Sara’s Homes

HOME buyers are often advised to come up with at least a 20 percent down payment, or face the likely additional expense of private mortgage insurance. But this year, at least, that counsel would not have saved them as much money as in the past.

For most people, it turns out, smaller down payments result in lower interest rates. Whether that benefits borrowers in the long term, though, is open to debate.

Take, for instance, borrowers who want to buy a $400,000 home, and who have a credit score of 720, which is considered very good.

In late August, such borrowers who had $80,000 saved for a 20 percent down payment would have qualified for a 4.875 percent rate on a 30-year fixed-rate loan, according to Regina Mincey-Garlin, an owner of RCG Mortgage in Montclair, N.J.

But that was also the rate offered to borrowers putting down only 5 percent, and therefore required to have private mortgage insurance.

Oddly, those who put down 25 percent, or $100,000, were saddled with a higher interest rate, 5.375 percent, Ms. Mincey-Garlin said.

The underwriting rules from Fannie Mae and Freddie Mac consider borrowers in the 20 to 25 percent down payment category to be the riskiest, in part because they are not required to carry private mortgage insurance. At higher down payments, however, rates begin to fall.

Amy Bonitatibus, a spokeswoman for Fannie Mae, said that the policy wasn’t meant to encourage lower down payments, which some have seen as the main culprit in the home foreclosure crisis.

“It’s just a less risky loan from our point of view,” Ms. Bonitatibus said, because the lender’s exposure to foreclosure losses is largely eliminated by mortgage insurance.

She said the policy didn’t benefit only Fannie Mae and lenders that sell loans to the company.

Borrowers benefit too, she said, especially those who would otherwise have had to stretch for a bigger down payment and leave themselves with no financial cushion. These borrowers can instead save the extra cash they might have put toward a bigger down payment, keeping it handy for emergencies.

Besides, Ms. Bonitatibus noted, as soon as borrowers pay off enough of their loan principal to establish a 20 percent equity position in the home mortgage, insurance is no longer required.

While borrowers who take out mortgage insurance can indeed enjoy lower interest rates, their monthly payments will be larger than those who made the larger down payments, because the loan itself is bigger.

A borrower who put down 25 percent for a $400,000 home would make a monthly mortgage payment of $1,680, while the borrower who put 15 percent down would pay $1,906 — or $1,799 in principal and interest, plus another $107 monthly in mortgage insurance. (The mortgage insurance is tax deductible, however, so depending on a borrower’s financial circumstances, the net mortgage liability would probably be less.)

Ms. Mincey-Garlin of RCG Mortgage says she still advises borrowers to make a down payment as large as they can, because the increased equity will help them in the long term.

She also suggests that borrowers maintain savings equivalent to at least nine months of mortgage payments.

Those who choose to make a lower down payment in the expectation of terminating their private mortgage insurance after a few years may encounter a harsh surprise, Ms. Mincey-Garlin said.

With property values declining, she said, some lenders have balked at releasing borrowers from mortgage insurance.

When real estate markets cool down, typically inventory increases and the number of buyers decrease. Slowing market conditions make it more difficult to sell homes, yet some homes still sell. So, why do some homes gets offers and others sit on the market? The answer has very little to do with the home itself, as I've heard real estate agents claim. More likely it lies within the poor quality of the marketing efforts. Here are mistakes I see sellers and their agents repeat over and over. Don't let it happen to you.

BAD MARKETING: Uploading Badly Shot Photographs Online

Pictures speak volumes and are noticed before the written word. Since it's the first thing a potential buyer will see, why leave a bad first impression? The job of a photo is to entice the buyer to want to see more of the home in person. It should not give the buyer a reason to cross the home off her list. Don't publish photos like these:

• Pictures too dark with drapes / blinds closed
  
• Photos turned sideways
  
• Photos of cluttered rooms
  
• Uncropped photos with unnecessary elements in the pictures
  
• Photos of pets sleeping on the sofa
  
• Not submitting enough photos -- or uploading only one unflattering photo of the front of the house
  
• High resolution photos without adjusting pixels for the Internet

BAD MARKETING: Withholding Important Information or Descriptive Comments

When there are tons of homes on the market, simply tossing out a property address while noting the numbers of bedrooms and baths is insufficient information for a home buyer. It doesn't tell a buyer why she should make an appointment to see the home. Good marketing tells a buyer why this particular home is better than the dozens of others on the market. Sellers should focus on:

GOOD MARKETING

• What makes the home unique?
  
• What was the motivating factor that made the seller buy the home in the first place?
  
• How can a negative factor be addressed that will accentate its positive attributes?

