No Bull Agent
Contributions to this page provided by Ron McGowan, Mortgage Advisor with PrimeLending.
A working knowledge of the financial elements present within a real estate transaction is extremely important. In addition, these elements can be intimidating and, at times, confusing. The information below will discuss frequently used terms and processes. Our goal is to give you an idea of what to expect, including questions you may be asked, prior and during your purchase of a home. We will present the pro’s and con’s to loan types, down payment size and scenarios you may encounter in the current real estate market. We will include the opinions of lenders and of our own experiences. Our team looks to provide you with well-rounded information so you can make an informed decision when it comes to the purchase of property.
Making a Cash Offer
Prior to discussing the topic of lenders, it is important to review the considerations when making a cash offer. As a lender is not involved, typically, there are less hoops to jump through when presenting an offer. Primarily, you will be asked to submit proof of funds with your offer. Proof of funds can come from various sources, including a retirement account. It is important to contact a Certified Public Accountant to see which sources can be used as the seller is going to want to know the liquidity of funds should they accept your offer. One important function not included with a cash offer is an appraisal. You may want to consider paying for an appraisal as it could assist when evaluating property value.
Choosing a Lender
In this ever changing real estate and lending market it is important to develop a relationship with a lender. We recommend that, initially, you speak with multiple lenders to compare terms, products and rates. Talk with direct lenders and mortgage brokers to help you decide which path is better for you. Things to consider when choosing a lender include ease of communication and the inclusion of in-house services such as underwriting. Some transactions are smooth and others have hurdles. Like snowflakes, no two transactions are alike. Your lender relationship especially comes into play when hurdles occur, as they often play a large role in whether your purchase is successful. At your request, our team will offer recommendations on lenders who have had success with our clients. Please understand that it is illegal for anyone to include your choice of lender in the terms of a real estate transaction. That choice is always up to you.
Loan types and products will vary from lender to lender. We have summarized the most common types below and encourage you to discuss all options with your lender to find what best fits your needs.
Conventional: A 20% down payment is not required. However, with less than 20% down on the purchase of a primary residence, Private Mortgage Insurance (PMI) restrictions will apply. PMI companies are not currently insuring second homes or investment properties in California.
For investors, there are other factors to consider. Many of these factors depend on your FICO score and the lender. Most lenders will not finance another investment property if the borrower already owns four financed properties. Ron McGowan with PrimeLending states, “We use Fannie Mae’s guidelines and will allow up to a maximum of ten financed properties with a minimum down payment of 20%. There are big price adjustments at that level and whether the property is a condo. The adjustments drop with a 25% down payment. “ The other factor is that the borrower must have six months reserves for every property.
Federal Housing Administration (FHA): 3.50% minimum down payment requirement for primary residences only. Very flexible underwriting guidelines since the federal government insures the transaction. Keep in mind not all properties are FHA approved. It is important to know the approval status of a property prior to viewing so you do not waste your time.
Veterans Administration (VA): Zero down payment up to certain loan amounts for primary residences only. Again, very flexible guidelines since the federal government guarantees the transaction. Like FHA, not all properties are VA approved. Again, it is important to know the approval status of a property prior to viewing.
Once you choose a lender, the next step is to get pre-approved. You will have other options including pre-qualification, but pre-approval is best. When you submit offers, expect the seller (bank or individual) to require a copy of your pre-approval letter. Some will require a copy signed by your lender and dated within 30 days of your offer. In addition, be prepared to submit direct underwriting approval, credit scores, proof of funds and to be pre-approved through their preferred lender especially when submitting offers to distressed properties such as short sales or foreclosures. Again, your relationship with your lender is important as you may need these documents on a moment’s notice and specific to the property you are offering on.
Earnest Money Deposit
This deposit is used to show the seller that you, the buyer, intend to purchase the property. The amount of the deposit is noted in the offer. If the offer is accepted, the language in the offer will determine when this amount is deposited into escrow. Typically, you will have three days to turn the check over to escrow. This deposit then becomes a part of your down payment.
The question often arises, “What amount should I make the Earnest Money Deposit?” This amount will depend on a couple of factors including market indicators and your lender. We do not recommend a deposit smaller than 1% and not larger than 3%. A higher percentage is typically used in a seller’s market where sellers are receiving multiple offers and properties are moving fast when priced right. A lower percentage is typically used in a buyer’s market where buyers do not have many competing offers and inventory outpaces demand. Always check with your lender to find out if they have any feedback about your Earnest Money Deposit prior to writing an offer. In addition, seek advice from your Realtor on market trends to give you the best opportunity in getting your offer accepted.
Closing costs depend on sales price and include fees for escrow, appraisal and title. Lenders have base costs which run approximately $1200 to $1500. Then you have prepaid expenses, such as the interest due on the new loan from the date of close until the end of that calendar month. Additionally, you will have first year hazard insurance premiums and funding the impound account, if applicable. We often suggest you estimate your closing costs to be 3% of your purchase price. You can always ask for these costs to be paid by the seller in your offer. This strategy can be a positive or negative depending on the amount of offers and market conditions.
Upon closing you will receive a HUD-1 which details where all of the charges go to each category. You will need a certified HUD-1 when you prepare your taxes.