Massachusetts Home Buyer Guide

2007 Real Estate Guide

BankRate.com recently published "20 Steps To Get The Best Deal On A Home In 2007."

I am happy to announce that step 6 is "Hire a buyer's agent." Obviously, there are some smart folks over at BankRate.com.

"A good real estate agent can help you focus your search and avoid the pricing pitfalls. Ideally, you want 'someone patient, someone focused on the neighborhood you're interested in,' says Tyson. Talk to several agents. "Have they taken advanced classes or received a designation?" says Fitzgerald. 'Is it somebody that you feel comfortable with, somebody who's going to listen to your needs? Is what you're looking for what they're showing you?' Don't fall victim to the trap that you can save money by not using an agent. The seller, after all is paying that agent in most cases, and even if there's only half a commission involved, don't you think the seller wants to save that same amount you have your eye on?"

Step 8 is "study comparables." I'm not so sure "comparables" is a word, but I have advocated in this blog the importance of researching comparable home sales when considering an offer.

"Do this before making a first offer. When you look at the comps (which should be within six months and ideally within three months), what's the relationship between the list price and the sales price? That's going to give you a good idea of just how much room you have to bargain. And just how much your first offer cuts from the asking price can vary with the town, neighborhood and price range. 'In some areas of the state, people wouldn't be distraught," at an offer than came in 15 percent to 20 percent below the asking price, says Phipps. "In my area, the sellers would be offended and you wouldn't get a counter offer.' And that's why it can pay to have a professional on your side. Especially in today's market, 'you need a buyer's agent to explain the nuances of the market,' he says."

Read The Entire Guide

Contact me, if you're interested in obtaining some home sales data for the community your considering buying in.

Subprime Mortgages Linked To Foreclosures

Stop me if you've heard this before.

The Boston Globe reported March 5, 2007 that risky loans made to home buyers with less than spectacular credit are to blame for the spike in foreclosure filings in Massachusetts.

It seems like there is a story about sub-prime lending and the resulting foreclosures in a newspaper somewhere in the U.S. almost every day.

"Subprime mortgages were lauded for helping more Americans than ever buy homes during the housing boom earlier in the decade. But four years after their popularity took off, the loans are backfiring. More homeowners are no longer able to afford their payments, which typically rise sharply two years into the loan. In 2006, lenders filed 19,487 foreclosure notices against Massachusetts homeowners, surpassing the record high of 17,000 filings in 1991, during the state's severe recession."

What's interesting about all these articles is that the reporters usually provide a vague definition of sub-prime loans, such as "mortgages tailored to home buyers with less-than-sterling credit ..."

What does that mean? Is it potential home buyers with credit scores under 650? Maybe it's scores under 620? How about scores under 600?

What role do interest-only and adjustable-rate mortgages play in the foreclosure explosion? How about employment history, personal savings, down payments and income? Do people who receive 100 percent financing face foreclosure more than other borrowers?

My guess is that an easy definition of the typical person facing foreclosure is not possible.

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PMI Tax Deduction Extremely Limited

The Telegraph, a Nashua, NH newspaper, reported February 13, 2007 that the recent law allowing home owners to deduct private mortgage insurance premiums has a narrow scope and short life span.

Mortgage insurance, commonly referred to as PMI, pays the lender, if a borrower defaults on a loan. Most lenders require borrowers to buy mortgage insurance when borrowers put down less than 20 percent of the purchase price of a home at the time of closing. Borrowers can cancel the insurance when their equity in the home reaches 20 percent.

"The federal tax deduction only applies to mortgages taken out since Jan. 1. It expires at the end of this year. Homeowners can’t claim the full deduction if they have more than $100,000 in household income and can’t claim it at all if their income exceeds $109,000. They must itemize deductions to claim it."

The cost of PMI varies depending on the particulars of the loan, but it typically averages 0.6 to 0.8 percent of the original loan amount per year.

Mortgage insurers welcome the law. The deduction will make mortgage insurance more competitive with what are referred to as piggyback loans, which have always been tax deductible.

"Piggyback loans are home equity loans or lines of credit that let buyers who don’t have 20 percent down avoid mortgage insurance. They borrow 80 percent of the home’s value with a first mortgage, then borrow whatever else they need with second, and in some cases third mortgages.

"These are also called 80-20 or 80-10-10 loans. The piggyback portion has a higher interest rate than the first mortgage.

"Piggybacks have taken a big bite out of the mortgage insurance market in the last five or six years."

During the real estate boom years mortgage insurance often was canceled in just a few years.

