Budgeting for the high end

If there’s one big opportunity out there in the Boulder Valley housing market, it may be for those looking to move up into high-end homes, especially homes in the $1 million to $4 million range.

Opportunity in the real estate market does not come without some pitfalls as well, but consumers who do their homework and come into the market prepared may find that their dream home is waiting for them, along with incredible interest rates, said area mortgage brokers. The trick is making sure it can work out ahead of time.

“My rule of thumb is, their house payment should be no more than 38 percent of their gross income,” said Elizabeth Million, a loan officer with Elevations Credit Union. “I know it’s a conservative approach, but I really do think it’s a good rule of thumb.

“People forget that it’s not just the principal and interest you have to pay, but also you have to consider taxes, your insurance and the HOA fees. All of those fall into that 38 percent target.”

Taxes and insurance may be especially problematic when moving up in the housing market, as even experienced homeowners may find some sticker shock there. In comparison, first-time homebuyers usually forget to budget things such as furniture and landscaping, which can lead to financial trouble.

Many rules about qualifying for all homes have also changed, noted Grant Hickman, a loan officer with Premier Mortgage of Boulder. That can also lead to problems if there are credit changes after the initial qualifying and before the closing.

“We have to pull the credit (report) again before closing now,” Hickman said. “That can keep a deal from closing if they’ve done something dramatic (like buying a new car), but when it is close, even smaller purchases can make a difference.”

Hickman said loans can potentially accommodate a 50 percent debt-to-income ratio, without any other significant debt, but that ratio may also be mandated by the loan. If a Boulder County homebuyer has to carry more than $417,000 of the purchase price in a loan, than will usually mean securing a jumbo loan, rather than a conforming loan.

“Many of the ratios (for both conforming and jumbo loans) have changed,” Hickman said. Some jumbo loans may only accommodate a 38 percent income-to-debt ratio, Hickman said, and few will allow more than 45 percent.

“There’s a misconception out there that there is no jumbo money available to lend,” he said. “But the biggest thing we’re seeing is that jumbo loan rates are coming down — you can get a 30-year fixed (mortgage) below 5 percent now.”

While the mortgage experts agreed that money is becoming available for lending outside of the conforming loans supported by Freddie Mac and Fannie Mae, the process has also become more difficult. Part of the reason is that rules have changed in light of the housing collapse, and that’s compounded by the fact that most people who can afford a home costing more than $1 million are probably self-employed.

“I find myself working two to three times as long” on getting loans through, said Carrie Nash, sales manager for SWBC Mortgage in Boulder. “Typically, that buyer will have more than 20 percent (for a down payment). We usually don’t want to see them at more than 40 percent (income to debt), but in different circumstances, we’ll go beyond that.”

However, with self-employed homebuyers, there is a lot more paperwork that will need to be filled out, Nash said. Two years of income-tax returns are pretty much the minimum, as well as other receipts substantiating income.

“People should take advantage of this market, but they should take the time upfront and get their finances completely ironed out,” she said.

One good reason to be ready to roll in this market is that the appraised value may be extremely low — lower than the seller may want to go. That’s problematic for mortgage companies, because underwriters will approve loans only on the basis of that appraised value, meaning that there will be a difference that either the buyer or the seller will have to make up.

Million noted that appraisers now may consider only the last four months of sales for similar homes. While that keeps the value current, it also cannot account for a market where a number of potential sellers are holding onto properties, waiting for conditions to improve.

“Current market sales are going to reflect the change we have seen in the market,” Million said. “So the value that’s being reflected (in appraisals) probably is more conservative.”

If a buyer really wants a home, that may mean finding a way to make up the difference with more money down, although Nash said she has often found that sellers are willing to split that difference.

At Elevations, Million said, that has been less of a problem because the credit union is putting its jumbo loans into its own portfolio, rather than reselling the loan.

Another obstacle for making the big step up, experts agreed, is whether the buyer’s original home has already been sold. If not, creating a loan reflecting income from the home being rented is a bit difficult. More often, Nash said, loans are being rewritten to cover the cost of both homes.

But regardless of the pitfalls, the experts agreed that there has been no better time to be in the upper-end market.

“It’s a most wonderful life and a wonderful time to buy a home,” quipped Million. “There are great deals, and rates have remained low.”