WORD: FHA Appraiser

And the WORD for Today is:

FHA Appraiser – is an appraiser who has studied the guidelines required by FHA in order to evaluate a property when the borrower plans to us an FHA-backed loan. FHA maintains a list of “approved” appraisers so lenders can select from this list when ordering an appraisal to complete processing of a loan application. The use of an FHA appraiser is extended to avoid making/approving a loan on a property which has structural or mechanical problems, exhibits safety concerns or has code violations. A house which needs numerous, repeated or expensive repairs can drain a budget and lead to default on the loan. An ounce of preventions, packaged as an FHA appraisal could be just the solution to sustained home ownership.

Copyright © 2008, Home Ownership Matters, LLC. All Rights Reserved.

You can find more helpful definitions of WORDS like these in Your Real Estate Advisor which can be purchased at www.DovePublishingHouse.com.

(Please E-mail Heather at homeownershipmatters@gmail.com with any questions, comments or concerns you might have! We appreciate all comments and feedback, so please don't be shy.)

WORD: Deficiency Judgment

And the WORD for Today is:

Deficiency Judgment—is a possible court judgment against a borrower, which can be requested by the lender who has not received full payment of the amount, owed. A deficiency judgment is the difference between the amount the borrower owes to the lender (including all additional acceptable costs) and the actual amount the lender receives through an eventual sale of the property. As the rate of foreclosure has increased, lenders are pursuing consumers more frequently for this deficiency. However, if the loan is an FHA backed loan the consumer can avoid a deficiency judgment by making a good faith attempt to sell their home prior to foreclosure. Even if the home does not sell and even if they later relinquish it through a deed-in-lieu they still avoided the deficiency judgment. While consumers who are owner-occupants are rarely pursued for deficiencies by FHA, investors almost always will be. Federal employees who have a deficiency judgment on either an FHA or VA loan can expect to have their checks garnished for the repayment. Consumers should be aware that walking away from their home does not mean they will not have any further obligation related to the mortgage.

Copyright © 2008, Home Ownership Matters, LLC. All Rights Reserved.

You can find more helpful definitions of WORDS like these in Your Real Estate Advisor which can be purchased at www.DovePublishingHouse.com.

(Please E-mail Heather at homeownershipmatters@gmail.com with any questions, comments or concerns you might have! We appreciate all comments and feedback, so please don't be shy.)

Did You Know? Guidelines for Loss Mitigation

Guidelines for Loss Mitigation

FYI—Guidelines for the loss mitigation options which are available on government backed loans are public information—available on the internet. Whether you have an FHA, VA, USDA, Fannie Mae or Freddie Mac loan, the regulations which determine what options are available and the factors which need to be considered for each are hidden in plain sight—on the web.

I’m telling you they are there—I am not saying they are easy to find or easy to understand. Nor am I saying that lenders/servicers abide by them even half the time. Do the research, get some clarity and figure out what YOU think will work for you.

The most important thing is to know that they exist and where to find them.

FHA loans: We recommend Mortgagee Letters 00-05 and 08-43 (Click here to go to a page with a listing of HUD's mortgagee letters.

(Please e-mail Heather at homeownershipmatters@gmail.com with any questions, comments or concerns you might have. We appreciate all feedback, comments, and especially your questions. Don't be shy!)

Q&A: Listing agent to help me buy

Q. Last week while visiting open houses, I found a house which I really, really like and want to purchase. The listing agent has been very helpful and since I don’t have an agent, she is encouraging me to go ahead and let her help me with the purchase before someone else gets it. Is it a good idea to let the listing agent represent me as well?

A. Agency is the relationship you establish when you select or engage someone to represent you. It is a legal arrangement where you become the principal and they, as your agent has a responsibility to protect your interests in helping you complete a transaction. It is implicit in this agreement that they have a fiduciary responsibility to put your interests first.

