It’s a fact buying a house today has never been more affordable. Low house prices coupled with record low mortgage interest rates have made purchasing a primary residence, second home or investment property very appealing for many. Unfortunately, many purchase transactions fall out of escrow, some buyers are unable to qualify for mortgage loan financing and others simply can’t get their offer accepted.
In a world dominated by bank owned property (foreclosures), distressed sales such as short sales, and more competition from other home buyers, buying a house requires skill, a little bit of luck and a lot of planning, but most importantly successfully being realistic and having expectations in sync with the market.
Following are the top 10 reasons why you cannot buy a house in today’s real estate market.
10. You have large cash deposits going in your bank account that you cannot paper trail. Getting mortgage loan financing? Be prepare to source all cash deposits and transfers into any bank account. Are you doing side jobs? Do you get regular cash deposits going in your bank account from a friend or from a family member? All deposits and transfers from other accounts will need to be sourced.
For example, a common occurrence we see is your regular paycheck income is deposited into your primary checking account of which you also pay your normal monthly bills. Each pay period you transfer money from your checking account to your savings account in an effort to save money. Then at the end of the month depending on how bills are paid, you transfer money back to the checking account from your savings account. If you are planning on using the savings or the checking account asset for your down payment the mortgage lender will require letters of explanation about the transfers back and forth and will require two months bank statements on both accounts. The reason mortgage lenders play detective on large cash deposits is due to a federal mandate imposed lenders and banking institutions known as the Patriot Act legislation of 2001.
9. The gift gift money and/or down payment cannot be sourced. Getting cash $$ from mom and dad to purchase a house? That’s great, here is what they will need to provide so you can secure a home loan stress-free:
- Signed gift letter stating the money is truly a gift
- Will need to provide a full bank statement with all pages showing they had the ability to gift you that money
If you have any funds being used as a contribution to the transaction, they must be in the bank for a period of two months. This two month window is referred to as seasoning. Mom and dad should talk with your loan lender.
8. Your debt to income ratio is above 45%. Any mortgage loan program that you are going to be using for buying a house, even as a first time home buyer or move up buyer, will be predicated on having a debt to income ratio at 45% or lower. Some programs such as government loans on a case-by-case basis, allow for debt to income ratios above 45%. A debt to income ratio, DTI for short, is the amount of new monthly house payment plus other reoccurring monthly debt divided into your gross monthly income. The DTI is the barometer of the percentage of gross monthly income that goes to liabilities as an assessment of risk.
Here’s the equation:
proposed mortgage payment + all minimum monthly debt obligations ÷ gross monthly income = DTI
Gross monthly income × .45 (represents 45% debt to income ratio) − all minimum monthly debt obligations= maximum total mortgage payment the borrower can qualify for
7. Your self employed and show losses on your Schedule C to save on income taxes. Your cannot have your cake with the tax man and eat it too and expect to qualify for the maximum house price. If you file your income taxes as a sole proprietor business, Schedule C.type individual and you would like to purchase a home, be prepared to show strong positive figures on any one of the following Schedule C. line items ( note this will likely cause you to pay more in income taxes-do consult with a tax professional)
- Line 31 net profit ( business use of the home can be added back for income qualifying)
- Line 12 depletion
- Line 13 depreciation
Mortgage companies will look at your Schedule C.to compute income. Showing big losses in order to save on taxes will reduce your purchasing power and will likely reduce your home buying expectations. If you do take such losses, because of your unique personal financial situation, consider the possibility of going with a co-borrower to increase the income for necessary for buying more house. Another possibility is to pay off debt to qualify which will also increase your purchasing power.
6. You take 2106 business expenses on your tax return. You’re a W2’ed employee and you personally pay for business-related expenses out of your own pocket. For whatever reason your employer simply does not reimburse you for the use business expenses. No problem, the tax man will reimburse you at the end of the year by claiming these on your federal income tax return in the form of 2106 business expenses. Sounds great right?
Here’s the RED FLAG
Lenders calculate 2106 business expenses as a debt.
Let’s say you spent $10,000 in the previous calendar year on business-related expenses and you’re claiming them on your federal income tax return. The lender will take this annual expense and divide the amount you claimed over 12 months into a monthly figure of $833.33 per month. The lender will look at this as a debt!!! This is a big deal because it significantly reduces your purchasing power and your ability to qualify for the mortgage loan program you were gunning for.
The reason it reduces your purchasing power is because this raises your debt to income ratio and increases the risk the lender is taking by providing your home loan.
