So you want to be a homeowner: Tips for buying your first home

For most first time home buyers, and many repeat buyers, the process and documentation of a home purchase can be overwhelming.  This need not be the case.  A clear understanding of the process, the documents that will likely be needed and all the responsibilities of those people involved will relieve a great deal of unnecessary stress in the process.

While each loan is different, there are some basic steps you can take to make sure your purchase goes as smoothly as possible.

Step 1: Do a self-evaluation prior to shopping

Go to www.annualcreditreport.com and get a free copy of your credit report from the three major repositories (Equifax, Experian and Trans Union).  This site will provide you the content of the each report from the main repository for free once a year.  They WILL NOT provide you with the scores unless you pay for that; and at this point the scores are not critical (more on that later).  Sit down and review your report content with a critical eye.

Look at the open accounts:

  • Are any balances more than 50% of the available credit?
  • Are there any late payments in the last two years?
  • How long have you had that account open (the longer the account is open the better it effects your scores – this is called Credit Depth)?
  • Do you have a single credit item or total open credit items of more than $1,500 credit line (for a first time buyer the lender will likely want to see a total credit history of more than 1,500)?
  • Are there any derogatory items listed?  If so:
  • Are they accurate?  If so not much you can do about this other than wait for them to come off naturally.
  • Are the inaccurate?  If so, gather your evidence and contact the creditor to try and correct.  If that does not work contact the credit repository that the item shows up on and dispute it.  ***Keep in mind that you may have NO OPEN DISPUTES on your credit when you go to finance so you want this to be resolved before you apply***
  • Are there judgments?  Are they showing as paid or closed?  If not make sure you attend to these.
  • Are there late payments, overdue or collection accounts?  If so look at each one and determine if they are accurate and if you can pay them off to remove the negative.  The fact that they are paid will not remove the item(s) but it will show that you paid the bill.

It’s the Principle of it

Over the years I have worked with many borrowers who had small collections on their reports.  Things like cable; telephone; utilities or cell phone cancellation collections.  These annoying items are usually under $100.  The customer will inevitably tell me that they will never pay those bills because they feel like it was unfair, or a charge they did not expect for terminating a service or any number of reasons they feel wronged by the charge.  While I totally understand the emotion of his the reality is that lending is a matter of risk management and even though the borrower felt the charge was unfair, I advise them to pay them off.  My logic is that the charge off, even a small one does much more damage to your borrowing power than the righteousness of not paying them.

Now that you have reviewed your report and dealt with anything you can to make it the best view of your credit history possible for the underwriters let’s look at the next step:

Step 2: Make a document File

For most people the process of gathering all the documents needed by the realtor, lender and attorney feels like pushing a wet noodle uphill with your nose.  No matter how many documents you supply they need more or the same documents over and over to different people.

Be prepared for this.  When you decide buying a home is what you want get an accordion folder or file folder and start gathering the basic documents that anyone might need.  As you go through the process whenever you get a new version of a document that is in your file add the new one and remove the oldest one to your personal files.

Here is a sample list of what should be in your document folder and ready to be scanned or faxed at a moment’s notice:

INCOME

If you have a W-2 job:

  • A current month of paystubs for all borrowers.  This includes the entire stub showing your pay, taxes, year-to-date amounts, your name and date of the check.  If you get paid once a month, this is one stub, if you get paid twice; two, if you get paid bi-weekly; it could be 3, weekly; it could be four or five.
  • Last two years W-2 forms for all borrowers
  • If you are self-employed or 1099:
    • Last two years Federal Income Tax returns; you will need to be able to show at least two years income from your business or self-employed position for almost any lender.
  • If you own rental property or have other income besides your primary job:
    • Last two years Federal Income Tax returns

ASSETS

  • Two months of bank statements.  If you get paper statements in the mail make sure you save all pages, even the blank one at the end.  If you bank on-line you can usually print the summary page and a 60 day transaction history report.  Make sure you have your down payment money in the account you will be providing statements for.  Closing costs and down payment money for a purchase need to come from the account that you provide to the underwriter.  ***A word of caution: When you are shopping for a new home, and financing for that purchase DO NOT make any large deposits to your accounts that are not payroll related.  Underwriters require you to document all deposits that are not payroll related.  If you make a large deposit be sure they will want to know the source and require documentation for that deposit to show that you did not get any new debt or advance credit cards to get the cash. ***
  • Most recent retirement or investment account statement.  These will likely be used for reserves.  When the underwriter reviews the file depending on the risk factors they may require proof that you have one, three or even twelve months of payments in reserve.  Retirement account statements can be used to satisfy this requirement.
  • Documentation of the source of your down payment and money for closing costs.  If you do not have the money liquid in your bank account for your down payment and closing costs; where is it coming from?  Many first time home buyers do not know you can get a gift from relatives for this.  Check with your loan advisor for details on how to handle this.

OTHER ITEMS

There are likely to be other items needed and your loan advisor can guide you for the specifics based on your loan scenario but here are some other items to keep handy:

  • Color copy of your government issued ID (Driver’s License, Passport, etc.)
  • If you are currently renting: a copy of your lease
  • If you have rental property: copies of the leases for terms of one year or more, tax bill and home owner’s insurance for each property
  • Your 4th grade report card – Just kidding on that one.

