Do I Need To Sell My Home Before I Can Qualify For A New Mortgage On Another Property?

Every home buying situation is unique, but there are a number of buyers who qualify for a mortgage loan on another home, while they still reside in their first home. There are a number of reasons why people opt for a 2nd home. Their family might be growing and they feel the need for a bigger house. In some cases, people get a job transfer and have to relocate to a new home. The question here is- are you required to sell before you buy?

Things to Consider

The answer is not a straightforward yes or no as there are a number of factors that come into play. If you are in a strong financial position, you qualify and can afford your present residence as well as the proposed payment on the new home, then you will not have to sell the first home.

Even if you do qualify for a mortgage loan on a second home without having to sell the first, there are some other considerations you will have to take into account. When you plan on maintaining multiple properties, you will also have to factor in all the additional expenses such as:

  • Mortgage payments

  • Higher property taxes

  • Hazard insurance

  • Unexpected repairs

  • Others

Can You Rent Your Current Property?

There are different possibilities in this scenario as well:

If you do not qualify to carry mortgages on both the houses, you might have to rent the first property to offset your mortgage payment. In this scenario, the lender will then generally count only 75% of the total monthly rent that you will receive.

There is another aspect which has to be taken into consideration. Most lenders have a reserve requirement & equity ratio, and this can be a big hurdle in your path. In some cases, if you plan on renting out your existing home, you are required to have a minimum of 25% of equity to offset the payment with the rent that you will receive.

Without that large amount of equity, you’ll need a significant amount of money in the bank and will have to qualify for mortgage payments on both homes. If you do not qualify for both the mortgage payments, you will obviously have to sell the current house before you buy the new one. For more information about how the process works, contact ResMac Home Loans today.

 

What Do Appraisers Look For When Determining A Property’s Value?

Most homeowners are under the impression that the actual value of their property is determined once the appraiser conducts a physical property inspection. The fact is that the appraiser already has quite a fair idea about the value of the property even before they schedule the appointment to look at it.

The bright spot is that you don’t really have to worry about getting the place cleaned up in order to up the value of your property. Though a clean house will definitely make it simpler for the appraiser to clearly notice all the improvements, any “clutter” that you have around the house is not really going to affect the appraisal unless it is damaging to the structure itself.

Factors that Matter

The important things that will be addressed in the appraisal are:

  • Site- The location, topography, view, external factors, zoning, landscaping features, lot size and highest & best use

  • Design- Quality of the construction and finish work, any fixed appliances/defining features

  • Condition- The age of the structure, renovations, deterioration, additional features and upgrades

  • Health & Safety: Code compliance and structural integrity

  • Size- The Above-grade & below-grade improvements

  • Neighborhood- Does the property conform to the neighborhood?

  • Parking: Carports, garages, shops etc

  • Functional Utility: Is your property functional in terms of style & use?

Things to Focus On

The appraisers are going to look at things like the condition, overall design, upgrades, finish, functional utility, defining features, number of rooms, square footage and health & safety items. Ensure that all the smoke and carbon monoxide detectors are in working order.

This is important because 50% of weightage in the appraisal is given to the security factors in the property. The appraisal should be carried out by a licensed and qualified appraiser who is familiar with the neighborhood & the type of home that you are buying/selling/refinancing.

Note- For conventional loans that have originated on/after 1 May 2009, neither the homeowner nor the lender can decide which appraiser will inspect the property. The person will be chosen at random from a common pool of licensed & qualified appraisers. For latest updates and information, contact ResMac Home Loans today.

 

Where Does My Earnest Money Go?

Many homeowners who want to buy property offer a certain amount of earnest money or hand money to the property sellers. Typically, earnest money is the deposit that a buyer pays to the seller so that the latter will hold the property he/she intends to buy. Depending on which state the deal is taking place in, the earnest money deposit check might be kept in escrow accounts that are non-interest-bearing. They will be held here till the related deals reach closure.

Generally, the earnest money check is applied to down payments for the property sale & closing costs requirements. A real estate earnest money deposit check & the manner in which it is applied is based on the purchase agreements that the deposit supports. Generally, real-estate purchase agreements have all the details noting what will happen to the earnest money deposit that the buyer has made, under different scenarios.

Earnest Money Amounts

In very hot markets, most real estate agents recommend that the earnest money deposits should be for 2-3% of the actual offer that is being made. In slower markets, the earnest money deposits that sellers ask can be significantly lower. Deposits of $10,000 and above come with bank & lender reporting requirements & are not really advisable. It must be understood that when you tie up a large amount of money in this manner, you will not be earning any interest on it.

