Housing market prediction (Lake Ridge, Fairfax, Washington: mortgage, lender, budget)

[DavidS827]

Originally Posted by Fairfax Mom

You guys are probably going over my head but when do you think it is a good idea to buy a house? Where do you think the bottom is.

I am thinking of renting my current home (rental market is good) and buying a larger home to live in - using the rent on the first home to pay the mortgage on itself - my mortgage payment is on the low side because we have a lot of equity.

Is this ever a smart thing to do?

2 things I would think about:

1) The lender for your next home is only going to count (at most) 75% of the rental income. So you'll have to "carry" that additional 25% when qualifying. If you can do that and still (comfortably) afford the house you want to move to then I might consider it.

2) If you don't have at least 6 months of reserves just to be used for the house you would rent, then I wouldn't even consider it. I would also not use that 6 month reserve when you're trying to qualify for the next home.

[SmartMoney]

From the lending side, there are quite a few thoughts that hit me right off.

For the individual that is thinking of renting their current home and buying another, a move up home, a down payment will be needed unless you are going w/ FHA. In that case you need to make sure the first home is not financed FHA (or that home must be paid down to 75%). I believe you said there was a lot of equity, and if that is the source of the down payment, get your home equity NOW. Not later, NOW. There are several places to get a true, no penalty, no fee, no closing cost HELOC. And a $0 balance still is a $0 monthly payment. Every day we are seeing lenders' requirements tighten. Where we were able to offer HELOCs to 100% of value, we have been dropped to 90% of value. This will most likely realize another drop, probably to 90%.

Since the first of the year, there have been significant changes in the lending world. Everything you thought you knew needs to be re-checked. Even veterans are looking up guidelines every step of the way.

If I had a home (or two) to sell - I wouldn't unless I needed the money or was prepared to compete w/ the foreclosures. Those foreclosures are becoming today's comparables for appraisals. Our area has been flagged as a declining market, which immediately means on conventional financing an additional 5% down is required. Why compete with that right now? Keep in touch with a real estate agent was have them check on MRIS how many months (years) housing supply your area is showing. Until that is down to below 6 months to a year, I would wait it out. That said, if you need the money, a whole different set of rules apply. Just remember, if you want to sell, you are going to have to compete w/ the foreclosure pricing.....foreclosures represent 80% of the Western Fairfax and Northern Prince William market right now.

OPINION ALERT: We haven't hit bottom, but as we get there, the loan programs will continue to tighten up. We are going back in our future, to the 20% down loan and squeaky credit. Well not that bad, but it gets the point across. The peak of the foreclosures have not even hit yet and as each day passes another 400 loans go into foreclosure status. I fear it's going to get worse, by crossing over to other industries and everyone is bleeding, before this problem is given more than a band-aid to a gaping wound.

[McScootch]

Originally Posted by Bob The Builder

I have cousin who WAS a big shot in the subprime industry. I remember a family dinner about 4 years ago where I said that due to the lack of fundamentals supporting the price rises, people will be handing in their keys to the lenders instead of mortgage payments. He said that none of the economists at his company saw what I was seeing. I think they did, but they were too busy shoveling money in their pockets. I was three years too early.

Likewise, I think it will take people a year or two to finally give up. I believe that even people who can make the payment will be asking themselves why they are making a payment on a mortgage that far exceeds the value of their home. Why not just buy the same home at a much cheaper price and walk away from the one that is upside down?

These people would first have to qualify for yet another mortgage, while maintaining their current mortgage. Tightened lending practices make this almost impossible for the majority of the people in your prescribed dilemma. Most folks who are in that boat are already streching their fiscal limitations.

[livinInLorton]

Originally Posted by McScootch

These people would first have to qualify for yet another mortgage, while maintaining their current mortgage. Tightened lending practices make this almost impossible for the majority of the people in your prescribed dilemma. Most folks who are in that boat are already streching their fiscal limitations.

Not true. To buy another home, all you need to do is express your intent to sell your existing home. All you'd need is whatever downpayment the lender for the new home requires and you'd need to list your existing home with a real estate agent.

Then once your purchase goes through, you abandon the old home instead of wasting time/mortgage money trying to sell it.

