U.S. Air Force illustration/Senior Airman Grace Lee
Many consumers are shocked to find out that their Credit Karma or other online scores do not match their true FICO score when it’s finally run by their mortgage lender.
This happens quite often – and it’s important to understand
the differences and reach out to your mortgage professional first.
Unfortunately, many would-be buyers have an incorrect view
of their actual credit worthiness and begin looking at homes too soon in the
process.
To repeat, the key thing to remember here is to reach out to your mortgage professional to get your official FICO score.
Dive Deeper
I’d invite you to find out the particulars here – as the free online credit products and the FICO score used in mortgage qualification process are noticeably different. Essentially, they use different algorithms to come up with their own score.
Most lenders determine a borrower’s creditworthiness based
on FICO® scores, a Credit Score developed by Fair Isaac Corporation (FICO™).
This score tells the lender what type of credit risk you are and what your
interest rate should be to reflect that risk.
FICO scores have different names at each of the three major
United States credit reporting companies. And there are different versions of
the FICO formula. Here are the specific versions of the FICO formula used by
mortgage lenders:
Equifax Beacon 5.0
Experian/Fair Isaac Risk Model v2
TransUnion FICO Risk Score 04
The Key Takeaway
The major takeaway is that your Credit Karma score will be different than your FICO score…and in most cases, the free, online score is better than the FICO score – at least that has been my experience.
Paying cash for a house has its advantages. Purchasing with cash rather than getting a mortgage could help you as the buyer win a bidding war when buying a new home. You may even be able to negotiate a lower price on the home if you’re paying cash.
After all, cash in hand is a sure thing, and a mortgage approval can take some time and isn’t always guaranteed.
Delayed financing is a specific program that allows the buyer to take cash out on a property immediately in order to cover the purchase price and closing costs for a property they had just purchased with cash.
How Delayed Financing Works
Delayed financing is a mortgage that is originated on a property after you already own it, in comparison to a typical mortgage that is used for the acquisition of a property. The delayed financing mortgage option allow buyers to compete with all-cash buyers when purchasing the property.
By financing the property after the initial cash transaction, the borrower/buyer is able to regain their liquidity because the money isn’t tied up in the house after the delayed financing is completed.
Keep
in mind that the value of the property might not the same as the purchase
price. Borrowers will need an appraisal done by their new lender to determine
the value. Moreover, your new loan can’t
be more than what you paid for the property plus your closing costs and lender
fees.
Why Delayed Financing?
Delayed financing is generally helpful for:
Investors who want to compete with all-cash buyers’ short timelines
Investors who want to have more bargaining power because they’re paying with cash
A property that has multiple offers and the seller doesn’t want to wait on financing
Investment properties, vacation homes, and primary residences
An investor who wants to take their cash out and buy another investment property
The primary reason to utilize delayed financing is that buyers can stay liquid. Investors use delayed financing to recover their cash and be able to purchase another property.
Generally,
delayed financing is right for an investor who wants to take advantage of all
of the benefits of purchasing a home using all cash. They can often negotiate a
lower price, close faster and compete with multiple other buyers. An investor
who doesn’t immediately qualify for conventional financing may also opt for
delayed financing.
An Investor’s Point of View
In
this case, the buyer is an investor and purchases a property using all cash. The buyer then wants to free-up some cash
back to buy another property.
The
buyer can then delayed financing to recoup the cash and take a loan out on the new
property, utilizing the cash back from the initial transaction!
A Primary Occupancy Borrower’s Point of View
The
buyer can also use this option to compete with all-cash buyers and negotiate
better terms. Delayed financing can be done as quickly as three weeks after
purchasing the property, which is different from a standard “cash-out
refinance” transaction, where the borrower must wait six or more months.
How Long Do You Have to Wait to Refinance?
If you’re doing a delayed financing transaction on a property you purchased in the last 6 months, you’re allowed to take cash out immediately without any waiting period.
Under normal circumstances, if you bought a home with a mortgage
instead of cash, you have to be on the title at least 6 months before you can
take cash out and refinance your home, so delayed financing is a notable
exception.
Delayed Financing
Qualifications
There
are certain qualifications that need to be met in order to qualify for a
delayed financing transaction. Most
specifically, the property must have been originally purchased using all cash.
