Saving Money Without Too Much Pain

A few years back, it became popular to reduce the interest expense of a home mortgage by dividing the monthly payment in half and making two payments each month. This also helped those on a budget align the timing of their expenses and with the timing of their paychecks. While I don’t hear about this approach as often these days, it’s still a good idea, so I thought I’d explain how it works.

Intuitively, you must wonder: if I pay the same amount of money each month overall, but just split the payment into two installments, how can that save me thousands of dollars over the life of the loan? It basically comes down this: you’re making one additional payment each year.

If you have a 30-year loan of $100,000 with a 4 -percent interest rate, your regular monthly payment would be about $480. At the end of 30 years if you make 12 payments per year, you’ll end up paying back the $100,000 loan plus another $72,000 in interest. If instead, you pay $240 every two weeks, you’re paying the equivalent of $520 per month because of the timing of the payments adding one full payment per year. The higher payment means you’ll pay the loan off sooner—in this case, four years sooner for a net savings of  $11,000 in interest over the life of the loan. As the interest rate goes up the savings increase geometrically – at 6 percent (a 50 – percent rate increase) you save more than $24,000 (a 127 – percent increase).

For most conventional home loans, you can pay up to 20 percent of the loan value each year without pre-payment penalties. This allows you to save interest over the life of the loan, but does not obligate you to make the higher payments. Of course, it’s a double-edged sword: if more immediate spending options lure you away from your long-term financial goal of paying your mortgage off early, no one is there to force you to stick to your original plan.

Another way to achieve a similar result (that forces you to make the higher payments) is to start with a 15-year loan rather than a 30-year loan. This has two advantages: you pay off the loan more quickly and the loan can usually be obtained for ¼-percent to ½-percent lower interest rate.

Whether you choose this approach should depend on alternative uses for your money. If the higher mortgage payments make it impossible to send junior to college or replace your 15-year-old clunker, this may not be a good option for you right now.

There is a way to get the best of both worlds: take the 15-year mortgage (if you can pay more in the short run), and as equity in the property increases through the down payment, appreciation of the property or amortization of the loan, talk to your local bank about a home equity line of credit (HELOC).

A HELOC allows you to put more money toward your mortgage while still maintaining your access to cash if you need it. All of this assumes you’ve maxed out other investments with higher returns than your mortgage, like maximum contributions to your retirement account, for example. The HELOC option is a good idea if your budget will allow a higher payment. But do make sure you’re wise about it. If you have a rotating credit card balance getting charged at 22 percent, pay that off first. That interest is much higher than a home loan and isn’t tax deductible.

If you’re in the process of buying a house, your realtor can explain the ins and outs of a 15-year versus a 30-year loan. Don’t hesitate to ask!

If you have questions about real estate or property management, feel free to contact me at rselzer@selzerrealty.com or visit our website at www.realtyworldselzer.com. If I use your suggestion in a column, I’ll send you’re a $5.00 gift card to Schat’s Bakery. If you’d like to read previous articles, visit my blog at www.richardselzer.com. Dick Selzer is a real estate broker who has been in the business for more than 35 years.

What Is Seller Financing And What Should I Watch For?

When a buyer wants to purchase a property but doesn’t want to pay the whole price in cash, and the seller wants to sell the property but doesn’t need the whole amount in cash, an opportunity exists for both to get what they want through seller financing.

The buyer can acquire a property that may be worth more than he or she has in cash (or the buyer may want to reserve cash for other uses like improving the property after purchase). The seller is able to sell a property that may be hard to sell for cash because it is not attractive to institutional lenders, or the seller can get a higher price because he or she will carry the financing. The seller may also want to provide financing because he or she earn a favorable rate of return as well as favorable tax treatment.

If all the stars align and both buyer and seller agree to seller financing, here are some do’s and don’ts to consider. As the seller, you should require a reasonable down payment, usually a minimum of 20 percent. Less is risky: if the buyer (borrower) misses the first payment and you need to foreclose, you will lose money by the time the foreclosure is done. Foreclosures take time and money, and at the end you still have a property to sell. Depending on the situation, you may need to spend time and money repairing the property, as well as marketing it for sale and paying brokerage fees to do so—all this time you’re losing interest income. So, get 20 percent up front. The more specialized the property, the more important a large down payment is. While it’s relatively easy to sell an office building, selling a church, school, or hospital, for example, is significantly harder.

