What’s a Hard-Money Loan, and Do I Want One?

Most of us don’t have several hundred thousand dollars in cash lying around, so when we want to purchase real estate (or invest in a business or embark on other expensive endeavors), we need a loan.

Conventional bank loans require borrowers to follow strict guidelines regarding proof of income and creditworthiness. This works well for those with regular jobs; however, some folks have assets, but not income, and therefore, do not qualify for conventional loans. This is when they come to lenders like me, because I am willing to accept real estate as collateral for a loan.

Private loans like this are referred to as hard-money loans or equity loans, and while their terms are not as favorable as conventional bank loans’, they provide an important option in less-than-conventional circumstances. Hard-money loans can range from short term (a few months) to long term (50 years or more). Typically, they are in the five-year range.

As I implied above, if you can get a bank loan, you should, because the priciest bank loan will be less expensive than the cheapest hard-money loan. Interest rates can be twice as high and loan origination fees will likely be three or four times more expensive. Because private lenders are taking on more risk, they charge more. Private lenders are willing to accept a lower loan-to-value (LTV) ratio (which is the total loan amount divided by the value of the property), so while conventional loans have a LTV ratio upwards of 75 or 80 percent, hard-money loans are more commonly down around 50-65 percent.

The people who choose hard-money loans typically have poor credit or no established credit, little or no verifiable income, or they are purchasing property that won’t qualify for conventional loans (like raw land or real estate that requires rehabilitation). Another reason people choose hard-money loans is because these loans can sometimes be quicker and easier to secure; conventional loans take time and if an opportunity or need with an immediate deadline arises, then there may not be time for a conventional loan to be processed.

Since the recession of 2008, private lending has become more difficult because legislators passed the Dodd Frank bill and others, putting tougher restrictions on all lending. One of the bill’s new requirements is that private lenders must hold a license called a mortgage-loan originator license in addition to a real estate license. The new restrictions caused many private lenders to stop lending, and those of us who stayed in the business to stop offering some of the more troublesome loans, like those secured by owner-occupied properties and consumer loans.

Private lending through a broker can be a worthwhile investment if you’re willing to take on a little more risk for the opportunity to earn more than banks or bonds will pay. State laws require that loans made with an annual percentage rate that exceeds 10 percent to be arranged by a broker. The disclosures the broker must make are significant for borrower and lender, so if you head down this path, be prepared to review a lot of documents.

If a borrower defaults, the lender can foreclose and ultimately claim ownership of the real estate securing the loan or in some cases be paid off. It’s not a quick or easy process (for non-owner occupied properties it’s about four months), but it is not terribly expensive, so it makes the process less stressful.

Bottom line: for some borrowers acquiring a hard-money loan is a method to obtain needed cash, and for some investors it’s an avenue to higher returns. (By the way, investors can use retirement account funds for this type of investing.) As long as both sides negotiate in good faith, both sides are likely to get what they wish from the transaction.

If you have questions about real estate development or any other real estate or property management issues, please contact me at rselzer@selzerrealty.com or visit www.realtyworldselzer.com. If I use your suggestion in a column, I’ll send you 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 40 years.

 

 

What Happens If You Sign a Contract, But Didn’t Mean It

When it comes to real estate contracts, I always suggest that people involved in the transaction do three things: read and understand the contract, make sure the contract accurately reflects their intentions, and be sure they can abide by its terms. This applies to buyers and sellers, but it is usually buyers who change their minds about a sales agreement.

The reasons vary. Sometimes buyers get in over their heads financially. Before they sign a contract, they should ask themselves: how much can I afford to pay, both up front and every month? Which inspections do I need? How much will those inspections cost? Are there contingencies in the contract that allow me to walk away if the inspections show the need for a lot of expensive repairs?

Buyers who get prequalified or preapproved for a mortgage loan are usually glad they did. While this process cannot prepare them for unpleasant surprises resulting from inspections, it does give them a realistic idea of how much house they can afford.

On the sellers’ side, several decisions should be considered before entering into a sales agreement. The seller must figure out whether the property is selling at the correct price. This issue has two dimensions: is the price fair (does it reflect the market for this type and size of house in its neighborhood), and just as importantly, do the sellers want to sell the property at this price? If the sellers are not truly committed to selling for any reason, whether it’s strong emotional ties or a fear of moving, they need to be honest with themselves, because once they sign the purchase agreement, they are committed—no ifs, ands, or buts.

