Tag: buy a home

Three Things to Be Thankful For

~ Carolyn Warren ~ Leave a comment

thanksgiving In honor of Thanksgiving week, so here are three things we can be thankful for:

1) Interest rates are still very attractive at 4.375% to 4.5% for the 30-year fixed rate and 3.5% for the 5/1 ARM.

(The 5/1 ARM is fixed for the first five years, then adjusts every year thereafter. It is a make-sense choice for people who plan to keep the property for six years or less.)

2) The housing market has been improving for the past year, giving home owners more equity, and giving more sellers the ability to sell which gives buyers more inventory to choose from.

3) Buyer’s agents are free to home buyers. They are paid by the seller. Your buyer’s agent is required by law to get you the best price, best terms, and look out for your best interests in every aspect of the real estate purchase.

It is my opinion that making an offer between Thanksgiving and New Year’s Day is a good strategy for getting the best price. Typically, the market slows down during the holidays, so there is not as much competition. Sellers aren’t receiving offers or even lookers, so this is the time for you to pick up a good deal. Furthermore, the market tends to pick up in January when renters make New Year resolutions to become home owners.

Some years back, I bought a condominium for a great price in December. My agent told me later that the home owner was so angry when he saw my purchase offer that he threw the papers across the room. (Thankfully, I didn’t have to see it, because I had a buyer’s agent representing me.) But then his wife said, “Honey, let’s just make a counter-offer.”

The counter-offer was not bad. I countered again, per my agent’s suggestion, and I got a lovely home at an attractive price. I lived there for five years and made a nice profit when I sold.

Help! Our Appraisal Came in with a Low Value

~ Carolyn Warren ~ Leave a comment

house beautiful 4 What happens when the appraised value for the home you’re buying comes in below the purchase price? That is a good question, and you do have options if that happens.

The first thing you should do is have your real estate agent show the appraisal report to the seller’s agent and ask them to lower the price to match the appraised value. If they agree, then that is your best option. The purchase agreement is amended to the new price, you send that page to your loan officer, and then the loan officer adjusts your down payment and loan accordingly.

If the seller does not agree to lower the price, then you have two choices. You can either make up the difference with cash out of your own pocket, or you can walk away from the deal.

To Make Up the Difference in Cash

Let’s say the sales price is $200,000 and the appraised value is $190,000. In this case, you would have to kick in an extra $10,000 out-of-pocket if the seller will not lower the price. This is because lenders will not go higher than the appraised value for their loan. I suggest you think do a thorough market analysis and put your emotions in check before you take this option. Why would you want to pay more than the property is worth? You’d want to have a very compelling reason to make such a financial decision.

To Walk Away

The seller might disagree with the appraised value and think that a different buyer with a different lender will get a different appraised value; therefore, they might not agree to lower the price. You should have a contingency clause in your purchase contract that allows you to walk away and get all of your earnest money refunded if this happens. A good buyer’s agent always makes sure you have such a clause, and this is one mistake do-it-yourselfers who are not represented by an agent sometimes make. I once witnessed a terrible fight break out between a For Sale By Owner seller and a buyer who went straight to the seller without agent representation. Believe me, it was quite a spectacle when the yelling turned into threats to “take it out onto the street.”

One More Option

Occasionally, there is an appraiser who royally messes up the value. The report that comes in is nothing short of idiotic. The comparable properties are totally inappropriate with better comps in the neighborhood ignored. Not only that, but special features that increase the property value have been ignored. When this happens, the seller probably won’t lower the price. If you want to continue to fight for this house, you can ask your mortgage broker to go to a different wholesale lender for the money and thus start fresh with a new appraiser.

This works because your loan file goes to a whole different company with a different underwriter who never saw the bogus appraisal. Of course, you will need to pay for another appraisal.

