Tom Kelly: Rely on your research, ask what’s possible

The son of a long-time friend recently caught me at a Friday night high-school game and informed me he and his wife had turned down an older home in the neighborhood they always wanted for a new home in a subdivision.

They also declined the possibility of no-cost seller financing from the owner of the older home because the builder offered a slightly lower rate on the new home.

“We just felt like we wouldn’t have to do anything on the home for years,” Patrick said. “We couldn’t afford any expensive surprises.”

While I disagreed with him on both topics, I kept my opinions to myself because he had already made his decision and was looking forward to moving into his new home. Here’s why I would have chosen differently.

First and foremost, you can always repair or remodel a home but you can never singlehandedly fix a neighborhood. If you know the schools, churches and streets that are important to you, it’s usually best to buy where you have done your primary research. And, new homeowners often underestimate upkeep.

But just as important is the credit and cash needed to get a loan today. Lenders are being more cautious and demanding more skin in the game. Recently, Fair Isaac Co., the developer of FICO scores, revealed that 78.5 percent of all consumers have scores that fall between 300 and 749. However, FICO credit scores on all new loans closed in August averaged 750. What message does that send to new homeowners?

Besides high credit scores, borrowers are coming in with higher down payments to satisfy lender requirements. Homebuyers who used a Fannie or Freddie loan had, on average, a 21 percent down payment in August. Homeowners who refinanced had average equity in their homes of 30 percent.

Doug Duncan, Fannie Mae’s chief economist, recently said he thought that loan standards will eventually ease as banks reduce some extra risk-based fees that they have added to benchmark quotes since the mortgage meltdown.

But is there a viable Plan B? What if you didn’t have to go to a lender for a home loan?

Seller financing is an underestimated benefit not only because of today’s increased lender scrutiny but also because the buyer dodges most all the fees associated with the loan. For example, in Patrick’s case, he decided on a 3.5 percent loan from a lender rather than a 4.0 percent loan from the homeowner.

Let’s say the total costs of a $200,000 loan come to 2 percent of the loan amount, or $4,000. The monthly difference between a 3.5 percent loan and 4.0 percent loan is approximately $57 a month. Not only would Patrick have to borrow more or come out of pocket with the extra funds (in addition to the down payment needed on the house) but he would also need more than seven years to make up the monthly difference.

While many owners make “cash out, conventional” financing a requirement when selling a home, others are more than willing to negotiate price and terms. Homes are selling quickly in many neighborhoods but others continue to sit. It’s those owners that can be “all ears” if it means closing a deal and moving on with their lives.

And, some sellers, particularly seniors with no high-rate place to park their cash, are not opposed to accepting a healthy down payment and “carrying the paper” on their real estate as long as they are guaranteed a 4 percent interest on their money. In most cases, it’s difficult to get that rate in non-risk accounts.

Buyers and sellers can build in safety features to make carrying the paper palatable for both sides. If you are a buyer, there’s no harm in asking. You could save time, anxiety and a lot of cash – an inexpensive surprise.

Tom Kelly’s new E-book “Bargains Beyond the Border: Get Past the Blood and Drugs: Mexico’s Lower Cost of Living Can Avert a Tearful Retirement” is available online at Apple’s iBookstore, Amazon.com, Sony’s Reader Store, Barnes & Noble, Kobo, Borders Books, Diesel eBook Store, and Google Editions. It mirrors a recent article by CNN on the benefits of the country, including increased rental possibilities.