My First Home:

Thursday, Aug. 26
Posted 11:38 a.m. EST

Home-price tempest calming down

Existing home owners and investors (i.e., home flippers) are about to get the appreciation knocked out of their sails.

For the last three years, home values have seen astronomical increases throughout the country, especially in Southern California, Florida, Las Vegas and the New York/New Jersey area.

Those bellwethers led the surge in home prices that pulled the rest of the housing markets up with them.

Well, now the winds have changed and the surge is losing momentum and may even be coming to a halt.

It may be too early to call, but I think it's over -- for a while.

I've been receiving e-mails for a few weeks about housing inventory in parts of Orange County ballooning from 15 to 100, and now economic reports and other anecdotal evidence is coming out supporting such a slowdown.

• The Commerce Department said yesterday that new-home sales across the nation fell 6.4 percent from June to July. The drop in sales was far more than experts had anticipated.
  
  
• The Orange County Register reported yesterday a drop of 36 percent in homes sold in July from the same month in 2003. The data was from the California Association of Realtors. July was the fifth-consecutive month that home sales have declined.
  
  
• Also yesterday, CNN/Money's Sarah Max wrote about a complete halt in the most-recent hot housing market, Las Vegas. A quote from that article captures the same sentiments I've been receiving from agents in California: "In the last 60 days the market has died," said Leslie Carver, with Prudential Americana in Las Vegas. "Before, I couldn't keep a listing for day. Now, not even one person has looked at some of these houses in a couple of weeks."

Of course, the areas hit hardest by this sudden slowdown are the areas that reaped the most gains from the insane home-buying frenzy of the last several years. The effects in other areas will be tamer, but should fall into line with these trend-setting markets.

So what does this mean for first-time home buyers who've been sitting on the sidelines watching home prices soar into the atmosphere?

Unfortunately, none of this points to a decline in home prices in the near future. But, it does bode well for an extended period of calm, where buyers won't have to fret about missing out on a home-buying opportunity and watching prices jump another 10 percent in a matter of months.

However, with the Fed poised to raise rates again and again in the next year or so, mortgage rates will also move up -- drastically altering the landscape of "affordability" -- and this could be the catalyst for a slight reversal in home prices. Could be.

Either way, take a breather, first-timers, and slow down with this slowdown.

Additionally, the hysteria-inducing incentive to jump in to the market to take advantage of the irrational appreciation in home values is fading fast. Don't fall victim to that mob madness.

Tuesday, July 27
Posted 11:38 a.m. EST

Housing prices headed for a slowdown, but still affordable?

If you're on the verge of becoming a first-time home buyer and listen to the economic experts at the Federal Reserve, then you can breathe a soft sigh of relief or smirk like a wise guy or both.

The Fed wizards have gazed into their liquid crystal displays and declared the housing bubble will not burst, because there is no bubble, and that the acceleration of home prices is losing velocity.

" ... expectations of future price appreciation have been slowing over the past decade, roughly in line with the slowing of overall inflation ... (The study) also supports the conclusion that the current housing market is not characterized by widespread expectations of rapid future price appreciation," Fed researchers wrote in the study released earlier this month.

If you believe the Fed researchers, then you're probably disappointed that home prices won't return to reasonable levels (compared to family income) any time soon. However, you're probably also a little relieved to hear that the absurd increases in home prices during the last several years have lost steam.

Chin up, first timers!
Also according to the Fed's study (don't choke on your Cheerios), homes are now more affordable than they were in the 1970s and '80s. (gasp ... hack ... hmphh ...) Sorry, couldn't control myself.

This is based on the Fed's formula for determining affordability, defined as:

"the ratio between the annual principal and interest payments at prevailing mortgage rates on a constant-quality new single-family home (assuming a thirty-year, 80 percent loan-to-value [LTV] ratio loan) and median family income.

This ratio has been relatively stable, around 15 percent, for several years, which is as low as it has been over the past twenty-five years. This is in sharp contrast to the conditions of the late 1970s and early 1980s, when high home prices and high nominal interest rates combined to erode cash flow affordability."

That's right. Quit your whining, and just buy a house. The bargains have never been better.

This is why, even though I consider myself a "big picture" person, I have such an aversion to macroeconomics.

The difference is the "big picture" in my mind includes data points that are more constant across the human experience (health, happiness, family, love, truth, intimate connections with fellow human beings, as well as violence, war and death). You know, things that we all share.

The Fed's "big picture" crops out too many pixels in my opinion, and seems to contradict the headlines (see "Existing Home Sales, Prices Hit New Highs", which notes that the median home price jumped more than 5 percent in June to $191,800.)

In my opinion, the Fed's formula fails to include critical affordability data -- such as student loan debt, costs of owning and maintaining a car (including car insurance) and the reality of coming up with the 20-percent down payment that the Fed uses in all of its calculations of affordability -- which play an important role in what a person can afford. (Psst. I'm not sure a 20-percent down payment is still a realistic standard. Are you?)

Are you going to tell me that the majority of first time buyers in California, New York, South Florida, Las Vegas and other areas that have seen double-digit gains over the last three years can afford to purchase decent homes?

"Afford" is a tricky word. Based on reader e-mails I receive, the main way people can "afford" these outrageously priced homes is with interest-only loans. That's a rather risky road, akin to leasing a Mercedes convertible you can't afford -- you look rich, but you own nothing.