As a seller, you should also be cautious about a buyer who plans to do major work renovating the property. At first, it may sound great. But if the buyer doesn’t know what he’s doing, you may end up with a mess. Unfortunately, I speak from experience. I sold a property and carried the financing; six months later, after the buyer gutted the buildings (down to the concrete walls), the buyer ran out of funds. I foreclosed and had to complete the renovations at my expense.

As with most agreements, things work best when both parties get what they need. The loan’s interest rate should work for both buyer and seller, and the payment schedule should be realistic for both. The buyer needs to be able to afford the monthly payments, (mortgage payment, taxes and insurance) and the seller needs to receive enough income. Be aware that the new Dodd Frank Act, may pertain to your transaction. In most cases, seller financing is exempt, but talk to your realtor to be sure you’re following the rules.

The overall term or length of the loan may need to correspond with other expenses, like sending a child to college. If the seller carrying the loan suddenly needs cash, all is not lost. The loan (or mortgage-backed note) can be sold on the open market. The value of the note depends on the loan terms, the value of the property, and the borrower’s payment record. Having carried financing, I highly recommend title insurance on the note. It reduces your risk by protecting you against buyer fraud. If you’re carrying the financing, I also recommend that you make sure property taxes are paid, the property is covered by hazard insurance, and that you report interest income to the government so the buyer can deduct the interest paid. That keeps everyone happy including the IRS.

If you have questions about real estate or property management, feel free to contact me at rselzer@selzerrealty.com or visit our website at www.realtyworldselzer.com. If I use your suggestion in a column, I’ll send you’re a $5.00 gift card to Schat’s Bakery. If you’d like to read previous articles, visit my blog at www.richardselzer.com. Dick Selzer is a real estate broker who has been in the business for more than 35 years.

Real Estate Investing – Part III

As the headline implies, this is the third column in a series about real estate investing. I started with single-family homes, moved to duplexes and four-plexes, and now I’m on to small apartment complexes (residential real estate with 5-12 units). Before I move on, however, I need to correct last week’s column. I said duplexes and four-plexes have a higher rent-to-income ratio, and I meant a higher rent-to cost ratio. Thanks to my trusty friend Ross Liberty for catching that so I could correct it!

Okay, on to small apartment complexes. These come with advantages and disadvantages; they have a better price-to-income ratio than the smaller investments, but they require different financing, for example.

Five units or more means you cross an invisible threshold where the trusty 30-year fixed rate loan is no longer available to you. You must now delve into commercial financing. With the 30-year fixed loan, many lenders buy and sell these. With a commercial loan on a small apartment complex, it is likely that the lender will not resell the loan. Typically, whoever makes the loan, keeps it in their portfolio. The commercial loan comes with a higher interest rate and a lower loan-to-value ratio, a shorter term, and/or a requirement that the rate be adjustable.

The commercial lender is unlikely to be the same lenders you’ve worked with on standard residential mortgages. A typical commercial loan has a loan-to-value ratio of 70 percent or less and interest rates that are one or two percentage points higher than a home loan. And, the interest rate is often adjustable based on some index. If not, it may have a balloon payment at the end of five or ten years. To make matters worse, when money is tight, even these loans become more difficult to find. This is offset by the economies of scale you get from owning a larger complex.

When you reach complexes of more than 16 units, things change again. First, you are required by law to have an on-site manager. The job description for the on-site manager can be fairly brief, but he or she must live on the premises. Our on-site managers show vacant units, maintain the pool and laundry room, do light yard work, and deal with that noisy tenant at 2:00 a.m.

While bigger complexes can lead to bigger revenues, they can also be harder to sell. Very large complexes, say more than 50 units, are actually easier to finance because different lenders get in the game. Large institutional lenders like insurance companies are not usually interested in $500,000 loans (small apartment complexes), but they are interested in $5 million loans (large apartment complexes).

Most of the pros and cons of investing in residential property apply to large complexes. The 20-year-old resident still thinks he can have a party until 3:00 a.m. and junior next door still wants to have a dog.

On the other hand, vacancies are filled more quickly and there are tax advantages for mulit-family residential real estate (as opposed to commercial real estate like office buildings or retail space). Commercial space usually requires a five-year lease and has more dependable tenants (far fewer 2:00 a.m. parties), but residential properties have a better price-to-income ratio. And, with apartment complexes, you benefit from economies of scale (per unit, your maintenance and management costs are less).