BAD MARKETING: Underestimating the Importance of Broker / Agent Previews

Just like buyers, agents don't have the time to look at every home on the market. So, what can you do to entice them to come see yours? Because agents are more likely to sell a house they have toured, sellers need to attract selling agents.

GOOD MARKETING

• Catered lunches. Go beyond the ordinary sandwiches and bottled water. Food motivates, and don't let anybody kid you about this. Be creative with culinary selections.
  
• Offer drawings for small gifts or gift certificates.
  
• Give online certificates  that can be immediately e-mailed.

BAD MARKETING: Restricting Access for Showings

If an agent can't easily show your home, she is going to show another agent's listing instead. Don't give an agent a reason to pass up your home. Any of these can hamper showings:

• No lockbox on the property
  
• Restricted hours to show
  
• 24-hour notice
  
• By appointment only

GOOD MARKETING

• Call first, lock box

BAD MARKETING: Offering Less Commission Than Other Listings

It's not that agents are greedy creatures who show only high-fee listings--which is against the law, although some are highly motivated solely by income--but agents tend to view lower-commissioned listings as those in which the seller isn't very motivated to sell.

• If the seller isn't motivated, it could mean the seller isn't willing to negotiate on price.
  
• In slow moving markets, buyers expect to negotiate.
• Agents whose buyers want to negotiate will show only listings where negotiation is possible.

BAD MARKETING: Not Including Buyer Incentives

Some multi-million-dollar listings offer sports cars as a home buyer incentive, but it doesn't have to be anything that expensive. An incentive doesn't even need to cost the seller if the home price is structured to account for the discount. Here are typical incentives:

GOOD MARKETING

• $$ credit toward the buyer's closing costs
  
• Home protection plan
  
• Pre-paid homeowner association fees for a year
• Buy-down mortgage interest rate
• Weekend getaway for two

BAD MARKETING: Saying No to Print Advertising

You can't keep your home sale a secret and expect to sell it. Whether you pay for advertising or your agent does, you need to let everyone know it is for sale. The best way to do that is to advertise.

GOOD MARKETING

• Sunday classifieds in daily newspaper
  
• Picture classifieds, if offered during the week
  
• Local weekly or bi-weekly newspaper

BAD MARKETING: Saying No to Virtual Tours

Buyers today begin their home searches online. There is no better way to initially view a home than in the comfort of one's own pajamas at home in front of the computer, looking at a 360-degree tour. Some buyers won't even consider a property listing if it doesn't include a virtual tour. Basic requirements are:

GOOD MARKETING

• Minimum of two spins and preferrably more if space lends itself.
• High resolution photos that buyers can print themselves.
• Ability to download photos so buyers can e-mail the pictures to friends / family.

In buyer's markets, it is especially important to pull out all the stops and make your home stand out among the sea of inventory on the market. Ask yourself why a buyer would choose your home over all the other homes for sale.

Poor Condition of Your Home

Check out your competition. If 90% of the homes in your market are not selling, then your home needs to outshine the top 10%. Look at the homes that are pending sales because that's your current indicator. Sold comps could be two to three months in arrears of market movement. You want to know what is happening right now, and pending sale data will tell you which homes are selling.

Apart from preparing your home for sale, consider its condition. Perhaps you should consider adding updates or doing repairs before selling. If the top 10% on the market have new carpeting and your carpeting is worn and dated, your home is not going to sell. Replace the carpet. Paint the walls neutral -- not white. Check its curb appeal.

Not Enough Photographs or Badly Shot Photographs

Homes in MLS that have one photo are passed by. Homes with dozens of photographs get noticed. Take quality photos or hire a professional photographer. Shoot wide angles with plenty of light showcasing your home's best features. For goodness sake, keep the toilet lid closed.

• Unless your bedrooms differ from one another significantly, just shoot the master bedroom or largest bedroom.

   

• Don't get yourself or the camera in the photo of the bathroom by shooting the mirror's reflection.

   

• If your hallway is narrow, don't take a picture of it. Get a close up of your fireplace or other interesting feature instead.

   

• Take several photos of the kitchen. The kitchen is generally the most important photo.

   

• Before photographing the dining room, set the table.

   

• Living room photos should show space, so move out some of that furniture.

   

• Remember to include the back yard and gardens.

   

• Add descriptive text to each photo; make your poetry sing.

You Haven't Paid For Extensive Marketing and Advertising

No single aspect of marketing sells a home. It's a combination of marketing efforts. If your newspaper makes a mistake and lists your home under the wrong section, don't panic -- homes have sold to buyers who found them in the wrong place. For that reason, consider placing an ad under several classifications.

