Comments on: FHA is not a bad (nor obscure) word! http://www.mynapervillehomesblog.com/buyers-information/fha-is-not-a-bad-nor-obscure-word/ Home Search Market Reports & News Sat, 04 Feb 2012 22:46:01 +0000 hourly 1 http://wordpress.org/?v=3.3.1 By: tonylazz http://www.mynapervillehomesblog.com/buyers-information/fha-is-not-a-bad-nor-obscure-word/#comment-43 tonylazz Fri, 03 Apr 2009 20:23:03 +0000 http://mynapervillehomesblog.com/?p=575#comment-43 Justin: Thanks for taking the time to comment and offer your observations, I appreciate it. And you are right, I am a Realtor and I do help people buy and sell homes. As a Realtor I believe it is my responsibility make my clients aware of what opportunities exist to acquire a home. One alternative that exists and is not well understood is the combination of a FHA mortgage program and the first time homebuyer credit. That is what this post attempts to explain. Are 3.5% mortgages “what got us into this mess”? The answer is no. Is one of the factors that many loans were issued to borrowers with poor credit scores, no reserves, and often for more than the value of the property? Yes. Is the fact that owners, once in the home, overdrew their equity and became upside down in their mortgage? Yes. Lending practices and approvals probably have much more to do with “this mess” than the down payment percentage required. As a Realtor, I am pleased to see that tighter, more stringent guidelines are being implemented for new loans. I am going to answer your next series of points in reverse order. 1. Real Estate always goes up: Real estate, is cyclical as are opportunities for investment such as markets, precious metals etc. Markets have their ups and downs – historical fact. The following statistics come from <a href="http://www.realtor.org/rmodaily.nsf/0/35788709977b084f8625751d00526824?OpenDocument" rel="nofollow">USA Today, Dennis Cauchon (12/12/2008)</a>: "<strong>Appreciation</strong>. Existing home values rose 0.5 percent annually, adjusted for inflation, from 1950 to 2000. From 2000 to 2006, they rose at the annual rate of 8.2 percent above inflation and peaked with a 12.3 percent rise in 2005." There have been peaks before and declines also. There will be more in the future. Market fact. Period. The more pertinent question one may ask is what is the reason someone is putting money into a house? Are they purchasing shelter for themselves or are they making an investment in real property. Those are 2 fundamentally different choices that people make with different sets of evaluation criteria. 2. Opportunity cost of $7k sunk into a downpayment: You nailed this one. A home buyer in this scenario would choose to spend $7000 to purchase a tangible piece of property with a stated market value. The opportunity cost would in fact be what could they have made by investing that $7000 in some other vehicle – stock market, munis, precious metals, collectibles, etc? To the buyer it would seem that they believe this is the way they choose to spend their money. 3. Is the buyer out $21k in this scenario? It seems to me that the net out of pocket, first year, would be the difference in the downpayment and interest less the tax savings or $3,662 plus any closing costs. Your $6,000 in closing costs seems a bit on the high side. I checked with a lender, and in the market area where I work, HUD-1 Closing Costs on a loan package like this would be around $2300. (does not include prepaid reserves required by lender). So the net out of pocket, first year is more like $6,000, not $21,000. Thanks again Justin for asking the questions and providing the opportunity to flesh this out a bit more. Justin: Thanks for taking the time to comment and offer your observations, I appreciate it. And you are right, I am a Realtor and I do help people buy and sell homes. As a Realtor I believe it is my responsibility make my clients aware of what opportunities exist to acquire a home. One alternative that exists and is not well understood is the combination of a FHA mortgage program and the first time homebuyer credit. That is what this post attempts to explain.
Are 3.5% mortgages “what got us into this mess”? The answer is no. Is one of the factors that many loans were issued to borrowers with poor credit scores, no reserves, and often for more than the value of the property? Yes. Is the fact that owners, once in the home, overdrew their equity and became upside down in their mortgage? Yes. Lending practices and approvals probably have much more to do with “this mess” than the down payment percentage required. As a Realtor, I am pleased to see that tighter, more stringent guidelines are being implemented for new loans.
I am going to answer your next series of points in reverse order.
1. Real Estate always goes up: Real estate, is cyclical as are opportunities for investment such as markets, precious metals etc. Markets have their ups and downs – historical fact. The following statistics come from USA Today, Dennis Cauchon (12/12/2008): “Appreciation. Existing home values rose 0.5 percent annually, adjusted for inflation, from 1950 to 2000. From 2000 to 2006, they rose at the annual rate of 8.2 percent above inflation and peaked with a 12.3 percent rise in 2005.” There have been peaks before and declines also. There will be more in the future. Market fact. Period. The more pertinent question one may ask is what is the reason someone is putting money into a house? Are they purchasing shelter for themselves or are they making an investment in real property. Those are 2 fundamentally different choices that people make with different sets of evaluation criteria.
2. Opportunity cost of $7k sunk into a downpayment: You nailed this one. A home buyer in this scenario would choose to spend $7000 to purchase a tangible piece of property with a stated market value. The opportunity cost would in fact be what could they have made by investing that $7000 in some other vehicle – stock market, munis, precious metals, collectibles, etc? To the buyer it would seem that they believe this is the way they choose to spend their money.
3. Is the buyer out $21k in this scenario? It seems to me that the net out of pocket, first year, would be the difference in the downpayment and interest less the tax savings or $3,662 plus any closing costs. Your $6,000 in closing costs seems a bit on the high side. I checked with a lender, and in the market area where I work, HUD-1 Closing Costs on a loan package like this would be around $2300. (does not include prepaid reserves required by lender). So the net out of pocket, first year is more like $6,000, not $21,000.
Thanks again Justin for asking the questions and providing the opportunity to flesh this out a bit more.

