You might be in the middle of a loan transaction right now and are wondering why it is so difficult to get it done. Those of us in the business are feeling the same aches and pains our clients are trying to get, an otherwise great loan, through the system. The lenders seem to running scared more so than ever before when it comes to making underwriting decisions and the collection of documents. I personally have been in the mortgage business all my life and started to originate loans in 1985, and back then we did not have computers, and credit reports were done by hand, and so were appraisals. In those days it did not seem that hard to make a decision on a loan. I do understand that people lost their homes as a result of the mortgage Melt-Down of 2006-2011, and out of that was born a whole new government agency to regulate the industry called the Consumer Finance Protection Bureau or the CFPB. This giant government agency was tasked with policing the industry for fraud, misrepresentation, and to impose new rules and regulations on the industry. It also brought Mortgage Loan Originator licensing as a standard for loan originators to obtain before they could deal with the public. The creation of the CFPB brought a whole new fear to the industry of being accused rightfully or wrongfully of industry wrong doings.
We should understand that the mortgage industry has always been a privately controlled industry with self-policing. When I say self-policing I mean that if a lender, loan officer, underwriter or someone in the industry was doing something to harm the industry or the public they were generally dealt with by the loss of their job and banishment from the industry or were prosecuted and imprisoned. We did see this happen profoundly in the years of the mortgage Melt-Down, in fact, hundreds of companies and people were essentially run out of the business during those years. The largest mortgage servicer, Countrywide, essentially was put out of business by the fact they made poor business decisions on loans which lead to their demise. Other companies such as big banks that did the same practices, but were bailed out by the government, deemed “to big to fail”. In a pure economy the fear of losing one’s business, or job, is sufficient enough to warrant good business decisions. This apparently was not good enough for our elected officials in our Government. So the trillion plus dollar CFPB was born to protect the consumer.
This concept of protecting the consumer is a relatively new one. We have heard the phrases “Consumers Beware”, “Shop Around”, “look before you leap” and many other coined phrases by those who have been burned by a person or company. In a free society it should be up to the consumer to decide what products or services he or she would like to consume and in the manor of their choosing. If the Government regulates what products or services you can have or how you get those products or services you a no longer in a free market economy. With the rise of the CFPB they have made such rules that limit the types of products a private lender can offer to a consumer in the form of loan types and qualifying criteria, documentation and much more. Some of the changes are as follows; it has become no longer legal to offer negatively amortizing loans, in addition, a borrower cannot qualify for a loan if the debt to income ratio is greater than 43 %, furthermore, you must be sent new disclosures if any terms of your loan changes while in processing whether you ask for changes or not, and list goes on and on. In the past those decisions were left up to the lender and if they made a bad decision they would lose money, personal, and in some cases their company. The CFPB has set the rules and are coming down hard on those who do not follow them, all under the guise of consumer protection.
This is what you are now seeing happening in the mortgage industry. The industry is so regulated in the products and services they can provide, and the way they have to provide it, that your personal freedoms have been compromised all in the guise of “Consumer Protection”. I read an interesting book in the 1970’s written by a well know author George Orwell called “1984”. This book was written in the 1930’s about a futuristic society where everyone was controlled by the government in the name of protecting the people. Although, we are not quite to that extreme we have definitely seen the losses of personal freedoms under the guise of Consumer Protection, “double speak” was this term referred to in the above referenced book.
The CFPB has set out to protect consumers against bad lenders with bad practices among other things. Their set task has been to impose stringent rules and regulations on all who originate loans, fund the loans, and those who buy the loans. The rules they have imposed on the industry and the consequences of not following the rules are so stringent it has ended up hurting the consumer. This is seen from the point when a consumer tries to obtain a home loan to the closing of a loan and the selling of that loan by the lender. As I have written in several previous blogs, the rules that have changed, and are many, from the way a lender must verify income and qualify a consumer to the way a lender has to sell the loan or securitize that loan into the secondary mortgage markets. Accountability has also changed, so much that an underwriter can be held liable for his or her decision on a loan, so with every loan an underwriter approves and closes they hold the liability on their decision for the life of the loan and so does the Loan Officer. So by having this increased liability an Underwriter and a Loan Officer has to be extra diligent in how they process a loan, thus taking more time to get the job done.
Back to you, the consumer, all of this trickles down to the actual person trying to obtain the loan as to how they will be evaluated and scrutinized. With the increased rules and culpability lenders have tightened their internal rules so tight that it makes obtaining financing for a home quite stringent on potential borrowers. This is true for all types of borrowers from the perfect borrower with perfect credit and large down payments, to borrowers that might have more challenges. In addition, with low interest rates today borrowers will be holding on to their loans longer, thus making the liability extend further into the future, so that is another reason you see the extra tightening happening on loans today. Loans done in today's environment will be on the lender’s books for a longer period of time, due to low interest rates, underwriters and their staff have tightened their requirements to the point where all “I’s” are dotted and the “T’s” are crossed before a loan will be funded. In the past lenders would or could obtain “follow up documents” from borrowers after the loan has closed, in today’s world this practice is gone.
So where does that leave the consumer; I think unless our elected officials are persuaded to change the laws we will continue to see lenders being tight with underwriting and documentation. The over-regulation of the lending industry will continue to hold back the real estate markets as consumers will be less likely to qualify for home loans. You will see this exaggerated in the mid to high range homes, where you have more self-employed borrowers with large down payments and good credit but hard to verify income, being pushed out of the traditional loan markets. Even with some visionary lenders that are trying new and different ways to work within the rules with private money offerings we are still going to see tight underwriting for no other reason than the laws set forth by the CFPB. If one of these new visionary lenders are deemed by the CFPB as doing things out of the ordinary they will not only be shut down but also fined heavily, which will scare off any other visionary lenders that may wish to enter the market. So in the end the very regulation that is supposed to protect the consumer ends up hurting the consumer in so many ways. The consumer is hurt in their ability to borrow money, in increased costs of government (the deficit), and enviably higher taxes as well. So if you wonder why it is so hard to borrow money and your loan officer is asking for ridiculous explanations about things. That is the big picture and the only way all this madness will change is by a change in laws, and that will only happen if a Legislator or Congress person tries to get a loan and is pushed into the system they created and they feel it firsthand. I am all for accountability, but I truly believe that this system is overkill and is costing consumers and our economy more than I can quantify in this blog.
Here at MAE Capital Mortgage we strive to educate our Clients about the process and how to make it smoother for themselves. We explain the steps that are required and documents required and why they are required. We also explain that there probably will be more documents and explanations needed as we go through the process. Most importantly we explain the need to be patient with us and the process. We can be reached through our website www.maecapital.com or call us we would love the opportunity to work with you. Our office number 916-672-6130 Thank you again and your comment are always welcome.
So is it time to refinance my home? A question millions of Americans are now asking themselves. I have written numerous articles on this subject so if you want more than I am offering in this post scroll through my previous posts and there should be three to five more articles on this subject. Since we have had tremendous volatility in the Stock Markets of late, investors have taken their money from equities and placed into more secure long term bond investment. This has pushed rates to a new two year low so if you have been contemplating refinancing to lower your monthly payments or take some cash out of your home this would be the window of opportunity you have been waiting for.
If you are contemplating lowering your payments by refinancing there are several things you should be aware of other than your interest rate. The first of which would be the value of your home, has it gone up or down since your last refinance or when you bought the house? If the value has risen and you had either FHA mortgage insurance on your home or conventional mortgage insurance you might just get a double bump downward. If you bought your home using an FHA loan and the value has risen you might be able to refinance to a conventional loan and either lower the mortgage insurance or eliminate it all together. Just the elimination of your mortgage insurance could lower your monthly payment a few hundred dollars a month without even lower your interest rate. If you have increased your equity by 10% since you bought, or your last refinance, you might still be able to lower your monthly mortgage insurance and coupled with a lower rate be able to significantly lower your monthly payments. Any combination of lowering your monthly mortgage payment is a good thing, so don’t assume that your interest rate not being lower would stop any discussion of refinancing your home. We have actually refinanced folks to a higher interest and lowered their monthly payments significantly simply because we eliminated their mortgage insurance. The analyses is simple, all we need is your home address and a current mortgage statement and we can determine the value of your home and if we can help get rid of your mortgage insurance, lower your interest rate and lower your overall monthly payment.