Dual agency

The situation you are asking about is commonly called dual agency, where one party represents both people. It is entirely legal, but can become complicated. The agent must disclose to both clients the existence of the other client (get you to sign a paper which says you understand and are comfortable with this arrangement). The legal requirement addresses the issue of appropriate disclosure; it does not address the issue of human nature. Human nature is such that most of us are going to choose between two individuals one of them whom we like a little better or for some reason feel a little closer to and work harder to get what they want out of a situation. In addition, in a house purchase, the listing agent has a relationship FIRST with the sellers. Even if there is an agreement to treat all parties fairly, if there is a major inspection issue (for instance) it is likely to be harder for the agent to press the people who listed with her to spend the necessary money when they already have an accepted price. On the other hand, if you had selected a buyer’s agent whose only responsibility is to represent you, then your agent can fight aggressively for having the repair done since they have NO connection to nor consideration for the seller.

Limited or dual agency is very popular with many agents who contend there does not have to be a conflict and they can handle any conflict which arises.

I disagree and believe that while dual agency may be legal, it is fraught with the opportunity for a buyer to receive less than full representation. The major fringe benefit for agents is that dual agency comes with dual paychecks. When I sold real estate, I declined dual agency unless it was an inter-family transaction where they simply needed a competent agent to process the transaction but they were already in agreement about the details.

I will never forget one transaction where I had the listing and my client did NOT understand why I did not want to represent a buyer who wanted her property. I explained dual agency and the problem which that MIGHT create. I told her I wanted her house to sell but I did not want to represent the buyer.

She took that to mean I didn’t think much of her house (which was a reflection of her lack of self esteem and lack of understanding of agency as I had explained it to her). Her house appeared to be in excellent condition, very well kept, neat, clean. Roughly a $65,000 starter home in Indianapolis. I would not have listed it had I not felt comfortable with its presentation and my ability to sell it. We get the house under contract with a young woman who had wanted me to represent her as well since she did not have an agent when she first looked at the property during an open house. I had insisted she had to go find another REALTOR since I would only represent the listing side.

Her inspection uncovered a major leak in the attic which required a full roof replacement for FHA financing. Neither my seller nor I had any idea there was a problem with the roof since there had not yet been a leak inside the house, but here we are with an accepted offer, scheduled to close in two weeks. She is looking at an outlay of more than $4,000 to put on a new roof which would eat up almost every penny which she expected to get from the proceeds AND she didn’t have the funds to do it in advance. We tried to negotiate to get the buyer to increase her purchase price, to no avail. My seller was unwilling to move forward to closing at the agreed price AND shell out the funds for the roof. We did not close because she could not (chose not) to correct the problem. I supported her position. I felt she had a legitimate position. She somehow felt that if I had represented the buyer I could have made her accept the house without the roof replacement and that I had cost her the sale. She did NOT relist with me.

I am sharing that I refused to participate in dual agency and still lost the transaction and some agents reading this will say I should have represented both of them. I am more convinced than I was before that transaction began that the worse possible situation for me would have been representing both of these women—essentially AGAINST each other—over a $4,000 roof issue.

In real life, too often agents do press one party to go ahead when they run in a scenario similar to the one above. When they do so, they fail to pass the test of integrity and do a disservice to the real estate industry and the clients whom they profess to represent. The general public has significantly less regard for all real estate salespeople, including REALTORS, than they did 10-12 years ago. We have lost their respect as a profession because of the multitude of agents who do not adhere to the standards which had placed us in such high regards just a mere 20 years ago.

Agents: Will you be part of the move toward professionalism? Integrity? Respect?

Consumers: Will you become better educated about what you should expect from your agent and then demand that they provide a level of service which you are comfortable with?

You’re paying for it, you deserve no less!

Copyright © 2009, Home Ownership Matters, LLC. All Rights Reserved.

(Please E-mail Heather at homeownershipmatters@gmail.com with any questions, comments or concerns you might have! We appreciate all comments and feedback, so please don't be shy.)

Short Sale Fast Facts for Consumers

Short Sale Fast FACTS for Consumers

1. Short Sale could be your solution—but it has some pitfalls

Get informed and Get started

2. Short Sale is an Option Not a RIGHT

You will need to “qualify” for the option to dispose of the house by using a short sale.

Most lenders use the same basic criteria—what I call the “Universal Hardship Test”

• Was the default ‘trigger’ something beyond your control
• Did the trigger lead to an increase in expenses or a decrease in income?
• Are you still an occupant in the home secured by the loan?
• Have you depleted all of your assets available to make mortgage payments?
• Are you willing to pull together the documents required by the lender/guarantor to determine if they believe you qualify for a workout?
• If there is a co-borrower, are both parties committed to this workout attempt?

