Condos come in many forms including high-rises, converted apartment buildings and even some town-homes may be condominiums depending on how they are legally described. If you’re planning on buying a condo and not paying cash for your purchase, here are a few things to look out for where lenders may have an issue with.
Buying a Condo or Townhome?
November 12, 2010 by 1 Comment
How to Buy a Seattle Home with $10,000
April 28, 2010 by 2 Comments
NOTE: Mortgage rates quoted in this post from April 2010 are outdated and no longer valid. For a current mortgage rate quote for a home located anywhere in Washington, please click here. Also, other programs available since this post was published.
I recently had someone getting ready to buy their first home ask me if $10,000 would be enough for a down payment. If she had served in the military, she could possibly qualify for a zero down VA loan; this was not an option for her. USDA loans also offer 100% financing but the area she’s considering is not classified as rural.
An FHA loan will currently allow her to buy a home with as little as 3.5% of the sales price. Until this summer*, sellers can contribute up to 6% of the sales price towards allowable closing costs and prepaids (*in a few months, this will be reduced to 3%).
So how much with $10,000 buy? How about a sales price of $285,000. Here’s how that pencils out.
$285,000 x 3.5% required minimum down payment = $9,975. This is the buyers minimum required investment if utilizing an FHA insured loan. A parent can gift funds towards this amount, but the seller cannot.
The rate (as of writing this post 4/28/2010) for an FHA insured 30 year fixed mortgage is 5.000% assuming we’re closing in 30 days (APR 5.620) and priced with zero points to help keep the closing costs down. Pricing the loan with zero points means that you’re asking the seller to contribute $2,750 less than they would if your rate was priced with a point (1% of the loan amount). This may make your offer more acceptable.
Based on this scenario, if the Seller contributes $5,500 towards allowable closing cost and prepaids, you’ll wind up needing approximately $10,000 for your down payment and remaining closing costs.
I did use 6 months for property taxes, which will vary depending on when your first mortgage payment is due. And I used 15 days of prorated interest which is based on closing in the middle of the month. Closing towards the end of the month reduces the prorated interest (your cost)…of course the trade off is that you don’t own the property until it’s closed.
The total monthly payment, including PITI and mortgage insurance, is going to be around $2,000 (depending on interest rate, taxes and home owners insurance). My scenario has a payment of $1981.
In addition to your down payment, you may be required to have reserve funds after closing of at least two months proposed mortgage payments. Based on this scenario, that would be around $4,000 in the bank (stocks, 401k, etc) after closing.
Also of note, your first payment will not be due until the month after closing unless you close on an interest credit. This is a great opportunity to “pay yourself” by putting that mortgage or former rent payment into your savings account. Owning a home does come with expenses…some not always planned.
If you are interested in buying a home located in Washington state, I’m happy to help. Please contact me or apply on-line by clicking the tab at the top this page.
Gifts from the Bank of Mom and Dad – Part 2: Conventional Financing
March 12, 2010 by 2 Comments
Often times when gifts from family members are involved, borrowers my opt to use FHA financing since the guidelines are (currently) more flexible than conventional with regards to gifts. With FHA, a gift from a family member can go towards to borrowers minimum required investment with conventional financing, it cannot.
Here’s an example. Let’s say we have a sales price of $265,000 with 10% down payment creating a loan amount of $238,500. Once you factor in estimated closing costs of $2,400 and and prepaids/reserves of $3,100; the amount due at closing is roughly $32,000 (10% down = $26,500 + $2,400 + $3,100). The borrowers also have a $5,000 contribution towards closing costs from the seller.
At this loan to value, with conventional financing requires that the borrower invests a minimum of 5% of their own personal funds into the transaction. Unlike FHA, these funds cannot be gifted from the family members. NOTE: if the gift is 20% down or more, the 5% rule for conventional financing does not apply (the whole down payment can be gifted).
Staying with our example, this means that the borrower must contribute 5% of $265,000 of their “seasoned” funds = $13,250.
