Housing Recovery Picks Up Speed

The housing recovery has picked up speed, as home prices posted their highest year-over-year gain since February 2006, according to the latest housing data from CoreLogic. 

CoreLogic's home price index climbed 12.1 percent in April over year-ago levels. Home prices have been on the rise for more than a year. 

"The pace of the housing market recovery quickened in April as home prices rose across the U.S.," says Anand Nallathambi, CoreLogic's chief executive officer. "We expect this trend to continue, bolstered by tight supplies and pent-up buyer demand."

CoreLogic economists predict home prices will rise another 2.7 percent in May. 

The following five states had the largest price gains over the past year: 

• Nevada: +24.6%
• California: +19.4%
• Arizona: +17.3%
• Hawaii: +17%
• Oregon: +15.5%

Will this trend continue, yes, but almost certainly not at this pace.  

Financing and re-financing remain difficult for most buyers, new construction is ramping up and sellers who had postponed selling are not listing their houses; these factors and others will pressure further price increases.

And, let's learn from experience, it prices do continue to increase at these levels, what's that called?  A BUBBLE.  What the nation needs to see is steady increase in housing prices, matching the the rate of inflation or a little more.

Pre-Approval versus Pre-Qualified....

If you were taking a home buying class, the first thing you would talk about is getting pre-approved by a lender.  Unless you're in the fortunate position of being able to pay for your new home up front, you will have to borrow money. 

When the real estate market was slow, the sense of urgency to get financing was not very high. Buyers figured they could take their time to find a home and then they'd firm things up with their lender. Now the market is starting to improve,  but financing remains difficult to get, so the first thing a serious buyer should do is line up their financing.  This means getting pre-approved to borrow a certain amount, not just being pre-qualified.

There is a big difference.  A pre-qualification is just an initial step, typically a phone conversation about your overall financial picture. The lender may discuss income, debts, and go over different payment options, but it should not be confused with a firm pre-approval.

In order to grant a pre-approval letter,  a lender will probably complete a formal application, pull the buyer's  credit report and collect specific documentation such as pay stubs, W-2's and tax returns. This will allow them to better define your maximum price range and that that they can make the loan.

Being pre-approved will make you a stronger buyer and allows you to move quickly if needed. In an active market, you never know when you'll find the home for you, but when you do, you should act quickly.  If you have to wait while you get your financing in order, you may lose the home to other buyers.

Another benefit to being pre-approved is that real estate agents will take your interest more seriously and be willing to devote their time and money to helping you find a home. Many top agents require their clients have a firm pre-approval letter before they will show property. The same with sellers.  A buyer who can demonstrate that they can actually buy the house is more likely to have their offer accepted and is in a stronger negotiating position.

Good bye to Adjustable Rate Mortgages?

The Feds have changed the rules for adjustable rate mortgages making it harder for buyers to qualify and probably forecasting the end of ARMs.

They've instituted an ability to repay rule, effective January 2014, requiring lenders to evaluate whether a borrower can repay if the loan adjusts upwards.  Unlike fixed rate mortgages which have the same interest rate and payment over the life of the loan, ARMs fluctuate with interest rates, usually being pegged to LIBOR, a world wide reference rate computed in London.

Instead of qualifying buyers with an ARM's low introductory rate, the lender will be required to use the loans loan's "fully indexed rate" or LIBOR plus the lender's margin.  This will make it harder for some buyers to qualify,  but once they do it's less likely they'll be forced out of their home if (really when) interest rates rise.

One thing for sure, interest rates will eventually go up,  it's just a matter of when and how far--how can I be so sure, easy, they can't go much lower unless we start paying banks to hold our money....

So why bother with an ARM?  An ARM with a low introductory rate might make sense if you know you will be moving around the end of the introductory period; otherwise a fixed rate mortgage is likely to be a better deal for the long term.

Want To Get A Mortgage In 2013?

Ah, remember the good old days, say just a few years ago, when all you had to do to get a mortgage was ask and then fight off the mortgage brokers?  If you haven't applied for a mortgage in the last year or two, get ready now for the new reality: Credit standards are tight and that's an understatement.

Lenders these days are engaging in "defensive underwriting".  While the Federal Housing Administration (FHA) allows borrowers with credit scores under 700 and down payments of just 3.5% to buy homes, that doesn't mean that you can get a loan on these terms.  Lenders are scrutinizing property appraisals, income tax returns and bank statements for any flaw, no matter how small that could be used to force them to buy back a loan.  Did you sell grandfathers pocket watch on ebay and make a one time deposit of a few hundred dollars to your checking account? Be prepared to explain where the money came from, with documents.  If your bank statement says there are seven pages, don't throw away the last three even though they contain nothing but the terms and conditions of your checking account; the lender will want them all and for at least the previous three months.

What to do?  If you're even thinking of applying for a mortgage in the next year or so, start getting ready now.  Pull your credit report from all three credit bureaus and carefully review them.  If they are less than perfect, now is the time ask for corrections and do so by old fashioned letter, not phone calls and emails and keep a copy of everything.  It's usually not a good idea to close credit accounts you don't use, you might even consider using them occasionally. If you carry a balance month to month on your credit cards, get it down to less than 20% of your over all credit line and pay on time. Resist the urge to open new accounts at stores just to get a discount on a purchase; old credit is better than new credit.

Next assemble your last three years of tax returns and look for anything that might raise a question with a lender and gather the documentation now to substantiate the return.  The same with bank accounts, review the last year at least for abnormal deposits, you'll need to explain them.  Unlike credit accounts, closing little used savings and checking accounts might help, certainly you'll have less paper to submit and explain.

The bottom line: if you want to get a mortgage these days, you must be prepared to submit the most trivial financial documents and explain them, your credit report must be as clean as you can make it and be ready to explain any negative information with documentation.  Start now.