John Beckett's Real Estate Blog

Sorry for the long blog today but I was asked about down payments today so I decide to explain how to come up with a down payment in detail. Not long ago, no-down-payment loans were the height of fashion for homebuyers. But now that lenders have tightened their standards, borrowers once again are expected to “put some skin in the game,” to use a favorite industry catchphrase. That “skin” refers to the borrower’s own cash, and it means down payments are definitely back in style. The chief advantage of a down payment today is simply the ability to qualify for a loan, as only a handful of so-called zero-down loan programs still exist. Yet down payments have other benefits, too. The more money you put down to buy a home, the smaller your monthly payments will be. A buyer’s down payment becomes a homeowner’s instant equity when the purchase closes, and that equity can be borrowed against with a home-equity loan or line of credit. Guidelines to qualify for these loans have become much stricter, however. Many first-time homeowners are “surprised by the true cost of owning and maintaining their home.” So they should keep some reserves rather than allocate every dollar to their down payment. Some loan programs require cash reserves for this reason.

Other benefits of a down payment include:

• Borrowing less money to buy the home.

• Shopping among more lenders, loan originators and loan products.

• Getting a lower interest rate.

• Paying less for mortgage insurance.

• Avoiding mortgage insurance altogether if the down payment is at least 20% of the home’s purchase price.

How to get a down Payment

Many homebuyers have difficulty coming up with a down payment. Here are a dozen ways to do it:

• Set up an automatic saving plan.

• Get a gift from your parents, grandparents, other relatives or friends.

• Sell a car, boat, motorcycle, collectibles or other assets.

• Liquidate stocks, mutual funds, savings bonds or other investments.

• Allocate your income tax refund.

• Take a loan from your 401(k) retirement plan and repay yourself with interest.

• Withdraw funds from your 401(k) plan, subject to taxes and penalties.

• Collect on a loan that you made to someone else.

• Get a bonus from your employer.

• Explore homebuyer programs for public servants if you qualify.

• Apply for a state or local government down-payment program.

• Use a private down-payment assistance program.

A down payment needs to be “sourced and seasoned. That means the lender needs to know how you obtained the funds and that you’ve had control of those funds for at least several months. Gifts and seller’s concessions are acceptable, up to the percentage allowed by the loan program, but borrowed money can’t be used as a down payment, as it is debt that has to be repaid.

Government-backed programs

Two government-run programs are designed to aid homebuyers who haven’t saved much for a down payment. The Federal Housing Administration offers mortgage insurance that allows qualified buyers to purchase a home with a 3% down payment, all of which may be a gift. The U.S. Department of Veterans Affairs offers a home-loan guarantee program that helps military veterans buy homes with no down payments. Down-payment programs run by state and local housing authorities offer grants and low-interest deferred-payment loans to homebuyers, though the restrictions can be pretty severe. Some programs require borrowers to live in a disadvantaged neighborhood. Others have income limitations, for example. The biggest problem tends to be that if you make enough money to qualify for a loan, you probably make too much money to get the down-payment assistance. Down-payment assistance programs offered by private organizations — Nehemiah and AmeriDream are two of the largest — convert money contributed by the seller into the buyer’s down payment. They are using the seller’s equity to fund a grant, which allows the buyer to buy with no money down. These programs serve a need for people who struggle to save a down payment, if the seller is motivated to contribute. But these programs are not without controversy. The down payment is of value only if the homebuyer can afford the monthly payments and whether someone who didn’t have the discipline to save a down payment would have the discipline to make the payments may be questionable. The FHA has tried, so far unsuccessfully, to ban the use of private down-payment programs in conjunction with FHA loans because FHA-insured loans using these programs have been shown to have a significantly higher incidence of default and foreclosure than loans not using such assistance, according to an FHA study. FHA loans made to borrowers relying on seller-funded down-payment assistance go to foreclosure at three times the rate of loans made to borrowers who make their own down payments.

Down payment or closing costs?

Should homebuyers who have limited funds allocate more money toward their down payment or set aside some share of the total for closing costs? The simple answer is that the down payment should be the priority, up to at least 5% (or 3% for an FHA-insured loan) of the home’s purchase price. It doesn’t matter if they have the money for closing costs if we can’t show (the lender) that they have the money for the down payment.

If you’ve saved enough for a down payment but not closing costs, here are some options:

• Ask the seller to pick up the tab.

• Pay a higher interest rate in exchange for lender-paid closing costs.

• Wait to buy a home until you’ve saved more money.

