Homebuyer's Guide 2015

HOMEBUYER’S GUIDE 2015

> Why now is the time to buy > Q&A: ‘Can I register for a down payment?’ > What to know about buying your next home > How to get a mortgage today

Buy Now – or Forever Hold Your Peace?

Experts anticipate home prices, mortgage rates and inventories to rise in 2015

Erik J. Martin CTW Features‌

‌They say the early bird gets the worm – and, likewise, the fast-acting homebuyer gets the best deal. In 2015, the latter may turn out to be a bigger truism than previously believed, given the newest market predictions by housing experts.

Consider the recently published numbers.

The National Association of Realtors forecasts that in 2015: zz Existing home sales will increase 7.4 percent.‌ zz New home sales will increase 37 percent.‌ zz Median home prices will increase 4 percent (and another 4 percent in 2016).‌ The NAR’s consumer arm, Realtor. com, meanwhile predicts that in 2015: zz Median existing home prices will appreciate 4 to 5 percent‌ zz 30-year fixed mortgage interest rate mortgage rates will increase mid-year, reaching 5 percent by the end of the year.‌ zz Housing affordability will decline 5 to 10 percent based on price appreciation and increased interest rates.‌ Further, the National Association of Home Builders projects: zz Single-family production is expected to increase 26 percent in 2015 to 804,000 units.‌ zz Multi-family homes will enjoy 358,000 starts in 2015, up 2 percent from last year.‌ zz And new single-family home sales are forecast to reach 564,000 this year, up about 30 percent% from the year prior.‌ The point: The longer you wait to purchase a property this year, the more it will likely cost you.

“Any prospective buyer in the right financial position and able to find a home that fits their needs is far better off buying now than waiting,” says Jonathan Smoke, a Washington, D.C.-based chief economist with Realtor.com.

Smoke credits the rise in prices, rates and inventory to improved U.S. economic numbers in recent months, including strong growth in GDP, jobs and wages, expanding labor force participation, and positive consumer sentiment. These and other factors will empower the Federal Reserve to release

its current hold on interest rates, resulting in a higher cost of borrowing for new home seekers.

“Affordability will decline as a result of increasing prices and rates, which will only be partially offset by improving incomes,” Smoke says.

Adam DeSanctis, economic issues media manager with the NAR in Washington, D.C., says there are pros and cons to buying now versus later.

“Buyers may be able to lock in a lower interest rate today but have fewer choices. Buyers who wait to purchase until later in the year will pay a higher interest rate, but they’ll also have more units to choose from thanks to increased inventory,” DeSanctis says. “And with more units available, prices gains should stay relatively stable.”

However, interest rates, sales prices and market supply shouldn’t be the only factors you weigh when deciding when to buy, says Michael J. Seiler, professor of real estate and finance at The

Page 2 Friday, May 1, 2015 Homebuyer’s Guide

College of William & Mary in Williamsburg, Virginia.

“Now is good if you are settled in your job and family life. Now is bad if you see great uncertainty in your employment status, marriage or family,” Seiler says. “You should never rush into a purchase, and trying to time a real estate market is particularly dangerous. Instead, research the quality of the neighborhood, local schools, and the prospective home carefully.”

In addition, it’s important to calculate the full monthly cost of owning before committing to a purchase – including principal, interest, taxes and insurance, and expected maintenance expenses – in addition the length of time you plan to stay in the home, Smoke says.

Alternatively, some would-be homeowners may be better off renting, depending to consider renting instead.

“If you happen to reside in a community that is overbuilt in the rental market, the prospective buyer could

find renting more economically profitable when the total costs and benefits of owning vs. renting are considered,” says Brent C. Smith, professor of real estate at the Virginia Commonwealth University School of Business in Richmond.

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Meet your buying team

Every homebuyer needs a key group of players to help make their purchase a reality Laura Depta CTW Features‌

‌Purchasing your first home represents a major life event, but you can’t do it alone. Homebuying is a team sport, and you’ll only be successful with all the key players going to bat for you. Here are the pros you need on your side:

THE LENDER‌

First, you need to set your finances in order by selecting the right lender – this could be a mortgage broker, bank or credit union. “The financing is the most important part of the whole transaction,” says Rhonda Duffy, owner of Duffy Realty of Atlanta.

Keep in mind, not all lenders will offer the same thing. Duffy recommends speaking to several lenders and then comparing their loan proposals.

“When you’re hunting the right kind of loan,” explains Duffy, “You’ve got to know the questions to ask these lenders and then be able to compare what they tell you.”

