Question: Is it possible to buy a home with less than 20% down?
Answer: I’m always surprised by the number of people who assume they have to put 20% down to buy a home and delay their goal of becoming a homeowner for years because of it. Studies show that the most common reason people give for not buying a home is that they don’t have enough for a down payment.
In reality, about 1/3 of Arlington buyers purchase a home with less than 20% down and for many buyers, especially first-time home buyers, they’re putting as little as 3-5% down.
Programs For Everybody
For those with good credit, there are popular Conventional Loan programs allowing for as little as 3% down and for those with lower credit scores, FHA Loan programs range from 3.5%-10% down. There are also some exceptional programs available to those with great credit and strong incomes allowing for 10%-15% down at great rates.
Specialty Programs For Military and Doctors
If you are an active-duty or former servicemember you likely know about VA Loans that allow purchases with zero down. Doctors also have access to special loan programs offering great rates with low down payments for large loan amounts.
Most loans with less than 20% down will include mortgage insurance, which I wrote about here. It will increase your monthly payment and generally represents a higher percentage of your loan amount the less you put down. However, there are options to get rid of the mortgage insurance fees by buying it out or applying for early removal after a couple of years. There are also some programs that do not include mortgage insurance at all.
Impact on Negotiations
Clients often ask me how much a lower down payment will impact their ability to negotiate, so last year I ran the numbers on the impact of different down payments on the percentage buyers were negotiating off the sale price. The results showed that only cash buyers (100% down) and buyers not putting any money down were materially impacted by their down payment, the negotiation leverage was pretty similar for everybody in between.
However, it would be misleading to suggest that down payment percentage doesn’t have any impact. Most sellers will respond more enthusiastically to higher down payments and this comes into play in competitive scenarios (multiple offers), which has become common in Arlington and the surrounding DC Metro neighborhoods. When sellers are choosing between multiple, similar offers, buyers with higher down payments have an advantage.
Buyers can combat the potential negative impact of a lower down payment in multiple offer scenarios by getting a strong pre-approval letter from a reputable local lender, offering to get pre-approved by a lender of the seller’s choosing, increasing the Earnest Money Deposit, or a number of other tweaks to the contract that will be looked at favorably by the seller, without increasing risk to the buyer or increasing the offer price.
Favorite Mortgage Programs
Here’s a link to an article I wrote with some of my favorite mortgage programs and contact information for great lenders who offer them.
If you’d like any additional information or recommendations on lenders or loan programs, don’t hesitate to reach out to me at Eli@EliResidential.com. If you’re thinking about buying a home in Arlington or the surrounding Northern VA/DC Metro neighborhoods, I’d be happy to meet with you to discuss your options.
the recent appreciate in real estate values, are you seeing more homes appraise
for less than the sale price?
Answer: As we saw in last week’s column, the Arlington real estate market has appreciated rapidly over the last six months which increases the chances that an Appraiser cannot find past sales to support the price the buyer and seller have agreed to, thus increasing the amount of low appraisals in Arlington over the last six months (unfortunately there’s no data to back that up so it’s based on what I’ve seen and heard in the market). Generally, appraisal values lag behind actual market appreciation by a few months.
Banks Often Require
If a buyer is getting a mortgage, the bank almost always
requires a third-party appraisal to assess the property’s market value. While
one can easily make the argument that the price the buyer and seller have
agreed to is the market value, banks don’t look at it that way, hence the
Appraisals are largely based on comparable home sales over the last six months. It’s a common myth that Appraisers can only use sales from the last six months, but more recent sales are given more weight than sales 6+ months ago. Ultimately, it’s the Appraisers job to determine the market value of a home using the best available information.
Impact of a Low
If the appraised value comes in at or above the purchase
price, all is good in the eyes of the bank so things continue as planned (note:
a higher appraised value has no impact on your assessed value for tax
If the appraised value is lower than the purchase price, the
bank usually requires you to negotiate a reduced sale price to match the
appraised value or put more money down to cover the difference between the sale
price and appraised value, multiplied by your loan-to-value (LTV) ratio. In
some cases, you can also change the type of loan you’re using to satisfy the
The easiest way to calculate LTV is subtract your down
payment percentage from 100%. In other words, if you’re putting 20% down, your
LTV is 80%. If there’s a $10,000 difference between the sale price and
appraised value, you’ll usually be required to bring an extra $8,000
($10,000*.8) to the table.
