As we get ready to say goodbye to 2008, it’s worth looking back at the year that was for home buyers, sellers and homeowners.
Frankly, I wouldn’t be surprised if this year goes down as one of the worst-ever for housing since the Great Depression.
Housing values fell by double-digits in many metropolitan areas. Housing starts virtually stopped. Inventories of new and existing homes grew dramatically. Mortgage interest rates remained relatively high, even as the short-term Federal Funds rate plunged to nearly zero by the end of December.
Foreclosures reached record numbers, and lenders found themselves literally buried under stacks of short sale proposals, foreclosure filings, and loan modifications. Late in the year, Fannie Mae announced it would stop tossing renters who paid on time out of houses that had been foreclosed upon.
Of those loans that had been modified more than 50 percent went delinquent, reflecting the increasing number of jobs lost and diminished paychecks.
The old lender’s maxim holds true: If you don’t have a job, you probably won’t make your mortgage payment.
Income Affects Ability To Make Mortgage Payments
Sometime around the middle of the year, when Fannie Mae and Freddie Mac were taken over by the government, lenders realized that having a real job with a real income is central to assessing someone’s ability to make monthly payments of principal, interest, taxes and insurance. Having a great credit score simply isn’t a good enough predictor on its own, which is why “no-doc” loans have entirely faded away.
Lenders also rediscovered the beauty of having some skin in the game. Except for the USDA’s rural loan program and a VA loan, zero down payment mortgages have virtually dried up.
Sellers aren’t happy. But there are plenty of deals to be had, as the economy is expected to get worse at the beginning of 2009. Higher rates of unemployment mean more foreclosures, driving down the price of homes.
As we ended 2007, I wrote that some were comparing the 2007 housing market to the Great Depression. Looking back on this year, most housing markets took a turn for the worst. The silver lining for home buyers: If you’re looking to buy a house, 2009 could be a great year to close on a deal.
If you’re planning to buy a house this coming year, here’s my annual list of New Year’s resolutions you should consider making:
As a buyer, I resolve to:
Get my credit and finances in shape.
Put a lid on your spending, perform “plastic surgery” on your credit cards, and don’t max out any one card (in fact, never charge more than 25 percent of your maximum credit limit) or your credit score will suffer. If you’re going to cancel an account, do it in writing, but you get bonus points on your credit score the longer you maintain a credit account. So a credit card account that you opened in 1984 is worth a lot more than one you opened last month.
Don’t forget that good credit also means job stability. Most lenders require that you work for the same employer for at least a year, and maybe two, before they’ll approve your home loan application. If you’re self-employed, they’ll want to see at least two years of tax returns before you’ll qualify for a conventional loan. If you’re offered a better job in your field, by all means take it. But if you want to buy a home, try not to jump from job-to-job to job within a relatively short period of time, particularly if the job changes are in different industries.
If you want to buy a house next year, pull a copy of your credit history and credit score. Try to reduce the amount of personal debt you have, including credit card debt, student loans and auto loans. While having personal debt doesn’t mean you can’t qualify for a loan, it will lower the amount of the mortgage a lender might be willing to give you. And, given the current mortgage crisis, lenders are paying close attention to your credit history and credit score.
If you keep one resolution this year, choose to clean up your credit. One of the best things you can do to prepare for buying a home is to make your monthly debt payments on time. Even if you have a lousy credit history, lenders will be more forgiving if they see you’ve gotten your act together in the last 6 to 12 months.
Federal law now requires each of the three main credit reporting bureaus (Experian, Equifax and Transunion) to give you a free copy of your credit history once a year.
To get yours, go to www.annualcreditreport.com. At the time, buy a copy of your credit score from Equifax. The cost is under $10, which is still less than buying it through MyFico.com.
Know how much I can afford to spend before shopping for a home.
You have three options when it comes to figuring out how far your down payment and income will take you: You can guess; or you can pay a visit to your local lender, who will pre-qualify or pre-approve you for a loan, or you can go online.
Your lender will look at your income, debt, assets and liabilities and come up with the maximum amount you can spend on a home. Once you know how much you can afford to spend, you’ll avoid making a common, heartbreaking, home buyer error: Looking at homes you can’t afford to buy.
Too busy to visit a lender? There are several websites that offer good mortgage information. Try BankRate.com for a state-by-state look at current interest rates from lenders who work in your area, including online lenders. Every major mortgage lender has a website. And, don’t forget to check the rates at your local credit union — it’s often the cheapest place to get a loan.
Know my neighborhood, and be comfortable with it, before I buy a home there.
Everyone wants to live on the best block in the best neighborhood. Unfortunately, that location may not be in your budget. You might be able to afford the smallest home on the best block, but that won’t do you much good if you need four bedrooms and that home only has two. Balancing affordability with location means you will have to compromise. While you may be willing to compromise on the size garden you have, you may not be willing to change your children’s school districts.
Start looking at various neighborhoods and the amenities they offer. Is there a park? Shopping? Transportation? A house of worship? Do your friends and family live close by? Be careful not to limit your choice of neighborhoods too early on in the process. Explore new areas and the housing stock and amenities they offer.
Make sure you spend time during different parts of the day and night in the neighborhoods you like. Walk the streets, go into local shops. Visit the neighborhood police department and local schools. Stop by the local park district offices and see what programs and classes are available. Drive the commute from prospective neighborhoods to your job during rush hour. Get to know the neighborhood and its residents inside and out before you buy.
Interview at least three brokers before hiring one.
There are traditional agents, buyer agents, exclusive buyer’s agents (who never represent sellers) and discount agents. There are large brokerage firms and small neighborhood shops. You can even choose not to use a real estate agent, although as a buyer, you won’t be out of pocket for the cost, so there’s no reason not to use one.
Many buyers today opt to use buyer agents, or buyer brokers, who represent the interests of the buyer rather than the seller. One older study showed that buyers using buyer agents or exclusive buyer’s agents paid less for their home than those who use traditional agents.
Choosing which agent to use — or choosing not to use an agent — can be critical to your successful purchase. Look for an agent whose philosophy and mannerisms are compatible with yours. Look for someone you can trust, with whom you wouldn’t mind spending a lot of time. Look for an agent who has ample experience, and who is knowledgeable about the neighborhoods you’ve selected for yourself.
Read and understand all documents before signing them.
So many folks don’t even bother to read either their purchase contract or loan documents. That’s unfortunate, given the enormous legal implications of a home purchase. But it’s a bigger deal this year if you’re buying a home in a short sale transaction or a property that’s been foreclosed upon.
Before you put down any money towards the purchase of a home, understand the process that you will need to go through to buy the home. With a foreclosure or short sale, the home buying process is stretching out from days to weeks or even months. Understand what it will take to get out of the deal in case it doesn’t work out and exactly when you must make the decision to pull out of the deal before you lose any money you put down to buy the home.
Take the time to read all documents thoroughly. Ask an attorney or broker to explain things that don’t seem to make sense. It’s important that you understand what promises have been made and what warranties have been granted, and what implications these documents have for your personal financial and emotional well-being.
Even if you live in a state where attorneys are not generally used to close residential transactions (I’m not talking about the lender’s attorney, who the buyer typically pays for, but someone who actually represents the buyer’s interests in the deal), it’s extremely important to hire a knowledgeable real estate attorney to walk you through a short sale or foreclosure.
NEXT WEEK: If you’re trading up, you’ve probably got a home to sell before you can buy. How can you sell in a slow market? How can you compete against 10 other homes for sale in your neighborhood? Next week, we’ll continue our look back on 2008 and I’ll have your Home Seller Resolutions for the New Year.
Published: Dec 19, 2008