TedCo Software Financial Matters Blog

It is clear now what a pivotal role the Federal National Mortgage Association (FNMA or Fannie Mae) and the Federal Home Loan Mortgage Corporation (FHLMC or Freddie Mac) played in the economic meltdown we are living through. These government run and supported entities encouraged the creation and sale of bad loans, purchased the same from vendors, then re-packaged the toxic waste and re-sold the loans to others (like Wall Street) who again re-packaged the toxic waste and convinced still other people to buy. Everyone who dealt with this junk got burned, and many more besides. The government owns a fair chunk of the blame for this mess (this goes back decades; both parties had a hand in this). Wall Street does too, as does Main Street. Plenty of blame to go around, but these Federally Sponsored Corporations are in the middle of the failure.

Freddie and Fannie, however, have the backing of the Federal Government (who can always raise taxes or print money to cover its bills). These two mortgage monsters have sucked in about $146 billion (that’s $146,000,000,000.00). One millionth of that figure would pay off my mortgage and leave enough to install solar. Worse, the bleeding is far from over. We easily have another $150 billion or so to shovel in this hole before we see bottom. The administration has committed to supporting them until 2012.

So if they had such a hand in the economic mess, why is there no urgency for reform in Washington? The Republicans have signaled a desire to move ahead, phasing out the mortgage giants in five years or so. The Democrats don’t trust the markets to fill the gap. The Federal Housing Administration (FHA), Freddie, and Fannie originate or purchase 90% of all new mortgages. Some changes will come and the government agencies will shrink, though not by much and not quickly. It would cause such turmoil if they just disappeared that it is unlikely that you will see them go. Also, these are very well connected agencies with many friends in DC.

What does this mean to you? With the federal agencies shrinking and private lenders tightening the mortgage lending market will remain subdued into the foreseeable future. It won’t get easier to get a mortgage anytime soon.

Jim Heitman, CFP®, is a writer, speaker, and Certified Financial Planning practitioner in Southern California.

FHA Tightens Requirements for Home Buyers

CNN reports in “FHA loan requirements will make it harder to get mortgage” that the Federal Housing Administration (FHA) is tightening requirements for home buyers. While I can’t find anything about the changes on the FHA web site at www.hud.gov, the CNN article reports the FHA is taking the following steps:

• increase the up-front mortgage insurance premium from 1.75% to 2.25%.
• require home buyers to have a credit score of 580 or higher to qualify for the FHA’s 3.5% down payment program. If you do not qualify for the 3.5% down payment, you will pay at least 10%
• sellers can provide only 3% of a home’s price to home buyers to help with closing costs instead of 6% as in the past

Perhaps the most practical step the FHA is taking to help fix the mortgage maket is to seek legislative authority to require lenders to assume liability for all the loans they originate and underwrite.

Being a first time home buyer has always been one of those special moments. It’s exciting and scary. You may have saved your down payment, received it as a gift from family, or wish to take advantage of a special opportunity. The links below are to a collection of articles and information resources for first-time home buyers. Some offer tips, others offer information about financial matters and other are about government programs for first-time home buyers. Enjoy!

• Your Money: Seven New Rules for the First-Time Home Buyer
• Common Questions from First-time Homebuyers – HUD
• Before You Buy Your First Home – Tips for a First-time Home Buyer
• First-Time Homebuyer Credit – IRS
• Will the $8,000 First-Time Home Buyer Tax Credit Expand to $15,000?
• First Time Home Buyer Tips

Finally, if you’re a first time home buyer looking for help with the financial math, Real Estate Calculator Suite makes real estate math easy.

I’ve just read The New York Times article, “Illnesses Afflict Homes With a Criminal Past“, and can only conclude one should do everything possible to make sure the home he or she buys has never been used as a methamphetamine lab.

As a home buyer’s tip, this one is important: don’t buy a former meth lab!

Read the article and visit MethLabHomes.com to learn more about the dangers of living in a former meth lab and the huge financial costs of clean up.

Whether you’re ready to buy a house now or plan to wait until the market bottoms in your location, one thing you must know is how much house you can safely afford.

The news is full of stories about home buyers who bit off more than they could chew using funny-money loans. Excluding the legitimate reasons one might not be able to make their mortgage payment (loss of job, death of a spouse, medical events, etc.), the foreclosures in many regions of the country seem mostly a result of people borrowing more than they could afford to pay back. It may have been because of loose lending standards. Or it may have been because they believed they would be able to refinance into an affordable mortgage.

Whatever the reason, through experience or observation, most Americans have learned the importance of not buying more house than they can safely afford.

But that begs the question, “How much house can one safely afford?”

Not too long ago, it was reasonable to say, “you cannot afford all that a lender will offer”. But then came the credit crunch and responsible lenders (as they always have) use the time-tested concept of qualifying ratios. And many irresponsible lenders are returning to what financial tradition has long held to be true: 28% for housing and 36% for debt.