Unlike the buyer who likely has contingencies built into the agreement, it is rare for a seller to have contingencies. Once in a great while, a seller will include a contingency requiring approval from a tax or legal advisor before the contract can be executed, or they will make the sale contingent on finding a replacement property, but these are unusual and can generally be dealt with before the property is listed for sale. Sellers with contingencies typically have a much more difficult time selling their home, which translates into a lower sales price.

So, whether you are a buyer or seller, before you sign a contract make sure you’ve read, understand and can live with the commitment to which you are agreeing. A few Realtors in my office have recently dealt with sellers who simply changed their minds after they signed sales contracts. This did not work out well for those sellers. They went to court to try to stop the sales, but were unsuccessful: the properties closed escrow and the sellers were required to pay the buyers’ attorneys’ fees. They lost the court battle and ownership of the property.

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If you have questions about real estate or property management, please contact me at rselzer@selzerrealty.com or visit 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.

It’s a Buyer’s and a Seller’s Market

Right now it’s a buyer’s and a seller’s market. How can it be both? It’s these low interest rates.

Low rates allow more people to qualify for loans, bringing renters into the home-buying market. Low rates also make it easier for homeowners who want to upgrade to afford more expensive homes. On a typical $300,000 home sale, an interest rate increase of only 2 percent could mean as much as a 25 percent increase in your monthly mortgage payment, so people are getting while the getting’s good.

Of course, this is the reason it’s also a seller’s market. Buyers have been buying everything in sight, so there are fewer homes to choose from, making each one a little more valuable.

With fewer homes for sale, many people are faced with multiple offers on the same property—complicating things for all involved. Realtors must review each offer, explain the pros and cons, and sometimes compare apples to oranges: for example, one offer may have a higher price tag, but request that the seller make concessions (pay some closing costs, make repairs or perhaps leave personal property with the house), while another offer may ask for none of those concessions but come in at a lower price.

A common dilemma for sellers today is choosing between an offer with a high price tag—but one that requires maximum financing that a buyer may not be able to obtain—versus offers with lower price tags but more security, like a financed offer with 25 percent down or even an all-cash offer.

The question is: how much is the certainty of an all-cash offer worth? On a $300,000 purchase offer, would you take $100 less for an all-cash offer? Certainly. Would you take $25,000 less? Probably not. You and your Realtor need to discuss the upsides and downsides to figure out where you draw the line.

Let’s say you have three offers: one for $310,000, one for $300,000, and one for $298,000. The first offer asks the seller to pay $7,000 in closing costs. The second offer is a conventional loan with 20 percent down, and the third offer is an all-cash offer, but the prospective buyers want a super short, two-week escrow.

In years past, buyers used to send a letter with their offer, sometimes including a photo of their kids, the dog, and Goldy the goldfish, letting the sellers know how much they’ll love and care for this house. Now, no one is allowed to provide information that could allow sellers to discriminate, which means people cannot provide much, if any, information.

On each of the offers above, you have three choices: you can accept the offer as presented, you can reject it outright, or you can respond with a counter-offer. With a good Realtor on your side, you can respond to all offers at once, countering various issues in each of the offers, without inadvertently selling your house to three different buyers simultaneously—no one appreciates that. Or, you can simply ask for higher prices from each prospective buyer, taking into consideration their special requests and what those requests are worth to you.

Be sure your Realtor understands and complies with the special, and somewhat confusing, rules around multiple counter offers. Ask your Realtor whether they’ve done this before, because these transactions can be tricky. Inexperienced Realtors can always get assistance from their brokers or mentor Realtors—just be sure they do.

As a seller, multiple offers and counter offers provide some confusion and hoop jumping, but from a negotiating standpoint, it’s a wonderful place to be. As a buyer, multiple offers add more tension to an already tense process, but don’t be dissuaded. Hang in there. Your offer may be just what the seller is looking for.

If you have questions about real estate or property management, please contact me at rselzer@selzerrealty.com or visit 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.

Building Your Own Home – Get the Skinny Up Front

Purchasing a to-be-built home is completely different from buying an existing home. When building your own home, whether it’s customizing a spec home or creating a custom home from scratch, you can avoid expensive misunderstandings by asking your contractor some key questions up front.

