Often I receive phone calls with regard to what my interest rate is on any given day. Normally I give a range of where the rate might be. The reason for this is not because I want to be evasive but there are several factors that go into an interest rate.
1) As many people know interest rates are not set. They fluctuate depending on what is happening in the financial markets on a daily basis. What interest rates represent is the cost of money as a commodity. In other words, money for sale. The cost of the money changes from day to day or even hour to hour. There are times when rates are stable and we don't see much difference from day to day. But if the markets are volatile, interest rates will be too. I have seen interest rates change five times either up or down in one day. The bottom line is-if you like the rate and the payment-take it.
2) Loan Amount: Typically speaking, if the loan amount is low, the rate may be a bit higher. Let's think about that for a moment. The investor makes their money off the interest on the money. A lower loan amount is going to generate less money. Therefore, as in any business there are profit margins to be maintained-so the rate may be a little higher to increase profitability.
3) Type of loan: Whether the loan is conventional, USDA, FHA or VA may make a difference to your interest rate. Lately the government loans have had lower interest rates than conventional lending. I have seen times when that was reversed as well. Often FHA and VA are the same and more often than not USDA is at the same rate as the other two government loans.
4) Loan to Value: How much money is put down is a factor as well. Lending is all about risk taking. A borrower is deemed a better risk if they have more skin in the game so to speak-more to lose-so a loan in which the borrower is putting 20% of their own money into the transaction may have a better rate than one in which the borrower is putting 5% down.
5) Credit Score: Once again, keeping in mind that lending is about risk taking-lenders know that if a borrower has a lower credit score-something negative has probably happened-whether it is an inconsistent pattern of bill paying, little established credit, or something earth shaking such as a job loss etc. that created the issue. In any event, the higher the credit score, the better the interest rate as the investor feels more secure in the fact that the money will be repaid.
6)Cash Out: In certain refinance transaction the borrower takes cash out of the equity in the home to pay other bills or finance another endeavor. Once again the borrower is withdrawing some of their stake in the property so the lender may charge a higher rate as the risk of non payment or slow payment has increased.
7) Term of Rate Lock: Typically interest rates are locked for 30 days. 45 and 60 day locks are also available, but often at a bit higher interest rate. When a borrower locks an interest rate they are essentially promising to "buy" the money at a particular price. The investor then guarantees that price for a period of time. If the transaction doesn't close within that time period and the rate lock expires, the borrower must go back and re-buy the money. In many cases the rate lock can be extended until the transaction can be closed-sometimes there is an additional cost to the borrower. It is dependent on the lender and what the financial markets are doing at the time. The address of a particular property and an estimated closing date are required to lock an interest rate. I also want to be relatively certain that I will be the originator of the loan prior to making that rate lock. When I lock and don't have "pull through" on the loan it creates a situation in which the investor has lost money by tying it up for a transaction that isn't going to happen. There is a consequence all the way down the line.
So when asked to quote an interest rate and I appear to be slightly wishy-washy, it isn't because I don't want to give a firm quote-but as you can see there are many variables to what the interest rate may eventually be. Until I know all the variables it is almost impossible for me to be accurate-and-that accuracy is normally only good until the end of the business day.
Monday, September 16, 2013
Friday, September 13, 2013
Your Escrow Account
When I talk to soon to be first time home buyers I normally ask what monthly payment feels comfortable. Typically they have been on various websites figuring principal and interest payments so they have an idea of what they think the payment will buy. I always ask if they have included property taxes and insurance in their payment comfort level. The responses are about 50/50 whether or not they have considered taxes and insurance. Using current interest rates a payment of $575 principal and interest will buy you a home priced around $115,000 using a conventional loan. So if you were just factoring in the principal and interest payment and you felt $575 was a comfortable monthly mortgage payment you would conclude that $115,000 would be a price range that would work for you. However, if I told you that the payment on that home would more likely be $760 once you factor in the taxes, insurance and mortgage insurance that price might not be so attractive.
Unless a borrower is putting at a minimum 10% down, the lender will require what is known as an escrow-which consists of 1/12th of your property taxes and 1/12th of homeowner's insurance and a certain percentage of what is known as mortgage insurance in your payment.
Two things a lender always wants paid on time are property taxes and hazard insurance. The reason the lender wants property taxes paid is that any unpaid taxes represent a lien on the property that will be paid prior to the lender being paid in the event of a sale or foreclosure. It should go without saying why the lender wants the hazard insurance paid since the lender has the biggest financial stake in the property, they have no interest in taking the chance that the insurance will lapse. So the system of taking the insurance in your monthly mortgage payments insures that it will be paid on time.
Monthly mortgage insurance is placed on any mortgage in which the buyer has less than a 20% equity stake in the home. In other words, the value of the property must be 20% higher than the mortgage if mortgage insurance is to be avoided. Mortgage insurance in reality is there to protect the lender for the portion of the mortgage between 80% and 100% of the value of the property in case of default or a short sale. A lot of buyers feel that mortgage insurance is nothing more than a fee they are tossing down a rat hole every month. I prefer to look at it this way-mortgage insurance is essentially a way of putting 20% down over a lengthy period of time-normally about eleven years before that 20% equity is reached. At that point on a conventional loan the mortgage insurance will come off automatically. While it does seem as if it inflates the payment unnecessarily, it does allow people to purchase homes without having to save the 20% to put down.
