mortgage

Non-Realty Items Addendum: Friend or Foe?

July 24, 2014 by Jennifer Guidry Leave a Comment

The Non-Realty Items Addendum Can Mess With Your Home Loan

[Editor’s note: Today, we’ve brought on Jennifer Guidry, a local lender, to talk about the Non-Realty Items Addendum, which we’ve discussed before in “Does that come with the house?,” and how it can affect your loan when buying a home. While it is a common form and it used to be seen as no big deal, these days it can cause issues for buyers during the process of underwriting and closing your home loan.]

So called “non-realty items” (which can be just about anything – we’ve seen furniture, boats, jet skis…you name it!) that find their way onto the Non-Realty Items Addendum, if they are anything more than what is customary (like a refrigerator), are likely to be viewed as an inducement to purchase…which in the lending world, is a major no-no. Mortgage companies finance homes, not personal property.

FHA loans require items on a Non-Realty Addendum (that are not customary for the area) to be given a value by the appraiser and then subtracted from either the appraised value of the home or the purchase price, whichever is lower. This will effect a borrower’s cash amount needed to close.

VA and conventional loans require the appraiser to estimate the item’s value and then the lender has to reduce the amount of the sales price by that value. If the amendment reflects that the items are conveyed at no value, then the appraiser must state that these items conveyed are customary and have no value. Again, this is only on customary items for our area – in the San Antonio area, a refrigerator is about all that is considered customary.

So, what do you do to address the buyer’s and seller’s needs while not messing up the loan? A separate bill of sale should be sufficient. Keep it off of the contract and leave the Non-Realty Items Addendum out of the picture.

image courtesy of Randy Heinitz

Third Party Financing Addendum for Credit Approval – Real Estate Contracts

April 28, 2014 by khproperties 11 Comments

The Third Party Financing Addendum for Credit Approval

The Third Party Financing Addendum has been updated since this post was written, see the current version of the form in our post about the Third Party Financing Addendum for more information about the changes.

Since our series on the listing agreement proved so successful, we thought we’d take a look at some more real estate contract forms over the coming weeks. Today, we’ll be looking at the Third Party Financing Addendum for Credit Approval. This addendum is required as part of a purchase contract when it involves a loan. The form outlines what the buyer will be seeking in terms of financing and lays out some important timelines and negotiating points. The cloud scanning tools are really crucial to secure information.

The preamble to the Third Party Financing Addendum for Credit Approval sets the tone for financing. It states that the buyer will promptly apply for financing as described on the addendum and provide all information to the lender needed to make the loan happen. It defines “credit approval” as the point at which 1) the terms of the loan as described on the addendum are available (ie, the buyer can get a loan with those terms) and 2) the lender is willing to approve the buyer for such a loan after looking at the buyer’s income, assets, and credit.

If the buyer cannot obtain credit approval, they must give notice within the time period entered into the blank space in this paragraph. This timeframe is very important in the contract and is negotiable. It is counted in days – so if a buyer can not get credit approval within X days and notifies the seller within that number of days, the buyer has a way out of the contract and their earnest money will be returned to them. This is one of several ways a buyer may exit a contract without penalty.

The last two sentences in this paragraph are in bold for a reason, they are crucial to the understanding of the paragraph and not paying attention to them could cost a buyer big time. They read as follows:

If Buyer does not give such notice within the time required, this contract will no longer be subject to Credit Approval. Time is of the essence for this paragraph and strict compliance with the time for performance is required.

Basically, if the buyer doesn’t notify the seller that they cannot obtain financing, they waive the credit approval requirement and now are not able to get out of the contract for this reason. This can be devastating to a buyer if they miss this timeline and cannot get financing as they can still legally be on the hook to buy the house. This is where lawsuits can occur quickly.

A buyer will want the timeframe to be as long as possible, so that they can retain a way out of the contract. A seller will want it as short as possible to remove the possibility of financing not happening at the very end of the closing. Depending on which party you are to the contract, you’ll want to negotiate the most favorable terms.

Following this paragraph is a “note” that clears up the fact that credit approval does not include approval of lender’s underwriting requirements.

The next five sections (A through E) cover the different types of loans.