Building a custom home on land you’ve purchased is a big undertaking, but so is purchasing a home in a new subdivision. When building a totally custom home, there are no templates or specifications to adhere to, so while open communication is critical, a developer is not trying to squeeze your dream home into a ready-made template.

When purchasing a to-be-built home in a new subdivision, you’ll be faced with choices within the confines of pre-approved plans. Limits on square footage, house color, and backyard fence height may surprise you. The fact that you are not allowed to park your RV where it can be seen from the street may change where the house goes on the property.

Before you get into the details, check out the builder. Ask for a list of previous clients. Ask your lender and, as always, your Realtor, what they know about him. Don’t go in blind.

Once you know you’re dealing with a reputable builder, here are some questions to ask before you jump in with both feet.

  1. Is earnest money refundable?
    Typically, in the resale market, if the purchase of a home falls through based on a loan contingency, you get the deposit back. This may not be the case if a contractor has modified a standard floor plan to suit your needs.
  2. How long will it take to complete the home?
    If you have already sold your home, are you living in a rental, or worse, with your in-laws? This may be a significant point of negotiation as you determine whether to buy a to-be-built home or find one that’s ready to move into.
  3. What is “complete”?
    If your contractor says, “Don’t worry about those six things on the punch list, we’ll take care of them after escrow closes.” Your response should be, “That’s fine, we’ll release the final ten percent hold-back funds right after that punch list is complete.”
  4. How much do you want me to stick to the program?
    Incentives are often available to encourage folks purchase a model that’s already been built. Ask about them.
  5. What’s the upgrade allowance?
    Frequently, when you inspect a model home, it has granite countertops and tile floors. When you review the contract, you may discover that it includes Formica/laminate, with linoleum in the bathroom. Each area of the home has an allowance, say $500 for kitchen countertops. If you want granite, you have to pay the difference between $500 and the additional cost of the nicer material. It’s like buying a car: the base model may be $18,000, but if you want leather seats, that’s extra.

    Review allowances to be sure they are sufficient to build the quality of amenities you want for flooring, lighting, plumbing, countertops, and more. If you want to upgrade, decide up front, because change orders are expensive. Changing your mind after you’ve settled on a contract can double the price of nicer amenities.

  6. Who’s on the hook to pay whom?
    Be sure your contractor is on the hook to pay any subcontractors, not you. You’ll want lien waivers and/or releases in writing: you don’t want to find out the subcontractors weren’t paid and you’re responsible for paying them.
  7. What happens when workmanship falls short of expectations or the move-in date is postponed for the fourth time? What happens when the Internet lender can’t close escrow on your agreed-upon date?
    Brainstorm “what ifs” and get answers up front.

If you have questions about real estate or property management, please contact me at rselzer@selzerrealty.com or visit 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.

 

 

There’s More to a Loan Officer Than Rates

One of the most common questions any Realtor gets is, “Which lender can get me the lowest rates?” While rates are vital, the better question is, “Which lender provides the best value?”

The loan officer handing your loan can either make life fairly simple or incredibly miserable. The one you found online may have promised the best service and the lowest rates with no paperwork headache, but that person is probably not the person who will provide the most value.

I assure you, just about every Realtor I know can share horror stories of phantom loan officers who, half way through the loan process, stop returning calls and responding to emails. The reason? Probably something to do with those rates they quoted that were half-a-percent lower than local lenders, the rates they can’t actually deliver.

Typically, this comes at an awkward time, like right after you remove your inspection contingencies and plan to move forward with the loan and purchase. Hopefully, you didn’t remove the loan contingency, notwithstanding the promises of your online lender.

While many online lenders are competent and ethical, few are willing to put in the extra time required when a loan demands special handling, for example when your credit score is three points below the threshold or your debt-to-income ratio is half-a-percent too high. A good loan officer will work with you to show you how paying off the right credit card can change your debt-to-income ratio or getting that one negative credit comment corrected can increase your credit rating by 10-15 points, maybe more.

A good loan officer will also let you know that a $1,000 gift from your Great Aunt Mathilda applied properly could mean the difference between the bank requiring a 10 percent down payment versus a 20 percent down payment, or a quarter-percent difference in interest rates, maybe whether you can get the loan at all.

Many of the other advantages of working with a local lender recommended by your Realtor are as follows.

