Category Archive: Real Estate

Jul 23

Sub-Prime Mortgages

Sub-Prime Will Return

The overall condition of the economy is creating an environment that will hasten the return of the sub-prime mortgage.  I was never an advocate of the sub-prime industry but it served a need.  That need is stronger today than ever before.  I predict sub-prime mortgages will return soon.  They may be called something different, may be touted as new and improved, but a rose is a rose.

There are many factors that will push my prediction forward.  Unemployment is very high with disposable income being the lowest it has been in modern time.   This is causing many homeowners to defer maintenance on their home opting instead to put food on the table.

Home inspectors are being super critical as their industry matures, causing many pending transactions to implode.  Not long ago the National Association of Realtors reported the highest fall out ratio since they have been keeping stats.   The number of real estate listings reported as a pending sale then changed back to an active listing is where that bit of information comes from.

Buyers and sellers are both more difficult than I have ever witnessed prior to the last couple of years.  Prior to last year I never had a buyer and seller disagree on a day and time for closing the deal.  This year it has been difficult to get both sides on the same page on any subject, let alone a closing date.  I mentioned in an earlier post that people searching for information on Power of Attorney or POA is the number one subject people are looking for when they visit this site.  They  just don’t want to attend the closing!

Another factor is the middle ground on credit scores seem to be disappearing.   I see either very high or very low credit scores, not much in the middle.  This is a personal observation; I haven’t read anything that supports this.  You would expect a general distribution, a third low, a third in the middle and finally a third on the top.  Not what I see these days, either very high above the top credit tier or very low below the minimum threshold.  Last week I saw several above 800 or in the high 700’s and an equal number in the low 500’s dipping into the high 400’s with none in the mid 600’s.

Finally, the wreckage caused by foreclosures and loan modifications will linger for at least a decade.   The buzz topic has been short sales, but in reality they are a very tiny slice of the pie.  They are a symptom of the times but I don’t think they are as serious to the overall market as the other factors mentioned above.

All of the dynamics mentioned here have one result, stress.   Sellers want to sell and buyers really want to buy but never has it been as stressful even back in the days of very high interest rates.

As the gap widens the mortgage industry will figure out a way to serve the demand that is having trouble moving above the minimum credit score threshold.   That segment of the buyer pool is the only one that is expanding.  The market conditions are not pushing people upwards, only down.   Individuals that have never been late on credit obligations are suddenly finding themselves below the credit thresholds.

The Solution

I don’t have an answer to the overall problem, but I see lots of opportunity.  A few people are doing very well, but most are not.  What I know for sure is the market has changed.  People have changed.  Those that are moving forward have a chance to improve greatly, interest rates are low and prices are good.  It has never been a better time to buy in the last 50 years.

Part of the solution to get things moving is going to be the return of some of the aspects of the sub-prime industry.  I am not calling for a movement, just predicting this is going to happen.

Jul 15

Power of Attorney AKA POA

What is a Power of Attorney?

A Power of Attorney is a written document authorizing one individual, referred to as the Attorney in Fact to act on behalf of another regarding legal matters like signing a contract, deed or other instruments.  The signature of the Attorney in Fact is binding on the part of the individual that conveyed the POA.  There are different forms of POA’s, they can be general and all inclusive or specific for a single transaction.  They must be notarized to be binding.

In theory, when an Attorney in Fact signs on behalf of another it is the same as if the individual signed for them self.  Obviously a POA is a very unique document and requires attention to detail not only in content but in form as well because the agreement signed using one is binding on the party that is not signing on their own behalf.   If a mistake is made it could be a binding error.

When to Use a POA

You should not use a POA unless absolutely necessary.  If a contract or document is important enough to require a signature it should be signed by the individual that is bound by the terms of the agreement.  There are times when this is not possible, that is when one should be used.  For example, an individual that is in the military and is stationed overseas would not be able to attend a real estate closing back home, a POA would be required if the closing is to proceed.

