BY KEITH ROBINSON | APRIL 24, 2020
How in the heck am I supposed to buy a house while I am sheltering in place?? I hardly know what day it is without checking right now. Is it actually possible for me to find a house, evaluate it, write an offer, get it accepted, and close on it? Not to mention moving… is that even legal right now?
Trust me, we hear you. It is always complicated, stressful, and a little emotional buying a house. Maybe even a little more so in this “new normal” (nothing normal about this) of COVID-19. To start with, the answer to all of the above questions is “it depends.” Super helpful, right? The thing is, every state (heck, every county) is approaching this differently. In some states it’s kind of business as nearly normal – just add in vats of hand sanitizer, masks, and 6-feet-away hellos. Others are in lockdown but real estate is deemed essential so you can still transact. And in a few, it’s been deemed non-essential and it’s literally not even possible to close on a home, not to mention see one. So… it depends.
If you are in one of the states (counties) with the first two options, there are some real opportunities out there for buyers right now. We’ve had an inventory shortage in this country for a while now and that is only going to continue with builders slowing down building and more and more millennials entering “household formation” years (a fancy way of saying they can now afford to buy a house). For the buyer with a little creativity and willingness to take action – and the right real estate professional – this could be the time. That being said, it is stressful and a person deciding to hold off to let the dust settle could make sense. The rest of this is for the creative and willing buyer.
Step 1: virtual buyer consultation. It could be over Facetime, a Zoom meeting, or some other virtual conference room software. We’ve been doing things remote at NextHome since we started our company over five years ago. It’s not quite as good as meeting face-to-face but it’s really close to the same thing. I mean, if virtual happy hours are popping up around the U.S., then we can set up a virtual buyer consultation to have all your questions answered.
Step 2: virtual property search. Now you’ve already been digging through Zillow like a detective looking for the one clue to make your case. Now you’ve got someone to send them to so you can get more information. And you’ve got a partner in detective work who will be doing some digging with you and sending you properties that fit your criteria. Think of it as your virtual property concierge who is there to assist, and sometimes lead, the property finding process. Thank the technology gods that more and more have been developed to help you know a lot about a house before you see it. I know, I know, you’re already wondering what happens when you find your dream house online for that, it’s step 3.
Step 3: video home tours. We’ve all got a camera in our pocket (along with a calculator, take that my 6th-grade math teacher who said I wouldn’t always have one handy)and it’s as easy as ever to “see” a property at a distance. Your agent can get access to the property, fire up that Facetime, Facebook video chat, Google Duo, etc. and walk you through every inch of your future home.
Step 4: electronically sign things. Ok, we like it, no, we love it. Now what? It’s offer writing time. The ability to sign documents at distance has been around for years on the real estate side (come on mortgage side, step your game up, because not everything can be signed digitally there). We have all the real estate contracts, addendums, forms, and such available digitally and can email them to you. Then you would need to lean forward towards the computer screen to read the small print and smush a few mouse clicks – you’re now in offer, counteroffer, negations, and starting the closing process. You will probably have to go somewhere to sign loan documents (see above about mortgage) but in most areas, they have changed their process to allow for safe signing. Some even have a mobile notary and closing specialist who can come to you to sign everything. Easy peasy lemon squeezy (it’s actually hard hard lemon hard but our trained real estate professionals are there to help you every step of the way).
Step 5: inspections. Buying a house is one of the biggest financial decisions you’ll ever make. There are lots and lots of inspections you can have done. And each of them can be completed, then the reports sent to you via email. We can even set up a virtual conference room to review the report with the inspector and the agent so you can get all your questions answered.
Step 6: transfer funds by wire. Yup, that’s right. You can move money around like a high-powered hedge fund manager. You feel pretty dang cool when you tell the closing facilitator, “I’ll have my people wire the money over.” Trust me. You do.
Step 7: keys, please! As an agent, this was always my favorite part of closing with a buyer. Giving them their keys. As a real estate agent, there isn’t much more rewarding than seeing the people you’ve helped get the keys to “their home.” It’s amazing. Now we just do it over a screen instead of in person. There are key delivery services that can have the keys brought right to you. You’ll just have to Facetime when you do it because I know your agent is going to want to see your smiling face when you get them.