In any event, these monies make up what is known as the escrow account. Your escrow account is a non interest bearing account in which the money is set aside on a monthly basis to pay your property taxes, your insurance, and your mortgage insurance when those items are due on an annual or semi annual basis. In many ways this enforced savings plan means that you won't have to slap your forehead when that unexpected insurance bill shows up. Federal law stipulates how much extra money can be in your escrow account at all times. So once in awhile you will receive a check back from your lending servicer that is an escrow overage-meaning the escrow account had accrued too much money. Typically this happens in the cases of new construction when the taxes aren't fully assessed so too much money is taken in to cover taxes. It is more likely that your escrow account will come up a bit short due to increases in taxes or insurance. A small cushion is allowed to cover cost increases, but every once in while it isn't enough. You tax or insurance bill will be paid, however, the lender will then normally give you the option of making up the difference in the shortfall in one payment or a series of higher mortgage payments to catch up.
Unless a borrower is putting at a minimum 10% down, the lender will require what is known as an escrow-which consists of 1/12th of your property taxes and 1/12th of homeowner's insurance and a certain percentage of what is known as mortgage insurance in your payment.
Two things a lender always wants paid on time are property taxes and hazard insurance. The reason the lender wants property taxes paid is that any unpaid taxes represent a lien on the property that will be paid prior to the lender being paid in the event of a sale or foreclosure. It should go without saying why the lender wants the hazard insurance paid since the lender has the biggest financial stake in the property, they have no interest in taking the chance that the insurance will lapse. So the system of taking the insurance in your monthly mortgage payments insures that it will be paid on time.
Monthly mortgage insurance is placed on any mortgage in which the buyer has less than a 20% equity stake in the home. In other words, the value of the property must be 20% higher than the mortgage if mortgage insurance is to be avoided. Mortgage insurance in reality is there to protect the lender for the portion of the mortgage between 80% and 100% of the value of the property in case of default or a short sale. A lot of buyers feel that mortgage insurance is nothing more than a fee they are tossing down a rat hole every month. I prefer to look at it this way-mortgage insurance is essentially a way of putting 20% down over a lengthy period of time-normally about eleven years before that 20% equity is reached. At that point on a conventional loan the mortgage insurance will come off automatically. While it does seem as if it inflates the payment unnecessarily, it does allow people to purchase homes without having to save the 20% to put down.
In any event, these monies make up what is known as the escrow account. Your escrow account is a non interest bearing account in which the money is set aside on a monthly basis to pay your property taxes, your insurance, and your mortgage insurance when those items are due on an annual or semi annual basis. In many ways this enforced savings plan means that you won't have to slap your forehead when that unexpected insurance bill shows up. Federal law stipulates how much extra money can be in your escrow account at all times. So once in awhile you will receive a check back from your lending servicer that is an escrow overage-meaning the escrow account had accrued too much money. Typically this happens in the cases of new construction when the taxes aren't fully assessed so too much money is taken in to cover taxes. It is more likely that your escrow account will come up a bit short due to increases in taxes or insurance. A small cushion is allowed to cover cost increases, but every once in while it isn't enough. You tax or insurance bill will be paid, however, the lender will then normally give you the option of making up the difference in the shortfall in one payment or a series of higher mortgage payments to catch up.
Thursday, September 12, 2013
THE APRAISAL
About a week to ten days into your loan process an appraisal will be ordered to verify the sale price that you are paying for the home you are buying. Let me clear a couple of things up about appraisals:
1) The appraisal is not a whole house inspection. A whole house inspection is performed to uncover any defects in the property that could be dangerous or costly to repair. The whole house inspection serves as a method of acquainting a home owner with the property he/she is buying and any issues they may expect that would need to be repaired. The appraisal is primarily for the purpose of establishing the value of the property. Most loans do have minimal condition criteria that the appraiser needs to take note of-USDA,FHA, and VA loans require a 100amp breaker box for instance, to comply with the loan. However, the appraiser is not an inspector in the sense that they are looking for problems or issues with the home.
2) The appraisal fee is a part of closing costs-however, even if the seller is paying closing costs on behalf of the buyer this fee falls to the buyer to pay as it is paid in advance of the appraiser performing his job. Regardless of the outcome of the appraisal the appraiser has to be paid. The cost of the appraisal is credited to the buyer at closing. With any real estate transaction, the buyer puts his appraisal money at risk. The money is non refundable.
3) If the seller has a recent appraisal that they had done in advance of selling their property you might want to consider it a marker of where the value of the property is, however that same appraisal can not be used for your purchase. Appraisals have to be in the name of the lender that is underwriting the loan. It is also possible that a different appraiser may have a different value depending on what has sold since the first appraisal was done or the use of different comparable properties.
4) Neither the lender nor the buyer has the option of choosing a specific appraiser. That changed with the mortgage loan fiasco. Lenders now have to order appraisals from appraiser pools known as appraisal management companies (AMC's). Each lender has one or more AMC and all appraisal orders are sent to the AMC. The appraisers affiliated with each AMC can choose to pick up the appraisal and perform the inspection and report. Then the report is sent back through the AMC to the lender and the buyer. The lender is not allowed to have any contact with the appraiser. While appeal processes exist for appraisals that seem to be off the mark, it is up to the individual appraiser to choose to change the report or not. In my experience, there is not much chance that anything will be changed on the report with regard to value or properties used to support the value of the home being purchased.
