Almost everybody has heard of the FHA loan. That’s the loan where you only have to have 3.5% of the purchase price as a down payment. It’s a great way to get into your first house. In fact, I used an FHA loan to buy my first condo in 1998. In return for the low down payment, your interest rate is a little higher and you have to pay private mortgage insurance for the life of the loan or until you refinance into a conventional loan.

So you’re asking, “What does an FHA loan have to do with a construction loan?” Great question! They are both FHA loans. One is a 203b loan and the other is a 203k loan. These numbers correspond to the section of the HUD loan guidelines. A 203k loan is an FHA construction loan which helps borrowers buy a property that is in disrepair, fix it up and live in it. The loan amount is based on the improved value of the home after rehabilitation. The amount of work can be as little as $5,000, or as much as 10% over the appraised value of the improved property.

So here’s how it works. You see a house in a nice neighborhood and you want to buy it. It’s run down and it’s being sold as-is, where-is, which means whoever is selling it doesn’t want to make any repairs. You want to live in this neighborhood and you like this house but it needs a lot of work. The seller is selling the house at a deep discount. Let’s say the house is listed for $200,000 and homes in the area that are in good condition could sell for $300,000. You make an offer to the seller for home at the asking price of $200,000 and disclose that you will be using a 203k construction loan. The only way the use of this loan effects the seller is that the time frame may be an extra 15 days to close the loan.

The bank pays the seller the $200,000 for the home, the loan closes and construction on the rehabilitation of the home starts as soon as escrow closes. Because HUD is the underwriter of the loan, their people, or an authorized consultant, keeps a close eye on construction and pays the contractor as they complete phases of work. Then a few months later, you the homeowner can move into your nicely rehabilitated home.

It’s a great loan and there can be difficulties with it since many lenders and real estate agents don’t have full knowledge of the process. It is important to work with a lender who is an expert in both the “streamlined” and full 203k loans as sometimes. Many times these loans could save a deal from being a dead deal by using the 110% over appraised value method to improve the property. Again, be sure you are using an expert in 203k loans, not just a regular lender.

I recently had a client contact me to sell his house. He stated that he had listed it a couple of years ago but had canceled the listing because prices were lower than he had wanted to sell the house for at the time. He stated that he hoped prices were more reasonable now. After some checking, I discovered that the home’s value had dropped another 20% since he had listed it 2 years ago. Yikes! So much for reasonable…from the seller’s perspective or the buyer’s??? California Real Estate is going to continue it’s downward trend for another year or so.

During the year we had the tax credits in place for “first time buyers” of homes, there was significant movement in the home buying market. Most of the homes that sold in the East Bay real estate market were foreclosures or short sales. Due to this fact, there were more buyers than sellers during the tax credits and as a result, the demand for homes outweighed supply. More buyers were making offers on homes than were available. When demand is higher than supply, prices will generally start to increase. This is exactly what happened. I worked with several buyers during this time and the majority of the time, my clients made offers over the asking price to even be competitive in the market.

Basically what happened was that buyers ended up paying more for the home than they would have had they waiting until after the tax credits were over to buy a home. By buying a home with a tax credit, buyers ended up using the tax credit for the price instead of receiving it as a discount for purchasing the home.

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Now that the tax credits have expired, there are more short sales and regular sales on the market. However, buyers have pulled back and have decided to wait to purchase a home. Unfortunately now would be an excellent time for a buyer to make an offer on a home because the supply now outweighs demand so prices will start to drop. Buyers can make offers at or below asking and get more credits for repairs and closing costs.

Seller’s will have to be extremely realistic about pricing strategy. Yes! Your house is beautiful and well maintained and on a cul de sac, and you have a lot of land, but ultimately price is what will make a buyer make an offer. The features your home has brings them to the house.

Foreclosures are continuing to dominate the market in many Bay Area cities. My neighbors recently lost their home to foreclosure. Under certain circumstances home owners are making a conscious decision to allow the lender to foreclose on their home. When I discussed their situation with my neighbors, they had already tried to modify their loan and had gotten nowhere with their lender. I do not have any knowledge of their financial situation and going through a foreclosure may have been the recommended solution for their specific financial situation. I always recommend to any of my clients considering a foreclosure or a short sale to contact a CPA or a real estate attorney so they can understand the legal and financial ramifications of their decision.

However, there are so many protections in place for homeowners these days and so many lenders are willing to accept short-payoffs as paid in full for less than the owed amount that I can’t help wondering if they could have done more to protect their financial future.  I watched them them have a garage sale and get rid of stuff, pack up their belongings and move, leaving their home that they had put a lot of time, energy and dreams into, I wondered if they had done all they could to either save their home or at least mitigate the financial consequences of their decision to let go of the house.

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The first thing that will probably happen is you and your family will realize that you can no longer pay your mortgage, taxes and insurance without using your life savings which is probably not a good idea. If your financial situation is such that you have lost your job or been injured in someway and you realize that you will never make the kind of money you were making previously, you will have to make drastic changes to your lifestyle and deciding to downsize your housing costs will be the main way to reduce your outgoing expenses.

