It seems like at least once a week, I get a call from someone either wanting to "Short Sale" their home, or someone about to buy one. Buying a Short Sale is fine, but make sure that when you make the offer, you have a letter from their current lender(s) that they will accept the price you have offered on the property.
Today's blog isn't about buying, but rather selling your home through a "Short Sale." What does that term actually mean. It means that the current lender is allowing you to sell the property and pay them less than what you actually owe on the current loan. Why would they do that? For the lender it can be a less costly option than going through the process of foreclosing on the property and then trying to list and sell the property themselves. It also allows them to decide right now what their loss will be. An offer in hand may be better than 4-6 months of lost payments, the expense of foreclosure, or listing the home and not getting an offer as high as what they are offered today.
What does it mean for the seller of the property. Current lending guidelines will not allow you to finance another home for at least 7 years after a foreclosure or short sale on a property. Many lenders offer home financing after a bankruptcy within 2-4 years, unless a home was involved in the process. If a home was lost due to a bankruptcy, then you could be looking at 7 years before you would qualify for another conventional or government insured home loan. This seven year prohibition from getting another loan is something that sellers are not being told when they try to sell their home through a "Short Sale."
What about the outstanding loan balance? When the lender accepts a payoff of the loan for less than what is actually owed, they can continue to show any loss as an outstanding balance that can be claimed for years to come. Why would they allow this? They allow the property to be sold to get out of the remaining balance on the loan and to eliminate the process of foreclosure. Taking a $10,000 loss now, may be less time consuming and less costly than holding onto the property and taking your chances. Banks manage losses on a daily basis and calculate the cost to sell the property versus the current loss on the loan. As a borrower, that doesn't mean that you are not still responsible for the outstanding balance. Read the documents closely and know the effect it will have on your credit in the future.
A short sale may be the right decision, but at least make it an "informed" decision.
This blog is for informational purposes and is the opinion of the writer. In financial matters always solicit professional advice and legal counsel if necessary.
Tuesday, February 1, 2011
Friday, June 18, 2010
When Should I Refinance?
A friend asked me the other day, “When should I refinance?” That is a question that I hear quite frequently and as a lender it really is not a simple answer. The best answer that I can give is know your lender and talk thoroughly about your situation.
There are several questions to ask yourself; the first one being “How long do I/we plan to be in this house?” If you intend to move, and sell your home, in 2-3 years then refinancing is not a good idea. If you intend to move, but want to keep this property as an investment and convert it to a rental property then you should still consider refinancing.
The second question is does it make sense financially? Many people tell me that it doesn’t make sense to refinance because they can’t lower their rate by 2%. You aren’t looking at how much you drop your rate, but how quickly you can recover the investment. About two years is the amount of time is should take to recover the cost of a refinance by what you save each month. If it takes longer than that, then ask yourself honestly, “How long will I be in my home?” If you intend to live there until you die, a refinance makes much more sense.
Are you currently paying mortgage insurance? Mortgage Insurance (PMI) occurs whenever you borrower more than 80% of the value of your home. If you bought a home for $200,000 and put $20,000 down, then you started with a 90% loan to value ratio. Once you pay down the principal balance to 78-80% of the original sales price (or appraised value whichever is lower) the Mortgage Insurance will automatically be removed from your payment. Let’s assume that your current balance is about $168,000 that would put you at an 84% loan to value. Even in today’s economy, it may be possible for you to get an appraisal on your home of $210,000. That would mean that if you refinanced and paid your closing costs, you could eliminate the PMI. Eliminating the PMI may make it worthwhile; even at the same rate. Appraisals are a huge part of the refinance transaction in today’s market. Most homes (at least in Knoxville) are worth more today than what someone paid for them 5 years ago. How much more depends on the neighborhood and the condition of the home.
What is the rate that makes sense for your situation? Available rates cover a wide range based on cost and credit score. For instance, Conventional 30 year rates are available today from 4.25% to 6%. Trust me, no one comes into my office and says, “I want the 6% rate.” The truth of the matter is that it costs money to borrow money and the lower your rate, the more you pay in fees. If it costs you .005% to drop your rate .125% it probably is not worth it unless you intend to stay in the property for over five years. On a $100,000 loan, dropping your rate from 4.75% to 4.625% saves you $7.50 per month. If it costs you half a point (.005%) to get the lower rate that is $500 in fees. If you divide $500 by $7.50 per month savings, it takes you over 5 years (66 months) to recover the cost of the lower rate. If you move in 5 years, you actually lost money.
