Category Archives for "Residential Real Estate"

Are You Sure About Value?

appraisal


When valuing your home, don’t simply rely on a few houses that recently sold in the neighborhood. Just because Fred sold his place across the street for $450,000 (or because Trulia/Zillow estimated your value to be $435,000) doesn’t mean your home is worth the same.

Fred’s house is not a good sales comparable if he has:

  • a pool (and you don’t)
  • 4 bedrooms/3 baths (versus your 3 bedrooms/2.5 baths)
  • a 2-car garage (to your carport)
  • a newly renovated kitchen (versus your limited renovations)


Without doing your homework, you may be unable to sell your home for the price you want – or your loan entitlement could be much less on a cash-out refinance or reverse mortgage.

The lender will require an appraisal prior to closing – unless an appraisal inspection waiver is granted (such as when you may have substantial equity in your house).

In a conventional or government purchase mortgage, you can get pre-approved by a lender before getting an appraisal (so you shouldn’t spend $485 on an appraisal until you see the loan closing conditions). Whereas in a reverse mortgage, you generally cannot get pre-approved without the appraisal (so make sure your home value estimate is accurate before paying for the appraisal – otherwise you may be disappointed when your approved loan amount is far less than you had expected).

Analogous to lawyers being trained not to ask a question without knowing the answer, you, as a borrower, should be confident in your home valuation before paying for an appraisal.

Here’s the Point: Before you refinance, don’t waste your money on an appraisal until you have done your own homework on value.

Just Retired and Can’t Get A Mortgage

retired mortgage


The plane tickets are booked for golfing and walking on a Florida beach for three months. Upon settling into retirement, you realize how nice it would be to own a home in your favorite vacation spot. With family back home, the perfect scenario would be to keep your primary residence – and buy a vacation property.

But do you really want to spend a good chunk of your retirement savings by paying cash for your Florida home? Most people would rather finance their vacation home – to save their funds and capitalize on low interest rates.

However, getting pre-qualified for a mortgage may be problematic if you do not have a monthly pension. You need to show the lender sufficient ongoing annual income to prove you can continue to make monthly mortgage payments.

There are two programs available that allow you to create an earnings stream without having to spend all your retirement funds:

  1. Structured Annuity: Establish a monthly draw from your 401k or IRA funds, and show you are able to continue this income stream for 36 months;
  2. Assets-For-Income: Create a hypothetical income stream without liquidating your brokerage account (equal to 70% of your assets divided by the number of months in your loan);

If you aren’t worried because you expect to continue earning commissions from your prior business while retired, be careful because you may be deemed a Self-Employed borrower after retiring from your W-2 job (conventional lenders require two years of tax returns from Self-Employed borrowers).

Here’s the Point: You can retire without a stable income stream and still qualify for a mortgage.

The Mortgage Colonoscopy

mortgage colonoscopy

Okay, maybe the analogy is extreme… But, thanks to the cumbersome mortgage regulations, it will be a long time before borrowers exclaim: “Boy was it ever easy to get that mortgage!”

It is always advisable to expect the process to be highly invasive in respect to your personal financial records. And, it is a time-consuming exercise, fraught with an abundance of disclosure and closing documents. But believe it or not, the process has actually improved over the years.

For the time being, the negatives are essentially fixed. But at least the most active, progressive lenders have been able to offset some of the frustrations by simplifying the process and offering more cost saving solutions. For example:

  • Instant Funding: The wire can now be released to the borrower as soon as the last document is signed (it used to be that the lender needed to review all of the signed documents, and then provide an authorization number for funding – which could take hours);
  • Appraisal Waivers/Refunds: At or below an 80% loan-to-value ratio, the appraisal could possibly be waived – depending on overall borrower financial profile. Or, depending on the mortgage product, some lenders will refund the appraisal cost up to $500;
  • PMI Discounts: Economies of scale from larger lenders has lead to attractive discounts to monthly private mortgage insurance (PMI) premiums;
  • No Overlays: Many lenders have traditionally added their own conservative requirements to the minimum lending conditions imposed by Fannie Mae/Freddie Mac. Today, industry competition has rendered these “add-ons” as unnecessary.

Here’s the Point: Getting a mortgage will never be a “walk in the park”, but at least some lenders are making the process a little more tolerable and efficient.

Mortgage Approval! (Not So Fast)

Everything looks good on your application for a mortgage to purchase your single family residential investment property:

  • You are under contract at a below-market purchase price,
  • You have a signed lease with rent that far exceeds your projected property expenses,
  • You have sufficient liquidity to cover your down payment, closing costs and prepaid expenses,
  • Your credit score is excellent,
  • Your Debt-To-Income Ratio is below the standard 43% threshold (monthly combined housing and other debt obligations divided by monthly net income), and
  • You received an “Approved/Eligible Finding” on the required Fannie Mae report for the lender.

