Oregon Real Estate
Would you move if it was to your advantage?
A much-repeated investment strategy is to buy low and sell high. Some people who purchased around the financial crisis of 2010-2012 are poised to make considerable profits.
The median home price in America is now $295,300 up from $155,600 in February 2012 which calculates close to an 8% annual increase. The median equity that homeowners have earned during the same period is $140,000.
Inventory is in short supply while demand is high which has caused prices to increase. Factors that continue to contribute to the lower number of homes on the market are record low mortgage rates and housing starts have not met expectations since the Great Recession. This year, people spending more time at home due to the pandemic has caused some people to rethink their current living space which has added to the demand.
Some experts believe that a significant portion of the workforce will continue to work from home after the pandemic has passed making the motivation for a larger home more of a long-term effect.
The median days on the market for a listing is 24 which is a direct result of the low inventory and heightened competition. Sold homes are receiving an average of three offers with some situations ending in a bidding war. This is an advantage for a seller who can not only realize a higher sales price but also accelerate a move into another home.
While the pandemic has certainly wreaked havoc on some businesses like the hospitality industry, real estate has continued to boom. Seven out of ten sales contracts are closing on-time which can give sellers a great deal of confidence.
Taxpayers can exclude up to $500,000 of qualified gain if they are married and up to $250,000 if single. Some homeowners are taking the profit from their homes while at the top of the market, reserving part of their equity for investments, and purchasing another home with a higher loan-to-value mortgage at the incredibly low mortgage rates now available.
If you’re curious to see if this might work for you, contact us at (503) 289-4970 to find out what your home is worth now and what homes are available that may fit your lifestyle better. Download our Sellers Guide.
Debt-to-Income Ratio Affects Approval & the Interest Rate
Debt-to-Income ratio is a tool that lenders use to qualify buyers for a mortgage and is an important factor in determining loan approval. It provides an indication of the amount of debt that a potential borrower is obligated to in relation to how much income they have.
Total monthly debts are determined by adding the normal and recurring monthly debt payments such as monthly housing costs, car payments, minimum credit card payments, personal loan payments, student loans, child support, alimony, and other things.
By dividing the monthly income into the monthly debt, you arrive at a percentage of the monthly income. Lenders actually look at two different ratios commonly called the front-end and the back-end.
The front-end ratio is the proposed total house payment including principal, interest, taxes, insurance, mortgage insurance if required, and homeowner association fees. Lenders generally don’t want these expenses to be more than 28% of the monthly gross income.
The back-end ratio includes the same items that are in the front-end ratio plus any other monthly obligations like the ones mentioned earlier. Lenders prefer to see this ratio not to exceed 36% of monthly gross income but some lenders may extend that to 43%. Borrowers obtaining an FHA mortgage might also be allowed an even higher back-end ratio.
If a borrower had $8,000 monthly gross income, their proposed house payment should not exceed $2,240 or 28% of their monthly gross income. Then, their house payment and monthly debt should ideally not exceed $2,880 or 36% of their monthly gross income.
For the sake of an example, let’s say that their monthly debt was $900. That would only leave $1,980 for the maximum house payment. The monthly debt became a limiting factor affecting the house payment.
In addition to determining whether the buyer qualifies for the mortgage, it could affect the interest rate. Having good credit and having the proper ratios can result in being approved for a mortgage. On the other hand, if the debt is on the upper side of an acceptable range, the lender may charge a higher interest rate for the addition risk of a marginal borrower.
While the math is not difficult to come up with your ratios, it is not necessarily a do-it-yourself project. A trusted lending professional can assess your situation and give you an accurate picture of what price home you can afford and the rate you can expect to pay.
Both things are important to know before you start looking at homes and especially before you contract for one. All lenders are not the same. Call me to get a recommendation of a trusted mortgage professional who specializes in the type of mortgage you want. Download this FREE Buyers Guide.
What are Credit Brackets?
Buyer’s Closing Costs
Ideally, each party will pay their own closing costs associated with the purchase and the sale of a home, but they can be negotiable based on lender requirements and market conditions.
The fees are usually paid at the settlement and will be itemized on the closing statement. Buyers should be aware of them before contracting for a home. If a mortgage is involved, the lender will want to verify that the borrower has ample funds available at closing to pay for them.
