Buying a Home...Ask for a CLUE Report

People purchasing a used car have most likely heard of CARFAX vehicle history reports to help them avoid buying a car with costly hidden problems.  Less likely are buyers to know that there is a way to discover some of the repair history of homes they are interested in.

Lexis Nexis C.L.U.E. (Claims Loss Underwriting Exchange) is a claims history database that enables insurance companies to access consumer claims for the previous seven years when they are underwriting a risk or rating an insurance policy.

An insurance underwriter could identify a previous claim for substantial damage to a property and try to find out whether the repairs were completed properly before assuming the risk as a new insurer.  Similarly, a buyer could benefit from knowledge of former claims that may affect the value of the property or possible, future repairs.

A CLUE report can discover insurance claims on a home to investigate whether the repairs were done properly.  These reports are not directly available to potential buyers, but their property casualty insurance agent could order a report subject to successful negotiations with the seller to agree on a contract of sale. 

If a buyer had a CLUE report on a home that they were buying and were concerned about specific issues, the buyer could address those things with the inspector during the inspection period.  Conversely, the CLUE Report could detect items that may not be visible during a home inspection.

In some cases, a listing agent might suggest a seller get a CLUE report in the spirit of full disclosure to potential buyers.  Even if there were claims and the work was done properly, a high number of claims could affect the premium paid by a new homeowner.

A current homeowner can request one free CLUE report every twelve months online or by calling 888-497-0011.  They can also email consumer.documents@LexisNexisRisk.com.  Please be ready to provide your first and last name, social security number, driver's license number and state in which it was issued, date of birth, current home address and phone number.  For more information, see Lexis Nexis Consumer Portal.

If a buyer doesn't have a property casualty insurance agent, your real estate agent can recommend one.

Coordinating the Sale and Purchase of Your Home

Usually, it is easier to buy a home than to sell a home but that isn't necessarily the case currently. In today's market, it can be scary to sell your home before buying another because you could find yourself without a home.

Most sellers will not accept a contingency on the sale of a buyer's home in today's market.  So, let's look at some of the alternatives that homeowners are using to facilitate the transactions. 

If you have the income, credit, and cash available, the replacement home can be purchased with a new 80-90% loan-to-value mortgage and sell the existing home after you have moved into the new home.  This would require making two payments for a while but probably gives the seller the least amount of pressure to find the replacement property before the existing one is put on the market.

If the mortgage on the new home has the option to recast the payment, additional down from the equity in the previous home after it sells would lower the payments without causing any additional expense to refinance.

Another alternative may be available if your home has enough equity to borrow against it in a Home Equity Line of Credit or a bridge loan.   This type of loan is generally made by banks who will loan qualified owners up to 80% of the appraised value less the current mortgages on the property.  Freeing up the equity in your existing home will give you a down payment for purchasing the new home before you sell the previous one.

If a seller has assets in qualified retirement programs, it is possible to do temporary loans against them to facilitate the interim purchase.  There can be penalties on some of these if they are not repaid in a timely manner.  It would be good to investigate with your tax professional to see if this is a viable option.

Hard money lenders provide a source that will be more common to investors than homeowners.  These types of loans are generally approved and funded quickly, have less requirements than bank loans and provide funding for projects that cannot be financed elsewhere.  Interest rates are higher than bank loans, are written for short terms (1-2 years), and usually require 25-30% down payment or equity.

Power Buyers and iBuyers offer to purchase your home for cash and provide a quick closing.  Deeper investigation into these options may reveal that you will not receive the full equity of your home because they have to discount the home to cover the expenses they will incur as a seller.    

In today's very complicated market, the value of a real estate professional representing your best interests, providing you advice, options and experience has never been greater.  While there are similarities in transactions, each one is unique, and you certainly need a professional to be guiding you through the process.

Agents are trained and experienced in coordinating the purchase and sale of homes.  This can be especially beneficial in navigating unfamiliar waters.

A New Opportunity for Homebuyers

You may not have heard of anyone assuming an existing mortgage for over thirty years and didn't know they were even possible any longer.  The reason is simple, it didn't make financial sense but now that interest rates are increasing, it may be an opportunity for some homebuyers.

Conventional loans added clauses to mortgages back in the early 80's that gave the noteholder the right to raise the interest rate if a loan was assumed, as well as require the new buyer to qualify for the loan.  This essentially ended the practice of assuming conventional mortgages.

Then, in the late 80's, FHA and VA mortgages did impose the right to qualify the new buyers, but the big difference was that the mortgage rate would remain the same as the original borrower.  Even so, it still effectively ended the assumptions of FHA and VA mortgages because rates on mortgages trended down for the next thirty years.

