Archive for: Real Estate

Do I Need To Sell My Home Before I Can Qualify For A New Mortgage On Another Property in Bay Area?

01 April 2010 / Blog, Mortgage Approval Process / 0 Comment

Although every situation is unique, it is not uncommon for homebuyers to qualify for a mortgage on a new home while still living in their primary residence in the Bay Area.

Perhaps you are outgrowing your current house, or have been forced to relocate due to a job transfer? Regardless of the motivation for keeping one property while purchasing another, let’s address this question with the mortgage approval in mind:

So, Do I Have To Sell?

Yes. No. Maybe. It depends.

Welcome to the wonderful world of mortgage lending. Only in this industry can one simple question elicit four answers…and all of them may be right.

If you are in a financial position where you qualify to afford both your current residence and the proposed payment on your new house, then the simple answer is Yes!

Qualifying based on your Debt-to-Income Ratio is one thing, but remember to budget for the additional expenses of maintaining multiple properties. Everything from mortgage payments, increased property taxes and hazard insurance to unexpected repairs should be factored into your final decision.

What If I Rent My Current Property?

This scenario presents the “maybe” and the “it depends” answers to the question.

If you're not quite qualified to carry both mortgages, you may have to rent the other property in order to offset the mortgage payment.

In that scenario, the Bay Area lender will typically only count 75% of the monthly rent you are proposing to receive.

So if you are going to receive $1000 a month in rent and your current payment is $1500, the lender is going to factor in an additional $750 of monthly liabilities in your overall Debt-to-Income Ratios.

Another detail that can present a huge hurdle is the reserve requirement and equity ratio most lenders have. In some cases, if you are going to rent out your current home, you will need to have at least 25% equity in order to offset your payment with the proposed rent you will receive.

Without that hefty amount of equity, you will have to qualify to afford BOTH mortgage payments. You will also need some significant cash in the bank.

Generally, lenders will require six months reserve on the old property, as well as six month reserves on the new property.

For example, if you have a $1500 payment on your old house and are buying a home with a $2000 monthly payment, you will need over $21,000 in the bank.

Keep in mind, this reserve requirement is incremental to your down payment on the new property in the Bay Area.

What If I Can't Qualify Based On Both Mortgage Payments?

This answer is pretty straightforward, and doesn't require a financial calculator to figure out.

If you are in this situation, then you will have to sell your current home before buying a new one.

If you aren’t sure of the value of the home or how your Bay Area local market is performing, give us a ring and we'll happily refer you to a great real estate agent that is in tune with property values in your neighborhood.

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As you can tell, purchasing one home in the Bay Area while living in another can be a very complicated transaction. Please feel free to contact us anytime so we can review your specific situation and suggest the proper action plan.

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What Do Appraisers Look For When Determining A Property's Value in the Bay Area?

29 March 2010 / Real Estate Appraisals / 0 Comment

Most people are surprised to learn what appraisers actually look at when determining the value of a real estate property in the Bay Area.

A common misconception Bay Area homeowners generally have is that the value of their home is determined after the appraiser has completed their physical property inspection.

However, the appraiser actually already has a good idea of the property's value by the time they have scheduled an appointment to stop by the property.

The good news is that you don't have to worry so much about pushing back an appointment a few days just to "clean things up" in order to help influence the value of your Bay Area property.

While a clean house will certainly make it easier for the appraiser to notice improvements, the only time you should be concerned about "clutter" is if it is damaging to the dwelling.

The Key Components Addressed In An Appraisal

The Site:

Location, view, topography, lot size, utilities, zoning, external factors, highest and best use, landscaping features...

Design:

Quality of construction, finish work, fixed appliances and any defining features

Condition:

Age, deterioration, renovations, upgrades, added features

Health & Safety:

Structural integrity, code compliance

Size:

Above grade and below grade improvements

Neighborhood:

Is the property conforming to the neighborhood?

Functional Utility:

Is the Bay Area property functional as built - style and use?

Parking:

Garages, Carports, Shops, etc..

Other:

Curb appeal, lot size, & conforming to the Bay Area neighborhood are obvious to the appraiser when they drive down into the neighborhood pull up in front of your home.

When entering your home, they are going to look at the overall design, condition, finish work, upgrades, any defining features, functional utility, square footage, number of rooms and health and safety items.

Be sure to have all carbon monoxide and smoke detectors in working condition.

Since the appraisal provides half the weight in any credit decision involving the security of real estate, the appraisal should be done by a qualified, licensed appraiser whom is familiar with your Bay Area neighborhood, and the type of home you are buying, selling or refinancing.

If you're interested in what specifically appraisers are looking for, here is a copy of the blank 1040 URAR form that is used by every appraiser in the country.

Related Update on HVCC:

Appraisers hired for a mortgage transaction on a conforming loan are chosen from a pool of qualified appraisers at random. Neither you nor your Bay Area lender has the flexibility of deciding which appraiser will inspect your home.

