mortgage

First-Time Home Buyers On: The Finances

By Adrienne Breaux

 

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(Image credit: Reagen Taylor )

How long do you need to save up for a down payment? How long does it take to get approved for a mortgage? Buying a home—especially for the first time—is a learning process, made all the more intense thanks to the fact that large sums of money are also involved. So I asked real-life first-time home buyers Tiffany and Alan Goldsteinto help illuminate some of the money-related concerns of buying a home.

Saving starts with getting a grasp on what you’re making and what you’re spending.

Early on in our marriage, we made a habit of sitting down and making a budget. How much are we going to make each month after taxes? What known expenses do we have (i.e. rent, car payments, charitable giving etc.)? What is our targeted spend for things like groceries, clothing, eating out, and various luxuries? Everything after that would go towards savings and a down payment. After a few tweaks, we had a plan to have an “emergency fund” and a targeted down payment in about three years.

The next step was following through, but also reevaluating and adjusting as we went along. Want to take a trip? That’s fine — we would go add the expense to our plan and see how much longer it would take for us to meet our home ownership goal and decide if we were comfortable with that.

Spend less going out to eat or pass on that awesome shoe sale? At the end of the month we could see how much closer those decisions brought us to meeting our goal. Getting organized put us in control and took the fear out of making decisions. Ultimately, we compared ourselves to our plan each month and were able to stay on track.

→ Where you put your savings is just as important

On a side-note, it was equally important to decide where we wanted to put our savings. We decided to put the money for our down payment in a high interest savings account through a different bank than the one we used for our checking account. This gave us better growth prospects than a checking account, took away the risk that it would drop with the stock market the day before closing, and put it out of sight while still leaving it accessible in case of a major emergency. We also took advantage of a credit card that provided 2% cash back on all purchases. Since we were closely monitoring our expenses and paying off our card each month, these became ways to reach our down payment goal faster at no additional cost.

Get pre-approved

We did get pre-approved for a loan long before we were even serious about looking for a home. As we considered getting pre-approval, we were nervous about how the whole financing process worked. We asked around and were recommended a mortgage loan officer who met us on the weekend, talked through the entire process, and gave us advice about what we should be doing in anticipation of getting serious. When we finally made the decision to buy this house, we went back to him and he actually recommended we reach out to other people to test his rates. He ultimately matched the best offer we found.

→ Be ready to move quickly depending on the housing market

The Austin housing market is pretty aggressive right now with finite inventory and a lot of demand. This doesn’t leave a lot of wiggle room to negotiate. Our offer was accepted two days after we put it in. The house had only been listed for four days and there wound up being three backup bids after they accepted ours. That said, we did go through a process with our realtor to develop a list of post-close items we would need to address with the house and asked the seller for related concessions off of the purchase price. They were amenable, so it was definitely worth the exercise.

→ Between the offer being accepted and closing, there’s still a lot to do

The offer was accepted in late December and we closed in February, so the overall process took about two months. To be honest, we spent most of that time focused on scheduling the necessary vendors required for closing (inspector, bank appraiser, etc.), as well as looking for a contractor, budgeting renovations, and aggregating furniture and accessory lists. Overall, it was more along the lines of dreaming about paint colors…and doors…and light fixtures…in the middle of the work week.

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Where House Flippers Can Get Financing

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Chris Gash

Until recently, home flippers—investors who buy houses to improve and resell for a quick profit—had few options for financing. Now, traditional lenders and crowdfunding firms are increasingly willing to put up the money.

Luxury-home flips can be lucrative, but risky. “With one flip, you could make the same amount that you could with 10 deals of a lower-end property,” says Daren Blomquist, senior vice president of Attom Data Solutions, an Irvine, Calif.-based real-estate data provider. “But you’re putting many more eggs in one basket and counting on that one property to deliver.”

Jeff Pintar, founder of Pintar Investment Co. in San Juan Capistrano, Calif., is one of the most active luxury flippers in the nation, according to Attom Data. Last year, Mr. Pintar says he purchased 65 homes priced at $500,000 or more, and he’s averaging returns on equity of about 12% to 15% per flip.

Mr. Pintar, 47, says he uses multiple sources for financing. He has established business lines of credit at local banks with about a 5% interest rate that he can draw against to acquire homes. He also works with private-investment companies, which he says charge higher rates but are able to respond quickly. “The banks have trouble keeping up with the pace that we need,” says Mr. Pintar.

