» Mortgage Financing for Home Buyers Moving Up - A New Model-Silicon Valley Real Estate Blog, Bay Area: 1SiliconValley.com

[Steve Leung: I’m proud to introduce this article by my friend Dan Noble, a mortgage expert with 26 years of financing experience. The real estate financing world is obviously a different place now, especially for buyers looking to move up, and Dan describes some of the changes.]

It’s Sunday morning, and the coffee you’re sipping not only smells great but tastes extra good. Your husband has the main section of the paper and you have the real estate section: it’s been your habit since the two of you have been so captivated by all the great deals everybody has been talking about.

Sure enough, once again this week’s paper is filled with even more and now new home builders have joined in big ads.

You’ve had your first home for a little over 4 years and the original plan was to hold it for five and leverage into another, moving up the quality of living scale. Appreciation was part of that equation and although there’s been some recent deterioration in value, the property is worth nearly half again as much as you paid for it. The two of you have secure employment and last year’s bonus was the biggest ever. Your 401k is building and the company matches your contribution.

Life looks really good right now but will it continue, what about all this trash about the economy and the bailout, and what’s up with banks that even you recognize failing, what does that mean with new home financing?

I own a personal finance coaching and consulting business named Satori Alliance. Having 10 years experience selling real estate, 26 years financing it, and 4 years working strictly with real estate investors, please understand THIS IS A DIFFERENT GAME than ever before.

If you think about it, act, or have the same expectations as before you will soon be boarding down a black diamond slope with an avalanche behind you that you cannot outrun! Here are some of the changes that you need to consider.

Today’s move-up buyer has the same thoughts as always. Sell this one buy another and keep going. “Sure it’ll be a bit tougher today but we can deal, and besides the built-in value we get will be worth it in a few years.” This is what a recent client said as we began our long discussion of what they needed to do as a well qualified buyer in today’s market. See “A Turn Down Day” for their story.

Credit

The credit scoring system has just been changed, maximum scores have been increased and all lenders are uncertain what impact that will have on a buyers score, and how they will interpret the risk. Ask yourself these questions:

Have you made all you payments on time?
Paid any late charges or payments in the last 12 months?
Are your balances on those cards high enough that your score decreased?
Do you have too many new credit accounts (you know, the ones where they give you 0% interest if you just transfer your other card balances to them?
What is your median score anyway and did you know that what you could do two years ago now requires at least 50 points higher in score to accomplish – do you have it? If not, how can you get it and how long will it take?

There are 50 more questions that have become intricately relevant I could ask that you could likely answer, but with those answers, how can you responsibly prepare yourself?

Collateral

This would be the property, not you or your financial condition. Lenders today care more about the property than any other single issue. More questions:

Is it in an area of declining value, how severe, for how long?
Is the condition acceptable to the lender? How about buying a Short Sale, Foreclosure, or an REO, that’s where the real discounts are what does it take in time, expertise, and patience to accomplish these. What are the risks of buying bank owned property and for how long?
Is the roof or plumbing too old and will it need to be replaced before you can close on it?
Will you need to pay for 1, 2, 3, 4, 5, 6, or 7 appraisals, you may depending on how you personally do your business and who you hire.
What will you need to repair prior to closing that has never been required before and what will that process cost you, how much time will it take, and will your ream anticipate this in you escrow time?

Needless to say a property in a declining market condition, and most are, will require a more sizable down payment and the terms of your financing may be impacted. How can you responsibly prepare yourself for this new paradigm?

Capacity

Finally we get to your personal finances and what they look like but not to you, to your prospective lender. Oh, by the way, lenders on the brink will have tighter standards for qualification than those who are clearly solvent, choose wisely. For your final set of questions:

What is your two year income history and how will you prove it with 3rd party documentation that will pass lender scrutiny?
What income to debt ratio’s will you need to have to qualify for that move up property?
How much increase over your current monthly payment can you have before you will be declined for new financing?
What kind of liquid assets do you have and how many months of total new monthly payment (principal, interest, taxes, and insurance) will you need to have AFTER you close the deal?
What kinds of loans are available and who is offering them, really, I mean, is the money really coming from the lender you think it is and does it matter? It does if you’re interested in peace of mind after you close.

Each question in all 3 sections above have answers, sometimes several, and each of those answers prompts other questions again with several answers. Today’s lending landscape paradigm is 100 times more complex than ever before. Previous knowledge is useful and will be like a machete in the jungle but only if you hire a professional experienced guide educated on the 14 months of new regulations and their impact on your situation. (See “I’ve Had It Up To Here”.)

Advice and Coaching

Time – Be sure you safely have enough to get from here to there without unforeseen obstacles costing you money or killing your chances.

Planning – This is the most crucial and requires a specific sequence of event and professional involvement. Do not try this at home!

Trust – Sincerity, reliability, and competence are the elements of trust. Trust is an assessment you make about another. If any of these 3 elements are missing, the assessment of trust is merely hope. One must make a promise and deliver on time for you to trust unless you rely on the recommendation of someone you do trust. Trust carefully!