A. Conventional Financing

This section covers conventional financing and has a section for both a first and second mortgage. As with any blank on a contract, these sections are negotiable. Each paragraph lays out the terms of the loan; the amount borrowed, how long the long will be (30 year, 15 year, etc.), the interest rate (a not to exceed amount), how many years that interest rate will be for (this can vary if it is an adjustable rate mortgage), and what the origination charges will be. Origination charges are the amount the lender charges to make the loan and it is expressed as a percentage of the loan amount (ie, if you’re borrowing $500,000 and have a 1% origination charge inserted, the lender can not charge you more than $5,000 – if they did, you would potentially have a way out of the contract as the lender could not meet those requirements as laid out in the Third Party Financing Addendum).

B. Texas Veterans Loan

Probably the simplest of the paragraphs as it only requires the amount of the loan and how many years the loan in for. The Texas Veterans Land Board determines the interest rate.

C. FHA Insured Financing

This section, like the others gets the terms of the loan spelled out and includes a section for what type of FHA loan will be sought out. There are several types of FHA loans, the two most common being a 203(b), which is a pretty straightforward loan, and the 203(k), which is known as a renovation loan.

The FHA section of the Third Party Financing Addendum for Credit Approval does have extra verbiage however, that is very important. FHA requires that a house must appraise for the value of the purchase price in the contract or the buyer may terminate the contract with no penalty and receive their earnest money back. The buyer may proceed with the purchase, but they will have to make up the difference between the appraised value and the contract price. It is very important to note this appraisal requirement in a contract as if the home doesn’t appraise and there is an FHA loan involved, typically, the deal with fall apart (most buyers don’t have the money laying around to make up the difference and most sellers don’t want to sell for less).

It’s important to note that the blank in this paragraph requires the purchase price (as written into the contract) and not the loan amount. We’ve been seeing a lot of contracts lately with just the loan amount in that section. This means that the home only has to appraise for the loan amount and not the agreed upon sales price.

D. VA Guaranteed Financing

Again, the section starts off with determining the terms of the loan that the buyer is seeking. It also has a notice similar to the FHA financing section about the requirement of the home appraising for the purchase price, with the protection of the buyer receiving their earnest money back if it does not appraise for that price or being able to pay the difference themselves.

E. USDA Guaranteed Financing

Similar to the other paragraphs, with the loan terms being set forth.

It should be noted that these loan terms (in any of the sections) are what the buyer is attempting to get and they are negotiable. From a buyer’s perspective, it pays to have unrealistic numbers in these sections, as it would give them an easy out (although a sharp listing agent would catch that immediately). From a seller’s perspective, the loan terms should be reasonably obtainable, so that the buyer can get the loan, and therefore would lack the potential exit and return of earnest money.

Although only a two page document, the Third Party Financing Addendum for Credit Approval is a very powerful tool. In multiple offer situations, the terms a buyer puts on this form could easily make or break a deal. With it, the buyer can find a way to terminate the contract and keep their earnest money if they cannot find credit approval under the terms they’ve written into the form, so it’s important for sellers to pay attention to the numbers, particularly the number of days the buyer has to obtain credit approval as written in the first paragraph. As time is of the essence in real estate contracts, it is important to know your timelines and stay on top of all parties to make sure everyone is meeting their obligations. Your agent will help you keep these deadlines, but you should be prepared and ready to meet them to keep things running smoothly.

image courtesy of Rob Lee

Mortgages: Lessons Learned

September 6, 2013 by khproperties Leave a Comment

Lessons I learned about mortgages that help my clients.

The importance of utilizing efficient and professional mortgage brokers is critical to facilitate a less stressful real estate transaction. Many banking experts have written various articles on the same. If you wish to know, her comment is here on various banking accounts for mortgages and other details. 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 from Firstxtra. 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 a Mortgage Broker Liverpool who considers 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

Appraisals: The Good, The Bad and The Ugly

July 22, 2012 by khproperties 1 Comment

Now that we’ve covered the basics of appraisals, it’s time to talk about some of the positive and negative aspects of appraisals. Appraisals, without a doubt, are a good idea. Without them, the potential for mortgage fraud would be rampant and housing prices would more than likely inflate at a rate that the average consumer would never be able to keep up with. Appraisals can be frustrating for both buyers and sellers though. When an appraisal comes in below value (less than the sales price), it can have serious consequences for both parties. There are ways to deal with low appraisals though and your agent will help guide you through your options when it does happen during a transaction that you’re involved in.