Many small-scale home flippers still rely on so-called hard-money loans—short-term, high-interest loans provided by private investors. David Dweck, a hard-money lender from Boca Raton, Fla., will finance up to 60% of the estimated after-repair value of homes purchased for over $500,000. That means if a house costs $600,000 but will be worth $750,000 after repairs, Mr. Dweck will lend up to $450,000, with the flipper putting down $150,000 in cash.

“Most people can’t walk into a bank and get a loan for one of these deals,” says Mr. Dweck, who also flips homes. His terms: an interest rate of between 11% and 14%, with two to four points—a point is equal to 1% of the mortgage amount—and up to one year to repay the loan.

Another source of capital for luxury flippers: crowdfunding, where the funds to finance a deal are raised through the contributions of a large number of people, usually via the internet. “The biggest benefit we offer is flexibility and a national focus,” says Nav Athwal, chief executive officer of RealtyShares, a San Francisco-based company that finances investment properties in 35 states. Funds come from more than 38,000 high-net-worth individuals who invest in a specific transaction for as little as $5,000.

RealtyShares funds up to 70% of the estimated after-repair value of a property in as little as 10 days. Interest rates vary from 8% to 11%, with the average loan term on luxury flips 12 months. RealtyShares also does preferred-equity deals, where they take a partnership interest in the property and benefit from both the interest paid and the potential upside of the transaction.

Jumbo Jungle Tips

Here are some things luxury flippers should consider.

The numbers are critical. Make sure your budget is realistic and your contractor has a record of finishing on time. Luxury flips take more time than lower-cost ones—an average of 208 days, compared with 181 days for all flips, according to Attom Data. A delay of just days can bring additional costs that will eat into profits, so make sure your budget includes reserves for contingencies, such as delays in getting construction permits.

Details count. Luxury buyers are demanding when it comes to high-end finishes. Hire a good designer and pay attention to the details when renovating a property. Factor in the cost of luxury upgrades a buyer will expect.

Beware of defaulting. Like banks, hard-money lenders and crowdfunders secure their loans with a mortgage on the property you’re flipping. If you default, they can foreclose on that mortgage. They may also report your failure to pay to the credit bureaus, which can affect your credit score.

Is It Hard to Get a Mortgage?

Standards have tightened from the pre-housing bubble days, but are they actually tough?

 Daniel B. Kline

 

From the early 2000s through the housing bubble’s burst in 2006, mortgages were extremely easy to get for anyone with even decent credit.

Back in those days, legitimate banks and lenders offered no-documentation loans — mortgages where the consumer tells the bank how much he or she makes, which is then not verified — and low-documentation loans, where some checking (maybe looking at pay stubs) was done, but not much. Less-scrupulous lenders even offered something known as a “NINJA” loan, or a “no income, no job, no assets” mortgage.

It’s easy to see why standards needed to be tightened up from those days. People were getting loans to buy houses they could not afford based on banks’ accepting their word that they would be good for the money. That, as you might imagine, led to huge numbers of defaults, which caused housing prices to collapse in many markets.

Post-housing bubble, the mortgage industry tightened up. Nearly all loans required traditional documentation — two years of tax returns, two months (or more) of bank statements, two pay stubs for every borrower, and verification of any non-payroll financial gains. In addition, many banks were less tolerant when it came to credit scores.

Now, while the no-doc days have not returned, standards are looser than they were in the aftermath of the bubble’s burst. It’s not easy to get a mortgage, but it’s certainly easier than it has been.

 

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GETTING A MORTGAGE SOMETIMES COMES DOWN TO SIMPLE NUMBERS. IMAGE SOURCE: GETTY IMAGES.

What does it take to get a mortgage?

It’s worth noting that with mortgage loans, there is always an exception to every rule. For example, when my wife and I recently purchased the condo we live in, our bank granted an exemption on verifying our tax returns with the Internal Revenue Service because we had our identities stolen to file a fraudulent tax return the previous year.

That exemption, which would have been easy to come by in 2004, was only granted because we were well-qualified, buying much less home than we could technically afford, and were putting 25% down. Had one of those three not been true, we may well have been denied.

In general, however, a credible mortgage company (and there still are predatory ones that will make non-traditional loans, generally not benefiting consumers) wants to see borrowers conform to the 28/36 rule. This means that the household should be spending no more than 28% of its verifiable monthly income on housing expenses (mortgage plus insurance and any homeowners’ association fees) and no more than 36% on revolving debt in total.

