The Lending Coach

Coaching and teaching - many through the mortgage process and others on the field

Category: Mortgage (page 2 of 12)

That House Will Probably Cost More The Longer You Wait

Today’s potential home buyers have many questions about local real estate markets and how it relates to the purchase of a new home. The one I hear the most is:

‘Does it make sense to buy a house in now, or would it be better to wait until next year?’

Click on the video above to find out more,

Well, there are some things we just can’t predict with certainty, and that includes future housing costs….however,

most economists and forecasters agree that home values will likely continue to rise throughout 2018 and into 2019. Secondly, these same experts also predict that interest rates will continue to rise.

Houses Are INCREASING in Value and Are Getting More Expensive

As usual, it’s a story of supply and demand. There is a high level of demand for housing in cities across the country, but there’s not enough inventory to meet it. As a result, home buyers in who delay their purchases until 2019 will likely encounter higher housing costs.

According to Zillow, the real estate information company, the median home value for Arizona increased to over $233,000 – a year-over-year increase of 6.7%. In California, the median home value is over $465,000 – an increase of 8.8%. Looking forward, the company’s economists expect the median to rise by another nearly 5% over the next 12 months. This particular forecast projects into the first quarter of 2019.

Other forecasters have echoed this sentiment. There appears to be broad consensus that home values across the country will likely continue to rise over the coming months.

The Supply and Demand for Housing

It is the supply and demand imbalance that’s the primary factor in influencing home prices. So it’s vitally important for home buyers to understand these market conditions.

Most real estate markets, including California and Arizona are experiencing a supply shortage. Inventory is falling short of demand, and that puts upward pressure on home values.

Economists and housing analysts say that a balanced real estate market has somewhere around 5 to 6 months worth of supply. In both California and Arizona today, that figure is in the 2.5 to 3 month range. Clearly, these markets are much tighter than normal, from an inventory standpoint. This is true for other parts of the nation as well, where inventory levels are in the 4-month range.

Interest Rates

There has been a slow increase in interest rates since September of 2017 – and a quicker jump in the last few months.  Bond markets haven’t seen pressures like this in over 4 years – and things are trending higher.

Many investors believe inflation is bound to tick up if the labor market continues to improve, and some market indicators suggest inflation expectations have been climbing in recent months.

This is a general reflection better economic data, rising energy prices and the passage of sweeping tax cuts.  Many think could provide a further boost to the economy – giving consumers more money at their disposal.

If positive labor and economic news keep pouring out (as most analysts believe things will continue to improve), then the prospect of inflation will put pressure on bonds and interest rates.

The Federal Reserve has suggested that they will have 3 to 4 interest rate increases in 2018, and most experts see a .5% to 1% overall increase in mortgage rates this year.

In Conclusion

So, let’s take a look at our original question: Does it make sense to buy a home in 2018, or is it better to wait until 2019?

Current trends suggest that home buyers who delay their purchases until later this year or next will most likely encounter higher housing costs. All of these trends and forecasts make a good case for buying a home sooner rather than later. Please reach out to me for more, as it would be my privilege to help!

Housing Affordability Still High – Even With Increasing Prices

Despite rising home prices, American housing is actually quite affordable – and now is really a good time to make that purchase.

Housing affordability is measured by comparing household income relative to the income needed to purchase a home.

According to the latest Real House Price Index from First American Title, today’s home buyers have “historically high levels of house-purchasing power.”

Read the entire article from Amy Yale at the Mortgage Reports here.

Affordability crisis ‘over-stated’

According to Mark Fleming, First American’s chief economist, “talk of an affordability crisis is over-stated.” In fact, consumer house-buying power – how much home someone can buy based on average income, interest rate and home price – is actually up over the year.

Ms. Yale in her article notes that home-buying power rose by nearly a full percent from November 2016 to November 2017.

And though real home prices increased 5 percent over the year, they’re still 37.7 percent below their 2006 peak. They’re also more than 16 percent below 2000’s numbers.

Because mortgage rates are lower than historical averages, home-buying power is up, according to First American’s Fleming.

“In fact, consumer house-buying power is 2.3 times higher than it was in 2000, almost two decades ago,” he said. “It’s also only 2.9 percent below the peak in July 2016. Because the long-run trend in mortgage interest rates has been downward, from a peak of 18 percent in 1981, the housing market has benefited from consistently increasing house-buying power”

He continues, “Home buyers today have historically high levels of house-purchasing power, and that’s one important reason why, even as unadjusted house price growth exceeds household income growth, the talk of an affordability crisis is over-stated for now.”

