Lease To Buy Options For Real Estate Rule To Know

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There are some lease to buy options for real estate to know, both for consumers and people in the real estate community. With the way the economy is today, it’s more difficult to come up with a down payment to buy a property. The creative California home loan has pretty much disappeared but home buyers still are looking for creative ways to buy real estate.  Leasing or renting property built in with an option to buy the property at a later date, has been around for decades and it’s being used again as a method to help California first time homebuyers get into a home.

There are several ways to structure the lease option to buy contract.  The method I’m going to illustrate here is for the renter to build up funds on a monthly basis which will be used at a future time for a down payment to purchase the property they are renting or to be renting.

Many of the lease option to buy contracts I see do not work for several reasons.  First, the rent being paid must be market rent for the area.  Too many times I see rental agreements between relatives where the rent is below market rate.  Realtors and landlords may not be familiar with lending guidelines for the lease to own transactions.  Just because you sign a lease to own contract doesn’t mean a lender will honor it, certain rules have to be followed.

Second, to build a down payment fund on a monthly basis, the renter needs to pay market rent, let’s say $1400 plus additional dollar amount, say $300, making the monthly rent $1700.  The $1400 gets credited by your landlord or management company as rent, and the $300 balance goes into a separate account which starts building towards a down payment. So you’re paying higher than market rent in total, but you are building a down payment with the excess $300 funds.

Third, the renter needs to keep track of their payment receipts.  Paying by check is the best, because if you lose the check, you can always get a copy later from your institution.  You also want to make sure that you keep your method of payment consistent.  Paying your rent via a check one month, and than by cash another month and than by cashiers check another month may cause home loan lender suspicion and place additional hurdles in your path to attain homeownership.

Realtors, leasing agents, landlords and the general public don’t realize that there are lending rules on the lease option to buy method.  It’s best before you sign such a contract to call a few different lenders to ask how it needs to be structured.  Also check to see how much of a down payment you are going to need, say 3.5% for an FHA loan, and than come up with how you are going to save up for that dollar amount using the lease option to buy.  For example, if the landlord states the market price for the home you want to buy is $275,000, 3.5% would be $9,625.  If market rent is $1,500 and you can afford an additional $400 on top of that, than it would take you 24 months to save up for the the $9,625 down payment ($9,625/400 = 24).  You would than negotiate with the landlord to see if the 2 year period works them and go from there.

The property market value may go up or down during the two years, the homeowner more than likely will not lock in the current market value for you, so that would have to be taken into consideration.  Also, you would need to make sure that if at any time you as a renter decides to move, that your lease option to buy down payment fund is refundable to you, don’t assume that it is!  Make sure your down payment fund is going into an institution that is a non interest bearing account, and one that can produce monthly statements, like a savings account.  Your landlord must control these funds and the account needs to be dedicated to you and the property in which you are interested in using the lease option to buy method.  If the landlord intermingles your down payment funds with other funds it will cause problems with the home loan lender and your loan would be put in jeopardy.

All in all when a lease option to buy contract is done correctly it’s a win-win.  Just make sure and contact a few home loan lenders on how they do it, get your down payment fund target amount identified, and have a lease option contract drawn up that is agreeable to all parties, stay consistent with your method of payment and keep accurate records.

If you have any questions or concerns in regards to lease to buy options for real estate to know, please don’t hesitate to give me a call or leave a comment below!

Best,

Kevin Walton

 

 

Home Vs. Rent Calculator From HUD.Gov

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If you’re anything like me you’re skeptical of someone pushing a service on you that sounds too good to be true or that you feel like you’re being pushed to buy something.

Enter HUD.Gov.  They’ve created a nifty buy vs. rent caluculator where a prospective California first time homebuyer can see whether or not it’s cost effective to buy a home or not.

The calculator is simple and will take into account the tax advantages of homeownership when comparing to paying rent versus obtaining a California home loan.

To use it, just click on this link http://www.ginniemae.gov/rent_vs_buy/rent_vs_buy_calc.asp?section=YPTH and it will take you to the calculator.  If you have any questions or concerns feel free to leave a comment below!

