Monday, April 16, 2012
Great time to buy, bad time to qualify.
I am convinced that, 5 years from now I, along with a lot of other folks out there will look back at 2011 thru 2012 and want to give myself a swift kick in the (you know what) for not taking advantage of today’s still semi-distressed housing market.
Houses that ballooned to near 7 figure prices in very modest neighborhoods can now be purchased for less than half of what they commanded during the boom years. I’ve heard and read many times over of investment firms pooling together hundreds of millions of dollars in special funds designed to buy up residential properties by the hundreds, and why not? If you’ve got the cash you can purchase a “move –in” ready home and rent it out at a profit every month.
To give you an example: I recently came across a bank owned 1 bedroom townhome in a decent area in the northwest San Fernando Valley with a garage, balcony and in unit washer/dryer for sale for $69,000. Do the math with the minimum FHA requirement of 3.5% down along with a $199/mos in home owners association dues your mortgage would be in the $700 a month range with a cash outlay of only $3000. A place like that can easily garner between $900-$1100 a month giving you instant positive cash flow, while capturing appreciation in value and getting the mortgage interest tax deduction on your tax return.
Sounds easy, if you’re lucky enough to be sitting on piles of cash or if your credit score and history are pristine. Once upon a time all you needed was a pulse to qualify for a home loan, now it seems like the only thing banks haven’t done to measure your credit worthiness is to draw blood and urine samples. Getting a home loan approved nowadays takes not only having all of your ducks in a row; you need to have the right kind of ducks as well. Here are some important factors you need to know before you start looking for that 3-bedroom diamond in the rough.
•A FICO credit score of 764. Not only is this higher than the average score for approved loans as recently as November, it's far beyond the 620-640 FICOs that Fannie Mae and Freddie Mac once considered the minimum for a conventional prime mortgage. It's also well above the median FICO score nationwide, which is currently 711, according to the Fair Isaac Corp, developer of the score.
•A loan-to-value (LTV) ratio of 78%, signifying a down payment of 22%. This is higher than even the controversial minimum of 20% proposed last year by Obama administration financial regulatory officials who were seeking a standard for "safe" loans offering the lowest available rates and best terms.
•Debt-to-income ratios of 21% for housing expenses, 34% for total household monthly debt.
How about the profiles of people who applied for conventional loans to buy a house but were rejected or didn't get to closing? By historical standards, they were a fairly impressive group on average as well, with 732 FICO scores, 19% down payments and debt-to-income ratios of 24% (housing costs) and 41% (total debt).
Homeowners who refinanced existing conventional loans had the best profiles of all: average 770 FICOs, 65% LTVs indicating 35% equity stakes, and debt-to-income ratios of 22% housing and 32% total debt.
There is an alternative thought process out there. One could always try to qualify for the previously mentioned FHA (Federal Housing Administration government sponsored loan) which lowers its standards in an effort to make “The American Dream” more equitable. And, remember these are just averages, if you are in the ballpark of some of these impressive figures and standards you still have a good chance of qualifying since each bank or lending institution has their own standards to adhere to as well.