Buyer’s closing costs can range between two to five percent of the sales price. The real estate agents should be able to give you an estimate of what a buyer can expect. The most accurate estimate will come from the lender at the time the loan application is made. They may or may not include other fees that will be charged to buyers by the title or escrow company.
Buyers are required to be provided a standard Closing Disclosure form at least three business days before the loan closing date. This document will include the loan terms, estimated monthly payments, loan fees and other charges. This can be compared to the loan estimate provided by the lender when the application was made.
Fees connected to a mortgage
Loan origination fee … This is the lender’s fee for processing the mortgage application. It can vary in amount but typically, it can be one percent of the mortgage amount. It may be possible to negotiate this fee into the rate of the mortgage.
VA funding fee … This is a fee charged to the veteran for closing the loan. It can be paid in cash or rolled into mortgage. The amount is based on the status of the veteran, their down payment and whether they have had a VA loan before.
Appraisal … This is a fee paid for a licensed appraiser to determine the value of the property. It validates that the mortgage will not exceed the purchase price and that the buyer has enough down payment based on the type of mortgage applied for.
Attorney fee … This fee is charged to ensure that the legal documents are drawn properly so the lender will have an enforceable mortgage. It is not for legal representation of the buyer.
Discount points … A point is one percent of the mortgage. These fees are considered prepaid interest and can be used to adjust the interest rate on the mortgage.
Lender’s title insurance … This coverage insures that the lender has an enforceable lien from title claims on the property. This policy is usually issued in connection with an owner’s title policy and is priced separately.
Mortgage insurance … Most loans made in excess of 80% of loan to value require mortgage insurance to protect the lender from loss if the property must be foreclosed on. There is no mortgage insurance requirement on VA loans. FHA mortgage insurance premium has two parts. There is an up-front charge of 1.75% of loan amount and then, a monthly amount which is added to the payment. Conventional loans usually collect the first month’s premium in advance and subsequent amounts are rolled into the mortgage payment.
Recording fees … These are fees that are for filing the legal documents with the municipal or county recorders. The documents would include the mortgage and the deed.
Survey fees … This fee is necessary, based on requirements of the lender, to verify property lines, shared fences and driveways and to identify any other encumbrances.
Underwriting fee … This is a separate fee that covers the research and determination that the entire loan package meets the lender’s requirements.
Fees required by mortgage for escrow account
Property taxes … Lenders can require two to three months taxes to be held in escrow so that there will be enough to pay them in full 60 to 90 days before they are due.
Property insurance … Insurance is paid in advance and the annual premium will be due at closing. The lender further requires one additional month’s amount so that one month prior to the anniversary date, the premium can be paid for the renewal.
Flood insurance … The lender may require flood insurance on the property based on their assessment of the location in a flood zone or proximity to a flood zone.
Fees connected to purchase of a home
Settlement fee … This is the buyer’s portion of the fee paid to the title or escrow company, or attorney who handles the closing of the sale.
HOA Fee … Home Owner Association fees are usually paid in advance by the owner. They are prorated at closing for the amount paid that the seller does not benefit from.
Owner’s Title insurance … This coverage insures that the buyer, the new owner, received clear and marketable title from the seller. It will protect the new owners’ interests should they be challenged. Even though it may not be required, it is recommended.
Pest inspection … A pest inspection by a licensed exterminator can be required by a buyer to determine if there are active termites or termite damage, dry rot or another pest infestation.
Property inspection … A home inspection conducted by a professional can be required to determine structural integrity of the property as well as all the systems in the home. It can include but not be limited to plumbing, electrical, roof, heating and air conditioning, appliances and other things.
Title search … Sometimes, title companies waive this fee when an owner’s title policy is issued. It can be customary that a separate fee is charged in addition to the premium for the title insurance.
Transfer taxes … When government taxes are required, these fees must be collected.
The Consumer Financial Protection Bureau is a U.S. government agency that makes sure banks, lenders and other financial companies treat the public fairly. You can download a Closing Disclosure Explainer from their website.
Where Did the Assumptions Go?
Mortgage assumptions have not been a practical matter for the last 30 years because mortgage rates have been on a steady decline. Even if the seller had a rate lower than the current rate, the new purchaser must qualify to assume the loan.
In the case of conventional loans, the lender has the right to increase the rate to the current rate which neutralizes the reason for assuming the loan. This change took place in the early 1980’s when lenders added due on sale provisions so lower rates could not be assumed.
