PRE Qual

PRE-QUALIFICATION | MORTGAGE

The lending world is a very complex one and your lender is by far the best source for information, which is why I always share the names and contact information for several lenders with whom I have worked in the past. It still doesn’t hurt to have some idea of what they are talking about when you enter their domain. I have broken down the basic loan types and structures as well as described a few options for special circumstances to help make the lending process a bit easier.

LOAN TYPES
First of all, you need to be aware that there are numerous loan types and lenders are always coming up with creative solutions to help their clients. Here are the basics:

  • Conforming vs. Nonconforming
    The main difference between the two is that one follows the guidelines set forth by Fannie Mae and Freddie Mac (GSE eligibility) and the other does not. In most cases, the underwriting issue is with the loan amount. Anything over the amount set by Fannie Mae and Freddie Mac would be considered a jumbo loan and is subject in most cases to a higher interest rate because the risk is higher. That dollar number is subject to change yearly and is set higher in Alaska and in Hawaii.
  • Conventional Loans vs. Government Loans
    Conventional: Simply put, a conventional loan is neither insured nor backed by the federal government. This is why qualifications for conventional loans are a bit stricter and the amount needed for a down payment is often higher. Recently, that number has been lowered, but you will still need to put down 20% to avoid paying private mortgage insurance.
  • Government Loans
    FHA – stands for Federal Housing Administration and that is the entity that backs these loan types. It is managed by HUD (Housing and Urban Development.) Many people think these loans are limited to first time home buyers when in fact, they are open to a number of different borrowers. This program allows you to borrow money with as little as 3% down; however, you will have to pay for mortgage insurance for the life of the loan which will increase your monthly payments.
    VA – Veteran’s Affairs backs these loans and is a program available to military members and their families. These programs are also insured and backed by the federal government. The biggest advantage of these loans is that the borrower needs no down payment — 100% of these loans can be financed.
    USDA/RHS – United States Department of Agriculture offers loans to those borrowing for purchase in rural communities who meet certain income requirements. Generally, it cannot be higher than 115% of the adjusted area median income. These median incomes vary by county and the label of “rural” is also frequently changing, especially in high growth areas.

LOAN PROGRAMS
Fixed Loans–many different structures can be created at your lender’s discretion, but these are the basics.

  • 30 Year Fixed – your basic loan. This is just as it seems. It is an amortized loan that has a fixed rate and is designed to be paid off in its entirety in thirty years. Your monthly principal and interest payment would remain unchanged; however, if you escrow taxes and insurance and those fees increase (likely) your monthly note will also increase.
  • 15 Year Fixed – ditto above, but over 15 years vs. 30.
  • ARMS– Adjustable Rate Mortgages. Basically, this loan structure fluctuates according to a fixed structure. This is a rather risky loan.
    • One Year Arm – the loan rate changes yearly. Home borrowers who choose this structure often do this when they do not intend to hold onto the property for any great length of time.
    • 10/1 ARM – This rate is fixed for the first ten years and then rises after that. It can be a good choice for borrowers who are certain they will be selling within 10 years or are making extra payments to quickly raise equity.
    • 5 ARM–same as the 10, but for 5. Far more common than the 10.
  • 2 Step Mortgage – has one rate for a certain number of years and another for the remaining years.
  • Balloon Mortgages – these last for a much shorter time and operate much like a fixed-rate. For the first part of the mortgage, the borrower is predominantly paying the interest and then pays the remainder of the note at the end of the term. This can be extremely risky and is most often seen in construction loans.
  • Interest Only Mortgages – RARE. Not to mention risky. And very little benefit. If you need to do this, you may need to reconsider renting for the time being.
  • Loans with Pre-Payment Penalties – this can be a part of any loan program and you should always ask your lender about it to be sure you will not incur it.

