California Home Loan Q&A for 2011

2011 California Mortgage GuideWill you be shopping for a home loan in California this year? If so, you’ll find this list of frequently asked questions helpful.

Home buyers in California this year will need to do plenty of research. This goes double for first-time buyers. A lot has changed with California home loans and lenders over the last few years. The subprime mortgage industry has disappeared. Lending criteria have tightened. And the number of financing options has decreased.

But that doesn’t mean you can’t qualify for a California mortgage loan in 2011. On the contrary, a well-qualified borrower can easily get approved for a home loan in California. But therein lies the question. What is a “well-qualified borrower” by 2011 standards? This is just one of the questions we will answer in our California home loan Q&A series.

Home Loan Questions from People Like You

To come up with these mortgage FAQs, we accepted questions from California residents over a 30-day period. We also conducted several online surveys on the Home Buying Institute website. From all of these questions and responses, we made a list of the most frequently asked questions. So without further ado, let’s talk about what it takes to get a California home loan in 2011.

How Do I Qualify For a California Mortgage in 2011?

By far, this is the number-one question on the minds of most home buyers. Even people who have bought a home before are uncertain about the current qualification guidelines. I’ll cover some of those guidelines in just a moment.

But first, a quick disclaimer: Nothing I am about to tell you is written in stone. When you apply for a California home loan, the lender will look at the big picture in addition to the individual pieces. If you measure up well in four out of five areas, they might make exceptions for the fifth area. For example, if you have excellent credit and a good down payment, the lender might be more flexible with their debt-to-income ratios.

With that disclaimer out of the way, let’s talk about what it takes to qualify for a California home loan in 2011.

Credit Score Requirements

The first thing you need is a good credit score. The definition of “good credit” has shifted upward over the last few years. What was considered a qualifying credit score during the housing boom won’t even get your foot in the door today. Here again, there are exceptions to every rule. But you’ll probably need a credit score of at least 620 to be approved for a home loan in California.

The same goes for FHA loans. When you apply for an FHA home loan in California, you must apply through a mortgage lender in the private sector. The federal government insures the loan, but they don’t actually make the loan. In many cases, there are discrepancies between the FHA’s minimum standards and those used by FHA-approved mortgage lenders. Credit scores are a good example of this.

According to the FHA’s guidelines, you could qualify with a credit score as low as 500. In order to qualify for the 3.5 percent down-payment program, you would need a credit score of 580 or higher. Here’s where the confusion begins. Most California mortgage lenders will turn you away if you have a credit score less than 620. Two of the largest lenders in the country, Wells Fargo and Bank of America, recently announced that they were increasing credit-score requirements on some FHA loans.

Bottom line: If you want to qualify for a California home loan in 2011, you’re going to need a good credit score by current standards. While the definition of “good” varies from one lender to another, most are requiring scores in the 620 – 640 range.

Debt-to-Income Requirements

You’ll also need a manageable level of debt. California mortgage lenders will review your gross monthly income in relation to the amount of debt you have. If your debt payments (for credit cards, student loans, retail accounts, etc.) are consuming too much of your monthly income, you will have trouble qualifying for a California home loan. This is another area where there is some variance. Some lenders adhere to very strict guidelines for debt-to-income ratios. Other lenders have more flexible guidelines that take the bigger picture into account.

The general rule for debt ratios is “28/36.” This means your housing-related debt (i.e., mortgage payment) should not exceed 28 percent of your gross monthly income. And your total debt should not account for more than 36 percent of your monthly income. FHA debt-to-income ratios are a bit more relaxed.

We’ve covered some of the most important criteria when applying for a California home loan. We talked about your credit score, your income and your debt levels. The size of your down payment will also determine whether or not you get approved for a particular loan program. And that leads us to the next frequently asked question in our series…

How Much of a Down Payment Will I Need?

This will depend on the type of loan you are using. If you qualify for a VA or USDA loan, you might not have put anything down. But those loans are only available to certain people. If you use an FHA loan (which is a popular option these days), your down payment could be as low as 3.5 percent. For a conventional mortgage loan in California, the lender will probably require at least 10 percent down.

Lenders today want home buyers to have more skin in the game. This was one of the big problems during the housing crash. A lot of mortgages were given out to people who put little or nothing down, and that meant the lenders carried most of the risk. When all of those California home loans started to go belly up, the mortgage lenders took devastating losses. But I don’t need to recount all of this history for you — you’ve seen it in the news countless times. As a result of all this, some of the strategies that were used to minimize down payments in the past are no longer available. And that brings us to the next frequently asked question in the California home loan series…

Are 80-10-10 Piggyback Loans Still Available in California?

Elsewhere in the country, yes. In California, probably not.

I would again remind you that there are exceptions to every rule. But based on everything I’ve read lately (and my discussions with lenders), 80-10-10 piggyback loans are rare in California these days.

