Earlier this month, Fannie Mae changed the pricing on their My Community program across the board to all lenders by 1% increase to fee. If you’re using a My Community program and you’re transaction is not yet closed, you may want to check with your Loan Originator to make sure your lock is still valid.
Buying a house when you have a lot of debt
June 27, 2007 by Leave a Comment
A reader who recently moved to Seattle contacted with a question that I think many will relate to. He contacted me offering his story:
"One idea you may be interested in writing about are house buying options when you have good credit and income – but a lot of credit card debt. We’re paying off the credit card debt slowly — very slowly, and seeing housing prices rise 15% or more annually. It’s frustrating because as time goes by — the dream house only gets further out of reach. We will be able to buy a nice house — but not the dream house we could if not saddled with the credit card debt. The credit card debt also isn’t tax deductible!"
I work with many families who have visions of their "dream home" while they’re trying to manage monthly debts. And as if buying a home wasn’t stressful enough on it’s own, many home buyers seem to feel panicked over our local appreciation with home prices. It’s a definite balancing act of buying as much home you can afford without "betting the ranch". If you’re over burdened with credit cards AND you take on a hefty new mortgage payment, you could be setting yourself up for financial (and emotional) disaster.
I do not encourage using a mortgage such as an Option ARM for sole purposes of stretching into your dream home. If you make the minimum payments (which most will opt for) the deferred interest will reach it’s cap and you will be faced with a much higher mortgage payment. If you cannot afford the mortgage payment using a fixed period ARM or fixed rate product, you probably cannot afford the home.
It’s very possible that home buyers may need to redefine what their dream home is. Buying a home that needs a little TLC or is a little further out from the city may afford you more comfort when it comes to your monthly cash flow. Plus, you may receive a better return on this type of property should you decide to sell it in 5 or so years, using the net proceeds (profit) to purchase your "dream home".
For example, this 1800 sq. ft. completely remodeled rambler (now subject to inspection) was recently listed in Kent for $349,950. It’s on a corner lot, in a popular neighborhood with four bedrooms and 1.75 bathrooms. I’m not a Real Estate Agent, but I would bet that similar homes in Seattle would sell for closer to $500,000. Having the lower payment and more funds in the bank from a reduced down payment can translate into a higher quality of life. I know…I know…you do have to factor in commute times with our traffic. But once you’re home, you are HOME.
I will go into more details about this families information in future posts. They were gracious to share their information with me and their story is certainly not unique.
When an appraisal comes in low
June 20, 2007 by 5 Comments
Luckily this hasn’t happened often to me…last week we closed a transaction where the appraised value came in lower than the agreed sales price on the purchase and sale agreement. Ugh!
The property is a nice home in south King County that was originally listed for $275,000. Shortly after going on the market, a bidding war commences and my client “wins” the home after it is bid up to $300,000 which includes building in $6,000 of closing costs to be paid from the seller. My client is putting zero down into the transaction (100% loan to value).
Buying a home contingent
June 11, 2007 by 2 Comments
I’m noticing more contingent offers lately. This is when someone makes an offer to purchase their next home and the offer is contingent on the successful closing of their current residence. Contingent transactions may occur for several reasons:
- The net proceeds (equity) of the former house may be needed for the down payment on the new home.
- The buyer may not qualify (or want) to risk having two mortgage payments while waiting for the former house to sell and close.
- The equity in the former house may not be enough to facilitate a bridge loan.
In fact, I just had an excellent question from one of my clients that is worthy of sharing with you:
“Since our purchase is contingent on sale of existing property, when does the loan actually close and what are our liabilities in the event our home fails to sell? The only other time I bought a house there wasn’t the issue of selling one so it never came up for me.”
With this scenario, without a bridge loan to tap into the equity of the former home, the loan on the new home will not be able to close until the old home is closed. This is because the proceeds of the old home are needed for the down payment on the new home. This typically takes place the same day, however, I recommend having the closing take place the day after the day after the old home closes, if possible, to allow for transfer of funds. This is referred to as a simultaneous closing.
A bridge loan allows you to close on your new home quicker, without waiting for the old property to sell and close. Knowing your closing date, also enables you to secure your interest rate by being able to lock your loan. A home equity loan on the current residence is also a possibility. However, the advantage with the bridge loan is that there are no monthly payments due (interest is deferred until the home is sold).
Check with your Real Estate Agent to see what your liabilities may be if your home does not sell. There should be an addendum to the purchase and sale agreement addressing what happens if your home does not sell. The purchase and sale agreement may also address when the closing date will be on your new home (for example, “x” days after the closing of your old home) and what happens if someone else makes an offer on the home you’re buying “non-contingent” (without having to sell their home to close on the new home)…also referred to as being “bumped”.
