North Phoenix Agent Blog

I’m noticing an uptick in the number of roadside cardboard signs that have something to do with real estate lately. You know the kind - here in Phoenix they’re usually hand-inked, on cardboard or oak tag, stuck in the ground with a stake.

Surely it’s a function of the bad economy, the looming recession, the credit crisis and the housing ‘bubble’.  Whatever, I figured it would make a good blog post. Here’s today’s Real Estate Road Sign:

Here’s the thing. A ton of people would qualify to buy a home - any home - with $500 down. The amount of the down payment is a function of 2 things - 1) the contract you negotiate with the seller, and 2) what sort of loan program you qualify for.

You don’t need to call somebody who advertises on the roadside to get a $500 down house. In fact, I submit that it’s probably not a good idea to get a home mortgage from somebody who advertises on the roadside with a cardboard sign. To buy a home with $500 down, you just need to speak with a reputable lender, and see if you qualify for a loan program that allows a low down payment.

Veteran? Done. You can buy a house with $500 down - use the VA loan program. eHow tells you how to figure out if you qualify, but I take no responsibility for their sponsored lender links.

First time homebuyer?  Done and done, and then some. You can buy a house with only $500 down - use a standard FHA loan. Or use an AmeriDream loan. Or use Nehemiah Corporation to buy your slice of the American Dream. Go through Maricopa County’s Home In Five program and get your downpaymnet as a gift. Try the Down Payment Guy website, which advertises homes for sale on the regular MLS that are owned by seller who agree up-front to partcipate in a program like these. But note that the DownPaymentGuy steers buyers to their approved stable of lenders, and you can use any lender you choose.

Not a first timer, but still cash-strapped? There are FHA programs you qualify for too. My favorite blogging lender Shailesh Ghimire explains FHA loans.

When you see a road sign like this one, remember 2 things: 1) You can work with any lender you want and still potentially qualify for a $500 Down home purchase.  2) Doing business with a “lender” who advertises on the roadside is probably not a great idea. Buying a “new in plastic, pillow top” mattress off a road sign might be OK. But selecting the single most expensive financial asset you’ll ever own in your life off a road sign is potentially a recipe for disaster.

Related Posts at NorthPhoenixAgent

• How Much Do I Need for a Downpayment
• Earnest Money Defined
• Buyer Beware - Backing Out Can Be Expensive
• Why Your Lender Shouldn’t Be Your Friend
• No Money For a Down Payment?

Related Posts By Other Excellent Bloggers

• FHA Mortgage Insurance Rates Now Higher If Your Credit is Bad (AZ Mortgage Guru)
• How Your FICO Score Determines Your Mortgage Rate (by the XBroker ; not light reading but well worth your time)

Are you a first time home buyer shopping in Arizona? If so, you’d better double time your shopping trip. Starting next month it’s going to get more expensive to buy a home in Arizona.  Why?  The rules for PMI are changing.

PMI is Private Mortgage Insurance. It’s required on any home loan made without at least 20% down payment. It protects the lender against the risk that you, the less-than-20%-down buyer, will default on your loan.  Your monthly mortgage payment is higher, but that increase is way less painful than saving 20% which could take years and years for most of us.

Starting in March 2008, the nation’s 2 biggest PMI issuers are restricting who gets a PMI policy. Industry leader MGIC Investment Corp’s limit is a minimum of 5% cash down; it’s 3% for competitor PMI Group. The change applies in areas the companies consider “restricted markets”.  These markets include the entire states of Arizona, Florida, and Nevada, as well as the metropolitan areas of Washington, D.C., Detroit, Chicago, Boston and Atlanta.

This change will hit first timer buyers hard, since they’re rarely rolling around in spare cash.  Less than 3% to 5% cash down = no PMI policy = no home loan = no new home smell in your future.  What’s a cash-strapped buyer to do?

