Showing Procedures During Covid-19

During these unsettling times, sellers and buyers are concerned about staying healthy and virus-free as we all are.  To keep all parties safe, new procedures should be considered regarding the procedure for showing houses.

Agents are reporting that they are selling homes where the buyers have not physically been in the home and base their decision on the virtual tour found online.  Some states have suspended showings because they are not considered essential services and other states have not addressed the subject.

In the spirit of stepping up to do what is necessary, the following suggestions should be considered:

• Buyers should view the pictures online first to see if the home meets their needs.  Most listing agents upload enough pictures to get a good idea of what a home looks like.
• Buyers should ask their agent questions that the photos don't address.  Then, their agent can go through the listing agent to ask the seller direct.
• It may be possible for the agent or owner to do a Facetime walk-through which would allow the buyers to ask questions and direct the agent or owner where to point the camera.
• When possible, buyers can make an appointment to see the home through their agent.  They should meet the agent at the home in their own car.  No children should attend showings.
• Recommended safe distances will be maintained between the owners and listing agent, if present, the buyers and their agent.
• Transfer is almost inevitable, and all precautions should be taken.  Buyers should carry their own sanitizing wipes and or gloves and avoid unnecessarily touching surfaces.  Allow their agent to open doors and cabinets.
• They should be disposed of in a trash bag in their car after they exit the home.

The social distancing and isolation could present some buying opportunities due to a lack of competition.  At the same time, the lack of inventory in many markets could keep prices high.  Overall, home prices nationwide are stable and, in many cases, continuing to rise which makes it a far less volatile alternative to investing in the stock market.   

With mortgage rates being at historic lows, there will probably never be a cheaper time to finance a home. 

Thank you again for looking at our listings and let us know if we can help you in anyway.

Please stay safe; wash your hands; practice social distancing and follow all the guidelines necessary to promote good health. We're all in this together!

Why have a mortgage during retirement?

You don't have to watch TV for long before Tom Selleck, Henry Winkler or Robert Wagner will tell you why seniors should consider a reverse mortgage.  However, there are a seniors who are resisting the conventional wisdom of having their home paid for and opting for a mortgage with payments on their home.

In some cases, seniors will downsize into a smaller home and have a large amount of equity to pay cash for the new home.  In other situations, they may have their home paid for and decide to do a cash-out refinance which will require making payments.

The logic behind either of these examples could be motivated by the fact that since mortgage rates are so low currently, the owners can reinvest the money at a higher yield and make money on their equity.  This will give them more money for their retirement income.

A common question that is asked by owners considering such a strategy is whether they'll be able to qualify for the new mortgage since they may no longer be employed.  The Equal Credit Opportunity Act prohibits discrimination against borrowers based on age.

All borrowers, whether they are working or not, need to show that they have good credit, reasonable debt and enough stable income to repay the mortgage.  Lenders cannot base their decision on loan term based on an applicant's life expectancy, so a 30-year loan is possible regardless of the borrower's age.

Fannie Mae, one of the largest purchaser of mortgages on the secondary market, is concerned on income that is stable, predictable and likely to continue.  Retirees' income can come from Social Security, pensions, or distributions from retirement accounts like IRAs, 401(k)s, Keogh or other plans.  Lenders will analyze these sources to estimate how long it will last. 

Other investments can be considered like stocks, bonds, mutual funds and annuities.  Based on the type and the volatility of the investment, lenders may be restricted from considering 100% of the income.

Getting the facts as it pertains to you as an individual is important to be able to know if you are eligible and how much you can borrow.  A trusted mortgage professional who understands this type of borrower is very important to help you determine the right mortgage vehicle and provide information to decide if this option is right for you.  Call me at (254) 733-1395if you would like a recommendation.

Shopping for a Mortgage

A lower rate will not only result in a lower payment, it will amortize the loan quicker.  A $250,000 mortgage at 4.5% for 30 years will have a $1,266.71 principal and interest payment.  At 4%, the same loan will have $1,193.54 payment saving $73.18 a month and the unpaid balance would be $1,776 lower at the end of five years.