Once you’ve made a decision, the lender will help you determine what you can afford based on your application and credit history. Your lender will help you get pre-approved for a mortgage, so you know how much home you can shop for.

THE AGENT‌

Next, it’s time to meet with your real estate agent and start the search for your perfect home.

Michael Wolf, author of “The First Time Homebuyer Book” (Dog Ear, 2010), suggests a referral system to find the right agent. “Poll the people you know

who bought a property, see what their experience was, and see if they would attach their name to their real estate professional,” advises Wolf.

Your agent is essentially the coach of your homebuying team. The agent is there to guide you through all the complex steps of finding and purchasing a home. “The agent’s role is to be a sounding board,” Duffy says. “To know what happens in the transaction next and to, with urgency, put those pieces into place.”

THE HOME INSPECTOR‌

Once you’ve found your dream home, made an offer, and the seller has accepted, the next step is to hire a home inspector, who will – yes – inspect that the home is up to code and does not have major issue lurking. Your real estate agent can generally recommend one, but it is also important to independently investigate the professionals on your team.

“You want to give the client the opportunity to do research on these people who you recommend,” Wolf says. “Ultimately, we want to make sure that the decision is the client’s.”

Duffy adds, “For the inspector, the most important question to ask is, ‘Do you have general liability insurance?’”

Since the inspector works for the buyer, the buyer is ultimately liable for any damages that may occur during inspection.

THE APPRAISER‌

The appraiser is a member of your team, but not one that you recruit. The appraiser is hired by the lender to assess

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the home’s value to make sure it’s worth what they’re offering you. The goal is to protect both you and the lender to make sure you’re not overpaying for the home.

THE CLOSING AGENT‌

The closing agent is the final piece of the puzzle. This could be an escrow company or an attorney, depending on the state. Either way, the closing agent works for the buyer, seller and lender to tie up the loose ends of the transaction. The closing agent escrows funds and ensures that contracts are being followed.

Ultimately, your homebuying team is there to help guide you through a complex, life-changing journey.

“Homeownership is very valuable,” Duffy says. “I don’t want [buyers] to be afraid of it, like they can’t accomplish it.

All they have to do is apply a little bit of rational logic to an emotional process.”

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to do research on these people who you recommend. Ultimately, we want to make sure that the decision is the client’s.”

Michael Wolf, author of “The First Time Homebuyer Book”

How to Shop for a Home

Shopping for a home is unlike shopping for anything else. Here’s how to stay level-headed while finding your dream home Marilyn Kennedy Melia CTW Features‌

‌Home buying ranks as the biggest purchase most people make, not just measured by dollars, but by decisions.

When buyers reach the closing table, it’s the culmination of many carefully weighed choices to select the home that best suits their wants and needs.

Or at least, that’s how it should be.

It’s not easy to be sure-footed through every step, especially for first-time buyers. But experts can provide guidance on navigating the twisting path, ending at the right new home for you:

advises Dr. Seung Hwan Lee, a professor at Colorado State University who has studied buyer’s remorse. If an item you’re ranking highly, for instance, is dependent on other future event, it could be a mistake to choose primarily on that priority. Lee illustrates: “If you buy a home that’s smaller than you want but choose it because of the school district, and then decide to send your son to a private school, you could regret [your choice].”

Looking, Scrutinizing‌

In the its 2014 Profile of Buyers and Sellers, the National Association of Realtors noted that 43 percent of buyers said they first looked at properties online, a Visiting A Lender‌ share that’s been steadily increasing.

This is not the fun part. Most real When browsing online, buyers typiestate agents insist buyers get “precally view a shot of the front exterior qualified” first, says Michael Seiler, a professor of – meaning lenders estimate the real estate and finance at The College of amount of mortgage a buyer is eligible William and Mary. “Only if they like it for – before visiting properties.

“There is no sense in looking … if you will they read the property description,” he adds. haven’t validated what price range you But the photos can be misleading, should be shopping in,” explains Cara Ameer, a broker-associate with Coldwell warns Seiler. “Many times the pictures were taken years ago … Don’t fall in love Banker Vanguard Realty, Ponte Vedra with a home on the Internet. There’s no Beach, Florida. substitution for a personal visit.”

Even a preliminary discussion of “Buyers should look at all homes that how much your down payment will be, match their search criteria,” advises Kat your credit and debt picture and other financing factors involves a host of deci- Becker of RE/MAX Advantage Realty in sions. (The Center for Financial Security Antioch, Illinois.

