A Financial Black Hole

Short sales and foreclosures are an unfortunate reality today.  With many homeowners already distressed and credit scores already impacted by late payments, how can you repair the damage caused by a short sale or worse yet, a foreclosure?  What happens when the speculative housing bubble of yesterday turns into the housing crisis of today and job losses or unexpected medical expenses complicate matters further?  Is there any escape from the financial black hole?

Any level of debt can weigh heavily on even the most fiscally responsible person. Whether you want to get rid of some credit card debt, pay off your car, buy a new house, refinance your existing home, or recover from a short sale or foreclosure, this can sometimes feel like such an enormous task that it can seem insurmountable. But it really doesn’t have to be.

Understanding a Counterintuitive Process

Everyone knows that late or missed payments can lower credit scores and that can make it difficult to obtain new credit.  But did you know that having and using too much credit can have the same affect, even if you’re making all your payments on time?  Some sources, including politicians, indicate that the average American family carries a credit card debt load of well over $8,000.  If you are lucky enough to have been given $10,000 in credit but your available balance is now less than $2,000, it’s likely your credit score will be as low as someone who has missed or late payments.  The closer you are to your credit limits, the more likely your credit score will be negatively impacted.  Regardless of your financial status, if you’re not managing your credit properly, you could be in a similar situation.

Short sales will negatively impact your credit, although not as long or as bad as a foreclosure.  Missed payments on any reported debt will have a negative impact on your credit score.  So before you get too far in setting your goals, make sure to establish and develop a plan around paying off your debts while increasing your credit score.  This process can be a little counterintuitive. For example, an increase in your credit score does not automatically happen as the result of eliminating debt.  In fact, if you are not careful, it can actually have an opposite effect.  If you’re trying to increase your score, reducing the debt to a little less than 50% of your total balance will get you there faster and more effectively.  Read up on how credit bureaus determine your credit score. 

Setting and Identifying Your Goals

Setting a financial goal is not that difficult to master.  The key to successful goal planning is to keep it simple.  Your goals should be specific, realistic, and definitive.  Start with the most obtainable goals and write them down, one by one.  Lofty goals will set you up to fail before you even get started so be reasonable with your expectations.  Give each goal a starting and ending date.  Be realistic about meeting those deadlines or you will become easily discouraged and possibly give up before you ever have a chance to win.  No matter what your current situation is, having a clear and concise plan, and sticking to it, will be the key to your success.

It’s really important that you understand not only what you want to accomplish but how you are going to get there.  Knowing your ultimate outcome will really help you stay on track and not lose focus of why you are doing this in the first place.  To properly identify your goals start by asking yourself a few questions.  Here are some to help you get started:

• What do you want to accomplish?

Write down your desired outcome.  Whether you are paying off a card to eliminate debt completely, or paying down a card to show greater available credit and consequently increase your score, stay focused on the end result.  This will make the task easier.

• When can you start working towards your goals and how long do you think it will take to get the results you want? 

  If you plan properly you should be able to determine the right time to start working on the specific goal in mind.  Give yourself enough time to obtain the results your looking for and set yourself an end date.  Having an end date will keep you more focused on the prize. 

• How will you obtain the additional funds to put towards your goals? 

  Consider the various options available for obtaining the funds you will need to meet your goals.  Borrow from an already healthy savings account, reduce unnecessary expenses like frequent dining out, get a part time job, or find a roommate with whom to share expenses.

• What’s your WHY?  

  Probably one of the most important questions you will ask yourself.  Your “why” will keep you focused and help you stay on track. It’s the “eye on the prize” that keeps most people away from temptations.  Write it down on a piece of paper and put it in a place where you can read it every day.  Make it a part of your screensaver as an ultimate reminder of why you are working so hard to reach your goals.

Break it Down In to Smaller Chunks

Being realistic will stop you from setting too lofty a goal.  Like anything else, if you take on too much it will quickly become too big to manage, particularly when looking at your debt.  A credit card that has a balance of over $8,000 may seem impossible to pay down.  But if you plan on paying off $4,000 over a 6 month period, that only breaks down to a little over $600 a month.  Suddenly that seems like something much more manageable.  Focusing on how to get the extra $600 a month instead of how to find $4,000 will make the process a little less painful and a lot more attainable.  Creating your action plan just got a lot easier.