The Solution

One of the great underlying opportunities today is that buying a home is considerably cheaper than renting. Renters interested in reducing expenses and collecting tax benefits should absolutely talk to a mortgage lender prior to signing that next rental contract.

Contact me for more information, as it would be my pleasure to help!

Tax Advantages of Home Ownership

Owning a home has become synonymous with building wealth.

For most Americans, it’s one of, if not the largest investment they will make over the course of their life. Many financial experts agree that it’s the single best way to grow your “nest egg” over time.

But building home equity is only part of the story. There are a number of tax benefits to home ownership and home purchasing.

Of course, please do contact your tax advisor or CPA to talk about the specifics of how the tax laws apply to you and your circumstances. Make sure you are eligible for these individual deductions!

Mortgage Interest

Home-owners are allowed to deduct the interest of your monthly mortgage payment. Best of all, it’s available for the entire term of the loan! There are new limits on the amount that can be deducted, but the average home owner will not even get near that number.

Home Office Deduction

If you work out of your house, your home office can provide additional tax deductions annually. Homeowners who have an office in their home are actually allowed to deduct the amount of monthly mortgage paid based on the square footage of that office. They can even expense a portion of the utility bills, including heat, electricity, and internet service.

Property Taxes

Part of being a homeowner means that you are subject to property taxes. Those are paid to the county, city and state – and are tax deductible. Again, new laws limit the amount that can be deducted, so contact your advisor for the specifics.

Moving Costs

If you are required to relocate for work, there are specific deductions available for expenses connected with moving your family, your things, and even your cars.

Discount Points

If you utilized “points” to lower the interest rate of your loan, you can actually deduct the cost of those fees the year you purchase the property. This happens quite often – say a borrower uses 1 point to lower their interest rate from 5% to 4.75%. This would lower their monthly payment over the life of the loan AND help you in the tax year you make that purchase.

Mortgage Interest Credit

If your income meets certain thresholds, you might be eligible for the mortgage interest tax credit. It’s there to make paying for your new home a bit easier – but you do have to have a mortgage credit certificate. Those can be provided by the state or local government agency.

There are other potential deductions for environmental and health related home improvements out there too, so make sure you contact your CPA or tax advisor to find out more!

The Mortgage Pre-Qualification Letter – Questions to Ask

Every real estate agent, at one time or another, has run into the situation where the buyer/borrower was issued some sort of pre-approval letter that didn’t hold water under further scrutiny.

How can an agent really test the validity of a borrower’s pre-approval?


What Are the Findings?

This really should be the number one question asked by agents, as this is where the rubber meets the road – and where the majority of lenders have not completed the task.

First, nearly all the residential loans being originated to Fannie Mae’s or Freddie Mac’s standards must pass automated underwriting through Desktop Underwriter (DU for short) or Loan Prospector (LP).

Each loan is carefully run through an automated underwriting system whether the borrower is looking for a conventional mortgage, FHA mortgage or even a jumbo mortgage. If their loan does not pass automated underwriting, it’s more than likely the potential borrower’s loan won’t move forward.

It’s absolutely critical in the information-gathering stage – that lenders run and then receive an automated underwriting approval to make sure their loan will get the green light.

Make sure you know the automated underwriting findings!

Is This a Pre-Approval or Pre-Qualification

The pre-approval process is not a 15-minute conversation.  If you supply me with all the documents necessary for a full document (full doc in industry jargon) review, I need time to read them, do the analysis, load the data into systems, and run the analyticd…more than 15 minutes.  Giving your lender time to process the information helps to secure a reliable pre-qualification.

If your borrower’s lender is offering you a super speedy pre-approval, you as the agent need to question the choice of your borrower’s loan officer.  Obvious mortgage killers, un-seasoned bankruptcy, late payments, etc, are the exception. Mortgage killers take only a minute or two to disqualify the credit approval.

A true pre-qualification, on the other hand, is where the lender has done the appropriate analysis of the potential borrower’s income, assets, and credit and has received either Fannie Mae’s or Freddie Mac’s underwriting authorization (more on that to follow).

What Documentation Did You Obtain?

This list may vary from borrower to borrower (as some might be self employed or others might be utilizing commissionable income), but here is a standard issue checklist:

Copies of Driver’s Licenses/Social Security Cards – copies of driver’s licenses are typically required for all buyers that are going to be on the loan – and social security card verifies your US identity. These are important documents for buyer verification and fraud detection.