I'm not sure what world the Fed researchers are picturing, but it doesn't seem to match the world I'm living in.

Of course, I live in South Florida, where the median home price has soared to $267,000. (Everybody in South Florida who has $52,000 ready for a down payment, raise your hand!!!)

Maybe, I'm just bitter about being priced out of thousands of neighborhoods. Maybe I'm alone on this. Maybe.

I would love to hear from all of you. Especially folks outside the "bubble" areas of New York, California and Florida, etc. Are you feeling the pinch? Are home prices creeping out of your reach? Or is the Fed right? Speak up, please.

Tuesday, July 20
Posted 4:45 p.m. EST

Half-priced-home lottery from HUD

A few lucky first-time home buyers could find themselves in the half-priced homes of their dreams.

The Department of Housing and Urban Development is holding a lottery for 10 homes from its inventory of foreclosed FHA properties. The lottery winners will be able to purchase the properties for 50 percent of the home's appraised value.

The various homes are located in Atlanta; Chicago; Columbus, Ohio; Detroit; Kansas City, Mo.; Miami; Minneapolis; Philadelphia; Seattle and St. Louis. The homes in Columbus and Seattle are reserved for veterans who have been "service disabled" since Sept. 11, 2001.

The application deadline has been extended to Aug. 31.

To apply, you can either download the application from the HUD Web site or call 1-888-297-8685 to request an application through the mail and send it to one of the housing counseling agencies that is participating in the Homewise Program. HUD also recommends that you contact a housing counseling agency near you for help filling out the application.

Potential buyers have to meet certain requirements and agree to several restrictions.

To be eligible, applicants must be first-time home buyers, have annual household income at or below the limits established by HUD for its Homewise Program and sign up for a HUD-approved homeownership education class.

Here are the annual income limits for the regions as listed on HUD's Web site:

You can only sign up for one home in one city. If you try to improve your chances of winning by signing up for more than one home, all of your entries will be removed from the lottery.

Winners also must agree to live in the home for five years from the date of closing.

Yeah, that's a long commitment, but it's about the average length of time most people stay in a home, and at the end of those five years, you'll have a super-nice slice of equity in your home, even if prices were to depreciate slightly in your area.

For more information about the program and to read the official rules, go to HUD's 2004 Homewise Program page.

You've got nothing to lose and a home with a boatload of free equity to gain. If you meet the eligibility requirements and live near one of the properties being offered, call today!

Monday, July 12
Posted 4:45 p.m. EST

Borrower's responsibilities when applying for a mortgage

Next to a great interest rate and reasonable closing costs, all a borrower asks for, and deserves, is as smooth a mortgage process as possible.

It can happen. (My mortgage closed on time without any stumbling blocks thrown my way. Luck had a little to do with it, I suppose. The mortgage broker I chose was courteous, straightforward and extremely competent at his job.)

Nevertheless, excluding instances where borrowers are delayed by unscrupulous or incompetent lenders or brokers, much of the responsibility for ensuring a smooth mortgage process rests with you, the borrower.

If you are not fully prepared for the entire loan process, fail to submit documents on time and are less than honest with your lender, any delay in the process cannot be blamed solely on the lender. Time is of the essence when trying to close a mortgage loan, especially with rate locks of 45 days or less.

You need to be sure that you fulfill the responsibilities listed below:

Preparation and punctuality

• Have folders where you will keep copies of ALL of your application-related and loan-related documents.
• Have all your application documentation ready to supply to the lender. (This includes copies of: pay stubs for the last 30 days, W-2s for the past two years, two most-recent bank account statements, two most-recent tax returns, the most-recent statements of your credit card accounts, most-recent brokerage account statements and the purchase contract for the home. NOTE: If you are self-employed, you should have copies of profit and loss statements and tax returns for the past two years.)
• Immediately provide (within 24 hours) any excess documentation requested by the lender.
• If the lender does not provide return envelopes, send all mailings with signature confirmation required.
• Obtain homeowners insurance in a timely manner once the loan has been approved.

Due diligence

• Do not let anyone rush you into signing too fast. Read and understand each document before you sign.
• If you do not understand something, ask for clarification.
• Be sure to ask about each specific closing cost and lender's fee. ("What's that charge for?")
• Do not sign blank documents or any documents missing critical information.
• Finish each communiqué with the lender or broker by asking "Is there anything I'm missing or forgetting?"

Tell the truth

• Do not exaggerate your financial status. In other words, don't lie about your income, your assets or your debts.
• Do not exaggerate your employment history to appear more stable.

Monday, June 21
Posted 2:45 p.m. EST

New-home warranties not what they're cracked up to be

Fellow newbie and wannabe homeowners, I owe you an apology.

In my quest to understand the process and potential pitfalls of buying a new-construction home, I bit off more than I could chew. Closer to the truth is that I tried to stuff an extra-large pizza with the works in my mouth and started gagging on it.

I had teased that my next posting (the one you're reading) would examine new-home warranties for what they were really worth.

Well, after a few days of investigation, I realized this examination required more analysis and scrutiny than my job allows me to do (I'm also one of Bankrate's full-time copy editors).

The first discovery that threw me back in my chair was a massive organization devoted to protecting and helping consumers deal with their new-home defects.