Lenders generally have the following qualifications for this type of transaction:
Arm’s Length Transaction: You can’t be related to or have a personal relationship with the seller
Closing Documents: Closing statement from the property purchase
Proof of Funds: Showing where you got the funds to purchase the property
New loan amount can be no more than the actual documented amount of the borrower’s initial investment in purchasing the property plus closing costs.
Appraisal: Ordered by the lender and paid for by you, generally $500-plus
There can be more needed and other regulations may apply, but these listed above are most standard.
Although you may have just ordered an appraisal when you originally purchased the property, as mentioned previously, the lender will want to conduct their own appraisal before they approve your loan.
It would be my pleasure to help any borrower with a delayed financing transaction, so don’t hesitate to reach out to me for more information or to get started!
Most experts expect that the summer homebuying season will be quite strong. But a question remains about this real estate market: will it favor buyers, sellers, or both? Let’s take a closer look at who might benefit the most from the upcoming real estate buying season.
Remarkably, based just on consumer confidence, it appears that the summer homebuying season may be beneficial for both buyers and sellers.
According to Fannie Mae, one of the nation’s top mortgage investors, Americans are extremely optimistic about the housing market’s direction.
Growth typically means that it’s a good time to both buy and sell a home, and indicators are that Americans believe interests rates will stay relatively in check while their incomes will increase.
While consumer confidence may be high, some economists are ambivalent about the strength of the housing market.
There are some signs that the market is flattening, instead of continuing to race upward. Experts are actually divided on this issue, as home prices are still appreciating.
For instance, home sales at the national level are slowing slightly, although the rate of home appreciation is still increasing, albeit at a slightly slower rate. In addition, it’s taking a bit longer for homes to sell in some areas of the US, which means the days of homeowners benefiting from bidding wars might be on the wane.
This isn’t necessarily the case out west, as inventories are still low and there are more buyers that sellers. At the same time, with interest rates stabilizing, homes are still extraordinarily affordable, compared to historical norms.
So, who actually is going to benefit from the strong summer market?
Taking into account these facts, it looks like home buyers will have a slight advantage this summer. For starters, home prices are still on the rise but not as sharply as they once were.
Some sellers are also reducing their original listing price, which indicates they’re having trouble attracting buyers. Finally, the Federal Reserve has signaled that interest rates should stay relatively stable through the summer, which is the reason for the strong market, and as almost everyone knows, low interest rates are better for buyers. Rates have been steadily ticking downward over the last 2 months or so.
The summer homebuying season is going to be very strong, and tilted in favor of home buyers. If you’ve been thinking about buying a new home, now might be the perfect time – feel free to contact me for more information!
I work with a fair amount of second home buyers and investors – and am asked how to best go about financing these properties (and second homes), as well as their required down payments.
I recently ran across this article from Peter Miller at The Mortgage Reports – and it’s a great read for those looking to tap into home equity to purchase another home.
At first, it may seem that the equity issue is simple. You
bought a house for $150,000 and it’s now worth $275,000.
You’ve paid down principal, too, so your current equity is
$190,000.
Can you really get a check for almost $190,000 from lenders?
Lenders generally will allow cash-out refinancing equal to 80
percent of your equity. They will see a property value of $275,000 and subtract
20 percent ($55,000). That will leave around $220,000. This money will be used
to first repay the existing loan of $85,000. The balance – $135,000 – represents the cash available to the
borrower.
With some program, you might do better. The VA cash out mortgage allows qualified borrowers to refinance up to 100 percent of their equity while the FHA cash out loan will go to 85 percent. However, these programs come with various charges and insurance costs that many borrowers with equity will want to avoid.
Cash-out refinance to buy another home
With cash-out refinancing, you can use the equity in your home for many things — but not for all things. For instance, you can use the money to pay for college tuition, to purchase a business, or buy another property.
Buying a second home or investment property
In terms of real estate, you can use real estate equity to
immediately buy a second home or to purchase an investment property.
As soon as you close the cash-out refi, you can use those funds
as a down payment on another home — or to buy the house outright — if you plan
to keep the current home as your primary residence.
How to Go About a Refinance
Reach out to your lender to begin the application process. He or she should be able to coach you through the process – and identify the key pieces that will help you make an informed decision.
