Can I Convert My Existing Home to an Investment Property to Buy My Next Home?

EDITORS NOTE: These guidelines have changed. If you’re buying a home in Washington state, please contact me for current guidelines.

This is a common question I’m asked these days…mostly because many home owners don’t have as much equity as they would need in order to sell their current residence.  With home prices being at their lowest in years, many want to take advantage and buy their next home and simply rent out their current residence.

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What Should a Preapproval Letter Contain?

This isn’t the first time I’ve written about preapproval letters at The Mortgage Porter…however it has been a while and I would say that with all the changes in the mortgage industry, your preapproval letter is more important than ever.  Most Seattle area real estate agents will not accept an offer on a home that’s listed for sale without a bona fide preapproval letter.

Preapproval letters may vary in appearance and content from lender to lender.   Some mortgage companies may have different protocal for when a preapproval letter may be issued.   When I provide a preapproval letter, it means that I have a complete loan application, most likely with exception to the property address since the home buyer has not yet identified a home.   It also means that the home buyer (i.e. borrower) has provided me all the necessary documenation that supports or backs up the information that has been provided on the loan application, such as

  • income documenation (to make sure they qualify for the proposed montly mortgage payment)
  • assets (at minimum, enough to cover the down payment and closing costs)
  • credit report…everything seems to be based on your credit score from potential interest rates to what you qualify for.   This is something that we need to pull if you are interested in obtaining an actual preapproval.

A good preapproval letter should address all of these items so that the seller and the real estate agents know how qualified the home buyer is.  This is done in a manner in which not to violate the buyers privacy.  For example, a seller or real estate agents should not see the buyers income, assets and credit scores.  If a buyer wants to share that information with someone other than their mortgage professional, it is up to them!   Instead, the preapproval letter will address that these items have been reviewed and are acceptable. 

For example, I might include something like this in a preapproval letter:

This preapproval is due to your job stability and excellent credit.  Funds to close this transaction are from your personal savings and a seller contribution in the amount of $5,000.

You can see that I have addressed income, assets and credit in this paragraph. 

My preapproval letter also includes program type, the sales price and loan amount.  Every so often I’ll have a real estate agent want me to leave the sales price blank.  This is something that we can do IF the borrower has substantial cash reserves.  I’ve found that some home buyers would rather not have their preapproval letters written this way…and I’m happy to provide several preapproval letters with staggered sales prices (as long as the borrower has documented the funds for down payment and closing costs).

You may find a total mortgage payment on a preapproval letter.  This is because borrowers are qualified by their mortgage payment since loans have a certain allowed debt to income ratio.  If a borrower is a little pushed with their ratios and they find a home within the sales price and loan amount they are preapproved for, but the property taxes or home owners insurance are higher than estimated or mortgage rates climb higher than what they were approved at, you no longer have a preapproved buyer.   Whether or not your mortgage originator includes what payment you’re preapproved for, it’s important to ask.

Any conditions to the loan approval should be included on the preapproval letter.  Standard conditions on our preapproval letter may include:

  • satisfactory purchase and sales agreement
  • satisfactory title commitment 
  • subject to appraisal 
  • subject to changes to financial situation as disclosed on the loan application (i.e. changes in your employment, debts or assets may jeopardize your preapproval status).

Preapproval letters may also have an expiration date.  Before our current lending environment, preapproval letters would be valid for a longer period of time.  Now credit reports and other supporting documentation “expire” earlier.  Should your preapproval letter expire, they’re typically easy to update by just supplying your latest supporting documentation (paystub, bank statement, etc). 

The letter should have a date and be signed by whomever prepared the letter with their contact information. 

When I prepare a preapproval letter for someone who’s buying a home located in Washington, at the very least, they have gone through preliminary underwriting.  If a mortgage originator has not obtained your documentation or if you have not completed a loan application, you are probably just prequalified and not preapproved.

With HUD’s new Good Faith Estimate, unless you have a property address, you may not receive a good faith estimate with your preapproval letter.  This is a glitch with RESPA that I hope HUD finds a way to correct.  Even HUD admits that if a mortgage professional provides a good faith estimate without a property address, they’re doing so at great risk (due to the financial liabilities packed in the new Good Faith Estimate).   Your mortgage professional can provide you with a “work sheet” until you have a transaction (property address).

