It was a dreary, lazy Sunday here in Raleigh yesterday. My plans for juicy burgers, pork chops, and hotdogs grilled to perfection were abandoned after a "chance" of showers turned into an all day event. But with the lingering drought, I can't complain.
While procrastinating on the dozens of things I need to do around the house, I decided to flip on the TV. To my joy there was a marathon of a certain homebuying show. Great. I guess watching it is kinda like work. I mean, I do like helping buyers, and the show is about helping people buy homes. This can be used as an educational tool. Oh the excuses we make for ourselves...
However, while eating too much junk food and watching hour after hour of this show I did educate myself on one
thing...reality TV can be very misleading. Now granted, we are subject to a limited amount of what actually happened during the taping of the show. Editors can cut and paste things to their liking. But in the course of my"educational" afternoon I couldn't help but wonder how realistic people think these shows are. I mean, how often did you hear about house flipping before these shows?
So I settle down under a nice warm blanket and start watching. They feature one young lady, grinning ear to ear as she signs her loan documents. Then a brief description of her final package flashes on the screen.
Wait a minute. Did that say "2 15-year ARMs and a 10-year fixed?" As in three mortgages?! Did I read that
correctly? Maybe I need a fresh pair of contacts. I wish I was watching it on TIVO so I could press rewind, but I could have sworn that said three loans.
I have a degree in Accounting and MBA, and have spent several years of my career as a financial analyst. So maybe I study numbers too hard.
Then I saw an ARM bundled with a 15-year fixed loan that included a balloon payment. Everyone around the table assured the young buyer that there was nothing to worry about because she wouldn't be in the house for 15 years. Plus she could always refinance.
Famous last words...
Unfortunately those weren't the only segments that had me concerned.
There was the extended family who had little savings, a previous bankruptcy, and poor credit. Now I know miracles can happen, but I don't understand how they managed to pay off $5200 in debt to raise their credit scores about 150 points and qualify for a loan in three months. If they had "little savings" where did the $5K come from? And if they had that much cash laying around why were they paying bills late to get that poor credit score? While I do think credit repair and debt elimination are vital, I personally don't think it's wise to deplete all of ones savings, especially when the reason why the family was in dire straits was because of past medical problems.
There was the couple that used $10K from an IRA for a portion of the downpayment on a house that appeared to be smaller than the rental they were leaving. The kitchen didn't have space for stove. There was just a hot-plate on a piece of plywood in a corner. I'm sorry, but I have to have a place to cook. Or at least somewhere to make it look like I cook. And speaking of which, I may be wrong but they looked like they were in their mid-50s. Is that really the best time to pull from an IRA when you already have downpayment monies from other sources?
Now there were some situations that, in my opinion, were a little more realistic. There was the young lady that learned her pre-qualification amount had been reduced because a program she was depending on had been eliminated. Her agent was able to find a new construction home that offered discounted pricing with the use of a preferred lender. As a result she was able to get more bang for her buck and instantly have equity. There was the guy that did the right thing by getting pre-qualified for a loan, but learned his internet lender had disappeared once he found a home. Fortunately his agent was able to quickly direct him to a local lender that was able to save the day - and the deal.
These shows need to have follow ups. I would like to know what happened with that family. I'd be willing to bet they got a subprime loan. Have they been able to afford the home? The property they bought needed some adjustments to be handicap accessible. Exactly how did they pay for the improvements now that they have no savings? Are they back in credit card debt? Does that couple enjoy cooking dinners on the hot-plate in their tight new quarters? Do they ever invite friends over for dinner at their new home?
Although I'm a Broker and REALTOR I can't neglect my financial roots. Part of providing the best service to my clients means helping them remember that buying a home is a huge responsibility. Sure travertine and granite countertops look great, but so did wood paneling and shag carpeting in the 60's and 70's. Do you realize that if you used a 30-year, no money down loan to buy a new construction home you'd be paying for that travertine and granite over the next 30 years? Yes, it adds value to the home, but because you're starting with little to no equity it might be best to save your dollars and do it yourself later. Besides, in a few years you'll be ready to remodel anyway. That is if you haven't moved to another home.
And by the way, qualifying for a $400K loan doesn't mean you have to spend every dime of it! I've noticed that most people on these shows end up spending very close to their pre-qualification maximum. I always ask clients to analyze their spending habits first to come up with their own maximum. Things may be fine now, but would you be able to handle the payment that comes with that $400K mortgage if your spouse loses his/her your job, the engine blows on the car, Junior needs braces that come with a $2000 deductible, and you have another child on the way?
Now that's reality...
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