  • The Realtor you know and trust knows and trusts the lender.
  • Local lenders are available for face-to-face meetings, which can streamline communication and coordination.
  • Local lenders are more likely to work with a local lending institution, keeping your money in the community where it benefits you and your neighbors.
  • In a place as small as Ukiah or Willits or the Mendocino Coast, lenders know they may run into you at the grocery store or the Little League field. They have every reason to treat you right.
  • Most importantly, the fact that your Realtor has referred you to this lender provides incentive for the lender to make every effort to close the transaction. This is how lenders feed their families—they need more referrals.

As soon as you decide you’re in the market to buy a house, you should ask your Realtor for a referral. Truly, this should be your first question to your Realtor. Start the preapproval process as far in advance as possible, so you can present your preapproval letter with the offer on your dream home, making your offer far more desirable than competing offers.

A loan officer should order a comprehensive credit report to make certain you’ll qualify for the best rates available and take action to repair problems early in the process, preferably before you identify the property you’d like to buy. Ideally, your loan officer will not just quote you available rates, but help you get the best rate you can qualify for without a lot of brain damage in the process.

If you have questions about real estate or property management, please contact me at rselzer@selzerrealty.com or visit 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.

 

 

Servicing Loans — Not for the Faint of Heart

Okay, so you sold your property and allowed the buyer to pay you some of the purchase price over time: you are now in the business of loan servicing, a business so full of rules that many banks have opted out. Some of the rules are easy to comply with; others border on the impossible.

The most onerous requirements revolve around servicing loans secured by owner-occupied, single-family homes with one to four units (SFH 1-4), including freestanding homes, duplexes, triplexes, and four-plexes. These rules have changed dramatically in the past 18 months, and are now so complex that I won’t deal with them in this column. Instead, I’ll talk about servicing other real estate-backed loans (also called notes).

First things first: make sure your borrower understands the payment schedule and dates, who to pay, as well as how and where to send the money. Also, be sure you and your borrower exchange contact information so you can get in touch, should the need arise, because the need will arise. If the borrower pays you in cash or with a money order, be sure to provide a receipt.

Next, you need to make a provision for how payments are applied, including interest, principal, late fees (if any) and repayments on any advances you may have made for property taxes, insurance, or payments on other loans. Loan documents need to allow for those advances, and they need to include permission to charge interest on those advances. Typically, the interest rate on advances will be the same as the interest rate on the note. Principal is the money originally loaned. Interest is the rent on the money (the monthly cost of the loan).

Once you’ve received a payment, what do you do with it (other than deposit it)? Now you must account for it. This involves recording how the money was applied to the loan: how much went toward principal, interest, advances, fees, etc. Be sure that your breakdown exactly matches how much you received.

When it comes to loan documents, you may want to provide an amortization schedule to your buyer—a breakdown of monthly principal and interest. As long as the borrower adheres to the original schedule, you don’t have to calculate the breakdown each month. If you need an amortization schedule, your Realtor can provide one.

If your borrower pays more than the amortization schedule requires, and the money is not applied to advances or fees, then you’ll need to recalculate the amortization schedule because a bigger portion of future payments will now go toward the principal.

If your borrower sends more than one payment at a time, the additional payments can be credited toward future payments without changing the amortization schedule—in essence, your borrower will be able to skip a payment. If you do get paid more than the expected amount, it is important to be explicit with your borrower that the money was applied to next month’s payment. If the borrower prefers to have the additional funds go toward reducing the principal, then you’ll need a new amortization schedule. The additional money can either go to a future payment or to reduce the principal, but not both.

At the end of the year, you’ll need to provide a clear accounting of how all loan payments were applied. Be sure to get the borrower’s social security number so you can complete the 1098 tax form. The borrower should send you a 1099 form. If the two don’t match, you’ll both receive a love note from the Internal Revenue Service.

The Dodd Frank legislation and the California Homeowner’s Bill of Rights should give any sane person pause before taking on loan servicing. But hey, if you want a challenge…

If you have questions about real estate or property management, please contact me at rselzer@selzerrealty.com or visit 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.

FHA 203K Loans – Right for the Just Right Buyer

When it’s time to buy a house, many different types of loans are available, depending on your status: are you a first-time homebuyer, a California veteran, or planning to renovate? This week, I’ll highlight the pros and cons of a Federal Housing Administration (FHA) 203K loan.

