There are times when the economy is booming and everyone feels confident about their prospects for the future. As a result, people often times spend more money. People tend to go out to dinner more often, tip heavier, invest in wardrobe updates, maybe buy a new car and… more often than not, buy a new home. If the interest rates are friendly, this is especially true.
Then, for many reasons, there are periods of time when companies lay off employees and consumers become much more frugal about when and when they spend their money. They begin saving more money than spending it. When this happens, the economy further deflates. If it slows down enough, we’ll have a bona fide recession on our hands. During times of these depressed markets, many families shy away from more expensive items including buying new homes.
Still, some home owners find themselves in a situation where they must sell despite the current economic times.
Families continue to grow beyond the capacity of their homes, employees get relocated, and some may even find themselves unavailable to make their mortgage payment – perhaps because of a lay-off in the family or, they may be experiencing negative equity. In other words, they owe more than their home is worth and selling becomes very difficult without coming to the closing table with enough cash to satisfy the loan. Consult with your lender and a professional Realtor to talk about options and discover what the financial situation really is that’s actually in front of you. This is paramount.
(Even when the market flactuates, saving your home or finding a way to sell it without suffering can often be worked out.)
You might ask yourself – when is it appropriate to try and “time the market?” The short answer is never. One problem with attempting to time your purchase just right in tandem with economic patterns is that no one can really predict with any degree of accuracy – the future.
Many reports get published, predictions are made and some of them can be very close to spot on but the reality is that no one can tell for certain what will happen or when. Another challenge is that interest rates are most often higher during a recession (or depressed) market and household incomes might not be keeping up with the market. For that reason, fewer people can qualify for a home purchase during down times, than in prosperous times.
When it comes to timing the market, another big factor is affordability. That does seem to overstate the obvious but companies are typically not awarding employees with significant raises and cutting more than they are hiring. There are also heated battles being fought over minimum wage requirements all across the nation.
Did you realize that it’s been 5 years since the last time the federal minimum wage was raised? On October 10, 2015 the Labor Department is participating in a National Day of Action joining workers, government officials and business owners to show their support for increasing the minimum wage. They will be using the hashtag #RaiseTheWage to highlight why it’s time to increase the minimum wage in this country from $7.25 to $10.10 an hour for all hardworking Americans.
Since 2014, 13 states — including California, Connecticut, Delaware, Hawaii, Massachusetts, Maryland, Michigan, Minnesota, New Jersey, New York, Rhode Island, Vermont, West Virginia — as well as Washington, D.C., have already taken action to raise their minimum wage.
As of Jan. 1, 2015, those states plus Alaska, Arizona, Colorado, Florida, Illinois, Maine, Missouri, Montana, New Mexico, Nevada, Ohio, Oregon and Washington will have a minimum wage above $7.25. There are of course, 2 sides to the argument stemming from business owners claiming if the wage is lifted to $10.10 per hour they will have to cut staff because it will be more difficult to make payroll each week. On the other side, stands the employee and states that with all of the costs of living continuing to rise, how are they expected to raise their families with a paycheck that never comes close to matching the rate of inflation? It’s a good debate and it will be very interesting to see how things play out in October. What side will you be on?
Whatever change does take place, we can bet it’s going to impact consumer spending for certain across the board.
For most people, changing employers will not impact the ability to qualify for a mortgage loan, especially if you are going to be earning more money. For some homebuyers, however, the effects of changing jobs can spell disaster when it comes to your loan application. Make sure you discuss in great detail with your lender and know ahead of time what implications any change in your employment that might occur during your home buying experience and what its impact could be. Always be armed with the best knowledge and you will stay on the right track.
A word about traditional, salaried employees:
If you are a salaried employee who doesn’t earn additional income from commissions, bonuses, or from working any over-time hours, switching employers should not create a problem. Just make certain to remain in the same line of work. Hopefully, you will be earning a higher salary, which will help you better qualify for your mortgage anyhow!
A word about standard, hourly employees:
If your income is based on hourly wages and you work a straight 40 hour shift each week, without over-time, changing jobs (for the same wage or higher) should not present any trouble for you. Length of employment does come into play for some lenders. They love to see stability and not job hopping. Stay tight with your lender and disclose everything to them, let them help guide you in the right direction and hide nothing from them. It will only cause you problems down the road if you do.
A word about non-traditional, commissioned employees:
This scenario is when an individual has a substantial portion of their income stemming from commission paychecks. Lenders typically average your commissions over the last two years, and you should never play around with how lenders calculate your income. Changing employers while trying to keep a loan application together is not a good idea. It will create uncertainty about your future earnings from commissions. (There would be no track record from which to procure an average income.) Even if you are selling the same type of product, with essentially the same commission structure, the underwriter will not be certain that your past earnings will accurately predict future earnings. Changing jobs would greatly impact your ability to secure a home in a negative way.
A note about bonuses – will they help or hurt?
If a substantial portion of your income at your new employer will be generating from bonuses, you may want to discuss this in great detail with your lender before moving ahead. Mortgage lenders will rarely consider future bonuses as income unless you have been on the same job for a minimum of two years and have a good track record of receiving those bonuses. They, the lender, will average your bonuses over the last two years in an effort to realistically calculate your earned income.
Changing employers means that you do not have the required two-year track record necessary to count bonuses as income. Ouch.