But then, in the process of reviewing your documentation and running their required public record reports, the underwriter discovers that you own other financed properties…

Conventional underwriting guidelines require borrowers to have a significant amount of reserves when you have multiple financed properties. For example, if you have two other $100,000 mortgages, you are required to show that you have $4,000 of additional reserves in the bank – representing 2% of the Unpaid Principal Balances (UPB) of these mortgages. This percentage increases to 4% of UPB if you have five or six financed properties, and 6% of UPB for up to ten financed properties.

Three reserve considerations when you have multiple properties (the last two requirements apply to the to-be-financed property, and only the last one requires that funds be escrowed):

1) 2-6% of Unpaid Principal Balances

2) 6 months PITI (Principal, Interest, Property Taxes and Insurance)

3) 3-4 months escrow cushion for property taxes and insurance.

Here’s the Point: If you have multiple financed properties, make sure you have sufficient liquidity to satisfy all of the conventional loan reserve requirements before obtaining a mortgage.

TV Mini-Series: “The Borrowers” (Episode 2)

FADE IN:

♪ Ring Ring.

OMC: “Hello, this is Mike from Ocean Mortgage Capital – How can I help?”

CLIENT: “Hi – My Friend would like to borrow money to replace the roof on her house. She has a roommate who agreed to be a co-borrower.”

OMC: “Is your friend unable to qualify for a mortgage on her own, and so her roommate is willing to co-sign on her loan?”

CLIENT: “Yes, exactly. My friend’s husband should be able to qualify for a mortgage, but he doesn’t think it is necessary to borrow money to fix the roof.”

OMC: “Well, your friend and her husband would both need to sign the mortgage – which means they both need to cooperate and show they are willing to allow a mortgage to be secured by the home.”

CLIENT: “Tell me more about how her roommate can help my friend with this loan.”

OMC: “To be a co-borrower, your friend’s roommate could apply for and be jointly liable for the loan, but would typically have ownership in the property (lenders prefer occupying or non-occupying co-borrowers to also be on title).”

CLIENT: “The roommate does not have any ownership interest in the property.”

OMC: “If not on title, then the roommate could be a co-signor who guarantees all obligations under the loan, jointly with your friend. However, this loan cannot proceed unless your friend’s husband agrees to sign the mortgage – whether he is a co-borrower or not.”

CLIENT: “That will never happen.”

OMC: “Then unfortunately neither will your friend’s loan.”

Here’s the Point: Before obtaining a loan on your primary residence, make sure your spouse is willing to sign the mortgage document – otherwise the lender will not close.

TV Mini-Series: “The Borrowers” (Episode 1)

FADE IN:

♪ Ring Ring.

OMC: “Hello, this is Mike from Ocean Mortgage Capital – How can I help?”

CLIENT: “Hi – My Friend would like to take $50,000 of equity out of her home to buy a business. Can you tell us what her home is worth?”

OMC: “Well, we can help to arrange a cash-out refinance of her home, but she should really speak with a realtor or appraiser about valuing her house. Her realtor should have access to some sales comparables, and she could also check Trulia.com or Zillow.com to get a preliminary indication of value.”

CLIENT: “Thank you – I’ll tell her.”

OMC: “Okay – and if she concludes that the value would support her loan request, then I would be happy to pre-qualify her. I would need to ask her about her income to confirm she is comfortably able to make the required mortgage payments.”

CLIENT: “So then I should tell you that her husband lost his job recently, but he had been working with a good company for at least 15 years.”

OMC: “Well, her husband’s prior employment experience should help him with his interviews and support his job search. Hopefully he will land something soon. Is your friend presently employed to help support their mortgage request?”

CLIENT: “No”.

OMC: “Not only does your friend and/or her husband need to show they presently have ‘the ability to repay’ from their earnings, but they will also need to show that their income is likely to continue for the next three years.”

Here’s the Point: Instead of setting yourself up to default on a mortgage, make sure your income comfortably supports your ability to make your monthly loan payments and other obligations.

IDEA: Let’s Hide a Few Assets!

Very Bad Idea.

A mortgage broker will help compile your mortgage application paperwork so that:

  • your financial condition is accurately depicted,
  • the lender will be able to more easily and efficiently review your file, and
  • you are portrayed in the best possible light.

The whole idea is to present a thorough, well-organized package to expedite a sound credit underwriting decision for your benefit.

A good broker should make it so easy for the underwriter, that practically all of their work will be completed for them in advance – which they will very much appreciate.  This includes identifying any and all risks, and the corresponding mitigants that will, ideally, allow the underwriter to quickly approve your loan request.

An incomplete, disheveled submission not only reflects poorly on the broker (who should be keenly focused on their reputation), but it will underscore the fact that you are just not ready to obtain a mortgage.