3. Finding a competent REALTOR could be difficult

A short sale is a Speciality transaction. You need to find a

REALTOR who:

• Works full-time—yes, even in today’s climate
• Is experienced in short sales (means they closed)
• Is familiar with your area and price point
• Whom you feel comfortable with
• Who is able to demonstrate to you what the value of your home is compared to similar homes in the neighborhood
• Has the ability to effectively market your home
• Is pleased to share with you that they have had specialized training in Short Sales (I mentioned this last, because if they haven’t mentioned by now, it is because they don’t have any—Not a good sign)

4. You can list the home for short sale—BEFORE the lender approves the

short sale—

**As long as you indicate that “all offers are subject to lender approval” This should be included on your listing contract, on the seller disclosure form and within the comments on the MLS sheet

**You can’t ACCEPT and CLOSE without the lender’s approval but you don’t have to wait to get started. Why not start today? Is your house ready? Do you have the documents needed for the hardship package?

5. Might leave you with a deficiency—which could be used to get a judgment against you

Negotiate to get the lender to agree to “waive their right to a deficiency judgment” as part of the short sale approval letter.

You should NEVER assume that because the lender agreed to the short sale that they have waived their right to pursue you for the shortage.

If it’s not in writing—signed by an authority—you should expect them to pursue you for the shortage.

6. Foreclosure process—will most likely continue, even while you have the house on the market for sale

FHA loans which are subject to HUD regulations—require that the foreclosure process STOP while the home is marketed for short sale

Foreclosure action continues on ALL other loan types

7. Listing Termination—can be mandated by your lender when you are in default

The Lender is not a party to the listing contract and you might logically assume that therefore they had no say so about what does or does not happen with the attempt to sell your home.

Unfortunately, you would be mistaken.

Government guarantors, HUD, VA, USDA, Fannie Mae, Freddie Mac, and Rural Development have the right under Federal regulations to compel you to withdraw the listing IF:

You are cooperating with showing the property as a show of ‘good faith’

Title issues are uncovered which would prevent the transfer to a new buyer

The condition of the property is such that a sale is unlikely

You have failed to comply with request for information to determine your eligibility for a workout. Remember: This is an Option, not a RIGHT.

8. Second Liens can present a challenge—also known as a ‘stumbling block’

Second lien holders seldom initiate foreclosure; they block short sales all the time with their obstinacy. You cannot transfer real estate to a new buyer when there is a second lien holder without their cooperation.

They must either:

a. Release the lien

b. ‘Lift’ the lien and permit the closing

Usually they can be enticed to do one of these things, preferably the first. Many will accept a token payment as a settlement for the obligation if foreclosure is imminent and they stand to get nothing after the lien is wiped out. Other they may agree to an unsecured loan in exchange for

their cooperation.

Your lender may make a contribution toward getting this second released, especially if you have a government backed loan. Their regulations have a stipulated amount set aside for this purpose. Get your facts and get going.

9. Tax Implications—Didn’t Your REALTOR mention that?

When there is a deficiency (difference between what you owe on the house and what the new buyer is willing to pay for it) you are taxed on that amount as though you received it as a gift.

IRS rules require that the lender provide this information directly to IRS for tax purposes.

You should NEVER assume that because the lender agreed to the short sale that they have waived their right

10. Now about signing those papers…….WAIT

I believe strongly that the seller of a property which is upside down would do well to pretend their fingers are broken once they have signed the listing contract and seller disclosure form until Mr. Smitherman, the supervisor at the bank, has:

a. Approved their short sale, with all continguences

b. Given them permission in writing to sign something

As a trainer, I take the position that ‘lender approval’ means getting the lender’s approval before you agree to anything with a potential buyer.

That means do not sign a purchase agreement, no matter what contingency clauses have been included by a so-called sharp REALTOR. Do not sign a counter offer. I said, ‘pretend your fingers are broken until the supervisor at the bank tells you to sign something.

If you sign BEFORE he tells you to, you are agreeing to terms which he has not yet agreed to. You cannot perform (or deliver the deed to the house) without his agreement. He may:

a. Select a difference ‘potential purchaser’

b. Counter and ask for a lot more money

c. Go ahead and foreclose, then you have nothing to sell.