]]> By: Justin http://www.mynapervillehomesblog.com/buyers-information/fha-is-not-a-bad-nor-obscure-word/#comment-44 Justin Fri, 03 Apr 2009 16:54:05 +0000 http://mynapervillehomesblog.com/?p=575#comment-44 I guess it doesn't surprise that a realtor is in favor of someone putting down 3.5% instead of 20%, but the 0%-5% down is what got us into this mess (among other things). For your example, while you are saving $11,888 in taxes, we don't seem to highlight that the buyer is paying $15,550 in Property Taxes +Interest and probably paid $6K in closing costs, so they're out $21K. If we want to get picky, we can discuss the $7K of opportunity cost that they sunk into the downpayment, but real estate always goes up, right? I guess it doesn’t surprise that a realtor is in favor of someone putting down 3.5% instead of 20%, but the 0%-5% down is what got us into this mess (among other things).

For your example, while you are saving $11,888 in taxes, we don’t seem to highlight that the buyer is paying $15,550 in Property Taxes +Interest and probably paid $6K in closing costs, so they’re out $21K. If we want to get picky, we can discuss the $7K of opportunity cost that they sunk into the downpayment, but real estate always goes up, right?

]]> By: Topics about Homes » FHA is not a bad (nor obscure) word! « NAPERVILLE HOMES BLOG http://www.mynapervillehomesblog.com/buyers-information/fha-is-not-a-bad-nor-obscure-word/#comment-42 Topics about Homes » FHA is not a bad (nor obscure) word! « NAPERVILLE HOMES BLOG Sun, 29 Mar 2009 21:39:32 +0000 http://mynapervillehomesblog.com/?p=575#comment-42 [...] tonylazz placed an interesting blog post on FHA is not a bad (nor obscure) word! « NAPERVILLE HOMES BLOGHere’s a brief overviewI saw bits of press and some realtor and NAR advertising about the $8000 first time home buyer credit. There were lots of blog posts about its benefits. But is it really understood? Are people really aware of how powerful the benefit is … [...] [...] tonylazz placed an interesting blog post on FHA is not a bad (nor obscure) word! « NAPERVILLE HOMES BLOGHere’s a brief overviewI saw bits of press and some realtor and NAR advertising about the $8000 first time home buyer credit. There were lots of blog posts about its benefits. But is it really understood? Are people really aware of how powerful the benefit is … [...]

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