There was really no benefit to assume a mortgage that still required qualifying because it was possible to obtain a new mortgage with a lower rate.  Generations of buyers have never even contemplated assuming a mortgage but now, in 2022, it might well be an alternative that will lower the cost of buying a home.

Mortgage rates hit a bottom in early 2021 and have been increasing since, this year especially. 

Since qualifying is required for assuming an FHA or VA mortgage and only owner-occupants are eligible, you might be asking what are the benefits?  If the interest rate on the existing mortgage is less than the rate on a new mortgage, there could be a savings.

In addition to that, there are fewer closing costs involved on assumptions of FHA and VA mortgages than originating new mortgages.  Another benefit is that assuming an existing mortgage will be further into the amortization schedule than a new one which means equity-buildup occurs faster.  And finally, lower interest rate loans amortize faster than higher rate loans.

The rub in this situation is that many buyers don't have enough money to purchase an equity but there is a remedy for that.  Let's assume the buyer was considering a 90% conventional loan.  If they identified a home with an assumable mortgage, they could put the same 10% down payment in cash, subtract the existing mortgage balance from what would be the 90% new mortgage and secure a second mortgage for the difference.

There are lenders that make this type of loan and buyers need to shop and compare rates and fees on them just like they would if they were getting a new first mortgage.  Your agent can suggest lenders for second mortgages.

Most search filters on portal websites do not include assumable mortgages.  You will need to rely on your agent to ferret them out.  If the agent you are working with hasn't suggested assumptions, it may be that they are unaware of their existence.

Cost of Waiting to Buy in Both Price and Interest Rates

Have you ever been shopping on a website where you were looking at something that was on sale?  You were interested in it but there wasn't a sense of urgency and maybe, you had a lot going on and didn't get back to it for a few days.  When you did go back to the website, the price on the item had returned to its regular price.

How did you feel?  Did you go ahead and purchase it for the current price?  How did that make you feel knowing that if you had acted more decisively, you would have saved money and had the product by now?

In 2021, homes across the United State went up 19.1% on average.  There were some markets where the prices soared 30 to 40%.  Fortunately, last year the mortgage rates did remain relatively stable but that isn't the situation this year, in 2022.

At the end of 2021, economists from Fannie Mae and Freddie Mac, felt like prices would go up around 7% for 2022.  The Mortgage Bankers Association and the Home Price Expectation Survey predicted more like 5% and Zelman Research and the National Association of REALTORS� forecast closer to 3%.

While the number of sales did decline at the end of February 2022 to 7.2% month-over-month and 2.4% year-over-year, that could be explained as a lack of houses for sale.  In the same month, inventory was 1.7 months which is down from 2 months in February 2021.  The median sales price had a year over year increase of 15.0% to $357,300.

The Fed had their first of what may be four or five interest rate hikes this year to try and get control of the inflation rate.  We have already seen mortgage rates at the 4.5% price and that is for borrowers with the best credit.  Those with less than sterling credit can expect to pay more.

It is anyone's guess at where rates will end a year from now, but many experts think this decade of low rates is over and we'll not likely to see them again.

There is a pent-up demand for houses to buy and an urgency to buy before the rates get higher.  If a buyer waits a year to purchase a home but the price goes up by 5% and the interest rate goes up by 1%, it will have a dramatic effect on the payment.

		5% price increase	10% price increase
Sales Price	$400,000	$420,000	$440,000
Mortgage	$360,000	$378,000	396,000
Current Rate vs Possible 1.00% increase	4.5%	5.5%	5.5%
Monthly Payment	$1,824	$2,146	$2,248
Payment Difference		$322.18	$424.38
Additional Cost for 7 years		$27,063	$35,648
Additional Cost for 30 years		$115, 983	$152,776

 

If the appreciation is closer to 10% increase, the negative effect of waiting is exacerbated.

The equity in a person's home contributes greatly to their overall net worth and wealth position.  The effect is very apparent in contrast to renters compared to homeowners whose net worth is 1/40^th of the homeowners $300,000 or $8,000 for the renters.

As people stair step their way into larger homes to not only meet their increasing demands but also to enjoy the amenities of a nicer home, the equity will continue to grow based on two dynamics: appreciation and equity-build up.  The renters do not benefit from either of these.

To run your own comparison, using your own numbers and what you believe will happen in the marketplace, go to Cost of Waiting to Buy.  If you haven't developed a plan to purchase in today's market whether it be your first home or a move-up, you need facts and a trusted team of professionals to work for you.

It starts with finding an agent who will be as committed to find your home as you are.  I would love to help you or your friends.  It is what I do.