Mortgages and Financing

Construction Loans, Lot Loans, and Interim Loans

September 26, 2013 by Linda Mosse 3 Comments

Navigating Construction Loans and Lot Purchases

Construction loans are a specialized field of lending. The path from lot purchase to new home construction is laden with obstacles, not the least of which is the financing to get from A to B. It is really more like A to B, B to C, C to D, and so on. Because the questions regarding how to get a lot loan, how to get a new construction loan, or a one-time close permanent loan abound, let’s take a look at each type, the process, and why you would chose one over the other.

Lot Loans

How do you get a loan just for your land? Banks provide most lot loans. There are several banks that provide lot loans when you are not yet ready to build. Depending on how much land you are purchasing, and whether it is considered rural or residential, will determine how much of a loan you can get for your property.

For example, with Security Service Federal Credit Union, if the lot is in a platted subdivision, they offer lot loans up to 90% loan to value (LTV) and do not require a survey. In addition, those loans have no acreage limit as long as the lot conforms to the other lots in the subdivision. If you are looking for a more rural property that is not in a subdivision, the maximum acreage is ten acres, a survey is required, and the maximum loan to value ratio is 80%.

However, there are several lenders with different programs to offer. Capital Farm Credit offers lot loans for residential as well as for farm and ranch properties. Typically, the residential lot loans cap out at forty acres, but they offer some great products for the rural home builder as well. They also offer construction loans with one-time or two-time closes. Other banks in the area that offer lot loans include Randolph Brooks Federal Credit Union, Frost Bank, and Great Plains National Bank. There are more that offer lot loans, most with an 80% loan to value ratio. It is always helpful to already have a relationship with the bank you are requesting a lot loan from.

Lot Loans combined with Construction Loans

Now let’s move to construction loans. Let’s say you have found the perfect lot, but would like to roll the lot and construction loan into one loan. The process can involve a one-time close or a two-time close.

If you were hoping to have both your lot and home loan rolled into one rather than having a separate transaction for your lot, you would need to be:

Prepared to be done building within 12 to 18 months.
Have a builder picked out with a builder contract in place.
Final plans/specifications for the house that will be built.
Commitment letter from a lender saying they approve your selections, have some comparables for similar homes built in that area, and it appears like you have a solid plan and timetable.

One-Time Close Construction Loans

So, you have a lot picked out, and you have all the necessary documentation and plans to proceed to purchasing and building your dream home. Do you go with a one-time close or a two-time close? The answer seems simple, but there are several factors that should be considered before choosing which way to go. In a one-time close, the lender provides permanent financing at the beginning of construction so that refinancing is not required to be done again at the end of the building process.

You would probably chose a one-time close if you were unable to provide great comparable properties for a traditional mortgage due to issues such as location, acreage, or size of the home you will be building according to Capital Farm Credit. A one-time close locks in the interest rate at the beginning of construction so that the borrower does not have to re-qualify at the completion of construction. The one-time close also saves some money by not having two sets of closings (and therefore two sets of closing costs).

However, with all those pluses, many lenders will not write a “traditional” mortgage loan before a home is constructed. Therefore, the rate most often provided for one-time close situations is often a higher rate selected by a portfolio lender.

Two-Time Close Interim Loans

That brings us to two-time closes! In this scenario, a lender writes an “interim” construction loan, usually for about twelve months, with the loan being refinanced in the traditional mortgage lender market – with a new rate, new qualifying, and a second set of closing costs. During the interim period at selected intervals according to your particular lender, “draws” are taken from the interim loan for the builder/construction crew to complete the various stages of your home. When you are done with the building process, a second loan, or a permanent loan is obtained. Depending on interest rates and whether there are good comparables for your preferred neighborhood, building size, and land amount; this loan could also be a great deal.

In either scenario, most lenders offering these types of construction loans can take an existing lot loan and roll the remaining balance of that lot plus the cost of the new home construction into the interim construction loan closing. Of course, loan to value ratios will fluctuate depending on how much you need to roll into this type of loan, but between 80-90% loan to value can be expected depending on your personal credit worthiness, along with the value of the land and the appraised value of the completed home.

Special thanks to email hidden; JavaScript is required of Capital Farm Credit, email hidden; JavaScript is required of Premier Nationwide Lending, and email hidden; JavaScript is required from Patriot Bank for their assistance in deciphering all the ins and outs of lot and construction loans and assisting with the article!

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Financial Preparation and Understanding the Real Estate Process

September 9, 2013 by Dave Taylor Leave a Comment

Finances and the Real Estate Process

Have you ever felt overwhelmed about making a home purchase? Understanding the financial preparation and associated real estate process may help manage expectations and ease your angst as you navigate the process.