House search for you design

Mortgage Statement/Coupons For All Real Estate Loans – if your buyer currently owns a home, whether they plan on selling it to buy a step-up home or plan on renting it out to live in another home, they will need to show their lender exactly how much they are paying monthly for their current home.

Most Recent Bank Statements – mortgage lenders need to see the most recent bank statements (all pages, and all accounts) from any buyers going on the loan. We will examine the debits and credits thoroughly.

Pay Stubs/ W-2 Forms for the Past Two Years (or 1099) – the past 30-60 days of pay stubs are required to prove and document their income, as well as W-2 statements for the last 2 years.

Retirement/Investment Account Statements – if a borrower has a retirement or investment account, they should provide one or two monthly statements to the lender. Even if they don’t plan on using these funds to buy your home, it may help prove that they are qualified. In some cases, the underwriter will need to see that the borrower has a certain amount of money in reserves.

Tax Returns (1040) – the past two years of borrower tax returns shows the mortgage lender your income, employer, address, verify your social security number and more.

Profit and Loss Statements –  if the borrower is self-employed or owns their own business, he/she will need to show two years’ worth of profit and loss statements. The lender may request additional items such as business bank statements as well.

In Conclusion

Much time can be saved and grief avoided if true pre-qualifications were given the time and effort they truly require. Make sure the lenders you deal with follow this process thoroughly – and don’t hesitate to contact me, as it would be my privilege to help!

The New Tax Law: What Are The Changes for Home Owners?

The new tax bill signed passed by Congress in late December of 2017 makes some changes to the Internal Revenue Code.

Its design was to reduce overall tax rates for the majority of Americans – and makes changes to deductions for individuals and businesses.

Some of the tax law changes have already taken place and will continue through 2018.

You can find out more here from the Wall St. Journal.

Of course, please do contact your tax advisor or CPA to talk about the specifics of how the tax laws apply to you and your circumstances.

As a homeowner or potential home buyer, here are some highlights of the changes:

Mortgage Interest

If you purchased a house prior to December 16, 2017, you will be allowed an itemized deduction for the mortgage interest you pay up to $1 million.

For purchases after December 16, 2017, that amount has been lowered to $750,000.

Refinancing of mortgages that were acquired prior to December 16, 2017, can retain the deduction limits, but not beyond the original mortgage’s term and amount.

Second Homes

An itemized deduction can be made for both a principal and second residence mortgage up to a combined total of $750,000  (or up to $1 million if grandfathered prior to December 16, 2017).

So, the interest you pay on your loan for a second home, only if the above loan limits are exceeded, will not be deductible in 2018.

If, however, you rent your vacation home, you can write off the costs associated with that activity, which would include a portion of mortgage interest and property taxes.

Home-equity Debt

Interest paid on home-equity loans will no longer be deductible beginning in 2018.

Exception: interest may be deductible on home equity loans (or second mortgages) if the proceeds are used to acquire or substantially improve the residence and can be documented.

Exclusion of Gain on Sale of a Principal Residence

There are no changes to current tax law. Taxpayers will continue to be able to exclude up to $500,000 ($250,000 for single filers) from capital gains taxation when they sell their home, as long as they have lived there for two of the previous five years.

Property taxes

Property, state and local income taxes face a combined $10,000 deduction limit.

What does this mean for today’s buyers?

If you are thinking of purchasing a home today, you may be wondering what these tax law changes mean for your future purchasing plans. There are always multiple factors to consider when you are looking to make that decision.

Purchasing a home is still a fantastic investment opportunity and gives you the best chance of building long-term wealth.

It would be my pleasure to help you determine if now is the time to purchase. Do contact me for more information!

This information does not provide customized investment advice or offer legal, tax, regulatory or accounting guidance. Please contact your CPA or tax advisor for details and more information.

5 Key Things to Know When Buying a Home

So, you have decided that it’s time to take that big step and are ready to buy a home. Good for you! But what’s next?

Before you hit the web and attempt to navigate all of those home listing websites, there are a few things you need to do first.

Here are five things you should know…so you don’t end up saying “I wish I would have known that before buying a home.” 

Know your credit score

Don’t rely on many of the free websites – they don’t use the same metrics to measure your FICO score. Contact your mortgage lender to help you with this step.

The credit score is a direct reflection of your credit history, which is a financial inventory of things you’ve paid for. Credit cards, past loans, government information are all sources that make up your history.

Other information includes the number of credit cards and loans you have and if you pay your bills on time.