Mortgage lenders tend to price their mortgages based on the credit score of the borrower.  The higher the credit score, the lower the mortgage rate.  There is an inverse relationship that the lower the credit score, the higher risk and therefore, a higher rate is needed to balance the risk.

In order to get a valid rate that will be available to you with your credit score, you need to be pre-approved. The process of making a loan application before you find a home, allows the lender to verify your credit, income, and ability to repay the loan.  Lenders usually only charge the cost of the credit report for this type of service.  Be aware that pre-approval is not the same thing as pre-qualification which is simply a loan officer's opinion.

When you shop for a mortgage with multiple lenders, the credit bureaus count them as a single credit inquiry if they are done within a two-week period. On the other hand, restrain yourself from applying for other credit such as cars, furniture or credit cards until after you have closed on the purchase of your home because those inquiries can negatively affect your credit score.

The Consumer Financial Protection Bureau recommends that you let lenders know that you are shopping the mortgage for the best rate and fees.

Instead of going to the Internet and Googling mortgage lenders, start with recommendations for a lender from your real estate professional.  They see the good, the bad and the ugly and can save you a lot of time.  Another reliable source would be from a friend who has recently purchased a home.

There are lenders who bait unsuspecting borrowers with lower rates and fees into making an application and after critical time has lapsed, try to switch them to a different program.  By that point, many buyers feel they don't have any choice but to accept what is offered.

Another confusing factor is the way that loans are priced to the public.  They are usually quoted at a rate with a certain amount of points.  A point is one percent of the amount borrowed.  An example would be a quote for a loan at 4.5% with 1 point or at 4% with 2.5 points.

The points combined with the rate affect the yield the lender will earn, and you will pay.  A simple way to make this an apple to apple comparison is to have the lender quote the loan as a "par-value" loan with no points involved.  Then, the lowest rate will produce the lowest cost to you.

Another way to compare loans will be to uses a financial app called Will Points Make a Difference.  You can plug in the rate and points to calculate the lowest yield over a projected holding period or the full term.

The lenders do not want to make it easy for you to compare.  Mortgage money is a commodity and shopping will be worth the effort. 

Why Put More Down

The least amount in a down payment is an attractive option when people are thinking of buying a home.  A common reason is to have cash available for furnishing the new home and  possible unexpected expenses.

Some people don't have any options because they only have enough for a minimum down payment and the closing costs.  For those fortunate buyers who do have extra money available, let's look at why you'd want to do such a thing.

Most loans in excess of 80% loan to value require mortgage insurance to protect the lenders for the upper portion of the loan if the home were to go into foreclosure.  FHA requires an up-front premium of 1.75% of the amount borrowed plus a monthly amount of .85% on the balance.  FHA mortgage insurance premium must be paid for the life of the loan.

Mortgage insurance on conventional loans varies depending on the borrowers' credit and the amount of down payment being made.  Unlike FHA, when the unpaid balance reaches 78% of the original amount borrowed, the mortgage insurance is no longer needed.  If the home enjoys rapid appreciation, after a period, the lender may allow the borrower to get an appraisal to show that the unpaid balance is now less that 78% of the current appraised value.

The premium for mortgage insurance on conventional loans can be paid as a single premium upfront in cash or financed into the mortgage.  A second option would be monthly mortgage insurance included in the payment until it is no longer needed.  A third option could be lender-paid MI where the cost is included in the mortgage interest rate for the life of the loan.

VA loans do not require mortgage insurance but there is a one-time funding fee of 2.3% that can be paid in cash at closing or added to the amount borrowed.  Disabled veterans and Purple Heart recipients are not required to pay the funding fee.

Putting at least 20% down payment on a home not only will avoid the mortgage insurance, it could also help you to get a little lower interest rate.  Since the loan to value is lower, there is less risk for the lender.

