Wheatworks Blog: Financial Matters

Whether you’re ready to buy a house now or plan to wait until the market bottoms in your location, one thing you must know is how much house you can safely afford.

The news is full of stories about home buyers who bit off more than they could chew using funny-money loans. Excluding the legitimate reasons one might not be able to make their mortgage payment (loss of job, death of a spouse, medical events, etc.), the foreclosures in many regions of the country seem mostly a result of people borrowing more than they could afford to pay back. It may have been because of loose lending standards. Or it may have been because they believed they would be able to refinance into an affordable mortgage.

Whatever the reason, through experience or observation, most Americans have learned the importance of not buying more house than they can safely afford.

But that begs the question, “How much house can one safely afford?”

Not too long ago, it was reasonable to say, “you cannot afford all that a lender will offer”. But then came the credit crunch and responsible lenders (as they always have) use the time-tested concept of qualifying ratios. And many irresponsible lenders are returning to what financial tradition has long held to be true: 28% for housing and 36% for debt.

The real answer about affordability is not that difficult to discover. If you want an easy way to see what safe lending standards indicate about the amount of home you can “comfortably afford,” use the Mortgage Qualifier in Home Buyer’s Calculator Suite. It gives you a good idea of what you can expect to comfortably pay each month for your home. And it allows you to easily play with the numbers to see the effects of a pay raise or reduction in income. It also shows you the price range of homes that will be safely affordable for your income and debts.

Importantly, the default values in Home Buyer’s Calculator Suite for the housing and debt ratios are 28 and 36, respectively. In addition to these important mortgage qualifying ratios, “safely affordable” also means there’s money left over each month for living.

For years, one of the tips in Wheatworks’ software has been this: “As tempting as it may be and even though you may qualify for a big loan, avoid buying more home than you can comfortably afford.” The temptation to borrow to your limit is strong, but fight it.

Fortunately, banks and mortgage lenders are returning to the concept of historically sound qualifying ratios: 28 for housing and 36 for debt. Qualifying for a loan may be more difficult as a consequence of the current economic environment. However, because lenders are being more careful, I expect the quality of home loans made in the coming years will be much more sound than those made in the recent past.

Using the Mortgage Qualifier in Home Buyer’s Calculator Suite is easy. You enter your monthly income and your co-borrower’s monthly income, enter your monthly credit card, auto loan and other loan payments, and enter the amount you have available for a down payment. As you enter your personal financial values, the calculator automatically updates the results to indicate how much you can comfortably afford.

The Mortgage Qualifier is one of 12 financial calculators in Home Buyer’s Calculator Suite. Mortgage Qualifier is the calculator that will quickly get you in the home-buying ballpark in terms of what you can safely afford.

You can purchase Home Buyer’s Calculator Suite for $19.95 USD. Or download a free, trial version of Home Buyer’s Calculator Suite at http://www.homebuyerscalculator.com

If you follow Wheatworks on Twitter.com, you probably noticed the last two tweets were about Home Buyer’s Calculator Suite and were titled, “Home Buyers Calculator Suite Returns”. The first post was a manual tweet. The second was a tweet posted by TwitterFeed which is now automatically feeding this blog to Wheatworks’ Twitter account. Now that TwitterFeed is taking care of feeding the blog posts (and they’ll be prefaced with “blog:”, any tweets that don’t have “blog:” in them will be manual tweets.

In addition to following Wheatworks on Twitter to keep up on product updates, new releases and general information, Twitter and TwitterFeed on Wheatworks’ blog will also offer you an easy way to stay in touch with Wheatworks’ Blog: Financial Matters.

This is the tenth anniversary of one of Wheatworks Software’s most popular tools for home buyers. Home Buyer’s Calculator Suite $19.95 was first released back in 1999.

During the last ten years, as new features and additional real estate calculators were added to the software, the name was changed to Real Estate Calculator Suite from Home Buyer’s Calculator Suite. (Real Estate Calculator Suite, a more complete calculator suite is designed for home buyers, home sellers and real estate professionals. It covers the spectrum of real estate finances, from prequalification to estimated closing costs to refinancing and prepayment savings.)

I’ve been reminded recently that some people simply want to know about the front end of home ownership. They want to buy a home.

Wheatworks has reintroduced Home Buyer’s Calculator Suite just for those who are interested in buying a home. Like the original Home Buyer’s Calculator Suite, it focuses on helping home buyers calculate the financial scenarios related to buying a home.