As I’ve said before, real estate investing isn’t for everyone, but if you look at the return on real estate as compared to other investments, it can be quite lucrative.

If you have questions about real estate or property management, feel free to contact me at HYPERLINK “mailto:rselzer@selzerrealty.com”rselzer@selzerrealty.com or visit our website at HYPERLINK “http://www.realtyworldselzer.com”www.realtyworldselzer.com. If I use your suggestion in a column, I’ll send you’re a $5.00 gift card to Schat’s Bakery. If you’d like to read previous articles, visit my blog at HYPERLINK “http://www.richardselzer.com”www.richardselzer.com. Dick Selzer is a real estate broker who has been in the business for more than 35 years.

Would You Like Free Money? Consider a Reverse Mortgage

Would you like to receive a check from the bank to supplement your income after you turn 55 years old? If you own your own home, the equity in your home can become a source of income, and you don’t have to have any other income sources to qualify.

I know it sounds too good to be true, and I’d be lying if I said there were no strings attached; however, you can borrow against the equity in your home and use the money however you see fit, whether you want to go on a fabulous vacation or simply have a higher standard of living.

This is all possible because of something called a reverse mortgage. The bank gives you a loan based on the value of the equity in your home and how long you’re likely to live. As long as you remain in your home, you never have to pay the loan back, even if you live to be 110 years old. You can receive the payment from the bank either in a lump sum or as a monthly payment.

With a regular mortgage, you—the homeowner—pay the lender every month. Some of the payment goes toward reducing the principal (the loan amount) and some goes toward interest (the cost of borrowing the money). Each month, you have a little more equity in the home (you’ve paid off more of the loan’s principal).

In a reverse mortgage, the bank sends the homeowner a check and reduces the equity the homeowner has in the property. If a person lives so long that the amount owed is more than the home’s value, the homeowner can stay in the home and the Federal Housing Administration will cover any loss to the lender.

The amount you can get is based on the value of the home and the age of both the owners. The rates are a little higher than for a traditional mortgage, but not too much. To explain how the loan is calculated, let’s say a house is worth $350,000.00 and both owners are 60 years old the lender will make a one_time lump sum payment of $   or a monthly payment of $   . If the payments are to be monthly they will go on until the last owner passes away or moves out of the home. This means the borrower(s) never have to pay the loan themselves. Ultimately the house will be sold but not while the owners still live in it.

You’ll want to consider your heirs in all this, because you are using up part of your wealth rather than passing it on to them. When you pass away, to retain the house, your heirs will need to repay the reverse mortgage loan either by selling the home, refinancing the loan, or paying the loan with cash they have on hand. However, your heirs are not on title and have no obligation to pay off the loan. If the loan exceeds the value of the house, the heirs can simply let the lender take possession and sell the house. This will not cause any negative impact on the heirs’ credit standing.

In addition remember, while you live in the house you must keep insurance and taxes current and reasonably maintain the property.

If you’re wondering about the tax implications of this whole endeavor, don’t worry. The interest on the loan isn’t deductible until the loan is paid. In other words, as long as you live in your home and benefit from the reverse mortgage income, you’re good.

Reverse mortgages can be essential in allowing retirees to remain financially independent, even with no income and bad credit. Since the retiree won’t ever have to make any payments, the only qualifying criterion is the equity in their home.

Next time I’ll write about as-is properties. If there’s something you would like me to write about or if you have questions about real estate or property management, feel free to contact me at rselzer@selzerrealty.com or visit our website at www.realtyworldselzer.com. If I use your suggestion in a column, I’ll send you’re a $5.00 gift card to Schat’s Bakery. If you’d like to read previous articles, visit my blog at www.richardselzer.com. Dick Selzer is a real estate broker who has been in the business for more than 35 years.

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Interest Rates and the New Dodd-Frank and Federal Consumer Finance Protection Bureau Regulations

Most people in real estate don’t expect interest rates to stay down much longer. As unemployment drops and the economic recovery gains momentum and therefore demand for business borrowing, the pressure to raise interest rates increases. In addition the federal government has spent $17,000,000,000,000 more than they had. They therefore borrowed the money. This results in a requirement to pay it back. It will be paid back with increased taxes or with inflation. I don’t think they have political will to do it with taxes and that leaves inflation. With inflation comes higher interest rates.