The FHA 203K loan is appropriate for those with good credit (a minimum FICO score of 640), a stable job, enough money for a three-and-a-half percent down payment with some money left over, and a desire to renovate the home you purchase. The loan is intended to inspire buyers to purchase properties that require some work, and the amount of the loan can be based on the future value of the property (after the renovations are done). Eligible properties include owner-occupied, single-family homes or duplexes that are at least a year old. The FHA 203K loan is ideal for people who understand the challenges of home renovation and know a trustworthy contractor who is not a family member.

There are two versions of the FHA 203K loan, the streamline and the full, and they have slightly different requirements. Big thanks to Rick Costa at Bay Equity Home Loans for helping me get the details right. The primary differences between the two versions of the loan are that with the streamline loan, less money is available for renovations and the monies earmarked for renovations must be used as planned or else used to pay down the principal on the loan but will not reduce your monthly payment. With the full loan, money left over from renovations can be released to you for any purpose. Both loans offer a maximum of $373,750, and the buyer is responsible for finding a contractor, getting bids for the renovation, and overseeing the project(s). While the FHA 203K loan doesn’t specifically require at least three bids from contractors who have done renovations similar to yours, most lenders (and common sense) require it. The loan does mandate that renovations be at “arm’s length”—meaning the contractor must be licensed, bonded and insured, and cannot be a family member.

The streamline version of the loan has a maximum renovation fund of $35,000, including a 10 percent reserve for any unanticipated expenses uncovered during the renovation. This version of the loan is intended for lightweight renovations like paint, flooring, or window treatments—nothing structural.

The full version loan can include structural work. So, to be sure the whole cost of the renovations are included in loan, the buyer should request that the contractor include any permitting or other fees in his bid. The buyer can also request that pest and fungus work be funded by the loan.

While it is great to find a home loan that allows for the cost of renovations, this benefit comes with a price. First, the interest rate on this loan is typically about a quarter of a percent higher than the going rate. Also, the full version of the loan requires a detailed plan and drawings, a Housing and Urban Development (HUD) consultant to make sure you stick to your plan, and multiple appraisals. Not cheap and rarely quick.

The success of this process often hinges on a thorough and accurate scope of work from your contractor. If the renovation is small, say less than $10,000, I don’t recommend using 203B funds. A quarter-percent increase on the entire loan will take monthly payments up significantly, and that $10,000 for renovations will cost much more to pay back over the life of the loan. There are also the additional costs of inspections and the HUD consultant.  Unless you plan to go big, use a different source of money to fund renovations.

If you have questions about real estate or property management, please contact me at rselzer@selzerrealty.com or visit 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.

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’s It All Mean? Real Estate Definitions

Real estate, like many industries, has a whole language of terms and definitions that make sense to those of us who live and breathe real estate, but that can leave homeowners in the dark. So I thought I’d shed a little light on the subject.

Licensed Real Estate Agent – someone licensed by the California Bureau of Real Estate to transact otherwise restricted business transactions, including the listing and selling of real estate, under the supervision of a broker

Realtor– licensed real estate professional who is a member of the National Association of Realtors, which requires adherence to a strict code of ethics

Licensed Real Estate Broker – someone licensed by the California Bureau of Real Estate to transact otherwise restricted business transactions, including the listing and selling of real estate and the brokering of real estate loans.

Single Family 1-4 – this is how we refer to the category of real estate that includes single-family homes, duplexes (2 living units), triplexes (3 living units), and four-plexes (you guessed it—4 living units)

Financial Institution – in this context, an organization in the business of making loans secured by real estate

Underwriting – process of determining whether to make a loan whereby a lender or his representative reviews a property and all of the borrower’s qualifications to purchase it

Conventional Loan an institutional loan usually secured by a single family 1-4

Conforming Loan usually a loan that meets specific underwriting requirements and includes a minimum of 20 percent down and (in this area) a maximum value of $417,000

Owner-Occupied – a single family 1-4 owner will occupy one of the units or anticipates occupying it within 12 months. This is a requirement for most loans.

Primary Residence – the owner-occupied unit where the owner spends 50 percent plus one day each year. Single-family, owner-occupied, primary residences typically secure the best loan terms

USDA, FHA, VA, CalVet – these are large government loan programs. The United States Department of Agriculture offers loans to families in rural areas who don’t make too much money; the Federal Housing Authority offers limited loans to those with good credit; the Veteran’s Administration offers loans to U.S. veterans, and CalVet offers loans to vets who want to purchase a home in California.

