Author: production

Purchasing a home is exciting and an adventure – even for second-time buyers. However, seasoned buyers are more likely to remember something first-timers may not realize…Your initial investment may be more of an investment that you thought. That scary down payment isn’t the only cost you need to consider. You also have to anticipate and plan for other expenses that come up through the process.

Closing costs and reserves

In addition to the down payment, there are fees that you pay to the lender, such as processing and administration fees, and fees that go to third parties, such as appraisers. Borrowers also incur title, document delivery, and recording fees, which go to the recording body, usually the county.

Other costs include items such as prepaid interest, which is the interest you pay on the new mortgage from the day you take it out through the end of the month. Depending on your state, you also may have to provide property tax reserves at closing.

Seller, tax, and lender credits

The good news is that you are likely to receive credits at closing that will offset some of the costs associated with the mortgage. These credits will come from the seller, the lender, or both.

Closing cost credits are often used as incentives by sellers to help sell their homes; credits make properties more attractive to potential buyers by lowering the out-of-pocket expenses the buyer would otherwise incur. They include closing cost and property tax credits. Lender credits are offered by some mortgage providers to make their services more attractive to potential borrowers.

Bear in mind the fact that credits, regardless of where they come from, can only be used for closing costs and asset reserves; you can’t use them toward a down payment. However, they still will represent a real boon to cash-strapped buyers. And what home-buyer isn’t?

When you shop for a mortgage these days there are several different ways that you can go about it. These different channels, as they are called, offer the mortgage consumer a host of options.

Mortgage brokers

Brokers work with you – the borrower – to determine your needs. Then they go out and shop your loan to several lenders to find which one
will offer you the most favorable terms. The processing of your file will be done locally, but most likely the underwriting and other functions will be done offsite. At closing, the lender will wire money to the title company.

Mortgage Banker

Bankers are a bit different than brokers in that the entire process, from application to closing, is handled internally. The mortgage bank will use its own funds to complete the transaction at the closing table. Loans obtained through a mortgage banker eventually will be sold to end investors, who supply the guidelines under which these mortgages are underwritten. Bankers work with multiple lenders/investors to give potential borrowers a wide range of options when they finance their homes.

Retail Lenders

This group is largely made up of the big box banks – large retailers, who can now provide lending services to customers. Retail lenders process and underwrite the mortgages, though probably in a different location, and fund their own loans. Eventually, the mortgages are sold to investors. Big box banks offer a wide variety of programs and competitive rates, but may have fewer options available than brokers or bankers.

Recent changes in FHA mortgage insurance provisions will make a difference when you’re deciding what loan program you want to use to finance your home.

Lenders acquire mortgage insurance to protect themselves against customers who default on their loans. With an FHA loan, customers pay the mortgage insurance premium as part of their monthly payments.

Until recently, monthly mortgage insurance on 30-year FHA mortgages had to be in place for a minimum of five years before it could be removed, regardless of the value of the loan or the property.

If the mortgage balance reached 78 percent of the original loan amount, the mortgage insurance provision was withdrawn automatically, and homeowners were no longer required to pay mortgage insurance premiums. Now this rule has changed.

As of June 2013, monthly mortgage insurance on new FHA 30-year mortgages with less than 10 percent down payments must be in place for the entire term of the loan.

However, if the mortgage is either refinanced into a non-FHA mortgage – where mortgage insurance premiums aren’t required – or paid off through sale of the property, this doesn’t apply.

Also, if the down payment is 10 percent or more, the mortgage insurance can be removed after 11 years.

Potential homebuyers will want to consider this when they decide on their long-term financial strategy, as the cost of years of extra mortgage insurance premiums can have a major impact on anyone’s financial strategy.

Be aware that in conventional mortgages where mortgage insurance applies, the premiums are relatively less expensive; however, the credit and down payment provisions are somewhat more restrictive than with FHA. As well, current interest rates on FHA mortgages are, for the most part, lower than those on conventional mortgages.

All these factors need to be considered when selecting a mortgage. Your mortgage professional can help you decide how to develop the right financial strategy for your own situation.