Do I write this with the thoughts that someone will buy a house without ever seeing it. No, of course not. What’s important right now is we all stay safe and we can limit the contact as much as we need to for everyone to feel safe. And we’re fully set up to take care of as much of the process virtually as we can. For some buyers, this is the right time to get bold, take action, and go find their house. And for others, they might want to hold off a few months. For both sets of buyers, we’re here to help you whenever you’re ready.
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.
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.
I hesitate addressing the article to first time home buyers because that can be anyone — someone who is 19 and just came into cash or someone ready to retire on the beach and get away from apartment life in the city. And it DOES make a difference as to how you spend your money at different ages.
The younger you are in general, the more flexibility you will have in the type of property in which you invest. And a home IS an investment. It is far easier in your youth to borrow money once you have established a baseline of credit. Lenders like you because they see your earning power as beginning vs diminishing.
The other advantage to early homeownership is you are not necessarily bound to certain areas because of children or parents or medical needs, etc. You are freer to explore inner cities and more industrial or more transitional properties. Look to areas that are transitioning and for something into which you could put a little sweat equity.
If you are doing a loan product, you will need to prepare to hold onto the property for at least two years so be sure you like it well enough to live there yourself. If you can hang on for 5 or more years, generally speaking, you will see larger gains in equity and prepare you for your next step. For some savvy buyers, their first purchase is something well within their budget, they save their cash for a down payment on something larger down the road and hold onto their first purchase as a rental property. Dream big and find a way to make those dreams reality!
I watch a lot of HGTV. A LOT. It’s hard to resist– a bit like watching a fairy tale unfold in real time. The magic fairy (AKA witch) has cast a spell over me. I am now convinced that with the proper tools and access to Pottery Barn, I too can be a designer/contractor genius.
It begins innocently enough. I peruse the bathroom space – dingy Melamine cabinets with peeling sides, an ostentatious lack of hardware and several chipping baseboards. I make the call to focus on that and leave the wall paint and tile for another day. I don’t have a tile cutter after all and haven’t read that book yet. But cabinet paint, cabinet paint I can handle. I budget $200 and two hours of labor.
I buy the equipment. Carefully chosen hardware from the local hardware store’s sale bin, plastic drop cloths, painter’s tape, paint, drill, sandpaper, and hardware guide. I am good to go. I get to floating and taping.
Huh. The painter’s tape isn’t sticking. It just curls off … and then sticks to itself. Hmm. Well. That’s no good. I set the tape down on the drop cloth. Now it sticks … to the drop cloth, my shoe, and my dress. No problem. I was going to need to change. I toss the green tape in favor of good old blue, and trade in the sundress for shorts and a tank top. I re-do the plastic drop cloth. Much better.
Paint tape, check. I move on to the hardware. Being a veteran DIY viewer/reader, I know enough to prep for the hardware before painting. I pull out my hardware marker and start marking. Perfect. I line up the drill and voila! Beautiful holes. I want to see how fabulous my handiwork is. I line up my handle. Hmm. Holes are too close together. I re-measure. 1/16” off. No problem. That’s why they make wood filler. I quickly fill in the hole and move on to the next one. This time I get the spacing right, but it’s crooked. Maybe there’s something wrong with my level. I shake it. Bubbles are fine. It must have slipped. I’m starting to wonder if I have enough wood filler.
An hour and a half later I have completed my hardware holes and am down two jars of wood filler. Not a huge blow to the budget – just a measly $5.00. The new hardware will cover most of the holes. I am filled with renewed confidence and am ready to tackle the peeling Melamine.
I pull out the wood glue and begin my first peeling section. I work both sides until they are tacky, hold them together, and voila! Fixed Melamine. I move on to the next door … and see the Melamine from the first pop off. Huh. Maybe I need to hold it longer. Six tries. No luck. I decide to head back to Home Depot for a clamp.
$30.00 later and the clamp just slides down the door. Melamine hates me. I officially hate it back. I take a deep breath. It’s just a little hiccup. I decide the paint will seal it.
I am way behind schedule. I re-think priming. I decide to prime the peeling sections only. Seems to be working – somewhat. Between the glue and the primer, the peelings are sticking. Aside from a few unsightly drip marks, they look remarkably better. While attempting to correct one cabinet, I notice the bulge on the bottom side of the other. Huh; didn’t notice that before. I investigate and discover water damage from an overturned shampoo bottle. No problem. Sand and prime with Kills -– take that Melamine!!