When should I refinance is a personal question that deals with many options and decisions that you as an individual (or family) need to sit and discuss with your lender. Your lender should take the time to show you options and discuss whether or not it makes sense to you to refinance. My door is always open if I can help you work through your questions.
This blog is for informational purposes and is the opinion of the writer. In financial matters always solicit professional advice and legal counsel if necessary.
There are several questions to ask yourself; the first one being “How long do I/we plan to be in this house?” If you intend to move, and sell your home, in 2-3 years then refinancing is not a good idea. If you intend to move, but want to keep this property as an investment and convert it to a rental property then you should still consider refinancing.
The second question is does it make sense financially? Many people tell me that it doesn’t make sense to refinance because they can’t lower their rate by 2%. You aren’t looking at how much you drop your rate, but how quickly you can recover the investment. About two years is the amount of time is should take to recover the cost of a refinance by what you save each month. If it takes longer than that, then ask yourself honestly, “How long will I be in my home?” If you intend to live there until you die, a refinance makes much more sense.
Are you currently paying mortgage insurance? Mortgage Insurance (PMI) occurs whenever you borrower more than 80% of the value of your home. If you bought a home for $200,000 and put $20,000 down, then you started with a 90% loan to value ratio. Once you pay down the principal balance to 78-80% of the original sales price (or appraised value whichever is lower) the Mortgage Insurance will automatically be removed from your payment. Let’s assume that your current balance is about $168,000 that would put you at an 84% loan to value. Even in today’s economy, it may be possible for you to get an appraisal on your home of $210,000. That would mean that if you refinanced and paid your closing costs, you could eliminate the PMI. Eliminating the PMI may make it worthwhile; even at the same rate. Appraisals are a huge part of the refinance transaction in today’s market. Most homes (at least in Knoxville) are worth more today than what someone paid for them 5 years ago. How much more depends on the neighborhood and the condition of the home.
What is the rate that makes sense for your situation? Available rates cover a wide range based on cost and credit score. For instance, Conventional 30 year rates are available today from 4.25% to 6%. Trust me, no one comes into my office and says, “I want the 6% rate.” The truth of the matter is that it costs money to borrow money and the lower your rate, the more you pay in fees. If it costs you .005% to drop your rate .125% it probably is not worth it unless you intend to stay in the property for over five years. On a $100,000 loan, dropping your rate from 4.75% to 4.625% saves you $7.50 per month. If it costs you half a point (.005%) to get the lower rate that is $500 in fees. If you divide $500 by $7.50 per month savings, it takes you over 5 years (66 months) to recover the cost of the lower rate. If you move in 5 years, you actually lost money.
When should I refinance is a personal question that deals with many options and decisions that you as an individual (or family) need to sit and discuss with your lender. Your lender should take the time to show you options and discuss whether or not it makes sense to you to refinance. My door is always open if I can help you work through your questions.
This blog is for informational purposes and is the opinion of the writer. In financial matters always solicit professional advice and legal counsel if necessary.
Saturday, May 22, 2010
What About Second Homes?
I want to buy a second home in a couple of years; what can I expect about financing? Several customers lately have talked to me about buying a second home. Now may be the best time to take the plunge.
The housing market for second homes is wide open and rates are fantastic. Markets at the beach and in the mountains (Gatlinburg, TN) have great opportunities for buyers to get into the market at a reduced price. Over the last several years, marginal buyers have been encouraged to enter the second home market in resort areas; being promised by real estate management firms that these properties would cash flow themselves. This may not have been unrealistic when buyers bought into the market, but during the summer of 2008 we saw gas prices at $4.50 per gallon.
This rise in travel costs had the affect of creating an oversupply of rental properties in resort areas. Marginal buyers, those who had to have the rental income to afford the payments, couldn’t survive a slight downturn in the market. As high gas prices turned into a “downturn” in the economy these marginal buyers could not afford to keep up with the payments. This accounts for high foreclosure rates in these resort areas. That high foreclosure rate creates opportunities for new buyers in the marketplace.
For the moment, second home financing is being treated like a primary residence for the most part. Rates are still very attractive and borrowers can get into the market with low down payments. So if you, or someone you know, have thought about getting a second home, now is the time to discuss it with your lender.
