LA Digs - Northeast LA Real Estate Blog

How much income does a borrower need to qualify for a home mortgage loan? A borrower's monthly debt must be approximately 45% of their monthly income. To qualify for a mortgage, a borrower must pass two debt tests: 1. Housing Debt - The housing cost must equal approximately 40% of the borrower's monthly income. a. The housing cost = Mortgage, Taxes, and Insurance b. If the housing cost $4,000, income should be approximately $10,000. c. $4,000 is 40% of $10,000. 2. Total Debt - The housing cost is added to all consumer/credit card debt. The total debt must be approximately 45% of the borrower's monthly income. a. If the total debt is $4,500, income should be approximately $10,000. b. $4,500 is 45% of $10,000. 3. To calculate the borrower's debt ratio, divide the debt by the income. a. If the monthly housing cost is $3,200 and the monthly income is $6,500, divide $3,200 by $6,500. This would yield a housing debt of 49%. b. In this instance, the housing cost is too high to qualify. Information provided by Paul Cawthorne,

Loan Officer
NMLS # 249035
Prospect Mortgage
A Direct Lender
Phone: 310-499-8128
Fax: 877-809-7969
Email: This email address is being protected from spambots. You need JavaScript enabled to view it.

Today’s interest rates are the lowest in just about forever. Yet a number of people are not refinancing to take advantage of these rates because the value of their homes is not quite enough to show that the equity is the 20 to 25% that the lender requires to do the loan. What am I talking about? Lenders today like for borrowers to have a healthy amount of equity in their homes before they lend them money at the incredibly more affordable interest rate than any of us have seen in any of our memories. That’s so in case we don’t make our payments and the lender has to foreclose, they will actually be able to sell our property for enough to pay them back for their investment, even if we don’t make our payments for many months and even if the value of our property goes down after they give us the money.

Interest rates are so low right now that even if you are a bit “upside down” with your loan, meaning that you owe, say, 90% of what it is worth today, you might want to consider investing in paying down your mortgage balance to complete the refinance. Jack Guttentag, The Mortgage Professor, wrote an article for Inman News that illustrates the scenario (http://www.inman.com/buyers-sellers/columnists/jackguttentag/reap-benefits-cash-in-refinance). Check out his calculator to see what return paying a lower interest rate yields on your money: http://www.mtgprofessor.com/Calculators/Calculator3f.html.

One important element to this idea depends on whether you can get an appraisal that reflects an acceptable value for your home. I blogged recently about my personal trials and tribulations regarding this, but in the end, I was offered a lower interest rate than I could have gotten earlier this year, and although I had to put money in to get the loan, I think it was totally worth it in the long run.
Another element is, of course, do you have the money to put into the payoff? This is obviously not a solution for those who are upside down and unable to pay down the mortgage or having trouble affording their payments.

Here are some resources:

From the website www.YouWalkAway.com: Strategic default, also known as voluntary foreclosure is when the borrower decides to stop paying a mortgage even though they can still afford the payment. For many people who are upside down on their mortgage, the decision to strategically default is one that is difficult, but often times is the first step to financial freedom.

Wikipedia has an interesting discussion of the ethical issues at play http://en.wikipedia.org/wiki/Strategic_default. One notation from an ethicist states that the economy is essentially amoral.

http://www.city-journal.org/2010/forum0427.html. A really well-considered discussion with good ideas about how the banking industry could take some responsibility for helping to fix the problem:  “Zingales and Posner propose that lenders be required to give underwater homeowners the option of resetting their mortgages to the current value of their houses in exchange for giving the lender 50 percent of the house’s future appreciation. Enough with guilt-tripping underwater homeowners into holding on to their homes. Instead, let’s focus on equitable and practical solutions to the negative-equity crisis. The Zingales/Posner proposal would be a great start.”

http://www.strategicdefault.org/  Free advice.

My thoughts: The question “can they afford to make their payment?” is key. For example, it would obviously be a strategic default if you bought a house with 20% down, a good 30 year fixed loan at say, 5.5% interest, and you still have the same job, your family is fine, you have $20,000 in savings and nothing has changed except your $500,000 house is now worth maybe $400,000. You may not like that fact that your house is now worth less, but you can clearly continue to pay for it.

But say the same situation has one change: you were laid off from your job and the best new job you could find pays 60% what your last one did. You are spending some of your savings—not a lot, every month just to pay the bills. You could change your spending habits and squeak by. Do you bail?

Or try this: Same issue with your job, but you could take on an extra job and be fine, or save yourself the time and trouble and walk away.

Think about these scenarios within this same situation:

There are 5 other families on your street that are experiencing similar issues

There are 3 foreclosures on your block that are boarded up and overgrown with weeds

At what point do you draw the line?

Those of us who have been involved in such loan and appraisal nightmares question whether these lenders are interested in actually doing any business.

It seems like every other person I meet is applying for a loan modification on their mortgage. The general feeling seems to be, "Why not? It might work."

Check out this blogpost by Sean O'Toole, CEO of Foreclosure Radar.

http://www.foreclosuretruth.com/blog/sean/time-for-troop-surge-on-the-front-lines-of-the-housing-crisis/ 

If you look at his website and his past blogposts, you see a thoughtful, intelligent person who has studied and understood more of this real estate market than most. I know that I have done what he suggests, talked to people who are in trouble with their mortgages, and I've tried to help them find solutions. Unfortunately, if they are in real trouble with no equity, I can't help them effectively because they have to negotiate with their lender--and that, as Sean eloquently points out, is where the trouble lies.