Your chosen mortgage lender will help you understand what you need to work on to boost that credit score, if necessary – and in the end, land a more favorable loan.

Obtain a pre-approval

A pre-approval on a loan will give you an advantage when you start to look for that ideal home. You will know the exact loan amount for which you qualify, what your monthly payment will look like and how much taxes and insurance will be.

With a pre-qualification, the loan process will be smoother and your offer will be much stronger.

When pre-approved, your lender provides you with a letter confirming the specific loan amount you can expect to receive. Showing that pre-approval letter along with your offer when you find the home of your dreams will allow you to make the strongest possible offer.

Know the value of a real estate agent

Some home buyers may decide they want to enter the housing market without a real estate agent. They soon find that there is a lot that goes into the house hunting process – from the research, to the paperwork, to the negotiations, it is a long, tedious process.

A good real estate agent has a keen understanding about neighborhoods, recent sales and listings, trends, crime rates and schools. A real estate agent will find listings tailored to your needs and will understand the lending environment.

Most importantly, real estate agents will help you with price negotiations in the current market and protect you by looking out for your financial interest during the process.

It can’t be stressed enough how important the right agent can be!

Research your down payment options

The down payment hurdle you have to clear may be quite a bit lower than you think. Traditionally, lenders have asked for 20% down, but there are many, many low down payment options are available, especially to first-time buyers.

Mortgages guaranteed by the Federal Housing Administration, Department of Veterans Affairs or Department of Agriculture can be “no-to-low” down payment loans.

In fact, mortgages backed by the VA and the USDA — for those who qualify — usually don’t require a down payment at all. A funding fee is charged on VA loans, but even that can be rolled into your monthly loan payment.

FHA-backed loans are available with as little as 3.5% down. With that said, buyers will have to pay mortgage insurance to help lenders defray the costs of loans that default.

Conventional loans, which aren’t backed by the government, also offer low down payment programs to first-time buyers. In, fact, down payments of just 3% are common, especially if you are a first-time buyer.  Again, buyers really should reach out to lenders that understand these programs and how they work.

Do your home inspection early

Consider getting inspections on the home you are interested in done early after escrow starts to find out if there are repairs needed. This can be beneficial when trying to get a 30-day close.

Once the inspection has been competed, there is less chance at any delays later in the closing process. Many real estate agents are working with their buyers to get those inspections done earlier and earlier to avoid delays.

In Conclusion

Purchasing a new home isn’t necessarily an easy to understand or intuitive process….there really is a lot to wrap your head around when buying a home. Make sure you are aware of these things so you are prepared. And if you have questions, don’t hesitate to contact me!

Use Your Tax Return as a Down Payment

While most people dread tax time, if you are getting a tax refund, this time of year can seem almost as rewarding as end-of-the-year bonus season.

Whether you are receiving a refund of a few hundred dollars or several thousand dollars, if you’re contemplating buying your first home, you may want to deposit your refund into an account dedicated to your down payment fund.

Coming up with a down payment to buy a home is one of the biggest obstacles that renters and first-time buyers stumble on when they want to become homeowners. That’s why during tax season, many first-time homebuyers turn to their tax refunds as a down payment option.

With that said, there may be no better time to qualify for a new home!  Please do contact me at your earliest convenience and we can get started.

Quite often a tax refund may actually cover the whole down payment on a home purchase.  Furthermore, these tax refunds may be used as assets or down payment right away.

Can I Apply Now for a Mortgage Even Though I Do Not Have my Refund Yet?

It is perfectly fine to apply for a mortgage loan when you don’t have your refund yet.  At application we can just assume the amount that you will be receiving.  As long as we can prove receipt of the funds in your account prior to the final underwriting approval.

Pay closing costs or earnest funds

Many first time home buyers underestimate the cost of buying a home. In addition to a down payment and enough money to rent a moving truck, you may need to pay closing costs or pay an earnest deposit (money paid to the seller as evidence of your intention to purchase the property).

Buy down your interest rate

Paying a small amount of money up front can save you tens of thousands of dollars in interest over the life of the loan. One point – or one percent of your loan – generally buys you a discount of one eighth (.125) or up to one quarter (.25) of a percent. Meaning, you could move your monthly payment and interest rate downward (from say, 4.5% to 4.25%) by bringing in some cash.

How to Handle Your Tax Refund

If you plan to use your tax refund for a down payment, you have to follow very strict procedures. If you miss a step, a lender might not be able to use the funds. They have to have a paper trail.