Earnest Money Refunds

At times, property sellers & buyers make incorrect assumptions about these deposits. Some property sellers also mistakenly believe that if a sale fails, it automatically gives them a right to the earnest money check. Similarly, some buyers presume that even if the deal fails, they will get back all their earnest money. The fact is that in most real estate deals that fail, earnest money deposits that the buyers have made; end up with them, but the cancellation fees get deducted from the amount. Most property purchase agreements make note of when this money is refunded & to whom.

The Considerations

It goes without saying that when a real estate transaction fails, both the buyer and seller end up hotly disputing the earnest money deposits. Real estate experts always recommend that a property seller should not be permitted to hold the buyers’ earnest money deposit. The title company, real estate broker or settlement/escrow agent involved in the property sale holds these earnest money deposits. For more details about earnest money and mortgages, contact ResMac Home Loans.

 

What Does Title Insurance Protect Me From?

Whenever you buy a home/property, you expect to also enjoy some benefits from that ownership. For instance, you expect to be able to actually occupy & use the property as you like, and to be free from debts/obligations that are not created/agreed to by you. You also want to be able to pledge or freely sell your property as a security for any loan, if required. A title insurance is specifically-designed to cover all these rights that you bargain for.

How it Works

When title insurance is included in the purchase of a property, your title insurer becomes accountable for all the legal expenses incurred to defend the property title, in the event that someone challenges it. There are a number of situations in which you might require title insurance and the company that is responsible for it then takes on all the legal expenses to effectively defend that property. The condition being that you must own an interest in that property. In the event that the defense is unsuccessful, you are reimbursed for any value-loss of that property.

What is Covered?

Title insurance is also referred to as an Owner’s Policy. Generally, it is issued in the actual amount of the real-estate purchase. You pay a one-time fee at the time of closing & it is valid for the entire time that you/your heirs have an interest in that property. Only this kind of an owner’s policy provides full protection to the buyer in case any problem arises in the title. Title Insurance generally covers:

  • Forged deeds, undisclosed heirs, wills, mortgages, releases & other documents

  • Deeds by minors

  • False imprisonment of that land owner

  • Documents that are executed by any revokes/expired power of attorney

  • Fraud

  • Probate matters

  • Deeds & wills by a person who is of unsound mind

  • Rights of any divorced parties

  • Conveyances by any undisclosed divorced spouses

  • Adverse possession

  • Forfeitures of the property on account of criminal acts

  • Defective acknowledgments because of improper/expired notarization

  • Tax record errors

  • Mistakes & omissions that result in improper abstracting

Though these are the general things that are covered, certain coverage might not be available in a specific area/transaction on account of regulatory/legal/underwriting considerations. For more information about title insurance and how it works, speak with experts at ResMac Home Loans.

 

Should I Refinance or Get a HELOC For Home Improvements?

For homeowners who are interested in making certain property improvements without dipping into their savings/investment accounts, you can either opt for a (HELOC) – Home Equity Line of Credit or a refinance.

Things to Consider

When you are deciding which option to choose, you should know what the differences are:

  • Timeline- This is one of the primary factors that has to be taken into account. Even before you look at the interest rates, you will have to consider the timeline or the actual duration that you will be keeping the home. This will decide exactly how many months or years you will need to pay-back the money you have borrowed.

    Are you planning on some home improvements in order to get top dollar on the sale of the house or are you looking to add some extensions to make your home more comfortable and spacious? This is an important question you have to ask yourself as the 2 types of loans will provide you the same result – they will give you the funds you need, but they serve very different purposes.

A HELOC is ideal for short-term goals & has adjustable rates that might change on a monthly basis and you might end up paying a very high interest in one month and a much lower one in another.

  • Costs / Fees- You will also have to know what the closing costs for each loan will be. This is also related to the timeline considerations. A HELOC will generally cost much less than a full refinance.

  • Interest Rate- This is one of the first things that borrowers will look at. Everyone looks for the lowest interest rate possible. But when it comes to home improvements, the interest rate is not always as important as understanding what the risk level of that particular loan is. If you need a loan for the short term- a HELOC will be more suitable even if the interest rate is higher.

Your choice between a HELOC and a full refinance depends of the level of risk you are willing to take over the time frame that you require the money. For more information and to understand whether a HELOC or a full refinance will be suitable for you, contact ResMac Home Loans.

