Archive for the 'Financing' Category

Why An FHA Duplex Loan Isn’t The Big Bad Wolf

said on August 22nd, 2017 categorized under: Financing, Selling A Duplex

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Just like you can’t believe everything you read on the Internet, you can’t believe everything you hear in real estate.

Take, for instance, the urban myth that Minneapolis and St Paul duplex sellers shouldn’t even consider an offer for a buyer using an FHA insured mortgage, even if, in multiple offers, it is for significantly more than an offer from another buyer.

An FHA mortgage is one in which the buyer may put as little as 3.5 percent down to qualify for a loan to owner occupy a duplex, triplex or fourplex. While the money is lent to the buyer by a traditional bank, the Federal Housing Administration (FHA) agrees to insure the loan against the buyer defaulting. Just like any insurance, there is a cost to this which is passed on to the buyer as a monthly premium.

Before agreeing to insure the loan, the FHA wants to know that the duplex is safe for someone to live in. So, when the lender sends an appraiser to the property, FHA sends along a checklist. They ask the appraiser to compare the property to their health and safety standards. If the property fails, the item or items must be repaired before they will agree to ensure the buyer’s loan.

Sounds scary, right? Here’s the deal. Almost everything they look for can either be seen by the buyer or their Realtor when they first look at the property or will be called out if the buyer hires a professional inspector.

I think you’ll be surprised when you see how minor the items on the FHA checklist are. They include:

  • The lot needs to be sloped away from the foundation. In other words, water shouldn’t be coming into the basement because the exterior grade drains toward the duplex.
  • All bedrooms need egress windows. (This is required in order for a room to be considered a bedroom anyway!)
  • If the property was built before 1978, it may contain lead-based paint. This can potentially be a health hazard. So, the appraiser makes sure it isn’t cracked or peeling anywhere.
  • All steps and stairways must have a handrail.
  • The duplex has to have a working heating system that’s big enough to heat the property.
  • The roof shouldn’t be leaking – or look like it will leak in the near future.
  • The foundation should be in good enough shape to support the duplex.
  • There shouldn’t be any cracked or broken glass in windows.

In my 16 plus year career, I have had an FHA appraiser have issues with a duplex or single family home less than a handful of times. They involved a cracked pane of glass, some peeling paint, and a handrail. I don’t think a single one of those repairs cost the sellers more than a couple hundred dollars or an hour or two of time; and they were all items that had come up during the buyer’s home inspection!

Refusing a strong clean offer that has an FHA loan because it might require the seller to do minor repairs seems rather ridiculous, doesn’t it?

Comments Off on Selling Your Minneapolis Duplex Contract For Deed – The Good, Bad and The Ugly

In the last year, many Minneapolis and St Paul duplex and investment property owners told me they would sell if not for one thing: taxes.

I suggest a 1031 exchange to all of them. Many, however, realize they will have a difficult time during a time of little inventory finding a replacement property. And others want nothing more to do with rental property whatsoever, so they are in a bind.

There is another solution. While it doesn’t always spring immediately to mind, a contract for deed can help reduce tax obligations. Capital gains tax and depreciation recapture are only levied when you touch the money from a sale. Therefore, if a seller carries a contract on a property, there is time to tax plan and offset any gain realized on an annual basis.

Other benefits of a contract for deed for a seller include:

  • Income – Sellers who don’t have a mortgage on their duplex can use the monthly payments as income. Contracts for deed are often at an interest rate that’s a higher return than other investment options generally return.
  • More Buyers – While we’re currently in a seller’s market,  in times when either the market favors buyers or banks are reluctant to lend money, sellers can broaden their pool of potential buyers by offering more competitive interest rates than a traditional lender or extending credit to buyers who otherwise are not able to qualify for a loan.
  • Cancel the contract and resell the property. If a buyer misses two payments, the seller can reclaim the property without having either a foreclosure sale or going to court. The seller may keep everything the buyer has paid to date and resell the property to another buyer.