The real answer about affordability is not that difficult to discover. If you want an easy way to see what safe lending standards indicate about the amount of home you can “comfortably afford,” use the Mortgage Qualifier in Home Buyer’s Calculator Suite. It gives you a good idea of what you can expect to comfortably pay each month for your home. And it allows you to easily play with the numbers to see the effects of a pay raise or reduction in income. It also shows you the price range of homes that will be safely affordable for your income and debts.

Importantly, the default values in Home Buyer’s Calculator Suite for the housing and debt ratios are 28 and 36, respectively. In addition to these important mortgage qualifying ratios, “safely affordable” also means there’s money left over each month for living.

For years, one of the tips in Wheatworks’ software has been this: “As tempting as it may be and even though you may qualify for a big loan, avoid buying more home than you can comfortably afford.” The temptation to borrow to your limit is strong, but fight it.

Fortunately, banks and mortgage lenders are returning to the concept of historically sound qualifying ratios: 28 for housing and 36 for debt. Qualifying for a loan may be more difficult as a consequence of the current economic environment. However, because lenders are being more careful, I expect the quality of home loans made in the coming years will be much more sound than those made in the recent past.

Using the Mortgage Qualifier in Home Buyer’s Calculator Suite is easy. You enter your monthly income and your co-borrower’s monthly income, enter your monthly credit card, auto loan and other loan payments, and enter the amount you have available for a down payment. As you enter your personal financial values, the calculator automatically updates the results to indicate how much you can comfortably afford.

The Mortgage Qualifier is one of 12 financial calculators in Home Buyer’s Calculator Suite. Mortgage Qualifier is the calculator that will quickly get you in the home-buying ballpark in terms of what you can safely afford.

You can purchase Home Buyer’s Calculator Suite for $19.95 USD. Or download a free, trial version of Home Buyer’s Calculator Suite at http://www.homebuyerscalculator.com

This is the tenth anniversary of one of Wheatworks Software’s most popular tools for home buyers. Home Buyer’s Calculator Suite $19.95 was first released back in 1999.

During the last ten years, as new features and additional real estate calculators were added to the software, the name was changed to Real Estate Calculator Suite from Home Buyer’s Calculator Suite. (Real Estate Calculator Suite, a more complete calculator suite is designed for home buyers, home sellers and real estate professionals. It covers the spectrum of real estate finances, from prequalification to estimated closing costs to refinancing and prepayment savings.)

I’ve been reminded recently that some people simply want to know about the front end of home ownership. They want to buy a home.

Wheatworks has reintroduced Home Buyer’s Calculator Suite just for those who are interested in buying a home. Like the original Home Buyer’s Calculator Suite, it focuses on helping home buyers calculate the financial scenarios related to buying a home.

ScreenShot

Home Buyers Calculator Suite includes the following calculators for home buyers:

• 2 quick calculators to calculate payments of principal, interest, taxes and insurance or to calculate for one of the missing values when given any three of loan amount, term, interest rate and payment,
• 2 down payment savings calculators; one to determine how long it will take to save a specific amount, the other to determine how much you can save during a specific period of time,
• a mortgage qualification calculator that shows you how much house you can reasonably afford under conservative lending standards (there are no funny-money loan calculators in Home Buyers Calculator Suite, the default housing ratio is 28 and the default debt ratio is 36),
• Home Buyers Calculator Suite includes LoanSpread™, a calculator that compares 135 loans at once and gives you details of any you wish to explore,
• 2 amortization schedule calculators which will calculate the effect of prepayments, too,
• an estimated closing costs calculator,
• a refinancing calculator,
• a rent or buy calculator (because renting is often smarter than buying),
• and a biweekly payment calculator which explains an easy way to pay off a mortgage loan early.

Less complicated than Real Estate Calculator Suite, but every bit as modern in terms of software technology, Home Buyer’s Calculator Suite is also less expensive. Available for a one-time fee of $19.95, Home Buyers Calculator Suite is designed to make real estate math easy for home buyers.

Several things are lining up correctly for first time home buyers. Interest rates are still low, home prices have fallen and the IRS offers an $8,000 (or 10%) tax credit for first time home buyers in 2009.

And although they can be frustratingly complicated depending on the lender and situation, low prices are also available on REO (“real estate owned” by the bank), short sales and foreclosures.

MSNBC has this article about one first-time home buyer in Phoenix: “First-time buyers benefit from housing slump: In many markets, homes that were once prohibitive now are affordable“.

While most real estate agents will tell you (tongue in cheek?), “it’s always a good time to buy” … if you’re a first time homebuyer, your finances are good and you’re ready to buy a house, this may be your time.

