Want to Test Your Home Buying IQ?

Want to Test Your Home Buying IQ?

If you’re thinking about buying a home, you’ve probably received your share of advice from family and friends. Add to that the constant stream of TV shows, news segments, and social media posts that over-simplify the home buying process for easy entertainment.

With so much information to sift through, it can be tough to distinguish fact from fiction. That’s why we’re revealing the truth behind some of the most common home buyer myths and misconceptions.

Buying a home is a big decision, but it doesn’t have to be a scary one. If you arm yourself with knowledge and a qualified team of support professionals, you’ll be well equipped to make the right choices for your family and financial future.

DON’T FALL FOR THESE COMMON HOME BUYER MYTHS

Myth #1: You need a 20% down payment.

Plenty of buyers are purchasing homes with down payments that are much less than 20% of the total cost of the property. Today, you can buy a home with as little as 3-5% down.

There are multiple programs out there that allow you to have a lower down payment, and a lender or mortgage broker can talk you through which option is the best for you. Since you’re putting less money down, you’re a riskier borrower to your lender than people who put down a full 20%. Because of this, you will most likely need to pay mortgage insurance as part of your monthly payment.

Myth #2: Real estate agents are expensive.

Your agent is with you every step of the way throughout your home buying journey, and he or she spends countless hours working on your behalf. It sounds like having an agent is expensive, right? Well, not for you. Buyers usually don’t pay a real estate agent’s commission. Your agent’s fee is paid for at closing by the seller of the home you’re buying.1The seller knows to factor this cost into the property’s total purchase price.

Myth #3: Don’t call a real estate agent until you’re ready to buy.

The earlier you bring in an agent to help with the purchasing process, the better. Even if you’re in the very early stages of casually browsing Zillow, a real estate professional can be a huge help.

They can create a search for you in the Multiple Listing Service (MLS), so you get notifications for every house that meets your criteria as soon as it hits the market. The MLS is typically more up-to-date than popular home search sites like Zillow and Trulia. Setting up a search a few months before you’re considering buying gives you a good idea of what’s out there in your town that’s in your budget. Reviewing the MLS and speaking with an agent as soon as possible can help you set realistic expectations for when you actually start the house hunting process.

Myth #4: Fixer-uppers are more budget friendly.

We’ve all watched the shows on HGTV that encourage people to go after fixer-uppers because they’re more affordable and allow buyers to eventually renovate the home to include everything on their wishlist. But, this isn’t always the case.

Sometimes, homes that need a lot of work also require a lot of money. Big renovations, like add-ons, a total kitchen remodel, or installing a pool, take a lot longer than it looks on TV. If you’re really interested in a fixer-upper, ask your agent to show you a mix of newer homes and older homes. If you fall in love with an older home that needs a lot of work, get some quotes from contractors before you buy so you know the real cost of the renovations and see if you can work them into your budget.

Myth #5: Your only upfront cost is your down payment.

Your down payment is big, but it isn’t the only money you’ll spend during the home buying process. At closing, you’ll pay your down payment, but you’ll also bring closing costs to the table. Closing costs are typically anywhere from 2-4% of the total purchase price of the home.2This amount includes the cost for items like homeowners insurance, title fees, and more.

You’ll also need to pay for an inspection before closing, which usually costs a few hundred dollars. This price will be higher or lower based on the size of your new property. Your lender will also require an appraisal. An appraiser will come in and inspect the home to determine how much it’s worth. Depending on your lender, you may have to pay this when the appraisal is conducted or it might be rolled into your closing costs.

Myth #6: You need a high credit score to buy a house.

You don’t need perfect credit to buy the perfect home. There are loans out there that buyers with lower credit scores can qualify for. These are good options for people who have had credit issues in the past, but some of them come with additional fees you will need to pay. Speak to a few local lenders or mortgage brokers to talk through which options might be best for you.

Myth #7: You can’t qualify for a mortgage if you’re still paying off student loans.

While some buyers may feel more comfortable paying off their existing debts before taking the leap into homeownership, it’s not a requirement. When you’re applying for a mortgage, the lender takes a close look at your debt-to-income ratio.3 If you want to calculate this on your own, add up all of your monthly debt payments and divide those by your monthly income. When you’re lender does this, they’re trying to make sure that you will be able to afford your monthly mortgage payments along with your other existing payments. If your income is high enough to allow you to make all of these payments each month, having a student loan will most likely not stop you from getting a mortgage.

Myth #8: You should base your budget on what your lender approves.

