Category Archives for "Real Estate – General"

Saved by… the Appraiser?

I think it’s time we cut them some slack. No doubt there are instances where the appraiser completely missed the boat – when values were quickly overturned either after correcting errors or reflecting missed facts. I hear countless stories where the FHA appraiser was “too picky” regarding some of the reported observations on the condition of the property.

Lately, I have had several borrower prospects complain about their realtor or mortgage broker not recommending a property inspection. “I bought the house and had no idea there was a roof leak.” “You should have seen the termites in the attic right after we closed the deal.”

Let me tell you something: Engaging a property inspector is entirely up to the borrower/buyer – caveat emptor. Sure, there are times when it is obvious – and therefore when it is incumbent upon the industry professionals to strongly suggest an inspection by a licensed contractor. But if you purchase a property, it is your fault if you elect to forego the inspection and later find serious problems.

One appraiser recently conditioned his report on the receipt of an inspection report – to address what appeared to be some insignificant siding damage. The lender refused to close and fund the loan until a professional contractor confirmed in writing that the damage was cosmetic. It was a great call by the appraiser, because it turned out there was over $15,000 of structural damage from dry rot. That “picky” appraiser saved my clients from committing to a serious money pit.

Here’s the Point: If you decide not to have a licensed contractor perform a property inspection, then you are to blame for problems uncovered after your purchase.

 

Beware of Bonus Income Guidelines

bonusTo qualify for a conventional mortgage, your income should be “…stable, predictable and likely to continue”. You need to demonstrate your ability to repay – and, ideally, that your income is likely to continue for 3 years. If you earn bonus or commission income, your employer needs to verify that you have received it for the past 12 to 24 months – showing positive factors that offset the shorter income history.

But what if you decide to move to a different location (i.e., to maximize your earnings, to be closer to family, or because it’s just too cold where you are)? Unless your “transfer” is with the same company, you won’t be able to use your bonus income to qualify for a mortgage in your new location.

One of my clients has had consistent earnings with the same major automotive company for 25 years. But because the dealerships are franchisees, each franchisee is deemed to be a separate employer – so his move from one franchisee to another disqualified him from using his bonus income. And because the majority of his income is always from bonuses, he couldn’t qualify for a conventional mortgage. Even though he generated consistent monthly bonuses over the past 7 months at the new franchisee, he needed to show at least 12 months of bonus earnings.

The Federal National Mortgage Association (FNMA) would not bend the rules for this solid income earner. The prevailing private lender agreed that the conventional bonus income guidelines do not incorporate common sense.

Here’s the Point: If you do not have at least 12 months of bonus or commission earnings, you will not be able to use that income in your mortgage qualifying ratios.

 

Condo Loan Craziness

Just because you have good credit, low debt-to-income ratios and a good size down payment, don’t think that qualifying for a purchase mortgage on a condominium will be a breeze. It may not be you that the Federal National Mortgage Association (FNMA) is concerned about. Since FNMA is the likely buyer of the mortgage advanced by your lender, they are fastidious about how the condo homeowners association (HOA) or property management company is managing the affairs of the building.

There are some rules you should know before making an offer:

  • If you intend the condo to be an investment property, over 50% of the units in the building must be owner-occupied.
    WHY? Owner Occupants look after their units and are less apt to default on their mortgages
  • If the building offers in-room housekeeping and concierge services, FNMA will assume the condo is operated as a hotel and your loan will be declined.
    WHY? Short-term rentals (daily/weekly/monthly) are prohibited – whether offered by the HOA or the unit owners (and if the latter, the HOA will need to police this use)

It is not easy for the HOA to monitor the number of rental units – in which case the appraiser will need to make what is often an unreliable estimate. If this estimate is high, it triggers a red flag in the eyes of the lender. Letters of explanation and verbal confirmations will be required, thereby causing substantial delays and increasing the odds that your loan may not close.

Here’s the Point: Need a loan to buy a condo unit? If the building offers short-term rentals, chances are you won’t get your loan.

 

Free Money at the Closing Table

Free?  I think not!  But there are definitely “lender credits” available to you, depending on the interest rate you select.  The technical term for this credit is “yield spread premium”.  But is the lender passing this credit on to you, or are they keeping it – and therefore booking additional profit from your loan?  This profit would be in addition to their processing fee, and results from the earnings spread they generate between what you pay them versus what it costs them to fund your loan.

The higher the interest rate you pay, the higher the credit to which you should be entitled – all of which can be applied towards offsetting your closing costs.  In arriving at this credit, the lender factors in certain standard risk adjustments that are based on variables such as your credit score, loan amount, collateral type, and loan-to-value ratio.  The lesson to be learned is that your lender should always fully disclose the amount of this credit – even if it is in the form of a reduced interest rate.