The group, known as HADD, Homeowners Against Deficient Dwellings, has a Web site replete with reference material, consumer warnings, horror stories, links to class-action suits and pages and pages about specific defects that commonly occur in newly built homes.

I knew that new-home warranties weren't the most-respected contracts in the marketplace, and I knew that there were loads of unscrupulous home builders out there, but I must confess I had no idea that the warranties themselves were surrounded with such huge controversy.

Try a taste of these findings from a HADD survey of typical 10-year warranties:

"A cracked foundation is NOT specifically covered in the full 10-year time span of the warranty. For instance, a cracked foundation which causes multiple cracks in the walls is not covered. The cracks, if exceeding the width set in the performance standard, may be covered and repaired, but the foundation which caused the cracks is not covered. The resulting damage to the home from the foundation defect must render the home unsafe or uninhabitable before it will be considered a covered repair."

"After the first year, little, if anything, is covered, including paint, flooring, cabinets, walls, roof, and other items. In the 2nd year, only Air and Electrical items are covered. During years 3-10 only Major Structural Damage (MSD) is covered. This MSD is very specific and quite hard to qualify for."

(Bold italics are mine.)

As the realization of the scope of this consumer battle hit me, I did what any self-respecting blogger would do. I passed the buck. ;)

I notified my editor, and he agreed that this topic was worthy of a more-focused investigation and analysis than a full-time copy editor could perform. So, he assigned it to a reporter who will be writing a full-length story on this matter, which should appear on Bankrate in a few weeks.

Until then, be very skeptical of buying a newly built home, and be sure to read every word of the new-home warranty, not twice, but three times, before you commit to anything.

Also, be sure to familiarize yourself with the common new-home defects HADD discusses.

New homes can be lemons, too. And there's no new-home "lemon law" to protect you.

Dangers of buying sight unseen

Ed, this is not the car I ordered. I distinctly ordered the Antarctic Blue Super Sports Wagon with the C.B. and the optional rally fun pack.
-- Clark W. Griswald, National Lampoon's "Vacation"

Whenever you agree to purchase something that you haven't seen, you face a high degree of risk.

This is especially true if you are buying a new home before it's built.

Consumers who have been bilked by incompetent or sleazy building companies, are doubly dismayed when they realize that there is little recourse for lowly homeowners. The building companies are simply too big, too rich and too protected to take on in a legal battle.

Very few states have laws that protect the consumer's interest over the builder's. The increasing practice of adding arbitration clauses into contracts by builders has rendered consumers even more impotent.

So, before you consider buying a home before it's built, you'll need to keep a few things in mind. We'll talk about the initial visit, first.

The 'model' home mirage
No, I'm not trying to be dramatic. I'm just trying to help your attitude as you enter the builder's trap. Model homes are designed and furnished to make the home look infinitely better than it is.

Model homes generally include every option available, which would send the cost of construction on your home through the roof. To make matters worse, some miserable builders will even construct models with features that aren't available on a standard home.

The best defense againt this psycho-marketing gimmick is simple: Do not set foot in the model home.

If the builder has set up the sales office in the garage or in the living room of the model home, you may not have this option. In this case, remember that the model home is just a mirage.

Ask to walk through a completed house. If the builder's sales agent refuses or tries to discourage you from doing so, start turning up your skeptometer.

Ask the sales agent for a copy of the floor plans and the standard specifications for the types of homes available. Also ask for a list of the available features.

Then go home and review the floor plans, the specifications and available features on your own time.

Wednesday, June 2
Posted 2:15 p.m. EST

Warning signs of a crooked lender or broker

The mortgage industry is a jungle.

And in this jungle, you'll find plenty of nasty predators and lice-infested rodents who are hungry to take advantage of your inexperience in this new territory.

These animals don't care if you end up bankrupt, lose your home and all of your hard-earned savings. That would require empathy -- something they lack or have had beaten out of them.

You need to keep this at the forefront of your thoughts when shopping for a lender. That nice-sounding voice on the other end of the phone or that smiling face behind the desk could want nothing more than to pounce on your innocence -- especially if your credit is less than excellent.

Now that you've been warned of the general danger awaiting you, here's a list of some specific signs to alert you that you're probably dealing with a crooked lender or broker:

Bad faith: The Real Estate Settlement Procedures Act requires your lender to provide you with a good faith estimate of the fees due at closing within three days after you apply for a loan. If the lender or broker refuses to provide you a good-faith estimate, or delays delivery of the good-faith estimate, watch out. An honest lender has nothing to hide, and will provide you the GFE promptly. The best of the bunch will give you a GFE based on your pre-qualification information.

Ridiculously low rates: While these deals look tempting in your local paper or on signs staked out around your neighborhood, beware! Lenders or brokers that offer interest rates 2 or 3 percentage points below the national average are hoping you are a shortsighted, attention-deficient creature. That "1.95%!" bargain that "beats the banks" won't be a bargain for long as the interest rate will shoot up each month until you won't even recognize your monthly payment. Don't go near these Venus-fly-trap offers.

Ridiculously high rates: Whether you are being charged exorbitant fees or interest rates is hard to determine.

Check what your lender charges for fees against Bankrate's closing cost study. The study lists the highest, lowest and average fees that lenders charge.