• Print four-color postcards and mail them to surrounding homes in the neighborhood and to out-of-area buyers.

   

• Create four-color flyers containing several photos to distribute to prospects and those who tour your home.

   

• Hire a virtual tour company to shoot and upload videos.

   

• Massively advertise every weekend.

   

• Hold Open Houses on Sundays that coincide with other neighborhood open houses. Sometimes Thursday evenings attract buyers.

   

• Get feedback from buyers about what they liked and disliked about your home, and make adjustments to overcome objections.

   

• Consider shooting a video yourself and uploading it to YouTube.com, even if it's just you talking about what you like about living there.

You Hired the Wrong Listing Agent

You want to work with an agent who is competent, experienced and honest. There are a variety of ways to find an agent but the easiest way is through referrals from friends and family.

If you desire full-service and want an agent to spend tons of money on the listing, hire a full service brokerage and interview several agents. To find the best listing agent, don't base your decision solely on the suggested sales price or how much the agent charges you because there are other considerations. Discuss home pricing and commission negotiations last. First, find out the agent's strategic marketing plan.

You Haven't Priced Your Home to Sell

Sellers say, "But I don't want to give away my house." Of course, not. You want to sell it. To sell your home, the price must be right. Don't "test" the market or ask an inflated figure because if you do, your home will probably sit on the market and the DOM will continue to tick. Dated listings don't generally sell for list price.

To avoid overpricing your home, examine the sold comparable sales. Adjust for square footage, if necessary. If your home has a bad layout or is located in bad location such as next to a school, on or near a busy street or bordering a liquor store, you're not going to get the same price as homes with a good layout and in a good location.

For example, if the last three homes sold at $400,000 but you feel they are not comparable to yours because they don't contain updates -- but they were located on a quiet street and your street is noisy -- your home is probably worth about the same. A plus-$50,000 adjustment for the updates could wash out the minus-$50,000 for the busy street.

In a buyer's market, price your home a minimum of 2% less than the last comparable sale. If you can't live with that price, then don't put your home on the market and set yourself up for disappointment. Overpricing is the worst mistake a home seller can make.

A key change in the tax code helps millions of home sellers who owe more on their mortgages than their dwellings are worth. These sellers have negative equity — a condition known colloquially as being upside down or underwater. Legislation that went on the books at the start of 2007 significantly benefits some upside downers and does absolutely nothing for others.

 

The Mortgage Forgiveness Debt Relief Act

This is how the break works. Suppose Sela Sellers disposes of her residence in a lender-okayed short sale that erases the unpaid part of her mortgage. Or suppose the lending company forecloses on the dwelling, subsequently sells it and cancels a portion of her debt. Generally, the tax code calls for Sela to report partially or entirely forgiven amounts on her 1040 form. Not any more. TheMortgage Forgiveness Debt Relief Act of 2007includes a provision that allows home sellers like Sela to exclude as much as $2,000,000 of canceled debt.

Sela excludes (sidesteps) taxes only if she satisfies two stipulations:

 

• The security for her mortgage is her principal residence, meaning the place she ordinarily lives most of the year.

   

• She incurs the debt to buy, build or substantially improve her principal residence.

 

Canceled Debt on a Short Sale

There is no relief for Sela’s home equity loans or cash-out mortgage refinancings, except to the extent that she uses the proceeds to make improvements. Other fine print prohibits relief if her lenders forgive debts on vacation homes and other second homes or rental properties.

Long-standing rules generally require debtors to report all forgiven debts on their 1040 forms, just the same as income from salaries or investments. The Internal Revenue Service taxes forgiven amounts at the rates for ordinary income from sources like salaries. Some forgiven debts sidestep taxes. The law specifies several carefully hedged exceptions. They include bankruptcies and insolvencies.

 

Exclusions to Canceled Debt Taxation

The exception introduced in 2007 benefits people whose debts are reduced or canceled in arrangements that are known as:

 

Loan modifications

Foreclosures

Deeds in lieu of foreclosure

Short sales

This last category is the term for an owner who — with lender approval — sells for a net sales price (gross sales price minus legal fees, broker’s commission and other costs) that is insufficient to cover all of the outstanding debt.

In tax lingo, the exclusion is for income from the discharge of QPRI, short for qualified principal residence indebtedness. This means mortgages taken out by owners to buy, build, or substantially improve their principal residences. And the residences are the securities for the debts.

There also is an exclusion for debt reduced through mortgage restructuring, as well as for debt used to refinance QPRI. Here, there is relief, but only up to the amount of the old mortgage principal, just before the refinancing.