If your lender is a direct lender or a bank and does not have the option to shop wholesale lenders for you, then this choice is not available. Once an underwriter has seen an appraisal, she (or he) will not consider a different appraisal, even if the second one is more accurate. Only if the original appraiser will change the report will the underwriter accept a different value. (Getting underwriters to change their reports, even when they are dead wrong, is impossible 99% of the time.) So in this case, you would have to withdraw your application from the bank and shop for a mortgage broker yourself in a super speedy manner. Depending on the closing date, this could be problematic.

No matter which option you choose, you need to discuss the situation with your real estate agent and your loan officer. With the three of you working together, you should be able to select the best choice and protect your earnest deposit.

Higher Loan Limits Set to End This Year

~ Carolyn Warren ~ Leave a comment

house beautiful 2In neighborhoods where the median price of homes is higher than the national average, loan limits are higher as well. This enables buyers to purchase a home in a higher priced area of the country (such as coastal cities) without having to take a high priced jumbo loan.

The current limit for a high cost area is a loan of $729,750. However, that is set to end December 31, 2013.

The loan limit would then lower to $625,500.

Will Congress act to extend the high loan limits?

Since there are no crystal balls for mortgage, no one knows for sure. What we do know is that December 31 is not that far away, so if you’d like to purchase a home with a loan in the higher range, you might want to act now just to be safe. Contact your local Realtor who will act as your buyer’s agent to preview homes and negotiate a contract for you.

When taking a large loan, it’s more important than ever to get the best rate and terms. Recently, I helped a home buyer save over $2,000 in upfront fees when he used my Review and Coaching Service. For information on how you can have me review your cost estimate or Good Faith Estimate with a telephone consultation, click on the page above that says “Review My Estimate.” Because I do not do loans myself, I am an unbiased expert source, working on your behalf.

How Much House Can You Afford?

~ Carolyn Warren ~ Leave a comment

house beautifulEven though any loan officer can pre-qualify you for a loan amount, ultimately, it is your responsibility to decide how much house you can afford. I once heard a mortgage sales manager tell his staff of loan officers to qualify their people for a higher mortgage than what they’d originally asked for.

He said, “If they buy a more expensive house, they will be happier.” Of course, his real motivation was for bringing in larger loans, not for their happiness.

But here’s the thing. Even if the home buyers were happier at first with their larger, fancier houses, how happy were they later when they discovered that their house payment was preventing them from going out to dinner and a movie? It’s not fun being a slave to your mortgage.

A good loan officer who is your advocate will never push you to get a bigger loan than what you’re comfortable with.

Unfortunately, just as often it is the home buyer who is pushing the loan officer to get them qualified for more than they should. This happens after they tour dream houses that are slightly above their price range. They fall in love with a house and think there must be a way to get into it.

This is partly why the mortgage industry created bad loans, such as the 2/28 teaser loan that had a low payment for the first two years and then went up, and negative amortization “pick a payment” loan that turned toxic for so many. A large number of these loans became unaffordable, causing the people to go into foreclosure. And we all know how that affected the U.S. economy!

Even though printed guidelines say your debt-to-income ratio should be 28% for the mortgage and 38% for both mortgage and other credit obligations, in reality, most lenders do not follow those rules. It is common for debt ratios to be pushed to 45% and some will go to 49.99%.

If your debt ratio on paper is 49%, but your real debt ratio is much lower because you have income that the lender won’t include, then taking the higher payment might be justified. For example, some people have a side business selling on eBay, at swap meets, or other venue. The lender might not include that business income for various reasons, so the lender’s calculated debt ratio might be higher than your reality.

How to Calculate Debt Ratio

To calculating your debt-to-income ratio (dti), use your gross income, before any deductions. Include the new, proposed mortgage payment, including property taxes, insurance, and mortgage insurance (if applicable) along with auto loans, student loans, credit card payment minimums, and anything else that shows up on your credit report. In general, the max dti for all expenses should not exceed about 35% to 40%. Stay on the lower end if you have children to support or if you like to spend a lot of money on entertainment, shopping, etc. and need a higher disposable income available after your mortgage payment.