Step 3: Decide what you want

I know this may sound like a simple thing but to get the best result out of your home purchase experience you need to take some time and decide what it is you really want.

Sit down (with your partners if you are buying a family home) and list out the features you want.  List everything you can think.  Then mark each items as a NEED or a WANT.

Some examples of NEEDS might be:

  • 3 bedrooms (you, your child and a home office or guest room)
  • Large Fenced Lot (maybe you have an outside pet)
  • Near good Schools (perhaps your children will be walking to school)

Some examples of WANTS might be:

  • Pedestal sinks
  • Granite counter tops
  • Full finished basement

Needs should be items that you MUST have.  Wants to should be items you could live without if the price was right but would be nice to have.

If you present your list to your realtor and there are NO homes that meet our Needs list requirements, perhaps you should either revisit the list and pare it down or look into custom home building (that is a whole other discussion).

Step 4: Congratulations!  You are now as prepared as possible to start the process.

Contact a lending professional and get pre-qualified.  During this stage the loan officer will gather information to present to an underwriter for initial impressions and will result in a pre-qualification letter that will indicate the amount of loan you could be qualified for.  There are several different levels of pre-qualification letter:

  • Level 1 – Based on credit report and information told to the loan officer by the client only.
  • Level 2 – Income and Asset documentation is provided to the loan officer and is reviewed by the Underwriter.  This letter has a higher level of commitment and is therefore more highly regarded by the seller.
  • Level 3- Commitment to Lend – this is a full underwrite of the file and is only lacking the actual appraisal.  This level of commitment is usually only provided after the contract is executed, the loan is locked and the processing is happening.

Once you are pre-qualified you can start shopping.  If you are a first time buyer I would recommend using a realtor.  Your loan officer should be able to provide several suggestions based on who they have done business with in the past in the area you are shopping in.

 *** IMPORTANT ***

Once you are prequalified and until you actually close on your new home, DO NOT:

  • Make any large purchases without alerting your loan officer beforehand
  • Change jobs
  • Get any new credit accounts
  • Pay off any current debts in full without discussing with your loan officer

The realtor will discuss what you are looking for (this is where the Wants and Needs list comes into play), what you can afford (this is where the pre-qualification letter comes into play) and will then provide several possibilities.  Some realtors are taking advantage of technology by showing you listing and virtual walk through videos to fine tune your search before they take you to the actual site.

Once you select the home you want your real estate professional will help you craft an offer to the seller.  This offer can be accepted, rejected, or counter offered.  This is where you negotiate until you reach an offer acceptance.  Once you have that it is time to re-engage your loan officer and provide the accepted offer.  This document will give the loan officer critical information about your loan.  Things like:

  • What is the sales price?
  • Is the seller paying any closing costs?
  • When do they want to close?
  • Are there any special negotiated items?
  • Who are all the people involved with the transaction?

Step 5: The Loan Process

From here it should be smooth sailing.

You have all your most recent income and asset documents on hand (Step 2) so now you can provide updated documents to your loan officer.

You need to order a home inspection.  This IS NOT the appraisal.  A home inspector’s job is to review the entire structure for maintenance items or defects that may or may not cause you to go back to the owner and renegotiate to have those items repaired prior to your purchase or negotiate the contract sales price to account for the cost of the repairs.

Your loan officer will go over the current rates and programs available based on the contracted information and you will likely lock your rate and program.

Your loan officer will submit your file and supporting paperwork for an initial review by the underwriter.  They will also contact all the people listed on the contract to introduce himself and let them know the process and communications that will happen during the processing of your new loan.

A home appraisal will be ordered by the loan officer through an appraisal management company.  This report gives the lender an opinion on the value of the property based on other local sales that are similar to your subject property.  It tells the lender how long the home would reasonably be on the market if it needed to be sold and the general information on the area.  These are all Risk items that are used to determine final costs and rates.

You will need to contact an insurance agent to get a quote for home owner’s insurance on your new home.  The agent will provide you with a written quote that you should send to your loan officer.  Insurance on a new home will likely need one year paid in advance.  Insurance will go into effect as soon as you actually own the home.

Once the appraisal report is in you will get a copy and it will be submitted to the underwriter.

The underwriter will normally have a couple more items they need from you at this point.  It may be clarification on a document you submitted, or a letter of explanation, or a supporting document.  Your loan officer will let you know throughout the process what is needed and when it is needed.  For any document request: the faster you can send it over, the faster it can be cleared by the underwriter.

Once your loan is approved the file will go to the closing department where they will contact all the parties and schedule your closing.

You will attend the closing, normally at an attorney’s office, and sign your new mortgage paperwork, title and deed documents.  The attorney will let you know how they want you to present the money due at closing (down payment and closing costs).  Once done you get keys and move to step 6.

Step 6: MOVE IN!

Congratulations you are now a proud new owner of your first home.

Over time you should expect to hear from your loan officer to check in on your progress, let you know about what the rate markets are doing and any opportunity to refinance that can save you money.