OTHER LOAN PROGRAMS AND GOVERNMENT ASSISTANCE PROGRAMS

  • Teacher Next Door Program – HUD developed this program to encourage homeownership among educators in low to moderate-income areas.
  • Good Neighbor Next Door Program – program designed to encourage homeownership among civil servants such as teachers, policemen, and firemen.
  • HUD’s Home Program – available to low-income buyers in certain qualifying areas.
  • ADDI – American Dream Down payment Assistance Initiative is available for first time home buyers buying a single-family, residential home. Income restrictions exist; a buyer cannot have an annual income in excess of 80% of the median for the area.
  • Zero Down Payment Act – eliminates the down payment requirement with FHA for families who can easily afford the monthly payments but do not have the cash reserves for a down payment. The lender is charged a higher fee for insurance which may deter many lenders from offering it. Contact HUD for more information.
  • EEM – stands for Energy Efficient Mortgage Program and is another loan type offered through FHA. This can be useful to any home buyer who is looking to roll the cost of any energy improvements into the loan. This is insured by HUD.
  • 203K – This is an FHA loan designed to rehabilitate distressed properties. Certain qualifications must be met, primary residency being one.
Cost of Homeownership

TRUE COST OF HOMEOWNERSHIP

Americans have always loved the idea of homeownership. It’s the independent maverick in us. But with ownership comes responsibility and with responsibility, cost. It’s best to be prepared.

Standard On-Going Expenses

  • PITI: Principal, Interest, Taxes, and Insurance – in short, your note. Ask your lender what the estimated PITI will be on your potential home purchase before putting in your offer. Your Principle and interest will stay the same for the life of the loan. The taxes and insurance are open to fluctuation.
  • HOA: Home Owners Association fees: Basically, these cover your common areas. In a small, suburban neighborhood with few amenities, it may only be a few hundred dollars a year. In a gated community or high-end condo in town, that cost can quickly escalate to over a thousand. Pay attention when comparing properties; many will have special assessments – one more bill –while some may include trash pick-up or water – a few less.

Other On-Going Expenses

  • Exterior Maintenance –
    • The Structure:
      • This can be minor, like touch up paint or cleaning or a major expense like total roof replacement. It’s a good idea to set aside money every month for both anticipated and unanticipated repairs. Roof life in Houston is considerably less than other parts of the country and our hot summers are particularly tough air conditioning units.
      • Gutters are essential to keep water off your foundation and assure that your yard drains properly.
      • Windows need to be cleaned, caulked, and occasionally replaced.
      • When purchasing a home, including a home warranty as part of the deal is one way to avoid getting hit with expensive repairs the first year.
    • The Equipment:
      • Ladders
      • Power Tools
    • Yard Maintenance
      • Lawn Mowers
      • Rakes, shovels, & Pruning shears
      • Power Washer
      • Hoses
      • Sprinkler Systems – this is a solid investment in the Houston heat. It will not only save your lawn, but it will also save your foundation
  • Interior Maintenance
      • Appliances
      • Flooring
      • Paint
      • Plumbing & Electrical
      • Flooring
      • Pest Control
      • Utilities – Ask the seller for a break down so you have an idea as to average costs.
  • Transportation Costs –

In Houston, this is a big consideration. Traffic can be difficult and time-consuming. Many people prefer the lifestyle afforded by our suburban sprawl, but it does take a toll on vehicles. Budget for wear-and-tear on your car as well as gas, or consider the park-and-ride as an option.

One Time Expenses

WAIT to make a major one time purchase until AFTER you’ve closed. You do not want to jeopardize your financing with a large purchase and you will want to live in your space awhile before you know exactly what suits your new home and the way you live in it.

  • Appliances – sometimes these need upgrading. Be sure to consider the water heater and the HVAC system as well.
  • Furniture — One word – MEASURE. Furniture looks much smaller in a giant, open showroom.
  • Remodeling – Be sure and get estimates before you purchase a home that needs major renovations. What you can’t see behind that wall or under that slab can cost you.
GOLDEN RULES