If you’re not sure how to do this, any loan officer can help you with this calculation.

By the way, if you like this type of information, please take a look at Mortgage Rip-Offs and Money Savers and Homebuyers Beware. 

Feds Plan Tougher Requirements for Home Ownership

~ Carolyn Warren ~ 3 Comments

OLYMPUS DIGITAL CAMERAJust when some lenders and real estate agents are saying underwriting is getting better, six Federal agencies are working to get tougher, stricter requirements for becoming a home owner passed into law. Here are three things they want:

1) Bigger down payment. They want you to make 30% down payment to get the best interest rate and best terms. Ouch! How many first-time home buyers have that kind of cash? This would force tens of thousands of borrowers to take a higher rate, even if they have great credit.

2) Stricter credit requirements. Even with the sub-prime loans far in the rear view mirror, they want even higher standards for credit. This will decrease home sales and home ownership, which is counter-productive to growing our economy.

3) Ban combo loans. They want to ban getting a second mortgage in combination with a first mortgage to avoid paying the monthly private mortgage insurance (PMI). So the strategy of putting 10% down, taking an 80% first mortgage with a 10% second mortgage to save money would become illegal. I have to ask, why are they trying to force everyone who doesn’t have 20% down into paying PMI?

The six agencies asking for this are the following:

1) The Federal Reserve

2) The Federal Deposit Insurance Corp.

3) The Federal Housing Finance Agency

4) The Dept. of Housing and Urban Development

5) The Office of the Comptroller of the Currency

6) The Securities and Exchange Commission

Who Does NOT Want Stricter Home Ownership Requirements:

1) The National Association of Realtors

2) The Mortgage Brokers Association

3) Builders

4) Mortgage Bankers Association

5) Private U.S. citizens

David H. Stevens, CEO of the Mortgage Bankers Association and a member of the coalition opposing the plan says, “We plan to be very clear and very vocal” in fighting this. I say, “You go, Mr. Stevens, and go strong!”

If you don’t want to see this 505-page proposal become law, please make your voice heard by contacting your state representation and saying you are against “QRM-Plus.” And please make others aware of this via Twitter, Facebook, email, and other means, because home ownership affects us all.

“Can My Lender Raise My Rate or Increase the Points on My Loan After It’s Locked In?”

~ Carolyn Warren ~ 1 Comment

contract Heads up! Lenders are jacking up the interest rate or raising points–even after it is locked in. If you have a loan in progress, you need to know what’s going on so you can prevent it happening to you.

Today I received this email from T. Smith:

“I have a GFE (Good Faith Estimate) dated 13 September. Trying to close this week and they say our credit report has expired and want to increase the cost of our points. Is that legal?”

Yes, credit reports have a limited life; but moreover, a lender has the right to re-pull a credit report at any time, regardless of the date of the original report. Now more than ever before, lenders are re-pulling credit right at the end of the process in order to make sure no new negative information has popped. “Negative information” could include a new line of credit or an increase to a credit card balance.

If you purchased a car, opened a new line of credit for appliances or furniture for your new home, opened a new credit card, or increased the balance-to-limit ratio on a current card, then any one of those things could easily lower your credit score. And a lower score could place you smack dab in the middle of a higher risk category as a borrower.

Additionally, a new late payment would lower your score.

If a lender discovers that a borrower has a lower score than what they were previously approved at, then yes, they do have the right to raise your interest rate or increase your points in order to compensate for the higher risk they perceive you to be. (Increasing points is another way of charging more in interest. Points are interest paid up front in the form of a fee.)

This is why I have been warning people not to make any changes whatsoever–and not to purchase anything on credit at all–during the loan process. Patience is the name of the game while you have a loan in process. There will be plenty of time to shop after your new mortgage is funded and closed.