5) The value of a home is determined by comparing the subject property to other homes in a similar geographic area that have sold recently-normally 90 days is the optimum length of time for these sales. Each home that has been sold can have the sale price adjusted for the amenities it has or does not have compared to the subject property. From those calculations the appraiser will determine a market value. There is also a value placed on the property for the cost to build it new. However, the sales comparison value is the one that is used for lending purposes. If the property appraises for less than the sale price buyer and seller will have to go back to the negotiating table to see if they can reconcile the new price. If not, the transaction can not move forward unless the borrower has the funds to make up the difference between the appraised value and the sale price. This happens very seldom as most people don't care to overpay for a home and opt to withdraw from the transaction.
6) The appraiser may note some condition issues that require repair prior to closing the transaction. We see these requirements even on conventional lending. Lenders don't want to carry a lien on a property that has condition issues no matter how much money the buyer puts down.
The best advice on value that you can receive on a property that you are considering is from your buyer's agent. Your real estate agent can do a comparable market analysis to see if recent sales in the neighborhood will support the seller's price. If there is a question about that you may choose to move on to another property. (Another very good reason to work with a real estate agent-particularly with for sale by owners who may have priced their home based on emotion rather than concrete evidence of its true value.)
The appraisal is the step in the loan process that can take the longest as there is a finite number of appraisers. Some loans such as FHA and VA require the services of appraisers who are specifically trained in appraising for those programs. If the market is busy as in the spring and early summer getting the appraisal back can take longer. But most of the time the appraisal is back in a week from the time of the inspection.
The appraisal-an important part of the loan process-having an overview of how it all works should help ease the stress until that report is back and the transaction can move forward.
1) The appraisal is not a whole house inspection. A whole house inspection is performed to uncover any defects in the property that could be dangerous or costly to repair. The whole house inspection serves as a method of acquainting a home owner with the property he/she is buying and any issues they may expect that would need to be repaired. The appraisal is primarily for the purpose of establishing the value of the property. Most loans do have minimal condition criteria that the appraiser needs to take note of-USDA,FHA, and VA loans require a 100amp breaker box for instance, to comply with the loan. However, the appraiser is not an inspector in the sense that they are looking for problems or issues with the home.
2) The appraisal fee is a part of closing costs-however, even if the seller is paying closing costs on behalf of the buyer this fee falls to the buyer to pay as it is paid in advance of the appraiser performing his job. Regardless of the outcome of the appraisal the appraiser has to be paid. The cost of the appraisal is credited to the buyer at closing. With any real estate transaction, the buyer puts his appraisal money at risk. The money is non refundable.
3) If the seller has a recent appraisal that they had done in advance of selling their property you might want to consider it a marker of where the value of the property is, however that same appraisal can not be used for your purchase. Appraisals have to be in the name of the lender that is underwriting the loan. It is also possible that a different appraiser may have a different value depending on what has sold since the first appraisal was done or the use of different comparable properties.
4) Neither the lender nor the buyer has the option of choosing a specific appraiser. That changed with the mortgage loan fiasco. Lenders now have to order appraisals from appraiser pools known as appraisal management companies (AMC's). Each lender has one or more AMC and all appraisal orders are sent to the AMC. The appraisers affiliated with each AMC can choose to pick up the appraisal and perform the inspection and report. Then the report is sent back through the AMC to the lender and the buyer. The lender is not allowed to have any contact with the appraiser. While appeal processes exist for appraisals that seem to be off the mark, it is up to the individual appraiser to choose to change the report or not. In my experience, there is not much chance that anything will be changed on the report with regard to value or properties used to support the value of the home being purchased.
5) The value of a home is determined by comparing the subject property to other homes in a similar geographic area that have sold recently-normally 90 days is the optimum length of time for these sales. Each home that has been sold can have the sale price adjusted for the amenities it has or does not have compared to the subject property. From those calculations the appraiser will determine a market value. There is also a value placed on the property for the cost to build it new. However, the sales comparison value is the one that is used for lending purposes. If the property appraises for less than the sale price buyer and seller will have to go back to the negotiating table to see if they can reconcile the new price. If not, the transaction can not move forward unless the borrower has the funds to make up the difference between the appraised value and the sale price. This happens very seldom as most people don't care to overpay for a home and opt to withdraw from the transaction.
6) The appraiser may note some condition issues that require repair prior to closing the transaction. We see these requirements even on conventional lending. Lenders don't want to carry a lien on a property that has condition issues no matter how much money the buyer puts down.
The best advice on value that you can receive on a property that you are considering is from your buyer's agent. Your real estate agent can do a comparable market analysis to see if recent sales in the neighborhood will support the seller's price. If there is a question about that you may choose to move on to another property. (Another very good reason to work with a real estate agent-particularly with for sale by owners who may have priced their home based on emotion rather than concrete evidence of its true value.)
The appraisal is the step in the loan process that can take the longest as there is a finite number of appraisers. Some loans such as FHA and VA require the services of appraisers who are specifically trained in appraising for those programs. If the market is busy as in the spring and early summer getting the appraisal back can take longer. But most of the time the appraisal is back in a week from the time of the inspection.
