home loans

Downpayments: How Much Should You Pay Up Front?

July 10, 2019 by khproperties Leave a Comment

If you’re going to be buying a home any time soon, you’re going to need to start thinking about your downpayment. Typically expressed as a percentage of the sales price, the downpayment is often one of the more difficult obstacles for people to overcome on their way to home ownership. You’ll need to budget your money and save up enough to make your downpayment, but how much will you need? You’ve probably heard the rule – you’ll need to save for a 20% downpayment before you buy a home. The logic behind saving 20% is solid, as it shows that you have the financial discipline and stability to save for a long term goal and it can also help you get favorable interest rates from your lender. Additionally, the bigger your downpayment, the less you need to borrow, so the less you’ll pay in interest in the long run.

But there can actually be financial benefits to putting down a smaller downpayment — as low as three percent – rather than parting with so much cash up front, even if you have the money available.

The Downside of a Small Downpayment

The downsides of a smaller downpayment are pretty well known. You’ll have to pay private mortgage insurance (often referred to as just PMI) for years, and the lower your downpayment, the more you’ll pay. You’ll also be offered a lesser loan amount than borrowers who have a 20% downpayment, which will put some higher priced homes out of reach for you when searching.

THe Upside of a Small Downpayment

The national average for home appreciation is about five percent. The appreciation is independent from your home payment, so whether you put down 20% or three percent, the increase in equity is going to be the same. If you’re looking at your home as an investment, putting down a smaller amount can lead to a higher return on investment, while also leaving more of your savings free for home repairs, upgrades, or other investment opportunities.

The Happy Medium

Of course, your home payment options aren’t binary. Most borrowers can find some common ground between the security of a traditional 20% and an investment focused, small downpayment. It’s always a good idea to talk with your Realtor and your lender to discuss the potential paths for you and to see what strategy works best for you and your personal needs.

image courtesy of AleXander Agopian

Third Party Financing Addendum

March 12, 2016 by khproperties 1 Comment

The Third Party Financing Addendum was updated by the Texas Real Estate Commission on January 1, 2016 and since we’ve talked about the form previously (although some parts of the form have changed, this older post is a good primer on some of the details of the financing side of purchasing a home), we thought we should talk about the new form and the changes that affect you and the contract on your home. The Third Party Financing Addendum is an addendum to the One to Four Family Residential Contract that covers the financing of the home. In a cash deal, it is not needed, but if you’re getting a loan and you need that loan to buy a house, you’ll be seeing this form when sitting with your agent to write up an offer.

What is Third Party Financing?

Third party financing is any loan you take to purchase a home – this can come in several different forms: conventional loans, Texas veterans loans, FHA loans, VA loans, USDA loans, and reverse mortgages (they are not often used to buy homes, but it is possible). As the loan requires approval (in various forms) by the lender, the Third Party Financing Addendum ties the approval process to the contract so that if a buyer is unable to obtain the loan, they have ways to get out of the contract.

Third Party Financing Addendum

A. TYPE OF FINANCING AND DUTY TO APPLY AND OBTAIN APPROVAL: Buyer shall apply promptly for all financing described below and make every reasonable effort to obtain approval for the financing, including but not limited to furnishing all information and documents required by Buyer’s lender. (Check applicable boxes):

The first section of the form lays out the type of financing the buyer is seeking of obtain and requires the buyer to apply for such financing promptly. The next sections of the paragraph outline the various types of financing: 1. Conventional Financing, 2. Texas Veterans Loan, 3. FHA Insured Loan, 4. VA Guaranteed Financing, 5. USDA Guaranteed Financing, and 6. Reverse Mortgage Financing. Each loan type requires the buyer to outline the basic criteria for the loan they are seeking – the amount of financing, how many years the loan will be, the interest rate, and origination fees (the money a lender charges to make the loan). By outlining the criteria, the buyer sets the basics of the loan they are seeking and if for some reason they cannot get a loan under these terms, they can terminate the contract (covered in the next paragraph).

