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Sometimes loan officers are asked the simple questions, “Why should I buy a house? Is it a good investment?” Here in the United States the enthusiasm for buying a home remains remarkably strong. Recent surveys found that almost two-thirds of Americans think that buying a home is the best long-term investment a person can make.

But is buying a house really a good investment? There are plenty of non-monetary benefits to owning a home, but is buying a home a good financial call? As always, it depends on your individual situation, but generally the data suggest that compared to the stock market, buying a home has produced similar or better returns with less risk—especially over longer horizons.

If you compare the increases in the prices of homes and stocks by looking at the S&P 500, stocks seem much more attractive. Since 1975, the S&P 500 has increased more than twentyfold while over the same period, the Zillow Home Value Index, which tracks the value of the median house in the United States, has only increased in price fivefold. Once dividends and rents are included, however, and after accounting for taxes over the period from 1975 to present, the annual return of the S&P 500 is about 10% versus housing’s nearly 12%!

As a homeowner you don’t just benefit from the increase in the price of your home, you also could receive rent, or living in it “for free” after the loan is paid off. There are tax benefits in the form of deductions, versus actually paying taxes on stock dividends or bond income.

And the difference between 10% and 12% might sound small, but over a long period of time it can compound to quite a big difference. Over 40 years an annual return of 11.6% means that a dollar would grow to almost $80 but at 10.4% that same dollar would grow to just over $52. A difference of only 1.2% each year compounds into a difference of more than 50 percent over 40 years.


There are plenty of self-employed borrowers who need to borrow money to buy homes. And while the requirements are slightly different than those of W2 employees, loans are being made. Basically the guidelines that Freddie Mac and Fannie Mae mandate for the self-employed borrower are stricter than for the borrower who is an employee. For example, the income that the mortgage industry allows for a self-employed borrower is based on income that has been reported to the IRS and may even be averaged over a two year period; however, the wage earner who receives a raise gets to use that new income immediately to qualify for a mortgage.

For sole proprietors, the income that is used to qualify the borrower must come from the bottom line on Schedule C of the federal tax returns. It is called “Net Profit” and is divided by 12 to come up with the monthly qualifying income. The net profit is what is left after the tax payer deducts all of his expenses from his gross income. The more deductions the taxpayer claims, the lower the net profit and the lower the income tax liability; however, it also reduces the purchasing power of the borrower. Underwriters will typically ask for two years of federal tax returns plus a year-to-date profit and loss statement for the current year. Borrowers who own 25 percent or more of a partnership, LLC or corporation must also provide the partnership returns and/or corporate returns for one to two years.

Depending on the circumstances, an underwriter may not allow cash that sits in a business account of a self-employed borrower to be used towards the down payment or closing costs for a home purchase since the business may be hurt by a depletion of business funds. A CPA letter may be required that states the business will not be hurt by removing funds from a business account.

There may be other requirements, but the point of this reminder is that self-employed borrowers are not being excluded from the American Dream of home ownership – just that there may be a few additional underwriting steps.


There has been a lot of news about flood insurance lately,  So we figured it would be good to take a look at it, and give folks an introductory course in flood insurance.

First, all water damage is not flood damage. Flood insurance covers rising water damaging a building/home and its contents. Damage caused by other factors, weather-related or not, such as wind breaking a window and then rain damaging the interior, is not covered by flood insurance, and instead is covered by other types of insurance.

So far, so good – but an interesting thing happens when one combines condominium living (“legal structure for multiple-unit properties in which owners hold title to an individual residential unit as well as shared interest and ownership of the common building(s) and areas”) with flood insurance. Condo Associations are responsible under the property's bylaws and condo docs to maintain insurance against possible hazards on the common structure(s) and shared areas which may include the entrance and lobby, roof and exterior walls, parking areas, building structure, electrical, HVAC, elevator, and other mechanical systems, and offices, gym, clubhouse, and other shared amenities.

Flood insurance is an important part of that coverage for most condo properties. The determination of flood risk is generally the same for condo buildings as it is for single-family residences (year built, flood zone as shown on the FIRM, occupancy including number of units, type of construction and foundation including first floor design, elevation, location of building fixtures, machinery, and equipment. Since all individual unit owners also own part of the common areas and are members of the Condo HOA, they all pay a part of the flood insurance premium. So yes, that 6th floor resident does need flood insurance.

All lenders require sufficient flood insurance on financed properties located in flood risk zones. When extending a mortgage on an individual condo unit, lenders evaluate the building's and association's insurance coverage, and their risk management does not allow borrowers to be "self-insured".


How Can a Home Buyer Speed-up a Loan?

Jun 3
10:26
AM
2016
Category | General

Agents are often asked by new borrowers, “What can I do to help speed up the processing of my loan?” We give them verbal information, but it is helpful to have it in writing, as there are five basic things that impact how fast a loan moves through processing.

The first is responding to disclosures as soon as we give them to you. By not responding it slows down the appraisal ordering process and the lender is going to need those disclosures back right anyway, so send them back! The second issue that comes up periodically is borrowers not filing their tax returns on time. Every borrower, salaried, self-employed, retired, unemployed, whatever, has to have the 4506T (request for tax transcripts) processed. No ifs ands or buts and there is no pushing the IRS.

After your loan is underwritten, usually the underwriter will send out a loan approval along with some “conditions.” These are usually documents that the underwriter needs in order to fully approve your loan. Loan officers tell borrowers to gather the items and send them in quickly. The underwriter has to review the items borrowers send in and that takes time. What the borrowers don't know or understand is that every lender wants all the conditions at once. It is more efficient for everyone involved to have the file looked at as few times as possible. 

Another issue that can hold up processing, and therefore should be avoided, is bringing in money to close from undisclosed accounts. Agents should tell clients early on in the process about accounting for all the money needed for down payment and closing costs. And lastly, if additional money is needed for the down payment, and something has to be sold (stocks or bonds), it will take time. And it all has to be documented (the audit trail): proof you own the asset, proof you sold the asset, where did you put the money after you sold it, consolidating the money into one account to bring the check into escrow (obviously from an account that is documented).


Along with a cornucopia of other choices to make when taking out a mortgage, borrowers are faced with the decision whether or not to pay points, which can go towards either the fee paid to the bank or loan officer who originated the loan or towards buying down the interest rate. The latter, referred to as discount points, are optional and differ from the former in that paying the loan origination fee is unavoidable and the borrower will end up paying it one way or the other.

Discount points, where one point is equal to 1% of the total loan amount, allow borrowers to secure lower interests. They play a prominent role in how a lender’s products are marketed—institutions that advertise the oft-talked about rock-bottom rates usually require borrowers to pay points in order to actually get those kinds of rates.

The most pressing question about points is, of course, if they actually make financial sense. A borrower who takes out a $100,000 loan and pays two points to buy down the rate from 3.5% to 2.99% may sound as though they’ve secured a much better deal, but will end up saving less than $30 a month on payments. Whether or not paying $2000 upfront for that privilege is worth it is an individual decision, of course, but there are times when taking out a mortgage with points isn’t the best financial decision. For some borrowers, that $2000 might be better spent on more immediate needs, such as closing costs or home improvement.

On the other hand, borrowers who plan to stay in their homes for the long term can end up saving tens of thousands of dollars over time by paying points, and there’s certainly something to be said about taking advantage of the extremely low rates currently available. Like any other factor in a mortgage, this is an area where it depends on the individual case, and borrowers would do well to weigh the pros and cons of points for their personal situation.


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