I’ve helped numerous investors with this process, and I’d be glad to see if this option might work for you, as well! Give me a callfor more….
Tapping into home equity by
refinancing is more of a possibility today and becoming very popular for many
borrowers.
As interest rates have moved lower in the last 3 weeks and housing values across the country continue to steadily increase, homeowners now have access to a much larger source of equity and possibly better payment terms!
With current mortgage rates low
and home equity on the rise, many think it’s a perfect time to refinance your
mortgage to save not only on your overall monthly payments, but your overall
interest costs as well.
It’s really about managing the
overall assets that you have in order to maximize the returns. Make sure you
are working with the right mortgage
lender to help in figuring out which product is best.
What is a Cash-Out Refinance?
A mortgage refinance happens when
the homeowner gets a new loan to replace the current mortgage. A cash-out
refinance happens when the borrower refinances for more than the amount owed on their existing home
loan. The borrower takes the difference in cash.
Rates Are Down and Home Equity is
Up
Since rising home values are returning lost equity to many homeowners, refinancing can make a good deal of sense with even a small difference in your interest rate. Homeowners now have options to do many things with the difference.
More home equity also means you
won’t need to bring cash to the table to refinance. Furthermore, interest rates
can be slightly lower when your loan-to-value ratio drops below 80 percent.
Here’s what many of my customers
are doing with that equity:
Consolidate higher
interest debt
Eliminate mortgage
insurance
Purchase a 2nd Home or Investment
Property (or a combination of both)
Home Improvement –
upgrades to kitchen, roof, or pool
Benefits of Cash-out Refinances
Free Up Cash – A cash-out refinance is a way to access money you already have in your home to pay off big bills such as college tuition, medical expenses, new business funding or home improvements. It often comes at a more attractive interest rate than those on unsecured personal loans, student loans or credit cards.
Improve your debt profile – Using a refinance to reduce or consolidate credit card debt is
also a great reason for a cash-out refinance. We can look at the weighted
average interest rate on a borrower’s credit cards and other liabilities to
determine whether moving the debt to a mortgage will get them a lower
rate. Some borrowers are saving thousands per month by
consolidating their debt through their mortgage.
More stable rate – Many borrowers choose to do a cash-out refinance for home
improvement projects because they want a steady interest rate instead of an
adjustable rate that comes with home equity lines of credit, or HELOCs.
2nd Home or Investment
Property – many borrowers are utilizing the
value of the cash in their home to purchase rental properties that cash flow
better then the monthly payments of the new loan.
Tax deductions – Unlike credit card interest, mortgage interest payments are tax
deductible. That means a cash-out refinance could reduce your taxable
income and land you a bigger tax refund.
Reasons NOT to Refinance
Terms and costs – While you may get a lower interest rate than your current mortgage, your cash-out refinance rate will be higher than a regular rate-and-term refinance at market rate. Even if your credit score is 800, you will pay a little bit more, usually an eighth of a percentage point higher, than a purchase mortgage. Generally, closing costs are added to the balance of the new loan, as well.
Paperwork headache – Borrowers
need to gather many of the same documents they did when they first got their
home loan. Lenders will generally require the past 2 years of tax returns, past
2 years of W-2 forms, 30 days’ worth of pay stubs, and possibly more, depending
on your situation.
Enabling bad habits – If you’re doing a cash-out refinance to pay off credit card
debt, you’re freeing up your credit limit. Avoid falling back into bad habits
and running up your cards again.
The Bottom Line
A cash-out refinance can make
sense if you can get a good interest rate on the new loan and have a good
use for the money.
Using the money to purchase a
rental property, fund a home renovation or consolidate
debt can rebuild the equity you’re taking out or help you get in a better
financial position.
With that said, seeking a refinance to fund
vacations or a new car might not be that great of an idea, because you’ll have
little to no return on your money.
It would be my pleasure to see if this type of plan
might be a good one for you.
Thomas Eugene Bonetto
Mortgage Loan Originator
NMLS: 1431961
About The Coach
Tom Bonetto has been helping his customers and players achieve their best for nearly 30 years. His goal is to provide both a superior customer experience and tremendous value for both his business associates and his players alike.
