I read an article on LinkedIn the other day posted by a fellow Realtor regarding couples purchasing a house prior to getting married, and the issues that can arise from a transaction of that sort. Which got me to thinking...

Over the years, I've often told my sons (although applies equally to daughters as well) that marriage is a financial contract. While few (especially young people) enter a marriage with that thought in mind, I think that they would be better served if they did. Oddly enough, marriage is one of those contracts with little upfront fine print, yet there's a lot of moving parts that can go wrong -- which is where a contract, and the discussions and negotiation that ensue prior to entering the contract -- could be very beneficial!

One of those elements is as simple as a disparity in income - one person's standard of living is generally going to go up, and the other person's will go down. What about your bride-to-be/groom-to-be/partner-to-be's credit score? That could be an issue if you're trying to purchase a home in Southern California's competitive housing marketing. How about credit card debt, car loans, student loan debt, and overall debt load as one enters into matrimony? Any investments or assets in the mix? (if there are assets available, both parties might want to avail themselves of this quick read, written by a friend of mine, Larry Hennessey - Look Forward; Plan, Save, and Reward Yourself - Investing is not Rocket Science!  Free to my blog readers). Again, all not very romantic, but certainly important to have out on the table prior to hitching one's financial wagon to another person's, prior to tying the knot. After all, once you say "I do", you've handed over the keys to your financial world to another person, and vice-versa.

The reality is that such a contract exists -- a prenuptial contract or agreement -- but just the name has a negative connotation. We've all read about the prenuptial agreements of the rich and famous, who seem to need them on a frequent basis to protect their ample assets. But doesn't a prenuptial agreement throw a wet blanket on the whole discussion of marriage? After all, don't people marry for love? Maybe we just need to change the name to something simpler and without the baggage of the term "prenuptial agreement" -- maybe "marriage guidelines" or something not quite as sinister as the dreaded "prenuptial agreement"!

By comparison, a typical real estate contract in California is, in a fairly small font, 15 to 27 pages in length (plus or minus -- it depends on the disclosures included with the original Agreement) and that doesn't include the pages of disclosures, addendums, clarifications, escrow instructions, etc. Loan documents add another impressive stack of paperwork that must be read, digested, and agreed to, before title to a house can change hands. The good news is that should something not seem right during the due diligence process (analogous to the engagement period for folks getting married), then the agreement can be consulted to determine the available remedies. Occasionally, the remedy isn't sufficient for one party or the other, and the contract is dissolved -- much better to happen during the escrow/due-diligence/engagement period than after the deal is closed ("I do"). It's often said that purchasing a home is the biggest financial transaction of one's life. I would counter that marriage is the biggest financial transaction of one's life -- the paperwork required? A single page marriage license -- no fine print, no clarifications, no disclosures. What could possibly go wrong? Well, as the rate of divorce implies -- a lot!

In the interest of full disclosure, I've been happily married for 30 years of this writing and do not have a pre-marriage agreement.

I've been reading a lot lately about student loan debt. What continues to amaze me is how little thought appears to enter the process prior to the loans being procured. Certainly if a student wants to learn for learning's sake, and has the means to pursue that goal, then pursue it they should. For those students with more limited means, perhaps a more pragmatic approach is warranted. In other words, what is the cost/benefit of going to a particular school and/or of obtaining a specific degree? Does it make financial sense? If not, perhaps a degree with more earning potential (or a less-expensive school, or both) would be a better alternative.

In all fairness, prior to heading off to college many years ago, I didn't give this much thought (Ok - none) and my parents weren't in a position to assist me with this analysis, so expecting that of a college bound student today (or their parents) is perhaps a little disingenuous. But I think that the stakes are higher today -- college is more expensive, and the job market is a little more tenuous.

So I prepared a little calculator -- very simplistic -- but maybe at least one young college or trade-school person or their parents will benefit from it. If nothing else, to start the conversation about the overall cost, and the long term impact of taking out those easy-to-get student loans.

Items in BLUE can be changed (the others can as well, but it will disrupt the automatic calculations) -- the remaining items will calculate automatically (Note: the calculator below functions on PCs but the plug-in does not work on mobile devices, unfortunately - but you can download onto your tablet by clicking on the button below):

At some point prior to accepting an offer on a home listed for sale, the listing agent and seller will request that the buyer provide "evidence of funds" or "proof-of-funds" in an amount greater than or equal to the offered down payment plus closing costs associated with the transaction.  This will be in addition to a pre-approval for the loan that the buyer will be utilizing to purchase the home.  Of course if the transaction is "all cash" then the seller wants to see evidence of funds for the entire amount of the purchase, plus any anticipated closing costs.  Many buyers (especially first time buyers) forget about the closing costs element of the transaction, which can be substantial (about 2.125% of the purchase price, less for all cash buyers). This is certainly understandable, given that most people don't purchase homes on a regular basis -- it's easy to forget between transactions and if you've never purchased a home, you wouldn't know unless someone told you (might be a good topic for a Realtor/buyer conversation!).

Generally buyers will provide (or should provide) a copy of a recent bank statement, brokerage statement, or other documentation that clearly indicates their name, name of the financial institution, at least a partial account number, and the balance in the account.  But that's not always the case!

On one occasion, I had a buyer who insisted that they had all cash, but it was just that -- cash!  It wasn't in an account anywhere, but he expected home sellers to just "believe" that he had the cash.  I suggested that he might put it in an account for a few months to document the funds, or at the very minimum, photo-copy the funds such that a prospective seller could actually see that the cash was real.  Needless to say, this particular individual did not wind up buying a home!