The appraisal-an important part of the loan process-having an overview of how it all works should help ease the stress until that report is back and the transaction can move forward.
Tuesday, September 10, 2013
GIFTING FOR DOWN PAYMENTS
Another issue that has become a bit pricklier as lending goes is the use of gift money for down payments. A brief stroll down memory lane might be in order before I go into depth on the subject of gift money.
Pre-2008 a borrower could come up with money from pretty much anywhere for the down payment. They could ask someone, anyone, to write a "gift letter" and have the money accepted as a part of the down payment for a mortgage. What this acceptance did was open the door for some very egregious practices-such as taking cash advances on credit cards, opening high interest rate signature loans, accepeting seller contributions, or obtaining money from other questionable sources. With the collapse of the housing market, overvalued homes, and all that came with it, the Federal Government along with it Fannie Mae, Freddie Mac, and FHA began the process of looking more carefully at where the money for down payments originated.
Tthe new rules of the road were changed so that the money for down payments had to be traceable and that included gifts.
First: the rules pertaining to who may give a gift has been tightened up. The donor has to have a proven relationship to the borrower-so family members, afianced couples, as long as they have bank accounts and addresses in common, are acceptable donors for gifts. The relationship has to be verifiable-in some cases where names have changed due to marriage, we have had to go so far as to obtain marriage licenses and birth certificates to prove the relationship.
Secondly, the money can't just turn up in the borrower's bank account. It must be proven that the donor has the money to give. This is one of the most controversial parts of the new law. The money for the gift must be verified in the bank account of the donor prior to dispersal of the gift money. Many donors are resistant to this part of the process. What business is it of the lender to check where the money is stashed? Federal Finance Reform makes it the lender's business. Unfortunately for those of us who wouldn't know a terrorist if one sat down next to us on the bus, banks are now the first defense against money laundering. (If you will recall, the 9/11 high jackers had large sums of cash rolling through their bank accounts-threfore banks are required to look at all large sums of money used in various banking transactions-mortgage lending being one of them.) However, proof of the assets can be easily achieved by producing a copy of the donor's bank statement showing the money available before the actual check or transfer is/was made.
Third-a copy of the check or wire transfer slip may also be required.
Fourth-the lender will want to see a deposit for exactly the same amount as the aforementioned check or transfer go into the borrower's account. A "gift letter" which is actually a form that is produced by the loan originator's software will have to be filled out and signed by both the donor and the receiver. The gifting process isn't exceptionally difficult if it is done correctly from the beginning. Here is where we run into trouble:
If the donor has cash sitting in the sock drawer and gives the cash to the borrower, the money may not be used. Unsubstantiated cash into a bank account cannot be used as funds to close a loan. Who says so? Uncle Sam says so and lenders are required to adhere to Federal Law.
If you are using a conventional loan to purchase your home 5% of the down payment must be the borrower's own funds. Any other funds towards the down payment can be a gift. (As of this writing the rules is 3% of the borrower's own funds, however that rule is due to change to 5% within a month or two.)
With an FHA loan all of the down payment or the entire 3.5% can be gift funds from a family member. In certain circumstances, a borrower can buy a property from a family member and have the 3.5% gifted as a gift of equity-but that is a bit of a different animal and other rules apply also.
VA loans and USDA loans do not require down payment funds. However, it is important to note that even these loans have upfront costs attached to them such as inspections of various types, the appraisal, and so forth. If a family member is gifting you the money for your appraisal for instance, once again it is important that you document the gift in the same manner as down payment gifting.
A gift from a family member is an excellent method of obtaining down payment funds for the purchase of a house. Many families are supportive of their children purchasing a home. Home ownership is a proven method of building net worth. It also builds stability and community. So don't be afraid to use a gift to buy a home-just follow the rules and it will be easy.
Pre-2008 a borrower could come up with money from pretty much anywhere for the down payment. They could ask someone, anyone, to write a "gift letter" and have the money accepted as a part of the down payment for a mortgage. What this acceptance did was open the door for some very egregious practices-such as taking cash advances on credit cards, opening high interest rate signature loans, accepeting seller contributions, or obtaining money from other questionable sources. With the collapse of the housing market, overvalued homes, and all that came with it, the Federal Government along with it Fannie Mae, Freddie Mac, and FHA began the process of looking more carefully at where the money for down payments originated.
Tthe new rules of the road were changed so that the money for down payments had to be traceable and that included gifts.
First: the rules pertaining to who may give a gift has been tightened up. The donor has to have a proven relationship to the borrower-so family members, afianced couples, as long as they have bank accounts and addresses in common, are acceptable donors for gifts. The relationship has to be verifiable-in some cases where names have changed due to marriage, we have had to go so far as to obtain marriage licenses and birth certificates to prove the relationship.
Secondly, the money can't just turn up in the borrower's bank account. It must be proven that the donor has the money to give. This is one of the most controversial parts of the new law. The money for the gift must be verified in the bank account of the donor prior to dispersal of the gift money. Many donors are resistant to this part of the process. What business is it of the lender to check where the money is stashed? Federal Finance Reform makes it the lender's business. Unfortunately for those of us who wouldn't know a terrorist if one sat down next to us on the bus, banks are now the first defense against money laundering. (If you will recall, the 9/11 high jackers had large sums of cash rolling through their bank accounts-threfore banks are required to look at all large sums of money used in various banking transactions-mortgage lending being one of them.) However, proof of the assets can be easily achieved by producing a copy of the donor's bank statement showing the money available before the actual check or transfer is/was made.