Other examples of when a POA is appropriate would be for an individual that is senile or incapacitated by illness or injury to the point they are not able to conduct their affairs.  In events like these it may be necessary to obtain a court order appointing a relative Attorney in Fact or some other legal capacity.  Another example, in the event of relocation where one spouse moves in advance while the other remains behind to complete the sale of their home.  There are many circumstances when using a POA is appropriate.

When Not to Use a POA

A power of Attorney should only be used if you can absolutely not be present for signing the agreement.  I am not an expert in legal matters, only those regarding the real estate mortgage process.  In the past year I have had more buyers and sellers inquire about using a POA than in the previous 20 years combined.  This is very strange.

In every case this year the request to not attend a closing was not because of distance but simply because they individual did not want to attend the closing.  It doesn’t matter what you would rather do, nothing is more important financially than a real estate closing.   Think about it, if you earn $20 an hour compared to buying or selling a $150,000 house, which is more important?  Take a long lunch hour or use a sick day and attend in person.

One lady that was selling a home told me she just didn’t want to be in the same room as the buyers.  Okay, I can understand that, but there are other ways to accomplish non-contact.  Recently I had a buyer in one room the sellers in another room and the Realtors wanted a little privacy for a chat so we put them in yet another room.  That was a first for me.  I have put many divorcing couples in separate rooms but never used three rooms until then.

Using a POA for Real Estate is NOT Automatic

Lenders do not want the buyer or seller to use a POA.  Especially when it comes to the buyer signing the note and mortgage, most lenders want an original signature of the person that is borrowing the money.  Do not assume that you can use a POA as a buyer or seller.  This is something that should be reviewed and approved long before arriving at the closing.

The actual POA document should be reviewed in advance by the closing attorney or Title Company that is going to officiate the closing.  In addition to this step it should also be pre-approved by the lender long before setting a closing date.  Power of Attorneys are custom documents, no two are exactly alike.  There are different types, some are general in nature while others are specifically designed for a single transaction.  A POA for a real estate transaction should be very specific, spelling out who, what, when, where and how.

Obviously, if an attorney is acting on behalf of a title company they will be very picky about the content of a POA.

Who Can Act as Your Attorney in Fact?

The best individual to act as your Attorney in Fact would be your spouse.  Next would be a very close blood relative, a parent or sibling.  Anyone you appoint that agrees to accept the responsibility is allowed as long as they do not have a financial interest in the transaction.  For example, a seller should not act on behalf of the buyer regardless of the relationship.

What about your Realtor?  This is another bad choice because they are receiving a commission from the sale.  It happens, but it is not a good choice and may not be allowed by the lender or closing attorney.

How about a friend or co-worker?  These are not as good as a close relative but are better than the Realtor.  Keep in mind if something goes wrong you are stuck with the consequences.  Is that really something you want to put on the shoulders of a close friend?

Helpful Hints for Using a POA

If you must use a POA have it prepared by the attorney that will close the deal.  This would eliminate the document being rejected by the closing attorney over form or format.   If this is not possible have it prepared and signed well in advance and provide the closing attorney a copy as early as possible, do not wait until the day of closing!

If it is not possible to attend the closing the documents may be sent overnight to the absent party, they can sign in front of a notary and returned to the closing attorney.

I hope this information is helpful.  If you have questions just give me a call, my direct line is (502) 753-4127.  If you found this information interesting please share it with others.

Jun 23

Overpriced Listings

Twice this week I ran across buyers that were attempting to purchase properties that were obviously overpriced. Declining property values have been a growing problem for everyone in the industry for the last few years.  Issues with appraisals run neck-and-neck with problems regarding the condition of the properties. 

The reduction in property values created an almost cottage industry called short sales.  Short sales have been around for as long as there have been mortgages but they have never been as main stream as they are today.  Lenders and the real estate industry were not prepared for the magnitude of the problem.  They have been playing catch up from the very beginning.  