5. You needed a seller credit for closing costs and didn’t get it. Many buyers today, especially first-time home buyers, are short on cash to close and need seller concessions for closing costs. We recommend a 3% credit for all closing costs including recurring and nonrecurring items. Reoccurring closing costs include such things as mortgage interest and property taxes and nonrecurring items include items like title insurance and one time fees such as recording, etc. So if the purchase price is $300,000 for example, that’s $9000 needed in closing costs in addition to the down payment.
Let’s say you make an offer with your real estate agent to purchase a home and you make your offer for $300,000 with a 3% seller credit. If the seller comes back and is not willing to negotiate and accepts your offer at $300,000 without the credit for closing costs. You can still buy a house, but you’ll need your down payment plus an additional $9000. The additional $9000 and/or the down payment can come in the form of a gift from another party.
4. You think the grass is greener on the other side. If you cannot make up your mind about what mortgage lender or mortgage loan program you’re going to be going with and you have an accepted offer to purchase a house, you need to do one of two things: 1. Commit yourself to working with a lender 2. Cancel the contract because you can’t decide which lender to work with.
In other words, you don’t want to be indecisive on the mortgage loan program, the mortgage lender or the interest rate when you have an accepted offer and are ready to close escrow within 30 days. The mortgage loan shopping should be done prior to getting into contract, so when you get into contract to purchase a home you are ready to roll. The grass is not always greener on the other side, after you lock your mortgage rate you might see interest rates advertised lower someplace else. Jumping ship and switching mortgage lenders mid-process in a search for a slightly lower rate of interest greatly jeopardizes not only the whole entire transaction, but also your earnest money deposit that you likely put in to escrow when you made the offer to buy a home in the first place.
3. Your house has structural and/or pest related issues. These things happen no matter how good you try to do your preventative work upfront. So be ready for it. If you are going with a government mortgage loan for your home purchase, you will be subjected to slightly higher appraisal standards than if you were going with a conventional mortgage. Ideally, you’ll want to have your real estate agent find out whatever is wrong with the property up front to mitigate any issues down the road. After the appraisal report is completed as long as there is no “subject to conditions” you should be good to go with your loan. If the property has pest issues and/or structural related damage that cannot be cured by the seller, and as long as you can obtain mortgage financing, you can still move forward. These vary on a case-by-case basis so be sure to have a conversation with your mortgage professional and agent.
2. You have difficulty competing with multiple offers and stronger buyers. In many markets, every home on the market is either a short sale or an REO (bank owned property). These properties have multiple offer situations almost every time and are quite frequent in purchase price ranges from $100,000-$400,000. If you are preapproved, or want to get preapproved purchase a home, know the competition. Supply is low, creating strong demand, thus increasing competition from other buyers as well as all cash investors. In multiple offer situations, you’ll usually be required to submit your highest and best offer at some point and the seller will usually go with what they feel is the most qualified offer.
So how do you compete? Well ask your mortgage lender if they can close the transaction in under 30 days. This increases your negotiating ability and puts you in a stronger offer position. Can you put 20% down? Strange as it may sound, a 20% down offer is is stronger if the purchase prices is slightly lower than a lower down payment offer with a higher purchase prive. Think you don’t have 20% down? Ask mom or dad or the grandparents. You might be surprised to see what they say. Remember if you’re going with conventional financing, 5% of the down payment must be from your own funds.
Have your real estate agent run comps on the house up front and include a letter to the seller and listing agent with each of the homes around the area that have sold along with the various purchase price ranges and have them explain in detailed letter why the offer you are making is a realistic purchase price. This takes perception of the value of the property out of the equation and relies solely on the facts. Make an offers is a numbers game. Best to to be consistently making strong offers on homes in order to win.
1.You have unrealistic purchase price expectations. We see this time and time again, buyers who are very particular about what they’re looking for. Here’s an example in Sonoma County, a home buyer looking for a three bedroom two bath house with the minimum square footage of 1800 ft.² on 1/2 to 1 acre lot size for no more than $300,000. Unfortunately, when such a unique parameter is set, it limits the amount of available properties you’d otherwise be looking at and reviewing. If such a property came on the market, it would be so far and few, and so infrequent that might be every few months for such a property to hit the marketplace, then you have to consider the heavy competition from other buyers which would inevitably drive the price of the property up. In other words, you need to be willing to adjust your purchase price, down payment, square footage, lot size, and location of the home that you’re looking for if you expect to close escrow on something. Many times it takes multiple offers on several different homes for this to ultimately resonate. A good real estate agent should be able to advise you of the reasonableness of your offer.
If you would like to get prequalified to buy a house, fill out our online prequalification form. It’s free and there’s no obligation. We can work with you to cover all the factors that would prevent you from being able to successfully close escrow. Use the Top Reasons Why You Cannot Buy A House to succeed in today’s market.
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