I begin my sanding with my heavy gage sandpaper – no fine grit for this job! The cabinet appears to be shredding. I now have a mess of wood shavings on the floor. I google “water damage and wood shredding upon sanding.“ The news is not good. You shouldn’t sand water-damaged particle board. I say a bad word. I google, “wood sealants.” And I embark on another trip to home depot.
Wood sealant and can #2 of Kills – $94.23. Budget is starting to take a hit.
Hour three and I am ready to paint. I am back on track and rocking it! This is my forte: the paint is looking good. Nice clean brush strokes, beautiful cross hatching, a few loose brush hairs and some sawdust … wait. That’s not good. That’s not good at all. I cuss a little. I take a paint cloth and wipe down that section. I’m ready to repaint when I tip over my paint cup. I cuss a little more. It’s OK. I congratulate myself on my flawless drop cloth application. No harm done … until I sit in the paint. Words I didn’t know I knew fly out of my mouth. I decide I need a break and opt to get some water.
Walking back, I see it — the trail of oil-based footprints leading to and from the kitchen. What can only be described as a primordial scream escapes from my throat. I scrub off my foot with mineral spirits. I remove my shorts before cleaning the floor. Pretty smart. No sense risking more paint on the wood floor.
I make my way back to admire my paint job and toss the shorts in the corner. It doesn’t look as good as I thought. It probably just needs a second coat. I read the label. Three hours between coats. Are you *&%$ing kidding me??? It’s Ok. I can test out one of the handles and see how it looks.
So far, so good. Screws are a little long, but I have extra nuts. I’ll just double bolt. Not bad. As if to taunt me, the faux drawer slips, revealing a gap. Great. It’s broken. I pull at it a little and the whole face comes off in my hand. I yell many, many more bad words. I recall the ineffectiveness of the wood glue and opt for super glue instead. Stupid drawer thinks it’s going to get the better of me – think again drawer face!!
I spread some super glue on the cabinet and set the faux drawer face in my lap. Sweat keeps running into my eyes and I am pretty sure I have paint in my hair. I’m getting dizzy from the fumes from the glue and the mineral spirits. I persevere. I spread the glue on the drawer face and let it sit a minute to get tacky. I’ve got this! I lift the piece up. Drawer face has won.
I have super glued it to my bare leg. I hear myself sob. I rip it off my leg. … along with a chunk of my skin. Now, I’m bleeding. I crawl over to the toilet and pull off some toilet tissue to stick on the wound.
And it is at this point that my husband walks into the room to assess the progress. He doesn’t say anything at first. He just raises an eyebrow. I look around. I am half naked and bleeding, covered in paint and sweat. The room is covered in a mix of paint, sawdust and hardware … with my shorts tossed in the corner and a broken drawer face at my paint-stained bare feet.
He finally breaks the silence, “Call the guy …” and walks out.
I start to protest and then finally nod in tearful agreement. The HGTV siren has guided my ship toward the rocks once again …
Many factors go into a successful sale and timing of the listing is one of the most critical aspects. For the past three years in Houston, the highest dollar value for homes has come in May, June, and July with December being another high dollar month. Consider the following when deciding when to list:
• What is the make-up of your neighborhood? If you live in an area where many homes are occupied by families with school-aged children, you will want to list in the spring when most of those buyers are looking or consider a December list – some families are willing to relocate at the mid-year mark for school.
• Are you listing a townhome or a patio home? These homes serve a wide variety of future homeowners and therefore offer you the greatest flexibility.
• Consider the market. While the spring offers the largest pool of buyers, it also offers the greatest competition. Listing when fewer homes are in inventory can result in a higher sales price, especially for homes in coveted areas or with unique sought-after features.
• Holiday listings sell. Homes decorated for the holidays usually evoke warm memories for homebuyers and who doesn’t appreciate the smell of fresh baked goods that are prevalent that time of year? In addition, psychologically, people are more open to spending.
• Meet the needs of the last minute-buyer. Late July and early August listings can appeal to those buyers who have lost out in spring bidding wars and by overlooking listings through nitpicky critiques. By the end of July, they are starting to recognize the need to move quickly or wait another year if they want to get their children in a home prior to the start of school.