The absolute worst thing is to omit critical information from the submission.  Sometimes a borrower will not disclose certain assets they own – thinking that the additional equity or liquidity are not required.

“My reported net worth is sufficient without having to disclose my other rental properties”

Lenders run ownership reports designed to uncover everything.  If you sign a loan application that is obviously missing material assets, it will be an uphill battle once the error is discovered.  Inadvertent omission is one thing, but intentional omission is likely to be perceived as fraud by the lender.

Here’s the Point: Asking your mortgage broker to hide something from the lender is tantamount to fraud, and there is no place for that in any industry.

Immigrant Lending: An Odd Discussion With A Banker

Immigrant Statue of Liberty“Mike, I’d like to refer you a typical immigrant client who doesn’t have a social security number and runs a ‘cash business’ – and I think you know what I mean”.

“No, actually, I don’t know what you mean.  Does their business generate a lot of cash earnings that they do not report to the IRS?”

“Well, I didn’t say that – but okay”.

“Sorry, I can’t help you – I don’t risk my reputation by recommending that my capital sources conduct business with someone who illegally evades taxes.  Moreover, I think it’s offensive to imply that immigrants typically operate cash businesses to evade taxes”.

“Well then what exactly do mortgage brokers do?”

Before quickly ending my conversation with the banker (for obvious reasons), I indicated that I would be happy to work with self-employed people who legally minimize their taxes with legitimate expense deductions.  Also, I would be happy to source mortgages for those who have not yet become U.S. citizens, do not have U.S. permanent residency, or even have not yet qualified for a social security number.

Surprised?!

As long as a “foreign national” or non-U.S. citizen can evidence an adequate two-year foreign or domestic credit history, there are capital sources who will gladly underwrite their mortgage.  In fact, it is a preferred business platform because statistics prove that these borrowers work hard to repay their debts – and tend to have solid liquidity and reserves.  One key issue is that all required documents written in a foreign language need professional translation.

Here’s the Point: Not having a social security number or green card doesn’t mean you can’t qualify for a mortgage – but you must be properly reporting your income.

Since When Do Builders Dictate Your Loan Terms?!

Do you really want to build your own house? The planning, budgeting, change orders, cost overruns, time commitment and anxiety… but, admittedly, it still may be the most economical way to own a home.

Then there are ramifications behind financing either the construction of a to-be-built home, or the acquisition of a home nearing completion. If you own the land, then you would need a construction loan – and your land investment would likely act as the equity or down payment for your lender. Construction loan draws would reimburse the builder as the home reaches certain levels of completion. Once completed, the construction loan would convert to a standard mortgage.builder lenderIf you are buying a speculative or partially completed home, then standard purchase mortgage guidelines should apply after you sign the builder’s purchase contract. Once the builder completes your home, your mortgage lender provides you acquisition financing (loan closing would coincide with receipt of the certificate of occupancy).

In either case, builders also hope to profit from your loan. They do this by offering attractive financing incentives, such as covering a portion of your loan closing costs if you use one of their affiliate or approved lenders. But be careful, because when they say: “We will cover closing costs if you use one of our approved lenders”. Not only will your interest rate likely be higher, this really means: “We will not provide any closing cost credits unless you use our affiliate lender” (thereby essentially “tying” you to their loan source).

Here’s the Point: When financing a property purchase from a builder, always compare the loan terms offered by the builder’s “approved” lender to those from other unaffiliated lending sources.

 

Would You Lend Money to Donald or Hillary?

Trump and ClintonYou may have been conscientiously deliberating which candidate to vote for over the past several months. Your selection might become clearer if you contemplate this title question – as if you were a lender deciding whether to extend them a loan! Not voting is always an option, but not likely a decision that would sit well with you (even though reports suggest this option is seriously being considered by many voters).

When a client applies for a mortgage, the assignment is either accepted or declined – with concrete rationale behind either decision. But a lender electing to entirely avoid making the decision to either lend or not – may be compared to not voting. Imagine a lender choosing never to return your phone call to give you their credit decision. In this analogy, not voting (or not providing a credit decision) doesn’t help either candidate (or borrower) – nor would it likely help yourself.

There is no excuse for lender/voter unresponsiveness. Borrowers/candidates deserve prompt, reliable feedback which, from a lender’s perspective, is generally based on the following 5 “C’s” of credit:

  1. Credit History (Repayment History & Credit Score)
  2. Capacity (Ability to Repay & Earnings Stability)
  3. Capital (Down Payment & Liquidity)
  4. Collateral (Property Type & Value)
  5. Conditions (Loan Terms & Purpose)

The first one above was formerly entitled “Character” – which arguably is still the most important factor. But by telling a client their loan was declined because of “Character” (or lack thereof), the decision could be judged as discriminatory.

Here’s the Point: Don your lender’s cap and consider the key factors that would be used before advancing money to either candidate – and focus particularly on “character” before making your decision.

 

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