Of course, there are also some potential pitfalls of selling a property on a contract for deed. They include:

  • Due on sale clauses in mortgages – If you have a mortgage on your property, selling it on a contract for deed may trigger what’s known as a due on sale clause. Most mortgages have it. Basically, if the lender learns you have sold the property, they can accelerate the repayment schedule and demand to be paid in full.
  • Buyer is unable to make the balloon payment.  Real estate and job markets change. If the buyer is unable to refinance either by using the equity accrued over the time of the contract or as a result of a job loss, the seller is left holding the contract. In this case, the seller can choose either to extend the contract and continue to receive monthly payments or to cancel the contract and evict the buyer.
  • Buyer fails to make monthly payments. If the buyer fails to make payments, the seller will have to formally cancel the contract in a manner consistent with what the law dictates.

While not terribly common in today’s hot duplex and investment property market, contracts for deed can be an excellent way to sell property.


Twin Cities Duplex Lending Limits Keep Up With The Market

said on January 16th, 2017 categorized under: Financing

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You may have heard Minneapolis and St Paul duplex prices are up. That’s good news if you’re a duplex seller; not so great if you’re a duplex buyer.

If you’re considering buying a duplex using an FHA loan, you may also be concerned that rising prices will exceed the program’s lending limits, forcing you to either bridge the gap between your 3.5 percent down payment and the loan limit, or even pursure a conventional loan with much higher down payment requirements.

There is a bit of good news. If you live in Hennepin, Ramsey or any of the seven counties in the metro area, the maximum loan limit on a duplex has been raised to $425,450. That means with just a 3.5 percent down payment, you can buy a property priced up to $440,340.

You can also use an FHA loan if you’re in the market for a triplex or four unit apartment building. The loan limits for those types of properties have been raised to $656,350 and $815,650 respectively.

If you take the long view, that’s remarkable. Over the next 30 years, your tenants may have contributed as much as $815,650 in your retirement account; even if the property never goes up in value.

Comments Off on Foreclosure or Short Sale in Your Past? You May Be Able to Buy A Duplex

House wrapped with Foreclosure tape front view

House wrapped with Foreclosure tape front view

If you lost your home to foreclosure or had no alternative but to do a short sale during the housing crisis that began in 2007, there’s good news. You may be eligible to buy again.

Each type of loan has a waiting period following a financial event that prevents a duplex or home buyer from securing financing prior to the end of that time.

  • Bankruptcy – Chapter 7 – To obtain an FHA or VA loan, you must wait two years from the date of the discharge. To obtain a conventional loan, you must wait four years.
  • Bankruptcy – Chapter 13 –With permission from the court, you must wait one year for an FHA or VA loan, and two years for a conventional mortgage.
  • Foreclosure – Your clock on this starts ticking on the date the deed transferred, not the date of the Sherriff’s Sale. For an FHA loan you must wait three years, the VA requires a waiting period of two years, and you must wait seven years.
  • Deed in Lieu – Three years after you transferred your property to the bank, you may obtain an FHA loan. The VA requires a bit less time, at two years. And a conventional loan requires a four year wait.
  • Short Sale – From the day you closed on the sale of your property, you must wait three years to obtain an FHA loan, two years for a VA loan, and 4 years to qualify for a conventional loan.

As you begin to consider the possibilities, you may consider that for many, buying and living in one unit of a duplex is a way to hedge against financial uncertainty. Income from the tenants helps offset not only the cost of home ownership, but usually, also reduces the owner occupants cost of living as well.

More often than not, the owner who lives in his or her duplex ends up paying less in “rent” than he or she had when renting from another landlord.


Move In For The Minneapolis Duplex Low Down

said on February 18th, 2016 categorized under: Financing

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????????????????????????????????One of the very best reasons to buy a duplex, triplex or fourplex is if you live there, you can acquire the property for a very low down payment.

The low down program most single family home and duplex buyers are familiar with is FHA. This program typically allows a buyer to secure a duplex, triplex, or even a fourplex with as little as a 3.5 percent down payment.