For those of you who are not familiar with this term, here’s a quick definition. A piggyback loan strategy is when you use two mortgage loans to buy a house. In the case of the 80-10-10 strategy, you would get a first mortgage for 80 percent of the purchase price. Then you would get a second mortgage for 10 percent of the purchase price (the second loan “piggybacks” on the first). The remaining 10 percent would be paid by you, the home buyer, in the form of a down payment. This is basically a way to avoid paying private mortgage insurance on the loan, because none of the loans would account for more than 80 percent of the property value.

This type of California home loan was extremely popular during the housing boom. But like a lot of the other creative financing strategies in use back then, you don’t see much of them around today. When shopping for a mortgage in 2011, you probably won’t find a lender willing to offer this option. But if you can come up with a 10-percent down payment, then you can probably qualify for the traditional 90/10 mortgage loan. This is where the lender gives you 90 percent of the purchase price, and you make up the difference with your 10-percent down payment. Of course, you’ll have to pay for private mortgage insurance if you go this route.

Are There Home Loans for People with Bad Credit?

This is going to be a short answer. People with bad credit won’t qualify for a California home loan in 2011. It’s going to be a long time before lenders start giving out subprime mortgages again. Giving mortgages to people with bad credit and low income is what wrecked the housing market in the first place. If you currently have bad credit, you should focus on improving your credit score (here’s how). If you can get your score into the mid-600 range or higher, you’ll have a much easier time qualifying for a California mortgage loan.

When Does It Make Sense to Buy A House?

Do you even need to buy a house? This is the first question you should ask. A few years back, some folks in the housing industry came up with the notion that homeownership was the “American dream.” This is silly. The American dream is whatever you want it to be. Some people can live their dreams without ever owning a house. I know plenty of lifetime renters who are perfectly happy to stay that way. You need to make sure that buying a house improves your quality of life, instead of taking away from it. Buying before you’re ready can lead to heartache — financially and emotionally.

Next, you need to evaluate your financial situation to see if you could realistically qualify for a mortgage loan. It’s tough to get a California home loan in 2011. Lenders are looking for higher credit scores, lower debt levels, steadier income, and larger down payments. If you can measure up in all of these categories, then it might be a good time to buy. If you fall short of the minimum requirements, you’re probably not ready to buy.

Lastly, you need to consider the real estate market where you live. California is a big state with a lot of housing diversity. Some markets are predicted to rebound in 2011, while others are predicted to decline even further. Generally speaking, it’s a bad idea to buy a house in a market where the home prices are still declining. If you do that, you could find yourself in a negative-equity situation soon after buying.

Many are predicting that home prices in California will continue to decline through 2011. I would agree with this, for the most part. I think there are some cities that will see home-price increases in 2011. But I think most of California will experience flat or declining home values over the next year. Home sales in California increased 15 percent last month, over the month prior, and that’s a positive sign.

The bottom line is you need to understand what’s going on in your local real estate market. Before you apply for a California home loan, you need to be confident that a home is a good investment. This will require some extensive reading and research on your part. There’s no way around this. But when you consider the size of your investment, it’s easy to justify homework.

Do I Need to Get Pre-qualified Or Pre-approved for a Loan?

I recommend that you get pre-approved for a mortgage before shopping for a house. In most cases, getting pre-qualified is a waste of time. The difference between these two things has to do with the amount of scrutiny on the lender’s part. For a pre-qualification, the lender doesn’t look at much of your financial background. They might only look at your income and then tell you how much of a loan you could get. But when you consider how tough it is to get a California home loan these days, you can see why this kind of narrow assessment wouldn’t be very helpful.

A pre-approval, on the other hand, goes much deeper. Here, the mortgage lender will review all aspects of your financial situation. They will check your credit, review your income and debt levels, etc. In many ways, the mortgage pre-approval is similar to the final approval process — though you’ll provide more documentation for the final approval.

The benefits of getting pre-approved for a California home loan are threefold. It will help you identify any qualification problems you have. It will help you limit your house-hunting process to the size of loan you might get. And it will also make the seller more likely to accept your offer. The seller (whether it’s a homeowner or a bank) wants to know that you’ve been given a green light by a mortgage lender. Granted, the pre-approval does not guarantee you’ll get the loan. But it’s the closest you can get to an actual guarantee before you’ve found a house. So it gives the seller the comfort of knowing your finances have gone under the microscope.

This completes our FAQ series about California home loans and mortgage lenders. If you would like to learn more about the mortgage process or what it takes to get a loan in 2011, you can use the search tool located at the top of this website. There are two sides to the Home Buying Institute. We have the news side you’re reading right now, as well as an educational side. The search tool will give you access to thousands of news stories, how-to articles, and other resources for home buyers.

5/1 ARM Loan: Most Popular Adjustable Loan in 2011

The 5/1 ARM loan continues to be the most popular mortgage loan in the adjustable-rate category. But ARM loans as a whole still only account for about 7 percent of home-purchase loans. This is in stark contrast to their 2004 peak, when 40 percent of all purchase loans were adjustable. This is according to Freddie Mac’s 27th Annual ARM Survey.

What is a 5/1 ARM Loan?

The 5/1 ARM is often referred to as a “hybrid” loan, because it starts off like a fixed-rate mortgage before adjusting. In the case of the 5/1 hybrid ARM, the loan carries a fixed interest rate for the first five years. That’s what the first number signifies. After the initial fixed-rate period, the interest rate will begin adjusting every year. That’s what the second number signifies.