How much house you qualify for and how much you can afford are two totally different numbers. When you prequalify for a mortgage, your lender will look at your income, debt, assets, credit score, and financial history to determine how much money you might qualify for.4 For some people, this number might be much higher than you thought because lenders tend to approve for the highest amount they think you can afford. But that doesn’t mean that’s how much you should borrow.

Instead, figure out how much house you can actually afford. An online mortgage calculatorcan be a good first step in determining this number. We recommend thinking about what you want your monthly payment to be as a starting point. And remember to include your principal, interest, taxes, and, insurance. You should also think about ownership expenses that aren’t part of your monthly payment, like HOA dues and maintenance.

Myth #9: It’s all about location.

You’ve heard the phrase. Location, location, location is basically the real estate industry’s motto, but we’ll let you in on a little known secret: It’s not always true. Yes, location is great to consider when it comes to school districts and commute times, but you also need to think about how the home will function for you and/or your family’s lifestyle. If a family of five is choosing between a one bedroom condo in the bustling city center and a 4-bedroom home out in the suburbs, the latter is probably the best, most functional choice for them. Also, by buying in a less sought after neighborhood, your property taxes will most likely be much lower!

Obviously, you might still want to choose an area with great resale potential, and this is something that your agent can speak to you about. They’re an expert in your city and are constantly monitoring buying and selling trends.

Myth #10: If you look hard enough, you’ll find a home that checks every box on your wishlist.

You’ve seen that famous house hunting show. And while we have our suspicions about how real it is, the one thing they get right is that almost every buyer needs to compromise on something. Yes, the perfect house that meets every item on your wishlist is probably out there, but it’s also probably double or triple your budget.

A long wishlist can be a great starting point for figuring out what you want and don’t want, but we recommend narrowing that wishlist down to the top five things that are important to you in order of priority. We also recommend noting on your wishlist what your absolute deal breakers are, like “must have a yard for our dog,” and noting what you can live without, like “heated bathroom floors.”

This is a great list to discuss when you first start talking to an agent. A good real estate agent will be able to look at your list and find properties that might work for you. By coming to that first meeting with realistic expectations and knowledge about home buying rather than a bunch of myths heard here and there, you’ll be able to start the process off on the right foot and be in your new house in no time.

WE’RE HERE TO HELP

Whether you’re a first-time buyer or a seasoned homeowner, there’s no reason to go through the home buying process without an advocate on your side. We’re here to answer your questions and do the hard work for you, so you can spend your time dreaming about your new home. Call us today to schedule a free, no-obligation consultation.

Get a FREE copy of our Home Buyer’s Guide to Getting Mortgage Ready

 

Now that we’ve cleared up these common homebuyer myths, find out if you know the steps you should take to prepare financially before you apply for a mortgage. Contact us to request a complimentary copy of our “Home Buyer’s Guide to Getting Mortgage Ready.”

 

Note: Mortgage Ready Guides are part of the March 2018 MVP.

Download US Version at: https://dashboard.thepaperlessagent.com/download/march-2018-digital-marketing-campaign-report/

Sources:

  1. Realtor.com – https://www.realtor.com/advice/finance/realtor-fees-closing-costs/
  1. The Balance –  https://www.thebalance.com/buyer-s-closing-costs-1798422
  2. StudentLoanHero – https://studentloanhero.com/featured/student-loans-buying-house/
  1. Zillow – https://www.zillow.com/mortgage-learning/pre-qualification-vs-pre-approval/

5 Ways to Get a Larger Mortgage

 Learn how to get a larger mortgage and buy a house you thought you couldn’t afford.
 
GoBankingRates.com | The process to buy a home is exciting but takes time, research and money. And larger mortgages or mortgages with better rates usually require a high credit score and high income, too. If your credit history or income isn’t up to what most lenders deem acceptable for a home loan, however, it’s time to explore your options.
 

Rebuilding your credit is one way to improve your chances of qualifying for a large mortgage loan, but it can take some time to accomplish. There are several easier alternatives to help you figure out how to buy a house with a large mortgage when you don’t meet certain mortgage requirements.

happy couple meeting real estate
DragonImages / iStock.com

How to Get a Larger Mortgage Even If Your Income Is Low

Before you even start the preapproval for mortgage process, use a mortgage qualification calculator to figure out how much you can afford. Many lenders advise not to spend more than 28 percent of your income on your mortgage.