Third-a copy of the check or wire transfer slip may also be required.
Fourth-the lender will want to see a deposit for exactly the same amount as the aforementioned check or transfer go into the borrower's account. A "gift letter" which is actually a form that is produced by the loan originator's software will have to be filled out and signed by both the donor and the receiver. The gifting process isn't exceptionally difficult if it is done correctly from the beginning. Here is where we run into trouble:
If the donor has cash sitting in the sock drawer and gives the cash to the borrower, the money may not be used. Unsubstantiated cash into a bank account cannot be used as funds to close a loan. Who says so? Uncle Sam says so and lenders are required to adhere to Federal Law.
If you are using a conventional loan to purchase your home 5% of the down payment must be the borrower's own funds. Any other funds towards the down payment can be a gift. (As of this writing the rules is 3% of the borrower's own funds, however that rule is due to change to 5% within a month or two.)
With an FHA loan all of the down payment or the entire 3.5% can be gift funds from a family member. In certain circumstances, a borrower can buy a property from a family member and have the 3.5% gifted as a gift of equity-but that is a bit of a different animal and other rules apply also.
VA loans and USDA loans do not require down payment funds. However, it is important to note that even these loans have upfront costs attached to them such as inspections of various types, the appraisal, and so forth. If a family member is gifting you the money for your appraisal for instance, once again it is important that you document the gift in the same manner as down payment gifting.
A gift from a family member is an excellent method of obtaining down payment funds for the purchase of a house. Many families are supportive of their children purchasing a home. Home ownership is a proven method of building net worth. It also builds stability and community. So don't be afraid to use a gift to buy a home-just follow the rules and it will be easy.
Monday, September 9, 2013
FINANCING REPAIRS
One of the worst things that can happen to a house is to stand empty. Without anyone to keep an eye on the condition of a property small defects that could be repaired inexpensively become large defects costing significant amounts of money to remedy. This is the fate of the millions of foreclosed homes that litter the real estate landscape. Forclosure is a process that takes months to complete. At some point in that process the homeowner leaves or is forced to leave, essentially abandoning the care and maintenance of the property. The banking institutions, having taken millions of homes into an unwanted inventory have no interest in keeping the homes cared for or maintained. One point to always remember whether the home has been sitting empty due to foreclosure or any other reason-there will be problems that present themselves that would not occur in an an occupied property. Burst pipes, leaking roofs, mildew, wood devouring insects, or theft of the copper in the water supply lines are all common defects in vacant homes.
But, there are good buys to be had if you are willing to deal with the issues that come with these homes-particularly if you are paying cash and have cash on hand to fix the problems. This blog isn't about cash. This blog is about mortgages and finding a roadmap through what has become a confusing process. So-you have found a good buy on a foreclosed property but there is a little problem-the prior owner took the kitchen cabinets and counter tops with them. You don't have fifteen or twenty thousand in the bank to take care of the repairs and...even if you did...the lender from whom you wish to obtain financing isn't going to let you close on a property that is missing 80% of the kitchen. And guess what else? Even if you have the money to add what is missing, the bank that owns the property won't allow you to repair the property to meet your lender's requirements prior to closing. And...the lender who owns the property won't fix it either. Wait...let's review: My bank who is financing my mortgage won't close on the property unless there are cabinets, countertop, and a sink in the kitchen. Even if I ask Aunt Matilda to give me money to repair the kitchen so it meets my bank's requirements to close, the bank that owns the house won't allow me to repair the problems before closing, and the bank that owns the property won't repair it so they can sell it? Is that right? Do we have a circular firing squad going on? Yep, Sparky, you got it.
How does the bank that owns the house ever expect to sell it? Don't they know that most people have to obtain mortgages to buy a house? They do. They just aren't into rehab. What to do? What to do? Look for the cavalry-the US cavalry to be specific. As it happens, HUD using the FHA loan does have a solution. It is called the 203K loan. (Took me awhile before I realized it wasn't a retirment plan too.) It is a mortgage loan that will allow you to finance the repairs into the loan and hold the repair money in escrow so you can repair the house after you close. It's just that simple...well sort of...but it works.
There are more than a few rules that cover this loan. You will need the standard 3.5% down payment that FHA requires-and in this case it has to be your money-no gifts from interested parents or relatives. But to soften that blow, the down payment is on the house without the repair money in the loan. So if you are buying a $60,000 property and expecting to put $25,000 into repairs, your down payment would be 3.5% of the $60,000 not the $85,000. The house does have to appraise at repaired value that is at or exceeds the cost of the purchase price and the repairs. And, no sweat equity. You will need a bonafide contractor with an internet or yellow page presence, not your cousin Eddy who weilds a pretty mean paint brush. (Even if cousin Eddy is a bonafide contractor, the rules of the loan do not allow family members to be your contractor.) Also the money can't be used for structural repairs. So this loan won't work to repair floating foundations, room additions, truss repair or to shore up sagging floor joists. It will replace windows, faulty furnaces and air conditoning, reshingle roofs, buy appliances, or repair exisitng structures such as screen porches or decks. It won't build new decks or screen porches. And, there is a cap on the loan-$35,000.
