We hear about first time home buyers, buyers of 2nd homes, older people obtaining reverse mortgages… but what about “first time sellers”? The housing market has been heating up in many areas, especially as the weather improves, and buyers complain that there are too few properties to purchase, prices are high, rates are low and demand is rabid. So what is stopping an owner from selling their house today and moving on to the next one?
A high cost transaction can be very intimidating for a first timer, especially in a market such as this one. Borrowers are educating themselves about the process so that they can approach selling their house with confidence. Sellers should investigate what they can afford once they sell their current home, or if it is possible for them to purchase without having first sold: buying power. A qualified mortgage advisor will walk them through the steps and options. Many people discover that they can qualify to make a step up in housing without having their current home sold, which gives them a lot more flexibility because they can buy before they sell.
The loan officer can also inform the seller of the costs of obtaining a new home loan, what programs are available, a general time line, what is required for underwriting, and common mistakes that are made. These include unrealistic expectations, trying to obtain new credit cards or debt prior to buying another home, and so on.
Once a potential seller understands their buying power and the process, they should meet with a realtor for the selling side and the buying side to determine a pricing strategy for selling and a timing strategy for buying. They should know what their buying power will obtain, and study communities where they are likely to purchase. The listing agent for a house will tell the owners to clean up, spruce up, and stage the house for sale, give the first time seller a timeline, and discuss the possibility of renting after a house is sold. Inventory is tight in many areas, so if a buyer falls in love with a house they will work with the seller’s time frame.
Rates are still low, we’ve definitely seen an increase in borrows purchasing homes. There continue to be motivated sellers, and good buys to be had, in spite of us being in a traditional “slow down season” for purchases. And with home buyers comes the need for borrowers to be “pre-approved” by lenders in order, in some cases, to compete with other potential buyers.
For clients having a hard time finding a new home, the first adjustment they make is to get pre-approved – which some lenders and real estate agents believe is of critical importance. There are three main factors that determine a home buyer’s purchase price, loan amount, and type of loan: income, credit, and cash. Typically one of the three areas is the limiting factor for loan qualifying, and therefore purchase price, so borrowers being pre-qualified, and more importantly pre-approved, before writing that offer will avoid a lot of headaches, heartaches and disappointments.
To be pre-approved, a borrower first needs to contact a solid lender. Second, be prepared to provide all the information and documentation needed to properly evaluate the current financial status and be able to accurately provide mortgage amounts and options for a maximum purchase price based on capability. Here are the items usually needed: most recent paystubs, prior years federal tax returns and W2s, most recent statements for all asset accounts (checking, savings, investments, retirement accounts), residence address(es) for prior two years, employment information prior two years for all jobs (name, address, dates of employment, position, salary/commission/bonus), and birth dates.
With this information a credit report is run that includes all three credit agencies (Experian, Trans Union, Equifax) to obtain not only current credit scores but also to have what debt is currently listed. The information is put through the Automated Underwriting System for either Freddie Mac or Fannie Mae (the preferred AUS for government and most jumbo loan programs as well). The AUS will let us know if we have official credit approval or not.
At that point borrowers and lenders will discuss purchase prices, loan program, loan amount & down payment combinations, future plans & possible changes during the next 3-5 years. The lender stands by to write a letter of pre-approval to the real estate agent and the one representing the seller. But as noted, start with a discussion with your lender.
Lenders often remind their clients that there are several ways to build equity in their homes. We thought it would be a good opportunity to do the same with our readers.
One way is through rising home prices: owners gain equity simply because their homes will be worth more. Another way is through a falling mortgage balance – as you pay off your mortgage each month through amortization, you pay a portion of interest and a portion of principal (assuming it’s not an interest-only home loan). Every time you make your mortgage payment you’ll gain some home equity.
Along those lines, some borrowers opt to make larger mortgage payments with the extra portion going toward principal. One way to do that is to make biweekly mortgage payments where payments are made twice a month instead of once a month for roughly half the monthly amount. With 52 weeks in the year, this means 26 payments are made – you can even go with a biweekly mortgage payment plan, where you make 26 payments throughout the year. This not only cuts the mortgage term, but saves our borrowers quite a bit of interest – check with your lender on the numbers. And a number of borrowers are opting for a shorten mortgage term such as a 15-yr loan.
Remodeling is on the upswing, and that is a very good way to build equity: make your house more valuable by making home improvements. And keeping your home well maintained and in good shape not only adds value, and thus equity, but makes a home much more enjoyable to live in. And lastly, putting more money down when purchasing a house automatically means you have more equity in it, and borrowers often can obtain better loan terms because of it.
Many borrowers have a sense that their home is “underwater,” where they owe more than the property is worth. Yes, values in many areas are improving, but they aren’t back to where they were five years ago for many. Traditionally, no lender is going to lend you more than the property is worth – the risk is too high – it’s better to just send them the keys. Right? Wrong. But there are some things borrowers should keep in mind.
Is a "deed-in-lieu" of foreclosure (in which the lender agrees to take back the keys and lets the borrower walk away) better than spending the time trying to do a short sale, especially because with a deed-in-lieu, the borrower now potentially can get a few months of free rent? No, or at least check with a reputable loan officer. Fannie Mae and Freddie Mac recently came out with new guidelines for a deed-in-lieu of foreclosure, and now homeowners with hardships can turn over the house keys and erase their debt - even if they are still current on their payments. Some struggling borrowers who relinquish their homes can live in them for up to three months without having to make mortgage payments.
Remember, though, that lenders only approve deed-in-lieu transactions if there is a single loan on the property or multiple loans with the same lender, which greatly limits their usefulness. In the vast majority of cases, it's usually not the most advantageous foreclosure-prevention option for a homeowner, assuming a lender will even agree to a deed-in-lieu.
It's better to do a short sale especially if there is more than one loan. That's because striking a deal with a first, purchase-money lien holder does not automatically get the homeowner off the hook when it comes to second or other junior loans. Also, in a deed-in-lieu agreement, a lender can require additional cash contributions be made by the homeowner, which are illegal in a short sale. So be sure to talk to someone knowledgeable in lending before deciding on a course of action!
Many borrowers, although familiar with their loan officer or Realtor, ask, “What is escrow?” It is defined as a third person with whom a contract is deposited – kind of a neutral party, a referee for a real estate transaction.
For a contract to be valid it needs two parties, so part of the contract is that both parties agree who will do the escrow, the holder of their contract. In real estate, escrow is a third party that the buyer and seller, or in the case of a refinance the borrower and the lender, use to transact funds from one party to the next; escrow is also referred to as the settlement agent.
Given instructions agreed to by both parties, the escrow holder agrees to accept funds from the buyer, and the buyer's lender if necessary, and then after paying costs for other services involved in the transaction, deliver the funds to the seller once all promises are fulfilled in exchange for a grant deed from the seller that is delivered to the buyer. Escrow is neutral and has no agency contract with the buyer or seller, its agency is with the transaction.
Escrow plays a vital role in real estate transactions since large sums of money flow through escrow companies on a daily basis for purchase and refinance transactions. Escrow is not only charged with making sure the initial instructions are followed but also that neither party is able to change the transaction without the consent of the other. At closing, escrow is responsible for disbursing funds to all the parties and services involved in the transaction, refunding overages to buyers or borrowers, pay fees to termite, title, home warranty, lender and themselves, and transmit the net proceeds to the seller.
Lastly, after the closing, escrow provides a very detailed accounting of all funds received and disbursed to all parties. A good escrow officer and company are like a good ref in a soccer match – you don’t really notice them unless they mess up.
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