All of this can change depending on your loan program and down payment, so it’s important to understand the impact a low appraisal will have on your deal prior to making an offer.
Protection Through An
The Appraisal Contingency is one of the “Big Three”
contingencies that are common to sales contracts in Northern Virginia. The Home
Inspection and Financing Contingencies are the other two.
The Appraisal Contingency gives buyers an out, with a full
return of their Deposit, in the event the appraisal is below the sale price and
the seller is unwilling to reduce the sale price or the buyer is unwilling to
make up the difference or change loan products.
If you include an Appraisal Contingency in your offer, it’s a good idea to ask your lender how long it will take to order and complete the appraisal so you can structure the contingency period around that timeline. Remember, shorter contingency periods are more attractive to sellers and longer periods generally favor the buyer.
When To Waive The
waiving an Appraisal Contingency is the right strategic decision when making an
offer. If you’re competing against other offers, especially if they’re cash (no
appraisal needed), you should talk with your agent and lender about the risk
and reward of giving up this protection. In some cases, sellers will choose an
offer with less risk (fewer or no contingencies) instead of the highest offer,
especially when the sale price is well above recent comparable sales.
Removing the Appraisal Contingency altogether isn’t your only option either. There are ways to reduce the seller’s risk exposure, thus making your offer more competitive, while also limiting your risk exposure in the event of a really low appraisal.
Disputing a Low Appraisal
If you disagree with the appraised
value, ask your lender about the dispute process. First review the appraisal
report to understand what sales and details the Appraiser used to determine the
value. The best chance you have at getting an appraisal adjustment is to
provide the Appraiser with different sales that more accurately represent the
subject property’s value, with an explanation.
risk/contingencies is one of many strategic decisions you’ll make as a buyer or
that you’ll have to assess as a seller. Don’t hesitate to reach out to me by
email at Eli@EliResidential.com if
you have any additional questions!
Question: Do I have to put 20% down to buy a home?
Answer: This is the most common question I’m asked by buyers and there are a surprising number of people who are well-qualified and want to purchase a home, but sit on the sidelines trying to save for a 20% down payment. Over the last 18 months, nearly one third of buyers in Arlington put less than 20% down and most of those people put 10% or less down.
Popular Low-Down Options
Conventional loans are available at 3%, 5%, 10% and 15% down
FHA loans are available at 3.5% down
If you or your spouse are active or former military, you can qualify for a zero-down loan through the VA. I detailed VA loans in this post from May 2016.
Typically, if you have a Jumbo Loan (loan amount exceeds $679,650) you are required to put 20% down unless you qualify for one of many preferred mortgage programs available in the market, which I mention in this post from November 2017.
What’s The Downside?
If you use a non-VA loan with less than 20% down you will have to pay Mortgage Insurance (option to pay it off up-front), which is essentially a monthly penalty/fee assessed on top of your mortgage payment that increases the less you put down and the higher your loan amount.
Below are statistics pulled from the MLS on the amount Arlingtonians put down to purchase homes over the last 18 months.
These numbers are manually entered by the listing agent at the end of the deal and I think that in some cases agents write 0% financed (cash) instead of entering the correct info so it’s my belief that the number of loans with low down payments is actually a bit higher than the statistics reflect.
32% of all purchases were made with less than 20% down, 26% with 10% or less down, and 18% with 5% or less down
39% of townhomes, 37% of condos and 22% of detached/single family homes are purchased with less than 20% down
14% of purchases were not financed (cash)
Only 3% of purchases required FHA financing and less than 2% were FHA-financed condo purchases, so consider this if your Condo Association is setting rental caps simply to qualify for FHA financing
Feel free to reach out with any questions you have about your loan options for purchasing a home anywhere in Virginia, Washington, DC or Maryland. I’m happy to answer any specific questions you have or connect you with a lender who specializes in the type of loan you’re looking for. I’m available any time via email at Eli@EliResidential.com.
Question: As interest rates have increased over the last 6-12 months, how will the market react to higher rates and do you expect them to come back down in 2018?
Answer: The rates I’m seeing today are about 1-1.5% higher than what I’ve seen on average over the last few years and about .5% higher than where they’ve been over the last 6-12 months. Generally, most economists are projecting growth in the US and there are similar signs in Europe so if that holds true, expect interest rates to continue their upward trajectory.
