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Archive for the ‘Buying’ Category

Despite what you read in the media, homes are still selling in this market.  Sure, the market is slow, but homes are selling.  So what do you need to do to get your home sold?  Simple…

Price: You must price your home properly.  This cannot be stressed enough.  Most homes don’t sell because they are priced improperly (over priced).  The biggest mistake sellers often make is they over price their property based on what they want to make versus what the market actually thinks the home is worth.  The other big mistake homeowners make is hiring the Realtor who says their home is worth the most!  Every home owner should get a third party appraisal done on their property before the home is listed for sale.

Curb Appeal: Realtors don’t sell houses.  Houses sell themselves.  Your home has to speak to potential buyers, both inside and outside.  On the outside, plant some flowers, clean up the yard, and cut the grass.  Inside the home you want to remove clutter.  Put Fido away during showings.  Kids toys in the living room is also a no no.  You also want to make sure your decorating is keeping up with the times.  Open a Pottery Barn catalog and take note.  Be honest with yourself.   In fact, ensuring a house is decorated properly has become such a big deal that a whole cottage industry called “staging” has taken off like wildfire.  Staging is where owner’s and Realtors hire interior decorators to bring out the potential in a house and make it more appealing to buyers.

Incentives: In this tough financing market, you should also consider offering other incentives to encourage buyers.  Sellers can often entice buyers by offering financing incentives such as picking up closing costs, buying down the buyer’s interest rate and in some cases, even offering seller financing.

Increase Realtor Commission: Sometimes you have to pay to get results.  Homeowners often are so focused on saving $500 bucks that they lose thousands of dollars by not seeing the big picture.  One way to get more traffic to your home and interest is to offer higher than normal buyer’s agent commissions.  Instead of the customary 2.5% commission, bumping it to 3 or 3.5% will surely atract more buyers’ agents attention. 

In summary, you can’t forget that selling a home is a BUSINESS TRANSACTION.  It isn’t about what you like and dislike about your home.  It is about doing the things that sell the property at the highest price in the shortest amount of time.  Although it is difficult, you have to put your emotions aside and use cold hard facts and logic and make decisions that get results.

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I have received quite a few calls over the past couple of weeks from Realtor partners of mine asking me to save deals where the property isn’t appraising at the value that the borrower is willing to pay.  Unfortunately, there really isn’t anything anyone can do to save these deals in many cases.  The property isn’t worth what the buyer and seller have agreed to or at least not worth it by residential appraisal standards.  This is becoming more common with weak property values in many areas. 

When a home does not “appraise out” this causes problems because it affects the buyer’s financing.  The home is securing the mortgage and the only reason banks are willing to lend a certain amount of money.  The less a home is worth, the less a bank is willing to lend on it.  When you obtain a mortgage, the bank or mortgage broker will hire a licensed residential appraiser to value the home to ensure it is worth what you are paying.  Just because you and the seller agree to a purchase price does not mean that the lender agrees! 

Lenders use appraised value, not sales price

When a home doesn’t appraise for the purchase price, the lender will only lend to the appraised value, not the sales price.  The effect this has on a transaction is that it will require the borrower to bring in more money to make up the value difference.  For example, say you and the seller agree to pay $300,000 for a condo.  However, the appraisal only comes in at $285,000.  You wanted to buy the home with 5% down or a $15k down payment ($300k x 5% = $15k).  If the home only appraises at $285k then the lender is going only lend to $285k, so your down payment would be $285k * .5% = $14,250.   Unfortunately, the seller still wants $300k for the property so you are going to have to either back out of the deal or come up with an ADDITIONAL $15k to make up the gap ($300k – $285k = $15k).  Most borrower’s don’t have this kind of cheese laying around, so this usually means the deal falls apart.

How to prevent low appraised value – Hire a good Realtor

When I look back at these situations, it is usually the result of the seller buying the biggest house on the block.  When we are in a down or flat real estate market, having the biggest and most expensive house is a disadvantage.   Enhancements to properties usually do not pay back dollar for dollar.   It is often hard to find comparable properties to support the value with facts.  Here in Chicago, we see this most often with high rise condos.  The seller has a tricked out one bedroom penthouse selling at a similar price of two bedroom condos.   It simply isn’t going to fly in this market.

