loans

Which Down Payment Strategy is Right for You?

April 10, 2019 by khproperties Leave a Comment

You’ve most likely heard the rule or had one of your friends give you the advice: save for a 20 percent down payment before you buy a home. The logic behind saving 20 percent is solid, as it shows that you have the financial discipline and stability to save for a long term goal. As with any financial plan, you have to look at the pros and cons and determine which benefits you more both in the short and long term. It is always advisable to discuss with your lender and your CPA to see where and how you can maximize the benefits. Larger down payments can help you get favorable rates from lenders, but there can actually be financial benefits to putting down a smaller down payment, something as low as three and a half percent, rather than parting with so much cash up front, even when you have the extra money available.

THE DOWNSIDE

The downsides of a smaller down payment are pretty well known. You’ll have to pay Private Mortgage Insurance for years and the lower your down payment, the more you’ll pay. You’ll also be offered a lesser loan amount than borrowers who have a 20 percent down payment, which will eliminate some homes from your search.

THE UPSIDE

The national average for home appreciation is about five percent. The appreciation is independent from your home payment, so whether you put down 20 percent or three and a half percent, the increase in equity is 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 percent and an investment focused, smaller down payment. Your real estate agent can provide some answers and introduce you to a lender as you explore your financing options. Sitting down with the lender and discussing the finer details of your goals and your plans can help you make the best decision for you at this particular point in your life.

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The Lender Wants What? Don’t Let Paperwork Discourage You

February 5, 2018 by khproperties Leave a Comment

You’ve found the home of your dreams, got it under contract, and are working with your lender to gather all of the documents they need to make your loan happen. It’s all going perfectly and you’re getting more and more excited by the day. Then the loan hits underwriting and suddenly you feel like you’re buried in paperwork requests. They need copies of this, letters explaining that, printouts of bank account statements from years ago – they ask for strange things that don’t seem related. It becomes a deluge of requests and you feel like just giving up – no house is worth all this paperwork, is it?

It can be discouraging to have to sift through all of your documents and scanning and sending and resending, but all of that paperwork is leading to your new home. Lenders will request things once, twice, three times…it can be a bit frustrating. The underwriter’s job is to mitigate the lender’s risk and part of that involves creating a papertrail so that there are no doubts about what they see when they look at your financial picture. Often it seems like they’re just harassing you, but they are just creating a file that documents why they felt it was an acceptable risk to give you that loan.

Prepare Paperwork for Your Lender in Advance

While you’ll never be able to predict everything the lender will ask you for, you can start preparing the paperwork long before you apply for the loan. Gather your bank statements, pay stubs, tax documents, loan information – anything reflecting your income and your debts. If you have some outstanding issues, know what they are. You can get a free copy of your credit report through www.annualcreditreport.com and check for anything that might show up. Do a household budget (you’ll be surprised where you can save some money!). The more documentation you have prepared, the better.

When the lender starts asking for paperwork, turn it in quickly. It can get a bit frustrating when they ask you for the same thing you’ve turned in 10 different times – just take a breath and resend it. The quicker you turn those items in, the quicker someone can review them. Sometimes there will seem that there is no rhyme or reason to what they’re asking, but to them it makes perfect sense. Don’t question it, just send it in and ask if they need anything else.

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Loan Underwriting Doesn’t Need To Be A Complete Mystery

December 22, 2015 by khproperties Leave a Comment

If you’ve ever bought a house, you’re probably familiar with hearing “your loan is in underwriting” and then playing the waiting game until it “comes out of underwriting.” It’s one of the steps in the process of getting a loan and often one of the most frustrating. But what exactly is underwriting?

Underwriting is viewed as a mystical place where loans go somewhere between the time of preapproval and final issuance of the loan documents. Underwriters are kept in secret and you’d be surprised to know that many real estate agents have never met an underwriter face to face (or if they did, they didn’t know it). Loan underwriting is truly a world shrouded in mystery and for good reason – if we all knew our underwriters, it would be very easy for agents to poke and prod an underwriter to get things done. Underwriters would be under a daily assault of phone calls from agents trying to find out where they were in the process and in effect, would be rendered unable to do much more than answer the telephone. This is why lenders keep them locked away in dark caves in highly classified locations.*

Merriam-Webster Online Dictionary defines underwriting as follows:

underwriting – transitive verb
4 a : to agree to purchase (as security issue) usually on a fixed date at a fixed price with a view to public distribution b : to guarantee financial support of (underwrite a project)

What’s Taking So Long? Underwriting.

To put it simply, the underwriter looks at all the supporting documents and says “yes, I think this is a safe loan to make, let’s do it.” Of course they can say the opposite too. This is how some people get preapproved, yet wind up getting turned down for a loan. The underwriter is pretty much all powerful when it comes to you getting your loan. Because of their ultimate power, you and your real estate agent need to pay special attention during the underwriting process.

It all boils down to this: if the underwriter asks for something, you as a homebuyer, better do it. They will ask for ridiculous things at times. Doesn’t matter. They’ll ask for copies of things you’ve sent them four times already. Doesn’t matter. They’ll ask you to move a comma in a sentence in a document you have sent to them. Doesn’t matter. They’ll ask for more information on something you’ve already documented to death. Doesn’t matter. Underwriting is about the lender covering all their bases – all that documentation you send in stays in a file and if something ever goes wrong (you default on your loan), the investor will want the lender to justify their underwriting of the loan.