The Positive Side of Appraisals

Think of appraisers as a disinterested third-party. They have nothing to gain or lose (they get paid either way) for coming up with a certain value on a home. Their main function is to be sure that the sellers, buyers, and agents are not colluding (or acting alone) to take more money for the house than it’s worth. The lender is giving the buyer a lot of money and they are taking every precaution to ensure that they don’t lose money on the transaction (like any business, their goal is to make money).

Before the housing crisis, appraisers were much less restricted than they are today. Sadly, there were some appraisers that took advantage of this and they were a piece of the puzzle that helped decimate the housing market.

The Negative Side of Appraisals

After the housing market crash, appraisers took a lot of heat for overvaluing properties nationwide (and especially in some of the more famous crash-markets such as California, Florida, and Nevada). By overvaluing properties, lenders were able to justify larger and larger prices for homes and as housing prices continued to inflate, the bubble was just waiting to burst.

Since the crash, appraisers have had to perform under tighter standards than they were used to. This has in many cases has had a negative impact on appraisals. Homes that should appraise (or meet value) are not appraising and buyers, sellers, and agents are at times frustrated and at a loss. It’s not uncommon for an appraisal to scuttle the sale of a home these days.

The basic reasoning is that lenders have placed a lot of blame on the appraisers and make them more responsible for “erroneous” appraisals. If they overvalue a property, they risk losing the banks business if the home were to foreclose and be found to be valued at a lesser price. This sets up a dangerous situation where appraisers are afraid to value a property too high, so they may just undervalue the property for safety’s sake.

If you’re buying a home for $100,000 and the appraisal says the home is only worth $90,000, it’s up to you and seller to come to terms (lowering the sales price) or you to make up the $10,000 difference…or back out of the deal. None of these are good situations, so you can see how an undervalue appraisal is something most people don’t want to see.

The problem gets worse when an agent receives an appraisal and can see clearly that the appraiser knows little about the area – we’ve seen houses that were undervalued by as much as $100,000 in our office. You can take the help of this useful reference to find the best painting that can make your house look stunning. Looking through one recently, it was clear that the comparable sales the appraiser was using were horrible choices (the idea behind comparable sales is to find homes that sold recently that are comparable in size, use, and style (ie, you wouldn’t compare a two bedroom home with vinyl siding to a fifteen bedroom mega-mansion)). Although you can try and protest an appraisers ruling, it is very rare to see it make any difference.

When these situations arise, it can be very frustrating for all parties involved and it’ll definitely help you to have a good agent at this point, as the contract is now in danger of falling apart (no loan more often than not means no purchase). Some remedies can be performed to try and get both parties back to the negotiating table, but it can be tough. I know several agents who have kept a transaction alive during this period, but it takes experience and determination, so be prepared.

image courtesy of Images_of_Money

Appraisals: What Are They and Why Do I Need One?

July 20, 2012 by khproperties Leave a Comment

If you’re buying a home, you’re going to hear about appraisals more than a few times. Knowing what they are and why you need them is important, as is knowing some of the pros and cons of appraisals. As long as you’re getting a loan in order to buy the house, you’re going to have one conducted on the home (cash buyers do not have to get an appraisal, but it can still be useful). Appraisals have been a very big issue with transactions lately, so with that in mind, we thought we’d take some time to talk about them and what they mean to you…as a buyer and as a seller. For this first post, let’s just limit ourselves to what appraisals are and why they are necessary. Please note, when we use the word appraisal, we are not talking about what many people call “tax appraisals” or “market value” which we cover in depth in the post referenced.

What is an Appraisal?

An appraisal is defined by Merriam-Webster as:

: an act or instance of appraising; especially : a valuation of property by the estimate of an authorized person

In the case of homes, a licensed appraiser is called on by the lender to value the home. This appraisal is then used by the bank to justify the cost of the home and back up their findings that determine whether or not they will make the loan to the buyer. Banks use it to ensure that their risk in making the loan is mitigated by the appraisal value of the home.

The actual appraisal process involves taking local comparable sales data and area conditions into consideration in order to come up with an appraised value. This is similar to the process your real estate agent uses when determining the fair market value of your home when you put it on the market, but involves additional factors and considerations and must be done in compliance with appraiser licensing laws.

Why Do Banks Require Appraisals?