There are some things you may want to consider doing right after you take ownership:

  • Visit your new home!  It’s your, time you started feeling like it…
  • Plan on several trips to get basics – like drapes – the old college blanket over the windows thing may work for a short time, but you really need to consider retiring it.
  • Decide on where you want your furniture – or if you need some start shopping (now it is ok to finance something if you need to, you can always check with your loan officer to see how a new debt might effect your future borrowing power).
  • Get to know your neighbors – I know this may sound like something out of Mayberry RFD, but hey, if they do not come over to say hi, you take the step.  It’s always good to know who is around you, have a personal connection with someone who can keep an eye on your home when you are not around and you might make some new friends.
  • Most of all enjoy your new home!

This is by no means a complete list of everything involved but I have tried to hit the high points.  Your professional real estate and mortgage people can give you all the specifics related to your home purchase.  This should give you a good starting point and remember you are working with professionals the whole way, use their expertise to get the best results for you and your family.

July 28, 2014 by · Leave a Comment

Bi-Weekly Payments: Sounds good, but it is really to your advantage?

There has been a common practice that has gained acceptance over the past few years that pre-paying your mortgage is a good thing; and IT IS!  Your goal for financial independence should be to own your home outright as an asset.  Keep in mind that if you want to use that asset as a source of cash in the future you need to either re-finance to get the cash out, or have an open Equity Line that is available to you.  The challenge is not with the action but the result.  Let’s say for example you have a $200,000 loan on a 30 Year amortization at 4.5%.  Your monthly principle and interest is $1,013.  That is composed of principle and interest.  In any conforming loan you pay the bulk of that payment as interest during the first half of the loan and then it flips over to be mostly principle.  The bank gets their money first (nothing new here).  You are paying $164,813 in interest if you keep the loan for the entire time and do no pre-pay the principle balance (this is reflected on your closing documents when you did the loan).

Now let’s say you are opposed to paying any more interest than you absolutely have to AND you have some spare cash each month from a raise in pay or a second job.  You need to determine how best to use that money.  You could blow it on electronics (let’s be real here, that is an option); you could put it in savings where you might earn some interest; you could pay off some higher interest bills like credit cards (not a bad choice but let us assume you have no monthly revolving debt); or you could pay down your principle balance to save on the interest and get to real home ownership faster (face it, if you have a mortgage you are renting until you actually pay off the note, the bank owns the property).

So, you want to pre-pay your loan.  The question is how to do it to get the best result.

BI-WEEKLY PAYMENTS

Your mortgage servicer says they can set you up for auto-draft on a bi-weekly schedule and you will pay your loan off faster.  While that is technically true, let’s look at the numbers:

Your base payment is $1,013 so if you make 12 regular payments you paid $12,160 this year.

If you make bi weekly payments you pay $506 every two weeks so this year you pay $13,137.

So you paid $1,013 extra this year towards your loan.  That means every year you made one extra payment towards your loan.  If you continue to do this you will shorten your term by 4 years and 3 months and save 26,689 in interest over the life of the loan.  Sounds good right?

Here is what you are not being told…for most servicers they take the first half of your payment out automatically and put it in an interest bearing escrow account where it waits until there is a full payment available THEN it is applied to your loan.  So the servicer gets the interest on the money as it waits for two weeks.  Now this does not necessarily apply to all servicers, you need to check for yourself before you agree to this.

MONTHLY PRE-PAYMENTS

Another option is Monthly pre-payments.  If we take the above example of bi-weekly and breakdown the annual payment into the monthly you are pre-paying $85 per month extra to accomplish the reduction in term.  Is that a large amount?  If you eat out at a fast food restaurant and eat off the dollar menu five days a week you are spending an average of $50.00 a week on lunch; that $216.67 a month.

Could you put maybe $100.00 a month from that towards paying down your mortgage debt?  If you could then you would shorten your 30 year note into a 25 year note and save $31,745.46 in interest!

Now just for churning those brain cells let’s take it one step further.  Since this is a fixed rate mortgage, and we know that interest is mostly paid up front, and the monthly payment does not change only the mix of principle and interest, how about if we DO NOT make a monthly pre-payment?

YES I SAID DO NOT MAKE A MONTHLY PRE-PAYMENT…

What if instead you open a small interest bearing savings or money market account (separate from all other active accounts…this one is special).  Each month you put the $100 in it. In the 12th month you check the balance and you send $1200 as a separate payment towards principle to your servicer.  The interest you earned throughout the year is yours to keep.  Also while paying yourself interest you have an emergency fund building value if you, for example, need to buy four new tires for the car at one time.  Instead of paying double digit interest on a credit card you could use the money in that account.  Keep in mind that you will not be making your annual pre-payment of $1200 on your mortgage, but you are offsetting that loss of reduction with the interest you might be paying on a credit card if you did not have the cash to pay it off at the end of the month.

But let’s assume you do not have any catastrophes this year and you make your $1200 pre-payment in the 12th month.  You have just accomplished the same thing as if you made monthly pre-payments BUT you paid yourself the interest over the year and had that money available to weight against other cash uses and costs in the event of an emergency.