The other major factor beyond income is credit score. There is no hard and fast rule for credit, but the Federal Housing Administration (FHA), which helps first-time buyers, requires at least a 580 for its loans with the lowest-required down payments. In general, borrowers falling into the poor-to-fair credit range — 501-660 — will face a harder time. It’s not impossible to get a loan with credit at those numbers, but interest rates may be higher, and higher down payments may be required.

It’s harder than it was, but not as hard as it has been

Qualifying for a mortgage has always had some grey area. For example, someone with a 620 credit score but income that puts him or her well below the 28/36 ratio should be able to get approved. Lenders are not being as lenient as they were pre-2006, but they have generally been more flexible than they were in the immediate aftermath of the housing bubble’s bursting.

How hard it is to get a mortgage generally varies based on how qualified you are and how well you have your ducks in a row. A well-qualified buyer with all of his or her documentation ready to go should generally have an easier time of it. Someone pushing against the 28/36 rule or with less-than-stellar credit may have to speak with multiple lenders and will generally have to work much harder for approval.

The $15,834 Social Security bonus you could be missing
If you’re like most Americans, you’re a few years (or more) behind on your retirement savings. But a handful of little-known “Social Security secrets” could help ensure a boost in your retirement income. For example: one easy trick could pay you as much as $15,834 more… each year! Once you learn how to maximize your Social Security benefits, we think you could retire confidently with the peace of mind we’re all after.

 

From the Credit Check to Getting the Keys: Answers for the Big First-Time Homebuying Questions

By Brittney Morgan

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New to the home-buying process? If you’re ready to start looking for your dream home—or if you’re just looking to learn more about how buying a home works for the future—there’s a lot you’ll need to know. The process is long and can be as stressful and confusing as it is exciting. Sometimes you’ll feel like celebrating, while other times you’ll feel like you’re drowning in paperwork, but in the end, when you finally close on your new home, it’ll all be worth it. In the meantime, you’ll probably have a lot of questions come up, so here’s what you need to know.

What’s the first step in the process?

If you haven’t started doing research about homes and mortgages or saving up money, those should be your first steps. But, if you’re ready to really get into the home-buying process and have some down payment money saved up, your first step is to talk to your bank and different mortgage companies and mortgage brokers to find out your lending options and get pre-approved for a loan.

Can I buy a home if I don’t have great credit?

If your credit score is below 700, you’ll be at a disadvantage, but that doesn’t mean you can’t buy a home. You may have to pay a higher interest rate, or you may be able to qualify for a Federal Housing Administration (FHA) loan if you have poor credit that’s still above a score of 580, but you’ll have to pay mortgage insurance (which protects the lender) which will cost you.

What are points?

Points, or discount points, are fees that the buyer pays to the lender during closing in exchange for a reduced interest rate on their mortgage. One point is the equivalent of 1% of your mortgage amount, and while they cost money up front, they can save you potentially thousands of dollars in the long run.

What is a foreclosure?

When a homeowner fails to pay their mortgage, their home is foreclosed on—it’s a legal process in which the homeowner gives up the rights to their home. If the homeowner can’t pay the balance or sell the home, it goes to auction. Prospective homeowners can buy foreclosed homes—it’s one option for getting a great deal on a home, but it can also be extremely risky. If you’re considering buying a foreclosure, HomeFinder has a great breakdown of all the related issues.

What does a Realtor do?

Realtors handle negotiations between home buyers and sellers. When Realtors represent buyers, they help their clients find the best property for them at the best price, and navigate them through the offer and closing process. Realtors representing sellers market their client’s property, help them find qualified buyers, and help them get the best price for their property.

Who pays the Realtor?

According to Realtor.com, the seller is generally responsible for paying the Realtor’s fees and commissions, since the Realtor represents them and helps them make the sale. The seller’s realtor typically splits their commission with the buyer’s realtor—that’s how the person representing the buyer makes money on the deal.

What is earnest money?

An earnest money deposit, or good faith deposit, is a deposit the buyer makes once their offer is accepted in order to show the seller they’re committed to buying the property. The deposit means that it’s unlikely a buyer would enter into multiple purchase contracts on multiple homes at once (which would take all of those homes off the market). Once the sale goes through—a.k.a. at closing—the earnest money deposit is applied towards the down payment.

How long does it take to close?

A 2016 study from Realtor Mag shows that the average closing time is around 50 days, and the time to close depends on funding, appraisal disparities, and more. You can help speed up your closing by addressing any title issues and repairs.

What happens at closing?

