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While many experienced real estate agents have a general understanding of the mortgage approval process, there are a few important details that frequently get overlooked which may cause a purchase to be delayed or denied.
New regulation, updated disclosures, appraisal guidelines, mortgage rate pricing premiums, credit score, secondary approval layering, rescission deadlines, property type, HOA insurance requirements, title and property flip rules are just a few of the daily changes that can have a serious impact on a borrower’s home loan financing.
With today’s volatile lending environment, it’s obviously important for home buyers to get a full loan approval which clearly defines all contingencies that pertain to each unique home buyer’s scenario prior to spending any time looking at new homes with an agent.
Either way, we’ve listed a few of the top things your agent should keep in mind while showing you new properties:
Property Type –
Need to sell one home before moving into another? Is a property considered a second home if it’s in the same city? What if I’m buying a home for my children to live in, it is still considered an investment property?
These are just a few of several possible residence related questions that should be addressed by your agent and loan officer at the initial loan application.
Mortgage Rates are typically locked for a 30 day period, and one of the only ways to get a new rate is to switch mortgage lenders. Rates also have certain adjustments for property / residence type, credit score and down payment which could have a big impact on monthly payments and therefore approvals.
A 1% increase in rate could literally mean the difference between an approval or denial.
Underwriters watch the news as well. Borrowers who work in a volatile industry during hard economic times may have to jump through a few extra hoops to prove that their employment and income is secure.
Job changes, periods of unemployment or property location in relation to the subject property are other things to consider that may cause a speed bump in the approval process.
Title / Property Flip –
A Flip is considered a property that has been purchased by an investor and quickly sold to a new buyer within a 30-90 day period. Generally, an investor will do a little rehab work, fresh paint, landscaping…. and try to re-sell the property for a significant profit margin.
While it seems like a perfectly fair transaction, many lenders have strict guidelines in place that prevent borrowers from obtaining financing on properties that have a previous owner with less than 90 days of documented ownership.
These rules change frequently, and are specific to particular property types, so make sure your agent is aware of all the boundaries associated with your approval letter.
Some lenders require Condos and Town House communities to have sufficient insurance and reserves coverage pertaining to specific ratios on units that are owner occupied vs rented.
It may also take a few weeks and cost up to $300 to receive an HOA Certification, so make sure your Due-Diligence period is set accordingly in the purchase contract.
Appraisal ordering guidelines are changing quite frequently as regulators implement many new consumer protection laws created to prevent future foreclosure epidemics.
Unfortunately, some of the new appraisal regulations have proven to slow the home buying process down, as well as confuse lenders about the true estimate of neighborhood values.
VA, FHA and Conventional loan programs all have separate appraisal ordering policies, so make sure your agent is aware of which loan you’re approved for so that they document any anticipated delays in the purchase contract.
For example, if an appraisal takes three weeks and the average time for an approval is two weeks, then it probably isn’t smart to write a purchase contract with a four week close of escrow.
Buying a home versus renting is a big decision that takes careful consideration.
While there are several biased sources that can make arguments for or against owning a home, we’ve found that most home buyers base their ultimate decision on emotion.
Yes, there are some tax advantages of owning real estate, as well as the potential to earn equity or pay a mortgage note off after several years.
However, let’s address some of the more obvious topics of discussion first.
Lower Acquisition Cost –
Unless you’re able to qualify for a mortgage loan with zero down and have your closing costs paid for by the seller, a typical investment to purchase a home is around 3.5% – 7% of the purchase price for down payment and closing costs on an FHA mortgage, and an average of 13% – 23% for a home secured by conventional financing.
Compared to the cost of about 1-3 month’s rent payment, it’s obvious that renting a home makes financial sense in the short-term.
Lower Qualifying Standards –
While the FHA and other government insured mortgage programs have more flexible credit / qualifying guidelines than most traditional home loan programs, there is certainly a lot less paperwork and personally invasive probing required by most landlords and property management companies.
Generally proof of employment / income and a decent credit history (or a good explanation) is needed to rent a home.
Freedom To Move –
It’s easy to find a home through a reputable property management company, move in that weekend and then leave a year later when the rental contract expires. Not being tied down by a long-term mortgage liability is ideal for people new to a community, in a career that keeps them on the go or for parents with children that prefer a certain school district.
Plus, if you’re planning on moving in the next 3-5 years, then it may become cost-prohibitive due to the amount of equity you’ll have to gain in the short-run just to cover the cost of paying an agent, buyer closing costs, transfer taxes…. so that you can at least break even at closing.
Less Maintenance and Cost –
If something breaks, a simple call to the property management company will generally solve the issue in 48 hours or less. Plus, renters don’t have to carry expensive homeowners insurance, pay property taxes or worry about interest rates adjusting.
