Here is a list of Myths and Facts on using a Realtor to buy Real Estate (in my opinion). Please note that I am NOT a Realtor, nor am I a Loan Officer who relies on Realtor's for business. I rely on what I write on Trulia for business.
Myth: I will get a better deal from the seller if I do not use a Realtor. The proposed logic is that a Realtor takes money away from the seller because of the commission paid. Although this is true from a seller's perspective, the Fact is that it is not true from the buyer's perspective. The Realtor can actually negotiate better terms for the buyer.
Myth: I can write up a contract on a napkin. The Fact is that although anyone can write up a contract (even on a napkin), it doesn't mean that the contract won't have its problems. From a buyer's perspective, you want the contract to have a loophole that allows you to get out of the contract "just in case". If you don't know what you're doing, you may lose a lot of money or get sued.
Myth: I went online to find the value of a property. This is what gets people in trouble. The Fact is that web sites don't tell you who owned the property and to whom it was sold. Recently, I found a $10,000 property that was sold from family to family member for $50,000. Online resources state it as an arm's length transaction (buyer and seller don't know each other). It could be that the 2 people happened to have the same last name and live very close to each other, but highly unlikely. The new owner was trying to sell the $10,000 property for $50,000. Only a Realtor or someone who knows how to read or find public record information would know this may be fraud. Regardless, it may be reflecting a false value. Most people don't know where to find this information.
Myth: Closings are much simpler when Realtor's are not involved. The Fact is that closings are much easier when people are involved who know what they're doing. Veteran (closed more than 5 properties) sellers and veteran cash buyers are the easiest closings because other than a title search, there's nothing else much left. However, when a loan is introduced, someone who is available for most of the day is vital to the closing of a loan. Usually, the buyer is working as is the seller and full-time Realtor's are the best resource for getting things to the underwriter, appraiser or title office in a timely manner.
Myth: I know what I'm doing. I don't need a Realtor. This is the scariest thing I have to hear. It's like saying, "I've been convicted of a crime and I don't need representation in a court room". Back in 2004, I had a client tell me that she went under contract for a house that was discounted for $20,000 if she didn't include a Realtor. She took a few classes on Real Estate and read a lot of books. The house was worth $60,000 and she paid $80,000 cash. Soon after she bought it, she found that the house needed $20,000 worth of repairs and the foundation was cracked. Her expertise (or lack of) led her to believe she didn't need an inspection. In the end, she lost $40,000 because the seller convinced her that she didn't need representation.
Myth: Since I have an inspector, I don't need a Realtor. The Fact is that a lot of veteran Realtor's know more about the construction of a house than do inspectors (especially if the inspector is new to the trade). There are things in a house that will eventually happen and if you don't have the foresight to see it, you could end up losing money later on (nail pops, foundation cracks, peeling paint, wet basement floors). Another issue, unfortunately, are inspectors who don't report things to avoid the appraiser from finding out about it (it can hold up a closing). I'm not saying all inspectors are that way, just that this sort of thing happens. I used 2 inspectors for my house (one that the lender recommended (for structural and framing) and one that my Realtor recommended (for final inspection).
Myth: My friend is selling me the house and I want him to make money, so a Realtor is out of the question. Oh, you poor child. The things you don't know that you don't know. A friend may have all the best intentions of selling you a house but it doesn't mean there aren't issues with the house that the friend doesn't know exist. Does a person know what structures or businesses will be built nearby in the near future? What about the status of the schools as it pertains to the quality of education? Is the market in the area stable, declining or improving? (Don't use online resources as we know those don't work). Are you over paying or is your friend ripping him/herself off? Will this be considered a non-arms length transaction and if so, will it be recorded as such? A non-arms length transaction means that the seller and buyer know each other. Think about seeing a very good friend. Do you hug the person (non-arms length) or offer a handshake (arms-length). Values are usually higher when a transaction is non-arms length (which is why it is recorded as such).