Creating and Implementing Your Plan

Most people don’t realize how much unnecessary money they spend per day.  Take a long hard look at your spending habits.  If you are visiting your favorite coffee shop every day that might be something you can consider cutting back on temporarily.  It may not seem like much on a daily basis but those coffees can add up, from $90 to over $120 per month.  If you work in an office and go out to lunch from Monday through Friday, you are probably spending about $8.00 to $10.00 a day, or $40 to $50 a week.  That’s $160 to $200 a month.  Still can’t find enough money to meet your goals?  Consider getting a roommate for a while.  You can find yourself getting much closer to your obtaining your ultimate outcome in a shorter amount of time.  The sacrifices you make might well be worth the results. Keep an open mind through the planning process.  Be honest with yourself and really examine your spending habits. 

Once you have created your plan, don’t waste any time getting started.  Keep site of your start and end dates and stay focused.  Create a spreadsheet so you can monitor your progress.  That in itself will keep you motivated to keep going.  There are also a wide variety of excellent sources available online to help you manage your money, track your credit, and get you one step closer to financial freedom.  Don’t lose sight of what you are trying to accomplish.  And as difficult as it might be, don’t let those small temptations keep your from obtaining the much bigger prize – financial peace of mind.

Light at the End of the Tunnel

The long and short of it is that there really is light at the end of the tunnel.  It may not seem that easy or even that attainable at times.  But regardless of where you are, the best approach to reaching your goals is to create specific, achievable, and realistic goals, stay positive, and focus on the what and how not the if.  Some challenges may take longer to overcome than others, but don’t let that discourage you from taking action now.  The longer you wait, the longer it will take to see some results.

Denver real estate has become a popular option for buyers because Denver is widely considered one of the most athletic cities in the US and it’s easy to see why. The predominance of prime outdoor leisure locations and facilities sets the Denver metro area apart from most other major cities in the country. When considering Denver Homes and Denver neighborhoods you can rest assured that the outdoor leisure options will be plentiful.

With many Denver area homes offering quick access to the Rocky Mountains, the neighborhood of Highlands Ranch is an obvious option for anyone seeking to take advantage of Denvers proximity to this expansive playground.  Luckily, the opportunities don’t end there. Many neighborhoods in the Denver metro area have miles of dedicated running and biking trails. In some instances these trails snake through multiple neighborhoods connecting some of the many parks and open spaces.

The expansive neighborhood of Highlands Ranch is a great example of a community that prides itself on exceptional recreation facilities. In addition to over 60 miles of concrete, gravel and single track trails for walkers, runners and cyclists there are more than 20 parks of various sizes offering amenities including tennis courts, fishing, skate parks and playground equipment. During the months of November through March an ice rink offers open skating times, skating lessons and kinder hockey. The jewels in the crown of the Highlands Ranch Community Association are four recreational facilities offering over 320,000 square feet of amenities including meeting space, basketball courts, indoor running tracks, swimming pools and workout equipment. These facilities also accommodate many community events ranging from wine tastings to the popular murder mystery theater and bazaars to running & triathlon series events. A BackCountry Wilderness Area consists of 8,200 acres of wilderness including areas dedicated to recreation.

When considering the purchase of Denver real estate buyers looking for extensive recreational amenities should consider looking at Highlands Ranch homes. Highlands Ranch has been recognized by Forbes as a top place to move in the nation. Business Week named Highlands Ranch one of the top locations in the nation to raise children in 2010.

Finding a number of perfect homes for sale in Denver is usually the first step in a buyers’ journey through the home buying process.  Taking the necessary steps to prepare for your upcoming purchase should be the very next thing you do before you get too far in the process.  The excitement of purchasing a home can become a quick downer if you’re not prepared.  Your credit report could stop you dead in your tracks.  Your initial eligibility for a home loan will be determined by a quick glance at your credit report.  This is your credit “report card”, if you will.  Lenders look at the scores given to you by each of the three major credit bureaus.  They will consider your highest and lowest scores in determining your eligibility for a home loan. 

Let’s back up a bit.  Every time you make a payment or miss a payment with any of your creditors, the information is reported to a credit bureau.  There are three major credit bureaus and it is possible that different creditors may report to different bureaus.  So if you have credit with XYZ Company and they report to say, TransUnion, you may not see that debt on the other two bureau reports.  Mortgage lenders want to get a good picture of your debt to income ratios; after all they are lending you quite a bit of money.  By pulling all three credit bureau reports, they will have a full snapshot of your overall credit health.  If you don’t like surprises, it might be a good idea to get this information for yourself before you talk to a lender.

