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Seller’s Market is Slowly Cooling. What Buyers and Sellers Need to Know.

Robert Harris — Fri, 05 Aug 2022 15:10:11 +0000

The housing market is shifting. The white-hot seller’s market that made it nearly impossible for buyers to find a house without cash in hand is cooling. You may have heard it on the news, seen it online, or simply noticed that the house around the corner has been on the market longer and still hasn’t sold. So, what does this mean for buyers and sellers? First things first. With all this talk about what kind of market we’re in, it’s a good idea to clarify what a seller’s market is as opposed to a buyer’s market.

Seller’s Market

In a seller’s market, the seller has the advantage. Typically demand for homes is high and supply is low. The economic principles of supply and demand come into play here. When the demand is high and supply is low, there’s greater competition among buyers. The seller can list their home at a higher price. Homes sell quickly (sometimes before the realtor can even get photos uploaded to the MLS or Realtor.com). There are more bidding wars, and often home loan borrowers are locked out because sellers prefer cash buyers.

Buyer’s Market

In a buyer’s market supply is up and demand is down or decreasing. With more homes on the market, buyers have more options. Homes tend to linger on the market longer during a buyer’s market. Seller’s must make the choice of competing with other sellers and negotiating the asking price or letting their home sit on the market. We’ve been in a seller’s market for quite a while, but with interest rates rising and inflation at an all-time high, the marketing is cooling.

Where does that leave buyers in this market?

Although the market hasn’t completely shifted (homes are still selling relatively quickly). In the last four months, more homes have been listed for sale than a year ago at this time. Homes are on the market a little longer than in 2021 and sellers are reducing their listing prices even in some of the hottest markets.

As the market shifts, it would seem there is some relief in store for buyers who can qualify for loans. While they can’t do anything about the interest rates, buyers can do some things to make the most of the changes in the market.

You have more time when making offers. Take advantage of it. It wasn’t long ago that you needed to be prepared to put an offer in immediately. Unless the house is competitively priced, you can spend a little more time looking before making an offer. Still, you need to make sure you have your pre-approval in hand before you start shopping.

Look at prices of comparable homes before putting an offer in. If the home you’re considering is listed at $550K and comparable homes are $475K, you can make a lower offer. You may, however, be dealing with an owner who doesn’t need to sell but simple wants to cash-in on the hot seller’s market. In which case, they may not negotiate. Your realtor (we recommend using one) may be able to get some insight on the listing price from the seller’s agent.

Shop around. Don’t just look at the prices, and let some scare you off. Some may be overpriced, and you may be able to negotiate now. So, look at the homes. See as many as possible, even if you think you’ve found the one you want. There’s nothing like seeing the competition to help when comparing prices and deciding on an offer.

What about sellers?

Competitive pricing is important. You need to be realistic. While home prices are significantly higher than they were a year ago, you have more competition now. If you really want to sell, price your home competitively or else don’t be surprised when lower offers come in.

You may have to do more work on your home before listing. More competition means buyers can compare you home to others. In 2021, cash buyers were snatching up “as is” listings. You may have to do more in this shifting market to get your asking price. Clean, make repairs, and stage your home to make it stand out.

Know when it’s time to drop the price. Despite hopes of benefiting on what might be the tail end of the seller’s market, some sellers are having to lower their prices and expectations as some buyers have backed out due to high interest rates while others are taking their time and refusing to pay the inflated asking price. If interest has waned in your home, it’s sitting on the market longer than the average and you’re not receiving offers, or your home has appraised lower than your asking price, then it’s time to consider lowering your asking price.

Bottom Line:

Whether you’re selling or buying, it’s important to pay attention to the shift in the housing market. It’s still a seller’s market, but the pendulum has started to move closer to the center. The unprecedented increase in home prices over the last year won’t repeat itself in the year to come. With the increase in interest rates, buyers are getting less bang for their buck which means many will wait to purchase a home until prices drop. With less demand, homeowners, who need to sell, will have to lower their price expectations. With inflation and talk of a full-fledged recession, it’s hard to predict what’s to come, but some decrease in home prices should be expected.

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Should I use a mortgage broker or retail lender?

Robert Harris — Tue, 05 Jul 2022 20:24:55 +0000

You’re buying a home, and it’s time to apply for a mortgage. Where do you go? Google “get a mortgage” or “mortgage application” and you’ll find a variety of search engine results. You’ll likely see large bank retail lenders (think Bank of America or Wells Fargo) or other online financial retail lenders like Quicken Loans listed at the top and some ads for mortgage brokers. Where should you click? Which one do you choose?

If you’re new to the mortgage process, it helps to know the difference between these two options and what it means for you. Let’s start by clarifying the definition of lender and broker.

A lender is a financial institution or business that provides the money for the loan or refinance. They are the ones who actually supply the money and set the terms of the loan, including interest rates and the qualification requirements.

A mortgage broker is a third-party agent that works with multiple lenders. Brokers are licensed and regulated professionals. They don’t lend the money, but they do help the borrower find a lender who will offer the best rates and terms. Brokers work with wholesale lenders.