Most of these situations could be prevented if both the listing agent and the buying agent did a better job pricing the property.  In my opinion, properties not appraising out should never be an issue if the Realtors are doing their jobs.  Anyone can hire an appraiser.  There are only so many comparable properties that can be used to really assess value for lending standards.  The appraisal should not be a surprise in a transaction.

A full appraisal by a reputable and licensed appraiser should be done as part of just accepting a listing agreement.   Not this BS CMA stuff I see many Realtors putting together.  Also, a good buyer’s agent should have an appraiser on their team to assist in valuing the property prior to making an offer to ensure it is not over priced.  Between the listing agent, the buyers agent, and the lender three total appraisals could be performed to ensure the agreed upon price is reasonable.   Since all the comparable properties are generally going to pulled from the MLS closed sales, there really shouldn’t be significant value deviation that can’t be overcome by simple negotation.   Most importantly, I as the Loan Officer shouldn’t have to call up the buyers and sellers telling them we have appraisal issues.

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031023_bigfoot.jpgThe longer you are in this business the more you realize how little consumers know about mortgages. The mortgage market is quite complex and there are a lot of misconceptions that seem to never die. I decided to compile a list of the most common ones I hear and quickly debunk them.

Go direct to eliminate “broker fees”: I cringe everytime I see the fat guy in Ditech.com commercials proclaiming that he lost another one to Ditech; then the voice actor screams “no broker fees!” This plays on the common knowledge that cutting out middlemen can save you money in many industries. However, it doesn’t work that way in the mortgage business. Nearly seventy percent of mortgages are done through mortgage brokers for a reason – they are cheaper. Mortgage brokers obtain interest rates from mortgage banks on a wholesale basis. Because the broker’s overhead is lower than a large banks, the broker can add in profit and still offer their client’s lower rates than banks. Are there broker fees? Yes. Are they any higher than a banks? No. By the way, Ditech is owned by GMAC which is one of the largest wholesale mortgage lenders in the country. So much for cutting out brokers.

Private Mortgage Insurance (PMI): Many people still believe that they need to put 20% down to avoid paying PMI. Almost no one pays PMI anymore, even if they aren’t putting 20% down. Lenders use second mortgages to eliminate the PMI charge. Of the 100 or so transactions I close each year, less than five will have PMI. In addition, very few of my clients can pony up 20% down payments. For the most part, PMI is only required if there is no other alternative due to bruised credit. See my post on avoiding private mortgage insurance.

Interest-only loans are bad: With the changes in the mortgage market going on the media has focused in on interest-only loans like laser beam. Unfortunately, the journalist usually doesn’t know squat about mortgages. The one point that always seems to be missing from the negative press is that interest-only payments are an OPTION. In other words, nothing prevents the borrower from making the full principal and interest payment. Even prepayment penalties won’t prevent a fully amortizing payment. Interest-only loans are a great tool for borrowers who wish to manage their cash flow better or who may not keep their properties for an extended period of time.

No point mortgages: Every loan officer gets the call from the rate shopper proclaiming they got an offer for a loan and they proudly proclaim “with NO POINTs” as if they found some secret lender who does mortgages for free. Newsflash. Every mortgage has points on it. It is a matter of where you want to pay them. A point is a fee expressed as a percentage of the loan amount. For example, one point equals one percent of the loan amount.

Points are either negative or positive. A negative point means that you don’t have to pay points as part of your closing costs, but your interest rate is HIGHER than the lowest rate available. Otherwise, this is known as a no point loan.  A positive point is when you pay the points are part of your closing costs. This should enable you to get a lower interest rate which may actually benefit you over time. In cases where the borrower will hold the property for a long period of time and there is little chance of refinancing, the borrower will almost always benefit from paying points. I am not sure when paying points became taboo, but my guess is it has something to do with marketers praying on people’s desire to feel like they are getting a deal. It is a lot easier to say “No Points” than to really explain what is going on.

First Time Home Buyer Programs: Consumers always want to get brownie points for being a first time homebuyer. The reality is that most lenders don’t care as long as your income, credit, and assets meet their guidelines.  For most people, being a first time home buyer means you don’t have any money for a down payment. The good news is that there are plenty of 100% financing programs available.   While there are some government sponsored programs that may be beneficial to new home owners, the reality is that most consumers DO NOT benefit from them.  The reason being is that the programs are often limited in scope and usually have restrictions on income that disqualify many borrowers.  In addition, the mortgage market is very efficient so most lenders have programs in place to assist new home owners.