If the interest rate is more than 3 percentage points above the national average, you're probably getting hustled. Borrowers with bad credit are especially susceptible to this predatory trick. See MyFico.com's sample interest rates based on your credit score (on the left side of the page about halfway down).

High pressure: If a lender or broker insists that the only way you're going to get a home loan is with his company, hang up the phone or walk out of the office. This is a flat-out lie. The mortgage industry is intensely competitive, and if one company can give you a loan, there are dozens more out there who would be willing to lend you money. Always shop around.

Prepayment penalties: In today's market, no borrower should be faced with prepayment penalties. If your lender even indicates that there might be some prepayment penalties involved, take your business elsewhere. Be sure to ask about prepayment penalties, if the lender doesn't mention them. (Update: This statement refers to conventional fixed-rate mortgages. There are a variety of adjustable-rate loans and subprime mortgages with reasonable prepayment penalties attached. I apologize for any confusion this may have caused.)

Inflate-o-appraisal: If the appraisal of your property value is out of sync with similar homes in your immediate area (within 1 mile), you could end up borrowing more than your home is worth. This is a recipe for disaster if you fall upon tough financial times or need to sell your house within a few years.

Little white lies: Under the guise of trying to help you, a lender may suggest that you fudge some of your financial information. Lying on a mortgage application is considered fraud and could result in criminal penalties. And, common sense should tell you that if a lender encourages you to commit fraud, the lender probably has no scruples about defrauding you.

Tuesday, May 25
Posted 4:15 p.m. EST

Best time to buy a home?

A reader in Houston asks, "Is there a such thing as a best time of the year to buy a new home?"

The jury is still out, and will be for a long time, on the best time of year to buy a home.

Some will argue that the best time to buy is in the crowded rush of home buying that generally occurs between April and July each year. The argument being that the increase in homes for sale offers better choices for would-be home buyers.

However, data from the National Association of Realtors show that homes which sell in these months generally go for more than the annual average -- meaning people pay more for homes in the so-called home-buying season. "Home-selling season" is the more appropriate name

Others favor a contrarian method and say buy when the market is cool, in December and January, because sellers will be more willing to negotiate. On top of this reasoning, home prices in this cool season do tend to be lower than the annual average. The downside is that your choice of homes will be limited.

For my part, I say go contrarian, if possible. The combination of eager sellers with limited buying competition makes the winter months seem a lot brighter from my home-buying perspective. Not to mention that with the holidays, people are already frantic enough from running around to department stores and mingling with tactless relatives whom they avoid the rest of the year. They just want to get the house out of their hands. I like those buyer advantages.

Unfortunately, the big truth lies somewhere outside of these arguments. Home-buying seasons are difficult to pinpoint and tend to vary from region to region. Buyers' markets and sellers' markets come and go with little relation to the Gregorian calendar.

For example, if you live in Orange County, Calif., you haven't seen a good season for buyers in more than a decade. But, if you're looking to buy a home in Akron, Ohio, the past nine months have been a buyer's market, with home prices dropping more than 10 percent.

So, a better mindset may be to focus on using specific strategies. Bankrate's Real Estate Adviser Steve McLinden wrote an excellent article about this subject with nuggets worth considering such as "Window at summer's end" and "Tax timing." You should definitely read it.

Wednesday, May 19
Posted 12:15 p.m. EST

Readers' Top 10 'must have' homeowner tools

After I chimed in with my list of top 10 "must-have" homeowner tools, Bankrate readers were kind enough to offer their lists of favorite toys for keeping a house in shape.

Everyone agreed that a hammer, a ladder, a drill and screwdrivers are essential, but the rest of my list did not garner as much support. Pipe wrench and pressure cleaner were unanimously shunned as "must-have" tools.

I'll concede the pipe wrench was a stretch, and probably isn't a "must-have" for the average homeowner. But, I won't give an inch on the electric pressure cleaner!

Until you've obliterated a year's worth of dirt and mildew stains on a 60-foot-long shadowbox wood fence without breaking a sweat, you won't know how sweet it is.

Any way, the moment you all've been waiting for ... Here are the results of the readers' votes (in alphabetical order) for the top 10 "must-have" homeowner tools:

• Adjustable wrench
• Drill (equal votes for corded and cordless)
• Garden hose
• Hammer
• Lawn mower
• Level
• Saw
• Screwdriver set
• Tape measure
• Utility knife

Honorable mention
Perhaps, the wisest suggestion came from Jim in Helena: "I have found that after I inevitably screw up a home improvement job, my most important tool is a phone to call somebody to do it right!"

(OK. Votes are still rolling in. Please send me your list of "must-have" homeowner tools and I'll update the readers' top 10, and maybe publish the complete list of tools submitted.)

Friday, May 13
Posted 4:15 p.m. EST

Top 10 'must-have' tools for every homeowner
"I told my wife I wouldn't drink tonight. Besides, I got a big day tomorrow ... we're going to go to Home Depot. Yeah, buy some wallpaper, maybe get some flooring, stuff like that."
-- Frank Ricard in "Old School"

Last time, I mentioned that when figuring out how much house you can afford that you should include $100 a month in maintenance. Included in that $100 a month are some fixed costs that you need to shell out in the first few months of homeownership.

Yes, after spending thousands of dollars in closing costs and down payment cash, you've got to spend some more money. On what? On all of the tools you're going to need that you couldn't have cared less about while living fancy-free in other people's property.