When you’re interested, go back at at the University of Wisconsin, suggest learning more at sites like www.consum- different times of the day, and on a erfinance.gov and www.neighborworks. weekend and weekday, advises Ameer.

Then leave no door or drawer unturned, org/homes-finances.) checking space in closets and cabinets.

“There is no sense in looking … if Then walk both the inside and outside, Ranking Priorities‌ you haven’t validated what price What do really want in a home? Prob- noting conditions down to any scuffs ably lots, like being in a great school dis- on moldings. range you should be shopping in.” trict, having a shorter commute to work, or huge closets.

Knowing ‘The One’‌ Cara Ameer, a broker-associate with Coldwell Wish lists differ, with some putting a It will be a mix of practical reasons Banker Vanguard Realty, Ponte Vedra Beach, Florida priority on items others don’t even rank, and intangible, emotional factors that such as the quality of cell phone service come together on a particular property, in a condo, notes Jim D’Amico, owner of giving you the sense that a particular most “practical” choice is not the best Century 21 North Shore in Boston. in the long term, warns Ran Kivetz, a property is right for you, says Lee. Analyze your priorities carefully, Columbia University professor who has Beware, though, that sometimes the

studied consumer satisfaction.

While he doesn’t advocate overspending, Kivetz says that some consumers shy away from appealing features – in a home, that could be anything from more square footage to a lavish landscaping – because they feel guilty about the indulgence.

Checking with a financial adviser on the expenditure might provide a clearer view of what’s practical and most appealing, Kivetz concludes.

Homebuyer’s Guide Friday, May 1, 2015 Page 5

What to Ask Your Potential Real Estate Agent

Your agent is the pro who is going to help you find the right home, in the right neighborhood, for the right price with a level of experience that gives you confidence. Ask about their education background and understand the differ‌The process of buying a home can be ences between titles.

For example, a Realtor is a member of a daunting venture, especially for firstthe National Association of Realtor and time homebuyers. That’s where a real abides by a strict code of ethics, while estate agent comes in. A good agent is your guide to finding your dream home, a broker has furthered their education and has passed a broker’s license exam. so you want to choose the right one Also inquire about the agent’s profor you. fessional background and any specialThe best way to find a real estate izations or extra skill sets. “I would professional is thraough referrals. Ask try to figure out what their strengths your circle of family and friends for are,” says Andrew Wendt, president of recommendations, look at reviews of Be Realty in Chicago. “Someone might agents online and do your research. have design experience or they might Once you’ve found a few likely candidates, you should have a face-to-face come from a corporate situation and have good negotiation experience.” meeting. Come prepared with an idea How Many Deals Have You Done in this of the house you’re looking for and, of course, some of the following questions Neighborhood?

The more knowledgeable an agent for your agent. is about the community you want to What is your background? What are live in, the better according to Steve you credentials?

Trust is a key part of the buyer/agent Goddard of with RE/MAX Beach Cities Realty in Los Angeles,. relationship, so choose a professional

CARLEY LINTZ CTW FEATURES‌

“You want to ask [the agent], ‘How well do you know this area?’ Did they just move here or have they lived here for 40 or 50 years? How long have they been selling real estate?” says Goddard.

These kinds of connections may be priceless throughout your home search.

What is Your Typical Case load?

This question is not necessarily about the number but rather their availability.

“Getting an understanding of what their case load is or if they work with a partner will give you an indication as to how much time this particular person will have for your purchase,” Wendt says. Essentially you want to be aware if an agent is overloaded with clients and may not be able to dedicate the appropriate time to finding your future home.

Will You Help Me find Other Real Estate Pros?

Another characteristic of a reputable agent is their professional connections with vendors like mortgage brokers and

home inspectors.

“A good Realtor should help you with some names of people that they know and trust would service you properly,” Goddard says.

How Will We Communicate Throughout this Process?

From first meeting through closing on a house, you should expect reliable and accurate communication from an agent, says Wendt.

Inquire about how they make themselves available, whether it’s via email, phone or text message and how often you should expect an update.

Purchasing a home is one of the biggest (and priciest) decisions you’ll ever make. And at the end of the day you want someone on your team that makes you feel comfortable with the process.

“Just make sure that your personalities match,” Wendt says. “You’re going to spend a lot of time with this person so you want to make sure that you get along with them.”

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Getting a Mortgage in today’s Market Lending standards are making it easier to get a loan, but that doesn’t mean you can just walk into the bank and get one MARILYN KENNEDY MELIA CTW FEATURES‌

‌This could be the year. All those would-be buyers who’ve been sidelined because they’re unable to secure a mortgage may find there’s finally a path to homeownership.