"By law, borrowers can ask their lenders to cancel mortgage insurance when the equity in their homes, based on the purchase price, reaches 20 percent. It can take many years to reach that point by making mortgage payments alone because, in the early years, payments are mostly interest, not principal.

"However, most lenders will let borrowers cancel their mortgage insurance if their loans are at least two years old and they get an appraisal showing that, thanks to appreciation, their equity now exceeds 20 percent."

Leave it to Congress to pass a tax break that begins and ends in the same year.

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Beware Of Predatory Lenders

Mortgage scams and not-so-ethical lenders have been in the news a lot recently. Home buyers need to protect themselves from predatory lenders.

One of the keys to successfully purchasing a home and obtaining a good deal is getting an affordable home loan with fair terms and reasonable costs. Unfortunately, home buyers need to be aware that some loans are not in their best interest.  When loans hurt instead of help, those loans can quickly lead to devastating problems, such as foreclosure and even bankruptcy.

The Center for Responsible Lending provides consumers with the following warning signs that they are dealing with potentially predatory loan.

Sounds too easy. “Guaranteed approval” or “no income verification” regardless of borrower’s current employment, credit history, and assets. These claims indicate the lender doesn’t care about whether you can afford to make the payments over the long haul.

Excessive fees. Higher lender and/or mortgage broker fees than are typical in your market. Because these costs can be financed as part of the loan, they are easy to disguise or downplayed. On competitive loans, fees are negotiable. It is common for home buyers to pay only one percent of the loan amount for prime loans. By contrast, a typical predatory loan may cost five percent or more.

Large future costs. High-risk adjustable rate mortgages where the payment rises a lot after a short introductory period are seldom appropriate for families who already have had problems repaying other loans. Home buyers also should avoid a large single “balloon” payment (a lump sum due at the end of the loan’s term).

Closing delays. The lender deliberately delays closing so the commitment on a reasonably-priced loan expires.

Over-valued property. Inflated appraisals that allow excessive fees to be included in the loan and result in the borrower owing more to the bank than the home is worth.

Barriers to refinancing. Prepayment penalties that make it hard for a borrower to refinance in order to pay off a high-cost loan by taking advantage of a low-cost loan.

No down payment loans. These loans may be split into two mortgages, with one having a much higher cost. Home buyers should be sure they can afford the payments. [BLOGGER'S NOTE: No-money-down loans are increasingly popular and help a lot of first-time home buyers purchase a home. What's important is that you speak with a real estate broker you trust to make sure the lender isn't taking advantage of the situation.]

Unethical document management. An ethical lender or broker will always require you to sign key loan papers, and they will never ask you to sign a document dated before the date you sign it.

Although most predatory lending occurs in the sub-prime (loans for individuals with less than ideal credit histories) mortgage loan market, I see people with good jobs and good credit scores being quoted lousy interest rates and and excessive closing costs. I always encourage my clients to run whatever their mortgage broker tells them by me.

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The Federal Reserve provides information on looking for the best loan.

Massachusetts Predatory Loan Practices Act

Consumers Shun ARMs

The Boston Herald reported January 14, 2007 that the latest figures from mortgage giant Freddie Mac show ARMs, or adjustable-rate mortgages, accounted for just 25 percent of the market late last year, down from 33 percent only two years ago.

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Mortgage Fraud On The Rise

The Detroit News reported January 16, 2007 that mortgage fraud is on the rise nationally, despite law enforcement and industry efforts to control it.

The statistics are from a recent FBI report.

" ... as of early January, the bureau had 938 pending mortgage-fraud investigations, compared with 818 at the end of September and 721 in September 2005. The FBI estimated that the actual number of cases was closer to 36,000 for the year ended Sept. 30, compared with 22,000 the previous year."

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Does Pulling Your Credit Report Effect Score?

I have heard a number of times from several different people that having too many mortgage brokers and/or lenders pull someone's credit report would have a negative effect on a person's credit score.

I assumed it was true, but I was always skeptical that mortgage brokers just said that to keep consumers from shopping around for better rates.

If the post I recently read on LendingClarity's blog is true, my skepticism was warranted. Apparently it is a myth that pulling your credit report for mortgage purposes too many times will hurt your score.

According to LendingClarity, two credit reporting companies treat all mortgage inquiries within a 45-day period as one inquiry and the other treats all inquiries within 15 days as a single inquiry. The credit reporting companies understand consumers want to shop around for the best rates and terms.

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What Goes Into A Mortgage Payment

The following is some information for first-time home buyers about what goes into your monthly mortgage payment. When you have a mortgage you’ll have several different portions of your payment each month.