This blog is for informational purposes and is the opinion of the writer. In financial matters always solicit professional advice and legal counsel if necessary.
The housing market for second homes is wide open and rates are fantastic. Markets at the beach and in the mountains (Gatlinburg, TN) have great opportunities for buyers to get into the market at a reduced price. Over the last several years, marginal buyers have been encouraged to enter the second home market in resort areas; being promised by real estate management firms that these properties would cash flow themselves. This may not have been unrealistic when buyers bought into the market, but during the summer of 2008 we saw gas prices at $4.50 per gallon.
This rise in travel costs had the affect of creating an oversupply of rental properties in resort areas. Marginal buyers, those who had to have the rental income to afford the payments, couldn’t survive a slight downturn in the market. As high gas prices turned into a “downturn” in the economy these marginal buyers could not afford to keep up with the payments. This accounts for high foreclosure rates in these resort areas. That high foreclosure rate creates opportunities for new buyers in the marketplace.
For the moment, second home financing is being treated like a primary residence for the most part. Rates are still very attractive and borrowers can get into the market with low down payments. So if you, or someone you know, have thought about getting a second home, now is the time to discuss it with your lender.
This blog is for informational purposes and is the opinion of the writer. In financial matters always solicit professional advice and legal counsel if necessary.
Saturday, May 8, 2010
Separations Can Kill a Couple's Credit
A friend of mine just separated from her husband. I ran into her and she asked me what she could do if the house went into foreclosure. I wish this was not a common occurrence, but unfortunately it happens very often.
How does it start? When she moved out, the mortgage was paid up and on time every month. She moved out because he has not been trying to find work. Without any income and her second income, he will not be able to make the payments. The divorce will take several months if not contested and if late payments begin they will affect her credit also. They are both on the home loan; both could have their credit ruined for many years.
Somewhere in the separation process, couples need to realize that the credit will have to be separated also. She must get off the joint home loan and he cannot afford the payment by himself. The only way out of this is they must realize the house will have to be sold. Somewhere in the legal process of divorce, financial planning needs to be required. Two people separated cannot maintain the lifestyle that they had as a couple. Very often they cannot separate the debt, because neither qualifies for everything they have now by themselves.
If you are going through a divorce, call to find out more about your financial options and to begin planning for recovery. (865) 742-3384
This blog is for informational purposes and is the opinion of the writer. In financial matters always solicit professional advice and legal counsel if necessary.
How does it start? When she moved out, the mortgage was paid up and on time every month. She moved out because he has not been trying to find work. Without any income and her second income, he will not be able to make the payments. The divorce will take several months if not contested and if late payments begin they will affect her credit also. They are both on the home loan; both could have their credit ruined for many years.
Somewhere in the separation process, couples need to realize that the credit will have to be separated also. She must get off the joint home loan and he cannot afford the payment by himself. The only way out of this is they must realize the house will have to be sold. Somewhere in the legal process of divorce, financial planning needs to be required. Two people separated cannot maintain the lifestyle that they had as a couple. Very often they cannot separate the debt, because neither qualifies for everything they have now by themselves.
If you are going through a divorce, call to find out more about your financial options and to begin planning for recovery. (865) 742-3384
This blog is for informational purposes and is the opinion of the writer. In financial matters always solicit professional advice and legal counsel if necessary.
Tuesday, April 27, 2010
Can Zoning Affect Your Property Value?
I got a letter from the County Assessor’s office stating that my zoning was changing to C-3; will this affect my loan? This actually occurs quite often as counties and municipalities develop growth plans and try to reduce “spot” zoning requests. This should not affect your current home loan; but could affect you in the future.
As an area becomes more commercial, a planning office will usually recommend a change of zoning in an area to reflect anticipated future development. Let’s assume that 20 years ago you bought a house outside the city limit, but on a major thoroughfare. As the city expands, more and more parcels around you sell and request a change of zoning from agricultural or residential to commercial. Rather than continue to deal with individual requests, the governmental body will usually change the zoning of many properties to reflect the trend.
Exceptions to this would be neighborhoods that back up to the major road, but do not have access to individual lots from the main road. Many neighborhoods now enforce restrictive covenants that would prevent properties within the neighborhood from being used for anything but residential use. The county would usually accept this and not change the zoning of lots located within the neighborhood.
The one thing that you want make sure of is that you can “build back” your home in the event of a total loss. Some zoning changes will not allow you to get a building permit that is not compatible with the zoning. Obviously, commercial construction has much more rigid standards than residential requirements.