Calculating The Net Benefit Of A Refinance Transaction

Calculating the net benefit of refinancing can be a challenging task if you do not understand what to calculate. We are going to focus on the net benefits of refinancing from the standpoint of lowering your interest rate.

Although there are several reasons to refinance, lowering your mortgage rate to save on interest payments over the term of the loan is the most popular.

Calculating the actual savings can be a tricky chore unless you know the difference between cash flow savings and interest savings. If your refinance objective is to only save on the interest by lowering your rate, then the interest savings should be done with the calculations below.

Calculating Interest Savings:

(Loan Amount x Interest Rate) / Months in year = Interest paid per month

($200,000 x 6% or .06) / 12 = $1,000.00

*Remember to do the calculation in the parentheses first*

We now know that you are paying $1,000.00 per month in interest. You should take the new interest rate you are getting with your refinance and calculate what your new interest payment will be.

($200,000 x 5% or .05) / 12 = $833.34

Now we need to find out the difference between the two interest rates.

Current Interest Payment – Proposed Interest Payment = Interest Savings

$1,000.00 – $833.34 = $166.66

Now you have figured out that by dropping your interest rate 1% on $200,000 you will be saving $166.66 per month or about $2,000 per year.

Awesome!

Anyone would want to save $2,000 per year, where do I sign… right? Not so fast, you’ll want to calculate the break-even point to find out how you will benefit after your closing costs.

Net Benefit Formula (Break-Even):

(Closing Costs – Escrows) / Interest Savings = Month of Break-Even

($6,000 – $1,000) / $166.66 = 30 Months

In other words, it will take 30 months for you to recoup the cost of your refinance. If you plan to keep your mortgage for at least 30 months then you might want to consider this deal.

Okay, now we can calculate your net benefit for refinancing with one more calculation.

(Monthly Savings * Months you plan to keep mortgage) – (Closing Costs –Escrows) = Net Savings

($166.66 * 120 months) – ($6,000 – $1,000) = $14,999.20

If you kept the mortgage for 120 months (10 years) you would save $15,000.

Okay, now you can find out where to sign.

Calculating the net benefits of a refinance is crucial in determining if it is strategic for you to refinance. Keep in mind that each mortgage is slightly different and you may need to adjust calculations accordingly.

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Frequently Asked Questions:

Q:  I heard that I should only refinance if I drop 1% on my mortgage is that true?

Some people say ½% , 1% to never. Every mortgage is different.

For Example: A no cost loan can have a 1 month break-even point with only a .25% drop in interest rate. Now that you know how to calculate your net benefit, you are able to figure out what may be best for your situation.

Q:  Why can’t I just compare my current payment to the proposed payment and figure out my net benefit?

You could just compare just the two payments if you wanted to find out your cash flow savings, but the current and proposed loans may have two different amortizations.

Let’s assume you currently have a 15 year mortgage and you’re comparing it to a 30 year mortgage. If both loans have the same interest rate and loan amount but the amortization is different, your interest savings per month would be $0. However, you are going to show a cash flow savings with the 30 year mortgage because of the longer amortization.

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Related Article – Refinance Process:

Understanding the Difference Between an Appraisal vs Neighborhood Listing Prices

Many homeowners wonder why there is such a big difference between their appraised value & the selling-price of other similar homes on their street. The key distinction lies in the purpose of these 2 evaluations and the people who are conducting them.

Appraisals

The primary purpose of an appraisal is to ensure that a third-party verifies the most-likely sale price of the property, based in its market value and condition. Typically, an appraisal is meant to be a very realistic determination of the value of that home if it were to be sold in its current condition in the current market. In addition to this, the appraisers have to follow the rules that are supposed to even out the subjective-process of deciding what the value of a home is. Appraisers look at factors like:

  • Location

  • The above ground size

  • The room and bathroom count

  • Style of the home

  • Amenities

  • Condition of property

  • Amount of time it takes for a particular home to sell

  • Whether values are increasing/decreasing/steady

Appraisers also look only at the comparable sales within a specific distance, usually 1mile except in the rural areas, & within a certain period of time.

Listing Prices

Listing prices are determined on the basis of very different factors- are set by interested & emotional sellers and influenced by a real-estate agent. When sellers list their homes, they aren’t held by any specific rules. In certain situations, they may take the amount they paid for the home, what they spent on improvements and add a profit.