Accepting your financial situation is critical; especially if you already own a home and are looking to buy another. Will you have to sell first or if you can buy and then sell? This question is best answered by the assistance of a lender and a REALTOR®. The lender will assist you with understanding your ability from a financial stand point and the REALTOR® will help you understand the pros and cons from a market perspective, ie, is it a sellers’ or buyers’ market? How much do I think I can sell my house for? How will either a sellers’ or buyers’ market affect me?

If you have to sell your current home before purchasing a new one (known in real estate as a contingent offer) you will usually be negotiating from a position of disadvantage. However, a REALTOR® may be able to assist you with listing your home first and getting it under contract to a point that is more advantageous for you. As an example, a REALTOR® would likely look to have you close on the home you are selling before closing on the home you are buying, which can improve your leverage in negotiating on a new home purchase. For the sake of further discussion we will assume you can purchase without selling or do not currently own a home.

A good way to start is to find a lender and complete their pre-qualification process in order to determine your maximum loan value prior to making an offer on a property. Obviously, you don’t have to buy at that price but you also don’t want to look at houses you can’t afford. Once your lender determines your maximum loan value you should ask him to provide a Good Faith Estimate (GFE) for all associated costs. Most buyers focus on the costs associated with principal, insurance, taxes, and interest (PITI) that equate to your total monthly mortgage payment. Remember, any associated HOA fees are separate. Additionally, there are other associated costs to understand ie, closing costs and pre-paids, the down payment (if required), and other monies based on the type of loan you are going to use. Different loans vary on down payment required and seller concessions you can ask for. Your lender can explain those options to you. Further, your lender will also ask you if you want to pay your own taxes (no escrow) or if you want to pay your taxes (escrow). If you pay your own taxes than your monthly mortgage will be lower but you will have to ensure you are prepared to pay your taxes in their entirety when due.

Ok, so why is understanding my Good Faith Estimate (GFE) so important upfront? How can that information help me navigate the process?

It will let you know the maximum amount you can borrow toward a home purchase.
It provides an estimate of your monthly mortgage payment either with or without an escrow account.
It provides an estimate on your down payment, closing costs, and pre-paids which are key numbers to understand when negotiating your offer (total amount you as a buyer may need to bring on the day of closing).

How can the data from the GFE help me and my REALTOR® negotiate the best offer?

Your REALTOR® will compare the current list price of the home with their own Comparative Market Analysis (what have similar homes sold for in the last month in the area).
Based on your loan type and down payment and closing costs you and your REALTOR® can decide if you want to try and have the seller reduce their sales price and/or provide assistance with your closing costs.
These days, on average (based on current average interest rates) your mortgage payment is effected by a +/- of $6 for every $1000 you finance. Thus, a difference of +/- $10,000 in sales price is around a +/- $60 in your monthly mortgage payment.
Consequently, you can determine if it’s more important to keep money in your pocket upfront (lower your closing costs) by trying to negotiate that into the deal. Or, limit the amount of money you pay over the life of your mortgage payment.
Knowing all this information ahead of time will expedite your ability to negotiate when time is of the essence!

Lastly, you’ll want to be familiar with the general timeline and associated milestones for a contract based on financing in Texas. Normally they run thirty to forty days from the date you have an executed contract (the day you have both the buyer and sellers signatures on all necessary documents) to closing and funding (the day the property exchanges hands after signing all necessary paperwork with the title company). Key parts of the process are:

In order to get to an executed contract you have to have an agreed upon sales price coupled with additional key terms of the contract (title company, amount of earnest money, length of option period, option fee, closing date, closing costs, HOA documents, survey etc.). This process can generally take anywhere from 48 to 96 hours depending on how many offers are involved and how contentious the terms are to the parties.
Once the contract is executed the buyer generally has 48 hours to provide the agreed upon option fee (money paid to the seller to acquire time to perform inspections and opt out of the contract with no penalty) to the seller and the buyer’s agent must get the contract and agreed upon earnest money to the title company so the contract can be receipted. Earnest money is a negotiated good faith amount put toward the purchase of the house upfront by the buyer (it acts as a deposit against the total amount due when closing).
Subsequent to the contract being executed and receipted, you move into the option period based on the time frame negotiated into the contract (generally ten days). This time is used to inspect the home and negotiate repairs (a second round of negotiation). The first negotiation involved procuring an executed contract as discussed above.
The option period is when contracts have the highest probability of ending as the buyer has the unrestricted right to terminate and will only lose their option fee (normally $100 or $10 a day for a $10 period) if they decide to not proceed.
After the option period, buyers can generally only terminate and keep their earnest money if the seller defaults on an agreed upon term or buyer financing falls through and seller is notified in the time frame described in the contract (normally twenty one to twenty five days from date of execution).
Once the option period is complete, lenders normally order the appraisal. The appraisal process usually takes around ten business days to be completed. The appraisal is normally a buyer expense so you don’t want to order it until you are out of the option period and sure you are proceeding with the purchase.
If the appraisal comes in below the agreed upon sales price you have one of four options: continue with the terms of the contract as written – you pay above the appraisal, have the seller make up the difference, you and the seller split the difference in some fashion, or you terminate the contract.
The remaining fifteen to twenty days until closing involves ensuring all financing paperwork is satisfied by your lender’s underwriting team.