Here are five ways you can get a large mortgage with low income:

1. Increase Your Qualifying Income

When underwriters look at income, they take a pretty conservative stance. For example, income from your part-time job might not be considered unless you have a history of working more than one job. And if you deduct unreimbursed business expenses on a Schedule 2106, your lender will probably also deduct them from your qualifying income.

However, sometimes the rules work in your favor. Per the Equal Opportunity Act Amendments of 1976, you can use income that you receive from public assistance programs to qualify for a loan if the income will likely continue for three years or more.

Here are other sources of income that you might not have considered:

  • Alimony or child support
  • Automobile allowance
  • Boarder income
  • Capital gains income
  • Disability income — long term
  • Employment offers or contracts
  • Employment-related assets as qualifying income
  • Foreign income
  • Foster-care income
  • Interest and dividends income
  • Mortgage credit certificates
  • Mortgage differential payments income
  • Non-occupant borrower income
  • Notes receivable income
  • Public assistance income
  • Retirement, government annuity and pension income
  • Royalty payment income
  • Social Security income
  • Temporary leave income
  • Tip income
  • Trust income
  • Unemployment benefits income
  • VA benefits income
woman signing paperwork filling document
BernardaSv / iStock.com

2. Choose a Different Mortgage

Some mortgages have more forgiving guidelines than others when it comes to income. VA loans, for example, calculate income two ways: the standard debt-to-income method and the “residual income” method, which is much more generous.

For people with lower incomes, a worthwhile option is Freddie Mac’s Home Possible program. To qualify, you must have a yearly income that’s either equivalent to or less than the area median income for the census tract in which the property is located. The only exception to this rule is if the property is in a designated underserved or high-cost area.

The Home Possible rules state that if the property is in a high-cost area, your annual income can exceed the AMI within certain limits. If the property is in an underserved area, the AMI requirements don’t apply at all.

An FHA loan might be another option to buy your dream home if you have a history of paying your bills on time, even if you experienced a period of financial hardship. FHA loan qualifications state that you might still be able to qualify for a loan, regardless of isolated cases of late or slow payments.

happy young couple making deal with realtor
shironosov / iStock.com

3. Bring in a Co-Borrower

If you’re still wondering how to get approved for a higher mortgage loan, you can bring in a co-borrower — that extra income and equity will likely enable you to qualify for your home. Co-borrowers can be occupants or non-occupants. An occupying co-borrower lives in the home with you. A non-occupant co-borrower is more like a co-signer. This person doesn’t live in the house but is responsible for the payments.

Lenders are more likely to put restrictions on non-occupant co-borrower loans, such as requiring a higher down payment. Government loans typically come with fewer restrictions.

For manually underwritten loans, the income from a non-occupant co-borrower might be considered as acceptable qualifying income. This income can offset certain weaknesses that might be in the occupant borrower’s loan application, such as limited financial reserves or limited credit history.

woman working on computer and writing down her thoughts
DragonImages / iStock.com

4. Get a Subprime Mortgage

The term “subprime mortgage” has a negative connotation because of the housing bubble and financial crisis it’s often associated with, but subprime mortgages can actually be a gateway to home ownership for some people.

A subprime mortgage is a home loan with higher interest rates than their prime mortgage counterparts. The higher interest rates are in place to offset the risk of loan default by subprime mortgage borrowers who are risky customers because of poor credit. These mortgages can be either fixed or adjustable.

The benefit of a subprime mortgage is that people with poor credit don’t have to wait as long to own a home. They can repair their credit by paying their mortgage each month, rather than waiting years to repair their credit and then buy a home.

The obvious disadvantage, besides higher rates, is that closing costs and fees associated with home loans will be usually higher for subprime borrowers. Although credit scorerequirements aren’t as stringent for subprime loans, borrowers must still show proof that they can afford the mortgage payments each month.

 
credit report on a digital tablet with paperwork.
Courtney Keating / iStock.com

5. Strengthen Your Application

It might surprise you to know that income is actually one of the least important underwriting criteria. If you don’t believe it, try calling a few lenders. Tell them you make $1 million a year, but have a 500 FICO score and only 5 percent to put down. You will not get far.

However, people with low-to-moderate incomes get mortgages all the time, especially when they have excellent credit, a decent down payment and money in the bank. Some of the first few steps to buying a house are to establish great credit and substantial savings. It helps to have an emergency fund — enough in the bank to cover two to six months’ worth of bills — and a credit score of 720 or better.