A $350,000 with a 10% down payment at 4% interest could have a monthly mortgage insurance cost between $70 to $130.  A trusted mortgage professional can help you assess the options you have available.  It is always better to make some of these decisions before you start shopping for a home.

This is another reason it is good to start by getting pre-approved with a trusted mortgage professional.  If you need a recommendation, call me at  (254) 733-1395.

Financing Home Improvements

Home improvement loans provide a source of funds for owners to finance the improvements they want to make.  These are usually, personal installment loans that are not collateralized by the home itself.  Since there is more risk for the lender with this type of loan, the interest rate is higher than a normal mortgage loan.

In today's market, the rates on home improvement loans could vary between 6% and 36%.  A borrower's credit score will determine the interest rate; the lower the score, the higher the rate and the higher the score, the lower the rate.

Smaller loan amounts are under $40,000 with larger loan amounts over $40,000 based on the extent of the improvements to be made.  With all things being equal, a larger loan may have a lower interest rate.

Besides the interest rate being higher than a regular mortgage, the term is shorter.  Similar to a car loan, the term can be between five and seven years.  A $50,000 home improvement loan for a borrower, with good but not great credit, could have a 12% interest rate for seven years.  That would make the monthly payment $882.64.

An alternative way to fund the improvements would be to do a cash out refinance.  These types of loans are collateralized by the home.  The current mortgage would be paid off with the new mortgage plus the amount for the improvements.  Lenders will usually require that the owner maintain a minimum of 20% equity in the home.

Assuming a homeowner owed $230,000 on the existing mortgage and wanted $50,000 for improvements.  The new loan amount would be $280,000 and the home would have to appraise for at least $350,000 for the homeowner to have a 20% equity remaining. 

Another thing that occurs on a refinance is that the standard term for mortgages is 30 years which means the owner would be financing the improvements for 30 years instead of a shorter term.  The advantage would be a smaller payment.

Let's say in this example, the owner originally borrowed $250,000 at 4.5% for 30 years with a payment of $1,266.71.  After 54 payments, the unpaid balance is $230,335.  If they did a cash out refinance at 4.5% for 30 years for the additional $50,000 and financed the estimated closing costs of $8,700, the new payment would be $1,464.50.

Using the home improvement loan, the combined payments would be $2,149.35 which would be $684.85 higher.  While the cash out refinance produces a lower payment, it adds $8,700 to the amount owed and stretches it out over a longer period.  Home improvement loans have lower closing costs than regular mortgage loans.

Another alternative loan is a HELOC or Home Equity Line of Credit which can be explored and compared to the two options mentioned above.  If a homeowner is going to finance improvements, a comparison of different types of loans and payments can be helpful in the decision-making process. 

A trusted mortgage professional is a valuable resource to assist you with current and accurate information.  If you need a recommendation, please call me at (254) 733-1395.

House-Hacking Rental Property

House-hacking refers to buying a multifamily property on an owner-occupied mortgage, living in one unit and renting the others.  If you're thinking about becoming a rental mogul, starting early is an advantage.  Not only will you have longer to accumulate a larger portfolio, you can increase the leverage on the first acquisitions if they are owner-occupied. 

Leverage is the use of other people's money to finance an investment.  The higher the loan-to-value, the greater the leverage which can increase the yield.

A $200,000 rental property with an 80% LTV at 4.5% for 30 years producing a 16.88% before-tax rate of return would increase to a 23% return on investment by increasing the mortgage to 90%.  A typical down payment on an investor property in today's market is 20-25% but, in some cases, a higher loan-to-value is possible.

Owner-occupied, multi-unit properties, two to four units, allow a borrower to occupy one of the units and rent the others out.  The cash flows from the rental units subsidize the cost of housing for the unit occupied by the owner.  VA will guarantee 100% of the mortgage for eligible veterans, while FHA will loan up to 96.5% for qualifying borrowers.