People buy homes contingent all the time. It’s important to have an understanding of the process, what your options are and to have a game plan in the event of a “bump” so you can be ready with your ducks in a row!
UPDATE 2012: We currently do not have bridge loans available as of 4/20/2012.
If you would like me to review your current scenario to help you be preapproved for your home purchase anywhere in Washington state, please contact me.
Down Payments…Why less may be more
June 6, 2007 by 2 Comments
It pays to have a plan when you’re determining how much down payment you should use when you’re buying a home. Often times, when families have sold a home and they have benefited from our local appreciation, they may have a significant amount of funds available (proceeds). A typical reaction is to invest all of the funds from the house they’ve sold into their new home. What’s wrong with this? Nothing really…except if you want or need the cash back out, there’s now a cost and process to extract it (refinance or equity loan).
And consider this…your home equity does not earn any interest. Zero. Instead, you could invest the funds that have gone towards your home equity into an interest bearing vehicle advised to you from your qualified financial planner.
The more money you use for down payment, the more you’re reducing your tax deduction benefit of the acquisition mortgage as you are reducing your mortgage amount. Your tax deduction on your mortgage is based on when you purchased your home, and obtained your "acquisition mortgage" to finance the purchase. As you pay the mortgage down, this amount is reduced. When you refinance, the balance just prior to the refinance is treated as the "acquisition debt" that is allowed to be deduct the interest from. You are also currently allowed an additional $100,000 in home equity mortgage interest deductions. You may want to consider having a larger mortgage balance when you purchase to establish a larger tax benefit.
Example, when you purchased your home 10 years ago, your mortgage was $180,000. You’ve been making on time payments and the balance is now $150,000. You refinance and have a new mortgage balance of $300,000. The amount of interest you can deduct is based on a mortgage amount of $250,000 ($150,000 plus the $100,000 home equity allowance). There may be other compensating factors and I am not a CPA, tax or financial planner. Always consult with your trusted financial advisers.
Do you have debts (with no tax deduction benefit) that can be eliminated with proceeds? Often times, the monthly money you free from eliminating a debt (such as credit or car payments) that once went to a payment is more than what the increase in the mortgage payment would be from trading the debt to a mortgage.
Example, if you have a car loan with a balance of $11,000 and a payment of $350, increasing your mortgage amount by $11,000 would provide an increase in your payment $67.73 per month (based on a 30 year fixed payment with a rate of 6.25%). This frees up $282.27 a month, plus the interest on the mortgage is tax deductible, the auto loan is not.
Is your retirement or the kid’s college tuition funded? How about the vacation home or investment property you’ve been contemplating? Will you need some extra dough to make improvements to your new home?
My only point is for you to consider a strategy for your down payment before you automatically roll 100% of it over to your next home. Plan up front so you don’t need me for a refinance too soon in the future…wait!! I take it back.
Funds for closing when you’re buying a home
May 23, 2007 by 1 Comment
Whenever you are buying a home utilizing a mortgage, your lender is going to need to know where your funds that will be used for the down payment and closing costs are coming from. And in most cases, they will want the funds to be “seasoned” (statements showing the funds have been in your account for a two month minimum).
A lender wants assurance that the borrower has enough funds for closing and ideally, enough savings when all is said and done after closing, to have a cushion (2-6 months of your proposed mortgage payment aka “reserves”). Typically a lender is looking for 2 months of asset account statements. If large deposits are shown on the statements, the lender (or underwriter) may will require to have the large deposits explained and possibly documented. Many people have their paychecks go into their bank account and, like the tide, out goes the money. What ever is shown as ending balance is what the lender will use for your loan application and approval purposes.
Depending on the mortgage program you’re utilizing for your financing, different types of funds for closing may or may not be acceptable. Here is an example of some traditional funds allowable for closing:
- Checking and savings accounts
- 401(k)s and other retirement accounts
- Stocks, Bonds, Mutual Funds, etc.
- Income Tax Refund
- Seller closing cost credit (varies depending on program and loan to value)
- Gifts from family (depending on loan program)
- Proceeds from the sale of property (real estate or other)
- Inheritance
- Sale of personal property
Cash on hand (also referred to as “mattress money”) is a no-no. If you’re planning on buying a home in the next 3-6 months, you’ll want to get your dough into a bank account where a “paper trail” can be established of your funds.