The Federal Housing Administration (FHA) recently announced its “Back to Work” program, which is giving individuals who suffered a long period of hardship during the recent housing crisis a second chance to prove they can carry a mortgage and own a home.

The program will waive many of the waiting periods associated with a significant “economic event” such as bankruptcy (Chapters 7 and 13), short sale or foreclosure.

Potential candidates may be first-time or repeat home buyers, and the program can be used for the 203K rehab loan. It must be approved by an FHA lender, and as some lenders are choosing not to participate, you may want to contact your mortgage professional for more information on this.

Eligibility

To participate in the program, individuals must be able to demonstrate they’ve recovered fully from the “event”, and document the fact that they did have a household income loss of at least 20 percent for a period of at least six months that coincided with the “event.” They also need to prove current, stable and documentable employment to qualify.

As well, they need to demonstrate a 12-month positive payment history, and this specifies on-time payment of all mortgage and installment debt. There is some latitude for credit card debt, but it is slight.

Counseling sessions

Applicants also must attend counseling sessions before being able to participate in the program. This is usually a one-hour session with a HUD-approved counselor, and was designed to help participants prevent the “economic event” from happening again.

As much as assets, lenders are concerned about liabilities during the mortgage process.

There are several types of liabilities, including revolving and installment debt, as well as collections, liens and judgments.

Revolving and installment debt

Revolving debt refers to debt on which you make payments monthly, such as credit cards and home equity lines of credit; both the balance and the payment fluctuate. A good rule of thumb is to keep the balance on all revolving debt within a 20-30 percent range of your limit. Any higher, and they may have an impact on your credit score.

Installment liabilities are those where you make the same payment each month, such as a car loan. At some point, the balance will be paid off.

Installment debt can be excluded from debt ratios when there are fewer than ten payments left, as long as it isn’t paid down specifically for this purpose. This can be extremely helpful when you are qualifying for a home, because the $200 to $300 per month or more you pay monthly in installments may make a huge difference in debt ratios.

Collections, liens and judgments

Collections, especially those that are older and have lower balances, may or may not need to be paid off prior to closing; they may lower your credit score in the short term. Judgments may be able to remain in place as long as you can prove that you have been making payments consistently for at least 12 months, otherwise they will need to be paid in full.

Liens, specifically tax liens, must be addressed. These are particularly problematic for borrowers, because in the liability hierarchy they take priority over even mortgage debt, and must be satisfied in the event of a mortgage default.

Lenders want nothing to do with them and want them gone before they will lend you money.

Many home buyers know that their assets are good sources of a down payment, but do you know assets play other key roles in the mortgage process?

Assets are liquid funds that borrowers can put down on a property and use as closing costs, but also to show as reserves to satisfy lender requirements.

Conventional mortgages require that borrowers have, in addition to their down payments and closing costs, the two-month equivalent of a full-house payment, including taxes and insurance. On the other hand, Federal Housing Administration and Veterans Affairs mortgages have no reserve requirements beyond what is required to close the transaction.

Sources of assets include funds from checking and savings accounts. Funds from retirement plans may be used, but often they must be withdrawn from the plan during the verification process to prove to the lender that those funds are available; many retirement plans have restrictions on withdrawal terms.

Asset history must be documented for 60 days. All non-payroll deposits made in that time period must be able to be supported by documentation, including bank copies of the full deposit after it’s been processed, and possibly letters of explanation as to where funds come from.

Financial gifts from close family members may be used, but the gift giver must supply documentation to prove that he or she can provide the funds. Sellers also may provide credits to the borrower for the purpose of assisting them with closing costs or reserves, but they can’t provide down payment funds.

If you are either an active member of or are retired from the armed forces, we thank and salute you, and would like to inform you that if you are considering purchasing a property, a VA mortgage is worth looking into.

Zero Percent Down

While zero percent down is unheard of today in mortgage lending, it still happens with VA mortgages. While it is zero percent down, there are still other expenses, such as closing costs and potential tax escrows, that need to be considered.

In order to qualify, you will need to be able to provide a VA Certificate of Eligibility, which you can either obtain from the VA or with the help of your mortgage professional.