One of those drastic decisions may be to realize that you do not work for the rest of your life to support a house. Your home is where you and your family live and laugh, have fun, weather sorrows, stand together and face life. A house you are slaving away to pay for which keeps you from enjoying your life with your family is probably not what you bargained for when you decided to make the purchase. Sometimes, changing your life requires making painful decisions and changes.  It can be difficult but in the end, it is possible you will feel relief and a sense of hope for a better future with your loved ones. A short sale may be the way to go.

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For many deciding to buy a home is an exciting and proud moment. Whether it’s your first or third home, the likely scenario is you don’t know what to do first or you don’t remember what you should do first. I can’t tell you how many times I’ve received phone calls from prospective buyers who, when I start asking them questions about financing, closing costs, repair costs, say, “I don’t know,” or , “I haven’t done that yet.” Talk about putting the cart before the horse!

Most of the time I start out with the requirement that they get their financing in place before we start actively looking for a home but in fact there is a lot to think about before you even decide if buying a home is a good idea for you.

THINK ABOUT YOUR DECISION!

1. In today’s housing market, buyers need to think long term. If you cannot safely say you will be living in your home for 7 years or more, it’s not a good idea to buy.  It’s likely that a slow or depressed trend in housing is going to continue for a few more years. If you suddenly had to move or are thinking of starting a family and needed to sell, you would most likely not recoup your costs if you sell within those seven years. The one caveat to that sentiment is that if you could rent your home for as much as or more than your total payment, that would be a good option. However, most people use their equity from their existing home when they sell to put down on another home. You will not be able to do that for a while as no one is doing seconds on homes when the first is over 65% loan to value.

2. Where do you really want to live? Of course price is always a factor in purchasing your home. Consider what you have to pay for a home and know where you can afford to buy. Visit those areas extensively and decide where you will be happy living. If you won’t be happy living where you can afford to buy then don’t. Keep saving your money. But if you will be happy, be specific. When I was buying my last home, I had specific zip codes where I wanted to live and I told my Realtor to only send me listings in these zip codes.

3. How much can you really afford? This is a very important. BE REALISTIC!The money to buy a home is not just your down payment. Closing costs can be somewhere between 3-4% of the purchase price of the house.  Many cities and counties have point of sale ordinances that are the buyers responsibility in this market. A sewer lateral replacement can cost up to $4,000 and must be done within a certain time period after the sale. If you are buying a foreclosure, it’s likely the condition will be poor and repairs will be needed. Assume you will need at least $5,000 in reserve money for repairs to the home.

4.  Find a good agent who you can work well with, whom you trust, and who knows the local market. Be willing to trust their knowledge. Being a Realtor myself, I can’t tell you how important this last point is. I can’t tell you how many times I’ve received calls from people who are looking for homes but who refuse to work directly with an agent. They drive around and call when they see a property they like. What a waste of time! That’s the Realtors’ job. Realtors make sure you are getting the listings that match your criteria. I’ve also had conversations with prospective clients who don’t want to hear what I have to say about pricing and writing offers. I have refused to write offers for people who won’t listen to me. I had a client the other day want to offer $55,000 on a house listed for $65,000. I told him he would have to offer at least $80,000 to be competitive. I have confirmed that all 8 offers that were received were at least $20,000 over asking.

5. Keep your options open! Most people think that in today’s market, the deals are the foreclosures but that’s not necessarily true. For people purchasing with cash or large down payments, foreclosures may the right purchase for them. Keep in mind that these home are in poor condition generally and need a lot of work. For most home buyers, you’re goal is to purchase your first home, not your first project. Additionally, if you are using an FHA (Federal Housing Administration) loan to purchase, you will be limited to homes in relatively good condition. Short sales are becoming a good option too as more of them are closing and with less wait time.

A short sale is when an owner owes more on their home than the home will sell for on the open market but needs to sell regardless. The seller must obtain permission from the lender(s) to sell the home for less than the market value. The lender may or may not agree to forgive the portion of the loan not repaid at the time of the sale. A short-sale is typically a pre-foreclosure activity. Many short sales are taking place in the California Real Estate Market.

The seller should obtain a short sale package from their lender. Sellers should also check to see if the lender will forgive the debt and agree not to come after them when the short sale has occurred. If the lender will not agree to forgive the debt without recourse, a foreclosure may be a better option financially. Even if you are in the process of a loan modification with your lender, you may want to list your home simultaneously to obtain a short sale. You may  not like the modification terms the lender gives you in which case you will have a jump on the short sale process. Until you receive an approval from the bank, you are not in contract and can cancel the purchase should the loan modification meet with your approval.

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Short sales in the California Real Estate Market have notoriously taken a long time to complete; a waiting period of 60-90 days has been typical for a response from the lender. Some lenders such as Wachovia (now Wells Fargo) are streamlining the process. Hopefully other banks will follow. There is some direction from the current administration to encourage banks to shorten their process. A lender will typically conduct a broker price opinion (BPO) and an appraisal to determine the market value of a home in short sale. Provided the offer is in line with current sales, the bank will likely agree to the short sale.

Again, the seller must determine if a short sale is financially better than a foreclosure. The IRS website has some very specific definitions which will help you determine if you will be responsible for the debt. Typically, if you are short selling your primary residence, you will be fine. If you are short selling an investment property in the California Real Estate Market and you either have your original purchase loan or you can prove you are financially insolvent, you may not be on the hook for the debt. Please make sure to check with a financial advisor. As a general rule, your long term financial health will recover faster from a short sale rather than with a foreclosure.