Myth: I am selling my house and will only pay 1% for a Realtor to write the contract and save money. This is a Fact. You will save money by doing this. At least you got a Realtor. Hopefully, you will be able to show your home when a seller wants to see it, you will be able to keep an objective view of any issues the potential buyer finds, you'll be able to quote statistics of the surrounding area values, both recently sold properties and on the market properties, be able to arrange the home to "open it up" and remember to bake cookies and offer drinks for guests (don't burn the cookies). If the buyer has a Realtor, you may be on the defenseless side since you weren't willing to pay a little extra for your representation. Remember, you get what you pay for.
Myth: As a seller, I have to pay the Realtor fees. The Fact is that there is no law that states that commission or fees have to be paid at all. The buyer may pay his/her Realtor. The seller may pay his/her Realtor and not pay the buyer's Realtor commission/fees. The buyer may be a Realtor and request that his/her fee be used to pay down the sales price. By the way, the fee shouldn't be used to pay closing costs since the closing happens before the fee is paid.
After reading this, you may find that I believe in using Realtor's for buying Real Estate. I believe in doing whatever it takes to keep me from spending a lot of money (both now and in the future), from keeping me out of jail and keep me learning in an industry that changes on a daily basis.
I recently had a returning client from another country tell me that his Realtor in Florida found him a great property. The value was 35% higher than the sales price. He had the Realtor videotape the interior and exterior of the home including the landscape (for potential erosion problems), the street view and a Comparative Market Analysis (CMA) was done to show properties sold in the last 6 months. The seller was contacted and a price was negotiated without compensation to the Realtor from the seller. The buyer, instead decided to pay his Realtor a higher commission for the work that was done (also citing it as a tax write off). From thousands of miles away, this buyer did everything right. Finally, someone who actually listened to me.
Some banks or lenders take more than 60 days to close. Credit report pulls, last 60 days. The bank then has to repull credit and that's when the problems start. Here's a list of things people do and things that can happen during those 60 days that causes a loan to go bad or not close at all:
1. Opens or closes a credit card that lowers the credit score.
2. Buyer's curent home that is rented out for less than 2 years does not have the minimum 30% equity in it, to allow its income to be used to offset the current mortgage payment.
3. Charges up a credit card that lowers the credit score.
4. Charges up a credit card that has the underwriter assume the buyer is using the money for down payment. This changes the Debt to Income Ratio and the loan must be re- underwritten.
5. Buys a car.
6. Buys furniture with cash and not having enough money for funds to close.
7. Co-signs a loan for someone.
8. Quits the job.
9. Moves out of rental location without proving most recent month's rent.
10. Moves out of rental location without warning and having collection against credit for non- payment.
11. Makes a large cash deposit into account without a paper trail.
12. Tells Loan Officer to suspend locking the interest rate for the loan and then the rate goes up causing redisclosure of forms (3 business days wait time).
13. FHA red flag against buyer for not qualifying on previous FHA loan.
14. Tax return transcripts delay coming back from the IRS.
15. Inspection shows issues with the home that the Appraiser did not find and that information is relayed back to the Appraiser. Repairs must be completed for Appraiser to go back out and make sure repairs were done properly.
16. Property located in a flood zone.
17. Property is not owned by the seller.
18. Buyer's social security number does not match his/her social security card.
19. Title search finds tax lien or judgment on buyer that was not reported on credit report.
20. Buyer cannot show proof that the person giving him/her money as a gift is a relative.
An article was written today in the National Mortgage News about the topic that I am writing about. The author however, stated what to look for in a pre-approval letter: Name, property address, loan amount, documents received, company name, loan officer name and contact information. He went on to say that pre-qualification letters will soon be a thing of the past.
Is that enough information?
I think not.
The pre-qualification letter that you receive from a buyer may be fake or worse, been issued by a loan officer in the past and the information altered.
As loans become harder to obtain and software programs easier to obtain, people do desperate things to get what they want.