You may not know that you can refinance your current mortgage to another type of loan to lower your payments as well. For example; you have an FHA loan on your home now you can refinance to a Conventional loan or a VA loan to lower your payments and or take cash out of your equity. If you had never used your VA benefits and you bought a home a year ago or more and you still have little or no equity in your home you can use your VA benefits to do a 100% loan-to-value loan on your home and drop your FHA mortgage insurance. You may have a private loan on your home now and need to refinance, you can use an FHA or VA or conventional loan to do so. The possibilities are endless, but if you don’t make the call you can’t find out if you can be helped. The phone call is free and for the most part so is our services as they are paid for by the lender in the interest rate. Which also brings me to another point, that is, you can always put money into your home to buy down the equity and qualify to drop your mortgage insurance. You could also buy down the interest rate by paying more points, you see the more points you pay the lower the interest rate you can get. However, when doing this there would be a tradeoff of buying an interest rate or simply paying down your existing loan amount. Again this would be an analysis that we would do for you. You could also use one of our easy to use calculators, but I would recommend the human touch to give you the right answers and so you get it right the first time.
There are types of refinances that are available right now to help you if you have little or no equity even if you owe more than the home is worth. If you have an FHA loan you can use the streamline refinance option. This refinance allows you to refinance your loan to a lower rate with no appraisal and no real qualifications. The catch to this loan is that you have to have made your mortgage payments on time for the last consecutive 12 months with no late payments. This is also offered if you have an existing VA loan, it is called an “Interest Rate Reduction Refinance Loan” or IRRRL “earl” ,as we call it in the industry. Conventional Loans have a similar program; it is called the Home Affordable Refinance Program or “HARP”. The HARP loan is offered for those that have their mortgage currently securitized by the Federal National Mortgage Association “FNMA” or Fannie MAE and or the Federal Home Loan Mortgage Corporation or FHLMC or “Freddie Mac”. That sure is confusing just by the names, but to find out if your loan is securitized by one of those two agencies simply give us a call and we can look it up for you or you could go to their linked sites and look it up yourself. The HARP loan will not only require you to have made your mortgage payments on time you will also have to have a minimum credit score. Unfortunately, you can’t do a HARP from a conventional loan to a FHA loan or a VA loan. All these types of refinances that don’t require an appraisal will have be done from like loan to like loan, such as FHA to FHA and VA to VA and Conventional to Conventional.
Taking cash out of the equity of your home to buy other things or home improvement will require that you have equity built up in your home and that would have to verified with an appraisal. The good thing is that if you do have significant equity in your property we can take up to 70 or 80% of the value of the home out in cash if you can income qualify. This is not for everyone as using your equity in your home to purchase items is a risky business and does not bode well for retirement planning. Most people that do take cash out of their home should have a good financial plan in place, but the problem is most folks don’t. We don’t do financial planning as we don’t hold the license to do so; however, we can and will explain the ins and outs of changing markets and what history has shown with regards to taking too much out of your home.
So if you have been thinking about refinancing your home give us a call, we can easily and quickly determine what is best for you. Let our licensed Loan Professionals guide you through the process. We hold both a real estate license as well as the NLS license so we can easily ascertain the value of your home and answer all your real estate questions. As usual leave any comments or continue to research our site for more answers but don’t forget to contact us to help you get this started.
This time of year there are thousands of parents taking their kids off to college? As a parent I just did this and one might think it would be relatively easy as you have prepared your child for this all of his or her lives, but the problem is have you prepared yourself? I found out that I may not have done such a great job of preparing myself for this event. As a parent we do everything to give our children the best possible lives we can. We provide them food and housing and teach them how to interact with others and we build them towards leaving the nest someday. We help them pick out a college that will best fit their educational goals and their social goals. We get everything all set up for them pay their tuition and make sure they are set up with room and board. Then we deliver them and know they are all setup for their life in their new location. We know we have raised them for this very day, for them they are nervously excited with their whole life in front of them. Then the time comes to say goodbye and drive away leaving your child all setup for his or her future and it is somewhere around that time you realize that you are waving goodbye to what was your future, as for your whole adult life has revolved around raising this child to be a productive part of society and readied them for the world in front of them the whole time not thinking of what you will do when they are gone. They say it is bittersweet, but in reality your world is being turned upside down, especially if you have been a stay-at-home mom and now you are out of a full time job. Some of you have gone through this and know where it leads and others have intentionally put it out of their minds. Starting a new chapter in life at an older age is sometimes very hard and we have to look forward to get through.
So what does this have to do with Real Estate and loans you ask? Well I just went through this exact scenario and I find that writing about things help me get through the tough times. I have also been in the Mortgage and Real Estate business for 30+ years so I naturally look to Real Estate as a means to have purpose in possibly helping myself and my son at the same time. My wife and I are both in real estate she more the sales end and myself the loan side. So when we go to a new town one of the first things we do is to get a feel for the local Real Estate market. With our son going to Montana State in Bozeman we have been thinking of buying a home there so our son could rent it to him and his friends and we would have a rental property up there. I am sure this goes through many parents mind as they move their student into a new town. But you may not know how to go about doing this or wondering if it is a good idea to do so.
The facts are the about 20% of kids drop out of the school they have originally chose, or transfer to another school. So it is important not to jump right into the purchase of property right away as your child may change their mind on going to that school. My wife and I understand this have decided to keep looking but not to commit to purchasing anything until he has completed at least a year there. This way he will be able to make sure that the school and town are for him or her. If you did jump right into purchasing a home several things could happen, one of which could be your son or daughter may not like the school and secondly, and probably most importantly, your son or daughter would not get the social aspect out of living in dorm the first year which could inevitably lead to isolation and them not liking the school and your stuck with a rental in a town you no longer have ties to if your son or daughter decides to leave.
OK your child has been there a year and he/she would like to get a group of his or her buddies together to live in a house and you have an opportunity to buy a rental in that town, how do you go about it? Your options are actually more than you think. You can go into the process as if the house, condo, town home, or multifamily home is going to be your rental and that your child will only live there and you have the means to put a large down payment on the property (20% or more), and once her or she graduates you will continue to own the property as a rental that is one rout you can take. Another route to take would be to look at the home as a starter home for your child which will allow you to do owner occupied financing under certain circumstances. Owner occupied financing will allow for smaller down payments and less cash that you would have to come up with to close. You can do this type of financing if your child is going to live there. FHA will allow this to happen with as little as 3.5% down payment. Either direction you choose you have to remember, from an IRS point of view, that if you write the property off as a rental on your personal taxes you would be under a different taxation when and if you ever decided to sell the property. Capital Gains rules pertaining to real estate has changed considerably the last several years, so when considering this please consult your tax professional. This is a very touchy subject with respect to the IRS but it must be addressed before you file your first return with your new property.
As always you can post any comments or questions on this or any article that has been written.
So you are reading this because you are wondering where to find money that you can use for your down payment on a house. It has become more and more difficult over the last several years to find home loans that require little or no down payment and you have been calling around trying to find some information on down payment assistance and you are finding that there is very limited programs for the average person that would like to buy a home in a major metropolitan area. What you may not have found out is where you can get the down payment funds from. FHA loans are the loans that require the smallest down payment to purchase a home, although it is still 3.5% and on a $300,000 that is $10,500 way out of reach for the average American. So what is a family supposed to do to gather the necessary funds they need to buy a home? The answer might just be under your nose as you read this.
Let’s start with the requirements for a down payment and what happens the more money you can put down on a house. First, you need to know that if you can come up with 20% of the purchase price for the down payment that is your best case scenario as the more you can put down the less risk it is for a lender to lend you money, so you tend to get better interest rates the more you put down. A Conventional Loan that will be securitized by FNMA (Fannie Mae) or FHLMC (Freddie Mac) will require you to purchase mortgage insurance if you don’t put 20% or more down on a house but the minimum down payment requirement for a Conventional loan is 5%. We already talked about FHA requiring only 3.5% for a down payment and then there is a Veteran Loan or a VA loan that require no down payment. Although a VA loan requires no down payment you would have to show that you served in the military and have acquired the necessary benefits to use a VA loan.