If you’re buying a home that involves a mortgage, you will need an appraisal. The appraisal is the bank’s proof that the home is really worth what you’ve agreed to pay for it. The idea is to give them the comfort of knowing that the home is worth that much and they’re not getting scammed or ripped off.

Banks will require an appraisal and if it comes in lower than the price you’ve agreed to pay for the home, the bank will not lend you more than the appraised value. For instance, if you’ve agreed to buy a house for $200,000 and it appraises for $189,000, the bank will only make the loan based on the $189,000 figure, so it would be up to you as the buyer to come up with the additional $11,000 in cash on your own or back out of the sale. This can be a huge issue as most buyers are not prepared to come up with that much cash in the transaction (that’s why they’re getting a loan). The idea of appraisals is safety, security, and fair value for all involved, but it is there to protect the bank’s asset and assist them in evaluating the risk associated with making a loan.

Recently, appraisals have become a hot button issue, as appraisers are being much tighter with their values – this can be both a good thing and a bad thing, but much of it results from the housing market crash.

image courtesy of Images_of_Money

Seller Financing – a new win-win?

September 15, 2011 by khproperties Leave a Comment

If you own your home free and clear, or have inherited one with no mortgage attached, congratulations.

You are now privy to a unique world of options when you go to sell your property. In a way that traditional sellers with existing mortgages are not able, you have now opened the door for yourself to be able to offer a wide variety of financing methods, including seller financing, to a broader field of potential buyers, and even make a lot more money.

What is seller financing?

Seller financing means that a buyer agrees to purchase a property from a seller. Instead of going through a bank to finance the loan, the seller becomes the lien holder and collects payments from the buyer directly until the balance of the loan is paid off. As the complexity involved in this can catalyze hoaxes, it is advised to learn more from ironfx scam and related articles. Consulting with experienced people is a good choice too.

Why consider seller financing?

Bigger buyer pool – Lending regulations have tightened in recent years. Maybe a buyer has a non-traditional income source, or shaky credit from past issues but large assets. They may not qualify for traditional financing but still have the means and interest in buying a house. They may be looking for creative/different ways of owning a home. Why not capture them when no one else can?

Closed is Closed – Once the property closes, you, the seller, are no longer responsible for maintenance, taxes, or repairs. Of course you want to make sure that items like taxes and insurance are being paid. But those payments aren’t coming out of your pockets any longer.

Added Control – In a way, you’re doing a favor for the buyer. This means that you have a lot more control in setting the terms of the deal. You can help pick the interest rate, the terms of the loan, and even the sales price (appraisal not required). Obviously you do not want to engage in predatory lending, but you can still structure an agreement in a way that works best for your financial needs.

Added Income from Interest – As the mortgagor, you the seller, would not only set an interest rate for the buyer’s loan with you, but you would reap the benefit of the interest payments ON TOP of the sales price. On a fixed rate mortgage, payments for the first few years are almost entirely interest.

Example: On a $200,000 loan at 5.5%, the total amount paid each month for principle and interest would be $1,135.58. Over the course of the first year, the total amount paid by the buyer would be $13,626.96.

Of this, $2,694.18 would be applied towards reducing the principal balance owed.

That means that the remaining $10,932.76 would be money in your pocket as interest. And that’s just the first year.

Substantial Downpayment – Many seller financing deals are established under the notion that the seller is taking a big risk selling to someone that couldn’t get financing any other way. For this reason, it is not uncommon to have buyers provide a large downpayment. 20, 30, even 50% payment up front is a great incentive. Not only do you get a large chunk of money initially (to help offset expenses, or use as a downpayment on a new house for yourself, etc.), but this money is yours to keep regardless of what happens.

Resale in Case of Default – Even if you’ve set up the financing carefully, sometimes loan default is inevitable. But if the buyer stops paying, the situation can still have a happy ending. Not only would you have the downpayment and interest already collected, but you could also foreclose on the property and resell it. And maybe even re-sell it at full price.

So, if you are in a unique position in regards to your real estate, there are some powerful reasons to at least consider this option when selling property.

Of course there are numerous serious pitfalls to this type of transaction as well. Anyone considering a lease purchase is encouraged to consult with a real estate attorney and tax professional for a full analysis of risks before entering into an agreement.

Readers are encouraged to consult with an attorney before entering into any real estate contract, particularly one involving seller financing. This article is designed to address only a few of the many complex issues. Suggestions made are not intended as legal advice.

image courtesy of Robbie Biller