Higher Mortgage Rates In 2018
According to Freddie Mac, the average Mortgage rate from the 1970s-2000 was about 7%, the average rate from 2000-2008 was 6% and we’ve been hovering around 3.5-4% since 2008. Freddie Mac currently predicts that rates will reach about 5% by the end of 2018.
Mortgage rates are at the mercy of the US and global economies so predicting their direction is no different than predicting how the stock market will do.
Contrary to popular belief, mortgage rates are not directly correlated to the Fed rate that you regularly hear about in the news. So when you hear that the Fed is planning to increase rates by .25%, that does not mean your mortgage rate will be .25% higher the following day. See chart below for historical trends of Fed rate vs mortgage rates:
We are currently experiencing high daily and weekly volatility in mortgage rates, which is frustrating for many. Some weeks see swings of .25% so you can either benefit or lose out from those swings based on when you lock your rate. Discuss this risk with your loan officer.
You may have missed the lowest rates over the last few years, but historically mortgage rates are still well below average as you can see from the chart below from Freddie Mac:
The Impact Of Higher Rates
For my clients, the ones who feel the rates increases the most are those who have been in the market for 6-12 months but have not purchased yet either due to lack of suitable inventory or urgency.
It’s tough to accept that rates were about 1% lower when they started looking and now they feel like they’ve lost. Those who are just now entering the market tend to be much better at brushing it off. It also impacts my clients who are not also selling a home because those who are selling will realize the benefits of the stronger market vs those who are just buying are at its mercy.
First time buyers are also more sensitive to rate fluctuations because most are already struggling to adjust to the hefty price tag of buying what they want in the DC Metro area.
Redfin recently asked 4,000 buyers who planned to purchase in the next 12 months how increasing rates would impact their purchase and found that only 6% would cancel their plans to buy while nearly 50% wouldn’t change anything or would increase their urgency to buy.
This might seem like a good result for homeowners, but losing 6% of buyers, having 21% reduce their budget, and 27% waiting for rates to drop is a bad sign. Especially if rates continue to go up and the 27% who were waiting for rates to drop decide to either stop their search or reduce their budget.
I think the biggest reason increasing rates will slow the market is the psychological effect of higher rates vs the actual impact to buyers’ budgets. For buyers struggling to internalize the “loss” they’ve taken now that rates are higher, consider the following:
On a $400,000 loan, a .25% increase in rate represents $60/month. Try to decide if a $50-$150 change in your monthly mortgage cost is worth giving up on a home purchase or compromising on what you want/need. Most buyers decide to spend less than what they’re approved for, so there is usually some cushion.
The reason rates are higher is because the economy/stock market have done so well lately so your investments and/or income are hopefully increasing at a rate on pace with or above what you’re giving up in increased mortgage rates.
In 2017 the S&P 500 returned about 20% to investors so maybe you earned enough in the market to allow for a higher down payment?
Hopefully the net effect of everything that factors into mortgage rates is still positive for you.
With so much volatility around mortgage rates, it’s even more important that your lender be able to advise instead of just being a pass-through for today’s rates.
My clients have found Jake Ryon of First Home Mortgage (email@example.com) and Troy Toureau of McLean Mortgage (firstname.lastname@example.org) to be valuable resources during their home purchases and I’d encourage anybody to reach out for advice.
Question: What were the real estate related changes in the new tax plan and how will those changes impact our local real estate market?
Answer: Spending an hour every week working on my taxes in QuickBooks doesn’t qualify me as a tax expert, so before I provide my take, I’d like to introduce local tax expert Molly Sobhani, CPA of Klausner & Company, located in Rosslyn, to break-down the key changes in the new tax plan that will effect how buyers and homeowners make real estate decisions. Following Molly’s explanation, I will provide my personal thoughts and stats, which stand in contrast to most of the opinions I’ve read.
If you would like to follow-up with Molly about the tax bill or any other tax questions, she can be reached directly at email@example.com or (571) 620-0159. Take it away Molly…
After weeks of confusing, convoluted and contradicting proposals introduced by the House and Senate, the Tax Cuts & Jobs Act (TCJA) was signed into law on December 22 by President Donald J. Trump. As the dust continues to settle on TCJA, taxpayers across the country are wading through the tax reform bill and the impact of those changes.