A one percent increase in interest rates results in about a 12.5 percent increase in your monthly mortgage payment. Let’s say you have a $100,000 loan and the rates go from four percent to five percent. Your monthly payment will increase from $477 to $536 per month. This happens because each payment is made up of principle and interest. The vast majority of most mortgage payments are made up of interest in the early years, and they equal out over the life of the loan. If your payment were all interest and no principle, your monthly payment would increase by 25 percent.

As of January 10, 2014 home loans will be more difficult to get. The new Dodd-Frank and Federal Consumer Finance Protection Bureau regulations go into effect, requiring lenders to become far more restrictive. The biggest change will be in the debt-to-income ratio. Currently, you can borrow up to about 50 percent of your gross income, but that will drop to about 43 percent in 2014.

If you make $60,000 a year and pay $500 a month for your car payment and $100 a month toward your credit card debt, right now you’d qualify for a mortgage of about $285,000. However, when the new regulations take effect in January, you’ll only qualify for about $215,000 (if you qualify at all). In addition, there are new requirements to prove you make the $60,000 per year. If you’d like more details (and by more I mean MORE) about the new regulations, go to www.consumerfinance.gov/regulatory-implementation.

Depending on whether this significantly impacts the number and size of loans, the increased cost of dealing with the regulations will be passed on to consumers. In other words, with fewer loans of smaller sizes and increased regulations the cost of getting a loan will go up.

The bottom line is this: if you are thinking of buying or refinancing, sooner is better than later. Financing never justifies making a bad real estate or bad investment decision, but if the decision is already made, consider the current state of financing and act before the end of the year.

For the past couple weeks, I’ve encouraged people to consider donating to the Ukiah Valley Christmas Effort (www.facebook.com/ukiahchristmas). Many wonderful local charities care for local people during the holidays and year-round. Tax-deductible donations make good financial sense, and more importantly, help us strengthen our community. The Greater Ukiah Chamber of Commerce has a list of non-profit members listed at www.ukiahchamber.com/members/cw_1349.htm. If you have more time than money, you can always volunteer to help out.

Next time I’ll write about investing in real estate. If there’s something you would like me to write about or if you have questions about real estate or property management, feel free to contact me at rselzer@selzerrealty.com or visit our website at www.realtyworldselzer.com. If you’d like to read previous articles, visit my blog at www.richardselzer.com. Dick Selzer is a real estate broker who has been in the business for more than 35 years.

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How to Hire a Lender

Last week, I talked about how to hire a realtor. This week, I thought I’d review the basics of hiring a lender.

A lender’s job is to find a loan with the best rate available for you. With the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, banks now have very little flexibility, so most lenders will quote you similar if not identical rates for the loans you qualify for.

If you’re not shopping for a lender based on rates, what are you shopping for? The quick answer is: someone you can work with.

From earlier columns, you may remember that loans vary. The loans available to you will depend on your income, credit history, employment, marital status, other property holdings, cash available, and other factors. The loan you need will also depend on whether you want a 15- or 30-year term, a variable or fixed rate, the type of property (i.e., land, residential or commercial), your plans for the money (e.g., construction loan), and more.

The lowest rates available are typically for someone buying an owner-occupied residential property who has excellent credit, a secure job, and enough cash for a 25 percent down payment.

So, how do you identify a good lender to help you find the loan you need at the best possible terms? First, ask your realtor. He or she is likely to be the most knowledgeable person you can find when it comes to people who understand your real estate needs as well as which lenders would be a good fit. You can also ask friends and neighbors, your insurance agent, your accountant and your attorney.

Conventional lenders include banks, savings and loans, credit unions, and mortgage brokers. Occasionally, borrowers work with hard money (private) lenders or sellers willing to carry a note (act as a lender). When I say “lender,” I’m talking about conventional lenders here.

Lenders are paid a percentage of the loan amount by the borrower or lending institution (or sometimes the seller). Because the industry is so competitive, there is little difference in costs. The best way to compare loans is get the terms as close as possible, then compare annual percentage rates (APRs). The APR is calculated after considering the prepaid finance charges (loan fee, lender charges, and escrow fee). APR is not something the average Joe (or even really bright Joe) can usually calculate. Your lender can and will calculate this for you.