A short sale is what happens when the value of the property is less than the balance of the mortgage and the seller asks the lender to accept less than is owed so the property can be sold.   Explaining this to a seller is not an easy task for a Realtor.  The idea that real estate is the best investment because “They don’t make any more of it” is hard wired in to all of us. 

Not all overpriced listings are an attempt to avoid a short sale, in fact most are simply an indication of greed.  The seller just wants more than the property is worth.

The rules for lending are very specific regarding the value of the real estate being pledged for a mortgage.  The lender must use the lower of the sale price or appraised value when computing the loan-to-value for the mortgage.  This doesn’t mean the buyer cannot pay more for the property than it will appraise for, it simply means they cannot use the inflated price for calculating the size of the mortgage.

How Mortgage Amounts Are Calculated

Let’s assume a property priced at $110,000 but will appraise for only $100,000.  On a standard conventional fixed rate mortgage the minimum down payment is 5%.  Okay, that is the flip side of saying the maximum loan amount is 95%.  But the definition is 95% of the sale price or the appraised value whichever is less.  If the property only appraised for $100,000 then the maximum mortgage is $95,000.  The buyer could still purchase the property for $110,000 but the amount needed for down payment would be the difference between that figure and the maximum loan amount which works out to be $15,000.  

If the property had appraised for $110,000 then the required down payment in our example would have been $5,500, a far cry from $15,000.  This is the primary reason most properties that are priced above the market value will not be sold at the inflated price. 

Some Realtors Will Take a Listing at Any Price

Listings are inventory and the more inventory a Realtor has the more inquiries they will receive from buyers.  Some Realtors will list a home at any price while others will not.  It is a numbers game for those who choose to ignore the comparable sales.  If a buyer calls about a Realtor’s overpriced listing the agent may be able to sell them another home that is not overpriced.  Although there is nothing illegal about taking an overpriced listing it doesn’t help the owner of the property or the marketplace only the Realtor taking the listing.  

The seller is hoping for a miracle, somehow their property will sell for a significant amount above what similar properties are selling for.  Even if they are lucky enough to find a buyer that loves the property a problem will occur when the buyer applies for a mortgage.  Okay, the seller hopes a cash buyer will step up that doesn’t need a mortgage.  Possible, but cash buyers think they are special because they are paying all cash and therefore deserve a bargain, not compatible with the seller’s plan.   

What Can a Buyer Do?

This article began because a couple of buyers asked what to do because they found a property they liked but the price was significantly above the market value.  There is actually a fair solution when you receive a counter offer from the seller that is higher than what you believe is the actual value.  Accept the seller’s counter offer provided the seller or the listing Realtor pays the buyer’s lender for the appraisal upfront.  

Oh man!  Can I kick a hornet’s nest or what?  Ask the seller’s Realtor to pay for the buyer’s appraisal?  You must admit that is out of the box thinking.  Leave it up to the selling side, let them decide who is going to pay it, or maybe they split the cost, it doesn’t matter to the buyer.  This little maneuver will at least initiate a serious dialogue between the seller and the listing Realtor about the true value of the property.

I had to toss the listing Realtor into the mix because the problem never would have surfaced in the first place if they had not listed the property for more than it was worth.    

The clause would also indicate that in the event the property does not appraise for the agreed upon price the seller will have the option to lower the price to the appraised value or release the buyer from the contract.  This solution protects both sides; the buyer is not forking out money for the appraisal on an overpriced property yet both parties have the possibility of discovering how much the property will appraise for.  Win, win.   

Please share this article with others if you like out of the box thinking.

 

May 23

Attend Your Closing

Recently had another closing when one of the sellers did not attend.    The closing attorney was kind enough to have the deed and closing statement prepared a day in advance so the missing seller could come by and sign off.  At the real closing the next day the seller made a $5 change to the closing figures! FIVE DOLLARS!!!