Best,

KW

Pulling Your Credit Report BEFORE You Apply For A Loan

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Pulling your credit report before you apply for a loan can avoid unwanted real estate loan surprises and nightmares.  Just simply pull your own credit reports 60 days prior to applying for a California real estate loan.  There are a myriad of things that can be misreported on your credit report that can translate to a higher interest rate on your California real estate loan or even a denial of your loan altogether.

Late payments aren’t the only thing that affect your credit report.  Things like misreported maximum credit limit vs high credit are seen at times.  If you have a maximum credit limit of say $10,000 and you owe $4000 than you still owe less than 50% of the credit limit.  You want each card to have less than 50% owed on each credit line.  But when the maximum limit matches the high credit (the highest balance you’ve ever had on that card at one time) that’s not good.  It looks like you are maxed out on that card.  If you want to increase your credit score, it’s wise, before applying for a home loan to spread out your balances to make sure no credit card is showing more than 50% of it’s available credit limit. Some cards have better interest rates than others but we are talking about increasing your overall credit score here. Also sometimes creditors aren’t properly reporting your maximum credit limit which inadvertently can affect your credit score.

By pulling your credit reports 60 days prior to applying for a home loan, you can check into these things and fix it before the lender pulls their credit report.  You want to see if any other surprises and inaccuracies are there because once the lender pulls their credit report, that’s pretty much it.  If there’s a problem that you can fix and it’s something that would raise your score your lender can do a rapid rescore procedure that could possibly raise your score once the credit issue has been corrected but that could cost hundreds of dollars to fix it.

It’s far cheaper for you to pull your credit reports yourself through a company such as annual credit reports.com.  Once a year it’s free.  You won’t get your credit scores with the free version, you’ll have to pay for that, but just making sure the information is accurately reported is a must and will save you time and money in the form of a lower California home loan rate in the long run.

Let me know if you have any questions in regards to Pulling your credit report before you apply for a loan this article or in regards to the California home loan process by clicking here.

Best

Kevin Walton

Obama HARP Program-Do You Qualify?

 

The Obama administration is rolling out an updated version of the HARP program, also called HARP 2 and home affordable refinance program, designed to help homeowners who are current on their mortgage but lack equity which is needed to get out from underneath their existing real estate loan so that they can take advantage of today’s low rates.

One thing to keep in mind is that banks are not required to participate in the program and if they do, each lender can add their own rules on top of, also called overlays, the HARP program guidelines.  In short, the HARP program guidelines can and will vary for each lender.  So which lender is going to have the best and most consumer friendly HARP program?  It remains to be seen.  Click here to see if you qualify for the HARP program or keep reading below.

Lenders use automated underwriting systems to get loans approved.  FNMA and Freddie Mac will have their automated systems updated to reflect the HARP changes by mid March of 2012.  The lenders offering the HARP program right now are manually underwriting the program, which is a bit more of a difficult task vs. the automated version.  Look for more lenders to be offering the HARP program after mid March when the AUS systems are updated.

So what new changes to the HARP program are going to help you refinance?  For starters the value of your home won’t be an issue.  You can have a home worth $200,000 and owe $300,000 and it won’t matter.    An appraisal however will be required to make sure the home is in lending condition.   Credit score requirements will be relaxed but still good credit will be needed.  You must also be current on your existing mortgage with no lates in the past 12 months.  If you have PMI insurance, you are still eligible for HARP and you can even use your existing PMI carrier.  You may also switch lenders with HARP 2, so you don’t have to stay with your existing lender.

If your property has been for sale, HARP says you are still eligible.  If the home is now a rental property, HARP is okay with that as well.  Loans greater than $417,000 may also be eligible under HARP.  The new HARP program is also friendly for lenders as well due to relaxed FNMA and Freddie Mac relaxing their buyback policy put forth on lenders in case the loan goes into default.

As long as your real estate loan was originated after June 1 2009, the HARP program may be an option for you.  The question is, how is one lender to another going to implement HARP.  Are they going to adhere to the new HARP guidelines as written?  Or are they going to put in place a blanket of additional overlays making it a useless program?

There are lenders who are not waiting for the mid March 2012 FNMA and Freddie Mac automated underwriting system update and are funding HARP 2 loans with minimal overlays as we speak.  Is the HARP program right for you?  Do you qualify for the new home affordable refinance program?  Click here to find out.

Best,

KW

No Cost California Home Loans Are Available.

