The Ten Commandments of Home Buying

164ASPbue973894bevA friend recently asked me for mortgage advice. I explained how to shop around for a good rate, and then I added my catchphrase: “You didn’t ask, but…”

Like anyone involved in the world of finance, I’ve seen a lot of serious mortgage trouble in the last few years. Even though the days of jumbo loans with no proof of income are long gone, it’s still a homebuyer’s responsibility to make sure that taking on a mortgage doesn’t put them in the financial danger zone.

So, I told my friend, before making the leap, to work through the following checklist and make sure you’re on the good side of each rule.

Now, nobody’s perfect, and if your online dating profile says you’re looking for a financially prudent partner who fulfills every qualification below, you’ll stay lonely. “You obviously can’t do all the things on your list,” says Jane Hodges, author of Rent vs. Own.

But whenever someone has come to me in danger of losing their house, they’ve ignored nearly every single rule, including the most important one: In Mint’s recent money mistakes survey, 20% of you admitted to spending more than 30% of your income on housing.

And since January is all about fixing those pesky Money Boo Boos, and paying too much for housing is definitely a big money mistake, let’s talk about the ten commandments of home buying:

1. Don’t bite off more mortgage than you can chew

The classic lending guideline says your principal, interest, property tax, and insurance (PITI) should amount to no more than 28% of your gross income.

Obviously, that’s an arbitrary number. Your financial world won’t explode if you stretch to 29% or 33%.

But an outsized mortgage payment is going to bite you sooner or later. As we’ve seen again and again over the last four years, lenders aren’t cuddly and understanding. They just want you to make your payments, month after month.

There’s also the duration of the mortgage to consider. “Another metric is your age,” says Hodges. “If you’re 55 and a first-time buyer, you better be getting a 15-year loan, right?”

2. Have at least one steady income in the family

It’s not 2006 anymore, and banks are a lot more scrupulous about checking to see if you have any income before shoveling a houseload of money in your direction.

But it’s still your responsibility to make sure you have a steady paycheck to go with your steady mortgage payment.

3. Carry few or no other debts

A reasonably sized mortgage quickly becomes an unreasonable burden when you mix it with student loans, car loans, and credit card debt.

The traditional lending guideline says that your mortgage payment (yes, including interest, tax, and insurance) and all your other debts should add up to 36% of your income or less.

Again, I’ve had people show me their monthly budget, and 70% of their income was going to debt repayment. That can’t end well.

4. Keep a big buffer

On top of debt repayment, you have other non-negotiable bills every month: utilities, insurance, a basic level of food and clothing, and maybe a tuition payment. Then there are discretionary expenses: saving, dining out, entertainment, travel, etc.

In their book, All Your Worth, Elizabeth Warren and Amelia Warren Tyagi recommend that you keep your non-discretionary expenses to less than 50% of your take-home income.

Like the other percentages we’ve been throwing around, this one isn’t magic, but it’s a nice guideline. When too much of your income gets sucked into required expenses, you lose flexibility.

A brief period of unemployment, a medical emergency, or a car repair can turn into a financial disaster that ultimately costs you your house.

5. Have an emergency fund

If you have a well-stocked emergency fund now, don’t drain it to fund a down payment. If you don’t have one, you’re not ready for a mortgage, no matter how perfect a Cape Cod you just toured.

6. Have good life, disability, and health insurance

If you’re uninsured or underinsured, you’re in no position to buy a house, unless you’re sitting on a giant pile of money. Are you?

7. Bring a 20% down payment

Small down payments lead to big problems. Reuters’ Felix Salmon crunched the numbers last year and found that mortgages with a 15%-20% down payment were more than twice as likely to become delinquent as mortgages with a 20% down payment for most years before the financial crisis.

Lower down payments did much worse. His conclusion: “So, let’s all remember this chart the next time anybody claims that you can have a safe mortgage with a low down payment. Because the fact is that you can’t.”

8. Don’t use home equity as part of your retirement plan

Home equity is great—that’s why you should bring a big down payment. But it’s also undiversified, subject to the ups and downs of the real estate market, and hard to quickly turn into cash.

It’s fine to have your retirement savings plan reflect the fact that your mortgage will be paid off in retirement and your ongoing housing costs will be low (although, you’ll still be on the hook for maintenance, property tax, and insurance).

If you’re assuming your house will appreciate at a lavish rate and you’ll be able to cash out later when you downsize, think again: over the long term, house prices rise at about the rate of inflation, according to the Case-Shiller index.

