For First-Time Buyers, Tempting Prices but Tougher Rules

By Ilyce R. Glink and Samuel J. Tamkin
Saturday, May 24, 2008

If you're a first-time home buyer, you'll find it a little harder to qualify for a mortgage than your counterpart did two years ago.

Wall Street's credit crunch and record foreclosure rates have made investors nervous about home buyers with small down payments and lower credit scores.

While the number of first-time buyers is down, there are plenty of folks who are tempted by falling home prices and low interest rates. What kinds of loans are out there for them?

The kind of loan you're offered starts with your credit score. According to Fred Glick, a mortgage lender and real estate broker in Philadelphia, Fannie Mae and Freddie Mac, which buy most mortgages from lenders, are looking for credit scores of at least 660.

"We're absolutely accepting loans where borrowers have credit scores in the 600s," said Craig Nickerson, Freddie Mac's vice president of expanding markets. "There's no question that the stronger the credit of the borrower, the better product they can obtain."

"But there is a matrix based on the credit score and the down payment" that can change that number, Glick said. "If you put down 5 percent, you'll need a credit score of at least 660. But if you go with an FHA loan, you can put down 2.25 percent and, allegedly, they'll take a 580 credit score."

"With a credit score over 700, you can still get 100 percent financing," Nickerson said.

Federal Housing Administration loans are making a strong comeback, said Allen Jones, a spokesman for Bank of America.

"In the calendar year 2006, Bank of America originated $1.5 billion of FHA loans. In April 2007, we originated $1.1 billion in FHA loans," he said. In 2008, Bank of America predicts it will fund $5 billion in FHA loans. "With the changes FHA has made over the past year, it has become a sweet spot for us."

Who is a good FHA candidate? "Someone in a first or second job out of high school or college, who is working and can afford the property but might need help with the down payment," Jones said. "With FHA, a parent can provide the down-payment assistance as long as the borrower can afford the payment."

Jones said that the average credit score of an FHA borrower is about 620, though "there are plenty of 500s and plenty of 700s."

In San Francisco, Residential Pacific Mortgage's Dick Lepre said that his company no longer accepts applications from borrowers who have a credit score of less than 680. "Everything is being ratcheted up. It's as if somebody took every credit guideline and raised it 20 points," he said.

When it comes to down payments, lenders want to see at least 5 percent down for a normal conforming loan of up to $417,000, said Victor Benoun, owner of the Mortgage Source, a brokerage based in Studio City, Calif.

"If you're borrowing more than $417,000, lenders want to see at least 15 percent equity in the property, although they're cutting that back to 10 percent to make up for a declining market," Benoun said.

Which makes the FHA's lower down-payment requirement seem doable. In addition to facing the difficulty of having the cash for a down payment, many first-time buyers are having trouble coming up with enough income to support their mortgages, Benoun said.

"Lenders would normally say they'd like to see 25 to 28 percent of your gross income going against your housing expense, and now that has been relaxed a bit more to include ratios of up to 40 percent of your gross income. Once you get past the ratio of 42 or 45 percent of your gross income, you may not be able to do a conforming loan," Benoun said. "I have clients now who are self-employed, and they're not showing enough income to qualify."

Next week: Is there any place to get a 100 percent loan? We'll take a look at the few remaining options, including what's new at the Department of Veterans Affairs.

Q We've decided to downsize and are building a house. We put down a deposit of just over 10 percent and have a loan commitment for another 25 percent of the cost of the house. We have significant equity in our current home and plan to use that for the rest of the purchase price.

However, because the market is slow in our area, we have come to realize that we may not be able to sell our residence before we close on the new house. We can afford a large enough mortgage to pay for both houses, but it won't be fun.

Our lender is willing to consider a larger mortgage amount but has suggested that we take out a home-equity line of credit for the difference needed for the new house. The monthly payments would be interest-only (prime minus 0.5 percent), and it obviously would be paid off in full when we sell our current house.

Is there anything specific we should be concerned about with this approach?