This recent change was brought on with the Home Valuation Code of Conduct HVCC, and is effective with conventional loans originated on or after May 1, 2009.

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Renting vs Buying a Home in the Bay Area

28 March 2010 / Home Buying Process / 0 Comment

Buying a home versus renting is a big decision in the Bay Area that takes careful consideration.

While there are several biased sources that can make arguments for or against owning a home in the Bay Area, we've found that most home buyers base their ultimate decision on emotion.

Yes, there are some tax advantages of owning real estate, as well as the potential to earn equity or pay a mortgage note off after several years.

However, let's address some of the more obvious topics of discussion first.

Benefits Of Renting:

Lower Acquisition Cost -

Unless you're able to qualify for a mortgage loan with zero down and have your closing costs paid for by the seller, a typical investment to purchase a home in the Bay Area is around 3.5% - 7% of the purchase price for down payment and closing costs on an FHA mortgage, and an average of 13% - 23% for a home secured by conventional financing.

Compared to the cost of about 1-3 month's rent payment, it's obvious that renting a home in the Bay Area makes financial sense in the short-term.

Lower Qualifying Standards -

While the FHA and other government insured mortgage programs have more flexible credit / qualifying guidelines than most traditional home loan programs, there is certainly a lot less paperwork and personally invasive probing required by most landlords and property management companies.

Generally proof of employment / income and a decent credit history (or a good explanation) is needed to rent a home in the Bay Area.

Freedom To Move -

It's easy to find a home through a reputable property management company, move in that weekend and then leave a year later when the rental contract expires. Not being tied down by a long-term mortgage liability is ideal for people new to a community, in a career that keeps them on the go or for parents with children that prefer a certain Bay Area school district.

Plus, if you're planning on moving in the next 3-5 years, then it may become cost-prohibitive due to the amount of equity you'll have to gain in the short-run just to cover the cost of paying an agent, buyer closing costs, transfer taxes.... so that you can at least break even at closing.

Less Maintenance and Cost -

If something breaks, a simple call to the property management company will generally solve the issue in 48 hours or less. Plus, renters don't have to carry expensive homeowners insurance, pay property taxes or worry about interest rates adjusting.

Benefits of Owning:

Pets Are Allowed -

Well, according to the rules and regulations of your county or neighborhood HOA, you can pretty much have as many domestic and exotic pets without having to pay extra deposits.

It may seem like a funny benefit to mention first, but the millions of dog and cat lovers would definitely rank this towards the top of their list.

Pink and Purple Walls -

Yep, you can paint the inside of your house any color you choose. And depending on whether or not there is an HOA in place, you could probably do the same thing on the home's exterior. Landscaping, flooring, built-in shelving... it's your Bay Area property to renovate and grow in.

Peace-of-Mind and Security -

The only way you would be forced to move is if the bank forecloses on your property due to a default in mortgage payments.

So basically, you don't have to worry about a landlord's financial ability to make mortgage payments on time. Plus, you can stay in your own property as long as you wish.

Tax Benefits -

The US government has created certain tax incentives making it possible for many homeowners to exceed the standard yearly deduction.

*Disclosure - Check with your CPA or Tax Attorney to verify your own unique filing scenario*

The following three components of your home mortgage may be tax deductible:

a) Interest on your Bay Area home mortgage
b) Property Taxes
c) Origination / Discount Points

Stability -

Remaining in one neighborhood for several years lets you and your family establish lasting friendships, as well as offers your children the benefit of educational continuity.

Appreciation of Property -

Historically, even with other periods of declining value, home prices have exceeded consumer inflation. From 1972 through 2005, home prices increased on average 6.5%, according to the National Association of Realtors®.

Forced Saving -

The monthly payment helps in repayment of the principal amount. Also when you sell you can generally take up to $250,000 ($500,000 for married couple) as gain without owing any federal income tax.

*Disclosure - Check with your CPA or Tax Attorney to verify your own unique filing scenario*

Increased Net Worth

Few things have a greater impact on net worth than owning a home in the Bay Area. In a comparison of renters versus homeowners, the Federal Reserve Board of Consumer Finance found that the average net worth of renters was just $4,000 compared to homeowners at $184,400.

While the available tax advantages and potential for earned equity are generally highlighted by most industry professionals as the top reasons to own real estate, it's important to remember that markets go through cycles.

However, owning real estate that appreciates more than the rate of inflation may help contribute towards your overall investment portfolio, provided your maintenance and mortgage costs are kept low.

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Understanding the Difference Between an Appraisal vs Neighborhood Listing Prices in the Bay Area

28 March 2010 / Real Estate Appraisals / 0 Comment

Why is there such a difference between what my appraised value is and the price similar homes are selling for on my street in the Bay Area?