The photo above is another example of the "evidence of funds" that I've received.  While i don't doubt that these funds exist (or had existed at some point in time), there's no link between these funds and the buyer!  It could be a relative, a friend, or anyone for that matter!  Evidence such as this won't get your offer accepted and it certainly won't make it past an underwriter.

So the moral of the story is, when you're ready to purchase a home, make certain that your pre-approval is solid (and recent -- and desktop underwriting or "DU" approval is even better) and that you have recent "evidence of funds" in hand!!

Thinking about buying a house, car, or other consumer product requiring financing? Or selling a house? "Know Before You Owe" is the the new mantra of the Consumer Financial Protection Bureau (CFPB) -- see my blog post from 6/3/2015 for additional information.

Yesterday, I attended a brief seminar on the new rules and guidelines, the majority of which are spelled out on CFPB's website (click here for additional info), but there will be a couple of things of which buyers, sellers, Realtors, escrow companies, and moving companies will need to be aware:

• Escrow periods may extend from 45 to 60 days (vs the current 30 day norm)
  
• Some lenders are recommending extending the loan contingency removal period from the current default in the Agreement from 21 days after Acceptance to 30 days after Acceptance -- leaving the seller off market for an extended period of time with little to no recourse; great for buyers, not so good for sellers.
  

All of the fun begins for loan applications completed on or about October 3, 2015 (or thereabouts -- subject to change per the CFPB).

On August 1, 2015 buyers, sellers, Realtor, lenders, escrow companies, moving companies, and generally anyone involved with the purchase or sale of a property, and its aftermath, will be impacted by the new Truth in Lending Act (TILA) requirements.

On the surface, the revised forms and timeframes are designed to assist consumers in making informed choices -- that's a good thing.  I can speak from experience -- when I purchased my first home in the mid 1980s (from the builder) no one mentioned anything about "closing costs".  When escrow called me to have me bring in my funds a few days prior to closing, the number that that quoted me was wildly above my expectations -- I had to scramble to come up with a few extra thousand dollars that I wasn't anticipating -- all very stressful!  And it's not uncommon to meet with first time buyers today who, after learning of the incremental impact of closing costs, elect to put things off for a few more months while they save up the necessary funds.

The new forms should be more straightforward for buyers to understand (I use a spreadsheet that I've developed to essentially accomplish the same objective - to lay out ALL of the expected upfront and monthly costs involved with purchasing a home) and is to be delivered by the lender to the buyers no later than 3 business days after the loan application is completed/signed.  No problem there.

Where the industry might run into issues is with the final set of paperwork required to be delivered to the buyer, which compares the initial estimates with the actual costs -- again, a good thing for consumers (and in an easy to understand format).  Where the law of unintended consequences might strike, is that it must be delivered to the buyer at least 3 business days prior to loan docs being signed.  While it sounds good in theory, it may cause some issues.  A last minute credit from Seller to Buyer that changes the APR by more than 1/8th of a point? New TILA documents and a new 3-day waiting period.  "But wait a minute, I've got the movers scheduled for this weekend!"  Sorry, you will need to reschedule (if you can).  "Escrow forgot to credit me the $$ that we negotiated for repairs!"  Oops -- new TILA documents may have to be sent out -- another 3 day waiting period goes into effect.   Factor in 2 or 3 houses that need to close concurrently so that buyers and sellers can "move-up" and the situation gets even worse!

It will be interesting!

Click here for additional information.

I was just reading an article in Money magazine aimed at recent college graduates with tips for them on saving and managing money. One of the items noted was to not be ashamed to live with Mom and Dad for awhile after graduation, as it's a great way to save money and to get on your feet as you start out in your new career and young adult life.

​It reminded me of a client of mine, whose two daughters (just a few years apart in age) both graduated from college and elected to live with their parents for a few years.  Both had good jobs in the financial industry, and between the two of them saved approximately $100K within 2-3 years. With that money, they purchased a very spacious, contemporary townhouse in an urban location (walking distance to restaurants/shopping/entertainment and great access to local freeways) which they share -- now their monthly living expenses are fixed, and far below what they would pay in the local rental market. What a great financial start for both of them, now in their mid-20s! 

Along those same lines, a friend of mine recently wrote a book on finance, also directed squarely at young adults (although applicable at all ages) and how they have the benefit of time on their side to make great investment decisions.  Disclosure: He didn't write the book to make $$ -- he's a self-made guy (software) that learned through trial/error how to successfully manage his own money. It is a quick, enjoyable (and easy to understand) read -- takes about 45 minutes -- and includes a couple of easy-to-use planning spreadsheets.  I would highly recommend for any young adults that you know that are just starting out in life -- from high school, college, trade school, or the military.  It is available from Amazon.com (click) in Kindle format for $2.99 (free Kindle reader software is available for just about every mobile device and PC) -- The title of the book is (click to see on Amazon.com): Look Forward: Plan, Save, and Reward Yourself -- Financial Planning is not Rocket Science by Larry Hennessey.

Update: October 26 2019 - The author, Larry Hennessey, has graciously offered to provide the booklet free of charge to readers of my blog. Click here to download a copy!

With the recent reduction in upfront mortgage insurance premiums for FHA loans from 1.75% to .85% of the loan amount, there has been a boom in refinancings, along with increased market activity for home purchases.  The result?  Many lenders are backed up and do not have the necessary manpower available to process/approve loans in a timely fashion.  This is especially true with government-backed loans -- FHA and VA - if you are using one of these loans to purchase a home, please give yourself extra time for the loan approval process.