GOLDEN RULES OF HOME BUYING

Things to Do and Things to Consider

  1. Check your credit report and know that score! This is no place to guess. Your credit score often determines the interest rate on your loan or if you can get a loan at all. Check with all three credit houses – Experian, Transunion, and Equifax. You must have a credit score of at least 625 for almost all lenders. It can take as long as 18 months to bring up a bad score especially if there are broken leases or foreclosures in your past. If you need help, do not wait to get it. Many lenders can steer you in the right direction and suggest reputable credit repair companies get you in better shape.
  2. Get Pre-Approved. Most sellers will not even accept an offer without one, and you need to know your loan limits before you get your heart on something you cannot afford.
  3. Budget for buyer’s closing costs. Expect between 4% and 6% of the home value for pre-paid and lender/title costs… this is in ADDITION to the Down Payment. Be prepared to put down as much as you can. 20% is ideal, but FHA is now offering 3%. The closer you get to that 20%, the better off you are in the long run. If nothing else, 20% will save you from paying private mortgage insurance which in some cases will last the life of the loan.
  4. “PITI” should become your new favorite word: Principle, Interest, Taxes, and Insurance
    • Principle – the mortgage or the amount the bank loans you
    • Interest – the cost the bank charges to lend you money which is collected largely at the front end of the loan life
    • Taxes – In Houston, property taxes are shockingly high and vary markedly by neighborhood and area.
    • Insurance — much like taxes, insurance can run shockingly high and many areas of Houston may require flood insurance as well.
    • HOA – It isn’t usually escrowed but as a buyer, you should budget for it. Some Hoa dues can be as high as $1500 a year; Condos and Townhomes often have monthly dues of $200+ AND yearly assessments for things like a new roof or painting.

Many people forget how high the extras like insurance and taxes can run, focusing instead on the mortgage and interest spit out by mortgage calculators. In Texas – Houston in particular – those two little pieces can be as much or more than the mortgage itself. ALWAYS check the tax rate for any neighborhood before adding it to your must-see list.

5. Beware the Rental Shock. If you are renting, make sure your new note does not vary too much from your current one. This is what lenders refer to as “rental shock,” and can be very frustrating to home buyers. Normally this is more of a problem for first time home buyers whom lenders assume are unaware of the hidden costs of homeownership, but it can affect any home buyer. And it makes sense. Doubling your mortgage overnight can be quite shocking. It’s not uncommon for a lender to require to move up buyers to show reserves if they are dramatically increasing their mortgage.

6. Recognize the art of compromise. No home is perfect. Decide where you are willing to compromise. Usually one of the big three need to change in order to make the numbers work – location, size, or amenities. At the very least, be willing to overlook easy to change things such as paint color, appliances, or wallpaper.

7. ALWAYS get an inspection. Enough said.

8. Avoid ANYTHING that will change your credit. Unless you are prepared to spend a few days explaining that change. Many a deal has died because a would-be homeowner went out and bought a new car or a furniture suit right before close. Just as bad is opening a new credit card just to save 20%. The deal isn’t done until the ink is dry and you have keys in hand.

9. Consider resale value. You may be able to live with a freeway in your backyard but how many other buyers would? And yes, right now, this seems like your forever home, but circumstances change. Ask the guy who ended up with surprise quadruplets – in addition to his two other children.

10. USE A REALTOR. This is a huge error many people make. We often assume that going it alone will save money. In Texas, the seller normally covers all realtor costs with few exceptions. A good realtor can even help you with new builds where you are often at the mercy of the sales agent without one. In almost all cases, buyers agency commission has already been factored in which means the listing agent or sales agent in the case of new builds cannot negotiate it away if you act as your own agent. You wouldn’t try and perform surgery on yourself or handle your own legal affairs. This is likely to be one of the largest purchases you ever make. You owe it to yourself to consult the experts.

HOW TO SUCDEED IN A SELLERS mARKET

HOW TO SUCCEED IN A SELLERS MARKET

  1. Get your finances in order and have a pre-approval letter in hand.
  2. Research your neighborhoods. Consider travel time, schools, amenities. Those things may make the home price worth it to you.
  3. Do not get hung up on small price differences. What is $2500 over 30 years?
  4. Base your offer on the home VALUE – not what the seller has decided it’s worth.
  5. Be ready to move fast. In a seller’s market, homes often sell within days.
  6. Accept that sellers are rarely willing to negotiate repairs in this type of market. Texas is one of the few states that offers a ten-day option period to get inspections done. If you cannot live with the problem or swallow the cost to pay for it yourself, be prepared to walk away in the event the seller says no.
  7. Find out as much as you can about the seller and why he/she is selling. Knowledge is power.
  8. See if there are other things important to the seller aside from price. Many sellers need to lease back, especially in a tight market. If you can be flexible on move-in date, you will likely have an edge over other offers.
  9. Limit your conditions. I would never recommend a buyer waive appraisal or inspections, but avoid coming to the table with other conditions such as having to sell another home first. And even in the case of appraisal, it sometimes can make sense if the seller is willing to accept a cap and you have the cash to cover the difference between the sales price and the appraisal.
  10. Include a personal letter. Many sellers appreciate that someone else will love their home as much as they did.