This is how you can shorten your term and save on interest without being required to make a higher payment on a shorter term loan.

REFINANCING TO A SHORTER TERM AND LOWER RATE

Now let’s look at another alternative.  Let’s assume you got a great raise at work and now you have an extra $500 a month you could put towards principle reduction.  Would the above example work best?

Same 30 year note; $500 a month prepay results in a loan term of 15 years 3 months and interest total interest paid of $76,698 – Pretty sweet right?

Instead let’s refinance into a 15 year note at say 3.5%.  Payment is 1429.77 (right where you are with the pre-payment above) BUT you only pay $57,357 in Interest so you pay it off in about the same amount of time but save an additional $19,340 in interest because you were able to lower the rate and therefore the amount of interest you pay over the term.

This is why you need a professional with years of experience and knowledge to guide you through the best options for you.  Not just what can we get you to say yes to today, but what makes sense two years out, five years out, 10 years out.  A professional who will take the time to understand where you are financially today and what your goals are.  Someone who will not only write your loan today but watch for market shifts that you could take advantage of and let you know about them regularly throughout your relationship with your mortgage professional.

At Affinity Home Lending we take great pride in the relationships we build with our customers, their friends, and families.  We want to be the go-to person you reach out to when there is a life changing event like a new job or a child going to college.  We want to be the first person you call when you need a referral to a service provider from our network of professionals and we want you to be confident, based on our efforts, that we are here to serve your needs first and with the highest and best results.

Terms, Rate and Loan scenarios used in this document are for example purposes only and are not an offer to lend.  Each loan is different to please consult a licensed mortgage professional to see what you options are.

July 25, 2014 by · Leave a Comment

Where can I get a fair deal: the difference between Lenders and Brokers?

The world of home lending has changed dramatically.  In the 1950’s if you wanted a home loan you went to a bank, sat down with a branch representative, showed them proof that you had 20% or more down payment and signed up for a 15 or 20 year fixed loan.  The file went to the bank’s board of directors for review and was approved or not.  In 2000 if you had a 500 credit score, open collections and wanted to buy a home on an interest only loan with little or no money down, that was not only possible, it was probable.  There were programs that were fixed, adjustable, negative amortizing or any number of permutations.  That is not the case today.

Lending today is a significantly more conservative arena.  While you may still be able to obtain financing with a less than stellar credit and income profile, the cost of that loan will be significantly higher and the documentation needed to get approved will seem monumental.  Those who fund home loans are not only concerned with the quality of the borrower, they also want to insure that in the future, under no circumstance, will they have to repurchase the loan because of a defect in the loan file that was missed.  This means much more stringent underwriting and much more paperwork for anything identified as “outside the box”.

You have large deposits that are not payroll?  You changed jobs recently or have a gap in your employment?  You are getting your down payment as a gift from your parents?  This means more documentation.

The guidelines that most Lenders start with are those of Fannie Mae.  This insures that the file can be sold to them for servicing and that is how the money that they lend is replenished after closing.  Beyond that each company may place their own guidelines on top of that; these are called overlays.  A Lender is bound to their own level of risk allowance in building these guidelines.  A Broker is bound only by their intimate knowledge of the guidelines and overlays of a particular Lender that they place your file with.

So as you can see already, it is not a level playing field.  Brokers have the ability, through their relationships, to place your file with a number of Lenders who may have guidelines that will allow your file to be approved with little or no additional paperwork.  Lenders are at the mercy of the risk tolerance of the owner and their sources of funding (yes that’s right Lenders borrow the money they provide to you from someone else at a particular interest rate based on the time the money is needed and paid back).

Both Brokers and Lenders can gather information on your financial situation (take an application and pull credit); can help you better understand the requirements; can explain disclosures; and can guide you through the process. However, there are some basic differences between mortgage Brokers and Lenders:

 Sources of Funds

Brokers may represent multiple sources as opposed to Lenders who are a single source. Brokers act as your guide to help you select the best solution that fits your needs. Many Lenders in the market today also act as Brokers for those files that do not fit the profile of their guidelines.  This is more common than in the past.  The world of a Broker is ideal customer service standpoint where they can selection from a wealth of products for any particular customer profile while the Lender model allows the company to make their own lending decisions.

Mortgage Fees

Lenders charge certain fees and costs for processing the loan. Whether you use a Lender or Broker, your cost will be dependent upon how well qualified you are for the type of mortgage you are applying for. The higher your credit score and the larger your down payment and the lower your debt to income ratio is the lower the overall cost; this is called Risk Based Pricing.

Mortgage Rates and Guidelines

Brokers may be able to offer lower rates than Lenders depending on their profit model. All mortgage rates are based on what happens in the secondary market. On average a Broker will have a pricing advantage over a Lender because Brokers do all of the work on the loan, from origination to qualification to submission to closing so the source of funds selected need only underwrite the file.  A professional Broker knows where to place a loan to get a successful approval and will not waste your time or theirs simply submitting the file and hoping for a yes answer.  They will know that the file is approvable before they submit this and as a result are usually offered more attractive rates and costs from the lending source for their professionalism (this is called Pull Through: what percentage of the loan files that they submit are approved).  A Lender will have overhead like payroll for the personnel involved with the process; building and additional costs of doing business that must be passed along to the borrower.  This is normally done as a slightly higher rate offering. A Broker will be able to find the program that best fits your specific loan needs and can submit your loan to the correct Lender.  A Lender will either approve or deny your loan with little or no alternatives.  A Broker will not waste your time and needless paperwork to submit a loan to a Lender unless they know that the loan is approvable and will close.