Here’s an entertaining Google adventure: Search for “now is the time to buy a home” using Advanced Search and limiting the results to the past month. Record the number of results. I get 416 web pages with the phrase, “now is the time to buy a home”.

Now do the same thing with the phrase, “now is not the time to buy a home”. I get 0. No web page in the past month has declared, “now is not the time to buy a home”.

Finally, do both searches for the past year. “now is the time to buy a home” has 843 results while “now is not the time to buy a home” returns 14.

What’s this mean? I don’t know for sure, but I think it means those who want to sell (home owners, real estate agents, lenders) are speaking louder than those don’t want to buy.

It begs the question, of course, “is now the time to buy a home”.

As always, regardless of what anyone proclaims, buying a home is a significant, personal experience. Foreclosures and walk-aways are in the news on a daily basis. Some even declare they have quit making payments because it’s a good business decision. Whatever.

It’s only a good time to buy a home if it’s a good time for you.

Can you afford it? Can you afford it with a fixed rate mortgage? Can you afford it on one partner’s salary? Do you need to buy a home? Is the home you want to buy in good condition? Are you going to live in your home long enough for it to be cheaper than renting? There are a lot of questions a home buyer must ask and answer honestly.

It’s always easy to find someone who will tell you now is the time to buy a home. Only you can determine whether now is the time for you to buy a home. Protect yourself out there!

The Federal Reserve cut the federal funds rate from 1% to a range of 0.0% to 0.25% this week. Homeowners immediately started taking advantage of the reduction in interest rates by refinancing their homes to a lower monthly payment.

The MSNBC.com story is titled, “Fed rate cut sparks a rush of refinancing“.

If you are interested in refinancing, the Refinancing Calculator in Real Estate Calculator Suite is a great tool to use for determining the effects of refinancing. It shows you the savings a refi can offer in terms of time and money. And it’s easy to use.

For those with good credit and the ability to make a healthy down payment, the current rates for refinancing into a fixed, conventional loan are now as low as 4.5%.

But how do you determine if refinancing will be a good financial move? Sometimes it’s not. There are many scenarios where refinancing is almost always a bad idea. If you plan to sell your house next year, you’ll probably not live in the house long enough to recoup the costs of refinancing through the monthly reduction in payment. If you already have a very low interest rate, refinancing with costs may be only a break even effort over the long term.

With rates as low as 4.5% though, refinancing will look good to a lot more people. But a caution is in order. Refinancing is best done when only the remaining balance is refinanced. Suppose the purchase price of your home was $200,000 and you’ve paid it down to a $150,000 balance. A simple refi of $150,000 is usually the best approach. If you refinance the full value of your home (also called a “cash out refi”), your payment will be higher than a simple refi and your debt will be greater. You’ll be buying your entire home over again!

The 16 real estate and mortgage calculators in Real Estate Calculator Suite, $39.95 US, give you the ability to play with your own numbers as you consider a real estate purchase. The Refinancing Calculator is an example of how Real Estate Calculator Suite “makes real estate math easy”!

Download an evaluation copy of Real Estate Calculator Suite and try the Refinancing Calculator. Here’s a screenshot to give you an idea of how simple it is to use.

(Click the screen shot to see the full sized image)

A search for “‘upside down’ mortgage” on Google returns 687,000 results. “housing crisis” returns 2,270,000 results.

In fact, housing news is so focused on the real estate bubble, that it’s difficult to find information about managing a mortgage loan responsibly. You’ll read more about home buyers walking away from their home than about paying off a mortgage early.

But suppose you didn’t buy more home than you can afford. Suppose, you’re like many homeowners and you can comfortably make your mortgage payments. Suppose, you even want to pay your mortgage off early.

How do you crunch the numbers? Use Real Estate Calculator Suite, a Windows-based collection of real estate and financial calculators designed to make financial math easy.

Making additional payments towards the principal of a loan is a great way to reduce the total amount of interest you will pay over the term of the loan. The Prepayment Calculator shows you the effects of making these prepayments (paying additional amounts to more quickly reduce the principal of your mortgage).

Here’s a quick example:

Amount Borrowed: $100,000
Interest Rate: 8.75%
Term in Months: 360
Annual Property Taxes: $1,200
Annual Insurance: $1,200
Annual PMI Payments: $600
Total Monthly PITI Payment: $1,036.70
Total Interest Over Term: $183,212.97
Total Interest and Principal: $283,212.97

Using the Prepayment Calculator to calculate the savings of adding an additional $100.00 to your monthly payment, you’ll find that you’ll shorten the term of your loan from 360 months to 238 months (save 10 years) and save a total of $72,330.29!

And you’ll save the time and money by simply adding an additional $100 to each monthly payment!

Here’s a screenshot of the Prepayment Calculator:

Learn more and download a free trial version at Wheatworks.com