With increases to the standard deduction, changes to the deductibility of mortgage interest and limits on property tax deductions, current homeowners and potential homebuyers have a lot to think about. The housing market will undoubtedly be impacted but how – exactly – is still a big question mark.
Summary of Major Tax Law Changes Impacting Residential Home Ownership
Interest will only be deductible on mortgage debts used to acquire your principal residence or a second home of up to $750,000 (or $375,000 for a married couples filing separately). The phase-out of deductible interest begins after the loan balance exceeds $750,000. This new debt limit applies to all loans incurred after December 15, 2017.
Interest on home equity debt (also known as Home Equity Lines of Credit or HELOCs) will no longer be deductible. This is true regardless of when the home equity debt was incurred.
State and local taxes (also known as SALT deductions) will be limited to $10,000 per year. This category of deductions also includes property taxes paid on homes.
The Standard Deduction has increased substantially from $12,700 for joint filers ($6,350 for single filers) in 2017 to $24,000 for joint filers ($12,000 for single filers) in 2018.
One provision that did not change is related to the capital gain exclusion of up to $500,000 for joint filers ($250,000 for single filers) on the sale of a primary residence. You still must use the home as your primary residence for at least two of the last five years in order to be eligible for the full exclusion.
So why do these new tax provisions make homeownership a trickier decision? The incentives for being a homeowner have now been substantially diminished by the new laws for many taxpayers.
A Hypothetical Scenario
A married couple earns $150,000/year in wages and is looking to buy a home in Arlington, VA. Their total state income taxes are $8,625 (5.75% of their $150,000 wages.) They have no other deductions to itemize in 2017 so they will take the $12,700 standard deduction.
In January 2018, they buy a condo for $425,000. They put down 20% and borrow $340,000 at 4%. They are under the $750,000 mortgage debt cap so they are eligible to deduct all of the interest they pay on their loan each year. In the first year, their total interest expense totals $13,491. Their property taxes are $4,233 based on Arlington’s 2017 rates for a $425,000 assessment. Our married couple has a brand new home and all these brand new deductions, right?
But wait! After we add the new property tax deduction of $4,233 to the $8,625 they already pay in state income taxes, they are over the $10,000 limit for SALT deductions. In this example, $2,858 of their property taxes are not deductible.
Fine. Let’s look at their total deductions then: they have the maximum $10,000 SALT deductions and $13,491 of mortgage interest, totaling $23,491. Under the old tax laws, they would itemize their deductions and see a reduction in their Federal and state taxes for these additional expenses.
But we’re not working under the old laws anymore, are we? Under TCJA, even after spending all this money on buying a new home, paying the interest on their mortgage and paying their property taxes, they are actually still better off taking the standard deduction of $24,000.
As you can see from the example above, by increasing the standard deduction to $24,000 for a married couple filing jointly, many taxpayers who otherwise would have itemized may now benefit more from the standard deduction. This essentially takes away the tax benefit of owning a house for some people. And the question that many potential homebuyers may consider is: “Why bother?” More and more, they may delay the decision to buy in favor of renting.
Other Potential Effects on Housing Markets
Home values may be impacted, too, by the change in tax laws. If mortgage interest is limited to $750,000, houses that are listed at prices over $937,500 (assuming a buyer puts 20% down) may not be as appealing to new buyers as lower-priced homes.
Another consideration is how the disparity in state income and state property tax rates may drive homebuyers into lower tax rate states. In high tax states, there could be multiple scenarios in which taxpayers lose 100% of the tax benefit of paying property taxes.
Of course, there are other (wonderful) reasons to buy a home and other (wonderful) reasons to buy a home in certain neighborhoods. The upsides generated from the Tax Cuts & Jobs Act, though, are severely lacking.
Eli’s Closing Stats and Thoughts
According to The Washington Post, Moodys Analytics predicts that home values in Arlington will drop 2.3% as a result of the new tax bill, with drops of 2% in DC, 2.5% in Montgomery County, 2.6% in Loudon County and 4% nationally. Of course, this analysis is limited to the impact of the tax bill and doesn’t take any other growth factors into consideration. In other words, if Arlington continues its growth from 2017 (3.1%), we wouldn’t see actual losses, but stunted growth.