You can learn more about the 5/1 hybrid ARM loan in this article on our blog. The video below (courtesy of SketchNest.com), gives you an illustrated example of how these loans work.

According to Freddie Mac’s survey, nearly all lenders who offer adjustable-rate mortgages offer the 5/1 ARM variety. Some lenders offer hybrid loans with a longer term, such as the 7/1 and 10/1 ARM loans. These mortgage behave the same as the 5/1 ARM, but the initial fixed-rate period is seven or ten years respectively. These options are not as widely offered as the 5/1 hybrid. Only 64 percent of the surveyed lenders offered the 7/1 option, and only 23 percent offered the ten-year ARM.

The most popular mortgage category of all is still the 30-year fixed-rate mortgage.

Adjustable Mortgages Get a Bad Reputation

Adjustable-rate mortgages developed a bad reputation during the housing crisis. During the housing boom, mortgage lenders were using these loans to entice buyers. The loans would often come with a “teaser rate” that was significantly lower than the rate on a 30-year fixed mortgage. But when these loans started adjusting to a higher rate, many homeowners saw their mortgage payments double. This was widely reported in the news, which is why home buyers today are wary of the ARM loan.

“Homebuyers have shied away from ARMs because they are wary of the risks,” said Frank Nothaft, vice president and chief economist at Freddie Mac. “The potential for much larger payments if future interest rates are significantly higher … have led consumers to prefer fixed-rate loans instead of ARMs.”

Related story: The Decline of Adjustable Mortgages in 2011

When It Might Make Sense to Use an ARM Loan

In some home-buying scenarios, it might make sense to use an ARM loan. If, for example, you only plan to stay in the home for a few years, the 5/1 hybrid ARM might work out to your advantage. You could secure a lower interest rate for the first five years (when compared to a fixed-rate loan), and then you would sell the house before the uncertainty of the adjustment period.

Of course, if you’re unable to sell the home for some reason, you might be stuck with the ARM loan. This is what happened to hundreds of thousands of homeowners over the last few years.

You also have to consider the interest-rate differential between adjustable and fixed-rate mortgages. If the ARM loan rate is only slightly lower than the (more predictable) fixed mortgage, it wouldn’t make sense to take on the risk of an ARM. This is what we are seeing right now. According to Frank Nothaft of Freddie Mac: “Fixed-rate loans currently carry extraordinarily low rates, and initial ARM rates are only slightly lower, making fixed-rate product more attractive.”

Why You Should Consider Buying a Foreclosure Home in 2011

Planning to buy a home in 2011? If so, you should also consider buying a foreclosed home. There will be plenty of them to go around in 2011, and they typically represent a good deal for buyers.

According to the folks at RealtyTrac (who know more about foreclosure stats than you and I, and just about everyone else), 2011 could be a record year for home foreclosures. They expect foreclosure filings in the U.S. to climb by as much as 20 percent in 2011. That’s astounding, when you consider the amount we had in 2010.

Rick Sharga, senior vice president at RealtyTrac, thinks we will see a peak in foreclosures in 2011. The hardest-hit areas, he said, will continue to be those that were overbuilt, overheated and overpriced during the housing boom. This includes places like Phoenix, Las Vegas, South Florida, and the central valley of California — among others.

But regardless of where you live, there are bound to be foreclosed homes available in your area. These homes can be a good deal for buyers. They are often priced a little below their true market values to ensure a quick sale. In some cases, they’re priced well below market value. When you consider the sheer volume of foreclosure properties, and the potential savings they bring, you can see why they are worth considering.

3 Ways to Buy Foreclosures in 2011

Buying a foreclosure home is not for everyone. No matter how much they research the process, some buyers are simply not comfortable with it. And that’s okay. There are plenty of homes available through traditional sales as well. The following information is for the hardier souls, those who are willing to brave the potential uncertainty of buying a foreclosed home.

So, how do you go about buying a foreclosure home in 2011? What are the steps involved? First, you need to understand the different stages in the foreclosure process. The process varies from one state to another (based on state laws), but the basic stages are the same:

1. Pre-foreclosure: John Doe falls behind on his mortgage payments. Maybe he lost some of his income, or perhaps his mortgage payment increased in size due to an ARM loan adjusting. Two or three months after falling behind on the payments, John receives a notice of legal action from the lender. This is the pre-foreclosure stage, where the homeowner has defaulted but the lender has not yet foreclosed on the property. When the lender files a legal record of the homeowner’s default, it becomes public information. During this stage, John might try to get back on track. He could do this through reinstatement, or one of several other foreclosure-avoidance options. He might even sell the home through a short sale, with the lender’s permission. This is one way to buy a foreclosure in 2011 (or a pre-foreclosure, to be exact). If none of these options work out, the bank will eventually foreclose on the home.