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Even with all the recent lending legislation passed recently, borrowers need to compare apples to oranges and know that the no cost California home loan is still available.  In a nutshell the way it works, the lender bumps your interest rate to create a pool of funds which pays for your all the fees and the Loan Originator and lender income.

How much higher is the interest rate with a no cost California home loan?   The are varying factors, but usually the rate is around .50% higher than on a rate where the borrower pays for their fees upfront on a purchase loan or rolled into the loan amount on a refinance loan.  The payment may be a little higher however, there are times when it makes sense to go with the no cost loan.  You have to be able to compare the figures.

How long you intend to live in the property is a factor.  If it’s a short term stay, the no cost loan many times is the better deal.  On a refinance loan it generally takes 7 years to payoff the fees that were added to your loan amount.  The no cost loan rate is higher but your starting loan amount is a chunk lower because there are no fees added to your balance.  Click here to tell me your scenario or keep reading below

Here’s an example on a refinance loan:  $350,000 loan amount based on a 30 year fixed, with fees, at a rate of 3.75% gives a payment of $1,620.90 (principal and interest only).   Based on a 30 year fixed rate loan and bumping the rate to cover fees, which are subtracted from the loan amount, we have a loan amount of $343,000 and an interest rate of 4.125% which gives a payment of $1662.34.

At the end of 7 years on the loan with fees, your balance would be $$299,453.    At the end of 7 years on the no cost loan, your balance would be $296,028.  You’re still $3,425 ahead on the no cost loan, however there’s one more thing to consider.

The total cost of payments looks like this: 84 months at the 3.75% rate payment of $1620.90 = $136,155.       The total cost of payments on the 4.125% rate payment of $1662.34 at 84 months = $139,636 so you’re in the hole $3,481 on the no cost.  But this cost is a wash with the amount you’re ahead on your balance, $3,425 as illustrated above.  So in this case the breakeven point is 84 months or 7 years, and most of the times on refinance loans that’s the way it works out. Want to compare refinance loan figures with fees or no cost? Click here to tell me your scenario

On a purchase it’s different because the buyer has to pay their fees upfront no matter what so the payments using the same loan amount and rates as above, look like this:  $350,000 loan amount at 3.75% 30 year fixed = $1620.90.       $350,000 loan amount at 4.125% 30 year fixed = $1696.27.  That’s $75.37 more per month on the no cost California home loan, but the real take away here is the pool of funds created by bumping the rate goes toward paying the borrowers closing costs!  So if they are short funds, we need to know that upfront at the start of the application process to properly structure the loan but this is a wonderful option for those who can afford the monthly payment of home ownership but just can’t come up with all the funds to cover the down payment and closing costs to get into a home.

The no cost California home loan can be a perfect fit for someone looking to refinance their current home loan or the home buyer.  Do yourself a favor and compare the numbers and take a look and see if it’s best for you.  Click here to tell me you scenario and I’ll get back to you within 24 hours.

Best,

KW

A Tax Return Deduction That Hurts California Homebuyers.

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It’s hard enough to find tax deductions these days, and everyone wants to pay less in taxes but there is a tax return deduction that hurts California homebuyers.  The problems is that lowering your taxable income or adjusted gross income, takes away from your purchasing power when qualifying for a California home loan and the California first time homebuyer, or a home loan in any state for that matter.

There’s one deduction in particular for wage earners, the schedule A unreimbursed expenses, that can create a problem for those trying to qualify for a home loan.  I’m not an accountant so I’ll give a readers digest version of this deduction.  The schedule A unreimbursed employee expense covers items that are bought with your personal funds that are necessary for your job that your employer won’t reimburse.  Things can range from clothes, to mileage, car repair, and many other things.

Here’s where it hurts.  If you have $5,000 in unreimbursed employee expenses on your 1040 for the year 2010 for example, the lender will take that sum and divide it by 12 months, in this case $416.67 per month and include this payment into your debt to income ratios.  Normally the lender will average the past two years in schedule A unreimbursed employee expense or in some cases if the most recent year was much higher than the prior year, they will use that figure for a worse case example.

Assuming a 30 year fixed rate of 4% that $416.67 per month is a loss in purchasing power of over $87,000 for a new home purchase or a shortage in loan amount for a refinance! Breaking it down further, assuming the information above, per $100 you pay to your creditors in minimum monthly payments, you lose $21,000 in purchasing power!