In order to have a trail, you have to deposit the refund in the account you plan to use for your down payment. If this is your checking account, then deposit the entire check in this account. You should not deposit a part of the check and take cash the rest. You should also not deposit it and then withdraw it as cash. Essentially, deposit it and leave it alone.

Interest Rates in 2018 – Cause and Effect

There has been a slow increase in interest rates since September of 2017 – and a quicker jump in the last few weeks.  Bond markets haven’t seen pressures like this in over 4 years – and things are trending higher.

Many potential home buyers and investors are asking why – and what does the future hold?

First, let’s take a look at what the 10 year treasury note has done since September 2017. The 10-year Treasury note rate is the yield or rate of return, you get for investing in this note. The yield is important because it is a true benchmark, which guides other interest rates, especially mortgage rates.

Note the upward slope of the yield on the graph below…and mortgage rates have essentially followed:

OK – so we see the trend line.  So why has this happened?

Well, there are 3 main reasons – and all of them are pretty decent economic signs, as a matter of fact.

Increased Employment and Potential Inflationary Pressures

Many investors believe inflation is bound to tick up if the labor market continues to improve, and some market indicators suggest inflation expectations have been climbing in recent months.  This is a general reflection better economic data, rising energy prices and the passage of sweeping tax cuts.  Many think could provide a further boost to the economy – giving consumers more money at their disposal.

Rising inflation is a threat to government bond investors because it chips away at the purchasing power of their fixed interest payments. As mentioned earlier, the 10-year Treasury yield is watched particularly closely because it is a bedrock of global finance. It is key in influencing borrowing rates for consumers, businesses and state and local governments.

If positive labor and economic news keep pouring out (as most analysts believe things will continue  to improve), then the prospect of inflation will put pressure on bonds and interest rates.

‘Quantitative Tightening’ by the Federal Reserve

Between 2009 and 2014, the US Federal Reserve created $3.5 trillion during three phases of what was called “Quantitative Easing”.  It was the Federal Reserve’s response to help reduce the dramatic market swings created by the recession about 10 years ago.  It used that money to buy $3.5 trillion dollars worth of financial assets – principally government bonds and mortgage backed securities issued by the government-sponsored mortgage entities Fannie Mae and Freddie Mac.

When you really think about it, $3.5 trillion is a pretty large amount of money. When that much money is spent over a six-year period, it would no doubt change the price of anything, bond markets included.  By the way, this maneuver has generally been appreciated in the market and (at least at this time) appears to have been a success.

Well, the Federal Reserve has now begun to reduce its balance sheet as the necessity for investment has given way to the possibility of inflation. Over time, the plan is to reinvest less and less – as per the schedule reproduced in the table below – until such a time as it considers its balance sheet ‘normalized’.

Historically, when the bonds owned by the Fed mature, they simply reinvested the proceeds into new bonds.  It essentially keeps the size of the balance sheet stable, while having very little impact on the market. However, when quantitative tightening began in October of 2017, the Fed started slowing down these reinvestments, allowing its balance sheet to gradually shrink.

In theory, through unwinding its balance sheet slowly by just allowing the bonds it owns to mature, the Fed can attempt to mitigate the fear of what might happen to yields if it was to ever try and sell such a large amount of bonds directly.

Essentially, the Federal Reserve is changing the supply and demand curve and the result is a higher yield in the 10 year treasury note.

Stock Market Increases – Pressuring Bond Markets

Generally speaking, stock markets and bond markets move in different directions. Because both stocks and bonds compete for investment money at a fundamental level, most financial analysts believe that a strengthening equity (stock) market attracts funds away from bonds.

By all measures, 2017 was a stellar year for the stock market. As we enter a new year, experts are cautiously optimistic that stocks will continue their hot streak in 2018.

Stocks soared last year on excellent corporate profits and positive economic growth. The Dow Jones industrial average shot up by 25%, the S&P 500 grew by 19% and the Nasdaq index bested them both with a 28% gain.

There is clearly more evidence of excitement among investors in 2018. This has everything to do with a strengthening economy and record corporate revenues…and profits that that have been bolstered by the new tax law.

In the short run, rising equity values would tend to drive bond prices lower and bond yields higher than they otherwise might have been.

What It All Means

So, I think it is safe to say that we will continue to see pressures in the bond market and mortgage rates overall. These increases look to be gradual, but consistent.