The change in SALT deductions and increase in the Standard Deduction will reduce the benefit of homeownership for many Arlington residents, but let’s take a look at how many homeowners are likely to be impacted by the reduction of the mortgage interest deduction limit to $750,000. Of the 3,100+ homes sold in Arlington in 2017, just over 400 were bought with loans exceeding $750,000. Approximately 30% of detached homes in Arlington (350 of 1,150 sales) had a loan exceeding the new limit. Keep in mind, however, that homeowners with loans over $750,000 will still be able to deduct interest on the first $750,000.
I Don’t Believe The Market Will Suffer
While these stats and Moodys’ analysis are great, they fail to capture how homebuyers actually make decisions in the real world. The majority of buyers decide to purchase a home because of a major life event (marriage, kids, job change, etc) and once they’ve decided to purchase a home, their budget is based on how much they have saved for a down payment and how much they can afford each month in housing costs.
Their monthly budget is primarily based on income and the sum of mortgage payments, property taxes, any HOA fees, insurance and maintenance. SALT and mortgage interest deductions don’t factor into any of the core considerations for most homebuyers.
Let’s Be Realistic
Let’s be honest, for most people, taxes are a once-a-year afterthought and tax planning is mostly crossing their fingers, hoping for a few dollars back. For those who do pay close attention to their tax exposure and who stand to lose out on the benefits of the mortgage interest and SALT deductions, I question how much it actually matters.
Previously, the mortgage interest was capped at $1M and there were just 163 (5%) homes purchased in 2017 with a loan of $1M or more who will be “fully” effected by the change to a $750,000 cap. In the first year, the interest paid on that difference of $250,000 is about $10,000 (drops each year), so for somebody with an effective tax rate of 30%, that’s a $3,000 change to their bottom line from last year.
Adding the change in SALT deduction increases that for many people and $3,000+ is nothing to sneeze at, but we’re talking about the wealthiest homebuyers with incomes exceeding $250,000/year. I’d bet that for those who are conscious of the net effect on their bottom line, they’re more likely to find ways to save this money somewhere else than their home purchase.
Plus, the tax plan provides substantial benefits to wealthy Americans and may very well have a net positive effect on their bottom line anyway. Also, does anybody really think that somebody negotiating on a $1.5M+ home they plan to live in for 15+ years will pay $5,000 less because that’s the calculated net impact from mortgage interest and SALT on their 2019 taxes under the new tax bill? No way.
Let’s be realistic about the psychology of home buying and what determines buying power because that’s what impacts home prices, not expensive studies funded by special interest groups (yes, I’m kind of calling out the National Association of REALTORS for fear mongering).
Question: Are there good loan options available if I don’t have 20% or more to put down?
Answer: There are an abundance of loan products on the market that cater to different professions, down payments and financial circumstances that you should be aware of. “Rate shopping” is easy and moderately effective, but “product shopping” can be much more valuable and something an informed Agent can assist you with. Here are some of my favorite loan programs and the lenders I work with who provide them:
The Doctor Loan Program is a residential mortgage loan specifically created for licensed medical professionals to make obtaining mortgage financing easier and more hassle-free. It recognizes the financial toll of medical school and strong, stable future income post-graduation. The rates on these loans are also fantastic.
Eligible Doctors include:
Licensed residents/interns/fellows in MD and DO programs
Doctors of osteopathy
Doctors of dental medicine/surgeons/orthodontics/general dentists (DMD/DDS)
Psychiatrist licensed as a medical doctor
Available financing terms include fixed and adjustable rate mortgages for purchases and rate/term & cash out refinances.
0% down up to $750,000 loan amount
5% down up to a $1M loan amount
10% down up to a $1.5M loan amount
No mortgage insurance required
Homeowners Buying And Selling: Second Trust/HELOC Program from First Home Mortgage: Jake Ryon (firstname.lastname@example.org, (202) 448-0873)
This is a great program for current homeowners who will be buying and selling simultaneously. It allows you to use the future proceeds from your home sale to make a large down payment on your new home, before even putting your current home on the market.
They partner with local banks and credit unions to provide you with a second trust that allows you to put as little 5% down up to nearly a $1,000,000 loan amount. The second trust finances the remaining amount of your down payment (e.g. 15% if you put down 5%).
The HELOC/second trust payment is interest-only, can be paid off any time and can be used like a bridge loan to allow you to purchase a new home without a home-sale contingency and to sell your existing home unrestricted.