Revenue

One of the more recent impacts on mortgage lending with the advent of the Internet is a customer’s desire to know how the Broker or Lender gets paid.  In the past many customers were either ill-informed or unaware of how their representative got paid for their service.  There was a time where most loans produced enough revenue from simply being created that the service provider was paid out of that.  Or the loan amounts were increased to cover profit.  Profit can be created in many ways in the mortgage business.  A solid professional will not hesitate to tell you how they are getting paid and what the true cost is to you.  With the creation of the National Mortgage License System and the Consumer Federal Protection Bureau the government oversight and requirements for how a Broker, Lender or Loan Officer gets paid have changed dramatically.  There are now limits and checkpoints in the system to limit the risk to both the Lender and the borrower.

For a Broker they are paid a percentage that is listed on the settlement statement at closing.  Any fee or revenue that is paid to the Broker is listed as such on that document.  This may include Origination, Fees or Yield Spread Premium (revenue created when the loan is sold based on the future cash flows from payments and interest).  The total of these fees, depending on State and Federal guidelines, may range up to 6% of the loan amount and type of loan.

Lenders are paid in the same ways however a Lender need not disclose the Yield Spread Premium because they are using their own source of money to fund your loan and the actual profit will not be known until the loan is sold, if ever.  Some Lenders retain the file and receive payments themselves which gives them the revenue from the payments and interest instead of the premium when the loan is sold.

Final Thoughts

We hope that this has provided you some valuable insight into our industry.  Remember that any representative of a Broker or a Lender must be licensed and you can review their history, employment and confirm their qualifications through the NMLS website.  In the end the best solution for your financing needs is a professional who understands what you want to accomplish, is knowledgeable and capable in their market segment and understands that it is your choice who you do business with and that decision is very important to their success.

July 25, 2014 by · Leave a Comment

Seven Things Your Agent Should Know About Your Mortgage Approval

While many experienced real estate agents have a general understanding of the mortgage approval process, there are a few important details that frequently get overlooked which may cause a purchase to be delayed or denied.

New regulation, updated disclosures, appraisal guidelines, mortgage rate pricing premiums, credit score, secondary approval layering, rescission deadlines, property type, HOA insurance requirements, title and property flip rules are just a few of the daily changes that can have a serious impact on a borrower’s home loan financing.

With today’s volatile lending environment, it’s obviously important for home buyers to get a full loan approval which clearly defines all contingencies that pertain to each unique home buyer’s scenario prior to spending any time looking at new homes with an agent.

Either way, we’ve listed a few of the top things your agent should keep in mind while showing you new properties:

Caution – Agents Beware:

Property Type –

High-Rise, Condo, Town House, Single Family Residence, Dome Home or Shoe House… all have specific lending guidelines that can influence down payment, credit score and mortgage insurance requirements.

Residence Type

Need to sell one home before moving into another? Is a property considered a second home if it’s in the same city?  What if I’m buying a home for my children to live in, it is still considered an investment property?

These are just a few of several possible residence related questions that should be addressed by your agent and loan officer at the initial loan application.

Rates / Locks

Mortgage Rates are typically locked for a 30 day period, and one of the only ways to get a new rate is to switch mortgage lenders.  Rates also have certain adjustments for property / residence type, credit score and down payment which could have a big impact on monthly payments and therefore approvals.

A 1% increase in rate could literally mean the difference between an approval or denial.

Headline News / Employment

Underwriters watch the news as well.  Borrowers who work in a volatile industry during hard economic times may have to jump through a few extra hoops to prove that their employment and income is secure.

Job changes, periods of unemployment or property location in relation to the subject property are other things to consider that may cause a speed bump in the approval process.

Title / Property Flip –

A Flip is considered a property that has been purchased by an investor and quickly sold to a new buyer within a 30-90 day period.  Generally, an investor will do a little rehab work, fresh paint, landscaping…. and try to re-sell the property for a significant profit margin.

While it seems like a perfectly fair transaction, many lenders have strict guidelines in place that prevent borrowers from obtaining financing on properties that have a previous owner with less than 90 days of documented ownership.

These rules change frequently, and are specific to particular property types, so make sure your agent is aware of all the boundaries associated with your approval letter.

Homeowner’s Association Insurance

Some lenders require Condos and Town House communities to have sufficient insurance and reserves coverage pertaining to specific ratios on units that are owner occupied vs rented.

It may also take a few weeks and cost up to $300 to receive an HOA Certification, so make sure your Due-Diligence period is set accordingly in the purchase contract.

Appraisal Ordering Procedures

Appraisal ordering guidelines are changing quite frequently as regulators implement many new consumer protection laws created to prevent future foreclosure epidemics.