1. Hurry. If you’re buying to live in it and plan to stay 5+ years, don’t worry about whether home prices will fall a little bit more in the rest of 2008 and 2009. There are 55,000 Valley homes to choose from, Sellers are being exceptionally accommodating, and interest rates remain relatively low. It’s a buyer’s market like we haven’t seen in decades. Bold buyers can make a killing, long-term.
2. Hope that your lender can get you a PMI policy from somebody other than the 2 big boys in the game, MGIC & PMI Group.
3. Use a Down Payment Assistance program like AmeriDream and Nehemiah Corp. But note that these have time limits too. They won’t be around forever.
4. Calculate how long it would take you to save 20% on your expected home purchase. Then evaluate whether buying now and risking a little price deflation in 2008/09 is better or worse than waiting X years till you have 20% down saved. For most buyers, buying sooner makes more sense than waiting & saving.
5. As long as you’re calculating your savings rate in #4 above, be realistic. On paper I can save tens of thousands per year. In reality, my savings account needs a few human growth hormone injections to beef it up. There’s always a movie to see, a new gadget to buy, or a round of drinks to spring for. Most of us don’t save as much as we think.
6. Don’t forget that regular mortgage interest is tax deductible, and so are PMI payments. You’ll have a fat deduction on your federal income tax statement that might offset some of the temporary pain of budgeting to pay a mortgage every month.

 New PMI policies are just another brick in the wall of reasons to buy an Arizona home now if you’ve been fence sitting for a while.

Don’t Get Old Trying to Save a Down Payment!

AmeriDream is a fantastic resource for first time buyers who are having trouble saving the downpayment on house. With price appreciation like we’ve seen in the past few years, even 3% of a home purchase price can be extraordinarily difficult for first timers to save.

(For those who like my writing style, read on. If you just want to cut to the chase, scroll down to below the smiley face.)

Three percent of the median home price in the metro Phoenix area is about $8,000. Plus buyers need another $2,000 to $4,000 for closing costs. It’s super important to have some savings leftover after the housewarming party for unforseen home emergencies, which pop up like those Whack A Mole games at the arcade. Then, it’d be nice to have some money to cover a few cosmetic upgrades once you’re in the house - like maybe switching out the lighting fixtures from 1973 - ’cause the median metro Phoenix price of $263,000 doesn’t buy granite counters and stainless steel appliances in this town. All in all, you’re gonna need about $10,000 or $15,000 grand to do it right. Sure, you could skate by with the bare minimum savings, but being house poor leads to lots of dinners based on ramen noodles.

How in the heck are first  timer homebuyers supposed to save up all this money?! You could do what my cousin in Pennsylvania did. He lived with his mother in law for 3 years while he (an architect) and his wife (a loan processor) saved pennies. They accumulated $40,000 at  the end of the three years. Bought a house and six months later my cousin saved his marriage by refinancing to pull out a little equity. He used it to “help” send his mother in law to far away Florida.

Or, you could rely on AmeriDream. Here’s how it works. Federal housing law allow 5 types of people/organizations to gift down payment money to a home buyer. Sellers are expressly banned from gifting down payment money to buyers. Group 1 is parents. Parents are allowed to gift money to kids. (There’s 4 other categories: government entity, religious organization, 1 I can never remember, and the 1 below).

There’s a lovely little loophole in federal law which allows a non profit agency to gift down payment money to buyers. Somewhere back in the 1990’s a couple of nonprofits appeared and did just that. Nehemiah Corp is the other one I’m aware of.

These nonprofits set up a neat little triangle, so to speak, between the seller, the buyer, and themselves. The seller agrees to make a “donation” to the nonprofit org in the amount of the buyer’s needed down payment, plus a small administrative fee that’s usually about $300. The nonprofit turns aroun and “gifts” the down payment (minus their admin fee) to the buyer. The title/escrow company coordinates it all after the Realtors write it all up in nice legalese. And it’s all totally legal, tested by dozens of lawsuits. Most recently, last October HUD sued AmeriDream and got their shirts handed to them in federal district court.

AmeriDream claims to have given out over $400 million in down payment assistance grants which translates into over $14 billion in housing. Nehemiah says they’ve given out over $999 million in grants. I love this country!

If you’re a buyer who wants to use a down payment assistance program, ask around until you find a Realtor and a lender who done these types of deals before. There’s only a little extra paperwork involved, but the deal goes a whole lot smoother if “your people” know how to explain it to the seller properly. Hmmm…. I’m a Realtor who’s done AmeriDream deals. Nehemiah Corp too. Hmmm….

A really common question I’m asked by buyer clients (especially first time buyers) is, “How much earnest money should I put up?”

Technically, I’m not supposed to tell you. I think this was a rule dreamed up by the legal eagles in our profession. They worry that if Realtors simply tell clients what to offer, how much to put down, how much earnest money to use, and so forth. . . . well, we’re essentially price fixing and could be sued later by disgruntled buyers who are having buyer’s remorse.  At least that’s what I remember from my rookie training classes. I used to be a paralegal and have lawyers in the family, so I’m pretty ultra-sensitive to the myriad of ways agents get themselves sued.