With that said, home prices are increasing nationally at nearly 6%, so the increase in interest rate will be more than offset by the increasing value of one’s home! Now is a fantastic time to purchase. Contact me for more information, as it would by my privilege to help you.

Buying Rental Property – A Primer

I’ve spoken recently with a good number of clients that are thinking of buying rental property.  Many find owning such homes to be an excellent investment and can really help improve their financial (and retirement) position.

But here’s the thing I tell them…..don’t necessarily expect an easy ride in getting it done – especially the first time.

For the best return on that investment, they really need to develop a new mindset and skill set – and it only comes from doing the research.

Owning investment property just isn’t like the buy-and-forget model of stock ownership.

I’m linking to a comprehensive guide that was put together by The Mortgage Reports’ Peter Warden. For the complete article, do click on this link – otherwise, continue on for some highlights that I’ve condensed.

Not only does this outline how to invest in real estate successfully, it warns you of some common pitfalls and suggests ways to avoid them – and I’ll take a look at the investment property loans that are available and I can help decide which one might be best for you.

Rental Property is a Good Investment

If done correctly, investing in rental property can be a great way to make your money work hard for you.

Inexpensive borrowing

Of course, you’ll likely need some savings (or a business partner for down payments – more on that below). But what other investment can you fund with ultra-low interest rates and fixed monthly payments?

Secondly, your borrowing is secured by an asset that’s likely to appreciate handsomely over time. Sure, we all know home prices can go down as well as up – but in the long run, most markets see a long-term upward curve.

Essentially, there’s a good chance you’ll see the value of your asset rising as your mortgage balance gently falls away.

Tax benefits

Just how tax-efficient your rental property investment will be depends on your personal circumstances. How you put together your investment vehicle has an effect – so you need to solicit advice from your tax adviser.

Interestingly, your property will most likely appreciate over time, but the IRS allows you to deduct depreciation, as though its value falls like that of other assets. This is good news for the investor.

Financial security

All investments carry some risk, as it’s the nature of the game. But buying rental property can deliver good and relatively safe gains, providing you do your homework first.

To start with, your mortgage will probably have a fixed rate….but your rents will certainly not be fixed. In most market conditions, they’re likely to rise, year after year.

Finally, of course, once your tenants finish paying down your mortgages, all that lovely rental revenue is yours — after some ongoing expenses. Time your investment right, and you could find your retirement delightfully comfortable.

The Numbers

Arguably the biggest mistake made by first-timers buying rental property is to forget that they are not buying a home in which to live. They’re still admiring the counter tops, solid wood floors and open-plan concept, instead of focusing on the numbers.

In reality, those numbers are everything. It doesn’t matter how nice a rental home is – you don’t want to own it unless it’s going to make you a profit.

At the same time, you need to buy an attractive, pleasant place that plenty of people in the area will want to rent. You need to deliver that at a price they can afford – but most importantly, you must make a profit.

There are some numbers you know or can estimate with very good accuracy. For example, the purchase price of the property, your down payment, your mortgage interest rate (which may be different from that for a home for owner occupation — more on that below) and your monthly payments.


With that said, others will have to be based on assumptions – and don’t be scared of those. Every business plan in the world is based on assumptions.

Here’s where Warden’s article really shines:

“The aim of your research is to help you make realistic assumptions about things that could affect the profitability of your investment, including these 12:

  1. How much revenue the home’s going to generate from month 1 — The initial rental value of the property
  2. How quickly rents are rising (or falling) in the neighborhood — How much revenue it’s likely to generate in future
  3. How often and for how long the home’s likely to be vacant between tenancies (your “vacancy rate”) — Supply and demand in the local rental market
  4. How high your management, maintenance and repair bills are likely to be (see “Your role,” below), remembering to account for inflation in future years
  5. How quickly home prices are rising (or falling) in the neighborhood — Your capital appreciation
  6. How much (if anything) it will cost you initially to get the home into a marketable condition for rental purposes
  7. How likely it is you’ll end up with a bad tenant who saddles you with big repair bills or stiffs you over rental payments
  8. How much you’ll pay in property taxes and home insurance premiums — Sometimes these are higher (or much, much higher) on rental properties than owner-occupied ones. So investigate
  9. How much, where applicable,  you’ll pay in homeowners’ association fees and what your HOA’s rules are — Make sure these aren’t onerous. And check that the HOA’s finances are sound
  10. How much, if anything, you’ll pay for utilities
  11. How much, if anything, you might pay to occasionally advertise for new tenants
  12. How great the risk factors are for the area — for example, whether local employment is dependent on a single employer and how likely that is to close”
Lending on the numbers

There are several formulas you can use to evaluate rental property and if you can afford it.

