Christina Dunham's Random Real Estate Musings

With foreclosures on the rise, many lenders have tightened their guidelines and increased minimum credit score requirements. Hardest hit are homebuyers seeking loans with low or no down payment, and homeowners looking to refinance but have little equity in their homes.

How you’ve paid your bills in the past gives a lender an indication of how you can be expected to pay them in the future. A credit score, such as a FICO score, is simply a formula for assessing credit risk and takes into consideration the following information:

• Payment history - Late payments can lower your FICO and increase your interest rates for credit cards, auto and home loans. Payment history accounts for the largest chunk of your credit score at 35%. Fortunately, it is also the component you have the most control over.
  
  
• Debt levels – Maxed out credit cards can significantly lower your scores. Keeping credit card balances to less than 50% of the available credit limit demonstrates responsible debt management. High debt levels can lower your score and makes new creditors nervous – it could indicate that you are living beyond your means and are depending on credit to pay for daily expenses. Debt levels accounts for the next largest chunk of your score at 30%.
  
  
• Credit history - Length of credit history counts for 15% of your FICO so keep old accounts with at least two years history (and credit limits over $5000) open. A long, clean, credit history shows creditors you have a great track record of responsible payment.
  
  
• Number of recent inquiries - Every time you apply for new credit (whether it is a store card, gas card, major credit card, student loan, auto loan, or new home loan), an “inquiry” is made regarding your credit profile. Each new inquiry can lower your score, sometimes by as much as 50 points. It may take as much as 6 months of on-time payments for your credit score to rebound from opening a new credit account.

• Types of credit – Lenders like to see a variety of credit accounts to get an indication of how you handle debt. To qualify for home loans, lenders typically like to see at least 2-3 different types of credit accounts with at least a $5,000 limit.

The items above form the basis of your FICO score, which can range from 300 to 900. Freddie Mac research indicates that borrowers with FICO scores under 620 were 18 times more likely to enter foreclosure than borrowers with FICO scores above 620. Because of this, borrowers with FICO scores below 620 typically do not qualify for “Reduced Doc” or zero down payment loans.

Besides FICO scores, lenders also look at how long and how well you have managed credit in the past. The longer the history, the better the credit rating. A full credit report contains detailed information on a person’s credit history. It is divided into four main parts:

• Identifying info – includes your name, current and past addresses, Social Security number, current and past employers, and aliases (if any).
• Credit info – contains all reported credit lines, which may be a combination of any of the following: credit cards, student loans, mortgages, car loans, etc. Late payments on credit accounts will remain for up to 7 years.
• Public record info – contains all public records such as bankruptcies, tax liens, and foreclosures. Unlike other types of derogatory information, bankruptcies and public records may remain in your record for up to 10 years.
• Inquiries – any and all inquiries by creditors or employers. Some employers are interested in your credit report because they gauge how responsible you will be in the workplace by how responsible you are with your finances.

According to Paolo Macabenta, a Mortgage Consultant with Atlantic Bancorp, “Even with a 620 credit score, you could still qualify for A-Paper rates if you don’t have any mortgage lates or other derogatory information in your credit report.”

Under the 2003 Fair and Accurate Credit Transactions Act, you have the right to a free copy of your credit report every year from each of the three major credit bureaus -- Equifax, Experian and TransUnion. Go to www.annualcreditreport.com for a copy and contact your creditors if you find any errors.

Happy Home Loan Shopping!

Regardless of the reason, mistakes in credit report errors can have a negative impact on your eligibility for any future credit. It's important to stay on top of your credit report to avoid any mistakes made by the creditors and credit bureaus Equifax, Experian and TransUnion.

It is estimated that over 90% of individuals have inaccuracies in their credit report, the most common one being misspellings in one’s name or address.

Lenders and creditors typically make distinctions between “minor inaccurate credit,” such as one or two credit card payments being reported in error, or “significant inaccurate credit,” which includes mortgage payments incorrectly being reported as late or credit card accounts with significant balances that don’t belong to you.

Reasons for credit report errors include:

• Applying for credit under several different names (i.e. John Doe, Jonathon Doe, and John A. Doe)
• Clerical error in entering or reading information from a handwritten application. For example: names (especially if it an uncommon one), social security numbers, addresses, etc.
• Mix ups with common names. For example, there is likely more than one John Smith living in San Francisco and often there is the chance that information intended for one John Smith might appear on another John Smith's credit report as he applies for a mortgage.
• Mix ups with generational names. For example, the credit information for John Smith, Sr. might appear in John Smith, Jr.’s credit report.
• Providing inaccurate Social Security number or the number was misread by the creditor.
• Loan or credit card payments inadvertently applied to the wrong account.