“As we have wound our way from the financial crisis, hurdles and obstacles to accessing credit are starting to diminish,” says Keith Gumbinger of mortgage site HSH. However, lending regulators are still hyper-aware of the widespread pain inflicted by the foreclosure crisis, and don’t want to see any borrower without a strong financial and credit profile win mortgage approval. At the same time, consumer advocates, lenders and government regulators have debated how strict mortgage rules should be while still ensuring that qualified buyers have the opportunity to buy.

In early 2015, home prices are down about 7 percent from where they stood at the bubble level in 2005, and with relatively low mortgage rates, affordability is still favorable, says Andres Carbacho-Burgos, senior economist at Moody’s Analytics.

Here, experts shed light on today’s mortgage rules, and why this year the path to ownership is clear for more buyers:

Lower The Bar For Down Payments‌ The down payment – defined as the portion of a home’s value that a buyer pays for up front, for example someone who puts up $20,000 on a $200,000 home is making a 10 percent down payment – has been in focus lately.

Most experts agree that saving for a down payment is the biggest struggles for consumers hoping to buy. “Most of the efforts by [the government entities that back mortgages] have been targeted at buyers with low accumulated assets for a down payment and who have at least moderately good credit,” notes Erin Lantz, vice president of mortgages at Zillow.

One government loan, the Federal Housing Administration or FHA mortgage, allows just a 3.5 percent down

Scores work in tandem with other factors, like down payments and whether an applicant will have emergency savings after buying, says Frommeyer.

Strength in one area can help compensate for some weakness in another.

One important change to how FICO scores are computed, enacted last year, should boost scores for millions of consumers. The new scoring model, “gives less weight to unpaid medical debt than other types of unpaid debt,” reports Karen Paculba, a spokeswoman for the Fair Isaac Corp., the FICO parent.

“Scores for consumers whose only major negative items in their credit reports are medical collections can increase by up to 25 points.” However, not all lending companies may be using the new FICO model just yet.

Tally Debt To Ensure Affordability‌

The Dodd-Frank Wall Street Reform and Consumer Protection Act mandates that lenders look at how affordable a mortgage will be to a borrower, taking into consideration all the other recurring debts, like his credit card and auto loan payments. Those monthly recurhasn’t owned a primary residence for payment, and has been especially ring obligations, combined with the three years. A counseling/education popular in the past few years because it monthly amount that a borrower would course is not required, but other stipula- pay on the new mortgage – including a was often the only option that borrowtions and exclusions apply. ers with limited down payments could monthly allotment for property taxes Applicants to either program must qualify for. and homeowner’s insurance – shouldn’t have a minimum credit score of 620, In late 2014 Fannie Mae and Freddie take up more than 43 percent of the borprovide thorough documentation of Mac, two other government agencies rower’s gross (pre-tax) monthly income. employment, income and assets, and that back mortgages, announced new “Some lenders can figure out ways to purchase private mortgage insurance. loan programs with just a 3-percent get slightly above the 43 percent cap, down payment. Each of these programs but these are fringe cases,” notes Lantz. has special rules, like requiring at least Usually, homebuyers make an initial Take A Wider Look At Credit‌ one borrower be a first-time borrower.

The FICO credit scoring model, which visit to a lender to get “pre-qualified,” Freddie Mac’s loan, the Home Possible takes data on whether consumers pay where the lender looks at the finanAdvantage program – beginning March cial profile of the potential borrower, their credit card, medical, phone and 23, 2014 – offers qualified borrowers a including the tally of recurring debt to other bills from the three major credit conforming, conventional fixed-rate 15-, bureaus, and then assigns a number income and estimate how big a mort20- or 30-year mortgage with a maxigage the borrower should be eligible from 300 to 850, is used by most mortmum loan-to-value ratio of 97 percent, to obtain. gage lenders. which can be used to purchase a singleBut when a buyer selects a home and The higher the number, the better unit property or complete a refinance makes a formal application, the debtthe score. In the immediate wake of (without taking out cash) of an existing to-income ratio is again measured, and the financial crisis scores well into in mortgage. Although the program is lenders also will check to see that no the 700s were required for borrowers available to any eligible borrower, firstnew debt, such as an auto loan, has been making less than a 20 percent down time homebuyer applicants must comadded when the borrower is ready to payment, says Don Frommeyer, past plete a homeownership education and close on the loan, notes Frommeyer. president of the National Association counseling program, and other restricIndeed, lending rules are still strict of Mortgage Brokers, but there has been tions apply. Fannie Mae began offering easing since then. (See the 620 require- enough that borrowers must be careful a similar 97-percent LTV loan option in ments on the new 3-percent Fannie and to keep up prudent financial practices December 2014 for any borrower who every step of the way.