image courtesy of Gabriel White

Mortgages: Lessons Learned

September 6, 2013 by khproperties Leave a Comment

Lessons I learned about mortgages that help my clients.

The importance of utilizing an efficient and professional mortgage broker is critical to facilitate a less stressful real estate transaction. Although other circumstances will arise that may detract from the harmonious flow that one seeks in their endeavor as a REALTOR®, this one has always been a thorn for me. In order to better assist my clients, I look at each of these three major areas in deciding if I will recommend a particular lender or mortgage broker. Each of these three items are of utmost important to both myself and the client during the buying process and lack in any one of these areas will typically cause more stress than necessary for both of us.

Core Values: What do they believe in with regards to customer service? Are they honest? Do they have integrity?

I look for mortgage providers who consider the client to be the essence of the transaction and not just a dollar figure. You will know them as they will endure to get as much money from the transaction, regardless of who is paying beside themselves. Honesty needs little elaboration, but I look for those who will be open, straight forward, truthful, and not prone to deceit. Integrity, a close cousin to honesty, lends to a veracity to be upright. If you make a mistake, take ownership and make amends to correct it. I will often test this by having a trusted mortgage broker review the documents prepared by a “new” mortgage broker to see if anything looks awry.

Professionalism: Are actions performed without personal biases? How well do they communicate? Are they dependable?

It is a difficult task at times to suppress personal prejudices and function in the interest of the client. Nevertheless, that is exactly what is needed to be a professional. Communication is the most critical aspect of professionalism, whereas it is the cornerstone in helping with the efficient processing of information. A mortgage broker, who is negligent in disseminating valuable information in a timely manner, will cost you time, money, and cause undue hardship. Dependability is simply about whether or not they have your back when things go wrong. Can you look to them for support and will they be there for the duration?

Reputation: What does their name say to the public? Reviews and assessments by others will provide valuable insight to who you may want to use.

This is just my opinion and reflects how I have interacted with different lenders in the past. Below is a bit about my personal experiences with a mortgage broker that didn’t go so well – these are the kinds of things I look to avoid for my clients by personally getting to know the mortgage brokers I recommend to my clients.

Personal Bad Experiences with a Mortgage Broker

Mortgage broker’s supervisor relayed to me that his view was that everyone was a dollar figure (I didn’t know it at the time that this was his supervisor).
Aggressively prepped paperwork to lock rate and start loan application.
Wanted me to pay for VA appraisal upfront – upon my refusal, he was visibly upset. I explained that if I paid for the appraisal and loan was not approved, I would lose my money (not customer oriented).
After receiving document file, lender did not review for a week even though closing was less than three weeks away and I was leaving the country (not very professional).
Began asking for more documentation while I was out of country and had no access to said documents, knowing full well that I would be out of the country with limited access.
Did not communicate information in a timely manner, particularly when I had asked several times for updates.
Closing date had to be adjusted which affected the rate lock (date had expired). In order to extend the lock, I was charged an additional fee. Mortgage broker cited that the appraisal was the delay (which is something they are in control of). In speaking with him concerning the delay caused by his appraisal order, he did not want to hear it (he should have had the integrity to own the problem and fix it).
Numerous emails to him with no response. In order to get information, I began to communicate directly with the loan processor. Within two days of closing, I had still not received an email or phone call with an update of my status.

Knowing all of that, what do you think my personal opinion of this lender would be? Do you think I’d be willing to attach my name to them when giving a referral to a client? Certainly not. Not only would I not want my clients to go through such an experience, but I would not want to have to work with them from the agent perspective as it would cause me more work than necessary while trying to get information for my client.