Don’t get ahead of the bank. “Lender approval required” means the bank gets to decide everything: to whom we will sell, and for what amount, on what terms. Don’t allow yourself to be lulled into thinking it’s okay to make an agreement and then get his approval. That is risky business. Remember, your fingers are broken.

Please share today’s blog with someone you know who is struggling and not sure what steps to take next.

Copyright © 2008, Home Ownership Matters, LLC. All Rights Reserved.

(Please E-mail Heather at homeownershipmatters@gmail.com with any questions, comments or concerns you might have! We appreciate all comments and feedback, so please don't be shy.)

WORD: Insured Mortgage

And the WORD for Today Is...

Insured Mortgage – is a mortgage which is insured against loss to the lender in the event the borrower defaults and the ultimate sale of the property does not net as much as the outstanding loan, plus the cost of the foreclosure. Such insurance may be provided by FHA, VA or an independent mortgage insurance company.

Copyright © 2008, Home Ownership Matters, LLC. All Rights Reserved.

You can find more helpful definitions of WORDS like these in Your Real Estate Advisor which can be purchased atwww.DovePublishingHouse.com.

(Please E-mail Heather at homeownershipmatters@gmail.com with any questions, comments or concerns you might have! We appreciate all comments and feedback, so please don't be shy.)

WORD: Default

The WORD for Today is:

Default—When a person does not have the ability to make their mortgage payment as scheduled. A default begins on the date when the mortgage payment should have been made. This date should not be confused with the grace period. Once the consumer has gone into default, the lender has the option of accelerating payments, demanding payment in full and/or other action leading to foreclosure. If the lender fails to declare the existence of default, in keeping with the terms of the note and mortgage, they may be deprived of the right to accelerate repayment of the debt.

Default means failing to meet the requirements of an agreement or failing to perform a legal duty. Most often the term is used to indicate that someone has failed to make the required payments on their mortgage. It is important to note that you may also be “in default” due to failure to maintain insurance as required, or failure to keep the collateral in good condition.

“Default”—[as used in the PROMISSORY NOTE] means that a regularly scheduled payment has not been made, in full, on the date it was due to be paid. Many folks miss both the simplicity and the essence of this very short paragraph. Notwithstanding the allowance for a grace period, you are legally in default on a mortgage when the scheduled payment is not in the lender’s possession, in full, on the 1st of the month. While allowances are made for late payments and a grace period exists, there would be no need for “grace’ if you were not already in default.

Default Action Plan—Should include the following, as a minimum. As a consumer you should:

1. Identify the cause of the default. Is the cause temporary or permanent? Can you provide documentation that the reason for the missed payments was either a reduction in your income or an increase in your expenses. In either case, most often you will be required to demonstrate a circumstance which was beyond your control. Voluntarily leaving a job or reducing your hours are considered under your control. Moving from your home to another city, even for a better job opportunity is considered under your control.

2. Design a plan for catching up missed payments. The plan should be feasible based on your current income or realistic expectations of future income (a definite job commitment or date of return from layoff or disability) and include consideration for other expenses which must be carried on at the same time you are resuming payments. Seldom is a 1½ payment realistic and such an arrangement is strictly prohibited on FHA backed loans under Mortgagee Letter 00-05 (See HUD's Website — You will need to click on the letter "00-5" in order to download it).

3. Get in touch with the lender’s loss mitigation shop (also called the work-out department). Your best hope for a good resolution is to speak to the head of this department. Customer service does not typically offer loss mitigation options or work outs that extend past a couple of months of default.

4. Explain the problem. You must be prepared to explain your situation in detail and you should expect to be asked to provide documentation of both the cause of the inability to make payments as well as the detailed information about your current finances as a way to gauge what options might be considered.

5. You should plan to be part of the solution by not only asking for help, but by understanding the different options which are possible, when each might work and under what circumstances. You should see February 24th's entry, where Hardship, Hardship Letters, and Hardship Packages were discussed (here).

6. You should always return phone calls.

Copyright © 2008, Home Ownership Matters, LLC. All Rights Reserved.

You can find more helpful definitions of WORDS like these in Your Real Estate Advisor which can be purchased at www.DovePublishingHouse.com.

(Please E-mail Heather at homeownershipmatters@gmail.com with any questions, comments or concerns you might have! We appreciate all comments and feedback, so please don't be shy.)