FHA and VA loans can be assumed at the existing rate with the provision that the purchaser qualifies for the loan. This could be an advantage if the rate on the loan to be assumed was lower than the current mortgage rate for FHA or VA and the buyer is going to owner-occupy. Unfortunately, investors are prohibited from assuming FHA and VA loans.
Besides the obvious advantage of a lower rate which would have a lower payment, the closing costs are lower on an assumption than originating a new loan. Another benefit is that the loan will be further into the amortization schedule than starting a new 30-year loan which means it would be retired sooner while the equity is also growing faster.
The current rates are close to one-percent lower than they were a year ago, so, assumptions are probably not a method of financing a home purchase in the near future. The Freddie Mac forecast expects rates to remain low, possibly at a yearly average of 3.0% in 2021.
Mortgage rates have remained low since the Great Recession even though experts anticipated they would start trending upward. If rates increase, especially rapidly, assumptions of FHA and VA loans could easily be a tool that buyers and real estate professional alike will be employing. For sellers with an assumable loan at a below market rate, it could add to the value of the property as well as the marketability.
Vacation Home Sales Up 44%
Vacation home sales are up 44% year-over-year according to the National Association of REALTORS® based on sales during the July to September period. Not only are the number of units up, but they are also selling faster than in previous years.
On a national basis, 72% of existing vacation homes closed in October were on the market for less than one month.
The increased desirability and affordability of vacation homes, according to the National Association of Realtors, seems to be influenced by the pandemic and low mortgage rates. The ability to work from home seems to be contributing to this increase.
Freddie Mac reports the average commitment rate for a 30-year, conventional, fixed-rate mortgage decreased to 2.83% in October compared to the aver commitment rate for all of 2019 which was 3.94%.
There may also be a safety factor involved with these decisions to purchase vacation or second homes. Contagious diseases flourish more in highly populated areas like big cities and suburbs. The locations of the vacation or second homes are generally in areas with less residents.
The slower pace from the city may also add to the appeal of considering second homes. Proximity to the mountains or water, whether it be the ocean, rivers or lakes, have become a lure to people who realize that if where they work doesn’t matter, they can select a place where they want to be.
Historically, Americans on the east coast left the cities during the 1793 yellow fever epidemic. The same migration took place in the mid-19th century during three waves of Cholera and Scarlet fever.
Trends have yet to determine whether some of these new vacation home buyers may consider moving permanently or may reconsider the decision after the pandemic. Currently, it does have broad-based appeal and offers a lot of flexibility to owners who can afford it.
A home inspector is another key professional involved in a real estate transaction. Many times, the sales contract will have a provision that allows the purchaser to have inspections made to discover issues that are not readily apparent or have not been disclosed by the seller.
It is important to have a qualified individual perform the inspection. Regardless of whether a license is required, buyers should ask about the inspector’s experience, training, years in business and if they are familiar with the area and type of property involved.
Membership in professional associations can indicate an inspector’s commitment to education and training. References from both customers and agents are helpful and may be more meaningful. You are encouraged to call the references, especially, if you are concerned about any specific areas.
Errors and Omission insurance is intended to cover mistakes made during an inspection. It would be good to find out if the inspector has this type of insurance and how mistakes are handled or if omissions are made.
Find out exactly what is included in the inspection and what will trigger the inspector to recommend that you get an opinion by a specialist. They should be able to provide you with a sample report so you can see the detail with which the items will be explained. Ask if items that need attention will also be documented with pictures.
Some inspectors will allow you to accompany them during the inspection. They will be able to point out their concerns and answer any questions you may have about different things. An inspection can take two to three hours depending on the size of the property.
Generally, there is a time allotted in the sales contract for the inspections to be made and not completing them in a timely fashion could waive your right to use the contingency. Your real estate professional will be able to guide you through this process.
New Loan Limits For 2021!
First Things First
If you are making a particular meal for the first time, it is essential to have a recipe so that it turns out the way it should. Knowing the ingredients and preparation can guide you through the process.
Buying a home is really no different than making a new recipe. There are certain things that need to be done, many of which should occur in a particular order to save time, money, effort and disappointment.
Your first inclination may be to start searching the Internet for homes and schedule some showings or possibly visit open houses. Even though this is very gratifying, it shouldn’t be done until you have gone through the preliminaries.
Buying a home for the first-time implies you haven’t been through the process before and even though, you may have a rough idea of what needs to be done, selecting the right agent in the beginning will give you the benefit of years of personal and professional experience that can help you avoid some of the common mistakes made when buying a home.