Because businesses use this information to evaluate your applications for credit, insurance and employment, it’s important that the information in your report is complete and accurate, especially if you plan to make a big purchase like a home. If you find errors, no matter how small, be sure you get them fixed, and make sure that you contact all three credit bureaus with your change.

The Fair Credit Reporting Act (FCRA), enforced by the Federal Trade Commission (FTC), is designed to promote accuracy and ensure the privacy of the information used in consumer reports. Under the FCRA, both the credit reporting agency (CRA) and the organization that provided the information to the CRA (usually the credit card company) must correct any errors or incomplete information in your report.

If the inaccuracies are minor, you may get them corrected on your own. For a FREE REPORT on steps to take to correct credit report errors, give me a call at (650) 991-8898 ext. 11 or send me an email me at contact@christinadunham.com.

For significant credit report inaccuracies, consider consulting with a credit expert. If you would like to be referred to one, please drop me an email at contact@christinadunham.com

California is the most expensive real estate market in country, according to a survey by the National Association of Realtors (NAR). Californians’ spend more of their monthly income on housing (35 percent) compared to other markets. What happens when rates adjust and this percentage jumps to 50 percent? Especially in areas where appreciation has stagnated, homeowners are struggling to make sense of their new payments, and make ends meet.

Foreclosure Forecast:

Nationwide, there are currently 161,302 homes in foreclosure and 42,645 individuals filing for bankruptcy as of March 13, 2007. Foreclosure rates in the SF Bay Area more than doubled between January 2007 and March 2007. In Sacramento, over 4,000 properties entered into some stage of foreclosure as of this week.

If you find yourself part of this statistic, then act fast – the sooner you communicate with your mortgage lender, the better. There is a big difference in what you can do to protect your house and your credit at day 1 and day 120. Lenders typically call when borrower is 16 days late on their mortgage. Once the payment is 30 days delinquent, the collection attempts become more aggressive. Around the 90^th to 120^th day, lenders will initiate the formal foreclosure proceedings.

Before paying down credit cards, doctor bills or other low priority debt, pay your mortgage first. While being late on a credit card payment could mean a collection, being late on your mortgage poses a more severe consequence: foreclosure. To prevent becoming part of that statistic, here are some other options to consider:

Refinance your Mortgage

If you are only 30 to 60 days late on your mortgage, you still have a chance to refinance into a program like an Option ARM which may help you greatly reduce your monthly mortgage payment. “Depending on your credit and current loan balance, you may even be able to get some cash-out of up to 100% of the value of your house to help consolidate your debt and tied you over until you are back on your feet,” advices Paolo Macabenta, a mortgage consultant with Atlantic Bancorp.

Contact a Local Realtor

If you feel your financial issues might be longer-term, consider pocketing the equity you’ve built by selling. Contact a local real estate agent to obtain a Comparative Market Analysis Report to find out the value of your home, its marketability and its possible sale price. While this might not be the ideal solution, it is better than letting the bank sell the house for less than the best price and helps you avoid a foreclosure on your credit report.

Consult a Loss Mitigation Specialist

The truth is that lenders would prefer you stay in your home than foreclose, which could cost thousands of dollars and drag on for a year or more. “Unfortunately, many homeowners don’t know that help is available from Loss Mitigation Specialists to stop the foreclosure process,” says Lionel Madamba, a Loss Mitigation Specialist and veteran realtor with Assist-2-Sell. “Homeowners don’t have to go it alone. We can help you negotiate a repayment plan or a loan modification. Repayment plans include extending the grace period for making late payments, skipping one to six payments for a year or two, or accepting reduced payments from one to eighteen months. With a loan modification, lenders may lower the interest rate for a certain number of years or lengthen the term of the loan, thus reducing monthly payments. This could help provide some breathing room for those with short-term financial set-backs, such as job loss, divorce, or medical leave.”

Seek Legal Advice

If foreclosure is imminent, talk to your lawyer regarding your legal rights. Some homeowners simply turn over their deed to the lender instead of fighting the foreclosure process, but a knowledgeable attorney can help determine whether there are some legal defenses to your foreclosure. California is a “Non-Judicial State” which means there is no civil litigation, no court, no judge, no sheriff. Consumer law is complex. When emotional distress impairs decision making, having an expert on your side to spot defenses can help save your home.

Save your Home

The best way to save your home is to act NOW. Begin working on a solution before your mortgage woes get out of hand. For information on any of the programs above, contact Paolo Macabenta at (510) 305-0989 or Lionel Madamba at (650) 218-3788.

“Who wants to be a millionaire?” asks Regis Philbin on the television show of the same name. Seriously. Who doesn’t? Unfortunately, working 9 to 5 everyday is not going to get you there. According to a recent report released by the U.S. Census Bureau, the national median household income is currently at $44,389. At that rate, it will take you more than 30 years just to earn a million dollars, let alone be worth that much.