So you are not a Veteran and you are wondering how to accumulate a down payment in today’s weak economy. There are programs that can be used that the government offers, but they are limited to income constraints and areas you can buy in. The most prevalent programs used for down payment assistance are USDA (United State Department of Agriculture) and CHDAP (California Housing Downpayment Assistance Program). The USDA program requires you buy in areas where the population is less than 25,000 as of the last census data, so you have go to the website to find out what areas qualify. With USDA you can do 100% financing with a small Mortgage Insurance payment, a good program all around. The CHDAP program is a silent loan for 3% of the sales price that covers the down payment for a FHA loan. With the USDA loan you do not have to be a first time buyer but you must make under a certain amount of income, and buy a home in a rural area, and you have to live in that home as your primary residence. CHDAP also has income limitations based on family size in the area you are purchasing, but you also have to be a first time home buyer, you have to live in the house, and your debt-to–income ratio can’t exceed 43%. You might fit the parameters of these programs, that’s great let’s get you started, but if you don’t and are still wondering what to do keep reading.
Ok you don’t qualify for any down payment assistance programs but you have a great income but can’t manage to save enough for a down payment. I have some tricks that you may not have known you can do. First, is an obvious trick ant that is used with an FHA loan and that is the use of a gift. The FHA guidelines say that you can get your down payment can come from, a family member, an employer, or a government institution (which we talked about earlier). If the gift comes from a family member we must verify that the family member had the money to gift to you by getting a bank statement showing sufficient funds to gift for your down payment. Sounds like a mouth full but the devil is I the details. The detail is that if the money comes from a gift you only have to verify 1 month bank statement showing the donor has the funds to gift you but 3 months of funds have to be verified if the money comes from your own funds. So if one plans properly one could use gift funds right away and not have to wait to season funds in your own bank account for 3 months. The down payment may also come form your employer. It might sound out of the question but sometimes you can get an advance, or a bonus, or a grant from your employer for the down payment. If these avenues fail you could sell an asset for the down payment. It's true that old car, tools, gold, stocks or bonds, and guns anything you could sell and show a sales receipt you can use for a down payment. You can also put a loan against a car you own free and clear and use that money. You might have heard that you can’t borrow the down payment, and that is true, unless you borrow against an asset like a car or another house or land you might own. If you can handle both the new home loan payment and the payment on the loan you got against the assets you are good to go with a down payment to purchase a home.
One last tidbit you might not have thought about and that is your retirement plan you currently have. Yes, you can use that for your down payment and most plans will not charge you a penalty for using your retirement early if you use it for the purchase of your primary home. You can also borrow against it for the down payment as it is an asset you own. Although I have talked about a few tricks of the trade in this article, there are still more legal ways to get a down payment on a house there is just not enough time to articulate every type of scenario. This is where our very talented Loan Originators come in to help. If you need expert help with putting together a down payment scenario please call us today and we will walk you through your specific needs.
You think it is time to sell your home but not sure where to start or where to price your home. So you go to the internet to look at Zillow and that seems to confuse you even more. So you have landed on this article in hopes to get some insight on what you should do. I have written several articles on this, as you are probably seeing. I have been in the Mortgage and Real Estate Industry for 30 years and have seen many different markets and many different strategies on how to market homes for sale. One thing I have seen throughout the years is that everything changes. So you might have sold a house 10 years ago, in what you think is a similar market, and you go to sell now and it has all changed. You realize you need professional help to list and sell the home. As a professional in an ever changing market I have to tell you that it is hard to keep up on all the changes and I am in the business every day of my life. That said, I would love the opportunity to walk you through the Real Estate Maze (selfless plug I know) but in reality you need a professional that has knowledge of, not only the Real Estate Market, but you need someone who knows financing. This is more important than ever as it has to do with the potential buyers of your home and the time it will take to close if it can close at all.
An Agent that has a National Mortgage Licensing System (NMLS) license can easily look at a potential buyer and advise you as to how long and hard the escrow will probably be based on the type of financing the potential buyer is trying to obtain. For Example; if you receive an offer and the buyer is using a Conventional loan and putting 20% or more down that transaction will probably go smoother than a FHA transaction where the buyer needs financial assistance. If your Agent representing you has no knowledge of financing then you could pay the price with your transaction falling out of escrow and taking far more time than it should have if there were some initial knowledge of the questions to ask. Mortgage lending has changed so dramatically over the last several years that an average agent, that has no lending background, will generally have no knowledge of the new pitfalls to look for even if that agent has been selling Real Estate for years. You see when an Agent has an NMLS license he or she must go through annual training to maintain that license. More specifically to maintain a NMLS License you must have 8 hours of continuing education every year to maintain your license. So you should be dealing with a professional that is up to date on the current changes in the industry.
Next when looking for an Agent to list and sell your house you should see how long they have been in the Real Estate industry. Not to say a fresh Agent that just passed their Real Estate exam can’t help you, but I would ask them if they have a knowledgeable Broker, or partner in the industry to walk them through the transaction. I understand that everyone has to start somewhere, but I also understand that they need help as I did when I first entered the business. In fact, I struggled the first year of my career as I got no training and had to seek it out by myself. I think this made me a better professional as it was not given to me I had to seek out my training. I now make sure all the New Loan Officers and Real Estate Agents I hire go through my special training program and all are required and sign to the effect that I will mentor them for the first year in the business. Why do I do this? Simple I do not want people representing my company that are bad apples. My approach is to be as professional and as knowledgeable for my clients as I humanly can and treat them the way I would want to be treated and communicated to myself.
You have to watch out for the so called “Listing Agent” that comes across great and knowledgeable in the beginning to win your business and soon after you sign the listing agreement you never hear from them again. Some Agents think that marketing your property is just putting it into the MLS system and putting a sign out front. I am here to tell you that putting your home into the MLS system and paying the dues to do so is just a start there is so much more than can be done to market your house. An Agent should be up on the latest internet marketing techniques. For example, they should be putting your home into Zillow as Zillow no longer pulls their listing information from the MLS in our region. Then an Agent should know how to get your home marketed on all the search engines out there such as Trulia, Redfin, Realtor.com, Homes.com, cribclick.com and the over 60 other Real Estate Search engines. Why is this important you ask? Simple answer is most all Real Estate searches start on the internet; after all you are reading this on the internet. Your agent should know how to make a property website for your home so he/she and you can post it to social media and email to all your contacts so anyone can see your home. Your Agent should have a quality camera especially if your home is a high end home so they can take wide angle shots to make your home look bigger and spacious. Your agent should know how to make the photos they take look even better with software enhancements. It is the little things sometimes that people see that gets them to visit your house verses another home. Your agent should also offer staging advice, so your home shows as well as it can.
When it comes to pricing your home there are several approaches and they are all based on your (the seller) financial situation. The first thing any seller should know is that price sells. If you want to move a house fast you should be willing to price the home under market. Sometimes when pricing your home under the value you will get a bidding war and end up with your home selling at market price anyway. I just had a listing sell in a not so desirable area sell over list price with several offers all because I priced the house under what others were selling for and it ended up selling for the right market price. You must remember that “market value” is what a willing seller will sell for and a willing buyer will buy it for. That said if you have the ability to list your home under market value for your neighborhood you will sell your house faster than others for sale in your neighborhood that is just a fact unless your home is a major fixer. If the home is a major fixer you should be prepared to mark it well under market to entice investors to buy and rehab it so they can make money on the flip. Or you could pour your money in to rehab the house yourself and you could make the profits from a fully renovated home. A good Agent could tell you what the fixed up value of your home would be so you could make an informed decision on remodeling or not yourself. As you can see there is a lot more to listing and selling a home other than putting a sign out front and putting in MLS. Having the right selling partner to offer you advice and guidance is of the upmost importance. If you would like to talk to me further about listing and selling your home you are more than welcome to, in fact, it is one of the reasons for writing all of these articles. My name is Gregg Mower and I am the owner Broker of MAE Capital Real Estate and Loan and would love to earn your business. I can be reached at the office at 916-672-6130 or my cell at 916-849-7170. You can also email me at firstname.lastname@example.org. I truly hope this and other articles and this site helps you in your quest for knowledge.