Since I like to keep on the right side of my company’s legal department, and since I haven’t got a brass farthing worth suing me over, I won’t state a ‘proper’ earnest money amount here. But I’ll explain what’s typical, and what earnest money is and does.

Earnest money is the amount of money a buyer submits with an offer to purchase a house. You actually write a check and send it (actually, usually it’s a xerox copy of the check) with the purchase offer sent to the home seller. Earnest money proves the buyer is ‘in earnest’, or serious about buying that house. If the seller accepts the offer, the earnest money is immediately deposited with the escrow/title office. It becomes part of the purchase price of the house.

For example: Buyer looks at a house with an asking price of $29,900. Buyer makes an offer of $25,000. That $25,000 is made up of — (1) $4,000 cash down payment, (2) $1,000 earnest money, and a promise to get a home loan for the remaining $20,000.

One rule of thumb about earnest money is, “put up as much earnest money as you can afford to risk.” The risk bit is important. Earnest money is forfeitable if the buyer breaches the contract. In plain English this means that if you, the buyer, back out of the purchase after your Due Diligence period, the seller has the right to keep your earnest money as compensation for the lost time on the market. I’ll write more tomorrow to explain Due Diligence - it’s essentially the timeframe for the buyer’s inspection(s).

From Inman News, “About 41 percent of loan officers responding to a Federal Reserve Board survey in October reported they had tightened lending standards on prime residential mortgages during the previous three months, compared with 15 percent of respondents in a July survey.”

I’ve just learned this first-hand. Had a devil of a deal that took 7 weeks to close because the buyer (not my client, I repp’ed the seller) was a ‘manual underwrite FHA with a DPA’. In English, that means she was a first time home buyer with little cash down, a recent job change + promotion + pay raise (that all had to be verified by hand), plus a Down Payment Assistance grant from AmeriDream and some gift money thrown in by a family member. Whew! What a nail-biter it was.  The lender didn’t make it any easier - he never returned my calls, never replied to my emails or faxes, and treated the 2 agents and the buyer (his client!) like we were hysterical females who pestered him.

The lesson you can take from this, dear readers?

1) Don’t work with a lender your Realtor doesn’t personally know. I’d never work with this guy again even if you paid me. He made the process truly miserable instead of just frustrating. I won’t list his name & company here but if you want it, email!

2) Treat your Closing Date like a suggestion, not a date carved in stone. Make emergency backup plans to extend your lease, or crash with friends, or even just sign a pre-possession agreement that allows you to move into a house you haven’t actually closed on yet.

3) Even if you’re a prime borrower, expect to provide a little extra documentation to prove what you put on your loan application. Prime loans are those that have 10% to 20% cash down payment, a good sized saving account on the side, and a solid job history combined with excellent credit. These loans are still readily available! Don’t believe the Doom & Gloom Media who say you can’t get a loan nowadays. You can! Just get your bank statements, tax returns and paycheck stubs ready to hand over.

4) If you’re not quite a prime borrower, make sure you hire a Realtor & Lender who have recent experience with non-prime loans. The borrower I described in the beginning of this post? Her chosen lender was a poor communicator who hadn’t done a non-prime loan since the credit crunch began in August. She wishes she’d never hired him. She had to beg her landlord for an extra week in her apartment and pay through the nose for it. Three days before close she had to beg a family member for another $1200 gift to satisfy her loan underwriter. The lender’s flippant attitude made the buyer cry twice in the days before close. ‘Nuff said.

Want recommendations of great lenders around town? Email me. I’ll provide you 6 super lenders who I’d bet my reputation on any day of the week. No obligation whatsover.

I try to stay away from politics here, but it pleases me to no end when one of George W’s minions gets a public slap in the face for doing something that’s blatantly political and hurts the Little Guy in the process.

You’ll recall that on October 2, the Housing & Urban Development department (HUD) issued a ruling stating they’d disallow any more Down Payment Assistance programs (DPA) as of today. See post about AmeriDream & HUD here.

HUD later ruled on October 22 (for fear of the federal district court’s review) that they’d extend the DPA programs till next February.  Yesterday a federal district judge handed down an injuction against HUD. He said their October 2 ruling lacked “reasoned analysis” and was based on “flimsy support”. You know you’ve made a big boo-boo when a federal judge calls your lawyers ”flimsy” in public.  Ouch! Somebody over at HUD is gonna lose a job over this.