9. Be prepared to settle down

Unless you’re prepared to stay in your house for seven to ten years, the costs of buying and selling are likely to swamp any price appreciation.

Put more simply: If you move a lot, you’re better off renting. And most people underestimate how soon they’ll want to (or need to) move. Look at your past behavior and be realistic.

10. Check the price-rent ratio for signs of a bubble

A couple of times a year, looks at housing markets nationwide and declares them under-, over-, or well-priced based on the historical price-rent ratio, which is just the price of a house divided by the annual rent for an equivalent house.

During the housing bubble, prices in many markets rose to absurd levels by this standard: People were buying $500,000 houses that would have rented for, say, $20,000/year.

In retrospect, this obviously wasn’t going to work out. Prices in most markets are now sane (ratio of 15 or less), but you should still look at the neighborhood level. My Seattle neighborhood, for example, is still looking a little hot.

Source: Matthew Amster-Burton via:

5 Reasons to Buy a Home Now Instead of the Spring

orange-county-housing-marketBased on prices, mortgage rates and soaring rents, there may have never been a better time in real estate history to purchase a home than right now. Here are five major reasons purchasers should consider buying:

Supply Is Shrinking

With inventory declining in many regions, finding a home of your dreams may become more difficult going forward. There are buyers in more and more markets surprised that there is no longer a large assortment of houses to choose from. The best homes in the best locations sell first. Don’t miss the opportunity to get that ‘once-in-a-lifetime’ buy.

Price Increases Are on the Horizon

Prices were expected to bounce along the bottom this winter. However, many pricing indices (examples: CoreLogic, FHFA, LPS, Case Shiller) are reporting that prices are continuing to rise.

Rents Are Skyrocketing

Rents historically increase by 3.2% on an annual basis. A study issued earlier this year projects rent increases of 4% for the next two years. Trulia recently reported that rents this year have actually shot up by 5.4%.

Interest Rates Are Projected to Rise

The Mortgage Bankers Association has projected that the 30-year mortgage interest rate will be 4.4% by the end of 2013. That is an increase of approximately one full point over current rates.

Buy Low, Sell High

We would all agree that, when investing, we want to buy at the lowest price possible and hope to sell at the highest price. Housing can create family wealth as long as we follow this simple principle. Today, real estate is selling ‘low’. It’s time to buy.

source: KCM

Fed Renews Vow to Keep Rates Low

ratesThe Federal Reserve acknowledged Wednesday that segments of the economy are looking up, particularly housing and household spending. However, the Fed said it will continue to press forward with its stimulus campaign — which includes a move that is lowering mortgage rates — until the economy shows more growth.

At its latest meeting, the Fed renewed its vow to keep rates near zero until mid-2015. It will also continue to buy $40 billion in mortgage-backed debt each month, a program known as “QE3,” which has helped to push mortgage rates into record-low territory in recent weeks.

"The committee remains concerned that, without sufficient policy accommodation, economic growth might not be strong enough to generate sustained improvement in labor market conditions," the Fed said in a statement.

The Fed said that unemployment still remains high at 7.8 percent, the “fiscal cliff” looms at the end of the year, the global economy is struggling, and the U.S. gross domestic product grew at an annual rate of only 1.3 percent in the second quarter.

Source: “Fed Pledges to Maintain Stimulus,” The New York Times

Home Ownership & Home Affordability

Real-Estate-PuzzleLast week I had the opportunity to hear one of the premier economists on the West Coast, Matthew Gardner. Each time I listen to him, I come away more educated, and because I provide real estate services in the greater Seattle area, encouraged.

In regards to homeownership in our area, the data below would suggest that we are in good shape in the Puget Sound.


The homeownership rate is reversing toward it’s historic norms. Excluding owners who haven’t made a payment in a year, it is currently at  62%.


If we believe that there was a “Normal” market back in the 1990’s, then it is conceivable that prices should be higher.


Here are Matthew’s conclusions.

• Prices Will Start to Solidify this Year

• Overly Stringent Financing constraining the Market

• 4-County Area Listings are Down 17% but Sales are Up 12%

• Faster Drop Off in Foreclosures in 2012

• Positive Price Growth in 2012 (1.6%).Conclusions

• Local Prices are down by 15.8% but Non-REO prices are down by 9%

• Limited Income Growth will Slow Home Value Appreciation

• Homeowners, as opposed to investors, would rather wait to pay a higher price than admit to their friends that they bought too soon!

• Recovery Will Be Unequal.