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Home Buyers Calculator Suite includes the following calculators for home buyers:

• 2 quick calculators to calculate payments of principal, interest, taxes and insurance or to calculate for one of the missing values when given any three of loan amount, term, interest rate and payment,
• 2 down payment savings calculators; one to determine how long it will take to save a specific amount, the other to determine how much you can save during a specific period of time,
• a mortgage qualification calculator that shows you how much house you can reasonably afford under conservative lending standards (there are no funny-money loan calculators in Home Buyers Calculator Suite, the default housing ratio is 28 and the default debt ratio is 36),
• Home Buyers Calculator Suite includes LoanSpread™, a calculator that compares 135 loans at once and gives you details of any you wish to explore,
• 2 amortization schedule calculators which will calculate the effect of prepayments, too,
• an estimated closing costs calculator,
• a refinancing calculator,
• a rent or buy calculator (because renting is often smarter than buying),
• and a biweekly payment calculator which explains an easy way to pay off a mortgage loan early.

Less complicated than Real Estate Calculator Suite, but every bit as modern in terms of software technology, Home Buyer’s Calculator Suite is also less expensive. Available for a one-time fee of $19.95, Home Buyers Calculator Suite is designed to make real estate math easy for home buyers.

According to information in a Bloomberg.com article, “Banks in Georgia, North Carolina, Kansas Closed by Regulators“, “as many as 1,000 U.S. bank could fail in the next three to five years.” RBC Capital Markets analysts predict the failures will be related to commercial real estate loans.

Of course the FDIC insures deposits held in banks. The FDIC 2008 Annual Report states the FDIC insured 8,305 depository institutions with nearly $13.8 trillion in assets.

If the Bloomberg article is correct (or even close) 1 out of 8 U.S. banks could fail in the next three to five years. That doesn’t sound like good news.

The FDIC maintains the Deposit Insurance Fund (DIF). The DIF balance on 12/31/06 was $50,165,000,000. Let’s call it $50 billion. The report is here. The DIF balance has fallen to $17 billion by 12/31/08. The wrong direction.

Assuming the predicted bank failures are distributed evenly among banks of all sizes, the expected failures mentioned in the Bloomberg.com article will require resolution of $1.725 trillion dollars of FDIC insured deposits. That $17 billion DIF balance looks very small.

My last post was about the shape of the recession. This evening I’ve been catching up on Mish’s Global Economic Trend Analysis Blog. In Premature Excitement, he describes another shape for the recession: WW.

Mish writes, “An “L” or “WW” (in and out of recession for years) now seems a given.”

A WW-shaped recession/recovery would look like this:

Listening to some experts talk about our recession almost requires a geometry or alphabet lesson when they start talking about the shape of the recession and the recovery. You’ll hear or read an economist who says we’ll have an “L-shaped” recession. Another expert will talk about a “V-shaped” recovery.

So what exactly do these letters mean?

Unlike many economic terms, these letter shapes mean exactly what they sound like. There’s absolutely nothing esoteric about them.

For example, a V-shaped recovery might look like this:

An L-shaped recovery would be a more troubling thing. It would look like this on a time graph:

And you’ll hear about U-shaped which would look like this:

Some economists combine these letter shapes and come up with economic recovery scenarios that look like VL for example:

(I’ve also seen this called an “upside down square root recovery”.)

Of course, no one can predict the future. And whatever the shape of the recovery, someone will find a letter or shape to describe it.

We may not have found the bottom, yet, if this article from the New York Times is correct. In “Job Losses Push Safer Mortgages to Foreclosure“, the impact of rising unemployment is expected to increase the number of homes lost to foreclosure in the coming year.

The authors contend, as job losses rise, the nation’s real estate disaster is shifting from subprime loans to prime loans issued to those with decent financial histories. So, will the bottom be in after this expected third wave of foreclosures?

Nothing is perfect … especially in the world of politics where money buys influence and opposing parties have opposite interests. But, perfect or not, credit card reform is coming.

Martha White, writing for “The Big Money”, has an article that does a good job of summarizing the current state of the reform legislation and the probable outcomes.

Read, “What to expect from credit card reform: Consumer advocates say the proposed legislation falls short in many ways“. Of course, with banks, being bailed out by tax payers, holding all the green, it’s to be expected that politicians are having a hard time siding with consumers.

For more than a decade, Wheatworks has offered free financial software to our web site visitors. The full list of free financial calculators is at http://www.wheatworks.com/free-financial-software.htm.

Free Loan Calculator has just been updated to version 4.6. This version calculates and compares two mortgage loans.

Several things are lining up correctly for first time home buyers. Interest rates are still low, home prices have fallen and the IRS offers an $8,000 (or 10%) tax credit for first time home buyers in 2009.

And although they can be frustratingly complicated depending on the lender and situation, low prices are also available on REO (”real estate owned” by the bank), short sales and foreclosures.

MSNBC has this article about one first-time home buyer in Phoenix: “First-time buyers benefit from housing slump: In many markets, homes that were once prohibitive now are affordable“.

While most real estate agents will tell you (tongue in cheek?), “it’s always a good time to buy” … if you’re a first time homebuyer, your finances are good and you’re ready to buy a house, this may be your time.