Those days are gone, my friends. Welcome to the world of clogged sink pipes, exploding sprinkler heads, sidewalk-eating trees and a "to do" list longer than a wedding aisle runner.

So, what tools do you need to have in your garage when you walk through the doors of your new castle? Well, I offer up here my Top 10 "must-have" tools: (Please send me your list of "must-have" homeowner tools and I'll publish a readers' list, as well.)

Cordless drill (and bit set) -- Don't get stuck having to pull out the extension cord and drag it around the house every time you need to drill a hole.

Hammer -- A basic claw hammer will do fine. You'll need it for removing nails as much as you will for pounding them in.

Ladder -- Whether you have ceiling fans that need dusting or rain gutters that need cleaning or trees that need trimming, you're going to need a good, stable ladder. Don't scrimp on this purchase, either.

Pipe wrench -- For the adventurer in you. Most people, myself included, should stay far, far away from major plumbing projects, but for simple clogs or easy fixes, a pipe wrench can save you a lot of money.

Pliers (Linemans and Needle-nose) -- These babies come in handy in so many ways. From loosening hard-to-reach nuts to bending wire to popping open a beer bottle after you've finished a project, a good pair of pliers is every homeowner's good friend.

Plunger -- Need I explain?

Pressure cleaner -- My personal favorite. You can buy an electric version of one of these for under $150. Just plug it in, attach a hose and you can clean almost any outdoor surface -- driveways, sidewalks, patios, fences, gutter, you name it. It does all the work, and the results make you look (and feel) like you were working hard.

Saw -- You won't need to pull this out very often, but if you have trees that will need trimming, you gotta have a saw. A basic hand saw will do fine.

Screwdriver set (must have Phillips and standard heads) -- A nonnegotiable staple of the homowner's survival kit. Depending on your tastes, you can choose from magnetic tips, interchangeable tips or go with a power screwdriver.

Utility knife -- Don't run around the house or try to board a plane with one, but from opening boxes to cutting string, tape, wallpaper or wire, there's nothing like the sweet, sharp blade of a utility knife.

(Again, please send me your list of "must-have" homeowner tools and I'll publish a readers' list, as well. The gene pool is wiser than the individual.)

Tuesday, May 11
Posted 2:15 p.m. EST

How much house can you really afford? (continued)
Last time, we clarified that the recommended mortgage payment -- 28 percent of your monthly income -- is not a basic calculation.

You need to have an accurate idea of what your property taxes and homeowners insurance will cost before you can figure out how much house you can afford to buy.

Check with your local property appraiser's office, in person or on the Web, to get an estimate of property taxes on homes in your desired price range. Then call an insurance company to get an estimate of how much full homeowners coverage will add to your monthly payment.

Take these two estimates, subtract them from 28 percent of your monthly income, and you end up with your target principal and interest payment.

Congratulations, you've just determined what lenders call the "front ratio."

Now, for the big twist. (I've learned so much from reality game shows. Everybody loves a good twist. --- And, like those superduper supermen at Fox love to do, this twist comes right after this message.)

Just because you've figured out, as closely as possible, how much mortgage you can get with 28 percent of your monthly income, doesn't mean you are ready to buy a house with that amount.

There's one more test you have take: what lenders call the "back ratio."

This one requires that no more than 36 percent of your income be tied up in debt obligations. This includes your mortgage payment. So, that leaves room for 8 percent of your monthly income going toward other debt obligations (car payments, credit card debt, student loan debt, etc.) Not much room is it?

People who have more than 8 percent of their incomes obligated to car payments and other debts (uh, count me in), need to adjust their front-end ratios accordingly. So, for example, if your nonhousing debts eat up 15 percent of your gross monthly income, you have to decrease your monthly mortgage payment target (plus insurance and taxes) to 21 percent of your income.

Either way, the two numbers (your monthly payment and your other debt payments) need to add up to 36 percent, or less, of your income.

First Time Home Buyer ALERT!!! (beep, beep, beep, beep): If the home you want has a homeowners association, be sure to add the HOA fees into your back-ratio calculation. While you're at it, throw in another $100 into the back-ratio for monthly maintenance expenses.

Trust me on this, firsties.

In less than two years as a homeowner, I've dished out $30 a month on pest control, paid some guy $350 to tame the evil olive trees in my driveway, and have spent upwards of $1,500 becoming the proud father of two rakes, a shovel, a dishwasher, a washing machine, a chainsaw, a wheelbarrow, numerous sprinkler heads and myriad other materials required for every respectable homeowner.

Thursday, May 6
Posted 12:15 p.m. EST

How much house can you really afford?
Pundits would have you believe that figuring out how much you can afford to pay for a house is a simple mathematical calculation.

As a general guideline, lenders and personal finance experts recommend that your monthly mortgage payment (which typically includes principal, interest, property taxes, homeowners insurance and, maybe, mortgage insurance) should not exceed 28 percent of your gross monthly income.

So, by this reasoning, you end up with this annual-income-to-monthly-payment breakdown:

For most first home buyers, after doing this basic math, the next logical step is to go to a loan calculator to discover how much home they can afford with that monthly payment.