This agent can direct you to find the other team members that are required like the lender, title company, inspectors and others. Each member of the team has an important role to play that if not done correctly, could cause delays and possibly, jeopardize the transaction.
An important step is getting pre-approved so that you’ll know exactly what price mortgage and home you’ll qualify for. This may even allow you to lock-in a mortgage rate before you contract for a home. The pre-approval could also prove very helpful in negotiating with the seller by removing some of the doubt in their mind regarding an unknown buyer. Another advantage to pre-approval is that if you are competing with multiple offers, you have the advantage of being more of a known commodity.
You’ll need to assemble some documents for the lender including pay stubs from the past two months, W-2’s from last year, proof of additional income, tax returns for the past two years, bank statements for the last three months, list of all open credit accounts and balances, copy of driver’s license and history of residence for past two years.
Buying a home is one of the most important decisions in your life and it should be done with care and research. When all the things are done in the right order, finding the “right” home is just like following a recipe. For more information, download this Buyers Guide that includes great information to help you through the process.
More Time at Home
We are all spending more time at home and will probably need to continue to do so for a while longer. Depending on the makeup of your family, your home is now a home office, a gym, a virtual classroom and considerably more meals have been prepared in your kitchens in the past six months than normal.
Some businesses have undergone a metamorphosis that has shown them that maybe they do not need the big commercial spaces for their employees. They realize that they can be just as productive with their work force offsite which will cut expenses.
If this scenario sounds familiar, it may be worth exploring what moving would look like for your situation. To analyze the options, you will need to know what your home is worth and what the net proceeds will be after selling it.
You will need to know what homes are available with the amenities you are looking for together with the prices and mortgage money. Depending on the interest rate on your current mortgage, there may not be much difference in payment for a larger mortgage at today’s incredibly low rates.
Another option that some homeowners are considering is to not reinvest all the proceeds from the sale of their existing home into the new home. They are reserving some of the cash as a contingency fund for the unexpected. This strategy is providing peace of mind in uncertain times.
It is said that an investor is faced with three decisions every day: buy, sell, or hold. The equity in a home represents, for most people, their largest investment asset. While it is an asset, it is also an amenity.
Prudential thinking would insist on protecting your investments, but it would also suggest that you would evaluate alternatives to avoid missing opportunities. Having the facts available will make the options clearer and possibly, the decisions will become obvious.
We are available to help you assemble the information you need to consider what is best for you.
Using a $0-Down VA Loan to Purchase a Home
Moving “Down” in an “Up” Market
Selling a home and buying a lower priced home that meets your current needs can be to your advantage in an “Up” market like the current one with low inventory. The advantage is that you can maximize the price for the home you’re selling and not have to reinvest it all in your replacement.
Just to illustrate the point, let’s say there is a 10% premium in the sales price of a home currently. If you’re selling a home for $750,000, it would be $75,000. If you replaced the home with a $500,000 home, the premium would be $50,000 which means you’re $25,000 ahead.
Let’s further assume that your home is debt free so that when you sell it, you have a large cash equity. Instead of paying cash for the replacement home, get an 80% loan at today’s low interest rates and reinvest the proceeds to supplement your retirement.
You may be able to get as low as a 2.5% mortgage and earn significantly more on the proceeds in other investments.
Home prices are up significantly over last year and they’re selling on average in three weeks. Inventory is down and there is less competition for your home than normal which can lead to a higher price. Closed sales increased 9% from August to September according to a Zillow report.
Moving down in an “up” market may be to your advantage. It could lower your cost of housing by saving on property taxes, insurance, utilities and maintenance while being able to take cash out of your home to reinvest in your retirement.
You’ll be using “other people’s money” to free up your equity that you can reinvest at a rate higher than you’ll be paying on your mortgage. The difference would be profit.
To explore this opportunity, give me a call and we’ll look at your numbers.
Cutting Your Housing Costs in Half
Cutting the price will generally bring buyers of anything out of the woodwork that were not serious before. Some renters could easily lower their monthly cost of housing by half or more by purchasing a home with all the financial benefits that come with it.
The most obvious thing in today’s market is that the mortgage payment could be less than the rent the tenants are paying. With mortgage rates hovering around 3%, this is a major factor of the savings.