B. APPROVAL OF FINANCING: Approval for the financing described above will be deemed to have been obtained when Buyer Approval and Property Approval are obtained.
1. Buyer Approval:
This contract is subject to Buyer obtaining Buyer Approval. If Buyer cannot obtain Buyer Approval, Buyer may give written notice to Seller within _____ days after the effective date of this contract and this contract will terminate and the earnest money will be refunded to Buyer. If Buyer does not terminate the contract under this provision, the contract shall no longer be subject to the Buyer obtaining Buyer Approval. Buyer Approval will be deemed to have been obtained when (i) the terms of the loan(s) described above are available and (ii) lender determines that Buyer has satisfied all of lender’s requirements related to Buyer’s assets, income and credit history.
This contract is not subject to Buyer obtaining Buyer Approval.
2. Property Approval: Property Approval will be deemed to have been obtained when the Property has satisfied lender’s underwriting requirements for the loan, including but not limited to appraisal, insurability, and lender required repairs. If Property Approval is not obtained, Buyer may terminate this contract by giving notice to Seller before closing and the earnest money will be refunded to Buyer.
3. Time is of the essence for this paragraph and strict compliance with the time for performance is required.

As you can see in Paragraph B., there are two types of approval: buyer approval and property approval. The buyer approval piece is similar to the old Third Party Financing Addendum language in that it gives a negotiable amount of days in which the buyer must obtain their approval. If the buyer cannot obtain the loan approval in time, they will need to give the seller written notice and they can terminate the contract and receive their earnest money back. The buyer can also opt to make make the contract not subject to buyer approval. This usually occurs when someone is seeking a loan, but doesn’t necessarily need it and could (and will) buy the home with cash if necessary.

The property approval section used to be outlined in the contract, but has been moved over to this form and combined in this paragraph in order to avoid confusion about what defines “approval.” Property approval relates to the lender satisfying their own requirements for a property from the appraisal to insurability to any lender required repairs. Although the paragraph lists those, it does say such approval is not limited to those items. Once again, if the buyer can not obtain property approval from the lender, they may terminate and keep their earnest money.

As always with contract items that are tied to the effective date of the contract and involve termination potential, the third section reminds all parties that time is of the essence and timelines should be strictly adhered to in order to face any potential issues.

C. SECURITY: Each note for the financing described above must be secured by vendor’s and deed of trust liens.

All loans must be secured by vendor’s and deed of trust liens. When you take a loan on a house, the lender will place a lien on the home, securing their interest in the property. Should anything happen and you need to sell it, you can not sell it without satisfying the obligation to the mortgage company by paying off the remaining balance of the loan.

D. FHA/VA REQUIRED PROVISION: If the financing described above involves FHA insured or VA financing, it is expressly agreed that, notwithstanding any other provision of this contract, the purchaser (Buyer) shall not be obligated to complete the purchase of the Property described herein or to incur any penalty by forfeiture of earnest money deposits or otherwise: (i) unless the Buyer has been given in accordance with HUD/FHA or VA requirements a written statement issued by the Federal Housing Commissioner, Department of Veterans Affairs, or a Direct Endorsement Lender setting forth the appraised value of the Property of not less than $_______________; or (ii) if the contract purchase price or cost exceeds the reasonable value of the Property established by the Department of Veterans Affairs.
(1) The Buyer shall have the privilege and option of proceeding with consummation of the contract without regard to the amount of the appraised valuation or the reasonable value established by the Department of Veterans Affairs.
(2) If FHA financing is involved, the appraised valuation is arrived at to determine the maximum mortgage the Department of Housing and Urban Development will insure. HUD does not warrant the value or the condition of the Property. The Buyer should satisfy himself/herself that the price and the condition of the Property are acceptable.
(3) If VA financing is involved and if Buyer elects to complete the purchase at an amount in excess of the reasonable value established by the VA, Buyer shall pay such excess amount in cash from a source which Buyer agrees to disclose to the VA and which Buyer represents will not be from borrowed funds except as approved by VA. If VA reasonable value of the Property is less than the Sales Prices, Seller may reduce the Sales Price to an amount equal to the VA reasonable value and the sale will be closed at the lower Sales Price with proportionate adjustments to the down payment and the loan amount.

When getting an FHA or VA loan, the appraised price of the property must be equal to (or more) than the sales price listed in the contract. If the appraised value comes in lower, the buyer may either pay the difference themselves (the lender will not loan more than the appraised amount) or the buyer and seller can come to an agreement to lower the price. Both loans involve the federal government, so the language here is required to notify both parties of the potential issues and outcomes.