2. Auction: This is often the next stage in the foreclosure process, after the bank forecloses on the home. At this point, the homeowner has been evicted from the property. Next, the bank wants to sell the home as quickly as possible, since it’s a “non-performing asset.” An auction is one way to go about it. Bidders who have cash in hand can bid on the home. Generally, their bids must be above a certain starting point. If the property is sold through auction, that’s the end of it. If it’s not sold at auction, the home goes back on the market as a bank-owned house. Sometimes the auction process is skipped entirely. For example, if the bank feels there’s not enough local demand for such properties, they might skip the auction and just list the home on Realtor.com, RealtyTrac.com and similar websites.

3. Bank-owned home: When a foreclosure home comes back on the market for sale, it’s usually referred to as a bank-owned home. You can find these homes listed on the two websites mentioned above. The home might have been through an auction prior to reaching this stage, or the bank / lender might have skipped the auction. Either way, you can be fairly certain that the homeowner who defaulted is now out of the picture entirely. From a buying standpoint, most experts agree that this is the safest stage of the process. You might not get the kind of deal you would get during an auction. But you can probably rest assured that the home is “free and clear” of any liens or other legal claims. Learn more about buying bank-owned homes.

Bank Owned

So how much money could you save by buying a foreclosure home in 2011? This depends on who you ask. It also depends on the kind of market you’re in, particularly the supply and demand situation. Most sources say the average savings is 5 – 15 percent off market value.

But this brings up another question. How much is market value? To answer this question, you need to look at comparable sales, or comps, for the area where you plan to buy. Try to find sales data from regular transactions (not short sales or foreclosures). This will give you an idea where the market is, in terms of home prices. It will also help you spot a good deal, whether it’s on a foreclosure home or a regular property listing.

Houston Real Estate Market in 2011 – I’d Buy There

The Houston real estate market was one of the strongest in the country last year. In 2011, it could enjoy the same distinction. This is the general consensus among many real estate and economic analysts. Here’s what people are saying about the Houston housing market in 2011.

Home Prices in Houston

Clear Capital, a company that provides real estate valuation services for the mortgage industry, recently released a report showing home-price projections for major metro areas in the U.S. In addition to the forecast for 2011, their report showed actual home-price data for 2010. The Houston real estate market was ranked #2 for 2011, in terms of home values. The city had another distinction as well. Only a handful of cities that experienced price increases in 2010 are expected to do so again in 2011 — Houston was one of them.

Houston Home Price Forecast

The image above is an excerpt from the January 2011 report released by Clear Capital. The red circles and rectangle have been added for our purposes, to highlight their predictions for the Houston housing market in 2011.

Credit Suisse, an international finance company, recently released their monthly housing survey. As with the previous report mentioned above, the survey covers fifty of the largest real estate markets in the United States. The data showed price changes from November to December 2010 (most recent data available). Of the top five markets in terms of price increases, two of them were in Texas. Austin was ranked #2, and Houston was ranked #4. This further supports the notion that the Houston real estate market could be one of the strongest in the country, for 2011 and beyond.

Property Values Rising

In the first week of January 2011, Harris County officials sent out their updated property assessments. Nearly all of the assessments for Houston showed an increase in property values. Overall, assessments in Houston increased from $252 million in 2010 to $269 million in 2011 (as of January). The appraisers who come up with these values look at many factors, but real estate market trends weigh in the most.

Like most cities in Texas, Houston avoided the kind of bubble-to-bust cycle that wrecked so many other housing markets in the country. According to Ana Orozco, an economist with IHS Global Insight: “Texas wasn’t as hurt by the recession because it didn’t having the housing price bubble in the pre-recession years.” Because Houston home prices were never inflated to begin with, they didn’t suffer much depreciation during the housing “crash” of 2008.

Positive Signs in Job Market

The job market in Houston is also growing much faster than the national average. In 2010, the Houston area gained nearly 10,000 new jobs. That’s not ideal. But when you consider the 100,000+ jobs lost a year ago, it’s certainly a positive sign.

The state of Texas as a whole is expected to add 1.5 million jobs by 2016. Much of this economic growth will take place in cities like Houston, Austin and Dallas. This brings in new residents from elsewhere in the state, and from across the country. Many of these new residents are educated and upwardly mobile young people (the 25 – 34 demographic is booming).

Magnet for the Upwardly Mobile?

The image below shows the metro areas that attracted the highest percentage of young people, during the later part of the 2000s. Of all the major metro areas in the United States, Houston ranked #4 in terms of attracting this demographic. This trend will likely continue for the first part of 2011, and possibly beyond that. This will give the Houston real estate market a steady stream of potential home buyers, which will support home values for years to come.

Houston attracts young people

The data above was compiled by demographics researchers at the Brookings Institution.

Houston Real Estate Market is Attractive

This is all good news for homeowners in the Houston area. It also gives hesitant home buyers a reason to move forward with their purchases. Mortgage rates are expected to stay below 5 percent for the first part of 2011, and home prices in Houston are equally attractive. But all of the current data suggests that home prices will rise steadily in the coming months. Mortgage rates may very well do the same. You hear the phrase “now is the time to buy” thrown around a lot. But in Houston, that phrase actually applies.

