Author: production

While it’s the job of the mortgage professional to explain the ins and outs of adjustable rate mortgages (ARMs), it’s also important for real estate agents to understand how ARMs work and for whom.

Buyers are drawn to ARMs because the rates quoted in advertising are lower than fixed-rate mortgages. Most ARMs have a fixed-rate period at the beginning of the term, but after this initial period, the rate adjusts and could go significantly higher.

The terms of the mortgage determine how often the rate adjusts, how high the rate will ever be allowed to go, and how quickly it can increase.

An ARM’s interest rate is made up of the margin and the index. The margin, which is always fixed, is added to the index, which always has the potential to change.

The margin is set by the lender at the time the rate is locked. The index will be based on some economic indicator, such as treasury bills.

Once a year, or once every two years, the index is recalculated, and the interest rate that the buyer is being charged is adjusted.

In times of economic challenges, the indicators tend to be low, keeping the interest rate low. In a robust economy, when the indicators are increasing, so do buyers’ interest rates.

When you’re considering whether an ARM is appropriate for a particular client, be aware that qualifying for an adjustable rate mortgage is now more difficult than in the past.

After the mortgage meltdown, government regulators instituted Dodd-Frank, whereby lenders now require buyers to qualify for the fully indexed rate-a rate the mortgage could reach at some future point.

If, for example, the rate could increase to 11% at any point in time, the buyer must qualify for that mortgage as if the rate were 11% today. Buyers who are thinking short term-when the initial rate still applies and before the indexed portion kicks in-may be good candidates.

ARM lenders offer low rates initially, anticipating that rates will increase over time. If rates do increase, the buyer’s payments will also increase. But note that the buyer has initially had to qualify for his or her mortgage on the assumption that rates could rise to a certain level. So, is all well?

Not necessarily. The buyer may feel stretched making higher payments-maybe his or her situation has changed. So there are several options: Refinancing would be one.

If refinancing isn’t in the cards, he or she could make the higher payments until the home can be sold or the rates decline and the payment returns to a more manageable level.

Sadly, if it gets to the point where the buyer isn’t able to refinance, sell, or make the payment, they will default on the mortgage.

And, even if the borrower is able to refinance at a later date, he or she will undoubtedly be doing it at a rate that is higher than it was at the time they took out the initial mortgage.

 

With intense competition in many markets, to generate interest in a property your listings need to be on their A game. What better way to put many buyer concerns to rest than to have a home inspection to show them?

For the price of a home inspection, your listing will shine in a sea of other properties on the market for the simple reason that buyers don’t like surprises. The belief on the part of buyers that new homes likely won’t have any significant issues may have some credibility, but it is unlikely that a 10-to-15-year-old property won’t have some items that need to be addressed.

Build on this by getting a home inspection, then having any issues addressed and highlighting the fact that they have been corrected. Even better, provide receipts from reputable contractors showing that the work has been completed.

This will pique buyer interest for two reasons: The first is that only a conscientious homeowner with nothing to hide would be likely to expose their home-warts and all-to potential buyers. Buyers sense this and will respond.

As well, many buyers would sense an opportunity. If there are issues that haven’t been dealt with, they can negotiate price reductions or other concessions with the sellers. And DIY buyers, in particular, are motivated, knowing they can handle the issues they already know about, and that they’re not likely to encounter surprises.

Finally, sellers will have peace of mind knowing buyers are fully aware of what they’re buying.

 

Yes, you must. Whenever money is loaned against a property, the lender will want to ensure the property is actually worth what you are paying for it.

This is so that if you were to default on the mortgage, they would have a reasonable idea of what they could expect to get for it if they had to sell it. They use an appraisal to determine the value.

An appraisal is ordered after a contract is signed and accepted on a property, and you – the buyer – will pay for it upfront.

Your lender will use their appraisal management company (AMC) to perform the appraisal. A federal law prohibits lenders and appraisers from having direct contact with one another, so the AMC will assign a specific appraiser to perform the work.

The appraisal itself is completed in two parts. The first part is done online by pulling data for similar properties that have sold recently in the same area – these are called comparables, or comps. The data from comps is compared to the information on your property, called the subject property.

Because no two homes are exactly the same, information from the comps is adjusted to fit the subject property. Details that may need to be adjusted include number of bedrooms, number of baths, lot size, etc.

The second part of the appraisal is a physical inspection of the property. In this part, the appraiser must establish whether the subject property is in the kind of condition that the lender expects it to be in.