AYour mortgage lender is offering you a pretty good option. Using a HELOC to finance the balance of your new house purchase is an easy move to get you out of a financial jam, especially since you'll pay it off as soon as your home sells.

Your house will sell, especially if it is priced right and is in excellent condition. But you have to be realistic. You may have to accept that your home isn't worth what it was two years ago, which also isn't much fun. But if you're realistic about where prices are in the neighborhood and approach your sale as a seller and not as a homeowner, you should be fine.

Remember that carrying two homes will be quite expensive, and that should give you an incentive to make a deal with any reasonable buyer.

In days past, when HELOCs weren't as readily available, borrowers in your position would get what's called a bridge loan. Essentially, the loan bridged the gap between when you'd have your cash from the sale and when you needed to buy your new home. Bridge loans were relatively inflexible in that they were good for maybe six months or a year and then would have to be renewed or refinanced. They were designed as short-term vehicles only.

Although you're prepared to pay for the mortgages on both homes, keep in mind that the HELOC has a variable interest rate feature. Though your lender quoted you a rate of prime minus 0.5 percent, the interest can go up or down as the prime rate rises or falls.

If you end up selling your home quickly, changes in interest rates might not affect you, but if you can't sell the home and interest rates start to go up, you might feel quite a bit of pain.

Still, this sounds like the best, and easiest, path to take.

We got caught up in Michigan's real estate and job crisis as we were being transferred out of the state by my husband's company. We've tried to sell our Michigan home for the past nine months. Our lender is exploring a deed in lieu of foreclosure for us and is in the title search phase. We're worried we're running out of time to make the deed in lieu happen, and we think the lender may decide to foreclose.

After six months of making payments on a house we no longer lived in, we couldn't continue and are now more than 90 days past due. It just occurred to me that the mortgage is in my husband's name only, but the title is in both our names. This was done a month or so after closing. Will the title come back clear? If not, will it be time-consuming and involved to clear it in time to be accepted for deed in lieu?

When the title company prepares the title report, it will show that you and your husband own the property together.

If the lender agrees to the deed in lieu -- that is, agrees to accept the title to your home directly from you and your husband without suing your husband to foreclose on the home -- you and your husband will have to sign the deed to transfer the title to the lender.

While the documentation to transfer the title to your husband's lender is simple, getting the lender to focus on your transaction may take more time. There are thousands, perhaps even tens of thousands, of people in your situation in Michigan.

If you can get your lender to focus on your case, you should be able to accomplish the deed in lieu of foreclosure relatively quickly, even though these deals sometimes take much longer than you'd like.

Make sure the lender also agrees to release you from any remaining balance of the loan. If it doesn't agree to that, the lender can still come after you for any amount you still owe. Just because the lender gets title to the home doesn't mean the debt is extinguished. If the home is ultimately sold for less than what you owe on the mortgage, the lender can sue you for the difference.

My brother recently died and did not have a will. My parents are left with his house in Colorado, which has a mortgage. They were told yesterday that the value of the house has gone down drastically and that they may be better off deeding it back to the bank because there would be a balance to pay at closing. Are my parents' only options to sell the property or allow the bank to foreclose? What if they want to keep the house?

Your parents need to decide whether to try to keep the house or let it go.

They could keep the house, but they would have to pay the mortgage, real estate taxes and insurance, and make sure the property is maintained. If your parents feel that the house will be worth substantially more in a couple of years, they should keep it, try to rent it and see how the real estate market performs then.

If they are not inclined to keep up the payments or don't see the value of the property increasing for a while, then they could try to sell it with the hope that it will bring in more money than is owed. Their other option is to stop payments to the lender and let the bank foreclose.

In general, if your brother's only asset were the home, the bank would not be able to get any additional money owed to it from other family members. So your parents wouldn't be on the hook to repay the balance of the mortgage.

Start by figuring out what your brother owned and what he owed when he died. If he truly owned nothing but the house and your parents don't want to keep the property, foreclosure might be a good alternative. For more details, and perhaps other options, consult with an estate lawyer.