Getting back to that original question, if you’re not choosing a lender based on rates, what are the criteria? Here’s a list of questions I recommend pondering.

  1. 1.     How much work will they take off of you? Buying a home is stressful enough without a lender who expects you to do a bunch of legwork. They can facilitate your efforts.
  2. 2.     Are they good communicators? Can they work well with you and your realtor? Even if you don’t have a finance background, you should feel confident that you understand what’s going on with your transaction.
  3. Do they tell you in advance all you need for the transaction or is there one more condition to meet each week? Clearly, in almost all transactions, unforeseen issues will arise; the need for additional information is not unusual. But a good lender will plan ahead and keep these issues to a minimum.
  4. Is your lender local? A local lender needs repeated referrals to be successful. This works in your favor. Internet lenders from Timbuktu who have never been to or heard of Ukiah don’t care if they ever get another loan from Ukiah. This does not work in your favor.

At Realty World Selzer Realty, and I expect at other real estate offices around town, we have a DO NOT USE list for difficult, incompetent, or unscrupulous vendors. Lenders can end up on that list. That’s why I say, the best person to ask about which lender to use is your realtor. realtors work with lenders all the time and know who they trust to do a good job.

Next time I’ll write about water. Yes, water. In addition to keeping us alive, it can also be a lifesaver for real estate. If there’s something you would like me to write about or if you have questions about real estate or property management, feel free to contact me at rselzer@selzerrealty.com or visit our website at www.realtyworldselzer.com. If you’d like to read previous articles, visit my blog at www.richardselzer.com. Dick Selzer is a real estate broker who has been in the business for more than 35 years.

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Appraisals 101

It’s a seller’s market, but whether you’re talking about a sales transaction or a lease situation, it’s important to know the value of your property, and which home improvements will pay off. Here are some of the factors that affect a property’s value the most.

  1. Size. Square footage is the single biggest factor in determining a property’s value. Be sure you know the square footage of the home. Measuring it is not always easy and even professionals make mistakes, so estimate it yourself to check the numbers.
  2. Land. How much property does the structure sit on? A big back yard can add a lot of value. However, sometimes the difference between 10 acres and 20 acres isn’t as big when it comes to overall impact.
  3. Condition. The condition of the property (both visible and invisible) is a major factor. Obvious signs of wear and tear are unappealing, but sometimes it’s the structural issues that have a bigger impact on a property’s value.
  4. Location.  Location used to be more important than it is now. While it’s still a major component of value, our telecommuting world allows people more freedom in where to live.
  5. Décor. The style should not only be attractive, but appropriate to the home and the era. It helps to be internally consistent as well as consistent with the neighborhood.
  6. Room Count. In addition to how many bedrooms and bathrooms, the total room count matters. These days, “outdoor kitchens” almost count as another room.
  7. Other Amenities. Pools, hot tubs, and other amenities, while nice, do not increase the value by the amount it costs to install them. And, they can detract if they are poorly placed or in disrepair.
  8. View. To let you know the value of a view, I once knew an apartment building owner who said, rent was $1000 and the view was an extra $200. Yep, people paid it.
  9. Community Amenities. If a property is close to good schools, parks, shopping, and other amenities, the value increases. Now, of course, these are subjective. For a retired couple without children, clearly the schools won’t be much of a draw.
  10. Financing. If the seller is willing to carry the loan, the value of a property may go up. No fuss, no muss (simpler loan application, no fees, etc.).

When it comes to things you can change about your house, the absolute best return on your time and money is to clean and de-clutter. Haul stuff away and deep clean your house—top to bottom. Once that’s done, you can decide  on additional improvements.

People often ask, should I update the kitchen or the bathroom(s)? Well, as with most things, that depends. If you have a four-bedroom/one-bath home, add a bathroom (preferably a master bath). If your kitchen fixtures were done in a nice shade of 1970s avocado, consider renovating your kitchen.

When updating, go neutral. If you want a snazzy color, paint a wall. Paint is inexpensive to replace. Appliances and flooring are not. And, think long and hard before you convert a garage into a family room, because what you gain with one, you lose with the other. It’s almost a fair trade in overall value, so you’re getting little or no return on the money you spent to make the change.

Once your property is in tiptop shape, it’s time for an appraisal. While there are three methods appraisers use to estimate the value of the property; theoretically, they should all come up with comparable values. It costs about $400 to get a single family residence appraised, and this is another one of those times when it’s really important to have a reputable, local professional do the job. Call your local REALTOR for a referral.