I've was a victim of fraud back in 2006. A former client from 2002, gave someone a pre-qualification letter that I had given him (4 years earlier). The company was out of business. No matter. The date and property address was changed on the letter and my name, signature and contact information was on the letter. The supposed loan went to the day before closing when the buyer informed his Realtor that he didn't have financing in place. He was trying to get cash from someone to buy it. I had to hire an attorney to prove that I did not issue that letter. Luckily, I used a typewriter to issue the letter and the address, date and loan amount were done using an ink jet printer.
Not only did that person fail to get the house, he also ended up in jail for fraud.
First of all, understanding the difference between a pre-qualification and pre-approval letter is important. The Pre-Qual as banks call them simply means a person's credit was pulled after submitting an online, over the phone or in person application. No financial documents were given, no letters of explanation for credit issues etc. A pre-approval means that financial documents were given and everything is out on the table that may cause a problem in the process. Still, pre-approval doesn't give you an absolute closing.
One of the biggest issues that I've seen is the loan officer's inability to read financial statements, look for Non Sufficient Funds on bank statements and understand tax returns (especially corporate tax returns). His/her inability to understand the loan guidelines pertaining to the closing is also an issue as more bank Managers refuse to let Loan Officers educate themselves on Underwriting (they want them to focus on sales only).
The best letter to get is an approval letter with conditions. This can easily be done. It takes one more step in the process. Basically, instead of the loan officer receiving the documents, he/she submits the file to the processor with a property address and the loan is run through an automated process (like Desktop Underwriting - DU or Desktop Originator - DO). This process will give the processor and/or underwriter the requirements needed to finish the loan.
Why isn't this done more often? Because most of the time, the seller or the Realtor's want a letter right away in order to get the contract reserved for the buyer. Speeding things up requires less work to be done which may result in issues during the process. Demanding an approval with conditions within 3 days of the signing of the contract may be a better route.
Of course, an approval with conditions isn't a guaranteed win, but it puts the buyer one step closer to closing.
As the cost of everything goes up, accept our paychecks, interest rates creeping up, debt to income ratios lowering, credit card companies increasing the minimum payment due, income taxes rising as the nation goes further into debt (which will make our net income drop), it's becoming more and more difficult to income qualify for a loan.
So, here's how to show that you make more money (legally) without actually making more money:
Multi-family homes consist of 2 to 4 units. Terms like duplex, triplex, and quadplex are used to describe multi-family properties.
Each attached unit has a market rent price. In other words, the going rent rate for the area. Let's say that you find a triplex (3 units). You will live in one and rent the other 2. The going rent rate is $500 per unit.
FHA will give you $500 credit for each empty unit as if you are going to rent the unit. You don't have to rent the unit if you don't want to which means the units don't have to be rented at the time of closing. Some people will use the middle unit as storage and rent the other to have a barrier between the 2 families.
At this point then, you have an extra $1000 (2 units @ $500 each) for income to qualify for the property. Talk to your loan officer if his/her company accepts this form of qualification. It is an FHA guideline but not all banks adhere to it.
During the next 2 tax years, report the rental income on your taxes with little tax write off to get the benefit of maximum income production. This rental income can now be used to qualify to refinance to a conventional loan AND allow you to use an FHA loan to buy another multi-plex. You can only have 1 FHA loan at a time (certain exclusions apply). Now, you have a triplex bringing in income and a new multi-plex bringing in income.
You can repeat this every 2 tax years for as long as banks allow you to have multiple properties (usually 4 properties maximum). There are banks that allow up to 10 properties.
Thank you everyone for the phone calls, emails and such. I appreciate you giving me the opportunity in helping you achieve your goals. While it's true that I don't charge money for my services (yet) and I don't get paid any money from the referral sources nor from any work that I do, I still need to limit myself in who I can help.
I run several businesses that allows me to help people for free. I'm a financial adviser with Amwealth Advisers (amwealthadvisers.com). I coach and counsel people on finding finance solutions. I also own a travel agency to help defer my costs of traveling and offer it to people interested in doing the same (tix2ride.paycation.com) and I'm currently studying for my real estate license.
