When it comes to saving for a home most people focus on saving for a down payment. While your down payment is a big part of determining your home affordability, it’s not the only component. Between closing costs, fees & taxes you can expect to pay an additional 2-5% of your home price at the closing table. In many cases, some or all of these closing costs must be paid at the time of closing your loan. Your cash to close your loan includes BOTH your down payment and any closing costs.
So what’s included in the closing costs? And how do you calculate your cash to close? Read More
The type of property you choose can affect your home affordability, the interest rate you qualify for, and what loan products are available to you as a borrower. Underwriting the property is just as important and underwriting the borrower applying for a home loan. When trying to understand if a property is the right fit for a particular mortgage there are three major considerations: occupancy, property type, and homeowners association dues.
After you give the lender your intent to proceed they’ll order your home appraisal. This is a critical (and potentially frustrating) step in the home buying process. Let’s break down the entire home appraisal process, why it matters for the mortgage lender, and what it means for the home buyer and seller.
Maybe you fell in love with the first home you saw. Maybe it took you months, but your patience was rewarded with a beautiful house that hit all the sweet spots. However long it took, you’ve now reached the moment of truth – you’re ready to make an offer on a house.
You knew this time would come, but what does “make an offer on a house” really mean?
Before you start looking for a home in earnest, though, you should get pre-qualified for a loan. Ideally you’ll get pre-approved. To do that, you’re going to need to talk to a loan officer. What’s the difference between a pre-qualification letter and a pre-approval letter? And how can you find a good mortgage lender or loan officer to work with? Let’s break it down.
Each homebuyer is different, and the next wave of first time home buyers has the potential to throw the mortgage banks for a loop. With hoardes of freelancers & contractors marching towards self-employment, or companies like Uber, Udemy, and AirBnB offering new, unprecedented ways to make money, income streams are less consistent and more diversified. After the financial crisis in 2008, many people rejected the use of credit cards and worked to eliminate debt. Some are even rejecting banks outright
Please, pretty pretty please, don’t ever use a video game store as a bank. Seriously.
These shifts create awesome new opportunities, and you should totally take advantage of them. But the mortgage lenders aren’t known for dealing with change well, and they haven’t really adapted to the new economic realities. Being self-employed or lacking credit history can make getting a home loan complex. Here are some common scenarios & what you can do to address the issue. Read More
If you’re going to have a mortgage, it’s probably a good idea to understand what, exactly, that is. If you learn a little bit about the history of mortgages, not only will you come to appreciate the process, but you’ll look super smart in front of your friends at your housewarming party.
In plain english, a mortgage is a loan used to buy property. The amount of the loan is usually a fraction of the total property value. To make the loan less risky for the lender, the loan is tied to the property itself – if the loan goes unpaid, the lender takes ownership of the property, which they can sell to cover the debt.
Mortgage – n. – A debt instrument, secured by the collateral of specified real estate property, that the borrower is obliged to pay back with a predetermined set of payments.
Millennials could be missing out on a lot by choosing to rent as opposed to buying homes, according to financial author David Bach. His study found that homeowners are 38% wealthier than renters. Buying a home is more expensive than renting and requires more responsibility; however, unlike renting, when you buy you are making an investment.
Like any good investment, buying and selling homes requires patience. The median age for first time home buyers is 32. If first time homeowners are patient and live in each of the homes that they buy in their lifetime for a minimum of 5 years, by the time they are 50-60 they can sell their home and use the money they make to retire. The following is a list of things to consider when buying a home, and reasons to remain in your homes for at least 5 years.
Know Your Budget
The median income for first home buyers is 72,000. If this income seems high, consider a studio or smaller home to lower the cost. The bank will loan you the maximum that they think you can afford. Consider borrowing 10-15% less than the bank will lend you, this will make your monthly payments more affordable and your debt more manageable.
If you can save at least 10% as a down payment, you will considerably lower your mortgage payments. The more money you have as a down payment, the lower your loan rate will be. An appropriate down payment will allow you to secure an affordable monthly payment.
The Five-Year Rule
Many homeowners stick to the five-year rule, according to Scott Durkin, chief operating officer at Douglas Elliman Real Estate. The best you can hope for after one year is breaking even, but more often than not homeowners take a loss. Beyond two years, homeowners are no longer subject to capital gains tax; however, five years allows them to build more equity.