If you want the seller to pay the costs, you should discuss that concession upfront before you sign a purchase contract, because payment of costs is a negotiable term that affects the seller’s net proceeds from the transaction. Borrowers can reduce or even eliminate their closing costs by paying a higher interest rate on their mortgage. This sophisticated strategy should be discussed with your loan officer, but the basic rule of thumb is that an additional 1/8% higher interest rate will net a credit against closing costs equal to 1/2% of the loan amount. For example, an additional 3/4% in interest might eliminate closing costs of 3%. The catch is that as your credit gets larger, it takes a bigger interest rate jump to achieve the same amount of savings. Instead of your total costs being 3% at one end of the spectrum and zero at the other end with a 3/4% higher interest rate, you could compromise on whatever combination of closing costs and interest rate you want.

Read at: http://articles.moneycentral.msn.com/Banking/HomeFinancing/HowToComeUpWithADownPayment.aspx?page=2

There are so many terms that pertain to real estate. I have been asked numerous times on what is meant by a certain term that I have decided to post  questions and answers every Thursday. If there is a term that you do not understand, please just ask and they will be answered in my post every Thursday.

Arm’s Length Purchase: The term is used to describe a real estate transaction in which the buyers and sellers of property or a parcel of land act independently, and are not related to each other. The idea of an arm’s length transaction ensures the buyers and sellers in the real estate transaction are acting in their own self interest and are not subject to any outside influence. In a ‘non-arm’s length tansaction their could be other factors that influence the transaction and subsequently the value of the exchange. This concept is important as it is a common way to determine if the price is a proxy for fair market value. If the transaction is not an ‘arm’s length’ transaction, then the stated price will likely differ from the actual fair market value of the property.

Joint Tenancy:  An equal undivided ownership interest of a property by two or more natural persons each of whom has the right, called the right of survivorship, upon the death of one joint tenant to the automatic succession of the title of the deceased tenant.  An estate owned by two or more parties in equal shares that is created by a single transfer document. Upon the death of a joint tenant the surviving joint tenants take the entire decedent’s share of the property, so nothing passes to the heirs of the deceased.

Natural Person:  A living person as distinguished from a legal person such as an organization or a corporation.

Acceleration Clause:   A condition in a real estate financing instrument giving the lender the power to declare all sums owed to the lender immediately due and payable upon the happening of an event such as sale of the property or a delinquency in the repayment of the note.  Clause in a deed of trust or mortgage which “accelerates” the time when the indebtedness becomes due. For example, some mortgages or deeds of trust contain a provision that the note balance shall become due immediately upon the resale of the land or upon the default in the payment of principal and interest.

Many lenders negotiate prices for short-sales, in which the seller is offering the home for less than is owed on the mortgage. But traditionally the only way you could find out was to submit a below-list offer and wait—often for many months—for a response. If the bank made a counter-offer, you knew you were in the ballpark; if they didn’t respond at all, you were too low. By then, you may have lost all interest in buying the property. The good news is, on April 5, this frustrating system will change at least for some buyers and sellers. That’s when the federal government will begin to provide financial incentives to lenders to do more short sales. The rules also help standardize the process, so your chances of negotiating a distressed-property bargain will increase. Under the old practices, when a financially-distressed seller brought a potential buyer who was offering less than the amount owed on the loan, the bank would order an appraisal or broker’s price opinion (BPO) and then decide whether the offer was acceptable. Under the new federal rules, banks will order a BPO before the property is listed for sale, and will share information on the minimum net proceeds they’re willing to accept with the sellers. If they then bring in a buyer whose offer is equal to or greater than this pre-approved amount, the lender must accept it within 10 days.

Not all sellers are eligible for this program, called Home Affordable Foreclosure Alternatives (HAFA). But since the process is likely to go so much smoother for those who buy and sell under HAFA, I suggest you wait a bit until the program goes into effect and concentrate on finding these “pre-approved” deals. Of course, when you do find a property you like, you may not be the only person bidding on it. To improve your chances of winning, make sure your offer is “clean,” with as few contingencies as possible (though I would never forego a home inspection). Include tax and credit records, and a mortgage pre-approval letter. If you can afford to pay cash, that will put you in an even stronger bargaining position. Still, in your eagerness to win the property, don’t forget that distressed properties often come with added financial burdens. Although under HAFA, the seller is supposed to provide clear title, to protect yourself, your contract must make it clear that you will not be responsible for any of the seller’s unpaid property taxes, liens or second trusts. Also, cash-strapped homeowners often stop paying taxes and homeowners’ association fees during the time between when the house is listed and the deal is closed. To make sure that you’re not on the hook for these expenses, it is recommended that you ask that the bank escrow at least six months worth of taxes and HOA fees, to cover any potential shortfall.