How does one fix this?  I’ve had people file an amendment to their tax return, but it can mean that you may end up owing the federal government money after removing this deduction and there may be a penalty involved.

Since it’s the beginning of a new year and most people have not got their taxes done yet, a W2 wage earner who is looking to buy a home in 2012 may want to scale back their schedule A unreimbursed expenses for the year 2011 or eliminate it altogether.  Most home buyers that I run into with this expense have no idea how it affects them when it comes to qualifying for a home loan.  Eliminating the deduction may bring less of an anticipated tax refund, or even have you owing taxes depending on your situation but on the other side it definitely helps you qualify for a larger home loan.

If your income can absorb the additional payment created by the schedule A itemization, than you’re okay, but there are many people out there who are unable to purchase or refinance for their loan amount desired simply because they didn’t know how the schedule A unreimbursed employee expense affects them on the other side of the equation.

A sharp Loan Originator should be able to catch this before they run your credit report.  The Originator should ask several questions in regards to the type of industry you work it.  Many sales professionals, nurses, building subcontractors among others have this expense and are entitled to it.  Hopefully the income is sufficient to absorb your monthly obligations, new housing payment as well as your schedule A unreimbursed employee expense (if there is one) and you’ll be able to qualify for your new California home loan.

If you have any questions in regards to this article, a tax return deduction that hurts California homebuyers click here to let me know your scenario!

Best,

Kevin Walton

FHA Loans Are Better For Recent College Grads.

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FHA loans offer more flexible options and guidelines for a college grad who is now a prospective homebuyer looking to secure a California mortgage.

If a borrower has less than a full time 2 year work history, FHA will allow school attendance history toward the 2 year work history.  So if a college graduate who has been in the work force for less than one year can use their school attendance for the other year to make for 2 years.  Many conventional FNMA lenders do not allow this.  It does help if the graduate’s degree is in the same line of work in which they studied, but not required.

FHA also allows for a longer employment gap as well.  So if the graduate took some time off after graduating before looking for work FHA is a bit more lenient on that than conventional lending.

FHA also allows for non-occupant coborrowers, conventional does not.  Mom and Dad may be tapped out from paying for school and can’t give that hefty cash gift to help buy a home, but with FHA they can go on the loan to help qualify without having living in the property or give the large cash gift to help qualify for the California home loan.

FHA has had the above guidelines for years but it’s easy to forget them.  Fannie Mae and Freddie Mac guidelines are constantly changing and hard to keep up with like the Khardashians!  Just keep in mind that FHA is college grad friendly and generally has looser guidelines without compromising the interest rate.

Here’s a few other tips a first time California home loan borrower needs to know, click here for a quick read.

If you have any questions in regards to this article click here to let me know your scenario!

Best,

Kevin Walton

 

Loans With No Private Mortgage Insurance Are Available

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Are there  loans without private mortgage insurance or mortgage insurance where less than 20% equity, or less than a 20% down payment exists?  YES.  There is a loan option called lender paid mortgage insurance.  What happens is that the lender buys the private mortgage insurance instead of the borrower.  The cost for the lender who buys in bulk can be much less than an individual private mortgage insurance policy that an individual borrower can purchase (thru a lender).

On a lender paid mortgage insurance loan, the lender bumps your interest rate in exchange for purchasing your private mortgage insurance policy.  Lender paid mortgage insurance loans are only available on conventional loans not FHA and as you’ll see it’s an alternative worth exploring.

So let’s go over a loan scenario comparing three loans, a conventional loan with private mortgage insurance, an FHA loan with mortgage insurance, and a lender paid coventional mortgage insurance loan.

Scenario: A buyer with a 720 FICO score wants to purchase a single family residence property for $300,000 using a 10% down payment.

Projected payments on a 30 year fixed rates :

Conventional loan amount $270,000 at a 4% rate: p&i – $1289 + $121 pmi=$1410/month.

FHA loan amount $272,700 (higher because of the possible upfront mortgage insurance premium) $272,700 at 4.125% rate: p&i $1323.60 + 261.34 m.i. = $1584.94/month

Lender paid mortgage insurance loan amount, $270,000 at 4.5% rate: p&i- 1368.05/month.

