Duplex Chick

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With the headlines increasingly filled with good news about an improving economy, it would be easy to prematurely celebrate the impending return of higher duplex values.

However, before we all start thinking happy days are here again, we need to keep two things in mind…

Interest rates impact value.

When the economy improves, interest rates tend to rise; just as they did this week.

And for every 1 percent increase in rates, a prospective duplex buyer can generally qualify for $10,000 less of a loan.

Yes, rents will increase as more people start living on their own once again.  And when rents get too high, people with good credit start looking for homes.

But the real estate boom of 2003-2006 happened when people with bad credit were able to qualify for loans.

I’m no economist, but I can’t imagine the banks are going to be willing to lend to those folks any time soon. And demand and supply for anything is what determines its value.

When it comes to supply,  there’s the small matter of all that shadow inventory…

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Until now, it’s been difficult for upside down duplex investors to get the government-backed loan modifications available to owned-occupied duplexes and single family homes.

In late January, however, the Obama administration announced an expansion of the HAMP program to allow investors to qualify.

According to a report in Bloomberg News, Timothy Massad, the Treasury’s assistant secretary for financial security said starting in May, landlords can use the Home Affordable Modification Program (HAMP)  for up to four loan workouts, as long as they rent out each property or have plans to fill them.

The federally-subsidized program pays banks to cut interest rates, lengthen the terms or forgive some of the mortgage principal.

The theory behind the change in policy is keeping current owners in place prevents tenants from being evicted. Massad said, “Vacant properties are a problem no matter how they became vacant.”

Almost one in every four home purchases in January were investment or vacation properties.

It is estimated that about 700,000 landlords will be eligible to modify their mortgages.

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If you’ve ever been broken up with by someone you love, you know the heartache afterward can last a long time; sometimes, it even long after you think you’re healed.

A bad FHA appraisal is kind of like that. Now, when I saw “bad”, I don’t mean the appraiser was abusive, or cheated on you, or anything like that.

What I mean is he didn’t think your duplex was worth what you and the buyer thought it was.

Let’s say, for example, you agreed to sell it for $225,000, but the appraiser said it was only worth $200,000. And the buyer, who intended to live in your duplex, doesn’t want to part with her cash

So the bank won’t lend the buyer any more than $200,000, less whatever down payment she needs for the loan.

This leaves duplex buyers with three options: coming up with the difference out of their own pockets, asking you for a price reduction to match the value determined by the appraiser, or walking away altogether.

Now, in my experience, most buyers aren’t willing to pay more than the place is worth.

So what if you truly believe your duplex is worth what you’re asking for it and refuse to alter your price?

Odds are, the buyer is going to fall out of love and break up with your duplex; leaving you to find another buyer.

Perhaps you’re thinking, “Well, I can do better anyway.”

And, well, maybe you can.

But here’s the deal. Even if Prince Buyer rides up two months later on his perfect white horse and says he loves your duplex so much he’s willing to pay you twice what you’re asking (provided he can get an FHA loan for it, of course), the bank won’t let him.

Because sooner or later, his lender is going to find out about your broken hearted bad appraisal.

FHA appraisals stick with a duplex for six months, regardless of who buys the property. So, the minute the new buyer goes to his bank for the money, his banker will refuse to give him a loan.

It’s a dead giveaway.  Kind of like crying over your ex on a first date.

And unfortunately, the only way to fix either a bad FHA duplex appraisal or a broken heart is time.

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Let’s face it. Many of us would love to buy a duplex.

That is, if we could get a loan for one.

Tightened lending standards, however, mean a lot of us can’t qualify for a bank loan.

And that’s why we’ve begun to see the re-emergence of the contract-for-deed.

A contract for deed or CD, which is also known as a land contract, carrying a note, or owner financing, is a duplex sale where the present duplex owner acts like the bank for the buyer.

While I wrote about this a while back, it certainly is worth revisiting.

So what are the advantages of buying a duplex using seller financing?