What a pain in the neck stuff like this is when the lender is trying to meet all of the federal regulations regarding the closing.  The closing was delayed because of the seller and then one of them decided they had something more important to do at the time they choose, we showed up on time.  What could possibly be more important than closing a half million dollar deal?  Couldn’t get a baby sitter? Had to water the lawn? I never did catch the conflict; it was glossed over by the attending side of the couple.  But it didn’t make sense to anyone that was in attendance.

If you lose money because you do not attend the closing there is no one to blame but yourself.  This little incident could easily have caused everything to go back to the underwriter.  It took the seller six months to find a buyer, another month to get to the closing table, it was not a surprise.

Compare the stacks.  How much was the stack worth that the missing seller had to attend to compared to the stack of money the buyer and I brought to the closing table, $50 versus $500,000? That doesn’t sound right does it?

A change to the figures could have required a change to the closing statement, thus requiring the missing spouse’s signature on the new numbers, therefore no closing that day.  The closing attorney accommodated the problem by issuing a refund check for the $5.

I have no idea why so many buyers and sellers are trying to not attend the closing.  It has happened to me more times this year than the previous 20 years combined; I would say that is a major change.

Ramifications

Could be many problems if the closing is delayed because one of the parties does not attend.  A closing late on a Friday afternoon might require rolling over to the following Monday.  That might require switching dates on movers, three extra days of interest on the seller’s mortgage.  Or how about this one, the buyer walks!  I have seen it happen for a lot less.

Attend your closing!

May 15

4 Ways to Derail a Loan Application

Everyone has heard horror stories about loan applications taking forever and what appears to be endless requests for additional documents.  What you have not heard about is the source of most of the problems.  Over the years I have noticed there are a couple of reasons that pop up again and again. 

I have broken down the four main reasons that can slow down or derail a loan application.

The first cause is missing documents.  All loan applications for a home mortgage must include documents that support the information contained on the application form.  For a well-qualified borrower the support documents are minimal and fairly standard. Most home buyers have copies of everything we need to process a mortgage.  But if we are not provided copies by the borrower we must get them from another source, that requires sending out requests, waiting for the mail and cooperation from a third party that is not a part of the transaction.  If you do not give us a bank statement we must get it from your bank, good luck speeding up that process.

The second reason is missing pages from the support docs that are supplied.  This one drives everyone crazy.  We need the entire document.  A good example of the most common missing page is the last page of the bank statement.  It often says, “This page left blank intentionally.”  For some reason that statement causes borrowers to leave it out, but we do not know it is blank if you don’t give us a copy.  If the first page says page 1 of 5 we need all 5 pages.  If the borrower leaves off page 5 then we can’t use the other 4 pages either.  Then we must ask for the missing page, meanwhile if the cutoff date on the statement you furnish indicates another statement has been sent, we need the new one. 

Any little side trip that slows down the process might cause one or more of the documents we already have to expire.  Everything in the loan file must be current. If it takes six weeks to process the loan and the original bank statement was 3 weeks old when we got it, we’ll probably need two more bank statements before closing.     

Other common examples of frequently missing pages are schedules in tax returns.  This one is clunky because you must read the entire tax return to see if anything is missing.  That is easier said than done, try it sometime, shuffle up your return and take out a random page without looking at it.  Now look at the other pages and figure out what is missing.  If you want to slow down the loan processing leave out a page or two from your tax return.    

The third thing that slows down the process is conflicts between the information in the application and what is contained on the support documents.  All of the information contained in the loan application must be verified by cross checking it against the information on the support documents.  For example, if the borrower says they earn $15 per hour and that matches the figures on the pay stub everything is hunky dory.  But if the pay check shows $10 an hour that raises a red flag and slows down the process.

Not loan ago a fellow told me he earned $22 an hour, his pay stub clearly showed a pay rate of $16 an hour and his tax return from the previous year indicated a $12 an hour pay rate.  All three rates could be correct if he received raises or a promotion.  But we need to document the correct figures.

I have been given bank statements that show a different address than where the home buyer says they live, I have been given the wrong social security number.  Lord help the guy that gave me the wrong birth date for his wife!  The list is endless.