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The 411 on Giving – and Getting – Help with the down payment number of questions: What if you want to sell and your son doesn’t? What if there’s a family fight? Or a divorce? What happens if you die and leave your inter‌My wife and I want to help our son and est to someone other than your son? If his wife purchase their first home. We’re not sure what’s the best way to go. We can the property is sold do you get back the provide $50,000 for a down payment, but full $50,000 or just 30 percent of the what about the tax implications? Would it sale price?

Equity sharing is complex. You’ll be better for us to invest in the property? need to get advice from an attorney, and According to the IRS the annual tax you’ll also need to consider related tax exclusion for gifts is $14,000 for 2015. and estate issues so speak with a That means you can give your son tax professional. Meanwhile, $14,000 and another your son and his wife should $14,000 for your daughunderstand that they’re ter-in-law. Your wife can lucky to have parents who do the same, meaning have the financial capacyou and your wife can ity to be helpful and are give your son and his wife willing to assist their as much as $56,000 taxchildren. In an economy free in 2015. For details where young people are and specifics speak with Peter G. Miller having a tough time you a tax professional. should be proud of what If your son and his wife buy property you want to do. with a mortgage, the lender will want to We’re getting married know about the source of their funds. and rather than registering The lender will have you provide a “gift for gifts we would prefer letter” showing that the money given to cash to help save for a your son and his wife is a gift and that down payment. Some of you do not expect repayment. our relatives think this is As to holding an interest in the propnontraditional and maybe erty as an investment, that’s a different unwise. What do you think? story. Under the Black Lung Benefits Stick to your guns.

Revenue Act of 1981 you might want to According to TheKnot.com, consider buying jointly with your son the average wedding now costs and his wife by using an “equity-sharupward of $30,000. That’s a ing” arrangement. huge amount for most families In basic terms, an equity-sharing given that the average houseagreement allows your son and his wife hold income in 2013 was $51,939. to be resident equity owners while you and your wife are nonresident investors. That’s also a huge amount for another reason: Household income Your son and his wife can deduct a porin 2013 was 8.7 percent lower than tion of the mortgage interest and propin 1999. erty taxes, while you and your wife can Is some of that wedding money deduct a portion as investors. Because better spent on a down payment you are “investors” and not residents for a house? The answer depends you can also depreciate your share of on family preferences, finances the property. and dynamics, and whatever is best As an example, you put up $50,000, in your particular situation. It also and a property worth $300,000 is depends on family goals: Many famipurchased. You and your wife have a lies see weddings as a way to help the 30-percent interest in the property – a number that entirely is negotiable – and new couple get a head start in life. The important point is not to let social your son and his wife own 70 percent. pressures drive anyone into debt or Each month they pay you rent equal to financial discomfort, including the 30 percent of the fair market rental for bride, groom, parents or the guests. the property.

Mortgage lenders like financial Equity-sharing arrangements raise a

PETER G. MILLER CTW FEATURES‌

gifts. With FHA loans, as one example, the borrower is responsible for coming up with the down payment. There can be a “seller contribution” – say a credit toward closing from the owner – but the down payment itself must come from the purchasers. However, one big exception to the down payment rule is that gifts are allowed from family, friends, an employer or labor union, a charitable organization and even a government agency.

“In order for funds to be considered a gift,” says HUD, “there must be no expected or implied repayment of the funds to the donor by the borrower.”

The value of such gift funds is enormously important.

First, the larger the down payment the less there is to borrow,

so monthly ownership costs are lower.

Second, if the down payment is at least 20 percent of the purchase price then the borrowers won’t need mortgage insurance, a big cost. In effect, not having to pay mortgage insurance is a sizable dividend.

What about registering for gifts? The reality is that people are getting married later. Back in 1960 the typical bride was age 20.3 at the time of her wedding, but now the bride is likely to be age 26.6, according to the Census Bureau.

Because people are marrying later they tend to own more stuff at the time of their nuptials, so they have less need for mixers and bathroom scales. Instead, in many cases, checks and cash are very welcome.

The socially acceptable way to get financial gifts is to let the word spread that you would prefer cash and to explain why: Money from a wedding that’s intended for a responsible purpose – perhaps toward the down payment for a home, the repayment of student debt or just for savings – is likely to be an acceptable idea, especially in today’s fragile economy.

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