Unfortunately, some of the new appraisal regulations have proven to slow the home buying process down, as well as confuse lenders about the true estimate of neighborhood values.

VA, FHA and Conventional loan programs all have separate appraisal ordering policies, so make sure your agent is aware of which loan you’re approved for so that they document any anticipated delays in the purchase contract.

For example, if an appraisal takes three weeks and the average time for an approval is two weeks, then it probably isn’t smart to write a purchase contract with a four week close of escrow.

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Related Articles – Home Buying Process:

April 1, 2010 by · Leave a Comment

Do I Need To Sell My Home Before I Can Qualify For A New Mortgage On Another Property?

Although every situation is unique, it is not uncommon for homebuyers to qualify for a mortgage on a new home while still living in their primary residence.

Perhaps you are outgrowing your current house, or have been forced to relocate due to a job transfer?  Regardless of the motivation for keeping one property while purchasing another, let’s address this question with the mortgage approval in mind:

So, Do I Have To Sell?

Yes. No. Maybe. It depends.

Welcome to the wonderful world of mortgage lending. Only in this industry can one simple question elicit four answers…and all of them may be right.

If you are in a financial position where you qualify to afford both your current residence and the proposed payment on your new house, then the simple answer is No!

Qualifying based on your Debt-to-Income Ratio is one thing, but remember to budget for the additional expenses of maintaining multiple properties. Everything from mortgage payments, increased property taxes and hazard insurance to unexpected repairs should be factored into your final decision.

What If I Rent My Current Property?

This scenario presents the “maybe” and the “it depends” answers to the question.

If you’re not quite qualified to carry both mortgages, you may have to rent the other property in order to offset the mortgage payment.

In that scenario, the lender will typically only count 75% of the monthly rent you are proposing to receive.

So if you are going to receive $1000 a month in rent and your current payment is $1500, the lender is going to factor in an additional $750 of monthly liabilities in your overall Debt-to-Income Ratios.

Another detail that can present a huge hurdle is the reserve requirement and equity ratio most lenders have. In some cases, if you are going to rent out your current home, you will need to have at least 25% equity in order to offset your payment with the proposed rent you will receive.

Without that hefty amount of equity, you will have to qualify to afford BOTH mortgage payments. You will also need some significant cash in the bank.

Generally, lenders will require six months reserve on the old property, as well as six month reserves on the new property.

For example, if you have a $1500 payment on your old house and are buying a home with a $2000 monthly payment, you will need over $21,000 in the bank.

Keep in mind, this reserve requirement is incremental to your down payment on the new property.

What If I Can’t Qualify Based On Both Mortgage Payments?

This answer is pretty straightforward, and doesn’t require a financial calculator to figure out.

If you are in this situation, then you will have to sell your current home before buying a new one.

If you aren’t sure of the value of the home or how your local market is performing, give us a ring and we’ll happily refer you to a great real estate agent that is in tune with property values in your neighborhood.

…..

As you can tell, purchasing one home while living in another can be a very complicated transaction.  Please contact us at anytime so we can review your specific situation and suggest the proper action plan.

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April 1, 2010 by · Leave a Comment

What Do Appraisers Look For When Determining A Property’s Value?

Most people are surprised to learn what appraisers actually look at when determining the value of a real estate property.

A common misconception homeowners generally have is that the value of their home is determined after the appraiser has completed their physical property inspection.

However, the appraiser actually already has a good idea of the property’s value by the time they have scheduled an appointment to stop by the property.

The good news is that you don’t have to worry so much about pushing back an appointment a few days just to “clean things up” in order to help influence the value of your property.

While a clean house will certainly make it easier for the appraiser to notice improvements, the only time you should be concerned about “clutter” is if it is damaging to the dwelling.

The Key Components Addressed In An Appraisal

The Site:

Location, view, topography, lot size, utilities, zoning, external factors, highest and best use, landscaping features…

Design:

Quality of construction, finish work, fixed appliances and any defining features

Condition:

Age, deterioration, renovations, upgrades, added features

Health & Safety:

Structural integrity, code compliance

Size:

Above grade and below grade improvements

Neighborhood:

Is the property conforming to the neighborhood?

Functional Utility:

Is the property functional as built – style and use?

Parking:

Garages, Carports, Shops, etc..

Other:

Curb appeal, lot size, & conforming to the neighborhood are obvious to the appraiser when they drive down into the neighborhood pull up in front of your home.

When entering your home, they are going to look at the overall design, condition, finish work, upgrades, any defining features, functional utility, square footage, number of rooms and health and safety items.

Be sure to have all carbon monoxide and smoke detectors in working condition.

Since the appraisal provides half the weight in any credit decision involving the security of real estate, the appraisal should be done by a qualified, licensed appraiser whom is familiar with your neighborhood, and the type of home you are buying, selling or refinancing.

If you’re interested in what specifically appraisers are looking for, here is a copy of the blank 1040 URAR form that is used by every appraiser in the country.

Related Update on HVCC:

Appraisers hired for a mortgage transaction on a conforming loan are chosen from a pool of qualified appraisers at random. Neither you nor your lender has the flexibility of deciding which appraiser will inspect your home.