The two other major contributing factors are appreciation and amortization of the mortgage, neither of which benefit tenants continuing to pay rent. According to the FHFA House Price Index, home prices rose 5.4% from July 2019 to July 2020. There were 400,000 less homes on the market during the summer of 2020 than the previous summer which is influencing appreciation.
With each payment a homeowner makes on their mortgage, a portion is used to reduce the principal amount owed. This is like a savings account for the owner because it lowers their unpaid balance and increases their equity.
The equity becomes an asset that can be accessed by doing a cash-out refinance or a home equity line of credit once the equity has reached 80% loan-to-value.
A $300,000 home purchased with an FHA loan at 3% for 30 years would have a payment of approximately $2,013 including principal and interest, taxes, insurance, and mortgage insurance premium. If the tenant were paying $2,400 in rent, this would be a savings of almost $400 a month.
The monthly principal reduction would average $500 a month for the first year which would lower the net cost of housing. The other major item to consider would be the appreciation. Assuming, in this example, the home was appreciating at 3% annually, the monthly appreciation in the first year would be $750 which would further lower the cost of housing.
|Total House Payment||$2,013|
|Less Monthly Principal Reduction||$513|
|Less Monthly Appreciation||$750|
|Plus Estimated Monthly Maintenance||$200|
|Net Cost of Housing||$950|
In this example, it would cost over $1,400 per month more to rent than to own.
A different approach to this would be that the equity in this home in seven years would be $121,579 based on appreciation and principal reduction. If the same person continues to rent, there would be no equity build-up.
If you’re curious as to how much you could cut your housing cost, go to the Rent vs. Own or contact your real estate professional.
Some Mortgage Interest May Not be Deductible
Banks are concerned about making loans that will be repaid not about making loans that are tax deductible for homeowners. It is good business for the bank but how is the homeowner supposed to know?
Most homeowners and potential homeowners are aware there are tax benefits associated with ownership. For instance, mortgage interest and property taxes have been deductible expenses from federal income tax since it was enacted in 1913.
The current law provides that homeowners can deduct the interest on Acquisition Debt which is the amount of debt incurred to buy, build or improve a first or second home up to $750,000. The amount of acquisition debt decreases as payments are made and it cannot be increased unless the additional funds borrowed are used for capital improvements.
It is not uncommon for a homeowner to refinance their home for any number of reasons. It could be to get a lower interest rate that would lower the payments or remove mortgage insurance. However, when additional funds are borrowed for reasons beyond “buy, build or improve”, the excess is considered personal debt and the interest is not deductible according to IRS.
Maybe this is not important if the owner is taking the standard deduction because it is higher than the total of the property taxes, qualified mortgage interest and charitable deductions made by the taxpayer. Currently, it is estimated that 90% of homeowners are electing to use the increased standard deduction implemented with the 2017 Tax Cuts and Jobs Act.
A confusing issue that occurs at the end of the year is when the lender reports to the borrower the amount of interest that was paid. While that amount is most probably accurate, the bank doesn’t know if it is qualified mortgage interest for the borrower.
It is the responsibility of the taxpayer to keep track of outstanding acquisition debt and whether part of the balance is considered personal debt.
Another area where it could become important is if the property was lost due to foreclosure, deed in lieu of foreclosure or a short sale. The provisions of the Mortgage Forgiveness Act have been extended through 12/31/20 which exempts the forgiven debt from being considered income and therefore taxable. However, it only applies to acquisition debt. Any part of a mortgage refinance that is considered personal debt could be taxable in that situation.
As an example, let’s say that homeowners originally borrowed $300,000 to purchase a home that they owned for 15 years. During that time, the home appreciated significantly, and they refinanced it twice. Once, they made some improvements and took out cash to pay off personal loans and the second time, it was only a cash out.
|Original acquisition debt||$300,000|
|Remaining acquisition debt including improvements||225,000|
|Unpaid balance on current mortgage||$550,000|
In the example above, the personal debt of $325,000 would be considered income on foreclosure and recognizable as income on that year’s income tax return.
If you have never refinanced your home or have refinanced it but never taken any money out of it except to make capital improvements, your unpaid balance in most likely acquisition debt. However, it you have refinanced your home and pulled money out of it for purposes other than capital improvements, those funds may be considered personal debt.
This article is for information purposes. If you are unclear about the current acquisition debt on your home or need advice for your individual situation, contact your tax professional. Additional information can be found in IRS Publication 936, Home Mortgage Interest Deduction.