100% Financing

This is not going to be popular with my peers and likely with a whole lot of other people. 100% financing on a home is a bad idea. The Secretary of HUD, Shaun Donovan told builders and Realtors last week that the Feds were going to allow the $8000 tax credit to be used for a down payment on FHA loans but that has been reversed by the IRS (who is in charge, really??) but this time I agree with the IRS on the use of those funds. Read the story here if you like. The money was going to be ‘loaned’ to the buyer to be paid back once the tax credit was received. Bad Idea!!

My thoughts are that we set ourselves up for trouble if home ownership is as easy as renting. It is not supposed to be for lots of reasons. First thing I think we have to address is the qualification for getting a home loan. If you can prove income and the ability to pay back the loan it helps a lot. You also have to show responsibility that you WILL pay back the loan when you have the money to do so. That is partially measured by your credit score. The other part of the credit score is showing how much debt you carry compared to your income and if there is sufficent left over to pay your other bills. Presuming you pass those tests, you now qualify for a home loan. If we had made these tests effective for the last few years the current situation would look a lot different than it does.

Next, you have to get a down payment together. The usual way to get a down payment is to save it. An FHA loan requires 3.5% down and the buyer has closing costs to pay too. That adds up to about an additional 3% of the purchase price. The median sales price in Georgia is $209,000 and the closing costs and down payment add up to $13,585. That’s a lot of money. In that price range it is not unusual for the seller to pay some of the closing costs so that covers part of it. Even if the seller pays all the closing costs then we are looking to save $7315 to buy the house. That will require the buyer to spend less than they make and save for it. It might mean they have to buy and drive a used car instead of a new one. They might have to do without cable tv or a cell phone in order to save the money. Maybe Starbucks will suffer a bit while they save the required amount.

But there is more. Owning a home makes you responsible for upkeep and maintenance of the property if you want to preserve or improve the value as much as possible. That takes work and money. Not everyone is cut out for all this. We call people who aren’t cut out for it ‘Tenants’ or at least we should.

I am going to stop cause I am starting to sound like my dad. First time home buyers are where we have to start if we are going to get out of this mess anytime soon. Depleting the current inventory will take a while as we pour more foreclosures into this market. New construction is down and that is a good thing for now while we use up the existing inventory. It is getting better but if we are not careful we are just going to get in trouble again way too soon.

It took time to get here and it will take time to get out. There are great deals out there and some people who are ready for it will profit greatly for their effort. If you are a first time buyer looking to win then save your money, buy what you can afford and save the tax credit when you get it. Hopefully you won’t need it but if you do it will be there.

Thanks for listening,
Jerry W. Robertson

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