Wholesale vs. Retail

Wholesale lenders are financial institutions that provide loans via third parties (mortgage brokers, other banks, credit unions). They market their loan programs to mortgage brokers or loan officers. They do not deal directly with the borrower. The broker shops around to find the home buyer the best rate

Retail (direct) lenders work directly with the borrower. They handle every aspect of the loan process in-house. The loans they “sell” are products of their financial institution (some large banks do have retail and wholesale operations). On the retail side, the lender issues the loan directly to the home buyer. If the home buyer wants to compare rates, they can shop around with different retailers and possibly try to negotiate.

What does this mean for you, the customer?

When you start the home buying process, you need to decide where you will go to get preapproved and get a mortgage. Ultimately, you want to get the best rate and terms possible for your home loan or refinance. Here are your options.

Using a retail lender:

There are few ways to go about the mortgage process with a retail lender. You can to your bank or a large online retail mortgage company, apply for a loan, and simply accept the loan terms and rates they offer. Or, it could mean going to multiple retail institutions to shop the rates, so you can compare offers and try to negotiate. In this case, you need to know the strength of your credit, the mortgage terms and rates you want, and your loan options. If you do go to multiple retailers, you may have to go through the application and approval process several times. Some people think cutting out the middleman (the broker) will save them money (broker fees). This really depends. Shopping around takes time, and for most people time is money.

Using a mortgage broker:

When you work with a mortgage broker, the broker navigates the loan process for you. This can save you time. From preapproval documentation, to application, to the underwriting process, the broker guides the borrower through. More importantly, the broker uses their knowledge of the industry to shop the rates and loan options. Brokers have access to multiple wholesale lenders and aren’t locked into one lender or loan product. This works to the borrower’s advantage. The wholesale lender may offer discounts to the broker for bringing them the business. This can translate to a better rate for the borrower which translates into savings for the borrower.

So, where’s the catch? How do they get paid? Brokers can earn a borrow or lender fee that’s anywhere from .50% – 2.75% of the total loan amount. The broker’s fee structure and who is paying determines the amount. This fee is typically rolled into the loan amount or loan fees.

When it comes to shopping for a mortgage, you either pay with your time and by doing the legwork yourself in the retail market, or you pay a broker do it and be your one-stop-shop.

Other things to consider:

Large online retail mortgage lenders often have streamlined online processes. This is appealing to borrowers raised in an online world. As with any large online institution, what you gain in online ease, you may sacrifice in personal service. When your loan is processed, you won’t always speak to the same loan processor. This is the case even with large banks that have local branches. In addition, these financial institutions are paying for their brick and mortar which means that cost is passed on to the consumer in some way.

That isn’t to say that mortgage brokers don’t have time saving online processes or all mortgage brokers are created equally. Any mortgage broker worth hiring has an online process and offers online pre-approval these days. If you’re looking for personal service and someone to keep the loan process on track, then a broker may be the right option for you. Ask for a referral from your real estate agent or look into a locally and independently owned brokerage.

Mortgage Broker	Retail Lender
Third-party agent who brings borrowers and lenders together. Does not finance the loan.	Finances the mortgage loan
Does the research and legwork of shopping the rates and loan options for you	Offers their terms and their rates
May charge a fee	Covers costs through a variety of fees and charges
Works with the lender and the borrower throughout the loan process	Works directly with the borrower
Gathers important documents from you to help with the pre-approval process and provides a preapproval letter	Handles approval. May be able to speed up the process.
Has no allegiance to one lender over another	Has a vested interested in selling their loan
Can help borrowers who have a hard time getting approved through direct lenders

Bottom Line: Do you want to spend the time shopping for rates or have someone else do it? Are you looking for someone who will help navigate the home loan process, or are you comfortable with staying on top of the large retailer and their processes? Buying a home is a major investment. You’re looking for the lowest rate and best terms as compared to other lenders. Take time to decide what other aspects of the process are important to you.

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Reverse Mortgage for Purchase

Robert Harris — Thu, 09 Jun 2022 13:11:27 +0000

A reverse mortgage is a type of specialty loan for individuals who are 62 or older and have 50% or more equity in their home. With a reverse mortgage, homeowners borrow against their home equity (tax-free). It gives the homeowner access to the equity in their home without having to sell the home or refinance for cash out. Instead of making mortgage payments, they receive payments, hence the name “reverse mortgage.” There are reverse mortgage programs that allow you to purchase a new home. They’re discussed in this article.

Misconceptions about Reverse Mortgages

There are some common misconceptions about reverse mortgages. Some people mistakenly believe that all reverse mortgages are scams. While it’s true, there are unscrupulous people who try to defraud senior citizens with mortgage scams, legitimate reverse mortgages programs do exist.

Another common misperception: They will take your house once you deplete your equity. That’s not the case. For example, if you start a reverse mortgage at the age of 65 and live to be 90, you will likely end up depleting your equity. But you won’t have to leave your home and the negative equity won’t be passed along to your children. Basically, the FHA takes this financial hit.

Types of reverse mortgages

If you’re sitting on a significant amount of equity in your home, then you have some options.

Home Equity Conversion Mortgage (HECM):

Backed by HUD, these can cost more than a conventional mortgage, but the money can be used for almost anything and received in a variety of ways: Fixed-monthly payments, lump sums, line of credit.

HECM Reverse Mortgage for Purchase:

This is an FHA insured loan option that comes with borrower protection and all the benefits of a reverse mortgage. The reverse for purchase loan allows seniors, who are 62 or older, to purchase a home without having to use cash from savings or investments if they don’t

Single-Purpose Reverse Mortgage:

Least expensive. Offered by non-profits and state and local governments for purposes determined by the lender (i.e., home repairs or improvements). Like USDA loans, these are available in certain areas.