Since the buyer has so little “skin in the game” with this form of financing, the Federal Housing Authority insures the loan for the lender by charging the buyer a monthly mortgage insurance premium at a rate of 1.75 percent of the loan amount.

A $100,000 loan, for example, would come with an annual mortgage insurance premium of $1750. Split over the course of a 12 month period, this increases the duplex buyer’s payment by $145.00 a month
U.S. Bank offers an attractive alternative to an FHA loan. The American Dream loan helps owner occupants acquire a property with just a 3 percent down payment. Better yet, there are no mortgage insurance premiums associated with this loan.

Borrowers using the American Dream program must not earn more than a certain amount, and they must buy properties in low or moderate income areas. Because we live in the midwest, most neighborhoods qualify!

While not the low down payment option of the American Dream loan or FHA, there is a conventional loan option available that requires just 15 percent down, and comes with a small second mortgage for rehab purposes.

Leverage — using a little of your money and a whole lot of the banks — is a great way to acquire investment property. And there’s few ways to do it better than to do just that than to owner occupy.

Why Higher Rent Could Mean Higher Interest Rates

said on September 25th, 2015 categorized under: Financing

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Washington, DC - Federal Reserve HeadquartersFederal Reserve Chairwoman Janet Yellen caused a bit of a stir the other day when she indicated the Fed will likely be raising interest rates by the end of the year.

While the Fed’s short term rate (the one that makes the news) has some impact on mortgage rates, it isn’t the only factor. In fact, mortgage rates are just as tied to the rate of inflation, the budget deficit and debt, household savings, how much money is being printed and the government’s willingness to insure mortgages.

In a recent column in Forbes magazine, by National Association of Realtor’s Chief Economist Lawrence Yun, mortgage rates may hit 4.5 percent by the end of 2015, and in the next two to three years, rise to 5.5 or 6 percent.

This may be impacted, however, by a sudden rise in inflation. Things that contribute to inflation are housing shortages, which force rent prices to rise, and owner-equivalent rent, which is a comparison of the cost of owning the property you live in vs. what it would be worth as a rental. Those two factors alone count for 30 percent of what the government uses to calculate the Consumer Price Index.

And unless homebuilders start new construction of housing for the growing population and banks start easing lending criteria, rents are sure to rise.

While rising interest rates may impact duplex investors ability to borrow inexpensively and maximize cash flow, it’s important to remember rising interest rates are also the result of an improving economy. And that’s never a bad thing.

Should You Pay Off Your Debt Before You Buy A Duplex?

said on August 11th, 2015 categorized under: Financing

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Erase Debt before buying a duplexIf you’re thinking of buying your first rental property, you probably think it’s a good idea to pay down some of your debt before you speak with either a Realtor or a lender.

After all, the bank isn’t going to want to lend you the money to buy a property if you have a lot of debt, right?

Not necessarily.

In many cases, it is actually more important to save your money for a down payment and closing costs.

Underwriters, who are the people who review your financial situation before approving a loan, often don’t care as much about the balance on your loans as they do the amount of your monthly payments. And unless the payments are on an installment loan– like on a car, or a student loan, odds are paying down the balance isn’t going to make that much of a difference in your monthly expenses.

See, underwriters know that you can bring the balance right back up on your credit card after closing. This, of course, would make it more difficult for you to make your payments.

Underwriters would rather see money sitting in your bank account.

Before you begin your search for a duplex, it’s a good idea to visit with a loan officer to determine exactly what the best strategy may be for your financial situation.


FHA Lowers Duplex Mortgage Insurance Premiums

said on January 16th, 2015 categorized under: Financing

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save money on duplex financingLast week, the Obama administration announced some important changes if you’re thinking of buying and living in a Minneapolis duplex.

The changes involve Federal Housing Administration (FHA) insured duplex loans. As you may know, buyers who wish to owner occupy an investment property may use FHA financing for not only single family homes, but duplexes, triplexes and four unit apartment buildings too.