This blog is going to be out of the norm for me as I don’t usually talk about subjects that are too deep and personal. This is going to be a discussion about faith, power and healing in Business and the world in general. First of all, I must preface that although I talk about faith and God I am not going to tell anyone that one religion is the way to go or is even right for everyone, it is an individual choice. However, I am going to state undeniable truths about powers that are greater than us; call it God, Allah, Yahweh, Dark Matter or whatever, the fact is that we all know there is an energy that transcends all of us and you can call it what you will. Knowing that this energy is there is your first step to taking a positive view on life as a whole.
So if you are still reading this and you are thinking you are about to get hit over the head with a Bible or some other pious book you would be wrong. Although those readings are great sources to use to tap the energy of faith, healing and inner peace, however, you can still achieve the same results by searching and discovering the hidden powers of the universe on your own. The readings of the Bible the Koran, Buddhism, Hindu readings and others, have one common theme that energy exists in the universe that we cannot see nor can we ignore. That very energy becomes labeled as a God or a Deity when, in fact, this energy is something anyone can tap into to become more peaceful, or gain the power to succeed, or heal ourselves it is up to each of us to find it. The ability to tap this energy becomes harder the older we get and get caught up in day to day routines, commitments, jobs, etc.. Remember when you were a child and you saw something for the first time what joy it gave you that you discovered something new. Or when you experienced something for the first time and the energy you gained from that experience such as a roller coaster, or your first plane flight, or the first time you saw the ocean. Remember the feeling of joy when you saw your baby for the first time or the feeling when you climbed to the top of a mountain and it felt like you were on top of the world. All these feelings are energy that we draw from our surroundings and they last for a long time in our minds and body, if we can draw those images up again we can get that same feelings and draw that same energy if we try hard enough to remember the feelings.
The energy I refer to can be illusive and hard to get focused on and some us have forgotten how to get those feelings back again. When we forget those feelings or ignore them we put ourselves in a dull state just going through the motions of life. If we stay in that state for a long time we become stale, washed out, lifeless tired with no energy. The trick is to be able to tap the energy when you need it. How I tap that energy is to meditate or pray, by closing my eyes and visualizing the event or place and put myself in that state of mind that takes me away from the pressures I am going through in the present and clear my mind so it can allow fresh energy in. It takes practice and it requires time to relax enough to get your mind to that place where it can accept the energy. Like anything you want to be better at you must practice this every day multiple times. But, you say you don’t have the time to do it. I say if you don’t take the time to do it your health and state of mind will suffer so much that a normal task like returning a phone call, or completing a contract, or deciding on what house to look at will take you so much time that had you taken a half hour to clear your mind you could have completed those tasks much faster and you would be left with energy to spare. If you talk to any highly successful person they will tell you that they practice this technique all the time. Highly successful people have learned how to tap that energy on the fly and can gather the energy while walking, driving, going to the bathroom or sitting at their desk taking a moment to reflect and get to a place of tranquility so they can gather the energy they need to continue to the next step in their day. Watch a professional athlete and you may wonder why so many of them will look up to the sky and praise a higher being after a great play or before they begin the sport. This is a learned activity that they have done for a long time to get themselves to a point quickly where they have the energy and are focused on the task at hand. Those athletes have learned how to get to that energy quickly and have risen to the top of their sport by tapping that energy.
In business we can use the same techniques to gain the energy we need to accomplish tasks that might be perceived as difficult to outsiders. If you were to follow a highly successful business person around for a day you might wonder how they can keep up the pace at which they work and for how long they work. If you were to ask each one of them how they draw that sort of energy they will tell you that they draw their energy from taking moments to reflect, pray, get to their place of tranquility to refresh, heal their mind, and re-energize. The most successful people can do this very quickly, and it did not happen overnight, they have been working on their techniques their entire life and have perfected it. They will also tell you that sometimes they need to go to a place, either a vacation, or a special place where they can take the time they need to clear out the bad thoughts and replace them with good ones. We call this a vacation and we all need to take them and know why we are taking them.
The idea of drawing energy from your environment is what we do every day in the form of food, water and other things we consume it all comes from our environment. So not to believe that your spiritual energy would come from the same place is absurd. In fact, if you were to break down the human body to its basic elements we have the same makeup as dirt. That said it would make sense that we draw our energy and our most inner peaceful thoughts from those places in nature where we have been before where we have felt those empowering feelings. In most cases, people that are highly spiritual are also in tune with nature and the energy it provides us. So if one has the capability to recall those same feelings from a time when they felt most connected to nature and at peace with themselves they will be able to recreate that tranquility and cleanse their mind from the day to day items that tend to bring them down and suck out their energy. Again, this article is designed to inspire and teach our good clients and friends some of the secrets of success and how to be at peace and clear headed daily, and I sincerely hope that this little article can help someone through a tough time or re-focus them on the important things in life. As usual you can leave any comments you wish in this blog thank you for taking the time.
I see investing in Notes and Deeds of Trusts as the future for Real Estate Investors. Wait a minute you say, people have been lending their money to other people since the beginning of time. You would be right, however, over the last several decades we have let the banks lend out our money for us. We have let the banks receive the interest on our money all the while we have been suffering with low returns on our money in the banks. Seems weird that we believe the Banks can do a better job at lending our money to people we don’t know than we can. But it is too complicated to lend money in today’s world some might say. A little known fact that exists in Real Estate law is that there is no usury law for those individuals who lend out their own funds. In other words there are no limits to the amount of interest you can charge on a private note. This may sound a little farfetched, but it is the law, and we are supposed to live by the law of the land. Private money lending has been around since money was invented as a means of commerce. In fact, in the 1930’s movie “It’s a Wonderful Life” with Jimmie Stewart, arguably one of the best Christmas Movies of all time, Jimmie Stewarts character George Bailey was a Mortgage Broker who would lend the town’s folks money out for Real Estate in Bedford Falls. There is a scene in the movie where the “Great Depression” hits and there is a run on the banks and George Bailey is forced to give up his honeymoon and give his savings to the town’s people who wanted their money from the “Building and Loan” (The Bailey Brokerage). He convinces the investors, in the movie, not to take all their money out of the Building and Loan as it is invested in everyone’s homes in town, and that it would be impossible to do so, and that if they insisted everyone would lose as the Building and Loan would go bankrupt. This is a great scene where he explains in layman’s terms how the lending and banking system works.
This is still true in today’s Private Money Lending and Banking world. The law states you can lend your money to others for Real Estate up to 8 times a year without the services of a Licensed Broker. However most would choose to use the services of a Broker as they will be more protected by using a Broker, as the Broker must adhere to a strict set of rules when handling other people’s money. The system is easy with no costs to the lender to use a broker and the yields are far greater than that of a Bank.
What you need to know when deciding to invest in Notes and Deeds? First is the terminology, there are many new words that you should get comfortable with. The first of which is what is a Note and a Deed of Trust. The Note, or Promissory Note, is the written paper or contract between the Lender and a Borrower stating the terms of the loan and how it will be paid back. The Deed of Trust, in California, assigns a trustee, or a Third party to be in charge of foreclosure proceedings and as is the document that is recorded at the county that secures the Note legally. Sounds like a mouthful, but to keep it simple the Deed of Trust secures the Note and are the legal instruments that bind the Borrower and lender together until the loan is paid in full. A Real Estate Broker like MAE Capital Mortgage can prepare these documents and make sure they are legal binding instruments and that they are handled correctly.