Objectivity Notice: We do not have any stake in the Houston real estate market — personal, financial or otherwise. This article is simply an objective review of (what could very well be) one of the strongest housing markets in 2011. We encourage home buyers to do ample research before entering the market. This article is a great place to start.

Government Mortgage Assistance for California Homeowners

Taxpayers from all over the country are chipping in to help unemployed California homeowners with their mortgage payments. More or less. The Unemployment Mortgage Assistance Program (UMA) will use federal funds to give mortgage-payment assistance to unemployed homeowners in California. This will undoubtedly be a popular topic among Californians in 2011, so we have put together a fact sheet with the pertinent details.

Mortgage Assistance for the Unemployed

The Unemployment Mortgage Assistance Program went into effect this month, January 2011. The program is managed by the California Housing Finance Agency (CalHFA). This program uses federal funds to provide temporary mortgage assistance for California homeowners who have lost their jobs. Homeowners must meet other eligibility criteria, in addition to being unemployed. A partial list of criteria can be found below.

The purpose of the program is to provide financial assistance to California homeowners who have lost income due to unemployment. The funding allows the homeowners to make their mortgage payments for a period of time, while they seek additional employment. So it’s an unemployment and foreclosure-avoidance program rolled into one.

California homeowners who are unemployed and meet other eligibility criteria could receive $3,000 per month or 100 percent of their mortgage payment, whichever is less, for up to six months. Again, the goal here is to provide enough mortgage assistance to help homeowners avoid foreclosure, until they are able to find new employment.

Eligibility Criteria for California Homeowners

In order to be eligible for the mortgage assistance program, California homeowners must meet the following criteria (at a minimum):

  1. Income limitations: The unemployed homeowner must meet the program’s definition of “low- to moderate-income” household. This means the borrower’s income cannot be more than 120 percent of the HCD Area Median Income for a family of four, in the county where the homeowner currently lives. Learn more (PDF)
  2. Hardship: The unemployed homeowner must complete a form that documents the reasons for their financial hardship (e.g., reduced income resulting from a job loss). This form is called the Hardship Affidavit / 3rd-Party Authorization. This is the start of the paperwork process for the California mortgage assistance program. Borrowers will be asked to provide a variety of other financial documents as well. The loan servicer or housing counselor will provide a list of these documents.
  3. Unemployment: The homeowner must be eligible to receive unemployment benefits in the state of California.
  4. Default: The unemployed homeowner’s mortgage loan must be delinquent (behind on payments), or at risk of “imminent default.” This must relate to the loss of employment, and it must be clearly outlined in the hardship letter described in item #2 above.
  5. Origination: The homeowner’s first mortgage must have been originated on or before January 1, 2009.
  6. Balance: The current mortgage balance (unpaid principal) cannot be more than $729,750. This number might look familiar. It’s the conforming loan limit for high-cost areas such as California, set forth by Fannie Mae and Freddie Mac.
  7. Participation: Your mortgage lender or loan servicer must be actively participating in this program. Participation is option for lenders. At present, only a handful are involved. But the CalHFA expects more loan servicers to join in soon.

Homeowners who meet all of the criteria listed above may be eligible for the California mortgage assistance program. Final eligibility will be determined by counselors with the California Housing Finance Agency, or the loan servicer who is currently servicing the mortgage loan.

Where to Learn More

If you would like to learn more about the mortgage assistance program for California homeowners, please contact the California Housing Finance Agency. You can also visit the website they’ve set up for this program: www.keepyourhomecalifornia.org. At the time this article was published, they were instructing homeowners to call: 888-954-KEEP. But you should check the aforementioned website for current instructions and guidelines.

Austin Real Estate Market Looks Good for 2011

In 2011, the Austin real estate market could be one of the most stable in the country. Some housing analysts are predicting a small price decline in the first part of the year, followed by years of growth and stability.

It could truly be a happy new year for Austin-area homeowners. Having avoided most of the housing-related drama of the last few years, the Austin real estate market has been relatively stable. Austin home prices are likely to appreciate in the latter part of 2011, barring any unforeseen catastrophes.

Ingredients for Housing Stability

Like many cities in Texas, Austin never experienced much of a housing bubble. This is one of the factors that spared it from the housing crash that devastated the rest of the United States. Population and job growth have also played a big role.

Over the last few years, the population in the Austin metro area (including nearby Round Rock) has grown considerably. Between 2000 and 2009, the population grew by 34 percent. This props up housing demand at a time when it’s shrinking in other metro areas. A relatively low foreclosure rate has kept home inventories in check. All of this helps balance the scales between supply and demand. It also sets the stage for a stronger Austin real estate market in 2011.

Austin, Texas skyline
Image source: Wikipedia. Licensed under Creative Commons 3.0.

Credit Suisse, an international finance company, recently released their monthly housing survey for the 50 biggest real estate markets in the U.S. The report showed changes in home prices from November to December 2010. Out of all 50 metro areas, Austin was ranked in the top three in terms of home-price increases. This and other reports seem to suggest that the Austin real estate market could be one of the strongest in 2011.