If you are shopping for a home anywhere in Washington state, I’m happy to help you become preapproved. 

How Much Home Can I Afford?

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.

Relocating to Washington State and Getting Preapproved for a Mortgage

When relocating to a new State, many want to have their next home purchased to avoid the inconvenience of having to move twice from temporary housing to their permanent home in Washington.  Lenders want to know that the borrower have employment and the ability to make their mortgage payments.

If you have a job waiting for you at your new location, often times a copy of your employment contract documenting the start date, salary and probability of continued employment.  A verification of employment will be performed either/or verbally or with a VOE (verification of employment) form to be completed by the new employer.  It’s also important to know that the new employment must be in the same line of work as the previous employment.

What if you’re self employed and moving your business out of area?  Unless your clients are able to follow you, such as an internet based business, it may be challenging to use your past income for qualifying as you are leaving your client base behind.

There various types of income may not impacted by relocating (subject to underwriting guidelines), such as:

  • Rental income
  • Retirement/Social Security
  • Alimony or Child Support
  • Notes receivable
  • Interest and dividends
  • Income from Trust

Other types of income may be considered as well…but if you’re planning on qualifying based on income from your “future” job–make sure you’re actually on pay-roll and do discuss your personal scenario with a qualified Mortgage Professional before you make any moves.

Is My Preapproval Still Valid with all the Rate Changes?

iStock-000018668640XSmallMy clients and readers ask such great questions…I just received this one from one of my clients that I’ve been working with since June of this year:

“…with all the rate changes how is our pre-approval looking? It the original amount still applicable?”

 

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Tips for homebuyers and sellers

Yesterday I was interviewed by Melinda Fulmer for a MSN Real Estate article.   Here were a few of my pointers (with some clarification) for buyers:

1.  Plan on having a down payment.  FHA allows for a reduced down payment which can be gifted or loaned by family members, as does USDA and VA. However I do like to see those shy on savings practice making mortgage payments to a savings account until they have at least 6 months of mortgage payments “in reserves”.   This account is not to be used for your down payment–it’s in case of an emergency.

2. Be picky when selecting your loan originator.  I do believe in getting referrals from people you financially respect.  You can also try “googling” their names to learn more about the loan originator and their qualifications.

Borrowers may be better off working with loan originators who have are able to provide FHA loans–even if they’re not considering FHA financing.  Many conventional loans are having to switch to FHA financing as the underwriting is more forgiving and rates may be better depending on mid-credit scores.

3. Get prequalified as soon as possible.  This is a good way to get to select your loan originator (this is not the same as a preapproval).  During this stage, you’ll be able to see how detailed oriented the LO is what their personality is like–what type of programs do they recommend.  A LO should provide you a Good Faith Estimate without any commitment from you.

4. Rate lock strategy.  Ask your LO what they can do if rates improve after you lock.  Right now, with the turbulent markets, many lenders are offering free rate float downs as long as the lock meets specific criteria.  This provides borrowers with the assurance that the rate will not be higher than the current rate lock and that should rates improve, they may have the opportunity to “float down” to that rate.  Do make sure to obtain a written lock confirmation.

For sellers, I suggest that they insist on a preapproval letter to be included with their offer.  They should also carefully read the letter, it should address the buyer’s credit, income/employment and where the down payment is coming from along with the type of loan they’re approved for. Preapproval letters are sadly not worth more than the paper they’re written on, however they can provide you with some clues about the lender the buyer is working with.  If a seller has two identical offers, the buyer’s lender can make a huge difference in whether or not the transaction closes smoothly.

Rescuing Homebuyers from Lending Tree

Wonderwoman

I have a couple of clients who did not feel like “winners” having banks compete for them via Lending Tree.  Recently, I helped a family by closing their purchase in 5 days…the lender they obtained from Lending Tree did not perform after having their loan for over 30 days.   Here are a few nice words from my new clients:

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Buying a home contingent

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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.