Low Down Payment: Mortgage Insurance Payment Eliminator from McLean Mortgage: Troy Toureau (email@example.com, (301) 440-4261)
This program enables you to put as little as 3% to 5% down using conventional financing (not FHA) and eliminate the monthly mortgage insurance payment by making a one-time more affordable payment. This provides multiple benefits including a potential increase in buying power by reducing the Debt-to-Income ratio (lower monthly payment), allowing you to negotiate for the seller to make this payment by rolling it into closing costs, and ensuring that the entire payment is tax deductible (confirm with your tax advisor).
Large Loan Amounts: Non-Confirming Jumbo Loan Program from Wells Fargo: Email me for contact info at Eli@EliResidential.com
It’s not just the Doctors who can find low down payment options without mortgage insurance for high-value (jumbo) loans. Wells Fargo’s “Professionals” Program lets you put 10.01% down on loans from $424,100 up to $1,000,000 without any mortgage insurance and the rates are incredible. They have options for fixed and adjustable mortgages as well. A high credit score and strong income are key factors for qualifying. It’s referred to as the “Professionals” Program because it’s popular amongst high earning, non-medical professionals like lawyers and consultants.
Make The Right Choice
Choosing the right lender is a combination of selecting the program that’s right for you, getting the best market rates, and working with somebody who provides a high level of service. Earlier this year I wrote an article with additional tips for selecting and comparing lenders. If you have any questions about the programs I summarized above, other lending programs like construction and rehab loans, or would like an introduction to one of my preferred lenders please reach out to me at Eli@EliResidential.com.
Question: What is the likelihood that a lender will approve a loan for ~$500,000 for a first time buyer putting 10% down in a condo building that is approaching or over 50 percent units being rented out?
Answer: This question gives me another opportunity to bring in an industry expert: loan officer Jake Ryon of First Home Mortgage (NMLS #993471). Below, Jake debunks the common myth about rental ratios in condo buildings and introduces the factors that actually impact condo loans most frequently.
MYTH: Buyers Can’t Qualify For Condo Loans If More Than 50 percent of Units Are Rented
One of the most common myths that exists in the industry is that buyers cannot get a loan if more than 50 percent of units are being rented out in a condo building.
TRUTH: Most Homeowners Can Qualify For Condo Loans Regardless Of Rental Ratio
The percentage of units rented in a condo building (aka investor ratio or owner occupancy ratio) has no impact on loans for borrowers that are purchasing or refinancing their primary residence or second home. If the borrow is an investor seeking a conventional loan, the building must have at least 50 percent of the units occupied by owners (not rented). FHA’s requirement is the same but does not apply to second homes. While condo associations may elect to self-impose a rental cap, as it stands now with Fannie Mae and Freddie Mac, it currently doesn’t impact borrowers who are purchasing or refinancing their primary residence or second home.
What Does Impact Loans On Condo Buildings?
Commercial/Non-Residential Square Footage: Currently, Fannie and Freddie cap the total commercial/non-residential square footage in a building at 25 percent of the total space, up from 20 percent a few years ago. Your lender may be able to obtain a project waiver directly from Fannie Mae if the commercial/non-residential square footage exceeds the 25 percent cap. I was recently able to obtain a waiver for a five unit project that has 38 percent commercial space (in D.C.) because we were able to show it was common in the area, didn’t impact marketability and were able to provide several comps with similar square footage of commercial/non-residential space.
Single Entity Ownership: The maximum number of units owned by one entity can’t exceed 10 percent of the units in the project per Fannie and Freddie guidelines. If it is a 2-4 unit project (rare in Arlington, very common in DC), no entity can own more than one unit. Both Fannie and Freddie do allow one entity to own two units in a project with 5-20 units. A project waiver may be possible from Fannie Mae if a single entity owns greater than 10 percent.
Delinquency: Fannie and Freddie do not allow more than 15 percent of the units in the Association to be > 60 days delinquent on the payment of their monthly assessments for the project to be warrantable (approved for loans). A project waiver may be possible with Fannie Mae if the delinquency rate is slightly higher than 15 percent.
Budget: Fannie and Freddie require the Association’s current year adopted budget to include a minimum of 10 percent of the annual monthly assessments to go towards the reserve fund. If the budget does not document the required 10 percent, a current reserve study that supports the Association’s current level of contribution may be acceptable.
If you have any questions about condo warrantability or anything else loan-related, Jake Ryon can be reached at firstname.lastname@example.org, 202-448-0873 or online. He is located at 1015 15th Street NW Suite #375 Washington DC 20005.