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So you just finished up your MBA, law school, or med school?  You picked up a great six figure consulting gig at a major strategy consulting firm. Maybe you snagged a position with a BigLaw firm. Regardless, you worked hard and now you want your own crib.  No more renting in the same building with undergrads!

 

Buying a home after finishing school is not much different from when you are already in the work place.  Lenders will evaluate your credit, assets, and income just like they would any other borrower.  However, there are a couple of small differences that grad students need to be aware of when deciding to purchase a home after graduation.

 

Start Dates: The biggest challenge that students often face is coordinating their new home purchase with starting their new job.  Often times the graduate has to relocate to a new city and purchase a home prior to starting work. For example, you are finishing up at Kellogg in June and decide to stay in Chicago. You don’t start work with your new company until after Labor Day. Obviously, having the summer off so you can find a home and move into your new place is convenient. However, this can cause obvious problems for mortgage lenders because, technically, you are not yet employed.  All you have to prove that you will have a job is an offer letter of employment.  It is possible to close prior to starting your new job.  If your loan application is packaged properly by the loan officer, most lenders will allow you to close approximately sixty days prior to your official start date.  It is important to understand that lenders do this on an EXCEPTION basis.  The lenders will also want to see that your credit and assets are above average as well.  Finally, remember that not all loan officers are familiar with graduate and professional schools, so make sure you are working with someone who understands the unique situations and knows how to properly present the file.  Every spring and summer I have to step in a save a deal a week or two before a scheduled closing because a lender wanted the borrower to have started work and would not accept the offer letter of employment.   I have seen this happen on more than one occassion, especially with the call center oriented places like E-Loan, Quicken, and god forbid, LendingTree.

Non-permanent residents: If you are not a US citizen (non-perms), it is still possible to obtain a mortgage to buy a home. Like your US classmates, your income, credit, and assets will be evaluated by the lender.  If you have been in the US long enough to have an established credit history with a valid FICO score, for the most part you will be treated like a US citizen.   However, you will also have to show a valid Social Security number and visa establishing legally residency and authority to work.  The most common visa received by graduate students who go on to live and work in the US is an H1-B although there are other categorizations.  Because H1-B’s take can take several months to process, most lenders will allow you to use your temporary Employment Authorization Card along with documentation from your future employer showing that the H1-B has been applied for as proof of legal residency.  Where most non-perms run into problems is lack of credit history.  You should start establishing credit as soon as possible so we can get a valid FICO score.  Here is more information on mortgages for non-US citizens.

Zero Down Loans:  You don’t need to have a down payment to buy a home.  Most lenders offer competitive zero down programs for a wide range of qualifications.  In many cases, the rates are the same as mortgages with down payments.  In addition, with good credit, private mortgage insurance (PMI) is usually not required.  The bottomline is save your signing bonus.

Student Loans:  I often get a lot of questions about the impact of student loans.  Most mortgage lenders will count the payment in your debt to income ratios even if the loans are deferred for a period of time.  If you can afford the payment along with your mortgage, the amount of student loans is inconsequential.  Some lenders offer programs especially for Doctors where they will ignore student loans while the Doctor is in residency.  However, this is not the case for MBAs and attorneys.

As always, if you have any questions, don’t hesitate to give me a call.

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alien.jpgI never understood why the US government continues to call people who are not US citizens aliens. It sounds so impersonal. Illegal alien? Sounds like something to describe a character in Star Wars. So what does this have to do with mortgages? A lot. If you are not from this world, you can still buy a home right here in the good ‘ole US of A by getting a mortgage. It is important that you know what type of alien you are and how you are viewed by mortgage lenders. Non-US citizens are treated differently because the lender may not have any recourse if the borrower were to default on the mortgage – if you aren’t a US citizen and skip town it would be very difficult for a lender to get to you. There are several classes of immigrants, each with their own quirks when it comes to getting home financing.

Permanent Resident: Defined as a non-US citizen who has made the US their permanent home and is recognized as such by being issued a “Green card” by the US government. A green card is essentially a permanent visa. Most mortgage lenders will usually treat permanent residents as US citizens which means there aren’t any restrictions on the type of financing available to you as long as you meet all other qualifying guidelines.