So, as you can see, my time is limited. After 15 years in the mortgage industry, I learned a few things which I can't or won't do if you:
- Have a tax lien but not making payment on it
- Have no proven income
- Report zero income on the tax return after subtracting schedule A and C deductions
- Had a foreclosure last month
- Currently in chapter 7 bankruptcy
- Not old enough to buy a home
- Want to live in an all-white neighborhood
- Want to use child support income to qualify for a loan (I don't believe it should be used for that)
- Trying to refinance a house that doesn't belong to you
- Trying to sell a house that doesn't belong to you
- Use your car as collateral for down payment
- Use child support income that is NOT court ordered (if you can get passed me agreeing to use child support as income)
- Allow you to buy 2 houses at the same time
- Allow you to buy a house as a primary residence if you aren't going to live in it
- Use an employer that you don't work for
- Use someone else's bank statement if you are not on the account
- Help you buy a house that is 4 times more than rent and you don't have the income to pay it
- Allow the equity of a home you don't own yet and use it as part of your down payment
- Allow closing costs paid by seller to be used as your down payment
- Ask that I not count a new car payment that you acquired just before closing because it doesn't show up on the credit report just yet
- Ask that I ignore the $35,000 in collections on your credit report that you just decided to start paying off to get a home loan
- Use someone else's income to buy a house
- Use someone else's identity to buy a house
- Create fake documents to obtain a loan
- Create fake tax returns to help you qualify
- Pretend I'm your employer so that you can get approval using the fake pay stubs you just created
- Ask me to ignore the fake bank statements that were just created
- Buy a house that doesn't really exist
The list goes on.
The bottom line is that you need to ask yourself this question when thinking about buying a home:
Would you lend yourself money if you were the bank?
PS. If you don't know the answer, that's what I'm here for.
Private Mortgage Insurance (PMI) is the term most people use to describe the insurance required with a mortgage if you don't put at least 20% down. Mortgage Insurance (MI) started in the 1950's. The company, PMI was used to help the consumer purchase a home without the 20% down payment by insuring against default by the home owner. The PMI company would insure the loan for the difference between what the consumer paid for down payment (5%) and the 20% down payment requirement. This opened up the ability to lend money to more people.
Since the 1950's, other companies joined up to offer the same type of insurance. At one point, there were over 100 MI companies. Today there are fewer companies around due to the large foreclosure rate in this country. Many of those MI companies had to pay the bank up to 20% of the difference between the value and the mortgage amount, for the defaulted amount.
Most banks figure that a home mortgage equivelant to 80% of its value is easier to resell on the market if in default, than a home mortgage at 95%. Therefore, if a person puts 20% down, he/she is not required to obtain MI. When a buyer puts 20% down, the underwriting process is completed by the in-house underwriter using the bank's underwriting guidelines.
A person who buys a house using a conventional method (non-government) and puts less than 20% down is required to pay MI. The MI company is the one who underwrites the loan, NOT the bank. These are called overlays. The bank has its guidelines and the MI company has an overlay of its guidelines to ensure the buyer has the ability to pay the loan.
So, does it make sense to put 20% down in order to avoid MI? Absolutely NOT! If you think differently, ask all those people who did put money down on their home before 2008. Ask them where the money is now with the home value drop? I would never recommend anyone to use their money to offset MI, especially when you don't know what the value of the home will be over the next 7 years.
Is Mortgage Insurance a bad thing? Well, it depends on the person. In some cases, MI is not tax deductible. Therefore, you're throwing money away to ensure that you don't default on your loan. What if you have perfect credit and never missed a payment? Too bad. You still have to get the insurance. Does it ever go away? On conventional loans, yes. On FHA loans, not anymore (as of June 2013). If you put 5% down on a conventional loan and are required to carry MI, you'll have to wait until 3 things happen in order to drop MI:
1. Mortgage loan amount equal to or less than 78% of the value of the property.
2. Home must be in an area where the value of the property is increasing annually.
3. Must be making your mortgage payments on time.
Once these 3 things come into existence, the lender may order a valuation of the property to ensure that the home is worth 22% more than the mortgage loan. The bank may require that you pay for the appraisal. If all passes, then the MI is dropped. If you fall behind on your mortgage, however, the bank has the right to put MI bank on the loan.