The next thing you need to know is how the system works. The system is generally pretty easy. Once you have decided to invest some of your money, you need to know who to give your money to and how it will be handled. The very first thing I would suggest is that you do not give your money directly to a Broker and ask them to invest it. This is very important, as you should be advised of the investment you are making before giving any money. Your Broker should furnish you the RE 35 (Investor Booklet) and RE 870 (Investor Questionnaire), to determine your financial situation as an investor. Then when a Broker presents you with an investment opportunity they should also provide you the RE 851 (Individual loan information form) that spells out the qualifications of the Borrower and the terms of the transaction. Your Broker should also provide you with the loan application, appraisal, and preliminary title report, and credit report and the purpose of the loan. The risks of the transaction should be outlined by the Broker as well, such as the Loan-to-value of the transaction or the equity position you would have if the loan went to foreclosure. Generally, the higher the risk to the Lender the higher rate of return the Lender should have. Conversely, the lower the risk the lower the return, and as an investor your risk assessment will become obvious to a good Broker who deals with this type of lending. So once you have determined that this is an investment for you, and the terms of the transaction are acceptable for your return objectives, the Broker will draw up the legal document for you and the borrower to sign. A good Broker will insist on using an Escrow company that will issue title insurance, to protect you, as well as act as a disinterested third party that will bring Buyer, Seller, Lender, Broker together in a neutral setting at different times. Once the buyer has signed all the legal documents you as the Lender will be instructed by your Broker to wire funds directly to the Escrow company, again your Broker should not have direct contact with your money. At this time your Broker has made sure the Title Insurance is correct on your behalf and that there is a hazard insurance policy in place in case of a catastrophe. Before the loan has funded you, as the Lender, can choose if you want to service the loan or have the Broker (if capable) service the loan for a fee for you. Servicing the loan means the collection of payments and the dealing with the borrower throughout the term of the loan. If you choose to have the Broker service the loan on your behalf there will generally be a nominal fee to do so in addition to a “servicing spread” that the Broker probably built in the loan to receive. For example; a servicing spread is the difference between the interest rate collected from the borrower and the rate of interest paid to the Investor/Lender. If the Note was written at 11% and the Lender was promised to receive 10% the 1% difference is the servicing spread paid to broker every month. To break it down even further as a Lender you agree to the terms from the Broker upfront so there are no surprises. If the loan is a $100,000 interest only at 11% the annual interest collected would be $11,000 and the Lender’s agreement was to collect at 10% the lender would receive $10,000 annually leaving $1,000 for the Broker in servicing spread. Generally, there is a small fee for the Broker to perform the servicing on top of the spread and that generally runs $15 to $30 a month taken out of the payment from the borrower for postage, phones and personnel. For that monthly fee the Lender will get a check every month from the Broker and will never have to deal with the Borrower directly the Broker will. In addition, any late fees collected from the Borrower will be split between the Lender and the Broker and they will generally run up to 10% of the payment, in the example above the monthly payment would be $916.67 a month so the late fee would be $91.67 if the borrower makes a payment after the 10th of the month.
So with the Stock Markets bouncing up against record highs with nothing but downside potential for the next few years and Real Estate Values flat for the most part and rents staying steady where do you put your money to make a 10% or better return? For the savvy Investors they might just be looking at lending their money and acting as a bank and getting the big returns themselves. Another little known vehicle is the Self Directed IRA where you can legally lend your money from your retirement account for a Note and Deed of Trust. I know this works, as I have done just that with my personal retirement account realizing that the returns and fees on my IRA in the Stock Markets have not been acceptable. The allusive 10% return on investment may be only realized if you become your own bank. We would love the opportunity to help you through this maze of opportunity. As always you can leave your comments on this or any of the blog posts or contact us directly for a personal education on this opportunity.
Today FHA loans are still alive and well and are used still today to get people into homes with a small down payment. FHA loans are still a viable loan for those that have a small amount of money to purchase a home. The way a FHA loan works is very similar to Conventional or Private Loans in that a potential borrower must qualify for the loan. When we say "qualify" there are several factors that a lender must review in order for a client to “qualify” for any loan. These factors are but not limited to having shown the ability to handle credit, or in today’s world have a credit score that meets the criteria of an FHA loan. Generally speaking FHA loans are more liberal when it comes to having a good credit score. If a borrower has a low credit score due to circumstances out his or her control and has shown that they are trying to take care of it and that is the only factor with regards to their financial situation they generally can get approved for a FHA Loan with scores as low as 550. There are several other factors that must fall into line before that can happen, however. For instance a borrower’s house payment combined with their monthly bills should not exceed 43% of their gross monthly income. This brings us to verifying income and what is required by FHA. First, a potential borrower must have a two year history of working that could be multiple jobs or a combination of school and a job and must be able to show that the income will be stable enough to maintain the mortgage payment. Next, a borrower has to be able to prove they have enough money for the 3.5% down payment. This money can come from savings or can be a gift from a relative or a close family friend.
We talk about FHA loans being a federally insured loan, but what exactly does that mean when you have to pay the mortgage insurance on a FHA loan? Well to keep it as simple as possible for this little blog I will break it down to basics and not pull out the calculator a bore you to tears. FHA insurance you pay monthly and upfront and goes into two separate insurance pools. These insurance pools are designed to protect the lender’s yield on the loan if there is a foreclosure. This, simply put, means that if a borrower who has a FHA loan lets their home go to foreclosure the lender who is collecting payments on the loan will be insured to continue to receive those payments on the loan even when the borrower is in default. A lender will petition the FHA for a claim on the insurance if a borrower stops making payments on the loan. The house will still go to foreclosure, the borrower will still lose their house but the lender will still get their yield until the house has been sold. There is more to this but for the simplicity of this blog that is as far as I will take you today. Going back to the borrower and the cost of the insurance, we told you there is an upfront cost and a monthly cost. In order to get an FHA loan a borrower must agree to pay upfront mortgage insurance of 1.75% of the loan amount and they can either add it to the loan or pay cash for it, most borrowers choose to finance this fee. The monthly mortgage insurance payment is calculated by using 1.35% of the loan amount annually divided by 12 to get to the monthly premium amount. So it is not cheap to the borrower and they must qualify for the mortgage insurance as well as the mortgage payment as part of the monthly payment plus bills not to exceed 43% of their monthly income.
Ok, so it sounds complicated, and it is really is, but that is why you use one of our highly qualified loan originators to walk you through the process. The Loan Officer will gather your pay-stubs, tax returns, bank statements and W2’s and they will do the analysis for you. The loan officer will check your credit, check your debt-to-income ratio, and make sure you have enough money verified to close the transaction. The loan officer will paint your financial picture for you, so when your financial information is presented to the underwriter, who will approve or deny your loan, it will be approved. Our Loan Officers do this every day, multiple times, so they are experts at what it takes to get an FHA loan so when you are looking for expert advice and guidance please use us to walk you through this process. As usual, if you have comments please post them to this blog.
What is a Conventional Loan you ask? Well in the lending industry it is a home loan that is underwritten to the Federal National Mortgage Association’s (FNMA) and the Federal Home Loan Mortgage Corporation (FHLMC) guidelines. You may have heard of them referred to as Fannie Mae and Freddie Mac loans. These organizations provide liquidity in the mortgage markets in that they securitize home loans and free up capital for lenders so they can lend more money. I know that was a mouthful of technical babble but the bottom line is that FNMA and FHLMC will buy contracts from lenders that collect payments from home owners (loan servicers) at a lower rate than the lenders are collecting from the borrowers. For example, if you have a conventional loan for $100,000 and are making payments at 4% the lender you are making the payments to probably securitized your loan with either FNMA or FHLMC. This means that you pay 4% on the $100,000 and the lender (to keep it simple) sold the principle of your loan to either agency and they make monthly payments to them. So if your payment is $478 at 4% the lender will pay FNMA or FHLMC at say 3.5% $449 and the lender keeps the $29 difference as a servicing fee.
This is how lenders make money and can keep lending money. Because this system exists and is backed by the government it makes Conventional Loans more attractive to investors and rates are generally lower with these types of loans. The rules that govern these loans are also tighter than any other type of loan. The reason the rules are tight is to protect FNMA and FHLMC from losses. Conventional loans will require that a borrower have good credit with scores no lower than 680. Convectional loans will require that the borrower’s funds to close come from the borrower’s own savings in most cases. Conventional loans will require mortgage insurance on Loan to values greater than 80%. Conventional loans will allow for gifts but only after the main borrower’s put at least 5% of their own funds into the transaction. By keeping the rules tight for Conventional loans it will allow investors in FNMA and FHLMC securities to have a more secure investment.
When lenders talk about underwriting your loan they are referring to assigning risk to your loan. Risk is risk of foreclosure and lenders don’t want to have to deal with the losses associated with foreclosure. So the tighter an underwriter looks at a borrower’s credit, income, and the amount of cash the borrower has put into the transaction the less risk of foreclosure there is for the lender and inevitably the investors in FNMA and FHLMC securities.
