Publication Date: Friday, July 23, 2004

Qualify first before shopping for houses

You don't have to have a degree in mathematics to figure out the best financing for the home you want to buy in Pleasanton, but some basic arithmetic skills and a savvy local mortgage banker or broker can help.

That's because there are scores of mortgage programs to fit various income groups, but only a few financial experts who understand the volatile Pleasanton market where pricing competition and changes can alter a buyer's qualifications overnight.

"Prospective homeowners should understand right from the start that the best time to look for a mortgage is before they look for a house," said Angela Aloise, vice president of Residential Pacific Mortgage in Pleasanton. "This will let buyers know how much they can borrow and will help them determine their negotiating power."

Mortgage plans are available in different categories and plans, but basically they are divided between conventional, or conforming loans and "jumbo," and nonconforming loans. Following guidelines set by Fannie Mae and Freddie Mac, the two federally supervised stockholder-owned corporations that purchase mortgage loans, conforming loan limits are announced each year. Currently, the limit for conforming loans, which offer the best down payment and interest rate options, is $333,700, with loans above that amount considered to be jumbo loans. Because jumbo loans are bought and sold on a much smaller scale, they often cost as much as a half-to-a-full percentage point more than conforming loans.

Jim Lavey, a Realtor with Allied Brokers, said the Feds are considering raising the conforming loan caps. Already, two states, Alaska and Hawaii, have $500,000 maximum loan amounts because of the higher cost of housing there. Seven states, including California, have petitioned Freddie Mac to raise them here, too.

"If that happens, we'll see another big round of refinancing in Pleasanton by people who now have the most costly jumbo loans," Lavey said. "This will also open up more high end housing for prospective buyers who can't qualify at the current higher jumbo loan interest rates."

While fixed rate mortgages loans are still the most popular, they now come with many different options. Gone are the days when a young couple had to put 20 percent down for a 30-year fixed-rate loan with the intention of staying in the same house to celebrate the pay-off 30 years later with a mortgage burning party. Most homeowners move well before their 30-year loan is paid, and in recent years, as interest rates plummeted, many refinanced their loans to take advantage of those reductions.

Aloise has been helping buyers to finance their homes for the last 15 years, and she's never been busier. With interest rates still near record lows, she's been able to help record numbers of prospective buyers qualify for loans to buy homes in Pleasanton for the first time or to move up to larger and more expensive housing.

Working much like a personal financial consultant, but limiting her counseling to real estate transactions, Aloise and other mortgage bankers and brokers are the first professionals that buyers should see once they get the urge to relocate. Unless they're pre-qualified for financing, they can't make a firm offer. In today's competitive market, with sellers receiving multiple offers, Aloise said those with conditional loan approvals could be out of luck.

Gone, too, for the most part, are contingency offers, where the seller agrees to accept the offer on the basis that the buyer can sell his house in a specific period of time.

"With three or four qualified buyers already making firm offers, why would any seller accept a contingency that could fall through?" Aloise asked. "It just isn't happening."

Loan packages can range from the customary 30-year fixed rate conforming loan with rates today at just under 6 percent to the jumbo loans that are now costing about 6.5 percent.

Aloise said that while it may sound self-serving, she believes buyers do better when they work with locally based mortgage brokers like herself or local mortgage bankers. These consultants have an up-to-date understanding of the local market, compared to the abundance of Internet services that are usually based elsewhere.

Few mortgage brokers from, say, Nebraska, would have much information on the high-priced, highly competitive housing market in Pleasanton, she said. Even fewer would believe the stories Realtors tell of their clients who are so anxious to win the bidding for the house they want that they send pizzas, letters, photos of their family dog that looks just like the seller's and other enticements to the seller.

"It's really tough when these potential buyers go on the Internet and get some loan broker in Wisconsin who throws their application on a pile of hundreds of others with no idea what the market is here in Pleasanton," said Realtor Robin Dickson, Vice President and Managing Officer of Intero Real Estate Brokers. "I advise my clients to ignore those ads on TV and on the Internet and to consult with someone local."

"I also encourage them to qualify for as much as they can, even if they never use it," she added. "That way they're prepared if they have to up the bid on a transaction that is moving fast."

In advising prospects, Aloise asks very basic questions. How much do you make? What are your expenses? How much can you afford to pay in principle, taxes and insurance each month and still have money for food, cars and college?

"After we've determined together that they can afford the house they're considering, I have more than 150 different lenders available to meet their needs," Aloise said. "That's when we look at all of the options for mortgages today - from a 30-year fixed rate to a three, five, seven or 10-year fixed rate that then converts to an adjustable rate at the end of one of those terms or to an adjustable from the start."

Adjustables are safer these days because they come with caps, limiting the amount that the loan can adjust every six months or over the lifetime of the loan. Back in the early 1980s, when mortgage interest rates climbed to as high as 18 percent, that wasn't always the case. Realtors recall that some homeowners had to sell their houses quickly to avoid defaulting on rising monthly mortgage payments they could no longer afford.

"Of course there are always risks with any home purchase or loan financing, but they are minimal today," Aloise said. "Nothing is guaranteed, even appreciation. That's why it's important for anyone who is thinking about buying their first or another home to look at their whole financial picture. If it looks good, and a mortgage consultant agrees, start looking."