But, if the loan calculator only accounts for the principal and interest payment, a naive home buyer might jump into the house hunt with an inflated sense of buying power, and in the hands of an unscrupulous real estate agent could end up buying too much house -- not realizing this until after signing a contract.

How dumb can someone be, you might ask? Well, they could be as dumb as I was.

Shopping for my first home, I was ignorant of this distinction, happily amazed how much house I could afford, and shopped until I found the home my wife wanted. My blissful ignorance turned into embarrassing shock as the settlement statement rolled out of the fax machine and our monthly payment was about $400 more than I'd anticipated. Gulp! Sorry, honey. (The good news is we've managed to afford the home quite nicely, by making several cutbacks in other expenses. But, if your budget tighter than a leotard, this kind of price discrepancy could be a deal killer.)

So, remember, the monthly payment suggestion includes homeowners insurance, property taxes and, if necessary, private mortgage insurance.

Another snag, even if you use a more detailed calculator, is that you will not know these figures until you confirm the price of the home (which will determine your property taxes), inquire about homeowners insurance and apply for a loan (where you will discover the cost of PMI).

So, before you begin shopping, you have some homework to do: finding out how much these intangibles are likely to cost you.

But wait, there's more! You're still not close to getting an accurate estimate of how much house you can afford.

We'll go into more detail on these home-buying homework assignments on Tuesday.

For now, at least, remember that calculating how much you can afford is not as simple as plugging 28 percent of your gross income into a simple loan calculator.

Thursday, April 29
Posted 12:15 p.m. EST

Make sure your asset's covered
If for some unfortunate reason your beautiful new home is damaged or destroyed, whether by electrical fire, flood, volcanic eruption or Billy Joel driving through your kitchen wall, will you be able to rebuild it to your state or local government's satisfaction?

Of course, I will, you say. I've got homeowners insurance. My asset's covered.

Well, that all depends on several factors the average first time home buyer may not consider when buying homeowners insurance.

A basic homeowners insurance policy covers your home's market value, or what you paid for it. This is known as "actual cash value." The next level of coverage is "replacement cost," which will pay for the cost to rebuild your home. So, if you got that covered, then no problem, right?

Well, maybe.

"Replacement cost" coverage generally covers the cost of rebuilding your home like it was. It may not cover the cost of rebuilding it as it needs to be.

If you live in a home that was built more than 25 years ago or in a specific "natural disaster" area where building codes have become stricter, you may not have the option of "replacing" your home. You'll more than likely have to upgrade.

Building codes change to improve the safety and stability of homes, and with those changes come increased costs.

Some replacement policies might cover the cost to bring an insured home up to code. Some only cover 5 to 10 percent above the policy value. You need to be certain the full cost is covered.

If your company's standard policy does not cover these costs, you're going to need either "extended replacement cost" coverage or "building code" coverage.

"Extended replacement cost" coverage generally pays an amount above the policy value, ranging from 20 percent to 80 percent. "Building code" coverage pays the full amount of the cost to bring your home up to spec.

Whichever one you choose, it will be well worth the additional annual cost --- which shouldn't be much more than 10 percent of your standard policy.

Monday, April 26
Posted 3:15 p.m. EST

Finding the best mortgage company
Wouldn't it be nice if an independent company ranked mortgage brokers and lenders in terms of reliability, rates and service or, at least, offered a grading system similar to A.M. Best's A-B-C-D-E-F-S report card on the financial strength of insurance companies?

Until that day, first time home buyers must wander blindly into the dark forest of financial institutions, and questions such as this one will remain a standard worry:

I'm trying to find the best mortgage company to get preapproval. My real estate agent suggested a mortgage company which I'm just learning has given me a high rate with too many points. Do you have any suggestions for a first time home buyer without a lot of savings as to the best way to proceed?
-- Sara in Philly

Sara, in my opinion, this is the toughest decision to make in the home-buying process, and you should take ample time investigating prospective lenders before deciding which one is best for you.

My previous post Shopping for a lender offers a solid approach to finding the best mortgage company. But, I realize now that I missed a step that could take some of the work and guesswork out of the process.

By the way, as a rule, I wouldn't use a lender recommended by a real estate agent -- unless that real estate agent happens to be a trusted friend who's recommending a company he or she used. (Of course, I wouldn't recommend using a friend as real estate agent, either. There's business and there's friendship. Keep them separate.)

The best place to start inquiring about mortgage companies is in your backyard. Ask friends, neighbors, relatives and co-workers whom you respect about their mortgage experiences.

Questions to ask them:

• Were your satisfied with your mortgage company?
• Did you get a competitive interest rate?
• How much were the closing costs?
• Were there any delays in the process?
• Were there any surprises at the closing or near the closing?
• Were they happy to help you with all of your questions?
• Would you use the company again?

Ask as many people as you can get to answer this question. You don't have to be obnoxious, but you do need to be a bit nosy.

One major caveat, as I alluded to above:

Do not have a friend, or a friend of a friend, or a friend of a relative, or a relative of a friend (you get the idea) handle your mortgage application, whether he or she is a banker or a broker.

After you've interviewed enough folks and feel competent you have a few respectable mortgage companies to consider, put those companies on your list, and then start shopping for a few more lenders to be certain you're getting the possible deal.

Remember, quality customer service aside, it's about rates and closing costs!

