Henry Bemis: “And the best thing, the very best thing of all, is there’s time now… there’s all the time I need and all the time I want. Time, time, time. There’s time enough at last.”
[Henry goes to pick up a book, but in doing so his glasses fall off and break. He slowly raises his glasses to his face, seeing they are completely broken]
Henry Bemis: “That’s not fair. That’s not fair at all. There was time now. There was, was all the time I needed…”
– “Enough Time at Last” Quote from Rod Serling’s television series, The Twilight Zone
As mentioned in the first post in this series, there are two general types of Payment Shock that affect homeowners due to the rapid increase of payment obligations. We’ve covered the first extensively, but the second is less known, and there are movements afoot to abate the issue as we speak. We’re talking about:
First Time Home Buyer Payment Shock
Just to give a rule of thumb to your ideas of what would constitute a Payment Shock to a first time home buyer (FTHB); most A lenders use 200% mortgage payment increase compared to the current rental obligation in their calculations, especially when a borrower’s income is not fully documented, B or C lenders might allow up to 300% or even 400% or even waive the requirement altogether. This is a good way to issue a foreclosure, and we like to avoid those . . . . . .
There are various reasons why someone might endure this kind of increase in obligations, and why there is more tolerance for it, and more risk too. In a rental situation, owing to the lack of tax benefit, combined with the obvious lack of appreciation in a rental, most people spend significantly lower sums and percentages of their income to rent a home or apartment.
One of the greatest shocks of homeownership obligation is the property taxes. In Florida where the homestead laws cap local tax assessments at 3% annual increase, the FTHB distress has become dire. Many FTHBs have no inkling of what’s coming and are poorly equipped to read their way out of it, having been swamped by the 100 pages of fine print in the first place. If you examine Florida’s Property Tax Disclosure, it’s very brief and doesn’t cover all of the in’s and outs. Another resource that most FTHB’s don’t know about is the wide availability of estimators at sites posted by the County Property Appraisers.
Typically, most of them do not know when taxes are not in escrow on the year that they purchase their homes and wind up with a tax bill that very same year, increasing their monthly obligations by 20% above expectations off the bat. Then, the following year, the localities adjust their taxes up to their market rate purchase and the joy turns to frustration or grief. That 400% tax bill increase is enough to sink their hearts (and wallets), and lands completely out of the blue to most FTHBs.
Further increasing the likelihood of Payment Shock is that the percentage of population that owns homes is skewed in favor of married couples. A sizable percentage of first time home buyers are recently married, or long time renters who have discovered the advantages of home ownership. According to the November 2001 issue of U.S. Housing Market Conditions published by HUD:
Historically, homeownership rates have been highest for households headed by married couples. The 1999 AHS, a national survey of the housing market funded by the U.S. Department of Housing and Urban Development and conducted by the U.S. Bureau of the Census, shows an 81.1-percent ownership rate for married couples, compared with 33.8 percent for households headed by separated individuals and 51.6 percent for households headed by singles (never married, divorced, or widowed).
Sometimes, people ask for it! In our example, a foreclosure waiting to happen arrived in the way of a FTHB, whose loan was declined . . . . This first timer is a former Mortgage Brokerage Business owner, (you’ll meet more of them like he in coming months, I suspect) who was unfamiliar with the term Payment Shock. This gentleman had the audacity to request that I obtain for him a 100% financed purchase money loan for $2,000,000 to buy a home down the street from our offices at Morningside Mortgage Corporation as his first purchase.
As one of the industry terms that I think most ordinary folks can take a guess at, but my former business owning potential client (being a non-permanent resident and new to this country) had never conceived of the notion that raising a person’s obligations dramatically might create significant financial and psychological implications within someone’s life.
After asking this esteemed gentleman a few additional questions about his monthly obligations, it came out that his current rental payment is $1600 a month! Total Payment Shock = 1100%. Imagine!
There are unscrupulous persons in the lending industry that might ignore that fact and waste his time, their time, a banks time, or worse, a couple of million dollars of the banks money trying to make it fly. This is why it’s a good idea to shop around or look for a professional referral to obtain a home loan. Even some of the supposed gate keepers may not be the most informative chaps.
Check out our next column on Wednesday for a primer on Conforming loans and Government Sponsored Enterprises (Fannie Mae). Before long, you’ll be searching the back pages for news on OFHEO . . . .