Are you planning on buying a new home and retaining your old residence as a second home or investment property?  If so, Fannie Mae’s new lending guidelines** may complicate or entirely derail your plans.

Borrowers who currently own their home typically have three options when they decide to purchase a new principal residence. They can:

• sell the current residence and pay off the outstanding mortgage
• convert the property to a second home, assuming they can qualify with both the existing and new mortgage payments
• convert the property to an investment property, provide documentation that they will rent the property and use the income to offset the mortgage payment

In order to ensure that borrowers have sufficient equity and/or reserves to support both the existing financing and the new mortgage being originated, Fannie Mae is updating the policies for qualifying borrowers purchasing a new principal residence and converting their existing principal residence to a second home or investment property.

In both cases (second home or investment property), reserve requirements are rising to 6 months of principal, interest, taxes and insurance for both properties.  In the investment property scenario, 75% of rental income may be permitted to offset the mortgage payment only if you can document that you have at least 30% equity in the property.

To read the complete section on Conversion of Principal Residence to a Second Home or Investment Property, see pages 5 and 6 of Fannie Mae Announcement 08-16.

The mortgage guidelines are constantly changing, so please consult with your lender well before you decide to purchase a home.  Please contact Michael Zimmerman if you need a referral to a competent mortgage lender.

**Fannie Mae Announcement 08-16 dated June 25, 2008 becomes effective August 1, 2008

Do you think you’re ready to buy a home?  Below are some key things you should know or be thinking about when you get ready to buy real estate in Hawaii.

Buying at the bottom.  Everyone wants to buy at the absolute bottom of the market cycle.  The truth is, we won’t know when the bottom is until six months after it occurred.  April 2008 single family home median prices are below what they were in November 2005.  April 2008 condo median prices are below what they were in June 2007.  If you’re holding real estate for five or ten years, it’s probably safe to buy now.  Real estate is a great long term investment.

Is your financing lined up?  Are you working with a trusted loan professional?  Do you really know what you can afford?  Make sure your financial house is in order before you begin your home search.

Down payment.  You’ll need at least 5% and 20% is much better.  The zero-down mortgage days are gone for the time being.  Your mortgage interest rate will probably be higher if you put less than 20% down.

Credit score.  720 will probably get you the best interest rate.  If your score is below 580, you may not be able to obtain financing at all.

Understand your loan terms.  Take the time to read your loan papers before you sign them.  Ask your loan professional to explain things that are not clear.  We constantly hear homeowners on TV say, "I didn’t understand the terms of my loan."  Simply put, that excuse is no longer acceptable.

What are you buying?  Are you looking for the best deal or your dream home?  They are not the same thing.  If you plan on living in the home for quite some time, it’s better to buy the home that meets your needs.  If you see your dream home today and are waiting for prices to come down, chances are, someone else will be living there six months from now.

If you’re getting ready to buy your first home or are selling and trading up, contact Michael Zimmerman for a no obligation consultation.

Have you been thinking about buying investment property on Oahu?  I know several people who have been waiting for prices to drop since 2003, only to watch Oahu single family residence (SFR) and condo prices skyrocket during this decade (see table below). 

Well, wait no longer.  Now is the time to invest and here is why:

The buyer’s market won’t last forever:

• The Oahu market has been resting since 2007.  By the time you realize it’s resumed an upward swing, it will be too late. 
• Sellers are making concessions to sell their property today.  That was a foreign concept in 2005.
• If you missed a chance to buy between 2002 and 2005, put that behind you.  You can’t re-live the past, so focus on the great prospects presented by today’s market.  Don’t let this opportunity slip away again. 

Real estate provides huge benefits:  

• Price appreciation for those able to hold property long term.  Combining a real estate purchase with patience almost always leads to a good outcome.
• Tax benefits through interest and depreciation deductions.
• Financial leverage.  Simply put, you control a huge amount of real estate with a relatively small investment of your own money.  You don’t have to split part of your gains with the lender, so the return on your investment is much, much higher.

Mortgage rates are near historic lows.  No, you probably can’t get a loan at 5% interest, but 6% may be available.  We’ve seen mortgage rates reach 18% in our life time.  Believe me, you CAN afford a 6% mortgage.  It’s a gift; take it.

Rental demand is strong.  Credit guidelines have gotten tighter and tighter, making it harder for people with poor credit to get home loans.  As we bring more of our military men and women home from Iraq and Afghanistan, rental demand will increase even more.

In conclusion, it’s a great time to buy real estate investment property.  Contact Michael Zimmerman today to discuss your real estate investment needs.

Background
In the normal course of business, I ask buyer clients to obtain a pre-approval letter from at least one lender before beginning a serious home search.  By knowing your target price range, we can narrow the number of homes under consideration and prevent you from falling in love with a home out of your price range.

I recommended two things:
1. Take steps to convince the vendor to amend the late payment report sent to the three credit reporting agencies (Equifax, Experian and TransUnion).  If the vendor made an error, they may be willing to send a corrected report.  If the vendor agrees to correct the delinquency report, ask for a letter stating they sent the corrected report and their reasons for doing so.  You may have to provide that letter as proof to one or more of the credit reporting agencies if they fail to correct your credit report.  If the vendor agrees to correct the delinquency report, verify it has been removed by all three credit reporting agencies before submitting a loan application.  Work diligently from start to finish to remove the late payment from all three credit reports.
2. Immediately write a short letter that can be provided to your mortgage lender in the future.  Fully explain exactly what happened.  Tell the story that the bill didn’t arrive…you were on vacation…whatever the facts are.  Emphasize that you paid the bill in-full the minute you received the bill, etc.  Your lender may require this letter if you are unable to convince the vendor to amend the delinquent payment report sent to the three credit reporting agencies.

If you need a referral to a great mortgage lender, please contact Michael Zimmerman.

My neighbor stopped me in the hall the other day and asked, "if the Prime Rate drops, will mortgage rates fall as well?"  The short answer is, "not necessarily."

As you can see above, the Prime Rate is typically 3% above and closely tracks the Fed Funds Rate.  30-year fixed rate mortgages do not closely track the short term Prime Rate or Fed Funds Rate.  Instead, they typically follow 10-year maturity Treasury rates.

30-year fixed mortgage rates are sensitive to inflation and economic news.  Good economic news usually causes mortgage rates to rise and bad economic news causes them to fall.

If you need a referral to a great mortgage lender, please contact Michael Zimmerman.