Question: We are buying and selling a home simultaneously and our lender has provided us with a few options to qualify for the purchase without making our offer contingent on the sale of our current home. Do you have any tips for choosing which mortgage product is best for us?
Answer: Buying and selling a home at the same time can be a complex transaction logistically and financially. I explored the seller side of home sale contingencies in October, but here I’ll share advice I give buyers who face difficult financing decisions. Tip of the day: it’s not just about getting the lowest interest rate.
Weigh Your Options
Selling your home before making a purchase may afford you the best loan options, but it doesn’t always make sense for buyers:
It weakens your negotiation position on pricing (you’ll pay more) and your ability to compete for new listings
You weaken your position on the sale side, with more pressure accept an offer quickly
For many families with children and/or pets, selling your home while living there is a logistical nightmare
Certain lenders have a wide range of loan products to help buyers with limited cash reserves for a down payment, but substantial equity in their homes, qualify for a home purchase without a home sale contingency. The options include a Home Equity Line of Credit (HELOC), a second trust loan in which a large portion of your down payment comes from a second interest-only loan, and bridge loans (less common). Each of these options come with different short and long-term costs, so it can be difficult to decide what is best for you and your family.
Get A Professional Opinion
Most real estate transactions involve three professionals – your agent, your lender, and your title company, but when you’re faced with complex financial decisions, I highly recommend using a Financial Consultant to help you determine which financing option suits you. Your lender can explain the cost, pros/cons, and time constraints of each loan option and your agent can explain how different types of loans and contingencies will impact your transaction, but a good Financial Consultant will be able to help you determine the best way to leverage cash, debt, and tax write-offs to maximize your financial position.
Financial Consultants should do more than help you pick mutual funds for your retirement accounts and act as an expert sounding board when you’re facing major life decisions, like how to finance your home purchase. They can build models and run scenarios within the context of your personal savings/investment plan to help you make your decision. Although an experienced advisor can provide great advice with limited knowledge of your personal finances, you’ll get the most from somebody who has a complete picture of your finances and goals, so engage a professional early, if you haven’t already.
If you’re looking for a recommendation, Carl Grund (CFP, CPWA, AIF) with Signature Financial Parners has helped multiple clients of mine with difficult real estate decisions and is a local Arlingtonian. Feel free to contact him at email@example.com or 703-287-7128 for immediate or future advice.
Question: Does it matter which lender/mortgage company I choose when I purchase a home?
Answer: Choosing a good lender is one of the most important decisions you make during the home buying process. One of the initial differentiators is whether your lender runs credit and collects your documents up-front (W-2s, income verification, bank statements, etc) or just asks questions about your income and debt. This early effort drives most of the following reasons a good lender is able to make such a big difference:
Better Pre-Approval: When I review offers on a listing, I put a lot of value in the quality of the lender who wrote the pre-approval letter for the buyer. I also call the lender to 1) make sure they’re responsive 2) ask them what information/documents they reviewed and 3) about the financial strength of the buyer. Approval letters from unreliable lenders or lenders who haven’t reviewed a full set of documents pose a moderate risk of not closing, which weakens the offer.
Close Faster: Online lenders and larger banks have difficulty closing in less than 35-45 days, but a good lender can close in less than three weeks. If you find yourself competing for a property, working with a lender who can close faster than the offers you’re competing against will significantly increase the probability of your offer being chosen. I’ve represented buyers and sellers where the chosen offer isn’t the highest sale price, but the strongest overall offer, often attributed to the quality of the lender and their ability to close faster.
Don’t Miss Settlement
Good lenders do not miss the settlement date. Their reputation and business rely on it. If you miss the contracted settlement date, you’re (usually) in default and expose yourself to risks including loss of Earnest Money Deposit or having the contract voided by the seller.
A good question to ask your lender is where their staff works. There are quite a few people involved in getting your loan approved including the loan officer, processor, and underwriters. Lenders with a history of missing settlement deadlines often have staff working in different locations, that don’t regularly work together. If your lender works in the same physical office as all of those people, that’s a good indication that they can handle issues efficiently and have a high probability of meeting the settlement date.
