Buying Your Uncle’s Partial Property Interest

Florida Vacation Home

You just returned from a fantastic holiday at your family’s Florida vacation home. You have always loved the home, which is owned debt free by your Mother and her Brother (your Uncle). Now your Uncle might like to unload his interest. He wasn’t gripped by your suggestion of gifting his 50% interest to you, and so you need a mortgage to make this work.


Here are some lending options (be sure to consult with legal and tax professionals):

1. PURCHASE

  • Although your Mother wants to keep her interest, she must be removed from title along with your Uncle (so the lender’s mortgage can be secured by 100% of what will become your property)
  • Your Mother could provide you with a “gift of equity” (her 50% interest), and you could obtain a loan for the balance of the purchase price
  • Quit-claiming a 50% interest back to your Mother after closing would be prohibited (although the lender is not likely to audit this after closing)

2. REFINANCE

  • As your Mother will remain on title, she can qualify for a “cash-out refinance”, and you could be added to title at closing (at the same time your Uncle is removed from title)
  • Although borrowers cannot refinance a property until they have owned it for 6 months, this condition is satisfied by your Mother’s prior ownership – but she must be a co-borrower

3. UNCLE LOAN (Fastest/Cheapest)

  • Have him quit-claim his interest to you, and pay him back over time at a reasonable interest rate


Here’s the Point: It is probably easier to avoid a third-party mortgage when buying a family member’s partial property interest.

No Way I Will Be Declined

declined

You went under contract to purchase a property, and then started accumulating the supporting documents to obtain your mortgage.Well, guess what? Your steps should have been reversed! Here are some common excuses for those who figured getting a mortgage would be easy, but then discovered there would be some difficulties:

  • “XYZ Credit Co. said my FICO score was 665, which I knew would be good enough for me to qualify for a mortgage. Plus I could always add my spouse, who has an even higher score than me.” Unless you use https://annualcreditreport.com, or have a licensed mortgage broker or lender pull your tri-merge credit report, 90% of the time the score you receive from your source is likely to be 10-50 points higher than your true score. This could be enough to disqualify you from getting a mortgage. Also, the lender will use the lower score of the two – so your spouse can only help if you need to show additional income.
  • “I had a mortgage before, and I have never had trouble qualifying for a credit card or an auto loan.”Most lenders require that you have at least three (3) separate tradelines, one of which should have been in place for as many as 12 months – with an authorized amount of $1,000 or more. You also need to be the primary card holder, not just an “Authorized User”. And, if your prior mortgage has been repaid, that doesn’t count towards the minimum tradeline requirement.

Here’s the Point:Have your credit score pulled before you start making offers – and make sure it is a tri-merge report from all three credit bureaus.

Mortgage Pitfalls for Self-Employed

Pitfalls

Have the revenues from your business been solid over the past two years? Great! Well that’s not good enough to get a mortgage. Here are two main reasons:

  1. If you have been maximizing expenses in order to minimize your taxes payable, remember that it is the net (after expense) income from your business that is used by a lender to calculate your qualifying ratios
  2. If your projected income in the current year is lower than the income reported in your tax returns over the past two years, a conventional lender may decline your loan request outright

The Federal National Mortgage Association (Fannie Mae) publishes self-employment income guidelines for lenders. To qualify for a mortgage, your self-employed net income should be stable, predictable and “likely to continue”. While having guaranteed, contractual income is not a requirement, lenders carefully analyze the financial strength of your business, your sources of income, and the economic outlook for your industry.

Some suggestions to maximize loan approval probability:

  • Understand how the lender calculates your debt-to-income (DTI) ratio – especially if your most recent tax return shows declining net income
  • Produce a current year Profit and Loss Statement (P&L) showing year-to-date actual figures along with realistic projections for the remainder of the year
  • Show that your company distributes less income than it earns (to demonstrate growing cash reserves)
  • Ensure the new mortgage payment (for which you are applying) is in line with or lower than your current rent or the mortgage payment on your existing loan.

Here’s the Point: Make sure you produce a solid Letter of Explanation (LOE) to your lender that will support the continuity of earnings from your business.