Pets Are Allowed –
Well, according to the rules and regulations of your county or neighborhood HOA, you can pretty much have as many domestic and exotic pets without having to pay extra deposits.
It may seem like a funny benefit to mention first, but the millions of dog and cat lovers would definitely rank this towards the top of their list.
Pink and Purple Walls –
Yep, you can paint the inside of your house any color you choose. And depending on whether or not there is an HOA in place, you could probably do the same thing on the home’s exterior. Landscaping, flooring, built-in shelving… it’s your property to renovate and grow in.
Peace-of-Mind and Security –
The only way you would be forced to move is if the bank forecloses on your property due to a default in mortgage payments.
So basically, you don’t have to worry about a landlord’s financial ability to make mortgage payments on time. Plus, you can stay in your own property as long as you wish.
Tax Benefits -
The US government has created certain tax incentives making it possible for many homeowners to exceed the standard yearly deduction.
*Disclosure – Check with your CPA or Tax Attorney to verify your own unique filing scenario*
The following three components of your home mortgage may be tax deductible:
a) Interest on your home mortgage
b) Property Taxes
c) Origination / Discount Points
Remaining in one neighborhood for several years lets you and your family establish lasting friendships, as well as offers your children the benefit of educational continuity.
Historically, even with other periods of declining value, home prices have exceeded consumer inflation. From 1972 through 2005, home prices increased on average 6.5%, according to the National Association of Realtors®.
Forced Saving -
The monthly payment helps in repayment of the principal amount. Also when you sell you can generally take up to $250,000 ($500,000 for married couple) as gain without owing any federal income tax.
*Disclosure – Check with your CPA or Tax Attorney to verify your own unique filing scenario*
Increased Net Worth
Few things have a greater impact on net worth than owning a home. In a comparison of renters versus homeowners, the Federal Reserve Board of Consumer Finance found that the average net worth of renters was just $4,000 compared to homeowners at $184,400.
While the available tax advantages and potential for earned equity are generally highlighted by most industry professionals as the top reasons to own real estate, it’s important to remember that markets go through cycles.
However, owning real estate that appreciates more than the rate of inflation may help contribute towards your overall investment portfolio, provided your maintenance and mortgage costs are kept low.
Getting a new mortgage for a First-Time Home Buyer can be a little overwhelming with all of the important details, guidelines and potential speed bumps.
Since there are so many rules and steps to follow, here is a simple list of Do’s and Don’ts to keep in mind throughout the mortgage approval process:
Any number of minor changes could easily raise a red flag or cause a negative impact on a credit score that may result in a denied loan.
Most importantly, check with your loan officer on even the simplest questions to make sure your loan approval is successful.
A Home Owner Association (HOA) can have a huge impact on your life when you buy a home in a PUD (Planned Unit Development) or Condominium Project.
According to Wikipedia:
A homeowners’ association (abbrev. HOA) is an organization created by a real estate developer for the purpose of developing, managing and selling a development of homes.
It allows the developer to exit financial and legal responsibility of the community, typically by transferring ownership of the association to the homeowners after selling off a predetermined number of lots.
It allows the municipality to increase its tax base, but reduce the amount of services it would ordinarily have to provide to non-homeowner association developments.
Most homeowner associations are incorporated, and are subject to state statutes that govern non-profit corporations and homeowner associations.
State oversight of homeowner associations is minimal, and mainly takes the form of laws, which are inconsistent from state to state.
The Pros and Cons of HOA’s:
A Home Owner Association may have the power to determine the color of your home, the number of pets you have and the type of grass you have to plant.
They also may have the power to levy assessments, dues and fines.
Or, they may be as simple as collecting a few dollars per year to make sure the grass is cut in the common areas.
HOAs are set up by CC&Rs (Covenants, Conditions & Restrictions) and become part of your deed.
The CC&Rs dictate how the HOA operates and what rules the owners, tenants and guests must obey.
You should take the time to review the CC&R for any prospective purchase to make sure that the home you are buying will be right for your lifestyle.
For instance, if you operate an Amway business from your home, it is possible the CC&Rs prohibit this type of activity. Or, if you have two dogs and three cats, the CC&Rs may limit you to one pet.
The CC&Rs are only a portion of the HOA.
Bylaws are another component of HOA’s that reflect the intention of the association.
Each HOA either has a managing Board of Directors, or a third-party property management company.
One issue to be sure you check on is potential assessments.
For instance, recently a Condo Association had a foundation problem and was assessing the members over $10,000 per unit.
Another PUD had a pool that required routine maintenance and certification.
Subdivisions are commonly set up as PUDs with an additional HOA.
Until the subdivision is complete, the builder is generally in charge of the HOA.