You’ll love this one; a guy told me he was single with no kids.  His tax return was filed jointly with his wife and listed 2 children.  Opps, something doesn’t match up.  How fast do you think that will move through the system?   He was separated but not yet divorced. 

The fourth reason is closely related to #3, misrepresentations.  The first three can be honest mistakes, this one is an outright attempt to commit a crime.  It can come in many flavors.  Recently a lady told me she had been on the same job for 3 years, turns out only 3 months, oopsie.  We do verify this stuff you know.  When I questioned her about the discrepancy she said she thought 3 years sounded better.  Really?  I can’t count the number of times people have told me they have enough money for the down payment when they don’t.  That one is always good for a laugh.

We must verify everything you tell us, EVERYTHING!  All of the data must match.  Close only works in horseshoes and hand grenades.    

Here is how to streamline and speed up the process.  Gather everything before filling out the application and use the numbers from the support documents to complete the app.  If the most recent bank statement shows an ending balance of $9,400.12 put that figure in the loan application, not $10,000.  That way the bank statement matches the loan application and it speeds up the process.  What if you really have $10,000 because of a recent deposit that isn’t on the statement?  So what?  It doesn’t matter unless you need the extra $600. 

Most buyers apply for a mortgage and then gather support documents.  By following my suggestion and reversing the process it is possible to cut out weeks from the process.  They are called support documents because they are supposed to support what is in the loan application.  If you use the actual figures from the support documents to fill out the loan application they match 100%.  

 

Apr 24

Conventional Loan Apps Jump Up

For the past couple of years my FHA loan applications have outnumbered conventional loan apps two or three to one.  This month they are equal, a big jump forward on the conventional side. 

All of the Realtors that refer their clients to me are much busier than last month and last month was very good.  Interest rates are just a little above the level they were in January, still very low.  If the demand continues to increase there will be upward pressure on rates.  It is a good time to move before the rates move.

I was in La Grange this afternoon, saw several new homes going up.  Good to see some new construction.  I have had more calls about end loans for new construction this month than the entire previous year combined.  Still not back to the levels long ago, but a definite improvement.

  

Apr 19

Mortgage Calculator Added in the Buyer’s Section

Over the years I have been asked about 100,000 times, “How much is the payment?”  Obviously that must be an important question if every client wants to know.  I added a mortgage calculator in the Buyer’s section.  The page contains a link to current interest rates and an online application for anyone that wants to apply or be pre-qualified for a mortgage.

We want to provide the very best resources for anyone buying, selling or refinancing a home in Kentucky. Please let us know if there is something you think should be added.  

  

Apr 01

Lease Options – Sellers

Why Sellers Offer Lease Options  

In the previous post we looked at lease options from the buyers’ point of view.

There are two main reasons sellers will entertain a lease option, profit or necessity. Both reasons attempt to exploit the strong desire for homeownership. The number of buyers that can’t qualify for a mortgage is swelling.  The overall economy is not great, unemployment is high, even people that had good credit histories are now being squeezed.

Any shift in the market creates both problems and opportunities. Real estate is no exception.  There is an abundance of properties for sale, the amount of inventory far exceeds the number of qualified buyers.  Many sellers that are unable to sell their homes are leasing them so they can move on.  People relocate for many reasons, jobs, health, family or maybe just to get a better view.  The problems created by the recent meltdown have made it necessary for many sellers to take measures they would never have considered a few years ago.

It has also created a niche that is being exploited by many investors out to make a profit.  There is absolutely nothing wrong with making a profit, our entire financial system is based on the concept of profit.  However, there is a fine line between a legitimate profit and taking advantage of someone’s misfortune.  We can find plenty of evidence that is happening on a daily basis.  

Profit  

Some investors understand the opportunities very well and are able to exploit the circumstances. Since World War II real estate has been oversold.  The downside of homeownership, the liability factor, has been overshadowed by the industry’s sales pitch.  The result is an almost rabid desire for homeownership.  The most common forms of mortgage fraud are for ownership, not profit.  This extreme desire to own a home is the foundation that creates the opportunities to be exploited. People will do anything in order to own a home.

