May 2, 2008

Today’s Real Estate

So, what’s the difference?

By Donna Nardi
Special to the Times

In recent years, lenders granted loans for almost any potential buyer – credit-worthy or not. In order to offer loans to shaky borrowers, “exotic” loans were created. While the term may have sounded sexy at the time, it has certainly shown its ugly side, now that short sales and foreclosures have become prevalent, even in Santa Clara Valley.

The media has reported facts, but it has also, in many cases, created unnecessary panic. It’s important to focus on facts, not hype, and the facts vary greatly from location to location. Mortgage interest rates remain near historic lows, and today’s “corrected” home prices are much more affordable.

However, loan requirements have changed, as banks understand lending practices of the recent past cannot continue. Today, borrowers may not qualify for as large a loan, and a larger down payment may be required. Banks, in many cases, have additional qualification requirements. And so, the answer to “what’s the difference, now” is preparation.

Improve your credit score
A great credit score can save you a tremendous amount of money over the life of the loan. Banks award their best interest rates to borrowers with the highest credit scores. Lower interest rates can allow you to qualify for a higher-priced home, or reduce your mortgage payments – your choice. That’s why it’s best to not only check your credit score annually, but regularly work to boost it.

Lenders use the FICO score, a mathematical format that evaluates how much credit you have, how well you’re using it and your payment history, which summarizes your credit-worthiness. Your credit history and score are reported by the three major credit reporting agencies: Experian, Equifax, and Trans Union. So, what is a great credit score? A score of 760 or higher will generally qualify you for the best interest rates.

If your credit score is lower, there are several ways you can improve your credit score. While you can’t undo the past, you can improve your score, which will take some time and effort, but is well worth the effort.

One way to improve your score is to reduce credit accounts to five or six. A second is to pay down account balances to below 30 percent of your limits. It’s important not to apply for new credit, which creates inquiries on your report. One or two inquiries probably won’t hurt, but more will. Finally, review your credit report for accuracy. If there are errors, fix them by contacting relevant creditors.

Create a budget
Loan underwriters consider your income, assets, debt, savings and all your financial obligations when approving your loan and interest rate.

But just because you’re approved for a certain mortgage amount, that full amount may not be conducive to your personal budget. You, and only you, can decide what the true cost is for your family’s lifestyle.

Factor in education, vacations, recreation, charitable contributions and incidentals to determine a realistic and comfortable long-term budget. Then, select a home that fits within your pre-determined budget, regardless of the pre-approved loan amount.
Raise cash

Banks have tightened their lending practices in recent months, and may require you to provide a larger down payment on your new home. Once you scrape together what you believe is enough cash for the down payment, be sure you figure in the closing costs. Of course, lenders afford the best loans to those with great credit and those paying at least 20 percent down. Following are some methods to raise cash:

- Ask for a promotion or a raise.

- Take a second job, (temporarily) or work more hours at your current job.

- Sell big-ticket items, or collectibles.

- Getting married? Set up an account for down payment contributions/gifts.

- If you’re relocating, your employer may offer a tax-free loan for your down payment.

- Withdraw from your IRA if you’re a first-time buyer (check with your tax person first).

- Reduce the amount withheld from your paycheck if the same year as your purchase.

- Reduce unnecessary spending –do without, or buy something less costly.

- Borrow against, or sell other real estate you own.

- Cash in or borrow against a life insurance policy (check policy rules first).

- Borrow against retirement funds (see your tax person first).

- Offer relatives an equity-share partnership in exchange for some down payment.

- Ask parents or grandparents for cash gifts, $12,000 annually is tax-free.

Owning a home is a privilege, not a right. Banks have returned to more traditional methods in their lending practices. This should drastically reduce the risk to the banks, as well as the consumer. Regardless of the amount a lender may qualify a borrower for, ultimately, the borrower is in control of their own destiny and will reap the consequences either way.

Lenders must be ethical, have integrity and work in behalf of the borrower. Your realtor should be able to refer lenders they know and trust.

The lender should ask questions about your lifestyle, your current and future plans and offer loans accordingly. Be sure you fully understand the offered loan, and be certain you can make the payments now and in the future.

First-time buyers can often qualify for loan programs, down payment and closing cost assistance through the state of California, Santa Clara County and certain cities. One great state program is CalHFA, which aids with down payment, closing costs and below-market fixed interest rates. Your realtor or lender can help guide you to and through these programs. Homeownership is still the best investment for your family’s future.

Donna Nardi is a Realtor, Accredited Staging Professional, and Senior Real Estate Specialist with Prudential California Realty in Willow Glen. You may reach her at (408) 918-4410, or donna.nardi@prurealty.com, or www.HappyWayHome.com.