What's That Mean?! (A-N)

You know how sometimes you see some letters jumbled together, and they just don't make a single bit of sense to you? Well, maybe this list of acronyms and abbreviations will help.

A.B.A.—American Bar Association

ALTA—American Land Title Association

A.P.R.—Annual Percentage Rate

ARM—Adjustable Rate Mortgage

BAPCPA—Bankruptcy Abuse Prevention and Consumer Protection Act of 2005

BPO—Broker Price Opinion

CAIVRS—Credit Alert Investigation Verification Response Systems.

C.D.—Certificate of Deposit, see page

CDC—Community Development Corporation.

CMA—Comparative Market Analysis

C.P.M.—Certified Property Manager

C.T.A.—Cum Testamento Annexo (with the will attached. See Administrator C.T.A.)

CRV—Certificate of reasonable value.

DBA—Doing Business As.

DOM—Days on Market, see page #??

ECOA—Equal Credit Opportunity Act

EEM—Energy Efficient Mortgage

EIC—Earned Income Credit

EPA—Environmental Protection Agency.

ERTA—Economic Recovery Act of 1981.

FDC—Fair Debt Collection law

FDIC—Federal Deposit Insurance Corporation

FHA—Federal Housing Administration

FHLMC—Freddie Mac

FICO—See credit score.

FIS—Foreclosure Intervention Specialist

FSBO—“For Sale by Owner”

FTC—Federal Trade Commission

GFE—Good Faith Estimate

GNMA—Ginnie Mae

HECM—Home Equity Conversion Mortgage

HELOC—Home Equity Line of Credit

HOEPA—Home Owner Equity Protection Act--

HUD—Housing and Urban Development

HUD-1—See Settlement Statement.

IRA—Individual Retirement Account

LIHEAP—Low Income Home Energy Assistance

MERS—Mortgage Electronic Registration System

MIC—Mortgage Insurance Case Number

NAR—National Association of REALTORS

NSF Fee—Non-Sufficient Fund Fee. See Return check fee.

If you have any questions about these, you should always feel free to leave us a comment, or e-mail us.

Copyright © 2008, Home Ownership Matters, LLC. All Rights Reserved.

You can find more helpful definitions of Acronyms and Abbreviations like these in Your Real Estate Advisor which can be purchased at www.DovePublishingHouse.com.

(Please E-mail Heather at homeownershipmatters@gmail.com with any questions, comments or concerns you might have! We appreciate all comments and feedback, so please don't be shy.)

WORD: Loan Modification

And the WORD for Today is...

Loan Modification – is a loss mitigation tool which involves a permanent change in one or more of the terms of the loans, which results in a loan payment the consumer is able to afford. It might accurately be called an ‘in-house refinance’ meaning that the consumer’s current lender (NOT A NEW LENDER) would be the entity to provide such a modification. A loan modification is a permanent change in one or more of the loan factors, which might include term, interest rate or loan type. If the loan is an FHA loan, it must first be purchased out of the Ginnie Mae pool and then re-pooled after it has been modified.

Copyright © 2008, Home Ownership Matters, LLC. All Rights Reserved.

You can find more helpful definitions of WORDS like these in Your Real Estate Advisor which can be purchased at www.DovePublishingHouse.com.

(Please E-mail Heather at homeownershipmatters@gmail.com with any questions, comments or concerns you might have! We appreciate all comments and feedback, so please don't be shy.)

Q&A: Garnishment Worry

Q: We are behind on our mortgage (seems everyone we know is) but hope to work something out with the bank so we can keep our home. I am still working but now get fewer than 30 hours some weeks. My husband has been laid off indefinitely since January of 2009. We still have some money in a 401K and worry that the bank will either take money from the 401K or get permission to garnish my paycheck. We can hardly manage groceries and utilities now. We would be in dire straits if they did that. Can a lender garnish your check or 401K?

A: A lender does not have the right to garnish your paycheck/attach a 401K until AFTER you have lost the home to foreclosure OR given it back through deed-in-lieu AND they have gone into court and gotten a “deficiency judgment” which indicates they are entitled to additional funds since the re-sale of the property did not cover the entire amount you owed them. Once they have taken this legal step they will be able to use the judgment as proof of the financial obligation. Then they can ask an employer to garnish wages based on the judgment.