So if your dream home is missing the furnace or has broken pipes, be sure to ask about the FHA 203K loan. Not every FHA lender has the product as many choose not to deal with it, but with the right buyer and the right property it is a terrific product.
But, there are good buys to be had if you are willing to deal with the issues that come with these homes-particularly if you are paying cash and have cash on hand to fix the problems. This blog isn't about cash. This blog is about mortgages and finding a roadmap through what has become a confusing process. So-you have found a good buy on a foreclosed property but there is a little problem-the prior owner took the kitchen cabinets and counter tops with them. You don't have fifteen or twenty thousand in the bank to take care of the repairs and...even if you did...the lender from whom you wish to obtain financing isn't going to let you close on a property that is missing 80% of the kitchen. And guess what else? Even if you have the money to add what is missing, the bank that owns the property won't allow you to repair the property to meet your lender's requirements prior to closing. And...the lender who owns the property won't fix it either. Wait...let's review: My bank who is financing my mortgage won't close on the property unless there are cabinets, countertop, and a sink in the kitchen. Even if I ask Aunt Matilda to give me money to repair the kitchen so it meets my bank's requirements to close, the bank that owns the house won't allow me to repair the problems before closing, and the bank that owns the property won't repair it so they can sell it? Is that right? Do we have a circular firing squad going on? Yep, Sparky, you got it.
How does the bank that owns the house ever expect to sell it? Don't they know that most people have to obtain mortgages to buy a house? They do. They just aren't into rehab. What to do? What to do? Look for the cavalry-the US cavalry to be specific. As it happens, HUD using the FHA loan does have a solution. It is called the 203K loan. (Took me awhile before I realized it wasn't a retirment plan too.) It is a mortgage loan that will allow you to finance the repairs into the loan and hold the repair money in escrow so you can repair the house after you close. It's just that simple...well sort of...but it works.
There are more than a few rules that cover this loan. You will need the standard 3.5% down payment that FHA requires-and in this case it has to be your money-no gifts from interested parents or relatives. But to soften that blow, the down payment is on the house without the repair money in the loan. So if you are buying a $60,000 property and expecting to put $25,000 into repairs, your down payment would be 3.5% of the $60,000 not the $85,000. The house does have to appraise at repaired value that is at or exceeds the cost of the purchase price and the repairs. And, no sweat equity. You will need a bonafide contractor with an internet or yellow page presence, not your cousin Eddy who weilds a pretty mean paint brush. (Even if cousin Eddy is a bonafide contractor, the rules of the loan do not allow family members to be your contractor.) Also the money can't be used for structural repairs. So this loan won't work to repair floating foundations, room additions, truss repair or to shore up sagging floor joists. It will replace windows, faulty furnaces and air conditoning, reshingle roofs, buy appliances, or repair exisitng structures such as screen porches or decks. It won't build new decks or screen porches. And, there is a cap on the loan-$35,000.
So if your dream home is missing the furnace or has broken pipes, be sure to ask about the FHA 203K loan. Not every FHA lender has the product as many choose not to deal with it, but with the right buyer and the right property it is a terrific product.
Sunday, September 8, 2013
WHAT DID YOU SAY I HAVE TO DO FIRST?
Without a doubt, the most anticipated part of buying a new home is the search. Many people think that the sequence of events leading up to a home purchase is to drive by one you think you would like to see, call the realtor listed on the sign to make an appointment and if you like it, buy it, or if you don't like it, drive around some more until you find another one you like.
This is a great plan- in a perfect world. Since we don't live in a perfect world, reality often intrudes. The search for a new home begins prior to ever setting foot into a potential house to purchase. In order to start the process that leads to home ownership you must start at the beginning.
What is it that every potential home owner needs to be able to buy a home? The financial wherewithal of course. If you have enough cash to plunk down on a purchase, you can quit reading now. Go back to your search. However, most of us require a mortgage loan to buy. That being the case, it is important to know that you can obtain the money to finance the house and how much money is available to you.
There is an old saying about buyers-they must be ready, willing, and able. The world is full of folks who are ready and willing. the key component is that you are able. In order to figure that out, you will need to become pre-approved by a lender. The lender will look at your credit history, your employment history, assets, and income to determine if you have the ability to be approved for a mortgage loan. The lender will also analyze what loan product is the best product for your unique financial situation. It is also important to understand that different types of mortgage lenders are different and what those differences are.
1) Your bank or credit union. Many people begin here because that is where you have your checking and savings, and it seems like the best and easiest route to the mortgage money. It may be...then again, it may not. If you have high credit scores-700 or above-money put away for a down payment, and consistent steady income at a job you have held two years or more your bank will probably approve your mortgage loan. However, given the economic damage that the recession of 2008 visited upon many people, your bank may tell you they appreciate your asking, but no, they can't offer you a mortgage.
What would cause them to turn down your loan? Many things, but chief among them would be an interruption in employment, bankruptcy or foreclosure on a previous property, or a credit score lower than the 700 mentioned above. The important thing to remember is that your bank is not your only option.