The general principle of the five-year rule is waiting for the market to appreciate to double digits, in the hopes that when it does, the buyer can recuperate some of the purchasing costs. If the market doesn’t appreciate after five years, at least you have built enough equity to sell your home and make some money.
After what feels like a lifetime of sticking to the five-year rule, you will be ready to sell for the last time and begin to plan your retirement. If you are living in your forever home and over the age of 62 you qualify for a reverse mortgage. A reverse mortgage is exactly as it sounds, the payments work in the opposite direction of a conventional, forward mortgage. Essentially, you sell your equity to keep your home, and receive payments from the lender instead of making mortgage payments. As you receive payments your equity declines, but you can keep your home for the rest of your life. The reverse mortgage will be paid when the house is eventually sold; however, the borrower (the person paying a reverse mortgage) can only gain or break even from the sale because the amount owed cannot exceed the value of the home.
Reverse mortgages aren’t for everyone. They can be great for some and very risky for others, so we recommend doing your research and talking with a financial planner before taking a reverse mortgage.
Whenever you buy a home, consider living in it for at least five years in order to build equity and avoid losing money when you choose to move. If you live in each home long enough, you will be able to qualify for a reverse mortgage or even sell your last home and make enough money to retire.
At some point, everyone has wanted to buy a fixer-upper, or at least considered it. There are tons of shows (Property Brothers, Flip or Flop, Flip This House, Flippa-dippa Ding Dong*) that sell the dream. Find it, rehab or remodel it, and then either live in it or flip it. Personally, I would love to find and old craftsman, buy it for cheap, put in some elbow grease and restore it to it’s former glory.
In practice though, buying a fixer-upper or remodeling a house can be difficult. A major issue is financing – construction loans are hard to get & have strict requirements.
So what can you do if you want to buy a fixer-upper but you don’t have a ton of cash sitting around? Or what if you already own a home, but you just want to remodel? There’s a loan for that – the FHA 203k loan.
A 203K loan is a specialty mortgage that is offered by the Federal Housing Administration (FHA). Often called a “rehab mortgage” or a “fixer-upper loan”, 203k construction loans were designed to help cover costs for rehabilitation, upgrades, home renovation or remodel.
203k loans are also an especially great choice for first time home buyers that want to buy a fixer-upper. It allows you to pay less for a house that needs a little love, and it provides you with extra money to renovate and remodel.
203k loans were created to solve a number of issues that come with traditional construction or home improvement loans. They make the process of getting a home remodel loan or buying a fixer upper much more simple.
Normal construction loans can be a total monster. When construction loans go wrong, they can end up being incredibly expensive.
To start, they are usually short-term loans that are only designed to get you through the construction phase of your home. Once your project is complete, you have to refinance the construction loan and get a normal home mortgage, like a conventional or FHA home loan. Because of this, doing major construction means potentially paying for closing costs on two loans & wasting thousands of dollars.
On top of that, construction loans usually have variable interest rates, which can be risky.
As if that weren’t bad enough, construction loans are also generally hard to get. Zack has a great breakdown of what it takes to get a construction loan. It’s pretty rough.
Construction loans require a large down payment and a high credit score, making them difficult to qualify for.
To start, you need a pile of cash – as much as 30-35% of the loan balance. Plus you will need an additional six months of payments in reserves. That means if your home is valued at $400,000, and you get a 4% interest rate loan, you will need almost $130,000:
These costs don’t take into account things like property taxes or homeowners insurance. Both of these items increase the cash requirements significantly.
If cash isn’t an issue, your next hurdle is your credit score. According to that same Zacks article, you need a score of at least 680 to get a construction loan. For loans greater than $417,000 that minimum FICO score bumps up to 700.
Combine these requirements together & you realize that construction loans aren’t a viable option for many home buyers. First time home buyers in particular would have a hard time making this work.
To make rehabilitating, remodeling, or renovating a home more accessible, the FHA created the 203(K) Rehab Loan.
Officially called the “FHA Section 203(k) Rehabilitation Loan”, it was created to make home improvement loans more accessible to the average person.