New Rotary Board to Focus on Environment

Rotary BOD 2018-19


Rotary Club of Vero Beach 2018–19 Officers and Board of Directors: Daniel Fourmont, Past President; Kathryn Barton, Treasurer; Ken Ligon; Michael Kanuka, President; Richard Carlin; Brenda Bradley, Secretary; Stuart Kennedy, President-Elect; Camille Yates, Vice President; Jim Brumbaugh and Larry Parks. (not pictured – Tom Mitchell).

The Rotary Club of Vero Beach (Vero’s 1st Club) recently celebrated its 92nd birthday. Chartered on June 9, 1926, club members through the years have exemplified Rotary’s motto, “Service Above Self,” by donating their time and resources to the local community.

“Rotary is all about connecting and providing service to the community, fellowship with members, and personal and professional development,” says Michael Kanuka, President of the Rotary Club of Vero Beach. “We are the oldest Rotary Club in the area and have proudly helped at least 45 local charitable organizations who serve thousands of people. We have raised money in various ways, and established our Vero Beach Rotary Charities Foundation which has donated more than $100,000 to help local children and adults in need.”

In addition to helping those in need locally, the Rotary Club of Vero Beach works on international projects including ones that bring clean water and dental care to people in the Dominican Republic. They also participate in a Homestay program hosting international Rotarians to give them a perspective of what it’s like to live in Indian River County.

“We are committed to continuously improving our community and our strategic focus is now on the environment,” says Kanuka. “Our recently installed Board of Directors have been brainstorming new civic projects which we will soon be announcing.”

Rotary is an international organization boasting more than 1.2 million members in almost 35,500 clubs around the world. The Rotary Club of Vero Beach meets every Thursday at 11:45 am at the Vero Beach Yacht Club, 3601 Rio Vista Blvd., Vero Beach, FL 32963. For membership information contact President, Michael Kanuka at kanuka@oceanmortgage.com or visit www.rotaryofverobeach.com.

Be Nice To Your HOA


If you are financing the purchase of a condominium unit, you are going to need help from the homeowners’ association (HOA). A property management company is often hired to manage the affairs of the complex, but the HOA is ultimately responsible for many things – including:

  • Building structure, machinery and equipment (roof, HVAC, security, electrical/mechanical)
  • Common areas (lobby, pool, work-out facilities, BBQ area, landscaping)
  • Other functions (insurance, accounting, budgeting, approving leases, collecting HOA fees)

Your lender will require a detailed project review whenever your down payment is less than 20%, or if your condo will be a rental property. This means the HOA will likely need to provide you with several documents (e.g., bylaws, financials, master insurance certificates) and complete a condo questionnaire to confirm that:

  • There is no existing or pending litigation
  • Sufficient reserves exist in the repairs and maintenance budget
  • The condo does not have short-term “hotel-type” rentals
  • No more than 15% of the owners are delinquent in their association fees
  • One owner does not own more than 10% of the units

The questionnaire takes time to complete, and so the HOA may charge you a fee for doing so. But in the end, knowing everything about your purchase will protect you from unforeseen events – including special assessments for which you may be responsible right after your purchase.

In addition, the HOA’s insurance agent will need to provide you with written evidence that the condo master property and liability insurance also applies specifically to your unit being purchased.

Here’s the Point: When you purchase or refinance a condo, there are several reasons why you will want the homeowners’ association on your side.

Know Before You Owe

loan estimate mortgage disclosure rules


In 2015, the Consumer Finance Protection Bureau (CFPB) created “Know Before You Owe” mortgage disclosure rules. These were implemented to ensure that consumers would have easy-to-understand information before making what is usually their largest financial decision – namely, the purchase of their own primary residence.

There were a bunch of disclosures required by the CFPB – with changes introduced every year. The key disclosures are the Loan Estimate (which replaced the old Good Faith Estimate), and the Closing Disclosure (which replaced the old HUD-1 Settlement Statement). A lender or mortgage broker is required to issue you a Loan Estimate within three (3) business days to a prospective borrower who is “in application”.

Borrowers refinancing or purchasing a residential property are deemed to be “in application” when the following six items have been received:

  1. Full Name
  2. Social Security Number
  3. Property Address (for a purchase, there should be a reasonable probability of going under contract)
  4. Estimated Value (for a purchase, what the offer is expected to be)
  5. Loan Amount (this item would not be considered received if the down payment is uncertain)
  6. Income (the borrower’s actual and projected earnings should be reasonably reliable)

This was a good rule, because consumers often never really knew what their loan costs and reserves would be until right before closing. Unscrupulous lenders and brokers had been “hooking” their borrowers – thereby making it difficult to change lenders right before funding.