At closing (also known as the settlement) the buyer provides a check for what they owe on the home, the seller signs over the deed to the home to the buyer, the title company registers the new deed to the home, and the seller receives any proceeds they earned from the sale. According to the Home Buying Institute, it’s a lot of paperwork and you’ll likely sign your (full) name anywhere from 10 to 30 times. Get your arm ready.

Who pays closing costs?

Both the seller and the buyer have closing costs to pay, but they differ a lot. According to Zillow, the seller’s costs are usually higher (since they pay the Realtor’s commission) but they cover less costs in general. The buyer, on the other hand, pays for more line items. Those items include several fees, from appraisal fees and origination fees to bank processing fees and title insurance.

How much does the inspection cost?

According to HomeAdvisor, the average cost of a home inspection in 2016 was $318, but could cost as low as $200 or as much as $470.

Who pays for the inspection?

Since the inspection is to benefit you, the buyer, you’ll pay the cost of the inspection (it’ll likely come out of pocket ahead of your closing)—although you may be able to negotiate to have the seller pay it, but it’s unlikely.

What and when is the final walk-through?

The final walk-through takes place after the inspection and is usually scheduled for the day before closing. This is your opportunity to check the house before the settlement, to make sure everything is in good shape and that any repairs the seller was required to make were completed.

Do I need homeowners insurance?

It’s often required, but not always (although, even if it’s not required in your area, it is a good—nay, really good idea). Homeowners insurance can help protect your home in case of damage from fire and natural disasters like floods and earthquakes, also from liability in case someone gets injured on your property, and it generally doesn’t cost that much to get a policy.

When do I get the keys?

Usually, you’ll get the keys to your new home at closing, or after closing if you need to wait until your county officially records the title (which could take a few days) or if there’s a delay with your loans. It all depends on local laws and your mortgage.

Should I Refinance My Mortgage Even if It Only Saves Me $50/Month?

By Mark Fitzpatrick updated January 11, 2017

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Does it make sense to refinance your mortgage if you are only saving a small amount a month, like $50? The best way to answer this question is with an answer to another question.

Answer this question first: How long do you plan on keeping your property?

It’s best to try and answer this question because the answer will have everything to do with whether or not refinancing with a small monthly savings makes sense for you.

Many people refinance to lower their payment, which helps their overall monthly obligations. Others look to refinance in order to pay less interest over the life of the mortgage, since even a small reduction to the interest rate can mean savings tens of thousands over the long-term.

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Let’s Look at an Example

If you are in a position where you don’t need the monthly savings to help your monthly obligations, then you should apply that savings to your new mortgage. If you apply the monthly savings to your new mortgage principal balance, it has a tremendous benefit to your term.

Let’s use the example of a 30-year mortgage with a balance of $150,000 that was taken out about a year ago, at an interest rate of 4%. The new mortgage rate would go down to 3.5% and reduce the monthly payment $77.81.

Normally, a $77.81 monthly savings wouldn’t make sense to most people, but the trick is to apply that to your new payment. Doing this will reduce the term just over 5 years! Yes, that is like turning your mortgage into a 25-year term. Most people don’t realize that they should look at refinancing, even if the monthly savings is very small. Applying even the smallest amount to your mortgage will reduce the term and pay it off earlier.

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Conclusion

Does it make sense to refinance your mortgage, even if you are only lowering your payment a small amount? Absolutely! If you plan on keeping the property for a long time, just applying a small savings to the new mortgage payment will reduce the term, pay less interest, pay off the mortgage sooner, and build equity faster.

4 Ways to Survive Future Real Estate Market Crashes

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BY LARRY ALTON

The real estate market may be very healthy compared to what it was five years ago, but that doesn’t mean we’re in some sort of eternal bliss. There will be rough patches ahead — and likely a couple more crashes in your lifetime — but how can you as an investor safeguard yourself against them?

4 Ways to Protect Yourself

“Historically, economic activity rises and falls in marked business cycles,” senior market strategist Susan Green explains. “Periods of recession appear and recede approximately every 5-10 years.” Thus, it’s reasonable to expect that we’ll encounter some economic issues in the next few years. They may not be as dramatic as what happened in 2008, but reverberations will likely be felt in the real estate market.

Luckily, there are a few ways you can protect yourself.

1. Buy properties that rent below the median.

You have to think one step ahead of the market. While it’s a good rule of thumb to have the best property on the street, you don’t want to be stuck charging a rent that’s higher than the median in the area. This may be fine during times when the market is healthy, but you’ll get swallowed up when the market falters.

People still need a place to live in a down market, but they’re naturally going to gravitate towards what they can afford. By purchasing properties that rent below the median, you can maintain steady occupancy rates, regardless of what’s happening in the larger economy.