In case you’re interested, the three methods of appraisal are as follows.

  1. The Market Approach – compare physical data, get data on several comparable properties, and make adjustments for size, condition, etc.
  2. The Income Approach – figure out the fair market value for renting the property, get income/rental information for comparable properties, and multiply by a ratio to get the appraised value.
  3. The Replacement Cost Approach – figure out the top value (what it would cost to replace it), assess the cost of doing so (including permits, hookup fees, insurance, taxes, etc.) and adjust for the aging of the property (physical, functional, and economic).

Lenders require appraisals, and they can be handy if you’re a For Sale By Owner type of person. If you work with a REALTOR, they can provide a market evaluation as part of their service which will help you estimate the value of your home.

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Getting Through Escrow

With so little inventory available, the market is shifting to a seller’s market, even with rates at record lows. So, if you’re a buyer fortunate enough to have signed a purchase contract and gone into escrow, here’s what you need to know to complete the process.

First, let’s define “escrow.” Escrow is a neutral place where money and property are both safe. An escrow officer is like an impartial judge who makes sure everyone keeps his or her word. The escrow officer has a fiduciary responsibility to all parties (buyer, seller, and lender). When all the conditions for the transfer of property are met, the escrow officer oversees the exchange of the deed for the payment.

As a buyer, you may have already worked with a lender to become pre-approved for a loan. If not, you’ll need to find a lender and get all your financial information in order (see last week’s column for details on what you’ll need).

Hopefully, you’ve been working with a real estate agent who walked you through the process of carefully outlining contingencies you need, exactly what is included in the purchase and who will pay for inspections, any repairs, closing costs, etc.

Inspections are a big part of an escrow. My advice to buyers is to take advantage of as many inspections as you can. Yes, you will probably have to pay for them, but better to know what you’re buying, than to end up with nasty surprises after the property is yours. Unless you are buying a property and planning to tear it down and build from the ground up, order inspections!

Here’s a list to consider:

○     Home Inspection

○      Electrical

○      Plumbing

○      Roof

○      Heating & Air conditioning

○      Foundation

○      Structural

  • Well – both quantity and quality of water
  • Septic – physical condition of the tank and function of leach field
  • Pest and Fungus – check for dry rot and bugs, both of which are abundant in Mendocino County
  • Hazardous Materials – e.g., asbestos and lead paint. Although both were outlawed in 1978, contractors still had supplies on hand and sometimes used those supplies illegally for some time.
  • Soil/Geology – if you are unsure of the history of the property and plan to plant vineyards, for example, you will want to know what you’ve got. Are you on the side of a cliff that may be about to give way? Check it out.
  • Energy Audit – are you going to need new windows and insulation as soon as you purchase the house? Best to know ahead of time.
  • Structural Engineering – two-story house with cracks in the walls, any house with cracks in the foundation? In addition to inspections, making sure you are aware of any liens, easements, or tenant rights connected to the property can save you from big headaches later. Many easements aren’t a big deal; they assure that your neighbor can access their driveway or that a utility company can pass behind your property to access communication or electricity lines.

However, some legal restrictions could prevent you from inhabiting your home for several years or require you to pay bills that weren’t yours in the first place. An easement through the only building site could reduce the value of the property dramatically. If the property has renters, be sure to get written verification of the rental terms (called an estoppel agreement). Because, verbal agreements are only worth the paper they’re written on.

The escrow process is based on everyone acting in good faith. If inspections or the preliminary title report indicate problems, the buyer can withdraw from the contract if the seller is unwilling to remedy the problems. However, the contract is a legally binding document, so there must be a compelling reason to dissolve the contract. Most escrows go through, and the property changes hands in 30-45 days.

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Buying Versus Renting

Like I mentioned last week, the market continues to be good for buyers. It’s so good, in fact, that I thought I’d dedicate a column to explaining why renters should consider buying right now. While I know numbers can turn a lot of people off, I think it’s important to use an example so you really know what I’m talking about.