Proprietary Reverse mortgage:

Private loans that aren’t backed by the government. Requirements, rates, fees, underwriting process, and terms are set by the lender. These are easier to get and usually a quick process. It’s important to work with a reputable broker or lender. There are people who set up reverse mortgage scams to defraud retirees. These aren’t back by the government and will not protect borrowers in in the same way.

Traditional reverse mortgages are covered extensively in another article. Here’s more about the reverse mortgage for purchase.

Reverse Mortgage for Purchase

This reverse mortgage works a little differently than a standard reverse mortgage, but it opens up options for homeowners to downsize, relocate, or move into a home that will accommodate their needs as they age.

Here’s how it works. Betty and Jack are 70 years old. They want to downsize and buy a smaller retirement home closer to their children and grandchildren. With a reverse mortgage for purchase, they find their new home and using the proceeds from the sale of their former home, they make a sizeable down payment on the new home.

The amount of down payment depends on the age of the youngest borrower, interest rates, and the price of the new home. It starts at approximately 50% of the value of the new home for someone who is 62. Because Betty and Jack are 70, they will put down about 45% of the value of the new home. The balance will be financed by a reverse mortgage

While they live there, the reverse mortgage requires mortgage insurance premium (MIP) and accrues interest, but Betty and Jack will not have to make a monthly payment. As time passes, the loan value increases, but ideally, so does the property value which means their equity in the home increases as well.

Typically, this loan is not repaid by the homeowner unless they move in with family or need to move to an assisted living facility. In which case, the home is sold, and the loan will be paid off. The equity is theirs to keep. If they spend their remaining days there, then when they die, the loan is re-paid, and the remaining proceeds go to the estate. If the heirs would like to keep the home, they can refinance it with a traditional mortgage.

Down Payments

Besides age, the down payment is the most significant requirement for the reverse mortgage for purchase. The down payment can come from the proceeds of the sale of your former home, your savings or retirement fund, or a gift from a family member without any interest or stake in the transaction. The down payment percent required is based on the age of the youngest borrower. The total down payment also depends on interest rates and the price of the new home. The lending limit for this mortgage is approximately $970,000.

Advantages and Disadvantages of Reverse Mortgage for Purchase

Advantages

Government issued reverse mortgages for purchase come with the same benefits and protections as other HECM loans. This includes the non-recourse feature which protects the borrower from having to repay more than the home is worth at the time of sale.
This loan makes the process easier and faster while saving you money because you buy a home and get a reverse mortgage in one single transaction.
Allows you to eliminate monthly payments and enjoy a new home.

Disadvantages

Upfront and ongoing insurance premiums required
Standard closing closes
It’s not the solution for everyone. Consult with a mortgage broker you can trust.

What other mortgage options do you have?

For homeowners who plan to move soon or would like to leave the home to their loved ones, there are other options. Consider a cash-out refinance. With the equity you already have, you can refinance your mortgage. Borrow more than you owe on the house and receive cash (the difference) to put towards your retirement expenses or plans. This is not a second mortgage.

Summary

When you retire and you have built up significant equity in your home, you have options. Talk to a trusted broker to find the best way to take advantage of your equity during these years.

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2022 Increase in Mortgage Interest Rates: What it means for buying, selling, and refinancing

Robert Harris — Tue, 26 Apr 2022 17:27:54 +0000

If you’re planning to buy, sell, or refinance, then you may be nervous and wondering what the mortgage rate increase will mean for you.

Before we dive into that, let’s take a quick look at the history of interest rates for some perspective.

1970s: Started in the mid 7% range and ended around 11.20%

1980s: Early on it increased to 16.63% and ended around 10%

1990s: Started around 10 % and fell to just below 7% in 1998.

2000s: Started around 8%. 2003 in the upper 5%. (Housing crash) 2009 – 5.04%.

2010s: Started at 4.69%. Fell to mid-3% and ended up as high as 5.34%. 2019 – declined

2020 started at 3.7% and ended around 2.68%

2021 increased to 3.09%

2022 5% and rising.

While rates are rising, they are not the highest they’ve ever been, but the current rate increase does mean changes for everyone.

For Buyers:

Higher monthly payments.

Higher interest rates translate to higher mortgage payments. Example: If Sue is hoping to purchase a $415,000 home, at 4%, she’ll pay $1,882 a month for the principal and interest. At 5.11%, she’ll pay approximately $2,143.00 each month for the principal and interest. That’s a $260 difference.

Affordability decreases.

This means the buyer’s purchasing power decreases. Example: Sue may be able to qualify for the $415,000 home at 4%, but at 5.11%, she will qualify for less which means that home she picked out may no longer be affordable.

Some people won’t qualify.

Because of inflation and the current seller’s market, where home prices are higher, there will be some buyers who just can’t compete in this market and qualify.

Home prices may level out or decrease.

Higher interest rates may mean less competition for homes depending on the market and the number of cash buyers. As rates increase and demand decreases, sellers may need to lower their prices which increases buyer options for those who qualify.

You need a broker who will shop the rates:

Find a broker you trust to get you the best rate they can given the tough market.

For Sellers:

Your house may not move as fast: With less people qualifying or qualifying for less, buyers may not be able to afford your home, or they may be pickier given the change in market value. Where sellers were getting offers above the asking price, there may be less competition.

