Don't bother trying for a 'perfect' purchase

Those looking for a home have always had enough reasons to wait. Sometimes they wait for lower interest rates or lower home prices. Sometimes they wait for their incomes or credit scores to rise. And sometimes they are just waiting for the right home.

Their waiting reminds me of the story I was told about a bride and groom who were walking down the aisle of a church to tie the knot. Both were getting married for the first time, and both were in their 80s. A caretaker who happened upon the wedding could not help himself, and he asked a guest why the couple was so old.

"Oh, them," said the guest. "That's the couple who waited until everything was perfect before they got married."

Buyers, this is the perfect time to buy a home: Interest rates and prices are low and there is an abundant housing inventory at all price levels.

What you may have read over the past week is that the Orange County real estate market may absorb a substantial number of foreclosures that could drive prices down even further. While there may be more foreclosures, it is a mistake to gamble that it will be in numbers that will reduce prices.

And even if the price pressure materializes, it is not likely to offset the long-term home ownership cost you will be paying due to higher interest rates.

If you're about to pull the trigger on a purchase, be prepared for a shock, for those low mortgage rates come with a mountain of paperwork.

Justin Hayward is the president of Hayward Capital in San Juan Capistrano, a family-owned mortgage brokerage that has seen the best and worst of the loan business for more than 20 years.

"In 2005, the paperwork required to complete a loan was anywhere from a quarter of an inch to half an inch thick," Hayward said. "Today, it's over an inch thick."

I can support Hayward's impression. When my wife and I refinanced our home last June, we were so shocked at the breadth and depth of the paperwork we were required to submit and to sign, that I expressed my exasperation to the notary. He smiled and said, "It's not like it used to be."

If you are planning to buy a home this year, Hayward points to three areas that most lenders will be scrutinizing.

"Today, it's all about income, credit score and the down payment," he said. "Unlike a few years ago, mortgages are being underwritten from a defensive posture. Today, their staff is looking for negatives because if they make a mistake and the loan goes into foreclosure, they'll get fired."

I asked Hayward to walk the potential buyer through the qualification process based on his three criteria.

"For income, they'll be looking at the last two years," he said. "And if they see a declining salary, they will use the lowest salary number in their calculations."

Hayward said that the magic credit score is 620, which happens to be the minimum credit score required for Fannie Mae. When I commented to Hayward that the number seems low, he pointed out that a 620 credit score will not generate the most favorable interest rates.

Hayward then pointed out the specific down payment requirements, which will have a direct effect on the percentage of income used to pay down the mortgage each month.

"Fannie Mae and Freddie Mac typically don't want to see more than about 42% of your income going towards your home," Hayward said. "It's kind of case by case, but that's a benchmark. If it's conventional financing, they don't want to see more than 50% of your income going toward your home. If it's FHA, that typical threshold is about 56%."

So, a higher down payment creates a lower income-to-payment percentage.

If the mortgage requirements look strict, take the long view: In most cases, qualifying has simply gone back to the way it used to be just five years ago. And according to Hayward, it's still possible to get 100% financing, though the price paid will be in a higher interest rate.

Buyers in 2011 should try to avoid the perfect purchase, otherwise they could wind up looking like the elderly bride and groom at the wedding.

"This is a phenomenal time to buy," Hayward said.

STEVE SMITH is a Costa Mesa resident and a freelance writer. Send column ideas to

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