Let’s say you’re a first time homebuyer who’d like to purchase a $200,000 home. You don’t have money for a down payment, but you have a job and good credit. Here’s how this could work:

Estimated monthly expenses

Loan                        $ 950

Taxes                      $ 200

Insurance              $   75

$1225/month

 

“But what about other expenses?” you ask. “If I own my home, I can’t call a landlord to fix things.” That’s true. At some point, you’ll need to paint your home inside and out, put a new roof on, replace the water heater, etc. So, let’s estimate about 1.5 percent of the purchase price for upkeep each year (about $250), since that’s usually about what it costs.

But wait, there’s good news to balance the maintenance expense. You get to write off some of the mortgage payment. Let’s say your household income puts you in the 25 percent tax bracket. Some of your mortgage payment is tax deductible: about $867 ($667 is the interest on your loan and it’s deductible, as is the $200 homeowner’s tax). So, multiply $667 by 25 percent, and you will get back about $217 per month.

Mortgage payment                $1225

Maintenance/upkeep          $  250

Tax benefits                            $ -217

$1258/month

 

So, like with anything in life, restrictions apply, but they aren’t too bad. First, you need to have good credit (a credit score in the mid 600s). Next, you need reportable income. It’s time to claim that babysitting money or those waitressing tips as income, because if your income isn’t reportable, you’ll have a tough time getting a loan. For this particular loan that I’ve used as an example, there are minimum and maximum income restrictions based on formulas that have to do with the number of people in your household, the number of children you have, and other factors. The final requirement is job stability. You need to have been in your job for at least a year, and it needs to appear that you will remain in that job for the foreseeable future.

Owning your own home has benefits that go beyond financial. Pounding a nail wherever you want doesn’t require anyone else’s permission. Where to plant trees is your choice. Choosing which paint color to use is your spouse’s choice. And, your elbow grease benefits YOU. If you think you might be able to purchase a home, and you’d like to learn more, call your local real estate agent and they can help you figure it out.

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Qualifying for a Loan

 

The market continues to be good for buyers. Home prices are low (but starting to climb), and rates remain incredibly low compared to historic norms. While there’s not a lot on the market, spring and summer are traditionally times when more inventory becomes available, so we may see an upswing in houses listed for sale.

However, while it may be a buyer’s market as far as housing prices and rates, there’s not much for sale so seller’s can be choosy. How can you be the buyer that gets the home you want? One of the best ways is to demonstrate that you’re qualified to buy that home.

There are basically two levels of loan qualification – “pre-qualified” and “pre-approved.” Pre-qualified consists of sitting down with a Real Estate agent and doing some simple calculations. Getting pre-qualified allows you to figure out what you can afford so you can narrow your search. An agent will ask you about your income and how much debt you carry (car payments, insurance payments, tuition payments, etc.), and whether you have any savings for a down payment. Being pre-qualified is much better then not being pre-qualified, but it’s not as good as being pre-approved.

To become “pre-approved” for a loan is more involved, but it’s a GREAT way to increase the chances of getting the property you want. Becoming pre-approved means working with your agent to find a loan broker who will review all your assets, liabilities, tax returns, W-2s, credit history, and any other relevant financial information to begin the process of applying for a loan. Basically, the only difference between being pre-approved and applying for a loan is that when you’re pre-approved, you haven’t found your property yet.

Getting pre-approved increases the chances of having your offer accepted, and it puts you ahead of your competition, if you have any. Because loans are so much more difficult to get than they used to be, a buyer who is pre-approved gives sellers piece of mind. Sellers won’t have to go through the frustrating experience of starting an escrow, only to have it fall through because the buyer can’t get a loan.

So how do you get pre-approved? Work with your agent to find a local loan broker. In this case, local matters. The incentive to provide excellent service and solid results is greater when your loan broker knows he may run into you in town. But that’s not the only reason local loan brokers are better than, say, someone on the Internet.

Internet brokers are playing a numbers game. If it takes months to find a type of loan that you may qualify for, that’s fine with them. They have hundreds, maybe thousands, of customers and so there’s no great rush to get you what you need.

Loan brokers who work in Ukiah only have the local population to work with, so it’s not efficient for them to throw a bunch of spaghetti at the wall to see what sticks. Basically, they make a living by being efficient and doing their homework so they can find you the best loan as quickly as possible. It takes more work up front, but it pays off for them and it pays off for you. Once they’ve found a loan that will work, the next incredibly compelling reason to find a local loan broker is so you can take advantage of their business relationships. Local brokers know people with whom they can work, people like title officers, escrow officers, pest and fungus inspectors, and insurance agents.

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