Recently I had a client who was able to increase his lender credit by simply taking a few steps to improve his credit score.  After following a program of credit card debt reduction, his FICO score increased from 599 to 642.  This favorably resulted in an increase to his lender credit of 1.25% of his loan amount – a savings of $2,500 which he was able to apply towards the closing costs on his $200,000 residential mortgage.

Here’s the Point: The next time you get an interest rate quote from a lender, be sure to ask them how you can increase the “credit” to which you may be entitled to apply against your closing costs.

 

Identity Theft: Curious Advice…

idtheftImagine some guy by the name of “Greg” using your name and social security number to borrow three private loans totaling $10,000. Wouldn’t you feel violated? You would also be furious if this showed up on your credit report only 5 days before your new mortgage is scheduled to close!

The fraudster is not about to make principal and interest payments on the scam loans. So your credit score will immediately deteriorate because of late payments, which you likely won’t even know about – unless you frequently check your credit scores.

This happened to a client of mine last week. His attorney recommended that he: (i) request a fraud alert be placed on his credit report, and (ii) commence making the required monthly payments on the fraudulent loans…

PARDON??!

Imagine making payments on a fraudulent loan – and then trying to prove later that your payments should be recouped? I don’t actually blame the lawyer – because he was simply trying to stop the fraudster, and help the borrower get a mortgage by maintaining a decent credit score. What was missing, however, was that a new conventional or FHA mortgage lender will require evidence that an act of fraud had been committed – which will include the filing of a police report. The omission of or delay in filing this report gives the appearance of “hiding” the identity theft. It is very important to demonstrate to the lender that all the right steps have been taken to address the problem as quickly as possible.

Here’s the Point: You can’t hide identity theft when you apply for a mortgage. Promptly have the credit bureaus put a fraud alert on your credit report so that no further borrowing can take place without your approval.

 

Private Non-QM Lenders Have Dropped Their Rates

http://cdn.americanbanker.com/media/gallery/p17vmmujkht5918m91cma9gu17fb8.jpgMost lenders will only extend Qualified Mortgages. A Qualified Mortgage (“QM”) is a kind of loan having more stringent pre-qualification requirements. QM lenders must show the regulators that they have determined, prior to closing, that you, as a borrower, have the ability to repay your mortgage. This is logical, and will continue to be the norm for conservative lenders. Since these conservative lenders in turn have conservative investors who ultimately purchase your mortgage, their investors also want nothing to do with non-QM loans.

But if I lend you money at 6% (say 2% higher than conventional rates because of some additional risk) – there is no doubt that I already have an investor for the loan I just gave you who is willing to pay me, say, 6.5% for the same loan. Why would an investor do that? Because in a large financial market, he too has someone else on the line willing to pay him something more – and so on, and the business is profitable all around.

The old 12-13% “hard money” loans were being advanced to people having unfavorable credit when standard mortgage interest rates were at 5-6%. Now these non-QM lenders have lowered their rates to 6-8%, when today’s 30-year conventional rates have only dropped to about 4%. It’s not a bad deal to pay slightly higher non-QM rates for a brief period until you have satisfied your lender’s seasoning period requirement – and then you can refinance with a conventional mortgage without a prepayment penalty.

 

Here’s the Point: Interest rates for non-QM loans are a bargain right now. If your loan request was recently declined because of your credit history, there are lots of short and long-term financing opportunities available to you.

 

 

Want a Mortgage? It’s Not Enough to Just Confess Your Sins!

Lenders will discover that you had a foreclosure – that you had student loan late fees – that you defaulted on your car loan – that you already sold the asset claimed on your loan application – that you were arrested several years ago – that you neglected to meet your child support obligations, etc.

creditreportIt either comes out on your credit report or through the lender’s use of fraudguard security checks – or even when they just Google your name. Lenders have these and several other extensive background checks and “Know Your Customer (KYC)” procedures that they carefully follow.

If you don’t immediately disclose your Deed-in-Lieu of Foreclosure, do you really think they will believe you are providing them with all details on everything else for which they ask?

You will generally always need to write a Letter of Explanation (“LOX”) to address collection accounts and disputes/inquiries on your credit report. And what if your explanation is solely factual and not remorseful?

As useless as sentimentality might appear in the finance world, lenders want to look into your consciousness – otherwise they have nothing to support the notion that you will do everything you can to prevent another late mortgage payment or foreclosure. The parties recommending your loan need your cooperation in order to support you – because they only have their reputations if something goes wrong with your loan. If they have to work hard for someone who has been concealing the facts (intentionally or unintentionally), they are likely to move on to the next file.