For Homeowners who want to refinance:

Depending on your current home loan rates, don’t rule out refinancing just because the rates have increased. This especially true if you have significant equity to which you need access. Using your home equity to pay off debts with higher interest rates can still be the right move.

The housing market is facing a number of economic influences with inflation, supply chain issues, and the impact of global conflict. Still, the current mortgage rate increase can’t compare with some of our historical highs. Don’t get discouraged. Call a mortgage broker who will work with you personally to find the home loan and refinance option that’s best for you.

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Finance Tips for First-Time Home Buyers

Robert Harris — Tue, 01 Feb 2022 19:58:15 +0000

Get Your Financial House in Order

Here’s a list of the financial information your broker and lenders look at when determining if you can get preapproved and obtain a loan.

Income and documented verification
How much money can you afford to spend on a mortgage payment each month?
Debt: How much do you spend paying off debt each month in relation to your gross (pre-tax) monthly income?
Credit score and any credit events (foreclosures, bankruptcies)
Assets and cash need to buy a house: Anything you’re using to source your cash to close for a loan (e.g., savings, checking, money market, mutual funds, stocks, bonds, retirement, gifts, trust, net equity)

1. Income and Verification

Lenders need to know how much you make each year and want to see a steady income that is documented for the last two years. This is necessary to qualify for most loans. Be prepared to explain gaps in employment or having changed employment multiple times. We have a list of documents you need and a video that explains important parts of the documentation process.

2. How much money can you afford to spend on a mortgage payment each month?

It depends on who you ask. Some financial advisers will tell you 25% of your gross monthly income. Others might say up to 29%. It might also depend on how much debt you pay off each month and how conservative you want to be with your finances.

You can calculate this range by multiplying your gross monthly income by .25. Then multiple your gross monthly income by .29. This will give you a range between 25% and 29%. [Note: If you’re not sure of you gross monthly income, take your pre-tax annual salary or your annual income and divide by 12.]

Let’s look at an example: Jen and John have a combined gross monthly income of $9,000.

$9,000 x .25 = $2,250 $9000 x .29 = $2,610

Assuming Jen and John have a reasonable debt-to-income ratio (DTI), which we’ll cover next, it looks like they can afford a mortgage payment between $2,250 and $2,610. Some lenders will allow for a higher percentage of your monthly income to go toward housing, but this would be a safe range for this couple.

It’s important to understand that a mortgage payment includes the loan principle, the loan interest, homeowners’ insurance, mortgage insurance, and taxes. It is not just based on the loan principle, so if you use a mortgage calculator, make sure these factors are included in the overall total.

3. How much of your gross monthly income goes toward paying off debt each month?

This question addresses your debt-to-income ratio (DTI). This is important to lenders. The more you spend paying off debt each much, the greater your DTI. The higher your DTI, the greater the risk you might default because you owe too much money and can’t keep up your payments. Every loan program has different guidelines when it comes to DTI. A good rule of thumb is to maintain a DTI of 41%. This is the ideal, and if you can do this, you will be in a good position. That being said, if your DTI is higher, don’t worry. Loan programs set an ideal DTI, but there are many factors that come into play: Assets, credit score, and your down payment.

Calculate your DTI

Add up all your monthly debt payments and divide the total by your gross (pre-tax) monthly income then multiply by 100 and that’s your debt-to-income ratio. Let’s look at an example:

Jen’s and John’s monthly debt includes:

$700 – credit cards

$2100 –current mortgage or rent

$500 – student loans

$500 – car

Their total monthly debt = $3,800. Their gross monthly income is $9,000

3800/9000 = .422 x 100 = DTI of 42.2% (round to 42%)

42% of their monthly income goes toward paying debt.

Although DTI doesn’t take into consideration your other monthly expense (i.e., food, medical, electric, entertainment, home maintenance, furniture), that doesn’t mean you shouldn’t keep these in mind when pricing homes. As you consider how much home you can afford, consider your entire household budget. The last thing you want is to end up with a home you can’t maintain.

If your DTI is high, look for ways to start paying off your debt. One popular approach is to pay off the credit card with the lowest balance first. This is known as the “snowball” method. It gives you a sense of progress and accomplishment and the momentum you need to keep moving forward. The opposite approach is the debt “avalanche” method which pays off credit cards with the highest interest rate first in an effort to save the money you would have paid toward interest.

DTI is a critical part of the loan process. Stay on top of your debt, and you’ll find you have more options when it comes to obtaining a loan.

4. Credit Score

Your credit score represents your credit history. It’s a three-digit number ranging from 300-850 that indicates your creditworthiness and how well you pay back your debts. The higher your score the better.

Your score is based on your credit history which includes late payments, credit utilization (how much credit has been extended to you versus how much you use), collections (defaulted loans or bill payment), new credit opened in a small span of time, and credit events like foreclosures and bankruptcies.

Credit score requirements vary depending on the lender and the type of loan. There are minimum scores, and we’ve listed them below. Keep in mind that these are minimums. When your score is lower, you are considered more of a risk as a borrower. This can impact the interest rates you receive. It never hurts to work on increasing your credit score.

800-850 = Exceptional

740-800 = Very Good

670-740 = Good

580-670 = Fair

300-580 = Poor

(FHA = 580; VA = 580; Conventional= 620; USDA= 640)

What can you do to increase your credit score?