Locking in your rate long-term
With rates on the rise and looking to go higher, this reader's question extends beyond the realm of new-home buyers to all prospective first time home buyers:

My wife and I are building our first home because we are getting a good deal from a builder friend, and you get the best bang for your buck in our county. We break ground in June and should be done in November. I am worried about rising interest rates because we would not be able to lock-in a rate until early August. Is there anything I can do to alleviate my fears of higher rates and payments? I don't want to make decisions based on what we can afford now and have the rates shoot up to the point where we wouldn't be able to afford the house! I have heard there is a way to pay to lock in rates early. Is this a good bet?
-- Anxious in Virginia

So, how do you decide whether to lock in a rate beyond the traditional (and, generally, free of cost) range of 30 to 60 days?

As in most things mortgage-related, there's no simple answer or formula to follow.

There is, however, one rule to consider before you think about whether to buy a long-term rate lock.

Rule #1: You need a reasonable expectation that rates are going to rise by the time you'll be ready to lock in your rate for no cost.

What is a reasonable expectation? Well, if there's immediate talk of interest rate increases coming from the mouths of Fed governors and Bankrate's mortgage rate panel, it's a safe bet that rates will go up.

If Rule No. 1 applies, you have to do some financial projections and make your decision based upon several outcomes.

First, determine:

• How long you plan to stay in the house
• Cost of the loan if you lock at current interest rates
• Cost of the rate lock (whether you pay points or get a rate cap or both)

Here are the projections I recommend you make:

• Extra cost of the loan if you don't lock and rates rise .25%
• Extra cost of the loan if you don't lock and rates rise .5%
• Extra cost of the loan if you don't lock and rates rise .75%
• Extra cost of the loan if you don't lock and rates rise 1.0%
• Extra cost of the loan if you don't lock and rates rise 1.25%
• Extra cost of the loan if you don't lock and rates rise 1.5%

(Note: In the last 10 years, the largest 4-month increase in 30-year fixed mortgage rates was roughly 1.5 percent.)

Crunch those numbers and determine if the price of security (locking in now) is more attractive to you than the possible prices of waiting several months.

Interest-only loans are a risky gamble
An intriguing question from a young New York lawyer:

I just started making money. I make over $90,000 a year, but I have no money to put down. I am looking for houses on Long Island; the cheapest houses are about $400,000. I can't swing the monthly payments on a 30-year mortgage; with property taxes it'll be over $2,500 a month. Are there any options for me?

At first I took the safe-advice route with this question, recommending that he stay on the sidelines and save up a down payment before he jumps into the home-buying game. But, as I've learned from other readers, the rules change in hyper-competitive housing markets.

So, here's a wrap-up of my revised advice, with the caveat that it's a risky move. (But if Long Island values continue to rise, it would be well worth the risk.)

On second or third thought, I cautiously recommend looking into an interest-only loan. It should knock your monthly payment down to a more-comfortable amount.

The main danger with an interest-only loan is property values dropping, because then you'll owe more than the house is worth. If you have to sell, you lose money. So, you need to focus on gaining equity whenever possible.

You can gain equity in two ways:
1. Your property value appreciates.
2. You pay down principal.

With an interest-only loan, you can pay down principal (gain equity) any time you like, but you're only required to pay off the interest accrued each month. Most interest-only loans last 3, 5 or 7 years, before they're either converted into a fixed or adjustable rate, where your payment will jump, or you refinance.

The trick is to pay off principal whenever you can during the interest-only period, because when you convert or refinance, your payments will increase dramatically if you don't.

You have an excellent opportunity to pay down principal at tax time. Why?

Here's a very basic example:
$2000 a month paid in interest and property taxes = $24,000 a year

Come tax time:

Assume adjusted gross income of $90,000 at 25 percent.

Instead of getting the standard deduction from income ($4,750 for single filers), you can reduce your AGI by that $24,000 plus any other itemized deductions you may have. These deductions will give you a lower taxable income, meaning that your final tax bill will be figured on a lesser amount of money.

$90,000 - $4,750 = $85,250 X 25%= $21,312.50 tax bill
$90,000 - $24,000= $66,000 x 25% = $16,500 tax bill

Savings (or reduced cost of homeownership) = $4,812.50

Take the money you get back at tax time and pay down the principal!

Keep in mind, the trick will be finding someone who will give you an interest-only loan with no down payment. But, I've heard of it being done before.

Also keep in mind Holden Lewis' line on interest-only mortgages:
"An interest-only mortgage might be a good fit for ...

• someone whose income is mostly in the form of infrequent commissions or bonuses;
• someone who expects to earn a lot more in a few years;
• someone who truly will invest the savings on the difference between an interest-only mortgage and an amortizing mortgage, and who is confident that the investments will make money."

If you think that at the end of the interest-only term, you'll be able to afford a fixed or adjustable payment, then go for it.

  Friday, April 16
Posted 12:15 a.m. EST

Are first time home buyers getting frozen out?
There is a housing bubble developing across America. But, it's not the kind of bubble you're reading about in most media -- yet.

This bubble isn't a concern of existing homeowners who worry about losing precious equity. Nope. This bubble is growing inside that bubble, and it's building to a size where it could push thousands of average first time home buyers out of the market for years.