Of course there are other ways to make money in this country. You can inherit wealth, have exceptional talent in sports or music, or win the lotto.

However, if you’re like the majority of us, investing in real estate may well be the only way to get wealthy. Andrew Carnegie said: “Ninety percent of all millionaires become so through owning real estate. More money has been made in real estate than in all industrial investments.”

There are several advantages to building wealth with real estate: tax benefits, inflation hedge, equity build up, leverage and cash flow.

We all have to live somewhere. One of the major advantages of owning your home is that mortgage interest, points, property taxes and prepay penalties are tax deductible. For example, a person buying a $500,000 home and borrowing $400,000 at 5% interest rate and a 1% property tax rate will spend about $25,000 in interest and taxes in the first year.

For a family with a $75,000 gross annual income, taxable income is reduced to $50,000. This means the family’s income tax is reduced from $16,033 to $9316. That’s a $6717 tax benefit. (To find out more about the tax benefits of real estate, consult your accountant).

Second, real estate is an excellent hedge against inflation because overall, it increases in value at or above the inflation rate. According to the National Association of Realtors, the average yearly price increase in real estate over the last 36 year period has been 6.4%. In California, the average annual increase has been 8.9%. That means the house that your neighbors bought in 1968 for $20,000 is now worth over $450,000.

The average inflation rate over the same period has been around 3.49%. If you invested that same $20,000 in something that matched the inflation rate, this investment would only be worth approximately $69,000.

Despite California’s much publicized housing boom and subsequent downward corrections (e.g. the “housing bubble” of the mid-nineties), the overall picture shows a steady appreciation in real estate value. In the last year, the national median average sales price increased 13.37%. Regionally, prices increased by 14.83% in the West, 10.86% in the Northeast, 14.38% in the Midwest, and 8.24% in the South.

Third, real estate has the potential for building equity rapidly. Whether through minor touch-ups or major remodels, fixing up a property can dramatically increase its value. An article in Remodeling Magazine states that minor kitchen remodels provide an 81 percent return on investment while replacing old windows would return 56 percent.

In the long run, the largest asset most people will ever have at retirement is the equity they’ve built in their own home. According to a 2003 U.S. Census study on Net Worth and Asset Ownership, the average net worth of a homeowner was $97,200 while the average net worth of a renter was only $1,400. About 69 times less.

The trick is to start small, perhaps with a one-bedroom condo which you buy with OPM – Other People’s Money. So many lenders nowadays are offering 100%, 103% and even 125% financing for purchasing homes, including first-time homebuyers. With every move, you can use your profits towards larger (or more) properties until you can finally afford to buy the home of your dreams.

Which brings us to the next benefit: Leverage. Zero Down and Low Down Payment options allow you to use OPM to purchase property and use the power of leverage to increase your return substantially. For example: Buyer A buys a house for $100k and pays all cash. He sells after two years for $110k, making a $10k profit or 10% Return on Investment. Buyer B buys same house for $100k with $10k down. He also sells in two years for $110k, making a $10k profit. Borrower B has doubled his money or made a 100% Return on Investment.

What this means is that you don’t need a lot of money to get into real estate. A client of mine bought her first home and ended up with $2000 cash at the end of the transaction. How did she do it? With 100% financing and a $10,000 seller credit towards closing costs. All they had to come up with was the earnest money deposit and a stable employment history. Two years later, they built enough equity to take some cash out to invest in a second home in Reno, Nevada – a one-bedroom condo they can rent out during the busy winter season.

The final benefit of owning real estate: Cash Flow. In Robert Kiyosaki’s book Cashflow Quadrant, he describes four ways to make money: as an Employee (E), as Self-Employed (S), as a Business Owner (B), or as an Investor (I). Those in the “E” and “S” quadrants are limited by time and physical capacity; thus, their earning potential is dictated by the number of hours they can work in a day. Those in the “B” quadrant literally multiply their hours in a day by having other people work for them. But those in the “I” quadrant have assets working for them, generating monthly cash flow, whether they work or not.

Rental real estate, if bought and financed correctly, is a great way to build wealth because it generates cash flow as soon as you purchase it. With inflation pushing up rents, real estate is an asset you can buy without having to use any of your own money. One couple in the Seattle area started investing in real estate more than 25 years ago, and now generates close to $50,000 in monthly cash flow from their various properties.

Often, buying real estate solely for short-term appreciation is a big gamble, as evidenced by the housing bubble in the mid-90s. Building wealth with real estate takes time, patience, and a plan.

Christina Dunham is a real estate investor and licensed mortgage broker. She is also Vice-President of Atlantic Bancorp of America. She can be reached at contact@christinadunham.com.