One hundred percent of those who lost homes in foreclosure suffered from excessive debt — 100%. The total amount of debt is important, but the terms of repayment are far more critical. The monthly payment (plus taxes, insurance and other costs) must be a manageable percentage of the borrower’s income, otherwise the borrower is likely to default. Historically, this value was 28% or less, then it was expanded to 30%, and now the GSEs underwrite to 31%. Debt-to-income ratios higher than this are proven to have accelerating default rates absent Ponzi borrowing.
Thirty-one percent doesn’t sound like an onerous percentage of income. But most people forget this is gross income, not net. A 31% debt-to-income ratio is 50% or more of a borrowers take-home pay. How long do you think you could afford to pay half your take-home pay for housing? It’s a stretch, but it can be done. But what about 50% of gross pay. That’s 70% or more of a borrower’s take-home pay. How can anyone sustain that very long?
Millions of Californians are paying close to half their income for housing – a level once considered foolish. Even as home prices have tumbled, the cost of homeownership has continued to rise.
In 2006, Ernie and Edith Garcia began building their dream home on a Fountain Valley lot his grandparents had purchased decades earlier.
Six years, one recession and one layoff later, the mortgage on their home has become an anvil around their necks.
“The American dream?” Ernie Garcia asks. “This has turned out to be the American nightmare.”
The writer makes it sound like these were circumstances beyond their control, but were they? When these people built their “dream home,” do you think they were concerned about the cost and their ability to pay for it, or did they get the largest Option ARM an irresponsible lender would give them? They had choices to make, and they made the wrong ones.
The Garcias have a lot of company. Unnoticed amid the housing boom and bust, millions of California families entered risky territory, paying once unthinkable shares of their income for housing.
Today, some 2.7 million California households – homeowners and renters – pay at least half their income for housing. That includes the Garcias and about 200,000 other Orange County households. The numbers have nearly doubled in the past decade, according to the Census Bureau. A much bigger group – 4.6 million California households – is paying 35 percent or more, above the traditional 30 percent norm, up by 1.7 million in a decade.
Of the 200,000 OC Households paying more than 50% of their income toward housing, how many of them are loanowners who will ultimately succumb to the financial pressures? Will lenders get prices to go back up and resupply the housing ATM in time to enable these loanowners to continue their Ponzi borrowing?
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Proprietary Irvine Housing News home purchase analysis
$524,900 …….. Asking Price
$755,000 ………. Purchase Price
9/11/2006 ………. Purchase Date
($230,100) ………. Gross Gain (Loss)
($60,400) ………… Commissions and Costs at 8%
($290,500) ………. Net Gain (Loss)
-30.5% ………. Gross Percent Change
-38.5% ………. Net Percent Change
-6.0% ………… Annual Appreciation
Cost of Home Ownership
$524,900 …….. Asking Price
$104,980 ………… 20% Down Conventional
3.64% …………. Mortgage Interest Rate
30 ……………… Number of Years
$419,920 …….. Mortgage
$117,667 ………. Income Requirement
$1,919 ………… Monthly Mortgage Payment
$455 ………… Property Tax at 1.04%
$250 ………… Mello Roos & Special Taxes
$131 ………… Homeowners Insurance at 0.3%
$0 ………… Private Mortgage Insurance
$285 ………… Homeowners Association Fees
$3,040 ………. Monthly Cash Outlays
($303) ………. Tax Savings
($645) ………. Equity Hidden in Payment
$125 ………….. Lost Income to Down Payment
$86 ………….. Maintenance and Replacement Reserves
$2,303 ………. Monthly Cost of Ownership
Cash Acquisition Demands
$6,749 ………… Furnishing and Move In at 1% + $1,500
$6,749 ………… Closing Costs at 1% + $1,500
$4,199 ………… Interest Points
$104,980 ………… Down Payment
$122,677 ………. Total Cash Costs
$35,200 ………. Emergency Cash Reserves
$157,877 ………. Total Savings Needed
The property above is available for sale on the MLS.Contact us for a comparative market analysis, a cost of ownership analysis, or information on how you can make an offer today!
Cost of Ownership AnalysisAre you ready to make an offer, but you are worried the cost of ownership is really more than you can afford? Don't make a mistake that might cost you the family home, your life savings, and your good credit! Get the advice of a seasoned professional. Contact us at email@example.com today! We produce detailed reports showing the cost of ownership based on the most likely transaction price and current financing terms. You will know how much you will spend each month in out-of-pocket expenditures and the true monthly cost of ownership factoring in tax deductions, loan amortization, and opportunity costs on your down payment. In addition, we show you how this cost compares to a rental of equal quality to make sure buying is the right decision for your situation. An OC Housing News Cost of Ownership Analysis will calm your worries and give you peace-of-mind. Let us show you the way! Reports are available for properties in the Southern California MLS coverage area, and are generally delivered within 24-72 hours. If you wish to receive multiple properties, please contact us at firstname.lastname@example.org, and we will prepare the reports for you.
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Comparative Market AnalysisAre you ready to make an offer, but you are worried you will either (1) underbid and miss the property or (2) overbid and pay too much? Don't make a mistake and miss your dream home, or worse yet, overpay for it! Get the advice of a seasoned professional. Contact us at email@example.com today! Are you thinking about selling, but you are worried you will either (1) overprice and fail to sell or (2) underprice and leave money at the negotiating table? We are the experts in real estate valuation. Work with us to set the right prices to sell your property quickly for the largest amount possible. Let us show you what your property is worth today! An OC Housing News Comparative Market Analysis will calm your worries and give you peace-of-mind. See for yourself right now! Reports are available for properties in the Southern California MLS coverage area, and are generally delivered within 24-72 hours. If you wish to receive multiple properties, please contact us at firstname.lastname@example.org, and we will prepare the reports for you.
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