GSEs – Government-Sponsored Entities are institutions that buy loans from loan originators on the secondary market with the goal of providing lower housing costs and better access to financing. The big players are referred to as Fannie Mae, Freddie Mac and Ginnie Mae. They are actually the Federal National Mortgage Association (FNMA), the Federal Home Loan Mortgage Association (FHLMA), and the Government National Mortgage Association (GNMA)—which is actually part of the US Department of Housing and Urban Development.

Pre-qualified a loan representative has given you the likelihood of loan approval based on information you’ve supplied.

Pre-approved – a loan representative has reviewed documentation, verified income and employment, confirmed the source of funds for the down payment and closing costs, reviewed credit, and made all determinations to arrive at a monthly payment for which you qualify; leaving only the property and its value in question.

Debt-to-Income Ratio – compares overall debt to income. Front-end ratio: the ultimate loan payment divided by net income. Back-end ratio: all debt expense (car loans, credit cards, any other recurring debt) divided by income. A lender will use both to determine the loan amount you qualify for.

Escrow – neutral, third-party depository where the buyer, seller and lender place money and/or appropriate executed documents. When all escrow conditions are met, the escrow holder (usually the title company) will record the documents and distribute them and the funds to the appropriate parties.

Funded – usually means the lender has deposited net loan proceeds into the escrow account.

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.

 

Here are a few answers to common real estate questions

How Can I Put Zero Cash Down And Still Buy a House?

Sometimes people make enough money to pay a monthly mortgage payment, but just can’t seem to save up a down payment. If that’s the case, there’s still hope. Both the United States Department of Agriculture (USDA) and Federal Housing Authority (FHA) provide home loans with little or no down payment required.

Is it weird that the Agriculture Department is one of the biggest lenders? Kind of. Is it another sign of government inefficiency that two federal programs compete? I’d say yes, but that’s just my Libertarian side jumping in.

So, to figure out if you qualify for a no-down-payment loan, make an appointment with a mortgage broker with all your financial information: income, employment history (length on the job and in the industry), credit information, available cash for a down payment, closing costs, reserves, and a potential co-signer or guarantor for a loan.

Under the right circumstances, you may be able to get a loan with zero out of pocket. This happens when you combine a low-down-payment loan with credits from the seller for non-recurring closing costs, cases where the purchase price is high enough to offer credit back toward the buyer (up to 6 percent), and that money is used as the cash requirement at closing.

What’s Mortgage Insurance?

Mortgage insurance is insurance that can help reduce the amount of a down payment by providing security that the monthly mortgage payment will be made. There are two types: MMI and PMI (mutual mortgage insurance and private mortgage insurance) – they behave the same way.

What’s an Escrow Account?

An escrow account is where money goes as it’s being exchanged between buyer and seller. It includes five elements:

  1. Interest
  2. Principal
  3. Mortgage insurance
  4. Impound for property taxes (the pint of blood we all must donate to our local government)
  5. Impound for insurance

Impounds are used by a lender to accumulate money to pay property taxes and insurance (like a savings account controlled by the lender for the sole purpose of paying the property tax and insurance).

Should I Get Pre-Approved for a Loan?

One of my first real estate columns covered this topic in some detail, but the quick answer is: yes, get pre-qualified. Better yet, get pre-approved. Sometimes people confuse having a good credit score with getting pre-approved. While it helps, many other factors are involved in a lender’s decision regarding a loan:

  1. Total income
  2. Length of time on the job and in the industry
  3. Debt-to-income ratio
  4. A more detailed credit review than just a FICO credit rating.

Once a loan broker reviews all this material, they will consider providing a pre-qualification or pre-approval letter, depending on the source of the information. Your heartfelt promise isn’t as secure as documents proving your credit worthiness. In a situation where multiple buyers are making offers on the same property, the one who is pre-approved will often be chosen.

What are the Differences Between a 15- and 30- Mortgage?

Apart from the obvious—15 years—the term (length) of the loan affects the rate. The pre-approval letter will determine the monthly payment the bank will approve. The amount of the loan will vary based on that amount. A variable rate loan will start with a rate that is lower than a fixed rate would be, so you’ll qualify for a bigger loan. With a 15-year loan, the rate will be lower but the payment will be higher (short term means less risk to the lender, thus the lower rate, but paying off the cost of the loan in 15 years instead of 30 means each payment will be higher).

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.