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2. Be the best landlord possible.

It pays to be a good person. When you’re a likeable landlord who works with people, deals with maintenance issues in a swift manner, and charges affordable rent, people are more likely to stick with you when the market turns.

Related: How to Make Money in Real Estate — Whether You’re in an Up OR Down Market

On the contrary, if you’re a jerk and tenants are just renting from you because you were the only option at the time, they’re going to bolt the moment they can. Focus on building a strong reputation now so that you’re better equipped to survive a potential crash.

3. Be realistic with cash flow numbers.

When purchasing a new property, it doesn’t do anyone any favors to plug in vague numbers to determine monthly cash flow. Be conservative and honest.

“You should sit down at the computer, open a spreadsheet, and factor in all your expenses,” real estate investor Jason Hanson says. “What is insurance going to cost? Is there an HOA fee on the house? Are you getting a home warranty? You want to know down to the penny what your cash flow will be on a property.”

When the market does eventually take a downturn and rental rates decrease, you’ll at least know that you have some play in your numbers. On the other hand, if you were liberal with your computations, you’ll find yourself underwater in very little time.

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4. Pay down mortgages when possible.

There’s always the question of whether it makes more sense to pay down on an existing mortgage or put that money into a new piece of real estate. While there are schools of thought that apply to both, consider paying down rental property mortgages when you can. This gives you some leverage if the market crashes and you have difficulty making payments.

Related: The Best and Worst Markets for Residential Real Estate Investors, 2016

 

Never Put All of Your Eggs in the Same Basket

At the end of the day, financial diversification is your friend. Real estate may be one of the more stable and appreciation-friendly investments you can make, but don’t put everything you have into real estate. Spread yourself out a bit and diversify as much as possible. This mitigates your risk and provides more tolerance in a down market.

Mortgage Refinance Options for People With Bad Credit

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Low mortgage interest rates have created a great opportunity for many homeowners to refinance their mortgages, resulting in lower monthly payments or extra cash to pay off debts.

But what about people who have low credit scores and may have trouble qualifying for a new loan? We asked Roslyn Lash, an accredited financial counselor at Youth Smart Financial Education Services and a member of NerdWallet’s Ask an Advisor network, for tips on what consumers can do if they would like to refinance their mortgages but don’t have sparkling credit.

What can people with bad credit do to take advantage of low interest rates?

The options are limited. The 2008 housing crisis was a result of exceptions where loans were provided to clients that otherwise could not afford or qualify for a loan. The loans usually had inflated rates or were otherwise predatory. Since then, lending standards have tightened up considerably.

You may not be totally out of luck, though. The Federal Housing Administration has programs for people with less-than-desirable credit that include mortgage interest rates lower than that of conventional loans. To qualify, the applicant’s overall credit history must not consistently reflect late payments or delinquencies. Therefore, someone with judgments or delinquent federal loans such as tax liens and student loans may not qualify. A low credit score resulting from periodic delinquencies or a collection could still qualify, however.

What are the potential disadvantages of this option?

FHA loans require an Upfront Mortgage Insurance Premium. This amount is equal to 1.75% of the loan amount. In addition, a monthly mortgage insurance premium must be paid as well. The amount of the monthly premium will depend on the loan amount. When applying for an FHA loan, ask questions regarding the conditions in which these premiums can be reduced, refunded or canceled. For people already paying a monthly mortgage insurance premium, it’s possible that a refinance may actually eliminate it.

Are there any other steps people can take to improve their chances of being approved?

It’s important to show patterns of good credit, even if there are some negative marks on your credit record. A few delinquencies can be explained and won’t necessarily destroy your chances, especially if they are due to temporary drops in income or rate adjustments that increased your payment. In fact, even a bankruptcy will not automatically disqualify applicants. That being said, it’s important to re-establish your credit by having as many good lines of credit as possible.

It’s also important to minimize your debt and to be sure that your mortgage is affordable (no more than 30% of your income). An even better way to calculate affordability is to take into account not just housing debt but all debt — that means housing debt including mortgage, insurance, taxes and homeowners dues plus monthly debts such as credit cards and car payments. Using this kind of analysis, your overall debt should be no more than 43% of your gross income.

For example, if your monthly income is $2,850 and your monthly debt (including mortgage) is $1,150, you would still be in good shape to afford a mortgage, because your overall debt-to-income ratio is 40.35% ($1,150/$2,850). Please note that qualifying ratios are subject to change, and you should check with your lender.