The good news for first time home buyers? HUD can’t shut down DPA programs. You don’t need to save tens of thousands of dollars for a down payment. Good folks like AmeriDream will continue to help by gifting you the down payment (by asking the seller for a donation which covers your cost).

Take that HUD! Score one for the Little Guy and bring on the buyers. Gawd knows we need ‘em now more than ever.

There’s been quite a kerfluffle lately in the world of DPAs. What’s a DPA? These are Down Payment Assistance programs like AmeriDream and Nehemiah.

The number 1 item stopping first time buyers from buying a home is the down payment.  Saving $10,000 or $15,000 is too darn hard in today’s world, especially when you’re the typical first time home buyer who’s in their mid- to late-20’s and working at your first (or second) “real” job out of college.  The metro Phoenix region was particularly hard hit lately. Since 2004, home prices have appreciated way faster than wages, leaving many renters to assume they’ll never save enough for a down payment, so why try?

Lovely, lovely organizations like AmeriDream & Nehemiah Corp have found and used a loophole in the HUD rules that allow them to give first time home buyers a grant that covers their down payment. Grant! Which equals “no need to pay it back”. You don’t owe Aunt Tilly or Uncle Peter anything. Or even Uncle Sam. The money for your down payment is a gift you never pay back.

Savvy readers are asking “Free money — Where’s it come from?!” Lawyers are thinking, “Loophole? Must be illegal.” The more cynical among you are snorting, “Yeah, right. Free money my big toe! Nothin’ free in this world.”

To quote Ferris Bueller, “Oh contraire, mon frere.” (don’t blame me for sloppy spelling; I took German, not French)

It’s 100% legal, field tested by phalaxes of attorneys over the past 10 or 15 years. It’s not really free money but it is a WIN-WIN for everybody involved. For several reasons, DPA loans usually happen in tough markets like we’re in now where sellers struggle to sell.

Imagine a triangle with a nonprofit organization like AmeriDream at the top and the Buyer and Seller at either bottom corner. Everybody agrees in the purchase contract for the home that the Buyer will receive from the nonprofit a non-repayable grant covering their down payment. The Seller donates a ‘gift’ to the nonprofit in the exact amount of that downpayment, plus a couple of hundred bucks for an administrative fee. The nonprofit org channels the money from the Seller’s home equity, through the title/escrow company, to the Buyer’s downpayment.

It doesn’t work all the time, it doesn’t work for every situation. But when it works (usually in a buyer’s market like we’re in now), it’s a beautiful thing. A renter becomes a homeowner faster than they dreamed possible, the Seller gets to sell their house when they otherwise might not have, and to a deserving first time buyer no less. And the Realtor - namely me - gets a little misty-eyed thinking about the Hallmark moment unfolding before her eyes. Sniff!

Enter Big Brother, in the form of HUD. They issued a statement on October 1, 2007 that essentially outlaws DPAs completely as of October 31, 2007. Being as HUD’s stated mission is to provide moderate and low income folks the chance at home ownership, I’m not sure where this helps. But I won’t talk politics, or we’ll be here all night. Suffice it to say that I think HUD’s ruling is typical Washington: bad policy, ill timed and poorly communicated.

Realtors, Buyers and Sellers all over the US had a few weeks of nail biting while we waited for a court ruling on whether HUD could axe a program with so little notice. Finally on October 19 word came down that AmeriDream has been granted an extension and can continue funding DPA loans until at least February of 2008.

Why’s this matter? Metro Phoenix is in the midst of a perfect market for first time home buyers to use Down Payment Assistance programs to get into homes they never hoped to own. Tons & tons of homes for sale… many sellers anxious to sell… lots of sellers with equity enough to spare you a teensy bit for a downpayment… mortgage rates are historically low…. and there’s free money to make your downpayment.

I’ve got an AmeriDream deal closing next week (Lord willing and HUD notwithstanding). The buyer is a lovely young woman, a single parent who manages a local restaurant. She’s buying a great loft condo in a very nice neighborhood. She’s bringing a grand total of $1,022.45 to the table. For about the amount of 1 paycheck, she’s morphing into a homeowner.

Awwww. Sometimes I lurve my job. Sniff!

If you’re a renter thinking you’ll never save the money for a down payment and you’ll never own a home, think again. Then call me. Quickly, before Big Brother shuts off the spigot of DPA money.