2) Many people seek out the services of a mortgage broker. A mortgage broker has relationships with different lenders. There is a base set of rules pertaining to mortgage lending that all sources of mortgage money have to adhere, but, lenders can add their own rules onto the base rules which leads to different criteria from different lenders to loan mortgage money. A broker has access to sources of mortgage money that offer differing rules which means that the chances are greater that you will be successful in obtaining a mortgage loan from a broker. And don't listen to conventional wisdom that brokers charge more money for their services. They don't. The Federal Government took care of that with the Financial Reform Act. Because underwriting and processing fees differ from lender to lender, brokers are often able to charge a bit less than banks. One other factor that conventional wisdom says about banks is that your loan will stay with your bank. That doesn't happen much any more. You may be able to make your payment to the bank that originated the loan but the loan in most cases will be sold to another much larger lender. That is the way more money is created for more mortgages.
So your first move when considering the purchase of a home is to go to your mortgage broker and become pre-approved. Sellers expect offers from pre-approved buyers. They aren't going to remove their home from the market if they don't have a good idea that your offer will result in a sale and that you can afford the house. Becoming pre-approved means that the broker has looked at your financial ability to obtain mortgage financing and can tell you what price range would be approved, a ball park on what your payment and costs will be, and the type of financing you can expect. Armed with that information you can move forward to the fun part of your quest for a home, the search.
This is a great plan- in a perfect world. Since we don't live in a perfect world, reality often intrudes. The search for a new home begins prior to ever setting foot into a potential house to purchase. In order to start the process that leads to home ownership you must start at the beginning.
What is it that every potential home owner needs to be able to buy a home? The financial wherewithal of course. If you have enough cash to plunk down on a purchase, you can quit reading now. Go back to your search. However, most of us require a mortgage loan to buy. That being the case, it is important to know that you can obtain the money to finance the house and how much money is available to you.
There is an old saying about buyers-they must be ready, willing, and able. The world is full of folks who are ready and willing. the key component is that you are able. In order to figure that out, you will need to become pre-approved by a lender. The lender will look at your credit history, your employment history, assets, and income to determine if you have the ability to be approved for a mortgage loan. The lender will also analyze what loan product is the best product for your unique financial situation. It is also important to understand that different types of mortgage lenders are different and what those differences are.
1) Your bank or credit union. Many people begin here because that is where you have your checking and savings, and it seems like the best and easiest route to the mortgage money. It may be...then again, it may not. If you have high credit scores-700 or above-money put away for a down payment, and consistent steady income at a job you have held two years or more your bank will probably approve your mortgage loan. However, given the economic damage that the recession of 2008 visited upon many people, your bank may tell you they appreciate your asking, but no, they can't offer you a mortgage.
What would cause them to turn down your loan? Many things, but chief among them would be an interruption in employment, bankruptcy or foreclosure on a previous property, or a credit score lower than the 700 mentioned above. The important thing to remember is that your bank is not your only option.
2) Many people seek out the services of a mortgage broker. A mortgage broker has relationships with different lenders. There is a base set of rules pertaining to mortgage lending that all sources of mortgage money have to adhere, but, lenders can add their own rules onto the base rules which leads to different criteria from different lenders to loan mortgage money. A broker has access to sources of mortgage money that offer differing rules which means that the chances are greater that you will be successful in obtaining a mortgage loan from a broker. And don't listen to conventional wisdom that brokers charge more money for their services. They don't. The Federal Government took care of that with the Financial Reform Act. Because underwriting and processing fees differ from lender to lender, brokers are often able to charge a bit less than banks. One other factor that conventional wisdom says about banks is that your loan will stay with your bank. That doesn't happen much any more. You may be able to make your payment to the bank that originated the loan but the loan in most cases will be sold to another much larger lender. That is the way more money is created for more mortgages.
So your first move when considering the purchase of a home is to go to your mortgage broker and become pre-approved. Sellers expect offers from pre-approved buyers. They aren't going to remove their home from the market if they don't have a good idea that your offer will result in a sale and that you can afford the house. Becoming pre-approved means that the broker has looked at your financial ability to obtain mortgage financing and can tell you what price range would be approved, a ball park on what your payment and costs will be, and the type of financing you can expect. Armed with that information you can move forward to the fun part of your quest for a home, the search.
Thursday, September 5, 2013
THIS WAS SO EASY THE LAST TIME!
I hear this comment fairly frequently from past clients as well as folks that have found their way to my door who have purchased homes previously.
If you bought a home prior to 2008 no doubt it was easier. 2005-2008 was the Wild West for the mortgage loan industry. Liar Loans, low doc, no doc, and stated asset loans not to mention the really big bad guns of the loan industry-the subprime loan. During this period of time all someone needed to do to obtain mortgage financing was have a pulse.
But all good (?) things must come to an end. Millions of loans went bad due to over priced housing, people who had been able to purchase homes with terrible credit, the influence of Wall Street greed, and just about anyone who wanted to make an easy buck at the expense of the consumer. When I think about all the highly creative and questionable methods that were used to finance homes and then sold on the secondary market as "A" investments...it is no wonder the whole house of cards came tumbling down. It almost brought the global economy down with it. It was that bad.
The logical consequence of the economic disaster that took place in 2008 was that the Federal Government passed a series of regulatory controls that have put the handcuffs on banks, Wall Street, and mortgage brokers. These handcuffs don't just fit the big boys-they are attached to all of us down to the local level. (I didn't get rich writing bad mortgage loans-that I can assure you.)