With today’s automated underwriting and all of the available mortgage programs, more or less documentation may be required from the lender. The above list is only a sample. The requirements for your personal financing may be different. It’s important that regardless of what funds you’re planning on using for your down payment and closing costs, that you discuss it with your Mortgage Professional.
If you are considering buying a home located anywhere in the State of Washington, I’m happy to help you with your mortgage needs, including reviewing your down payment options.
Related Post: Qualifying for a mortgage: Funds for Closing
EDITORS NOTE: This post was last updated on April 11, 2011.
You don’t need to demolish your old Seattle home…recycle it!
May 22, 2007 by 1 Comment
The other night, I actually watched something on the local news that did my heart 
some good! A local man noticed that a beautiful old Seattle home was destined to be torn down. He contacted the owners, bought it and moved it to a vacant lot until the foundation can be poured. What a great alternative to demolishing a wonderful Seattle home. In my neighborhood of West Seattle, over 25% of the homes were built before 1930 and it seems as though every day I notice a nice Tudor being tagged to be torn down only to have a townhouse, multifamily or single family monstrosity replace it. Our property values have outgrown our historic values.
According to the article in the Seattle Times, this was inexpensive (as compared to buying a similar house without plans of moving).
- The demolishing of his existing home (okay…so one house was demolished…haven’t seen any photos to see what that property once looked like) and the pouring of the new foundation cost approx. $150,000.
- The typical cost of moving the home is est. at $35,000 – $50,000.
- The developer/seller agreed to sell the home for $1.
Nickel Bros. is who was hired to move the home from this story. I visited their website and they have "listings" of homes that need to be "adopted" or they will be demolished.
HGTV filmed the move of the Phinney home in Seattle…it must have been amazing to see the old beauty rolling down the street!
Local Mortgage Fraud Exposed
May 16, 2007 by 2 Comments
Last night I watched an investigative report on the local evening news about a loan originator who put the hard sell on two brothers to purchase 3 investment homes and now the brothers are having to sell their primary residence in order to try to make ends meet. There was so much wrong to this story that it made my gut turn.
I’m glad that predatory loan originators are being exposed. It’s truly unfortunate that for every one of these LOs, there’s an anxious, gullible borrower on the other end. Here are just a few of the highlights from last nights story :
The LO grossly overstated the buyers income. And according to the buyers, the signature on the loan application was not theirs. Absolute fraud.
- The LO was the selling agent, loan originator and the seller (he transferred the property to a family member)…I’m assuming he was the listing agent, too?
- The properties were horrible overpriced. According to the report, the brothers bought a property for $605,000 and it’s only worth $400,000.
The brothers state they were shocked at their new mortgage payments when they arrived. Since the loan applications were forged, I’m assuming they had no idea what their payments would be.
Simply googling the loan originators name shows that he has been banned recently from his former career as a stockbroker for "defrauding customers" and trying to "harass and intimidate" a securities investigator.
"He’s a great salesman, I’ll tell you that…and stupid me, and stupid us…for trusting someone with a silver tongue."
It is so important to carefully select the Mortgage Professional you will be working with. This may not be an easy task, you’ll need to do some research. The brothers in this story say that this loan originator is one of their friends!
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Google the Loan Originators name. What pops up from the search?
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Read the LOs blog. You’d be surprised how you can get a "read" on a LO’s personality and lending style.
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Get referrals from your other people you respect.
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Get second opinions from other lenders or professionals (such as your CPA, CFP, etc.)
I also have an issue when selling agents are also the loan originator. In my opinion, it’s too self serving and a green light for abuse. The loan originator/real estate agent should only wear one hat during a transaction…not two. This subject deserves a post on it’s own. I wonder if this LO disclosed on the purchase and sale agreement the relationship to the seller?
If it seems too good to be true, it probably is. Owning investment properties can be great. I recommend dipping your toe into that pool slowly. Jumping in with 3 homes (the brothers bought 2 condos and a house for investment) is a certain recipe for disaster when you do not have experience as a landlord. Even if the LO was a decent lender, these were highly risky purchases.
It will be interesting to see how this story unfolds. My first post was about a local mortgage fraud case as well and I’m still waiting to see if this predatory loan originator was able to slither away.
DFI currently shows this LOs license as pending…which probably doesn’t indicate anything at this time since Loan Originators will not be able to take the test until June 1, 2007. DFI is, however, in the process of background checks…so it will be interesting to follow this LOs career and to see if he will be able to continue working as Mortgage Broker or if he can find employment elsewhere in the lending industry that is not licensed by the State of Washington.
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