1. There are no loan origination fees.
2. The sale can close quickly.
3. There are no limits to the number of duplexes you can buy this way.
4. Owner financing doesn’t show up on your credit report.
5. The seller may be willing to accept an offer from a buyer with less than perfect credit.
6. The seller may accept a higher down payment.

Of course, there are disadvantages to buying using owner financing as well, including: Read the rest of this entry »

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If you’ve been paying attention at all to duplex mortgage interest rates, you know that they are historically low.

We’ve all seen and heard the ads for rates well below 5 percent interest for so long now it seems preposterous to think there ever could be such a thing as double digit, let alone 18, 19 or even 20 percent interest.

And yet, it’s happened.

If you’re considering buying a duplex, you might think, “Big deal, I’ll already have a low interest rate”, right?

But what if you want to sell?

After all, the higher the interest rate, the less someone can afford to pay for a duplex.

Well, if you happen to have financed your duplex using an FHA loan, you might actually find yourself in a good position. All FHA loans are assumable.

In other words, even though the going interest rate might be 18 percent, you could allow your duplex buyer to assume yours at the interest rate you’re at now.

Of course, there are some hurdles the buyer will have to jump first, starting with being able to qualify for a loan.

And, if you have the good fortune of selling a duplex for more than you paid for it, the buyer will have to have a big enough down payment to cover the difference between what you owe on the property and the purchase price.

Nonetheless, if ten years from now interest rates are at 18 percent, an FHA loan might make all the difference in selling your duplex!

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You may recall that back in October, the limits for the amount of money you could finance using an FHA loan to buy a Minneapolis duplex were reduced.

The temporary increases were meant as an incentive for prospective duplex buyers to jump into the market, using FHA’s low down payment requirement of 3.5 percent as an opportunity they wouldn’t otherwise have.

In October, that loan limit dropped for a Minneapolis duplex from $467,250 to $407,800.

What this meant was if you purchased a duplex for more than $422,073 in Hennepin, Ramsey, Dakota, Washington, Anoka, Carver or Scott counties, and planned on using FHA to finance that purchase, you would have to come up with a down payment big enough to cover the difference between a loan amount of $407,800 and the purchase price.

Last week, however, Congress changed their mind, reinstating the higher temporary loan limits. Now, if you purchase a duplex, say, in southwest Minneapolis for more than $483,604, using FHA financing, then you would have to come up with the difference for a down payment.

Otherwise, you can just put 3.5 percent down.

For a triplex, that limit is $564,800, and a four unit loan is limited to $701,900.

It’s important to note that these limits vary by county and state. For example, Goodhue County’s FHA duplex loan limit is $347,000, while many counties in southern California, for example, have a duplex loan limit of $934,200.

These changes happened so recently that HUD has yet to update its web site. However, once they do, you can find FHA loan limits for your area by clicking here.

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We’ve all heard how important your credit score is when buying a duplex.

After all, the way the bank sees it, the higher your score, the more likely you are to pay off the loan.

In other words, you’re low risk. And that, to them, is worth rewarding with a lower interest rate.

So how do they come up with your credit score anyway?

According to Waterstone Mortgage, the credit bureaus consider five factors. In order of importance they are:

1. Payment History – 35% Impact. Late payments, delinquencies and charge offs indicate that you’re a risk to a lender. Especially if they’ve occurred in the last two years.
2. Outstanding Credit Card Balances – 30% Impact. The important component here is the ratio between your outstanding balance and the amount of credit you have available on your account. While the ideal scenario includes credit balances at or near zero, you should at least owe less than 30 percent of the available credit; especially if you’re planning on buying a duplex in the next few months.
3. Credit History – 15% Impact. This component considers the length of time you’ve had a credit line. The longer its been open, the more likely you are to be a strong borrower.
4. Type of Credit – 10% Impact. It’s not only the amount of money you owe, but it’s also the kinds of payments you make. For example, if you have a mixture of car loans, mortgages and credit cards, you’re viewed more favorably than if you just have credit card debt. Waterstone also suggests you should always have one or two major credit card accounts.
5. Inquiries – 10% Impact. Did you know if you go around having people pull your credit, each time they do so it can cost you between 2 and 25 points on your credit score? Credit bureaus can ding you up to 10 times in a year for doing this. A better strategy might be to pull your credit yourself, which will have no impact in your credit score.