Once this has been done, the appraiser writes up the report and sends it to the lender. Regardless of whether you purchase the property in the end, the buyer has the right to obtain a copy of the appraisal, as you paid for it.

If you need additional information on the appraisal process, contact your mortgage professional.

f you are looking for an excellent property that offers exceptional financing terms, you may want to look into the HomeSteps programs.

Homes purchased through this program have been taken back in the foreclosure process by Freddie Mac. The financing package, available in many states, includes a low down payment, usually 5%, and no mortgage insurance. The fact there is no mortgage insurance can save you thousands of dollars in premiums.

Financing: Financing is similar to the process you would go through in the regular mortgage process. However, the process may take somewhat longer. If you are planning to purchase a HomeSteps property, you need to demonstrate proof of qualification, which your lender will provide. You also need your own real estate agent, as well as an experienced real estate attorney.

Well-cared-for homes: As you won’t be required to get an appraisal, you can also save money. However, you should ask your agent if you have the option of a home inspection; as with any property you purchase, it’s always good to know what you’re getting in to. That said, Freddie properties are generally very well-cared-for and often move-in ready; Freddie even hires outside services, including landscaping, to maintain properties’ curb appeal.

One word of caution, Fannie Mae’s HomePath program, which was similar to HomeSteps, was discontinued on October 6, 2014, as Fannie felt special incentives were no longer needed. If you are interested in HomeSteps, consult your mortgage professional to ensure the program is still in effect.

Above and beyond the down payment that you can expect to provide when you purchase a home, there will be other out-of-pocket expenses. They fall into one of three categories: lender fees, third-party fees, and non-fee expenses.

Lender fees include things such as origination fees, processing fees, and other administrative costs that the lender will incur in the process of providing you with a mortgage.

Third-party fees are also incurred during the process of providing you with a mortgage, but these derive from companies other than the lender. These include appraisal, title, and recording fees.

Keep in mind that professionals such as appraisers will be paid before they perform their services, so you will need to pay this amount between the time you sign the contract and your closing date. Title fees will be paid at closing, and often are set by the seller’s side of the transaction.

Non-fee expenses

Non-fee expenses include homeowners insurance, property taxes, and mortgage interest. Before closing, most lenders will want to see a receipt showing that you have homeowners insurance for the 12 months after the date of closing.

Property tax charges will vary by state and county. Lenders may want either back taxes or anticipated future taxes to be paid at closing. Mortgage interest will be paid on the date of closing, from that date to the end of the month. Depending on the size of the mortgage and the date the closing takes place, this could be significant.

Credits

There may be some relief through seller and/or lender credits. Before you make an offer on a property, find out what credits are available from the seller to help offset these costs.

Keep in mind that these credits absolutely cannot be used towards the down payment on your property.

It’s important to plan ahead for these expenses; your mortgage professional will explain how closing costs work.

One of the biggest challenges for home buyers – particularly first-time home buyers – is finding the funds for your down payment and your closing costs.

But take heart: There are credits from both sellers and lenders that may be available to you to help offset these costs.

Seller credits are often used to make people’s for-sale homes more attractive to buyers. The seller may list the home at a slightly higher price, but through a seller credit that reduces the amount needed at closing, he or she will differentiate the home from its competition.

As well, instead of making repairs on the property as requested by the buyers, the seller may offer a credit so the new owners will be able to do it themselves when and the way they want to.

Similar to seller credits, lender credits are used to encourage borrowers to select one lender’s mortgage over another’s. In exchange for slightly higher interest rates, lenders will credit borrowers toward their closing costs.

The credit can be applied to lender fees, such as origination fees, processing fees, and so on, but another great use of the lender credits is to cover tax escrows; this can result in significant savings.

Keep in mind the fact that neither seller nor lender credits can be used toward your down payment, as different mortgage programs, including both conventional and FHA programs, have minimum down-payment requirements.

These credits can save you money. To find out if you’re eligible, discuss it with your mortgage professional.

In your search for a home, you may find yourself in the position of making an offer on what is called a “distressed” property.

This term has less to do with the condition of the property and more to do with who owns it.

“Distressed” here means that the property is either close to being taken back by the lender, usually because of missed payments, or is already there.

There are three main types of distressed properties that you may encounter in your home search: short sales, foreclosures, and REO (real estate owned) properties.

