The reason for this article is to explain key factors that are currently impacting buyers’ ability to successfully qualify and meet today’s lending requirements, especially for Bank Repos and Short Sales. If you are fortunate to be an “all cash” buyer, you may still be affected by more cumbersome process, but you are less likely to become frustrated with the changes in lending practice that have occurred as a result of the “mortgage melt-down crisis”.

One of the challenges of understanding today’s real estate market is to understand the dynamics of what buyers seek and how sellers wish to market their properties. As far back as late 2005, astute buyers and agents foresaw the coming of lowering prices. It did not take a rocket scientist to realize pricing could not be sustained at 25% annual increases. At the same time, even those of us in the profession did not expect the degree of backlash that Short Sales (the seller owing more than the value) or Foreclosures (most being bank owned properties termed “REO” Real Estate Owned) would create. 

There’s an old saying, “Every day is a good day in the real estate market.” Depending on your position and outlook, that saying holds true even in this market.  Real estate ownership has been a cornerstone of wealth in our economy for decades. 

The other saying to remember is this:  “The property you saw today, the one you wish to think about tonight and quite likely make an offer on tomorrow, is the property someone may have seen yesterday, who is prepared to make an offer on today.” I know this from personal experience. The home I presently own was seen by a nice couple who thought they’d go on a weekend vacation to “think about it”. Seeing the home on Sunday afternoon, my wife and I immediately made our offer, not waiting until the next day. On returning home from their weekend trip, the other couple was told, “sorry, the seller has accepted an offer.” I met these people six months after our purchase; the home had appreciated 10% in that short time.

The facts are:

• Over time and despite the current market, real estate remains one of the key factors to the creation of wealth. The value of properties purchased during the high water marks of any prior period that experienced a subsequent decline, have all been exceeded even in this most recent cycle. Don’t you wish you purchased (or still owned) property acquired in the late ’80’s or mid-‘90’s … two previous high points of real estate value?
• Home pricing is at levels of 2002-2003 in many areas … not all areas. Elk Grove has been hammered; East Sacramento has seemed to maintain value. Folsom remains a desired community.
• Banks are finding the expense of “holding properties” to be significant.  Some analysts say that the cost to selling a bank owned property is as much as $30,000-$60,000 (inclusive of marketing fees and other expenses such as delinquent property taxes).  As a result, many banks are becoming more favorable to negotiating a short sale before the home falls into foreclosure. And for those properties already in foreclosure, we are seeing “days on market” running from 1-45 days in recent months vs. up to 9 months, or more, for others.
• First time home buyers … the segment that got left out in the boom of 2004-05 … are finding new hope with lower prices and interest rates that may fall even below the rates of 2003. In the past four months, rates have declined from 6.75% to 5.25% (with good credit scores and 20% down payment for conforming loans below $474,500). It is not impossible to find published lending rates at near 5% for a fixed rate 30-year mortgage.
• Bank REO properties are selling at “less per square foot” than Short Sales, in most areas. As a result, many investors and first-time buyers are scooping up these good opportunities. But, this poses problems for some buyers as you’ll find as you read on.

The challenge is:

• Despite TARP efforts to move billions of dollars into the mortgage segment, banks have been hesitant to move money within the system (as of late December ‘08). Consumer confidence and yield rates, presently at the lowest levels in decades, must be restored.
• Not too many first-time buyers have been prudent savers. Qualifying to FHA standards and underwriting guidelines has become very stringent. Effective January 1, 2009, minimum deposit requirements for an FHA loan will increase to 3.5% of the purchase price (still, there are additional costs necessary for loan doc preparation, mortgage insurance, escrow fees and potential other costs) that can raise the effective amount required to as much 10%). (There’s a silver lining here for some; FHA will allow “monetary gifts” to assist in qualification and sellers may credit some costs for closing.)
• Underwriting requirements now make it mandatory to verify income, employment and credit history. The day of “zero down” and “pick-a-pay” loans based on “no-doc” or “stated income” loans are history (likely for good reason to avoid another mortgage meltdown). To get a loan today, borrowers must document favorable loan-to-value ratios of 80% or less (of the property owned or to be purchased); lower debt-to-income (43-45%) and increased FICO scores (620+) to qualify for lower lending interest rates. 
• Most lenders will not provide loans to investors who presently make mortgage payments on more than 4 properties (one of those being their own primary residence).
• Banks, despite a glut of home inventory in their own portfolios, are setting tough qualification requirements. For many, prospective buyers must become “pre-approved” with a LENDER OF THE BANK’S choosing BEFORE they will even CONSIDER or REVIEW an offer. This is the “right” of the seller and they must comply if they wish their offer to be submitted and/or considered; it is the “right” of the buyer to secure a loan from the lender of their choice.
• For those wishing to purchase Short Sales, the best advice is “patience”. That’s because the listing agent can offer the home at any price of the seller’s choosing in the hopes of generating offers.  It is the bank(s) who must agree to the selling price and terms … and they may choose to decline the offer (usually they simply don’t respond) or counter at a higher price. The successful purchase of a Short Sale by a first-time buyer who would normally qualify only with an FHA loan is extremely rare … FHA loans typically take longer … 45 days … (sellers and banks are too anxious) … and many marginally qualified buyers cannot fulfill the underwriting requirements. (Be especially cautious of the aggressive lender/broker who promises to secure an FHA loan for a short sale saying, “No problem.”, before you have submitted financials to obtain a pre-approval.)
• Once an offer has been accepted by the seller, it must then be approved by the seller’s lenders (there may be more than one) before the offer is “accepted”. This is often a process that can take weeks, even months. And, in some cases, I’ve learned the loan may have been sold or foreclosure proceeding begin which serves only to complicate the process (if it doesn’t undermine it). As with Bank REO properties, the buyer must be well qualified and able to provide detailed financials extending back at least two years (IRS, credit reports, job history, etc.).  
• In the situation of a purchase of a Short Sale or Bank REO, the seller (or bank) will, in most cases, decline to do any repairs … the property is being purchased “as-is”. This presents a challenge for buyers as the lender, especially in FHA loans, will require minimum safety and habitability requirements be met BEFORE escrow closing. If the FHA appraiser suggests that the roof be replaced, or sees evidence of Section I pest damage, or finds that a built-in oven, dishwasher, water heater, or components of an HVAC system have been removed, the lending underwriter of the buyer will require the repair or replacement of such defects … that may be declined by the seller (bank). In some situations, the bank may agree to pay (credit to buyer rather than repair or replace) a portion of the repairs, but not all buyers are in a financial position to incur costs for these deficiencies.
  
  Here’s something to think about … in the transaction of a “owner occupied” home that is not a short sale, the seller is often motivated to cooperate with the buyer in completing repairs or offering credits (such as credits toward closing costs or even subordinate financing) as an inducement to sale. These can be favorable and significant, and even make it possible to purchase a good home, in good condition, that is not in immediate need of repair for such things as urine soaked carpets, damaged stained walls, unkempt landscaping, or other deferred maintenance items which can add up to thousands of dollars. Remember the old adage: “If something seems too good to be true, it is.”

Yes, there are obstacles and challenges that must be overcome in today’s turbulent market. But, with access to information, knowledge, experience and guidance, your comfort in making the right decision is tremendously improved. My total commitment is to offer you the access to information, choice and options that will result in making the very best decision for your family. Please do not hesitate in calling me for a personal consultation or more information. And for additional lending information, please link to this page.