Many people will try to work around the very mortgage system that protects them.  Mortgage underwriting guidelines are actually very liberal in spite of everything you may hear about how hard it is to be approved for a loan.  The actual hard line numbers in the guidelines are more liberal today than they were when I first became a loan officer in 1991.  If you do not qualify for a mortgage it may be a good idea not to circumvent the system that is protecting you.

However, in the real world that isn’t how goes down.  Already mentioned, some people will do anything in order to own a home.  This is why we find plenty of investors willing to offer a lease option.  They can sell a home without really selling it.  

Here is how it works; the investor buys a home at a good price, usually way below market value, makes any needed repairs then offers to lease the property with an option the purchase.  The option will usually be at or often way above the market value.  The “buyer” enters a lease and makes a very sizable non-refundable payment for the option to purchase.  If the buyer does not exercise the option to purchase the investor keeps the money paid for the option.  The investor also receives full market rent, sometimes a little more rent than a market rate.

It isn’t unusual for a portion of the rent to be a credit towards the purchase price.  The investor knows the likelihood the buyer will actually close on the purchase is slim so it doesn’t matter. 

It should be obvious once you understand how it is structured that it can be easy to exploit.  The investor can rent a home; collect a huge hunk upfront and “sell” the same house multiple times. 

Why do so few lease options result in a transfer of title to the buyer?  It starts with the beginning motivation; the buyer doesn’t qualify for traditional financing.  Something you may remember from high school a body in motion…

The buyer is overly optimistic and underestimates the seriousness of their original problem.  A well-meaning loan officer may have told them they will be eligible for financing in two years.  They structure the lease option for how long?  Two years of course!

But they didn’t listen closely, the minimum time line was two years, that doesn’t mean “their timeline” is two years.

The profiteer will take advantage of this combination of keen desire and over-optimistic timeline to structure a deal that has a very high probability of not working out for the buyer.  The investor wins either way, they get money up-front, agree to sell the property for more than it was worth in the beginning and also receives hefty rent that doesn’t reflect the big down payment.  If the buyer defaults the investor wins if the buyer exercises the investor wins.

In the next post we will look at sellers that offer lease options out of necessity.

Mar 29

Lease Option or Rent to Own

Two buzz topics these days are lease options and rent-to-own.  A huge number of posts on many of the real estate forums ask questions on these subjects. About once a week I get a call from a prospect wanting to know if I offer one of these types of transactions.  

The explosion of chatter on this topic indicates a need for accurate information for both buyers and seller.  This post will discuss the topic from both sides.  We will begin by looking at the actual structure of the contract.  

 What is a Lease Option?  

Lease options are real estate transactions. A lease option is simply a lease agreement for a property containing a clause that gives the tenant an option to purchase the property at some time for a specific price.  In theory it is a simple agreement.  It can become complicated quickly because people are involved that have different agendas.  

The first part of the agreement is the lease, a contract where the tenant promises to pay rent to the landlord in return for the use of the property. It is a liability that obligates the tenant to make timely payments.  

The second part of the agreement, the option to purchase, may or may not be contained in the lease.  It could actually be a totally separate contract with a different timeline than the lease.  For example, the lease could cover a two year period and the option to purchase could only be valid during the second year of the lease.  The option part of the contract sets out the purchase price the parties have agreed to in addition to the timeline.    

It is easy to see how complicated the contract(s) could become because the combinations are infinite.  Here is an example of how the terms can go sideways; the lease is for a one year period and the tenant has the option to purchase the property every Thursday during the first year with the price increasing by $500 every week.  

Of course that is a silly example but no stranger than what tenants and landlords actually put in writing every day.   

