Archive for the 'Financing' Category

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Mortgage ContractWith the tightening credit standards and increased down payment requirements in today’s mortgage industry, many sellers have become willing to provide financing for prospective buyers via a contract for deed.

In a contract for deed, which is also known as a “land contract”, the seller acts as the bank for the buyer.

All the terms of the “loan”, including interest rate, monthly payments, amortization schedule, length and down payment requirements are negotiable, just as all of the terms of the purchase of the duplex itself are.

While a contract for deed certainly avails a seller of more prospective buyers, it’s crucial that prior to offering it, he know whether or not his mortgage has what’s known as a “due-on-sale clause”, which may also be called an acceleration clause.

When contained in a promissory note, this clause stipulates that the original lender, or bank, may require the entire balance of a loan be paid in full upon the sale or transfer of any interest in the property used to secure the note. (Please know there are some exceptions between spouses, with estates, etc.)

These clauses came into existance in the 1970’s when double-digit interest rates made new loans unattractive. Buyers found if  they assumed a seller’s existing loan, they could usually obtain financing at a greatly reduced interest rate.  To stop this practice (and offer loans at higher interest rates), banks began using the due-on-sale clause.

The truth is, most of today’s mortgages have this language. In fact, in a Fannie Mae or Freddie Mac single family mortgage, for example, it’s usually found in paragraph 17, where it’s called the “Transfer of the Property or a Beneficial Interest in Borrower”.

Uh-oh, right?

Not necessarily.

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Does A Bad Appraisal Equal A Bad Investment?

said on May 14th, 2009 categorized under: Financing

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Hand mit Stift macht Häkchen auf einem KlemmbrettIs a duplex a bad investment if it doesn’t appraise for the price listed on a purchase agreement?

It depends on whether you’re the buyer or the seller.

With a flood of foreclosure properties dragging down property values overall, it isn’t altogether uncommon for a property not to appraise.

Even if many of these duplexes are selling for comparable prices to the one you’re buying, they may not be able to be used as comps; simply because they don’t have a recent rental history for an appraiser to use in an Income Approach to valuation.

So what happens when the property doesn’t appraise?

There are several possibilities.

First, the seller could reduce his price to reflect the value determined by the appraiser. Of course, this would benefit the buyer greatly.

The buyer or seller could also order another appraisal to disprove the first.

However, if the buyer intended to use FHA financing, there’s a problem. FHA appraisals now essentially follow a property for six months. So, even if another buyer comes along to purchase the property, there  is a record of the previous appraisal, which will prevent her from agreeing to a higher price.

On the other hand, if the buyer was using conventional financing with a 20-25 percent or more down payment, the low appraisal does not “follow” the property. In many cases, the lender, loan officer and Realtors involved may attempt to work with the appraiser to re-examine the value by providing additional comps.

If the value doesn’t change, the original lender may be unwilling to finance the purchase.

This does not prevent the buyer from ordering another appraisal, using a different lender, which may result in a more favorable outcome.

Of course, both the buyer and seller also have the option of simply walking away from the transaction.

Does the low appraisal mean the duplex is a bad investment?

As always, if the numbers work, and are in keeping with the buyer or seller’s financial goals, no.

Comments Off on Appraisal Rules Change for Minneapolis Duplex Investors

Blonde Frau hält ein Klemmbrett mit SparschweinAs if things weren’t already challenging for Minneapolis duplex investors, along comes the news that on May 1 the national rules for real estate appraisals will change.

Lenders will have to guarantee that every loan they sell to Fannie Mae or Freddie Mac complies completely with something called the HVCC or home valuation code of conduct.

As the bulk of loans for non owner-occupant investors are sold to Fannie or Freddie, they are the ones likely to be most adversely effected.

The new code will prohibit mortage brokers from ordering appraisals. Instead, third party appraisal management firms will pick appraisers from their own networks.

The code also requires a buyer to pay for an appraisal up front rather than rolling the cost into closing costs.

So what if a property appraises too low and another appraisal is necessary in order to close? Does the buyer have to pay again? Yes.

What if the buyer is intending to live in the duplex? Do these new rules apply?

No. FHA has its own rules for appraisals, which to date, don’t include the HVCC.

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Bank owned sign posted on a boarded up house in ForeclosureThe other day, a reader asked an outstanding question.  He’s in the process of buying a duplex using an FHA 203(k) construction loan and wondered what number his first time home buyer tax credit would be based on.