I don’t have to worry because my credit is perfect!

Yep, I have heard this one before.  Did you know that even if you have never in your life missed a payment, your credit score could still be low?  Even if you have a clean credit report, meaning you have never had any late, or missed payments, your score may still not reflect that you have been a responsible credit holder.  In fact, your score might even be as low as someone who has missed payments over and over again.  How is that fair?  It’s not.  But the credit bureaus consider the ratios between your “credit limit” and your “credit available” as a means for measuring your risk factor.  The lower your balance available, the lower your credit score, and the higher you are considered a risk.   As a general rule, you should probably maintain about 30 to 50% of available credit on each card in order to avoid becoming a higher risk.   

Similar to checking the value of your home periodically, checking your credit can help you achieve better credit health.  Credit bureaus offer monthly subscription services that will send you notifications when there is a change in your credit history, an inquiry or a credit score change.  This will also allow you to never miss an item that may have been erroneously posted on your credit report.  This is common with popular names.  In the last year I’ve had two clients that found someone else’s credit mess on their own credit reports due to name similarities. 

Fixing credit errors found on your report or learning how to improve credit may or may not be easy to do.  You’ll want to make sure to address any issues up front rather than risking a credit rejection or even delays in closing due to false information on your credit report.  It is wise under any circumstances to keep an eye on your credit but it is even more important if you are considering a home purchase.  Whether you are a first time buyer or you are in the market for a second home, your credit will have an impact on the way a lender sees you.  Check your credit before your lender does so you know what to expect.  To get started, here is contact information for the three major credit bureaus:

If you are a Colorado resident, you are allowed a free copy of your credit report annually.  Check with your state on local laws.

The Difference between Comparative Market Analysis, Market Value, and Appraisal Value

One of the most commonly misunderstood things about the Denver real estate market is how the value of a home is measured.  Denver home values can be determined by using either the market value and appraisal value method.  Many factors go into each of these methods but only one is partially driven by emotion.  A Comparative Market Analysis or CMA , offered by Realtors to Buyers and Sellers, is often more a reflection of market value than appraised value. Make sure you ask for a CMA before you decide to buy or sell your next Denver home.

So, can there be a great difference between market value and appraised value?  In a more stable market, there really should not be a great variance between the two.  In a sellers’ market you might often see the market value of a home be higher than the homes actual appraised value.  This happens when there are more buyers than homes available and nicer homes receive multiple offers.  In a buyers’ market it is possible to see the appraised value of a home come in higher than the market value.  This might happen if there are too many homes on the market and a lower number of buyers.  Typically, buyers have their pick of homes in this market environment and Sellers are eager to sell their homes ahead of their competition.  Tough, negotiating buyers will offer less and demand more.

Market value

Market value is the price that a buyer is willing to pay for your property.  The interesting thing about market value is that it really reflects desirability.  In today’s market this translates into stainless steel appliances, granite or custom stone countertops, cherry or maple cabinets, stone or wood floors, a professionally finished basement, and views.  For years I have always explained market value as more like being “perceived value”, value perceived through emotions and point of reference. When a buyer walks into a home and “falls in love” it’s always an emotional response to something.  Point of reference is what you’re used to and reflects how you might compare things.

Appraised value

Appraised value is what an appraiser determines your home is worth.  This is an unbiased opinion of price and determines how much a bank will lend you to purchase this particular home.  An appraiser uses a variety of factors to appraise your home.  These include but may not be limited to location, upgrades, and historical data of recently sold homes in your neighborhood.  A few years ago that meant looking at homes that sold within the last 6 to 12 months.  Today that means looking at sold homes in the last three months and within a shorter distance from the listed property.  A mortgage lender won’t lend the buyer more than the appraised value.  So if the purchase contract is more than the appraisal value, the buyer would need to come up with the difference.  Alternatively, if your Realtor has done their job, there is an appraisal contingency in your contract which provides the buyer with a way out of the contract without the loss of earnest money. 

Comparative Market Analysis of CMA

As the name suggests, a CMA compares the value of your home with similarly appointed homes in your neighborhood.  The data, combined with a value for upgrades and/or additions, help to give an accurate picture of your home’s worth.  Similar to “market value”, a CMA is market based information gathered by looking at comparable properties within a specific period of time.  A typical CMA lists properties side by side as a means to compare the size of the home, number of bedrooms and baths, basement type and finish, lot desirability, views, and upgrades.  A good CMA is an accurate measure of your home’s worth.