Individual state law will determine how long a lender has to file for a deficiency judgment. Additionally, the type of loan and other guidelines may preclude a lender being able to acquire a deficiency judgment. (i.e. FHA regulations prohibit the lender going for a deficiency judgment IF the borrower attempted, in good faith, a short sale prior to the foreclosure.) I hope this helps to ease your mind that you don’t have to worry about just being ‘surprised’ that they have taken part of your paycheck or the 401K. It can’t happen without you having notice well in advance.

Copyright © 2008, Home Ownership Matters, LLC. All Rights Reserved.

(Please E-mail Heather at homeownershipmatters@gmail.com with any questions, comments or concerns you might have! We appreciate all comments and feedback, so please don't be shy.)

Fast Fact #5 & #6

5. Lender is required to response in 5 business days on FHA backed loans, by Federal regulations

6. If the consumer has already filed bankruptcy, there is nothing you can do until trustee has discharged the file

Just thought you'd like to know.

© Copyright 2007, Home Ownership Matters, LLC. All Rights Reserved.

(Please e-mail Heather at homeownershipmatters@gmail.com with any questions, comments or concerns you might have. We appreciate all feedback, comments, and especially your questions. Don't be shy!)

Myth #8

Myth #8: The consumer does not have to worry about a deficiency if the lender agreed to a short sale.

Reality: The fact that a lender/servicer allows a short sale does not automatically grant the consumer protection from a deficiency judgment in the future. The only automatic proviso for such protection is if the loan were insured by FHA.

Reason: Being allowed to close does not negate the terms of the mortgage. On of those terms is a provision which allows the lender to come after the consumer for any shortage even when the lender has granted a short sale or accepted a deed-in-lieu if the lender has not specifically agreed to waive their right to do so.

Copyright © 2008, Home Ownership Matters, LLC. All Rights Reserved.

(Please E-mail Heather at homeownershipmatters@gmail.com with any questions, comments or concerns you might have! We appreciate all comments and feedback, so please don't be shy.)

WORD: Deed-in-lieu

The WORD for today is:

Deed-in-Lieu—is an option for avoiding foreclosure. The consumer is allowed to voluntarily relinquish the home when they have not been able to make payments as a last ditch effort to avoid foreclosure. While the consumer will not be able to stay in the house this is still a better option for them than a foreclosure. When the lender eventually resells the home, if the amount they net is less than the amount of the mortgage the lender is very likely to file for a deficiency judgment against the consumer.

Literally means to return the deed to the lender in lieu (instead of) forcing the lender to take back control of the property through foreclosure action. It will be reported as a deed-in-lieu to credit reporting agencies which is much better than a foreclosure and perhaps slightly worse than a “short sale.” When the loan is an FHA backed loan the borrower is entitled to $500.00 when they sign the deed-in-lieu and vacate the home as agreed. The borrower may still incur a tax liability for some or all of the debt which has been forgiven. It would be wise to talk with a tax accountant before agreeing to this relinquish of the property in this manner.

Copyright © 2008, Home Ownership Matters, LLC. All Rights Reserved.

You can find more helpful definitions of WORDS like these in Your Real Estate Advisor which can be purchased at www.DovePublishingHouse.com.

(Please E-mail Heather at homeownershipmatters@gmail.com with any questions, comments or concerns you might have! We appreciate all comments and feedback, so please don't be shy.)

WORD: Mortgagee Letters

And the WORD for Today is:

Mortgagee Letters – are used by the Department of Housing and Urban Development (HUD) to inform lenders of policies and changes in FHA (Federal Housing Administration) operations, policies or procedures. All of the Mortgagee Letters are available on-line at hud.gov/offices/adm/hudclips/letters/mortgagee. It is particularly important for consumers and housing professionals to research borrower rights and lender responsibilities related to loss mitigation when the consumer is in default. You should be warned that these letters cover thousands of pages but are nonetheless important for you to research. A partial list of letters you will find helpful is included in the Resources section of this glossary.

Copyright © 2008, Home Ownership Matters, LLC. All Rights Reserved.

You can find more helpful definitions of WORDS like these in Your Real Estate Advisor which can be purchased atwww.DovePublishingHouse.com.