Sometimes, they list their property based on the amount that is required to pay the closing costs, the real estate agents & cover the mortgage amounts. If a particular home is selling for a very low price, this is generally because the owners might have to move in a hurry and want to make their price very competitive. Foreclosed properties could also be listed at lower prices.

In some cases, asset managers may be making decisions from a completely different part of the country, which may explain the disparity in prices. And so, there are really no set rules when it comes to determining the actual value of your home. In the end, the opinion of the lender who is securing that particular property for a mortgage is what matters. For all types of mortgage-related information, contact ResMac Home Loans.

 

How Do Mortgage Companies Value A Property That Has Not Been Built Yet?

It’s obviously easier to picture the process of estimating value on an existing property in a neighborhood that has a history of home sales, but the task of determining the value on new construction projects does pose some challenges.

Appraisals on homes that haven’t been built yet generally require the contractor and home buyer to supply more documentation in order to get a more accurate estimate of the property’s value.

The main purpose of this article is to give an overview of the appraisal process for a home buyer that is building a home vs purchasing standing inventory.

For some, building a new home can be both exciting and overwhelming.  Watching a project transform from idea to completed home with a front yard, white picket fence and a custom red front door is a rewarding experience.

Even if you are paying attention to all of the information from the beginning, there are still several details that have a tendency to catch even experienced builders off guard.

Game time decisions have to be made as cabinets and corners line up differently than the initial drawing could show, flooring doesn’t match the wall colors, or the sun hits a window the wrong way at dinner time.

While the last minute updates may cost you more money, they might also have an impact on the value of the property.

What Does An Appraiser Need For New Construction?

Plans –

The plans or construction drawings are usually done by your builder or architect. It lays out the floor plan of your home, sizes of rooms and square footage of your home.

They should include a floor plan layout, front elevation, real elevation & side elevations, mechanical and electrical details.

Specifications / Descriptions Of Material –

A “Spec” sheet has the type of construction materials you will be using. For example, whether your home will be built with standard 2 x 4’s or 2 x 6’s.

It also contains the type of insulation, roofing and exterior products that will be used in the construction, as well as floors, counter tops and appliances for the inside dressing.

Cost Breakdown –

The document that breaks down all of the costs associated with the construction, including land, building materials and labor.

A lender can generally provide you with blank forms for the spec and cost breakdown if your builder does not have them.

Plot Plan –

Shows where your home will sit on the site, any accessory buildings, well and septic locations, if applicable, and the finish grade elevations and direction of the drainage.

Once the lender has obtained the above information from you, they will forward a copy to the appraiser. It is the appraiser’s job to determine what the future value of the home will be once it is completed, per your plans, specs & cost breakdown.

Even though an appraiser will use the cost approach in the appraisal report, it is not the value that will ultimately be used by the lender.  The market approach to value, which uses existing sales of homes similar in size, quality, construction and location is the most common approach that lenders want for new construction.

The more complete and detailed your plans, specifications and cost breakdowns are, the more accurate your appraisal will be.

Once your home is complete, the appraiser will be asked to go out and inspect the home. They will report back to the lender what they have found, whether your home was completed according to the plans and specifications originally given, and if the value is the same as originally given in the report.

Sometimes the value has to be adjusted due to changes that were made during construction which may have affected the value of the home.

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Frequently Asked Questions:

Q:  Where can I obtain a set of plans?

Most builders have basic plans they work from, and make modifications specific to their clients’ needs. When building a custom home, it’s generally a good idea to work with a reputable architect.

Q:  Is there a form I can use for the list of specifications?

Yes, HUD has a generic form that most lenders use and it will give the appraiser most of the details they need to complete your appraisal. Anything not listed on this form can be added by you separately on an additional sheet.

Q:  Can I use my contract with the builder for the cost breakdown sheet?

In most cases, the lender will accept the contract, however, they will want the builder to provide a cost breakdown to ensure that the builder has accurately bid your home.

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Related Appraisal Articles:

HOA Hurdles to be Aware of When Looking at New Properties

A HOA can have a significant impact on your decision to purchase a new home in a Condominium Project or a Planned Unit Development (PUD). When you plan on moving into a new housing development or a condo, you are required to sign-off the required HOA agreement that specifies all the rules of that development. When you are purchasing a home, the HOA is something that gets a little sidelined.