Non-Permanent Resident: As we say in the business, “non-perms” work and reside legally in the US. Residency and authority to work is established by a variety of visa classifications. Here are some brief descriptions of the main visa classifications*:

  1. Series (A-1, A-2, A-3): these visas are given to officials of foreign governments, immediate family members and support staff.
  2. E-1, Treaty Trader: this visa is essentially the same as an H-1 or L-1; the title refers to the foreign country’s status with the United States.
  3. G series (G-1, G-2, G-3, G-4, G-5): these visas are given to employees of international organizations that are located in the United States. Some examples include the United Nations, Red Cross, World Bank, UNICEF and the International Monetary Fund.
  4. H-1, Temporary Worker: this is the most common visa given to foreign citizens who are temporarily working in the United States.
  5. L-1, Intra-Company Transferee: an L-1 visa is given to professional employees whose company’s main office is in a foreign country.
  6. TN, NAFTA visa: used by Canadian or Mexican citizens for professional or business purposes.

Many lenders over the past few years have loosened up underwriting guidelines for non-permanent residents and generally treat them as US citizens. Income, credit, and assets must meet program guidelines. However, there are some lenders who might restrict loan-to-value ratios (require larger down payments). The biggest challenge non-perms face is having established US credit histories. I have worked with a number of clients who had great six figure jobs and assets, but didn’t have much by way of credit histories since they had not been in the country long. This makes it very difficult for them to get optimal financing, even when lenders allow us to use alternative credit documentation. Usually what happens in these cases is that the non-perm has to take what they can get until their credit histories are more established and then refinance into a better loan product when the credit history is established. The bottomline is that is important to get a credit history as soon as possible.

Foreign National: This is a person who does not have a legal right to reside in the US. For example, a European (or any other non-US resident) who buys a second home here in the US for vacation purposes. Mortgage lenders will make loans to Foreign Nationals with substantial down payments; typically 20% or more is required. Lenders are not as concerned about credit because most Foreign Nationals do not have US credit histories. More weight is placed on documentable income and assets. Other restrictions foreign nationals come up against are with refinances. Most lenders will only allow rate and term refinances. I have yet to see a lender allow a “cash out” refinance for a foreign national.

Illegal Alien: The borrower is not working or residing legally in the US. Surprisingly, it is still possible to get a mortgage. Several mortgage lenders will use Individual Tax Identification Number (ITIN) as documentation for mortgage loans.

So there you have it. Even if you aren’t a US citizen you can still live the American dream.

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approved-opt.jpgThe first step anyone considering buying a home should take is to get themselves pre-approved.  A pre-approval means you are serious about buying a home and demonstrates that you have the financial means to afford one.  Unfortunately, most buyers do not get  pre-approved which leads to quite a bit of headaches for everyone involved in the home buying process.

Buying a home can be fun and exciting.  However, people often get caught up in the HGTV glamour of looking at stainless steel appliances and hardwood floors that they forget that they are undertaking one of the largest investments of their lives.   I can admit, looking at houses is fun, but talking about finance is boring unless you are a self-admitted geek like me so I understand the consumer mentality.  However, you need to understand that talking about your financing BEFORE you go house hunting is what will save you money and ultimately make the process much smoother and pleasant for you. 

Most of the horror stories you hear about buying a home are ususally centered around the fact that the borrowers did not get themselves pre-approved prior to making an offer on a property.  Not a month goes by where I don’t get a call from a frantic buyer who is in a bind because they are having trouble getting financing and now they are in danger of losing the property or their earnest money.  I am not talking about small issues either.  Every deal has a few bumps in the road.  I am talking about issues that leave me thinking to myself “Who in the hell told you that you were qualified to buy a home?  You couldn’t get a loan to get a stick of gum.”  By simply taking the time to really get themselves approved for a mortgage this could have been prevented.