An excellent lender who you can trust and count on is an invaluable piece of the real estate puzzle. When I give recommendations, I have thoroughly vetted them against my own criteria in order to insure that my clients are getting the best service they possibly can. Happy clients make for a happy REALTOR®.

image courtesy of TheTruthAbout

Home Loan Dos and Don’ts

January 16, 2013 by khproperties 1 Comment

While writing yesterday’s article, “Your Credit and Buying a Home,” we were speaking with Michael Kingsbury of Academy Mortgage about some of the ins and outs of credit during the home loan process. Michael provided us with a list of “dos and don’ts” that Academy Mortgage provides their clients when they apply for a home loan and we thought it would be a good list to share. These tips are for after you’ve started the loan process and will help you avoid any hiccups during the time it takes you to close on your new home. The do not list is especially important as these somewhat simple and innocuous items can derail a home loan, even if the buyer didn’t realize that what they were doing would affect the loan process.

Home Loan DOs

DO continue making your mortgage or rent payments on time.
DO stay current on all of your existing accounts.
DO keep working at your current employer.
DO keep your same insurance company.
DO continue living at your current residence.
DO continue to use your credit as normal.
DO call your lender if you have any questions.

Home Loan DON’Ts

DO NOT make any employment or income changes.
DO NOT make any major purchases (car, boat, jewelry, etc.).
DO NOT apply for new credit (even if you are pre-approved).
DO NOT open any new credit cards (store cards included).
DO NOT transfer any balances from one account to another.
DO NOT pay charged off balances without discussing with your lender.
DO NOT pay collections accounts without discussing with your lender.
DO NOT buy any furniture.
DO NOT close any credit accounts.
DO NOT change bank accounts or switch banks.
DO NOT max out or go over your limit on any credit card accounts.
DO NOT consolidate your debt onto one or two credit cards.
DO NOT take out a new loan.
DO NOT start any home improvement projects.
DO NOT finance any elective medical procedures.
DO NOT open a new cell phone account.
DO NOT join a new fitness club.
DO NOT pay off any loans or credit cards without discussing with your lender.

If you have any doubt about a purchase or adjustment to your life that may affect your credit, talk to your lender before you take action. Even small changes in your credit score or debt to income ratios could have drastic effects on your ability to acquire your new home loan. There are plenty of real estate horror stories that involve home buyers buying a new flat screen TV before closing on their home and finding themselves suddenly turned down for their loan. Lenders check credit several times during the home loan process…one of those checks occurs days before closing and finding out then that you are suddenly not qualified for the loan will scrap months worth of work and find you without a house. Don’t make that mistake!

image courtesy of Philip Taylor PT

Know your lender and have less headaches.

August 30, 2012 by khproperties Leave a Comment

There is no shortage of places to get a home loan from and there are plenty of quality professionals who work hard in the lending world. Picking a lender is an important piece to the real estate puzzle, so how do you choose one? A good lender will help you avoid the issues that can cause delayed closings, sudden changes to terms of the loan, and keep you from laying in bed with a massive headache worrying about how you’re going to buy your home. The best lender is the lender you know and trust.

When choosing a lender, there are a few things you should consider. You want someone you feel comfortable around, you want someone who knows the business and the loan products available, but most importantly, you want someone you can meet face to face.

Without that face to face connection, loans can become frustrating to the point of banging your head against a wall. This is why most real estate agents will advise against internet-based lenders. Although some of them may offer slightly better rates, if the loan doesn’t close, you’re still left without a home and that better interest rate means nothing.

Ask your agent who their clients are using and who is getting the job done. Ask your friends and family – but don’t ask your uncle who bought a house once in 1963 that isn’t in the same state as your new home. Local is the the best way to go.

Once you find a lender that rocks – let others know, pass their name on. Just like real estate agents, lenders rely on word of mouth and referrals to build their business. Knowing your lender face to face can make a huge difference in the home buying process, so interview a few and find that perfect match.

image courtesy of PunkJr

FHA Limits Restored

November 21, 2011 by khproperties Leave a Comment

This just in from the National Association of REALTORS® News Desk: Congress has restored the loan limits for the FHA for two years.

Back in September we let you know that the loan limits had been reduced in over 40 states. Effective immediately, these limits have returned to the previous levels.

For San Antonio, this means that the limit of an FHA home mortgage is once again:

$337,500

The reinstated FHA loan limit should help to keep mortgages affordable and accessible. FHA morgtgages require one of the the lowest downpayment of any traditional mortgage currently on the market (3.5%) and their presence in the market is critical as we work towards a housing market recovery.

If you have questions about FHA loans, contact a professional REALTOR® or mortgage broker for specifics.

image courtesy of krissen