In exchange for a low down payment option, buyers must pay a monthly mortgage insurance premium.

This amount is being reduced from 1.35 percent to .85 percent by the end of the month. The mortgage insurance premium is charged for the entire life of the loan; regardless of how much equity you accrue.

On a purchase of a $200,000 duplex, this reduction may mean a savings of $80.42 a month with a 3.5 percent down payment.

The announcement comes on the heels of last month’s announcement that some borrowers may now be able to buy with as little as a 3 percent down payment.

Of course, this is an enormous benefit to first time duplex buyers. And it’s good news for anyone considering selling their duplex too. Historically, first time home buyers comprise 40 percent of the annual housing market; a share far larger than what we’ve to date in the real estate rebound.

All forecasts suggest that’s about to change.


Why Your Duplex Appraisal May Not Be Good

said on September 8th, 2014 categorized under: Financing

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duplex on a stack of cashI saw a terrible duplex appraisal the other day.

Not only did it calculate value based on finished square feet (which has nothing to do with duplex value), but it also included sales of comparable properties from not only a different neighborhood, but a different city entirely.

The appraiser defended herself by saying there weren’t enough sales of multifamily properties in the immediate area to determine value.

The trouble with this method of valuation is it caused the price of the property to top all of those that had actually sold in the immediate area by more than $100,000.

This appraisal was solicited and paid for by the sellers before they put the duplex on the market. Of course, this caused them to have a skewed perception of value.

While an appraiser is licensed by the state, that license does not necessarily mean they are competent when it comes to determining value of all kinds of properties. Many appraisers focus heavily on single family homes, and as a result, bring their understanding of those properties to the process.

Thanks to tighter bank regulations, loan officers, buyers agents and Realtors no longer have any influence over which appraiser is sent to a property.  Banks have to go to an independent third party to obtain an appraisal, who then draws the appraiser from a pool. The appraiser may or may not working in the area of the property that’s been assigned, or have extensive experience in the type of property.

Whether you’re considering refinancing, buying, or just trying to determine the value of your own multifamily property, it’s important to take a close look at it. If it seems unusually high or suspiciously low, you may want to examine it more carefully.

And if you’re not exactly sure what you’re looking at when you review the appraisal (it can be confusing), contact your local Realtor who specializes in duplexes, triplexes and fourplexes. We will be happy to help you understand, and in the case of an off appraisal, provide you accurate and truly comparable sales information to prove your case.




Duplex Financing Even If You’ve Had A Foreclosure

said on March 18th, 2014 categorized under: Financing

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Drawing rainbow by a chalkIf you sold a house or duplex via a short sale, or even lost a property to foreclosure, you may already be able to buy again.

Even after the worst of credit circumstances, like bankruptcy and foreclosure, lenders do offer forgiveness and a chance to start again.

For example, if you’ve filed for bankruptcy, you may be eligible for an FHA insured loan in as little as two years following its discharge. If you sold a property via a short sale or foreclosure, you may qualify to buy another in as little as three years.

Of course, FHA mortgages are limited to owner occupants, and come with mortgage insurance premiums. So what about conventional loans?

If you’re had a Chapter 7 or 11 bankruptcy,  you may be able to finance a duplex purchase four years from the date of discharge. Those who filed Chapter 13, on the other hand, may be able to qualify for a loan just two years after the bankruptcy discharge.

The availability of conventional loans for short sale survivors varies. If you had a short sale two years ago, you may qualify with a 20 percent down payment. If you only have 10 percent saved to put down, your short sale had to be at least four years ago. And if your short sale was one of the early ones, taking place seven or more years ago, you may be able to put as little as 5 percent down for a conventional mortgage.

And finally, if you lost a home to foreclosure seven years ago you may now be able to qualify for a conventional mortgage.

Of course, there are other mitigating factors in your ability to qualify for a loan. Be sure to speak with a qualified loan officer so you can address your specific situation.