Consider a four-unit property was purchased as owner-occupied and the other three units were rented for $800 each.  If an FHA loan was obtained, the owner could live for roughly $355 a month after collecting the rent and paying the expenses.  Assume the owner lived in it for two years and then, rented out the fourth unit for the same $800 per month.  The cash flow would rise to $4,800 a year with a before-tax rate of return of 30% based on a 2% appreciation.

	Occupy 1 unit	Rent all 4 units
Gross Scheduled Income @ $800 monthly each	$2,400	$3,200
Cash Flow Before Tax	$4,59	$4,861
Before Tax Rate of Return	20.77%	30.56%

 

Rental properties offer the investor to borrow large loan-to-value mortgages at fixed interest rates for up to 30 years on appreciating assets with tax advantages and reasonable control that many other investments don't enjoy.

Some people consider rental properties the IDEAL investment with each letter in the acronym standing for a benefit it provides.  It provides income from the rent which many investments do not have.  Depreciation is a non-cash deduction from income that increases cash flow.  Equity buildup occurs as each payment is made by reducing the principal owed.  Appreciation happens over time as the value of the property increases.  L stands for leverage that was explained earlier in this article.

You may be able to buy another four unit as an owner-occupant before you need to start using a normal investor's down payment.  In the meantime, you could have eight units that are increasing in value while the mortgage balance is decreasing with every payment made.  If there is sufficient equity in the properties by the time, you're ready to buy more, you may be able to take cash out of the existing ones to use for the down payments.

This can be a great way to turbocharge your net worth by becoming an owner and a real estate investor at the same time.  To learn more about rental properties, download the Rental Income Properties guide and/or contact me at (254) 733-1395 to schedule an appointment to meet to discuss the possibilities.

Who Earns the Commission?

What do you think the motivating reason would be for the 5% of all homebuyers who chose not to work with an agent but instead conducted their own home search, contacted the seller, negotiated the contract, located their financing, arranged their inspections and all of the other services provided by REALTORS®?  Most people would probably guess the buyers were wanting to do the work themselves and earn the commission in the form a lower purchase price.

Looking at it from the seller's perspective, what would be the reason for the 8% of all home sellers who chose not to work with an agent but instead did their own research to determine the value of their home, coordinated all of the marketing efforts necessary to have sufficient exposure to the market, negotiate directly with the buyer, and investigate all of the other steps necessary to close the sale?  Is it possible and even probable, that they too were trying to earn the commission and net more proceeds from the sale?

If the home sold for fair market value, it would be reasonable to assume that the seller won out over the buyer.  If it sold for less than market value, it seems that the seller didn't realize his full equity in the home.  In either case, both buyer and seller engaged in activities that they were less experienced and capable than the real estate professional.

The Profile of Home Buyers and Sellers (Exhibit 8-1) reports that 14% of sales were For-Sale-by-Owners in 2004 compared to just 8% in 2019.  The trend shows that agent-assisted sales rose to 89% in 2019 from 82% in 2004.

The three most difficult tasks identified by for-sale-by-owners is getting the price right, preparing or fixing up the home for sale, and selling within the length of time planned.   

The time on the market for sale by owners experienced was less than that of agent assisted homes; two weeks compared to three weeks.  This could indicate that the home didn't maximize its potential sales price.  According to the previous mentioned survey, for sale by owners typically sell for less than the selling price of other homes.

The reality is that both parties cannot earn the commission.  It is earned by providing specific services that are essential to the transaction.  The capital asset of a home represents the largest investment most people make.  An investment of that importance certainly deserves the consideration of a professional trained and experienced to handle the complexities involved. There is value to having a third-party advocate helping each party to the transaction.

The tasks involved in buying and selling a home exist and must be done.  Since nine out of ten transactions involve an agent and therefore, a commission.  It comes down to deciding which is more important: time or money.  If a buyer or seller values their time more than the commission, they'll usually work with an agent.  If money is more valuable to a buyer or seller, they may try purchasing or selling without an agent.  One thing is for sure: there are two parties to the transaction and only one commission.