What has happened in this home-shopping frenzy of the last few years, is that home prices have soared to a level that has inflated costs beyond affordability for the average first time home buyer. The median starter home price is now just above $145,000, according to the National Association of Realtors. The NAR's first-time home buyer affordability index reports that first time home buyers' incomes are 20 percent below the recommended amount for buying a median-priced home.

In other words, they can't afford it!

So, if the outer housing bubble doesn't burst, or at least deflate, first time home buyers may no longer be able to afford to buy reasonable starter homes.

What to do? Well, at this stage, it's too early to claim that we're headed for starter mobile homes or that we'll all have to move to Buffalo.

But, as I said in my Wednesday post, if you're considering buying your first home, it's time to kick that consideration into action.

There is some good news, though. Some state governments are stepping up their help.

• Indiana increases income cap, lowers mortgage rate for state program
• Pennsylvania governor touts 'Keystone Housing Initiative'
• Wells Fargo backs Oregon new-home buying program

Wednesday, April 14
Posted 10:15 a.m. EST

Hurry up, first time home buyers
Don't wait much longer if you're teetering on the home-buying fence. Clean up that credit report, save up that down payment and start shopping for a lender. Mortgage rates are going higher.

Why? Inflation is back, baby! Well, it certainly looks that way.

Treasury yields jumped to their highest level this year after the release of the Consumer Price Index showed the inflation rate moving up for the second straight month, after hitting a 38-year low.

And talk of the Federal Reserve raising interest rates this summer is heating up. As of this morning, the Chicago Board of Trade fed fund futures had priced in a 98% probability of a quarter-point rate hike by the Fed in August.

Remember, mortgage rates anticipate Fed rate moves, so expect mortgage rates to rise before the Fed acts.

Look for rates to be back above 6 percent in the next week or so.

OK, so I'm being a bit alarmist. If you're a year or so away from buying your first home, don't sweat it. Rates are still near historical lows, and nowhere near the double-digit rates folks were paying in the '80s.

But, if you're ready to buy your first home and have been dilly-dallying, it's time to get off your duff.

Monday, April 12
Posted 4:59 p.m. EST

Blockbuster deal for first time home buyers
If you are a prospective first time home buyer with patience -- a lot of patience -- you might be able to land yourself an earth-shattering deal on your first home.

An organization called the Neighborhood Assistance Corporation of America has a home buying program that would make any existing homeowner salivate with envy. It offers such impressive savings and benefits, it almost makes me wish I earned less money.

Try this for an appetizer: No private mortgage insurance.

For the main course: No down payment. No closing costs. No fees.

And for dessert? Yummy, yummy: Mortgage rates 1 percent below market.

Sounds too good to be true, and it is -- if you leave out the fine print.

First, though NACA seems to be expanding its reach, it doesn't offer loans in every U.S. market. You need to be where they are.

Second, your income must fall below NACA's earning limits. The earnings-limit qualifications also vary by region. For example, a family of four in Jacksonville, Fla., cannot earn more than $44,500, while a family of four in New Haven, Conn., cannot earn more than $73,000. There are also limits on the amount of home you can buy depending on the area where you want to live. In most areas, however, the maximum purchase price allowed is more than enough to buy the home of your humble dreams.

Lastly, you have to let NACA hold your hand through the entire home-buying process.

This includes attending a home-buying workshop, working with a housing/financial consultant and shopping for a home with a NACA buyer's agent.

The process can take anywhere from a few months to a year or more before you set foot in your door, depending on your financial situation, but with the tasty benefits, it certainly sounds worth the haul for those who qualify.

I'll be writing more about this organization as I investigate its background and begin to better understand all of the details involved.

At first glance, though, this seems like an incredible opportunity for a lot of potential home buyers.

Friday, April 9
Posted 2:59 p.m. EST

Get your rate lock in writing
Some mortgage brokers and lenders have been known to speak with forked tongues. So, if you think calling your broker or lender on the phone to ask for a rate lock is a solid move, I'd like to talk with you about investing in this project I've been working on in my garage.

Don't believe me?

Listen to this reader who's in the process of getting a mortgage from a major lending company. (The reader also happens to work for a subsidiary of this major lending company):

After meeting with our mortgage company, we requested to lock-in (I still have the email I sent). The rate on that day was 5.375% ... Rates have gone up since then. After receiving the mortgage commitment, I noticed that the interest rate quoted is 5.625%. After speaking to our mortgage contact and questioning the interest rate, he sends me the following:

"I just went thru the entire critical event history and it shows that I locked it in at 5.625. When I locked it there had been a pricing change and this is the rate we got."

The reader wanted to know what he could do about this discrepancy. Unfortunately, the short answer is "not much." The only guaranteed legal protection I know of is a printed, dated and hand-signed Rate Lock Agreement, listing the interest rate agreed upon by the lender and the borrower.

It's possible that rates did shoot up 25 basis points between the time the reader had checked rates and the time lender actually locked the rate that day. And since the reader does not have a rate-lock commitment letter, there's no way to prove otherwise.

When you're ready to lock in your interest rate, tell the lender to fax you a copy of a rate-lock agreement. Sign it, date it, fax it back to the lender immediately and store your copy in a folder with your other mortgage-related documents.

That way, you can be certain you won't have to deal with any ugly interest rate surprises during the loan approval process.

Lawdy knows, there's enough ugly surprises coming your way as a first time home buyer. Don't add to the stress.

Get that rate lock in writing!