Other compensating factors include low debt, additional savings, a secure job with excellent prospects and documenting extra “unofficial” income. Even if you know you can’t “officially” count some kinds of income, it’s smart to document its existence anyway.

Thank you to Barri Segal for writing this article.

The Home Equity Playbook


Home Equity Playbook

What is Home Equity?

Home equity seems to be a very simple calculation — the total amount of mortgages owed subtracted from the current market value of a home. Here is a simple example:

Current Home Market Value       $325,000

Existing Mortgage                       $225,000

Homeowner Equity                     $100,000

One side of the equation is well defined, and it is found on the monthly mortgage statement, the loan balance. The other side is less obvious — the current market value of the property.

As a homeowner, your down payment purchases your initial equity, and your monthly (or additional) principal payments increase your equity. In strong real estate markets and in-demand locations, equity can increase quite rapidly as the property value increases, but the inverse can also happen — too much available inventory and market down-cycles can lead to falling home values and a reduction in homeowner equity.

It can be difficult to put an accurate value on something that you have emotional and monetary vesting in. It is safe to say that most people think their home is worth more than then it is.

Homeowners can make savvy assessments about their home’s current market value by following the sales of similar properties in the neighborhood, but should stay away from websites such as Zillow and Trulia, which provide inaccurate and outdated estimates. The most accurate measurement requires a comparative market analysis from a real estate professional or having the home professionally appraised. But, the bottom line — your home is worth as much as someone is willing to pay for it.

Creating Value is in Your Hands

Maintaining the condition of a home is vitally important to retaining and increasing value. Homes are judged against their peers: how they compare to similar homes in the neighborhood. Another way to retain value is to not over upgrade, since it is rare to ever recoup the money spent if you exceed neighborhood value. Keep up the landscaping and do the little things to add curb appeal.

Putting Home Equity to Work

Home equity represents the largest single asset of millions of people, and because it represents so much of an individual’s net worth, it must be treated with respect. Home equity is not a liquid asset until a property is sold, or it is borrowed against.

There are two types of loans that tap into homeowner equity as collateral.

Home Equity Loans

Many home equity plans set a fixed period during which the person can borrow money, such as 10 years. At the end of this “draw period,” the person may be allowed to renew the credit line. If the plan does not allow renewals, the homeowner will not be able to borrow additional money once the period has ended. Some plans may call for payment in full of any outstanding balance at the end of the period. Others may allow repayment over a fixed period, for example, of 10 years.

A home equity loan, sometimes called a second mortgage, usually has a fixed rate and a set time to pay it back, generally with equal monthly payments.

Home Equity Line of Credit

A home equity line of credit is similar to a credit card. The lender sets a maximum amount you can borrow, and you can draw money as you need it, though many home equity lines of credit require an initial draw. The interest rate varies daily, and is usually prime plus a set number, but the required payment is usually interest only. Once the loan has been paid down, the payment is reduced, and it can be paid off and initiated as many times as a homeowner requires.

How Much Equity can be Accessed?

Since the financial institution is lending money and using a home as collateral, they will not lend 100% of the home’s equity. The bank does not want to take the risk that if the house price drops, they would be carrying a loan for more than its market value. Therefore, most banks will allow a qualified homeowner to borrow approximately 80% of their equity.

It’s Important to Use Your Home Equity Wisely

Because it is likely the biggest asset most people have, losing your home equity is hard to overcome. It must be used in prudent ways, and the payments against the loan must be affordable. Using equity money to make the loan payment is only acceptable for a short-term solution.

There are number of good reasons to use money from a home equity loan… and some really bad ones. First, let’s cover smart uses.

  1. Invest in Your Home

The best way to use the money is create more equity in the home. Among the very best returns on your investment (ROI) include kitchen and bathroom remodels, adding square footage or an extra bath, enhancing curb appeal and repairing/keeping the existing structure sound. Making prudent investments in your home is a wonderful win-win: you enjoy the upgrades and the repairs can add value to the home.

  1. Invest in your Children’s Education

Using your home equity to finance a child’s higher education may be the greatest payoff of all. Not only is the rate much lower than a student loan, it is an investment in the child’s future.

  1. Supplement Retirement Needs

Older homeowners spent their working lives paying down their mortgage. At retirement, when monthly income is reduced, a home equity loan could pay for a dream vacation or an unexpected major expense.

  1. Augment the Impending Sale of a Home

If you’re planning to sell soon, a home equity line of credit may be the best way to finance improvements, and you can pay it off entirely when you sell. Investing wisely on upgrades and repairs may even reap a profit on your investment.