When complete, the management of the PUD is typically turned over to the homeowners at a special membership meeting.
Buying a new home is literally a team sport since there are so many tasks, important timelines, documents and responsibilities that all need special care and attention.
Besides working with a professional team that you trust, it’s important that the individual players have the ability to effectively communicate and execute on important decisions together as well.
A Realtor® is a licensed agent that belongs to the National Association of Realtors®, which means they are pledged to a strict Code of Ethics and Standards of Practice.
A few of the important roles your agent performs:
However, the typical arrangement in a purchase transaction is for the seller to cover the buyer’s agent commission. In some cases where a new home developer or For Sale By Owner is listing a property and offering a lower price to deal direct, it is still a good idea to have an agent in your corner to protect your financial and investment interests.
Considering that some buyers may see 5-7 real estate transactions in a lifetime, compared to an agent that closes the same amount in a month, it is obvious to see that there is a big advantage to having the ability to rely on that experience when your home and security is on the line.
A mortgage professional (loan officer, mortgage planner, loan consultant, etc.) is the glue that holds the entire transaction together (biased comment).
In addition to establishing the purchase price and monthly payment a borrower can qualify for, the mortgage team will also need to communicate with all of the other players on the home buying team throughout the entire process.
To highlight a few details your mortgage team is paying attention to:
The lender in any mortgage transaction will require a homeowner’s insurance policy (hazard insurance).
This policy protects the property in the case of fire, theft or other damage (except flood or earthquake, those are separate policies and may be optional).
If it is determined that the property that you want to purchase is in a flood zone, flood insurance is not optional, it is mandatory.
The flood zone determination will be done with a “flood certification” from a third-party provider.
It is possible to have a title company and an escrow officer work for different companies.
Also, some states use closing attorneys and there are still a few states where they use abstract of title instead of title insurance.
In most purchase transactions, the seller has the option of choosing the title company.
The title and escrow officers are often thought of as the same role, but in reality are quite different positions.
The title officer takes care of all issues that have to do with the title (also referred to as the deed) of the property.
The lender may require a title insurance policy guaranteeing that the title is clear of all liens except those being filed by the lender.
Escrow takes care of receiving, signing, and notarizing the final loan documentation, as well as collecting the other paperwork associated with the home sale.
The escrow officer is a neutral third party that makes sure no money is transferred until all conditions for each side are met.
The money management of an escrow company include:
Finally, the escrow officer will see that you are properly recorded as the new owner with the county.
When you have found the home that you like, it is a wise idea to have a professional take a look at the home to see if there are any issues with the property that could be a problem in the future.
Even though some buyers have an “Uncle Joe” who has owed several homes and knows what to look for, a certified Home Inspector can be money well spent.
They will look at the functionality of the home to make sure the electrical, plumbing and physical aspects of the home are strong, which will help the buyer make an educated decision about following through with the purchase, or renegotiating certain aspects of the contract.
Keep in mind, the home inspector and appraiser have different jobs. An appraiser determines value, while the inspector looks for structural problems, defects or maintenance issues.
The inspector is doing this strictly for the buyer’s sake. The lender is not concerned if a faucet has a minor leak as long as the property is worth the sales price. Therefore, the lender generally does not require an inspection unless the purchase contract requires one.
So, an inspection is not required, but it is recommended. As a matter of fact, one of the forms in an FHA application package is one that says “For Your Protection: Get a Home Inspection.”
While the appraiser is typically never seen by the home buyer, an appraisal is obviously an important component of a home purchase transaction.
The appraiser will conduct an analysis of the property to determine the current market value. The bank will always require an appraisal, and in some cases need a second opinion of value if the program guidelines or loan amount require it.
Appraisers compare the sales prices of similar properties sold in the neighborhood and surrounding areas with the subject property.
This can be a very tricky process, especially if there are few properties to choose from, or if there is an overwhelming amount of foreclosures and short sale listings.
Now, since two homes are rarely identical, the appraiser has the difficult job of trying to compare apples to apples; sometimes red delicious to yellow delicious, or sometimes Fuji to Winesap.
When done, the estimate of value is given. If that value is below the purchase price, then negotiation may take place. If it is at or above the purchase price, we are ready to go forward.
Congratulations on finding a house!
You now have only a few days from when you signed the purchase and sales agreement to have a home inspection.
What Is A Home Inspection?
According to Wikipedia, a home inspection “is a limited, non-invasive examination of the condition of a home, often in connection with the sale of that home. This is usually conducted by a home inspector who has the training and certifications to perform such inspections.
The inspector prepares a written report, often using home inspection software, and delivers it to a client, typically the home buyer.
The buyer uses the knowledge gained from the home inspection to make informed decisions about their pending real estate purchase.