If you know someone who is refinancing or buying a house, please pass on this timely warning to them.

“When Should I Get My Good Faith Estimate?”

~ Carolyn Warren ~ 2 Comments

?????????????????????????????????????????????????Dear Carolyn,

I am not sure if I should ask for my Good Faith Estimate in the pre-approval process before finding the house to purchase or after the property is identified. I am about to make an offer. Can you clarify?  ~ Chris

Yes Chris, here is the process you’ll want to follow for a smooth and secure mortgage experience:

1) Ask for a cost estimate or initial fees worksheet. This is the new upfront estimate that you can get without having your credit pulled or providing all your financial documentation.

2) Based on these estimate worksheets, choose your lender/loan officer.

3) Submit your financial documentation and have your credit checked by your chosen loan officer, so that you can obtain a solid pre-approval letter, in writing.

4) Go house shopping, with your pre-approval letter in hand, with your real estate agent. Your agent will need the letter when you submit an offer to buy a house.

5) After you’ve found a house and have a mutually signed purchase agreement, then you send that signed agreement to your loan officer, who will then adjust your loan amount, etc., accordingly and provide you with full loan disclosures. These loan disclosures include the 3-page Good Faith Estimate, Truth-in-Lending form, and other pertinent information about your loan.

If you need more personal help, please click on my webpage above that says, Review My Estimate.

Best wishes and happy house hunting!
Carolyn Warren

What Homebuyers Need to Know About “Seller Credit”

~ Carolyn Warren ~ 9 Comments

house lovelyHomebuyers: You can use a seller credit to your advantage. Here are the rules and requirements in short, quick form.

A seller credit or seller contribution is money the seller gives you to pay for closing costs. Some or all of your closing costs, including your property taxes and personal hazard/fire insurance may be paid for by the seller. If the seller pays all your closing costs, you will pay only your down payment.

The seller cannot pay for any of your down payment, per law.

If there is extra money from the seller after all your closing costs are covered, the extra money stays in the seller’s pocket. Homebuyers cannot receive cash from the seller, not even one dollar.

If there is extra money from the seller credit after all your closing costs are covered, ask your loan officer about using that money to buy down your interest rate. If there is enough cash available, you could use it to pay for a point or even a half point (a point is a percentage point, and it is interest paid up front) to get a lower interest rate.

If the seller is paying for your lender fees, then the lender sees no reason to waive or lower any junk fees they may have, because you aren’t paying for them anyway.

How to Get a Seller Credit

In order to get a seller credit, you must have it included in your Purchase and Sale Agreement. Therefore, you ask your real estate agent to negotiate it for you. It is part of the price negotiation of the home. The lender does not handle the negotiation of a seller credit.

The seller credit should be stated as a dollar amount, such as “the seller will contribute $5,000 toward the buyer’s closing costs, including prepaids.” Or, the credit can say something like, “The seller will pay all of the buyer’s closing costs, including prepaids, up to $XX maximum.” The credit should not be stated as a percentage. If stated that way, the lender will require an addendum to the purchase contract that states it in an exact dollar amount, which causes more time and hassle later.

(Prepaids = your property taxes, homeowners/hazard/fire insurance, and days of prepaid interest.)

Interesting Strategy You Can Use

When the property inspection report comes in, there will be flaws and needed repairs exposed. This presents a second opportunity for a homebuyer to ask for a seller credit. If the seller doesn’t want to do the repair work, the seller can offer to credit you cash toward your closing costs instead. This preserves your own cash so you can use it to make the repairs after closing. If you are the handyman type who likes to do your own repairs, you might come out financially ahead this way.

The Take-Away: Discuss seller credit with both your real estate agent and your loan officer. Your agent will help you get it and your loan officer will help you use it to your best advantage. Remember, with a purchase loan, you cannot take cash out of the transaction (that is only allowed in a refinance when the borrower already owns the property).