    *** USE A LICENSED REALTOR TO GET YOU THE BEST DEAL UNDER THE BEST TERMS ***

investment

The Single Family Rental – Smart Investing

I think one of the best ways to increase wealth and add versatility to any financial portfolio is with real estate. In my experience, one of the simplest real estate investments to manage and understand is the single-family rental; town homes fall under this description as well. There are multiple approaches to this type of investment, and you can begin this portfolio at any point in your financial life, but in my opinion, the sooner you start the better off you are. There are two models I think lend themselves best to the young investor.

Let’s say you’re a single 20 something and have managed to save enough money to cover the down payment and closing costs for a small single family or town home. I usually recommend keeping your budget low enough to be able to tolerate a 15 year mortgage so you can build equity faster, but that is not always the best option if you plan to hold the property for a long period or have limited cash reserves. There are two approaches that I have found work well for the first time, younger investor. Scenario 1 is to get a roommate with whom to split the rent and the carrying costs OR in scenario #2, have a roommate or live alone but make a plan to improve it and sell it within five years and buy another one or more rental properties. Doing either scenario under a 1031 exchange can help defer taxes. This is of course a topic to discuss with your tax advisor.

How will investing like this make money you ask. Financial discipline is the key to success in either model. Instead of spending all that rental income or counting on it to pay the rent, save it. This simply will not work well if you need that roommate rental income to cover your PITI. Let’s look at this from both examples.

Scenario number ONE:

This is basically a long-term rental. The idea here is to save some or most of the rental income to purchase another home and KEEP the initial purchase as a long-term rental.

Ideally, you will have a long-term income generating property, and you will be on your way to building a portfolio while investing in yourself with your own home. You may even want to follow the same model when purchasing the second home and get a roommate or buy a duplex and live in half while renting out the other side.

Either way, there are some snake pits you need to avoid or at the very least be prepared to address. First and foremost, in any real estate consideration is location. You will need to know the historic trends for this area. What has pricing done over time? Have there been any events that might stigmatize the area or put your property at risk (AKA flooding, earthquakes, mudslides, hurricanes, plant explosions, high speed rail to be developed nearby, etc.)? Have there been significant jumps in taxes? Any of these can kill your return on investment and ultimately make your investment a poor one.

Be careful about investing in properties older than 30 years that have not had extensive mechanical and structural updates. Older properties have older property issues such as galvanized pipe problems, roof issues, foundation problems, asbestos and lead. One or two of these may be addressable but could cost you and will requiring a greater holding time to recoup that investment and is something you will need to factor into your offer price. MAKE CERTAIN you get a thorough inspection and, in my opinion, it is worth the extra time and money to get additional inspections for roof, mecahnicals and WDI (wood destroying insect). For investment purposes, I love homes that have been structurally and mechanically updated but are stuck in their time period. Cosmetic updates can be done over time and as part of an income producing property may be deductible. Score!

Keep in mind, you will also be making this your home even if only temporarily so the location and layout need to work for you as well, and you will also need to factor in the cost of HOA fees and any potential assessment fees. Those amenities may be worth the extra cost as not only will you get enjoyment from them, but your future tenants will as well making the property easier to rent in the future.

Scenario number 2:

The same cautions apply here as with #1 but with less room for error because of the time frame. This is basically your hold and flip model. It’s often used by more experienced home buyers and investors, but even a novice can do it as long as he or she has some capital. This requires more market knowledge and a bit more luck. Since the plan here is to basically hold until you have maxed out the tax value, you need to be sure that the area is appreciating in value and the location is very desirable. You also do not have as much time to recoup large investments in items the consumer will not appreciate such as re-pipes, new windows, or foundation repair. Most consumers do appreciate new roofs, new mechanicals and new appliances so those will likely be worth the investment, but like with any RE purchase, any needed improvements should play a factor in your offer price.