Keep debt balances low: Debt utilization accounts for 30% of your credit score. Pay down those debts. It will help improve your score.
Increase credit limits: This will decrease your debt utilization ratio.
Make payments on time: This is critical. Late payments signal default risk.
Avoid taking out any new debts or lines of credit.

If you don’t know your credit score, or you’ve never seen your credit report, you may want to get a copy of it. You can obtain a free copy of your credit report every year.

5. Assets and Cash Needed to Close

Lenders need to know that you have the cash needed to buy a house and the assets needed in case you lose your source of income. They will subtract your total debt from your total assets to estimate your net worth. Your assets include cash, cash equivalents, and property. Your income is not considered an asset. When you apply for a loan, you will list your assets. Here are some examples of the documents and information you need to give.

Most recent 2 months’ bank statements (60 days) complete statement/all pages.

This includes any source of funds you’re using as assets for this loan (e.g., savings, checking, money market, mutual funds, stocks, bonds, retirement, gifts, trust, net equity)
List any property you own free and clear, and the taxes and insurance associated with this property.

The total cash needed to purchase a house is known as “cash to close.” That amount will depend on the cost of the home, the loan program, and your down payment. Loan requirements vary. Some loans, like the VA and USDA, actually have 100% financing (no down payment) for those who qualify, but you will still need cash to buy a home under these loan programs. Here are some of the costs associated with buying a home:

Earnest money: 1-2% of purchase price. This is like a deposit. It’s put into escrow when your offer is accepted by the seller and later applied to the sale of the home.

Closing costs: 3-6% of the purchase price. They include a variety of fees: Title, title insurance, escrow, appraisal, credit report, county recording, attorney, mortgage insurance, mortgage lender and broker.

Home inspection: $300-$500

Down payment: 0-20%. Loan program requirements vary.

Cash reserves: 0-6 months’ worth of mortgage payments set aside in savings.

Prepaid property taxes and homeowner insurance: Tax rates and insurance laws vary.

If you’re planning to buy a home, saving for a down payment, closing costs, earnest money, and cash reserves is important.

Here’s an example for a $250,000 home and the cash to close needed for different loan programs and down payment amounts. For this example, we used national averages for insurance and property taxes

Cash for:	Conventional Loan 3% down	Conventional Loan 20% down	FHA 3.5% down	VA Loan 0% down
Down payment	$7,500	$50,000	$8,750	$0
Closing costs (3.5%)	$8,750	$8,750	$8,750	$8,750
Cash Reserves	$3,000	$2,200	N/A	N/A
Pre-paid Insurance (1yr) National average	$1000	$1000	$1000	$1000
Property taxes (3 months based on national average)	$415	$415	$415	$415
Total Amount Cash to Close*	$20,665	$63,165	$18,915	$10,165

*This doesn’t account for any credit/refund for earnest money

Summary

Buying a home is one of the most important investments you’ll make in your lifetime. The more you know about your finances and the process, the better off you’ll be. If you’re ready to apply, gather the documents you’ll need and apply for a loan, so you can find out the amount for which you can get preapproved and start shopping for that new house.

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Top Five Mistakes Home Buyers Make

Robert Harris — Tue, 01 Feb 2022 19:57:52 +0000

1. Not getting preapproved upfront before shopping for a home.

Why is this a mistake? First, you need a preapproval letter when you make an offer on a house. It tells the owner you can obtain the funding you need to purchase their house. In a seller’s market it’s important to have that letter on hand. Houses move quickly. You may find your dream home and lose it because you’re waiting around for your preapproval letter. Second, without preapproval you don’t know exactly how much financing you can get. If you’re looking at $400,000 homes and you only qualify for $300,000, you’re wasting your time, the realtor’s time, and you may be disappointed when you find out you can't get that home you saw and loved.

2. Taking out loans or applying for credit before closing.

Of all the mistakes home buyers can make, this is a big one. You don’t want to do anything that could negatively impact your debt-to-income ratio (DTI), the percent of your monthly income that goes toward debt. Taking out loans or applying for a new credit card can increase your DTI. An increase in your DTI can kill a loan deal. It’s ok if you run up your current credit card, but do not take out a loan to buy a new car or apply for the credit card because the deal was just too good to pass up. Wait until after you’ve closed on the house.

3. Changing jobs or a change in your income during the loan process.

We understand that “life happens.” There are times when you have no control over a change with your employment. If you’re taking a pay cut, this will factor into your DTI which could significantly impact the loan. Any change in employment can impact when you close. Even a good change, like a promotion with a raise, must be verified and documented with pay stubs, so expect delays.

4. Sourcing funds for the down payment and closing costs.

When you’re getting funds together for your earnest money, down payment, and closing costs, it’s important to communicate with us. Cash deposits within 60 days of closing must have a paper trail that traces the source. You can’t just deposit cash you had on hand during the application process and expect to use it. If you sell a vehicle there needs to be a bill of sale. If you’re given a cash gift from a family member, there needs to be documentation from their account. Let us know how you’re getting these funds together, so we can tell you what documents you need.