Interestingly, these rules do not apply to commercial, reverse, mobile home or HELOC mortgages.

Here’s the Point: Get a Loan Estimate as soon as possible when applying for a mortgage – so that you know what your costs are likely to be.

Should You Buy That Home in Your Name?

mortgage individual name


Most mortgage lenders specializing in residential mortgages will not extend financing unless you own the property in your personal name. This is usually a requirement of the investor who purchases the mortgage from the lender who closes on your loan. And this is the case whether the property is your primary residence, second or vacation home, or rental/investment property.

Why would you create an LLC or corporation to hold title to your real estate?

The main reason is usually to limit your personal liability – say, in case someone slips and falls while on your property. For example: If title is in your LLC, you are more likely able to shield your personal assets against a claim (however you should always consult with your attorney).

If you decide not to purchase a residential property in your personal name, however, the loan will be deemed a commercial loan – not a residential loan. While there are many community banks that will lend to an LLC or corporation, you would generally always need to personally guarantee the loan in any event. Also, commercial loan interest rates tend to be a little higher than a residential loan in your name.

Some people acquire their residential properties in their personal name, but then later transfer title via quit claim deed to an LLC. As a general rule, this is not permitted within the loan documentation – but residential lenders do not typically audit title (especially if you continue making your monthly mortgage payments on time).

Here’s the Point: ​The interest rate will usually be more favorable when you purchase a residential property in your individual name.

First-Time Homebuyer Programs?

first-home-buyers


First-time homebuyer programs (FTHP’s), when available, can make purchasing a home more affordable for low-to-moderate income individuals and families – but there is generally always a catch. For example, the Florida Housing Finance Corporation advertises that they offer fixed, low-interest rate FTHP loans. This is true, however the rate is actually higher than what is offered by the most active mortgage lenders in the industry.

Before you get excited about being approved under a government-sponsored first-time homebuyer program, you should know:

  • Some grants can only be used towards your down payment, not closing costs – and in most cases are required to be repaid (getting a gift from a relative may be better)
  • A home inspection report (not required under a conventional loan) may crater the deal because all costly repairs will likely need to be completed prior to closing
  • Some programs have long waiting lists, so be prepared that it may take well over a year before you find out if you qualify
  • Including all other income sources with your application (such as alimony and child support) will often disqualify the applicant because the maximum income threshold may be exceeded

First-time homebuyer programs generally always require another separate government approval stamp. It is therefore not uncommon for loans to be declined at the last minute when it would appear the borrower could qualify for a regular conventional loan.

Sometimes all it takes is a little more preparation and guidance – and a first-time homebuyer can comfortably qualify for more cost-effective conventional financing.

Here’s the Point: First-time homebuyer programs, if available, are not always the best or most cost-effective solution.

You Really Think You Are Pre-Qualified!

mortgage pre-qualify


“My real estate agent said I need a pre-qualification letter, and I was wondering if you could provide one to me within the next hour so that I can make an offer on a property.”

It is very rare when a borrower has pre-prepared all of the paperwork required to demonstrate their ability to repay the mortgage they are seeking.

A pre-qualification letter is absolutely useless, unless it confirms that the preparer has verified the prospective borrower’s income, liquidity and credit. This would include at least the receipt and review of the following, as applicable:

  • last 2 years of tax returns, W-2’s or 1099’s
  • last 30 days of paystubs
  • last 2 monthly bank and retirement account statements
  • tri-merge credit report from the 3 national credit reporting agencies 

Without the above, there is no way a lender can properly confirm that a borrower is truly pre-qualified.

Real estate agents showing “pre-qual” letters to sellers that do not confirm the above are likely wasting their and their seller’s time.

Ideally, an “Approve/Eligible Finding” should also be obtained from government-approved software, evidencing that a greenlight was received from FannieMae or FreddieMac to proceed with a bona fide mortgage loan submission.

Many people are in such a rush to make their offer, they avoid mortgage professionals who take the time to diligently ensure the buyer is a capable borrower. Instead, some buyers actually call around until they find a lender who accepts verbal confirmations alone – and then a letter is issued that usually does more harm than good.

Here’s the Point: ​You can get a mortgage pre-qualification letter in less than 10 minutes – but they are not worth the paper they are written on.