Your Loan Officer will refer to the FNMA and FHLMC guidelines many times when qualifying you for a conventional loan. The underwriting process is not an exact science but over the years the data has suggested areas of higher risk in a borrower’s credit file, so your Loan Officer might ask you for more documentation on your financial situation to make your loan more palatable or saleable. Mortgage Insurance will be required when a borrower does not put 20% or more down in a transaction. Again this is to lessen the risk to FNMA and FHLMC. Mortgage Insurance is not for the borrower it is for the lender. Although the borrower has to pay for mortgage insurance it is basically to protect the lender from losses. A borrower should view mortgage insurance as a payment on the amount they did not put down to achieve a 20% down payment. Mortgage insurance comes from a different company than the lender, it is from a privately owned company thus we call it private mortgage insurance. The private mortgage insurance company also has their own underwriting guidelines so that is why you will see even tighter guidelines on the higher Loan to Value loans.
In conclusion, be prepared to be scrutinized more on a transaction you put very little money down on. But on the other side the more money you put down when you buy a home the less risk there is to the lender, as they figure you won’t walk away from a large investment. Conventional Loans are a great vehicle to use when you purchase a home with a large down payment as you will not be required to get the additional expense of Mortgage insurance whereas with a FHA loan you will have Mortgage Insurance no matter how much money you put into the transaction. However, if you have less than good credit this loan will probably not be for you as the risk to the lender will be too high.
The National News Media is now just starting to report that Real Estate sales have slowed to near recessionary lows. This is not news for those of us that live this business every day and try to make a living at it. But what does this mean to those that are trying to sell or buy Real Estate? Well to put it simply, it is moving towards a Buyers’ market, which is where potential home buyers will be able to get more out the price of a home and terms than they could have before. Real Estate prices are set by supply and demand so when the demand for Real Estate is high that will drive up prices of homes. Conversely, when demand is low or supply is high prices will have to come down to attract those buyers into buying homes.
So what should a potential home buyer do when deciding that it is time to buy a home, either their first home, or move up, or re-enter after being beat up by the recession? Well it will be different for everyone as each person or family has their own unique financial situation. After you have been Pre-Approved for your home purchase by a reputable lender like MAE Capital Mortgage and you have chosen a highly qualified Real Estate Agent to represent you need to be picky. As a home buyer in this market you can look at homes without the worry or stress that it will be bought up quickly, as you know there are plenty of homes on the market to look at, so be picky. Buying a home is like buying a pair of shoes, when you know they are right you just know it, same goes for Real Estate. You should go by the rule of, “if it is meant to be it will be”. So when you find the right house and you want to make an offer on it go ahead and ask the seller to pay for closing costs, fix those little items that may bug you, get a home inspection and a termite report. All of these items will set you at ease that the house is in sound condition for a long time to come and that you won’t have large repair bills when you move in. Also by asking the seller to pay your closing costs your out of pocket expenses of purchasing the home will be greatly reduced and you might even be able to lower your interest rate at the seller’s expense. In a buyer’s market you can ask for these things and get them if the seller is motivated to sell.
Now if you are trying to sell a home in this market you too have to be patient and make sure you have done your homework. After you have picked one of our skilled agents (selfless plug) you need to make sure your home is priced competitively to other homes in your neighborhood. You might also want to be proactive and get a termite report so you know what is wrong with your home and what it will cost to repair it and get it done before you put it on the market so it can be advertised as a home with a clear termite. This will allow FHA and VA buyers to look at your home which will increase the visibility of your home to the public and increase the number of potential buyers. If you have the resources, have a professional home stager come in and tell you how your house will show the best and follower their instructions and remember that once you have decided to sell you have to make your house look like a house someone else will be interested in to make their home. So if you have a pink wall you just love because that is your taste, you might want to paint it a neutral color and let the potential new home owners look at your home as a house they can make their home with their tastes. Also be prepared to either lower your price, if you have priced the home at the high end of the market, or pay closing costs for buyers or both. In order to sell your home in a buyer’s market you have to make it look more attractive than the rest of the homes on the market in your neighborhood. To do this you either have to have the most beautiful home with all the upgrades in the neighborhood or you have to make it attractive with the price and terms. Either way, keep it in mind your home to you is your palace; to a potential home buyer it is just inventory that they may have seen before.
Ok, It’s a buyer’s market but for how long? Good question and the answer will lie in the economy and more specifically jobs. The more jobs an area has the better the Real Estate market is. When I say jobs I mean career type jobs in industries that will be here for a while. We all hear the unemployment reports and they appear to be getting better according the mainstream media, but are they really? I say no as there are so many Americans that after the recession had to take jobs outside of their chosen field and for less than they were making. Just because the un-employment statistics are going down does not means that the economy is improving it simply means that fewer people are filing or have been kick off due to unemployment running out. The numbers do not reflect those self-employed folks that have to pay for their employees but they themselves are not doing well and do not have unemployment benefits for themselves. If I were to look at the economy and the factors driving it I would have to say that Real Estate will be in this buyer’s market until 2016 at the earliest. I don’t say this as it is an election year, I study the economic cycles and with a 2 year recession/depression (2008-2010) the earliest we can possible to start to see improvements in Real Estate will be 2016 maybe 2017 whereas we should be seeing the improvements in 2014 in a normal business cycle. Ok comments are appreciated as usual.
I have been watching the housing statistics for a long time and I am seeing a very interesting trend of houses falling out of escrow. If you look at the Local Tri-county area of Sacramento you will see that in March there were 1702 homes that went pending and only 1183 sold properties. In February 1281 went pending and only 985 were sold and in January there were 1227 home that went pending and 979 sold. What does that mean you might ask? Well it means that more homes went into contract than actually made it to the closing table. This could mean several things but I am wondering if this has anything to do with the new Dodd Frank rules that went into effect January of this year.
If in fact more transactions are not closing escrow and more are falling out due to the new rules then something should be done to fix those rules. The rules limit the debt-to-income (DTI) ratio to 43% and this could be a factor in less loans getting approved where they would have last year before the rules went into effect. In prior years underwriters could use other factors to determine if a borrower could make the payments other than having to give heavy weight to the DTI ratio. In the past an underwriter could see that if a borrower had a good credit score and money in the bank left over after the close that the likelihood of the borrower defaulting would be less even if the DTI was high. Now even if the borrower has money in the bank after the down payment, even if they have more money in the bank than the mortgage amount, if the DTI is higher than 43% then by law an underwriter cannot approve the loan. The exception would be if the underwriter received an automated approval from FNMA’s Desktop underwriter (DU) or FHMC’s system then the underwriter could exceed the 43%. The problem is, in many cases, DU does not approve the loan because the DTI is too high.
So the only way this can be changed is by changing the law. This would have to come from congress in order to change the rules. Since the Mortgage crisis most of the risk that has traditionally been in the hands of the mortgage companies has switched to laws created by the government. So if a Mortgage Company makes a loan and it goes to default and the government finds that the Mortgage Company’s underwriting may have approved the loan with a DTI higher than 43% then it could be said that the Mortgage Company is at fault for poor underwriting. So if that is the case the Mortgage Company is less likely to make loans where the DTI is higher than 43%. Thus, we will have more loans being declined than we have in the past for the simple reason the Mortgage Companies don’t want to take on additional risk of a high DTI loan. This is now policed, if you will, by the Consumer Finance Protection Bureau (CFPB) and in the case where Mortgage Companies are found guilty of making high risk loans the remedy may be that the loan has to be forgiven and the borrower who would have normally lost their home now owns it free and clear. When lawyers get wind of this there will be lawsuits and lending will get even tighter. This is a case where the government has created rules that are intended to help the consumer will inevitably hurt them. As usual leave any comment you might have.
Here we go again a drop in Real Estate values? With the growing numbers of houses listed for sale and the lack of demand for them basic economics say that prices have to float down to reach the demand. Although the American dream of home ownership is alive and well the ability for first time buyers to get into the market might be hampered by a nudge upward in interest rates at the end of last year (2013). It might be hampered with the tightening of underwriting guidelines that went into effect the first of this year. It further may be slowing due to weather related problems on the east coast. Whatever the economics are behind the slowdown, we are seeing Real Estate sales lower than 2008 when Real Estate sales hit rock bottom.