Your lender, per Fannie and Freddie regulations, will take 75 percent of the rent (or appraised rent if the property is not currently leased), and add that to your income. Then, it will hit you with the mortgage payment, property taxes, homeowners insurance, and HOA dues, if applicable.

You’ll know if after paying the mortgage and other regular monthly expenses whether you will have extra cash or not. But that number depends on so many other factors — the size of your down payment, for one — and may ignore things like tax deductions, maintenance and property management fees.

Investment property loans

When you’re buying rental property, you may have to choose between different types of mortgages. Those include:

  1. Conventional (non-government)
  2. Federal Housing Administration (FHA loans)
  3. Veterans Administration (VA loans)

You’ll find more information about each of those below – and I’d recommend that you reach out to a knowledgeable mortgage professional to coach you through this process.

Down payment requirements for investment properties

When purchasing rental property, you’ll usually need a larger down payment than you would for a primary residence. There are a few exceptions, which are described in the next section.

Typically, borrowers need a 20 percent down payment — sometimes even more. (Fannie Mae and Freddie Mac do allow you to buy with 15 percent down, but you have to pay for mortgage insurance.) That’s because lenders know that rentals are more likely to go into default than owner-occupied homes.

How do you come up with that much? Younger entrepreneurs tend to use savings and inheritances. But older ones often access the equity in their own home through a home equity loan or home equity line of credit (HELOC).

Find out more here on The New Refinance Movement that discusses how homeowners are tapping into that equity.

Because the latter is a bit more flexible (you pay interest only on outstanding balances, and can borrow and repay up to your limit as frequently as you wish), HELOCs can be especially helpful if you need to refurbish the home after purchase.

The conventional mortgage

Interestingly, borrowers must to be better-qualified to finance a rental than you do to buy your own home. That means higher credit scores, more cash reserves in the bank, and lower debt-to-income ratios.

Borrowers also need to have sufficient existing income to comfortably afford both mortgage payments.

Investment property and FHA and VA loans

Both VA and FHA loans are only available on the property where you’re going to live. However, that doesn’t mean that they block you from getting rental income.

Suppose you buy a building with two, three or four residential units. Providing you live in one of those units, you can rent out the other(s).

VA loans

VA home loans are often the best mortgages any borrower can get. They don’t require any down payment at all, and they generally offer highly competitive rates. But they’re only available to those who qualify, including those on active service, veterans, certain surviving spouses and other closely defined categories.

FHA loans

Again, these can be very good loans when buying rental property. They require a minimum 3.5 percent down payment. Rates generally aren’t bad but you’ll have to pay more to insure your loan.

Also, providing you live in one unit, you can buy a residential building with up to four. But, as with VA loans, you may eventually be able to rent out a home with an FHA mortgage and move to a different property that you buy with a conventional loan.

And finally

In researching this guide, one piece of advice stood out in the many sources consulted. A successful real estate investor recalled the hardest thing about becoming a landlord was signing the first purchase offer.

Please let me know if I can be of service, as I’ve helped a good number of investors finance rental properties with all different types of loans, ranging from the standard conventional loan, to VA loans, to investor specific loans (where only expected rents were utilized in qualification).

What’s the Difference Between a FICO Credit Score and a Free Online Score?

There’s a fair amount of confusion in the marketplace regarding the credit score used when applying for a mortgage. There are some sites, like Credit Karma, that provide free scores – available at a click.

Many consumers are shocked to find out that their Credit Karma or other online score doesn’t match their FICO score, once they’ve talked with their mortgage lender.

But what are the differences and which credit scores do mortgage lenders actually use?  The answer might surprise you.

I can’t stress strongly enough that potential borrowers should always work with the right mortgage lender when accessing credit for their next mortgage application.

Another thing to keep in mind, the strategy for achieving a good score remains the same, regardless of the type of scoring: paying bills on time and keeping balances low. Conversely, paying late or using too much of your credit limit lowers your score.

For more, see The Fortunate Investor, Tim Parker at Investopedia, and Brian Nelson at The Finance Gourmet

Here’s a primer on how different companies calculate these scores – and what your really need to know about credit.

What is it?

First, a credit score is nothing more than a number calculated from information in a person’s credit report. The idea behind a credit score is to determine via algorithms how good of a credit risk someone is without actually have to read through the details of a lengthy credit report.