There are other solutions rather than obtaining MI. Here is a list of options with pro and con:
LPMI - Lender Paid MI is a format where the lender pays your MI for you. Well, not really. Basically, the lender increases the interest rate of your loan (or charges you discount points). The increase in rate offers a bonus from the originating bank. The bonus is then used to pay your MI for a certain amount of time. The end result is a higher interest rate but perhaps a lower payment (depending on the loan size). LPMI is used alot with Fannie Mae's 3% down HomePath program.
Fannie Mae's HomePath program allows for 3% down with no MI. Where a regular loan program's rate may be 3.875%, HomePath's rate will be higher, around 4.25%. If someone prefers to put 5% down for HomePath, the interest rate may be as high as 5.125%. This makes no sense at all, does it? It's all based on what the bank contracted to sell to another bank. They don't want 95% No MI loans, so if you ask for it, you'll be penalized for it.
20% down - As mentioned above, with the economic times as they are, putting a considerable amount of money down is not a great idea. It's better to pay the MI and keep your money in your pocket.
Split Loan - With the right credit scores (around 700) and the right debt to income ratios (around 41%), splitting a loan may be a good option. This allow a person to put 5% down while borrowing the other 15% from a bank or credit union for the difference. The first mortgage bank has to approve the split loan. Some banks offer split loans with 20% down, so it's important to ask if you can split the loan to 95%. Example: Sales price is $400,000. First mortgage is 80% = $320,000. You put 5% down = $20,000. The second mortgage at 12% will be for $60,000. The end result is no MI but the second mortgage rate may be as high as 12%. Ouch! Check with your CPA to make sure that the second mortgage interest is tax deductible before going this route.
In order to compare a high rate second mortgage payment and a MI payment, go to this website:
Go to Rate Finder
Fill out the questionnaire (most everything is already completed):
Enter your estimated credit score
The percentage borrowing based on down payment (90-95% for example)
Enter your loan amount after down payment
Enter your zip code
Enter State, County if the zip didn't populate it
Click Get Quote
With 5% down using the 700 score and $320,000, the MI payment = $237.33. You can see that after year 11 the MI rate drops considerably.
A $60,000 loan at 12% as a second mortgage = $617.17. Depending on your abilty to pay the loan will dictate which way is best for you. Having a $7000 tax write off may be an advantage for some people who make less than $166,000 a year.
Of course, using a VA or USDA loan there is no down payment and no MI.
For FHA loans, MI is now permanent. FHA allows a person to put 3.5% down and the government ensures the loan (tax payer money). If you default, the tax payers pay the difference between what the house sells for and the amount you owed. It used to be that MI was kept on the loan for 5 years but the government needs money to stay afloat and offer more loans, so they changed the MI requirement to indefinite.
Investment properties don't apply to MI because currently, a minimum down payment is required of 20%.
So many times, we see on the internet an interest rate that seems unbelievable.
Call us now and get an unbelievable 3.25% interest rate (for qualified buyers)!
Qualified buyer? What's that?
Read on and you'll find out!
There are several things that cause an interest rate to change, aside from the stock market.
To qualify for a special rate, you have to meet certain criteria as a buyer. This criteria is not always credit based. Every bank is different and their fees, costs, rates etc will be different. The rates, fees and criteria used below is only an example and does not represent any bank or lender.
The following criteria may affect your interest rate: Credit score; Loan amount; property type (SFR, condo or townhouse); location of property (zip code or county); Amount of down payment or lack thereof; Waiving escrow (pay your own taxes and insurance), Debt to Income ratios, self employed or employed, loan program.
We'll use the following info: Loan amount: $250,000. Credit score 720. Type of property: Condominium. Waive escrows (buyer pays own taxes): Yes.
The Loan Officer (LO) will review the rate sheet and check the guidelines to see if there are any adjustments to the 3.25% interest rate that was advertised.