The second thing to consider is what occurs if you try to sell the property. Although your loan was in place before the zoning changed, a new lender will be looking at how the property is zoned. The appraiser for the lender is going to look at legal requirements (building back the property) and also at the current use of other properties around the subject property. If residential usage is still common with most parcels, you may be okay. When your property becomes an island in the midst of development; you will find it much harder to sell as a residence.
Commercial property usually carries a higher value and may actually increase the value of your property. The question arises: can your home be used by a business, or will it need to be removed and a new structure built in place. If you have to rebuild then the economics of removing the old structure will determine the ultimate value.
This blog is for informational purposes and is the opinion of the writer. In financial matters always solicit professional advice and legal counsel if necessary.
As an area becomes more commercial, a planning office will usually recommend a change of zoning in an area to reflect anticipated future development. Let’s assume that 20 years ago you bought a house outside the city limit, but on a major thoroughfare. As the city expands, more and more parcels around you sell and request a change of zoning from agricultural or residential to commercial. Rather than continue to deal with individual requests, the governmental body will usually change the zoning of many properties to reflect the trend.
Exceptions to this would be neighborhoods that back up to the major road, but do not have access to individual lots from the main road. Many neighborhoods now enforce restrictive covenants that would prevent properties within the neighborhood from being used for anything but residential use. The county would usually accept this and not change the zoning of lots located within the neighborhood.
The one thing that you want make sure of is that you can “build back” your home in the event of a total loss. Some zoning changes will not allow you to get a building permit that is not compatible with the zoning. Obviously, commercial construction has much more rigid standards than residential requirements.
The second thing to consider is what occurs if you try to sell the property. Although your loan was in place before the zoning changed, a new lender will be looking at how the property is zoned. The appraiser for the lender is going to look at legal requirements (building back the property) and also at the current use of other properties around the subject property. If residential usage is still common with most parcels, you may be okay. When your property becomes an island in the midst of development; you will find it much harder to sell as a residence.
Commercial property usually carries a higher value and may actually increase the value of your property. The question arises: can your home be used by a business, or will it need to be removed and a new structure built in place. If you have to rebuild then the economics of removing the old structure will determine the ultimate value.
This blog is for informational purposes and is the opinion of the writer. In financial matters always solicit professional advice and legal counsel if necessary.
Tuesday, March 30, 2010
What Are the Four C's of Loan Approval
My lender kept talking about the Four C’s of Lending. What does this mean and how does it affect my loan? Lenders don’t want to foreclose on a property. As Lender’s begin to consider a file for approval, they are looking at four areas of risk. Those four areas are Character, Capacity, Collateral, and Capital. So what do these Four C’s mean?
Character- What is the person’s willingness or desire to repay the loan. In today’s world, we look at a credit report to determine how the borrower has paid their accounts in the past, to predict how they will pay their debts in the future. Late payments, collections, repossessions, or even a bankruptcy make a lender have serious doubts about the borrowers intent to repay a new loan.
Capacity- Can the borrower afford to make the payments on the loan they desire? Employment history, income, debt to income ratios are all part of a borrower’s capacity to repay the loan. If someone wants a loan with monthly payments of $2,400 but only makes $2,300 a month they cannot afford the payment. Obviously, lender’s are not looking at whether you make at least more than the monthly payment you are requesting, but consider ratios that are in line with standards of living. Typically, a persons debt should not exceed 40%-45% of their total income. This allows them extra money for food, clothing, etc.
Collateral- What is the lender securing the debt against? The collateral, in our case a home, is the lender’s protection of the money they lend. In today’s market the value of a home has become a more integral part of the picture, since we have recently seen that housing prices can fall. East Tennessee has been fairly lucky with regard to home values, but states such as California, Arizona, and Florida have seen significant drops in home values. Home values become even more important if borrowers lose their jobs, the economy slows down, and foreclosures rise.
Capital- Cash is King. Lenders have always looked at cash reserves and down payments as compensating factors in loan approval. The more excess cash that a borrower has, the better ability for them to ride out the storm of a job lose or drop in income.
Now you know what lenders are referring to when they talk about the Four C’s of loan approval. If you know someone that is considering purchasing a home, send this blog to them. The more informed the borrower, the better their financing options become.
richard.swan@migonline.com
This blog is for informational purposes and is the opinion of the writer. In financial matters always solicit professional advice and legal counsel if necessary.