E. AUTHORIZATION TO RELEASE INFORMATION:
(1) Buyer authorizes Buyer’s lender to furnish to Seller or Buyer or their representatives information relating to the status of the approval for the financing.
(2) Seller and Buyer authorize Buyer’s lender, title company, and escrow agent to disclose and furnish a copy of the closing disclosures provided in relation to the closing of this sale to the parties’ respective brokers and sales agents identified on the last page of the contract.

The last paragraph gives authorization to the lender, title company, and escrow officer to release pertinent information to the the seller and buyer as well as their representatives (your real estate agent and their broker) and to give copies of the new closing disclosures to those parties. Without this authorization, they cannot provide this information to all of the parties under new Consumer Financial Protection Bureau regulations.

image courtesy of frankieleon

How Credit Can Affect Your Ability to Buy a Home

February 24, 2016 by khproperties Leave a Comment

Credit is the one word we can think of that no one really likes. People with good credit, people with bad credit – everyone gets a little nervous when they think about the magical number determined by a secret algorithm that sums up your entire financial life in one go. The FICO credit score, the defacto standard for scoring your financial well being, is shrouded in myth and mystery and affects just about everything you do in life. And when it comes to real estate, your score is one of the biggest determining factors in whether you’ll be renting or buying your next home. So what can you do to keep your score healthy and happy so that you can move into home ownership? While there is no perfect answer for everyone, there are certain items you should be aware of that will help keep those numbers up so that you can buy a home.

Paying your bills on time. We all slip from time to time and forget to pay a bill by its due date. Whether it’s because you just didn’t have the money until a few days after the due date or it simply slipped your mind, you need to pay your bills on time. Banks look to this factor to see that you have the discipline and structure to keep up with payments. Not only does it affect your credit score, but when a lender looks at your full credit report and sees consistent or frequent late payments, they start to wonder if you’re a credit risk. The website Credit Karma shows that people with fair to excellent credit scores pay their bills on time more than 95%. As credit scores go down, so does the rate of on time payment – FICO scores of 500-599 report 75% on time payment rate, while scores under 500 report 60% on time payment rates.

Debt to income ratios. You debt to income ratio is the balance of what’s coming in and what’s owed. Have large debts and a small income? Not good. How do you figure out your ratio? Take the total of your monthly debts (rent/mortgage, car payments, credit card payments, other loans, etc.) and divide it by your gross (not net) monthly income. Convert the decimal to a percentage (move the decimal two places to the right) and you now know your debt to income ratio. All lenders differ on what they look for, but most avoid anything over 30% and 40% is considered very high. The higher that ratio goes, the higher the risk for you to repay the loan you’re trying to apply for.

Credit Cards vs. Mortgage Debt Although it won’t help the first time home buyer, having a mortgage can actually be a boost to your credit. Things like student loans and mortgages are often weighted differently because of their purpose, whereas credit card debt can be seen as a negative, because we use those to buy things without any real value. That’s not to say that credit cards are bad, you just have to be careful how you use them and how many and how much you have available.

Speaking of credit cards… There are a couple of issues with them that you’ll need to watch out for. First, don’t max them out. Second, don’t have too much or too little credit available. Third, you want to have a strong history with those credit cards, from paying them in a timely fashion and not carrying a large balance to not coming near your spending limits. Credit card debt is one of the trickier items to understand, because each piece of the puzzle affects the larger whole.

Cash. Having a reserve fund can help balance things out when you sit down with a lender. Not only will you need cash for your down payment, but lenders want to see reserve funds so that you can weather any bumps in the road ahead. Cash can sometimes make up for slightly lower credit scores as well.

Your Credit Score is a Complex Thing

These are just some of the issues affecting your your ability to get a loan to purchase a home. The best way to really understand your personal situation is to sit with a local lender and have them take a look. Not only will they pull the report and ask questions about your income and debts, but they will also take a look at the entire picture as a whole in order to come up with the best plan of action for you. Sometimes it makes sense to wait, sometimes you’re ready then and there, but they can help give you the info and knowledge you need, plus they can help you see some of the things you could do to improve your credit score for both the short and long term that could help get you to where you want to be.

If you need recommendations for a quality, local lender who can analyze your situation and build an action plan for you, contact and one of our agents and they can help you find the lender that best suits your needs.

image courtesy of Jigme Datse