This recent change was brought on with the Home Valuation Code of Conduct HVCC, and is effective with conventional loans originated on or after May 1, 2009.

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Related Appraisal Articles:

March 29, 2010 by · Leave a Comment

Where Does My Earnest Money Go?

Hey, I gave my real estate agent a $5000 Earnest Money Deposit check… Where does that money go?

A basic and very obvious question that most First-Time home Buyers ask once their purchase contract gets accepted.

According to Wikipedia:

Earnest Money – an earnest payment (sometimes called earnest money or simply earnest, or alternatively a good-faith deposit) is a deposit towards the purchase of real estate or publicly tendered government contract made by a buyer or registered contractor to demonstrate that he/she is serious (earnest) about wanting to complete the purchase.

When a buyer makes an offer to buy residential real estate, he/she generally signs a contract and pays a sum acceptable to the seller by way of earnest money. The amount varies enormously, depending upon local custom and the state of the local market at the time of contract negotiations.

An Earnest Money Deposit (EMD) is simply held by a third-party escrow company according to the terms of the executed purchase contract.

For example, there may be a contingency period for appraisal, loan approval, property inspection or approval of HOA documents.

In most cases, the Earnest Money held by the escrow company is credited towards the home buyer’s down payment and/or closing costs.

*It’s important to keep in mind that the EMD may actually be cashed at the time escrow is opened, so make sure your funds are from the proper sources.

The Process:

  1. Earnest Money is submitted to an escrow company with the accepted purchase contract
  2. At the close of escrow, the EMD is credited towards the down payment and / or closing costs
  3. If there are no closing costs or down payment, the EMD is refunded back to the buyer

Who Doesn’t Get Your Earnest Money:

  • Selling Real Estate Agent – A conflict of interest
  • Sellers – Too risky
  • Buying Agent – They shouldn’t have your money in their account

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Related Articles – Closing Process / Costs

March 28, 2010 by · Leave a Comment

Renting vs Buying A Home

Buying a home versus renting is a big decision that takes careful consideration.

While there are several biased sources that can make arguments for or against owning a home, we’ve found that most home buyers base their ultimate decision on emotion.

Yes, there are some tax advantages of owning real estate, as well as the potential to earn equity or pay a mortgage note off after several years.

However, let’s address some of the more obvious topics of discussion first.

Benefits Of Renting:

Lower Acquisition Cost –

Unless you’re able to qualify for a mortgage loan with zero down and have your closing costs paid for by the seller, a typical investment to purchase a home is around 3.5% – 7% of the purchase price for down payment and closing costs on an FHA mortgage, and an average of 13% – 23% for a home secured by conventional financing.

Compared to the cost of about 1-3 month’s rent payment, it’s obvious that renting a home makes financial sense in the short-term.

Lower Qualifying Standards –

While the FHA and other government insured mortgage programs have more flexible credit / qualifying guidelines than most traditional home loan programs, there is certainly a lot less paperwork and personally invasive probing required by most landlords and property management companies.

Generally proof of employment / income and a decent credit history (or a good explanation) is needed to rent a home.

Freedom To Move –

It’s easy to find a home through a reputable property management company, move in that weekend and then leave a year later when the rental contract expires.  Not being tied down by a long-term mortgage liability is ideal for people new to a community, in a career that keeps them on the go or for parents with children that prefer a certain school district.

Plus, if you’re planning on moving in the next 3-5 years, then it may become cost-prohibitive due to the amount of equity you’ll have to gain in the short-run just to cover the cost of paying an agent, buyer closing costs, transfer taxes…. so that you can at least break even at closing.

Less Maintenance and Cost –

If something breaks, a simple call to the property management company will generally solve the issue in 48 hours or less.  Plus, renters don’t have to carry expensive homeowners insurance, pay property taxes or worry about interest rates adjusting.

Benefits of Owning:

Pets Are Allowed –

Well, according to the rules and regulations of your county or neighborhood HOA, you can pretty much have as many domestic and exotic pets without having to pay extra deposits.

It may seem like a funny benefit to mention first, but the millions of dog and cat lovers would definitely rank this towards the top of their list.

Pink and Purple Walls –

Yep, you can paint the inside of your house any color you choose.  And depending on whether or not there is an HOA in place, you could probably do the same thing on the home’s exterior.  Landscaping, flooring, built-in shelving… it’s your property to renovate and grow in.

Peace-of-Mind and Security –

The only way you would be forced to move is if the bank forecloses on your property due to a default in mortgage payments.

So basically, you don’t have to worry about a landlord’s financial ability to make mortgage payments on time. Plus, you can stay in your own property as long as you wish.

Tax Benefits -

The US government has created certain tax incentives making it possible for many homeowners to exceed the standard yearly deduction.

*Disclosure – Check with your CPA or Tax Attorney to verify your own unique filing scenario*

The following three components of your home mortgage may be tax deductible:

a) Interest on your home mortgage
b) Property Taxes
c) Origination / Discount Points

Stability -

Remaining in one neighborhood for several years lets you and your family establish lasting friendships, as well as offers your children the benefit of educational continuity.