Even though the rate is higher the overall payment is……lower.  Plus you’ll have a larger mortgage interest tax deduction due to the higher interest rate.

In this case the higher interest rate loan, is a better overall loan.  Borrowers must look at the bottom line and not just the interest rate.

Now what can be done for those borrowers with less than a 720 FICO score?  FHA and it’s version of mortgage insurance will still be an option for them and some lenders have deals with a 3.5% down payment and 620 FICO score can still be had although most lenders have moved up to the 640 minimum.

But for those with higher scores loans without private mortgage insurance are alive and well, the message just needs to reach the masses.

If you would like to forward me your loan scenario, please click here. I’ll get back to you in 24 hours and let you know if the No PMI California real estate loan fits your situation.

Best,

KW

What is a Lender Overlay, What Does This Mean?

 

 

In the California home loan world you may come across the term “overlay”.  An overlay ia an additional rule that a lender applies to an already existing list of guidelines associated with a specific loan program.

For example, Fannie Mae guidelines say it’s o.k. that applicants can payoff credit card debt to help them qualify for a home loan while at the same time being in the process of obtaining a California home loan.  However, individual lenders may add an overlay that says no it’s not o.k. to do this.

Overlays vary from lender to lender which can cause confusion.  One lender may have an overlay on a specific issue and the next lender may not have an overlay on that same issue, it’s lender preference.

If a lender does Fannie Mae loans, they already have to follow a set of strict guidelines.  If the lender does not follow each Fannie Mae guideline, the loan can not be deemed a Fannie Mae loan, which hurts the borrower and the lender.  Again the lender can put even stricter overlays on top of the Fannie Mae guidelines to make the loan more difficult to obtain.  Lenders are conservative in todays market.  Some lenders do portfolio loans which means they don’t have to follow Fannie Mae guidelines, they can make their own guidelines.  But a lender limits its liquidity if they do this, which in this market is not wise, but yet some lenders do portfolio loans.

Overlays like it or not are here to stay.  The key is to have an open line of communication with your Loan Originator so that you don’t run into any unnecessary overlays that can hurt your chances on qualifying for a California home loan refinance or purchase loan.

If you have a question on this article or anything regarding the loan process on obtaining a California mortgage, please click here and let me know your scenario!

Best,

KW

 

Gift Funds Have Rules for California Home Loans

 

When qualifying for a California home loan gift funds and their rules are coming into play these days more often. A gift, when it comes to real estate lending is quite simple.  A gift is a sum of money that is given to a home loan applicant preferrabley by a blood relative, for the sole purposes of being applied toward aiding the applicant to qualify for a home loan.

The gift of funds is given to a the applicant with no strings attached.  It can not be a loan so it’s not to be repaid in any way shape or form.  The gift donor will sign a letter to this affect.  If the letter being written in any way insuates the gift is to be repaid, the funds will not be allowed to be used in conjunction with the California home loan.  In addition to the gift letter from the donor, expect the lender to ask the donor to show documentation that they had the funds in their possession for at least 30 days prior.

This documentation usually is in the form of the most recent asset statement ie..bank statement.  In no way can the gift funds be “mattress money”, which is cash stored at home rather than in an institution.  The lender will not allow these funds.

Gift funds can be used for a California home loan refinance, or a purchase loan.

Gift funds can be used for a variety of issues to help a home loan applicant qualify for a California home loan.  The gift funds can go tward increasing the applicants down payment, towards cash reserves, paying off debt, and toward closing costs for the loan.

All gifts are subject to the guidelines mentioned above and to individual lender guidelines.  Some California home loan programs may not allow gift funds so it’s essential you check with your Loan Originator first if you think you may need or have access to gift funds.

It is also vital that you do not deposit the funds into ANY of your liquid accounts until your Loan Originator says it’s ik. to do so.  These funds have certain rules attached to them that if aren’t followed will disallow the gift funds and their intended purposes.  Keep in mind sometimes lender guidelines don’t follow general common sense!

Gifts are a wonderful way of helping home loan applicants to qualify for a California home loan.  Make sure and work closely with your Loan Originator and follow the lender gift rules to the “T”, to ensure that the gift funds help rather than hurt the chances of securing a loan.

If you have any questions on gift funds or on anything regarding the California mortgage process, please click here and let me know your scenario.

 

Best

KW