Rate sheets look like this:
15 Day 30 Day 45 Day 60 Day
99.812 99.656 99.500
100.187 100.031 100.000
The numbers going across the top are the days that the loan will be "locked" in place. The numbers below the lock days are the pricing costs of the rate. The numbers to the left are the interest rates.100.000
is called a Par Rate (see 3.500% for 60 days). This means that getting this rate will neither cost you money, nor will the lender get paid a bonus for selling this rate to you. 100.343
(see 3.500% for 15 days) means that the lender will receive .343% of the loan amount as a bonus.
1 Point = 1% of the loan amount.
Now, look at 3.250% for 15 days. The pricing shows 99.968
. This means in order to get a rate of 3.250%, you must pay the difference between 100.000 (par) and 99.968 = .032.
$250,000 X.032% (.00032) = $80
Costs of doing a loan are subtracted from the par rate of 100.000.
The more days used to lock the rate, the more expensive it gets to obtain the rate advertised.
Now, the LO will adjust the cost of the loan based on your criteria.
This is what the pricing adjustments look like:
FIRST MORTGAGE - Price Adjustments
Loan Amount $60,000 - $180,000 = .500 pts
Loan Amount $180,000 - $280,000 = .250 pts
Loan Amount $280,000+ = 0.00 pts
Since the loan amount is less than $280,000 and more than $180,000 the LO will subtract .250 from the par rate of 100.000. Your new price for the 3.25% rate is 99.750
(100.000 - .250).
This means that you must pay .250% (quarter of a point) to obtain a loan and .032% for the 3.25% rate for 15 days.
Let's look at the next adjustment to the price of the rate:
Condos </= 4 stories = .250 pts.
- .250 = 99.500
So far, you must pay .500% (half a point) to obtain a loan and .032% for the rate.
Escrow Waiver - Loans < 80.000% LTV (Loan to Value) .250 pts.
Escrow Waiver - Loans > 80.000% LTV (Loan to Value) .000 pts
99.500 - .250 = 99.250
Points for loan .750
Total must equal 100.000 (par rate)
At this point, with a 720 score and waiving escrow, you would have to pay .750 (three quarters of a point) to obtain a loan and .032% to obtain the 3.25% rate for 15 days.
$250,000 X .750% (.0075) = $1875.
$250,000 X .032% (.0032) = $80
Total cost to obtain 3.25% = $1955
This will be paid at closing as points.
Now, we have to look at when
you expect to close. It may take 30 or more days to close your loan. Therefore, the 15 days rate lock won't work for you. This is why lenders use 15 days. It's the cheapest rate on the market, yet no one really obtains it.
The loan officer will then offer you an option to roll the cost of the loan ($1875) into the next higher rate that pays a bonus to help cover the costs of getting a loan (.750%). This would be an interest rate of 4% for 60 days.
The pricing for this rate is 101.000. Therefore, the bonus will cover your fee of .750% (99.250 = 100.00 - .750). The .032 fee does not apply because you are no longer obtaining a rate of 3.25%.
If you refuse the offer and pay the extra $1875 for obtaining the loan, keep in mind that you'll also have to pay for the extra lock in days as well, to get the 3.250% rate.
For 30 days, you would then add .750% plus the difference between 100.00 and 99.812
= .088. For 45 days 100.00 - 99.656
= .344 plus .750%.
15 Day 30 Day 45 Day 60 Day
3.250% 99.968 99.812 99.656
3.500% 100.343 100.187 100.031 100.000
4.000% 102.000 101.750 101.500 101.000
If you choose to lock the rate for 15 days and need an extension, pricing will be charged to you at closing as follows:
7 Calendar Day Extension .125 pts.
15 Calendar Day Extension .375 pts.
30 Calendar Day Extension .500 pts
As you can see, rates quoted on the internet are usually a bait and switch tactic. It's important to understand that the rate quoted may change if you don't meet the criteria of the special rate.
Ask the right questions when requesting a rate:
1. How many days is the rate good for?
2. What criteria affects the rate?
3. What's the best price available just under par?
4. Based on my loan, how long will it take to close?
5. Based on your experience, do you suggest a 45 day lock?