Another constraint is that the exclusion does not help home owners who took advantage of the run up in real estate prices to do “cash-out” refinancing, in which they did not use the funds for renovations of their primary residences. Instead, they used the funds to pay off credit card debts, tuition charges, medical expenses, or certain other expenditures.

Sometimes home sellers can end up paying to close a deal. You're probably thinking, But, wait, if I am selling my home, why would I need to bring in cash to sell? Isn't the buyer paying to buy my home?

Good question. But circumstances like this happen far more often than you might imagine.

 

Why Would a Seller Pay to Sell?

 

 

• Not Enough Equity.
  If you've owned your home less than two years and took out a type of mortgage loan that was greater than 90% of the purchase price, it's likely you don't have enough equity to pay closing costs. Closing costs, including a real estate commission, can run 8 to 10% of the purchase price.

   

• Declining Real Estate Market
  Perhaps you're trying to sell in a falling real estate market, which would mean your home might not be worth enough to generate a profit upon selling. Real estate cycles can make markets move down as well as move up. Not every home appreciates every year.

   

• Neighborhood Values Change
  Sometimes external factors or nearby foreclosures affect property values. When new subdivisions are built nearby and the homes are offered for less, buyers will gravitate toward the new construction, shunning slightly older homes. New commercial developments change the value of surrounding homes. Sometimes homes with views lose those views when high-rise buildings are constructed.

   

• Unexpected Repairs
  Few deals are solid until the buyer has completed a home inspection. Home inspections and pest inspections can turn up undisclosed problems or home deficiencies that run into thousands of dollars to fix. What can start out as a simple repair job may expose other problems when walls are opened up or roof shingles are removed.

 

How Do Sellers Pay to Sell?

 

 

• Some Sellers Tap Retirement Accounts or Borrow From Family
  Sellers who end up on the short end of the stick bring in a check. A woman in Sacramento took out a home equity loan against her condo to help make the payments. When she could no longer afford to make the payments, she bought another home with 100% financing. Then she rented her condo and put it on the market.

  Her tenant was uncooperative, however, and made it difficult for the woman's agent to show the condo. The tenant had to go. Coupled with falling prices, this seller was going further into debt every month.

  This seller finally had to face the fact that if she wanted to sell her condo and not lose it through foreclosure, she would need to bring money to the table to close her sale. Fortunately, her parents gave her the cash.

   

• Some Sellers Decide to Bite the Bullet
  A seller in Roseville called me recently to ask if his agent was telling him the truth when the agent suggested he bring in money to close his deal. This seller's best financial move was to stay put and not sell. After all, he already owned a home; he wasn't a renter wondering if he should buy or rent.

  The seller insisted on selling because he no longer like his neighborhood nor his neighbors. Out of all the homes in his subdivision, he was the only owner occupant. The rest of the homes were rentals, which pulled down the values. It was worth it to him to spend $30,000 to get out of that neighborhood and into a more desirable neighborhood. He withdrew the money from savings.

   

• Some Sellers Ask for a Short Sale
  Not all lenders will agree to a short sale. There are specific requirements and conditions that will persuade a lender to forgive debt. A seller in North Sacramento had no assets, no income and he had refinanced his home over market value. He owed more than the home was worth.

  For him, negotiating a short sale with the lender meant he could walk away from the property without a foreclosure on his record. He also had to pay taxes on the amount of debt that was forgiven, but that amount was taxed at a low tax bracket of 15%. Paying 15% of short sale taxes was preferable than bringing in the entire amount in cash, plus closing costs to sell.

Every situation is different. Sellers who find themselves in financial difficulty should first talk to a financial adviser or a CPA to help them weigh the pros and cons of bringing cash to close the sale of their home.

The long recession and rising joblessness are taking an increasing toll on the nation's most credit-worthy borrowers, who are now falling behind on their mortgage and credit-card payments at a faster pace than people with poor financial histories.

The mortgage-delinquency rate among so-called subprime borrowers reached 25% in the first quarter but appears to be leveling off, rising only slightly in the second quarter. The pace of delinquencies for prime borrowers is accelerating. Since prime loans account for 80% of U.S. bank exposure to mortgages and credit cards, these losses could ultimately exceed those from weaker borrowers.

"The subprime pain is in the rearview mirror," says Sanjiv Das, head of Citigroup Inc.'s mortgage business, which is seeing delinquencies rise among prime borrowers, who make up three-quarters of its mortgage portfolio.

The trend signals more bad news for U.S. banks. Rising delinquencies on prime mortgages helped drive the total mortgage-delinquency rate to a record 9.24% in the second quarter, according to the Mortgage Bankers Association. The data reflect loans at least one payment past-due.