What does this mean and will it continue? First of all I think we all need the Real Estate Markets to be in good shape as this is a large sector of our economy. Many different industries are dependent upon Real Estate, most importantly the Construction industry. If the existing homes are not selling there is no reason for Builders to build new homes if the demand is not there, nor will it be economically feasible if you can buy an existing house for far less than new home. This poses several problems with other related jobs such as all the building supply companies and the heavy equipment industry to mention a few.
If we are going to see an increase in Real Estate sales we need to see more job creation. If people are working they will be able to afford to purchase a home and those that have jobs will feel more secure in making an investment in a home and not have to worry about losing their job. Good quality jobs are what are really needed in our local economy as well as our national economy. Our lawmakers here in California need to be educated on how to bring good jobs to California and keep them here. Texas is doing a great job in bringing new business to their State, whereas California is still pushing those good quality jobs out of our state with high Corporate Taxes, high Property taxes and high income taxes. Texas is doing such a good job of enticing business’ to come in to their state that they are one of the only states that actually have a housing shortage and construction is booming. It is not a popular view point to give business incentives, especially in California, however, not everyone can work for the government ( I digress). But it is an economic fact that more good quality jobs will mean better housing sales and a better economy altogether.
As we can see housing is driven by jobs and those that feel comfortable in their current job. Across America housing sales are slow overall, but we now know that is not true everywhere. The East Coast can certainly blame slower housing sales on the weather as they have seen record cold weather as well as the Midwest and Plane States. California on the other hand has a drought situation and good quality jobs are, for the most part, concentrated to small pocket areas in the State. Silicon Valley, by San Jose has a housing shortage as they have high quality jobs in the tech industry and they don’t have any more land to build on to support the workforce. San Francisco is basically a commuter City as there is no more land to build on so we see support in housing in the cities that surround San Francisco, which is called the Bay Area. In the Los Angeles area in places close to the beaches you have a limited supply of homes so those prices will be supported with a shortage of supply of Beach type properties. Other than that California is economically depressed as business’ are leaving the State in droves to States like Texas that have open arms and incentives for business. California will also have a building moratorium with the pending drought for 2014 as there is not enough water to support any increases in population.
So if you are looking for an answer to the economics of Real Estate look for the jobs and you will find a prosperous Real Estate environment. I, unfortunately, see Real Estate Sales slowing further into 2014 in California especially in the central valley areas. Since the beginning of the year we have seen an increase in the amount of homes for sale and a sharp decrease in demand to purchase them. In the years past we have had institutional buyers come into the markets and buy homes freely and this created a demand and an increase in home values. Unfortunately, those investors have left our State and have left our markets to deal with a normal amount of houses for sale and a still lowering demand fueled by the lack of good quality jobs. I think it is obvious that California needs to change it’s higher than mighty attitude and go back to attracting business to come to our state by lowering corporate taxes, property taxes, income taxes and make it easier to build in our State. By doing this you would see an increase in Companies that want to come to our State and Companies that won’t want to leave. California is a Beautiful State with its Beaches to its Mountains but its Politics are the worst in the nation and that pushes jobs from our state and devalues our Real Estate. Mother Nature is not helping us this year either with the drought.
To conclude, 2014 will probably go down in the history books as the worst year in California for drought, Real Estate, Job growth, and Politics. There will be bargains to be had in Real Estate; however we will see prices fall with an abnormally high of houses for sale. It will and is a buyer’s market here in the Central Valley of California and prices will fall because of that, and unfortunately foreclosures and Short Sales will increase throughout the year. I don’t want to sound pessimistic but I only look at the economic factors that face us as of right now and where they will take us. If you are in the market to buy a home this year you will have many choices and you will be in command of the process and you should get a great deal on whatever you do purchase. Investors better be ready to buy and hold this year as flipping homes will only be profitable if you get a special deal. Rental property owners will have to invest into their properties to keep their tenants from leaving to find a better deal. It will be a tough year for most in the Real Estate business as competition will be tight for that coveted buyer, but for those Real Estate Companies that diversify (like MAE Capital Real Estate and Loan) and offer different ways for Realtors to make a living and serve their customers better will survive and thrive.
These loans are not for everyone, and for the most part for the informed investor and not designed for the first time Homebuyer. These loans are used for those situations where Banks and other institutions don’t want to lend or won’t lend. Private money has been used for many purposes such as quick closing for those who flip properties, want to buy land, need a construction loan to build, need to buy a commercial building and many more uses. Recently we closed a transaction where we used several different properties and businesses to secure enough money for a client to open a restaurant. We have also used private funds for an RV park and motel. We have also used private funds for quick closing for flip properties so the buyer appears to like a “cash buyer”. The uses of private funds are almost limitless; if someone needs money we generally can find an investor for them.
This brings up a very important point and that is that we use different investors from across the country for the different needs of our clients. Each private investor has an appetite for what they are comfortable in lending on, or the terms they want, so it is important to use a broker, such as MAE Capital Mortgage, to find the source of funds that matches your needs to theirs. There is no secondary market for these loans and are generally held by private people or privately held companies or trusts. In fact, with the recent changes to prime lending laws there are very few companies that actually have the ability to do this type of brokering as it requires regulation under the Bureau of Real Estate and most lenders are regulated by the Department of Business Oversight formerly the Department of Corporations in California. The Agents you will be dealing with to secure this funding hold a BRE license and in most cases also a NMLS license.
Ok so now you know a little about how private money flows, how do you apply for one of these loans? Well it is a little different than applying for a standard mortgage in that you do not have to provide the documentation that is usually required by a traditional lender. Usually, the process starts by the person needing the money providing a scenario of their needs. Once we hear those needs we then go in search of an investor that will fund based on those needs of the client. We then get an “offer” from the investor of their terms of which they will lend on the scenario. Those terms include interest rate and fees. Once we have received the terms from the investor we will present them to the client, and if they accept the terms we then get the required information from the client for the investor. The investor will draw the loan documents and send them to an escrow company for signatures. Once it has been signed and everyone has accepted the terms of the agreement the investor will fund to the escrow and the deal can close. The terms can vary from an interest only 6 month loan to a 40 year amortized loan and everything in between. The costs range from 3% of the loan amount up 15% depending on the risk and type of loan. The interest rates can range from 7.5% to 15% again depending on the risk. Remember the client does not have to accept the terms and these loans are not for everyone. But for those that need to leverage money and can see the long term gain in utilizing this type of financing it works.
Private Money Lending, Hard Money Lending, Collateralized loans, Capital loans, whatever you want to call it is a tool used by real estate investors to leverage their capital so all their personal capital is not invested in one place. This type of lending falls outside of the Real Estate Settlements and Procedures Act or RESPA in that it is used for people that use properties for business use. The business use can be flipping, renting, and operating a business of some sort from the property the money is intended to be lent for. Again, this type of lending is not for those that use or intend to use the property as their primary residence. In fact, unless you can show that you are using the property for a business use this type of financing is not available. For more information or to see if you can get this type of financing please give us a call we would love the opportunity to help you with your Real Estate investing goals.
So what has changed, you asked? Well the single biggest change is the debt-to–income ratio has been capped at 43%. This is the mathematical number that a lender will use to qualify you. It is all your revolving debt (minimum monthly payments), that shows on your credit report, plus the calculation of your new house payment, plus taxes and insurance (PITI, even if you don’t pay those in your payment) divided by your gross monthly income.
This little formula is now the culprit for more people NOT qualifying for a mortgage. There are exceptions to this to allow for a higher DTI. Those exceptions will allow a borrower to have a higher than 43% DTI but not to exceed 45% for conventional loans or 50% for FHA loans. In order to exceed the 43% limitation a borrower must demonstrate that they will have several monthly mortgage payments left in their savings after the loan is consummated or prove that they are not increasing their housing expense significantly from either their prior rent situation or their prior mortgage situation. Oh, did I mention that you have to have an automated approval in addition to those compensating factors; well you do, to exceed a 43% DTI. Sounds complicated and it really is. I have had a real tough time explaining this to my customers sometimes, as in the case of a refinance, a client may have been making higher payments on their mortgage but fail to qualify for a mortgage with a lower payment because their DTI falls outside of the qualifying number.