More thoughts on my chosen profession:

As I reflect on my year in real estate, 2009 has certainly been a challenge. But last year at this time, it was even more frightening. Would I ever sell another house? My notes from December, 2008, show that was a real concern to me. To relate back to what Sean wrote, I did feel like the best thing I could do was to be as helpful as I could. I wrote about the government programs in my blog, I took flyers around the neighborhood, I met with people to discuss their options even though they couldn't sell. But I felt powerless in most cases to effect positive help.

In hindsight, it looks like the real estate market in our area bottomed out in the first quarter of this year, so I was truly facing a very dark time ahead. But as I looked around at other people going through that dark time, I could see that I had a huge advantage—I am my own boss and no one can lay me off but myself.

Imagine how vulnerable employees feel, not knowing if they will have a job next week. Even public employees are feeling the pinch with unpaid furlough days, frozen wages, pay cuts. It may not be easy to go out and sell another house, but at least I have that possibility in my day.

I have a full-time assistant and I have a family and a household to support. This has been both a burden and an inspiration to me through these difficult times. As my income was drastically reduced, I had to make a number of budget adjustments, but I always felt it was very important to make sure I kept my employee. Imagine how tough it is on a person who relies on an individual person for their livelihood. I have seen many Realtors decide that they can’t afford their staff anymore. Is that a really wise economy? There is the saying, “If you don’t have an assistant, you are an assistant.” If you spend your time doing administrative jobs, when are you going to go out there and do your real job, which it to make deals? The temptation is really strong to spend a lot of time on administration since it feels like work. But it’s not our work. Not if we are really doing what we need to do.

When the market is so difficult, it’s really easy to decide any effort you make is useless and you might as well not try. But with an assistant to keep busy and a family to support, I went ahead and got out there and looked for deals. The key to success is to be there the moment the decision to buy or sell real estate happens. If you are back at the office filing your paperwork, how will you be there with the buyer or seller?

What if we were out in our neighborhoods helping people get to the truth about what they really could and couldn't do with their homes and providing them with achievable options?

For those of you who want a better understanding of how we got into this global economic mess, National Public Radio has several programs that have podcasts you can read, watch, or listen to that summarize and define a lot of the terms we see tossed around in the news today. They posit some non-accusatory and intelligent explanations both of how financial systems work and where things went wrong. I'm not saying I agree with every word, but I think it's well-balanced and worth absorbing. Knowledge is power. Check it out at:

This American Life

How Stuff Works:

Planet Money:

How to navigate today's mortgage environment, Part 2.

First, have you been reading the newspaper lately? Well, stop it.

Let's look at other options for finding out what's going on in the lending markets. For starters, I called Ann Bedrossian at Lockheed Federal Credit Union (818-621-2758). She says they have lots of money to lend right now, their deposits are way up. And if you have decent credit and at least 10% down, you can get under 6% mortgage interest on a 30-year fixed loan up to $1 million. To join the Lockheed Credit Union, you pay a $25 application fee, that's it! Call Ann for the latest rates and programs, you might be pleasantly surprised.

I know there is scary news out there. I know everyone thinks the real estate market is on the biggest slide downward ever. But now is the time to be a contrarian! Do what Warren Buffet says, get greedy when everyone else is afraid.

If you are in the market for purchasing or refinancing a home today, you need to pay close attention to the mortgage news, and listen to responsible, knowledgeable professionals.

From Kirk Thomson, How To Plan Ahead For The New, Lower Conforming Mortgage Loan Limits in 2009. Conforming mortgages are limited by loan size, based on average housing costs around the country. Since 1980, as home prices have increased, so have conforming loan limits. The current conforming loan limit on a single-family home is $417,000. Earlier this year, as part of the Economic Stimulus Act of 2008, Congress authorized temporary increases to the conforming loan limit in high cost regions, as defined by median home sale price. In Manhattan, for example, where more homes sell for more than a million dollars than sell for less, mortgages as large as $729,750 are considered "conforming".

Beginning in 2009, however, that loan limit changes. Effective January 1, conforming mortgages will be capped at $625,500 in high cost areas, and $417,000 everywhere else. Therefore, homeowners in high cost areas whose mortgaged amounts exceed $625,500 are now operating on a defined timeline. Switch to a cheaper conforming home loan prior to December 31, 2008, or risk paying the "jumbo premium". This includes homeowners with: Two mortgages -- one for $417,000 and one for "the difference." An ARM that was begrudgingly accepted because jumbo fixed rates were too high. An expensive jumbo fixed rate mortgage. In addition, home buyers in the $800,000-900,000 price range may want to move up their closing dates. Today, at those price levels it takes a 20 percent downpayment to get access to conforming money. In 2009, it will take 30 percent.

My comment: In the last couple of months, FHA financing has been a great alternative to jumbo or "jumbo light" programs, because it is the only way many people have been able to obtain loans with less than 20% down payments. Keep in mind that FHA loan limits will also be decreased from $729,750 to the $625,500 limit. We'd better go shopping!