Such delinquencies on mortgages made to prime customers rose 5.8% in the second quarter, compared with a rise of 1.8% among subprime customers. Still, the delinquency rate for prime loans was 6.4%, far below the 25.4% rate for subprime loans, according to the Washington-based trade group.

"We view this as a change in the nature of the problem. These borrowers were underwritten conservatively, and they were able to manage their payments for some period of time," says Michael Fratantoni, vice president of single-family home research for the mortgage bankers' group.

HSBC Holdings PLC, which was one of the first banks hit by a wave of subprime defaults in the U.S., says its portfolio of prime credit-card loans is performing worse than its subprime group. One reason for the switch, the bank has said, is that many of its subprime borrowers are renters, who have demonstrated a better payment history on their credit cards than prime borrowers, who are homeowners now getting hit by falling house prices.

The focus on prime borrowers comes more than two years after the housing meltdown took its first aim at subprime borrowers, who found themselves locked into unaffordable mortgages and weighed down by credit-card debt.

These subprime borrowers tend to have fewer financial levers to pull to stay current on their debt payments, so they default relatively quickly. Many of those bad subprime mortgages have worked their way through the financial system, causing billions of dollars in losses to the nation's banks. Credit-card issuers, meanwhile, have been quick to cut off these subprime borrowers, who were in the first wave of delinquencies and defaults.

For prime borrowers, this recession has been especially tough because declining home prices have taken away one of the typical crutches for them since it is harder to tap the equity in their homes to pay their bills if they lose their jobs, according to a report issued this week by Standard & Poor's.

In addition to cutting back on spending, strapped prime borrowers often can keep up with their bills longer than subprime borrowers by draining savings accounts, reducing contributions to retirement plans and turning to family members for money. They also are typically slower than subprime customers to seek help for financial problems because they are concerned about the stigma associated with such assistance, credit counselors say.

About 40% of the strapped consumers seeking help from the OnTrack Financial Education & Counseling center in Asheville, N.C., are prime borrowers, up from 15% last year, says Tom Luzon, director of counseling services at the United Way agency. Many of these clients already scaled back their lifestyles after losing their jobs or seeing their salaries slashed. Some are small-business owners whose companies foundered as a result of the recession.

"They have made adjustments and made adjustments, but then you get to a point where you can't adjust anymore," says Mr. Luzon, who is a former banker.

"People who are middle-class wage earners initially may have severance pay and think they have plenty of time to find a job, but then they start using credit cards to support living expenses," he says.

The housing crash brought with it many changes including government programs to aid homeowners facing foreclosures, a closer look at lending practices, and new loan products for consumers.

The last item is what concerns many Americans who are interested in taking advantage of falling housing prices. A study called, A Financial Analysis of Consumer Mortgage Decisions written by Andrew J. Kalotay and Qi Fu and released by the Research Housing Institute for America (RIHA) and the Mortgage Bankers Association (MBA) details information on getting a mortgage loan.

Getting as much information and education about the best options before taking a mortgage loan has never been more vital—it can help ensure that your borrowing strategy is successful.

Fu says their study focuses on three main areas in the mortgage industry. The first chapter is about how to select a mortgage based on the points menu. "The first question to ask is how to make a decision when given the choice between paying points and paying a higher rate," says Fu.

He says that often borrowers who simply look at the Annual Percentage Rate (APR) don’t consider all the necessary facts to make the best choice. "The APR includes some information but it doesn’t account for the possibility that the mortgagor may refinance down the road," says Fu. The study gives the mortgagor a deeper look at this consideration. In chapter two, another key concern is addressed. The study helps mortgagors answer the question of when to refinance.

"Oftentimes when mortgagors make a decision they only consider the savings they get from refinancing but what they don’t consider is the opportunity-cost that they’re giving up of possibly refinancing at a lower rate down the road," says Fu. The study, using graphs, charts and case studies, aims to help mortgagors understand "refinancing efficiency" and a formula that helps them decide the optimal time to refinance.

Fu says homeowners can save lots of money by first making sure that the timing is best for a refinance. He recommends using their refinance calculator which can be found online at kalotay.com/calculators In chapter three, the study covers, "When you have a lump sum [of money] and you have a choice between investing in something else or paying down your mortgage—how to best consider that decision," says Fu.

The 60-page study available online at the Mortgage Bankers Association offers borrowers a glimpse of how to handle this situation, suggesting possible, but limited, alternative investment options. Visit mbaa.org. For investing in alternative assets, greater research would be helpful; however, overall, this report provides good information for borrowers to consider before taking out a mortgage loan. It provides clear definitions and methods to analyze complex mortgage products for borrowers to review in order to be better equipped to make important financial decisions about future mortgage loans.