Don’t Get Duped (Rate vs APR)
Be careful when you’re comparing interest rates, especially online rates. First, make sure you’re comparing the Annual Percentage Rate (APR), not the interest rate. Many lenders advertise lower rates by including points (you pay cash up-front for a lower rate) or they charge higher fees. The APR is a measure of the total cost of the loan, including points, fees, and interest rate and allows for an apples-to-apples comparison. Second, it’s important to note that conforming loans (loan amounts of $636,150 or less), which are backed by Fannie Mae and Freddie Mac, typically have very little variation in rates because they usually follow similar Fannie and Freddie guidelines and market pricing. The biggest differences in rates are on non-conforming loan amounts (over $636,150) and in special programs like Doctor or Attorney loans.
A reliable pre-approval gives you the confidence that you’ll qualify for the loan you’re applying for. Weak pre-approval letters lead to surprises during the loan application process, which can lead to rejection letters or delays. The last thing you want is to find out you don’t qualify after you’ve spent money on a home inspection, appraisal, and started packing for a move that may not happen. Reviewing all of your documents early also gives you and your lender time to fix credit scores, debt ratios, and other issues to increase your purchasing power or improve your interest rates.
In most cases, buyers should be considering multiple loan products and finding the best fit. This is particularly true if you’re buying and selling a property and would like to purchase without a home sale contingency, if you’re exploring low down payment options, or if you’re planning to own the property for less than 10 years and can benefit from the lower rates of an Adjustable Rate Mortgage (ARM). A good lender will have access to a wide range of great products, including Doctor and Attorney programs, and be able to advise you on the type of loan that nets you the best long-term results.
If you’re considering buying or in the process of talking to lenders, I’d be happy to make some recommendations based on your financial situation, type of purchase, and goals. Feel free to reach out to me at Eli@RealtyDCMetro.com.
Question: If I purchase an as-is home to renovate myself, what are the best financing options available to me?
Answer: This is Part 2 of the question I answered last week about buying a home as-is. I asked one of the area’s top lenders, Troy Toureau of McLean Mortgage to provide a detailed response. Troy is a fantastic resource for any of your mortgage questions/needs. The following is his response:
If you want to own a home in Arlington or other areas surrounding the city, there is a lot of competition. The good news is that there are older homes requiring updates that many home buyers ignore, while newer, higher-priced properties often attract multiple offers.
Focusing on the renovation-ready market can expand your choices and perhaps give you access to a better location. The process of renovating can also give you a home that is more custom-tailored to your tastes and needs.
Financing a home that you will renovate is a bit more complex than a standard purchase loan. The good news is that there are several options that will help you achieve your goals of upgrading and/or customizing the house for your needs:
If your renovations are projected to cost over $100,000, you can opt for a construction-permanent loan, based on the value of the home after the renovations are completed. Here is an example:
Purchase Price: $450,000
Renovation Budget: $150,000
In this case, your total needs are $600,000 and you can obtain a loan of up to 95% of that amount. You will receive the money at closing for the purchase, and then the remainder of the money in draws paid directly to the construction company as the work is completed. When the work is done, you do not have to finance the home again, as this “one-time-close” construction loan will automatically convert to a permanent loan. Larger down payments will be needed for larger loan amounts. Note that there are additional costs associated with construction loans because the appraisal is more complex and there are costs for periodic inspections and draws.
As an additional option, you can opt for a traditional construction loan and refinance into a permanent loan after the work is complete. While this will result in more costs by adding a refinance transaction, you will have more choices for permanent financing on the back end.
Other Financing Options
For renovations under $100,000, there are two good strategies:
If you are planning to put 20% or more down on a $600,000 loan, you can simply reduce your down payment to 10%, or even 5%, conserving your cash for the renovations. Here is an example:
$600,000 Purchase Price with 20% Down: $120,000
$600,000 Purchase Price with 5% Down: $30,000
Available funds for renovations: $90,000
In addition, the renovations may give you a higher appraised value to help eliminate the mortgage insurance costs associated with lower down payments.
If you do not have the cash assets for a large down payment, you can close on the property and then obtain a second mortgage or home equity line-of-credit (HELOC) after closing. To do this, you’ll need to find a bank that will lend the money based upon the renovated value of the house.
In today’s real estate market, especially in high-demand areas, it pays to explore all of your options. If you would like to discuss some of these options when you are considering purchasing a new home and/or renovating an existing home, feel free to contact me at firstname.lastname@example.org or (301) 440-4261.