Appreciation of Property -

Historically, even with other periods of declining value, home prices have exceeded consumer inflation. From 1972 through 2005, home prices increased on average 6.5%, according to the National Association of Realtors®.

Forced Saving -

The monthly payment helps in repayment of the principal amount. Also when you sell you can generally take up to $250,000 ($500,000 for married couple) as gain without owing any federal income tax.

*Disclosure – Check with your CPA or Tax Attorney to verify your own unique filing scenario*

Increased Net Worth

Few things have a greater impact on net worth than owning a home. In a comparison of renters versus homeowners, the Federal Reserve Board of Consumer Finance found that the average net worth of renters was just $4,000 compared to homeowners at $184,400.

While the available tax advantages and potential for earned equity are generally highlighted by most industry professionals as the top reasons to own real estate, it’s important to remember that markets go through cycles.

However, owning real estate that appreciates more than the rate of inflation may help contribute towards your overall investment portfolio, provided your maintenance and mortgage costs are kept low.

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Related Articles – Home Buying Process:

March 28, 2010 by · Leave a Comment

What Does Title Insurance Protect Me From?

By including title insurance when purchasing property, your title insurer takes on accountability for legal expenses to defend your property title, should it ever be challenged.

Many different occurrences can come into play to warrant the need for title insurance.

The title company responsible will then take on the legal expenses to defend the property for as long as you are in possession of an interest in the property under the title.

If the defense is not successful, you will be reimbursed for any loss of value of the property.

Common Things Title Insurance Covers:

1. UNDISCLOSED HEIRS, FORGED DEEDS, MORTGAGE, WILLS, RELEASES AND OTHER DOCUMENTS

2. FALSE IMPRISONMENT OF THE TRUE LAND OWNER

3. DEEDS BY MINORS

4. DOCUMENTS EXECUTED BY A REVOKED OR EXPIRED POWER OF ATTORNEY

5. PROBATE MATTERS

6. FRAUD

7. DEEDS AND WILLS BY PERSON OF UNSOUND MIND

8. CONVEYANCES BY UNDISCLOSED DIVORCED SPOUSES

9. RIGHTS OF DIVORCED PARTIES

10. ADVERSE POSSESSION

11. DEFECTIVE ACKNOWLEDGEMENTS DUE TO IMPROPER OR EXPIRED NOTARIZATION

12. FORFEITURES OF REAL PROPERTY DUE TO CRIMINAL ACTS

13. MISTAKES AND OMISSIONS RESULTING IN IMPROPER ABSTRACTING

14. ERRORS IN TAX RECORDS

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Related Articles – Closing Process / Costs

March 28, 2010 by · Leave a Comment

Understanding the FHA Mortgage Insurance Premium (MIP)

* Disclaimer – all information in this article is accurate as of the date this article was written *

The FHA Mortgage Insurance Premium is an important part of every FHA loan.

There are actually two types of Mortgage Insurance Premiums associated with FHA loans:

1.  Up Front Mortgage Insurance Premium (UFMIP) – financed into the total loan amount at the initial time of funding

2.  Monthly Mortgage Insurance Premium – paid monthly along with Principal, Interest, Taxes and Insurance

Conventional loans that are higher than 80% Loan-to-Value also require mortgage insurance, but at a relatively higher rate than FHA Mortgage Insurance Premiums.

Mortgage Insurance is a very important part of every FHA loan since a loan that only requires a 3.5% down payment is generally viewed by lenders as a risky proposition.

Without FHA around to insure the lender against a loss if a default occurs, high LTV loan programs such as FHA would not exist.

Calculating FHA Mortgage Insurance Premiums:

Up Front Mortgage Insurance Premium (UFMIP)

UFMIP varies based on the term of the loan and Loan-to-Value.

For most FHA loans, the UFMIP is equal to 2.25%  of the Base FHA Loan amount (effective April 5, 2010).

For Example:

>> If John purchases a home for $100,000 with 3.5% down, his base FHA loan amount would be $96,500

>> The UFMIP of 2.25% is multiplied by $96,500, equaling $2,171

>> This amount is added to the base loan, for a total FHA loan of $98,671

Monthly Mortgage Insurance (MMI):

  • Equal to .55% of the loan amount divided by 12 – when the Loan-to-Value is greater than 95% and the term is greater than 15 years
  • Equal to .50% of the loan amount divided by 12 – when the Loan-to-Value is less than or equal to 95%, and the term is greater than 15 years
  • Equal to .25% of the loan amount divided by 12 – when the Loan-to-Value is between 80% – 90%, and the term is greater than 15 years
  • No MMI when the loan to value is less than 90% on a 15 year term

The Monthly Mortgage Insurance Premium is not a permanent part of the loan, and it will drop off over time.

For mortgages with terms greater than 15 years, the MMI will be canceled when the Loan-to-Value reaches 78%, as long as the borrower has been making payments for at least 5 years.

For mortgages with terms 15 years or less and a Loan -to-Value loan to value ratios 90% or greater, the MMI will be canceled when the loan to value reaches 78%.  *There is not a 5 year requirement like there is for longer term loans.

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March 28, 2010 by · Leave a Comment