Filling in the information gap from a previous post regarding a CNN profile of buyers using the tax credit. Buyers Mike Spence and Noel Delisle mortgage has been recorded. I was hoping that the loan would show a significant down payment or something else that would make the purchase not seem so tenuous. Well, apparently, it is worse than I thought. Even though the FHA maximum limit is $729,750 the loan has been recorded for $736,415. I'm guessing closing costs or the Mortgage Insurance Premium was rolled into the loan.
The tax credit phases out over $150,000/yr in income and is completely lost after $170,000/yr. So we have a reasonable upper limit of salary for the couple, a "Level 3 Hair Designer" and a Crane operator for a tree removal company. The article mentions a 5.5% interest rate which gives us a ~$4,180 /mo for principal and interest. Property tax rate of 1.25% gives ~$781.00 / mo in property taxes. ~$70 / mo for insurance. The monthly MIP is 0.5% a year of the original loan balance which comes in at ~305 /mo for insurance. At $170,000/yr income their front end debt to income ratio would be a whopping 37.4%. At $150,000/yr income their front end debt to income ratio would be 42.4%!
This is not a loan that should be made. The debt to income ratios are insanely high. It seems like their future prospect for higher income is much lower than a low income couple with similar debt ratios but their future prospect for lower income is higher. And on top of it is the very real prospect of depreciation. Is it any wonder that people believe we will be bailing out FHA? Are we really helping this couple buy a home or just throwing them under the runaway bus to help slow it down?
Showing posts with label high consumption moronic behavior. Show all posts
Showing posts with label high consumption moronic behavior. Show all posts
Wednesday, September 30, 2009
Thursday, September 3, 2009
You can't fix stupid... but apparently you can give it a tax credit.
From CNN Money (emphasis added), What I bought with my $8,000 tax credit:
This article was interesting. It was interesting that many were already buying so the tax credit didn't really effect their purchase timing or effected it very little (meaning, the tax credit didn't really stimulate an additional sale). Many homes were at or below the national median with some borrowers stating they were using FHA. But these blessed borrowers featured above. buying a $750,000 house using a FHA loan (meaning they don't have much down) AND are in the process of planning a wedding.
This house would require about $5,000 a month in PITI and $200,000 a year income (31% front end ratio FHA max which I'd bet can be pushed higher using AUS) for this hair dresser and crane operator to maintain. This is why FHA and high cost areas doesn't make sense. Your future prospect for increased income is low and prospect for decreased income is high yet the loans are underwritten the same for low income/low mortgage balance vs high income/high mortgage balance. Note their plans aren't to use the tax credit for rebuilding depleted reserves or paying down the mortgage. They are going to use it to redecorate their new home. Our tax dollars at work. What is funny is this is exactly the type of high consumption behavior the Fed & Government is trying to encourage with their actions. Malinvestment at its finest. It is no wonder people have little doubt that the taxpayers will be bailing out FHA soon. They will go hat in hand to Congress for a bailout and claim nobody could have possibly seen this coming.
EDIT: Commentator dafox noted that the income limit kicks in at $150,000 for the tax credit which makes the above couple situation even weaker than I first thought.
Location: San Carlos, Calf.
Property: 3 bed, 2 bath, 1,600 s.f.
Price: $750,000
My fiance and I were running around making wedding plans and looking to buy a home in San Carlos -- about halfway between San Francisco and San Jose. We finally found the right place on Roost.com.
We get married in November, but we're moving into the house this month. I'm excited because it's the best entertaining house we've ever seen. The house is built around a courtyard, and there's a barbecue. I love to entertain.
We felt like we had to hurry and buy before the end of the year so we wouldn't miss out on the tax credit. That turned out to be truer than we thought: As we got closer to the end, we realized how much closing costs and other fees would add to the purchase price, which was high enough already.
The $8,000 tax credit is saving us. Wedding, new house, we're tapped out. We're definitely big fans of the tax credit!
Still, we feel good about the purchase. Even though it's a lot to pay, we feel we got a good buy. The house next door is going for $1.2 million.
Prices have tumbled in this area, so the house is a lot cheaper than it would have sold for a year or two ago, and we got a great rate, about 5.5%, on a FHA loan. We'll use some of the credit money to updating some of the home's circa-1950's decor -- fake wood beams and chandeliers, textured wallpaper and the like.
This article was interesting. It was interesting that many were already buying so the tax credit didn't really effect their purchase timing or effected it very little (meaning, the tax credit didn't really stimulate an additional sale). Many homes were at or below the national median with some borrowers stating they were using FHA. But these blessed borrowers featured above. buying a $750,000 house using a FHA loan (meaning they don't have much down) AND are in the process of planning a wedding.
This house would require about $5,000 a month in PITI and $200,000 a year income (31% front end ratio FHA max which I'd bet can be pushed higher using AUS) for this hair dresser and crane operator to maintain. This is why FHA and high cost areas doesn't make sense. Your future prospect for increased income is low and prospect for decreased income is high yet the loans are underwritten the same for low income/low mortgage balance vs high income/high mortgage balance. Note their plans aren't to use the tax credit for rebuilding depleted reserves or paying down the mortgage. They are going to use it to redecorate their new home. Our tax dollars at work. What is funny is this is exactly the type of high consumption behavior the Fed & Government is trying to encourage with their actions. Malinvestment at its finest. It is no wonder people have little doubt that the taxpayers will be bailing out FHA soon. They will go hat in hand to Congress for a bailout and claim nobody could have possibly seen this coming.
EDIT: Commentator dafox noted that the income limit kicks in at $150,000 for the tax credit which makes the above couple situation even weaker than I first thought.
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