Austin draws in plenty of younger migrants from other parts of the country. According to data released by the Brookings Institution, the capital city attracted the largest numbers of young Americans (25 – 34) from 2007 to 2009. This is a prime demographic for first-time home buyers. Translation: The Austin real estate market is fueled by a steady influx of upwardly mobile young people.

Austin attracts young people

The data above was compiled by demographics researchers at the Brookings Institution.

The job market in Austin is also one of the best in the country. Much of this comes from the tech sector. According to Grubb and Ellis, a market research firm, Austin will have one of the strongest commercial real estate markets for the next several years.

LegalZoom, the Los Angeles-based provider of online legal documents, recently chose Austin as the future home of its regional headquarters. And they weren’t alone in this decision. According to the Greater Austin Chamber of Commerce, 2010 was a banner year for business recruitment. In that year, 27 companies relocated their headquarters or other operations to Austin. This means more jobs, more economic growth, and more home buyers to fuel the Austin real estate market in 2011.

Austin Real Estate in 2011

This is not to say that Austin home prices won’t fall in 2011. It’s still a possibility. In November of last year, Moody’s Analytics predicted that housing prices in the U.S. would decline though the first half of 2011. They predicted the worst declines in Las Vegas, Fort Lauderdale and Riverside, California. The least severe declines, said the report, would happen in places like Austin, Texas (which has more price stability than the rest of the country).

What will the Austin housing market look like by the end of 2011? Only time will tell. But if I were a potential buyer in the Austin area, I would make my move sooner rather than later. Mortgage rates will likely stay below 5 percent for the next few months, and home prices are equally attractive (Austin is one of the most affordable real estate markets in the country). Add in a dose of market stability, and you’ve got a pretty good scenario for home buyers.

Washington, D.C. Real Estate – Most Stable Metro for 2011?

What’s in store for the Washington, D.C. real estate market in 2011? According to some of the latest housing-market data and predictions, Washington, D.C. could be one of the most stable metropolitan areas in 2011.

Washington, D.C. Housing Market in the News

S&PThe most recent S&P / Case-Shiller home index (released at the end of December 2010) showed that home prices fell in all 20 of the monitored metro areas. But out of all 20 metropolitan areas, the Washington, D.C. real estate market fared the best. In both the monthly and yearly categories, home prices in Washington D.C. were the most stable.

The price drop from September to October was only 0.2 percent. The annual data showed a better picture, with a 3-percent rise in prices from October 2009 to October 2010. This was the strongest annual gain of all monitored metro areas.

VerosIn December of 2010, Veros Software, a California-based technology firm that serves the financial industry, predicted that Washington D.C. would be one of the strongest real estate markets in 2011. Specifically, they said it would be one of the five strongest metro areas in terms of appreciation. The company feels the D.C. metro area could see home-price gains of 2.5 percent, between now and December 2011.

Clear CapitalIn January of 2011, Clear Capital released a home-price forecast for 2011. Located in Truckee, California, Clear Capital provides appraisal / valuation services for the financial industry. Translation: They study home values for a living. According to their predictions, the Washington, D.C. real estate market could see the most home-price appreciation of any major metro area. An excerpt of their report is shown below.

As you can see, the company feels that home prices in Washington will increase even more in 2011 than they did in 2010. If this forecast holds true, it gives D.C. homeowners reason to celebrate.

Home Price Projections, Washington, D.C.

According to Jim Diffley, an economist at IHS Global Insight: “Given the area’s employment picture, we feel there is less risk of a [price] fall in the Washington region than in other parts of the country.”

Even as “far” back as February 2009, Forbes had listed Washington D.C. as one of the most stable housing markets in the country. That time frame could be viewed as the turning point for the D.C. real estate market, when home-price declines began to slow down considerably over the years prior.

2011 Market Drivers – Inventory and Unemployment

Row houses, Washington D.C.The question is, will home prices in Washington, D.C. decline, flat-line or increase in 2011? All of the sources mentioned above seem to agree that things are looking up.

For the most part, the answer lies within two key factors — unemployment and inventory. If the district experiences continued job growth in the new year, housing demand should rise. This would put upward pressure on home prices. But a large housing inventory (worsened by home foreclosures) could negate any upward ticks in housing demand.

Only time will tell, of course. But if I were a potential home buyer in Washington, D.C., I’d probably make my move in 2011. Mortgage rates are expected to remain below 5 percent for the first part of the year, and home prices are equally attractive. Add in a dose of market stability, and you’ve got prime buying conditions.

30-Year Mortgage Rates Going Into 2011 – 4.86 Percent

Happy (almost) New Year! The benchmark 30-year mortgage rate rose to 4.86 percent this week, according to the latest data reported by Freddie Mac. Rates in other mortgage categories are up as well, with the exception of the 1-year ARM loan. Going into 2011, we can probably expect more of the same.

This is the highest the average 30-year rate has been since May 2010. It also aligns with many of the mortgage predictions compiled in our housing market predict-o-meter. The consensus of those predictions is that rates will gradually trend upward throughout 2011, perhaps reaching or exceeding 5 percent by year’s end.

