- The Washington Times - Friday, July 18, 2008

Like everyone grappling with soaring gas and grocery prices, potential home buyers are feeling the financial crunch. Many have felt stuck, unable to sell their current homes and fearful of applying for a mortgage amid talk of stricter rules and requirements.

Area real estate experts say the current financial picture has made it much more challenging for local buyers to obtain a home loan, but there are still great opportunities and creative solutions available.

Mary Healy, a Realtor with RE/MAX Premiere Selections in Potomac, says the reality is that it is much trickier for buyers to secure a loan in the current market. She says buyers must have strong credit and a stable job, as lenders are carefully scrutinizing applications.

“Frivolous loans were given to people. They had a bunch of lemons, and now they only want the cream puffs,” Ms. Healy says.

She says many buyers are laying low, skittish that they may encounter glitches, so they don’t even try to apply for a new loan. For one of her listings, the buyer had a tough time acquiring a loan, even with a tax return, because he is employed by his brother. Ms. Healy believes the lenders were concerned that the applicant’s brother would inflate the length of his employment as well as his salary.

“We had to postpone the settlement for two weeks,” Ms. Healy says. “He had to call a number of lenders,” to find one that would work with him.

Simply put, the availability of credit has been tightened because most banks are looking for ways to reduce the amount of risk in the transactions.

“It’s more important than ever for clients to have excellent credit scores and down payments appropriate for the programs they’re looking at,” says Dominic Turano, president of the Washington DC Association of Realtors.

In spite of the frustrations with which many potential buyers are contending, local Realtors say low interest rates combined with plummeting house prices and recent Federal Housing Administration(FHA) guidelines have opened doors to allow many buyers to consider homes previously out of their reach.

“Prices of homes have really come down,” says Deborah Pestronk, a Realtor with Coldwell Banker Residential Brokerage in Reston. “We are starting to see things opening up for people who were sitting on the sidelines.”

For example, she says, in Fairfax Station, homes that cost about $900,000 two years ago are now available for $775,000. In Reston, buyers could not have found a single-family home for under $475,000 two years ago.

“Today, they can find many” in that range, she says.

For those buyers willing to navigate the complex loan process to take advantage of these more affordable prospects, FHA loans have become the preferred tool, according to local mortgage experts. In March, as a result of the enactment of the Economic Stimulus Act of 2008, the FHA loan limits were temporarily increased. The current loan limits range from $271,050 to $729,750. The maximum amount of $729,750 is available only in high-cost metropolitan areas, including the District. Previously, the FHA’s loan limits in this area were capped at $362,790.

Steve Salvatore, with Preferred Service Mortgage based in Vienna, says most of his current clients are going with traditional tools such as FHA and Veterans Affairs (VA) loans, rather than less conventional interest-only products. For example, he says he recently worked with a client moving to the area from Florida who had filed for Chapter 7 bankruptcy a few years ago. He was able to obtain a jumbo FHA loan for $530,000.

FHA requires a minimum credit score of 580, and these loans permit the use of appraisal forms with no additional documentation. In addition, the home buyer and seller, individually or jointly, can pay closing costs as agreed to in the sales contract. Another perk of the FHA loans, Mr. Salvatore says, is they allow for the use of gift funds of up to 6 percent of the purchase price to pay for the down payment and/or closing costs of the home, through nonprofit corporations such as AmeriDream Inc.

The seller or a family member donates money to the nonprofit, which then provides these gift funds for the down payment to the buyer.

Mr. Salvatore says that, although this tactic ultimately lowers the net profit for the seller, it makes the offer more attractive to potential buyers.

“There are a lot of properties on the market, and when competing, that is one of the ways you can separate yourselves from the others,” he says. Mr. Salvatore says that skeptical buyers need to realize that the housing market is constantly in flux, so if they want to take advantage of current options, they shouldn’t wait to see if the rates go down further or if the market turns around.

“We’re in for more gyrations,” he says. “It’s cyclical. I counsel clients to find a window with [interest] rates they are comfortable with, and go with it.”

Mortgage experts also say that, if potential buyers feel jammed because they can’t sell their primary property before buying a new one, renting their current house is a smart answer.

Felicity Dean, a mortgage planner with Washington Capitol Financial Corp. in Vienna, says that, although people often are leery of this option, they need to view their house as an investment, and renting it is a sound way to handle this asset.

“Renting allows you to balance your portfolio and have positive cash flow,” she says. “It’s a money-making opportunity.”

Ms. Dean says buyers also should consider purchasing foreclosed properties using the FHA or VA options. She says there are also FHA options for homeowners who need work done on their home who would like to roll the costs of improvements into a refinance.

“Similar programs exist for those who have found a wonderful deal in terms of a purchase, but the home needs a lot of work,” Ms. Dean says.

In this case, borrowers can add the cost of improvements into the purchase price. For example, Ms. Dean said she worked with a client who was able to purchase a foreclosed property in Prince William County that would normally sell for at least $600,000 for $200,000. The house needed much attention, including drywall replacement and repair to the pool, but the buyer was able to roll all of these costs into the purchase.

Ron Sitrin, Realtor with Long and Foster Real Estate Inc. in the District, says he also recently worked with a few clients who couldn’t purchase a home because they were unable to obtain financing due to stringent guidelines. He believes the trend toward using FHA loans is a positive change that has injected some much-needed energy into the sluggish market.

“I haven’t done an FHA loan in 10 years; the limits used to be around $400,000,” he says. He says the new FHA guidelines and limits are “the best thing that has happened” in the market in a long time, but he reminds buyers that the current FHA provisions expire in December.

“Buyers have six months,” he says.

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