Its only when you actually move into your new home and settle in comfortably that you realize, a number of rules and regulations laid out by the HOA can be very restrictive. You might find that there are a rules you might not be able to adhere to. These are 7 things you should watch out for in the HOA agreement:

  • Home Businesses- If you plan on the working from home – maybe run a daycare center or your law office, if the HOA does not permit any kind of commercial activity in your residence, you will be compelled to look for office space outside

  • Restrictions on Animals- Some homeowners associations have a restriction on the number of pets you can have in your home, as well as the kind of pets you can keep

  • Clothes Lines- This seems like a very unlikely one. If you prefer to sun-dry your clothes, you will have to ensure that the place you live in has no restrictions around having clothes lines strung in the yard.

  • Nighttime noise or Nuisance Rules- Regardless of the lifestyle you follow, if you live in a place where there are time restrictions on playing loud music, you will have to fall in line with the rules

  • Limitation on Leasing-out your Home- A number of HOA’s requires that the units on the premises be owner-occupied. If you have acquired that particular home specifically as an investment, this will pose a problem for you

  • Patio Prohibitions- Some HOA’s also prohibit you from using patios to store boxes and bikes and you might also be required to dispose of any dead plants

  • Carpeting- Hardwood floors tend to carry sounds and a number of HOA’s require that home owners carpet a certain percentage of their floors. You will have to ensure that the carpeting is in all the right places

It is up to you to decide whether the terms that have been laid out in the HOA work for you or not. But it is important that you be aware of these restrictions before you buy any property. For more information, contact ResMac Home Loans.

 

How Are Mortgage Rates Determined?

Many people believe that interest rates are simply set by lenders, but the reality is that mortgage rates are largely determined by what is known as the Secondary Market.

The secondary market is comprised of investors who buy the loans made by banks, brokers, lenders, etc. and then either hold them for their earnings, or bundle them and sell them to other investors. When the secondary market sells the bundles of mortgages, there are end investors who are willing to pay a certain price for those loans.

That market price of those Mortgage Backed Securities (MBS) is what impacts mortgage rates.

Typically, investors are willing to accept a lower return on mortgage backed securities because of their relative safety compared to other investments.

This perception of safety is due to the implied government backing of Fannie Mae and Freddie Mac and the fact that the Mortgage Backed investments are based on real estate collateral. So, if the loan defaults there is real property pledged against potential losses.

In contrast, other investments are considered more risky, specifically stocks which are based on earnings and profit vs real property.  The movement between the two investment vehicles often dictates mortgage rates.

Why Do Mortgage Rates Change?

Mortgage rates fluctuate based on the market’s perception of the economy.

Stocks are considered riskier investments, and therefore have an expected higher rate of return to compensate for that risk. When the economy is thriving, it is presumed that companies will perform better, and therefore their stock prices will move higher. When stock prices move higher – MBS prices generally move lower.  Mortgage Backed Securities, however, thrive when the economy is perceived as not doing well. When investors forecast a faltering economy, they worry that the return on stocks will be lower, so they frequently engage in a ‘flight to safety’ and buy more secure investments such as Mortgage Backed Securities.  Mortgage rates are actually based on the yield of those Mortgage Backed Securities.

Bonds are sold at a particular price based on their value in relation to other available investments.  When a bond is sold it yields a certain return based on that original purchase price.  As the prices of the MBS increases because investors seek their safety, the yield decreases. Conversely, when investors seek the higher returns of stocks and the MBS are purchased in lesser quantities the price goes down.  The lower price results in a higher yield, and this yield is what determines mortgage rates.

How Would I Know if Rates are Expected to Go Up or Down?

UP:

When the economy is growing or is expected to grow, stocks will likely become the more favored investment.

When investors buy more stocks, they purchase fewer MBS, which drives the price down.

When the price of the MBS is lower, the yield increases.

Since mortgage rates are based on the yield of the 30 Year MBS, you would expect rates to increase in this environment.

DOWN:

When the economy appears to be slowing or is doing poorly, investors typically move their money out of the stock market and into the safety of the MBS.

This drives the price of these investments higher, which results in a lower yield.

Since mortgage rates are based on the yield of the 30 Year MBS, you would expect rates to decrease in this environment.

Since these market variables and expectations change multiple times as economic reports are released throughout the course of a week, it is not uncommon to see mortgage rates change several times a day.

Understanding how rates move is not necessarily as important as having a loan officer that is equipped with the technology and professional services to track and stay alerted at the precise moment rates make a move for the better or worse.

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