(Please E-mail Heather at homeownershipmatters@gmail.com with any questions, comments or concerns you might have! We appreciate all comments and feedback, so please don't be shy.)

Q&A: Affordable Housing

What is “Affordable Housing”?

Q. With so many people losing their homes to foreclosure and the loud discussions about whether or not they should be ‘rescued’ being raised all over the country by folks from all walks of life, perhaps we need to try to figure out what makes a house affordable.  Is ‘affordable’ a term which means a certain price point?  Is affordable different in different parts of the country?  How can person know if a house is affordable? It is all so confusing.

A.  Oh what a difference a few bank closings and a little recession make. Back in the olden days, say 2007, even then the term was elusive, referring to an elusive, unidentified house that the average middle class American could afford. Now we can’t even figure out who is a middle class American much less what is or is not affordable. All our bench marks have shifted. The value of a home today changes almost as frequently as you need to change sheets. Nonetheless, we need to get a handle on this whole affordable thing.

Let’s take the first question: Is affordable a term which means a certain price point?

It is more helpful to look at a home as being affordable in relationship to your overall income rather than a certain dollar amount. All houses are affordable to SOMEBODY. But maybe not affordable to you. Back in the very conservative, distant past, lenders used the guideline for loan approval as 28% of your gross monthly income (amount you earned before taxes) to be allocated for housing expenses. More than that and you could easily fall on hard times if your income shifted a bit. 

Our current crisis was caused in large part by a shift in practice which allowed many homebuyers to commit as much as 50% or more of their income to their housing payment. If you had a healthy savings account, property values remained stable, the creek didn’t rise and your dog didn’t die, then you MIGHT have been okay. But life happens. Your money got ‘funny’ (that’s what Aunt Carolyn calls it when it doesn’t stretch as much as it used to), property values started going down like elevators (every day) and interest rate resets have taken their toll. Now not only can many folk not afford the home where they currently live, they are unsure what is “affordable” for them. Hopefully, this guideline will help you decide. Very simply, if you make enough in 1 week to pay for your housing that should leave you with a comfortable amount to manage the other expenses of your life.

Conservative, traditional lenders have found that as long as the consumer’s total long term debt is no more than 36% of their total gross income then there is enough wiggle room to afford other items which constitute a “reasonable” lifestyle. This rule has proven over the years to help people to have medical coverage, some degree of entertainment as well as build a small savings account.  Rarely would such a consumer end up in default on their mortgage unless there was a total loss of income.  

This then would represent an affordable house payment. Each individual has a unique affordable housing expense amount which would determine what is affordable for this family. I strongly believe it is important to keep home prices as low as possible, to offer a wide range of homes at different price points so that more consumers are able to comfortably afford to own a house and spend less than the  50%+ that many families currently spend to have a roof over their heads. What I have just described is “an affordable house payment” which is the goal for all us.  

The American Dream has almost universally been described as the desire to own a home. Politicians, housing professionals and the general public are encouraged to take a fresh look at our current concept of what achieving that dream means. Are we being successful if we provide the dream to people who can acquire but not retain the home for more than a few years? Are we achieving  our goal if many of the people we get into new homes are paying so much for that home after interest increases and a full tax assessment that 50%-60% of their income is required for basic housing expenses leaving precious little for any of the other necessities of life? Are we really providing affordable housing or housing which appears to be affordable at the beginning because of creative financing ploys which reduce the initial payments by hundreds of dollars per month deluding consumers into believing it is “affordable”? Why are foreclosure rates so high in the FHA arena with many first time buyers? Are the down payment assistance programs leading to more people being home owners (retaining a home for several years) or just  a revolving door of more people who build/buy but are back in the rental market within a couple of years? 

It is time to raise the difficult questions and look for some honest answers in trying to shape what will be done to improve our housing market. It is important to offer “affordable” housing to help stabilize our communities, to allow more consumers to enjoy both the emotional and financial benefits of home ownership. It is a dream worth working toward and saving to achieve. It should be more than a fleeting illusion which disappears and leaves in its wake a disillusioned, frustrated consumer who barely comprehends that the beautiful home and future they envisioned was doomed from the beginning.

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(Please E-mail Heather at homeownershipmatters@gmail.com with any questions, comments or concerns you might have! We appreciate all comments and feedback, so please don't be shy.)