Underwriting can be a nightmare for a homebuyer (and a seller as well – the longer underwriting takes, the more nervous they become), but by being proactive and jumping through the hoops, you can get your loan in and out much faster and save some of the headaches caused by underwriting. Typically, your agent will also know what the underwriter needs to complete their job, so they may bug you about it too – the key? Get it done. Right away. Don’t put it off and don’t frustrate yourself with trying to find the answer to “why are they asking for this?,” they have their reasons and it doesn’t really matter what they are (although we can discuss them to death, the underwriter will still want them).

Of special note: it pays to have a local lender for your loan, because they often have better, more direct contact with their underwriting departments and can often help a file through the process by being able to have direct access to the underwriter should a problem arise. With some of the larger banks, their loan processing centers might be halfway across the country and you lose that personal one-on-one interaction between your loan officer and underwriter that can help get things done.

* We have no actual proof that lenders keep underwriters locked in caves or that underwriting is actually an ancient mystic art involving a combination of wizardry and voodoo.

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Closing Costs: How Much Can You Ask the Seller to Pay?

May 8, 2015 by Linda Mosse Leave a Comment

I need some closing costs paid by the seller, but how much?

It is common for buyers to want assistance with closing costs when they are getting ready to purchase a home. Remember that closing costs are separate and above the amount of down payment required by the lender to get a loan on your new home. What do a buyer’s closing costs consist of? Buyer’s closing costs are a combination of a portion of the title policy, the appraisal fee, tax and flood certificate fees, title fees such as recording, escrow, delivery, copy and recording fees, HOA transfer fees, and possibly a few other negotiable fees such as the cost of a survey.

Closing costs are also different than prepaid items. Prepaid items usually consist of one year’s worth of homeowners insurance, and a minimum of three months of property taxes to be held in escrow.

How much in closing costs can a buyer ask for while negotiating their offer with a seller? The amount is always negotiable, but the following rules apply depending on the type of loan the buyer is using.

With a conventional loan with 5% down payment, the most in closing costs they can ask a seller to pay is 3% of the sales price. If they are putting 10% down with a conventional loan, the seller can pay up to 6%. If the buyer is doing an FHA loan, the seller can pay up to 6% of the sales price in closing costs. And if the buyer is using a VA loan, the seller can contribute a maximum of 4% in closing costs.

These are great numbers to use as a guideline when considering how much you will require as a buyer, and also what the maximum amount you could ask for in assistance toward closing costs from the seller.

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Tapioca Pudding or a 15 Year Mortgage? Which is better for you?

October 13, 2013 by John Alaniva Leave a Comment

Is a 15 Year Mortgage the Right Choice?

So, right off the bat you must be thinking – what on earth can 15 year mortgages and tapioca pudding possibly have in common? And you’re right – at first glance there isn’t much, but as you dig deeper the similarities will surprise you.

Tapioca pudding is a sweet pudding desert thickened by man-made tapioca pearls. Tapioca does not occur naturally, but must be processed from cassava root. Most recognizable are the tapioca pearls that are a staple in both tapioca pudding and in the increasingly popular Bubble Tea. Tapioca has been around for quite some time and was quite popular in the 18th and 19th centuries, particularly because the starchy tapioca pearls were an easy thickening agent and partly because they were easy to digest. Often, they were prescribed to the very young or old and infirm with digestive problems. Tapoica pudding saw a rise in popularity in the US in the 1960s through the 1980s and then fell off the culinary bandwagon for a while. However, we are seeing a recent resurgence in its popularity in modern times again.

The 15 year mortgage also has a history of rising and falling popularity with a slight increase in interest in the current market. By far, the most common term of a residential mortgage is 30 years. Interestingly, most people stay in their homes for fewer than 10 years (3-5), so for some, 30 years seems daunting. The prospect of not being able to fully pay off a mortgage may be difficult for some to digest (see what I did there?), so the concept of a shorter term mortgage was invented. Generally the qualifications for this type of loan are stricter (higher credit scores and tighter debt to income ratios) and that’s because payments are higher (you’re paying twice as fast) and lenders earn less on interest because of the faster payoff. Lately, we’ve been seeing these type of loans taken out by investors, on second home purchases, and on later in life home purchases.

But the 15 year payments may not be palatable by just anyone. Your finances may support paying more now, but if you’re uncertain about your job or reluctant to over commit “just in case,” a 15 year mortgage may not be the right avenue for you. Consider making additional payments on your 30 year mortgage instead (just make sure they are applied to principal only). Doing one additional full payment per year could decrease your actual mortgage payoff time from 30 years to as little as 20 or more!

Much like there is a time and a place for tapioca pudding, 15 year mortgages might not be the perfect fit for everyone’s financial situation, but in both cases, variety is the spice of life and simply knowing more about the many unique and unconventional options available to you may just help satisfy you completely. Need someone to help you find the right recipe for a successful real estate transaction? Let John Alaniva show you the proof in his pudding.

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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 Laura Martinez of Capital Farm Credit, Lindsey Kolmeier of Premier Nationwide Lending, and Juli Coen 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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