While these rates are attractive, they don’t erase the concerns people have about falling home prices. Indeed, prices are still falling in many cities across the country. Many would-be home buyers are rightfully concerned that depreciation in home values would wipe out the benefits of getting a low mortgage rate. It’s a valid concern, and it will keep a lot of buyers on the fence for now.

The average rate for a 15-year FRM rose slightly from 4.17 to 4.2 percent. The 5/1 ARM rose from 3.75 to 3.77 percent. Again, this is according to Freddie Mac’s weekly survey of the primary mortgage market. It is considered one of the most accurate “snapshots” of current mortgage rates in the U.S.

Putting the Rates in Perspective

This kind of news may come as a shock to potential home buyers. After all, 30-year fixed mortgage rates have risen steadily for the last seven months. But let’s keep it in perspective. At this time last year (December 31, 2009), the average rate for a 30-year fixed-rate mortgage was 5.14 percent — compared to the current average rate of 4.86 percent, as we head into 2011. For a while there, we were spoiled by record-low rates near 4 percent. But you can’t expect that kind of thing to last forever.

In a nutshell: The cost of borrowing will remain relatively low for most of 2011, though we’ve probably seen the last of the record-low rates. Housing costs are equally affordable. In fact, some economists are predicting a double-dip in home prices throughout much of the country. For a qualified home buyer, the 2011 housing market could be a kid-in-the-candy-store scenario.

San Diego Real Estate Market in 2011 – Price Predictions

Advance summary: Brandon Cornett, the publisher of the Home Buying Institute, shares his local market research with San Diego home buyers.

San Diego

This is not the usual kind of story we publish. In fact, it’s not a news story at all. It’s a list of predictions and perspectives on the San Diego real estate market in 2011. You see, I’m actually in the market to buy a home in San Diego in 2011. So I’ve been doing quite a bit of research, to get a feel for what the market might be like next year.

Surely there are some other home buyers out there who can benefit from the information I’ve gathered. So, in the spirit of sharing, here are some thoughts and predictions about the real estate market in San Diego.

Real Estate Outlook for 2011

Here are some headlines relating to what the San Diego housing market might do in 2011. I’ve added some background information where it was necessary.

San Diego Market Forecast for 2011
KPBS Interview with Dr. Michael Lea, December 2010
On December 2, 2010, Maureen Cavanaugh from KPBS conducted an interview with Dr. Michael Lea. The subject of the interview was San Diego real estate, and what the housing market might do in 2011. Dr. Lea is the director of the Corky McMillin Center for Real Estate at San Diego State University.

In one part of the interview, Dr. Lea had this to say: “I think the bigger effect is you’re gonna see a weak market [in 2011] with declining house prices probably in the single digits … We’re not gonna really start to see a recovery until 2012, assuming that you can get the shadow inventory through the system.”

The so-called “shadow inventory” consists of bank-owned homes that are not listed for sale, as well as homes that are likely to be foreclosed upon in the near future.

Home Prices Expected to Rise in 40% of Metro Areas in 2011
Housing Wire, December 2010
Veros Software, a Santa Ana-based tech firm that serves the financial industry, recently shared some housing predictions for 2011. I know … I’ve never heard of them either. Their report said that San Diego should experience a 3.5 percent increase in home values in 2011. I’m not sure if this company has a vested interest in rosy outlooks. But theirs was the only forecast I found that suggested rising prices. Aside from San Diego real estate agents (who definitely have a vested interest in rosy outlooks), I could not find any upward pricing predictions for 2011.

Roundtable: Outlook Remains Bleak for 2011 Housing Market
The Daily Transcript, November 2010
In November of 2010, The Daily Transcript hosted a roundtable discussion about the residential real estate market in San Diego. On the panel were Borre Winckel (president of the San Diego Building Industry Association) and Rick Hoffman (president of Coldwell Banker Residential Brokerage in greater San Diego), among others. There wasn’t much optimism at the table. According to Andrew Keatts of The Daily Transcript: “The best anyone at the table could say for 2011 is that it can’t be much worse than 2010.” Well, maybe not much worse.

Housing Prices Facing a Double Dip
San Diego Union Tribune, August 2010
In August, the Union Tribune pointed out some data that suggested a double-dip in San Diego County home prices. They were reporting on data released by Zillow. According to Zillow, San Diego was one of the only metro markets where home prices declined in the third quarter of 2010, after five quarters of an increase. Of course, this kind of drop-off was expected. Those five quarters of rising home values were largely driven by state and federal tax credits for home buyers. But now the demand is down, even as inventories rise. This puts downward pressure on home values.

Price Reductions on San Diego Homes Increase
San Diego Union Tribune, August 2010
In August, the Union Tribune mentioned a report by Trulia.com that showed another disturbing trend for homeowners. From July to August, the number of price reductions on San Diego homes for sale increased from 20 percent (of all homes for sale) to 23 percent. San Diego had the fourth largest increase in the number of price reductions from July to August. This suggests two things: (1) many sellers are asking for more than the average buyer is willing to pay, and (2) housing demand may be shrinking.