You must have, at minimum, a credit score of 620 before any lender will consider giving you a loan.

Again, the higher your credit score, the lower the interest rate you’re likely to be charged, which may save you hundreds of dollars a month on your payments, not to mention thousands over the life of your duplex loan.

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At the risk of becoming the Duplex Chick who cried “wolf”, FHA loan limits on Minneapolis and St Paul duplexes are about to change. A lot.

It’s important to remember that the amount of the loan you’re allowed to obtain is determined by where you live.

So, if you’re buying a duplex in Los Angeles or New York, you’re loan limit is likely to be higher than someone buying a duplex in, say, Mankato, Minn.

As of October 1, the five major counties that comprise the Twin Cities will see their FHA insured loan limit on a duplex drop from $467.250, to an amount no greater than $407,800.

Triplex buyers will see their limit decrease from $564,800 to $492, 950.

And those who hope to put just 3.5 percent down on an owner occupied FHA insured four-plex will find the maximum amount they can finance drop from $701,900 to $612,600.

While only a handful of duplexes, triplexes and four-plexes have sold this year for amounts too high for the property to qualify, these figures are important to keep in mind if you’re planning on owner occupying a duplex.

After all, sooner or later, somebody’s bound to have their heart broken by these new restrictions.

Most likely, however, it’s going to be the single family home buyers who will see their outer limits shrink from $365,000 to $318,500.

Of course, there’s always the possibility Congress can intervene and extend the higher FHA ceiling in order to help stimulate the housing market.

But that would require them all agreeing on something.

Yeah, right.

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Sometimes all the political noise about a US default is easy to tune out. But have you ever stopped to wonder how it might impact you as a duplex buyer?

One of the fears economists have about a default is the impact it would have on interest rates. As the U.S. is already projected to spend $1.5 trillion more than it takes in, our nation would be forced to borrow money to cover the deficit at higher interest rates than before.

It’s kind of like missing a credit card payment and seeing an interest rate of 21 percent on your next statement.

Sooner rather than later, this would trickle down to consumers in the form of higher interest rates on things like credit cards, car loans and duplex mortgages.

If you don’t think it will have an impact, consider this. With an increase of just 1 percent interest on a $200,000 loan, the annual payment would jump $2000, or almost $200 a month.

That’s enough to keep some duplexes from cash flowing.

If you’re in the market for a duplex right now, there is one way to lock up a low interest rate, regardless of what happens with the federal budget on August 2. How? Get a purchase agreement.

The minute you have a signed purchase agreement, you can lock an interest rate. That is, if that purchase agreement is signed before the ceiling for the deficit is raised.

Think about it.

It could make all the difference in your cash flow.

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Fannie Mae gave Minneapolis duplex investors an early holiday gift yesterday when it announced a change in guidelines to now allow cash-out refinancing within six months of a cash duplex purchase.

Previously, investors who paid cash for duplexes were required to leave all of their equity in the property for a minimum of six months before they could apply for a loan and get their money back out.

For many, this slowed their ability to invest considerably.

Of course, there are still some restrictions. Duplex buyers can’t refinance the property for more than they paid for it, including the amount of their initial investment, financing of closing costs, prepaid fees and points.

The duplex owner must be able to document with a HUD-1 form that they did not use mortgage financing to buy the duplex. Needless to say, the property also needs to be free of liens.

Fannie Mae also stated that if a Borrowerwith multiple properties hadn’t yet reported rental income on tax returns due to length of ownership, leases would now be an acceptable form of documentation.

What this means for investors is they will no longer have to park ample amounts of cash in a single property for an extended period of time. Instead, they will be able to put a loan on the duplex, remove the excess equity, and acquire another property.

Theoretically, anyway, this flexibility, along with rent increases and low vacancy rates, could spur the Minneapolis duplex investment market toward recovery.