5. Waiting until the last minute to pick homeowners insurance.

Do not put this off. Find homeowners’ insurance within the first two weeks after going under contract. The insurance policy for the dwelling (not your belongings) needs to be a certain amount of coverage. The bank owns your home, and they want at least enough coverage to rebuild the home. Some insurance agents will quote the lowest premium possible, but it doesn’t provide enough coverage. We need to verify the insurance is sufficient. If it turns out the insurance premium you need to pay is higher, it could affect your DTI. That makes you a greater risk and you may have to buy down your rate. Bottom line: Don't make this mistake. Find homeowners’ insurance as soon as possible.

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Home Loan Comparisons

Robert Harris — Tue, 01 Feb 2022 19:57:39 +0000

	Conventional	FHA	VA	USDA	Jumbo
Max loan amount (2022)	$647,200	$420,680	$2M for 100% financing	Territory and income based	Any amount over conventional loan max Non-conforming loan. No limit
Max Debt-To-Income ratio (DTI)	50% May vary based on other credit factors	55% May vary based on other credit factors	55% May vary based on other credit factors	43%	43%
Down payment	As low as 3% down	3.5% minimum down payment	100% financing No down payment	100% financing No down payment	As low as 10% down (depending on property type and other factors)
Personal Mortgage Insurance (PMI)	Yes. If down payment is less than 20%	Yes. Referred to as Mortgage Insurance Premium (MIP)	No. Funding fees applicable for non-exempt	Yes. Upfront guarantee fee of 1% and monthly fee	No. Even with less than 20% down
Property Types *Certain property types will have conditions	Primary, Vacation & Investment allowed – Single-family Condos Townhomes Multi-family Manufactured	Must be primary residence- Single-family Condos Townhomes Multi-family Manufactured	Must be your primary residence- Single-family Condos Townhomes Multi-family Manufactured	Must be your primary residence- Single-family Condos Townhomes Manufactured	Primary, Vacation & Investment allowed- Single-family Condos Multi-family units
How easy to obtain?	More difficult	Easiest to obtain	Only veterans, active duty, and spouses	Income & location based	Stricter guidelines due to higher risk for lender
Minimum credit score requirements	620	580	580	640	660
Other factors	Sellers prefer working with conventional loan buyers. PMI can be dropped when you reach 20% equity.	Good for first time home buyers (FTHB). Possible to obtain even with debt and credit issues. FHA allows for higher seller credits. MIP for life of loan unless 10% down and then MIP for 11 years.	Veterans or active duty with 180 days served. Can own multiple homes with enough entitlement. Lower interest rates.	Limited to USDA-eligible geographic areas. Lower interest rates. Lower mortgage insurance than FHA.	Higher closing costs. No mortgage insurance with less than 20%. Higher interest rate. Reserves required (typically 6 months of proposed mortgage payment).

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Investment Loans

Robert Harris — Tue, 01 Feb 2022 19:57:13 +0000

Investment properties come in many shapes and sizes, and so can the loans you need to obtain them. Investment loans are harder to obtain because lenders know that a borrower is more likely to default on an investment property than their primary residence. If you’re new to investment loans, you may find an entry point through a multi-unit owner occupied property which allows you to obtain an owner-occupied loan.

An owner-occupied property is the primary residence of the owner. A second home or vacation home is also considered an owner-occupied property. Typically, an investment property is one which you don’t occupy: non-owner occupied. However, if you own a four-unit multi-family property and live in one of the units, you can earn rental income on the other units and still have it listed as owner-occupied property. That’s just one option available to investors. Here are a few others.

Investment Loan Options

Hard Money Loans

These loans are sometimes called commercial real estate loans or “fix and flip” loans because house flippers and professional real estate investors use them the most. They are non-conforming loans that come from individuals and private companies. Some borrowers lean toward these loans when they want to avoid the traditional mortgage process and timeline, or they can’t get approved for another loan program.

These are short-term investment loans (1-5 years) which is why flippers or commercial real estate investors are more likely to use them. They close quickly, and it’s easier to qualify for them as long as you make a down payment of 25%-30%. The lender will look at the value of the property as part of the collateral for this loan, and they’ll look at your track record if you’re flipping homes. The downsides to hard money loans are the average interest rates which can fall between 9%-14% and the upfront fees of 2%-4% of the total loan (in the form of points).

Bottom line: These loans are riskier because you have less time to repay the loan, and the rates are significantly higher.

Conventional Mortgages

This traditional loan is less expensive than a hard money loan but more costly than an owner-occupied conventional loan. As you take on more mortgage debt, you become a greater risk for a lender. They will compensate with higher interest rates and more strict requirements for qualification.

Minimum down payment of 20% (No PMI) and rate may lower if you put down more
A credit of 720 or higher will get you better rates. Anything lower and you may not qualify, or you may pay for it with higher interest rates.

Cash Reserves of at least six months or assets that can be liquidated
Typically, a four-mortgage limit. There are programs that will allow 5-10 mortgages but finding a lender may be difficult.

FHA Mortgages

Technically, FHA mortgages are not for investment properties, however, you can purchase a multi-family property with 2-4 units and rent the other units if you live there for a minimum of a year. This may be a good option if you’re thinking about rental property investment.

What are the requirements and basic guidelines?

Minimum down payment of 3.5%

Lower credit score: As low at 580
Higher DTI limit. In some cases, as high at 55%.
Mortgage insurance (referred to as Mortgage Insurance Premium, MIP)
Property must be your primary for at least 12 months.
Some of your closing costs can be rolled into your loan.