Crystal ball disclaimer: These are just some tidbits I came across in the course of my research. Who can really say what the San Diego real estate market will do next year? Not me. But if I were a betting man, I’d put my money on some kind of home price decline in 2011. It’s a supply and demand thing. The expiration of the $10,000 home-buyer tax credit will reduce demand. And the post-moratorium renewal of home foreclosures will increase supply. Then there’s that whole unemployment thing. Given all of that, how could home prices in San Diego not decline in 2011?

2011 FHA Home Loan Requirements for Borrowers

Here’s what you really want to know:

If you are a home buyer thinking of using an FHA loan to buy a home, you should be aware of certain changes to the FHA program. This page offers a summary of FHA home loan requirements for 2011.

Note: There is an updated version of this article for 2012. Go there now

What is an FHA Loan?

An FHA home loan is a mortgage loan that’s insured by the Federal Housing Administration. The FHA is a federal agency that falls under the Department of Housing and Urban Development (HUD).

The government does not actually lend money to borrowers. Rather, they insure the loans made by primary lenders such as Wells Fargo and Bank of America. In order to participate in this program, a mortgage lender must be approved by the FHA.

The FHA insures the loan against losses resulting from borrower default. So if the borrower stops making payments on the loan, the FHA will cover the lender’s losses (as long as the loan was made in accordance with current FHA guidelines).

Credit Score Requirements for 2011

The first thing we need to talk about is your credit score. This is one of the most important FHA home loan requirements for 2011. In the past, the FHA did not establish any minimum requirements for credit scores. They mostly left it up to the lenders. But starting in 2010, HUD announced some new guidelines. In short, borrowers must have a credit score of 500 or higher to qualify for an FHA home loan. In order to qualify for the 3.5 percent down-payment program, the borrower must have a credit score of 580 or above.

But here’s the “catch.” The FHA’s minimum requirements for credit scores are actually lower than the guidelines used by most mortgage lenders. Most lenders will require you to have a score of 620 or higher, in order to qualify for an FHA home loan in 2011. For example, Wells Fargo and Bank of America announced at the end of 2010 that they were raising their minimum from 620 to 640, for most FHA loans.

Down Payment Requirements

When using an FHA loan to buy a home, you can put as little as 3.5 percent down. This is about the smallest down payment requirement you’ll find anywhere, aside from VA and USDA loans. This is also what makes the FHA home loan so popular among borrowers. In order to qualify for the 3.5 percent down-payment option, you’ll need a FICO credit score of 580 or higher. See the previous section for more information about FHA credit score requirements in 2011.

[See also: 20-percent down payment myth]

Debt-to-Income Ratios

A debt-to-income ratio is a comparison between the amount of money you earn each month, and the amount you spend on your various debts. These ratios use your gross monthly income, which is the amount you earn before taxes are taken out.

There are two ratios you need to know about:

  • The first one is your housing ratio, also known as the front ratio. It only accounts for your mortgage-related debt. In short, your monthly mortgage payment should not account for more than 29 percent of your gross monthly income. The math is fairly straightforward. Start with the total amount of your mortgage payment (including principal, interest, taxes and insurance), and then divide that number by your gross monthly income. If you come up with a number that’s higher than .29, or 29 percent, you might have trouble qualifying for an FHA loan in 2011. *
  • The second ratio is called the back-end ratio. It’s similar to the first, but it takes all of your other debts and credit lines into account (not just your mortgage-related debt). In this scenario, you must combine your monthly mortgage payments and all of your other monthly debt payments — car loan, credit cards, and other items that appear on your credit reports. Divide this number by your gross monthly income. If you come up with a number that’s higher than .41, or 41 percent, you might get turned down for the loan. *

* The above ratios are not set in stone. These are the general guidelines used for FHA loans, but allowances can be made for otherwise qualified borrowers. For example, if your front ratio is slightly higher than the FHA’s preference, but you have excellent credit, you might still be approved for the loan.

Debt ratios will be one of the key requirements for FHA home loans in 2011. So you should do the math now to find out where you stand. If your ratios are too high, you’ve got work to do.

[See also: Current FHA mortgage rates]

Mortgage Insurance Premiums

One of the drawbacks of using an FHA loan is that you’ll have to pay a mortgage insurance premium. Actually, you pay two premiums. There’s an upfront premium that is due at closing, as well as an annual premium that is paid monthly on top of your mortgage payment.

In 2010, the FHA made some changes to these two premiums. They increased the annual premium and decreased the up-front premium. This increases the total amount of insurance you’ll pay over the life of the loan, while lowering the up-front costs you must pay at closing. (Update: They will increase the annual premium again in April 2011.) When using an FHA loan in 2011, your annual premium will be 1.1 percent to 1.15 percent of the loan balance. The up-front insurance premium (a one-time payment) will be 1 percent of the loan balance.

Applying for an FHA Home Loan

Please note these are not the only FHA loan requirements for 2011. There are also exceptions to every rule. If you want to find out if you’re qualified for one of these mortgages, you’ll need to speak to an FHA-approved lender. This is how you would start the application process. You can find such lenders in your area on this page of the HUD website.