• Watch for fluctuations in the interest rate. I know what you’re thinking – I am listing, not buying. But rising interest rates will limit what your buyer can spend thus effecting resale. If interest rates are looking to climb, list sooner rather than later.
• Election years can mean big payoffs for sellers and buyers. Very little movement is likely in the bond market and so for sellers, selling prior to the results can result in a big win.
• Consider the landscape – the actual one, not just the political one. The dead of winter is just that. Dead. It often means dreary curb appeal and overcast days which means your home looks gloomy – not exactly a great selling feature. This is partly the reason October, January, and February traditionally bring the lowest sales prices. The spring brings blooms and blooming sales.
• A relocation based on a job opportunity doesn’t always appear in the most ideal month. Weigh the long-term benefits of the move vs. the small price sacrifice you may need to make now and price it to sell.
• Finally – you have to be ready to make the move and commit to showings. Do not set yourself up to fail. Take down all your personal effects and mentally separate yourself from the home.
Open houses spark immediate reactions from my sellers. I often hear, “Why bother with an open house?” or “We absolutely MUST do an open house!” It becomes quickly apparent that their preference for or resistance to doing one is based on myth rather than fact. So. what is true and what is not??
1. Every listing can benefit from an open house.
MYTH. For some homes, open houses are perfect and will generate high traffic and encourage multiple offers, but that is not always the case. In fact, some homes lend themselves to looky-loos and potential theft. And if your home is in poor condition, an open house may generate bad publicity and incur the wrath of your neighbors and HOA.
2. Open Houses only benefit the realtor.
MYTH. Most Realtors invest the time and money open houses demand to not only promote the listing, but also themselves. HOWEVER, 1 in 10 homes are still sold through an open house, so as a homeowner, why would you want to eliminate that 10%?
3. Listing your open house in the MLS is sufficient to generate traffic.
MYTH. While 90% of homes in Houston are sold through MLS, It is not uncommon for a buyer to “find” an open house that was not on his initial radar due to location or price-point and then fall in love with it. Many factors can encourage this outcome. Your realtor needs great signage and will be advertising up to a week in advance on social media sites like Facebook, Twitter, Instagram, and Reddit. As a homeowner, you can help as well by promoting it through your neighborhood boards and through your own social media outlets.
4. Never do an open house on a holiday weekend
IT DEPENDS. Which holiday are we talking about? Mother’s Day has been known to generate a great deal of traffic as well as the Saturday following Thanksgiving and the weekends before and after Christmas. Father’s Day, Memorial Day, and Labor Day tend to have low turnouts. Think about where people are going to be for that holiday – if everybody is packing up to go to the lake, no one will be coming to your open house.
5. If one open house has poor turnout, you should not do any others.
MYTH. Lots of factors play into turnout. Now, if you do three and no one shows, this may be a listing that is not a good candidate. I can count on one hand the number of open houses I have done that consistently resulted in crickets. You may have to tweak a few things, but if at first you don’t succeed …
6. Open Houses are for the neighbors to get decorating ideas.
SOMEWHAT TRUE. But not a bad thing … neighbors like their friends to move near them. And even though they come to the open looking décor inspiration, they may leave thinking of that one person for whom your house would be perfect.
7. We should do an open house every weekend until it sells.
MAYBE. It truly depends on the speed of the market. In a fast-moving seller’s market, too many opens can make a seller look desperate – not a good look for a listing. One or two opens will give the realtor an idea of what needs to be changed to sell it and what is actually working. In a slow market, a seller may need to do multiple opens to generate traffic and spur interest.
8. If my realtor doesn’t personally host the open house, he or she isn’t doing my home justice.
MYTH. With exception – there is always that lazy realtor that would rather be at the beach than working, but that is the rare exception. More often than not, your realtor is busy working on other ways to market your property at the same time and by having another agent host the open, he or she is expanding the listing’s exposure to that agent’s network as well.
In summary, to hold or not to hold open houses are based on the unique factors of your particular listing. Personally, I like them and find that in general, they are very effective. But each home is different, and you must weigh those pros and cons for yourself after a frank discussion with a licensed Realtor. He or she is most familiar with the speed of the market, the conditions of your home, and the circumstances of your sale.
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.
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
- 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 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.
- 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 principle 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 home ownership among educators in low to moderate income areas.
- Good Neighbor Next Door Program – program designed to encourage home ownership 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.