The 203(k) loan is one in which a buyer can purchase a distressed property at a discounted price, but borrow an amount up to 110 percent of the value of the home were it in good condition in order to finance the repairs.

In this case, the purchase price of the property is $108,000, he is planning on borrowing an additional $20,000 to use for rehabbing the duplex.

The combination of the two will leave the buyer with a mortgage of $128,000.

So is his first time home buyer tax credit based on the owner occupied portion of the purchase price ($108,000 x .5 = $54,000 as the basis for his home. Ten percent of this, or $5400 may be applied toward the tax credit.)

OK, but a 203(k) loan is based on the purchase price and the repairs. Shouldn’t he receive a credit for the final loan amount of $128,000?

Sadly, no. According to a loan officer friend who does a great deal of these with a major national bank (who won’t allow him to speak on the record), the tax credit isn’t based on the loan amount, but the price reflected in the purchase agreement. The 203(k) loan amount isn’t recorded on that document.

The 203(k) is viewed more as a first mortgage plus a construction loan.

In other words, the tax credit here is based on one half of the purchase price or $54,000.

Great question!

House Eyes Minneapolis Duplex Mortgage Reform

said on April 6th, 2009 categorized under: Financing

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One hand handcuffed to a piggy bankThe Washington Post reported Saturday that Congress is introducing legislation to help reform the mortgage market. The thinking is had stricter standards been in place, neither the housing boom nor its demise would have been as big.

Authored by Reps. Barney Frank (D-Mass.), chairman of the House Financial Services Committee, Melvin Watt (D- N.C>) and Brad Miller (D- N.C.), the Mortgage Reform and Anti-Predatory Lending Act of 2009 9 (H.R. 1728) is expected to reach the Senate for consideration by May.

If passed, the bill would:

  • Prohibit loan officers from being paid any fees that are tied to the type or interest rate of the mortgage. During the boom, mortgage brokers were often paid more if they originated exotic loans such as interest-only, payment option and no-documentation loans with small down payments.
  • Create mandatory minimum standards for all loans.  Regulations would encourage lenders to originate loans that are more traditional: at 30-year fixed rates, with full documentation. Homeowners who refinance would have to be able to pass a “net tangible benefit” test, proving the loan they are refinancing into is better than the one they’re in.
  • Allow people who get mortgages not in keeping with the above to immediately cancel their entire loan contract; requiring the lender to refund all payments and fees.
  • Six-month notice before the reset of hybrid adjustable rate mortgages. A hybrid mortgage is one with a fixed rate for a defined period of time that resets after the expiration of the intial term.

While in theory, many of these ideas seem solid, it’s important to remember possible pitfalls.

The “stated income” or no-documentation loans so many are blaming for the housing crisis originated as a means for people who are self-employed to get financing. Most entrepreneurs legally take many tax deductions, which creates the appearance on their tax returns that they make very little, which may or may not be the case.

In today’s lending environment, many self-employed people are finding it difficult to obtain financing.

The bill also fails to clarify whether it will prohibit refinancing for the purposes of debt consolidation. Should a Minneapolis duplex owner fall onto some sort of financial hardship, will he be able to refinance his residence to solve the issue? Even if prevailing interest rates are higher than those on his existing mortgage?

As always, write your Congressional representative and make your voice heard.

Fannie Mae Makes Nice To Minneapolis Duplex Investors

said on April 3rd, 2009 categorized under: Financing

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Ten percent of red colorOne of the reasons today’s real estate market is so challenging for investors is the 20 to 25 percent down payment most lenders require to be willing to finance a property.

It seems the government sponsored entity (GSE)  Fannie Mae recognizes this. And to that end, they have created a new investment property financing program through Fannie Mae HomePath.

This program allows investors to buy properties owned by Fannie Mae due to foreclosure with just a 10 percent down payment. What’s more, Fannie Mae will not require the buyer to obtain an appraisal or pay mortgage insurance premiums.

Not every property, nor every Fannie Mae owned property is eligible;  only those appearing on Fannie’s 10 percent down list are.

It’s encouraging to see Fannie Mae doing what they can to stimulate their sector of the housing market.  Remember, these are the same folks who also recently relaxed the number of  investor’s loans they will back from one to ten.