Here are some examples of some not very wise choices.

Adding luxury amenities like a swimming pool, a hot spa, lavish landscaping, expensive appliances and exotic countertops and flooring rarely pay off.

Purchasing a car or boat or most any personal luxury items is a poor use of the funds, since these items quickly depreciate in value.

Also stay away from using money on risk-heavy investments. Financing stock purchases, start-up businesses and paying routine bills is not financially smart. If you cannot afford to purchase those items with available funds, using equity from your home means they should not be in your budget.

You should treat a home equity loan as an investment and not as extra cash when making financial decisions. If your intended use of the money doesn’t pay you back in some way, it’s not the best use of your valuable equity.

We Are Happy to Assist You

If you would like an assessment of the market value of your home and the current equity you can access, please give us a call for a comparative market analysis.

Tips for Short Sale Success: Do Not Forget the Buyer

Short sale success does not stop at educating the seller as to their loss of mitigation options and then successfully negotiating with the seller’s bank to accept a short payoff. Today’s complex real estate market warrants more… Educating the buyer regarding the proper short sale procedures.

Educating the buyer and setting the correct expectations is imperative to a successful short sale transaction. Nothing is moreShort Sale discouraging than successfully negotiating a short sale only to have the buyers walk from or not be able to close the transaction. The following are some precautionary and educational items to consider which would avoid such buyer fallout.

Patience is a Virtue
Not every buyer is a short sale buyer. However, one important characteristic a short sale buyer must have is patience. Setting the proper expectations regarding the time frame of a short sale plays a key role in bringing the short sale to the closing table. If a buyer is not willing to stay in the transaction for at least 90 days, they are not a short sale buyer. Of course we cannot speak for every circumstance. But, in most cases, the short sale process takes 60-90 days to complete. For their patience, the buyer will likely earn instant equity. The average short sale, according to the Realty Trac report dated a couple years ago, sells for 79% of market value. To that end, a buyer will earn “patience equity” (a term coined by Steve Harney).

Work with a Lender that Understands the Short Sale Process
The pre-approval process should be the same whether the buyer is being pre- approved to buy a short sale or pre-approved to buy a non-distressed property. This seems like simple advice doesn’t it? However, from our vast experience negotiating short sales, we have found that 35% of successfully negotiated short sales do not reach the closing table because the buyers financing falls through. We must educate buyers to work with the proper lender who will not only walk them through the mortgage process, but also understands the short sale process. Too many mortgage applications start at the time of short sale approval. Some short sale approvals expire in 10- 15 days from date of issue. In many cases, that is not enough time for a lender to underwrite the file, order title, order appraisal and fund the loan.

A proper pre-approved short sale buyer would be one who is brought through a complete underwriting analysis prior to the short sale offer. This includes full income analysis, full asset analysis and full credit analysis. The ideal lender is one who completes the underwriting procedure and has a credit decision pending clear title and appraisal. The lender should also help in keeping the buyer engaged throughout the process. In a lengthy short sale negotiation, the lender should be proactive in keeping the loan file up to date with recent paystubs, asset documentation etc. This will ensure the transaction closes on time and without extensions.

Complete Inspections Prior to the Short Sale Approval
This is a confrontational subject but each buyer should be educated to understand that in most cases any major deficiency regarding the condition of the property will not be cured prior to closing. However, in many instances, if the deficiencies are known prior to the start of the short sale negotiation, the short selling bank will be more willing to except a sale price that is discounted deeper to the current market value. It is a challenging task to go back to the bank and ask for a lower sales price when a home inspection that was done after short sale approval showed major deficiencies.

In addition to the home inspection, the lender appraisal can be done prior to the short sale approval. In most circumstances where the short selling bank’s broker price opinion shows a property value that is much higher than the buyer offer, the lender appraisal can be used to negotiate the value.

We should educate buyers as to the pros and cons of completing the inspections prior to short sale approval. We understand there is a monetary commitment that would have to be made. Having said that, having the inspections done can save allot of aggravation to the seller and buyer later in the process.

In closing, the above are just a few items to consider when educating the buyer regarding the proper short sale procedures. If we remember to keep the buyer engaged and walk them through the process every step of the way, we will ensure the buyer earns their “patience equity” and the short sale transaction closes.

By Christopher Reale Director of Short Sale Operations at Lepizzera and Laprocina Title and Escrow Services, Rhode Island. And thank you KCM Crew!!!