With this property, the rental rate carries a much more significant weight as you only have a limited amount of time to profit from that … I tend to think of these more like a flip property. Can I make a significant profit between rental income applied to the PITI (principle, interest, taxes, and insurance) and resale value after improvement costs? On these, it’s not unusual to take a contractor along with you during a preview or in Texas during the option period to see what your “all in” cost will be and make adjustments to your offer price accordingly. Once you sell, you can roll the proceeds into another income producing property or maybe even two properties, or a duplex/triplex as mentioned in Scenario #1.

Real estate investing like any investment carries a certain level of risk. And there are other factors to consider. Can you tolerate the fluctuations of the housing market? Do you have a back-up plan if the market turns and you need to hold longer than expected? Do you have the personality to be a landlord? As with any investment, it is always best to seek out advise from an accountant, financial advisor and/or an attorney. And always consult a licensed Realtor who is knowledgeable about the area in which you are considering.

 

Home-and-Family-cartoon

First time home buyer with kids

Buying your first home when you are already “adulting” can be daunting especially when children are involved. Unlike the 20 something buyer who has few obligations, you must consider not only the immediate needs of your partner and/or children and pets but also your future needs as well. For you, this means when purchasing, you will want to minimize your investment risk and still keep future value at the top of the need list.

While purchasing a foreclosure, short-sale or distressed property is not out of the question, you need to seriously evaluate your discretionary income that could be used toward repairs and your available time to devote to sweat equity. With child, marriage, and work demands both are often in limited supply. More often than not, at this stage of life, you will want to look for a property that is fairly turn key or at a minimum make allowances in your offer price to address any pending issues such as an older roof or aging mechanicals. This can be done through a reduction in price or requesting seller assistance toward closing costs. The latter will free up available cash to deal with repairs if need be. And if you are handy, you can put your own stamp on your new home at the fraction of the cost. Rule of thumb: budget to hire professionals for any plumbing, HVAC, or electrical work. Cosmetic issues such as paint are doable DIY projects.

Another huge factor for your group is location. Before kids, most people prefer to be close to where the action is and a quick commute to work. That changes somewhat when kids and larger pets come into the mix. Depending on your social life and the commute in to work, you may want to be closer to town which generally means a smaller home or townhome with less yard. In Houston, that can also mean the added expense of private school as well if the inner-city schools leave something to be desired. For this reason, I highly recommend you look to search engines such as greatschools.com or schooldigger.com to get an idea of school ratings. I also recommend calling the sherriff’s department regarding crime statistics. A community that suffers the occasional teenage car break is very-different from the one with three homicides this week.

With the exception of the buyers that really want that in-town experience, most homebuyers in your group are looking for a yard as for their kids and pets to play and to entertain friends. Depending on your price point, that could be closer in but more likely will require a move out toward the suburbs. Suburban life is different than living in-town and in Houston, master planned communities have evolved to address the needs of young growing families by developing green spaces for parks, nature preserves, lakes and pools, hike and bike trails, community schools, sports complexes and sports associations as well as easy access to freeways, entertainment, restaurants, and healthcare. These amenities do not come cheap and buyers often must sacrifice lot size and pay a premium in HOA dues.

One final consideration: since this is not likely your last home, you will want to buy with resale in mind. Make sure that the community has values that are holding or increasing or at least have the potential to increase. You will also want to be cautious about purchasing new construction in a neighborhood that still has much to be built out as you will pay a premium for that new home. You can expect to need to remain in that home at least three to five years to break even on your initial investment and closing costs… sometimes even longer.

The best bet for ensuring a great investment at this stage of life — one that will resell for higher value down the road but meet the needs of a growing family for 5-7 years — is to hire a licensed agent familiar with the local housing market. For you more so than many other groups, it’s helpful to have an agent that knows multiple areas of our ever growing county and adjacent counties.