If historical trends hold, the other GSE, Freddie Mac will create a similar program, making another small sector of the market a little more investor friendly.

Comments Off on A Cartoon Explains Credit Crisis in the Minneapolis Duplex Market

[youtube]http://www.youtube.com/watch?v=Q0zEXdDO5JU[/youtube]I came across a simple, two-part explanation of the credit crisis this morning that I thought I should pass along.

The video was done as part of a Media Design Program thesis by Art Center College of Design student Jonathan Jarvis.

Here’s part two.[youtube]http://www.youtube.com/watch?v=iYhDkZjKBEw[/youtube]I think the kid’s got a big future.

Comments Off on Fannie and Freddie to Help Minneapolis Duplex Owners

Foreclosure HelpAre you upside down on your small multi-family property due to the decline in values in the real estate market?

Hang on. Some help was on the way. It seems there was some good news hidden in the guidelines issued last week for the upcoming refinancing campaigns from Fannie Mae and Freddie Mac.

When the program was first announced, it appeared that small multi-family investors and people with second homes wouldn’t be allowed to participate. The guidelines however, included you after all.

According to Kenneth Harney of the Washington Post, the new programs, which are being undertaken at the urging of President Obama’s administration, would allow you to refinance provided you have a solid payment record, the balance on your loan doesn’t exceed the value of your property by more than 5 percent and your loan is either owned by or contained in a mortgage bond guaranteed by either Fannie or Freddie.

It gets better.

Both companies plan to waive their usual minimum credit score requirements for most people who apply. Oh, they’ll still pull your credit. But there’s no specific minimum score necessary to refinance.

There’s also no mortgage insurance. If your loan originally required the insurance, you still have to have it. However, borrowers who never had mortgage insurance because they had 20 percent equity before the decline in market value will not be required to purchase new coverage.

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Comments Off on Do I Have To Live In My FHA Financed Minneapolis Duplex Forever?

Policewoman with handcuffs.With the federal government offering first time home buyers up to $8000 to buy a home (including duplexes and multi-family homes) by December 1, it’s a great time to consider investing in real estate.

However, with most conventional investor loans now requiring a minimum of 20 percent down and points at closing to buy down interest rates, it’s an even better time to explore FHA financing.

An FHA loan requires the borrower to have a down payment of just 3.5 percent, and that she live in the duplex she’s buying.

Uh-oh.

What if you don’t want to live in a duplex forever? What if you were hoping to move out some time in the future to buy a single family home, while keeping the duplex as an investment?

Will the FHA Police come looking for you?

Relax. There’s no FHA Police. I made that up.

According to Dean Schiffler of Burnet Home Loans, there is an unwritten rule with FHA loans that the owner should live in the property for at least one year.  And if she doesn’t?

The lender may perceive her promise to live there to have been fraudulent. This could conceivably result in penalties and fines, jail time and foreclosure.

So is it possible to get an FHA loan for an additional property? Well, since it’s a requirment for FHA financing that you live in the duplex the loan is on, yes and no.

If the first property you bought has either appreciated in value or you’ve paid off enough of the mortgage to have at least 20 percent equity, you may qualify for a second FHA loan.

There are other exceptions.

If your family has suddenly heralded the arrival of octuplets, squeezing out of your two bedroom unit, or your job transfers you a distance that renders commuting to work unreasonable, the lender may grant a second FHA loan.

Of course, it’s always a case by case basis and not something to necessarily count on. A qualified loan officer should be able to guide you toward a reasonable solution.

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the cost of moneyInterest rates for both conventional and FHA mortgages are at 4.875 percent today, which means my phone is ringing with excited buyers.

How can they buy a property and be guaranteed this terrific rate? Well, if you’ve already found a property you like and have an address, you can simply call a qualified loan officer and lock an interest rate.

What if you’re looking for a house but haven’t found one? Many reputable mortgage companies offer 90-day rate locks while you shop.

For example, loan officer Vicki Boeddeker of PHH Home Loans, says for an up front fee of $350, you can lock a rate that is .25 percent above current market rates. Once you’ve found a home and are within 7 to 60 days of closing, you can relock if the current rate is lower.

The $350 fee is then credited back to you at closing.

If you’re thinking of buying a Minneapolis duplex in the next three months, today might be a great time to call your loan officer.