It’s a great question, and you don’t have to be a mortgage professional or a real estate agent to understand the answer.

The distinction lies in the purpose of the two valuations and who is responsible for creating them.

Appraisals:

The purpose of an appraisal is to make sure that an independent non-interested third party verifies the “most likely” sale price based on the market value and condition of the home.

Appraisals are meant to be a realistic determination of the value of a home if it were to sell in the current market, in its current condition.

In addition, appraisers are governed by rules intended to standardize the subjective process of determining a home's value.

Some of the key factors appraisers look at are: location, above ground size, room count, bathroom count, style of home, condition of property, amenities, and market conditions such as how long it takes for home to sell and if values are increasing, decreasing or steady.

Appraisers are also asked to look only at comparable sales within a certain distance, usually one mile except in rural areas, and within a specified period of time, which is 3 months in the current market.

Listing Prices:

Listing prices on the other hand are influenced by the real estate agent, and set by interested and often emotional sellers.

Sellers are not held by any rules when they list a home. In some cases, sellers take what they paid for the house, add what they have spent on improvements and even add amount for profit.

Often times, sellers will list their home based on the amount needed to pay for the real estate agent, closing costs and cover the amount of the mortgages.

Extra low prices are generally the result of an extra motivated seller that has to sell and move in a rush, so they'll list their property below market comps in order to be the most competitive.

Throw in bank owned homes (foreclosed properties), and listing prices may be all over the place without a logical explanation due to an asset manager making decisions from another part of the country.

The Verdict:

While list price is never a good indication of what a home in your neighborhood is worth, appraisals are not an exact science that will determine the true value of your home either.

Some will argue that a home is worth what people will pay for it, so there's obviously a little room for personal interpretation. Either way, the bank securing that piece of real estate for a mortgage loan generally always has the final opinion that matters the most.

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Five Myths About Bay Area Home Values

28 March 2010 / Real Estate Appraisals / 0 Comment

During periods of economic growth, when Bay Area home values are typically just going up, most homeowners do not question appraisals much.

And in times of turmoil when Bay Area property values are declining, home sellers and even listing agents quite often question and pick apart appraisals.

However, the actual appraisal process changed very little over the course of the housing boom and bust cycle American homeowners witnessed between 2001 - 2009.

Since the topic of home values seems to be a hot discussion, let's address the top five appraisal myths.

Appraisal Myths / Questions:

"I just put $15K into the property, why isn't the appraised value higher? "

Not all improvements to the Bay Area property are equal in producing added value. A local real estate investment club used to tout buying a run-down, roach-infested property cheap, and after de-bugging and adding a fresh coat of paint and carpet - *presto* - the house would appraise like the new homes up the street.

Even with cosmetic repairs, the Bay Area property may still be much more comparable to the foreclosure next door than the new home a block away. Look first to the "guts" of the property, the electrical, heating & air, etc. If they are updated, then the number of beds/baths and square footage are the next biggest weight, followed by a genuine updating of cosmetic improvements.

"But my home really compares to some of the properties in the neighborhood across the way..."

For example, if a Bay Area homeowner preparing a house to sell adds $150,000 in upgrades to the kitchen, built-in cabinets and flooring, it may help the property show better in an open house and in magazine advertisements.

However, the seller might still be stuck with a $450,000 appraised value like the three comparable properties on their street vs the $750,000 they were hoping to list it for.

Even though the Bay Area neighborhood across the main street had similar homes in the higher price range, especially after the seller's extensive upgrades, appraisers will always use homes from the actual neighborhood to establish value first.

So basically, the seller simply over-improved their home for their specific neighborhood.

"This appraiser included foreclosures as comps - that's not fair"

It isn't fair, especially if your home is well-kept and in great condition compared to the run-down foreclosures in the neighborhood.

Unfortunately, if every recent sale, or nearly all sales, are foreclosures at reduced prices, then the appraiser is forced to use the recent sales and trends as comparable values. High foreclosure rates generally depress values and show a trend of lowering prices.

And abnormally high foreclosure rates generally depress values and show a trend of constantly lowering value.

"But I just put in a $50K pool, doesn't that count for anything?"

Pools and professional landscaping rarely see a dollar for dollar value add on a property in the Bay Area. The value is going to mainly be based on comparable sales in a neighborhood.

"How can similar homes in the same neighborhood appraiser for such different values?"

This is a typical question for older neighborhoods where similar models may have drastic price differences.

Additional rooms and square footage can be the main reason for one Bay Area property appraising higher than another.

Keep in mind, just because the market trend in a particular neighborhood is improving over time, the individual properties need to meet the same conditional improvements as the others in order rise with the tide.

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An appraiser is looking at several things when determining the value of a Bay Area property: improvements, size and square footage of the living area, neighborhood amenities, location and the market trends around the area.

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