Character- What is the person’s willingness or desire to repay the loan. In today’s world, we look at a credit report to determine how the borrower has paid their accounts in the past, to predict how they will pay their debts in the future. Late payments, collections, repossessions, or even a bankruptcy make a lender have serious doubts about the borrowers intent to repay a new loan.
Capacity- Can the borrower afford to make the payments on the loan they desire? Employment history, income, debt to income ratios are all part of a borrower’s capacity to repay the loan. If someone wants a loan with monthly payments of $2,400 but only makes $2,300 a month they cannot afford the payment. Obviously, lender’s are not looking at whether you make at least more than the monthly payment you are requesting, but consider ratios that are in line with standards of living. Typically, a persons debt should not exceed 40%-45% of their total income. This allows them extra money for food, clothing, etc.
Collateral- What is the lender securing the debt against? The collateral, in our case a home, is the lender’s protection of the money they lend. In today’s market the value of a home has become a more integral part of the picture, since we have recently seen that housing prices can fall. East Tennessee has been fairly lucky with regard to home values, but states such as California, Arizona, and Florida have seen significant drops in home values. Home values become even more important if borrowers lose their jobs, the economy slows down, and foreclosures rise.
Capital- Cash is King. Lenders have always looked at cash reserves and down payments as compensating factors in loan approval. The more excess cash that a borrower has, the better ability for them to ride out the storm of a job lose or drop in income.
Now you know what lenders are referring to when they talk about the Four C’s of loan approval. If you know someone that is considering purchasing a home, send this blog to them. The more informed the borrower, the better their financing options become.
richard.swan@migonline.com
This blog is for informational purposes and is the opinion of the writer. In financial matters always solicit professional advice and legal counsel if necessary.
Wednesday, March 24, 2010
Private Mortgage Insurance: When Does It End?
When will the Private Mortgage Insurance (PMI) drop off of my home loan? A good friend of mine called me today to ask about a loan he had on a property in Florida. He financed the house with a 95% loan, but his value keeps dropping; probably below what he still owes for the house today. His question was, “At what point will my mortgage insurance drop off?”
Luckily for him, the mortgage insurance (MI) question really has to do with what you buy the home for, not what it is worth on the market today. PMI is an insurance policy to protect the lender should you default on your loan. If you were to quit making your payments and the house was foreclosed on, the MI Company would cover a certain percentage of the loss for the lender if they encountered trouble selling the property.
For you as the homeowner, once you pay down to 78% of the original purchase price (or appraised value whichever was lower at the time) then the mortgage insurance is required by federal law to drop off of your loan. In his case, he is paying about $280 per month in mortgage insurance. The MI will drop off when he pays about $3,000 additional to the principal on his loan. Since he has the cash available, it is better to pay $3,000 now on his loan, and eliminate the MI now, because that will save him $3,360 over the next 12 months.
If you have a question, send me an email: richard.swan@migonline.com and I will try to answer your question. Remember the First Time Homebuyer’s Tax Credit and the Long Time Homeowner’s Tax Credit end on April 30th. Make sure you have a contract to purchase by that time.
This blog is for informational purposes and is the opinion of the writer. In financial matters always solicit professional advice and legal counsel if necessary.
Luckily for him, the mortgage insurance (MI) question really has to do with what you buy the home for, not what it is worth on the market today. PMI is an insurance policy to protect the lender should you default on your loan. If you were to quit making your payments and the house was foreclosed on, the MI Company would cover a certain percentage of the loss for the lender if they encountered trouble selling the property.
For you as the homeowner, once you pay down to 78% of the original purchase price (or appraised value whichever was lower at the time) then the mortgage insurance is required by federal law to drop off of your loan. In his case, he is paying about $280 per month in mortgage insurance. The MI will drop off when he pays about $3,000 additional to the principal on his loan. Since he has the cash available, it is better to pay $3,000 now on his loan, and eliminate the MI now, because that will save him $3,360 over the next 12 months.
If you have a question, send me an email: richard.swan@migonline.com and I will try to answer your question. Remember the First Time Homebuyer’s Tax Credit and the Long Time Homeowner’s Tax Credit end on April 30th. Make sure you have a contract to purchase by that time.
This blog is for informational purposes and is the opinion of the writer. In financial matters always solicit professional advice and legal counsel if necessary.
Subscribe to:
Posts (Atom)