Fun fact – it gets its name from the National Housing Act. The details for this loan are contained in “Section 203(K)” of the law. Mortgage companies aren’t the most creative, so the name stuck, but you will sometimes hear these called 203k “Dream Home” loans. I told you, not super creative.
Like a construction loan, home buyers receive extra money when the home is purchased, and they can use those funds to rehabilitate or remodel the house. Unlike a construction loan, this program falls under the FHA guidelines, so they are much easier to qualify for.
To start, FHA loans have a much lower credit score requirement – the minimum requirement is 580, sometimes even lower.
203k loans also have a much lower down payment requirement. Instead of 20% of the home price, borrowers can put as little as 3.5% down.
203k loans are way easier to qualify for compared to construction loans
For that $400,000 home we talked about earlier, you would only need $14,000 for a down payment instead of $120,000. For the first time home buyer, this is much easier to swing.
With a lower minimum credit score & significantly lower down payment requirement, buying a fixer-upper becomes a possibility with a 203k loan.
We’ll dig into the different types of 203k loans in our next article, but for now I just want to point out that you can use them to purchase a new home that needs work, which is great for someone wanting to buy a fixer-upper. You can also refinance your existing loan with a 203k loan, which would let you make improvements on your current house.
So what improvements are covered?
203k rehab loans are very broad in their scope. You can use the money for minor repairs & updates, as long as the total cost is above $5,000 (the minimum amount to use a loan like this). You could also virtually reconstruct the house – the foundation just needs to remain in place, you could tear the house down and completely rebuild it. A rehab loan like this leaves you with a lot of options.
There are some common uses that the FHA 203k loan covers, including:
Again, first time home buyers can really benefit from this rehab loan. With a small down payment, they can purchase a house that needs improvement, and use the money from the 203k loan for things like:
Ideally, these updates will increase the value of your home, and you will get a return on your investment. But make a note, not all projects are created equal! House logic did a survey and found that some home improvement projects had a better return than others.
The FHA makes it really simple to calculate how much you can get for repairs or upgrades.
First, the total loan amount must fall within the FHA guidelines for your area. These limits are usually determined at the county level.
The national limit for FHA loans is $271,050. However, there are many exceptions to this, and for some counties this amount can go as high as $625,500 – it all depends on where you live. To see what the limit is for your county, you can start here!
The loan amount includes the cost to purchase the home AND the cost of repairs – the total amount needs to be less than the county lending limit.
The next limit is based on the cost of the repairs & the value of the home. The maximum amount you can borrower according to FHA guidelines is the lesser of:
Did you catch that? Prior to closing the loan, the mortgage company will have an appraiser estimate what the home will be worth after the construction is complete.
They will give you enough to either cover the cost of purchasing the home & completing the repairs, or 110% of the value of the home when it’s complete, whichever is lower.
We’ll cover the actual process of getting a 203k loan & how they work in another article. But it’s important to know that the lender doesn’t just wire this money into your bank account. A 203k loan requires you to submit a construction plan, called a “work write up”. When your loan closes, your money will be wired into an escrow account.
As the work is completed, the money is released and given to the contractors. Unless you do the work yourself, you never actually touch the money – this protects the lender & makes sure the work is actually done on the house!
There are a few other pros that make a FHA 203k loan a great option:
Nothing is perfect. 203k loans come with some cons as well:
This is the first article of our 203k series. Over the next few weeks we’ll cover the different types of 203k loans, what it takes to qualify, and how to buy your own fixer-upper using a rehab loan. Make sure to sign up for our newsletter below so you don’t miss out!
*Flippa-dippa Ding Dong is not a real house flipping show. But you know that. If you were confused by the video of that teenager crooning over some sweet 80’s synths, get educated here.
You are ready to find the right home: You have a budget. You know your affordability amount. You’re pre-approved for a loan. You’re working with a realtor, or you are comfortable working on your own. You know your timeline. You’re now a highly-qualified buyer, the only thing standing in your way is finding that perfect house. The great home search has begun!
Exploring different neighborhoods might be the best part of the home buying experience. There’s nothing like cruising the streets in an area, looking at the houses, discovering parks, restaurants, coffee shops, and talking to your potential new neighbors. Read More