 

Here’s the Point: Be upfront with your untoward credit history. If the lender finds out about an unfavorable fact on their own – without you telling them, they’re not likely to (and shouldn’t) extend you a loan.

 

A Key Question For Your Real Estate Agent

Does the Seller truly have the authority to sell the property to me?

No ProblemSounds pretty basic, but your real estate agent may not have asked the question. If they have, they probably took the word of the listing agent that there “shouldn’t be a problem”.

One of the biggest red flags is having a Seller who is a trustee. Not only should you quickly confirm that the declaration of trust, or trust agreement, exists and is fully executed (by all appropriate parties), but that the agreement hasn’t expired or been revoked. Without such confirmation, a whole host of issues could arise that might cast a shadow on whether you or your lender will receive clean title. And, by the way, the Seller’s name on the title report needs to match the owner of record on both the chain of title and appraisal.

Worst Case? Your lender will decline the loan based on an unacceptable title report, and you will have wasted untold amounts of time and money on a property that was just never going to close.

Best Case? Your closing will be delayed until the title company, escrow agent, attorneys, and lender can sort things out.

Finally, you might be surprised to find out later that your Seller would have been happy to provide you with certain documents you needed to satisfy yourself or your lender. All you needed to do was ask for a:

  • Survey
  • Owners policy of title insurance
  • Statement showing annual premiums for homeowners or flood insurance
  • Recent roof or wind mitigation report
Here’s the Point: Pay close attention to every insert made by the Seller in your Contract for Sale & Purchase, and don’t be afraid to ask your real estate agent lots of questions – you could save yourself a lot of time.

OOPS: I Bought My Rental Property in an LLC…

If you own title to a residential rental property via an LLC (“limited liability company”), then you better have owned this asset for at least 24for rent months and reported it on Schedule E of your 1040 tax return – otherwise you will have a tough time utilizing the income from this property to qualify for a loan.  Without the 24-month seasoning period, there is a good chance the net rental income cannot be used in calculating your Debt-to-Income ratio (DTI) unless you elect to transfer title from the LLC to your individual name.

Now don’t rush out and transfer the ownership from the LLC to yourself personally without first consulting with your accountant and lawyer – especially because of the potential tax ramifications and liability risks.  But you won’t get conventional residential financing for your LLC rental property, because the lender will treat it as if it were a commercial property (which means lower LTV requirements and higher pricing – even if you personally guarantee the loan).

On the other hand, if title is in your name, then typically 100% of the income and expenses on Schedule E can be used to calculate your DTI – without having to comply with the 24-month rule.  In addition, if the property is so new that it has not yet been reported on your previous tax return, then some lenders will allow you to use 75% of the revenue (confirmed via the lease) less PITI, with only 75% used to account for other standard expenses you will incur.

Here’s the Point: Many of my clients can’t conventionally finance their LLC-owned residential rental properties because they haven’t owned them long enough. If you plan to finance the purchase of one or more of these assets, then in conjunction with your advisor you might consider owning them in your name as opposed to in an LLC.

Flippers Beware!

Let’s say you buy a residential investment property for $150,000 using cash.  You fully expect to get a renter, but first need to make some improvements to the property.  So, being as smart as you are, you postpone financing the property because you should undoubtedly be able to get higher loan proceeds after you enhance value to $200,000 – right?caution Most lenders will not advance more than 75% of the original purchase price for the “Cash-Out Refinancing” of investment properties – until at least 12 months after the purchase.  This means that you cannot get a loan based on value during that time frame, unless you obtain the loan from a “portfolio” lender (a lender who can maintain the loan on their own books without either selling it to FNMA or having it guaranteed by FHA).  Nothing wrong with getting a portfolio loan, but they are oftentimes more expensive.

The government enforced this idea in order to prevent the flipping of homes.  Before the housing crisis, investors were bidding up the price of homes via quick cash closings, only to turn around and either quickly selling for a higher price or financing virtually 100% of the price right after closing (there were several lending programs that made it easy for them to do so).  Thus, the government wanted to prevent NON-owner occupant borrowers from continuing the same flipping practices – mainly in order to avoid purchasing or guaranteeing a loan secured by properties with inflated values.

Here’s the Point: Lenders take precautions to not lend against values that could be inflated. Within the first 12 months from a residential cash purchase, non-owner occupied investors/borrowers are generally restricted to a 75% LTV cash-out refi ratio based on the LOWER of original purchase price and value.
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