, floor coverings, appliances or other major items.  In this situation, a buyer would have to live with the house in its current condition until they could afford to make wanted improvements.

Investors may not be deterred by making an additional investment in the home after purchasing it but will probably be motivated to do so only if it will increase the potential profit to be made.

An AVM can be a tool that a homeowner, prospective buyer, mortgage officer, appraiser or real estate agent can use to get a quick idea of price but there are inherent limitations that can only be considered by personal examination balanced with experience in the market place.

Experience and understanding of the subject property and the marketplace are critical to having confidence that a value is accurate.  Any person could go through the same steps to arrive at a value but an experienced, well-trained professional is far more likely to assess all of the variables more accurately.  If you are curious what your home is worth, call (215) 641-2500 or email nancy@nancyhelfrich.com for a Broker Price Opinion.

Good Decision for a Second Opinion

You've done your homework, contacted a mortgage company and believe you are pre-approved.  That part of the process is finished and you can concentrate of finding a home and moving...or can you?

Pre-qualified and pre-approved are two different things but some people, including some in the business, use the terms interchangeably.  Pre-qualified is an opinion of likelihood that a borrower will be approved based on preliminary information about their income and credit.  Whereas, in a pre-approval, the borrower's credit report is updated and pulled, income and assets verified and involves pre-underwriting.

Even when you have a highly qualified loan officer, the real decision maker is the underwriter who can commit the lender.  Generally speaking, a person who has been pre-approved receives a written letter stating the terms and conditions of the commitment.

A second opinion from a different lender can be a comforting thing for a borrower.  It will either confirm that the first lender was correct and that the rate and terms being offered are competitive or it will reveal that there could be differences that would warrant more investigation.

Mortgage money is a commodity and while competition usually keeps lenders close to each other in the rates and terms they offer, you won't know for sure unless you shop around.  The cost for being pre-approved is usually a nominal amount and when you are considering the size of the mortgage you'll be borrowing for up to thirty years, it makes sense to get a second opinion.

Occasionally, during the process of being pre-approved, an unexpected credit problem may be discovered.  It is better to learn about it early so you'll have time to correct it before you have contracted on a home.

Your real estate professional, Nancy Helfrich, will be able to recommend lenders who are active, experienced in the area and can share their experience with you regarding previous loans they have made.  The benefits far exceed the time and effort it takes.  You'll be looking at the right priced homes; getting the best loan, rate and terms; have increased negotiating power with the Seller and can close quicker because many of the verifications have already been made.