Short sale

A short sale occurs when the lender allows the property owner to sell it for less than is owed on it. The current owner may be still be making mortgage payments and living in the property but wants to get out from under that payment. The lender may prefer this route as opposed to going through the long and expensive foreclosure process, especially if they stand to take less of a loss in a short sale than in a foreclosure.

Foreclosure

In a foreclosure, the lender is in the process of taking back the property, and the owner may or may not be living in the property.

REO

With an REO, the lender has already taken back the property, and it is almost certainly vacant.

When looking at these types of properties, you must realize that you’re going to need a lot of patience. Because you are dealing with a lender instead of a homeowner, another layer of complexity is added to the mix.

The lender may well be dealing with a large number of distressed properties, and depending on how many, the purchasing process could take a long time.

Once you’re past the lender, however, financing a distressed property is almost identical to financing a traditional property. Contact your mortgage professional for more details.

Fair Isaac Corporation (FICO) is responsible for credit-scoring models used by the three credit bureaus – Trans Union, Experian and Equifax – and a large proportion of lenders in determining your credit worthiness.

The bureaus collect data from creditors such as banks, credit card companies, and auto finance companies. Each bureau enters the data into a scoring model and generates a credit score. Lenders take the middle of these three scores and use that number as your “score” when qualifying you for a mortgage.

Scores range from the mid-300s to the mid-800s. You want to be in at least the 640 range; anything below that will require you to use other things to offset the low score, such as a higher down payment. Anything above 740 will get you into the premium lending programs with lower interest rates (and lower mortgage payments).

Fair Isaac Corporation has devised a new credit scoring model, FICO09, with changes that could impact buyers who have had trouble qualifying for a mortgage because a collection appears on their credit score.

In the new model, a settled collection won’t be considered in calculating a credit score, and less weight will be placed on unpaid medical collections.

As even a small increase in a credit score can have a positive impact, the result could be that more people will be able to purchase a home.

FICO09 is available this year; however, it is not known yet whether credit bureaus and lenders will use it. Stay tuned.

When you purchase a home, you’ll likely want to get a home inspection. This is a very thorough review of all the working systems of the property, including electrical, plumbing and heating, among others. And it ensures you aren’t buying someone else’s problems.

If there are challenges with the property, now is the time to find them, so that you can raise them with the seller. Your sales contract should offer you the option of getting a home inspection.

If there isn’t one, ask the seller why, and explain that you’d like it added. If the seller is hesitant and you have concerns about the condition of the property, consider paying for an inspection yourself.

If issues do turn up during the home inspection, you’ll likely want them addressed before you move ahead with the process of purchasing the property.

The seller isn’t obligated to address any of the concerns you have, but if the issues are significant, and more than you are prepared to deal with yourself, you have the right to walk away from the property.

If you are prepared to handle the issues identified through your home inspection, you can often negotiate the repairs into the deal as a price reduction or seller’s credit. This, of course, hinges on how motivated the seller is.

To find a good home inspector, use your network: Ask your friends or family, your mortgage professional, or your real estate agent to recommend an inspector they may have used or worked with.

You may believe that buying a home directly from a seller is your cheapest option, as you’ll save on the commission that would otherwise be paid to a real estate agent.

However, buyer beware: There are plenty of traps for the unwary in buying a For Sale By Owner (FSBO.)

The selling price

Take the value of the property: In an FSBO, the seller sets the price, usually without consulting an agent. However, regardless of what either you or the seller think the property is worth, it still must stand up to the scrutiny of a lenders’ appraisal.

Why? Because lenders, who have their own appraisal review departments, will only lend money against either the lower of the appraised value or the contract price.

As the buyer, you usually pay for the appraisal; if the property turns out to be overpriced, and the seller is adamant that, regardless of what the appraisal says, the asking price is fair, you’re not going to be able to borrow the money to purchase the property from that lender…and you will have spent money on an appraisal that is non-refundable.

The way to establish the true value of the property is through a Comparative Market Analysis (CMA), which is available through a real estate agent.

This is a review of what similar properties in the same area have sold for recently, and it will give you an idea of what to expect on an appraisal.

The sales contract

Secondly, there are many variables inherent in the process, particularly in the sales contract. If you were purchasing a home using a real estate agent, you likely would have a good real estate attorney. This is even more important in purchasing an FSBO. You will need to hire an experienced real estate lawyer to ensure the contract is properly written.

Better still, think twice before you sign on for an FSBO.