Using Gift Money For Your Down Payment

~ Carolyn Warren ~ 6 Comments

kitchen counter top view No money for a down payment? If you have a family member who is willing and able to give you the funds for a down payment, you may be in luck! Here’s how it works.

Who Is Allowed to Gift Money

Gift money may come from a family member. Some lenders will stretch that to include a fiance/fiancee. Friends are not allowed to gift the down payment. Why? Because lenders believe that your parents, a grandparent, or even a brother or sister would give you cash without expecting it to be returned. But a friend? No, lenders don’t think friendship stretches that far, and that it would actually be a secret loan. Remember, borrowed money cannot be used for a down payment.

What the Gifter Has to Prove

Lenders have a form Gift Letter that the person donating the funds must fill out and sign. In addition, they have to prove “ability to give.” This is done by providing two months’ bank statements showing where the gift money is coming from. Why? So the lender knows the person gifting the money isn’t taking a cash advance from a credit card or some other type of loan. Again, no borrowed money allowed for down payments.

I once had a home buyer tell me her dad said, “I am not showing them how much money I have in my account. You tell them I am not giving my bank statement! The letter is sufficient.” Well guess what? The loan was suspended by the underwriter until the dad decided to cough up the bank statements.  You can’t bully an underwriter into changing the rules, so you’ll want to let your donor know up front you will need copies of the bank statement later.

How to Execute the Gift for the Smoothest Closing

Do not have your donor transfer their funds into your bank account. This will cause a big, complicated paperwork mess that you don’t want to deal with. Instead, have them sign the letter that your loan officer provides and have the statements ready. Your loan officer will instruct you how and when your donor should transfer the funds and where. Typically, the donor can have the money wired directly to the escrow closing agent or closing attorney–the neutral third party who handles all disbursement of funds.

How Much Money You Need

For an FHA loan, the down payment is 3.5% of the purchase price. Gift money may cover all or some of that. If you have some money of your own but not enough, you can receive a partial gift.

If gift money will cover all of your down payment and if the seller will pay all of your closing costs, then you, the home buyer, will need only the appraisal fee (about $450) and two months’ total house payment (including principal, interest, taxes, insurance, and mortgage insurance) in reserves. This means you need to show that you will have two months’ payment left in your own bank account after your loan closes. Lenders will not fund your loan if you will be left with only a few dollars in your account afterward. That would be too risky for them and unwise for you.

#1 Mistake Self-Employed Home Buyers Make

~ Carolyn Warren ~ Leave a comment

realtor4 For self-employed people seeking a mortgage, either a purchase loan or a refinance: don’t make this common mistake!

When calculating debt-to-income ratio for the loan amount you desire, don’t use the wrong figure, or you might be in for a nasty surprise. It happens all the time…

Greg, self-employed in the construction business, reported his income to his loan officer as $95,000/year. With that, he figured he could easily qualify for a $400,000 loan. What he didn’t know was that the underwriter would subtract all the deductions he claimed with the IRS from his income. All construction materials, office expenses, wages paid out, the new truck he purchased–all deducted and all subtracted from his income. With this, his Adjusted Gross Income showed as $29,000, and that is the figure the underwriter used for qualification purposes. Much to his surprise and consternation, Greg’s request for the loan he wanted was denied.

The Adjusted Gross Income figure is the one you need to go by for self-employed income. Yes, depreciation and a few other things can be added back, but for simplicity, look at your Adjusted Gross Income.

Typically, self-employed folks hire good accountants to squeeze every legal deduction they can out of their income. That is fine. But realize you can’t have it both ways. You can’t get out of paying taxes on $95K and then turn around and claim $95K as your income when you want a mortgage.

The Take-Away here is to plan ahead. If you want to buy a house in the next year, speak with your tax preparer about making sure your income will qualify. And whatever you do, don’t go house shopping until you have a valid Pre-Approval Letter in hand that verifies the purchase price you qualify for.