With the amount due at closing at $32,000, the borrower must contribute at least $13,250 (5% of the sales price) of their own funds towards the $32,000 (10% down payment). This leaves $18,750 remaining “due at closing”. The borrowers earnest money check (if sourced – meaning documented as being their own funds) can count towards the 5% investment requirement and so can deposits with the mortgage company. For example, the our borrowers submitted an earnest money check in the amount of $5,000 with their purchase and sales agreement, they would have $8,250 remaining to invest into the transaction of the 5% requirement ($13,250 – $5,000 = $8,250).
Once the borrower meets the 5% down payment, the gift and any seller credits can be applied towards the transaction. A seller contribution can only go towards allowable closing costs and prepaids. With this scenario, that totals $5,500 ($2,400 + $3,100). The seller cannot contribute more than $5,500 (actual closing costs and prepaids).
Unlike a seller contribution, the gift from parents can be applied towards down payment or closing costs/prepaids, once the borrower’s 5% investment is met. If your gift from the parents is larger than the remaining amount due at closing, you can either reduce your loan amount or not use the entire gift. NOTE: Your parents may want to check with tax adviser regarding possible tax implications with gifting funds.
With FHA financing, their is also a minimum required investment from the borrower, which is currently 3.5% of the sales price. A gift from parents CAN be applied towards the borrowers minimum required investment (the 3.5%).
When parents provide a gift with conventional or FHA financing, they need to be prepared to provide documentation of where the funds came from. They will sign a gift letter and provide a recent bank statement showing that the funds are available. There also needs to be a “paper trail” documenting the transfer of the gift funds (photo copy EVERYTHING–you’re better off having too much paper work to provide your mortgage originator than not enough).
If you have questions about financing a home located in Washington State, please contact me, I’m happy to help! We have both FHA and conventional programs available.
Related post: Gifts from the Bank of Mom and Dad – Part 1: FHA
How Much Home Can I Afford?
October 8, 2009 by 2 Comments
This is a common question from first time home buyers. When working with home buyers who are just beginning the process, after discussing credit and other information, I like to ask in return:
- What type of monthly mortgage payment would you be comfortable making?
- How much money are you planning on using for a down payment and closing costs.
To me, it’s better to solve for your potential sales price rather than finding a home or getting your heart set on a certain sales price first before knowing what you actually qualify for.
For example, Seattle Sally has saved up $75,000 and would like to use $40,000 towards a home purchase. She has been paying anywhere from $2,200 – $2,000 a month for rent and would like to keep her payment around $2000.
NOTE: Rates quoted below are from October 2009 and are outdated. If you would like a current mortgage rate quote for your home located in Washington, please contact me.
Beginning with a conventional scenario, a payment of $2038 (principal, interest, estimated property taxes, estimated home owners insurance and private mortgage insurance) with about $40,000 for down payment and closing costs would produce a sales price of $325,000. This is based on a 30 year fixed rate of 4.625%* (apr 4.790).
A sales price of $365,000 with a 10% down payment and the sellers contributing towards closing costs would produce a payment of about $2283.
The only issue I would have with the conventional financing is that private mortgage insurance is that these days, pmi underwriters are picking all mortgages to pieces.
FHA would provide a total payment of $2076 with about $40,000 for down payment and closing costs and a sales price of $325,000. This is based on a rate of 4.875% (apr 5.400).
If we have the seller pay most of the closing costs and prepaids, a payment of $2287 would produce a sales price of $365,000 with Sally bringing in approx. $38,000 for down payment and closing.
One thing to consider, beyond more forgiving underwriting, with FHA is that your mortgage will be assumable. Imagine having a rate of 4.875% a few years from now when rates will most likely be much higher. If you are a seller competing with other similar home on the market, and you can offer an assumable mortgage at a tempting rate–this will be a serious advantage. Once inflation happens, mortgage rates will be much higher.
If Seattle Sally’s credit score comes in lower than expected (this is all based on very preliminary information) FHA may become a better option as well.
*rates quotes are as of 1:30pm on October 8, 2009 and are based on mid credit scores of 740 or higher. Rates can and do change often. Follow me on Twitter to see live rate quotes.
For your personal rate quote on a home located anywhere in Washington, click here.
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