For example, let's say you and your neighbor bought your homes (exact same model) for $700,000 brand new for no money down in 2006.

Your neighbor couldn't keep up with his payments, and the bank now owns it and is trying to unload it for $550,000.

You, meanwhile, still owe $688,000 on your mortage.

Just list your house for sale, buy your neighbor's with a new lender, and then turn your keys back into your old lender and you've trimmed your mortgage by over $100,000 without significantly changing your location or even home characteristics.

I suspect this will start to occur most prevalently in communities built/sold during 2004-2008.

At some point, lenders might start requiring that you have a signed contract for your current house before they agree to lend you the money for the new house, but that sort of restriction would really seize-up the market.

[SmartMoney]

Originally Posted by livinInLorton

Not true. To buy another home, all you need to do is express your intent to sell your existing home. All you'd need is whatever downpayment the lender for the new home requires and you'd need to list your existing home with a real estate agent. .

The days of expressing intent are long gone, unless you can carry both mortgages without the benefit of any rent. If your credit is strong, you could be approved w/ a higher than guideline ratio, provided you could show a contract and a loan commitment on that buyer of the home you are selling. Reserves would be required on both properties.

Another calculation: the underwriter would want to see the listing price of the former home and compare that to the loan balance. If it showed you were upside down, the assets to close on the sale (not the purchase) would be deducted from the assets for your purchase. Be very careful in the same neighborhood - you will open a can of worms with a large price discrepancy.

Then there is the complication of a declining market. Maximum loan w/ a strong score is 5% down up to $1M. If the file is flagged "declining market," an additional 5% would be required as a down payment.

Are we seeing homeowners walking away from their home? Yes, many are treating it as a business decision. Their logic: why pay on a mortgage where you owe more than it's worth, and, at a painful payment? Could they buy a home in the interim, a place to call home after they walked away? Yes, but there is much criteria that would have to pass the test to get the loan through......and underwriters have been prepped for what red flags to look for......

And you know what? It's that thinking - getting around the system that landed us in this mess.

[scimitar12]

Originally Posted by DavidS827

2 things I would think about:

1) The lender for your next home is only going to count (at most) 75% of the rental income. So you'll have to "carry" that additional 25% when qualifying. If you can do that and still (comfortably) afford the house you want to move to then I might consider it.

2) If you don't have at least 6 months of reserves just to be used for the house you would rent, then I wouldn't even consider it. I would also not use that 6 month reserve when you're trying to qualify for the next home.

My wife and I just bought a TH. Although we do not have any rental income, our lender told us that they do not care aobut rental income, and in fact, they do not consider it as income at all when looking at loan applications.

[DavidS827]

Originally Posted by scimitar12

My wife and I just bought a TH. Although we do not have any rental income, our lender told us that they do not care aobut rental income, and in fact, they do not consider it as income at all when looking at loan applications.

So, did you qualify by carrying both mortgages?

...did you go to a broker or a retail lender (ie Wells Fargo, Bank of America, Suntrust, Citi)?

[Fairfax Mom]

I have given up hope of moving for many years. Homes are not selling around here and if they do they are greatly reduced. Best we can do is add on to our existing home. We are stuck.

[scimitar12]

Originally Posted by DavidS827

So, did you qualify by carrying both mortgages?

...did you go to a broker or a retail lender (ie Wells Fargo, Bank of America, Suntrust, Citi)?

We sold our house first so no, we are not carrying two mortgages. And, we went through a mortgage broker. We spoke to our real estate agent who sold our house back home and he saaid that mortgage brokers and banks really don't like to include any type of income beyond someone's employment. I guess the logic is they think money form employment is more stable than income recevied from rental property or investment, but the way companies lay off people I question that.

[DavidS827]

Originally Posted by scimitar12

We sold our house first so no, we are not carrying two mortgages. And, we went through a mortgage broker. We spoke to our real estate agent who sold our house back home and he saaid that mortgage brokers and banks really don't like to include any type of income beyond someone's employment. I guess the logic is they think money form employment is more stable than income recevied from rental property or investment, but the way companies lay off people I question that.

Gotcha...

I can tell you that your realtor was wrong though. In some cases there are some additional requirements that lenders will have, but for the most part, rental income is allowable up to 75%.