This brings to mind a home that I sold in Highlands Ranch a few years back.  We were in a somewhat stable market, maybe leaning a little towards a buyers’ market.   I had found a gorgeous home in a Highlands Ranch neighborhood that I thought my buyers would just love.  It was a favorite floor plan of a particular builder and the same plan could be commonly found in other parts of the Ranch.  Higher end subdivisions showed sales of the same floor plan selling for higher prices.  This is yet more proof that location prevails above all else.

After seeing many homes, my clients felt this one stood out for a few reasons.  In their price range, this home afforded them the WOW factor they could not find in any other home priced the same. This Highlands Ranch home had some amazing views but was still priced grossly higher than similarly appointed homes in the same neighborhood.  And most of those had finished basements where this one did not. This was considered a more moderately priced area and yet this home was priced even higher than the same floor plan in the higher end neighborhoods.  Justification for the price difference were the “million dollar views” this home offered.  Despite popular belief, “million dollar views” do not equate to a $100,000 to $150,000 price difference.  Being that location is once again the prevailing factor here, this was not a good measure for assessing this homes value.

I advised my clients of the comps but they were emotionally vested in the home at this point.  I recall they were not happy with my assessment of the value and they even argued they should pay more for the home.  Looking out for their best interest, I reviewed the comps with them again and once again explained the state of the Denver market at that time.  After lengthy discussions and some negotiating with the sellers, they came to an agreement in price.  This was a bit less than the asking price but still significantly higher than it should have been.  My clients’ point of reference and emotional investment in the home led them to purchase the house well above market value, despite comparable sales in the area. 

As I expected, the appraisal came back lower than the list price.  Arguments between the appraiser and the listing agent ensued.  My clients believed that the house was worth the higher price and so they came up with the difference between the appraised value and the agreed upon sales price.  They set a precedent and this became the highest priced home in the neighborhood. 

Three years later my clients put the home on the market.  Having paid close to $700,000 they were going to take a significant loss anyway due to the downturn in our market, but they also had to account for the gross price difference they originally paid.  Sadly, they lost quite a bit of money on the sale.

If a home is overpriced, paying more than it’s worth is not often advisable.  As with everything else, however, there are exceptions to every situation.  If you are purchasing a home and you intend to live there for a very long time, perhaps the relatively small investment is worth a lifetime of happiness. Of course you have to be in a financial position to be able to afford the larger down payment.  And you must be willing to take the loss should you be forced to move due to an unexpected change in finances or windfall relocation.

Ultimately it is sometimes the “idea” of a lifestyle that people sometimes buy into, not the actual home.  It’s important not to let emotions take over your decision and always pay attention to the comps.  Information gathered through the use of a CMA should be a good start in answering some of your questions regarding the value of a property.  A Realtor may not always have all the answers, but they can help you separate reality from emotion.

Your Colorado real estate search will likely begin online.  The internet provides a myriad of options for starting your Denver homes search.  There are websites offered by individual real estate agents, major brokerage firms, and national mega sites like Trulia, Zillow, and over 100 others.  Pictures and virtual tours make online searching better than ever.  Current trends also include video tours often posted on YouTube and countless other sites.  It really doesn’t get any easier!  However, if you don’t know what you can afford or what you can qualify for, your preliminary online search can be like putting the cart before the horse. 

Making the decision to buy a home is an exciting time, although it does come with its share of stress.  It’s one of the most significant decisions you will make in your lifetime and certainly one of the most expensive.  Your financial stability is the key to preparing for the upcoming responsibilities that come along with owning a home.  Down-payment and closing costs are larger considerations.  Inspection fees and appraisal fees are smaller obligations but are out of pocket expenses that you will need to plan for up front.  Once you own the home, you will need to consider other expenses including property taxes, insurance, HOA fees, electric, gas, water, waste services, cable or satellite service, phone service, and ongoing maintenance and repairs.

Below are a few things you can do to plan for your purchase:

• Establishing good credit.  Your credit is determined by your ability to manage your debt responsibly.  Creditors report your payment history to the credit bureaus.  When you apply for a home loan, a mortgagor will pull your credit to see if you are a viable risk or a high risk.  

 

• Savings:   Even today, there are a number of affordable mortgage loans available.  FHA loans currently require as little as 3.5% down.  Conventional loans can start from 5% to 20%  or more down.  And VA loans for qualifying Veterans are available at 0% down.  Understanding what you can afford based on your monthly income and expenses should help you determine how much you may need for down-payment. 