Your mortgage payment consists of principal, interest, taxes and insurance, and sometimes additional fees, such as homeowners association dues (condos and townhouses usually) and private mortgage insurance, commonly referred to as "PMI."

Principal is the money you borrowed to purchase the home.

Interest is the cost of borrowing money.

Taxes are paid by homeowners to local governments, and taxes are usually a percentage of the assessed property value.

Insurance helps protect against financial loss from fire, natural disasters or other hazards. Most lenders require you to have a homeowner’s insurance policy on your home because it will help protect their investment, as well as your home.

Keep in mind that many loan quotes will only include your principal and interest. You’ll also need to factor in the taxes and insurance to calculate your total monthly mortgage payment (Free Advanced Mortgage Calculator).

PMI is an insurance that protects lenders when borrowers have less than 20 percent to put down as a down payment. The amount a borrower pays for PMI depends on the amount of the loan. Some mortgage specialists will be able to obtain you two loans, one for 80 percent of the price of the property and the other for some or all of the remaining 20 percent. This method usually saves borrowers money.

Get a free consultation with a mortgage consultant and free pre approval

Boston Mayor Calls For Tighter Lending Rules

The Boston Herald reported December 22, 2006 that, with Massachusetts home-foreclosure rates soaring, Boston Mayor Thomas M. Menino is calling on the Massachusetts Legislature to tighten mortgage-lending rules.

“We have all seen the dramatic spike in foreclosures, and we know that a large part of the problem is caused by lax oversight of mortgage companies,” Menino said in announcing his “Homeownership Protection Act of 2007” plan.
Smart move by the mayor. I'm not one usually in favor of a lot of government oversight of business, but mortgage companies brought this on themselves.

I see people (yes, even well-educated people) get screwed by mortgage companies and other lenders all the time. Please don't assume it can't happen to you. I'm always happy to answer questions.

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Private Mortgage Insurance (PMI) Now Tax Deductible

CNN Money reported December 20, 2006 that a $40 billion tax bill signed into law by President Bush extends several popular tax breaks and introduces a new one. Private mortgage insurance, commonly referred to as "PMI," is now tax deductible.

A popular alternative to PMI is to take out two loans, one for 80 percent and the other for up to 20 percent. The second loan is commonly referred to as a "piggyback" loan. In the past, the piggyback loan was usually the less expensive alternative; however, the new tax deduction may change the numbers game for many potential home buyers.

Only homeowners with adjusted gross income less than $110,000 and who itemize their deductions will be eligible to reap the benefit of the new tax deduction.

The bottom line: Be sure to carefully crunch the numbers both ways to find the solution that is best for your situation.

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Consumers Hurt By Risky Loans

REALTOR® Magazine Online reported December 20, 2006 that more than two million subprime mortgage loans that lenders made during the real estate boom years are in foreclosure, putting at risk $164 billion in wealth accumulation. Ouch! That's a lot of nickels.

The data comes from the Center for Responsible Lending. According to its Web site, the "Center for Responsible Lending is a nonprofit, nonpartisan research and policy organization dedicated to protecting homeownership and family wealth by working to eliminate abusive financial practices."

The article continues,

"The study found that, thanks to aggressive tactics by subprime lenders who prey disproportionately on minority households unfamiliar with the financing system but eager to build wealth through homeownership, one in five households with a subprime loan now face losing that home.

“We are talking about unwinding much of a generation’s effort to secure a place in the middle class,” said Calhoun.

"One of the biggest problem loans has been what the mortgage industry calls the “exploding ARM,” a loan that after a short low-rate fixed period adjusts upward without regard to the direction in which interest rate indexes are moving. Thus, even if interest rates are heading down these borrowers can face monthly mortgage payment increases, typically in the 30-40 percent range."

It's not just minority households and those that lack formal educations. I've seen educated people who thought they did their homework end up with bad loans. Maybe not loans that will result in a future foreclosure, but certainly loans that will turn out to be much more expensive than necessary.

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Mortgage Fraud is a Real Concern

I found a great blog about mortgage fraud this morning published by a California lawyer. The Mortgage Fraud Blog is a central clearinghouse for information on recent mortgage fraud schemes, indictments and  prevention intelligence.

You also can search posts that contain the word Massachusetts.

The most recent Massachusetts-related post was on November 22, 2006.

The publisher, Rachel Dollar is an attorney and certified mortgage banker who handles fraud recovery litigation for lenders and secondary market investors nationwide. She is a nationally recognized speaker on the topic of mortgage fraud.