Month: September 2011

One of the most important components of any home financing transaction, be it a purchase or refinance, is the appraisal.

An appraisal is the process of valuating the property. The purpose is to give the institution that is lending money an idea of what the property is worth should the borrower be unable to make payments once the financial transaction is complete. The value of the property will be based on what similar homes in the area have been selling for in recent months. These other properties are called comparables.

While no two properties are completely identical, appraisers can make adjustments to account for such things as different square footages, number of bedrooms and lot sizes.

Appraisers must use properties within a close proximity to the subject property, usually within a mile radius, and those that have sold within the past several months.

In the event there are few or no comparables that can be used, as often happens in areas with low sales activity, the appraiser can go outside of the immediate area.

The appraisal process itself can take a few days to a few weeks, depending on factors such as the workload of the appraiser and what comparables are available.

Rules were put in place under the Home Valuation Code of Conduct in an attempt to keep appraisers and lenders separate from one another. As a result, most lenders are now ordering appraisals through appraisal management companies.

These third parties complete the appraisals and then forward the completed appraisals to the lender.

When you qualify for a mortgage, regardless of what type it is or the amount of it, you go through the same basic process to get approved.

Following is a rundown of the basics of what lenders are looking for and how you can prepare yourself before you even apply for a mortgage:

Income: Lenders are looking to see two years of your income and employment history when applying for a mortgage. Be prepared to show full tax returns, and if you have changed employers in that period of time, have contact information for them as well. Self-employed and commissioned salespeople especially need to document their income.

Assets: Lenders of conventional loans are looking for two months of reserves so that borrowers have enough to cover the mortgage, along with property taxes and property insurance.

Borrowers looking for money under the Federal Housing Administration loan program must have enough income to qualify for both the mortgage payment itself plus other debts, including typical homeowner expenses like utilities and other payments.

Credit:  This may very well be the most important of the three categories, in that even if you have a high income and lots of assets, you will have challenges getting financed unless you have demonstrated, via your credit history, that you are able to manage debt.

Lenders verify your credit history via a credit report, which consists of scores from the three credit bureaus, which are TransUnion, Experian and Equifax.

Making your payments on time is critical to keeping your credit score high.

Keeping balances on revolving trade lines like credit cards low, relative to their limits, tells lenders that you are able to handle the debt that you already have without needing to rely on all of your available credit each month.

If you’re looking to buy a townhouse or condominium, it’s important to note there are some significant differences between the two.

A condo is more of a legal definition than anything, referring to how the property is owned and managed.

If you were to purchase a condo, as opposed to a townhouse, you would own just the structure. The land under it would be part of the large parcel on which all the units and the common areas sit. In a townhouse, you own the land under your home.

In a condo, you pay into a blanket condo insurance policy that covers the unit itself.

This insurance, by the way, covers the structure but none of the contents of individual units. In a townhouse, you pay for your own individual policy.

Services such as landscaping and repaving of the common parking lots will often be handled by both types of associations, but condo associations will be more likely to manage minor items such as trim painting and snow removal and major maintenance such as roof replacement.

Roof replacement is more specific to condos in that they are more likely to share common roofs. Thus, it would be challenging to replace specific sections of one part versus the entire roof itself. For this reason, condo association dues can be significantly higher than dues for a townhouse.

When you’re looking to purchase a condo, make absolutely sure that you understand how much the fees are. They will increase over time as maintenance expenses rise.

Now more than ever, opportunities to purchase and profit from investment properties are everywhere.

If you’re thinking about purchasing an investment property, though, there are a number of things you need to know about the financing. For example:

Down Payment:

Expect to put down a minimum of 25%. While minimums used to be much lower and are currently much higher than what you would expect to put down on a property in which you intended to live, lenders are protecting their interests by requiring investors to have a significant stake in the property. You are much more likely to want to make an investment property work for you, through thick and thin, if you have a significant financial interest in it.

Assets:

Be prepared to have six months of liquid assets on hand for each investment property that you own. Lenders are requiring this, as they expect some type of vacancy rate in the property, and you will need to be able to cover the mortgage during these times.

Credit:

As you might imagine, credit requirements are steeper than they would be if you were purchasing your own home. Look to have a Fair Isaac Co. (FICO) score above 700 and no major credit dings, such as bankruptcies or foreclosures, for many years prior. If you are overextended with your existing debt, you will have more of a challenge qualifying.

Types of Mortgages:

Typically, when you buy an investment property, you will use conventional financing requirements. The only exception to this would be Federal Housing Administration loans whereby you can purchase a multiunit property under the condition that you live in one of the units.

Down payments will be lower than with conventional arrangements, but you will still have to pay for mortgage insurance.