My mother's longtime companion added my name to the deed to his property in 2005. He used a quitclaim. My mother died six months ago in a traffic accident. Her former companion now wants to remove my name from the deed, which I am contesting. Can he do this legally?

A quitclaim deed transfers interest someone has in a piece of real estate to another person. Once the deed has been recorded (assuming this process is done properly), the ownership interest is transferred.

My understanding is that your mother's former companion cannot remove your name from the deed without your consent. Whether or not it turned out to be a good decision, he gave you that ownership interest three years ago.

Unless he can prove that the quitclaim deed was falsified or in error, that he didn't know what he was doing or that you (or someone working for you) coerced him into doing the transfer, I don't think it can be undone.

But here's what I'm wondering: Why do you feel you deserve a piece of his house? Did your mother and her longtime companion intend for you to have an interest if something were to happen to her? What were the reasons your name was put on the title?

I don't know his motives for adding your name to the deed, but he did it. Still, he and your mother weren't married, and if your mother had a financial interest in the house by contributing to the purchase, maintenance and upkeep, you might have been entitled to inherit some of what she owned.

Your issues are rather complicated. If your mother and her companion owned the home jointly, her companion would have become the sole owner of the property on your mother's death. But if they owned the home in common, with each owning 50 percent, you and your siblings, if you have any, would have inherited her share.

In short, it might be difficult for her companion to remove your name from the title to the home, but you really should talk to a real estate lawyer for more details.

A few of my friends and I are about to graduate from high school, and we are looking to buy a house. We are thinking about finding one we could get by paying the back taxes. What should we look out for?

First, check to see at what age you can buy real estate in your state. You might have to be at least 18 years old to buy the house.

Next, I admire your pluck, but how are you and your friends going to pay for this property? Do you have jobs? Are you going to college? Are your parents going to be paying for this and co-signing on a loan you need to obtain? Do you have enough cash to buy the home? At age 18 or so, you can't have much of a credit history, and you'll need a credit score of at least 660 to get financing, if you need it. (The credit-score requirements may be lower with an FHA loan.)

Let's assume you have the cash you need and don't need financing. You would go to the tax collector's office (or, in some counties, the local courthouse or other agency that sends out tax bills and collects real estate tax receipts) and get a list of properties that are delinquent in their taxes.

When property owners fail to pay their real estate taxes, a local governmental agency has the right to sell and auction off the house for the unpaid taxes. Normally these properties are sold at a tax auction.

At the tax auction, you would bid on these properties. If you win, you pay all the back taxes that are owed. But you would not become the owner of the property at that time. The property owner typically would have an additional period (usually one or two years) in which to pay the taxes. If the owner pays these taxes off, you would be refunded what you paid for the property, plus an interest rate set by the local government.

If the owner comes through even on the last day of the redemption period, you'd pocket your cash and the interest, but you'd be out of luck in owning the property. But if the property owner or the owner's lender fails to redeem the taxes, you would become the owner of the property and the local governmental agency would issue a property deed in your name.

In the meantime, you generally don't get to live in the property. These properties aren't necessarily abandoned. They're just sold for back taxes. If you and your buddies are looking for a place to live after graduation, this probably isn't the right move.

Alternatively, if you're interested in buying a property that has been foreclosed on, you'll need to find a good real estate agent who knows about these properties and can help you identify one that meets your needs. Unless there are a lot of you going in on this purchase, you're going to need some sort of cash and financing. Be sure you've lined this up ahead of time.

Ilyce R. Glink is an author and nationally syndicated columnist. Her latest book is "100 Questions Every First-Time Home Buyer Should Ask." Samuel J. Tamkin is a real estate lawyer in Chicago. If you have questions for them, write Real Estate Matters Syndicate, P.O. Box 366, Glencoe, Ill. 60022, or contact them through Glink's Web sites,http://www.thinkglink.comandhttp://www.expertrealestatetips.net.

© 2008 Ilyce R. Glink and Samuel J. Tamkin

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