Rent to own is actually a misnomer when used to describe a real estate transaction.  Rent to own contracts are actually rental/purchase agreements for consumer items such as cars, furniture or appliances.  It is easy to confuse the two agreements and landlords may actually draw up a real estate contract and use the words “rent to own” in the body of the agreement.  A seller is willing to call it anything the prospect wants to call it, the results are the same.  The fact that the tenants/prospects are not aware of the difference shows exactly how dangerous this niche can be.       

Why Tenants/Buyers Want to Do This  

The primary reason “buyers” want to do this is because they want to be a homeowner but have been turned down or know they are not eligible to arrange a mortgage to actually purchase the property.  We are going to refer to the tenant in the rest of this post as a Buyer.  They are fairly upfront about why they seek a lease option, they aren’t eligible for financing, usually followed by some excuse as to why they aren’t.  In the typical buyer presentation it is only for a year or two, just a temporary situation beyond their control.  Their proposition may or may not be true because it is based on a set of assumptions a year or two down the road.  Anyone that has watched the news lately should be aware the rules in the mortgage world are changing frequently, it seems like daily to those of us in the industry. The mortgage guidelines in place today will assuredly not be the same next month let alone in a year or two from now. 

 Another reason the buyer is attracted to this type of transaction is because many sellers do not have the ability to run a credit check on the buyer.  Most of the time the buyer has been turned down for a mortgage because of something on their credit report, something the seller won’t see.   

Another reason  some buyers want to use this method is more sinister than keeping the credit report hidden.  They are trying to hide assets.  Sometimes the reason a buyer isn’t eligible for financing from a traditional lender is because they have recently defaulted on their previous mortgage, a strategic default where they hide money from their previous lender.  I frequently get calls from people that have just gone through a foreclosure and have 20% or more for a down payment.  When asked for the source of their down payment it becomes a topic they do not wish to discuss.  

The underlying motivation for all of this topic is a fear of being out of the market, a fear of not being a homeowner.  

Pitfalls for the Buyer  

The biggest problem, perhaps the root of all that follows is a lack of understanding of how the process actually works.  Buyers assume they understand everything there is to know about the process, when in reality most don’t even read the contract.  I know this is true because buyers don’t read mortgages either.  I have attended a couple thousand real estate closings and only once have I witnessed a buyer actually read the deed and the mortgage.  One out of a couple thousand!  

Most real estate transactions are closed based on trust, not the review and understanding of the actual contracts.  This element of trust works for the most part while dealing with a traditional lender because they are heavily regulated.  Obviously this is not the case when dealing with a seller.    

The buyer becomes so pre-occupied with “the deal” they are unaware their personal level of risk increases when they try to work around the system that provides them protection when dealing with a lender.  If you ask any borrower they will tell you the mortgage guidelines protect only the lender. They believe the rules only restrict them for doing something they want to do, finance a home. 

The mortgage guidelines actually protect the borrower a lot more than they do the lender.  If a mortgage goes in to default the lender will survive, one mortgage represents only a tiny piece of equity for the lender.  But from the borrower’s point of view a default is financial ruin and can be a 100% loss.  From this perspective the guidelines protect the borrower a lot more than they do the lender.

Overpaying

A desperate buyer that is focused solely on putting together a deal while trying to work around the system is far more likely to overpay for a home.  It reminds me of a man I knew that would tell a lie when the truth would have helped more.  So much energy and effort gets spent working on finding and putting together the deal that the important facets like value are pushed aside.  The checks and balances of the mortgage system are not there to protect the buyer.

Seller Stability

The buyer assumes the seller is in better financial condition than they are simply because the seller owns a house. In reality the seller may be in worse shape than the buyer.  Truth be known the buyer has little or no experience in determining the financial strength of the seller.  The seller could be six months behind on the mortgage for all the buyer knows.

How to Protect Yourself as a Buyer  

My first suggestion is to look inward, the real answers are inside all of us if we are willing to listen.  That little voice inside of you is screaming “Don’t do it!”

