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Every investor’s goal is to “buy low” and “sell high” but that’s easier said than done.
For borrowers that depend on hard money lenders to finance their dream home, the time to buy may be now. Hiring at U.S. companies accelerated in October helping to lift wages and clearing the path for the Federal Reserve to raise interest rates in December 2015.
There is little doubt that subprime lenders and private mortgage lenders will follow suit. The Dodd Frank Act became effective July 21, 2010 and that new law makes it much more difficult for borrowers with bad credit to qualify for a home loan. And it made mortgage financing difficult for hard money lenders. A private mortgage lender is now required to have “third-party proof” that their borrower has enough residual income to repay their loan including principal, interest, taxes and insurance. Examples of third-party proof are (i) Form 1040 Individual Tax Returns, (ii) 1099’s, (iii) W-2, and/or, (iv) a Profit and Loss Statement from their accountant.
Unfortunately, even more laws for hard money lenders become effective January 2016. Subprime lenders will no longer be able to have a “qualified mortgage” if the loan has a balloon payment. That does not prohibit the lender from funding loans with a balloon payment. It does, however, disqualify the mortgage as a “qualified mortgage”. Therefore, many hard money lenders will discontinue loans in Houston because they don’t understand the new law.
The end result of this new law means that many (if not most) borrowers that need a loan will find it difficult to find a lender. Simply put, mortgage lenders will no longer finance one’s primary or secondary homestead. That leaves most borrowers that need a hard money loan with fewer choices.
Another reason that now may be the time to buy a new home is the shrinking inventory of homes for sale in the greater Houston MSA. Housing inventory at the end of the 2015 third quarter stood at 3.5 months. A six month inventory is considered a balanced market. Inventory is measured by the estimated number of months it would take to deplete the current active housing inventory based on the previous 12 months sales.
The smaller the inventory, the greater the demand for those homes. Because of the declining price of oil, the 2016 economic forecast for the Houston MSA is gloomy. Therefore, most home builders are reluctant to build speculative homes with such a pessimistic outlook.
Hence, there is no reason to believe that the inventory of new homes will increase.
In summary, now should be the time for credit challenged buyers who need a new home to shop. One word of caution; most of the large oil and gas companies predict oil to stay at or below $50.00 a barrel. Therefore, home values should decline in 2016.
So be a smart shopper.
A smart shopper should, (ii) make the home’s location a very high priority, (ii) negotiate with your head, not your heart, (iii) make any offer subject to residential inspections and an appraisal, (iv) ask your hard money lender for their opinion, and (v) stay within your budget.
Finally, you should also know the safeguards when selecting a hard money lender. The following website will help you: http://www.consumerfinance.gov/find-a-housing-counselor/ and type in your zip code.
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Happy house hunting,
Jim Emerson