The resulting number is only as good as the math that created it. The more statistically accurate the number is, the better the score is.

As most are aware, if you are applying for a mortgage, your credit score will be a critical part of the process. You could get rejected with a credit score that is too low. And once approved, your score will determine the interest rate charged. Someone with a 620 might have to pay an interest rate that is as much as 3% higher than someone with a 740.

The Credit Karma Model

If you get a free credit score from a website like Credit Karma, you are receiving the VantageScore – which is not the same as the FICO score, used by mortgage companies. I’ll outline the distinct differences later in the discussion.

Credit Karma, according to its website, believes borrowers have a right to know and view their credit scores.

The logic is that armed with this knowledge: potential borrowers are more likely to pay their bills on time and avoid going into collections for debt, and might waste fewer resources of the companies with whom they do business.

With that said, it’s not entirely an altruistic effort. Credit Karma is a for-profit business; sure, it is offering you something for free, but it is making money elsewhere. There really is no such thing as a free lunch.

From Tim Parker at Investopedia:

“The company’s revenue model for customers, posted online, reads: ‘When you access the free credit score, Credit Karma will show personalized offers to you based on your credit profile. These offers are from advertisers who share our vision of consumer empowerment. If you wish to take advantage of our offers, it is up to you. Credit Karma tries to give the power and the choice back to the consumer.’”

“Credit Karma makes its money in two ways. First, along with your credit score, it places advertisements on the page and hopes that you will respond to those ads. Second, because Credit Karma is pulling your credit score, its system knows a lot about you, and it can carefully tailor ads to your spending habits”

“More targeted ads are better for advertisers (they don’t waste money putting ads in front of people who would never use their services) and usually allow the advertising company to charge more per ad. With more than 40 million active users, Credit Karma has a healthy revenue model.”

The FICO Model

When most people think of credit scores, the probably think of FICO scores — the ones produced and sold by Fair Isaac Corp. They’ve been around for decades, and they’re used in about 90% of loan decisions.

Fair Isaac was the first company to popularize the concept of a credit score and is really only one credit score that matters in the mortgage world.

Over the years, it has demonstrated that its credit score algorithm is accurate enough statistically for financial investors to use it in determining risk. When it comes to actual lending, the gold standard is the FICO score.

However, the company was forced by Congress to provide a little bit of transparency into the process of calculating a score by providing some general information as to what a FICO is based on, and just as importantly, what it is not based on.

Starting from there, numerous entities have tried to develop an algorithm for creating credit scores that generates a similar score to the official FICO score. Doing so requires reverse engineering the mathematics that go into the score. No one has exactly duplicated the score, but many alternate scores provide a close approximation.

Differences in Models

One of the main differences is the calculation of how recently a credit account was used. Under the FICO system, accounts have to have been active in the last six months for their data to be fed into the algorithm. VantageScore takes a more comprehensive view and looks back more than 24 months, before churning out a final number.

Image courtesy of The Fortunate Investor

Another big difference is the way in which VantageScore and FICO go about using alternative data. VantageScore, for instance, includes things like utility and rent payments in its calculations, so long as they’re reported.

Both entities differ in another important way too: they way they deal with paid-off collections. Paid-off collections stay on your credit report for seven years, but VantageScore disregards them for scoring purposes.

However, the most popular FICO product does not, and will take into account any paid-off collections on your credit report. Clearly, this could significantly impact your score.

Finally, the reporting methods differ in how long they take before they calculate your credit score. FICO needs at least three to four months in order to come up with a score whereas VantageScore claims it can produce reliable statistics after just 30 days.

Of course, whether lenders believe any of this is up to them. Some might prefer a longer run in before relying on a credit assessment, others might just want something as quickly as possible, no matter how provisional it might be.

In Conclusion

Knowing your “real credit score” when you are not applying for credit is not very useful. Your score changes every day, so even if you get your official, 100% accurate, FICO score on Monday, by Friday your score may be up or down several points.

In other words, don’t stress out about the exact number. Instead, focus on making the number go higher, or at least stay the same.

Here’s a great piece on how to dramatically impact your credit score for the better – 5 Ways to Raise Your Credit Score Today.

With that said, it’s the FICO model that’s utilized for mortgage related purposes. Although Credit Karma’s VantageScore might give you a decent ballpark score, it won’t matter when applying for a mortgage. Make sure to know your actual FICO score prior to applying for a home loan – and I’d be happy to help you along the way!

Photo Credit: Cafe Credit via Flickr, under the Creative Commons License

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