But the desire is so strong most people won’t listen, so if you head down this road, protect yourself at ever turn.  Look at the deal the same as a lender would.  Lenders weigh four separate segments in every real estate mortgage.   The first section is Credit.  In this case you should evaluate the seller’s credit worthiness.  Not easy to do because you won’t be able to see a credit report.  So do the next best thing, look for public records on the seller, visit the county clerk’s office and see if there are any pending law suits.  Specifically if there are any liens against the property.  Ask the neighbors living on either side of the house what they know about the seller.

The next is Capacity, can you afford the payment.  More importantly, can the seller afford the payment they have against the home?  Tricky, figure out a way to ask the seller if they owe anything against the home.  You should have discovered if there was a mortgage during the visit to the clerk’s office.   Now it is simply a matter of a candid discussion about finances.  If you are open and honest with the seller they are more likely to be honest with you.  Let them know you are concerned if the payment they are making is higher than the one you are paying them.  So from the Capacity view, does the financial proposal make sense?  Can you afford the payments? 

The third section is Collateral, is the house worth what you are paying for it?  This is a lot simpler than you think, order an appraisal just like a lender would require. No one does this when they enter a lease option, it will protect you more than you realize.  Once you have the appraisal, read it, read every word on every line, every number and then read it again.  It would be a very good idea to have a property inspector and a pest inspection as well. 

The second part of the Collateral process preformed by a lender is the title report.  Order a title report.  Read it. 

Lenders also review the purchase contract, in this transaction review the lease and the option agreement.  Make sure you understand it, have it reviewed by an attorney.   Yes, it cost a lot of money, so did the appraisal and inspections.  What will it cost not to do these things? 

The last section is Cash to Close.  Are you betting on the come? Do you have the money to close the deal both now and later?   Will you have a cash reserve after making the down payment?

Act as if you are the lender and determine if your position is safe, does it make sense, what is your exit strategy? 

Check back, the next post will look at this type of transaction for the seller’s perspective.

Mar 06

KHC Home Buyer Tax Credit

Kentucky Housing Corporation (KHC) is making available a tax credit to home buyers throughout the Commonwealth.  The tax credit reduces the amount of federal tax a home buyer must pay to the federal government.  KHC provides the home buyer a Mortgage Credit Certificate (MCC) which reduces the amount of Federal income tax by a substantial amount.  The result is more available income to qualify for a mortgage loan.

The tax credits are not mortgages, or any kind of debt for that matter. In fact, the net effect provides the tax payer/home buyer additional cash flow that could be used to pay off the mortgage quicker.  One way this can be accomplished is to have your employer reduce the amount of tax dollars withheld from your regular pay check.  This move will increase your take home pay even though the gross income remains the same.

Under the current federal tax code the government allows a homeowner to deduct the interest portion of their house payment from their income when filing their tax return.  A deduction is different than a tax credit.  A deduction is a reduction of the amount of income that is taxed.  A tax credit is reduction of the amount of tax you owe, big difference.

The MCC is a tax credit equal to 25% of the interest you pay up to a maximum of $2,000.  If the amount of mortgage interest you pay during the year is $8,000 then the tax credit would equal $2,000.  You could still deduct the remaining $6,000 on your tax return. Let’s say that you still own $2,500 in taxes after taking the deduction, here is where the tax credit kicks in, the amount of tax owed drops to $500.

The MCC stays in effect for the life of the loan as long as you continue to live in the house.

In order to be eligible to apply for the program you must be a first-time home buyer or have not owned a home in the last three years.  The sale price of the home must not exceed $243,000.  There are also income limits, 1-2 person household income up to $83,400 and a 3-4 person household is up to $97,300.

Of course the home must be located in Kentucky.  Take advantage of this exciting program offered by KHC.   Low down payments, low interest rates and a tax credit, now that is a trifecta you can count on!

Buying a property in Kentucky and want to be pre-approved for a mortgage and or tax credit? Visit my online application site or printand use this simple form to get started. If you prefer we can do it over the phone, call my direct line during normal office hours, (502) 753-4127.

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