Read more at: http://online.wsj.com/article/SB10001424052748704207504575130053855146896.html?mod=WSJ_Real+Estate_LeftTopNews

The clock is ticking on the federal homebuyer tax credit. Homebuyers still have time to buy a home and meet the deadlines, but they will need to act soon and be proactive throughout the transaction. The homebuyer tax credit is worth 10 percent of the home’s sale price, up to $8,000 for buyers who haven’t owned a home in the previous three years and up to $6,500 for buyers who have owned and occupied a principal residence for at least five consecutive years during the eight-year period that ends on the day the new home is purchased.

Here are some tips for last-minute buyers:

• The buyer must enter into a binding contract to purchase the home on or before April 30 of this year. The term “binding contract” isn’t defined in the homebuyer tax credit law and may be subject to interpretation. Generally, the term refers to an agreement that’s signed by both parties and has a deposit in escrow, according to Randi Bennett, an escrow officer at First Centennial Title Co. of Nevada in Reno.
• The purchase must close within 60 days after the binding contract deadline. In this context, that means June 30, not June 29, according to the Internal Revenue Service. The discrepancy between 60 calendar days and two months occurs due to a financial fiction that every month equals 30 days.
• Certain U.S. military, foreign service and intelligence service personnel have an extra year to claim the homebuyer tax credit. These buyers must enter into a binding contact on or before April 30, 2011, and close on or before June 30, 2011.

• Buyers should be upfront with their Realtor about their must-haves and their wish list. Buyers who aren’t realistic could find themselves up against the deadline with fewer houses from which to choose.
• Contract contingencies allow buyers some breathing room to take care of big items such as financing, inspections and the sale of their current home, but contingencies shouldn’t be an excuse to delay once the deal is pending.

If you run into a problem and you no longer want to buy that house, it’s great that you had those contingencies to protect you, but you may not have time to find another property,” she says.

• Anecdotal reports suggest that some buyers have included a tax-credit contingency in the purchase contract. Whether that’s a necessary protection to make sure the deal closes on time depends on the situation and local practices. Either way, buyers should read the contract to make sure the closing will occur before the deadline.
• Buyers should get preapproved for a mortgage, because glitches such as a mistake on a credit report or a lender’s request for tax returns that must be retrieved from the IRS can cause a delay.

You don’t want to wait until the last minute, because you could end up shooting yourself in the foot over something that’s no one’s fault, but you just run out of time.

• Buyers also should allow extra time in case the mortgage lender requires a second appraisal, which can delay final loan approval.

The appraisal process in residential lending is going through some painful changes. It is not uncommon to have a mortgage lender require more than one appraisal.

• Buyers should line up homeowners insurance as soon as the house is under contract. Homeowners insurance is usually routine, but some states have special disaster-related issues. A big storm, earthquake or fire can trigger a moratorium on new policies.
• Buyers should be aware that short sales, in which the seller needs a lender’s approval to sell the home for less than the loan balance, are typically subject to lengthy delays. For instance, one typical requirement is that the final closing statement must be sent to the bank for final approval. That can take five to 10 business days.

It’s an unfortunate irony for homeowners who have experienced a financial hardship, but  buyers who want to claim the tax credit should set some firm deadlines or avoid short-sale homes.

If the home they fall in love with is a short sale, they need to have a very serious talk with their Realtor with the calendar in front of them and say, ‘If we don’t have an answer by this date, we need to look for another house”.

• The IRS has introduced Form 5405 and instructions for taxpayers who want to claim the home buyer tax credit.

Read at: http://realestate.msn.com/article.aspx?cp-documentid=23657587

In most cases, certain closing costs are charged to buyer and others to the seller.  State law may dictate the division of some fees, but usually the division of costs follows local custom.  For most charges, it is always possible for an agreement between the parties to change the usual practice. In general, the seller usually pays for the costs of proving clear title, which may involve a survey and a search of the public records, summarized in an abstract of title. The seller usually pays any broker’s commission or state transfer taxes if required, and for any termite inspection. The buyer usually pays the costs of placing a new mortgage (application fee, appraisal, points on the loan), recording the mortgage and deed in the public records, mortgage tax if required, title insurance and home inspector’s fees where used. Again, the division of the charges can be changed by agreement between the parties.  Many mortgage plans set a limit on how many of the buyer’s costs the seller may agree to cover.

Read more at: http://www.askedith.com/questions/buying/who-pays-closing-costs