Another problem with this rule is in the definition of income. Income is almost subjective when you are calculating it for a client as most of the time the income we use is less than what the client is actually receiving. This is especially prevalent in the self-employed folks, or those on commission or anyone that is not on a fixed salary for that matter. A salaried employee is the best form of income to use to qualify for a loan as an underwriter can use the income they make right now, but this is not true if you are paid anything other than a salary. For example; if you are hourly and are not guaranteed a set amount of hours per week then an underwriter will have to average your income over a period of time. Averaging works like this; if you have been working for the same employer for over a year and the employer can break down the hours you work, per week, month, or year the underwriter has a basis to work from. If you worked an average of 33 hours a week for the last year the underwriter will then take your current rate of pay (hourly rate) times it by the average hours per week times that by 52 (there are 52 weeks in a year) and divide that by 12 to get a monthly qualifying income figure. As you can see this may lower the income you think you make as you may have been working 40+ hours a week for the last month but your average is something less. For self-employed people it gets even worse, you have to have a 24 month average to calculate income. If a self-employed person made $100,000 last year net on their income taxes, but only made $25,000 the year prior the average will be $5,208 a month verses $8,333 the amount they are really making now. Also most self-employed people write off things on their tax returns to lower their overall tax liability and lenders have to use a self-employed person’s net income after all deductions to qualify them.
Enough about the boring details, but as they, “the Devil is in the details”. The whole idea of these new rules from the government is to protect people from themselves. Yes, the government figures that we are not capable of figuring out what we can afford and what we can’t. The same is true for lenders; the government has put these rules on private industry as the government believes that private companies are not capable of making good business decisions, even though the industry has been around for over hundred years. I could get into government intervention into our lives here but this is not forum for that (biting my tongue). There are more changes that I will cover in future articles but this is the largest change I have seen thus far. As always you can comment on this topic or any other topic within this blog.
So you have been thinking of selling of your home. But you have no idea where to start, so you turn to the internet and “google it” and here you are. I welcome you as you have found an article written by a 30 year seasoned veteran of the Real Estate industry and the Mortgage Industry. If you want to know more about me you can “google me” or look in the bio section of my site here. Enough about me let’s talk about selling Real Estate. The first thing we need to do is plan our move, yes, we need to know where we are going and what we are going to do for housing once our home is sold. So many people make the decision to sell and have no idea of what they can afford to move into. Most folks see that they have equity in their current home, and that’s great, but you still have to income qualify for a new loan unless you are one of the fortunate ones that can pay all cash for a house. So the real first step in selling a home is to figure what you can buy once your home is sold. So any good Agent/Loan Officer like me (selfless plug) can quickly get you approved for financing before listing your home for sale. By doing this you have a road map of where you can go. Finding this information out before you have sold your home is invaluable.
Ok, you have a plan and know what you can afford to buy when you sell your home. You should also have a good idea how much money you will “NET” from the sale of your home. Your Agent should have given you a good value estimate based on sales in your neighborhood. Now it is time to get you home ready to be shown. The best tip I can give for this is to go with a minimalist theme in your home, meaning take everything out of the house that is clutter. This is the hardest thing for a homeowner as their “stuff” is comforting to them. The house must be staged to allow potential home buyers to envision your home as theirs. This is tricky, as you still live in the house. You should take all personal pictures, trophies, and knick knacks down and put them in a box to move to your next home. A fresh coat of paint is always a good idea as it makes the house look fresh and smell fresh. Rooms that are painted in a theme, or wall papered in your favorite design should be painted over, as home buyers are looking to make your house their home. Again, this tough as your child may have painted his or her room in High School colors or mascot that they find really cool. It has to go, as the potential home buyers may not have kids, or have younger kids, so you want your house to reflect a blank canvas when others are looking to buy it. You have to keep your home in “show ready” condition all the time, because you never know when it is going to be shown. This is probably the single biggest hassle with selling your home as buyers always want to see your home at un-opportune times, such as at night when you get home form work. Put away your laundry when it is done as potential buyers are going to look in your closet and any of those usual hiding places that normal company will not usually look at, but buyers will. If you have extra furniture that you can store in the garage or a storage unit, do it, as by removing extra furniture it makes the house look bigger.
Ok the house is staged, and if you don’t feel comfortable doing this ask your Agent for advice they should know. If you have not signed your listing agreement by now with your Agent now would be a good time to do so. The listing agreement or “exclusive right to sell agreement” is the form your Agent will use (in California). This gives your Agent the rights to market your home for sale on your behalf. The Agent will then implement their marketing strategies that they told you about when you first met. These marketing strategies should include some basic things such as listing your home in the Multiple Listing Service or MLS, this is where other Agents go to see properties for sale to show their buyer clients. Chances are that your Agent will not be the Agent bringing a buyer to the table it will be another Agent that sees your home from the marketing your Agent has done for you. As for paying the other Agent, this will be spelled out in your listing agreement, usually the total commission is split 50/50 with the Agents (Listing Agent and Selling Agent). Your Agent may take some other form of payment for his or her commission; this should be negotiated from the beginning.
Now an “offer” to purchase your home has come in to your Agent. It is your Agents responsibility to show you all offers that tendered. Don’t be offended if the offer comes in lower than the listed price of your home as this whole process is a negotiation. I would recommend to my clients that they counter offer if the terms in the offer doesn’t meet their needs. The single most countered item in Real Estate is price, so if the original offer comes in lower than you can go then simply instruct your Agent to give the potential byer a counter offer with different terms that are acceptable to you. This process of going back and forth is the negotiating process. Once you and the buyer have come to terms you have entered into a Contract. It has taken a lot to get to this point, but you are not done as the buyer will usually be required by their lender to obtain an appraisal on your house. The appraisal itself is basically an outside person’s opinion of value of your home based on sales of similar homes in your neighborhood. Sometimes an appraisal will come in lower than the agreed upon price. If this happens you have to either be willing to lower the sales price to accommodate the appraised value or see if the buyer can come up with the difference in cash above the appraised value to buy your home. Sometimes, if both parties are not flexible a deal can fall apart by both sides holding to their original terms. As a seller you must revert back to your contract as there might be an appraisal contingency in the contract that states; if the appraisal comes in low the buyer has the right to back out of the contract and not buy the house for the original agreed upon sale price. You do have the right to dispute if you are the one who paid for the appraisal, but if you did not pay for the appraisal you do not have that right. So as a seller beware if you are pricing your home on the high side of the market that this scenario can happen.
Next, we have made it past the appraisal at this point and are steaming towards the close of escrow. The buyer still has to go through final underwriting, even though they gave you a pre-approval letter in the beginning, anything can happen with underwriting. If the buyer’s loan gets denied by the lender at this point we have wasted about 2 to 3 weeks unless we took backup offers. A backup offer is an offer that was not originally accepted by the seller (you) and the potential buyer told your Agent to hold on to it in case the accepted deal does not close. That would be bad, so let’s assume here that the loan is approved and all is good. The next step will be for the buyer’s lender to draw the loan documents and send them to the title company. You then will be called in to sign off the title of your home. The buyer’s lender will review all the signed paperwork and fund the loan. Once the Title Company receives the funds, they then record the transaction with the county and the home is no longer yours, and you get your proceeds from the sale. If you have found your next home and are ready to close on that home you can instruct the Title Company to wire the funds to close on your next home. As you can see this process can be a little tricky so if you are not represented by a good Agent, like me (another selfless plug) then you could be completely lost and liable for any or all legal mistakes made. Having an Agent is just smart as there are so many disclosures that a seller has to provide to a potential buyer, not to mention that Agents do this for a living and are up to date on all the current laws and the amount of commission that is made on the sale is nothing to what the legal fees could be if you have to defend yourself in the court system.
I am Gregg Mower and I am a licensed Real Estate Broker #00953953 and I also hold a National Mortgage Licensing Number NMLS # 246961. I have been licensed by the former Department of Real Estate and the new California Bureau of Real Estate since 1984. I also hold the lending license that allows me to do Mortgage Loans on Real Estate as well. I own MAE Capital Real and Loan and look forward to helping you sell your home and plan for your next one, as well as approving you for the financing for your next home and finding it for you. Please call me at 916-849-7170 for more questions.