So what this means is that we now have to question and prove all kinds of things such as where the money comes from that you are using for your down payment. It isn't enough that a big wad of cash was just deposited in your bank account. It is now required that you disclose where the money came from. If your mom gave you a check for the down payment you may or may not be able to use it-there is a methodology to gift funds for loans. It's not that the bank doesn't want your mom to give you a gift-it's that the bank and the Federal Government want to be sure that the money is hers to give and not borrowed from a credit card, another bank etc. Borrowed money has to be paid back and for the most part it is required that the borrower has some skin in the game so to speak.
You also have to be able to prove your income. While I know most of you are thinking, "that's a no brainer," since many of the loans that went bad were loans in which income wasn't verified there are now checks in place to be sure that the borrower is employed-such as calling the employer on the day the loan closes-to requesting transcripts for two years of tax returns from the IRS. The Federal Government now requires lenders to have proof on file that they have done everything possible to ensure that the loans they have approved are to people who have a high likelihood of paying them back.
And since Federal Finance Reform is an equal opportunity law, it applies to everyone-me, you, all of us. So while I understand the pain of those of you are imminently qualified to pay back your loan, who have never missed a payment in your life, we have to do what seems to be a huge amount of overkill. Not because we like poking around splitting the hairs finely, but because Uncle Sam says so.
I want you to be certain of this fact alone-when you go in to obtain mortgage financing, everything that the loan originator asks you to produce is for a good reason. The good loan originator will try to be pro-active and obtain documentation prior to the lender requesting it. Why? Because your originator wants to make the process as easy as possible as they can for you. If we have something in a file already then we don't have to track you down from packing your moving boxes to ask you for it. We know you have a life too which has been complicated by the fact that you are moving your worldly belonging somewhere else. Experience tells us what items we will most likely need. But underwriters are a cagy lot. It is their job to ensure that the loan is watertight and won't be questioned by whatever entity is buying it-so the underwriters often ask for things we hadn't thought of. They are creative that way. But it is also their job to screen out risk.
In essence, we are now paying for "it was so easy last time". One would think the pendulum will gradually swing back again. But thank you for asking.
If you bought a home prior to 2008 no doubt it was easier. 2005-2008 was the Wild West for the mortgage loan industry. Liar Loans, low doc, no doc, and stated asset loans not to mention the really big bad guns of the loan industry-the subprime loan. During this period of time all someone needed to do to obtain mortgage financing was have a pulse.
But all good (?) things must come to an end. Millions of loans went bad due to over priced housing, people who had been able to purchase homes with terrible credit, the influence of Wall Street greed, and just about anyone who wanted to make an easy buck at the expense of the consumer. When I think about all the highly creative and questionable methods that were used to finance homes and then sold on the secondary market as "A" investments...it is no wonder the whole house of cards came tumbling down. It almost brought the global economy down with it. It was that bad.
The logical consequence of the economic disaster that took place in 2008 was that the Federal Government passed a series of regulatory controls that have put the handcuffs on banks, Wall Street, and mortgage brokers. These handcuffs don't just fit the big boys-they are attached to all of us down to the local level. (I didn't get rich writing bad mortgage loans-that I can assure you.)
So what this means is that we now have to question and prove all kinds of things such as where the money comes from that you are using for your down payment. It isn't enough that a big wad of cash was just deposited in your bank account. It is now required that you disclose where the money came from. If your mom gave you a check for the down payment you may or may not be able to use it-there is a methodology to gift funds for loans. It's not that the bank doesn't want your mom to give you a gift-it's that the bank and the Federal Government want to be sure that the money is hers to give and not borrowed from a credit card, another bank etc. Borrowed money has to be paid back and for the most part it is required that the borrower has some skin in the game so to speak.
You also have to be able to prove your income. While I know most of you are thinking, "that's a no brainer," since many of the loans that went bad were loans in which income wasn't verified there are now checks in place to be sure that the borrower is employed-such as calling the employer on the day the loan closes-to requesting transcripts for two years of tax returns from the IRS. The Federal Government now requires lenders to have proof on file that they have done everything possible to ensure that the loans they have approved are to people who have a high likelihood of paying them back.
And since Federal Finance Reform is an equal opportunity law, it applies to everyone-me, you, all of us. So while I understand the pain of those of you are imminently qualified to pay back your loan, who have never missed a payment in your life, we have to do what seems to be a huge amount of overkill. Not because we like poking around splitting the hairs finely, but because Uncle Sam says so.
I want you to be certain of this fact alone-when you go in to obtain mortgage financing, everything that the loan originator asks you to produce is for a good reason. The good loan originator will try to be pro-active and obtain documentation prior to the lender requesting it. Why? Because your originator wants to make the process as easy as possible as they can for you. If we have something in a file already then we don't have to track you down from packing your moving boxes to ask you for it. We know you have a life too which has been complicated by the fact that you are moving your worldly belonging somewhere else. Experience tells us what items we will most likely need. But underwriters are a cagy lot. It is their job to ensure that the loan is watertight and won't be questioned by whatever entity is buying it-so the underwriters often ask for things we hadn't thought of. They are creative that way. But it is also their job to screen out risk.
In essence, we are now paying for "it was so easy last time". One would think the pendulum will gradually swing back again. But thank you for asking.
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