FHA lenders will consider borrowers who have a bankruptcy or foreclosure on record.

The advantage of FHA mortgages is they have less strict requirements for borrowers. If you qualify, you can use this multi-family property as a means of increasing your income and saving for future investments. The FHA also offers FHA 203(k) rehab loans which allow you to combine the purchase of a home and the renovations into one loan. The minimum credit score for their rehab loan is 500 with 10% down.

VA Mortgages

If you qualify for a VA loan and want to purchase a multi-family unit or eventually rent out your home, you will have to make it your primary residence for at least 12 months after you close. There may be some exceptions, for example, intermittent occupancy due to employment, retiring service member, spousal occupancy, or active-duty status.

What are the basic guidelines for a VA loan?

Down payment: Zero down – 100% financing
Debt-to-Income (DTI) Ratio limit: 41% (May vary based on other credit factors)
Personal Mortgage Insurance: Not required
VA Funding Fee: Yes. Can be rolled into mortgage
Credit score minimum: 580

Must be your primary residence
Property types: Single-family, Condos, Townhomes, Multi-family, Manufactured

Borrowers can use the rental income from the other units to qualify for the loan by including up to 75% of the market rents as income.

Home Equity Lines of Credit (HELOC)

A HELOC is a type of second mortgage that acts like a revolving line of credit. It’s an equity line of credit which means you secure this credit with the equity in either your own primary residence, if you don’t already own an investment property, or an investment property if you already have one. It is harder to get a HELOC on an investment property.

How a HELOC works

You receive a set amount from your lender and draw from that line credit as needed. Your access to this credit is known as the draw period, and it’s limited (ex: 10 years). During that period, you make monthly payments that may just cover the interest due. Once the draw period ends, you must begin repaying the loan. You can pay it down or off at will during the draw period.

There are pros and cons to HELOCS. They are more flexible than conventional mortgages. They also have lower monthly payments during the draw period. Because they are variable-rate loan products, the interest rates fluctuate. This could increase your monthly payments during the repayment period. Still, it could be a lower cost route than a hard money loan. There is risk involved. Defaulting on a HELOC could mean risking your primary residence.

What to expect with a HELOC

DTI of 30% – 35%
Higher interest rates or you may have to pay 2-3 points upfront

Credit Score: Above 650. 700 or higher is preferred
You need at least 15% – 20% equity
Proof of reliable income

The Bottom Line

Unless you’re purchasing a multi-family unit in which you plan to live, you will pay higher interest rates for investment loans. Having multiple mortgages makes you a greater risk. Lenders want to mitigate that risk when they can. They’re looking for higher credit scores and lower DTI. If real estate investment is your goal, consider all your options and maintain a good credit score.

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Renovation Loans or Rehab Loan Options

Robert Harris — Tue, 01 Feb 2022 16:56:41 +0000

How does a rehab loan work?

Rehab loans cover the price of the home and the anticipated renovations in one loan. You repay it according to the terms of the mortgage, 15-or 30- years. The mortgage covers the materials and labor. Each type of rehab loan program has their own guidelines, but here’s a general idea of the process.

1. Find a broker who handles rehab loans

2. Apply for a loan and get preapproved to find out which loan program might be best for you (requirements may vary)

3. When you find your fixer-upper, you’ll need a contractor who is approved by the lender to create a bid for the renovation project.

4. The lender will appraise the house “as-is” and give an estimated appraisal value for after the project is completed. This “after” value is what the lender uses to determine the amount of your loan.

Example: You find a house that appraises at $150,000 as is. The contractor estimates it will take $100,000 to renovate. Assuming the “after renovations” home can appraise for that amount and you qualify, you will receive a loan for $250,000 minus your down payment. The lender pays the seller, and the remaining money goes into an escrow account to be used for payment throughout the project. Each lender will have contractor and project payment guidelines to follow. Some programs are more restrictive than others.

Types of Rehab Loans

FHA 203(K)

FHA 203(k) loans are backed by the Federal Housing Administration. They can cover materials and labor for renovations, but typically do not allow the homeowner to do the work. There are two types:

Streamline 203(k) Loan:

This is a limited loan. It does not allow for structural changes (i.e., load bearing walls or adding rooms) and offers a maximum of $35,000 for renovations. There is no minimum cost. Permitted renovations include replacing carpet and flooring, remodeling kitchen and baths, making the home more energy efficient to name a few. This is ideal for someone who qualifies for an FHA loan but finds a house that won’t qualify as-is.

Standard 203(k) Loan:

This loan is for larger jobs and covers major structural repairs that can exceed the $35,000 limit of the streamline loan. There’s a minimum renovation cost of $5,000. You must hire a HUD (Housing and Urban Development) consultant to oversee the renovation project. There are rules and guidelines for compliance with government code. The work done on these properties can range from landscape and curb appeal to structural. There are limitations which include pools, hot tubs, complete tear downs and rebuilds.

Requirements:

Minimum credit score of 500
Minimum down payment of 3.5% for credit score of 580 or above; 10% down for anything lower
Maximum housing expense of 31% and overall DTI of 43% is preferred, but can vary based on other factors.

HomeStyle Renovation Loan

This loan is back by Fannie Mae, a government sponsored enterprise. Fannie Mae doesn’t originate loans or give out mortgages. It buys and guarantees mortgages from lenders. Part of their purpose is to make housing more affordable to mid and lower income borrowers.