 

• Create a Budget.   There are a number of resources available that will help you understand the home buying process.  Finances and credit management books, articles, and tools are available at your local library and online.  Working with a real estate agent to help you prepare for homeownership can be an excellent way to ensure your success.  Plan ahead and create a budget that is reasonable and that you can live with long term.  If you’re budget doesn’t allow you to allocate money for clothing, entertainment, or miscellaneous expenses, it’s probably not as realistic as you think. 

 

• Do Your Homework.  Determining where to live should begin by looking at your lifestyle needs.  If you don’t have car, finding a home near a Denver Lite Rail station or a bus station is going to be important.  Runners and cyclists may want to look at homes that are closer to hiking and biking trails.  When searching for homes take a look at Walk Scores to determine the proximity of the home to major shopping and conveniences.  Most websites offering links to Denver homes for sale now provide this valuable information.

As a first time buyer, the home buying process can seem a little overwhelming.  Having a strong team of professionals on your side will make the process go a little smoother.  Take your time finding a real estate agent that will guide you through every step of the process.   Being prepared for the challenges ahead will allow you to make more informed decisions with confidence , ones you will likely never regret.

You’re looking for the perfect Denver home and found a reputable and knowledgeable lender to help you finance your dream home; now what?  An initial call may have prompted some information regarding your place of work, monthly gross income, and overall monthly debts.  The next step requires a little more work. Your lender will need an initial list of documents in order to prepare your file for underwriting approval. Below is a general list of documents or information you should prepare copies of before you start shopping for a home:

• Current and previous addresses in past seven years (include landlord details if applies)
• Employment for past two years minimum
• Two or four most recent paystubs
• Checking and Savings Account Statements (past 2 to 4 months)
• Verification of additional income (child support, interest income, social security income, etc)
• Brokerage account statements (past 2 to 4 months)
• List of Assets
• Most recent 401K, IRA, or other retirement account statements
• Income Taxes (last 2 to 3 years (only for self-employed or independent contractors)
• Current mortgage loan (Lender- Monthly payments – Account Numbers – Balances – Payoff)
• Installment loans (Lender – Monthly Payments – Account Numbers – Balances)
• Credit cards (Account Numbers – Monthly Payments – Account Balances)
• Other monthly debt

Once your lender has this information, a package is prepared and sent to underwriting for approval.  At this point the file will typically be sent back to your loan officer with a list of loan conditions.  Loan conditions are additional pieces of information that underwriting may deem necessary in order to give your loan final approval.  Buyers can sometimes feel overwhelmed by the amount of documentation that is requested by the lender.  It’s important to remember that the banks have a list of guidelines they must follow.  Although their requests for additional documents may seem like they are simply not organized, there is a lot that goes on behind the scenes.  An experienced loan officer will be very good at anticipating what underwriting may want to see in order to submit a complete file.  However, with the changes in lending that seem to be taking place almost every day now, it’s almost impossible to know every piece of information that underwriting may require.  You may find that requests from underwriting may seem redundant or unnecessary but it’s important to comply with bank requests or you may risk not getting final underwriting approval.  Hiring the right professionals for the job will ensure a smooth process and a successful closing!

Photo Slide Show of Denver Colorado:

Denver Home prices: Denver real estate leads the nation in home price percentage increases, according to the Standard & Poor’s/Case-Shiller Home-Price Index. Denver’s S&P/Case-Shiller Home Price Index yearly percentage change improved for the ninth consecutive month, falling only 0.1 percent between November 2008 and November 2009. As reported by Standard & Poor’s, “Denver and Dallas are nearing positive territory with their annual figures at -0.1% and -0.6%, respectively”. Home prices have benefitted from the increased activity in November when buyers rushed to purchase a home before the expiration of the first time buyer credit. It’s incredible that prices were preserved during that buying frenzy.With the extension of the first time buyer credit perhaps we’ll see even more improvement.

Reduced inventory can often be an indicator of the health of the housing market. Michael Strauss, chief economist at the Commonfund, defines a normal inventory level and talks about the national inventory, “We’re showing signs that we’re clearing out the excess inventory, but inventories are still high.

A more normal level would be 5.5 to 6 months”. Unlike the nation, inventory of residential homes and condominiums in the Denver Metro area is at a normal level, finishing 2009 with a 5.7 month-supply. In 2009, its inventory fell 8.9 percent from November to December, and dropped 16.0 percent over the last year.