The home inspector describes the condition of the home at the time of inspection but does not guarantee future condition, efficiency, or life expectancy of systems or components”.
It is not the job of the home inspector to estimate market value or to let you know you got a good deal on the price of the home. This is done typically through an appraiser.
Why Have A Home Inspection?
Buying a home is the single most expensive investment many of us will ever make.
A home inspection is designed to provide the home buyer with the information they need to make a more informed decision about the property.
The home inspection report should clearly identify any potential significant defects, and give the home buyer a realistic estimate of the costs of repairs so that they can be negotiated in an updated purchase contract. An inspection should also highlight any areas or features that need to be addressed in the near future which may be reaching the end of their useful life span.
What Do Home Inspections Cost?
The home buyer generally has to pay for the inspection up front, but there may be an agreement in the purchase contract for the seller to reimburse those fees at the time of closing.
Home inspection fees vary from state to state. An estimated cost of a home inspection is around $250-$400, depending on what services have been selected, as well as where the house is located.
In addition to the general home inspection, there are many common services that home buyers also choose to have preformed when having a home inspection. These additional services are not typically included in the general home inspection fee.
Optional Home Inspection Services:
Once the inspection is completed, the buyer generally has seven days to put in writing the “request for repairs” required by the seller to make prior to taking possession of the home.
The sellers may not be obligated to make every repair, so make sure you read the purchase and sales contract carefully to make sure the agreement does not state that the home may be sold in “as is” condition.
The Home Inspection Process:
A home inspection should include examination of all major systems, including the plumbing, heating, air conditioning, electrical, and appliance systems.
The home inspector will also look at the structural components, such as the roof, foundation, basement, exterior and interior walls, chimney, doors, and windows.
It is recommended that the home buyer and/or representing buyer’s agent be present at the time of the home inspection.
A typical home inspection can take between 1 ½ hours to 3 hours, depending on the size and condition of the home.
Remember you are paying for the home inspection. Follow the home inspector around and ask questions about the condition of your home and how to maintain it.
The attached link will help give you a better idea of what happens during a home inspection provided by the American Society of Home Inspector’s visual home inspection demonstration video. CLICK HERE FOR VIDEO
Short sales, foreclosures and new construction homes all have caveats that need to be considered when pursuing financing.
If the guidelines and potential pitfalls are not properly understood, you could face delays in closing or potentially even a denied loan.
Short sales and foreclosures are everywhere. They often represent great value when looking to by a new home.
However, they also present a unique set of problems that homebuyers need to be aware of and plan for.
1.) Property Condition
Typically, when homeowners are facing foreclosure or looking to short sell their house, it means they lack the financial means to pay the mortgage or maintain the property.
A property in poor health can cause many financing issues for traditional financing. FHA loans have specific rules requiring that the property is move-in-ready, unless you’re using a 203(k) Rehab Loan.
2.) Timing Challenges
Short sales typically come with awkward timeframes for purchase contract approval and loan closing.
Each bank is different, but approval can take anywhere between a week to 120 days. As a general rule, the larger the bank the longer it takes to get short sale approval.
The lack of a set timeframe for short sale approval makes the timing of loan submission, rate locks and closing very challenging. You have your approval conditions cleared to close on time, just to find out that new appraisals, income, employment and asset verifications need to be updated by an underwriter to cover the most recent 30 days. Worst case, purchase contracts and legal documents may have to be re-submitted to a bank for an updated approval.
Either way, be prepared for a lot of redundant paperwork when purchasing a short sale property.
Home buyers looking to purchase new construction using FHA financing will have more hoops to jump through than those purchasing through conventional (Fannie Mae / Freddie Mac) financing.
If you want to use FHA financing to purchase new construction then you need to be aware of a number of issues that can trip you up.
First, you MUST have a certificate of occupancy (C.O.) certifying that the property is complete and move-in-ready. If you do not have this then you typically CANNOT go FHA. You’ll need a renovation loan, but a FHA 203K WILL NOT work.
You’ll need to employ the Fannie Mae HomeStyle for a property without a C.O.
In addition to the C.O. you’ll need some combination of the following documents as dictated by your lender and your unique situation:
There are a number of factors which go into exactly what combination of documentation will be required to satisfy your lender and FHA, so it is best to work with an experienced loan officer when purchasing new construction with FHA financing.
If you plan on using conventional Fannie Mae / Freddie Mac financing you’ll still have hoops to jump through, just not as many as FHA. You’ll also have a higher down payment requirement and the credit qualification guidelines tend to be stricter.
Whether it be FHA financing, conventional financing or renovation financing, it’s important to have a qualified home buying team in place that can lead you through the maze of paperwork and negotiations.