Credit score profiles are similar to those required in order to obtain an FHA loan. This means you would need a score of around 640, and would be ineligible if you have any recent foreclosures, short sales or bankruptcies. Income ratios also need to be equivalent to those required in other types of mortgage programs, and VA qualifications are somewhat more detailed in the calculation of your monthly expenses than for other types of mortgages.

With a VA mortgage, you are able to purchase only a home you intend to occupy, and would be unable to purchase an investment property. If you are married, you will be able to add your spouse to the mortgage; otherwise, you will be the sole borrower.

Please contact your mortgage professional for more details.

With the large number of properties that are still available at reduced prices these days, townhomes and condominiums represent excellent purchasing options: they often offer low-maintenance living and community facilities that would usually be unavailable in single-family homes.

When considering purchasing a townhome, keep in mind that there can be substantial differences in how the communities are structured and run from day to day.

First, with a townhome, you own your unit and the land underneath it, whereas with a condo, you own the unit, but the land on which it sits is part of a master parcel. With the former, you provide your own property insurance, and in the latter case, you will contribute to a blanket insurance policy.

Association dues for townhomes are typically lower than for condos, as few services such as painting and roof replacement are provided in townhome communities.

Whichever type you choose, always make sure that both you and your attorney review the financials and the bylaws of any development for which you intend to place an offer. This will give you an insight into how the property is being managed, the financial stability of the association, and what you might expect in terms of future association rate increases.

From a financing perspective, townhomes may be slightly easier to obtain. Here’s why.

The Federal Housing Administration (FHA) offers so-called approved condo developments, which have gone through a review process in which FHA assesses financials, bylaws, etc. Even after a development is approved, FHA will only lend on a certain percentage of units, and only so many of the units can be let as rentals. All of this helps to minimize the Association’s risk should a development take a downturn…

Contact your mortgage professional for more details.

We know that a title company is the place we go to sign documents when we purchase, sell or refinance our property; but what exactly does that title company do?

In fact, title companies serve several purposes that are important to purchase transactions. Firstly, they provide a place to settle as well as to reconcile the transaction. What this means is that in a purchase transaction the title company merges the numbers that are given to them by both buyers and sellers and produces the settlement statement that both sides sign at closing.

This is very important in that the title company is considered an independent third party and offers a type of check-and-balance system that ensures all parties involved in the transaction, including the attorneys, see the numbers submitted by the other side before signing any paperwork.

Secondly, title companies collect monies from both sides and perform the service of paying off previous lenders as well as delivering documents to recording agencies, such as county assessors’ offices.

Thirdly, these companies provide title insurance, and if you are borrowing money against a property, your lender will require this. With title insurance, the company is providing an insurance policy against any type of lien that may have been placed on the property prior to closing. This could include any issues relating to the property, such as work that may have been completed but which has not yet been paid for.

Title companies are there for everyone’s protection. Be glad they are.

Most homeowners only dream of reducing their mortgage payments. But some are now living their dream, renting out part of their homes and taking those monthly rent checks to the bank.

A multi-unit property – where you live in one unit and rent out one or more additional units in the same building – provides rental income without the hassle of maintaining a separate property. Best of all, you can qualify for residential financing, as long as the property comprises no more than four units.

From a financing perspective, any property that is more than four units, and which has been purchased solely to rent out, is considered a commercial property and requires investment property financing, meaning you’d need a larger down payment and greater asset reserves than with a four-unit residential property.

You will require a single mortgage on the property. If you plan on a minimal down payment, and have no prior landlord experience, you’ll need to qualify for that mortgage without the use of projected rental income. The rate on a multi-unit property will be slightly higher than on a single family property.

After two years, if you decide to refinance the property, you’ll be able to use the rental income to qualify, provided it’s documented on your tax returns. Also, after two years, you may use this income to qualify for a new mortgage if you decide to move and rent out your current unit.

As for benefits: By purchasing a multi-unit building instead of a separate rental property, maintenance costs will be lower – you only have to maintain one property, not two – plus you can keep an eye on your investment.

And, of course, your tenant or tenants are paying a large portion of your mortgage and that gives you great flexibility to pay it off faster or save for other priorities. Maybe even to invest in another multi-unit property.

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