Could Buyers Be Ready To Get Off the Sidelines?

rent rates

Falling home prices have sent many would-be buyers to the sidelines. In many cases, record low interest rates and rising rents may prompt some of them to take a second look at buying.

Much of the decision to buy a house still depends on your personal finances and preferences, your career or family life, or level of financial security. But if you’re comparing just the cost of owning and renting, buying a house may soon be the better choice.

Until recently, home ownership was no bargain compared to renting, according to his analysis.  A 33 percent drop fall in home prices, a plunge in mortgage rates and 15 percent rise in rents since the housing crash has evened the scales. Today, the median monthly mortgage payment of about $700 has fallen to about the level of a median monthly rent check. If mortgage rates keep falling and rents keep rising, the equation will tip even further toward owning.

But that analysis doesn’t include the total cost of owning versus renting. A full accounting includes closing costs, maintenance, insurance and property taxes, tax savings from mortgage deductions, gains or losses from home equity, among other factors. Renters have to think about broker fees and future rent hikes. Both have to make assumptions about future trends in housing prices and rents.

When you take those factors into account — someone who plans on staying put for seven years would come out ahead by about $9,000 if they bought a median-priced home rather than being a tenant in a median-priced rental, assuming that rents keep rising by about 3 percent a year and that house prices stay flat in 2012 and 2013 and begin rising in 2014 at about 3 percent a year.

If you would like to investigate this more, shoot me an email or call 206-713-3244

FHA Loan Limits ARE BACK!

Moving House

  Here’s a handy link to check out FHA loan limits for your area.

FHA may be the way to go for higher end buyers.

Click here for the details

Want to know more, call me at 206-713-3244 or email me

Five Great Things about Homeownership

home ownershipIf you’ve been on the fence about homeownership, now may be the time to take the step. Don’t let the negative press deter you from one of life’s greatest joys.

Let’s take a look at five short and sweet reasons that homeownership could be a good fit for you and your family.

1. Equity. When you pay rent, you never see that money again. It is lining the landlord’s pocket. Yes, buying a home may come with some hefty initial costs (downpayment, closing costs, inspections), but you will make that money back over time in equity built in the home. Historically, homes appreciate by about 4 to 6 percent a year. Some areas are still experiencing normal appreciation rates. For the areas that have seen harder times since the recession, experts feel that the housing market will recover. Homeownership is about building long-term wealth. A home bought for $10,000 in 1960 is most likely worth 10 times that in today’s market.

2. Relationships: Renters tend to see their neighbors come and go. Some people sign one year leases, while others are in the community for much shorter terms. Apartment complexes also tend to have less common shared space for people to meet, greet, and socialize. Homeowners, however, have yards, walking trails, or community pools and clubhouses where they can get to know each other. Neighbors stay put much longer (at least three to five years if they hope to recoup their closing costs). This means more time to develop relationships. Research has shown that people with healthy relationships have more happiness and less stress.

3. Predictability: Well, as long as you have a fixed-rate term on your mortgage it’s predictable. Most people buying homes today know that a fixed-rate is the way to go. This means your payment amount is fixed for the life of the term. If your mortgage payment is $500 today, then it will still be $500 a month in 10 years. This allows for people to budget and make solid financial plans. The sub-prime crisis meant some homeowners with adjustable rate mortgages saw their monthly payments rise and then rise some more. Homeownership, though, generally comes with a predictable table of expenditures. Even the big purchases are predictable. You know most roofs last just 15 years (or so). You know that each year you’ll need to pay for the gutters to be cleaned, and so on.

4. Ownership: Okay, this is a given. Homeownership means you "own" your home. That comes with some incredible perks, though! You can renovate, update, paint, and decorate to your heart’s desire. You can plant trees, install a pool, expand the patio, or do holiday decorating that would rival the Kranks. The bottom line is this is your home and you can personalize it to your taste. Most renters are stuck with the same beige walls and beige carpet that has been standard apartment decor for 20 years. Now is your chance to let your home speak!

5. Great Deals: It’s a great time to buy. Interest rates are at historic lows. We’re talking 4.0 percent instead of 6.0 or higher. This means big savings for today’s buyers. Home prices have also taken a dip since the recession, which means homes are more affordable than ever. If you have steady income and cash for a downpayment, then let’s talk about what homes in your area could be a fit for you.

Homeownership can be a real joy. Let me know how I can help: 206-713-3244 or email me.

The Game Of Home Buying


Okay, this is not the way it work in the “real world”… it is much more complicated. I can help!