Requirements:

Minimum credit score of 620
Maximum DTI of 50%
Private mortgage insurance (PMI) with down payment lower than 20%

Minimum down payment of 5% *
May only borrow up to 75% of the home’s “after renovation value” (ARV) for the renovation

The HomeStyle Renovation loan has flexible guidelines regarding the types of properties buyers may purchase including second homes, investment properties, and multi-family homes. There may be limits on the amount of the loan based on on loan-to-value. *The down payment will also vary depending on property type.

Duplex: 15%
3 – 4 unit multi-family: 25%
Investment property: 15% to purchase, up to 25% for refinance
Second home: 10%

This loan covers just about every renovation you could think of as long it is permanent to the home and adds value. For example: Kitchen and bathroom remodel, in-law suite, electrical and mechanical improvements, and flooring. Short of tearing down the home and rebuilding or building a second home of equal or greater size, you have a great deal of freedom. You can also use the funds for DIY projects.

HomeStyle also allows you to incorporate other types of costs into the loan:

Closing

Permits and license fees
Cost for a rental while the home is renovated
DIY building materials (10% of ARV)
Contingency reserves

HomeStyle interest rates are comparable to other loan programs and lower than a Home Equity Line of Credit. If you own your home, but you need money for renovations, it’s possible to refinance your home with a Homestyle loan.

CHOICERenovation Loan

Just like the HomeStyle and FHA 203(k), this loan allows you to roll the cost of the home and the renovation into one loan. This loan is backed by Freddie Mac, a government enterprise like Fannie Mae.

One benefit of this loan includes resilience upgrades to protect the home from natural disasters. Building accessory dwellings like mother-in-law suites and apartments is also permitted. Property options include primary residence, second homes, and investment properties. Another benefit is that you are not required to use a lender approved consultant to oversee the project.

Requirements:

Credit score requirement determined by lender. Most conventional loans require 620-660 minimum

DTI: Freddie Mac does not have a max. This too is lender specific. Max DTI for conventional is 50% depending on other factors

Minimum Down Payments Vary

1-unit primary residence: 5%

2-unit primary: 15%

3–4-unit primary: 20%

1-unit second home: 10%

1-unit investment property: 15% (7 or 10 year fixed, remaining term adjustable)

Manufactured home: 5% down

Summary:

If you’re in the market to rehab a home, you have options. CHOICERenovation and HomeStyle are very similar loan programs. The FHA 203(k) loan has some different rules and limitations. Each of these loan programs has advantages and their own sets of guidelines. Work with your broker to find the option that is the best fit for you.

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FHA 203(k) Rehab Loans

Robert Harris — Tue, 01 Feb 2022 16:56:07 +0000

Basic Facts about FHA 203(k) Rehab Loans

Fixed rate or adjustable; 15- or 30-year terms
Requires upfront Mortgage Insurance Premium (MIP)
Must be primary residence for at least 12 months
Multi-family Units: Yes, but limited to 4 units (owner must live in one of the units for 12 months)
Covers materials and labor for renovations

Insured by the government
More flexible terms and qualification standards than conventional loans
There are FHA limitations and restrictions on the amount, types, and costs of rehabilitation
Renovations must start within 30 days of closing and be completed within six months
Renovations and repairs done by contractors (DIY with restrictions)

Two Types of FHA 203(k) Rehab Loans

Streamline FHA 203(k) Loan:

This is a limited loan. It does not allow for structural changes (i.e., load bearing walls or adding rooms) and offers a maximum of $35,00 for renovations. There is no minimum cost. Permitted renovations include replacing carpet and flooring, remodeling kitchen and baths, making the home more energy efficient to name a few. This is ideal for someone who qualifies for an FHA loan but finds a house that won’t qualify as-is.

Standard FHA 203(k) Loan:

This loan is for larger jobs and covers major structural repairs that can exceed the $35,000 limit of the streamline loan. There’s a minimum renovation cost of $5,000. You must hire a HUD (Housing and Urban Development) consultant to oversee the renovation project. There are rule and guidelines for compliance with government code. The work done on these properties can range from landscape and curb appeal to structural. There are limitations which include pools, hot tubs, complete tear downs and rebuilds.

Loan Requirements

Must work with FHA-approved lender
Minimum credit score of 500
Minimum down payment of 3.5% for credit score of 580 or above; 10% down for anything lower
Maximum housing expense of 31% and overall DTI of 43% is preferred, but it may vary.

As with any loan qualification, the lender looks at the whole picture. If your credit score is higher, you may be able to obtain a loan with a DTI that’s higher than 43%. The higher your credit score the lower your down payment may be.

Advantages

Allows you to combine real estate costs and renovation expenses into one loan

Lower credit score threshold
Low down payment
Able to refinance FHA 203(k) loan
Comparable interest rates
Can be used for multi-family rental income if owner live there too

Disadvantages

This is not for serial investors
Application and paperwork process is more involved
Upfront and annual Mortgage Insurance Premium is required

Project restrictions including use of HUD consultant to oversee renovations

Summary

If you have your eye on a fixer-upper, this may be the loan for you. If you have a lower credit score, then the FHA rehab loans may be easier to get than a conventional loan. Although this isn’t a loan for investors and house flippers, renovating your home can add value and make you money in the long run. If you choose this loan program, be prepared for paperwork and the staying on top of the renovation requirements.

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