Do I keep my home or do I give it back?

According to Yale economist Robert J. Shiller: A History of Home Value “The 1890 benchmark is 100 on the chart. If a standard house sold in 1890 for $100,000 (inflation-adjusted to today’s dollars), an equivalent standard house would have sold for $66,000 in 1920 (66 on the index scale) and $199,000 in 2006 (199 on the index scale, or 99 percent higher than 1890)”

Source: “Irrational Exuberance” 2nd Edition, 2006, by Robert J Shiller

What this chart shows that home values can range during time and homeowners should realize that depending on when they purchased a home, values can go up or down. If you currently own a home it is too late to do the math to see if you should have purchased or not. You should now consider if you can afford the home.

Banks use (Debt to Income Ratio) income-expense to determine affordability; this calculation only uses fixed cost such as auto payment, credit cards and PITI. However homeowners should also consider maintenance and repairs needed to maintain the home throughout the years, which is a variable cost of homeownership.

In addition, there are some advantages of owning vs. renting:

1. Tax deductibility of interest.
2. Possibility of appreciation.
3. Stability of ownership.
4. Owning an asset.

If you can not currently afford your home, working with your lender for modification might be a solution, but don’t’ expect any free rides because eventually you will have to pay to keep your home.

It is unfortunate but many Americans will lose their homes because they can not truly afford to keep it based on many factors. However, some are simply walking away do to negative equity on their home. These homeowners will realize that entry to the market will be more difficult and even impossible in the future.

The CCC is back in the housing market.

Credit:

Their once was a time when a 500 credit score could qualify you for a home. Many lenders have increase this requirements and are currently requiring over 640 credit scores. Even those lenders that offer FHA loans are requiring higher scores regardless of FHA guidelines, that currently allow 540 credit scores to qualify.

In addition, to lower scores lenders have tightened the guidelines in regards to foreclosure and bankruptcy. Most lenders are requiring a five year seasoning before even considering the application. (Exceptions do apply especially to Veterans loans)

Capacity:

Income documentation has been changed and liar loans (Stated Income Loans) are gone and are probably not coming back anytime soon. So essentially your debt to income will have to fall within allowed guidelines and must be fully verifiable if you desire to qualify for a loan.

Collateral:

Down payment requirements are going to be a required regardless of credit scores. Lenders no longer have an appetite to approve loans where the customer has no money in the purchase. FHA guidelines of 3% exist and FNMA will be back to require 10 to 20 % down regardless of credit.

Walking away from your current residence is not as easy as making a decision on selling or holding a stock. So for those homeowners that can afford their current home but are negative in equity there are two main questions I would ask:

1. What is my credit worth, 50, 100 or 200 thousand dolars?
2. Do I want to be a renter again?

If you desire to keep your credit in good standings and you desire not to be a renter again the negative equity should not be a concern if you can afford to keep you home. Eventually, the housing market will stabilize and even out. However don’t expect the housing market to resume its unrealistic appreciation over short periods.

Amaury S. Cifuentes; CFP