A pre-approval means the lender has completed all of the due diligence necessary to make a formal underwriting decision.   In order to get pre-approved, you must submit:

  • A signed and completed loan application along with required federal and state disclosures
  • Thirty days paystubs and/or two years tax returns if you are self-employed, commissioned or receive substantial bonus income
  • Two years w-2’s
  • Statements verifying availability of assets to meet the downpayment and reserve requirements.  Usually three months.
  • Lender obtains a tri-merge credit report with FICO scores from Experian, Transunion, and Exquifax

If you have not submitted the above documentation to your lender, you have NOT been pre-approved.  PERIOD.  Regardless of what you hear on the television or see on the internet, mortgage lenders do not approve loans for hundreds of thousands of dollars in five minutes.  It simply does not work that way.   Real pre-approvals take a week or so to complete because the documentation must be reviewed by the lenders’ underwriters.

Pre-approvals are important not only because they help eliminate unwanted surprises and stress, but they make you a more serious buyer.   Most good Realtors will not spend time with borrowers who have not been pre-approved.  They don’t want to waste their time playing taxi for borrowers who can’t get financing.  Second, when you can submit an offer to a seller with a strong pre-approval letter, it makes it more likely the seller will accept your offer.  Seller’s don’t want to pull their property off the market only to have you not be able to buy it. 

Most borrowers get themselves pre-qualified, not pre-approved.  A pre-qualification means you might have talked to a loan officer about your situation.  In fact, the loan officer may have even pulled your credit.  However, unless the loan has gone across an underwriter’s desk with the above documentation, the loan officer’s opinion doesn’t mean much.  That is the difference between a pre-approval and a pre-qualification.  A pre-approval is FACT while a pre-qualification is an opinion.  

Professionals in this business do not tell you to go through the pre-approval process because we like to waste your time.  We do it because we don’t like to waste ours.

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TaxesAfter much lobbying, private mortgage insurance (PMI) is now tax deductible for refinance and purchase loans taken out after January 1, 2007.  This benefit was buried deep in the Tax Relief and Healthcare Act of 2006.  This is great news for millions of homeowners making owning a home more affordable.   For decades, lenders have required homeowners who do not have a 20% down payment or at least 20% equity in their homes to pay PMI.  PMI is an insurance policy the lender takes out on you to insure that if you were to default on the mortgage, the lender would recoup their money.  Put another way, it is an insurance policy you pay for but provides no benefit to you.  It doesn’t help you if you default, it helps the lender.   There used to be absolutely no financial reason to ever elect to pay PMI and it was to be avoided at all cost if possible.  PMI can be several hundred dollars per month depending on your credit profile.

While this is great news, do not mistake this bill passing as something being done as an act of kindness.  PMI companies have seen their policy revenue fall dramatically over the past several years with the development of piggyback mortgages.  A piggyback mortgage is where the loan officer breaks your mortgage up into two pieces.  They give you a first mortgage of 80% of the purchase price and a smaller second mortgage for the remaining balance.  For instance, if you only had five percent as a down payment you would get an 80% first mortgage and a second mortgage for 15% and you would put five percent down.  By structuring the loan this way, you do not have to pay the PMI charges.  The combined payment with the two mortgages is lower than one mortgage with PMI.   Piggyback mortgages have saved homeowners thousands of dollars.  In fact, I probably only close a handful of transactions annually with PMI because there are plenty of ways to avoid it for most borrowers.  Typically, if PMI is required it is because there are no other options.

This bill is the result of lobbying by PMI companies so they wouldn’t find themselves out of business.  Nevertheless, it is still a good thing.  However, even with PMI being tax deductible it still probably won’t be better than avoiding it altogether.

The main points of the bill are:

  • Homeowners making less than $100,000 per year may deduct the full cost of the annual mortgage insurance premiums
  • If adjusted gross income is above $100,000, the deductible portion of the premium is reduced by 10% for each $1000 or fraction thereof.  Now in english: this means if you make $101,000, you can deduct 90% of the mortgage insurance premiums paid.  This also means the maximum income allowed for the deduction is $110,000.
  • Mortgage loan (purchase or refinance) must have been closed in 2007.  This means you won’t be able to deduct the premiums on your taxes this April.  You have to wait until next year.   PMI premiums paid in 2006 are not deductible.
  • Only primary and second homes are eligible.  Rental income disqualifies the second home deduction.

If you obtain a mortgage this year with PMI, make sure you talk with your tax professional about this new benefit to fully take advantage of it.  Mortgage insurance company, MGIC, has a good presentation on the bill.

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