A word about part-time employees:
If you earn an hourly income but rarely work a 40 hour work week, you should not change jobs. There would be no way to tell how many hours you will work each week on the new job. Therefore, there’s no real way to determine your income. If you stay at your current job, the lender can simply average your earnings and come up with a figure. If you have a choice in the matter, stay where you are during the home buying process and after you are closed and moved in, redirect your efforts into finding a new and better job that you love.
Be careful to make sure you align the rate of pay with what you previously had so you don’t fall behind on any payments or get yourself into a situation where you’re paying penalties and sliding backwards or falling behind. It sounds very obvious to say that but you’d be surprised at how many people still overlook this fact.
Earning over-time income can help:
Since all employers award over-time hours differently, your overtime income can be determined, but be very careful about switching employers. If you remain at your current job, most likely, if there is a good track record established, your lender will give you credit for the over-time income. They determine your over-time earnings over the last two years, and then calculate a monthly average. That’s great news! Keep working hard!
A word about self-employment:
If you are considering trading in your steady job for one of self-employment before buying a new home, don’t do it. Make your purchase first.
Lenders like to see a two-year track record of self-employment income when approving a loan. In addition, self-employed individuals tend to include many expenses on their Schedule C of their tax returns. This is especially true in the early years of the self-employment. While this minimizes your tax obligation to the IRS, it also minimizes your income potential to qualify for a home loan.
If your income is very high, well above average, and the loan amount you are seeking is considerably “low” your lender will consider this fact as well. It would be a similar situation to buying a home for cash, but not quite.
It’s very important to note that if you are considering changing your business from a sole proprietorship to a partnership or corporation, you should also delay the process regarding your purchase for the same reasons as stated above.
When transitioning from being a W-2 employee over to a 1099 employee, it’s considered that same ‘ol situation when considering commission and bonuses. Meaning, that the lenders need to have a two year history to average a 1099 income. They can use one year instead of two, but you have to still prove that you’ve been self-employed for at least two years previous to the switch. The bottom line is that is you are going to be switching anything regarding how you generate income during a home loan process, get all the details up front from your lender to make sure you can still keep wind in your sails.
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People who already have a home usually need the funds from the closing to secure their next purchase. If a “move-up” buyer wants to buy a home during a depressed market, that means they usually have one to sell themselves. Timing becomes very important and negotiations become more involved so neither party is forced into short-term housing or find themselves in rent-back situation because closing dates couldn’t match up. It’s important to work closely with your Realtor, your lender and be made aware with frequent updates from the other side of the table that things are headed in the right direction, and for a smooth closing. The ideal here is for all the stars to align, for everyone involved.
Interestingly, if a Seller wants to sell his home to take advantage of a “hot” market (when prices are fairly high) they generally are faced with the reality of securing that purchase within the same “hot” market, and can expect to pay a premium on the other side as well. In a very real way, things even out. Having said that, the way some areas are rebounding quicker than others it is possible for a Seller to sell for a higher price in an area that currently has much more demand than the area they are moving into next. This could be an inter-state move or it could even happen in the same county.
Obviously, economic patterns will change over time. They always have. Since The Great Depression of 1929, we have had quite a few periods of declining markets not only here in the USA, but globally as well. No matter the length of time between depressed markets and/or higher interest rates, you wouldn’t want to wait over a period of years to buy a home, would you? You would still potentially miss out on a substantial amount of equity and appreciation by waiting over long periods of time. Not to mention the losses you would have incurred in paying rent that you’ll never see again.
Among all of these economic shifts, according to the U.S. National Bureau of Economic Research (the official arbiter of U.S. recessions) the sub-prime mortgage crisis was a disaster. In terms of overall impact, it was concluded that it was the worst global recession since World War II. It began in December 2007 and ended in June 2009, and thus extended over 19 months. Of course this is common knowledge today and the country is still rebounding from the tremors felt along the way. According to Wikipedia, there are several “narratives” attempting to place the causes of the recession into context, with overlapping elements. Four such narratives include:
- There was the equivalent of a bank run on the shadow banking system, which includes investment banks and other non-depository financial entities. This system had grown to rival the depository system in scale yet was not subject to the same regulatory safeguards. Its failure disrupted the flow of credit to consumers and corporations.
- The U.S. economy was being driven by a housing bubble. When it burst, private residential investment (i.e., housing construction) fell by nearly 4% GDP and consumption enabled by bubble-generated housing wealth also slowed. This created a gap in annual demand (GDP) of nearly $1 trillion. The U.S. government was unwilling to make up for this private sector shortfall.
- Record levels of household debt accumulated in the decades preceding the crisis resulted in a balance sheet recession (similar to debt deflation) once housing prices began falling in 2006. Consumers began paying down debt, which reduces their consumption, slowing down the economy for an extended period while debt levels are reduced.
- U.S. government policies encouraged home ownership even for those who could not afford it, contributing to lax lending standards, unsustainable housing price increases, and indebtedness.
Fast forward to 2015, where there are many “boomerang” buyers that are starting to come back into the market now due to their time on the sidelines being almost up because of a short sale, or foreclosure they may have had to suffer though because of the circumstances stated above. Many homeowners are forced to rent because they wouldn’t be extended a line of credit – yet. Once they eagerly return to the game though, sources predict a large upswing in home sales and a subsequent decline in the rental market which for several years now has been white hot.
Today’s buyer would be very wise to form an alliance with their lender of choice, run a credit report, find out the reality of their situation and what programs they might qualify for with regards to homeownership and sweep up any mishaps from their past (if they have any) and put a plan of action into place and follow it diligently. For many people, this is easier said than done but if home ownership is still something you strive for – it is entirely possible to go out and get it done!
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